** **

**FORM 10-Q**

** **

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington DC 20549**

 

 
| **(Mark  One)****ý**                                                                                                                                                               |   | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                    |   |                                                                                               |
| **For  the quarterly period ended September 30, 2003.**                                                                                                                            |
|                                                                                                                                                                                    |   |                                                                                               |
| **or**                                                                                                                                                                                  |
|                                                                                                                                                                                    |
| **o**                                                                                                                                                                                   |   | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                    |   |                                                                                               |
| **For  the Transition Period  From            to            .** |
|                                                                                                                                                                                    |   |                                                                                               |
| **Commission File Number 0-5555**                                                                                                                                                       |

 

**LIBERTY HOMES, INC.**

(Exact name of registrantas specified in its charter)

 

| **Indiana**                                                |   | **35-1174256**                     |
|------------------------------------------------------------|--------|------------------------------------|
| (State of  Incorporation)                                  |   | (IRS Employer  Identification No.) |
|                                                       |   |                               |
| **PO Box  35, Goshen, Indiana**                            |   | **46527**                          |
| (Address of principal  executive offices)                  |   | (ZIP Code)                         |
|                                                       |   |                               |
| **574.533.0431**                                           |
| (Registrant’s telephone  number, including area code) |

 

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days                               Yesý  No o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).                    Yes o  No ý

 

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date.

 
| **Class**                              |   | **Shares of  Outstanding  at November 5, 2003** |
|----------------------------------------|--------|------------------------------------------------------|
|                                   |   |                                                 |
| Class A Common Stock,  $1.00 par value |   | 2,002,045                                            |
|                                   |   |                                                 |
| Class B Common Stock,  $1.00 par value |   | 1,652,422                                            |

 

 

----

 

###### **INDEX**

 
| Part I -  Consolidated Financial Information |                                                                                                                 |
|----------------------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                                         |                                                                                                                 |
| General                                      |                                                                                                                 |   |
|                                         |                                                                                                                 |   |
| Item 1.                                      | Consolidated  Financial Statements                                                                                   |   |
|                                         |                                                                                                                 |   |
|                                         | Consolidated Balance Sheet,  as of September 30, 2003   (Unaudited) and December 31, 2002             |   |
|                                         |                                                                                                                 |   |
|                                         | Consolidated Statement  of Income (Unaudited), for the  three  months ended September 30, 2003 and 2002    |   |
|                                         |                                                                                                                 |   |
|                                         | Consolidated Statement  of Income (Unaudited), for the  nine  months ended September 30, 2003 and 2002     |   |
|                                         |                                                                                                                 |   |
|                                         | Consolidated  Statement of Cash Flows (Unaudited), for   the nine months ended September 30, 2003 and 2002 |   |
|                                         |                                                                                                                 |   |
|                                         | Notes to  Consolidated Financial Statements (Unaudited)                                                              |   |
|                                         |                                                                                                                 |   |
| Item  2.                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          |   |
|                                         |                                                                                                                 |   |
| Item  3.                                     | Quantitative  and Qualitative Disclosures About Market Risk                                                          |   |
|                                         |                                                                                                                 |   |
| Item  4.                                     | Management’s  Report on Disclosure Controls and Procedures and Internal Control                                 |   |
|                                         |                                                                                                                 |   |
| Part II - Other  Information                 |
|                                         |                                                                                                                 |   |
| Item 6.                                      | Exhibits and  Reports on Form 8-K                                                                                    |   |
|                                         |                                                                                                                 |   |
|                                         | Signature and Certifications                                                                                         |   |

 

2

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**Part1.  CONSOLIDATED FINANCIAL INFORMATION**

 

**Item 1.  Consolidated Financial Statements**

 

**LIBERTY HOMES, INC.**

CONSOLIDATED BALANCE SHEET

as of September 30,2003 and December 31, 2002

 
|                           |   | **(Unaudited)**              |       |                        |   |
|--------------------------------|--------|------------------------------|------------|-----------------------------|--------|
|                           |   | **September 30,  2003** |       | **December 31,  2002** |   |
| **ASSETS**                     |   |                         |       |                        |   |
| Current assets:                |   |                         |       |                        |   |
| Cash and cash equivalents      |   | $                            | 3,498,000  |                        | $      | 4,308,000 |   |
| Short term investments         |   | 150,000                      |       | 300,000                     |   |
| Receivables                    |   | 7,624,000                    |       | 5,815,000                   |   |
| Inventories                    |   | 11,321,000                   |       | 10,644,000                  |   |
| Deferred tax asset             |   | 3,441,000                    |       | 3,441,000                   |   |
| Income taxes refundable        |   | —                       |       | 1,912,000                   |   |
| Prepayments and other          |   | 552,000                      |       | 2,148,000                   |   |
|                           |   |                         |       |                        |   |
| Total current assets           |   | 26,586,000                   |       | 28,568,000                  |   |
|                           |   |                         |       |                        |   |
| Property, plant and equipment: |   |                         |       |                        |   |
|                           |   |                         |       |                        |   |
| Land                           |   | 2,014,000                    |       | 2,014,000                   |   |
| Buildings and improvements     |   | 23,592,000                   |       | 23,580,000                  |   |
| Machinery and equipment        |   | 20,855,000                   |       | 20,735,000                  |   |
|                           |   |                         |       |                        |   |
|                           |   | 46,461,000                   |       | 46,329,000                  |   |
|                           |   |                         |       |                        |   |
| Less accumulated depreciation  |   | 27,575,000                   |       | 26,458,000                  |   |
|                           |   |                         |       |                        |   |
|                           |   | 18,886,000                   |       | 19,871,000                  |   |
|                           |   |                         |       |                        |   |
| Property held for sale         |   | 4,581,000                    |       | 4,581,000                   |   |
|                           |   |                         |       |                        |   |
| Total assets                   |   | $                            | 50,053,000 |                        | $      | 53,020,000 |   |

 

 
|                                                                                            |   | **(Unaudited)**              |       |                        |   |
|-------------------------------------------------------------------------------------------------|--------|------------------------------|------------|-----------------------------|--------|
|                                                                                            |   | **September 30,  2003** |       | **December 31,  2002** |   |
| **LIABILITIES**                                                                                 |   |                         |       |                        |   |
| Current liabilities:                                                                            |   |                         |       |                        |   |
| Accounts payable                                                                                |   | $                            | 3,217,000  |                        | $      | 1,779,000 |   |
| Floorplan notes payable                                                                         |   | 543,000                      |       | 895,000                     |   |
| Accrued compensation & payroll taxes                                                        |   | 1,416,000                    |       | 1,150,000                   |   |
| Other accrued liabilities                                                                       |   | 6,180,000                    |       | 6,439,000                   |   |
|                                                                                            |   |                         |       |                        |   |
| Total current liabilities                                                                       |   | 11,356,000                   |       | 10,263,000                  |   |
| Deferred income taxes                                                                           |   | 2,732,000                    |       | 2,732,000                   |   |
| Minority interest in consolidated subsidiaries                                                  |   | 961,000                      |       | 929,000                     |   |
| Contingent liabilities (see notes)                                                              |   | —                       |       | —                      |   |
|                                                                                            |   |                         |       |                        |   |
| **SHAREHOLDERS’ EQUITY**                                                                   |   |                         |       |                        |   |
| Capital Stock:                                                                                  |   |                         |       |                        |   |
| Class A, $1 par value                                                                           |   |                         |       |                        |   |
| Authorized-7,500,000 Shares Issued &  outstanding-2,002,000 in 2003 & 1,995,000 in 2002 |   | 2,002,000                    |       | 1,995,000                   |   |
| Class B, $1 par value                                                                           |   |                         |       |                        |   |
| Authorized-3,500,000 Shares Issued &  outstanding-1,652,000 in 2003 & 1,659,000 in 2002 |   | 1,652,000                    |       | 1,659,000                   |   |
|                                                                                            |   |                         |       |                        |   |
| Other capital                                                                                   |   | 83,000                       |       | 83,000                      |   |
|                                                                                            |   |                         |       |                        |   |
| Retained earnings                                                                               |   | 31,267,000                   |       | 35,359,000                  |   |
|                                                                                            |   |                         |       |                        |   |
|                                                                                            |   | 35,004,000                   |       | 39,096,000                  |   |
|                                                                                            |   |                         |       |                        |   |
| Total liabilities and shareholders’ equity                                                 |   | $                            | 50,053,000 |                        | $      | 53,020,000 |   |

 

The accompanying notesare a part of the consolidated financial statements.  

 

3

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LIBERTY HOMES, INC.

CONSOLIDATED STATEMENT OF INCOME

 

for the three monthsended September 30, 2003 and 2002

 

UNAUDITED

 
|                                                                  |   | **2003**   |       | **2002**   |   |
|-----------------------------------------------------------------------|--------|------------|------------|------------|--------|
|                                                                  |   |       |       |       |   |
| Net sales                                                             |   | $          | 23,854,000 |       | $      | 23,959,000 |   |
|                                                                  |   |       |       |       |   |
| Cost of sales                                                         |   | 20,841,000 |       | 21,223,000 |   |
|                                                                  |   |       |       |       |   |
| Gross profit                                                          |   | 3,013,000  |       | 2,736,000  |   |
|                                                                  |   |       |       |       |   |
| Selling, delivery, general and administrative  expenses               |   | 3,750,000  |       | 4,558,000  |   |
|                                                                  |   |       |       |       |   |
| Operating loss                                                        |   | (737,000   | )          | (1,822,000 | )      |
|                                                                  |   |       |       |       |   |
| Interest expense                                                      |   | (8,000     | )          | (38,000    | )      |
| Interest income and other loss                                        |   | (64,000    | )          | (123,000   | )      |
|                                                                  |   |       |       |       |   |
| Loss before minority  interest and income taxes                  |   | (809,000   | )          | (1,983,000 | )      |
|                                                                  |   |       |       |       |   |
| Minority interest                                                     |   | (12,000    | )          | 68,000     |   |
|                                                                  |   |       |       |       |   |
| Income tax benefit                                                    |   | —     |       | 674,000    |   |
|                                                                  |   |       |       |       |   |
| Net loss                                                              |   | $          | (821,000   | )          | $      | (1,241,000 | ) |
|                                                                  |   |       |       |       |   |
| Net loss per outstanding Common Share – basic and  fully diluted |   | $          | (.22       | )          | $      | (.33 | ) |
|                                                                  |   |       |       |       |   |
| Weighted average shares outstanding                                   |   | 3,654, 000 |       | 3,745,000  |   |
|                                                                  |   |       |       |       |   |
| Cash dividend per share:                                              |   |       |       |       |   |
|                                                                  |   |       |       |       |   |
| Class A Common Stock                                                  |   | $          | .07        |       | $      | .07 |   |
|                                                                  |   |       |       |       |   |
| Class B Common Stock                                                  |   | $          | .07        |       | $      | .07 |   |

 

The accompanying notesare a part of the consolidated financial statements.

 

4

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LIBERTY HOMES, INC.

CONSOLIDATED STATEMENT OF INCOME

 

for the nine months endedSeptember 30, 2003 and 2002

UNAUDITED

 
|                                                                       |   | **2003**   |       | **2002**   |       |
|----------------------------------------------------------------------------|--------|------------|------------|------------|------------|
|                                                                       |   |       |       |       |       |
| Net sales                                                                  |   | $          | 62,382,000 |       | $          | 70,526,000 |   |
|                                                                       |   |       |       |       |       |
| Cost of sales                                                              |   | 54,612,000 |       | 61,516,000 |       |
|                                                                       |   |       |       |       |       |
| Gross profit                                                               |   | 7,770,000  |       | 9,010,000  |       |
|                                                                       |   |       |       |       |       |
| Selling, delivery, general and administrative  expenses                    |   | 10,951,000 |       | 13,170,000 |       |
|                                                                       |   |       |       |       |       |
| Operating loss                                                             |   | (3,181,000 | )          | (4,160,000 | )          |
|                                                                       |   |       |       |       |       |
| Interest expense                                                           |   | (71,000    | )          | (130,000   | )          |
| Interest income and other (loss)                                           |   | (40,000    | )          | 7,000      |       |
|                                                                       |   |       |       |       |       |
| Loss before minority  interest and income taxes                       |   | (3,292,000 | )          | (4,283,000 | )          |
|                                                                       |   |       |       |       |       |
| Minority interest                                                          |   | (32,000    | )          | 143,000    |       |
|                                                                       |   |       |       |       |       |
| Income tax benefit                                                         |   | —     |       | 1,456,000  |       |
|                                                                       |   |       |       |       |       |
| Net loss                                                                   |   | (3,324,000 | )          | $          | (2,684,000 | ) |
|                                                                       |   |       |       |       |       |
| Net loss per outstanding  Common Share – basic and fully diluted |   | $          | .(91       | )          | $          | (.72 | ) |
|                                                                       |   |       |       |       |       |
| Weighted average shares outstanding                                        |   | 3,654,000  |       | 3,746,000  |       |
|                                                                       |   |       |       |       |       |
| Cash dividend per share:                                                   |   |       |       |       |       |
|                                                                       |   |       |       |       |       |
| Class A Common Stock                                                       |   | $          | .21        |       | $          | .21 |   |
|                                                                       |   |       |       |       |       |
| Class B Common Stock                                                       |   | $          | .21        |       | $          | .21 |   |

 

The accompanying notesare a part of the consolidated financial statements.

 

5

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LIBERTY HOMES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

for the nine months endedSeptember 30, 2003 and 2002

UNAUDITED

 
|                                                     |   | **2003**   |       | **2002**   |   |
|----------------------------------------------------------|--------|------------|------------|------------|--------|
| Cash flows provided by (used in) operating  activities:  |   |       |       |       |   |
| Net loss                                                 |   | $          | (3,324,000 | )          | $      | (2,684,000 | ) |
| Adjustment to reconcile net loss                         |   |       |       |       |   |
| Depreciation                                             |   | 1,351,000  |       | 1,546,000  |   |
| Minority interest in income (loss) of subsidiary         |   | 32,000     |       | (143,000   | )      |
| (Gain) loss on sale of fixed assets                      |   | 19,000     |       | (61,000    | )      |
|                                                     |   |       |       |       |   |
| Changes in assets and liabilities:                       |   |       |       |       |   |
| Receivables                                              |   | (1,809,000 | )          | 859,000    |   |
| Inventories                                              |   | (677,000   | )          | 293,000    |   |
| Prepayments and other                                    |   | 1,596,000  |       | 291,000    |   |
| Accounts payable                                         |   | 1,438,000  |       | 878,000    |   |
| Accrued liabilities                                      |   | 7,000      |       | 169,000    |   |
| Income taxes payable/receivable                          |   | 1,912,000  |       | (705,000   | )      |
|                                                     |   |       |       |       |   |
| Net cash provided by operating activities                |   | 545,000    |       | 443,000    |   |
|                                                     |   |       |       |       |   |
| Cash flows provided by (used in) investing  activities   |   |       |       |       |   |
| Additions to property, plant and equipment               |   | (393,000   | )          | (1,210,000 | )      |
| Redemption of short-term investment                      |   | 150,000    |       | —     |   |
| Proceeds from sale of fixed assets                       |   | 8,000      |       | 324,000    |   |
|                                                     |   |       |       |       |   |
| Net cash used in investing activities                    |   | (235,000   | )          | (886,000   | )      |
|                                                     |   |       |       |       |   |
| Cash flows provided by (used in) financing  activities - |   |       |       |       |   |
| Cash dividends paid                                      |   | (768,000   | )          | (780,000   | )      |
| Proceeds from notes payable                              |   | 5,336,000  |       | 780,000    |   |
| Payments of notes payable                                |   | (5,688,000 | )          | (2,084,000 | )      |
| Retirement of common stock                               |   | —     |       | (54,000    | )      |
|                                                     |   |       |       |       |   |
| Net cash used in financing activities                    |   | (1,120,000 | )          | (2,138,000 | )      |
|                                                     |   |       |       |       |   |
| Net decrease in cash and cash equivalents                |   | (810,000   | )          | (2,581,000 | )      |
|                                                     |   |       |       |       |   |
| Cash and cash equivalents at beginning of period         |   | 4,308,000  |       | 7,223,000  |   |
|                                                     |   |       |       |       |   |
| Cash and cash equivalents at end of period               |   | $          | 3,498,000  |       | $      | 4,642,000 |   |
|                                                     |   |       |       |       |   |
| Supplemental disclosures of cash flow information  cash  |   |       |       |       |   |
| cash received for income taxes                           |   | $          | 1,912,000  |       | $      | 750,000 |   |
| cash paid for interest expense                           |   | 71,000     |       | 130,000    |   |

 

The accompanying notesare a part of the consolidated financial statements.

 

6

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**(UNAUDITED)**

 

GENERAL

The consolidatedfinancial statements and footnotes thereto have been prepared using accountingprinciples generally accepted in the United States of America.  Such principles have been applied on a basisconsistent with 2002.  The results ofoperations for the interim period presented are not necessarily indicative ofresults to be expected for the year. The information furnished herein reflects all adjustments (consisting ofnormal recurring adjustments) which, in the opinion of management, arenecessary for a fair presentation of the results for the interim periods.

 

PRINCIPLES OFCONSOLIDATION

The consolidatedfinancial statements include the accounts of the Company and all its whollyowned and majority owned subsidiaries. Upon consolidation, all inter-Company accounts, transactions and profitshave been eliminated.

 

SHORT TERM INVESTMENTS

Short-term investmentsconsist primarily of certificates of deposits with original maturities greaterthan 90 days.

 

INVENTORIES

Inventories are stated atthe lower of cost or market, with cost determined on a first-in, first-outbasis.  Inventories atSeptember 30, 2003 consist of:

 

| Raw Material     |   | $         | 5,839,000  |   |
|------------------|--------|-----------|------------|--------|
| Work in Progress |   | 1,626,000 |       |
| Finished goods   |   | 3,856,000 |       |
|             |   | $         | 11,321,000 |   |

 

PROPERTY HELD FOR SALE

The Company currently hasfor sale three of its former production facilities, one each in Ocala, Florida,Dorchester, Wisconsin and Tuscumbia, Alabama. The Wisconsin and Alabama facilities ceased operation in 2000.  Production from the Dorchester, Wisconsinplant was consolidated into the Company’s other Dorchester plant, while theTuscumbia business was moved 50 miles to the Hamilton, Alabama plant.  At the end of 2002, production ceased at theFlorida plant.  The Company now servesthis market area from its other facilities. These closings were done as part of the Company’s response to thecurrent industry downturn.

 

Each facility includesland, land improvements and buildings. Appraisal values and asking price for each of these properties exceedsthe net book value of each.  All threefacilities can fit a wide variety of uses. The Company anticipates selling all of these properties for amounts thatexceed their net book value plus disposal costs.  Accordingly, the statements reflect the aggregate net book valueof $4,581,000 for all these properties and no adjustments for impairment havebeen made.

 

7

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NOTES PAYABLE

 

At September 30,2003, the Company had the following notes payable:

 

 

| Revolving credit line secured by subsidiaries’  retail inventory bearing interest at 1/2% over prime rate with total approved  credit of $1,200,000 |   | 543,000 |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|---------|
| Revolving credit line of $5,000,000 secured by  certain real property bearing interest at 1/2% under prime                                               |   | -0-     |    |
|                                                                                                                                                     |   | $       | 543,000 |   |
|                                                                                                                                                          |        |         |         |  |

 

CONTINGENT LIABILITIES

Repurchase Obligations

The Company iscontingently liable under terms of repurchase agreements with various financialinstitutions.  These agreements providefor the repurchase of its homes sold to dealers under floor plan financingarrangements upon dealer default.  Therisk of loss under these agreements is spread over many dealers and is furtherreduced by the resale value of the homes. The Company has, as of September 30, 2003, provided for losses onhomes for which it has received or expects notification of repurchase.  Any significant change could place unplanneddemands on the Company.

 

Other Contingencies

The Company is party tovarious legal proceedings from the normal course of operations.  The Company has provided for anticipatedlosses resulting from the litigation. In management’s opinion, the Company has adequate legal defenses anddoes not believe these suits will materially affect the Company’s operations orfinancial position.

 

EARNINGS PER SHARE

Basic and dilutedearnings per share are computed based on weighted average Class A and Class Bshares outstanding.  There are nooptions or warrants outstanding to create a dilutive effect.

 

REVENUE RECOGNITION

Revenue is recognizedwhen title to the home is transferred upon shipment.

 

NATURE OF BUSINESS, RISKSAND UNCERTAINTIES

The Company designs,manufactures and sells at wholesale a broad line of single and multi-section manufacturedhomes and multi-section modular homes to numerous independent dealers inthe United States.  The Companyconsiders itself to be in the industry segment of manufacturing residential homesas other operations are immaterial.

 

There are many risks anduncertainties in the industry segment, general nature of business and the worldsocioeconomic climate that affect the Company. The list included herein is not to be considered complete, however, includedamong them are the following.

 

•                  changes in the availability of retail(consumer) and wholesale (dealer) financing and the volatility of the interestrates thereon

•                  the stability of the dealer network

•                  the level of inventory of new andrepossessed homes

•                  inventory repurchase contingencies

•                  the availability and retention of acompetent workforce

•                  availability and price of rawmaterials

 

8

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•                  unanticipated results in pendinglegal proceedings

•                  regulatory constraints

•                  world and economic events that affectconsumer confidence

 

Further insight into someof these items can be found in the discussion of the  “Outlook and Risk Factors” section of this 10Q in Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.

 

USE OF ESTIMATES

The process of preparingfinancial statements in conformity with accounting principles generallyaccepted in the United States requires the use of estimates and assumptionsregarding certain assets, liabilities, revenues and expenses.  Such estimates primarily relate to unsettledtransactions and events as of the date of the financial statements.  Accordingly, upon settlement, actual amountsmay differ from estimated amounts.  Themost notable assumptions included in the financial statements involve productwarranty costs, potential repurchase obligations on dealer floorplan financingarrangements, lawsuits, deferred taxes and property held for sale.

 

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

 

RESULTS OF OPERATIONS

Our net sales during thethird quarter of 2003 were $23,854,000, a decrease of $105,000 or less than onepercent from net sales of $23,959,000 during the third quarter of 2002.  The percentage decline of unit sales was muchhigher with home shipments totaling 22% less in 2003 than 2002. The 2003shipment totals exclude sales from our Ocala Florida production facility, whichceased production at the end of 2002. Excluding those units from the comparison shows that the remaining homevolume decreased 16%.

 

During the most recentquarter, our average sales price per home was considerably higher than duringthe third quarter of 2002.  Some priceincreases were made in response to higher raw material costs.  However, the primary cause of a higheraverage sales price was product mix change. The number of single-section manufactured homes shipped in thethird quarter of 2003 was down from the 2002 quarter due to significantly lowerpurchases from one of our community development customers.  Our multi-section manufactured homeshipments did not fall nearly as much while our modular home sales continued togrow.  The values of our modular andmulti-section manufactured homes are higher thansingle-section homes.  Therefore,even though the unit volume fell, total revenue declined by only $105,000.

 

Comparatively, shippingstatistics reported by the Institute of Building Technology and Safety showthat total US shipments of manufactured homes fell 20% from the third quarterof 2002 to the third quarter of 2003. Current national modular housing statistics are unavailable.

 

Raw material costsescalated in the third quarter of 2003. Insulation, steel, lumber and lumber products, especially OrientedStrand Board, were considerably higher at that time as compared to thebeginning of 2003 and the third quarter of 2002.  Due to competitive industry conditions, we were unable toincrease our selling prices enough to fully offset these cost increases. At thesame time, continuing our cost control measures resulted in a 9% reduction ofthird quarter 2003 fixed costs compared to the same period of 2002.  Our gross profit rose by $277,000 in acomparison of the third quarter 2003 to 2002. Gross profit was $3,013,000 or 13% of net sales in 2003 and $2,736,000or 11% of 2002 net sales.

 

9

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Selling, delivery,general and administrative expenses were $3,750,000 during the third quarter of2003 while totaling $4,558,000 during the same quarter of 2002.  Our delivery costs were impacted by lowervolume and fell by $100,000 while cost reduction programs in place for selling,general and administrative expenses helped cut these costs by $708,000.

 

Our loss before minorityinterest and income taxes was $809,000 in the third quarter of 2003.  This result is a $1,174,000 improvement overthe loss of $1,983,000 during the corresponding quarter of 2002.

 

Due to the full usage oftax loss carryback benefits in prior periods, no income tax benefit wasattributed to the third quarter 2003 loss. For the comparable 2002 quarter, a tax benefit of $674,000 wasrecognized.

 

Net loss for the thirdquarter 2003 was $821,000 or $420,000 lower than the third quarter net loss of$1,241,000 in 2002.  The basic and fullydiluted loss per share was $.22 for 2003 and $.33 for 2002.

 

LIQUIDITY AND CAPITALRESOURCES

Liquidity and capitalresources dropped from our position at December 31, 2002.  Cash, cash equivalents and short terminvestments as of September 30, 2003 and December 31, 2002 were$3,648,000 and $4,608,000, respectively. Working capital as of September 30, 2003 and December 31, 2002was $15,963,000 and $18,305,000, respectively. The current ratio was 2.3 to 1 and 2.8 to 1 at September 30, 2003and December 31, 2002, respectively.

 

The Company currently hasa $5,000,000 operating line of credit on which no balances were borrowed atSeptember 30, 2003.  This line issecured by a portion of the Company’s real property. This credit arrangement isdue for renewal on June 30, 2004.

 

Additionally, held forsale are three production facilities which have been closed as part of our costreduction program.  These propertieshave an aggregate net book value of $4,581,000 and we believe they can be soldfor an aggregate amount in excess of this value.

 

We believe that cash flowfrom operations, cash reserves and credit arrangements currently in place willbe sufficient to meet the Company’s requirements in the coming year.  We have taken into consideration the currentconditions in which we operate and recognize that any additional downturn inthe industry could affect the Company and cause us to seek additional lines ofcredit.

 

OUTLOOK AND RISK FACTORS

The dynamics thatpropelled the manufacturing component of our industry into its currentcondition will continue to affect near term performance.  These factors are not limited to thefollowing, but include:

 

•                  changes in the availability of retail(consumer) and wholesale (dealer) financing and the volatility of the interestrates thereon

•                  the stability of the dealer network

•                  the level of inventory of new andrepossessed homes

•                  inventory repurchase contingencies

•                  the availability and retention of acompetent workforce

•                  availability and price of rawmaterials

•                  unanticipated results in pendinglegal proceedings

•                  regulatory constraints

 

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•                  world and economic events that affectconsumer confidence

 

Our Company is not immuneto the forces in the industry and, therefore, we are impacted by the same riskfactors.  Since we produce only todealers’ orders and sales backlogs are traditionally short, our order activityis indicative of the day to day retail sales activity of our products.  Any changes affecting retail customerdemand, such as cost, unemployment and other factors previously mentioned, mayhave an immediate effect on our operations.

 

The climate for retaillending will continue to have an impact on the sale of manufactured homes.Recent restrictions in underwriting policies by both the Federal NationalMortgage Association (Fannie Mae) and the Federal Home Loan ManagementCorporation (Freddie Mac) have added to an already tight credit condition.  A number of lenders have exited the industryin the last few years and those that remain have previously increased theirunderwriting standards.  The actions ofFannie Mae and Freddie Mac will further affect the industry.  Continued constriction of credit will keepmany potential homebuyers out of the marketplace for our manufactured homes.

 

Modular housing financingdoes not meet the same conditions. Retail lenders are less restrictive in this area and the restrictionsimposed by Fannie Mae and Freddie Mac on manufactured housing do not apply tomodular housing.  Such conditions havebenefited the Company’s modular housing business in the past.  Our outlook is for continued growth in thisarea.

 

Previously, lessrestrictive underwriting standards created a high default rate on loansresulting in numerous repossessions.  Webelieve the current rate of repossessions and the supply of these unsold homesis slightly less than in prior years. However, they continue to pose a challenge to new home sales.

 

It is a common practicefor manufactured housing producers to participate in dealer financing programswhich require the manufacturer to repurchase homes which remain unsold and indealer inventory within a certain time period following delivery to the dealer,if the dealer defaults on its financing obligations.  When initiated, this repurchase obligation brings homes back intothe wholesale market and may result in some discounting as the units areresold.  At times in the past, theindustry has had a significant level of these repurchased homes that competedwith future orders to factories for new homes. Such conditions could arise again and affect our ability to make newhome sales.

 

Our Company’s ownrepurchase obligations were significant in 2000, the beginning of this currentdownturn.  Since then, our dealerturnover has abated significantly. While it is difficult for us to predict the potential for are-occurrence of such a high level, if it should, existing and standby capitalresources will be heavily utilized while our other resources will be divertedaway from our business of producing and selling new homes.

 

The impact of repurchaseobligations in the distribution system for our modular homes may be somewhatdifferent.  While we sell some of ourmodular homes to traditional manufactured home retailers, a large percentage ofmodular homes are sold to builder developers who do not typically stocknumerous homes for display. Consequently, homes sold to such builder developers are not subject torepurchase as described above.  As themodular portion of our business grows, the contingent liability for repurchaseof homes should proportionately shrink, thereby lessening potential demand forthe Company’s resources.

 

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CRITICAL ACCOUNTINGPOLICIES

The Company’s AnnualReport on Form 10-K for the period ended December 31, 2002, under theheading “Critical Accounting Policies and Estimates,” provides a list ofaccounting policies that are integral components to the portrayal of financialcondition and results of operations of the Company. These items are warranty,repurchase obligations, lawsuits, deferred taxes and property held forsale.  Since that report, except forchanges in the valuation of tax benefits, we have not changed the use ofestimates and judgements in the application of Generally Accepted AccountingPolicies used in the United States.  Forthe valuation of tax benefits, we have placed no valuation on federal and statetax benefits resulting from the Company’s net operating losses occurring in2003.

 

FORWARD LOOKING STATEMENTS

The discussion abovecontains forward looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements include statements we make regarding industry andcompany outlooks and risk factors.  Wemay make other forward looking statements orally or in writing from time totime.  All such forward lookingstatements are not guaranties of future events or performance and involve risksand uncertainties.  Actual results maydiffer materially from those in our forward looking statements as the result ofa number of material factors.  Thesefactors include without limitation:

 

•                  changes in the availability of retail(consumer) and wholesale (dealer) financing and the volatility of the interestrates thereon

•                  the stability of the dealer network

•                  the level of inventory of new andrepossessed homes

•                  inventory repurchase contingencies

•                  the availability and retention of acompetent workforce

•                  availability and price of rawmaterials

•                  unanticipated results in pending legalproceedings

•                  regulatory constraints

•                  world and economic events that affectconsumer confidence

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

We currently have a smallamount of borrowing on our retail centers’ floorplan line of credit, and havemade infrequent use of our general line of credit.  To the limited extent that we do borrow, we are exposed tochanges in interest rates.  We do notuse interest rate derivative instruments to manage exposure to interest ratechanges.  Additionally, we do not investin securities or funds or any other type of intangible trading security that isexposed to market risk.  We do not enterinto any contractual obligations whose final settlement can be affected byinterest rate volatility, foreign currency rate fluctuations or commodity pricechanges.

 

Item 4. Management’s Report on Disclosure Controls and Procedures and InternalControl. 

 

(a)                                  TheChief Executive Officer and the Chief Financial Officer of the Company haveevaluated the effectiveness of the design and operation of the Company’s systemof disclosure controls and procedures (as defined in Rules 13a-14(c) and15d-14(c) under the Exchange Act) as of a date within 90 days prior to thefiling of this Form 10-Q.  As a resultof that evaluation, they have concluded that the Company’s disclosure controlsand procedures are effective to ensure that information required to bedisclosed in the Company’s reports filed or submitted under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

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(b)                                 Therehave been no significant changes in the Company’s system of internal controlsor in other factors that could significantly affect internal controlssubsequent to the date of their evaluation. There were no discoveries of any significant deficiencies or materialweaknesses in such controls that would require the Company to take correctiveactions.

 

##### **PARTII – OTHER INFORMATION**

##### ** **

Item 6. Exhibits and Reports on Form 8-K

 

Exhibit 31.1 –Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of2002

Exhibit 31.2 –Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of2002

Exhibit 32.1 –Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

No reports on Form 8-Kfor July, August or September, 2003 have been filed.

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | LIBERTY HOMES, INC.                                                                                                                                              |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | Registrant                                                                                                                                                       |
|   |                                                                                                                                                             |
|   |                                                                                                                                                             |
|   |  BY:  /s/ MARC A. DOSMANN                                                                                                                              |
|   |                         Marc  A. Dosmann |
|   |  Vice President –  Chief Financial Officer                                                                                                             |
|   |  (Principal  Financial and Accounting Officer)                                                                                                              |
|   |                                                                                                                                                             |
| Dated  | November 14, 2003                                                                                                                                           |   |   |
|        |                                                                                                                                                                  |  |  |

 

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