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SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934 (Mark One)x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 26, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the
transition period from  to
 Commission File Number 0-24268 PALM HARBOR HOMES, INC.  Florida
(State or Other Jurisdiction of
Incorporation or Organization)
    
    59-1036634
(I.R.S. Employer Identification No.)
 15303 Dallas Parkway, Suite 800, Addison, Texas
(Address of Principal Executive Offices)
    
    75001
(Zip Code)
 Registrants telephone number, including area code: (972) 991-2422 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share
(Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o The aggregate market value of the registrants common stock held by
non-affiliates of the registrant as of September 26, 2003, was $167,669,754
based on the closing price on that date of the common stock as quoted on the
Nasdaq Stock Market. As of April 30, 2004, 22,837,462 shares of the
registrants common stock were issued and outstanding. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes x No o DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants Proxy Statement relating to our Annual
Meeting of Shareholders to be held July 28, 2004 are incorporated by reference
in Part III.




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TABLE OF CONTENTS PagePART IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    8Item 3.
    
    Legal Proceedings
    
    
    8Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    9PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    10Item 6.
    
    Selected Financial Data
    
    
    11Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results Of Operations
    
    
    12Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 8.
    
    Financial Statements and Supplementary Data
    
    
    23Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    41Item 9A.
    
    Controls and Procedures
    
    
    41PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    41Item 11.
    
    Executive Compensation
    
    
    41Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    41Item 13.
    
    Certain Relationships and Related Transactions
    
    
    41Item 14.
    
    Principal Accountant Fees and Services
    
    
    41PART IVItem 15.
    
    Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    42Signatures
    
    
    43Index to Exhibits
    
    
    44Certifications
    
    
    47List of SubsidiariesConsent of Ernst & Young LLPCertification Pursuant to Rule 13a-14(A)Certification Pursuant to Rule 13a-14(A)Certification Pursuant to Section 906Certification Pursuant to Section 906




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PART I. 
 Item 1. Business General We were formed in 1977 and are one of the leading manufacturers and
marketers of factory-built homes in the United States. We market nationwide
through vertically integrated operations, encompassing manufactured and
modular housing, chattel and mortgage bank financing as well as insurance. At
March 26, 2004, we operated 19 manufacturing facilities in nine states that
sell homes in 29 states through 149 of our company-owned retail superstores and
builder locations and approximately 275 independent retail dealers, builders
and developers. Through our 80% owned subsidiary, CountryPlace Mortgage, Ltd., we offer
chattel and non-conforming land/home mortgages to purchasers of manufactured
homes sold by our retail superstores. Through our investment as the sole
limited partner in BSM Financial L.P., we offer conforming and non-conforming
mortgages. We provide property and casualty insurance for owners of
manufactured and modular homes through our subsidiary, Standard Casualty Company. Beginning in 1999, the manufactured housing industry entered a cyclical
downturn as the result of the tightening of credit standards, limited retail
and wholesale financing availability, increased levels of repossessions,
excessive retail inventory levels and manufacturing capacities. Industry-wide
shipments of manufactured homes for calendar year 2003 were down 22% as
compared to calendar year 2002. Despite these conditions, our shipments of
manufactured homes declined only 10%, we have not closed any manufacturing
facilities and our number of company-owned retail superstores and builder
locations has remained steady at 149, after closing only 9 company-owned retail superstores. Industry-wide modular shipments for
calendar year 2003 were up 6% as compared to calendar year 2002. Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations further explains the impacts of these conditions on our operating
results. Factory-Built Operations Our factory-built operations consist of production of manufactured homes
and modular homes. Our manufactured homes are constructed in accordance with
the Federal Manufactured Home Construction and Safety Standards (HUD
regulations). Approximately 88% of the homes we produced in fiscal 2004 were
built to HUD regulations. The remaining 12% of homes we produced were modular
homes, which are built in accordance with state or local building codes. The following table sets forth the total factory-built homes sold as well
as the number of manufacturing facilities we operated for the fiscal years
indicated: 2000
    
    2001
    
    2002
    
    2003
    
    2004Factory-built homes sold:Single-section
    
    
    2,862
    
    
    
    2,166
    
    
    
    1,473
    
    
    
    727
    
    
    
    474Multi-section
    
    
    11,439
    
    
    
    8,663
    
    
    
    8,465
    
    
    
    7,280
    
    
    
    6,780Modular
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    670
    
    
    
    962Total factory-built homes sold
    
    
    14,301
    
    
    
    10,829
    
    
    
    9,938
    
    
    
    8,677
    
    
    
    8,216Operating manufacturing
facilities (at end of fiscal year)
    
    
    15
    
    
    
    15
    
    
    
    15
    
    
    
    19
    
    
    
    19
 1




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The principal materials used in the production of our factory-built homes
include wood, wood products, gypsum wallboard, steel, fiberglass insulation,
carpet, vinyl, fasteners, appliances, electrical items, windows and doors. We
believe that the materials used in the production of our factory-built homes
are readily available from a wide variety of suppliers and the loss of any
single supplier would not have a material adverse effect on our business. The
three suppliers which accounted for more than 5% of our total purchases during
the fiscal year ended March 26, 2004 represented only 10.3%, 7.1% and 5.7%,
respectively, of our total purchases during the fiscal year ended March 26,
2004. Prices of certain materials such as lumber and gypsum can fluctuate
significantly due to changes in supply and demand. Although we and others in
the industry typically have been able to pass higher material costs on to the
consumer through price increases, we were unable to do so fully in fiscal 2004
due to the competitive industry conditions. No assurances can be made that we
would be able to pass these costs on in future years either. Manufactured Homes We manufacture single and multi-section manufactured homes under various
brand names including Palm Harbor, Masterpiece, Keystone, CountryPlace,
River Bend and Windsor Homes. Approximately 95% of the manufactured homes we
produced were multi-section in fiscal 2004 as compared to 94% in fiscal 2003.
We offer over 600 floor plans, ranging in size from approximately 800 to 3,200
square feet. Approximately 90% of the manufactured homes we produced are
structurally or decoratively customized to the home buyers specifications.
Although we produce a wide price range of manufactured homes, the average
retail sales price (excluding land) of our manufactured homes was approximately
$72,000 at our fiscal year end. Our homes are manufactured in indoor facilities, which have approximately
100,000 square feet of floor space and employ an average of 190 associates who
generally work one shift per day, five days per week. Construction of our
homes is performed in stages using an assembly-line process. Each section is
permanently attached to a steel support chassis, various components such as
floors, interior and exterior walls and a roof are added and function testing
is performed. We currently manufacture a typical manufactured home in
approximately five days. Our facilities have the capacity to produce an
aggregate of approximately 119 sections per day. The current rate of
production is 59. Our typical manufactured home contains two to five bedrooms, a living
room, family room, dining room, kitchen, two or three bathrooms and features
central air conditioning and heating, a range, refrigerator, carpeting and
drapes. In addition, we offer optional amenities, including dishwashers,
washers, dryers, furniture packages and specialty cabinets, as well as a wide
range of colors, moldings and finishes. Optional features usually associated
with site-built homes such as stone fireplaces, ceramic tile floors, showers
and countertops, computer rooms, skylights, vaulted ceilings and whirlpool
baths are also offered. We have a unique package of energy saving construction
features referred to as EnerGmiser which includes, among other things,
additional insulation to reduce heating and cooling costs, and which exceeds
statutorily-mandated energy efficiency levels. We are constantly introducing new floor plans, decors, exteriors, features
and accessories to appeal to different regions of the country and changing
trends. Our manufactured homes are designed and copyrighted after extensive
field research and consumer feedback. We have developed engineering systems
which, through the use of computer-aided technology, permit customization of
homes and assist with product development and enhancement. The completed manufactured homes are transported by independent trucking
companies to either the retail sales center or to the customers site. The
transportation cost is borne by the independent retailer. Retailers or other
independent installers are responsible for placing the manufactured home on
site, joining the interior and exterior seams, making utility hook-ups and, in
certain instances, providing installation and finish-out services. The
industry practice is to have third parties hired by the retailer provide the
installation and finish-out services. Our associates, rather than third
parties, perform the finish out services on manufactured homes sold. We
believe our finish-out services ensure that our quality procedures are applied
during the entire process and increase customer satisfaction, thereby
providing us a competitive advantage. Our backlog of manufactured housing orders as of April 29, 2004 was
approximately $21.7 million, as compared to approximately $13.1 million as of
June 2, 2003. Since retailers may cancel orders prior to production without
penalty, we do not consider our order backlog to be firm orders; however, such
cancellations rarely occur. 2




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Because of the seasonality of the manufactured housing market, the level of
backlog generally declines during the winter months. Modular Homes We manufacture modular homes principally through our wholly-owned
subsidiary, Nationwide Custom Homes, Inc. Nationwide operates three facilities
in Martinsville, Virginia, one in Arabi, Georgia, and one in Siler City, North
Carolina. In addition, certain of our other manufacturing facilities produce
modular homes under the brand name Discovery Custom Homes. Our modular homes
include single story ranch homes, split-levels and two and three story homes
with a variety of floor plans and exteriors. Each modular home is assembled in sections. The process begins on a
production line where a team of assemblers creates the floor and walls of the
house. The section is then wheeled down a tracked path where various stages of
finish are performed and components are added  from wiring and insulation
early in the process to fixtures and floor coverings just prior to
shipping. Nationwide typically completes a modular home in seven to eight
days. The homes are shipped directly off the manufacturing line to the
customers site. Once on site, the homes are typically crane set on the
foundation, the roof is raised and the final seam of roof shingles along the
ridges of the roofline is applied. Our
backlog of modular housing orders as of April 29, 2004 was
approximately $29.6 million, as compared to approximately
$28.4 million as of June  2, 2003. Retail Our homes are sold through a distribution network consisting of retail
superstores we own, independent dealers, builders and developers. The
following table sets forth the number of homes we sold through each of these
distribution channels, as well as the number of company-owned retail
superstores and independent dealers, builders and developers during the past
three fiscal years: March 29,
    
    March 28,
    
    March 26,2002
    
    2003
    
    2004Factory-built homes sold by:Company-owned superstores
and builder locations
    
    
    8,298
    
    
    
    6,541
    
    
    
    5,846Independent dealers, builders
and developers
    
    
    1,640
    
    
    
    2,136
    
    
    
    2,370Total
    
    
    9,938
    
    
    
    8,677
    
    
    
    8,216Number of:Company-owned superstores
and builder locations
    
    
    151
    
    
    
    158
    
    
    
    149Independent dealers, builders
and developers
    
    
    100
    
    
    
    300
    
    
    
    275Total
    
    
    251
    
    
    
    458
    
    
    
    424
 We first established wholly-owned superstores in 1992 and currently have
144 superstores in 21 states. One of our typical retail superstores consists
of a sales office, which is a manufactured home, and a variety of model homes
of various sizes, floor plans, features and prices. Customers may purchase one
of the model homes or may order a home that will be built at one of our
manufacturing facilities and customized to meet their needs. Many of our
retail superstores also sell used and repossessed homes. Through Nationwide, we have five (5) builder locations in Virginia and
North Carolina. Our typical builder location consists of a modular home which
serves as a sales office. 3




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Our independent retailer network principally consists of local dealers and
builders that market land/home packages and developers of communities. No
single independent retailer accounted for 5% or more of our net sales during
fiscal 2004. Independent Builders/Developers Approximately
12% of the modular homes we sold in fiscal 2004 were sold
from our five Nationwide manufacturing facilities directly to a consumer. Nationwides independent distribution network
consists of approximately 200 local builders and developers with whom we have
developed relationships through direct marketing, trade shows, the Internet and
referrals. Nationwide transports the home to the builders/developers site
and the builder/developer contracts crews to lift the home with a crane onto
its foundation and subsequently perform the finish-out services. Modular homes
typically require a larger amount of work to be done on-site to complete the
production of the homes. Currently six of our manufacturing facilities build
modular homes and sell homes directly to builders/developers. Markets Served During the fiscal year ended March 26, 2004, the percentage of our
revenues by region was as follows: Percentage ofRegion
    
    Primary States
    
    Revenue by RegionSoutheast
    
    Florida, North Carolina, Alabama, Georgia, SouthCarolina, Mississippi, Tennessee, Virginia, WestVirginia, Maryland
    
    
    44
    %Central
    
    Texas, Oklahoma, Arkansas, Louisiana
    
    
    29West
    
    New Mexico, Arizona, California, Colorado, Oregon,Washington, Montana, Nevada, Idaho
    
    
    23Midwest
    
    Ohio, Michigan, Indiana, Kentucky, Illinois, Pennsylvania
    
    
    4100
    %
 The three states which accounted for greater than 10% of our revenues were
Texas, Florida and North Carolina with 26%, 18% and 10% respectively, of total
revenues. Factory-built housing, which consists of manufactured housing and modular
housing, is a regional business and the primary geographic market is within a
250-mile radius for a manufactured housing facility and within a one-day drive
for a modular housing facility. Each of our manufactured housing facilities
typically serves 30 to 75 retailers, and the facility sales staff maintains
personal contact with each retailer, whether company-owned or independent. Our
decentralized operations allow us to be more responsive in addressing regional
customer preferences of product innovation and home design. Consumer Financing We maintain relationships with conventional lenders who provide two basic
types of consumer financing in the manufactured housing industry: chattel or
personal property loans for purchasers of a home with no real estate involved
and land/home or mortgage loans which finance the land, home and all
improvements on the property. There are two types of mortgage loans 
conforming and non-conforming. Conforming loans conform to FHA, VA, Freddie
Mac and Fannie Mae. Generally, the type of required foundations installed
conform to Federal requirements and the borrower must meet certain criteria.
Non-conforming loans are financed by a major bank or lending institution which
does not require a specific foundation type and have more flexible criteria.
Beginning in fiscal 2000, many consumer lenders tightened credit underwriting
standards which reduced lending volumes and resulted in lower sales volume of
manufactured homes. Some of our customers obtain
third-party construction financing, which allows for progress
payments to be made to us at periodic intervals during the
manufacturing, sale and closing processes. This type of financing is
primarily available to those customers obtaining land/home or
mortgage loans, which finance the land, home and improvements on a
piece of real property. Such third-party construction financing
through our customers is generally more advantageous to us in that
generally the timing of cash receipts from our customers results in
our obtaining floor plan financing for such home for a lesser
average period of time, if at all. We believe that our ability to provide financing to our customers on
competitive terms improves our responsiveness to the financing needs of
prospective purchasers and provides us with an additional source of earnings.
Through CountryPlace, we offer customary chattel loans and non-conforming
land/home mortgage loans for manufactured homes through our own retail superstores. Through BSM, we
offer conforming and non-conforming mortgage financing for both
modular and manufactured homes. Prior to the third quarter of 2003, CountryPlace originated loans and
immediately sold them to other lenders. During the third quarter of 2003, we
executed our planned strategy and expanded CountryPlace into a full 4




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service chattel lender with originating, servicing and securitization
capabilities. CountryPlace originated approximately $77.5 million of loans for
its own investment portfolio in fiscal 2004. CountryPlace services and
collects its portfolio of loans using its own employees and systems. Insurance We offer property and casualty insurance as well as extended warranties
for owners of manufactured homes through our subsidiary, Standard Casualty. At
the end of fiscal 2004, Standard Casualty had approximately 11,000 policies in
force and 61% of homeowners who purchased a home through our own retail
superstores purchased property and casualty insurance. Wholesale Financing In accordance with manufactured housing industry practice, substantially
all retailers finance a portion of their purchases of manufactured homes
through wholesale floor plan financing arrangements. Under a typical floor
plan financing arrangement, a financial institution provides the retailer with
a loan for the purchase price of the home and maintains a security interest in
the home as collateral. The financial institution which provides financing to
the retailer customarily requires us to enter into a separate repurchase
agreement with the financial institution under which we are obligated, upon
default by the retailer and under certain other circumstances, to repurchase
the financed home at declining prices over the term of the repurchase agreement
(which generally ranges from 12 to 18 months). The price at which we may be
obligated to repurchase a home under these agreements is based upon our
original invoice price plus certain administrative and shipping expenses. Our
obligation under these repurchase agreements ceases upon the purchase of the
home by the retail customer. The risk of loss under such repurchase agreements is mitigated by the fact
that (i) only 22% of our homes are sold to independent retailers; (ii) a
majority of the homes we sell to independent retailers are pre-sold to specific
retail customers; (iii) we monitor each retailers inventory position on a
regular basis; (iv) sales of our manufactured homes are spread over a large
number of retailers; (v) none of our independent retailers accounted for more
than 5% of our net sales in fiscal 2004; (vi) the price we are obligated to pay
declines over time and (vii) we are, in most cases, able to resell homes
repurchased from credit sources in the ordinary course of business without
incurring significant losses. We estimate that our potential obligations under
such repurchase agreements were approximately $11.0 million as of March 26,
2004. During the fiscal years ended March 29, 2002, March 28, 2003 and March
26, 2004, we incurred net expenses under these repurchase agreements totaling
$212,000, $69,000 and $6,000, respectively. Beginning in fiscal 2000, lenient credit standards, which had facilitated
increased industry-wide wholesale shipments in previous years, tightened,
resulting in declining wholesale shipments, declining margins and lower retail
sales levels for most industry participants. During this time, several major
floor plan lenders have exited the wholesale financing business and a number of
regional banks have entered the retail financing or increased their lending
volumes. Competition The manufactured housing industry is highly competitive at both the
manufacturing and retail levels, with competition based upon several factors,
including price, product features, reputation for service and quality, depth of
field inventory, promotion, merchandising and the terms of retail customer
financing. In addition, manufactured and modular homes compete with new and
existing site-built homes, as well as apartments, townhouses and condominiums.
The efficiency of the assembly-line process, protection from the weather and
nationwide purchasing power enable us to produce a home in less than a week and
typically at a lower cost than a conventional site-built home of similar
quality. We do not view any of our competitors as being dominant in the
industry, although some of our competitors possess substantially greater
manufacturing, distribution and marketing resources than us. 5




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Although many lenders to the manufactured housing industry have reduced
their volume or gone out of business, there are still competitors to
CountryPlace and BSM in the markets where we do business. These competitors
include national, regional and local banks, independent finance companies,
mortgage brokers and mortgage banks. None of these competitors is considered
to be dominant or to have a material impact on the financing opportunities at
CountryPlace or BSM. Business Segment Information We operate principally in two segments: (1) factory-built housing, which
includes manufactured housing, modular housing and retail operations and (2)
financial services, which includes finance and insurance. See Note 15 of
Notes to Consolidated Financial Statements in Item 8 of this report for
information on our retail sales, income (loss) from operations, identifiable
assets, depreciation and amortization expense and capital expenditures by
segment for fiscal 2002, 2003 and 2004. Government Regulation Our manufactured homes are subject to a number of federal, state and local
laws, codes and regulations. Construction of manufactured housing is governed
by the National Manufactured Housing Construction and Safety Standards Act of
1974, as amended (the Home Construction Act). In 1976, the Department of
Housing and Urban Development (HUD) issued regulations under the Home
Construction Act establishing comprehensive national construction standards.
The HUD regulations, known collectively as the Federal Manufactured Home
Construction and Safety Standards, cover all aspects of manufactured home
construction, including structural integrity, fire safety, wind loads, thermal
protection and ventilation. Such regulations preempt conflicting state and
local regulations on such matters, and are subject to continual change. Our
manufacturing facilities and the plans and specifications of our manufactured
homes have been approved by a HUD-certified inspection agency. Further, an
independent HUD-certified third-party inspector regularly reviews our
manufactured homes for compliance with the HUD regulations during construction.
Failure to comply with applicable HUD regulations could expose us to a wide
variety of sanctions, including mandated closings of our manufacturing
facilities. We believe our manufactured homes meet or surpass all present HUD
requirements. Our modular homes are subject to state and/or local codes with
certification and regulation and we believe our modular homes meet all state
and/or local codes. Manufactured and site-built homes are all typically built with some
products that contain formaldehyde resins. Since February 1985, HUD has
regulated the allowable concentrations of formaldehyde in certain products used
in manufactured homes and requires manufacturers to warn purchasers as to
formaldehyde-associated risks. The Environmental Protection Agency and other
governmental agencies have in the past evaluated the effects of formaldehyde.
We use materials in our manufactured homes that meet HUD standards for
formaldehyde emissions and believe we comply with HUD and other applicable
government regulations in this regard. The transportation of factory-built homes on highways is subject to
regulation by various federal, state and local authorities. Such regulations
may prescribe size and road use limitations and impose lower than normal speed
limits and various other requirements. Our manufactured homes are subject to local zoning and housing
regulations. In certain cities and counties in areas where our homes are sold,
local governmental ordinances and regulations have been enacted which restrict
the placement of manufactured homes on privately-owned land or which require
the placement of manufactured homes in manufactured home communities. Such
ordinances and regulations may adversely affect our ability to sell homes for
installation in communities where they are in effect. A number of states have
adopted procedures governing the installation of manufactured homes. Utility
connections are subject to state and local regulation and must be complied with
by the retailer or other person installing the home. Our modular homes are
also subject to local zoning regulations which govern the placement of homes. Certain of our warranties may be subject to the Magnuson-Moss Warranty
Federal Trade Commission Improvement Act, which regulates the descriptions of
warranties on products. The description and substance of our warranties are
also subject to a variety of state laws and regulations. A number of states
require manufactured home producers to post bonds to ensure the satisfaction of
consumer warranty claims. 6




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A variety of laws affect the financing of the homes we manufacture. The
Federal Consumer Credit Protection Act (Truth-in-Lending) and Regulation Z
promulgated thereunder require written disclosure of information relating to
such financing, including the amount of the annual percentage rate and the
finance charge. The Federal Fair Credit Reporting Act also requires certain
disclosures to potential customers concerning credit information used as a
basis to deny credit. The Federal Equal Credit Opportunity Act and Regulation
B promulgated thereunder prohibit discrimination against any credit applicant
based on certain specified grounds. The Real Estate Settlement Procedures Act
and Regulation X promulgated thereunder require certain disclosures regarding
the nature and costs of real estate settlements. The Federal Trade Commission
has adopted or proposed various Trade Regulation Rules dealing with unfair
credit and collection practices and the preservation of consumers claims and
defenses. Installment sales contracts eligible for inclusion in a Government
National Mortgage Association program are subject to the credit underwriting
requirements of the Federal Housing Association. A variety of state laws also
regulate the form of the installment sale contracts or financing documents and
the allowable deposits, finance charge and fees chargeable pursuant to
installment sale contracts or financing documents. Our sale of insurance
products is subject to various state insurance laws and regulations which
govern allowable charges and other insurance practices. Our operations are also subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. Governmental
authorities have the power to enforce compliance with their regulations, and
violations may result in the payment of fines, the entry of injunctions or
both. The requirements of such laws and enforcement policies have generally
become more strict in recent years. Accordingly, we are unable to predict the
ultimate cost of compliance with environmental laws and enforcement policies.
See Item 3. Legal Proceedings. Seasonality Our business is seasonal. Most of our sales occur during the months of
March through October. Our sales are slower during the winter months and
shipments can be delayed in areas of the country that experience harsh weather
conditions. Associates As of March 26, 2004, we had approximately 4,500 associates. All of our
associates are non-union. We have not experienced any labor-related work
stoppages and believe that our relationship with our associates is good. Website Access to Company Reports and Other Documents Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports are available free of
charge on our website at www.palmharbor.com as soon as reasonably practicable
after such material is electronically filed with or furnished to the SEC.
Those reports are also available at the SECs website, www.sec.gov. You may
read and copy any materials we file with the SEC at the SECs Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Copies of our annual report will be made available, free of
charge, upon written request to our corporate secretary at our principal
executive office. We have adopted a code of conduct. A copy of our code of conduct is
available at our website, www.palmharbor.com. 7




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Item 2. Properties We currently own or lease properties at 19 manufacturing facilities in
nine states. We own substantially all of our machinery and equipment. We
believe our facilities are adequately maintained and suitable for the purposes
for which they are used. Our current utilization rate at our manufacturing
facilities is approximately 47%. The following table sets forth certain
information with respect to properties at our manufacturing facilities: Commencement
    
    
    
    ApproximateState
    
    City
    
    of Production
    
    Owned/Leased
    
    Square FeetAlabama
    
    Boaz
    
    1986
    
    Leased
    
    
    97,6831993
    
    Leased
    
    
    75,164Arizona
    
    Tempe
    
    1978
    
    Owned
    
    
    103,500Casa Grande
    
    1997
    
    Owned
    
    
    90,000Florida
    
    Plant City
    
    1981
    
    Owned
    
    
    93,6001985
    
    Owned
    
    
    87,200Georgia
    
    Arabi
    
    1999
    
    Owned
    
    
    97,970LaGrange
    
    1996
    
    Owned
    
    
    200,000North Carolina
    
    Albemarle
    
    1994
    
    Owned
    
    
    112,700Siler City
    
    1988
    
    Owned
    
    
    91,2001996
    
    Leased
    
    
    40,000Ohio
    
    Sabina
    
    1988
    
    Owned
    
    
    85,000Oregon
    
    Millersburg
    
    1995
    
    Owned
    
    
    168,650Texas
    
    Austin
    
    1981
    
    Owned
    
    
    103,8001992
    
    Owned
    
    
    77,000Burleson
    
    1993
    
    Owned
    
    
    94,300Fort Worth
    
    1993
    
    Owned
    
    
    121,300Buda
    
    1994
    
    Owned
    
    
    88,275Virginia
    
    Martinsville
    
    1969
    
    Owned
    
    
    43,5051972
    
    Owned
    
    
    148,3461974
    
    Owned
    
    
    56,5931996
    
    Owned
    
    
    75,262
 In addition to our production facilities, we own certain properties upon
which 37 of our retail superstores are located. We also lease approximately
48,000 square feet of office space in Addison, Texas for our corporate
headquarters. Our corporate headquarters lease expires in 2013. 
 Item 3. Legal Proceedings We are not currently subject to any pending or threatened litigation,
other than routine litigation arising in the ordinary course of business, none
of which is expected to have a material adverse effect on our financial
condition, results of operations or cash flows. In late 1992, we removed an underground storage tank formerly used to
store gasoline from the site of our Tempe, Arizona manufacturing facility. We
are currently working in cooperation with the Arizona Department of 8




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##### Table of Contents



Environmental Quality to assess and respond to gasoline related
hydrocarbons detected in soil and groundwater at this site. Under certain
circumstances, a state fund may be available to compensate responsible parties
for petroleum releases from underground storage tanks. We are evaluating the
extent of the corrective action that may be necessary. Site characterization
is complicated by the presence of contaminants associated with the Indian Bend
Wash Area Superfund Site described below. At this time, we do not expect that
the costs of any corrective action or assessments related to the tank will have
a material adverse effect on our financial condition, results of operations or
cash flows. Our Tempe facility is partially located within a large area that has been
identified by the EPA as the Indian Bend Wash Area Superfund Site. Under
federal law, certain persons known as potentially responsible parties (PRPs)
may be held strictly liable on a joint and several basis for all cleanup costs
and natural resource damages associated with the release of hazardous
substances from a facility. The average cost to clean up a site listed on the
National Priorities List is over $30 million. The Indian Bend Superfund Site
is listed on the National Priorities List. Groups of PRPs may include current
owners and operators of a facility, owners and operators of a facility at the
time of disposal of hazardous substances, transporters of hazardous substance
and those who arrange for the treatment or disposal of hazardous substances at
a site. No government agency, including the EPA, has indicated that we have
been or will be named as a PRP or that we are otherwise responsible for the
contamination present at the Indian Bend Superfund Site. In general, although
no assurance can be given as to the future actions of either the EPA or PRPs
who may incur cleanup costs related to this site, we do not believe that our
ownership of property partially located within the Indian Bend Superfund Site
will have a material adverse effect on our financial condition, results of
operations or cash flows. In 1994, we removed two underground storage tanks used to store petroleum
substances from property we own in Georgia. In November 2001, we received a
letter from the Georgia Department of Natural Resources indicating no further
action was necessary with respect to these storage tanks. The letter, however,
did not preclude additional action by the State if contaminants were found in
adjoining properties. At this time, we do not expect that the costs of future
assessment and corrective action related to the tanks will have a material
adverse effect on our financial condition, results of operations or cash flows. 
 Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of security holders, through the solicitation
of proxies or otherwise. 9




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##### Table of Contents



PART II. 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock has been traded on the Nasdaq Stock Market under the
symbol PHHM since July 31, 1995, the date on which we completed our initial
public offering. The following table sets forth, for the period indicated, the
high and low sales information per share of the common stock as reported on the
Nasdaq Stock Market. Fiscal 2004
    
    High
    
    LowFirst Quarter
    
    $
    20.24
    
    
    $
    14.12Second Quarter
    
    
    19.17
    
    
    
    16.70Third Quarter
    
    
    19.59
    
    
    
    16.55Fourth Quarter
    
    
    24.04
    
    
    
    16.22
 Fiscal 2003
    
    High
    
    LowFirst Quarter
    
    $
    25.09
    
    
    $
    19.85Second Quarter
    
    
    19.50
    
    
    
    11.17Third Quarter
    
    
    19.12
    
    
    
    10.12Fourth Quarter
    
    
    18.84
    
    
    
    14.35
 On April 30, 2004, the last reported sale price of our common stock on the
Nasdaq Stock Market was $22.50. As of April 30, 2004, there were approximately
750 record holders of our common stock, and approximately 3,000 holders of the
common stock overall based on an estimate of the number of individual
participants represented by security position listings. We have never paid cash dividends on our common stock. Our board of
directors intends to retain any future earnings we generate to support
operations and to finance expansion and does not intend to pay cash dividends
on our common stock for the foreseeable future. The payment of cash dividends
in the future will be at the discretion of the board of directors and will
depend upon a number of factors such as our earnings levels, capital
requirements, financial condition and other factors deemed relevant by the
board of directors. Future loan agreements may or may not restrict or prohibit
the payment of dividends. 10




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##### Table of Contents



Item 6. Selected Financial Data The following table sets forth selected financial information regarding
our financial position and operating results which has been extracted from our
audited financial statements for the five fiscal years ended March 26, 2004.
The information should be read in conjunction with Item 7  Managements
Discussion and Analysis of Financial Condition and Results of Operations and
the Consolidated Financial Statements and accompanying Notes in Item 8 of this
report. Fiscal Year EndedMarch 31,
    
    March 30,
    
    March 29,
    
    March 28,
    
    March 26,2000
    
    2001
    
    2002
    
    2003(2)
    
    2004(In thousands, except per share data)Statement of Income:Net sales
    
    $
    777,471
    
    
    $
    650,451
    
    
    $
    627,380
    
    
    $
    573,130
    
    
    $
    578,465Cost of sales
    
    
    530,415
    
    
    
    443,131
    
    
    
    426,356
    
    
    
    408,725
    
    
    
    427,826Gross profit
    
    
    247,056
    
    
    
    207,320
    
    
    
    201,024
    
    
    
    164,405
    
    
    
    150,639Selling, general and
administrative expenses
    
    
    180,224
    
    
    
    165,896
    
    
    
    168,171
    
    
    
    157,474
    
    
    
    157,414Income (loss) from operations
    
    
    66,832
    
    
    
    41,424
    
    
    
    32,853
    
    
    
    6,931
    
    
    
    (6,775
    )Interest expense
    
    
    (10,245
    )
    
    
    (12,792
    )
    
    
    (8,377
    )
    
    
    (6,676
    )
    
    
    (5,566
    )Equity earnings in limited partnership
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,416
    
    
    
    1,848Other income
    
    
    7,034
    
    
    
    7,279
    
    
    
    6,450
    
    
    
    1,458
    
    
    
    1,440Income (loss) before income taxes and cumulative
effect of change in accounting principle
    
    
    63,621
    
    
    
    35,911
    
    
    
    30,926
    
    
    
    5,129
    
    
    
    (9,053
    )Income tax benefit (expense)
    
    
    (25,025
    )
    
    
    (14,034
    )
    
    
    (11,478
    )
    
    
    (1,908
    )
    
    
    3,036Income (loss) before cumulative effect of change
in accounting principle
    
    
    38,596
    
    
    
    21,877
    
    
    
    19,448
    
    
    
    3,221
    
    
    
    (6,017
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    (2,048
    )
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    38,596
    
    
    $
    19,829
    
    
    $
    19,448
    
    
    $
    3,221
    
    
    $
    (6,017
    )Net income (loss) per common share -
basic and diluted
    
    $
    1.66
    
    
    $
    0.87
    
    
    $
    0.85
    
    
    $
    0.14
    
    
    $
    (0.26
    )Weighted average common shares
outstanding - basic
    
    
    23,225
    
    
    
    22,760
    
    
    
    22,820
    
    
    
    22,913
    
    
    
    22,857Weighted average common shares
outstanding - diluted
    
    
    23,255
    
    
    
    22,772
    
    
    
    22,820
    
    
    
    22,913
    
    
    
    22,857Operating Data:Number of new factory-built homes sold
    
    
    14,301
    
    
    
    10,829
    
    
    
    9,938
    
    
    
    8,677
    
    
    
    8,216Multi-section manufactured homes sold as a
percentage of total manufactured homes sold
    
    
    80
    %
    
    
    80
    %
    
    
    85
    %
    
    
    91
    %
    
    
    93
    %Number of manufacturing facilities (1)
    
    
    15
    
    
    
    15
    
    
    
    15
    
    
    
    19
    
    
    
    19Number of company-owned superstores (1)
    
    
    133
    
    
    
    145
    
    
    
    151
    
    
    
    153
    
    
    
    144Number of company-owned builder locations (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Balance Sheet Data:Total assets
    
    $
    457,174
    
    
    $
    468,368
    
    
    $
    473,271
    
    
    $
    482,567
    
    
    $
    521,822Bonds payable
    
    
    3,149
    
    
    
    2,908
    
    
    
    2,742
    
    
    
    2,567
    
    
    
    2,377Shareholders equity
    
    
    217,176
    
    
    
    235,652
    
    
    
    256,657
    
    
    
    260,174
    
    
    
    256,053
  (1)
    
    As of the end of the applicable period.(2)
    
    On June 7, 2002, we acquired Nationwide Custom Homes, Inc., a
manufacturer and marketer of modular homes. Nationwide contributed $51.2
million in revenues and $4.3 million in income from operations in fiscal
2003. 11




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Executive Overview We are one of the nations leading manufacturers and marketers of
factory-built homes. We market nationwide through vertically integrated
operations, encompassing manufactured and modular housing, chattel and
mortgage bank financing, as well as insurance. As of March 26, 2004, we
operated 19 manufacturing facilities that sell homes through 149 company-owned
retail superstores and builder locations and approximately 275 independent
retail dealers, builders and developers. Through our subsidiary, CountryPlace,
we offer chattel and non-conforming land/home mortgages to purchasers of
manufactured homes sold by company-owned retail superstores. Through our
investment as the sole limited partner in BSM, we offer conforming and
non-conforming mortgages for both modular and manufactured homes. We also provide property and casualty insurance for
owners of manufactured and modular homes through our subsidiary, Standard Casualty. The manufactured housing industry has continued to face a very difficult
operating environment as evidenced by the 22% decline in industry shipments for
calendar 2003. Limited availability of retail and wholesale financing,
increased levels of repossessions, excessive retail inventory levels and
manufacturing capacity continued to impact our sales and operating results in
fiscal 2004. Additionally, our operating margins have been adversely affected
by significant increases in materials costs which we have not been able to
fully pass on to the customer through price increases due to competitive
industry conditions. Despite this challenging backdrop, we have not closed any manufacturing
facilities and we only closed nine company-owned retail superstores bringing us
to 149 retail superstores and builder locations. We continue to tightly manage
receivables and new home inventory per retail superstore, which declined 5%
compared to a year ago. Floor plan payable per retail superstore has declined
22% compared to a year ago. Although industry-wide manufactured housing shipments for calendar 2003
were down approximately 22%, our shipments declined only 10%. Additionally,
CountryPlace, Standard Casualty and BSM continued to be additive to our results
of operations for fiscal 2004. With the limited availability of financing in the manufactured housing
industry, in fiscal 2003 we executed our planned strategy to expand
CountryPlace into a full service chattel lender with originating, servicing and
securitization capabilities. During fiscal 2004, CountryPlace originated over
$77 million of loans to be held for investment on its balance sheet and is now
servicing over $103 million of loans. These loans were funded through
borrowings from its warehouse facility, as well as capital contributions and
borrowings from us. During the fourth quarter of fiscal 2004, CountryPlace
entered into a new warehouse facility agreement with a financial institution
providing for increased borrowing capacity. See Liquidity and Capital
Resources below for additional information. The largest impediment of our growth is financing for our retail customers
which, if limited, could affect our sales volume. Additionally, obtaining
funding for CountryPlace and obtaining wholesale financing are key risk factors
that could impair the growth of our company. Although we cannot predict with any certainty when sustainable industry
improvements will occur, we are continuing to position ourselves strategically
for the future. First, we are focusing on the introduction of our Discovery
Homes series of modular homes, as we believe that modular housing will be a key
driver of our future growth and profitability. We continue to control our
fixed expenses to enhance our competitive position as the industry begins to
recover from this downturn. 12




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##### Table of Contents



Results of Operations The following table sets forth certain items of our Statement of Operations as
a percentage of net sales for the periods indicated. Fiscal Year EndedMarch 29,
    
    March 28,
    
    March 26,2002
    
    2003
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    68.0
    
    
    
    71.3
    
    
    
    74.0Gross profit
    
    
    32.0
    
    
    
    28.7
    
    
    
    26.0Selling, general and administrative expenses
    
    
    26.8
    
    
    
    27.5
    
    
    
    27.2Income from operations
    
    
    5.2
    
    
    
    1.2
    
    
    
    (1.2
    )Interest expense
    
    
    (1.3
    )
    
    
    (1.2
    )
    
    
    (1.0
    )Equity in earnings of limited partnership
    
    
    
    
    
    
    0.6
    
    
    
    0.3Other income
    
    
    1.0
    
    
    
    0.3
    
    
    
    0.3Income (loss) before income taxes
    
    
    4.9
    
    
    
    0.9
    
    
    
    (1.6
    )Income tax benefit (expense)
    
    
    (1.8
    )
    
    
    (0.3
    )
    
    
    0.6Net income (loss)
    
    
    3.1
    %
    
    
    0.6
    %
    
    
    (1.0
    )%
 The following table summarizes certain key sales statistics as of and for the
period indicated. Fiscal Year EndedMarch 29,
    
    March 28,
    
    March 26,2002
    
    2003
    
    2004Homes sold through company-owned retail superstores
and builder locations
    
    
    8,298
    
    
    
    6,541
    
    
    
    5,846Homes sold to independent dealers, builders and developers
    
    
    1,640
    
    
    
    2,136
    
    
    
    2,370Total new factory-built homes sold
    
    
    9,938
    
    
    
    8,677
    
    
    
    8,216Average new manufactured home price  retail
    
    $
    60,000
    
    
    $
    63,000
    
    
    $
    68,000Average new modular home price  consumer
    
    
    
    
    
    $
    148,000
    
    
    $
    135,000Average new modular home price  builders and developers
    
    
    
    
    
    $
    64,000
    
    
    $
    67,000Number of retail superstores at end of period
    
    
    151
    
    
    
    153
    
    
    
    144Number of company-owned builder locations
    
    
    
    
    
    
    5
    
    
    
    5
 2004 Compared to 2003 Net Sales.Net sales increased 0.9% to $578.5 million in 2004 from $573.1
million in 2003. Net sales for the factory-built housing segment increased
$2.5 million primarily due to modular sales which totaled $83.5 million in
fiscal 2004 versus $66.3 million in fiscal 2003, which was somewhat offset by a
decrease in overall manufactured housing volume. The volume of manufactured
homes sold through our retail superstores declined 12.4% while overall
manufactured housing unit volume, which includes sales to independent
retailers, declined 8.2% in fiscal 2004. This decline in volume is partially
offset by an increase in the average selling price of a new manufactured home
to $68,000 in 2004 from $63,000 in 2003. This increase in average selling
price resulted primarily from our passing higher materials costs on to the
customer through price increases as well as a shift in product mix towards
multi-section manufactured homes, which constituted 93% of our manufactured
homes sold in 2004, as compared to 91% in fiscal 2003, as customers are
purchasing larger homes with more amenities. The number of our retail
superstores and builder locations decreased from 158 at the end of fiscal 2003
to 149 at the end of fiscal 2004. Financial services revenue increased $2.8
million, which consists of a $1.5 million increase in interest income resulting
from an increase in the loans held for investment from $32.1 million at the end
of fiscal 2003 to $96.8 million at the end of fiscal 2004, and a $1.3 million
increase in insurance revenues. Gross Profit.In fiscal 2004, gross profit as a percentage of net sales
declined to 26.0%, or $150.6 million, from 28.7%, or $164.4 million, in fiscal
2003. Gross profit for the factory-built housing segment decreased $16.1
million 13




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##### Table of Contents



from 27.5% of net sales in fiscal 2003 to 24.5% of net sales in fiscal 2004.
This decrease is principally the result of price increases of approximately
$10.8 million in lumber, gypsum and other materials which outpaced materials
price increases to customers. The percentage of factory-built homes sold
through our retail superstores and builder locations decreased from 76% in
fiscal 2003 to 71% in fiscal 2004. Gross profit for the financial services
segment increased $2.4 million due to the increase in net sales as explained
above. Selling, General and Administrative Expenses.As a percentage of net sales,
selling, general and administrative expenses decreased to 27.2% in 2004 from
27.5% in 2003. Selling, general and administrative expenses decreased slightly
to $157.4 million in fiscal 2004 from $157.5 million in fiscal 2003.
Selling, general and administrative expenses for factory-built housing
decreased $0.9 million in fiscal 2004, which reflects a $3.5 million decrease
in selling, general and administrative expenses associated with nine fewer
retail superstores and a focus on reducing fixed costs in fiscal 2004 offset by
an increase of $3.3 million due to selling, general and administrative expenses
including 12 months of Nationwides expenses in fiscal 2004 versus 10 months in
fiscal 2003. Selling, general and administrative expenses for financial
services increased $0.8 million primarily due to additional expenses related to
the expansion of CountryPlace. Interest Expense.Interest expense decreased 16.6% to $5.6 million in 2004 as
compared to $6.7 million in 2003. This decrease was primarily due to a $25.5
million decrease in the average floor plan liability in fiscal 2004 coupled
with a slight decrease in the prime interest rate from 4.25% at the end of
fiscal 2003 to 4.00% at the end of fiscal 2004. Equity in Earnings of Limited Partnership.Equity earnings in limited
partnership decreased 45.9% to $1.8 million in fiscal 2004 as compared to $3.4
million in fiscal 2003. This $1.6 million decrease was primarily due to our
share of operating losses at BSM in the last half of fiscal 2004 resulting from
a decline in the number of mortgage refinance originations and a decline in
margins due to the timing differential between loans funded and loans sold to
investors. Other Income.Other income decreased 1.2% to $1.4 million in fiscal 2004 as
compared to $1.5 million in fiscal 2003. This slight decrease was due to a
$0.9 million decrease in interest income, $0.5 million decrease in income
earned on a real estate investment offset by an increase of $1.1 million in
gains on short-term investments. 2003 Compared to 2002 Net Sales.Net sales decreased 8.6% to $573.1 million in 2003 as compared to
$627.4 million in 2002. Net sales for the factory-built housing segment
decreased $49.7 million primarily due to the reduction of retail financing
available in the manufactured housing industry, partially offset by the
addition of modular sales which totaled $51.2 million in fiscal 2003. The
volume of manufactured homes sold through our retail superstores declined 21.1%
while overall manufactured housing unit volume, which includes sales to
independent retailers, declined 19.4% in fiscal 2003. This decline in volume
is partially offset by an increase in the average selling price of a new
manufactured home to $63,000 in 2003 as compared to $60,000 in 2002. This
increase in average selling price resulted from a slight shift in product mix
towards multi-section manufactured homes. Multi-section manufactured homes
represented 91% of our manufactured homes sold in 2003. The number of our
retail superstores and builder locations increased from 151 at the end of
fiscal 2002 to 158 at the end of fiscal 2003. Financial services net sales
decreased $4.6 million due to a 35.3% decrease in the number of loans
originated by CountryPlace, a $1.0 million decrease in insurance revenues
resulting from the decrease in volume of new homes sold, and a $0.6 million
decrease in investment income related to Standards investments. Gross Profit.In fiscal 2003, gross profit as a percentage of net sales
declined to 28.7% as compared to 32.0% in fiscal 2002. Gross profit decreased
18.2% to $164.4 million in 2003 compared to $201.0 million in 2002. Gross
profit for the factory-built housing segment decreased $31.6 million from 30.5%
of net sales in fiscal 2002 to 27.5% of net sales in fiscal 2003. This
decrease, both as a percentage of sales and in absolute dollars, is principally
the result of the contraction of retail financing and the intensely competitive
industry environment. The percentage of factory-built homes sold through our
retail superstores and builder locations decreased from 83% in fiscal 2002 to
76% in fiscal 2003 due to the addition of Nationwide which has a much lower
internalization rate of 14%. Gross profit for the financial services segment
decreased $5.0 million due to the decrease in net sales as explained above. 14




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##### Table of Contents



Selling, General and Administrative Expenses.As a percentage of net sales,
selling, general and administrative expenses increased to 27.5% in 2003 as
compared to 26.8% in 2002. Selling, general and administrative expenses
decreased $10.7 million, or 6.4%, to $157.5 million in 2003 as compared to
$168.2 million in 2002. Selling, general and administrative expenses for
factory-built housing decreased $10.9 million in fiscal 2003. This reduction
reflects our focus on reducing fixed costs somewhat offset by its continued
commitment to building brand awareness via advertising. Additionally, selling,
general and administrative expenses for fiscal 2003 include 10 months of
Nationwides fixed expenses. Selling, general and administrative expenses for
financial services increased $0.3 million. Interest Expense.Interest expense decreased 20.3% to $6.7 million in 2003 as
compared to $8.4 million in 2002. This decrease was primarily due to a
decrease in the prime interest rate from 4.75% at the end of fiscal 2002 to
4.25% at the end of fiscal 2003, coupled with a decrease in the floor plan
liability. Equity in Earnings of Limited Partnership. Equity earnings in limited
partnership increased 100.0% to $3.4 million in fiscal 2003 as compared to none
in fiscal 2002. This $3.4 million increase was due to our becoming a 50% sole
limited partner in BSM during the first quarter of fiscal 2003. Other Income. Other income decreased 77.4% to $1.5 million in fiscal 2003 as
compared to $6.5 million in fiscal 2002. This decrease was primarily the
result of a $2.1 million decrease in interest income in fiscal 2003, a $1.8
million decrease in income earned on a real estate investment in fiscal 2003
and a $1.0 million loss on short-term investments in fiscal 2003. Liquidity and Capital Resources Cash and cash equivalents totaled $50.9 million at March 26, 2004, up from
$45.6 million at March 28, 2003. During fiscal 2004, net cash of $40.5 million
was provided by operating activities primarily from increased accounts payable
and decreased trade receivables. Payables increased due to temporarily
renegotiated payment terms with certain vendors and receivables decreased due
to increased collection efforts. At the beginning of fiscal 2005, payment terms returned to original terms
following CountryPlaces successful renegotiation of the warehouse facility. Net cash used in investing activities consisted
of $66.8 million used for originating loans at CountryPlace, offset by net
sales of investments of $3.9 million. Net proceeds from the warehouse facility
of $58.9 million were offset by payments of $30.4 million on floor plan
liabilities, and contributed to the $28.4 million in net cash provided by
financing activities. CountryPlace originates loans with customers in
connection with the customer purchase of our factory-built homes. Loan
originations related to this strategic investment in our customers is shown in
our consolidated statement of cash flows as cash used in investing activities.
To the extent cash outflows related to loan originations are shown in our
consolidated statement of cash flows as cash used in investing activities, cash
inflows are shown in our consolidated statements of cash flows as cash provided
by operating activities. Typically, for customer purchases of our
factory-built homes that are financed by CountryPlace, 80% of the originated
loan amount is borrowed by CountryPlace under its warehouse facility and 20% is
funded through our operations. We have an agreement with a financial institution for an $80.0 million
syndicated floor plan facility expiring March 19, 2006. The advance rate for
this facility is 90% of manufacturers invoice. We have a second facility with
another financial institution for $10.0 million, which automatically renews
annually on October 11 unless a 30-day notification of cancellation is received
by the financial institution. These facilities are used to finance a major
portion of the new home inventory at our retail superstores and are secured by
new home inventory and a portion of receivables from financial
institutions. The interest rates on the facilities are prime (4.00% at March
26, 2004) or prime plus 1.0% to 3.0% for aged units, of which we had none as of
March 26, 2004 under our floor plan arrangements. These two floor plan
facilities contain certain provisions regarding minimum financial requirements
which we must maintain in order to borrow against the facilities. As of March
26, 2004, we were in compliance with amended minimum financial requirements under
the $80.0 million facility. However, we do not expect to be in compliance with
the current covenants regarding funded debt to EBITDA, minimum EBITDA or
minimum profitability during the next fiscal year. Accordingly, in
April 2004, we obtained a firm commitment from the lending
institution for a new, 3 year, $70.0 million floor plan facility conditional only upon customary preparation and execution of the final written agreement being entered into between the lender and us. The new floor plan facility will contain covenant requirements for minimum liquidity, tangible net worth, cash flow and profitability. We expect to be in
compliance with the covenants of this new facility during the next fiscal year.
At March 26, 2004, we were not in compliance with the covenants under the $10.0 million facility,
specifically the covenants for funded debt to EBITDA, minimum EBITDA or minimum profitability.
We have obtained a three-month limited forbearance with respect to this $10.0
million facility. The limited forbearance limits, under certain conditions the financial institution
from exercising its rights and remedies with respect to default under the 15




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##### Table of Contents



terms of the floor plan agreement. It is not a waiver of the financial
institutions rights or remedies, does not obligate the financial institution
to forbear on any type of default in the future and does not amend or waive any
term or provision of the floor plan agreement, which continues unchanged and in
full force and effect. We do not expect to be in compliance with these
covenants in the next fiscal year and are in the process of renegotiating the
facility. In the event we are not in compliance with any of our floor plan facility requirements in
future periods, we would seek a waiver of any default from the lending
institutions and, if no such waiver was obtained, maturities of outstanding
debt could be accelerated. We had $114.4 million and $84.1 million outstanding
under these floor plan credit facilities at March 28, 2003 and March 29, 2004,
respectively. During the fourth quarter, CountryPlace entered into an agreement with a
financial institution for a $200.0 million warehouse facility to fund chattel
loans originated by Company-owned retail superstores, replacing its previous
warehouse facility. The new facility is collateralized by specific receivables
pledged to the facility and bears interest at the rate of LIBOR (1.125% at
March 26, 2004) plus 2.00%. The facility terminates on March 18, 2006, however
amounts outstanding under the facility are effectively settled and re-borrowed
on a monthly basis. The facility provides for an advance of 80% against the
outstanding principal balance of eligible receivables as defined in the
warehouse agreement. The previous facility provided maximum funding of $125.0
million, an advance rate of 65%, an interest rate of LIBOR plus 1.25% and a
one-year term. The new facility provides for an advance rate adjustment on
March 18, 2005 as determined by the financial institution. If the advance rate
is lowered, CountryPlace may terminate the borrowing facility with no penalty.
If CountryPlace does not terminate the facility, it is obligated to pay the
financial institution a fee of $1.0 million on March 18, 2005. CountryPlace
had outstanding borrowings under warehouse facilities of $74.1 million and
$15.1 million as of March 26, 2004 and March 28, 2003, respectively. The
facility contains certain requirements relating to the performance and
composition of the receivables pledged to the facility and certain financial
covenants, which are customary in the industry. As of March 26, 2004, both we
and CountryPlace were in compliance with these requirements. In connection
with the warehouse borrowing facility, we agreed to fund in cash to
CountryPlace, up to 25% of each loan loss incurred. During fiscal 2004, we
funded $26,000 to CountryPlace under this loss funding arrangement. As
CountryPlace continues to expand and draw down on its warehouse facility, we
will fund 20% of any additional loan originations. Should CountryPlace
increase its borrowings under the facility to the maximum $200.0 million, we
will have to fund from other sources an additional $20.0 million of these loan originations. During the fiscal years ended March 28, 2003 and March 26, 2004,
CountryPlace originated, net of financed loan points, $32,859,000 and
$77,090,000 of chattel loans, respectively. Of these amounts, in fiscal 2003,
$17,724,000 of loan originations was funded by our operations and $15,135,000
was funded through warehouse borrowings, and in fiscal 2004 $13,347,000 of loan
originations was funded by our operations and $63,744,000 was funded through
warehouse borrowings. CountryPlace currently intends to originate and hold loans for investment
on a long-term basis. CountryPlace makes loans to borrowers that it believes are credit worthy based on its credit guidelines. However, originating and holding loans for investment subjects CountryPlace to more credit and interest rate risk than the previous business practice of originating loans for resale. The ability of customers to repay their loans may be affected by a number of factors and if customers do not repay their loans, the
profitability and cash flow of the loan portfolio would be adversely affected. CountryPlace intends to securitize its loan portfolio on
a routine basis. While we believe it will be able to obtain additional
liquidity through the securitization of such loans, no assurances can be made
that CountryPlace will successfully complete securitization transactions on
acceptable terms and conditions, if at all. We believe that cash flows from operations, together with floor plan
financing and other available borrowing alternatives in addition to the
warehouse facility, will be adequate to support our working capital needs,
currently planned capital expenditure needs and expansion of CountryPlace for
the foreseeable future. However, because future cash flows and the
availability of financing will depend on a number of factors, including
prevailing economic and financial conditions, business, the market for asset
backed securitizations, and other factors beyond our control, no assurances can
be given in this regard. 16




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Contractual Obligations and Commitments(dollars in thousands) The following tables summarize our contractual cash obligations and
commercial commitments, excluding interest, at March 26, 2004. For additional
information related to these obligations, see the Notes to Consolidated
Financial Statements. Payments Due by PeriodLess than
    
    1-3
    
    4-5
    
    After 5Total
    
    1 year
    
    years
    
    years
    
    yearsDebt obligationsFloor plan payable
    
    $
    84,069
    
    
    $
    84,069
    
    
    $
    
    
    
    $
    
    
    
    $
    Warehouse revolving debt
    
    
    74,071
    
    
    
    74,071
    
    
    
    
    
    
    
    
    
    
    
    Bonds payable
    
    
    2,377
    
    
    
    205
    
    
    
    2,172
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    21,507
    
    
    
    5,400
    
    
    
    5,501
    
    
    
    3,797
    
    
    
    6,809Total contractual cash obligations
    
    $
    182,024
    
    
    $
    163,745
    
    
    $
    7,673
    
    
    $
    3,797
    
    
    $
    6,809
 Amount of Commitment Expiration Per PeriodTotalAmounts
    
    Less than
    
    1-3
    
    4-5
    
    Over 5Committed
    
    1 year
    
    years
    
    years
    
    yearsRepurchase obligations (1)
    
    $
    11,016
    
    
    $
    9,003
    
    
    $
    2,013
    
    
    $
    
    
    
    $
    Letters of credit (2)
    
    
    4,771
    
    
    
    4,771
    
    
    
    
    
    
    
    
    
    
    
    Total commercial commitments
    
    $
    15,787
    
    
    $
    13,774
    
    
    $
    2,013
    
    
    $
    0
    
    
    $
    0
  (1)
    
    We have contingent repurchase obligations outstanding at March 26, 2004
which have a finite life but are replaced as we continue to sell our
manufactured homes to dealers under repurchase agreements with financial
institutions. Our losses related to these contingent repurchase
obligations were $212,000, $69,000 and $6,000 during fiscal 2002, 2003,
and 2004, respectively. For additional information on our repurchase
obligations, see critical accounting policies  reserve for repurchase
obligations.(2)
    
    We have provided letters of credit to providers of certain of our
insurance policies. While the current letters of credit have a finite
life, they are subject to renewal at different amounts based on the
requirements of the insurance carriers. We have recorded insurance
expense based on anticipated losses related to these policies as is
customary in the industry. Critical Accounting Policies Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements. 17




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Impairment of Intangible Assets.In assessing the recoverability of our
intangibles, we must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective assets. If these
estimates or their related assumptions change in the future, we may be required
to record impairment charges for these assets. Revenue recognition.Retail sales, including shipping charges, are
recognized when a down payment is received, the customer enters into a legally
binding sales contract, title has transferred and the home is accepted by the
customer, delivered and permanently located at the customers site. Homes sold
to independent retailers are recognized when the home is shipped which is when
the title passes to the independent retailer. The transportation cost is borne
by the independent retailer. Warranties.We provide the retail home buyer a one-year limited warranty
covering defects in material or workmanship in home structure, plumbing and
electrical systems. We record a liability for estimated future warranty costs
relating to homes sold, based upon our assessment of historical experience
factors. Factors we use in the estimation of the warranty liability include
historical warranty experience related to the actual number of calls and the
average cost per call. Although we maintain reserves for such claims based on
our assessments as described above, which to date have been adequate, there can
be no assurance that warranty expense levels will remain at current levels or
that such reserves will continue to be adequate. A large number of warranty
claims exceeding our current warranty expense levels could have a material
effect on our results of operations. Reserve for Repurchase Obligations.Manufactured housing companies enter
into repurchase agreements with financial institutions which have provided
wholesale floor plan financing to independent retailers. These agreements
generally provide that in the event of a retailers default we will repurchase
the financed home from the lending institution at declining prices over the
term of the repurchase agreement (generally 12 18 months). The risk of loss
under such repurchase agreements is mitigated by the fact that (i) only 22% of
our homes are sold to independent retailers; (ii) a majority of the homes we
sell to independent retailers are pre-sold to specific retail customers; (iii)
we monitor each retailers inventory position on a regular basis; (iv) sales of
our manufactured homes are spread over a large number of retailers; (v) none of
our independent retailers accounted for more than 5% of our net sales in fiscal
2004; (vi) the price we are obligated to pay declines over time and (vii) we
are, in most cases, able to resell homes repurchased from credit sources in the
ordinary course of business without incurring significant losses. Allowance for Loan Losses. CountryPlace originates and holds for
investment purposes loans related to the retail sale of our manufactured homes,
with such loans being collateralized primarily by the manufactured home. We
provide allowances for estimated future loan losses at the time of sale and
during the term of the loan. The allowance for loan losses gives consideration
to the composition of the loan portfolio, including number of delinquencies and
historical loss experience, and expectations as to future loan losses based
upon industry knowledge. Although CountryPlace maintains an allowance for loan
losses based upon these expectations and other criteria, future differences
between CountryPlaces expectations with respect to loan losses and actual
losses incurred in the portfolio could differ, and require CountryPlace to
provide additional allowances. New Accounting Pronouncements In May 2003, the Financial Accounting Standards board (FASB) issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. Effective March 29, 2003, we adopted SFAS No.
150 which specifies the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. This statement
requires that qualifying instruments be classified as liabilities in statements
of financial position. The adoption of SFAS No. 150 did not have a material
effect on our financial position, results of operations and cash flows. In 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46) which requires the consolidation of variable
interest entities, as defined, by the primary beneficiary of such entities. In
general, variable interest entities are entities that do not have, or are not
subject to control through, voting interests. The provisions of FIN 46, as
revised, were applicable to us for any interests in certain special purpose
variable interest entities in the fourth quarter of fiscal 2004. For all other
types of variable interest entities, the provisions of FIN 46 were applicable
in our first quarter of fiscal 2005. We do not hold any investments in, or are
the primary beneficiary of, any type of variable interest entity, and thus the
adoption of FIN 46 did not have a material effect on our financial position,
results of operations or cash flows. 18




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Securities and Exchange Commission SEC Staff Views on SFAS No. 95 Members of the SEC Staff have recently advised us of their view that
the origination and collection of long-term loans, which are held for
investment purposes, in connection with customer purchases of our
products or services should be presented as an operating activity,
rather than as an investing activity, in the consolidated statement
of cash flows. The accompanying consolidated statements of cash flows
have been prepared on a basis consistent with our established
interpretations of SFAS No. 95 and generally accepted accounting
principles, including industry practice. Accordingly, the origination
and collection of loans held for investment have been classified as an
investing activity in the statement of cash flows. Alternatively, had
we classified the origination and collection of loans held for
investment as an operating activity, consistent with the view of
members the SEC Staff discussed above, net cash provided by (used in)
operating activities for the fiscal year ended March 28, 2003 and
March 26, 2004 would have decreased to $16,812,000 and $(26,231,000),
respectively and net cash provided by (used in) investing activities
for the fiscal year ended March 28, 2003 and March 26, 2004 would
have increased to $(34,609,000) and $3,176,000, respectively. The SEC
Staff has indicated they are going to continue to consider this
matter, the final resolution of which may require us to reclassify
our cash flows as currently presented. Forward-Looking Information/Risk Factors Certain statements contained in this annual report are forward-looking
statements within the safe harbor provisions of the Securities Litigation
Reform Act. Forward-looking statements give our current expectations or
forecasts of future events and can be identified by the fact that they do not
relate strictly to historical or current facts. Investors should be aware that
all forward-looking statements are subject to risks and uncertainties and, as a
result of certain factors, actual results could differ materially from these
expressed in or implied by such statements. These risks include such
assumptions, risks, uncertainties and factors associated with the following: Financing for our retail customers may be limited, which could affect our sales
volume. Our retail customers generally secure financing from third party lenders,
which have been negatively affected by adverse loan experience. Conseco
Finance Servicing Corp. and The Associates, which had provided financing for
our customers, have withdrawn from the manufactured housing finance business.
Reduced availability of such financing is currently having an adverse effect on
the manufactured housing business and our home sales. Availability of
financing is dependent on the lending practices of financial institutions,
financial markets, governmental policies and economic conditions, all of which
are largely beyond our control. Quasi-governmental agencies such as Fannie
Mae and Freddie Mac, which are important purchasers of loans from financial
institutions, have tightened standards relating to the manufactured housing
loans that they will buy. Most states classify manufactured homes as personal
property rather than real property for purposes of taxation and lien
perfection, and interest rates for manufactured homes are generally higher and
the terms of the loans shorter than for site-built homes. Financing for the
purchase of manufactured homes is often more difficult to obtain than
conventional home mortgages. There can be no assurance that affordable retail
financing for manufactured homes will continue to be available on a widespread
basis. If third party financing were to become unavailable or were to be
further restricted, this could have a material adverse effect on our results of
operations. If CountryPlace is unable to securitize its loans, it will be required to seek
other sources of long term funding, which funding may not be available. Our wholly-owned subsidiary, CountryPlace, originates chattel and
non-conforming land home mortgage loans that are funded with proceeds from its
warehouse borrowing facility and borrowings from us. We anticipate that a
primary future source of funding for CountryPlace will be from securitizations
of its mortgage loans. The proceeds from the securitizations will be used to
repay borrowings from the warehouse facility and from us, as well as to
originate new loans. The securitization market is dependent upon a number of
factors, including general economic conditions, conditions in the securities
market generally and conditions in the asset-backed securities market
specifically. Although the asset-backed securitization market for manufactured
housing lenders has improved slightly in the past year in terms of access to
the markets, as well as pricing and credit enhancement levels, poor performance
of any loans we may securitize in the future could harm our future access to
the securitization market. If CountryPlace is unable to securitize its loans
on terms that are economical, or if there is a decline in the securitization
market for manufactured housing lenders, and if CountryPlace is unable to
obtain additional sources 19




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of long term funding, it could have a material adverse effect on our results of
operations, financial condition and business prospects. If CountryPlace is unable to adequately and timely service its loans, it may
adversely affect its results of operations. Although CountryPlace has originated loans since 1995, it has limited loan
servicing and collections experience. In 2002, it implemented new systems to
service and collect the portfolio of loans it originates. The management of
CountryPlace has industry experience in managing, servicing and collecting loan
portfolios; however, many borrowers require notices and reminders to keep their
loans current and to prevent delinquencies and foreclosures. A substantial
increase in the delinquency rate that results from improper servicing or
mortgage loan performance in general could adversely affect the profitability
and cash flow from the loan portfolio in CountryPlace. If CountryPlaces customers are unable to repay their loans, CountryPlace may
be adversely affected. CountryPlace makes loans to borrowers that it believes are creditworthy
based on its credit guidelines. However, the ability of these customers to
repay their loans may be affected by a number of factors, including, but not
limited to:  
    
    national, regional and local economic conditions;
    
    changes or continued weakness in specific industry segments;
    
    natural hazard risks affecting the region in which the borrower resides; and
    
    employment, financial or life circumstances. If customers do not repay their loans, the profitability and cash flow from the
loan portfolio could adversely affect CountryPlace and our
consolidated financial position, results of operations and cash flows. Reduced availability of wholesale financing may adversely affect our inventory
levels of new homes. We finance a portion of our new inventory at our retail superstores
through wholesale floor plan financing arrangements. Through these
arrangements, financial institutions provide us with a loan for the purchase
price of the home. After the departure of Conseco Finance Servicing Corp. from
wholesale financing, in 2002, Deutsche Financial Services Corporation announced
that they were exiting the floor plan financing business. Although we
currently have floor plan facilities with financial institutions totaling $90
million, there can be no assurance that we will continue to have access to such
facilities or that we will not be forced to reduce our new home inventory at
our retail superstores. Our repurchase agreements with floor plan lenders could result in increased
costs. In accordance with customary practice in the manufactured housing
industry, we enter into repurchase agreements with various financial
institutions pursuant to which we agree, in the event of a default by an
independent retailer in its obligation to these credit sources, to repurchase
manufactured homes at declining prices over the term of the agreements,
typically 18 months. The difference between the gross repurchase price and the
price at which the repurchased manufactured homes can then be resold, which is
typically at a discount to the original sale price, is an expense to us. Thus,
if we were obligated to repurchase a large number of manufactured homes in the
future, this would increase our costs, which could have a negative effect on
our earnings. Tightened credit standards by lenders and more aggressive
attempts to accelerate collection of outstanding accounts with retailers could
result in defaults by retailers and consequently repurchase obligations on our
part may be higher than has historically been the case. During fiscal 2004 and
2003, net expenses incurred under these repurchase agreements totaled $6,000
and $69,000, respectively. Increased prices and unavailability of raw materials could have a material
adverse effect on us. Our results of operations can be affected by the pricing and availability
of raw materials. In 2004, we experienced an increase in prices of our raw
materials of 14%. Although we attempt to increase the sales prices of our
homes in response to higher materials costs, such increases typically lag
behind the escalation of materials costs. 20




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Three of the most important raw materials used in our operations, lumber,
gypsum wallboard and insulation, have experienced significant price
fluctuations in the past fiscal year. Although we have not experienced any
shortage of such building materials today, there can be no assurance that
sufficient supplies of lumber, gypsum wallboard and insulation, as well as
other materials, will continue to be available to us on terms we regard as
satisfactory. We are dependent on our executive officers and the loss of their service could
adversely affect us. We are dependent to a significant extent upon the efforts of our executive
officers, particularly Lee Posey, Chairman of the Board and Larry H. Keener,
President and Chief Executive Officer. The loss of the services of one or more
of our executive officers could have material adverse effect upon our business,
financial condition and results of operations. Our continued growth is also
dependent upon our ability to attract and retain additional skilled management
personnel. We are controlled by two shareholders, who may determine the outcome of all
elections. Approximately 54% of our outstanding common stock is beneficially owned or
controlled by our Chairman of the Board, Lee Posey and Capital Southwest
Corporation and its affiliates. As a result, these shareholders, acting
together, are able to determine the outcome of elections of our directors and
thereby control the management of our business. If inflation increases, we may not be able to offset inflation through
increased selling prices. If there is a material increase in inflation in the future, it is unlikely
that we will be able to increase our selling prices to completely offset the
material increase in inflation and as a result, our operating results may be
adversely affected. The manufactured housing industry is highly competitive and some of our
competitors have stronger balance sheets and cash flow, as well as greater
access to capital, than we do. As a result of these competitive conditions, we
may not be able to sustain past levels of sales or profitability. The manufactured housing industry is highly competitive, with relatively
low barriers to entry. Manufactured and modular homes compete with new and
existing site-built homes and to a lesser degree, with apartments, townhouses
and condominiums. Competition exists at both the manufacturing and retail
levels and is based primarily on price, product features, reputation for
service and quality, retailer promotions, merchandising and terms of consumer
financing. Some of our competitors have substantially greater financial,
manufacturing, distribution and marketing resources than we do. As a result of
these competitive conditions, we may not be able to sustain past levels of
sales or profitability. Our business is highly cyclical and there may be significant fluctuations in
our quarterly results. The manufactured and modular housing industry is highly cyclical and
seasonal and has experienced wide fluctuations in aggregate sales in the past.
We are subject to volatility in operating results due to external factors
beyond our control such as:  
    
    the level and stability of interest rates;
    
    unemployment trends;
    
    the availability of retail financing;
    
    the availability of wholesale financing;
    
    housing supply and demand;
    
    international tensions and hostilities;
    
    levels of consumer confidence;
    
    inventory levels; and
    
    changes in general economic conditions. Sales in our industry are also seasonal in nature, with sales of homes
traditionally being stronger in the spring, summer and fall months. The
cyclical and seasonal nature of our business causes our revenues and operating
results to fluctuate and makes it difficult for management to forecast sales
and profits in uncertain times. As a result 21




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##### Table of Contents



of seasonal and cyclical downturns, results from any quarter should not be
relied upon as being indicative of performance in future quarters. We are concentrated geographically, which could harm our business. In fiscal 2004, 26% of our
revenues were generated in Texas. Additionally, in fiscal 2004, 18% of our
revenues were generated in Florida and 10% of our revenues were generated in
North Carolina. A decline in the demand for manufactured housing in these
three states and/or a decline in the economies of these three states could have
a material adverse effect on our results of operations. 
 Item 7A. Quantitative and Qualitative Disclosure About Market Risk We are exposed to market risks related to fluctuations in interest rates
on our variable rate debt, which consists primarily of our liabilities under
retail floor plan financing arrangements and warehouse revolving debt, and our
fixed rate loans receivable balances. We are not involved in any other market
risk sensitive contracts or investments such as interest rate swaps, futures
contracts, or other types of derivative financial instruments. For variable interest rate obligations, changes in interest rates
generally do not impact fair market value, but do affect future earnings and
cash flows. Assuming our and CountryPlaces level of variable rate debt as of
March 26, 2004 is held constant, each one percentage point increase in interest
rates occurring on the first day of the year would result in an increase in
interest expense for the coming year of approximately $1.6 million. For fixed rate loans receivable, changes in interest rates do not change
future earnings and cash flows from the receivables. However, changes in
interest rates could affect the fair market value of the loan portfolio.
Assuming CountryPlaces level of loans held for investment as of March 26, 2004
is held constant, a 10% increase in average interest rates would decrease the
fair value of CountryPlaces portfolio by approximately $3.6 million. This
decrease in fair value is not linear to changes in interest rates and may or
may not have any impact on the realizable amount of the receivables. CountryPlace is exposed to market risk related to the accessibility and
terms of financing in the asset-backed securities market. CountryPlace intends
to securitize its loan portfolio as a means to obtain long term fixed interest
rate funding. The asset-backed securities market for manufactured housing has
been volatile during the past year. The inability to securitize its loans
would require CountryPlace to seek other sources of funding or to reduce or
eliminate its loan originations if other sources of funding are not available. 22




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Item 8. Financial Statements and Supplementary Data Report of Independent Auditors Board of Directors
Palm Harbor Homes, Inc. We have audited the accompanying consolidated balance sheets of Palm Harbor
Homes, Inc. and Subsidiaries (the Company) as of March 26, 2004 and March 28,
2003, and the related consolidated statements of operations, shareholders equity,
and cash flows for each of the three fiscal years in the period ended March 26,
2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Palm Harbor
Homes, Inc. and Subsidiaries at March 26, 2004 and March 28, 2003, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended March 26, 2004, in conformity with
accounting principles generally accepted in the United States. Dallas, Texas
    
    Ernst & Young LLPMay 1, 2004
 23




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Consolidated Balance Sheets
(In thousands) March 28,
    
    March 26,2003
    
    2004AssetsCash and cash equivalents
    
    $
    45,592
    
    
    $
    50,915Restricted cash
    
    
    4,484
    
    
    
    4,771Investments
    
    
    23,987
    
    
    
    21,126Trade receivables
    
    
    66,346
    
    
    
    48,766Loans held for investment, net
    
    
    32,135
    
    
    
    96,833Inventories
    
    
    115,753
    
    
    
    113,799Prepaid expenses and other assets
    
    
    14,952
    
    
    
    14,207Deferred tax asset, net
    
    
    8,547
    
    
    
    10,352Property, plant and equipment, at cost:Land and improvements
    
    
    36,347
    
    
    
    35,969Buildings and improvements
    
    
    64,808
    
    
    
    63,818Machinery and equipment
    
    
    62,322
    
    
    
    63,402Construction in progress
    
    
    1,985
    
    
    
    2,472165,462
    
    
    
    165,661Accumulated depreciation
    
    
    72,575
    
    
    
    83,11492,887
    
    
    
    82,547Goodwill, net
    
    
    78,079
    
    
    
    78,506Total assets
    
    $
    482,762
    
    
    $
    521,822
 24




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Consolidated Balance Sheets
(In thousands, except share and per share data) March 28,
    
    March 26,2003
    
    2004Liabilities and Shareholders EquityAccounts payable
    
    $
    32,059
    
    
    $
    46,103Accrued liabilities
    
    
    58,195
    
    
    
    59,149Floor plan payable
    
    
    114,437
    
    
    
    84,069Warehouse revolving debt
    
    
    15,135
    
    
    
    74,071Bonds payable
    
    
    2,567
    
    
    
    2,377Total liabilities
    
    
    222,393
    
    
    
    265,769Commitments and contingenciesShareholders equityPreferred stock, $.01 par valueAuthorized shares  2,000,000Issued and outstanding shares  none
    
    
    
    
    
    
    Common stock, $.01 par valueAuthorized shares  50,000,000Issued shares  23,807,879 at March 28,
2003 and March 26, 2004
    
    
    239
    
    
    
    239Additional paid-in capital
    
    
    54,149
    
    
    
    54,149Retained earnings
    
    
    223,580
    
    
    
    217,563Accumulated other comprehensive income
    
    
    195
    
    
    
    767278,163
    
    
    
    272,718Less treasury shares  948,557 at March 28,
2003, and 970,417 at March 26, 2004
    
    
    (15,657
    )
    
    
    (16,057
    )Unearned compensation
    
    
    (2,137
    )
    
    
    (608
    )Total shareholders equity
    
    
    260,369
    
    
    
    256,053Total liabilities and shareholders equity
    
    $
    482,762
    
    
    $
    521,822
 See accompanying notes. 25




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Consolidated Statements of Operation
(In thousands, except per share data) Year EndedMarch 29,
    
    March 28,
    
    March 26,2002
    
    2003
    
    2004Net sales
    
    $
    627,380
    
    
    $
    573,130
    
    
    $
    578,465Cost of sales
    
    
    426,356
    
    
    
    408,725
    
    
    
    427,826Selling, general and
administrative expenses
    
    
    168,171
    
    
    
    157,474
    
    
    
    157,414Income (loss) from operations
    
    
    32,853
    
    
    
    6,931
    
    
    
    (6,775
    )Interest expense
    
    
    (8,377
    )
    
    
    (6,676
    )
    
    
    (5,566
    )Equity in earnings of limited partnership
    
    
    
    
    
    
    3,416
    
    
    
    1,848Other income
    
    
    6,450
    
    
    
    1,458
    
    
    
    1,440Income (loss) before income taxes
    
    
    30,926
    
    
    
    5,129
    
    
    
    (9,053
    )Income tax benefit (expense)
    
    
    (11,478
    )
    
    
    (1,908
    )
    
    
    3,036Net income (loss)
    
    $
    19,448
    
    
    $
    3,221
    
    
    $
    (6,017
    )Net income (loss) per common share -
basic and diluted
    
    $
    0.85
    
    
    $
    0.14
    
    
    $
    (0.26
    )Weighted average common
shares outstanding  basic and diluted
    
    
    22,820
    
    
    
    22,913
    
    
    
    22,857
 See accompanying notes. 26




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Consolidated Statements of Shareholders Equity
(In thousands, except share data) AccumulatedAdditional
    
    
    
    
    
    OtherCommon Stock
    
    Paid-In
    
    Retained
    
    Comprehensive
    
    Treasury Shares
    
    UnearnedShares
    
    Amount
    
    Capital
    
    Earnings
    
    Income
    
    Shares
    
    Amount
    
    Compensation
    
    TotalBalance at March 30, 2001
    
    
    23,807,879
    
    
    $
    239
    
    
    $
    54,149
    
    
    $
    200,911
    
    
    $
    2,869
    
    
    
    (964,590
    )
    
    $
    (16,512
    )
    
    $
    (6,004
    )
    
    $
    235,652Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,448
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,448Unrealized gain on
securities available-
for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    845
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    845Realization
of gains on interest
only strips
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,775
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,775
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,518Treasury shares purchased, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,356
    
    
    
    2,981
    
    
    
    
    
    
    
    2,981Long-Term Incentive PlanShares granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,987
    )
    
    
    (2,987
    )Terminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,273
    )
    
    
    (638
    )
    
    
    638
    
    
    
    Provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,493
    
    
    
    2,493Balance at March 29, 2002
    
    
    23,807,879
    
    
    
    239
    
    
    
    54,149
    
    
    
    220,359
    
    
    
    1,939
    
    
    
    (858,507
    )
    
    
    (14,169
    )
    
    
    (5,860
    )
    
    
    256,657Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,221
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,221Realization
of gains on interest
only strips
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,939
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,939
    )Unrealized gain on
securities available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,477Treasury shares purchased, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,518
    )
    
    
    (228
    )
    
    
    
    
    
    
    (228
    )Long-Term Incentive PlanTerminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,532
    )
    
    
    (1,260
    )
    
    
    1,260
    
    
    
    Provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,463
    
    
    
    2,463Balance at March 28, 2003
    
    
    23,807,879
    
    
    
    239
    
    
    
    54,149
    
    
    
    223,580
    
    
    
    195
    
    
    
    (948,557
    )
    
    
    (15,657
    )
    
    
    (2,137
    )
    
    
    260,369Comprehensive incomeNet income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,017
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,017
    )Unrealized gain on
securities available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    572
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    572Total comprehensive income
(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,445
    )Treasury shares purchased, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-Term Incentive PlanShares granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,463
    
    
    
    156
    
    
    
    (156
    )
    
    
    Terminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,323
    )
    
    
    (556
    )
    
    
    556
    
    
    
    Provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,129
    
    
    
    1,129Balance at March 26, 2004
    
    
    23,807,879
    
    
    $
    239
    
    
    $
    54,149
    
    
    $
    217,563
    
    
    $
    767
    
    
    
    (970,417
    )
    
    $
    (16,057
    )
    
    $
    608
    
    
    $
    256,053
 See accompanying notes. 27




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Consolidated Statements of Cash Flows
(In thousands) Year EndedMarch 29,
    
    March 28,
    
    March 26,2002
    
    2003
    
    2004Operating ActivitiesNet income (loss)
    
    $
    19,448
    
    
    $
    3,221
    
    
    $
    (6,017
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activitiesDepreciation and amortization
    
    
    12,087
    
    
    
    13,798
    
    
    
    14,167Provision for credit losses
    
    
    
    
    
    
    1,409
    
    
    
    2,076Deferred income taxes
    
    
    (1,138
    )
    
    
    740
    
    
    
    (1,805
    )(Gain) loss on disposition of assets
    
    
    329
    
    
    
    515
    
    
    
    (439
    )(Gain) loss on investments
    
    
    
    
    
    
    1,002
    
    
    
    (114
    )Purchases of stock for Long-Term Incentive Plan
    
    
    (2,987
    )
    
    
    
    
    
    
    Provision for Long-Term Incentive Plan
    
    
    2,493
    
    
    
    2,463
    
    
    
    1,129Equity in earnings of limited partnership
    
    
    
    
    
    
    (3,416
    )
    
    
    (1,848
    )Changes in operating assets and liabilities:Restricted cash
    
    
    
    
    
    
    (4,484
    )
    
    
    (287
    )Trade receivables
    
    
    3,497
    
    
    
    11,357
    
    
    
    17,580Inventories
    
    
    3,869
    
    
    
    12,214
    
    
    
    1,954Prepaid expenses and other assets
    
    
    (1,657
    )
    
    
    4,694
    
    
    
    (520
    )Accounts payable and accrued expenses
    
    
    (3,283
    )
    
    
    3,181
    
    
    
    14,667Cash provided by operations
    
    
    32,658
    
    
    
    46,694
    
    
    
    40,543Loans originated for resale
    
    
    (137,880
    )
    
    
    (63,670
    )
    
    
    Sale of loans
    
    
    139,711
    
    
    
    64,998
    
    
    
    Net cash provided by operating activities
    
    
    34,489
    
    
    
    48,022
    
    
    
    40,543Investing ActivitiesBusiness acquired, net of cash acquired
    
    
    
    
    
    
    (31,789
    )
    
    
    Investment in limited partnership
    
    
    
    
    
    
    (3,000
    )
    
    
    Distributions from investment in limited partnership
    
    
    
    
    
    
    1,525
    
    
    
    1,850Loans originated for investment
    
    
    
    
    
    
    (32,859
    )
    
    
    (77,090
    )Principal payments on loans originated
    
    
    
    
    
    
    1,649
    
    
    
    10,316Purchases of property, plant and equipment, net of proceeds
from disposition
    
    
    (14,708
    )
    
    
    (6,407
    )
    
    
    (2,552
    )Purchases of investments
    
    
    (13,318
    )
    
    
    (5,470
    )
    
    
    (8,337
    )Sales of investments
    
    
    8,399
    
    
    
    10,532
    
    
    
    12,215Net cash used in investing activities
    
    
    (19,627
    )
    
    
    (65,819
    )
    
    
    (63,598
    )Financing ActivitiesNet payments on floor plan payable
    
    
    (9,770
    )
    
    
    (20,540
    )
    
    
    (30,368
    )Net proceeds from warehouse revolving debt
    
    
    
    
    
    
    15,135
    
    
    
    58,936Principal payments on bonds payable
    
    
    (166
    )
    
    
    (175
    )
    
    
    (190
    )Net purchases of treasury stock
    
    
    2,981
    
    
    
    (228
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (6,955
    )
    
    
    (5,808
    )
    
    
    28,378Net increase (decrease) in cash and cash equivalents
    
    
    7,907
    
    
    
    (23,605
    )
    
    
    5,323Cash and cash equivalents at beginning of year
    
    
    61,290
    
    
    
    69,197
    
    
    
    45,592Cash and cash equivalents at end of year
    
    $
    69,197
    
    
    $
    45,592
    
    
    $
    50,915Supplemental disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    8,896
    
    
    $
    6,257
    
    
    $
    4,458Income taxes
    
    $
    15,409
    
    
    $
    361
    
    
    $
    230
 See accompanying notes. 28




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies Principles of consolidation The consolidated financial statements include the accounts of Palm Harbor
Homes, Inc. (the Company) and its majority-owned and wholly-owned
subsidiaries. Investments in 50% or less-owned entities are accounted for
under the equity method. CountryPlace Mortgage, Ltd. is 80% owned by
the Company. All significant intercompany transactions and
balances have been eliminated in consolidation. The Companys fiscal year ends
on the last Friday in March. Headquartered in Addison, Texas, the Company
markets factory-built homes nationwide through vertically integrated
operations, encompassing factory-built housing, chattel and mortgage bank
financing, as well as insurance. Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and the accompanying notes. Actual results could differ from the estimates and
assumptions used by management in preparation of the financial statements. Revenue recognition Retail sales, including shipping charges, are recognized when a down payment is
received, the customer enters into a legally binding sales contract, title has
transferred and the home is accepted by the customer, delivered and permanently
located at the customers site. Homes sold to independent retailers are
recognized when the home is shipped which is when the title passes to the
independent retailer. Transportation costs, unless borne by the retail
customer or independent retailer, are included in cost of sales. Interest income on loans held for investment is recognized as net sales on an
accrual basis. Loans receivable are placed on nonaccrual by the Company
whenever payments become more than 120 days past due or once a related home is
repossessed, whichever is earlier. Loan origination fees and certain direct
loan origination costs are deferred and amortized into net sales over the
contractual life of the loan using the interest method. Most of the homes sold to independent retailers are financed through standard
industry arrangements which include repurchase agreements (see Note 13). The
Company extends credit in the normal course of business under normal trade
terms and our receivables are subject to normal industry risk. Premium income from insurance policies is recognized on an as earned basis.
Premium amounts collected are amortized into net sales over the life of the
policy. Policy acquisition costs are also amortized as cost of sales over the
life of the policy. Residual interests and recourse obligations Through November 2002, CountryPlace Mortgage, Ltd. (CountryPlace), the
Companys finance subsidiary, originated and sold loan contracts to national
consumer finance companies and received cash and/or retained a residual
interest in the interest generated by the sold contracts. Since April 1, 1999,
substantially all interest income on sold contracts was received in cash upon
the sale of the contracts. Prior to April 1, 1999, a residual interest in the
interest generated by the sold contracts was retained and recorded. The fair
value of the residual interests was previously recorded on the balance sheet at
fair value. Additionally, in some cases, in connection with the sale of loan
contracts, CountryPlace was required to share in the losses resulting from
defaults or prepayments of loan contracts previously sold and therefore
established estimated losses at the time the loan contracts were sold. During the fourth quarter of fiscal 2003, the Company sold all of its
interest-only strip receivables related to loan contracts previously sold for
approximately $7.0 million and was released from all of its related recourse
obligations. No significant gain or loss was recorded in connection with this
transaction. During the fiscal year ended March 28, 2002 and March 28, 2003,
the Company recognized approximately $3.9 million and $1.0 million in gains,
respectively, related to loan contracts sold. The Company had $0.8 million in
unrealized gains for the 29




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) fiscal year ended March 29, 2002. Cash and cash equivalents Cash and cash equivalents are all liquid investments with maturities of three
months or less when purchased. Restricted cash At March 26, 2004 and March 28, 2003, $4,771,000 and $4,484,000, respectively,
of cash was pledged as collateral for outstanding letters of credit which
collaterized insurance programs and surety bonds. Loans held for investment Loans held for investment are stated at the aggregate remaining unpaid
principal balances less allowances for loan losses and unamortized deferred
finance fees. Allowance for loan losses CountryPlace originates and holds for investment purposes loans related to the
retail sale of factory-built Palm Harbor homes, with such loans being
collateralized primarily by the factory-built home. The Company provides
allowances for estimated future loan losses at the time of sale and during the
term of the loan. The allowance for loan losses gives consideration to the
composition of the loan portfolio, including number of delinquencies and
historical loss experience, known losses due to existing repossessed homes,
expected losses due to specific customer delinquencies, and expected future
losses based on industry knowledge of losses for a given credit score.
Although the Company maintains an allowance for loan losses based upon these
expectations and other criteria, future differences between the Companys
expectations with respect to loan losses and actual losses incurred in the
portfolio could differ, and require the Company to provide additional
allowances. The Company recorded a provision for credit losses totaling
$1,409,000 and $2,076,000 for fiscal 2003 and 2004, respectively, and four
loans were charged off totaling $87,000 in fiscal 2004. Investments The Company holds investments as trading and available-for-sale. The trading
account assets consist of marketable debt and equity securities and are stated
at fair value. Marketable debt and equity securities not classified as trading
are classified as available-for-sale. Available-for-sale securities are stated
at fair value, with the unrealized gains and losses, net of tax, reported in
shareholders equity. Inventories Raw materials inventories are valued at the lower of cost (first-in, first-out
method which approximates actual cost) or market. Finished goods are valued at
the lower of cost or market, using the specific identification method. Property, plant and equipment Property, plant and equipment are carried at cost. Depreciation is calculated
using the straight-line method over the assets estimated useful lives.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease period or the improvements useful lives. Estimated
useful lives for significant classes of assets are as follows: Land and
Improvements 10-15 years, Buildings and Improvements 3-15 years, and Machinery
and Equipment 2-10 years. The Company had depreciation expense of $11,993,000,
$13,704,000 and $13,331,000 in fiscal 2002, 2003 and 2004, respectively.
Repairs and maintenance are expensed as incurred. The recoverability of
property, plant and equipment is evaluated whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable, primarily based on estimated selling price, appraised value or
projected undiscounted cash flows. The Company has not recorded any impairment
charges in fiscal 2002, 2003 or 2004. 30




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) Goodwill Goodwill is the excess of cost over fair value of net assets of businesses
acquired. Goodwill is no longer amortized. The Company tests goodwill
annually for impairment by reporting unit and records an impairment charge when
the implied fair value of goodwill is less than its carrying value. The
Companys two reporting units are factory-built housing and financial services.
All of the Companys goodwill relates to its factory-built housing reporting
unit. The Company performed its annual goodwill impairment test for fiscal
year 2004 as of December 27, 2003, the first day of its fourth fiscal quarter,
and noted no implied impairment of goodwill. Warranties Products are warranted against manufacturing defects for a period of one year
commencing at the time of sale to the retail customer. Estimated costs
relating to product warranties are provided at the date of sale. Start-up costs Costs incurred in connection with the start-up of manufacturing facilities and
retail superstores are expensed as incurred. Income taxes Deferred income taxes are determined by the liability method and reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Earnings per share In computing both basic and diluted earnings per share, the number of weighted
average shares outstanding during the periods presented were used. Financial statement classifications During the fiscal year ended March 28, 2003, the Company announced plans to
significantly increase its finance operations through CountryPlace. As of
March 26, 2004, CountryPlace had obtained a warehouse revolving debt facility
of $200.0 million whereby CountryPlace could borrow against the facility on a
short-term basis to fund the origination of manufactured housing loans until
sufficient sums of loans are accumulated and then securitized with debt with
longer-term maturities. As of March 26, 2004, the Company had approximately
$96.8 million of net loans held for investment. As a result of the Companys plans to continue to significantly expand its
finance and insurance operations, an accounting policy to no longer present a
classified balance sheet was adopted in fiscal 2003. Accumulated other comprehensive income Accumulated other comprehensive income is presented net of income taxes and is
comprised of unrealized gains and losses on securities available-for-sale. New Accounting Pronouncements In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. Effective March 29, 2003, the Company adopted SFAS
No. 150 which specifies the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. This Statement
requires that qualifying instruments be classified as liabilities in statements
of financial position. The adoption of SFAS No. 150 did not have a material
effect on the Companys financial position, results of operations and cash
flows. 31




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) In 2003, the FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), which requires the consolidation of variable
interest entities, as defined, by the primary beneficiary of such entities. In
general, variable interest entities are entities that do not have, or are not
subject to control through, voting interests. The provisions of FIN 46, as
revised, were applicable to the Company for any interests in certain special
purpose variable interest entities in the fourth quarter of fiscal 2004. For
all other types of variable interest entities, the provisions of FIN 46 were
applicable in the Companys first quarter of fiscal 2005. The Company does not
hold any investments in, or is the primary beneficiary of, any type of variable
interest entity, and thus the adoption of FIN 46 did not have a material effect
on the Companys financial position, results of operations or cash flows. Securities and Exchange Commission SEC Staff Views on SFAS No. 95 Members
of the SEC Staff recently advised the Company of their view that the
origination and collection of long-term loans, which are held for
investment purposes, in connection with customer purchases of
products or services from the Company should be presented as an
operating activity, rather than as an investing activity, in the
consolidated statement of cash flows. The accompanying consolidated
statements of cash flows have been prepared on a basis consistent
with the Companys established interpretations of SFAS No. 95
and generally accepted accounting principles, including industry
practice. Accordingly, the origination and collection of loans held
for investment have been classified as an investing activity in the
statement of cash flows. Alternatively, had the Company classified
the origination and collection of loans held for investment as an
operating activity, consistent with the view of members the SEC Staff
discussed above, net cash provided by (used in) operating activities
for the fiscal year ended March 28, 2003 and March 26, 2004
would have decreased to $16,812,000 and $(26,231,000), respectively
and net cash provided by (used in) investing activities for the
fiscal year ended March 28, 2003 and March 26, 2004 would
have increased to $(34,609,000) and $3,176,000, respectively. The SEC
Staff has indicated they are going to continue to consider this
matter, the final resolution of which may require the Company to
reclassify its cash flows as currently presented. 2. Acquisitions/Investments On June 7, 2002, the Company acquired Nationwide Custom Homes (Nationwide), a
manufacturer and marketer of modular homes, for $32.5 million in cash. The
acquisition was accounted for using the purchase method of accounting. The
Company acquired Nationwide primarily to enhance its competitive position,
extend its geographic presence, expand its product line offerings, target more
customers in the higher-end market, and further complement its existing
operations. These factors contributed to the Companys purchase price, which
resulted in approximately $25 million of goodwill. Proforma results of
operations would not be materially different for fiscal year 2003 and therefore
are not presented. The following table details a condensed balance sheet of
Nationwide Homes assigning an amount to each major asset and liability account
as of the acquisition date (in thousands): Accounts receivable
    
    $
    664Inventories
    
    
    5,919Goodwill
    
    
    25,397Other assets
    
    
    9,032Accounts payable
    
    
    (2,539
    )Accrued liabilities
    
    
    (5,790
    )Other liabilities
    
    
    (894
    )$
    31,789
 32




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) In June 2002, the Company invested $3.0 million to become the sole limited
partner and 50% owner of an existing mortgage banking firm, BSM Financial L. P.
(BSM) which is being accounted for using the equity method of accounting.
During fiscal 2004, the Companys equity in the net income of BSM was $1.8
million. Condensed balance sheets as of March 28, 2003 and March 26, 2004 and
the condensed income statements for the fiscal years ending March 28, 2003 and
March 26, 2004 are as follows (in thousands): March 28,
    
    March 26,2003
    
    2004Cash
    
    $
    390
    
    
    $
    1,481Receivable for mortgage notes assigned to investors
    
    
    130,319
    
    
    
    98,784Other current assets
    
    
    2,341
    
    
    
    1,351Property, plant and equipment, net
    
    
    879
    
    
    
    753Other assets
    
    
    52
    
    
    
    103Total assets
    
    $
    133,981
    
    
    $
    102,472Warehouse revolving debt
    
    $
    120,360
    
    
    $
    91,942Other current liabilities
    
    
    5,921
    
    
    
    2,993Debt obligations
    
    
    163
    
    
    
    4Partnership capital
    
    
    7,537
    
    
    
    7,533Total liabilities and partnership capital
    
    $
    133,981
    
    
    $
    102,472
 Ten Months Ended
    
    Twelve Month EndedMarch 28,
    
    March 26,2003
    
    2004Revenues
    
    $
    27,991
    
    
    $
    47,710Net income
    
    
    6,831
    
    
    
    3,696
 3. Inventories Inventories consist of the following: March 28,
    
    March 26,2003
    
    2004(in thousands)Raw materials
    
    $
    7,779
    
    
    $
    10,113Work in process
    
    
    4,493
    
    
    
    5,025Finished goods  factory-built
    
    
    2,337
    
    
    
    2,920Finished goods  retail
    
    
    101,144
    
    
    
    94,559Finished
goods  consumer
    
    
    
    
    
    
    1,182$
    115,753
    
    
    $
    113,799
 4. Investments The Companys investments totaled $23,987,000 and $21,126,000 at March 28, 2003
and March 26, 2004, respectively. The fair value of the available-for-sale
securities was $14,619,000 and $14,486,000, and the Company had net unrealized
gains recorded of $195,000 and $767,000 at March 28, 2003 and March 26, 2004,
respectively. The majority of the available-for-sale securities consist of
U.S. government related obligations and other debt obligations with contractual
maturities of generally 2 to 11 years. The remaining of the Companys
investments are classified as trading securities. 33




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Floor plan payable The Company has an agreement with a financial institution for an $80.0 million
syndicated floor plan facility expiring March 19, 2006. The advance rate for
this facility is 90% of manufacturers invoice. The Company has a second
facility with another financial institution for $10.0 million, which
automatically renews annually on October 11 unless a 30-day notification of
cancellation is received by the financial institution. These facilities are
used to finance a major portion of the new home inventory at the Companys
retail superstores and are secured by the new home inventory and a
portion of receivables from financial institutions. The interest rates on the facilities
are prime (4.00% at March 26, 2004) or prime plus 1.0% to 3.0% for aged units,
of which the Company has none as of March 26, 2004 under its floor plan
arrangements. These two floor plan facilities contain certain provisions
regarding minimum financial requirements which the Company must maintain in
order to borrow against the facilities. As of March 26, 2004, the Company was
in compliance with amended minimum financial requirements under the $80.0 million
facility. However, the Company does not expect to be in compliance with the
current covenants regarding funded debt to EBITDA, minimum EBITDA or minimum
profitability during the next fiscal year. Accordingly, in April
2004, the Company obtained a firm commitment from the lending
institution for a new, 3 year, $70.0 million floor plan facility
conditional only upon customary preparation and execution of the
final written agreement being entered into between the lender and the
Company. The new floor plan facility will contain covenant
requirements for minimum liquidity, tangible net worth, cash flow and
profitability. The Company expects to
be in compliance with the covenants of this new facility during the next fiscal
year. The Company, at March 26, 2004, was not in compliance with the covenants under the $10.0
million facility, specifically the covenants for funded debt to EBITDA, minimum EBITDA or minimum
profitability. The Company has obtained a three-month limited forbearance with
respect to this $10.0 million facility. The limited forbearance
limits, under certain conditions the
financial institution from exercising its rights and remedies with respect to
default under the terms of the floor plan agreement. It is not a waiver of the
financial institutions rights or remedies, does not obligate the financial
institution to forbear on any type of default in the future and does not amend
or waive any term or provision of the floor plan agreement, which continues
unchanged and in full force and effect. The Company does not expect to be in
compliance with these covenants in the next fiscal year and is in the process
of renegotiating the facility. In the event the Company is not in compliance
with any of its floor plan facility covenant requirements in future periods, the Company would seek a waiver of any
default from the lending institutions and, if no such waiver was obtained,
maturities of outstanding debt could be accelerated. The Company had
$114,437,000 and $84,069,000 outstanding under these floor plan credit facilities
at March 28, 2003 and March 29, 2004, respectively. 6. Warehouse revolving debt In March 2004, the Company, through its subsidiary CountryPlace, entered into
an agreement with a financial institution for a $200.0 million loan warehouse
borrowing facility to fund chattel loans originated by company-owned retail
superstores, replacing its previous warehouse facility. This new facility is
collateralized by specific receivables pledged to the facility and bears
interest at the rate of LIBOR (1.125% at March 26, 2004) plus 2.00%. The
facility terminates on March 18, 2006, however amounts outstanding under the
facility are effectively settled and re-borrowed on a monthly basis. The
facility provides for an advance of 80% against the outstanding principal
balance of eligible receivables, as defined in the warehouse agreement. The
previous facility provided maximum funding of $125.0 million, an advance rate
of 65%, an interest rate of LIBOR plus 1.25% and a one-year term. The new
facility provides for an advance rate adjustment on March 18, 2005 as
determined by the financial institution. If the advance rate is lowered,
CountryPlace may terminate the borrowing facility with no penalty. If
CountryPlace does not terminate the facility, it is obligated to pay the
financial institution a fee of $1,000,000 on March 18, 2005. CountryPlace had
outstanding borrowings under warehouse facilities of $15,135,000 and
$74,071,000 as of March 28, 2003 and March 26, 2004, respectively. The
facility contains certain requirements relating to the performance and
composition of the receivables pledged to the facility and certain financial
covenants, which are customary in the industry. As of March 26, 2004, both
Palm Harbor and CountryPlace were in compliance with these requirements. In
connection with the warehouse borrowing facility, Palm Harbor agreed to fund in
cash to CountryPlace, up to 25% of each loan loss incurred. During the year
ended March 26, 2004, the Company funded $26,000 to CountryPlace under this
loss funding arrangement. As CountryPlace continues to expand and draw down on
its warehouse facility, the Company will fund 20% of any additional loan
originations. Should CountryPlace increase its borrowings under the facility
to the maximum $200.0 million, the Company will have to fund
from other sources an
additional $20.0 million of these loan originations. 34




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) During the fiscal years ended March 28, 2003 and March 26, 2004, CountryPlace
originated, net of financed loan points, approximately $32,859,000 and $
77,090,000 of chattel loans, respectively. Of these amounts, in fiscal 2003,
$17,724,000 of loan originations was funded by the Companys operations and
$15,135,000 was funded through warehouse borrowings, and in fiscal 2004
$13,347,000 of loan originations was funded by the Companys operations and
$63,744,000 was funded through warehouse borrowings. 7. Accrued liabilities Accrued liabilities consist of the following: March 28,
    
    March 26,2003
    
    2004(in thousands)Salaries, wages and benefits
    
    $
    15,981
    
    
    $
    14,795Accrued expenses on homes sold, including warranty
    
    
    14,715
    
    
    
    13,818Customer deposits
    
    
    11,954
    
    
    
    14,184Sales incentives
    
    
    4,285
    
    
    
    4,587Other
    
    
    11,260
    
    
    
    11,765$
    58,195
    
    
    $
    59,149
 8. Bonds payable Bonds payable consist of the following: March 28,
    
    March 26,2003
    
    2004(in thousands)Economic development revenue bonds;
interest payable monthly at 7.54%; monthly
interest and principal payments of $31,393 through
January 2006 with final payment of
$2,002,040 in February 2006
    
    $
    2,567
    
    
    $
    2,377
 The revenue bonds require the maintenance of certain financial statement
ratios, prohibit the payment of dividends and are collateralized by certain
fixed assets having a carrying value as of March 26, 2004 of $4,319,000. The
Company was in compliance with the financial statement ratios as of March 26,
2004. Scheduled maturities of bonds payable are as follows (in thousands): Fiscal Year
    
    Amount2005
    
    $
    2052006
    
    
    2,172$
    2,377
 The carrying value of the Companys bonds payable approximates their fair
value. 35




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Income taxes Income tax expense for fiscal years 2002, 2003 and 2004 is as follows: March 29,
    
    March 28,
    
    March 26,2002
    
    2003
    
    2004(in thousands)CurrentFederal
    
    $
    11,566
    
    
    $
    433
    
    
    $
    (1,544
    )State
    
    
    911
    
    
    
    420
    
    
    
    387Deferred
    
    
    (999
    )
    
    
    1,055
    
    
    
    (1,879
    )Total income tax expense (benefit)
    
    $
    11,478
    
    
    $
    1,908
    
    
    $
    (3,036
    )
 Significant components of deferred tax assets and liabilities are as follows: March 28,
    
    March 26,2003
    
    2004(in thousands)Deferred tax assetsWarranty reserves
    
    $
    196
    
    
    $
    141Accrued liabilities
    
    
    5,155
    
    
    
    4,919Inventory
    
    
    2,310
    
    
    
    2,699Unrecognized income
    
    
    532
    
    
    
    268Property and equipment
    
    
    2,875
    
    
    
    3,701Other
    
    
    2,617
    
    
    
    2,657Total deferred tax assets
    
    
    13,685
    
    
    
    14,385Deferred tax liabilitiesTax benefits purchased
    
    
    1,313
    
    
    
    685Other
    
    
    3,825
    
    
    
    3,348Total deferred tax liabilities
    
    
    5,138
    
    
    
    4,033Net deferred income tax assets
    
    $
    8,547
    
    
    $
    10,352
 Tax benefits purchased are investments in Safe Harbor lease agreements that
are carried net of tax benefits realized. The balance will be amortized over
the remaining term of the related lease. The effective income tax rate on pretax earnings differed from the U.S. federal
statutory rate for the following reasons: March 29,
    
    March 28,
    
    March 26,2002
    
    2003
    
    2004(in thousands)Tax at statutory rate
    
    $
    10,824
    
    
    $
    1,795
    
    
    $
    (3,169
    )Increases (decreases)State taxes  net of federal tax benefit
    
    
    592
    
    
    
    273
    
    
    
    26Tax exempt interest
    
    
    (110
    )
    
    
    (84
    )
    
    
    (77
    )Other
    
    
    172
    
    
    
    (76
    )
    
    
    184Income tax expense (benefit)
    
    $
    11,478
    
    
    $
    1,908
    
    
    $
    (3,036
    )Effective tax rate
    
    
    37.1
    %
    
    
    37.2
    %
    
    
    (33.5
    %)
 36




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Shareholders equity The Board of Directors may, without further action by the Companys
shareholders, from time to time, authorize the issuance of shares of preferred
stock in series and may, at the time of issuance, determine the powers, rights,
preferences and limitations, including the dividend rate, conversion rights,
voting rights, redemption price and liquidation preference, and the number of
shares to be included in any such series. Any preferred stock so issued may
rank senior to the common stock with respect to the payment of dividends or
amounts upon liquidation, dissolution or winding up, or both. In addition, any
such shares of preferred stock may have class or series voting rights. 11. Long-Term Incentive Plan Effective March 29, 1999, the Board of Directors approved the Fiscal Year 2000
Long-Term Incentive Plan (the Plan) whereby certain key associates received
awards of restricted common stock. The Companys Chairman and President/CEO do
not participate in the Plan. Shares awarded under the Plan are either
purchased by the Company in the open market or transferred from the Companys
treasury stock account. These restricted stock awards give the associate the
right to receive a specific number of shares of common stock contingent upon
remaining an associate of the Company for a specified period. Effective April
3, 2000, April 2, 2001 and April 1, 2002, the Board of Directors approved the
Fiscal Year 2001 Long-Term Incentive Plan (the 2001 Plan), the Fiscal Year
2002 Long-Term Incentive Plan (the 2002 Plan) and the Fiscal Year 2003
Long-Term Incentive Plan (the 2003 Plan), respectively. The 2001 Plan, 2002
Plan and the 2003 Plan have substantially the same terms as the Plan. The
adoption of the Fiscal Year 2004 Long-Term Incentive Plan was modified until
certain earnings levels are achieved. The unamortized cost of the common stock acquired by the Company for the
participants in the plans is reflected as Unearned Compensation in the
accompanying Consolidated Balance Sheets. The plans are administered by a
committee authorized by the Board of Directors. 12. Employee plan The Company sponsors an employee savings plan (the 401k Plan) that is
intended to provide participating employees with additional income upon
retirement. Employees may contribute between 1% and 18% of eligible
compensation to the 401k Plan. The Company matches 50% of the first 6%
deferred by employees. Employees are immediately eligible to participate and
employer contributions, which begin one year after employment, are vested at
the rate of 20% per year and are fully vested after five years of employment.
Contribution expense was $1,627,000, $1,631,000 and $1,123,000 in fiscal years
2002, 2003 and 2004, respectively. 13. Commitments and contingencies Future minimum lease payments for all noncancelable operating leases having a
remaining term in excess of one year at March 26, 2004, are as follows (in
thousands): Fiscal Year
    
    Amount2005
    
    $
    5,4002006
    
    
    3,2172007
    
    
    2,2842008
    
    
    2,0522009 and thereafter
    
    
    8,554$
    21,507
 Rent expense (net of sublease income) was $8,617,000, $8,124,000 and $8,451,000
for fiscal years 2002, 2003 and 2004, respectively. The Company is contingently liable under the terms of repurchase agreements
covering independent retailers floor plan financing. Under such agreements,
the Company agrees to repurchase homes at declining prices over the term of the
agreement, generally 12 to 18 months. At March 26, 2004, the Company estimates
that its potential obligations under all repurchase agreements were
approximately $11.0 million. However, it is managements 37




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) opinion that no material loss will occur from the repurchase agreements.
During fiscal years 2002, 2003 and 2004, net expenses incurred by the Company
under these repurchase agreements totaled $212,000, $69,000 and $6,000,
respectively. The Company is subject to various legal proceedings and claims that arise in
the ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company. 14. Other income During fiscal years 2002, 2003 and 2004, the Company recorded interest income
of $3,823,000, $1,700,000 and $826,000, respectively and other income (expense)
of $2,627,000, $(242,000) and $614,000, respectively. Other income consists
primarily of income earned on a real estate investment of $2,700,000 in fiscal
2002, $928,000 in fiscal 2003 and $457,000 in fiscal 2004, partially offset by
a $1,000,000 loss on short-term investments in fiscal 2003. 38




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. Business segment information The Company operates principally in two segments: (1) factory-built housing,
which includes manufactured housing, modular housing and retail operations and
(2) financial services, which includes finance and insurance. The following
table details net sales, income (loss) from operations, identifiable assets,
depreciation and amortization expense and capital expenditures by segment for
fiscal 2002, 2003 and 2004 (in thousands): Year EndedMarch 29,
    
    March 28,
    
    March 26,2002
    
    2003
    
    2004Net salesFactory-built housing
    
    $
    604,298
    
    
    $
    554,613
    
    
    $
    557,111Financial services
    
    
    23,082
    
    
    
    18,517
    
    
    
    21,354$
    627,380
    
    
    $
    573,130
    
    
    $
    578,465Income (loss) from operationsFactory-built housing
    
    $
    38,342
    
    
    $
    11,650
    
    
    $
    2,269Financial services
    
    
    10,844
    
    
    
    6,237
    
    
    
    7,767General corporate expenses
    
    
    (16,333
    )
    
    
    (10,956
    )
    
    
    (16,811
    )$
    32,853
    
    
    $
    6,931
    
    
    $
    (6,775
    )Interest expense
    
    $
    (8,377
    )
    
    $
    (6,676
    )
    
    $
    (5,566
    )Equity in earnings of limited partnership
    
    
    
    
    
    
    3,416
    
    
    
    1,848Other income
    
    
    6,450
    
    
    
    1,458
    
    
    
    1,440Income (loss) before income taxes
    
    $
    30,926
    
    
    $
    5,129
    
    
    $
    (9,053
    )Identifiable assetsFactory-built housing
    
    $
    291,438
    
    
    $
    287,947
    
    
    $
    256,209Financial services
    
    
    69,715
    
    
    
    86,993
    
    
    
    152,101Other
    
    
    112,118
    
    
    
    107,627
    
    
    
    113,512$
    473,271
    
    
    $
    482,567
    
    
    $
    521,822Depreciation and amortizationFactory-built housing
    
    $
    11,435
    
    
    $
    13,030
    
    
    $
    12,543Financial services
    
    
    137
    
    
    
    118
    
    
    
    966Other
    
    
    515
    
    
    
    650
    
    
    
    658$
    12,087
    
    
    $
    13,798
    
    
    $
    14,167Capital expendituresFactory-built housing
    
    $
    13,819
    
    
    $
    5,773
    
    
    $
    2,387Financial services
    
    
    138
    
    
    
    452
    
    
    
    165Other
    
    
    816
    
    
    
    182
    
    
    
    $
    14,773
    
    
    $
    6,407
    
    
    $
    2,552Net sales for financial services consists of:Insurance
    
    $
    13,465
    
    
    $
    11,840
    
    
    $
    13,145Finance
    
    
    9,617
    
    
    
    6,677
    
    
    
    8,209$
    23,082
    
    
    $
    18,517
    
    
    $
    21,354
 39




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Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 16. Accrued product warranty obligations The following table summarizes the changes in accrued product warranty
obligations during the last three fiscal years. A portion of warranty reserves
is classified as other long-term liabilities in the consolidated balance sheet. Accrued warrantyobligation(in thousands)Reserves at March 30, 2001
    
    $
    8,183Net warranty expense provided
    
    
    16,182Cash warranty payments
    
    
    (17,782
    )Reserves at March 29, 2002
    
    
    6,583Net warranty expense provided
    
    
    11,721Cash warranty payments
    
    
    (13,961
    )Reserves at March 28, 2003
    
    
    4,343Net warranty expense provided
    
    
    13,835Cash warranty payments
    
    
    (14,170
    )Reserves at March 26, 2004
    
    $
    4,008
 17. Quarterly financial data (unaudited) The following table sets forth certain unaudited quarterly financial
information for the fiscal years 2003 and 2004. First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Total(in thousands, except per share data)Fiscal Year Ended
March 28, 2003Net sales
    
    $
    138,459
    
    
    $
    149,612
    
    
    $
    148,974
    
    
    $
    136,085
    
    
    $
    573,130Gross profit
    
    
    39,539
    
    
    
    44,327
    
    
    
    42,920
    
    
    
    37,619
    
    
    
    164,405Income (loss) from operations
    
    
    (935
    )
    
    
    3,269
    
    
    
    4,758
    
    
    
    (161
    )
    
    
    6,931Net income (loss)
    
    
    (1,307
    )
    
    
    1,612
    
    
    
    2,733
    
    
    
    183
    
    
    
    3,221Earnings (loss) per share  basic and
diluted
    
    $
    (0.06
    )
    
    $
    0.07
    
    
    $
    0.12
    
    
    $
    0.01
    
    
    $
    0.14Fiscal Year Ended
March 26, 2004Net sales
    
    $
    155,899
    
    
    $
    148,547
    
    
    $
    144,215
    
    
    $
    129,804
    
    
    $
    578,465Gross profit
    
    
    40,377
    
    
    
    39,134
    
    
    
    36,628
    
    
    
    34,500
    
    
    
    150,639Income (loss) from operations
    
    
    82
    
    
    
    59
    
    
    
    (3,535
    )
    
    
    (3,381
    )
    
    
    (6,775
    )Net income (loss)
    
    
    812
    
    
    
    515
    
    
    
    (4,132
    )
    
    
    (3,212
    )
    
    
    (6,017
    )Earnings (loss) per share  basic and
diluted
    
    $
    0.04
    
    
    $
    0.02
    
    
    $
    (0.18
    )
    
    $
    (0.14
    )
    
    $
    (0.26
    )
 40




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 
 Item 9A. Controls and Procedures As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective to
cause material information required to be disclosed by us in the reports that
we file or submit under the Exchange Act to be recorded, processed, summarized
and reported within the time periods specified in the SEC rules and forms.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date we carried out our evaluation. 
 PART III. 
 Item 10. Directors and Executive Officers of the Registrant (a) Information with respect to our board of directors and executive
officers is incorporated by reference from our definitive proxy statement to be
filed with the SEC on or before June 10, 2004 in connection with our annual
meeting of shareholders to be held July 28, 2004. (b) Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to us pursuant to Rule 16a-3(e) promulgated under the Exchange Act
during our most recent fiscal year, other than our Chief Executive Officer who
filed a Form 4 seven days late and our Chief Financial Officer who filed a Form
4 one day late, no person who, at any time during the most recent fiscal year
was a director, officer, beneficial owner of more than 10% of any class of our
equity securities registered pursuant to Section 12 of the Exchange Act, or any
other person subject to Section 16 of the Exchange Act failed to file on a
timely basis, reports required by Section 16(a) of the Exchange Act during the
most recent fiscal year. 
 Item 11. Executive Compensation Information with respect to executive compensation is incorporated by
reference from our definitive proxy statement to be filed with the SEC on or
before June 10, 2004 in connection with our annual meeting of shareholders to
be held July 28, 2004. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters Information with respect to security ownership of certain beneficial
owners and management is incorporated by reference from our definitive proxy
statement to be filed with the SEC on or before June 10, 2004 in connection
with the annual meeting of shareholders to be held July 28, 2004. 
 Item 13. Certain Relationships and Related Transactions None. 
 Item 14. Principal Accountant Fees and Services Information with respect to principal accountant fees and services is
incorporated by reference from our definitive proxy statement to be filed with
the SEC on or before June 10, 2004 in connection with our annual meeting of
shareholders to be held July 28, 2004. 41




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##### Table of Contents



PART IV. 
 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)   (1) Financial Statements Our Consolidated Financial Statements for the year ended March 26, 2004
are included on pages 23 through 40 of this report.  (2)
    
    Financial Statement SchedulesNone(3)
    
    Index to Exhibits ExhibitNo.
    
    Description3.1
    
    
    Amended and Restated Articles of Incorporation (Incorporated by
reference to Exhibit 3.1 to the Registrants Registration
Statement on Form S-1, Registration No. 33-79164).3.2
    
    
    Articles of Amendment (Incorporated by reference to Exhibit 3.2 to
the Registrants Registration Statement on Form S-1, Registration
No. 33-79164).3.3
    
    
    Restated Bylaws (Incorporated by reference to Exhibit 3.3 to the
Registrants Registration Statement on Form S-1, Registration No.
33-79164).4.1
    
    
    Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 to the Registrants Registration Statement on Form
S-1, Registration No. 33-79164).10.1
    
    
    Associate Stock Purchase Plan (Incorporated by reference to
Exhibit 10.2 to the Registrants Registration Statement on Form
S-1, Registration No. 33-97676).10.2
    
    
    Form of Indemnification Agreement between the Company and each of
our directors and certain officers (Incorporated by reference to
Exhibit 10.4 to the Registrants Registration Statement on Form
S-1, Registration No. 33-79164).10.3
    
    
    Compensation Agreement between the Company and Lee Posey
(Incorporated by reference to Exhibit 10.7 to the Registrants
Registration Statement on Form S-1, Registration No. 33-79164).10.4
    
    
    Amended and Restated Amendment to Compensation Agreement between
the Company and Lee Posey (Incorporated by reference to Exhibit
10.6 to the Registrants Registration Statement on Form S-1,
Registration No. 33-97676).*21.1
    
    
    List of Subsidiaries.*23.1
    
    
    Consent of Ernst & Young LLP.24.1
    
    
    Power of Attorney (included on the signature page of the Report).*31.1
    
    
    Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended, by Larry H. Keener.*31.2
    
    
    Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended, by Kelly Tacke.*32.1
    
    
    Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002 by Larry H. Keener*32.2
    
    
    Certification pursuant to section 906 of the Sarbanes-Oxley Act of
2002 by Kelly Tacke.
   *
    
    Filed herewith  (b)
    
    None.(c)
    
    See Item 14(a)(3) above.(d)
    
    None. 42




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on our behalf by the undersigned, thereunto duly authorized on May 3, 2004. PALM HARBOR HOMES, INC./s/ Lee PoseyLee Posey, Chairman of the Board
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby constitute
and appoint Lee Posey and Kelly Tacke, and each of them, each with full power
to act without the other, his true and lawful attorneys-in-fact and agents,
each with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments to the annual report on Form 10-K for the year ended March 26, 2004
of Palm Harbor Homes, Inc., and to file the same, with any and all exhibits
thereto, and all other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite
and necessary to be done as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all of
each of said attorneys-in-fact and agents or any of them may lawfully do or
cause to be done by virtue thereof. Signatures
    
    Title
    
    Date/s/ Lee Posey
Lee Posey
    
    Chairman of the Board and Director
(Principal Executive Officer)
    
    May 3, 2004/s/ Larry H. Keener
Larry H. Keener
    
    Chief Executive Officer,
President and Director
    
    May 3, 2004/s/ Kelly Tacke
Kelly Tacke
    
    Vice President-Finance,
Chief Financial Officer and
Secretary (Principal Financial
and Accounting Officer)
    
    May 3, 2004/s/ William R. Thomas
William R. Thomas
    
    Director
    
    May 3, 2004/s/ Walter D. Rosenberg, Jr.
Walter D. Rosenberg, Jr.
    
    Director
    
    May 3, 2004/s/ Frederick R. Meyer
Frederick R. Meyer
    
    Director
    
    May 3, 2004/s/ John H. Wilson
John H. Wilson
    
    Director
    
    May 3, 2004/s/ A. Gary Shilling
A. Gary Shilling
    
    Director
    
    May 3, 2004/s/ Jerry D. Mallonee
Jerry D. Mallonee
    
    Director
    
    May 3, 2004
 43




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##### Table of Contents



INDEX TO EXHIBITS ExhibitsNo.
    
    Description3.1
    
    
    Amended and Restated Articles of Incorporation (Incorporated by
reference to Exhibit 3.1 to the Registrants Registration
Statement on Form S-1, Registration No. 33-79164).3.2
    
    
    Articles of Amendment (Incorporated by reference to Exhibit 3.2
to the Registrants Registration Statement on Form S-1,
Registration No. 33-79164).3.3
    
    
    Restated Bylaws (Incorporated by reference to Exhibit 3.3 to the
Registrants Registration Statement on Form S-1, Registration No.
33-79164).4.1
    
    
    Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 to the Registrants Registration Statement on Form
S-1, Registration No. 33-79164).10.1
    
    
    Associate Stock Purchase Plan (Incorporated by reference to
Exhibit 10.2 to the Registrants Registration Statement on Form
S-1, Registration No. 33-97676).10.2
    
    
    Form of Indemnification Agreement between Palm Harbor and each of
our directors and certain officers (Incorporated by reference to
Exhibit 10.4 to the Registrants Registration Statement on Form
S-1, Registration No. 33-79164).10.3
    
    
    Compensation Agreement between the Company and Lee Posey
(Incorporated by reference to Exhibit 10.7 to the Registrants
Registration Statement on Form S-1, Registration No. 33-79164).10.4
    
    
    Amended and Restated Amendment to Compensation Agreement between
the Company and Lee Posey (Incorporated by reference to Exhibit
10.6 to the Registrants Registration Statement on Form S-1,
Registration No. 33-97676).*21.1
    
    
    List of Subsidiaries.*23.1
    
    
    Consent of Ernst & Young LLP.24.1
    
    
    Power of Attorney (included on the signature page of the Report).*31.1
    
    
    Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act, as amended, by Larry H. Keener.*31.2
    
    
    Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act, as amended, by Kelly Tacke.*32.1
    
    
    Certification pursuant to section 906 of the Sarbanes-Oxley Act
of 2002 by Larry H. Keener*32.2
    
    
    Certification pursuant to section 906 of the Sarbanes-Oxley Act
of 2002 by Kelly Tacke.
   *
    
    Filed herewith