** **

**SECURITIES AND EXCHANGECOMMISSION**

** **

**Washington,DC 20549**

** **

##### **Form 10K**

 
| **(Mark  One)** | **Annual  Report Pursuant to Section 13 or 15(d)  of the Securities Exchange Act of 1934**                                                                    |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**      | **For the fiscal year ended December 31, 2003.**                                                                                                              |
|            | **Transition Report Pursuant to  Section 13 or 15(d)  of the Securities Exchange Act of 1934**                                                                |
| **o**           | **For the Transition Period From             to            .** |

 

**CommissionFile Number 0-5555**

 

**LIBERTYHOMES, INC.**

(Exact name of registrant as specified in itscharter)

 
| **Indiana**                              |   | **35-1174256**                  |
|------------------------------------------|--------|---------------------------------|
| (State of Incorporation)                 |   | IRS Employer Identification No. |
|                                     |   |                            |
| **PO Box 35, Goshen, Indiana**           |   | **46527-0035**                  |
| (Address of Principal Executive Offices) |   | (ZIP Code)                      |
|                                     |   |                            |
| Registrant’s telephone number       |   | **574.533.0431**                |

 

Securities registered pursuant to Section 12 (g) of the Act:

 
| **Title of  Each Class** |   | **Name of  Each Exchange  on Which Registered** |
|--------------------------|--------|-------------------------------------------------|
| Class A Common Stock     |   | NASDAQ                                          |
| Class B Common Stock     |   | NASDAQ                                          |

 
| 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  ý      No o |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Indicate by check  mark if disclosure of delinquent filers pursuant to Item 405 of Regulation SK  (229.405 of this chapter) is not contained herein, and will not be contained,  to the best of registrant’s knowledge, in definitive proxy or information  statements incorporated by reference in Part III of this Form 10K or any  amendment to this form  10K.                                                                  ý |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Indicate by check  mark whether the Registrant is an accelerated  filer.                                                                              Yes  o      No ý |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

As of June 30, 2003, theaggregate market value of the non-voting Common Stock Class A, held bynonaffiliates and the voting Common Stock Class B, held by nonaffiliates (basedupon the closing price on the last date of trade) was approximately $2,600,000and $980,000, respectively.

 

Number of shares outstandingof each of the registrant’s classes of common stock.  

 
| **Class**                             |   | **Shares of  Outstanding  at June 30, 2003** |   |
|---------------------------------------|--------|---------------------------------------------------|--------|
|                                  |   |                                              |   |
| Class A Common Stock, $1.00 par value |   | 1,998,945                                         |   |
|                                  |   |                                              |   |
| Class B Common Stock, $1.00 par value |   | 1,655,522                                         |   |

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant’s Annual Report to Shareholders for the fiscalyear ended December 31, 2003 are incorporated by reference into PartII.  Portions of the Proxy Statement forthe 2004 Annual Meeting of Shareholders are incorporated by reference into PartIII.  

 

The Exhibit Index is located on page 15.

 

 

----

 

**PARTI**

 

**ForwardLooking Information –**The discussion below containsforward looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Thesestatements include statements regarding industry and company outlooks and riskfactors.  The Company may make otherforward looking statements orally or in writing from time to time.  All such forward looking statements are notguaranties of future events or performance and involve risks and uncertainties.Actual results may differ materially from those in the forward lookingstatements as the result of a number of material factors. These factors includewithout limitation:

 

•                                          changesin the availability of retail (consumer) and wholesale (retailer) financing andthe volatility of the interest rates thereon

•                                          thestability of the retailer network

•                                          thelevel of inventory of new and repossessed homes

•                                          inventoryrepurchase contingencies

•                                          theavailability and retention of a competent workforce

•                                          availabilityand price of raw materials

•                                          unanticipatedresults in pending legal proceedings

•                                          regulatoryconstraints

•                                          worldand economic events that affect consumer confidence

 

Item 1.  Business

 

Liberty Homes, Inc. (the “Company”) was organized as an Indianacorporation in 1970 as the successor to a business founded in 1941.  The Company designs, manufactures and sellsat wholesale throughout most of the United States a broad line of manufacturedhomes and modular homes under various trade names.  The Company has manufacturing facilities in Alabama, Indiana,Kansas, North Carolina, Oregon, Pennsylvania and Wisconsin.  Additionally, it sells at retail through 2subsidiaries in Indiana and North Carolina.

 

Constructed on a wheel-mounted under-carriage, a manufactured home is arelocatable factory-built dwelling which, when moved to a location, properlyset up and connected to utilities, provides permanent housing.  A manufactured home may also consist of 2 ormore units which are moved separately and when securely joined together are calledmulti-sectional housing.  A manufacturedhome is to be distinguished from a travel trailer, motor home or otherrecreational

 

2

----

 

vehicle which is generally used for living accommodations duringrelatively short periods, primarily for vacation and recreational purposes.

 

The Company’s typical manufactured home contains aliving room, dining room or area, a fully equipped kitchen, 2, 3, 4 or 5bedrooms, and one or more full baths. The Company also produces many homes with such additional living spacesas family rooms, sunrooms, dens, utility rooms and porches.  The homes are equipped with central heating,carpeting, a choice of coordinated colors and interior decoration, and areoffered in a wide range of floor plans. Single section homes are 12, 14 or 16 feet wide and vary in overalllength from 36 to 76 feet. Multi-section homes are 2 or more 12, 14, 15 or 16 foot widesections, with overall lengths ranging from 36 to 76 feet.

 

The Company’s typical modular home is built in 2 or 3 sections and isvery similar to a multi-section manufactured home, however without apermanent steel chassis.

 

The Company utilizes assembly line techniques in the production of itshomes.  Lumber for walls, roofs,ceilings and floors, steel, wood or vinyl siding, ceiling materials, windows,furniture, electrical and plumbing fixtures, and many other items are purchasedfrom numerous suppliers for fabrication or assembly.  Sources of material are readily available and the Company is notdependent upon any particular supplier for its raw materials or componentparts.

 

For the most part, the Company sells its products to numerousindependent retailers and builders, most of whom also sell competingproducts.  In the year endedDecember 31, 2003, the Company’s largest customer accounted forapproximately 4% of the Company’s sales. The Company generally manufactures its homes only after receipt oforders and sales backlogs in the manufactured housing and modular housingindustries are traditionally short.

 

Retail prices for the Company’s single section homes typicallyrange from approximately $25,000 to $50,000 and from approximately $35,000 to$125,000 for multi-section homes. The Company’s homes generally fall within the mid price range of theindustry.

 

3

----

 

Homes were sold by the Company during 2003 to retailers and builders inmost of the continental United States. Transportation charges from the point of manufacture to the deliverypoint are an important factor in the cost of a home and often influence achoice of product.  In general, mostdeliveries are made within a 500-mile radius of the manufacturing facility.

 

In each of the geographical areas in which the Company operates, itfaces direct competition from other manufacturers, some of whom are larger thanthe Company and possess greater resources. This group of competitors consistsof manufacturers who compete with the Company on a national level as well asmany others who are only regional in scope. According to data from the Institute of Building Technology and Safety,at the end of 2003, there were 62 companies operating 206 facilities producingmanufactured housing in the United States. The number of companies and facilities involved in modular housingproduction is unknown.

 

Generally, since the homes sold by the Company are a form of housing,changes in factors which influence the national housing market usually affectthe Company’s business, either beneficially or adversely.  Over the last 5 years, however, while thesite built housing industry has benefited from low interest rates and high loanavailability, financing for manufactured housing has not followed the samecourse.  Therefore, the manufacturedhousing industry and the Company’s manufactured housing business have notfollowed the national housing market trend. The Company’s modular home business, which began in the year 2000, seemsto trend more in line with the other portions of the housing industry.

 

In addition, the quality and number of manufactured home developmentswith space available for new homes sometimes affect the market for manufacturedhomes.  Manufactured home parks and theplacement of manufactured homes on real-estate type scattered sites or subdivisionsare generally subject to local zoning ordinances and other localregulations.  Any limitation of theavailability of space for manufactured homes due to any cause, including suchlocal ordinances, could adversely affect the Company’s business.

 

4

----

 

Because of their size and weight, the Company’s homes are generallytransported by specially modified trucks. Most states require special permits for the movement of such homes.Typically, these permits prescribe the roads to be used, speed limits, hoursduring which travel is permitted, types of signaling devices which must beused, and other such restrictions, primarily for safety purposes.  Seasonal weather conditions can also be afactor for transportation.

 

The construction of manufactured homes, and the plumbing, heating andelectrical systems installed therein, are subject to the National ManufacturedHome Construction and Safety Standards promulgated by the U.S. Department ofHousing and Urban Development (HUD) pursuant to authority granted them by theNational Manufactured Home Construction and Safety Standards Act of 1974.  HUD has also promulgated lengthy and complexregulations to implement and enforce the construction standards, and there aresubstantial penalties for deviations from the regulations.  The standards for construction of theCompany’s modular homes are subject to state or local modular buildingcodes.  These codes are also lengthy andcomplex and, given the Company’s wide range of geographical market, morevoluminous.

 

The Company’s ability to sell its homes is dependent to a considerabledegree upon the availability and terms of financing both to its retailers andto retail customers.  Consequently,increases in interest rates or tightening of credit could adversely affect theCompany’s business. Conversely, a lowering of interest rates or relaxation ofcredit restraints could improve the Company’s business.  The availability and financing terms ofmanufactured housing do not always follow the attributes of financing for othertypes of housing.

 

Retail customers usually finance their home purchases with fundsborrowed from banks, finance companies, mortgage companies and savings and loanassociations.  Manufactured home loansare secured either by the home (chattel mortgage) or by a combination of thehome and land (land/home or real property mortgage).  Chattel loans are often made at a substantially higher rate ofinterest and are not competitive when conventional real property mortgage ratesare low, as they

 

5

----

 

have been in recent years.  Inaddition, the number of financial institutions making chattel loans onmanufactured homes has declined in the past few years.  However, manufactured homes and modularhomes qualify for and are financed utilizing conventional real propertymortgage financing. The acceptance of these homes for such financing has, to asmall extent, offset the decline in the availability of chattel financing.

 

Many retailers who purchase from the Company generally obtain inventoryfinancing from financial institutions (usually banks or finance companies) on a“floor plan” basis whereby the financial institution obtains a lien upon, ortitle to, all or part of a retailer’s inventory.  To assist retailers in obtaining such financing, the Company, inaccordance with trade practice, generally enters into repurchase agreementswith lending institutions whereby the Company, during the period (usually from1 – 1 1/2 years) pending sale to a retail customer, agrees to repurchase a homeso financed in the event of the retailer’s default and subsequent inability torepay the amount borrowed from the financial institution.  In the event of repurchase, the Company willexperience a loss if the repurchase price paid to the financial institutionplus any related costs of repossession (e.g., freight, repairs and shortages)exceed the proceeds received by the Company from resale of the homerepurchased.

 

A growing number of the Company’s retailers are buying homes and fundingthe purchase through construction financing. This type of financing does not require the Company to repurchase thehome if the retailer has defaulted on the loan.

 

Irish Homes, Inc., a wholly-owned subsidiary of the Company, commencedoperations in 1988 to develop subdivisions located in Northern Indiana usingthe Company’s manufactured and modular homes. The homes located within subdivisions include a garage and are placed ona foundation with landscaping, concrete and other work, performed on site by independentcontractors.

 

In 1994, the Company formed Waverlee Homes, Inc., a majority ownedsubsidiary, which

 

6

----

 

operates production facilities in Hamilton, Alabama.  This operation enhanced the Company’s abilityto serve the market in the South Central United States.

 

During 1997, the Company formed Gipper Development Company, LLC, awholly-owned entity, which is developing a manufactured housing community inNorthern Indiana.

 

In 1998, Statesville Housing Center, Inc. was formed as a wholly-ownedsubsidiary of the Company and began operations as a retailer of the Company’shomes.  This retail center is located inStatesville, North Carolina within a mile of one of the Company’s manufacturingplants.

 

In 2000, the Company formed 3 subsidiaries, Ocala Housing Center, Inc.;Waverlee Homes of Texas, Inc.; and First American Homes, Inc., to establishtemporary retail outlets for homes the Company was obligated to repurchaseunder agreements with various financial institutions providing inventoryfinancing to the Company’s independent retailers.  During 2001, the Company closed and liquidated First AmericanHomes, Inc., closed and liquidated Waverlee Homes of Texas, Inc. during 2002and closed and liquidated Ocala Housing Center, Inc. in 2003.

 

Employees

 

As of March 13, 2004, the Company had approximately 790 full-timeemployees.

 

Item 2.  Properties.

 

###### **Manufacturing Facilities –**

 

Syracuse, Indiana

Yoder, Kansas

Dorchester, Wisconsin

Plant #1

Plant #2

Leola, Pennsylvania

Sheridan, Oregon

Ocala, Florida

Statesville, North Carolina

Hamilton, Alabama

Tuscumbia, Alabama

 

7

----

 

The Tuscumbia plant and Plant #1 at Dorchester were idled during theyear 2000 and the Ocala plant was idled at the end of 2002.  All of these plants are currently beingmarketed for sale and are suitable for a wide variety of use.  All of the remaining manufacturing facilitiesare utilized during one shift per day.

 

The Company owns all of its manufacturing facilities in fee simple andbelieves that its facilities and equipment contained therein are wellmaintained and in good condition.  Allthe Company’s manufacturing facilities are intended for the manufacture ofhomes, and in the Company’s judgment, all are adequate for their current use.

 

###### **Retail Facilities –**

 

Statesville, North Carolina

 

The Company leases a retail facility in Statesville, NorthCarolina.  The facility is intended forthe display and retail sale of manufactured and modular homes and is wellmaintained and in good condition.

 

Elkhart, Indiana

 

The Company uses one of the model homes it has in the subdivision as asales office.

 

**Other –**

 

Goshen, Indiana

 

The Company’s executive office and its engineering and design center islocated in Goshen, Indiana.  The Companyowns the property in fee simple.  Theproperty is in good condition, is well maintained and fits the purpose of itsintended use.

 

Item 3.  Legal Proceedings.

 

The Company is party to various legal proceedingsresulting from the normal course of operations. The Company has provided foranticipated losses resulting from such litigation.  In management’s opinion, the Company has adequate legal defensesand does not believe these suits will materially affect the Company’s operationsor financial position.

 

8

----

 

Item 4.  Submission of Mattersto a Vote of Security Holders.

 

There were no matters submitted to a vote of securityholders for the 3 months ended December 31, 2003.

 

**PARTII**

 

Item 5.  Market for theCompany’s Common Equity and Related Stockholder Matters.

 

The Company’s 2003 Annual Report to Shareholders is anexhibit of this filing.  The informationunder the caption “Capital Stock” on page 7 of the report is incorporated by referenceas Item 5 of this filing.  The Companydoes not have any compensation plan or individual compensation arrangementunder which shares of the Company’s common stock have been reserved forissuance to any person in exchange for consideration in the form of goods orservices.

 

The Company’s shares are traded on the NASDAQ smallcap market.

 

Item 6.  Selected FinancialData.

 

The Company’s 2003 Annual Report to Shareholders is anexhibit of this filing.  The informationunder the caption “Selected Financial Data” on page 1 of the report isincorporated by reference as Item 6 of this filing.

 

Item 7.  Management’s Discussionand Analysis of Financial Condition and Results of Operations.

 

The Company’s 2003 Annual Report to Stockholders is anexhibit this filing.  The informationcontained on pages 1 through 7 of the report under the caption “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” isincorporated by reference as Item 7 of this filing.

 

Item 7a.  Quantitative andQualitative Disclosures About Market Risk 

 

The Company currently has a small amount of borrowingon their retail businesses’ floorplan line of credit, and has made infrequentuse of the general line of credit.  Tothe limited extent of borrowing, there is exposure to changes in interestrates.  The Company does not useinterest rate derivative instruments to manage exposure to interest ratechanges.  Additionally, the Company doesnot invest in securities or funds or any other type of intangible tradingsecurity that is exposed to market risk. The Company does not enter into any contractual obligations whose finalsettlement

 

9

----

 

can be affected by interest rate volatility, foreigncurrency rate fluctuations or commodity price changes.

 

Item 8. Financial Statements and Supplementary Data.

 

The Company’s 2003 Annual Report to Stockholders is anexhibit of this filing.  The 2003, 2002and 2001 consolidated financial statements and footnotes thereto, together withthe report thereon of Crowe Chizek and Company LLC dated February 20,2004, on pages 9 through 19 of the report are incorporated by reference as Item8 of this filing.

 

Item 9a. Management’s Report on Disclosure Controls and Procedures and InternalControl. 

 

(a)                                  The Chief Executive Officer and the ChiefFinancial Officer of the Company have evaluated the effectiveness of the designand operation of the Company’s system of disclosure controls and procedures (asdefined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a datewithin 90 days prior to the filing of this Form 10K.  As a result of that evaluation, they have concluded that theCompany’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed in the Company’s reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

 

(b)                                 There have been no significant changes inthe Company’s system of internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of theirevaluation. There were no discoveries of any significant deficiencies ormaterial weaknesses in such controls that would require the Company to takecorrective actions.

 

**PARTIII**

 

Item 10.  Directors andExecutive Officers of the Registrant.

 

Edward J. Hussey, age 86, was President from 1960 to2003 and has been Chief Executive Officer, Chairman of the Board and a Directorsince 1960 of the Company (or it predecessors), and is the father of EdwardJoseph Hussey and Michael F. Hussey.

 

Edward Joseph Hussey, age 56, is an attorney and a son of Edward J.Hussey.  He has been

 

10

----

 

a Director of the Company since 1981, Secretary of the Company since1985 and was named Vice President of the Company in 1990.  In September, 1987, he began employment withthe Company on a full time basis.  Since1975, he has been associated with the law firm of Hodges & Davis P.C.,where he is of counsel.

 

Michael F. Hussey, age 47, has been employed by the Company since1980.  He was named Vice President ofFinance in 1984 and became a Director in 1988. He was elected President in 2003. He is the son of Edward J. Hussey.

 

David M. Huffine, age 55, has been a Director of the Company since1988.  He is currentlyself-employed.  From 1993 to 2002, hewas Vice President of Duneland Mortgage, President of I.M. Homes, Inc., RockyFord, Colorado, President of Sky View Homes, Inc. and Chairman of the Board ofRampart Investigations.

 

Mitchell A. Day, age 48, has been a Director since1995.  He has also been President of DayEquipment Corporation, Goshen, Indiana since 1984.

 

Lester M. Molnar, age 73, retired as Vice President ofthe Company in 1993 after sixteen years of service.  He has been a Director since 2001.

 

James R. Evans, age 43, was appointed a Director in2004.  He has been Chief FinancialOfficer of Marque, Inc. and Pinnacle Building Systems Company since 1999.

 

Dorothy L. Peterson, age 92, has been employed withthe Company since 1952.  She wasappointed Assistant Treasurer in 1985.

 

Marc A. Dosmann, age 51, joined the Company inFebruary 1995 as Vice President and Chief Financial Officer.

 

Bruce A. McMillan, age 52, has served the Company in various capacitiesfor over 30 years. He was appointed to the position of Vice President of Salesin 1994.

 

Ronald F. Atkins, age 53, has served the Company in manufacturing andpurchasing functions since 1981.  During1996, he was appointed to the position of Vice President of Purchasing.

 

11

----

 

Nader Tomasbi, age 44, joined the Company in July 1994.  In 1998, he was appointed as Vice Presidentof Engineering and Design.

 

Brian L. Christner, age 44, joined the Company inDecember 1994 as Controller and has held the position of Treasurer sinceJanuary 2002.

 

Gregory T. Shank, age 36, joined the Company inDecember 1999 as Controller.  Hewas Controller from August 1998 to December 1999 of the TruckAccessory Group, Inc.

 

Item 11.  ExecutiveCompensation.

 

The Company’s Proxy Statement for the Annual Meetingof Shareholders to be held on April 28, 2004 includes information underthe captions “Executive Compensation and Shareowner Return PerformancePresentation” on pages 6 through 9.  Theproxy statement has been separately filed and those sections are exhibits ofthis filing and are incorporated by reference as Item 11 of this filing.

 

Item 12.  Security Ownership ofCertain Beneficial Owners and Management.

 

The Company’s Proxy Statement for the Annual Meeting of Shareholders tobe held on April 29, 2004 includes information under the caption “SharesOutstanding and Voting Rights” on pages 2 and 3. The proxy statement has beenseparately filed and this section is an exhibit of this filing and isincorporated by reference as Item 12 of this filing.

 

Item 13.  Certain Relationshipsand Related Transactions.

 

The Company’s Proxy Statement for the Annual Meetingof Shareholders to be held April 29, 2004 includes information infootnotes 4, 7 and 11 on pages 5 and 6. The proxy statement has been separately filed and this information isincorporated by reference as item 13 of this filing.

 

Item 14. Principal Accountant Fees and Services.

 

The Company’s Proxy Statement of the Annual Meeting ofShareholders to be held April 29, 2004 includes information under thecaption “Relationship with Independent Certified Public Accounts” on page10.  The Proxy Statement has beenseparately filed and those sections are exhibits of this filing and areincorporated by reference as item 14 of this filing.

 

12

----

 

**PART IV**

 

Item 15.  Exhibits, FinancialStatement Schedules and Reports on Form 8K.

 

(a) The following documents are filed as part of thisreport on Form 10K:

 
| **1.   Financial  Statements**                                                                               |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheet at December 31, 2003 and 2002                                                               |   |
|                                                                                                                        |   |
| Consolidated Statements of Income  for Years Ended December 31, 2003,  2002 and 2001                              |   |
|                                                                                                                        |   |
| Consolidated Statements of Changes in  Shareholders’ Equity for the Years Ended December 31, 2003, 2002 and  2001 |   |
|                                                                                                                        |   |
| Consolidated Statements of Cash Flows for  the Years Ended December 31, 2003, 2002 and 2001                            |   |
|                                                                                                                        |   |
| Notes to Consolidated Financial Statements                                                                                  |   |
|                                                                                                                        |   |
| Report of Independent Auditors   (Crowe Chizek and Company LLC)                                                        |   |

 

(b) Reports on Form 8K

 

No reports on Form 8K were filed during the 3 months endedDecember 31, 2003.

 

(c) Exhibits

 

The exhibits filed with this Form 10K are listed in the exhibit indexlocated on page 15.

 

13

----

 

### **SIGNATURES**

 

Following the requirements of Section 13 or 15(d)of the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                | **Liberty Homes, Inc.**                       |
|---------------------|-----------------------------------------------|
|                | (Registrant)                                  |
|                |                                          |
|                |                                          |
| March 30, 2004 |                                          | By: | /s/ Marc A. Dosmann |   |
|                | Marc A. Dosmann                               |
|                | Vice President – CFO                     |
|                | (Principal Financial and Accounting  Officer) |

 

 

Following the requirements of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.

 

 
| /s/ Edward J. Hussey     |   | Director, Chairman of the Board of  Directors                  |
|--------------------------|--------|----------------------------------------------------------------|
| Edward J. Hussey         |   | (Principal Executive Officer)                                  |
|                     |   | March 30, 2004                                            |
|                     |   |                                                           |
| /s/ Michael F. Hussey    |   | Director & President                                       |
| Michael F. Hussey        |   | March 30, 2004                                            |
|                     |   |                                                           |
|                     |   |                                                           |
| /s/ Edward Joseph Hussey |   | Director, Vice President, Secretary &  Assistant Treasurer |
| Edward Joseph Hussey     |   | March 30, 2004                                            |
|                     |   |                                                           |
|                     |   |                                                           |
| /s/ Mitchell Day         |   | Director                                                       |
| Mitchell Day             |   | March 30, 2004                                            |

 

14

----

 

**EXHIBITINDEX**

 
|   |   |                                                                                                                                                                                                                                                                                 |   | **Page** |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|
| 3(a)   |   | Articles of Incorporation of the Company.

(File #0-5555, Form 10K for the year ended December 31, 1984).                                                                                                                                                                       |   | *        |
|   |   |                                                                                                                                                                                                                                                                                 |   |     |
| 3(b)   |   | Amendment to Articles of Incorporation.

(File #0-5555, Form 10-Q for the quarter ended March 31, 1985,  Exhibit 4).                                                                                                                                                            |   | *        |
|   |   |                                                                                                                                                                                                                                                                                 |   |     |
| 3(c)   |   | By-laws of the Company.

(File #0-5555, Form 10K for the year ended December 31, 1987).                                                                                                                                                                                         |   | *        |
|   |   |                                                                                                                                                                                                                                                                                 |   |     |
| 10(a)  |   | Employment Agreement between the Company and Edward Joseph Hussey  dated September 14, 1993

(File #0-5555, Form 10K for the year ended December 31, 1993).                                                                                                                |   | *        |
|   |   |                                                                                                                                                                                                                                                                                 |   |     |
| 10(b)  |   | Employment Agreement between the Company and Michael F. Hussey  dated September 14, 1993

(File #0-5555, Form 10K for the year ended December 31, 1993).                                                                                                              |   | *        |
|   |   |                                                                                                                                                                                                                                                                                 |   |     |
| 13     |   | Annual Report to Shareholders for 2003

(Except for those portions of this report which are expressly  incorporated by reference in this Form 10K, the information contained in such  2003 Annual Report to Shareholders is not deemed “filed” as part of this Form  10K). |   | *        |
|   |   |                                                                                                                                                                                                                                                                                 |   |     |
| 14     |   | Code of Ethics                                                                                                                                                                                                                                                                       |   |     |
|   |   |                                                                                                                                                                                                                                                                                 |   |     |
| 21     |   | List of Subsidiaries                                                                                                                                                                                                                                                                 |   |     |
|   |   |                                                                                                                                                                                                                                                                                 |   |     |
| 31.1   |   | Certification of CEO pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                 |   |     |
|   |   |                                                                                                                                                                                                                                                                                 |   |     |
| 31.2   |   | Certification of CFO pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                                 |   |     |
|   |   |                                                                                                                                                                                                                                                                                 |   |     |
| 32.1   |   | Certification of CEO and CFO pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                                         |   |     |

 

----

*  Incorporated by reference

 

15

----

 

**EXHIBIT 13**

 

**ANNUAL REPORT TO SHAREHOLDERS FOR 2003**

 

**THECOMPANY**

 

**LIBERTY HOMES, INC.**and Subsidiaries design and manufacture a broad line of single andmulti-section manufactured homes and modular homes.  Sales are made to numerous independentretailers throughout most of the United States and to consumers at theCompany’s two retail operations.  TheCompany currently operates manufacturing plants in Syracuse, Indiana; Yoder,Kansas; Dorchester, Wisconsin; Leola, Pennsylvania; Sheridan, Oregon;Statesville, North Carolina; and Hamilton, Alabama.  Corporate offices, including engineering and design facilities,are located in Goshen, Indiana.

 

**SELECTEDFINANCIAL DATA**

as of or for the year endingDecember 31,

(Amounts in Thousands Except per Share Data)

 
|                           |   | **2003** |   | **2002** |   | **2001** |   | **2000** |    | **1999** |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|---------|----------|--------|
| Net Sales                      |   | $        | 84,421 |     | $      | 91,861   |   | $        | 112,266 |     | $      | 128,165 |   | $ | 181,736 |   |
| Net income (loss)              |   | $        | (4,643 | )        | $      | (4,551   | )      | $        | (1,574  | )        | $      | (5,916 | ) | $ | 2,162 |   |
| Net income (loss) per share    |   | $        | (1.27  | )        | $      | (1.22    | )      | $        | (.42    | )        | $      | (1.53 | ) | $ | .55 |   |
|                           |   |     |   |     |   |     |   |     |    |     |   |
| Total assets                   |   | $        | 47,270 |     | $      | 53,020   |   | $        | 61,499  |     | $      | 69,769 |   | $ | 75,088 |   |
| Long term obligations          |   | —   |   | —   |   | —   |   | —   |    | —   |   |
| Cash dividends paid per share: |   |     |   |     |   |     |   |     |    |     |   |
| Class A & B common stock   |   | $        | .28    |     | $      | .28      |   | $        | .28     |     | $      | .28 |   | $ | .28 |   |

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**GENERAL**

***Industry***– For the fifth straight year, the manufactured housing industry experienced acontraction during 2003.  Shipments ofmanufactured homes sold from United States manufacturing facilities during theyear were slightly less than 131,000. Beginning in 1999, when the current slump began, shipments have fallen65%.  This reduction has been steep aswell as lengthy and, as is characteristic of changes of this sort, it has beendriven by wide sweeping forces.

 

Principal causes of the industry’s decline can be traced to anaggressive expansion that took place during the five years preceding theslump.  During that time, retail andwholesale credit availability grew as a result of increased amounts of fundsbeing available as well as the relaxation of underwriting standards.  The increased availability of credit on boththe wholesale and retail levels led to a large increase in the number ofretailers.  Manufacturers responded tothis increased demand by increasing production capacity.

 

Relaxed credit standards inevitably led to a higher level of poorlending decisions.  The result was arash of foreclosures and repossessions when the US economy began todecline.  Retail demand declined and anoversupplied distribution network coupled with an over-saturated number ofretailers led to retailer failures, repossession of wholesale inventory andreduced wholesale demand on manufacturers. With repossessed retail and wholesale inventory flooding the market andsurviving retailers experiencing cutbacks in their inventory financingpackages, a large discounted inventory base provided considerable competitionagainst new factory orders.

 

When lending institutions that dealt in retail and wholesale creditsuffered from high default rates,

 

16

----

 

they either significantly tightened underwriting standards or exitedthe business.  Reduced pricing on theresale of repossessions gave consumers some bargains but also created lowervalues for subsequent loan appraisal purposes in the following market period,further curtailing consumers’ abilities to finance new homes.

 

All of these factors led to reduced orders for new manufactured homes,shipments began to tumble and manufacturers began closing facilities.  At the recent high point, as reported by theInstitute for Building Technology and Safety, the industry had 330 plantsproducing homes at the beginning of 1999. By the end of 2002, the number of plants had fallen to 233.  Furthermore, during 2003, the number ofmanufactured homes shipped declined from the prior year by 22% and the numberof operating production plants further fell to 206 at the end of the year.

 

Credit standards continue to be tight. In fact, The Federal National Mortgage Association and the Federal HomeLoan Management Corporation moved to tighten their standards on manufacturedhousing during 2003.  At year-endthough, pressure was causing these two institutions to publicly expressreconsideration of their moves.

 

The results of 2003 do show some stabilizing factors.  The rate of repossessions has abated, nomajor lending institutions have left the market and the rate of retailerfailures has diminished.

 

Conditions in the manufactured home industry have increased theattraction of modular homes.  Comparedto manufactured homes, modular homes are constructed to a different code, havemore favorable financing alternatives, are manufactured in a similar processand require a higher degree of engineering and administrative involvement.  Because of the similarity in productionprocesses, manufacturers have been expanding into this segment of the housingmarket.  There are, unfortunately, noindustry wide statistics available to gauge this growth.

 

Certain raw materials saw substantial price increases during 2003.  Due in large part to the site built housingboom, many structural components, such as lumber, decking and sheathing reachednear record prices during the year.

 

***Liberty Homes, Inc.***– Since 1941, Liberty Homes, Inc. has been a part of the manufactured housingindustry.  It should come as no surprisethen that the Company’s experiences and performance have been greatly affectedby the industry.

 

During the five-year industry downturn we have seen decreases in ourCompany’s sales that are similar in proportion to the manufactured housingindustry’s performance.  Ourmanufactured home unit sales have declined 75% over the last five yearsincluding, during 2003, a 29% decrease over the prior year.  Part of this decline has been driven by theindustry’s problems.  Single-section homeswere affected the most due to the exit of many retail finance companies whoprovided chattel financing for these products. As a result, we turned to multi-section manufactured homes andmodular housing, and over the five years, our shipments of those homes havedropped 51%.  During 2003, ourmulti-section manufactured and modular home unit volume was 7% lower thanin 2002.  Additionally, the Company didnot begin modular home production until 2000. With favorable results, we grew this business by 97% from 2002 to 2003to represent 21% of total home shipments during 2003.

 

We experienced an abnormally high level of retailer failures in theearly part of the five-year downturn. Each of these failed retailers defaulted on financing packages thatrequired us in most situations to repurchase all of the homes in theirinventory.  The resale of these homesrequired significant discounts and costs and in some cases we entered theretail market ourselves to make

 

17

----

 

an orderly disposition of large blocks of repurchased inventory.  During 2002 and 2003 our retailer networkbecame more stable and the failures and resultant repurchase requirementsduring these years were a fraction of the previous high level.

 

During this five-year downturn we closed three of our operatingfacilities.  In 2000 we consolidated theoperations of one of our Dorchester Wisconsin plants and our Tuscumbia Alabamafacility into nearby production facilities. At the end of 2002, we decided to close our Ocala Florida manufacturingoperation.  By year-end 2003 we wereoperating seven manufacturing operations.

 

As we shifted our business to multi-section homes that requiremore extensive assembly and construction activity, more wholesale and retailfinancing alternatives became available for our homes.  All of these homes qualify for constructionfinancing and traditional consumer mortgages. Construction financing does notcarry a repurchase contingency.  Thisaided in the curtailed level of our repurchase activity during 2003.Furthermore, traditional mortgages with the attendant security interest inrealty present a more favorable risk to lenders.

 

Our raw material costs began escalating at the beginning of the thirdquarter of 2003.  Prices for steel,lumber and lumber products, most notably oriented strand board, wereconsiderably higher during the last half of 2003 than in the prior few quartersand years.  This inflation was rapid anddue to competitive industry conditions, we were unable to increase our sellingprices enough to fully offset these cost increases.

 

Additional conditions impacted our performance in 2003.  As noted before we decided at the end of2002 to close our Ocala Florida plant. We completed this closure during 2003. Employee benefit costs were disproportionately higher in 2003 ascompared to 2002.  The year 2003 alsosaw the closure of the final one of three retail operations we set up to handlemajor inventory repurchases in previous years. All inventory was sold in an orderly manner and the cessation of thesefacilities’ operating costs will reduce overhead.

 

**RESULTS OF OPERATIONS**

Our net sales for 2003 were $84,421,000, a $7,440,000 or 8% decreasefrom the year 2002.  Net sales in 2002decreased by $20,405,000, an 18% reduction to $91,861,000 from 2001 net salesof $112,266,000.  The Company sold 18%fewer homes during 2003 than during 2002 and 20% fewer in 2002 than 2001.  As the product mix has shifted fromsingle-section homes to multi-section homes, our average sellingprice has increased, helping to minimize the reduction of revenue.  During 2003, multi-section homesaccounted for 86% of shipments.  Thiscompared to 76% in 2002 and 64% in 2001.

 

Gross profit was $10,024,000 or 12% of net sales in 2003, $10,875,000or 12% of net sales in 2002 and $16,565,000 or 15% of net sales in 2001.  A significant increase in the cost of rawmaterials during the last half of the year created significant pressure ongross profit in 2003.  Competitiveforces in the declining market for our homes did not allow us to fully recoupthese cost increases, thereby eroding gross profit.  Additionally, employee fringe benefit costs were abnormally highthrough medical plan and workers’ compensation insurance cost increases.

 

Selling, delivery, general andadministrative expenses totaled $14,548,000 or 17% of net sales in 2003, a$3,691,000 decrease from $18,239,000 or 20% of net sales in 2002.  The decrease results from the elimination ofthese costs at the closed Florida manufacturing plant, the closed retailoperation previously established to resell repurchased homes and other generaladministrative cost reductions.  Theyear 2002 includes $877,000 reserved as closing costs for the Florida facility.Selling, delivery, general and administrative expenses during 2001 were$18,976,000 or 17% of net

 

18

----

 

sales.

 

The Company’s 2003 loss from operations was $4,524,000, a $2,840,000 or39% reduction from the $7,364,000 loss in 2002.  The operating loss in 2001 was $2,411,000.  Continued declining sales by the industryand by the Company plus the other factors cited before have created a difficultenvironment in which to operate. Continued attention to cost control and our focus on new products andapproaches to the homebuyers’ market helped us reduce the Company’s loss in2003.  By no means are we fullysatisfied with these results and our focus and control will continue.

 

Interest and other income or loss was a loss of $102,000 in 2003, and incomeof $55,000 in 2002 and $562,000 in 2001. Interest income primarily results from interest earned from theCompany’s investment of cash.  Variancesare due to varying interest rates, which have dropped considerably over thethree years, and the amount of cash available to invest.  The Company experienced in 2003, losses onthe disposition of fixed assets and other investments.

 

Tax loss carryback benefits had been substantially utilized in periodsprior to 2003 leaving only a minimal benefit of $63,000 for the current yearcompared to a $2,742,000 benefit in 2002 and a benefit of $692,000 in2001.  Operations for the year produceda net loss of $4,643,000 in 2003, a $92,000 increase in the net loss of$4,551,000 in 2002.  The net loss was$1,574,000 in 2001.  The basic and fullydiluted loss per share was $1.27, $1.22 and $.42 in 2003, 2002 and 2001,respectively.

 

**LIQUIDITY AND CAPITALRESOURCES**

Cash, cash equivalents and short-term investments increased during theyear to $6,130,000 at December 31, 2003 compared to $4,608,000 at the endof 2002.  Working capital was$14,057,000 and $18,305,000 at the end of year 2003 and 2002,respectively.  The current ratio was 2.4to 1 at the end of 2003 and 2.8 to 1 at the end of 2002.

 

The Company has no installment debt, leases or other material scheduledpayment obligations.  Capitalexpenditures during 2003 and 2002 have been limited to repair and replacementof existing assets.  There are currentlyno plans, projects or commitments that would place a substantial requirement onfuture cash flow.

 

Through the consolidation of manufacturing operations and the wind upof repossessed inventory retail operations, we have idled three manufacturingfacilities and one retail center that we own. The real estate in all these properties is held for sale.  Appraisals on them exceed their net bookvalue. We hope to sell all these properties for amounts that exceed their netbook value plus the costs of disposal. At December 31, 2003, the aggregate net book value of these propertieswas $5,180,000.

 

The Company is contingently liable under agreements to third partyfinancing companies that require the Company, under certain conditions, torepurchase homes it sells to its retailers. We believe, as of December 31, 2003, the total repurchase amountpotentially due on all homes subject to repurchase is approximately$16,000,000.  The risk of loss underthese agreements is spread over many retailers and is further reduced by theresale value of the homes.  During 2003and 2002, the Company funded all of its repurchase obligations through internalsources.  As of December 31, 2003,we have made provisions for all obligations of which we are aware plus anypotential repurchases we have deemed likely to be required.  Any significant change could place unplanneddemands on future cash flows.

 

The Company has secured line of credit agreements, which provide up to$1,366,000 to finance inventory held for retail sale and a general secured lineof credit of $5,000,000.  AtDecember 31,

 

19

----

 

2003, $573,000 was payable on the inventory credit agreements.  As seasonal forces come to bear on cashflow, we have used the general line of credit for a short period of time ineach of 2003 and 2002.  At December 31stof both years, nothing was borrowed on the general credit line.

 

We believe that cash flow from operations, cash reserves and creditarrangements currently in place will be sufficient to meet the Company’srequirements in the year 2004.  We havetaken into consideration the current conditions in which the Companyoperates.  Any additional downturn inthe industry could affect the Company and cause us to seek additional lines ofcredit.

 

**OUTLOOK AND RISKFACTORS**

Many of the factors that have created the slump in the manufacturedhousing industry will continue to be felt. As we have stated in our general discussion previously, these factorsare broad sweeping and have a pronounced effect on our Company and we arecautious about future effects.

 

Reduced credit availability and tighter underwriting standards willcontinue to have a dampening effect on the sale of manufactured homes.  Given the excesses that preceded the currentdownturn, the long-term health of the industry will be enhanced by the prudentunderwriting of consumer loans.

 

The spate of retailer failures that occurred industry-wide in 2000 hasslowed since then.  However, it isdifficult to project what may happen with the existing retailer base in thefuture.  Continued fallout among thispart of the distribution chain may disrupt the market.

 

It is a common practice for manufactured housing producers toparticipate in retailer financing programs which require the manufacturer torepurchase homes which remain unsold and in retailer inventory within a certaintime period following delivery to the retailer, if the retailer defaults on itsfinancing obligations.  When initiated,this repurchase obligation brings homes back into the wholesale market and mayresult in some discounting as the units are resold.  Such discounting creates pricing pressure on the sale of our newhomes.  Furthermore, considerablerepurchase demands on our own retailers would require uses of our capital inthis unproductive area.  We do notbelieve, however, that the major repurchase activity seen in past years islikely to occur again in the very near future.

 

The distribution system for our Company’s modular homes may be somewhatdifferent.  While the Company sells someof its modular homes to traditional manufactured home retailers, a largepercentage of modular homes are sold to builder developers who do not as a rulestock homes for display.  Consequently,homes sold to such builder developers are not subject to repurchase asdescribed above.  As the modular portionof the Company’s business grows, the Company’s contingent liability forrepurchase of homes should proportionately shrink.

 

The Company’s operations run parallel to the forces in the industry andare impacted by the same risk factors affecting the industry.  Since we produce only to retailers’ ordersand sales backlogs are traditionally short, the order activity is indicative ofthe day to day retail sales activity of our products. Any changes affectingretail customer demand, such as cost, unemployment and the factors previouslymentioned, may have an immediate effect on operations.  Additional risk factors of the Company aredescribed in the Liquidity and Capital Resources section of thisdiscussion and in the Notes to Consolidated Financial Statements, Note Six,Contingent Liabilities.

 

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

The Notes to Consolidated Financial Statements contain descriptions inNote One, Accounting Policies, of the Company’s accounting policies which wereused in the preparation of the financial information used in this report and inother publicly disclosed information. These policies are

 

20

----

 

Generally Accepted Accounting Policies used in the United States(GAAP).  Our preparation of thefinancial information requires us to use judgment and estimates in thevaluation of certain assets and liabilities, recognition of certain expensesand the disclosure of contingencies.  Itis our opinion that this use of judgment and estimates has been done incompliance with GAAP.

 

The Company’s critical accounting policies and estimates are used inestablishing amounts for warranty, repurchase obligations, lawsuit reserves,deferred tax valuation and the valuation of property held for sale.  Management has discussed with the Company’sAudit Committee the effects of the application of these critical accountingpolicies and estimates.  All of theseestimates relate to unsettled transactions and events.  Accordingly, upon settlement, actual amountsmay differ from these estimated amounts.

 

Warranty – We use an analysis of historical warranty expense and theaverage period of time after the sale of the Company’s homes in which warrantyclaims arise to establish reserves for the cost of potential warranty work thatmay need to be performed on homes that are sold.

 

Repurchase Obligations – Estimates are used to determine reserves forpotential losses the Company may realize on the resale of homes that it hasreceived requests to repurchase but not yet repurchased or on homes deemedlikely to be repurchased.  Theseestimates are based on current market conditions of the supply of repurchasedhomes and the value for which recent repurchased homes have been sold.  The Liquidity and Capital Resourcessection of Management’s Discussion and Analysis, and Note Six, ContingentLiabilities, in the Notes to Consolidated Financial Statements includeadditional discussion about the Company’s repurchase obligations.

 

Lawsuits – The Company is party to various legal proceedings from thenormal course of operations. We analyze the facts and circumstances of eachspecific claim and determine the need to establish a liability for a potentialsettlement amount.  On those claims forwhich a settlement seems appropriate, a liability is set after review withlegal counsel and a review of the outcome of similar claims.

 

Deferred Taxes – The Company calculates the difference between theamounts of income and expense items determined according to GAAP and theamounts determined by the various tax laws and regulations effective for theareas in which the Company operates. The predominant incidence of these differences result from temporarydifferences in the timing of the recognition of income or expense.  An estimate of the value of these items ismade using the prevailing tax rates. These rates may change at the time the temporary differences areactually realized for tax purposes and may therefore be different than ouroriginal estimates.  We also estimatethe time at which these temporary differences will cease and the time at whichfuture operations will be affected by the deferred taxes.  We have given no value to the tax benefit ofnet operating loss carryforwards. Additional information about deferred taxesis included in the appropriate section of Note One, Accounting Policies,and in Note Three, Income Taxes, of the Notes to Consolidated FinancialStatements.

 

Property Held For Sale – We have estimated the market value ofproperties held for sale to be in excess of the net book value plus disposalcost of the properties.  We usedappraisals to establish the market valuations in making this estimate.  The Liquidity and Capital Resourcessection of Management’s Discussion and Analysis and the appropriatesection of Note One of the Notes to Consolidated Financial Statementsinclude additional discussion about the Company’s property held for sale.

 

21

----

 

## **FORWARD LOOKINGSTATEMENTS**

The discussion above contains forward looking statements within themeaning of the Private Securities Litigation Reform Act of 1995.  These statements include statements we makeregarding industry and company outlooks and risk factors.  We may make other forward looking statementsorally or in writing from time to time. All such forward looking statements are not guaranties of future eventsor performance and involve risks and uncertainties.  Actual results may differ materially from those in our forwardlooking statements as the result of a number of material factors.  These factors include without limitation:

 

•                                          changesin the availability of retail (consumer) and wholesale (retailer) financing andthe volatility of the interest rates thereon

•                                          thestability of the retailer network

•                                          thelevel of inventory of new and repossessed homes

•                                          inventoryrepurchase contingencies

•                                          theavailability and retention of a competent workforce

•                                          availabilityand price of raw materials

•                                          unanticipatedresults in pending legal proceedings

•                                          regulatoryconstraints

•                                          worldand economic events that affect consumer confidence

 

**CAPITALSTOCK**

The Company’s Class A and Class B Common Stock are traded on the NASDAQStock Market. As of February 20, 2004, there were approximately 225holders of record of the Company’s Class A Common Stock and approximately 150holders of record of the Company’s Class B Common Stock. The following tableshows the high and low closing bid price per share for the Company’s Class Aand Class B Common Stock for each of the quarters in 2003 and 2002 as well ascash dividends paid in each quarter in 2003 and 2002.  During 2002, the Board of Directors deferred their quarterlymeeting, normally held in late December, to early January 2003.  As a result, the quarterly dividend,normally declared each year at the December meeting to be paid in thefirst quarter of the following year, was not declared until the first month of2003.  Accordingly, although the date ofthe Company’s dividend declaration changed during 2002, the dividend paymentpolicy was not changed.

 
|            |   | **Price per  Share ($)** |   | **Cash  Dividends Paid  per Share** |   |
|-----------------|--------|--------------------------|--------|-------------------------------------|--------|
|            |   | **2003**                 |   | **2002**                            |   |   |
|            |   | **High**                 |   | **Low**                             |   | **High** |   | **Low** |   | **2003** |   | **2002** |   |
| First Quarter:  |   |                     |   |                                |   |   |   |   |   |   |   |   |   |
| Class A Common  |   | 4.93                     |   | 3.52                                |   | 7.10 |   | 4.50 |   | $ | .07 |   | $ | .07 |   |
| Class B Common  |   | 6.25                     |   | 4.59                                |   | 7.90 |   | 4.85 |   | $ | .07 |   | $ | .07 |   |
| Second Quarter: |   |                     |   |                                |   |   |   |   |   |   |   |   |   |
| Class A Common  |   | 6.24                     |   | 3.90                                |   | 7.70 |   | 5.35 |   | $ | .07 |   | $ | .07 |   |
| Class B Common  |   | 5.45                     |   | 4.15                                |   | 7.51 |   | 6.50 |   | $ | .07 |   | $ | .07 |   |
| Third Quarter:  |   |                     |   |                                |   |   |   |   |   |   |   |   |   |
| Class A Common  |   | 4.95                     |   | 4.14                                |   | 6.00 |   | 4.50 |   | $ | .07 |   | $ | .07 |   |
| Class B Common  |   | 7.50                     |   | 4.44                                |   | 6.95 |   | 4.70 |   | $ | .07 |   | $ | .07 |   |
| Fourth Quarter: |   |                     |   |                                |   |   |   |   |   |   |   |   |   |
| Class A Common  |   | 6.40                     |   | 4.50                                |   | 5.90 |   | 4.02 |   | $ | .07 |   | $ | .07 |   |
| Class B Common  |   | 8.00                     |   | 4.87                                |   | 6.55 |   | 5.20 |   | $ | .07 |   | $ | .07 |   |

 

22

----

 

March 22, 2004

 

 

To Our Shareholders:

 

As mentioned in Management’s Discussion and Analysis, the year 2003provided another year of substantial challenges to the manufactured housingindustry and to Liberty Homes, Inc. Industry over-capacity, tightened credit standards and few financialinstitutions servicing the industry continued to fuel the poor environment inwhich the Company operated.

 

We responded by focusing on new and innovative products, exploring newavenues into the homebuyers’ market and by controlling costs.  During 2003, we completed the closure of theCompany’s Ocala, Florida facility.  Theplant is currently held for sale.

 

During the year 2003, the Company generated net sales of$84,421,000.  This amount represents adecrease of $7,440,000 from the prior year. Although still a loss, our 2003 operating loss improved to $4,524,000compared to $7,364,000 in the prior year while our net loss was $4,643,000during the current year compared to net loss of $4,551,000 in 2002.

 

Once again, we want to take this opportunity to thank our shareholders,employees and suppliers for their efforts and continuing support.

 

Very truly yours,

 
| LIBERTY HOMES, INC.   |
|-----------------------|
|                  |
|                  |
| /s/ Edward J. Hussey  |   |
| Chairman of the Board |
|                  |
| pkm                   |

 

23

----

 

**CONSOLIDATEDBALANCE SHEET**

 

December 31, 2003 and 2002 (Amounts inThousands)

 

**ASSETS**

 
|                                |   | **2003** |   | **2002** |   |
|-------------------------------------|--------|----------|--------|----------|--------|
|                                |   |     |   |     |   |
| **Current Assets:**                 |   |     |   |     |   |
|                                |   |     |   |     |   |
| Cash and cash equivalents           |   | $        | 6,080  |     | $      | 4,308 |   |
|                                |   |     |   |     |   |
| Short term investments              |   | 50       |   | 300      |   |
|                                |   |     |   |     |   |
| Receivables                         |   | 3,867    |   | 5,815    |   |
|                                |   |     |   |     |   |
| Inventories                         |   | 9,594    |   | 10,644   |   |
|                                |   |     |   |     |   |
| Deferred tax asset                  |   | 3,490    |   | 3,441    |   |
|                                |   |     |   |     |   |
| Income taxes refundable             |   | 81       |   | 1,912    |   |
|                                |   |     |   |     |   |
| Prepayments and other               |   | 1,029    |   | 2,148    |   |
|                                |   |     |   |     |   |
| Total current assets                |   | 24,191   |   | 28,568   |   |
|                                |   |     |   |     |   |
| **Property, Plant and  Equipment:** |   |     |   |     |   |
|                                |   |     |   |     |   |
| Land                                |   | 1,519    |   | 2,014    |   |
|                                |   |     |   |     |   |
| Buildings and improvements          |   | 23,803   |   | 23,580   |   |
|                                |   |     |   |     |   |
| Machinery and equipment             |   | 20,151   |   | 20,735   |   |
|                                |   |     |   |     |   |
|                                |   | 45,473   |   | 46,329   |   |
|                                |   |     |   |     |   |
| Less accumulated depreciation       |   | 27,574   |   | 26,458   |   |
|                                |   |     |   |     |   |
|                                |   | 17,899   |   | 19,871   |   |
|                                |   |     |   |     |   |
| Property held for sale              |   | 5,180    |   | 4,581    |   |
|                                |   |     |   |     |   |
|                                |   | $        | 47,270 |     | $      | 53,020 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.  

 

24

----

 

**LIBERTY HOMES, INC.**

 

**LIABILITIES**

 
|                                                                                                                                                       |   | **2003** |   | **2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                                                                                       |   |     |   |     |   |
| **Current  Liabilities:**                                                                                                                                  |   |     |   |     |   |
|                                                                                                                                                       |   |     |   |     |   |
| Accounts payable                                                                                                                                           |   | $        | 1,668  |     | $      | 1,779 |   |
|                                                                                                                                                       |   |     |   |     |   |
| Floorplan notes payable                                                                                                                                    |   | 573      |   | 895      |   |
|                                                                                                                                                       |   |     |   |     |   |
| Accrued compensation & payroll taxes                                                                                                                   |   | 862      |   | 1,150    |   |
|                                                                                                                                                       |   |     |   |     |   |
| Other accrued liabilities                                                                                                                                  |   | 7,031    |   | 6,439    |   |
|                                                                                                                                                       |   |     |   |     |   |
| Total current liabilities                                                                                                                                  |   | 10,134   |   | 10,263   |   |
|                                                                                                                                                       |   |     |   |     |   |
| **Deferred Income  Taxes**                                                                                                                                 |   | 2,781    |   | 2,732    |   |
|                                                                                                                                                       |   |     |   |     |   |
| **Minority Interest  in Consolidated Subsidiaries**                                                                                                        |   | 926      |   | 929      |   |
|                                                                                                                                                       |   |     |   |     |   |
| Contingent Liabilities                                                                                                                                     |   | —   |   | —   |   |
|                                                                                                                                                       |   |     |   |     |   |
| **SHAREHOLDERS’  EQUITY**                                                                                                                             |   |     |   |     |   |
| **Capital Stock:**                                                                                                                                         |   |     |   |     |   |
| Class A, $1 par value, Authorized -  7,500,000 shares; Issued and outstanding – 2,002,000 in 2003 and 1,995,000 in  2002                              |   | 2,002    |   | 1,995    |   |
|                                                                                                                                                       |   |     |   |     |   |
| Class B, $1 par value, convertible to Class  A, Authorized – 3,500,000 shares; Issued and outstanding – 1,652,000 in 2003  and 1,659,000 in 2002 |   | 1,652    |   | 1,659    |   |
|                                                                                                                                                       |   |     |   |     |   |
| **Other Capital**                                                                                                                                          |   | 83       |   | 83       |   |
|                                                                                                                                                       |   |     |   |     |   |
| **Retained Earnings**                                                                                                                                      |   | 29,692   |   | 35,359   |   |
|                                                                                                                                                       |   |     |   |     |   |
|                                                                                                                                                       |   | 33,429   |   | 39,096   |   |
|                                                                                                                                                       |   |     |   |     |   |
|                                                                                                                                                       |   | $        | 47,270 |     | $      | 53,020 |   |

 

25

----

 

**CONSOLIDATED STATEMENT OF INCOME**

 

For the Years Ended December 31, 2003, 2002 and 2001

(Amounts in Thousands, Except per Share Data)

 
|                                                    |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                    |   |     |   |     |   |     |   |
| Net sales                                               |   | $        | 84,421 |     | $      | 91,861   |   | $ | 112,266 |   |
| Cost of sales                                           |   | 74,397   |   | 80,986   |   | 95,701   |   |
|                                                    |   |     |   |     |   |     |   |
| Gross profit                                            |   | 10,024   |   | 10,875   |   | 16,565   |   |
|                                                    |   |     |   |     |   |     |   |
| Selling, delivery, general and  administrative expenses |   | 14,548   |   | 18,239   |   | 18,976   |   |
|                                                    |   |     |   |     |   |     |   |
| Operating loss                                          |   | (4,524   | )      | (7,364   | )      | (2,411   | )      |
|                                                    |   |     |   |     |   |     |   |
| Interest and other income or (loss)                     |   | (102     | )      | 55       |   | 562      |   |
| Interest expense                                        |   | (83      | )      | (152     | )      | (340     | )      |
|                                                    |   |     |   |     |   |     |   |
| Loss before minority interest and income  taxes         |   | (4,709   | )      | (7,461   | )      | (2,189   | )      |
| Minority interest in consolidated  subsidiaries         |   | 3        |   | 168      |   | (77      | )      |
| Income tax benefit                                      |   | 63       |   | 2,742    |   | 692      |   |
|                                                    |   |     |   |     |   |     |   |
| Net loss                                                |   | $        | (4,643 | )        | $      | (4,551   | )      | $ | (1,574 | ) |
|                                                    |   |     |   |     |   |     |   |
| Net loss per outstanding common share                   |   |     |   |     |   |     |   |
| Class A – basic and fully diluted                  |   | $        | (1.27  | )        | $      | (1.22    | )      | $ | (.42 | ) |
| Class B – basic and fully diluted                  |   | $        | (1.27  | )        | $      | (1.22    | )      | $ | (.42 | ) |

 

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

 

For the Years Ended December 31, 2003,2002 and 2001

(Amounts in Thousands)

 
|                                           |   | **Class A  Common  Stock** |   | **Class B  Common  Stock** |   | **Other  Capital** |   | **Retained  Earnings** |   | **Total** |   |
|------------------------------------------------|--------|----------------------------|--------|----------------------------|--------|--------------------|--------|------------------------|--------|-----------|--------|
|                                           |   |                       |   |                       |   |               |   |                   |   |      |   |
| Balance, January 1, 2001                  |   | $                          | 2,083  |                       | $      | 1,670              |   | $                      | 83     |      | $      | 43,746 |   | $ | 47,582 |   |
| Conversion from Class B to Class A             |   | 5                          |   | (5                         | )      |               |   |                   |   | —    |   |
| Net loss for the year                          |   |                       |   |                       |   |               |   | (1,574                 | )      | (1,574    | )      |
| Cash dividends declared                        |   |                       |   |                       |   |               |   | (1,051                 | )      | (1,051    | )      |
| Balance December 31, 2001                 |   | 2,088                      |   | 1,665                      |   | 83                 |   | 41,121                 |   | 44,957    |   |
| Conversion from Class B to Class A Shares      |   | 6                          |   | (6                         | )      |               |   |                   |   | —    |   |
| Repurchase and cancellation of Class A  Shares |   | (99                        | )      |                       |   |               |   | (431                   | )      | (530      | )      |
| Net loss for the year                          |   |                       |   |                       |   |               |   | (4,551                 | )      | (4,551    | )      |
| Cash dividends declared                        |   |                       |   |                       |   |               |   | (780                   | )      | (780      | )      |
| Balance December 31, 2002                 |   | 1,995                      |   | 1,659                      |   | 83                 |   | 35,359                 |   | 39,096    |   |
| Conversion from Class B to Class A Shares      |   | 7                          |   | (7                         | )      |               |   |                   |   | —    |   |
| Net loss for the year                          |   |                       |   |                       |   |               |   | (4,643                 | )      | (4,643    | )      |
| Cash dividends declared                        |   |                       |   |                       |   |               |   | (1,024                 | )      | (1,024    | )      |
| Balance December 31, 2003                 |   | $                          | 2,002  |                       | $      | 1,652              |   | $                      | 83     |      | $      | 29,692 |   | $ | 33,429 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

26

----

 

**CONSOLIDATED STATEMENT OF CASH FLOWS**

For the Years Ended December 31, 2003,2002 and 2001

(Amounts in Thousands)

 
|                                                                             |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Cash flows from (used in) operating  activities:                                 |   |     |   |     |   |     |   |
| Net loss                                                                         |   | $        | (4,643 | )        | (4,551 | )        | $      | (1,574 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |     |   |     |   |     |   |
| Depreciation                                                                     |   | 1,797    |   | 2,039    |   | 2,465    |   |
| Deferred income taxes                                                            |   | —   |   | (339     | )      | (420     | )      |
| Minority interest                                                                |   | (3       | )      | (168     | )      | 77       |   |
| Loss (Gain) on sale of property, plant  & equipment                          |   | 33       |   | (37      | )      | —   |   |
| Net value of retail center assets written  off                                   |   | —   |   | —   |   | 151      |   |
| Changes in assets and liabilities:                                               |   |     |   |     |   |     |   |
| Receivables                                                                      |   | 1,948    |   | 4,691    |   | 753      |   |
| Inventories                                                                      |   | 1,050    |   | 1,923    |   | 4,855    |   |
| Prepayments and other                                                            |   | 1,119    |   | 100      |   | (222     | )      |
| Accounts payable                                                                 |   | (111     | )      | (872     | )      | (1,008   | )      |
| Accrued liabilities                                                              |   | 304      |   | (109     | )      | (1,808   | )      |
| Income taxes payable/receivable                                                  |   | 1,831    |   | (1,550   | )      | 3,281    |   |
| Total adjustments                                                                |   | 7,968    |   | 5,678    |   | 8,124    |   |
|                                                                             |   |     |   |     |   |     |   |
| Net cash from operating activities                                               |   | 3,325    |   | 1,127    |   | 6,550    |   |
|                                                                             |   |     |   |     |   |     |   |
| Cash flows from (used in) investing  activities:                                 |   |     |   |     |   |     |   |
| Additions to property, plant &  equipment                                    |   | (480     | )      | (1,349   | )      | (396     | )      |
| Proceeds from sale of property, plant &  equipment                           |   | 23       |   | 368      |   | —   |   |
| Redemption of short term investments                                             |   | 250      |   | —   |   | 50       |   |
| Net cash (used in) investing activities                                          |   | (207     | )      | (981     | )      | (346     | )      |
|                                                                             |   |     |   |     |   |     |   |
| Cash flows from (used in) financing  activities:                                 |   |     |   |     |   |     |   |
| Proceeds from notes payable                                                      |   | 5,793    |   | 1,152    |   | 3,751    |   |
| Repayments of notes payable                                                      |   | (6,115   | )      | (2,640   | )      | (6,577   | )      |
| Cash dividends paid                                                              |   | (1,024   | )      | (1,043   | )      | (1,051   | )      |
| Retirement of common stock                                                       |   | —   |   | (530     | )      | —   |   |
| Net cash (used in) financing activities                                          |   | (1,346   | )      | (3,061   | )      | (3,877   | )      |
|                                                                             |   |     |   |     |   |     |   |
| Net increase (decrease) in cash and cash  equivalents                            |   | 1,772    |   | (2,915   | )      | 2,327    |   |
| Cash and cash equivalents, beginning of  year                                    |   | 4,308    |   | 7,223    |   | 4,896    |   |
|                                                                             |   |     |   |     |   |     |   |
| Cash and cash equivalents, end of year                                           |   | $        | 6,080  |     | 4,308  |     | $      | 7,223 |   |
|                                                                             |   |     |   |     |   |     |   |
| Supplemental disclosures of cash flow  information -                             |   |     |   |     |   |     |   |
| Cash received from income taxes                                                  |   | $        | 1,954  |     | 811    |     | $      | 3,403 |   |
| Cash paid for interest expense                                                   |   | $        | 83     |     | 152    |     | $      | 373 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

27

----

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

## **1.ACCOUNTING POLICIES:**

## **Principles ofConsolidation**

The consolidated financial statements include the accounts of theCompany and all its wholly owned and majority owned subsidiaries.  Upon consolidation, all inter-companyaccounts, transactions and profits have been eliminated.

 

## **Cash and CashEquivalents**

Cash and cash equivalents include highly liquid investments which areconverted to known amounts of cash on a daily basis.  These investments are carried at cost which approximates marketvalue.

 

## **Short-TermInvestments**

At December 31, 2003 and 2002, short term investments consistedprimarily of certificates of deposit with original maturities of 90 days to 12months and readily convertible to cash. These investments are carried at cost, which approximates fair marketvalue.  The Company intends to hold thecertificates of deposit until maturity. The Company’s investments were maintained at a single financial institutionat December 31, 2003.

 

## **AccountsReceivable**

The Company accounts for trade receivables using the amounts billed toits customers.  Past due receivables aredetermined based on the contractual terms of the transactions billed.  The Company does not accrue interest on anyof its trade receivables.  From time totime the Company reviews accounts receivable for amounts that may seemuncollectable.  Based on the currentcircumstances of customers, specific transactions and economic conditions, theCompany establishes an allowance for doubtful collection of receivables.  When collection attempts are deemed to havefailed, the receivable is charged against the allowance.  The Company’s allowances are immaterial.

 

## **Inventories**

Inventories are stated at the lower of cost or market, with costdetermined on a first-in, first-out basis. A recap of inventories is as follows:

 
| **(Amounts in Thousands)** |   | **2003** |   | **2002** |   |
|----------------------------|--------|----------|--------|----------|--------|
| Raw material inventory     |   | $        | 5,202  |     | $      | 5,344 |   |
| Work in process inventory  |   | 1,725    |   | 1,927    |   |
| Inventory held for sale    |   | 2,667    |   | 3,373    |   |
|                       |   | $        | 9,594  |     | $      | 10,644 |   |

 

## **Property, Plantand Equipment**

Property, plant and equipment is recorded at cost.  Depreciation is taken over the estimateduseful life of the asset and is provided principally on the straight-linemethod.  When assets are retired ordisposed, the related cost and accumulated depreciation is removed from theaccounts and any resulting gain or loss is included in operations.  Operations are charged with all maintenance,repairs and rearrangement expenses, while betterments and renewals whichincrease the productive capacity of assets are capitalized and depreciated. Theproperties are reviewed for impairment when events indicate the value may notbe fully recoverable.

 

## **Property Held forSale**

The Company currently has for sale three of its former productionfacilities, one each in Ocala, Florida, Dorchester, Wisconsin and Tuscumbia,Alabama and also has for sale a closed retail center

 

28

----

 

in Ocala, Florida.  TheWisconsin and Alabama facilities ceased operation in 2000.  Production from the Dorchester, Wisconsinplant was consolidated into the Company’s other Dorchester plant, while theTuscumbia business was moved 50 miles to the Hamilton, Alabama plant.  At the end of 2002, production ceased at theFlorida plant. The Company finished the plant closure in 2003 and will servethis market area from its other facilities. These closings were done as part of the Company’s response to thecurrent industry downturn.  The retailcenter was established in order to liquidate homes that the Company was requiredto purchase from some of its failed retailers. This center was closed in 2003 after all inventory was disposed.

 

All facilities are for sale and include land, buildings and landimprovements.  The appraised values andasking price for each property exceeds the net book value of each.  All three manufacturing facilities can fit awide variety of utilization and the retail location is suitable for manypurposes.  The Company anticipatesselling all of these properties for amounts that exceed their net book valueplus disposal costs.  Accordingly, thestatements reflect the aggregate net book value of $5,180,000 for all theseproperties and no adjustments for impairment have been made.

 

## **Product WarrantyCosts**

Estimated warranty obligations are accrued at the time of sale.  This estimate is made from an analysis ofthe Company’s historical warranty cost. The following table details the accrual of warranty costs and thechanges therein for the past three years.

 
| **(Amounts in Thousands)**           |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Accrual at beginning of year         |   | $        | 2,081  |     | $      | 1,764    |   | $ | 1,764 |   |
| Plus charges to expense              |   | 6,133    |   | 7,087    |   | 8,392    |   |
| Less payments of claims and services |   | (5,748   | )      | (6,770   | )      | (8,392   | )      |
| Accrual at end of year               |   | $        | 2,466  |     | $      | 2,081    |   | $ | 1,764 |   |

 

## **Income Taxes**

The Company accounts for income taxes using the asset and liabilitymethod.  Under this method, deferredincome taxes are recognized for the tax consequences of temporary differencesby applying enacted statutory tax rates applicable to future years todifferences between the financial statement carrying amounts and the tax basesof ending assets and liabilities.  Theeffect on deferred taxes of a change in tax rates is recognized in income inthe period that includes the tax change enactment date.

 

## **Recently Enacted AccountingStandards**

The Financial Accounting Standards Board has recently issued or revisednew accounting standards (FAS) and new accounting interpretations (FIN).  These standards and interpretations coverasset retirement obligations (FAS 143), early extinguishment of debt and leaseaccounting (FAS 145), accounting for restructuring activities and exit costs(FAS 146) mortgage loan commitments (FAS 149), reporting of redeemable stock(FAS 150), additional disclosures about defined benefit pension plans (revisedFAS 132), information about guarantees of others (FIN 45), and consolidation ofvariable interest entities (FIN 46).  Atthe respective effective dates, management believes the implementation of thesestandards and interpretations has not had or will not have a material impact onthe Company’s financial condition, results of operations or cash flows.

 

## **Earnings Per Share**

Basic and diluted earnings per share are computed based on weightedaverage Class A and Class B shares outstanding.  There are no options or warrants outstanding to create a dilutiveeffect.

 

29

----

 

## **RevenueRecognition**

Revenue is recognized when title is transferred upon shipment.

 

## **Delivery Revenuesand Costs**

The Company includes in net sales the amounts billed to its customersfor delivery services.  The costs ofthese services are included in the Company’s selling, delivery, general andadministrative expenses.

 

## **Nature ofBusiness, Risks and Uncertainties**

The Company designs, manufactures and sells at wholesale a broad lineof single and multi-section manufactured homes andmulti-section modular homes to numerous independent retailers in theUnited States.  The Company considersitself to be in the industry segment of manufacturing residential homes asother operations are immaterial.

 

There are many risks and uncertainties in the industry segment, generalnature of business and the world socioeconomic climate that affect theCompany.  The list included herein isnot to be considered complete, however, included among them are the following.

 

•                                          changesin the availability of retail (consumer) and wholesale (retailer) financing andthe volatility of the interest rates thereon

•                                          thestability of the retailer network

•                                          thelevel of inventory of new and repossessed homes

•                                          inventoryrepurchase contingencies

•                                          theavailability and retention of a competent workforce

•                                          availabilityand price of raw materials

•                                          unanticipatedresults in pending legal proceedings

•                                          regulatoryconstraints

•                                          worldand economic events that affect consumer confidence

 

Further insight into some of these items can be found in theManagement’s Discussion and Analysis of Financial Condition and Results ofOperations section of this report.

 

## **Use of Estimates**

The process of preparing financial statements in conformity withaccounting principles generally accepted in the United States requires the useof estimates and assumptions regarding certain assets, liabilities, revenuesand expenses.  Such estimates primarilyrelate to unsettled transactions and events as of the date of the financialstatements.  Accordingly, uponsettlement, actual amounts may differ from estimated amounts.  The most notable assumptions included in thefinancial statements involve product warranty costs, potential repurchaseobligations on retailer floorplan financing arrangements, lawsuits, deferredtaxes and property held for sale.

 

### **2. CAPITAL STOCK:**

The shares of Class A Common Stock have no voting rights and are notconvertible.  The shares of Class B CommonStock have voting rights of one vote per share and are convertible into Class ACommon Stock on a one for one basis. The Class A Shares may carry a preferential dividend rate.  However, in no event will the dividend ratebe less than the Class B shares.  Theweighted average of all shares outstanding in 2003, 2002 and 2001 was 3,654,000shares, 3,727,000 shares and 3,753,000 shares, respectively.  The Board of Directors has approved a stockrepurchase program authorizing the Company to repurchase up to 1,100,000outstanding shares of its Class A and Class B Common Shares on the open marketor in negotiated transactions at management’s discretion.  At December 31, 2003, 856,000 shares ofClass A Common Stock and 61,000 shares

 

30

----

 

of Class B Common Stock had been repurchased and canceled under thisprogram.  No shares were repurchasedduring 2003.  During 2002, the Board ofDirectors deferred their quarterly meeting, normally held in late December, toearly January 2003.  As a result,the quarterly dividend, normally declared each year at theDecember quarterly meeting to be paid in the first quarter of thefollowing year, was not declared until the first of 2003.  Accordingly, although the date of the Company’sdividend declaration changed during 2002, the dividend payment policy has notchanged.

 

### **3.   INCOME TAXES:**

 

The deferred taxes in the accompanying balance sheet include thefollowing amounts of deferred tax assets and liabilities:

 
| **(Amounts in Thousands)** |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Deferred tax asset         |   | $        | 5,153  |     | $      | 3,441    |   | $ | 2,820 |   |
| Deferred tax liability     |   | (2,781   | )      | (2,732   | )      | (2,450   | )      |
| Valuation allowance        |   | (1,663   | )      | —   |   | —   |   |
| Net deferred tax asset     |   | $        | 709    |     | $      | 709      |   | $ | 370 |   |

 

The tax effects of principal temporary differences and carry forwardsare as follows:

 
| **(Amounts in Thousands)**                                      |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Nondeductible accruals & reserves                           |   | $        | 1,398  |     | $      | 1,658    |   | $ | 1,567 |   |
| Net Operating Loss and Alternative Minimum  Tax Carried Forward |   | 3,413    |   | 1,439    |   | 1,058    |   |
| Accelerated tax depreciation                                    |   | (2,439   | )      | (2,388   | )      | (2,255   | )      |
| Valuation allowance                                             |   | (1,663   | )      | —   |   | —   |   |
|                                                            |   | $        | 709    |     | $      | 709      |   | $ | 370 |   |

 

The components of income tax benefit are as follows:

 
| **(Amounts in Thousands)** |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current:                   |   |     |   |     |   |     |   |
| Federal                    |   | $        | 31     |     | $      | 2,431    |   | $ | 240 |   |
| State                      |   | 32       |   | (28      | )      | 32       |   |
| Deferred:                  |   |     |   |     |   |     |   |
| Federal                    |   | 1,519    |   | (135     | )      | 393      |   |
| State                      |   | 144      |   | 474      |   | 27       |   |
| Valuation allowance        |   | (1,663   | )      | —   |   | —   |   |
|                       |   | $        | 63     |     | $      | 2,742    |   | $ | 692 |   |

 

31

----

 

The income tax benefit is based on consolidated loss before taxesadjusted for non-taxable income and non-deductible expense.  The tax benefit reconciles with thestatutory United States federal income tax rate in 2003, 2002 and 2001 as follows:

 
|                                           |   | **Income Tax  Expense** |   |
|------------------------------------------------|--------|-------------------------|--------|
| **(Amounts in Thousands)**                     |   | **2003**                |   | **2002** |   | **2001** |   |
| Income taxes at statutory federal rate 34%     |   | $                       | 1,601  |   | $ | 2,537 |   | $ | 744 |   |
| State income taxes, net of federal tax  effect |   | 21                      |   | 294 |   | 39 |   |
| Valuation allowance                            |   | (1,633                  | )      | — |   | — |   |
| Other                                          |   | 104                     |   | (89 | ) | (91 | ) |
|                                           |   | $                       | 63     |   | $ | 2,742 |   | $ | 692 |   |
|                                           |   |                    |   |   |   |   |   |
| Effective Tax Rate                             |   | 2                       | %      | 37 | % | 32 | % |

 

For the year 2003, the Company placed a reserve against the futurebenefit of its net operating losses. This benefit will expire in 2023.

 

### **4.**              NOTES PAYABLE:

The Company has agreements through some of its subsidiaries for certaininventory financing for a total loan commitment of $1,366,000 under master loanagreements.  The agreements are securedby virtually all of the assets of the subsidiary companies and the guarantee ofthe parent company and bear interest at 1/2% over prime at December 31,2003.  Payment is due when the relatedhome is sold.  The loan agreementscontain covenants restricting the subsidiaries from certain transfers of assetsand business mergers and consolidation. Total interest expense related to these obligations was $43,000 for 2003and $152,000 for 2002.  The balanceoutstanding at December 31, 2003 was $573,000 and $895,000 atDecember 31, 2002.

 

The Company has also entered into a $5,000,000 secured revolving lineof credit with 1st Source Bank with interest payable monthly at therate of .25% to .50% below the prime rate depending on the Company’s leverageratio.  The line is subject to renewalon June 30, 2004 and contains covenant provisions related to financialratios and certain other matters, with which the Company was in compliance atDecember 31, 2003.  Total interestexpense was $40,000 in 2003.  There wasno balance outstanding at December 31, 2003.

 

### **5.  OTHERACCRUED LIABILITIES:**

Other accrued liabilities atDecember 31, 2003 and 2002 are as follows:

 
| **(Amounts in Thousands)** |   | **2003** |   | **2002** |   |
|----------------------------|--------|----------|--------|----------|--------|
| Marketing Programs         |   | $        | 1,565  |     | $      | 1,774 |   |
| Product Warranty           |   | 2,466    |   | 2,081    |   |
| Other                      |   | 3,000    |   | 2,584    |   |
|                       |   | $        | 7,031  |     | $      | 6,439 |   |

 

### **6.  CONTINGENTLIABILITIES:**

## **RepurchaseObligations**

The Company is contingently liable under terms of repurchase agreementswith various financial institutions, which provide for the repurchase of itshomes sold to retailers under floor plan financing

 

32

----

 

arrangements upon retailer default. The Company believes, as of December 31, 2003, the total repurchaseamount potentially due on all homes subject to repurchase is approximately$16,000,000.  The risk of loss underthese agreements is spread over many retailers and is further reduced by theresale value of the homes.  The Companyhas, as of December 31, 2003, provided for losses on homes for which ithas received or expects notification of repurchase.

 

## **OtherContingencies**

The Company is party to various legal proceedings from the normalcourse of operations.  The Company hasprovided for anticipated losses resulting from the litigation.  In management’s opinion, the Company hasadequate legal defenses and does not believe these suits will materially affectthe Company’s operations or financial position.

 

### **7.  RETIREMENTPLAN:**

The Company has a 401(k) retirement plan which covers substantially allemployees.  The Company has agreed tomatch a portion of the employee contributions made to the plan.  The expense for this plan for the year endedDecember 31, 2003, 2002 and 2001 was $127,000, $132,000 and $147,000,respectively.

 

### **8.  QUARTERLYRESULTS OF OPERATIONS (UNAUDITED):**

The Company’s results of operations in 2003 and 2002 by quarter are asfollows:

(Amounts in Thousands except per share data)

 
|                       |   | **Quarter Ended** |   | **Year  Ended  Dec. 31** |   |
|----------------------------|--------|-------------------|--------|--------------------------|--------|
| **Mar 31**                 |   | **Jun 30**        |   | **Sep 30**               |   | **Dec 31** |
| 2003:                      |   |              |   |                     |   |   |   |   |   |   |   |
| Net sales                  |   | $                 | 17,154 |                     | $      | 21,374 |   | $ | 23,854 |   | $ | 22,039 |   | $ | 84,421 |   |
|                       |   |              |   |                     |   |   |   |   |   |   |   |
| Gross profit               |   | 1,597             |   | 3,160                    |   | 3,013 |   | 2,254 |   | 10,024 |   |
| Net loss                   |   | (1,985            | )      | (518                     | )      | (821 | ) | (1,319 | ) | (4,643 | ) |
| Net loss per Class A Share |   |              |   |                     |   |   |   |   |   |   |   |
| Basic and Fully Diluted    |   | (.54              | )      | (.14                     | )      | (.22 | ) | (.37 | ) | (1.27 | ) |
| Net loss per Class B Share |   |              |   |                     |   |   |   |   |   |   |   |
| Basic and Fully Diluted    |   | $                 | (.54   | )                        | $      | (.14 | ) | $ | (.22 | ) | $ | (.37 | ) | $ | (1.27 | ) |
|                       |   |              |   |                     |   |   |   |   |   |   |   |
| 2002:                      |   |              |   |                     |   |   |   |   |   |   |   |
| Net sales                  |   | $                 | 21,899 |                     | $      | 24,668 |   | $ | 23,959 |   | $ | 21,335 |   | $ | 91,861 |   |
|                       |   |              |   |                     |   |   |   |   |   |   |   |
| Gross profit               |   | 2,607             |   | 3,667                    |   | 2,736 |   | 1,865 |   | 10,875 |   |
| Net loss                   |   | (981              | )      | (462                     | )      | (1,241 | ) | (1,867 | ) | (4,551 | ) |
| Net loss per Class A Share |   |              |   |                     |   |   |   |   |   |   |   |
| Basic and Fully Diluted    |   | (.26              | )      | (.12                     | )      | (.33 | ) | (.51 | ) | (1.22 | ) |
| Net loss per Class B Share |   |              |   |                     |   |   |   |   |   |   |   |
| Basic and Fully Diluted    |   | $                 | (.26   | )                        | $      | (.12 | ) | $ | (.33 | ) | $ | (.51 | ) | $ | (1.22 | ) |

 

33

----

 

 

 

**REPORT OF INDEPENDENT AUDITORS**

 

 

Board of Directors and Shareholders

Liberty Homes, Inc.

Goshen, Indiana

 

We have audited the accompanying consolidated balance sheets of LibertyHomes, Inc. and Subsidiaries as of December 31, 2003 and 2002 and therelated consolidated statements of income, changes in shareholders’ equity andcash flows for each of the three years in the period ended December 31,2003.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of LibertyHomes, Inc. and Subsidiaries as of December 31, 2003 and 2002, and theresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2003 in conformity with accounting principlesgenerally accepted in the United States of America.

 

 
|                   | /s/ Crowe Chizek and Company LLC |
|------------------------|----------------------------------|
|                   |
|                   |
| Elkhart, Indiana       |
| February 20, 2004 |

 

34

----

 

**BOARDOF DIRECTORS**

 
| **NAME**             |   | **PRINCIPAL  OCCUPATION AND EMPLOYER**                                      |
|----------------------|--------|-----------------------------------------------------------------------------|
| Edward J. Hussey     |   | Chairman of the Board of Liberty Homes, Inc.                                |
|                 |   |                                                                        |
| Michael F. Hussey    |   | President of Liberty Homes, Inc.                                            |
|                 |   |                                                                        |
| Edward Joseph Hussey |   | Vice President, Secretary & Assistant Treasurer  of Liberty Homes, Inc. |
|                 |   |                                                                        |
| David M. Huffine     |   | President, David M. Huffine & Associates, Crown  Point, Indiana         |
|                 |   |                                                                        |
| Mitchell A. Day      |   | President of Day Equipment Corporation, Goshen, Indiana                     |
|                 |   |                                                                        |
| Lester M. Molnar     |   | Retired, Former Vice President of Liberty Homes, Inc.                       |

 

## **OFFICERS**

Edward J. Hussey, Chairman of the Board

Michael F. Hussey, President

Edward Joseph Hussey, Vice President and Secretary

Marc A. Dosmann, Vice President and Chief Financial Officer

Bruce A. McMillan, Vice President - Sales

Ronald F Atkins, Vice President – Purchasing

Nader Tomasbi, Vice President – Engineering and Design

Brian L. Christner, Treasurer

Gregory T. Shank, Controller

Dorothy L. Peterson, Assistant Treasurer

 

## **REGISTRAR &TRANSFER AGENT**

Computershare Investor Services

Chicago, Illinois

312.588.4194

 

## **AUDITORS**

Crowe Chizek and Company LLC

Elkhart, Indiana

 

## **LEGAL COUNSEL**

Hodges & Davis PC

Merrillville, Indiana

 

Barrett & McNagny LLP

Fort Wayne, Indiana

 

35

----

 

## **ANNUAL REPORT ONFORM 10-K AND CODE OF ETHICS FOR CEO AND FINANCIAL OFFICERS**

These documents filed with the Securities and ExchangeCommission are available to shareholders at no charge upon written request toLiberty Homes, Inc., PO Box 35, Goshen, Indiana 46527-0035, attention Marc A.Dosmann.

 

36

----