-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RtYi9qPzNRNZdr2mCx+4QnosZ4z/G/HiD/2FoKxQHEzeEo2qhr7A06riT626BxOw 0OP/LoFL0NzyJqcpYHynRA== 0000950134-99-005517.txt : 19990616 0000950134-99-005517.hdr.sgml : 19990616 ACCESSION NUMBER: 0000950134-99-005517 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990326 FILED AS OF DATE: 19990615 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PALM HARBOR HOMES INC /FL/ CENTRAL INDEX KEY: 0000923473 STANDARD INDUSTRIAL CLASSIFICATION: PREFABRICATED WOOD BLDGS & COMPONENTS [2452] IRS NUMBER: 591036634 STATE OF INCORPORATION: FL FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24268 FILM NUMBER: 99647005 BUSINESS ADDRESS: STREET 1: 15303 DALLAS PKWY STREET 2: STE 800 CITY: DALLAS STATE: TX ZIP: 75248 BUSINESS PHONE: 9729912922 MAIL ADDRESS: STREET 1: 15303 DALLAS PARKWAY STREET 2: STE 800 CITY: DALLAS STATE: TX ZIP: 75248 10-K 1 FORM 10-K FOR FISCAL YEAR END MARCH 26, 1999 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended March 26, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ---- ---- Commission File Number 0-24268 ---------- PALM HARBOR HOMES, INC. (Exact name of registrant as specified in its charter) FLORIDA 59-1036634 (State or other jurisdiction of (I.R.S. Employer identification no.) incorporation or organization) 15303 DALLAS PARKWAY, SUITE 800, ADDISON, TEXAS 75001 (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. [ ] The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant as of May 15, 1999, was $ 198,260,313 based on the closing price on that date of the Common Stock as quoted on the Nasdaq National Stock Market. As of May 15, 1999, 23,763,174 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 26, 1999, 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, 1999 are incorporated by reference in Part III. 2 This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, those regarding the growth and financing strategies of Palm Harbor Homes, Inc. (the "Company"), projections of revenues, income or other financial items, the effective implementation of the Company's business or growth strategy, the adequacy of the Company's capital resources and other statements regarding trends relating to the manufactured home industry and various other items involving known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include political, economic or other factors such as inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the business in each of the Company's markets; demographic changes; competitive product, advertising, promotional and pricing activity; raw material and labor costs and availability; dependence on the rate of development and degree of acceptance of new product introductions in the marketplace; relationships with customers or dealers; the availability, terms and development of capital; changes in or failure to identify or consummate successful acquisitions or to assimilate the operations of any acquired businesses with those of the Company; the difficulty of forecasting sales at certain times in certain markets; and government regulation. PART I. ITEM 1. BUSINESS GENERAL Palm Harbor Homes, Inc. 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 26, 1999, the Company operated 16 manufacturing facilities that sell homes through retailers in 32 states including approximately 300 independent retail sales centers and 120 Company-owned superstores. At March 26, 1999, the Company owned and operated 120 superstores in Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia, and Washington. With the opening of 29 superstores in fiscal 1999, the Company took significant steps in fiscal year 1999 toward its plan to increase sales through Company-owned superstores. 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 provides 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, Masterpiece, Keystone, River Bend and Windsor Homes. Palm Harbor offers over 150 floor plans and approximately 85% 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 78% 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 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. -1- 3 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 240 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 113 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:
1995 1996 1997 1998 1999 ------ ------ ------ ------ ------ Homes sold: Single-section ............ 1,474 2,192 2,781 2,687 3,474 Multi-section ............. 8,723 9,983 11,092 11,547 12,154 ------ ------ ------ ------ ------ Total homes sold ............. 10,197 12,175 13,873 14,144 15,628 ====== ====== ====== ====== ====== Sections Produced ............ 19,163 22,049 24,545 26,014 27,380 Manufacturing facilities (at end of fiscal year) ... 13 14 15 16 16
The Company's homes are constructed at the Company's manufacturing facilities. Independent trucking companies transport finished homes to either the retailer or the customer's site. Typically, independent installers are responsible for placing the home on site, making utility hook-ups and, in certain instances, providing installation and finish-out services. The Company believes that its factory finish-out program, whereby Palm Harbor associates perform installation and finish-out services, ensures that Palm Harbor quality is applied to the entire process, lessens customer concerns, strengthens the Company's relationship with its customers and provides the Company an advantage over many of its competitors. The Company's backlog of orders as of May 21, 1999 was approximately $7.9 million, as compared to approximately $26.0 million as of May 29, 1998. 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. Four suppliers, which accounted for more than 5% of the Company's total purchases during the Company's fiscal year ended March 26, 1999, represented approximately 9.4%, 7.3%, 5.8% and 5.3%, respectively, of total purchases during such fiscal year. The Company does not believe that the loss of any single supplier would have a material adverse effect on its business. -2- 4 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 distribution channels, as well as the number of superstores and retail sales centers in each channel, during the past three fiscal years:
March 28, March 27, March 26, 1997 1998 1999 --------- --------- --------- Homes sold by retailers: Company-owned.............. 5,211 7,696 10,776 Independent ............... 8,662 6,448 4,852 ------ ------ ------ Total ..................... 13,873 14,144 15,628 ====== ====== ====== Number of sales centers: Company- owned ............ 54 94 120 Independent ............... 600 300 300 ------ ------ ------ Total ..................... 654 394 420 ====== ====== ======
The Company originally established wholly-owned superstores in 1992, and currently has 120 superstores in Alabama, Colorado, Florida, Georgia, Indiana, Louisiana, Nevada, New Mexico, North Carolina, Ohio, Oregon, South Carolina, Texas and Washington. The Company plans to add 15 to 20 retail superstores in fiscal 2000. 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 1999. 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. The Company's five largest retailers (including Company-owned or affiliated superstores) accounted for approximately 51% of net sales in fiscal 1999. The Company's independent retailer arrangements are terminable at will by either party without penalty. 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 26, 1999, the percentage of the Company's revenues by region was as follows:
PERCENTAGE OF REGION PRIMARY STATES REVENUE BY REGION - --------- ---------------------------------------------------------- ----------------- Southeast Florida, North Carolina, Alabama, Georgia, South Carolina, 42% Mississippi, Tennessee, Virginia Central Texas, Oklahoma, Louisiana, Arkansas, Kansas 32 West New Mexico, Arizona, Colorado, California, Oregon, 20 Washington, Idaho, Montana, Nevada, Utah Midwest Ohio, Michigan, Indiana, Kentucky, West Virginia, Illinois 6 ----- 100.0% =====
-3- 5 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 17 to 79 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 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 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 three 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) only 37% of the Company's homes are sold to independent retailers; (ii) a majority of the homes sold by the Company to independent retailers are pre-sold to specific retail customers; (iii) the Company monitors each retailer's inventory position on a regular basis; (iv) sales of the Company's manufactured homes are spread over a large number of retailers, (v) none of the Company's independent retailers accounted for more than 5% of the Company's net sales in fiscal 1999; (vi) the price the Company is obligated to pay declines over time; and (vii) 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 26, 1999. During the fiscal years ended March 28, 1997, March 27, 1998 and March 26, 1999, net expenses (income) incurred by the Company under these repurchase agreements totaled $55,000, ($13,000) and $ 29,000, 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. -4- 6 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 establishing comprehensive national construction standards. The HUD regulations, known collectively as the Federal Manufactured Home Construction and Safety Standards, cover all aspects of manufactured home construction, including structural integrity, fire safety, wind loads, thermal protection and ventilation. Such regulations preempt conflicting state and local regulations on such matters, and are subject to continual change. The Company's manufacturing facilities and the plans and specifications of its manufactured homes have been approved by a HUD-certified inspection agency. Further, an independent HUD-certified third-party inspector regularly reviews the Company's manufactured homes for compliance with the HUD regulations during construction. Failure to comply with applicable HUD regulations could expose the Company to a wide variety of sanctions, including mandated closings of Company manufacturing facilities. The Company believes its manufactured homes meet or surpass all present HUD requirements. Manufactured and site-built homes are all typically built with paneling and other products that contain formaldehyde resins. Since February 1985, HUD has regulated the allowable concentrations of formaldehyde in certain products used in manufactured homes and requires manufacturers to warn purchasers as to formaldehyde-associated risks. The Environmental Protection Agency (the "EPA") and other governmental agencies have in the past evaluated the effects of formaldehyde. The Company uses materials in its manufactured homes that meet HUD standards for formaldehyde emissions and believes it otherwise complies with HUD and other applicable government regulations in this regard. The transportation of manufactured homes on highways is subject to regulation by various federal, state and local authorities. Such regulations may prescribe size and road use limitations and impose lower than normal speed limits and various other requirements. The Company's manufactured homes are subject to local zoning and housing regulations. In certain cities and counties in areas where the Company's homes are sold, local governmental ordinances and regulations have been enacted which restrict the placement of manufactured homes on privately-owned land or which require the placement of manufactured homes in manufactured home communities. Such ordinances and regulations may adversely affect the Company's ability to sell homes for installation in communities where they are in effect. A number of states have adopted procedures governing the installation of manufactured homes. Utility connections are subject to state and local regulation, and must be complied with by the retailer or other person installing the home. The Company is subject to the Magnuson-Moss Warranty Federal Trade Commission Improvement Act, which regulates the descriptions of warranties on products. The description and substance of the Company's warranties are also subject to a variety of state laws and regulations. A number of states require manufactured home producers to post bonds to ensure the satisfaction of consumer warranty claims. A variety of laws affect the financing of manufactured homes by the Company. The Federal Consumer Credit Protection Act (Truth-in-Lending) and Regulation Z promulgated thereunder require written disclosure of information relating to such financing, including the amount of the annual percentage rate and the finance charge. The Federal Fair Credit Reporting Act also requires certain disclosures to potential customers concerning credit information used as a basis to deny credit. The Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder prohibit discrimination against any credit applicant based on certain specified grounds. The Real Estate Settlement Procedures Act and Regulation X promulgated thereunder require certain disclosures regarding the nature and costs of real estate settlements. The Federal Trade Commission has adopted or proposed various Trade Regulation Rules dealing with unfair credit and collection practices and the preservation of consumers' claims and defenses. Installment sales contracts eligible for inclusion in a Government National Mortgage Association program are subject to the credit underwriting requirements of the Federal Housing Association. A variety of state laws also regulate the form of the installment sale contracts or financing documents and the allowable deposits, finance charge and fees chargeable pursuant to installment sale contracts or financing documents. The sale of insurance products by the Company is subject to various state insurance laws and regulations which govern allowable charges and other insurance practices. The Company's operations are also subject to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Governmental authorities have the power to enforce compliance with their regulations, and violations may result in the payment of fines, the entry of injunctions or both. The requirements of such laws and enforcement policies have generally become more strict in recent years. Accordingly, the Company is unable to predict the ultimate cost of compliance with environmental laws and enforcement policies. See "Item 3. Legal Proceedings." -5- 7 ASSOCIATES As of March 26, 1999, the Company had approximately 5,400 associates. All of the Company's associates are non-union. The Company has not experienced any labor-related work stoppages, and believes that its relationship with its associates is good. ITEM 2. PROPERTIES The Company's homes are currently manufactured at 16 facilities in 8 states. The Company owns substantially all of its machinery and equipment. The Company believes its facilities are adequately maintained and suitable for the purposes for which they are used. The following table sets forth certain information with respect to the Company's manufacturing facilities:
COMMENCEMENT APPROXIMATE STATE CITY OF PRODUCTION OWNED/LEASED SQUARE FEET ----- ---- ------------- ------------ ----------- Alabama Boaz December 1986 Leased 97,683 January 1993 Leased 75,164 Arizona Tempe January 1978 Owned 103,500 Casa Grande July 1997 Owned 90,000 Florida Plant City September 1981 Owned 93,600 June 1985 Owned 87,200 Georgia LaGrange August 1996 Owned 200,000 North Carolina Albemarle January 1994 Owned 112,700 Siler City January 1988 Owned 91,200 July 1996 Leased 40,000 Ohio Sabina January 1988 Owned 85,000 Oregon Millersburg April 1995 Owned 168,650 Texas Austin January 1981 Owned 103,800 April 1992 Owned 77,000 Burleson June 1993 Owned 94,300 Fort Worth April 1993 Owned 121,300 Buda November 1994 Owned 88,275
In addition to its production facilities, the Company owns certain properties upon which 23 of its retail superstores are located. The Company also leases approximately 29,000 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 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. -6- 8 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. -7- 9 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 Stock 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 Stock Market.
FISCAL 1999 HIGH LOW - ----------- ------ ------ First Quarter(1) ................................ $38.10 $27.20 Second Quarter .................................. 37.40 24.00 Third Quarter ................................... 27.63 19.00 Fourth Quarter .................................. 30.00 19.75
FISCAL 1998 HIGH LOW - ----------- ------ ------ First Quarter(2) ................................ $26.40 $17.00 Second Quarter .................................. 30.00 24.80 Third Quarter ................................... 30.50 24.75 Fourth Quarter .................................. 38.38 27.50
- --------- (1) On June 30, 1998, 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 14, 1998. The stock dividend was paid on July 28, 1998. (2) 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. On May 15, 1999, the last reported sale price of the Company's Common Stock on the Nasdaq National Market was $21.31. As of May 15, 1999, there were approximately 1700 record holders of the Common Stock, and approximately 4100 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. ITEM 6. SELECTED FINANCIAL DATA Information with respect to this Item 6 is incorporated herein by reference from page 11 of the Company's Annual Report to Shareholders for the year ended March 26, 1999, such pages 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 12 through 15 of the Company's Annual Report to Shareholders for the year ended March 26, 1999, such pages being filed as Exhibit 13.1 hereto. -8- 10 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 year ended March 26, 1999 are listed in the accompanying Index to Consolidated Financial Statements at page F-1 and are incorporated by reference from pages 16 through 29 of the Company's Annual Report to Shareholders for the year ended March 26, 1999, such pages being filed as Exhibit 13.1 hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 6 of the Company's definitive Proxy Statement filed with the Securities and Exchange Commission on June 3, 1999 in connection with the Annual Meeting of Shareholders to be held June 30, 1999. (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 7 through 9 of the Company's definitive Proxy Statement filed June 3, 1999 in connection with the Annual Meeting of Shareholders to be held June 30, 1999. 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 4 and 5 of the Company's definitive Proxy Statement filed June 3, 1999 in connection with the Annual Meeting of Shareholders to be held June 30, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 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 year ended March 26, 1999 are listed in the accompanying Index to Consolidated Financial Statements at page F-1 and are incorporated herein by reference from pages 16 through 29 of the Company's Annual Report to Shareholders for the year ended March 26, 1999. (2) Financial Statement Schedules None (3) Index to Exhibits -9- 11
Exhibit No. Description ------- ----------- 2.1 Agreement and Plan of Merger, dated as of June 30, 1996, by and among Palm Harbor Homes, Inc., Newco Homes, Inc., Scott W. Chaney, Christopher M. Finke, Thomas B. Kesterson and Joseph H. Kesterson (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated August 1, 1996 (File No. 0-24268)). 2.2 Amendment No. 1 to Agreement and Plan of Merger, dated August 1, 1996 (Incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated August 1, 1996 (File No. 0-24268)). 2.3 Stock Purchase Agreement dated February 9, 1998, by and among Palm Harbor Homes, Inc., Cannon Manufactured Housing Group, Inc., Cannon Mobile Homes, Inc., Pleasant Valley Mobile Homes, Inc., Countryside Mobile Homes, Inc., Cumberland Homes, Inc., 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 One 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., 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). *10.5 Amended and Restated Compensation Agreement by and between the Company and Lee Posey dated to be effective as of March 27, 1999. *13.1 Selected pages of the Company's Annual Report to Shareholders for the year ended March 26, 1999. *21.1 List of Subsidiaries. *23.1 Consent of Ernst & Young LLP. 24.1 Power of Attorney (included on the signature page of the Report). *27.1 Financial Data Schedule [Filed in electronic format only].
- ---------- * Filed herewith (b) None. (c) See Item 14(a)(3) above. (d) None. -10- 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on June 15, 1999. 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 26, 1999 of Palm Harbor Homes, Inc., and to file the same, with any and all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all of each of said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue thereof.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ LEE POSEY - ---------------------------- Chairman of the Board and Director June 15, 1999 Lee Posey (Principal Executive Officer) /s/ LARRY KEENER - ---------------------------- Chief Executive Officer, President and June 15, 1999 Larry Keener Director /s/ SCOTT W. CHANEY - ---------------------------- Executive Vice President and Director June 15, 1999 Scott W. Chaney /s/ KELLY TACKE - ---------------------------- Vice President-Finance, Chief Financial June 15, 1999 Kelly Tacke Officer and Secretary (Principal Financial and Accounting Officer) /s/ WILLIAM R. THOMAS - ---------------------------- Director June 15, 1999 William R. Thomas /s/ WALTER D. ROSENBERG, JR. - ---------------------------- Director June 15, 1999 Walter D. Rosenberg, Jr. /s/ FREDERICK R. MEYER - ---------------------------- Director June 15, 1999 Frederick R. Meyer /s/ JOHN H. WILSON - --------------------------- Director June 15, 1999 John H. Wilson /s/ A. GARY SHILLING - ---------------------------- Director June 15, 1999 A. Gary Shilling
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 11 through 29 of the Company's Annual Report to Shareholders for the year ended March 26, 1999): Consolidated Balance Sheets as of March 27, 1998 and March 26, 1999 Consolidated Statements of Income for the years ended March 28, 1997, March 27, 1998 and March 26, 1999 Consolidated Statements of Shareholders' Equity for the years ended March 28, 1997, March 27, 1998 and March 26, 1999 Consolidated Statements of Cash Flows for the years ended March 28, 1997, March 27, 1998 and March 26, 1999 Notes to Consolidated Financial Statements Report of Independent Auditors F-1 14
Exhibit No. Description ------- ----------- 2.1 Agreement and Plan of Merger, dated as of June 30, 1996, by and among Palm Harbor Homes, Inc., Newco Homes, Inc., Scott W. Chaney, Christopher M. Finke, Thomas B. Kesterson and Joseph H. Kesterson (Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated August 1, 1996 (File No. 0-24268)). 2.2 Amendment No. 1 to Agreement and Plan of Merger, dated August 1, 1996 (Incorporated by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated August 1, 1996 (File No. 0-24268)). 2.3 Stock Purchase Agreement dated February 9, 1998, by and among Palm Harbor Homes, Inc., Cannon Manufactured Housing Group, Inc., Cannon Mobile Homes, Inc., Pleasant Valley Mobile Homes, Inc., Countryside Mobile Homes, Inc., Cumberland Homes, Inc., 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 One 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., 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). *10.5 Amended and Restated Compensation Agreement by and between the Company and Lee Posey dated to be effective as of March 27, 1999. *13.1 Selected pages of the Company's Annual Report to Shareholders for the year ended March 26, 1999. *21.1 List of Subsidiaries. *23.1 Consent of Ernst & Young LLP. 24.1 Power of Attorney (included on the signature page of the Report). *27.1 Financial Data Schedule [Filed in electronic format only].
- ---------- * Filed herewith EX-10.5 2 AMENDED/RESTATED COMPENSATION AGREEMENT 1 EXHIBIT 10.5 AMENDED AND RESTATED COMPENSATION AGREEMENT This Amended and Restated Compensation Agreement ("Agreement") is made and entered into by and between Palm Harbor Homes, Inc., a Florida corporation ("Palm Harbor"), and Lee Posey ("Employee"), dated to be effective as of March 27, 1999. WITNESSETH: WHEREAS, effective April 1, 1995, Palm Harbor and Employee entered into that certain Compensation Agreement (the "Original Agreement"); and WHEREAS, the parties desire to amend and restate the Original Agreement to reflect the current agreement between the parties; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the employment and payment of compensation to Employee upon the terms and conditions set forth herein and each act done pursuant hereto, the parties hereto agree as follows: EMPLOYMENT 1. Nature of Employment. For the term of employment as below stated, and subject to general supervision by the Board of Directors of Palm Harbor (the "Board"), to whom Employee shall exclusively report, Palm Harbor hereby employs Employee as its Chairman of the Board to supervise and manage the operations of Palm Harbor, and to perform such other duties as are customarily provided by persons in similar officer positions with companies of the same general size and engaged in comparable businesses as the Company and as the Board shall from time to time reasonably prescribe. Employee shall have the authority to bind Palm Harbor to contracts to the same extent as the Chief Executive Officer and/or President of Palm Harbor, without the necessity of having the Board adopt a specific resolution in each such instance in which the Chief Executive Officer and/or President has or is given authority to execute contracts. 2. Initial Term. Subject to earlier termination as hereinafter provided, the initial term of employment of Employee hereunder shall commence on the date hereof, and continue for a period of eight years, which eight-year term shall be renewable at the end of such eight-year period upon mutual written agreement of Palm Harbor and Employee. As used herein, the phrase "term of employment" shall mean said initial eight-year term of employment as well as any renewal terms thereof. 3. Termination. This Agreement shall be terminated prior to the expiration of the term of employment only as follows: (a) by mutual consent of the parties; 2 (b) upon the death or permanent disability (as determined in accordance with the then existing policy of Palm Harbor) of Employee; (c) by Palm Harbor, upon conviction of a felony by Employee; (d) by Palm Harbor, upon commission of any intentional misconduct relating to the business of Palm Harbor which causes material damage to Palm Harbor; or (e) at Employee's option. 4. Relationship. In performing the services described under this Agreement, it is mutually understood and agreed that Employee will at all times be acting and performing as an employee. This Agreement creates the relationship of principal and agent between Palm Harbor and Employee during the employment period. Subject to the limitations in Section 1, Employee shall have the authority to create obligations and make any contracts, agreements, representations and warranties on behalf of and in the name of Palm Harbor during the employment period. 5. Services. During the term of employment, Employee shall furnish the services of Chairman of the Board to Palm Harbor for 100 days per year during the three fiscal years following the date of this Agreement, and 50 days per year during the five fiscal years thereafter, and shall perform such other services reasonably related thereto as the Board may from time to time reasonably request. 6. Compensation. As compensation for his services to Palm Harbor and other duties and responsibilities herein contemplated during the term of employment, Employee shall receive from Palm Harbor $400,000 per annum during the term of employment that he provides 100 days of service to Palm Harbor, and $300,000 per annum during the term of employment that he provides 75 days of service to Palm Harbor, such amounts to be paid evenly during Palm Harbor's 24 pay periods. 7. Sick Leave, etc. During the term of employment, Employee shall be entitled to sick leave of such duration as he is currently entitled, and dental, medical and other insurance and other fringe benefits, as are consistent with Palm Harbor's policy for its executive level employees. All reasonable travel expenses and other business expenses incurred by Employee in connection with the performance of his services for Palm Harbor shall be reimbursed to Employee by Palm Harbor. Such reimbursement shall be made upon presentation to Palm Harbor of vouchers, receipts, business purpose summaries and other statements itemizing such expenses in detail complying with all tax reporting requirements therefor and reimbursement policies of Palm Harbor. 8. Compensation in the Event of Termination. If this Agreement is terminated for any reason, Employee or his estate, as applicable, shall be entitled to receive the lesser of (i) $1,000,000 or (ii) $16,667 multiplied by the remainder of 96 minus the number of months Employee provided services as an employee under this Agreement after March 27, 1999. Any amounts due and owing to Employee or his estate under this Section 8 shall be payable in cash, at Employee's or his -2- 3 executor's, as applicable, sole option (i) in equal monthly installments over a number of months selected by Employee or the executor of his estate, as applicable; or (ii) in one lump sum payment within 30 days of the date of termination. 9. ARBITRATION. THE PARTIES AGREE THAT ANY AND ALL DISPUTES BETWEEN THEM RELATED HERETO AND ANY RELATED CLAIM BY ANY PARTY THAT CANNOT AMICABLY BE SETTLED SHALL BE DETERMINED SOLELY AND EXCLUSIVELY BY ARBITRATION IN ACCORDANCE WITH THE RULES THEN PROMULGATED BY THE AMERICAN ARBITRATION ASSOCIATION ("AAA") OR ANY SUCCESSOR AT ITS OFFICES NEAREST DALLAS, TEXAS, UNLESS THE PARTIES OTHERWISE AGREE IN WRITING. A DISPUTE SUBJECT TO THE PROVISIONS OF THIS SECTION 9 WILL EXIST IF EITHER PARTY NOTIFIES THE OTHER IN WRITING THAT A DISPUTE SUBJECT TO ARBITRATION EXISTS AND STATES WITH REASONABLE SPECIFICITY THE ISSUES SUBJECT TO DISPUTE (THE "ARBITRATION NOTICE"). THE PARTIES AGREE THAT AFTER THE ISSUANCE OF AN ARBITRATION NOTICE, THE PARTIES WILL TRY IN GOOD FAITH TO RESOLVE THE DISPUTE BY MEDIATION IN ACCORDANCE WITH THE COMMERCIAL MEDIATION RULES OF THE AAA BETWEEN THE DATE OF ISSUANCE OF THE ARBITRATION NOTICE AND THE DATE SET FOR ARBITRATION. THE PARTIES ALSO AGREE THAT THE AAA OPTIONAL RULES FOR EMERGENCY MEASURES OF PROTECTION SHALL APPLY TO THE PROCEEDING. IF THE DISPUTE IS NOT SETTLED BY THE DATE SET FOR ARBITRATION, THEN ANY REMAINING UNRESOLVED CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE BREACH THEREOF WILL BE RESOLVED BY BINDING ARBITRATION IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AAA, AND JUDGMENT UPON THE AWARD RENDERED BY THE ARBITRATOR(S) MAY BE ENTERED AND ENFORCED IN ANY COURT OF COMPETENT JURISDICTION. ANY MEDIATOR OR ARBITRATOR SELECTED TO RESOLVE SUCH A DISPUTE MUST HAVE AT LEAST 10 YEARS EXPERIENCE IN THE FINANCE FIELD AND MUST HAVE ACTED AS MEDIATOR OR ARBITRATOR IN AT LEAST FIVE PRIOR DISPUTES WHERE THE AMOUNT IN CONTROVERSY EQUALS OR EXCEEDS THE AMOUNT IN CONTROVERSY IN THE SUBJECT DISPUTE. ANY SUCH MEDIATOR OR ARBITRATOR MUST BE ACCEPTABLE TO EMPLOYEE AND PALM HARBOR AND MUST BE KNOWLEDGEABLE ABOUT MANUFACTURED HOUSING AND RELATED FINANCIAL ISSUES; PROVIDED, HOWEVER, THAT SUCH MEDIATOR OR ARBITRATOR SHALL NOT BE EMPLOYED BY OR ACTING AS A CONSULTANT TO A COMPETITOR OF PALM HARBOR. IF THE PARTIES ARE UNABLE TO REACH AGREEMENT ON A MEDIATOR OR ARBITRATOR WITHIN SEVEN DAYS AFTER RECEIPT OF THE ARBITRATION NOTICE, THEN A MEDIATOR OR ARBITRATOR MEETING THE REQUIREMENTS OF THIS SECTION 9 WILL BE SELECTED BY THE AAA. 10. Confidentiality. During the term of this Agreement, and thereafter, Employee shall not use for his personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company other than Palm Harbor or its affiliates, -3- 4 any Confidential Information. "Confidential Information" means information relating to the operations of Palm Harbor or any subsidiaries or affiliates thereof that is not generally known, is proprietary to Palm Harbor, its subsidiaries or affiliates or is made known to Employee or learned or acquired by Employee while in the employ of Palm Harbor, including, without limitation, information relating to advertising, marketing, accounting, purchasing, selling, finance and business methods and techniques. 11. Notice. Whenever, in connection with this Agreement, any notice is required to be given or any other act or event is to be done or occur on or by a particular number of days, and the date thus particularized should be a Saturday, Sunday, or bank holiday in the City of Dallas, Texas, such date shall be postponed to the next day which shall not be a Saturday, Sunday, or bank holiday in the City of Dallas, Texas. In the event a notice or other document is required to be given hereunder to Palm Harbor or Employee, such notice or other document shall either be personally delivered or be mailed to the party entitled to receive the same by registered or certified mail, return receipt requested, at the appropriate address set forth below or at such other address as such party shall designate in a written notice given in accordance with this Section: CORPORATION: EMPLOYEE: Palm Harbor Homes, Inc. Lee Posey 15303 Dallas Parkway, Suite 800 17427 Club Hill Drive Addison, Texas 75001 Dallas, Texas 75248 Notice shall be deemed given on the date of actual delivery, if delivered in person, or, if mailed, then on the date noted on the return receipt. 12. Severability and Reformation. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations of Employee or Palm Harbor under this Agreement would not be materially and adversely affected thereby, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part thereof, the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom, and in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible, and Palm Harbor and Employee hereby request the court or any arbitrator to whom disputes relating to this Agreement are submitted to reform the otherwise unenforceable covenant in accordance with this Section 12. 13. Waiver, Modification, and Integration. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any party. This instrument contains the entire agreement of the parties and supersedes all prior and contemporaneous representations, understandings and agreements, either oral or in writing, between the parties and all such prior or contemporaneous representations, understandings and agreements (including, but not limited to, the Original Agreement) are hereby terminated. This -4- 5 Agreement may not be modified, altered or amended except by written agreement executed by all the parties hereto. 14. Binding Effect and Assignability. Employee and Palm Harbor understand and acknowledge that Employee's duties and responsibilities under this Agreement are personal in nature and shall not be assigned by Employee or Palm Harbor to any other person or entity without the prior written consent of the other party hereto, which consent may be withheld in such party's sole discretion. 15. Law Applicable; Venue. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas; this Agreement is performable in, and venue for any litigation shall lie in, Dallas County, Texas. 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original instrument, and all of which together shall constitute one and the same Agreement. 17. Attorney's Fees. The prevailing party in any arbitration brought by or against the other party to enforce any provision of this Agreement shall be entitled to recover against the non-prevailing party the reasonable attorney's fees, court or arbitration costs and other expenses incurred by the prevailing party. IN WITNESS WHEREOF, this Agreement is executed as of the date first set above. PALM HARBOR HOMES, INC., EMPLOYEE a Florida corporation - -------------------------------- -------------------------------- LARRY KEENER, CHIEF EXECUTIVE LEE POSEY OFFICER AND PRESIDENT -5- EX-13.1 3 ANNUAL REPORT TO SECURITY HOLDERS 1 EXHIBIT 13.1 11 PALM HARBOR HOMES 1999 ANNUAL REPORT SELECTED FINANCIAL DATA (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AND OPERATING DATA)
Fiscal Year Ended ---------------------------------------------------------------------- March 31, March 29, March 28, March 27, March 26, 1995 1996 1997 1998 1999 ---------- ---------- ---------- ---------- ---------- STATEMENT OF INCOME: Net sales $ 330,547 $ 417,214 $ 563,192 $ 637,268 $ 761,374 Cost of sales 275,848 345,508 436,850 466,494 530,698 Gross profit 54,699 71,706 126,342 170,774 230,676 Selling, general and administrative expenses 40,776 52,676 86,927 117,018 158,916 ---------- ---------- ---------- ---------- ---------- Income from operations 13,923 19,030 39,415 53,756 71,760 Interest expense (395) (751) (3,085) (4,700) (9,728) Other income 514 1,276 2,250 2,718 4,933 ---------- ---------- ---------- ---------- ---------- Income before income from affiliate and income taxes 14,042 19,555 38,580 51,774 66,965 Income from affiliate 2,745 2,995 1,049 -- -- ---------- ---------- ---------- ---------- ---------- Income before income taxes 16,787 22,550 39,629 51,774 66,965 Income tax expense 5,562 7,572 14,890 19,920 26,788 ---------- ---------- ---------- ---------- ---------- Net income $ 11,225 $ 14,978 $ 24,739 $ 31,854 $ 40,177 ========== ========== ========== ========== ========== Net income per common share - basic and diluted $ 0.59 $ 0.75 $ 1.07 $ 1.35 $ 1.69 ========== ========== ========== ========== ========== Weighted average common shares outstanding 18,905 19,863 23,013 23,589 23,783 Weighted average common shares outstanding - assuming dilution 18,905 19,863 23,036 23,632 23,838 OPERATING DATA: Number of homes sold 10,197 12,175 13,873 14,144 15,628 Multi-section homes sold as a percentage of total homes sold 86% 82% 81% 81% 78% Number of manufacturing facilities(1) 13 14 15 16 16 Number of company-owned superstores(1) 9 16 54 94 120 BALANCE SHEET DATA: Working capital $ 1,966 $ 22,727 $ 39,232 $ 22,290 $ 40,316 Total assets 97,650 143,712 246,335 353,846 427,410 Long-term debt 7,700 3,784 3,583 3,382 3,149 Shareholders' equity 32,907 68,982 119,949 157,056 195,325
(1) As of the end of the applicable period. 2 12 Palm Harbor Homes 1999 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations (In thousands of dollars, except per share and operating data) Palm Harbor reported record net sales, net income and earnings per share in fiscal 1999. These results reflect a compound growth rate over the last five years of 27%, 46% and 40% for net sales, net income and earnings per share, respectively. The Company's strategic commitment to vertically integrating its operations has had positive results. During the year, the Company increased the number of Company-owned retail superstores by 26 to 120. This increase in Company-owned retail superstores resulted in a rise in the internalization rate, which is the percentage of homes manufactured by the Company and sold through the Company's retail superstores. For fiscal 1999, the Company's internalization rate was 63% up from 53% in the preceding fiscal year. CountryPlace Mortgage, the Company's finance subsidiary, reached record funding levels and Standard Casualty Company, the Company's insurance subsidiary, continued its consistent contribution through premiums on its property and casualty insurance. The following table sets forth certain items of the Company's statement of income as a percentage of net sales for the period indicated.
Fiscal Year Ended ---------------------------------------- March 28, March 27, March 26, 1997 1998 1999 ---------- ---------- ---------- Net sales 100.0% 100.0% 100.0% Cost of sales 77.6 73.2 69.7 ---------- ---------- ---------- Gross profit 22.4 26.8 30.3 Selling, general and administrative expenses 15.4 18.4 20.9 ---------- ---------- ---------- Income from operations 7.0 8.4 9.4 Interest expense (0.6) (0.7) (1.3) Other income 0.4 0.4 0.7 ---------- ---------- ---------- Income before income from affiliate and income taxes 6.8 8.1 8.8 Income from affiliate 0.2 -- -- Income tax expense 2.6 3.1 3.5 ---------- ---------- ---------- Net income 4.4% 5.0% 5.3% ========== ========== ==========
The following table summarizes certain key sales statistics as of and for the period indicated.
Fiscal Year Ended ---------------------------------------- March 28, March 27, March 26, 1997 1998 1999 ---------- ---------- ---------- Homes sold through company-owned retail superstores 5,211 7,696 10,776 Total new homes sold 13,873 14,144 15,628 Internalization rate (1) 31% 53% 63% Average new home price - retail $ 54,000 $ 55,000 $ 55,000 Number of retail superstores at end of period 54 94(2) 120 Homes sold to independent retailers 8,662 6,448 4,852
(1) The internalization rate is the percentage of new homes that are manufactured by the Company and sold through Company-owned retail superstores. (2) Includes the 18 retail superstores acquired at the close of business in fiscal 1998. 3 13 1999 COMPARED TO 1998 Net Sales. Net sales increased 19.5% to $761.4 million in 1999 from $637.3 million in 1998. Of this increase, 17.0% was the result of an increase in manufactured housing sales and 2.5% was the result of an increase in financial services revenues. The increase in manufactured housing sales was primarily due to a 40.0% increase in the volume of homes sold through Company-owned retail superstores. The Company ended fiscal 1999 with 120 retail superstores compared to 76 in 1998, excluding the 18 retail superstores acquired at the close of business in fiscal 1998. The increase in financial services revenues was primarily due to an increase in the gain on the sale of loans in which CountryPlace Mortgage, Ltd., the Company's finance subsidiary, retains a residual interest. Gross Profit. Gross profit increased 35.1% to $230.7 million in 1999 compared to $170.8 million in 1998. During the same period, gross profit margin as a percentage of net sales increased to 30.3% compared to 26.8%. This increase was the result of selling 63% of the Company's homes through Company-owned retail superstores in 1999 versus 53% in 1998 and production efficiencies at manufacturing facilities. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 35.8% to $158.9 million in 1999 from $117.0 million in 1998, primarily due to planned increases in promotion and advertising expenditures, expenses associated with the 44 additional retail superstores and performance-based compensation expense. As a percentage of net sales, selling, general and administrative expenses increased, as planned, to 20.9% in 1999 from 18.4% in 1998. This planned increase is due to the growth in the Company's retail operations which, generally, have higher selling, general and administrative expenses as a percentage of net sales as compared to wholesale operations. Income from Operations. As a result of the foregoing factors, income from operations increased 33.5% to $71.8 million in 1999 compared to $53.8 million in 1998. Interest Expense. Interest expense increased 107.0% to $9.7 million in 1999 from $4.7 million in 1998. This increase was primarily due to increased borrowings under the Company's floor plan credit facilities. Other Income. Other income increased 81.5% to $4.9 million in 1999 from $2.7 million in 1998. This increase was primarily the result of increased interest income and gains on sales of investments. 1998 COMPARED TO 1997 Net Sales. Net sales increased 13.2% to $637.3 million in 1998 from $563.2 million in 1997. Although retail sales increased 50% and wholesale sales increased 6%, consolidated net sales increased only 13.2% due primarily to two factors. First, net sales were impacted by the increase in retail stock inventory as the number of Company-owned retail superstores increased from 54 in 1997 to 76 in 1998, excluding the 18 retail superstores acquired at the close of business in fiscal 1998. Second, the increasing internalization rate limits sales in certain markets to independent retailers. Gross Profit. Gross profit increased 35.2% to $170.8 million in 1998 compared to $126.3 million in 1997. During the same period, gross profit margin as a percentage of net sales increased to 26.8% compared to 22.4%. This increase was primarily the result of selling 53% of the Company's homes through Company-owned retail superstores in 1998 versus 31% in 1997 and production efficiencies at manufacturing facilities. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 34.6% to $117.0 million in 1998 from $86.9 million in 1997. As a percentage of net sales, selling, general and administrative expenses increased, as planned, to 18.4% in 1998 from 15.4% in 1997. This planned increase is partially due to the growth in the Company's retail operations which, generally, have higher selling, general and administrative expenses as a percentage of net sales as compared to wholesale operations. Selling, general and administrative expenses were also impacted by increased promotion and advertising expenditures and performance-based compensation expense. 4 14 Palm Harbor Homes 1999 Annual Report Management's Discussion and Analysis of Financial Condition and Results of Operations (In thousands of dollars, except per share and operating data) Income from Operations. As a result of the foregoing factors, income from operations increased 36.4% to $53.8 million in 1998 compared to $39.4 million in 1997. Interest Expense. Interest expense increased 52.4% to $4.7 million in 1998 from $3.1 million in 1997. This increase was primarily due to an increase in the floor plan payable. Other Income. Other income increased 20.8% to $2.7 million in 1998 from $2.3 million in 1997. This increase was primarily the result of additional interest earned due to an increase in the loan portfolio originated by CountryPlace Mortgage, Ltd., the Company's finance subsidiary. Income from Affiliate. Income from affiliate was $1.0 million in 1997 compared to zero in 1998. The decrease was due to consolidating the operations of Newco Homes, Inc. ("Newco") with the Company's operations beginning in the second quarter of fiscal 1997. See "Acquisitions" in Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities increased to $20.1 million in 1999 compared to $16.3 million in 1998, after reflecting substantial increases in inventory required to open new Company-owned retail superstores. Cash provided by operations combined with additional floor plan financing and the borrowings on the revolving line of credit has been adequate to support the Company's acquisitions and working capital needs since its public offerings. On August 1, 1996, the Company acquired the remaining 58.4% of Newco, a Texas-based retailer of manufactured homes. The Company had previously owned 41.6% of Newco's outstanding shares. The purchase price for the remaining 58.4% of Newco's outstanding shares consisted of $17.3 million cash and 1,444,445 shares of the Company's common stock. On March 27, 1998, the Company acquired the Cannon Group, a privately-owned, Atlanta-based operator of 18 retail manufactured home centers. The purchase price consisted of $26.8 million cash and 157,975 shares of the Company's common stock. The purchase prices of other acquisitions during fiscal year 1998 totaled $7.8 million in cash. Capital expenditures were $21.6 million, $16.7 million and $20.8 million in 1997, 1998 and 1999, respectively. Capital expenditures during these periods were for expansion of retail superstores and manufacturing facilities and for normal property, plant and equipment improvements. In 1997, capital expenditures included the April 1996 acquisition and renovation of a manufacturing facility in Georgia for $3.2 million, the November 1996 acquisition of a manufacturing facility in Arizona for $1.4 million and expansion of retail superstores for $9.1 million. Approximately $7.0 million was expended for improvements on mature manufacturing facilities. In 1998, capital expenditures included $4.1 million for renovation of the manufacturing facility in Arizona that was acquired in November 1996 and expansion of retail superstores for $8.0 million. Approximately $4.6 million was expended for improvements on mature manufacturing facilities. In 1999, capital expenditures included $11.7 million for expansion of retail superstores and approximately $9.1 million for improvements on mature manufacturing facilities. The Company expects capital expenditures to approximate $20.0 million during 2000 to add 15-20 retail superstores and to upgrade current manufacturing facilities. The Company has floor plan credit facilities totaling $80.0 million and $150.0 million from financial institutions as of March 27, 1998 and March 26, 1999, respectively, to finance a major portion of its home inventory at the Company's retail superstores. These facilities are secured by a portion of the Company's home inventory and cash in transit from financial institutions. Interest rates are prime (7.75% at March 26, 1999). The Company had $79.6 million and $128.9 million outstanding on these floor plan credit facilities at March 27, 1998 and March 26, 1999, respectively. In July 1997, the Company obtained a $25.0 million unsecured revolving line of credit from a financial institution for general corporate purposes. The line of credit bears interest, at the option of the Company (under certain conditions), at either the LIBOR rate (4.94% at March 26, 1999) plus 0.625% or the prime rate (7.75% at March 26, 1999) minus 1%. The line of credit contains provisions regarding minimum net worth requirements and certain indebtedness limitations which would limit the amount available for future borrowings. The line of credit also requires an annual commitment fee of $20,000 and is available through July 10, 1999. The Company had $17.0 million and 5 15 zero outstanding on this line of credit at March 27, 1998 and March 26, 1999, respectively. The increase in floor plan credit facilities has effectively reduced the amount available under the line of credit to zero. The Company believes that cash flow from operations, together with floor plan financing, will be adequate to support its working capital and currently planned capital expenditure needs in the foreseeable future. The Company may, from time to time, obtain additional floor plan financing for its retail inventories. Such practice is customary in the industry. However, because future cash flows and the availability of financing will depend on a number of factors, including prevailing economic and financial conditions, business and other factors beyond the Company's control, no assurances can be given in this regard. In accordance with customary business practice in the manufactured housing industry, the Company has entered into repurchase agreements with various financial institutions and other credit sources pursuant to which the Company has agreed, under certain circumstances, to repurchase homes sold to independent retailers in the event of a default by a retailer in its obligation to such credit sources. Under such agreements, the Company agrees to repurchase homes at declining prices over the term of the agreement (which generally ranges from 12 to 18 months). The Company estimates that its potential obligations under such repurchase agreements approximated $65.0 million at March 26, 1999. During 1997, 1998 and 1999, net (income)/expenses incurred by the Company under these repurchase agreements totaled $55,000, ($13,000) and $29,000, respectively. Year 2000 Issue. The "Year 2000 Issue" is the result of computer programs that use two digits instead of four to record the applicable year. Computer programs that have date-sensitive software may be unable to properly categorize and process dates occurring after December 31, 1999. This could result in a system failure of miscalculations in the Company's computer programs causing significant, unanticipated liabilities, expenses and possible disruption of its business. Based on an assessment by the Company of operating, financial and management information systems, the Company implemented a plan during the third quarter of fiscal 1997 to modify or upgrade certain equipment and software necessary to address the Year 2000 Issue. Costs are estimated to be significantly less than $0.50 million. Under the plan, all modifications and upgrading of critical systems will be completed and tested by September 30, 1999. The plan is designed to utilize resources from within the Company with minimal impact on other non-Year 2000 Issue management information system projects. Additionally, risk of business disruption exists if Year 2000 Issue-related failures occur among the Company's lenders, suppliers, transporters and other upon which the Company relies, but over which the Company has no control. There can be no guarantee that the systems of these third parties on which the Company relies will be modified on a timely basis and will not have an adverse effect on the Company's systems or operations. The Company is maintaining contact with these critical third parties to determine the extent to which the Company would be affected if there were Year 2000 Issue-related failures among these third parties. To date no known Year 2000 Issue-related failures among these third parties exist. There are no formal contingency plans in place if the Company does not complete all Year 2000 management information system projects. The Year 2000 Issue is being closely monitored, and additional measures will be taken as risks are determined. FORWARD-LOOKING INFORMATION Management is unaware of any trends or conditions that could have a material adverse effect on the Company's consolidated financial position, future results of operations or liquidity. However, investors should also be aware of factors which could have a negative impact on prospects and the consistency of progress. These include political, economic or other factors such as inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the business in each of the Company's markets; competitive product, advertising, promotional and pricing activity; dependence on the rate of development and degree of acceptance of new product introductions in the market place; and the difficulty of forecasting sales at certain times in certain markets. 6 16 PALM HARBOR HOMES 1999 ANNUAL REPORT CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS)
March 27, March 26, 1998 1999 ---------- ---------- Assets Current assets: Cash and cash equivalents $ 21,073 $ 39,413 Investments 5,091 17,167 Receivables 71,171 79,219 Inventories 108,185 122,662 Prepaid expenses and other assets 602 554 Deferred income taxes 4,561 5,795 ---------- ---------- Total current assets 210,683 264,810 Notes receivable 3,977 2,200 Goodwill, net 60,509 59,236 Other assets, net 11,317 20,598 ---------- ---------- 75,803 82,034 Property, plant and equipment, at cost: Land and improvements 14,166 16,189 Buildings and improvements 44,187 51,023 Machinery and equipment 29,025 35,422 Construction in progress 3,580 8,742 ---------- ---------- 90,958 111,376 Accumulated depreciation 23,598 30,810 ---------- ---------- 67,360 80,566 ---------- ---------- Total assets $ 353,846 $ 427,410 ========== ========== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 44,547 $ 48,026 Floor plan payable 79,564 128,852 Line of credit 17,000 -- Accrued liabilities 46,338 47,383 Current portion of long-term debt 944 233 ---------- ---------- Total current liabilities 188,393 224,494 Long-term debt, less current portion 3,382 3,149 Deferred income taxes 5,015 4,442 Commitments and contingencies Shareholders' equity: Preferred stock, $.01 par value: Authorized shares - 2,000,000 Issued and outstanding shares - none Common stock, $.01 par value: Authorized shares - 50,000,000 Issued shares - 19,045,668 at March 27, 1998, and 23,807,879 at March 26, 1999 191 239 Additional paid-in capital 54,197 54,149 Retained earnings 102,865 143,681 ---------- ---------- 157,253 198,069 Less treasury shares - 16,611 at March 27, 1998, and 30,765 at March 26, 1999 (197) (442) Unearned compensation -- (2,302) ---------- ---------- Total shareholders' equity 157,056 195,325 ---------- ---------- Total liabilities and shareholders' equity $ 353,846 $ 427,410 ========== ==========
See accompanying notes. 7 17 PALM HARBOR HOMES 1999 ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended -------------------------------------- March 28, March 27, March 26, 1997 1998 1999 ---------- ---------- ---------- Net sales $ 563,192 $ 637,268 $ 761,374 Cost of sales 436,850 466,494 530,698 Selling, general and administrative expenses 86,927 117,018 158,916 ---------- ---------- ---------- Income from operations 39,415 53,756 71,760 Interest expense (3,085) (4,700) (9,728) Other income 2,250 2,718 4,933 ---------- ---------- ---------- Income before income from affiliate and income taxes 38,580 51,774 66,965 Income from affiliate 1,049 -- -- ---------- ---------- ---------- Income before income taxes 39,629 51,774 66,965 Income tax expense 14,890 19,920 26,788 ---------- ---------- ---------- Net income $ 24,739 $ 31,854 $ 40,177 ========== ========== ========== Net income per common share - basic and diluted $ 1.07 $ 1.35 $ 1.69 ========== ========== ========== Weighted average common shares outstanding 23,013 23,589 23,783 ========== ========== ========== Weighted average common shares outstanding - assuming dilution 23,036 23,632 23,838 ========== ========== ==========
See accompanying notes. 8 18 PALM HARBOR HOMES 1999 ANNUAL REPORT CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS OF DOLLARS)
Common Stock Additional --------------------------- Paid-In Retained Shares Amount Capital Earnings ------------ ------------ ------------ ------------ Balance at March 29, 1996 10,863,598 $ 109 $ 23,012 $ 46,272 Net income -- -- -- 24,739 1.25 to 1 stock split 2,733,408 27 (27) -- Issuance related to acquisitions 1,512,746 15 25,983 -- Treasury shares purchased - net of sales -- -- 26 -- Payments on shareholders' notes -- -- -- -- ------------ ------------ ------------ ------------ Balance at March 28, 1997 15,109,752 151 48,994 71,011 Net income -- -- -- 31,854 1.25 to 1 stock split 3,777,941 38 (38) -- Issuance related to acquisition 157,975 2 5,241 -- Treasury shares sold - net of purchases -- -- -- -- Payments on shareholders' notes -- -- -- -- ------------ ------------ ------------ ------------ Balance at March 27, 1998 19,045,668 191 54,197 102,865 Net income -- -- -- 40,177 1.25 to 1 stock split 4,762,211 48 (48) -- Treasury shares purchased -- -- -- -- Unrealized gain -- -- -- 639 Long-Term Incentive Plan -- -- -- -- ------------ ------------ ------------ ------------ Balance at March 26, 1999 23,807,879 $ 239 $ 54,149 $ 143,681 ============ ============ ============ ============ Notes Treasury Shares Receivable ---------------------------- From Unearned Shares Amount Shareholders Compensation Total ------------ ------------ ------------ ------------ ------------ Balance at March 29, 1996 (13,281) $ (205) $ (206) -- $ 68,982 Net income -- -- -- -- 24,739 1.25 to 1 stock split (2,586) -- -- -- -- Issuance related to acquisitions -- -- -- -- 25,998 Treasury shares purchased - net of sales 2,423 11 -- -- 37 Payments on shareholders' notes -- -- 193 -- 193 ------------ ------------ ------------ ------------ ------------ Balance at March 28, 1997 (13,444) (194) (13) -- 119,949 Net income -- -- -- -- 31,854 1.25 to 1 stock split (3,361) -- -- -- -- Issuance related to acquisition -- -- -- -- 5,243 Treasury shares sold - net of purchases 194 (3) -- -- (3) Payments on shareholders' notes -- -- 13 -- 13 ------------ ------------ ------------ ------------ ------------ Balance at March 27, 1998 (16,611) (197) -- -- 157,056 Net income -- -- -- -- 40,177 1.25 to 1 stock split (4,154) -- -- -- -- Treasury shares purchased (10,000) (245) -- -- (245) Unrealized gain -- -- -- -- 639 Long-Term Incentive Plan -- -- -- $ (2,302) (2,302) ------------ ------------ ------------ ------------ ------------ Balance at March 26, 1999 (30,765) $ (442) $ - $ (2,302) $ 195,325 ============ ============ ============ ============ ============
See accompanying notes. 9 19 PALM HARBOR HOMES 1999 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
Year Ended -------------------------------------- March 28, March 27, March 26, 1997 1998 1999 ---------- ---------- ---------- Operating Activities Net income $ 24,739 $ 31,854 $ 40,177 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 6,026 5,641 7,588 Amortization 123 1,870 3,982 Deferred income tax benefit (898) (1,597) (1,807) Income from affiliate (1,049) -- -- Gain on sale of loans -- -- (11,438) Gain on disposition of assets (32) (27) (45) Purchases of stock for long-term incentive plan -- -- (2,302) Changes in operating assets and liabilities Accounts receivable (4,868) (14,838) 6,586 Due from affiliate 3,848 -- -- Inventories (20,973) (19,684) (14,477) Prepaid expenses and other current assets (20) 804 48 Other assets 6,202 (2,148) (10,213) Accounts payable and accrued expenses (7,169) 14,449 4,524 ---------- ---------- ---------- Cash provided by operations 5,929 16,324 22,623 Loans originated -- -- (160,690) Sale of loans -- -- 158,133 ---------- ---------- ---------- Net cash provided by operating activities 5,929 16,324 20,066 Investing Activities Purchases of property, plant and equipment (21,608) (16,707) (20,846) Cash consideration for acquisitions (net of cash acquired) (3,284) (34,648) -- Purchases of investments (10,206) (5,302) (23,900) Sales of investments 12,195 3,308 11,824 Proceeds from disposition of assets 35 69 97 ---------- ---------- ---------- Net cash used in investing activities (22,868) (53,280) (32,825) Financing Activities Net proceeds from (payments on) floor plan payable 19,801 14,858 49,288 Borrowings on line of credit -- 22,000 -- Payments on line of credit -- (5,000) (17,000) Principal payments on notes payable and long-term debt (187) (185) (944) Net sales (purchases) of treasury stock 37 (3) (245) Notes receivable from shareholders, net 193 13 -- ---------- ---------- ---------- Net cash provided by financing activities 19,844 31,683 31,099 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 2,905 (5,273) 18,340 Cash and cash equivalents at beginning of year 23,441 26,346 21,073 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 26,346 $ 21,073 $ 39,413 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,988 $ 4,674 $ 9,024 Income taxes $ 16,190 $ 22,592 $ 28,625 Supplemental schedule of non-cash investing activities: Common stock issuance for acquisitions $ 25,998 $ 5,243 $ -- Unrealized gain on sale of loans $ -- $ -- $ 639
See accompanying notes. 10 20 PALM HARBOR HOMES 1999 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include the accounts of Palm Harbor Homes, Inc. (the "Company") and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Company's fiscal year ends on the last Friday in March. Headquartered in Dallas, Texas, the Company markets manufactured homes nationwide through vertically integrated operations, encompassing manufacturing, marketing, financing and insurance. Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes thereto. Actual results could differ from the assumptions used by management in preparation of the financial statements. Revenue recognition Retail sales are recognized when cash payment is received or, in the case of credit sales, when a down payment is received, the customer enters into an installment sales contract and the home is delivered. Wholesale sales are recognized when the home is shipped which is when the title passes to the independent retailer. Most of the homes sold to independent retailers are financed through standard industry arrangements which include repurchase agreements (see Note 14). The Company extends credit in the normal course of business under normal trade terms and its receivables are subject to normal industry risk. The Company has adopted Statement of Financial Accounting Standards No. 125 (SFAS 125) "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which became effective after December 31, 1996. SFAS 125 modifies the Company's accounting policies for the origination and sale of loan contracts through CountryPlace Mortgage, Ltd. ("CountryPlace"), the Company's finance subsidiary. CountryPlace sells the loan contracts to national consumer finance companies and retains a residual interest in the interest generated by the sold contracts. The fair value of the residual interest is determined using a number of market based assumptions. The gain on the sale of these contracts is included in revenues net of any estimated credit losses while unrealized gains are included as a component of retained earnings. The effect of SFAS 125 on prior periods was not material. The Company also recognizes income from the sale of property and casualty insurance policies. During fiscal year 1999, the Company recognized approximately $11.4 million in gains and $639,000 in unrealized gains on the sale of loan contracts through CountryPlace in accordance with SFAS 125. Additionally, as of March 26, 1999, the Company had net receivables of approximately $8.7 million related to the retained residual interests of loan contracts previously sold by CountryPlace, of which $7.0 million is long-term and has been included as other assets. Cash and cash equivalents Cash and cash equivalents are all liquid investments with maturities of three months or less when purchased. Investments The Company holds investments as trading and available-for-sale. The trading account assets consist of marketable debt and equity securities and are stated at fair value. Marketable equity securities not classified as trading are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in shareholders' equity. Inventories Raw materials inventories are valued at the lower of cost (first-in, first-out method which approximates actual cost) or market. Finished goods are valued at the lower of cost or market, using the specific identification method. 11 21 Property, plant and equipment Property, plant and equipment are carried at cost. Depreciation is calculated using the straight-line method over the assets' estimated useful lives. Leasehold improvements are amortized using the straight-line method over the shorter of the lease period or the improvements' useful lives. Goodwill Goodwill is the excess of cost over fair value of net assets of businesses acquired and is amortized on the straight-line method over the expected periods to be benefited - in most cases between 10 and 20 years. The Company evaluates the existence of goodwill impairment on the basis of whether the goodwill is fully recoverable from projected, undiscounted future cash flows. Product warranties Products are warranted against manufacturing defects for a period of one year commencing at the time of sale to the retail customer. Estimated costs relating to product warranties are provided at the date of sale. Start-up costs Costs incurred in connection with the start-up of manufacturing facilities and retail superstores are expensed as incurred. Income taxes Deferred income taxes are determined by the liability method and reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Earnings per share During fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings per Share." SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. The adoption of SFAS 128 did not result in a change to the reported earnings per share of the Company. In computing both basic and diluted earnings per share, the number of weighted average shares outstanding during the periods presented, adjusted for subsequent common stock splits, were used. Historical earnings per share data has been adjusted to reflect the effects of the 1.25 to 1 stock splits effective as of July 26, 1996, July 8, 1997 and July 14, 1998. Business segment information During fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way public companies report information about operating segments in annual financial statements and requires those companies to report selected information about reportable segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. 12 22 PALM HARBOR HOMES 1999 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. ACQUISITIONS On April 12, 1996, the Company acquired Energy Efficient Housing, Inc., a retailer consisting of eight superstores in North Carolina, for a combination of cash and 68,301 common shares of the Company. On May 31, 1996, the Company acquired Standard Casualty Company, a property and casualty insurer of manufactured homes headquartered in Texas. On August 1, 1996, the Company acquired the remaining 58.4% of Newco Homes, Inc. ("Newco"), a Texas-based retailer of manufactured homes. The Company had previously owned 41.6% of Newco's outstanding shares. The purchase price for the remaining 58.4% of Newco's outstanding shares consisted of $17.3 million cash and 1,444,445 shares of the Company's common stock. Goodwill relating to the acquisition totaled approximately $25.8 million at March 28, 1997, and is being amortized over 20 years. Prior to the acquisition of the remaining 58.4% of Newco, the Company recorded its 41.6% equity interest in the net earnings of Newco as income from affiliate. On March 27, 1998, the Company acquired the Cannon Group, a privately-owned, Atlanta-based operator of 18 retail manufactured home centers. The purchase price consisted of $26.8 million cash and 157,975 shares of the Company's common stock. The purchase prices of other acquisitions during fiscal year 1998 totaled $7.8 million in cash. Goodwill relating to all of these acquisitions totaled approximately $34.6 million. All acquisitions were accounted for using the purchase method of accounting. 3. INVENTORIES Inventories consist of the following:
March 27, March 26, 1998 1999 ---------- ---------- (in thousands) Raw materials $ 8,625 $ 8,936 Work in process 2,803 3,208 Finished goods - manufacturing 156 247 Finished goods - retail 96,601 110,271 ---------- ---------- $ 108,185 $ 122,662 ========== ==========
4. INVESTMENTS The Company's investments, which totaled $5,091,000 and $17,167,000 at March 27, 1998 and March 26, 1999, respectively, consist of marketable debt and equity securities with original maturities beyond three months. 5. GOODWILL Goodwill was $63,522,000 at March 27, 1998 and $66,109,000 at March 26, 1999, with accumulated amortization of $3,013,000 and $6,873,000, respectively, as of those dates. 6. FLOOR PLAN PAYABLE The Company has floor plan credit facilities totaling $80.0 million and $150.0 million from financial institutions as of March 27, 1998 and March 26, 1999, respectively, to finance a major portion of its home inventory at the Company's retail superstores. These facilities are secured by a portion of the Company's home inventory and cash in transit from financial institutions. Interest rates are prime (7.75% at March 26, 1999). The Company had $79.6 million and $128.9 million outstanding on these floor plan credit facilities at March 27, 1998 and March 26, 1999, respectively. 13 23 The Company has entered into a floor plan financing agreement with a financial institution. As part of this agreement, the Company is able to earn interest on investments made with the financial institution, which can be withdrawn without any imposed restrictions. The interest rate on the outstanding borrowings is prime (7.75% at March 26, 1999). The agreement also calls for a minimum of $50.0 million to be maintained as the outstanding balance on the related credit facility. The agreement is effective until December 31, 1999. At March 26, 1999, the Company had $36.0 million invested and has classified this amount as Cash and Cash Equivalents in the accompanying Consolidated Balance Sheet. 7. LINE OF CREDIT On July 11, 1997, the Company obtained a $25.0 million unsecured revolving line of credit from a financial institution for general corporate purposes. The line of credit bears interest, at the option of the Company (under certain conditions), at either the LIBOR rate (4.94% at March 26, 1999) plus 0.625% or the prime rate (7.75% at March 26, 1999) minus 1%. The line of credit contains provisions regarding minimum net worth requirements and certain indebtedness limitations which would limit the amount available for future borrowings. The line of credit also requires an annual commitment fee of $20,000 and is available through July 10, 1999. The Company had $17.0 million and zero outstanding on this line of credit at March 27, 1998 and March 26, 1999, respectively. At March 26, 1999, the additional floor plan credit facilities discussed in Note 6 effectively reduced the amount available under the line of credit to zero. The weighted average interest rate for borrowings under the Company's revolving line of credit was 6.3% and 6.4% during fiscal 1998 and 1999, respectively. 8. ACCRUED LIABILITIES Accrued liabilities consist of the following:
March 27, March 26, 1998 1999 ---------- ---------- (in thousands) Salaries, wages and benefits $ 14,296 $ 16,228 Accrued closing costs on homes sold 6,429 8,863 Warranty 6,016 6,490 Customer deposits 4,676 5,806 Sales incentives 4,311 1,561 Other 10,610 8,435 ---------- ---------- $ 46,338 $ 47,383 ========== ==========
14 24 Palm Harbor Homes 1999 Annual Report Notes to Consolidated Financial Statements 9. LONG-TERM DEBT Long-term debt consists of the following:
March 27, March 26, 1998 1999 --------- --------- (in thousands) Economic development revenue bonds; interest payable monthly at 7.54%; monthly interest and principal payments of $40,029 through February 2001, $31,393 through January 2006 with final payment of $2,002,040 in February 2006 $ 3,598 $ 3,382 Promissory note; interest payable monthly at 9% per annum until March 13, 1999 with outstanding principal payment due March 13, 1999 728 -- --------- --------- 4,326 3,382 Less current portion 944 233 --------- --------- Long-term debt, less current portion $ 3,382 $ 3,149 ========= =========
The revenue bonds require the maintenance of certain financial statement ratios, prohibit the payment of dividends and are collateralized by certain fixed assets having a carrying value as of March 26, 1999 of $5,918,000. Scheduled maturities of long-term debt are as follows (in thousands):
Fiscal Year Amount - ----------- ------ 2000 $ 233 2001 243 2002 163 2003 176 2004 and thereafter 2,567 ------ $3,382 ======
The carrying value of the Company's long-term debt approximates its fair value. 10. INCOME TAXES Income tax expense for fiscal years 1997, 1998 and 1999 is as follows:
March 28, March 27, March 26, 1997 1998 1999 -------- -------- -------- (in thousands) Current: Federal $ 14,010 $ 19,941 $ 25,144 State 1,888 2,269 2,831 Deferred (1,008) (2,290) (1,187) -------- -------- -------- Total income taxes $ 14,890 $ 19,920 $ 26,788 ======== ======== ========
15 25 Significant components of deferred tax assets and liabilities are as follows:
March 27, March 26, 1998 1999 --------- --------- (in thousands) Current deferred tax assets Warranty reserves $ 2,106 $ 2,272 Accrued liabilities 969 2,041 Inventory 214 465 Other 1,272 1,017 --------- --------- 4,561 5,795 Non-current deferred tax assets Unrecognized income 1,842 2,240 --------- --------- Total deferred tax assets 6,403 8,035 Deferred tax liabilities Tax benefits purchased 3,168 2,921 Property and equipment 678 (200) Other 1,169 1,721 --------- --------- Total deferred tax liabilities 5,015 4,442 --------- --------- Net deferred income tax assets (liabilities) $ 1,388 $ 3,593 ========= =========
Tax benefits purchased are investments in Safe Harbor lease agreements that are carried net of tax benefits realized. The balance will be amortized over the remaining term of the related lease. The effective income tax rate on pretax earnings differed from the U.S. federal statutory rate for the following reasons:
March 28, March 27, March 26, 1997 1998 1999 --------- --------- --------- (in thousands) Tax at statutory rate $ 13,873 $ 18,121 $ 23,437 Increases (decreases) Equity in earnings of affiliate (367) -- -- State taxes - net of federal tax benefit 1,227 1,475 1,840 Goodwill amortization 400 612 1,023 Tax exempt interest (230) (87) -- Other (13) (201) 488 --------- --------- --------- Income tax expense $ 14,890 $ 19,920 $ 26,788 ========= ========= ========= Effective tax rate 37.6% 38.5% 40.0% ========= ========= =========
11. SHAREHOLDERS' EQUITY The Board of Directors may, without further action by the Company's shareholders, from time to time, authorize the issuance of shares of preferred stock in series and may, at the time of issuance, determine the powers, rights, preferences and limitations, including the dividend rate, conversion rights, voting rights, redemption price and liquidation preference, and the number of shares to be included in any such series. Any preferred stock so issued may rank senior to the common stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up, or both. In addition, any such shares of preferred stock may have class or series voting rights. 16 26 PALM HARBOR HOMES 1999 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. LONG-TERM INCENTIVE PLAN Effective March 29, 1999, the Company adopted the Fiscal Year 2000 Long-Term Incentive Plan (the "Plan") whereby certain key associates will receive awards of restricted common stock. These restricted stock awards will give the associate the right to receive a specific number of shares of common stock contingent upon remaining an associate of the Company for a specified period. The cost of the common stock acquired by the Company for the participants in the Plan is reflected as "Unearned Compensation" in the accompanying Consolidated Balance Sheet. The Plan is administered by a committee authorized by the Board of Directors. 13. EMPLOYEE PLAN The Company sponsors an employee savings plan (the "401k Plan") that is intended to provide participating employees with additional income upon retirement. Employees may contribute between 1% and 15% of eligible compensation to the 401k Plan. The Company matches 50% of the first 6% deferred by employees. Employees are eligible to participate after three months of employment and employer contributions, which begin one year after employment, are vested at the rate of 20% per year and are fully vested after five years of employment. Contribution expense was $1,099,000, $1,891,000 and $2,469,000 in fiscal years 1997, 1998 and 1999, respectively. 14. COMMITMENTS AND CONTINGENCIES Future minimum lease payments for all noncancelable operating leases having a remaining term in excess of one year at March 26, 1999, are as follows (in thousands):
Fiscal Year Amount - ----------- ------ 2000 $ 5,484 2001 4,351 2002 2,936 2003 1,986 2004 and thereafter 7,119 ------- $21,876 =======
Rent expense (net of sublease income) was $4,357,000, $5,191,000 and $7,868,000 for fiscal years 1997, 1998 and 1999, respectively. The Company is contingently liable under the terms of repurchase agreements covering independent retailers' floor plan financing. Under such agreements, the Company agrees to repurchase homes at declining prices over the term of the agreement, generally 12 to 18 months. At March 26, 1999, the Company estimates that its potential obligations under such repurchase agreements were approximately $65.0 million. However, it is management's opinion that no material loss will occur from the repurchase agreements. During the past three fiscal years, no significant costs have been incurred relating to such repurchase agreements. The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Company. 15. RELATED PARTY TRANSACTIONS Through acquisitions, the Company has existing lease commitments totaling $6,752,000 to former business owners of acquired locations. Rent expense related to these lease commitments was $253,000 for fiscal year 1999. 17 27 16. BUSINESS SEGMENT INFORMATION The Company operates primarily in three business segments, retail sales, manufacturing and financial services. The following table summarizes, for the periods indicated, the amounts of consolidated net sales, income from operations, identifiable assets, depreciation and amortization, and capital expenditures attributable to these segments. Intersegment sales are primarily sales by the manufacturing segment to the retail segment and are transferred at market prices. Income from affiliate in the consolidated statements of income relates to the retail segment.
March 28, March 27, March 26, 1997 1998 1999 ---------- ---------- ---------- (in thousands) Net sales Retail $ 289,387 $ 433,495 $ 612,730 Manufacturing 452,221 480,215 509,869 Financial services 3,862 8,335 24,219 ---------- ---------- ---------- 745,470 922,045 1,146,818 Intersegment sales (182,278) (284,777) (385,444) ---------- ---------- ---------- $ 563,192 $ 637,268 $ 761,374 ========== ========== ========== Income from operations Retail $ 10,798 $ 22,595 $ 27,088 Manufacturing 33,363 35,178 40,496 Financial services 227 1,208 13,183 General corporate expenses (2,481) (3,681) (5,888) ---------- ---------- ---------- 41,907 55,300 74,879 Intersegment profits (2,492) (1,544) (3,119) ---------- ---------- ---------- $ 39,415 $ 53,756 $ 71,760 ========== ========== ========== Interest expense $ (3,085) $ (4,700) $ (9,728) Other income 2,250 2,718 4,933 Income from affiliate 1,049 -- -- ---------- ---------- ---------- Income before taxes $ 39,629 $ 51,774 $ 66,965 ========== ========== ========== Identifiable assets Retail $ 85,568 $ 149,771 $ 167,444 Manufacturing 136,345 166,632 215,403 Financial services 15,682 27,350 34,888 Other 8,740 10,093 9,675 ---------- ---------- ---------- $ 246,335 $ 353,846 $ 427,410 ========== ========== ========== Depreciation and amortization Retail $ 1,812 $ 1,856 $ 2,912 Manufacturing 3,969 5,182 8,191 Financial services 63 96 148 Other 305 377 319 ---------- ---------- ---------- $ 6,149 $ 7,511 $ 11,570 ========== ========== ========== Capital expenditures Retail $ 9,134 $ 8,035 $ 11,722 Manufacturing 12,179 8,540 8,757 Financial services 195 132 88 Other 100 -- 279 ---------- ---------- ---------- $ 21,608 $ 16,707 $ 20,846 ========== ========== ==========
18 28 PALM HARBOR HOMES 1999 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth certain unaudited quarterly financial information for the fiscal years 1998 and 1999.
First Second Third Fourth Quarter Quarter Quarter Quarter Total ---------- ---------- ---------- ---------- ---------- (in thousands, except per share data) Fiscal Year Ended March 27, 1998 Net sales $ 159,097 $ 153,106 $ 161,969 $ 163,096 $ 637,268 Gross profit 40,536 40,225 43,115 46,898 170,774 Income from operations 12,967 13,145 13,021 14,623 53,756 Net income 7,668 7,893 7,792 8,501 31,854 Earnings per share .33 .34 .33 .35 1.35 Fiscal Year Ended March 26, 1999 Net sales $ 204,130 $ 190,853 $ 186,054 $ 180,337 $ 761,374 Gross profit 57,297 57,853 56,137 59,389 230,676 Income from operations 18,388 19,471 15,869 18,032 71,760 Net income 10,125 10,425 9,440 10,187 40,177 Earnings per share .42 .44 .40 .43 1.69
19 29 Palm Harbor Homes 1999 Annual Report Report of Independent Auditors BOARD OF DIRECTORS PALM HARBOR HOMES, INC. We have audited the accompanying consolidated balance sheets of Palm Harbor Homes, Inc. and Subsidiaries (the "Company") as of March 27, 1998 and March 26, 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three fiscal years in the period ended March 26, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Palm Harbor Homes, Inc. and Subsidiaries at March 27, 1998 and March 26, 1999, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended March 26, 1999, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Dallas, Texas April 30, 1999 EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 Subsidiaries
Name Jurisdiction of Organization ---- ---------------------------- AAA Factory Model Center, Inc. Tennessee Palm Harbor Finance Corporation Texas Palm Harbor G.P., Inc. Nevada Standard Casualty Corp. Texas 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 First Home Mortgage Corporation Georgia
EX-23.1 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 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 April 30, 1999, with respect to the consolidated financial statements included in the 1999 Annual Report to Shareholders of Palm Harbor Homes, Inc. and subsidiaries. /s/ Ernst & Young LLP Dallas, TX June 11, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AS OF MARCH 26, 1999 AND CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED MARCH 26, 1999 LOCATED IN THE COMPANY'S 1999 ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 1,000 YEAR MAR-26-1999 MAR-28-1998 MAR-26-1999 39,413 17,167 79,219 0 108,185 264,810 80,566 0 427,410 224,494 3,149 0 0 239 195,086 427,410 761,374 761,374 530,698 530,698 0 0 9,728 66,965 26,788 0 0 0 0 40,177 1.69 1.69
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