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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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
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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.
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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
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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:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
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distribution channels, as well as the number of superstores and retail sales
centers in each channel, during the past three fiscal years:
<TABLE>
<CAPTION>
March 29, March 28, March 27,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
(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:
<TABLE>
<CAPTION>
PERCENTAGE OF
REGION PRIMARY STATES REVENUE BY REGION
- ------ ---------------------------------------------------------- -----------------
<S> <C> <C>
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%
======
</TABLE>
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
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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
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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."
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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:
<TABLE>
<CAPTION>
COMMENCEMENT APPROXIMATE
STATE CITY OF PRODUCTION OWNED/LEASED SQUARE FEET
----- ---- ------------- ------------ -----------
<S> <C> <C> <C> <C>
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
</TABLE>
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
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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.
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
- ----------- ---- ---
<S> <C> <C>
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
</TABLE>
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<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
- ----------- ---- ---
<S> <C> <C>
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
</TABLE>
- -----------
(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
<PAGE> 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
<PAGE> 11
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
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]
</TABLE>
- ---------------
* 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
<PAGE> 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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/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
</TABLE>
11
<PAGE> 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
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
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]
</TABLE>
- ---------------
* Filed herewith
<PAGE> 1
EXHIBIT 13.1
Selected Pages of the Palm Harbor Homes, Inc.
Annual Report to Shareholders for the Period Ended March 27, 1998
<PAGE> 2
Palm Harbor Homes 1998 Annual Report
Selected Financial Data
(In thousands of dollars, except per share and operating data)
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------------
March 25, March 31, March 29, March 28, MARCH 27,
1994 1995 1996 1997 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(1) As of the end of the applicable period.
Pg. 9
<PAGE> 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.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------
March 29, March 28, MARCH 27,
1996 1997 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
=====================================
</TABLE>
The following table summarizes certain key sales statistics as of and for
the period indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------
March 29, March 28, MARCH 27,
1996 1997 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
(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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 7
Palm Harbor Homes 1998 Annual Report
Consolidated Balance Sheets
(In thousands of dollars)
<TABLE>
<CAPTION>
March 28, MARCH 27,
1997 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
==========================
</TABLE>
SEE ACCOMPANYING NOTES.
Pg. 14
<PAGE> 8
Palm Harbor Homes 1998 Annual Report
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
March 29, March 28, MARCH 27,
1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===========================================
</TABLE>
See accompanying notes.
Pg. 15
<PAGE> 9
Palm Harbor Homes 1998 Annual Report
Consolidated Statements of Shareholders' Equity
(In thousands of dollars)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=============================================================
<CAPTION>
Notes
Receivable
Treasury Shares From
Shares Amount Shareholders Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=============================================================
</TABLE>
See accompanying notes.
Pg. 16
<PAGE> 10
Palm Harbor Homes 1998 Annual Report
Consolidated Statements of Cash Flows
(In thousands of dollars)
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
March 29, March 28, MARCH 27,
1996 1997 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
See accompanying notes.
Pg. 17
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
March 28, MARCH 27,
1997 1998
- -----------------------------------------------------------
(in thousands)
<S> <C> <C>
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
========================
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
March 28, MARCH 27
1997 1998
- ---------------------------------------------------------------
(in thousands)
<S> <C> <C>
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
=======================
</TABLE>
Pg. 21
<PAGE> 15
Palm Harbor Homes 1998 Annual Report
Notes to Consolidated Financial Statements
11. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 28, MARCH 27,
1997 1998
- ----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
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
=======================
</TABLE>
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):
<TABLE>
<CAPTION>
Fiscal Year Amount
- --------------------------------------------------------------------
<S> <C>
1999 $ 944
2000 233
2001 243
2002 163
2003 and thereafter 2,743
------
$4,326
</TABLE>
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:
<TABLE>
<CAPTION>
March 29, March 28, MARCH 27,
1996 1997 1998
- -----------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
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
===========================================
</TABLE>
Pg. 22
<PAGE> 16
Significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
March 28, MARCH 27,
1997 1998
- -------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
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
=======================
</TABLE>
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:
<TABLE>
<CAPTION>
March 29, March 28, MARCH 27,
1996 1997 1998
- --------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
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%
============================================
</TABLE>
Pg. 23
<PAGE> 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):
<TABLE>
<CAPTION>
Fiscal Year Amount
- ----------------------------------------------------------
<S> <C>
1999 $ 5,487
2000 4,049
2001 2,758
2002 1,912
2003 and thereafter 8,250
-----------
$ 22,456
===========
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- --------------------------------------------------------------------------------------------------------
(in thousand, except per share data)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
Pg. 25
<PAGE> 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
<PAGE> 1
Exhibit 21.1
Subsidiaries
<TABLE>
<CAPTION>
Name Jurisdiction of Organization
- --------------------------------- ----------------------------
<S> <C>
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
</TABLE>
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> MAR-27-1998
<CASH> 21,073
<SECURITIES> 5,091
<RECEIVABLES> 71,171
<ALLOWANCES> 0
<INVENTORY> 108,185
<CURRENT-ASSETS> 210,683
<PP&E> 67,360
<DEPRECIATION> 0
<TOTAL-ASSETS> 353,846
<CURRENT-LIABILITIES> 188,393
<BONDS> 3,382
0
0
<COMMON> 191
<OTHER-SE> 156,865
<TOTAL-LIABILITY-AND-EQUITY> 353,846
<SALES> 637,268
<TOTAL-REVENUES> 637,268
<CGS> 466,494
<TOTAL-COSTS> 466,494
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,700
<INCOME-PRETAX> 51,774
<INCOME-TAX> 19,920
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,854
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.69
</TABLE>
