** **

**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 June 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 FileNumber 0-5555**

 

**LIBERTY HOMES, INC.**

(Exact name of registrant as 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 mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days                                                                                                                                                                                                                                                        Yes  ý   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 of sharesoutstanding of each of the registrant’s classes of common stock, as of thelatest practicable date.

 

| **Class**                              |   | **Shares of Outstanding  at August 7, 2003** |
|----------------------------------------|--------|----------------------------------------------|
|                                   |   |                                         |
| Class A  Common Stock, $1.00 par value |   | 1,998,945                                    |
|                                   |   |                                         |
| Class B  Common Stock, $1.00 par value |   | 1,655,522                                    |

 

 

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**INDEX**

 
| Part I – Consolidated Financial Information |
|--------------------------------------------------|
|                                             |
| General                                          |   |
| Item 1.                                          | Consolidated Financial Statements |
|                                             | Consolidated Balance Sheet, as of June 30, 2003 (Unaudited) and  December 31, 2002 |
|                                             |   |
|                                             | Consolidated Statement of Income  (Unaudited), for the three months ended June 30, 2003 and 2002 |
|                                             |   |
|                                             | Consolidated Statement of Income  (Unaudited), for the six months ended June 30, 2003 and 2002 |
|                                             |   |
|                                             | Consolidated Statement of Cash Flows  (Unaudited), for the six months ended June 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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**Part 1. CONSOLIDATED FINANCIAL INFORMATION**

**Item 1. Consolidated Financial Statements**

** **

**LIBERTYHOMES, INC.**

CONSOLIDATED BALANCE SHEET

as of June 30, 2003 and December 31, 2002

 
|                                                                                            |   | **(Unaudited)**    |       |                    |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|--------|
|                                                                                            |   | **June 30,  2003** |       | **December  31,  2002** |   |
| **ASSETS**                                                                                      |   |               |       |                    |   |
| Current assets:                                                                                 |   |               |       |                    |   |
| Cash and cash equivalents                                                                       |   | $                  | 3,679,000  |                    | $      | 4,308,000 |   |
| Short term investments                                                                          |   | 200,000            |       | 300,000                 |   |
| Receivables                                                                                     |   | 6,670,000          |       | 5,815,000               |   |
| Inventories                                                                                     |   | 11,076,000         |       | 10,644,000              |   |
| Deferred tax asset                                                                              |   | 3,441,000          |       | 3,441,000               |   |
| Income taxes refundable                                                                         |   | —             |       | 1,912,000               |   |
| Prepayments and other                                                                           |   | 970,000            |       | 2,148,000               |   |
|                                                                                            |   |               |       |                    |   |
| Total current assets                                                                            |   | 26,036,000         |       | 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                                                                         |   | 20,790,000         |       | 20,735,000              |   |
|                                                                                            |   |               |       |                    |   |
|                                                                                            |   | 46,396,000         |       | 46,329,000              |   |
|                                                                                            |   |               |       |                    |   |
| Less accumulated depreciation                                                                   |   | 27,178,000         |       | 26,458,000              |   |
|                                                                                            |   |               |       |                    |   |
|                                                                                            |   | 19,218,000         |       | 19,871,000              |   |
|                                                                                            |   |               |       |                    |   |
| Property held for sale                                                                          |   | 4,581,000          |       | 4,581,000               |   |
|                                                                                            |   |               |       |                    |   |
| Total assets                                                                                    |   | $                  | 49,835,000 |                    | $      | 53,020,000 |   |
|                                                                                            |   |               |       |                    |   |
| **LIABILITIES**                                                                                 |   |               |       |                    |   |
| Current liabilities:                                                                            |   |               |       |                    |   |
| Accounts payable                                                                                |   | $                  | 2,720,000  |                    | $      | 1,779,000 |   |
| Notes payable                                                                                   |   | 406,000            |       | 895,000                 |   |
| Accrued compensation & payroll taxes                                                        |   | 1,329,000          |       | 1,150,000               |   |
| Other accrued liabilities                                                                       |   | 5,618,000          |       | 6,439,000               |   |
|                                                                                            |   |               |       |                    |   |
| Total current liabilities                                                                       |   | 10,073,000         |       | 10,263,000              |   |
| Deferred income taxes                                                                           |   | 2,732,000          |       | 2,732,000               |   |
| Minority interest in consolidated  subsidiaries                                                 |   | 949,000            |       | 929,000                 |   |
| Contingent liabilities (see notes)                                                              |   | —             |       | —                  |   |
|                                                                                            |   |               |       |                    |   |
| **SHAREHOLDERS’ EQUITY**                                                                   |   |               |       |                    |   |
| Capital Stock:                                                                                  |   |               |       |                    |   |
| Class A, $1 par value                                                                           |   |               |       |                    |   |
| Authorized-7,500,000 Shares Issued &  outstanding-1,999,000 in 2003 & 1,995,000 in 2002 |   | 1,999,000          |       | 1,995,000               |   |
| Class B, $1 par value                                                                           |   |               |       |                    |   |
| Authorized-3,500,000 Shares Issued &  outstanding-1,655,000 in 2003 & 1,659,000 in 2002 |   | 1,655,000          |       | 1,659,000               |   |
|                                                                                            |   |               |       |                    |   |
| Other capital                                                                                   |   | 83,000             |       | 83,000                  |   |
|                                                                                            |   |               |       |                    |   |
| Retained earnings                                                                               |   | 32,344,000         |       | 35,359,000              |   |
|                                                                                            |   |               |       |                    |   |
|                                                                                            |   | 36,081,000         |       | 39,096,000              |   |
|                                                                                            |   |               |       |                    |   |
| Total liabilities and shareholders’ equity                                                 |   | $                  | 49,835,000 |                    | $      | 53,020,000 |   |

 

The accompanying notes are apart of the consolidated financial statements.

 

3

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LIBERTY HOMES, INC.

 

CONSOLIDATEDSTATEMENT OF INCOME

 

for the three months ended June 30, 2003 and2002

 

UNAUDITED

 
|                                                                  |   | **2003**   |       | **2002**   |   |
|-----------------------------------------------------------------------|--------|------------|------------|------------|--------|
|                                                                  |   |       |       |       |   |
| Net sales                                                             |   | $          | 21,374,000 |       | $      | 24,668,000 |   |
|                                                                  |   |       |       |       |   |
| Cost of sales                                                         |   | 18,214,000 |       | 20,972,000 |   |
|                                                                  |   |       |       |       |   |
| Gross profit                                                          |   | 3,160,000  |       | 3,696,000  |   |
|                                                                  |   |       |       |       |   |
| Selling, delivery, general and  administrative expenses               |   | 3,602,000  |       | 4,497,000  |   |
|                                                                  |   |       |       |       |   |
| Operating loss                                                        |   | (442,000   | )          | (801,000   | )      |
|                                                                  |   |       |       |       |   |
| Interest expense                                                      |   | (36,000    | )          | (46,000    | )      |
| Interest and other income                                             |   | 9,000      |       | 75,000     |   |
|                                                                  |   |       |       |       |   |
| Loss before minority interest and income  taxes                       |   | (469,000   | )          | (772,000   | )      |
|                                                                  |   |       |       |       |   |
| Minority interest                                                     |   | (49,000    | )          | 47,000     |   |
|                                                                  |   |       |       |       |   |
| Income tax benefit                                                    |   | —     |       | 263,000    |   |
|                                                                  |   |       |       |       |   |
| Net loss                                                              |   | $          | (518,000   | )          | $      | (462,000 | ) |
|                                                                  |   |       |       |       |   |
| Net loss per outstanding Common Share –  basic and fully diluted |   | $          | (.14       | )          | $      | (.12 | ) |
|                                                                  |   |       |       |       |   |
| 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 notes are apart of the consolidated financial statements.

 

4

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LIBERTY HOMES, INC.

 

CONSOLIDATED STATEMENTOF INCOME

 

for the six months ended June 30, 2003 and2002

 

UNAUDITED

 
|                                                                  |   | **2003**   |       | **2002**   |   |
|-----------------------------------------------------------------------|--------|------------|------------|------------|--------|
|                                                                  |   |       |       |       |   |
| Net sales                                                             |   | $          | 38,528,000 |       | $      | 46,567,000 |   |
|                                                                  |   |       |       |       |   |
| Cost of sales                                                         |   | 33,771,000 |       | 40,261,000 |   |
|                                                                  |   |       |       |       |   |
| Gross profit                                                          |   | 4,757,000  |       | 6,306,000  |   |
|                                                                  |   |       |       |       |   |
| Selling, delivery, general and  administrative expenses               |   | 7,201,000  |       | 8,612,000  |   |
|                                                                  |   |       |       |       |   |
| Operating loss                                                        |   | (2,444,000 | )          | (2,306,000 | )      |
|                                                                  |   |       |       |       |   |
| Interest expense                                                      |   | (63,000    | )          | (92,000    | )      |
| Interest and other income                                             |   | 24,000     |       | 98,000     |   |
|                                                                  |   |       |       |       |   |
| Loss before minority interest and income  taxes                       |   | (2,483,000 | )          | (2,300,000 | )      |
|                                                                  |   |       |       |       |   |
| Minority interest                                                     |   | (20,000    | )          | 75,000     |   |
|                                                                  |   |       |       |       |   |
| Income tax benefit                                                    |   | —     |       | 782,000    |   |
|                                                                  |   |       |       |       |   |
| Net loss                                                              |   | $          | (2,503,000 | )          | $      | (1,443,000 | ) |
|                                                                  |   |       |       |       |   |
| Net loss per outstanding Common Share –  basic and fully diluted |   | $          | (.69       | )          | $      | (.39 | ) |
|                                                                  |   |       |       |       |   |
| Weighted average shares outstanding                                   |   | 3,654,000  |       | 3,747,000  |   |
|                                                                  |   |       |       |       |   |
| Cash dividend per share:                                              |   |       |       |       |   |
|                                                                  |   |       |       |       |   |
| Class A Common Stock                                                  |   | $          | .14        |       | $      | .14 |   |
|                                                                  |   |       |       |       |   |
| Class B Common Stock                                                  |   | $          | .14        |       | $      | .14 |   |

 

The accompanying notes are apart of the consolidated financial statements.

 

5

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LIBERTY HOMES, INC.

 

CONSOLIDATEDSTATEMENT OF CASH FLOWS

 

for the six months ended June 30, 2003 and2002

UNAUDITED

 
|                                                                       |   | **2003**   |       | **2002**   |   |
|----------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| Cash flows provided by (used  in) operating activities                     |   |       |       |       |   |
| Net loss                                                                   |   | $          | (2,503,000 | )          | $      | (1,443,000 | ) |
| Adjustment to reconcile net loss to net  cash used in operating activities |   |       |       |       |   |
| Depreciation                                                               |   | 900,000    |       | 1,036,000  |   |
| Minority interest                                                          |   | 20,000     |       | (75,000    | )      |
| (Gain) loss on disposal of fixed assets                                    |   | 19,000     |       | (61,000    | )      |
| Changes in assets and liabilities                                          |   |       |       |       |   |
| Receivables                                                                |   | (855,000   | )          | (274,000   | )      |
| Income taxes payable/receivable                                            |   | 1,912,000  |       | (50,000    | )      |
| Inventories                                                                |   | (432,000   | )          | 248,000    |   |
| Prepayments and other                                                      |   | 1,178,000  |       | 132,000    |   |
| Accounts payable                                                           |   | 941,000    |       | 300,000    |   |
| Other current liabilities                                                  |   | (642,000   | )          | (1,193,000 | )      |
|                                                                       |   |       |       |       |   |
| Net cash provided by (used in) operating  activities                       |   | 538,000    |       | (1,380,000 | )      |
|                                                                       |   |       |       |       |   |
| Cash flows provided by (used in) investing  activities                     |   |       |       |       |   |
| Additions to property, plant and equipment                                 |   | (274,000   | )          | (862,000   | )      |
| Proceeds from sale of fixed assets                                         |   | 8,000      |       | 324,000    |   |
| Redemption of short-term investments                                       |   | 100,000    |       | —     |   |
|                                                                       |   |       |       |       |   |
| Net cash used in investing activities                                      |   | (166,000   | )          | (538,000   | )      |
|                                                                       |   |       |       |       |   |
| Cash flows provided by (used in) financing  activities                     |   |       |       |       |   |
| Cash dividends paid                                                        |   | (512,000   | )          | (525,000   | )      |
| Proceeds from notes payable                                                |   | 4,977,000  |       | 481,000    |   |
| Payments of notes payable                                                  |   | (5,466,000 | )          | (909,000   | )      |
| Retirement of common stock                                                 |   | —     |       | (54,000    | )      |
|                                                                       |   |       |       |       |   |
| Net cash used in financing activities                                      |   | (1,001,000 | )          | (1,007,000 | )      |
|                                                                       |   |       |       |       |   |
| Net decrease in cash and cash equivalents                                  |   | (629,000   | )          | (2,925,000 | )      |
|                                                                       |   |       |       |       |   |
| Cash and cash equivalents at beginning of  period                          |   | 4,308,000  |       | 7,223,000  |   |
|                                                                       |   |       |       |       |   |
| Cash and cash equivalents at end of period                                 |   | $          | 3,679,000  |       | $      | 4,298,000 |   |
|                                                                       |   |       |       |       |   |
| Supplemental disclosures of cash flow  information.                        |   |       |       |       |   |
| Cash received for income taxes                                             |   | $          | 1,912,000  |       | $      | 749,000 |   |
| Cash paid for interest expense                                             |   | 63,000     |       | 92,000     |   |

 

The accompanying notes are apart 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 (consistent ofnormal recurring adjustments) which, in the opinion of management, arenecessary for a fair presentation of the results for the interim periods.

 

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements includethe accounts of the Company and all its wholly owned and majority ownedsubsidiaries.  Upon consolidation, allinter-Company accounts, transactions and profits have been eliminated.

 

SHORT TERM INVESTMENTS

Short-term investments consist primarily of certificates of depositswith original maturities greater than 90 days.

 

INVENTORIES

Inventories are stated at the lower of cost or market, with costdetermined on a first-in, first-out basis. Inventories at June 30, 2003 consist of:

 

| Raw Material     |   | $         | 5,828,000  |   |
|------------------|--------|-----------|------------|--------|
| Work in Progress |   | 1,494,000 |       |
| Finished goods   |   | 3,754,000 |       |
|             |   | $         | 11,076,000 |   |

 

PROPERTY HELD FOR SALE

The Company currently has for sale three of its former productionfacilities, one each in Ocala, Florida, Dorchester, Wisconsin and Tuscumbia,Alabama.  The Wisconsin and Alabamafacilities ceased operation in 2000. Production from the Dorchester, Wisconsin plant was consolidated intothe Company’s other Dorchester plant, while the Tuscumbia business was moved 50miles to the Hamilton, Alabama plant. At the end of 2002, production ceased at the Florida plant.  The Company now serves this market area fromits other facilities.  These closingswere done as part of the Company’s response to the current industry downturn.

 

Each facility includes land, land improvements andbuildings.  Appraisal values and askingprice for each of these properties exceeds the net book value of each.  All three facilities can fit a wide varietyof uses.  The Company anticipatesselling all of these properties for amounts that exceed their net book valueplus disposal costs.  Accordingly, thestatements reflect the aggregate net book value of $4,581,000 for all theseproperties and no adjustments for impairment have been made.

 

NOTES PAYABLE

At June 30, 2003, the Company had thefollowing 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 |   | 406,000 |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|---------|
| Revolving credit line of $5,000,000 secured  by certain real property bearing interest at 1/2% under prime                                               |   | -0      | -       |
|                                                                                                                                                     |   | $       | 406,000 |   |
|                                                                                                                                                          |        |         |         |  |

 

7

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CONTINGENT LIABILITIES

Repurchase Obligations

The Company is contingently liable under terms ofrepurchase agreements with various financial institutions, which provide forthe 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 June 30, 2003, provided for losses on homes forwhich it has received or expects notification of repurchase. Any significantchange could place unplanned demands 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 diluted earnings pershare are computed based on weighted average Class A and Class B sharesoutstanding.  There are no options orwarrants outstanding to create a dilutive effect.

 

REVENUE RECOGNITION

Revenue is recognized whentitle is transferred upon shipment.

 

NATURE OF BUSINESS, RISKS ANDUNCERTAINTIES

The Company designs,manufactures and sells at wholesale a broad line of single and multi-sectionmanufactured homes and multi-section modular homes to numerous independentdealers in the United States.  TheCompany considers itself to be in the industry segment of manufacturingresidential houses as 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,included among them are the following.

 

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

•                                          thestability of the dealer network

•                                          thelevel of inventory of new and repossessed homes

•                                          inventoryrepurchase contingencies

•                                          theavailability and retention of a competent workforce

•                                          availabilityand price of raw materials

•                                          unanticipatedresults in pending legal proceedings

•                                          regulatoryconstraints

•                                          worldand economic events that affect consumer confidence

 

Further insight into some of theseitems can be found in the discussion of the “Outlook and Risk Factors” section of this 10Q in Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

USE OF ESTIMATES

The process of preparing financial statements in conformity withaccounting principles generally

 

8

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accepted in the United Statesrequires the use of estimates and assumptions regarding certain assets,liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events asof the date of the financial statements. Accordingly, upon settlement, actual amounts may differ from estimatedamounts.  The most notable assumptionsincluded in the financial statements involve product warranty costs, potentialrepurchase obligations on dealer floorplan financing arrangements, lawsuits,deferred taxes and property held for sale.

 

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

 

RESULTS OF OPERATIONS

While certain sectors of the United States economy hinted at a recoveryduring the second quarter of 2003, the manufactured housing industry continuedto seek solid footing from which to recover. In a comparison of statistics, asreported by the Institute of Building Technology and Safety, on the secondquarter 2003 to the same period in 2002, shipments of manufactured homesdeclined 25%. Current national data is not readily available on modular homeshipments, however anecdotal information seems to indicate some growth.  Tight credit underwriting continued tohamper retail sales contracts.  Andcredit availability restricted funds at both the wholesale and retaillevels.  Additionally, consumerconfidence still seemed uncertain.

 

This environment shaped ourCompany’s performance.  Net sales forthe second quarter 2003 were $21,374,000, a decrease of $3,294,000 or 13% fromnet sales of $24,688,000 during the corresponding period of 2002.  On the quarter to quarter comparison, ourmanufactured home shipments decreased 14% while modular homes increased 10%,resulting in an overall 12% decline of total homes sold.  Net sales were lower in 2003, due in part tothe absence of shipments from our Ocala Florida plant that ceased operations atthe beginning of 2003.  The remainingoperating plants experienced lower demand for homes.

 

Costs of raw material, variable labor and variable overhead remainedstable during the current quarter. Through our cost control programs, total fixed costs dropped 12%.  However, lower volume offset the costreductions.  Gross profit fell by$536,000 in a comparison of the second quarter of 2003 to 2002.  Gross profit was $3,160,000 or 15% of netsales in 2003 and $3,696,000 or 15% of net sales in 2002.

 

Selling, delivery, general andadministrative expenses were $3,602,000 during the second quarter of 2003 andtotaled $4,497,000 during the same quarter of 2002.  Current period expenses were $895,000 lower.  We achieved a reduction of $822,000 inselling, general and administrative expense through a cost reduction programwhile lower volume reduced delivery expense by $73,000.

 

The Company’s loss beforeminority interest and income taxes was $469,000 in the second quarter2003.  This result is a $303,000improvement over the loss of $772,000 during 2002.

 

Due to the full usage of tax loss carryback benefits in prior periods,no income tax benefit was attributed to the second quarter 2003 loss.  For the comparable 2002 quarter, a taxbenefit of $263,000 was recognized.

 

Net loss for the second quarter 2003 was $518,000 or $56,000 higherthan the second quarter net loss of $462,000 in 2002.  The basic and fully diluted loss per share was $.14 for 2003 and$.12 for 2002.

 

9

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity and capital resources dropped from our position at December31, 2002.  Cash, cash equivalents andshort term investments as of June 30, 2003 and December 31, 2002 were$3,679,000 and $4,308,000, respectively. Working capital as of June 30, 2003 and December 31, 2002 was$15,963,000 and $18,305,000, respectively. The current ratio was 2.6 to 1 and 2.8 to 1 at June 30, 2003 andDecember 31, 2002, respectively.

 

The Company currently has a $5,000,000 operating line of credit onwhich no balances were borrowed at June 30, 2003.  This line is secured by a portion of the Company’s realproperty.  This credit arrangement isdue for renewal on June 30, 2004.

 

Additionally, held for sale are three production facilities which havebeen closed as part of our cost reduction program.  These properties have an aggregate net book value of $4,581,000and we believe they can be sold for an aggregate amount in excess of thisvalue.

 

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:

 

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

•                                          thestability of the dealer network

•                                          thelevel of inventory of new and repossessed homes

•                                          inventoryrepurchase contingencies

•                                          theavailability and retention of a competent workforce

•                                          availabilityand price of raw materials

•                                          unanticipatedresults in pending legal proceedings

•                                          regulatoryconstraints

•                                          worldand economic events that affect consumer confidence

 

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.

 

Increased underwritingstandards and a reduced number of retail lenders are factors which will affectthe industry for the foreseeable future. Continued constriction of credit will keep many potential homebuyers outof the marketplace for our housing.  Welook, however, with favor upon the announcement of a major financialinstitution to begin serving this vital sector of our industry. We believe thissource has the ability to provide a significant amount of credit to fund retailpurchases of homes.  Of course, this ventureis not yet fully launched and we are cautious in our outlook.

 

Previously, lessrestrictive underwriting standards have created a high default rate on loansresulting

 

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in numerousrepossessions.  We believe the currentrate of repossessions and the supply of these unsold homes is slightly lessthan in prior years.  However, theycontinue 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.

 

The Company’s own repurchase obligations were significant in 2000, thebeginning of this current downturn. Since then, our dealer turnover has abated significantly.  It is difficult for us to predict thepotential for a re-occurrence of such a high level.  If it should, existing and standby capital resources will be heavilyutilized while our other resources will be diverted away from our business ofproducing and selling new homes.

 

The distribution systemfor our modular homes may be somewhat different.  While we sell some of our modular homes to traditionalmanufactured home retailers, a large percentage of modular homes are sold tobuilder developers who do not typically stock numerous homes for display.  Consequently, homes sold to such builderdevelopers are not subject to repurchase as described above.  As the modular portion of our businessgrows, the contingent liability for repurchase of homes should proportionatelyshrink, thereby lessening potential demand for the Company’s resources.

 

The spate of dealerfailures that occurred industry-wide in 2000 has slowed since then.  However, it is difficult for us to projectwhat may happen with the existing dealer base in the future.  A return to a high fallout among this partof the distribution chain may disrupt the market.  Such a disruption among our competitors’ customers may cause ourcompetitors to aggressively pursue our customer base.  Wherever the disruption may hit our own customer base, we willalso be adversely affected.

 

CRITICAL ACCOUNTINGPOLICIES

The Company’s AnnualReport on Form 10-K for the period ended December 31, 2002, under the heading“Critical Accounting Policies and Estimates,” provides a list of accountingpolicies that are integral components to the portrayal of financial conditionand results of operations of the Company. These items are warranty, repurchaseobligations, lawsuits, deferred taxes and property held for sale.  Since that report, except for changes in thevaluation of deferred tax benefits, we have not changed the use of estimatesand judgements in the application of Generally Accepted Accounting Policiesused in the United States.  For thevaluation of deferred tax benefits, we have placed an allowance on thevaluation of federal and state tax benefits resulting from the Company’s netoperating losses occurring in 2003.

 

FORWARD LOOKING STATEMENTS

The discussion above contains forward looking statements within themeaning of the Private Securities Litigation Reform Act of 1995.  These statements include statements we makeregarding industry and company outlooks and risk factors.  We may make other forward looking statementsorally or in writing from time to time. All such forward looking statements are not guaranties of future eventsor performance and involve risks and uncertainties.  Actual results may differ materially from those in our forwardlooking statements as the result of a number of material factors.  These factors

 

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include without limitation:

 

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

•                                          thestability of the dealer network

•                                          thelevel of inventory of new and repossessed homes

•                                          inventoryrepurchase contingencies

•                                          theavailability and retention of a competent workforce

•                                          availabilityand price of raw materials

•                                          unanticipatedresults in pending legal proceedings

•                                          regulatoryconstraints

•                                          worldand economic events that affect consumer confidence

 

Item 3.  Quantitative andQualitative Disclosures About Market Risk 

 

We currently have a smallamount of borrowing on our retail centers’ floorplan line of credit, and makeinfrequent use of our general line of credit. To the limited extent that we do borrow, we are exposed to changes ininterest rates.  We do not use interestrate derivative instruments to manage exposure to interest rate changes.  Additionally, we do not invest in securitiesor funds or any other type of intangible trading security that is exposed tomarket risk.  We do not enter into anycontractual obligations whose final settlement can be affected by interest ratevolatility, foreign currency rate fluctuations or commodity price changes.

 

Item 4.  Management’s Report onDisclosure Controls and Procedures and Internal Control. 

 

(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.

 

(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 of 2002

Exhibit 31.2 -Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 -Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Actof 2002

 

No reports on Form 8-K forApril, May or June, 2003 have been filed.

 

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**SIGNATURE**

 

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

 

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

 

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