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EX-31.2 - SECTION 302 CERTIFICATION OF CFO - PALM HARBOR HOMES INC /FL/dex312.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CEO AND CFO - PALM HARBOR HOMES INC /FL/dex321.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - PALM HARBOR HOMES INC /FL/dex311.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 25, 2009

Commission file number 0-26188

 

 

PALM HARBOR HOMES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Florida   59-1036634

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

15303 Dallas Parkway, Suite 800, Addison, Texas 75001-4600

(Address of principal executive offices) (Zip code)

972-991-2422

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Shares of common stock $.01 par value, outstanding on November 3, 2009 – 22,875,245.

 

 

 


PALM HARBOR HOMES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

     September 25,
2009
    March 27,
2009
 
     (Unaudited)     (As adjusted)  
           (Note 1)  

Assets

    

Cash and cash equivalents

   $ 17,324      $ 12,374   

Restricted cash

     16,717        17,771   

Investments

     14,077        17,175   

Trade receivables

     20,543        23,458   

Consumer loans receivable, net

     184,227        191,597   

Inventories

     85,948        97,144   

Assets held for sale

     4,575        5,775   

Prepaid expenses and other assets

     9,034        10,451   

Property, plant and equipment, net

     33,088        35,937   
                

Total assets

   $ 385,533      $ 411,682   
                

Liabilities and shareholders’ equity

    

Accounts payable

   $ 24,814      $ 18,954   

Accrued liabilities

     44,302        45,882   

Floor plan payable

     44,550        49,401   

Construction lending line

     4,471        3,589   

Securitized financings

     130,969        140,283   

Convertible senior notes, net

     49,117        47,939   
                

Total liabilities

     298,223        306,048   

Commitments and contingencies

    

Shareholders’ equity:

    

Common stock, $.01 par value

     239        239   

Additional paid-in capital

     69,042        68,200   

Retained earnings

     34,148        54,522   

Treasury shares

     (15,717     (15,717

Accumulated other comprehensive loss

     (402     (1,610
                

Total shareholders’ equity

     87,310        105,634   
                

Total liabilities and shareholders’ equity

   $ 385,533      $ 411,682   
                

See accompanying notes.

 

1


PALM HARBOR HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     September 25,
2009
    September 26,
2008
    September 25,
2009
    September 26,
2008
 
           (As adjusted)           (As adjusted)  
           (Note 1)           (Note 1)  

Net sales

   $ 74,797      $ 110,716      $ 157,218      $ 240,737   

Cost of sales

     56,784        84,081        119,881        182,145   

Selling, general and administrative expenses

     24,657        31,084        49,035        62,263   
                                

Loss from operations

     (6,644     (4,449     (11,698     (3,671

Interest expense

     (4,054     (4,493     (9,018     (9,372

Gain on repurchases of convertible senior notes

     —          738        —          3,775   

Other income

     211        583        439        1,164   
                                

Loss before income taxes

     (10,487     (7,621     (20,277     (8,104

Income tax benefit (expense)

     91        (184     (97     (242
                                

Net loss

   $ (10,396   $ (7,805   $ (20,374   $ (8,346
                                

Net loss per common share – basic and diluted

   $ (0.45   $ (0.34   $ (0.89   $ (0.37
                                

Weighted average common shares outstanding – basic and diluted

     22,875        22,869        22,875        22,860   
                                

See accompanying notes.

 

2


PALM HARBOR HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     Six Months Ended  
     September 25,
2009
    September 26,
2008
 
           (As adjusted)  
           (Note 1)  

Operating Activities

    

Net loss

   $ (20,374   $ (8,346

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     2,854        2,979   

Provision for credit losses

     1,496        1,530   

Non-cash interest expense

     1,982        1,476   

Loss (gain) on disposition of assets

     624        (593

Loss (gain) on sale of loans

     77        (1,309

Gain on repurchases of convertible senior notes

     —          (3,775

Loss (gain) on sale of investments

     159        (146

Changes in operating assets and liabilities:

    

Restricted cash

     1,054        3,720   

Trade receivables

     2,688        (3,189

Consumer loans originated

     (18,166     (16,487

Principal payments on consumer loans originated

     6,954        26,910   

Proceeds from sales of consumer loans

     17,236        57,412   

Inventories

     11,196        6,378   

Prepaid expenses and other assets

     1,163        1,310   

Accounts payable and accrued expenses

     4,056        (7,847
                

Net cash provided by operating activities

     12,999        60,023   

Investing Activities

    

Net disposals (purchases) of property, plant and equipment

     909        (1,452

Purchases of investments

     (1,023     (12,767

Sales of investments

     5,348        15,387   
                

Net cash provided by investing activities

     5,234        1,168   

Financing Activities

    

Net (payments on) proceeds from floor plan payable

     (4,851     6,178   

Net payments on warehouse revolving debt

     —          (42,175

Net proceeds from construction lending line

     882        —     

Payments to repurchase convertible senior notes

     —          (8,538

Payments on securitized financings

     (9,314     (15,059
                

Net cash used in financing activities

     (13,283     (59,594

Net increase in cash and cash equivalents

     4,950        1,597   

Cash and cash equivalents at beginning of period

     12,374        28,206   
                

Cash and cash equivalents at end of period

   $ 17,324      $ 29,803   
                

See accompanying notes.

 

3


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements reflect all adjustments, which include normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. generally accepted accounting principles. Certain footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. The condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended March 27, 2009 included in the Company’s Form 10-K. Results of operations for any interim period are not necessarily indicative of results to be expected for a full year.

The balance sheet at March 27, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

Subsequent Events

The Company evaluated subsequent events after the balance sheet date of September 25, 2009 through the date of the filing, November 3, 2009.

General Business Environment

The prevailing economic uncertainties and depressed housing market have continued to challenge the factory-built housing industry and the Company’s business in the second quarter of fiscal 2010. The Company’s revenues for the quarter are indicative of the constrained demand for factory-built housing products resulting from a more restrictive financing environment and an over-supply of discounted site-built homes. While the Company’s year over year revenues declined 32.4% and retail deliveries were down 27.3% as compared with the second quarter of fiscal 2009, the year-to-date national industry shipments declined 43.6% for HUD-code products and 50.4% for modular products. The major portion of this decline continues to be from the key states of Florida, Arizona and California.

With the expected reduction in revenues, the Company has continued to streamline its operating costs. As a result of the Company’s improved manufacturing efficiencies, gross margin for the second fiscal quarter was 24.1%, which was unchanged from the prior year. The Company effectively lowered its quarterly selling, general and administrative expenses by 20.7% from the same period a year ago. The Company believes this will better position it to sustain a continued downturn and, at the same time, benefit from any market improvements when it occurs. The Company is also pursuing innovative ways to both expand its product offering and reach new distribution channels to further drive revenues. The Company has focused on the commercial and military markets for modular products to provide a new growth opportunity at higher price points than the residential market. The Company was the winning bidder on a $13.5 million military project that will be completed in calendar year 2010 and it will continue to aggressively bid on additional future projects. Finally, the Company’s financial services segment continued to deliver profitable results in the second quarter of fiscal 2010.

The Company’s floor plan agreement is with Textron who announced during the third quarter of fiscal 2009 that they are in the process of an orderly liquidation of their housing inventory finance business. In April 2009 (with an effective date of January 26, 2009), the Company agreed to an amendment which included a committed amount of $50 million, an expiration date of March 31, 2010, an interest rate of LIBOR plus 7.00%, and new financial covenants. In June 2009, as discussed in Note 6 to its condensed consolidated financial statements, the Company agreed to a further amendment which extended the expiration date to June 30, 2010 and lowered the committed amount from $50 million to $45 million and further lowers it to $40 million upon the earlier of the sale of certain assets or December 31, 2009, among other things.

 

4


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In light of the current challenging business conditions, the Company is focusing a significant amount of effort on cash generation and preservation, including the exploration of various alternatives to generate additional liquidity. These alternatives include the possibility of raising new debt or equity capital or completing strategic asset sales. However, there can be no assurance that these efforts will be successful or will generate cash resources adequate to fully retire the Textron floor plan facility at maturity. In this event, there can be no assurance that Textron will consent to a further amendment or extension of the floor plan facility agreement.

New Accounting Pronouncements

Codification. Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became the single official source of authoritative, nongovernmental generally accepted accounting principles (“GAAP”) in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting policies were not affected by the conversion to ASC. However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the appropriate section of ASC.

Fair Value. In September 2006, the FASB issued guidance, which defines fair value, establishes a market-based framework for measuring fair value and expands disclosures about fair value measurements. The guidance is contained in ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”). The guidance does not expand or require any new fair value measurements and is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. In February 2008, the FASB deferred the effective date for most non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008. The Company adopted the provisions for financial assets and financial liabilities effective March 29, 2008 and adopted the remaining provisions for nonfinancial assets and nonfinancial liabilities on March 28, 2009. These new provisions did not have a material effect on the consolidated financial position, results of operations or cash flows.

Other-Than-Temporary Impairments. In April 2009, the FASB issued new guidance on the recognition of other-than-temporary impairments of investments in debt securities, as well as financial statement presentation and disclosure requirements for other-than-temporary impairments of investments in debt and equity securities. We adopted the provisions of this guidance for the quarter ended June 26, 2009. The adoption did not have a material effect on our consolidated financial statements.

Subsequent Events. In May 2009, the FASB issued guidance that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. The guidance is contained in ASC Topic 855, “Subsequent Events” and requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The guidance is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. These new provisions did not have a material effect on the consolidated financial position, results of operations or cash flows. Note 1 to these condensed consolidated financial statements contains certain disclosures related to the adoption of these provisions.

Convertible Debt. On January 1, 2009, we adopted the Cash Conversion Subsections of ASC Subtopic 470-20, “Debt with Conversion and Other Options – Cash Conversion” (“Cash Conversion Subsections”), which clarify the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. The Cash Conversion Subsections require issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible

 

5


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

debt (unsecured debt) borrowing rate when interest cost is recognized. The Cash Conversion Subsections require bifurcation of a component of the debt, classification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our consolidated statements of operations. Once adopted, the Cash Conversion Subsections require retrospective application to the terms of instruments as they existed for all periods presented. The adoption of the Cash Conversion Subsections affects the accounting for our 3.25% Convertible Senior Notes issued in 2004 and due 2024 (the “Notes”).

The Company adopted the Cash Conversion Subsections on March 28, 2009 and applied the provisions of the standard retrospectively to all periods presented. The retrospective application of this pronouncement affects fiscal years 2005 through 2009. The Company determined that the liability component of the convertible notes was $52.7 million and the equity component of the convertible notes was $22.3 million as of the date of issuance in fiscal 2005.

The following tables summarize the effect of the accounting changes resulting from the adoption of the Cash Conversion Subsections on the consolidated financial statements (in thousands, except per share date):

 

     Three months ended September 26, 2008     Six months ended September 26, 2008  
     As
originally
reported
    Effects
of

change
    As
adjusted
    As
originally
reported
    Effects
of

change
    As
adjusted
 

Statements of Operations:

            

Interest expense

   $ 3,817      $ 676      $ 4,493      $ 7,896      $ 1,476      $ 9,372   

Gain on repurchases of convertible senior notes

     1,393        (655     738        5,796        (2,021     3,775   

Net loss

     (6,474     (1,331     (7,805     (4,849     (3,497     (8,346

Net loss per common share – basic and diluted

     (0.28     (0.06     (0.34     (0.21     (0.16     (0.37

 

     As of March 27, 2009
     As
originally
reported
   Effects
of
change
    As
adjusted

Balance Sheets:

       

Convertible senior notes, net

   $ 53,845    $ (5,906   $ 47,939

Additional paid-in capital

     54,093      14,107        68,200

Retained earnings

     62,723      (8,201     54,522

Total shareholders’ equity

     99,728      5,906        105,634

 

6


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     Six months ended September 26, 2008  
     As
originally
reported
    Effects
of

change
    As
adjusted
 

Statements of Cash Flows:

      

Net loss

   $ (4,849   $ (3,497   $ (8,346

Non-cash interest expense

     —          1,476        1,476   

Gain on repurchases of convertible senior notes

     5,796        (2,021     3,775   

 

2. Inventories

Inventories consist of the following (in thousands):

 

     September 25,
2009
   March 27,
2009

Raw materials

   $ 5,499    $ 8,198

Work in process

     4,802      6,110

Finished goods at factory

     1,871      2,934

Finished goods at retail

     73,776      79,902
             
   $ 85,948    $ 97,144
             

Inventories are pledged as collateral with Textron. See Note 6.

 

3. Investments

The following tables summarize the Company’s available-for-sale investment securities as of September 25, 2009 and March 27, 2009 (in thousands):

 

     September 25, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value

U.S. Treasury and Government Agencies

   $ 1,476      66      —        $ 1,542

Mortgage-backed securities

     4,104      215      —          4,319

States and political subdivisions

     445      14      —          459

Corporate debt securities

     4,460      230      —          4,690

Marketable equity securities

     3,146      219      (298     3,067
                            

Total

   $ 13,631    $ 744    $ (298   $ 14,077
                            

 

7


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     March 27, 2009
     Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
    Fair
Value

Mortgage-backed securities

   $ 7,119    $ 274    $ (2   $ 7,391

States and political subdivisions

     991      16      —          1,007

Corporate debt securities

     5,612      27      (128     5,511

Marketable equity securities

     4,355      20      (1,109     3,266
                            

Total

   $ 18,077    $ 337    $ (1,239   $ 17,175
                            

The following table shows the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 25, 2009 (in thousands):

 

     Less than 12 months     12 Months or Longer     Total  
     Fair
Value
   Unrealized
Loss
    Fair
Value
   Unrealized
Loss
    Fair
Value
   Unrealized
Loss
 

Marketable equity securities

   $ 410    $ (61   $ 506    $ (237   $ 916    $ (298
                                             

Total

   $ 410    $ (61   $ 506    $ (237   $ 916    $ (298
                                             

The following table shows the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 27, 2009 (in thousands):

 

     Less than 12 months     12 Months or Longer    Total  
     Fair
Value
   Unrealized
Loss
    Fair
Value
   Unrealized
Loss
   Fair
Value
   Unrealized
Loss
 

Mortgage-backed securities

   $ 509    $ (2   —      —      $ 509    $ (2

Corporate debt securities

     3,830      (128   —      —        3,830      (128

Marketable equity securities

     1,611      (1,109   —      —        1,611      (1,109
                                        

Total

   $ 5,950    $ (1,239   —      —      $ 5,950    $ (1,239
                                        

During the first six months of fiscal 2010, 11 of the Company’s available-for-sale equity securities with a total carrying value of $0.4 million were determined to be other-than-temporarily impaired and a realized loss of $0.1 million was recorded in the Company’s consolidated statements of operations. During the first six months of fiscal 2009, none of the Company’s available-for-sale securities were determined to be other-than-temporarily impaired.

The Company’s investments in marketable equity securities consist primarily of investments in common stock of industrial companies ($1.6 million of the total fair value and $259,000 of the total unrealized losses in common stock investments). The remaining marketable equity securities consist primarily of bank trust and insurance companies and public utility companies. Within the Company’s portfolio of common stocks in industrial companies, the fair value and unrealized losses are distributed among approximately 18 companies. The severity of the impairment (fair value is approximately 17.4% less than cost) reflects the decline in the overall stock market. The Company has seen increases in the market value of its stock portfolio during the first six months of fiscal 2010, consistent with improvements seen in the overall stock market. Based on the improvements in the stock market and the Company’s ability and intent to hold the investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider the investments to be other-than-temporarily impaired at September 25, 2009.

 

8


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The amortized cost and fair value of the Company’s investment securities at September 25, 2009, by contractual maturity, are shown in the table below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Amortized
Cost
   Fair
Value

Due after one year through five years

   $ 6,320    $ 6,622

Due after five years

     4,165      4,388

Marketable equity securities

     3,146      3,067
             

Total investment securities available-for-sale

   $ 13,631    $ 14,077
             

Realized gains and losses from the sale of securities are determined using the specific identification method. Gross gains realized on the sales of investment securities for the first six months of 2010 and 2009 were approximately $256,000 and $323,000, respectively. Gross losses were approximately $415,000 and $177,000 for the first six months of fiscal 2010 and 2009, respectively.

 

4. Restricted Cash

Restricted cash consists of the following (in thousands):

 

     September 25,    March 27,
     2009    2009

Cash pledged as collateral for outstanding insurance programs and surety bonds

   $ 9,683    $ 10,358

Cash related to customer deposits held in trust accounts

     2,925      3,225

Cash related to CountryPlace customers’ principal and interest payments on the loans that are securitized

     4,109      4,188
             
   $ 16,717    $ 17,771
             

 

5. Consumer Loans Receivable and Allowance for Loan Losses

Consumer loans receivable, net, consist of the following (in thousands):

 

     September 30,     March 31,  
     2009     2009  

Consumer loans receivable held for investment

   $ 189,459      $ 198,169   

Consumer loans receivable held for sale

     1,069        1,148   

Construction advances on non-conforming mortgages

     4,135        3,638   

Deferred financing costs, net

     (5,460     (5,558

Allowance for loan losses

     (4,976     (5,800
                

Consumer loans receivable, net

   $ 184,227      $ 191,597   
                

 

9


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The allowance for loan losses and related additions and deductions to the allowance during the three months ended September 30, 2009 and September 30, 2008 are as follows (in thousands):

 

     Six Months Ended  
     September 30,
2009
    September 30,
2008
 

Allowance for loan losses, beginning of period

   $ 5,800      $ 8,975   

Provision for credit losses

     1,496        1,530   

Loans charged off, net of recoveries

     (2,320     (2,157

Reduction of reserve due to loan sale

     —          (1,641
                

Allowance for loan losses, end of period

   $ 4,976      $ 6,707   
                

CountryPlace’s policy is to place loans on nonaccrual status when either principal or interest is past due and remains unpaid for 120 days or more. In addition, they place loans on nonaccrual status when there is a clear indication that the borrower has the inability or unwillingness to meet payments as they become due. At September 30, 2009, CountryPlace’s management was not aware of any potential problem loans that would have a material effect on loan delinquency or charge-offs. Loans are subject to continual review and are given management’s attention whenever a problem situation appears to be developing. The following table sets forth the amounts and categories of CountryPlace’s non-performing loans and assets as of September 30, 2009 and March 31, 2009 (dollars in thousands):

 

     September 30,
2009
    March 31,
2009
 

Non-performing loans:

    

Loans accounted for on a nonaccrual basis

   $ 2,389      $ 2,574   

Accruing loans past due 90 days or more

     1,186        390   
                

Total nonaccrual and 90 days past due loans

     3,575        2,964   

Percentage of total loans

     1.88     1.49

Other non-performing assets (1)

     1,692        2,048   

Troubled debt restructurings

     7,193        5,013   

 

(1)      Consists of land and homes acquired through foreclosure, which is carried at fair value less estimated selling expenses, and is included in prepaid and other assets on the consolidated balance sheets.

          

Beginning in fiscal 2009, CountryPlace modified loans to retain borrowers with good payment history. These modifications were considered to represent credit concessions due to hurricane and other repayment matters (such as employment/financial stress) impacting these borrowers. As of September 30, 2009, CountryPlace has modified approximately $7.2 million of loans where principal and interest payments have been deferred or waived for periods ranging from one to three months. These loans are not reflected as non-performing loans but as troubled debt restructurings. As of September 30, 2009, the allowance for loan losses totaled $5.0 million of which $0.1 million is an impairment allowance for these loans.

 

10


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Loan contracts secured by collateral that is geographically concentrated could experience higher rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral that is more geographically dispersed. CountryPlace has loan contracts secured by factory-built homes located in the following key states as of September 30, 2009 and March 31, 2009:

 

     September 30,
2009
    March 31,
2009
 

Texas

   43.0   42.6

Arizona

   6.2      6.3   

Florida

   7.0      7.1   

California

   2.1      2.2   

The states of California, Florida and Arizona, and to a lesser degree Texas, have experienced economic weakness resulting from the decline in real estate values. The risks created by these concentrations have been considered by CountryPlace’s management in the determination of the adequacy of the allowance for loan losses. No other states had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of September 30, 2009 or March 31, 2009. Management believes the allowance for loan losses is adequate to cover estimated losses at September 30, 2009.

 

6. Floor Plan Payable

The Company has an agreement with Textron for a floor plan facility. During the third quarter of fiscal 2009, Textron announced that they are in the process of an orderly liquidation of certain of their commercial finance businesses, including their housing inventory finance business. On June 4, 2009, the Company agreed to an amendment that included the following modifications:

 

   

extends the expiration date from March 31, 2010 to June 30, 2010;

 

   

lowers the committed amount from $50 million to $45 million and further lowers it to $40 million upon the earlier of the sale of certain assets or December 31, 2009;

 

   

alters the maximum quarterly net loss before taxes covenant of $10 million to exclude any interest expense reflected on the financial statements due to 2009 accounting changes; and

 

   

requires a prepayment of principal equal to any amounts of cash and cash equivalents greater than $20 million as of March 31, 2010 no later than the earlier of 10 business days after the closing of the Company’s fiscal quarter ending March 31, 2010 or April 30, 2010.

The facility has an interest rate of LIBOR plus 7.0%, an advance rate of 90% of manufacturer’s invoice and is principally secured by new home inventory and a portion of receivables from financial institutions. In order to borrow against the facility, the Company must comply with the following financial covenants: maximum quarterly net loss before taxes of $10 million, minimum annualized inventory turn of 2.75, and a maximum borrowing base requirement of 60% of eligible finished goods inventory.

The Company was in compliance with its new financial covenants as of September 25, 2009. Quarterly net loss, after excluding any interest expense reflected on the financial statements due to 2009 accounting changes was $9.8 million, annualized inventory turn was 3.00, and the Company’s borrowings were lower than 60% of eligible finished goods inventory.

However, in light of market conditions, it is possible that the Company may be unable to comply with the new financial covenants during the remaining quarters of fiscal 2010. Textron could also declare a loan violation due to a material adverse change, as defined in the agreement. Should a violation occur, the Company would seek a waiver from Textron and consider any other available remedies. However, no assurances can be made that Textron would provide the Company with a waiver or that the Company will otherwise have available remedies and, if a loan violation were to occur and not be waived or remedied in accordance with the terms of the floor plan facility, Textron could declare an event of default and demand that the full amount of the facility be paid in full prior to maturity. Such a demand would result in, among other things, a cross default on the Company’s convertible senior notes described in Note 7.

 

11


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company is focusing a significant amount of effort on cash generation and preservation, including the exploration of various alternatives to generate additional liquidity. These alternatives include the possibility of raising new debt or equity capital or completing strategic asset sales. However, there can be no assurance that these efforts will be successful or will generate cash resources adequate to fully retire the Textron floor plan facility at maturity. In this event, there can be no assurance that Textron will consent to a further amendment or extension of the floor plan facility agreement.

 

7. Convertible senior notes

In 2004, the Company issued $75.0 million aggregate principal amount of 3.25% Convertible Senior Notes due 2024 (the “Notes”) in a private, unregistered offering. Interest on the Notes is payable semi-annually in May and November. The note holders may require the Company to repurchase all or a portion of their notes for cash on May 15, 2011, May 15, 2014 and May 15, 2019 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest, if any. During the first six months of fiscal 2009, the Company repurchased $14.4 million principal amount of the Notes, which had a book value of $12.2 million net of debt discount, for $8.5 million in cash. The purchase price was allocated entirely to the liability component of the securities. The Company recorded a gain of $3.8 million in connection with the repurchase. The Company did not repurchase any Notes in the first six months of fiscal 2010.

The liability component related to the convertible senior notes are reflected in the condensed consolidated balance sheets as of September 25, 2009 and March 27, 2009 as follows (in thousands):

 

     September 25,
2009
    March 27,
2009
 

Principal amount of the liability component

   $ 53,845      $ 53,845   

Unamortized debt discount

     (4,728     (5,906
                

Convertible senior notes, net

   $ 49,117      $ 47,939   
                

Interest expense for the six months ended September 25, 2009 and September 26, 2008 includes $1.2 million and $1.5 million, respectively, representing amortization of the debt discount at an effective interest rate of 9.11%.

 

8. Securitized financings

On July 12, 2005, the Company, through its subsidiary CountryPlace, completed its initial securitization (2005-1) for approximately $141.0 million of loans, which was funded by issuing bonds totaling approximately $118.4 million. The bonds were issued in four different classes: Class A-1 totaling $36.3 million with a coupon rate of 4.23%; Class A-2 totaling $27.4 million with a coupon rate of 4.42%; Class A-3 totaling $27.3 million with a coupon rate of 4.80%; and Class A-4 totaling $27.4 million with a coupon rate of 5.20%. Maturity of the bonds is at varying dates beginning in 2006 through 2015 and were issued with an expected weighted average maturity

 

12


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

of 4.66 years. The proceeds from the securitization were used to repay approximately $115.7 million of borrowings on the Company’s warehouse revolving debt with the remaining proceeds being used for general corporate purposes, including future origination of new loans. For accounting purposes, this transaction was structured as a securitized borrowing. CountryPlace’s obligation under this securitized financing is guaranteed by the Company.

On March 22, 2007, the Company, through its subsidiary CountryPlace, completed its second securitization (2007-1) for approximately $116.5 million of loans, which was funded by issuing bonds totaling approximately $101.9 million. The bonds were issued in four classes: Class A-1 totaling $28.9 million with a coupon rate of 5.484%; Class A-2 totaling $23.4 million with a coupon rate of 5.232%; Class A-3 totaling $24.5 million with a coupon rate of 5.593%; and Class A-4 totaling $25.1 million with a coupon rate of 5.846%. Maturity of the bonds is at varying dates beginning in 2008 through 2017 and were issued with an expected weighted average maturity of 4.86 years. The proceeds from the securitization were used to repay approximately $97.1 million of borrowings on the Company’s warehouse revolving debt with the remaining proceeds being used for general corporate purposes, including future origination of new loans. For accounting purposes, this transaction was also structured as a securitized borrowing.

 

9. Notes payable to related parties

On April 27, 2009, the Company issued warrants to each of Capital Southwest Venture Corporation, Sally Posey and the Estate of Lee Posey (collectively, the lenders) to purchase up to an aggregate of 429,939 shares of common stock of the Company at a price of $3.14 per share, which was the closing price of the Company’s common stock on April 24, 2009. The Black-Scholes method was used to value the warrants, which resulted in the Company recording $0.8 million in non-cash interest expense in the first quarter of fiscal 2010. The warrants were granted in connection with a loan made by the lenders to the Company of an aggregate of $4.5 million pursuant to senior subordinated secured promissory notes between the Company and each of the lenders (collectively, the Promissory Notes). The proceeds were used for working capital purposes. The Promissory Notes were repaid in full on June 29, 2009. The warrants, which expire on April 24, 2019, contain anti-dilution provisions and other customary provisions. The Promissory Notes bore interest at the rate of LIBOR plus 2.0% and were secured by 150,000 shares of Standard’s common stock.

 

10. Other Comprehensive Loss

The difference between net loss and total comprehensive loss for the three and six months ended September 25, 2009 and September 26, 2008 is as follows (in thousands):

 

     Three Months Ended     Six Months Ended  
     September 25,
2009
    September 26,
2008
    September 25,
2009
    September 26,
2008
 

Net loss

   $ (10,396   $ (7,805   $ (20,374   $ (8,346

Unrealized gain (loss) on available-for-sale investments, net of tax

     144        (1,234     1,162        (954

Amortization of interest rate hedge

     23        23        46        50   
                                

Comprehensive loss

   $ (10,229   $ (9,016   $ (19,166   $ (9,250
                                

 

11. Commitments and Contingencies

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 or cash flows of the Company.

 

13


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

12. Accrued Product Warranty Obligations

The Company provides the retail homebuyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. The amount of warranty reserves recorded are estimated future warranty costs relating to homes sold, based upon the Company’s assessment of historical experience factors, such as actual number of warranty calls and the average cost per warranty call.

The accrued product warranty obligation is classified as accrued liabilities in the condensed consolidated balance sheets. The following table summarizes the accrued product warranty obligations at September 25, 2009 and September 26, 2008 (in thousands):

 

     September 25,
2009
    September 26,
2008
 

Accrued warranty balance, beginning of period

   $ 2,972      $ 5,425   

Net warranty expense provided

     3,079        6,480   

Cash warranty payments

     (3,474     (7,058
                

Accrued warranty balance, end of period

   $ 2,577      $ 4,847   
                

 

13. Fair Value Measurements

The book value and estimated fair value of the Company’s financial instruments are as follows (dollars in thousands):

 

     September 25, 2009    March 27, 2009
     Book
Value
   Estimated
Fair Value
   Book
Value
   Estimated
Fair Value

Cash and cash equivalents (1)

   $ 17,324    $ 17,324    $ 12,374    $ 12,374

Restricted cash (1)

     16,717      16,717      17,771      17,771

Investments (2)

     14,077      14,077      17,175      17,175

Consumer loans receivables (3)

     190,528      185,535      199,317      193,029

Floor plan payable (1)

     44,550      44,550      49,401      49,401

Construction lending line (1)

     4,471      4,471      3,589      3,589

Convertible senior notes (2)

     49,117      18,399      47,939      13,461

Securitized financings (4)

     130,969      104,844      140,283      108,972

 

(1)      The fair value approximates book value due to the instruments’ short term maturity.

(2)      The fair value is based on market prices.

(3)      Includes consumer loans receivable held for investment and held for sale. The fair value of the loans held for investment is based on the discounted value of the remaining principal and interest cash flows. The fair value of the loans held for sale approximates book value since the sales price of these loans is known as of September 25, 2009.

(4)      The fair value is estimated using quoted market prices for similar securities.

In accordance with guidance in ASC Topic 820, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

14


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

 

     As of September 25, 2009
     Total    Level 1    Level 2    Level 3

Investments (1)

   14,077    3,067    11,010    —  

Other non-performing assets (2)

   1,692    —      1,692    —  

 

(1)      Unrealized gains or losses on investments are recorded in accumulated other comprehensive loss at each measurement date.

(2)      Consists of land and homes acquired through foreclosure.

 

14. Business Segment Information

The Company operates principally in two segments: (1) factory-built housing, which includes manufactured housing, modular housing and retail operations and (2) financial services, which includes finance and insurance. The following table details net sales and income (loss) from operations by segment for the three and six months ended September 25, 2009 and September 26, 2008 (in thousands):

 

     Three Months Ended     Six Months Ended  
     September 25,
2009
    September 26,
2008
    September 25,
2009
    September 26,
2008
 

Net sales

        

Factory-built housing

   $ 65,539      $ 101,466      $ 138,928      $ 220,434   

Financial services

     9,258        9,250        18,290        20,303   
                                
   $ 74,797      $ 110,716      $ 157,218      $ 240,737   
                                

Income (loss) from operations

        

Factory-built housing

     (6,077     (3,100     (10,091     (4,289

Financial services

     4,294        3,601        8,144        9,323   

General corporate expenses

     (4,861     (4,950     (9,751     (8,705
                                
     (6,644     (4,449     (11,698     (3,671
                                

Interest expense

     (4,054     (4,493     (9,018     (9,372

Gain on repurchases of convertible senior notes

     —          738        —          3,775   

Other income

     211        583        439        1,164   
                                

Loss before income taxes

   $ (10,487   $ (7,621   $ (20,277   $ (8,104
                                

 

15


PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

15. Income Taxes

During the six month periods ended September 25, 2009 and September 26, 2008, the Company recorded no federal income tax expense or benefit due to the availability of net operating loss carryforwards, which are not assured of realization. Tax expense recorded in these periods related to taxes payable in various states the Company does business. The Company expects to record no federal income tax expense or benefit for the remainder of fiscal 2010, as it is uncertain whether the Company is assured of realization of benefits associated with its net operating loss carryforwards.

 

16. Stock Incentive Plan

Effective July 22, 2009, the Palm Harbor Homes, Inc. 2009 Stock Incentive Plan (the “Plan”) was adopted. The Plan allows for the issuance of up to 1,844,000 shares of common stock to the Company’s employees and outside directors in the form of non-statutory stock options, incentive stock options and restricted stock awards. During the second quarter of fiscal 2010, the Company granted 1,217,040 shares at an exercise price equal to the market price of the Company’s common stock as of the date of grant. Such options generally have a 10 year term and vest over five years of service.

 

16


PART I. Financial Information

 

Item 1. Financial Statements

See pages 1 through 16.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

We are one of the nation's leading manufacturers and marketers of factory-built homes. We market nationwide through vertically integrated operations, encompassing manufactured and modular housing, financing and insurance. As of September 25, 2009, we operated nine manufacturing facilities that sell homes through 78 company-owned retail sales centers and builder locations and over 140 independent retail dealers, builders and developers. Through our subsidiary, CountryPlace, we currently offer conforming mortgages to purchasers of factory-built homes sold by company-owned retail sales centers and certain independent retail dealers, builders and developers. The loans originated through CountryPlace are either held for our own investment portfolio or sold to investors. We provide property and casualty insurance for owners of manufactured homes through our subsidiary, Standard Casualty.

The prevailing economic uncertainties and depressed housing market have continued to challenge our industry and our business in the second quarter of fiscal 2010. Our revenues for the quarter are indicative of the constrained demand for factory-built housing products resulting from a more restrictive financing environment and an over-supply of discounted site-built homes. While our year over year revenues declined 32.4% and retail deliveries were down 27.3% as compared with the second quarter of fiscal 2009, the year-to-date national industry shipments declined 43.6% for HUD-code products and 50.4% for modular products. The major portion of this decline continues to be from the key states of Florida, Arizona and California.

With the expected reduction in revenues, we have continued to streamline our operating costs. As a result of our improved manufacturing efficiencies, gross margin for the second fiscal quarter was 24.1%, which was unchanged from the prior year. We effectively lowered our quarterly selling, general and administrative expenses by 20.7% from the same period a year ago. We believe this will better position us to sustain a continued downturn and at the same time, benefit from any market improvements when it occurs. We are also pursuing innovative ways to both expand our product offering and reach new distribution channels to further drive revenues. We have focused on the commercial and military markets for modular products to provide a new growth opportunity at higher price points than the residential market. We were the winning bidder on a $13.5 million military project that will be completed in calendar year 2010 and we will continue to aggressively bid on additional future projects. Finally, our financial services segment continued to deliver profitable results in the second quarter of fiscal 2010.

Our floor plan agreement is with Textron who announced during the third quarter of fiscal 2009 that they are in the process of an orderly liquidation of their housing inventory finance business. In April 2009 (with an effective date of January 26, 2009), we agreed to an amendment which included a committed amount of $50 million, an expiration date of March 31, 2010, an interest rate of LIBOR plus 7.00%, and new financial covenants. In June 2009, as discussed in Note 6 to our condensed consolidated financial statements, we agreed to a further amendment which extended the expiration date to June 30, 2010 and lowered the committed amount from $50 million to $45 million and further lowers it to $40 million upon the earlier of the sale of certain assets or December 31, 2009, among other things.

In light of the current challenging business conditions, we are focusing a significant amount of effort on cash generation and preservation, including the exploration of various alternatives to generate additional liquidity. These alternatives include the possibility of raising new debt or equity capital or completing strategic asset sales. However, there can be no assurance that these efforts will be successful or will generate cash resources adequate to fully retire the Textron floor plan facility at maturity. In this event, there can be no assurance that Textron will consent to a further amendment or extension of the floor plan facility agreement.

 

17


The following table sets forth certain items of our condensed consolidated statements of operations as a percentage of net sales for the periods indicated.

 

     Three Months Ended     Six Months Ended  
     September 25,
2009
    September 26,
2008
    September 25,
2009
    September 26,
2008
 

Net sales

   100.0   100.0   100.0   100.0

Cost of sales

   75.9      75.9      76.3      75.7   
                        

Gross profit

   24.1      24.1      23.7      24.3   

Selling, general and administrative expenses

   33.0      28.1      31.2      25.9   
                        

Loss from operations

   (8.9   (4.0   (7.5   (1.6

Interest expense

   (5.4   (4.1   (5.7   (3.9

Gain on repurchases of convertible senior notes

   —        0.7      —        1.6   

Other income

   0.3      0.5      0.3      0.5   
                        

Loss before income taxes

   (14.0   (6.9   (12.9   (3.4

Income tax benefit (expense)

   0.1      (0.2   (0.1   (0.1
                        

Net loss

   (13.9 )%    (7.1 )%    (13.0 )%    (3.5 )% 
                        

The following table summarizes certain key sales statistics as of and for the three months ended September 25, 2009 and September 26, 2008.

 

     Three Months Ended    Six Months Ended
     September 25,
2009
   September 26,
2008
   September 25,
2009
   September 26,
2008

Homes sold through company-owned retail sales centers and builder locations

     596      828      1,176      1,737

Homes sold to independent dealers, builders and developers

     170      312      319      596

Total new factory-built homes sold

     766      1,140      1,495      2,333

Average new manufactured home price – retail

   $ 67,000    $ 74,000    $ 68,000    $ 75,000

Average new manufactured home price – wholesale

   $ 51,000    $ 53,000    $ 53,000    $ 52,000

Average new modular home price – retail

   $ 168,000    $ 171,000    $ 168,000    $ 172,000

Average new modular home price – wholesale

   $ 73,000    $ 67,000    $ 74,000    $ 73,000

Number of company-owned retail sales centers at end of period

     74      83      74      83

Number of company-owned builder locations at end of period

     4      4      4      4

 

18


Three Months Ended September 25, 2009 Compared to Three Months Ended September 26, 2008

Net Sales. Net sales decreased 32.4% to $74.8 million in the second quarter of fiscal 2010 from $110.7 million in the second quarter of fiscal 2009. This decrease is primarily the result of a $35.9 million decrease in factory-built housing net sales. Financial services net revenues were essentially flat compared to the second quarter of fiscal 2009. The decline in factory-built housing net sales is primarily due to a 32.8% decrease in the total number of factory-built homes sold coupled with decreases in the average selling prices of new manufactured and modular homes. The decrease in the total number of factory-built homes sold reflects the severe state of the factory-built housing industry, the prevailing economic uncertainties, credit crisis and general consumer paralysis that has kept potential homebuyers on the sidelines. Homes sold to independent dealers, builders and developers decreased 45.5% in the second quarter of fiscal 2010 largely due to slowdowns in sales to lifestyle communities in the three key states of Florida, California and Arizona, which historically were some of our most profitable states. The decrease in the average selling prices is the result of our customers moving down market and buying smaller, less expensive homes.

Gross Profit. As a percentage of net sales, gross profit was flat at 24.1% in the second quarter of fiscal 2010 as compared to the second quarter of fiscal 2009. In dollars, gross profit decreased to $18.0 million in the second quarter of fiscal 2010 from $26.6 million in the second quarter of fiscal 2009. Gross profit for the factory-built housing segment decreased to 18.0% of net sales in the second quarter of fiscal 2010 from 20.4% in the second quarter of fiscal 2009. Factory-built housing margins were impacted by competitive pressure in the current housing market, somewhat offset by improved manufacturing efficiencies. Gross profit for the financial services segment increased $0.3 million in the second quarter of fiscal 2010 due to decreased net revenues as explained above in the net sales section.

Selling, General and Administrative Expenses. In dollars, selling, general and administrative expenses decreased $6.4 million to $24.7 million in the second quarter of fiscal 2010 from $31.1 million in the second quarter of fiscal 2009. Of this $6.4 million decrease, $5.4 million related to the factory-built housing segment, $0.6 million related to general corporate expenses and $0.4 million related to financial services. The decline in selling, general and administrative expenses related to the factory-built housing segment resulted from a reduction of nine operating sales centers and two factories versus prior year, in addition to a decrease in the fixed expenses of our ongoing operations. As a percentage of net sales, selling, general and administrative expenses increased to 33.0% of net sales in the second quarter of fiscal 2010 as compared to 28.1% of net sales in the second quarter of fiscal 2009.

Interest Expense. Interest expense decreased 9.8% to $4.1 million in the second quarter of fiscal 2010 from $4.5 million in the second quarter of fiscal 2009. Interest expense decreased due to decreased interest expense of $0.2 million related to securitized financings, $0.1 million related to convertible senior notes and $0.1 million related to floor plan payable.

Gain on Repurchases of Convertible Senior Notes. During the second quarter of fiscal 2009, we repurchased $3.6 million principal amount of our convertible senior notes, which had a book value of $2.9 million net of debt discount, for $2.2 million in cash. We recorded a gain of $0.7 million in connection with the repurchases.

Other Income. Other income decreased 63.8% to $0.2 million in the second quarter of fiscal 2010 from $0.6 million in the second quarter of fiscal 2009. This decrease is primarily due to a $0.3 million decrease in interest income.

Income Tax Benefit (Expense). Income tax benefit was $91,000 in the second quarter of fiscal 2010 as compared to expense of $184,000 in the second quarter of fiscal 2009. The tax benefit in the second quarter of fiscal 2010 resulted from additional benefits for a reduction in Texas margin tax for prior tax years and was offset by taxes payable in various states we do business.

 

19


Six Months Ended September 25, 2009 Compared to Six Months Ended September 26, 2008

Net Sales. Net sales decreased 34.7% to $157.2 million in the first six months of fiscal 2010 from $240.7 million in the first six months of fiscal 2009. This decrease is primarily the result of an $81.5 million decrease in factory-built housing net sales and a $2.0 million decrease in financial services net revenues. The decline in factory-built housing net sales is primarily due to a 35.9% decrease in the total number of factory-built homes sold coupled with decreases in the average retail selling prices of new manufactured and modular homes. The decrease in the total number of factory-built homes sold reflects the severe state of the factory-built housing industry, the prevailing economic uncertainties, credit crisis and general consumer paralysis that has kept potential homebuyers on the sidelines. Homes sold to independent dealers, builders and developers decreased 46.5% in the first six months of fiscal 2010 largely due to slowdowns in sales to lifestyle communities in the three key states of Florida, California and Arizona, which historically were some of our most profitable states. The decrease in the average selling prices is the result of our customers moving down market and buying smaller, less expensive homes. The decrease in financial services net revenues reflects a decline in the average consumer loans receivable balance from $233.7 million for the first six months of fiscal 2009 to $187.9 million for the first six months of fiscal 2010, resulting from the sale of approximately $51.3 million of loans in April 2008.

Gross Profit. In the first six months of fiscal 2010, gross profit decreased to 23.7% of net sales, or $37.3 million, from 24.3% of net sales, or $58.6 million in the first six months of fiscal 2009. Gross profit for the factory-built housing segment decreased to 18.2% of net sales in the first six months of fiscal 2010 from 20.1% in the first six months of fiscal 2009. Factory-built housing margins were impacted by competitive pressure in the current housing market, somewhat offset by improved manufacturing efficiencies. Gross profit for the financial services segment decreased $2.2 million in the first six months of fiscal 2010 due to decreased net revenues as explained above in the net sales section.

Selling, General and Administrative Expenses. In dollars, selling, general and administrative expenses decreased $13.2 million to $49.0 million in the first six months of fiscal 2010 from $62.3 million in the first six months of fiscal 2009. Of this $13.2 million decrease, $12.0 million related to the factory-built housing segment, $1.0 million related to financial services and $0.3 million related to general corporate expenses. The decline in selling, general and administrative expenses related to the factory-built housing segment resulted from a reduction of nine operating sales centers and two factories versus prior year and a major decrease in the fixed expenses of our ongoing operations. The decline in selling, general and administrative expenses related to the financial services segment is due primarily to decreased compensation expense resulting from a reduction in headcount. As a percentage of net sales, selling, general and administrative expenses increased to 31.2% of net sales in the first six months of fiscal 2010 as compared to 25.9% of net sales in the first six months of fiscal 2009.

Interest Expense. Interest expense decreased 3.8% to $9.0 million in the first six months of fiscal 2010 from $9.4 million in the first six months of fiscal 2009. Interest expense decreased $0.4 million due to decreased interest expense of $0.5 million related to securitized financings, $0.5 million related to convertible senior notes, and $0.1 million related to floor plan payable. These decreases are offset by noncash interest expense of $0.8 million related to warrants issued in connection with $4.5 million of short term Promissory Notes.

Gain on Repurchases of Convertible Senior Notes. During the first six months of fiscal 2009, we repurchased $14.4 million principal amount of our convertible senior notes, which had a book value of $12.2 million net of debt discount, for $8.5 million in cash. We recorded a gain of $3.8 million in connection with the repurchases.

Other Income. Other income decreased 62.3% to $0.4 million in the first six months of fiscal 2010 from $1.2 million in the first six months of fiscal 2009. This decrease is primarily due to a $0.4 million decrease in interest income.

 

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Income Tax Expense. Income tax expense was $97,000 in the first six months of fiscal 2010 as compared to $242,000 in the first six months of fiscal 2009. Tax expense recorded in these periods related to taxes payable in various states we do business. We do not expect to record federal income tax expense for the remainder of fiscal 2010 due to the availability of net operating loss carryforwards.

Liquidity and Capital Resources

Cash and cash equivalents totaled $17.3 million at September 25, 2009, up $5.0 million from $12.4 million at March 27, 2009. Net cash provided by operating activities was $13.0 million in the first six months of fiscal 2010 as compared to $60.0 million in the first six months of fiscal 2009. The decrease in net cash provided by operating activities is primarily attributable to $57.4 million of consumer loans sold in the first six months of fiscal 2009.

Net cash provided by investing activities was $5.2 million in the first six months of fiscal 2010 as compared to $1.2 million in the first six months of fiscal 2009. Net cash provided by investing activities in the first six months of fiscal 2010 was primarily the result of $4.3 million in net cash received from divesting of investments and $0.9 million resulting from net disposals of property, plant and equipment. Net cash provided by investing activities in the first six months of fiscal 2009 was primarily the result of $2.6 million in net cash received from divesting of investments, offset by $1.5 million resulting from net purchases of property, plant and equipment.

Net cash used in financing activities was $13.3 million in the first six months of fiscal 2010 as compared to $59.6 million in the first six months of fiscal 2009. Net cash used in financing activities in the first six months of fiscal 2010 was primarily the result of $4.9 million used to pay down the floor plan facility and $9.3 million used for payments on securitized financings. These cash outflows were offset by $0.9 million in proceeds from borrowings on the construction lending line. Net cash used in financing activities in the first six months of fiscal 2009 was primarily attributable to $42.2 million used to repay in full and terminate the warehouse borrowing facility, $15.1 million used for payments on securitized financings, and $8.5 million used to repurchase $14.4 million principal amount of our convertible senior notes. These cash outflows were offset by $6.2 million in net proceeds on the floor plan facility.

We have an agreement with Textron for a floor plan facility. During the third quarter of fiscal 2009, Textron announced that they are in the process of an orderly liquidation of certain of their commercial finance businesses, including their housing inventory finance business. On June 4, 2009, we agreed to an amendment that included the following modifications:

 

   

extends the expiration date from March 31, 2010 to June 30, 2010;

 

   

lowers the committed amount from $50 million to $45 million and further lowers it to $40 million upon the earlier of the sale of certain assets or December 31, 2009;

 

   

alters the maximum quarterly net loss before taxes covenant of $10 million to exclude any interest expense reflected on the financial statements due to 2009 accounting changes; and

 

   

requires a prepayment of principal equal to any amounts of cash and cash equivalents greater than $20 million as of March 31, 2010 no later than the earlier of 10 business days after closing our fiscal quarter ending March 31, 2010 or April 30, 2010.

The facility has an interest rate of LIBOR plus 7.0%, an advance rate of 90% of manufacturer’s invoice and is principally secured by new home inventory and a portion of receivables from financial institutions. In order to borrow against the facility, we must comply with the following financial covenants: maximum quarterly net loss before taxes (as defined) of $10 million, minimum annualized inventory turn of 2.75, and a maximum borrowing base requirement of 60% of eligible finished goods inventory.

We were in compliance with our new financial covenants as of September 25, 2009. Quarterly net loss, after excluding any interest expense reflected on the financial statements due to 2009 accounting changes was $9.8 million, annualized inventory turn was 3.00, and our borrowings were lower than 60% of eligible finished goods inventory.

 

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However, in light of market conditions, it is possible that we may be unable to comply with the new financial covenants during the remaining quarters of fiscal 2010. Textron could also declare a loan violation due to a material adverse change, as defined in the agreement. Should a violation occur, we would seek a waiver from Textron and consider any other available remedies. However, no assurances can be made that Textron would provide us with a waiver or that we will otherwise have available remedies and, if a loan violation were to occur and not be waived or remedied in accordance with the terms of the floor plan facility, Textron could declare an event of default and demand that the full amount of the facility be paid in full prior to maturity. Such a demand would result in, among other things, a cross default on our convertible senior notes described in Note 7.

We are focusing a significant amount of effort on cash generation and preservation, including the exploration of various alternatives to generate additional liquidity. These alternatives include the possibility of raising new debt or equity capital or completing strategic asset sales. However, there can be no assurance that these efforts will be successful or will generate cash resources adequate to fully retire the Textron floor plan facility at maturity. In this event, there can be no assurance that Textron will consent to a further amendment or extension of the floor plan facility agreement.

In 2004, Palm Harbor issued $75.0 million aggregate principal amount of 3.25% Convertible Senior Notes due 2024 (the “Notes”) in a private, unregistered offering. Interest on the Notes is payable semi-annually in May and November. The note holders may require the Company to repurchase all or a portion of their notes for cash on May 15, 2011, May 15, 2014 and May 15, 2019 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest, if any. During the first six months of fiscal 2009, we repurchased $14.4 million principal amount of the Notes, which had a book value of $12.2 million net of debt discount, for $8.5 million in cash. We recorded a gain of $3.8 million in connection with the repurchase. We did not repurchase any Notes in the first six months of fiscal 2010.

In January 2009, CountryPlace obtained a $10.0 million construction lending line to use for financing mortgage loans during the construction period. There is no expiration period for the agreement, but CountryPlace is obligated to repurchase individual loans within 180 days from the date of original purchase of each respective loan by the financial institution. Historically, the construction period has been approximately ninety days. The construction lender has full discretion to accept or decline each individual loan purchase requested by CountryPlace. The maximum advance for loans purchased is 92% of the loan amount. The interest rate on unpaid amounts advanced is 10%. CountryPlace had outstanding unpaid advances under the facility of $4.5 million as of September 30, 2009. The facility contains certain requirements relating to the documentation of the loans purchased and amounts drawn during the construction period of each individual loan, which are customary in the industry. CountryPlace funds the difference between the amounts advanced under the facility and the balance of any additional loan.

On April 27, 2009, we issued warrants to each of Capital Southwest Venture Corporation, Sally Posey and the Estate of Lee Posey (collectively, the lenders) to purchase up to an aggregate of 429,939 shares of our common stock at a price of $3.14 per share, which was the closing price of our common stock on April 24, 2009. The Black-Scholes method was used to value the warrants, which resulted in us recording $0.8 million in non-cash interest expense in the first quarter of fiscal 2010. The warrants were granted in connection with a loan made by the lenders to us of an aggregate of $4.5 million pursuant to senior subordinated secured promissory notes between us and each of the lenders (collectively, the Promissory Notes). The proceeds were used for working capital purposes. The Promissory Notes were

 

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repaid in full on June 29, 2009. The warrants, which expire on April 24, 2019, contain anti-dilution provisions and other customary provisions. The Promissory Notes bore interest at the rate of LIBOR plus 2.0% and were secured by 150,000 shares of Standard’s common stock.

We believe that our cash on hand and the proceeds from floor plan financing, conforming mortgage sales, and any other available borrowing alternatives will be adequate to support our working capital needs and currently planned capital expenditure needs for the foreseeable future. However, our top priorities are cash generation and conservation throughout our operations to help support these cash needs as well. Because future cash flows and the availability of financing will depend on a number of factors, including prevailing economic and financial conditions, business, credit market conditions, and other factors beyond our control, no assurances can be given in this regard.

Forward-Looking Information/Risk Factors

Certain statements contained in this annual report are forward-looking statements within the safe harbor provisions of the Securities Litigation Reform Act. Forward-looking statements give our current expectations or forecasts of future events and can be identified by the fact that they do not relate strictly to historical or current facts. Investors should be aware that all forward-looking statements are subject to risks and uncertainties and, as a result of certain factors, actual results could differ materially from these expressed in or implied by such statements. These risks include such assumptions, risks, uncertainties and factors associated with the following:

If the current crisis continues for an extended period of time, or if the crisis worsens, we could face significant problems caused by a lack of liquidity.

We are currently experiencing an extreme crisis in the national and global economy generally as well as in the housing market specifically. This crisis has materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in certain cases has resulted in the unavailability of certain types of financing. Continued uncertainty in the credit and equity markets may negatively impact our ability to access additional financing at reasonable terms or at all, which may negatively affect our ability to conduct our operations or refinance our existing debt. Disruptions in the equity markets may also make it more difficult for us to raise capital through the issuance of additional shares of our common stock. In light of this economic crisis and the challenging business conditions that we are currently facing, we are focusing a significant amount of effort on cash generation and preservation. We currently have in excess of $100 million of unlevered assets and we are working with a financial advisor to leverage these assets to generate cash. However, there can be no guarantee that these efforts or any other efforts we take to increase our liquidity will be successful. If the current economic crisis continues for an extended period of time, or if the crisis worsens, we may have insufficient liquidity to meet our financial obligations in the future.

Reduced availability of wholesale financing could have a material adverse effect on us.

We finance a portion of our new inventory at our retail sales centers through wholesale “floor plan” financing arrangements. Through these arrangements, financial institutions provide us with a loan for the purchase price of the home. Since the beginning of the industry downturn in 1999, several major floor plan lenders have exited the floor plan financing business. We have a floor plan facility with Textron. During our third quarter, Textron announced that they are in the process of an orderly liquidation of certain of their commercial finance businesses, including their housing inventory finance business. On April 28, 2009 (with an effective date of January 26, 2009), we agreed to an amendment which includes the following modifications: a new committed amount of $50 million (reduced from $70 million) which will gradually be reduced to $40 million by December 31, 2009, a new facility expiration date of March 31, 2010, a new interest rate of LIBOR plus 7.00%, and new financial covenants. We agreed to a further amendment dated June 4, 2009, which includes the following:

 

   

extends the expiration date to June 30, 2010;

 

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lowers the committed amount from $50 million to $45 million and further lowers it to $40 million upon the earlier of the sale of certain assets or December 31, 2009;

 

   

alters the maximum quarterly net loss before taxes covenant of $10 million to exclude any interest expense reflected on the financial statements due to 2009 accounting changes; and

 

   

requires a prepayment of principal equal to any amounts of cash and cash equivalents greater than $20 million as of March 31, 2010 no later than the earlier of 10 business days after the closing of our fiscal quarter ending March 31, 2010 or April 30, 2010.

We were in compliance with our new financial covenants as of September 25, 2009. Quarterly net loss, after excluding any interest expense reflected on the financial statements due to 2009 accounting changes was $9.8 million, annualized inventory turn was 3.00, and our borrowings were lower than 60% of eligible finished goods inventory.

However, in light of market conditions, it is possible that we may be unable to comply with the new financial covenants during the remaining quarters of fiscal 2010. Textron could also declare a loan violation due to a material adverse change, as defined in the agreement. Should a violation occur, we would seek a waiver from Textron and consider any other available remedies. However, no assurances can be made that Textron would provide us with a waiver or that we will otherwise have available remedies and, if a loan violation were to occur and not be waived or remedied in accordance with the terms of the floor plan facility, Textron could declare an event of default and demand that the full amount of the facility be paid in full prior to maturity. Such a demand would result in, among other things, a cross default on our convertible senior notes described in Note 7.

We are focusing a significant amount of effort on cash generation and preservation, including the exploration of various alternatives to generate additional liquidity. These alternatives include the possibility of raising new debt or equity capital or completing strategic asset sales. However, there can be no assurance that these efforts will be successful or will generate cash resources adequate to fully retire the Textron floor plan facility at maturity. In this event, there can be no assurance that Textron will consent to a further amendment or extension of the floor plan facility agreement.

Recent turmoil in the credit markets and the financial services industry may reduce the demand for our homes and the availability of home mortgage financing, among other things.

Recently, the credit markets and the financial services industry have been experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. While the ultimate outcome of these events cannot be predicted, it may have a material adverse effect on us, our liquidity, our ability to borrow money to finance our operations from our existing lenders or otherwise, and could also adversely impact the availability of financing to our customers.

Deterioration in economic conditions in general could further reduce the demand for homes and, as a result, could reduce our earnings and adversely affect our financial condition.

Changes in national and local economic conditions could have a negative impact on our business. Adverse changes in employment levels, job growth, consumer confidence and income, interest rates and population growth may further reduce demand, depress prices for our homes and cause homebuyers to cancel their agreements to purchase our homes, thereby possibly reducing earnings and adversely affecting our business and results of operations. Recent changes in these economic variables have had an adverse affect on consumer demand for, and the pricing of, our homes, causing our revenues to decline and future deterioration in economic conditions could have further adverse effects.

 

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Changes in laws or other events that adversely affect liquidity in the secondary mortgage market could hurt our business.

The government-sponsored enterprises, principally Fannie Mae and Freddie Mac, play a significant role in buying home mortgages and creating investment securities that they either sell to investors or hold in their portfolios. These organizations provide liquidity to the secondary mortgage market. Fannie Mae and Freddie Mac have recently experienced financial difficulties. Any new federal laws or regulations that restrict or curtail their activities, or any other events or conditions that prevent or restrict these enterprises from continuing their historic businesses, could affect the ability of our customers to obtain the mortgage loans or could increase mortgage interest rates or credit standards, which could reduce demand for our homes and/or the loans that we originate and adversely affect our results of operations.

 

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Financing for our retail customers may be limited, which could affect our sales volume.

Our retail customers who do not use CountryPlace generally either pay cash or secure financing from third party lenders, which have been negatively affected by adverse loan origination experience. Several major lenders, which had previously provided financing for our customers, have exited the manufactured housing finance business. Reduced availability of such financing is currently having an adverse effect on both the manufactured housing business and our home sales. Availability of financing is dependent on the lending practices of financial institutions, financial markets, governmental policies and economic conditions, all of which are largely beyond our control. Quasi-governmental agencies such as FHA, Fannie Mae and Freddie Mac, which are important purchasers of loans from financial institutions, have tightened standards relating to the manufactured housing loans that they will buy. Most states classify manufactured homes as personal property rather than real property for purposes of taxation and lien perfection, and interest rates for manufactured homes are generally higher and the terms of the loans shorter than for site-built homes. There can be no assurance that affordable retail financing for manufactured homes will continue to be available on a widespread basis. If third party financing were to become unavailable or were to be further restricted, this could have a material adverse effect on our results of operations.

The factory-built housing industry is currently in a prolonged slump with no recovery in sight.

Historically, the factory-built housing industry has been highly cyclical and seasonal and has experienced wide fluctuations in aggregate sales. The factory-built housing industry is currently in a prolonged slump with no near-term recovery. We are subject to volatility in operating results due to external factors beyond our control such as:

 

   

the level and stability of interest rates;

 

   

unemployment trends;

 

   

the availability of retail home financing;

 

   

the availability of wholesale financing;

 

   

the availability of homeowners’ insurance in coastal markets;

 

   

housing supply and demand;

 

   

international tensions and hostilities;

 

   

levels of consumer confidence;

 

   

inventory levels;

 

   

severe weather conditions; and

 

   

regulatory and zoning matters.

Sales in our industry are also seasonal in nature, with sales of homes traditionally being stronger in the spring, summer and fall months. The cyclical and seasonal nature of our business causes our net sales and operating results to fluctuate and makes it difficult for management to forecast sales and profits in uncertain times. As a result of seasonal and cyclical downturns, results from any quarter should not be relied upon as being indicative of performance in future quarters.

We continue to reduce our manufacturing capacity and distribution channels to effectively align with current and expected regional demand to maintain operating profitability. If the economy continues to worsen, our return to operating profitability will be delayed.

During the last three fiscal years, we idled 8 manufacturing plants and one retail sales center to effectively align current and expected regional demand. If the U.S. economy continues to slow, financial markets continue to decline, and more layoffs occur nationally, our realignment will not allow us to return to operating profitability and further cost savings and other measures will be required.

 

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We face increased competition from site builders of residential housing, which may reduce our net sales.

Our homes compete with homes that are built on site. The sales of site built homes are declining and new home inventory is increasing, which is resulting in more site built homes being available at lower prices. Appraisal values of site built homes are declining with greater availability of lower priced site built homes in the market. The increase in availability, along with the decreased price of site built homes, could make them more competitive with our homes. As a result, the sales of our homes could decrease, which could negatively impact our results of operations.

If CountryPlace’s customers are unable to repay their loans, CountryPlace may be adversely affected.

CountryPlace makes loans to borrowers that it believes are creditworthy based on its credit guidelines. However, the ability of these customers to repay their loans may be affected by a number of factors, including, but not limited to:

 

   

national, regional and local economic conditions;

 

   

changes or continued weakness in specific industry segments;

 

   

natural hazard risks affecting the region in which the borrower resides; and

 

   

employment, financial or life circumstances.

If customers do not repay their loans, CountryPlace may repossess or foreclose in order to liquidate its loan collateral and minimize losses. The homes and land securing the loan are subject to fluctuating market values, and proceeds realized from liquidating repossessed or foreclosed property are highly susceptible to adverse movements in collateral values. Recent and continued trends in general house price depreciation and increasing levels of unemployment may result in additional defaults and exacerbate actual loss severities upon collateral liquidation beyond those normally experienced by CountryPlace. CountryPlace has a significant concentration (approximately 43%) of its borrowers in Texas. To date, Texas has experienced less severe house price depreciation and more stable economic conditions than other parts of the country. However, these conditions may change in the future, and a downturn in economic conditions in Texas could severely affect the performance of CountryPlace’s loans. In addition, CountryPlace has loans in several states that are experiencing rapid house price depreciation, such as Florida, Arizona, and California. This may adversely affect the willingness of CountryPlace’s borrowers in these states to repay their loans and result in lower realized proceeds from liquidating repossessed or foreclosed property in these states.

Some of CountryPlace’s loans may be illiquid and their value difficult to determine or realize.

Some of the loans CountryPlace has originated or may originate in the future may not have a liquid market, or the market may contract rapidly in the future and the loans may become illiquid. Although CountryPlace offers loan products and prices its loans at levels that it believes are marketable at the time of credit application approval, market conditions for mortgage-related loans have deteriorated rapidly and significantly recently. CountryPlace’s ability to respond to changing market conditions is bound by credit approval and funding commitments it makes in advance of loan completion. In this environment, it is difficult to predict the types of loan products and characteristics that may be susceptible to future market curtailments and tailor our loan offerings accordingly. As a result, no assurances can be given that the market value of our loans will not decline in the future, or that a market will continue to exist for all of our loan products.

If CountryPlace is unable to develop sources of long-term funding it may be unable to resume originating chattel and non-conforming mortgage loans.

In the past, CountryPlace securitized loans as its primary source of long-term financing for chattel and non-conforming mortgages. CountryPlace used a warehouse borrowing facility to provide liquidity while aggregating loans prior to securitization. Because of recent significant and continued deterioration in the asset securitization market, CountryPlace is presently unable to rely on warehouse financing for liquidity and can no longer plan to securitize its

 

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loans. As a result, CountryPlace has ceased originating chattel and non-conforming mortgage loans for its own portfolio until it determines that a term financing market exists or can be developed for such products. At present, no such market exists, and no assurance can be given that one will develop, or that asset securitization will again be viable term financing method for CountryPlace. Further, no assurance can be given that warehouse financing will be available with economically favorable terms and conditions.

If interest rates increase, the market value of loans held for investment and loans available for sale may be adversely affected.

Fixed rate loans originated by CountryPlace prior to long-term financing or sale to investors are exposed to the risk of increased interest rates between the time of loan origination and term financing or sale. If interest rates for term financings or in the whole-loan market increase after loans are originated, the loans may suffer a decline in market value and our interest margin spreads could be reduced. From time to time, CountryPlace has entered into interest rate swap agreements to hedge its exposure to such interest rate risk. However, CountryPlace does not always maintain hedges or hedge the entire balances of all loans. Furthermore, interest rate swaps may be ineffective in hedging CountryPlace’s exposure to interest rate risk.

If CountryPlace is unable to adequately and timely service its loans, it may adversely affect its results of operations.

Although CountryPlace has originated loans since 1995, it has limited loan servicing and collections experience. In 2002, it implemented new systems to service and collect the portfolio of loans it originates. The management of CountryPlace has industry experience in managing, servicing and collecting loan portfolios; however, many borrowers require notices and reminders to keep their loans current and to prevent delinquencies and foreclosures. If there is a substantial increase in the delinquency rate that results from improper servicing or loan performance, the profitability and cash flow from the loan portfolio could be adversely affected and impair CountryPlace’s ability to continue to originate and sell loans to investors.

Increased prices and unavailability of raw materials could have a material adverse effect on us.

Our results of operations can be affected by the pricing and availability of raw materials. In fiscal 2009, average prices of our raw materials increased 5% compared to fiscal 2008, and in fiscal 2008, average raw materials prices decreased 2% compared to fiscal 2007. Although we attempt to increase the sales prices of our homes in response to higher materials costs, such increases typically lag behind the escalation of materials costs. Although lumber costs have moderated, three of the most important raw materials used in our operations - lumber, gypsum wallboard and insulation - have experienced significant price fluctuations in the past several fiscal years. Although we have not experienced any shortage of such building materials today, there can be no assurance that sufficient supplies of lumber, gypsum wallboard and insulation, as well as other materials, will continue to be available to us on terms we regard as satisfactory.

Our repurchase agreements with floor plan lenders could result in increased costs.

In accordance with customary practice in the manufactured housing industry, we enter into repurchase agreements with various financial institutions pursuant to which we agree, in the event of a default by an independent retailer in its obligation to these credit sources, to repurchase manufactured homes at declining prices over the term of the agreements, typically 12 to 18 months. The difference between the gross repurchase price and the price at which the repurchased manufactured homes can then be resold, which is typically at a discount to the original sale price, is an expense to us. Thus, if we were obligated to repurchase a large number of manufactured homes in the future, this would increase our costs, which could have a negative effect on our earnings. Tightened credit standards by lenders and more aggressive attempts to accelerate collection of outstanding accounts with retailers could result in defaults by retailers and consequently repurchase obligations on our part may be higher than has historically been the case. During fiscal 2009, 2008 and 2007, we did not incur any significant losses under these repurchase agreements.

 

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We are dependent on our principal executive officer and the loss of his service could adversely affect us.

We are dependent to a significant extent upon the efforts of our principal executive officer, Larry H. Keener, Chairman of the Board and Chief Executive Officer. The loss of the services of our principal executive officer could have a material adverse effect upon our business, financial condition and results of operations. Our continued growth is also dependent upon our ability to attract and retain additional skilled management personnel.

We are controlled by three shareholders, who may determine the outcome of all elections.

Approximately 52% of our outstanding common stock is beneficially owned or controlled by the estate of Lee Posey (our former Chairman Emeritus), Sally Posey, and Capital Southwest Corporation and its affiliates. As a result, these shareholders, acting together, are able to determine the outcome of elections of our directors and thereby control the management of our business.

The manufactured housing industry is highly competitive and some of our competitors have stronger balance sheets and cash flow, as well as greater access to capital, than we do. As a result of these competitive conditions, we may not be able to sustain past levels of sales or profitability.

The manufactured housing industry is highly competitive, with relatively low barriers to entry. Manufactured and modular homes compete with new and existing site-built homes and to a lesser degree, with apartments, townhouses and condominiums. Competition exists at both the manufacturing and retail levels and is based primarily on price, product features, reputation for service and quality, retailer promotions, merchandising and terms of consumer financing. Some of our competitors have substantially greater financial, manufacturing, distribution and marketing resources than we do. As a result of these competitive conditions, we may not be able to sustain past levels of sales or profitability. In addition, one of our competitors provides the largest single source of retail financing in our industry and if they were to discontinue providing this financing, our operating results could be adversely affected.

If our retail customers are unable to obtain insurance for factory-built homes, our sales volume and results of operations may be adversely affected.

We sell our factory-built homes to retail customers located throughout the United States including in coastal areas, such as Florida. In the second quarter of fiscal 2010, approximately 13% of our net sales were generated in Florida. Some of our retail customers in these areas have experienced difficulty obtaining insurance for our factory-built homes due to adverse weather-related events in these areas, primarily hurricanes. If our retail customers face continued and increased difficulty in obtaining insurance for the homes we build, our sales volume and results of operations may be adversely affected.

We are concentrated geographically, which could harm our business.

In the second quarter of fiscal 2010, approximately 43% of our net sales were generated in Texas and approximately 13% of our net sales were generated in Florida. While Texas has lagged the national recession to a certain extent, a further decline in the economy of Texas could have a material adverse effect on our results of operations as well.

 

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Item 3. Quantitive and Qualitative Disclosure About Market Risk

We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists primarily of our liability under retail floor plan financing arrangements. For variable interest rate obligations, changes in interest rates generally do not impact fair market value, but do affect future earnings and cash flows. Assuming our level of variable rate debt as of September 25, 2009 is held constant, each one percentage point increase in interest rates occurring on the first day of the year would result in an increase in interest expense for the coming year of approximately $0.4 million.

CountryPlace is exposed to market risk related to the accessibility and terms of long-term financing of its loans. In the past, CountryPlace accessed the asset-based securities market to provide term financing of its chattel and non-conforming mortgage originations. At present, asset-backed and mortgage-backed securitization markets are effectively closed to CountryPlace and other manufactured housing lenders. Accordingly, it is unlikely that CountryPlace can continue to securitize its loan originations as a means to obtain long-tern funding. This inability to continue to securitize its loans caused CountryPlace to discontinue origination of chattel loans and non-conforming mortgages until other sources of funding are available.

We are also exposed to market risks related to our fixed rate consumer loans receivable balances and our convertible senior notes. For fixed rate loans receivable, changes in interest rates do not change future earnings and cash flows from the receivables. However, changes in interest rates could affect the fair market value of the loan portfolio. Assuming CountryPlace’s level of loans held for investment as of September 30, 2009 is held constant, a 10% increase in average interest rates would increase the fair value of CountryPlace’s portfolio by approximately $1.5 million. For our fixed rate convertible senior notes, changes in interest rates could affect the fair market value of the related debt. Assuming the amount of convertible senior notes as of September 25, 2009 is held constant, a 10% decrease in interest rates would increase the fair value of the notes by approximately $0.5 million.

 

Item 4. Controls and Procedures

Under the supervision and with the participation of our principal executive officer and principal financial officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange act of 1934) as of September 25, 2009. Based on that evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures were effective as of September 25, 2009.

There has been no change to our internal control over financial reporting during the quarter ended September 25, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. Other Information

 

  Item 1. Legal Proceedings – Not applicable

 

  Item 2. Unregistered Sales of Equity in Securities and Use of Proceeds – Not applicable

 

  Item 3. Defaults upon Senior Securities – Not applicable

 

  Item 4. Submission of Matters to a Vote of Security Holders – Not applicable

 

  Item 5. Other information – Not applicable

 

  Item 6. Exhibits

 

  (a) The following exhibits are filed as part of this report:

 

Exhibit No.

 

Description

31.1   Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 3, 2009

 

  Palm Harbor Homes, Inc.
  (Registrant)
By:  

/s/ Kelly Tacke

  Kelly Tacke
  Executive Vice President and
    Chief Financial Officer
By:  

/s/ Larry H. Keener

  Larry H. Keener
  Chairman of the Board and Chief
    Executive Officer

 

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