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SECURITIES AND EXCHANGE COMMISSION  FORM 10-K/A (Amendment No. 1)
  FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934(Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 26, 2004
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto
 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 þ 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 þ 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  PART IIItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 8. Financial Statements and Supplementary DataConsolidated Balance SheetsConsolidated Balance SheetsConsolidated Statements of OperationConsolidated Statements of Shareholders EquityConsolidated Statements of Cash FlowsSIGNATURESINDEX TO EXHIBITSConsent of Ernst & Young LLPCertification Pursuant to Rule 13a-14(a)/15d-14(a)Certification Pursuant to Rule 13a-14(a)/15d-14(a) EXPLANATION OF AMENDMENT Palm Harbor Homes, Inc. is filing this form 10-K/A as Amendment No. 1 to its
Annual Report on Form 10-K for the year ended March 26, 2004 that was filed
with the Securities and Exchange Commission on May 3, 2004 for the purpose of
re-filing Item 7 Managements Discussion and Analysis of Financial Condition
and Results of Operations and Item 8 Financial Statements and Supplementary
Data. See Resolution of Securities and Exchange Commission SEC Staff views
on SFAS No. 95 in Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 1 to the consolidated financial
statements included in Item 8 Financial Statements and Supplementary Data. 1




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PART II 
 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. 2




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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 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 3




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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. 4




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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 $26.2 million
was used in operating activities primarily for originating loans at
CountryPlace, increased accounts payable and decreased trade receivables. The
amount of loans originated at CountryPlace increased due to a full year of
originations in fiscal 2004 versus less than half a year of originations in
fiscal 2003. 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 provided by investing activities primarily consisted of
sales of investments of $12.2 million offset by purchases of investments of
$8.3 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. 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 the amended financial requirements under the $80.0
million facility. However, we do not expect to be in compliance with amended
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. We were not in compliance with the covenants under the $10.0
million facility, specifically 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 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 5




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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 onits 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. 6




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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. 7




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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. 8




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Resolution of Securities and Exchange Commission SEC Staff views on SFAS No.
95 We were recently notified by members of the SEC Staff that the SEC Staffs
view on the Consolidated Statement of Cash Flows had now been confirmed by
Staff Members of the Office of the Chief Accountant of the SEC and we should
now restate the Consolidated Statement of Cash Flows to conform with the SEC
views. Accordingly, the Consolidated Statement of Cash Flows has been restated
to classify the origination and collection of long-term loans, which are held
for investment purposes, in connection with customer purchases of products or
services from us as operating activities rather than investing activities. As
previously disclosed in our Consolidated Financial Statements in the Form 10-K,
the restatement of the Consolidated Statement of Cash Flows had the following
effect: Year Ended
    
    Year EndedMarch 28, 2003
    
    March 26, 2004As Presented
    
    Restated
    
    As Presented
    
    RestatedNet cash provided by (used in)operating activities:
    
    $
    48,022
    
    
    $
    16,812
    
    
    $
    40,543
    
    
    ($
    26,231
    )Net cash provided by (used in)investing activities:
    
    ($
    65,819
    )
    
    ($
    34,609
    )
    
    ($
    63,598
    )
    
    $
    3,176
 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 80%-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 9




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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 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. 10




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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. 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; 11




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##### Table of Contents




    
    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 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. 12




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm 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 the standards of the Public Company
Accounting Oversight Board (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 U.S.
generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company
restated its consolidated statement of cash flows for the fiscal years ended
March 26, 2004 and March 28, 2003. Dallas, Texas
May 1, 2004,
  except for the last paragraph of Note 1 and Note 18 -
Subsequent Event,  both of which the date is June 28, 2004
    
    Ernst & Young LLP
 13




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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
 14




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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. 15




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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. 16




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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. 17




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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
    
    2004(Restated)
    
    (Restated)Operating 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
    
    
    
    17,580Loans originated for investment
    
    
    
    
    
    
    (32,859
    )
    
    
    (77,090
    )Principal payments on loans originated
    
    
    
    
    
    
    1,649
    
    
    
    10,316Inventories
    
    
    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 (used in) operations
    
    
    32,658
    
    
    
    15,484
    
    
    
    (26,231
    )Loans originated for resale
    
    
    (137,880
    )
    
    
    (63,670
    )
    
    
    Sale of loans
    
    
    139,711
    
    
    
    64,998
    
    
    
    Net cash provided by (used in) operating activities
    
    
    34,489
    
    
    
    16,812
    
    
    
    (26,231
    )Investing ActivitiesBusiness acquired, net of cash acquired
    
    
    
    
    
    
    (31,789
    )
    
    
    Investment in limited partnership
    
    
    
    
    
    
    (3,000
    )
    
    
    Distributions from investment in limited partnership
    
    
    
    
    
    
    1,525
    
    
    
    1,850Purchases 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 provided by (used in) investing activities
    
    
    (19,627
    )
    
    
    (34,609
    )
    
    
    3,176Financing 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. 18




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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 19




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) in gains, respectively, related to loan contracts sold. The Company had $0.8
million in unrealized gains for the 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 20




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) undiscounted cash flows. The Company has not recorded any impairment charges
in fiscal 2002, 2003 or 2004. 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. 21




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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. Resolution of Securities and Exchange Commission SEC Staff views on SFAS No.
95 The Company was recently notified by members of the SEC Staff that the SEC
Staffs view on the Consolidated Statement of Cash Flows had now been confirmed
by Staff Members of the Office of the Chief Accountant of the SEC and the
Company should now restate the Consolidated Statement of Cash Flows to conform
with the SEC views. Accordingly, the Consolidated Statement of Cash Flows has
been restated to classify 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 as operating activities rather than
investing activities. As previously disclosed in the Companys Consolidated
Financial Statements in the Form 10-K, the restatement of the Consolidated
Statement of Cash Flows had the following effect: Year Ended
    
    Year EndedMarch 28, 2003
    
    March 26, 2004As Presented
    
    Restated
    
    As Presented
    
    RestatedNet cash provided by (used in)
operating activities:
    
    $
    48,022
    
    
    $
    16,812
    
    
    $
    40,543
    
    
    ($
    26,231
    )Net cash provided by (used in)
investing activities:
    
    ($
    65,819
    )
    
    ($
    34,609
    )
    
    ($
    63,598
    )
    
    $
    3,176
  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
 22




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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. 23




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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 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 the 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 had 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 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 24




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##### Table of Contents



Palm Harbor Homes, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 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 to of these loan originations. 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. 25




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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
    %)
 26




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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 27




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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. 28




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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
 29




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##### Table of Contents



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
    )
 18. Subsequent Event On May 5, 2004, the Company
issued $65,000,000 aggregate principal amount of 3.25%
Convertible Senior Notes due 2024 (the 3.25% Notes) in a private, unregistered offering. Interest on the 3.25% Notes is payable semi-annually in May and November.
Within 120 days from the date of issue, the Company intends, for the benefit of the 3.25% Note holders, to file a shelf registration statement covering resales
of the 3.25% Notes and the shares of the Companys common stock issuable upon the conversion of the 3.25% Notes. The 3.25%
Notes are senior, unsecured obligations and rank equal in right of
payment to all of Palm Harbors existing and future unsecured and senior indebtedness. Each $1,000 in principal amount of the 3.25% Notes is convertible, at the option
of the holder, at a conversion price of $25.92, or 38.5803 shares of
Palm Harbors common stock. On June 8, 2004, the initial purchaser of the 3.25% Notes exercised its option to purchase an additional $10,000,000 aggregate principal amount of the notes. 30




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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. 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
 31




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##### Table of Contents



INDEX TO EXHIBITS ExhibitsNo.
    
    Description23.1
    
    Consent of Ernst & Young LLP,
Independent Registered Public Accounting Firm.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