UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended October 3, 1997 or
[ ] 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: 0-21204
SOUTHERN ENERGY HOMES, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-1083246
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Highway 41 North, P.O. Box 390, Addison, Alabama 35540
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(205) 747-8589
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
14,516,291 shares of Common Stock, $.0001 par value, as of November 13, 1997
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I FINANCIAL INFORMATION:
Consolidated Condensed Balance Sheets,
October 3, 1997and January 3, 1997 2
Consolidated Condensed Statements of Operations - Thirteen
Weeks Ended October 3, 1997 and September 27,
1996 and Thirty-nine Weeks Ended October 3, 1997
and September 27, 1996 3
Consolidated Condensed Statements of Cash Flows - Thirty-nine
Weeks Ended October 3, 1997 and September 27, 1996 4
Notes to Consolidated Condensed Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION 12
SIGNATURES 14
</TABLE>
I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
October 3, January 3,
1997 1997
--------------- ----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,754,000 $ 5,299,000
Accounts receivable (less allowance for doubtful accounts of
$190,000 and $362,000, respectively) 29,730,000 17,558,000
Installment contracts receivable - current 435,000 421,000
Inventories 26,769,000 27,019,000
Deferred tax benefits 2,293,000 1,829,000
Prepayments and other 1,347,000 890,000
--------------- ----------------
75,328,000 53,016,000
--------------- ----------------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 27,873,000 23,527,000
Less - accumulated depreciation 6,643,000 5,169,000
--------------- ----------------
21,230,000 18,358,000
--------------- ----------------
INTANGIBLES AND OTHER ASSETS
Installment contracts receivable, less allowance for credit
losses of $1,001,000 and $1,142,000, respectively 9,417,000 26,064,000
Goodwill 12,424,000 13,093,000
Non-compete agreements 449,000 667,000
Organization and pre-operating costs 544,000 649,000
Other assets 4,322,000 811,000
--------------- ----------------
27,156,000 41,284,000
----------------
===============
$123,714,000 $112,658,000
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 12,105,000 $ 12,025,000
Current maturities of long-term debt 1,248,000 -
Accounts payable 8,555,000 4,303,000
Accrued liabilities 19,012,000 18,953,000
--------------- ----------------
40,920,000 35,281,000
----------------
---------------
LONG-TERM DEBT 4,140,000 -
--------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 1,000,000 shares authorized,
None outstanding - -
Common stock, $.0001 par value, 40,000,000 shares authorized;
15,460,674 issued and 14,574,591 shares outstanding at
October 3, 1997 and 15,437,801 issued and outstanding at
January 3, 1997 2,000 2,000
Treasury Stock, at cost, 845,000 shares at October 3, 1997 and
no Shares at January 3, 1997 (8,296,000) -
Capital in excess of par 36,346,000 35,999,000
Retained earnings 50,602,000 41,376,000
--------------- ----------------
78,654,000 77,377,000
=============== ================
$123,714,000 $112,658,000
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------------ ------------------------------------
October 3, September 27, October 3, September 27,
1997 1996 1997 1996
--------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
NET REVENUES $76,327,000 $77,414,000 $233,322,000 $232,446,000
COST OF SALES 64,763,000 66,490,000 198,134,000 199,571,000
--------------- ----------------- --------------- ----------------
Gross profit 11,564,000 10,924,000 35,188,000 32,875,000
--------------- ----------------- --------------- ----------------
OPERATING EXPENSES:
Selling 2,915,000 1,731,000 8,523,000 4,910,000
General and administrative 2,428,000 2,526,000 8,204,000 7,942,000
Non-recurring charge - - 2,146,000 -
Provision for credit losses (100,000) 168,000 (100,000) 1,066,000
Amortization of intangibles 202,000 130,000 636,000 379,000
--------------- ----------------- --------------- ----------------
5,445,000 4,555,000 19,409,000 14,297,000
--------------- ----------------- --------------- ----------------
Operating income 6,119,000 6,369,000 15,779,000 18,578,000
--------------- ----------------- --------------- ----------------
INTEREST EXPENSE 416,000 7,000 1,010,000 10,000
INTEREST INCOME 137,000 164,000 208,000 501,000
--------------- ----------------- --------------- ----------------
Income before income 5,840,000 6,526,000 14,977,000 19,069,000
taxes
PROVISION FOR INCOME TAXES
2,234,000 2,509,000 5,751,000 7,337,000
--------------- ----------------- --------------- ----------------
Net income $ 3,606,000 $ 4,017,000 $ 9,226,000 $ 11,732,000
=============== ================= =============== ================
NET INCOME PER COMMON SHARE
$ 0.25 $ 0.27 $ 0.61 $ 0.78
=============== ================= =============== ================
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES
14,693,233 15,101,706 15,161,050 15,075,229
=============== ================= =============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
------------------------------------
October 3, September 27,
1997 1996
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,226,000 $ 11,732,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Gain on sale of installment contracts (775,000) -
Non-recurring charge 2,146,000 -
Depreciation of property and equipment 1,474,000 1,165,000
Amortization of intangibles 636,000 379,000
Credit for deferred tax benefits (464,000) (919,000)
Provision (credit) for doubtful accounts (39,000) 19,000
Provision (credit) for credit losses (100,000) 1,066,000
Origination of installment contracts (543,000) (25,806,000)
Principal collected on originated installment contracts 482,000 85,000
Change in assets and liabilities:
(Increase) decrease in inventories 98,000 (4,096,000)
Increase in accounts receivable (11,907,000) (4,973,000)
Increase in prepayments and other (132,000) (1,765,000)
Increase in accounts payable 4,252,000 5,894,000
Increase (decrease) in accrued liabilities (817,000) 6,373,000
---------------- ----------------
Net cash provided by (used in) operating activities 3,537,000 (10,846,000)
---------------- ----------------
INVESTING ACTIVITIES:
Purchase of subsidiary, net of cash acquired - (413,000)
Capital expenditures (4,664,000) (2,994,000)
Maturities of investments - 2,076,000
Purchase of investments - (650,000)
Investment in joint ventures (3,511,000) -
---------------- ----------------
Net cash used in investing activities (8,175,000) (1,981,000)
---------------- ----------------
FINANCING ACTIVITIES:
Repurchase of common stock (8,296,000) -
Net borrowings on notes payable 80,000 -
Repayments on long-term debt (252,000) (63,000)
Borrowings on long-term debt 5,633,000 -
Proceeds from exercise of stock options 182,000 335,000
Proceeds from sale of installment contracts 16,736,000 -
---------------- ----------------
Net cash provided by financing activities 14,083,000 272,000
---------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 9,445,000 (12,555,000)
---------------- ----------------
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 5,299,000 16,750,000
---------------- ----------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $14,754,000 $ 4,195,000
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 909,000 $ 10,000
================ ================
Income taxes paid $ 6,621,000 $ 6,778,000
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated condensed balance sheet as of January 3, 1997, which has been
derived from audited financial statements, and the unaudited interim
consolidated condensed financial statements as of October 3, 1997, have been
prepared by the Company without audit, but in the opinion of management reflect
all adjustments (which include only normal recurring adjustments) necessary for
the fair presentation of the information setforth therein. Results of operations
for the interim 1997 periods are not necessarily indicative of results expected
for the full year. While certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, the Company believes that
the disclosures herein are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report to Stockholders for the fiscal year ended January 3, 1997.
2. INVENTORIES:
Inventories are valued at first-in, first-out ("FIFO") cost, which is not in
excess of market. An analysis of inventories follows:
October 3, January 3,
1997 1997
--------------- -------------------
(Unaudited)
Raw $11,335,000 $11,607,000
materials
Work in progress 1,102,000 1,108,000
Finished goods 14,332,000 14,304,000
--------------- -------------------
$26,769,000 $27,019,000
=============== ===================
3. NET INCOME PER SHARE:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share. This statement establishes standards for computing and presenting
earnings per share ("EPS"). This Statement will simplify the standards for
computing earnings per share previously found in APB Opinion No. 15, Earnings
per Share, and will make them comparable to international EPS standards. It will
replace the presentation of primary EPS with a presentation of basic EPS and
will require dual presentation of basic and diluted EPS on the face of the
income statement and requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted EPS
computation.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods, and requires restatement of
all prior-period EPS data presented. The Company will adopt the Statement at
fiscal year-end 1997. Had the Company implemented SFAS 128 on December 30, 1995,
the pro forma EPS results would have been as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended October 3, 1997 Thirteen Weeks Ended September 27, 1996
------------------------------------ ---------------------------------------
Dilutive Dilutive
Effect of Effect of
Options Options
Basic Issued Diluted Basic Issued Diluted
----- ------ ------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net income $3,606,000 - $3,606,000 $4,017,000 - $4,017,000
Shares available to
Common
shareholders 14,693,233 128,951 14,822,184 15,101,706 161,848 15,263,554
Earnings per share $0.25 - $0.24 $0.27 - $0.26
</TABLE>
5
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended October 3, 1997 Thirty-nine Weeks Ended September 27, 1996
--------------------------------------- ------------------------------------------
Dilutive Dilutive
Effect of Effect of
Options Options
Basic Issued Diluted Basic Issued Diluted
----- ------ ------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net income $9,226,000 - $9,226,000 $11,732,000 - $11,732,000
Shares available to
Common shareholders
15,161,050 156,757 15,317,807 15,075,229 146,199 15,221,428
Earnings per share $0.61 - $0.60 $0.78 - $0.77
</TABLE>
4. REPURCHASE AGREEMENTS:
It is customary practice for companies in the manufactured home industry to
enter into repurchase agreements with financial institutions, which provide
financing to independent dealers. Generally, the agreements provide for the
repurchase of the manufactured homes from the financing institution in the event
of repossession upon an independent dealer's default. The Company's contingent
liability under such agreements is approximately $93.5 million as of October 3,
1997. Losses experienced under these agreements have not been significant and,
in the opinion of management, any future losses under these agreements should
not have a material effect on the accompanying financial statements.
5. LEGAL PROCEEDINGS:
The Company is a defendant in a lawsuit filed on March 27, 1996 in Fulton County
Superior Court, Georgia by EurAm International, Inc., a sales agent for the
Company. On April 29, 1996 the Company removed the case to the United States
District Court for the Northern District of Georgia in Atlanta. In this lawsuit,
the plaintiff alleges that the Company breached an agreement relating to the
sale of the Company's modular homes in Germany, including alleged
misrepresentations and faulty performance, resulting in damages alleged to
amount to $25 million. The Company believes the claim is without merit and
intends to vigorously defend the claim, but the litigation is currently in
discovery and there can be no assurances as to its likely outcome.
In addition, the Company has been informed by Gesellschoft fur Bauen Und Wohnen
Hannover MbH ("GBH"), a German housing authority, that GBH has replaced the
Company with a local company to complete a contract that GBH entered into with
the Company for the purchase and erection of modular housing in Hannover,
Germany. In connection with the contract, the Company posted a $660,000 letter
of credit in favor of GBH. In March 1997, GBH made a claim against the Company
for damages of approximately $800,000 arising from the shift in suppliers and
has attempted to draw upon the letter of credit posted by the Company. The
Company has obtained a temporary restraining order-preventing GBH from drawing
upon the letter of credit and the Company is actively negotiating with GBH to
resolve the dispute. There can be no assurances as to the likely resolution of
the GBH claim.
The Company is a party to various other legal proceedings incidental to its
business. The majority of these legal proceedings relate to employment matters
or product warranty liability claims for which management believes adequate
reserves are maintained. In the opinion of management, after consultation with
legal counsel, the ultimate liability, if any, with respect to these proceedings
will not materially affect the financial position or results of operations of
the Company; however, the ultimate resolution of these matters, which could
occur within one year, could result in losses in excess of the amounts reserved.
6. BUSINESS COMBINATIONS:
Wenco has been originating and servicing consumer loans primarily for homes
manufactured by the Company. In February 1997, the Company formed a joint
venture, Wenco 21, with 21st Century. The Company made an initial capital
contribution of $500,000 to Wenco 21, representing a 50% ownership interest in
the joint venture. Wenco 21 will continue to offer, through 21st Century,
consumer financing for homes manufactured by the Company as well as for other
homes sold through its retail centers and independent dealers. In light of the
shift in consumer finance activities to Wenco 21, Wenco has suspended its loan
origination activities and has engaged 21st Century to service its existing loan
portfolio.
7. NON-RECURRING CHARGE:
During the second quarter of 1997, the Company recorded a $2.1 million
non-recurring charge in connection with its decision to close its manufactured
housing facility located in Pennsylvania. The decision was based primarily on
changes in local market conditions and operating results of the facility. During
the thirty-nine weeks ended October 3, 1997 and September 27, 1996, this
facility generated 1.3% and 3.7%, respectively, of the total revenues of the
Company. The impact of this facility on the operating income of the Company was
immaterial during the thirty-nine weeks ended October 3, 1997 and September 27,
1996. The asset impairment losses consist of the write-off of goodwill,
($505,000), the write-off of non-compete agreements
6
($134,000), and certain other operating assets ($632,000) and plant closing
costs consisting primarily of lease obligations ($400,000), warranty reserves
($260,000) and severance pay ($141,000).
8. SALE OF INSTALLMENT CONTRACTS
In August 1997 the Company sold installment contracts totaling $16.7 million,
along with the related servicing. The Company retained an interest in certain of
the cash flows ascribed to such loans (the "interest only strip"). The fair
value of the interest only strip was calculated using the expected future
cashflows discounted at the current market rate and considering prepayment and
default rates on the loans. The Company also retained credit risks on the
installment contracts sold and has recorded a reserve for such estimated credit
losses. The Company provides for losses on credit sales in amounts necessary to
maintain the reserves at amounts the Company believes are sufficient to provide
for future losses based upon the Company historical loss experience, current
economic conditions and an assessment of current portfolio performance measures.
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Thirteen and thirty-nine weeks ended October 3, 1997 as compared with thirteen
and thirty-nine weeks ended September 27, 1996.
Net Revenues
Total net revenues (gross sales less volume discounts, returns and allowances)
for the thirteen weeks ended October 3, 1997 were $76.3 million, which
represented a decrease of 1.4% over the prior year period. For the thirty-nine
weeks ended October 3, 1997, total net revenues were $233.3 million, up 0.4%
from $232.4 million for the comparable period a year ago.
During the fourth quarter of 1996, the Company entered into the retail sector of
the industry through the acquisition of BR Holding Corp., and a group of retail
companies doing business as Blue Ribbon HomesNet revenues of the manufactured
home segment, which includes the Company's retail operations, were $75.9 million
for the thirteen weeks ended October 3, 1997 as compared with $76.7 million for
the prior year period. Retail home sales accounted for $13.8 million of the
manufactured home segment revenues for the thirteen weeks ended October 3,
1997,compared with no retail home sales for the comparable prior period. Sales
to dealers accounted for approximately $62.1 million of manufactured home
segment revenues for the thirteen weeks ended October 3, 1997, compared with
$76.7 million for the comparable prior year period, a decrease of $14.6 million
or 14%. For the thirty-nine weeks ended October 3, 1997, manufactured home
segment revenues were $231.5 million, as compared with $231.2 million for the
prior year period. Retail home sales accounted for $35.7 million of the
manufactured home segment revenues for the thirty-nine weeks ended October 3,
1997, compared with no retail home sales for the comparable prior period. Sales
to dealers accounted for approximately $195.8 million of the manufactured home
segment revenues for the thirty-nine weeks ended October 3, 1997, as compared
with $231.2 million for the comparable prior period, a decrease of $35.4
million, or 15%. The decline in sales to dealers was attributable to a decline
in the number of homes shipped, which was partially offset by an increase in the
average wholesale price per home shipped. Total homes shipped in the thirteen
weeks and thirty-nine weeks ended October 3, 1997 was 2,329 and 7,248, down
15.4% and 13.7%, respectively, from the number of homes sold in the comparable
prior year periods. The decrease in homes sold was attributable primarily to
unfavorable weather conditions.
Revenues from the Company's retail financing segment were $463,000 for the
thirteen weeks ended October 3, 1997, as compared with $710,000 for the prior
year period, a decrease of $247,000. This decrease was attributable to the sale
of a $16.7 million portfolio in October 1997. For the thirty-nine weeks ended
October 3, 1997, revenues from the Company's retail financing segment were $1.9
million, as compared with $1.2 million for the comparable period a year ago. The
increase for the thirty-nine weeks was attributable to increased average
outstanding balances resulting from lending activity from the Company's wholly
owned subsidiary, Wenco Finance, Inc. ("Wenco"). Wenco has been originating and
servicing consumer loans primarily for homes manufactured by the Company. In
February 1997, the Company formed a joint venture with 21st Century Mortgage
Corporation ("21st Century"). The joint venture, Wenco 21, will continue to
offer, through 21st Century, consumer financing for homes manufactured by the
Company as well as for other homes sold through its retail centers and
independent dealers. In light of the shift in consumer finance activities to
Wenco 21, Wenco has suspended its loan origination activities and has engaged
21st Century to service its existing loan portfolio.
Gross Profit
Gross profit consists of net revenues less the cost of sales, which includes
labor, materials and overhead. Gross profit for the thirteen weeks ended October
3, 1997 increased to $11.6 million, or 15.2% of net revenues, from $10.9
million, or 14.1% of net revenues in the prior year period. For the thirty-nine
weeks ended October 3, 1997, gross profit was $35.2 million, or 15.1% of net
revenues, as compared with $32.9 million, or 14.1% of net revenues in the prior
year period. The increase in gross profit percentage in the current year periods
was attributable to increased sales from the company's retail segment, which was
partially offset by decreased efficiencies associated with lower production
levels, which resulted from a decrease in backlog of orders.
8
Selling Expenses
Selling expenses include primarily sales commissions, advertising expenses,
salaries for support personnel and freight costs. Selling expenses were $2.9
million, or 3.8% of net revenues, during the thirteen weeks ended October 3,
1997, as compared with $1.7 million or 2.2% of net revenues, for the same period
of the prior year. For the thirty-nine weeks ended October 3, 1997, selling
expenses were $8.5 million, or 3.7% of net revenues, as compared with $4.9
million, or 2.1% of net revenues, for the same period of the prior year. The
increase in selling expense as a percentage of net revenues was attributable
primarily to increased selling expenses associated with the Company's retail
operation, which was partially offset by savings in shipping costs realized from
an increase in shipments through MH Transport, the company's trucking
subsidiary, which reduced the Company's reliance upon independent trucking
companies.
General and Administrative
General and administrative expenses include administrative salaries, executive
and management bonuses, insurance costs and professional fees. For the thirteen
weeks ended October 3, 1997, general and administrative expenses were $2.4
million, or 3.2% of net revenues, as compared with $2.5 million, or 3.3% of net
revenues, for the same period of 1996. For the thirty-nine weeks ended October
3, 1997, general and administrative expenses were $8.2 million, or 3.5% of net
revenues, as compared with $7.9 million, or 3.4% of net revenues in the prior
year period. The decrease in general and administrative expense in the most
recent quarter is attributable to a gain of approximately $775,000 resulting
from the sale of $16.7 of the Company's installment contracts receivable
portfolio.
Non-Recurring Charge
During the second quarter of 1997, the Company recorded a $2.1 million
non-recurring charge in connection with its decision to close its manufactured
housing facility located in Pennsylvania. The decision was based primarily on
changes in local market conditions and operating results of the facility. During
the thirty-nine weeks ended October 3, 1997 and September 27, 1996, this
facility generated 1.3% and 3.7%, respectively, of the total revenues of the
Company. The impact of this facility on the operating income of the Company was
immaterial during the thirty-nine weeks ended October 3, 1997 and September 27,
1996. The asset impairment losses consist of the write-off of goodwill,
($505,000), the write-off of non-compete agreements ($134,000), and certain
other operating assets ($632,000) and plant closing costs consisting primarily
of lease obligations ($400,000), warranty reserves ($260,000) and severance pay
($141,000).
Provision for Credit Losses
The Company provides for estimated credit losses upon origination, based on
industry experience, historical loss experience, current repossession trends and
costs, and management's assessment of the current credit quality of the loan
portfolio. For the thirteen and thirty-nine weeks ended October 3, 1997, the
provision for credit losses was a credit of $100,000 and $100,000, respectively,
as compared with charges of $168,000 and $1.1 million in 1996 for the respective
periods. The decline in the current year provision reflects the suspension of
loan originations.
Interest Expense
Interest expense for the thirteen weeks ended October 3, 1997 was $416,000, as
compared with $7,000 in the prior year period. For the thirty-nine weeks ended
October 3, 1997, interest expense was $1.0 million, as compared with $10,000 in
the prior year period. The increase in interest expense in the current year
periods was a result of increased notes payable associated with the floor plan
financing of the Company's retail inventory and the addition of $4.1 million of
long-term debt.
Interest Income
Interest income for the thirteen weeks ended October 3, 1997 was $137,000, as
compared with $164,000 in the comparable prior year period. For the thirty-nine
weeks ended October 3, 1997, interest income was $208,000 as compared with
$501,000 in the prior year period. The decrease in interest income in the
current year period reflects lower average cash and investment balances.
Provision for Income Taxes
Income taxes are provided for based on the tax effect of revenue and expense
transactions included in the determination of pre-tax book income. Income tax
expense for the thirteen weeks ended October 3, 1997 was $2.2 million, or an
effective tax rate of 38.3% as compared with $2.5 million, or an effective tax
rate of 38.4% in the prior year period. For the thirty-nine weeks ended October
3, 1997, income tax expense was $5.8 million, or an effective tax rate of 38.4%,
as compared with $7.3 million, or an effective tax rate of 38.5% in the prior
year period.
9
LIQUIDITY AND CAPITAL RESOURCES
Since its organization, the Company has financed its operations primarily with
cash generated from a combination of operations, stock offerings, and
borrowings.
Cash Flows
During the thirty-nine weeks ended October 3, 1997, the Company's cash provided
by operations was approximately $3.5 million. Cash provided by operations
included net income, after a $2.1 million non-recurring charge, of $9.2 million
and increased accounts payable of $4.3 million. These amounts were partially
offset by increased accounts receivable of $11.9 million, decreased accrued
liabilities of $817,000 and origination of installment contracts of $543,000.
Cash used by investing activities included capital expenditures of $4.7 million
and investment in joint ventures totaling $3.5 million. In February 1997, the
Company formed a joint venture, Wenco 21, with 21st Century, which through 21st
Century will originate and service retail installment contracts. The Company has
made an initial capital contribution of $500,000 to Wenco 21, representing a 50%
ownership interest of the joint venture. Under its joint venture agreement with
21st Century, the Company may be called upon to make additional capital
contributions or loans in order to meet Wenco 21's capital requirements. The
Company believes that cash on hand, cash generated by its operations, and funds
available under its existing line of credit will be adequate to fund any such
commitments. In July 1997, the Company acquired a one-third interest in,
Woodperfect, LTD. ("Woodperfect"), for producing and using wood truss rafters in
its home manufacturing operations. The purchase price for the interest in
Woodperfect was $2.0 million, representing a 33.3% ownership interest. In March
1996, the Company formed a joint venture, Ridgepointe Manufacturing, LLP
("Ridgepointe"), with Cavalier Homes, Inc. and Belmont Homes Corporation. The
Company has made an initial capital contribution of $850,000 to Ridgepointe,
representing a 33% ownership interest of the joint venture. In July 1997, the
Company formed a joint venture, Woodperfect of Texas, L. P.
("Woodperfect-Texas"), with Cavalier Homes, Inc., Patriot Homes, Inc., Schult
Homes, Inc. and Jordan Family Partnership. The Company has made an initial
capital contribution of $100,000 to Woodperfect-Texas, representing a 20%
ownership of the joint venture.
Cash provided from financing activities included proceeds from the sale of
installment contracts of $16.7 million, long-term borrowings of $5.6 million,
short-term borrowings of $80,000 and proceeds from stock option exercises of
$182,000, which was partially offset by the repurchase of 903,800 shares of the
Company's common stock, for cash of $8.3 million.
During the thirty-nine weeks ended September 27, 1996, cash used in operating
activities was approximately $10.8 million. Cash used in operating activities
reflects origination of installment contracts of $25.7 million and increased
inventory, accounts receivable and prepayments of approximately $10.8 million.
These amounts were partially offset by net income of $11.7 million and an
increase in accounts payable and accrued liabilities of approximately $12.3
million. Each of these increases was primarily related to sales growth during
the prior year. Other significant cash flows included capital expenditures of
$3.0 million and maturities of investments of $2.1 million.
At October 3, 1997, the Company's net working capital was $34.4 million,
including $14.8 in cash and cash equivalents, as compared with $17.7 million at
January 3, 1997, including $5.3 million in cash and cash equivalents. The
increase in net working capital was a result of an increase in cash and cash
equivalents of $9.5 million and an increase in accounts receivable of $12.2
million, which was partially offset by increased short-term borrowings of $1.3
million and increased accounts payable of $4.3 million.
The Company maintains a $15.0 million unsecured line of credit, which is
renewable annually and bears interest at the London Interbank Offered Rate
("LIBOR") plus 1.5%. The Company's ability to draw upon this line of credit is
dependent upon meeting certain financial ratios and covenants. The Company has
no borrowings outstanding under this line at October 3, 1997.
Substantially all of the Company's independent dealers finance their purchases
through "floor-plan" arrangements under which a financial institution provides
the dealer with a loan for the purchase price of the home and maintains a
security interest in the home as collateral. In connection with a floor-plan
agreement, the financial institution which provides the independent dealer
financing customarily requires the Company to enter into a separate repurchase
agreement with the financial institution, under which the Company is obligated,
upon default by the dealer, to repurchase the homes at the Company's original
invoice price plus
10
certain administrative and shipping expenses less any principal payments made by
the independent dealer. At October 3, 1997, the Company's contingent repurchase
liability under floor-plan financing arrangements was approximately $93.5
million. While homes that have been repurchased by the Company under floor-plan
financing arrangements are usually sold to other dealers and losses experienced
to date under these arrangements have been insignificant, no assurance can be
given that the Company will be able to sell to other dealers homes which it may
be obligated to repurchase in the future under such floor-plan financing
arrangements or that the Company will not suffer losses with respect to, and as
a consequence of, those arrangements.
Expansion
The Company has continued to demonstrate its ability to expand production
capacity and vertically integrate its operations through the acquisition of
additional manufacturing facilities and businesses.
In November 1996, the Company acquired a group of retail sales centers in
Alabama and Mississippi. The initial purchase price consisted of approximately
$1.1 million in cash and $4.5 million of common stock issued. The Company is
obligated to make additional payments to the seller if the acquired business
meets certain earnings targets. Any additional payments will be made 20% in cash
and 80% in shares of the Company's common stock and will be accounted for as
goodwill and amortized over the remaining recovery period of the goodwill. In
May 1997 an additional payment totaling approximately $207,000, $41,000 in cash
and 14,256 shares of the Company's common stock (approximate market value of
$148,000) was made for earnings targets achieved through December 31, 1996.
The Company plans to acquire or open more retail sales centers. The Company
believes that cash on hand, cash generated by operations, and funds available
under its existing line of credit will be adequate to fund its expansion plans.
Inflation
The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on its sales or profitability.
The Company has in the past been able to pass on most of the increases in its
costs by increasing selling prices, although there can be no assurance that the
Company will be able to do so in the future.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 Forward-looking statements in this report, including without limitation,
statements relating to the adequacy of the Company's resources, are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking statements
involve risks and uncertainties, including without limitation: the cyclical and
seasonal nature of housing markets; the availability of financing for
prospective purchasers of the Company's homes; the amount of capital that the
Company may commit to its Wenco 21 joint venture to make available consumer
loans; the performance of the loans held by the Company's finance subsidiary;
the availability and pricing of raw materials; the concentration of the
Company's business in certain regional markets; the Company's ability to execute
and manage its expansion plans; the availability of labor to implement those
plans; the highly competitive nature of the manufactured housing industry;
Federal, state and local regulation of the Company's business; the Company's
contingent repurchase liabilities with respect to dealer financing; the
Company's reliance on independent dealers; and other risks indicated from time
to time in the Company's filings with the Securities and Exchange Commission.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is the defendant in a lawsuit filed on March 27, 1996 in Fulton
County Superior Court, Georgia by EurAm International, Inc., a former sales
agent for the Company. On April 29, 1996 the Company removed the case to the
United States District Court for the Northern District of Georgia in Atlanta. In
this lawsuit, the plaintiff alleges that the Company has caused a breach to a
written agreement relating to the sale of the Company's modular homes in
Germany, including alleged misrepresentations and faulty performance, resulting
in damages alleged to amount to $25 million. The Company believes the claim is
without merit and intends to vigorously defend the claim, but the litigation is
currently in discovery and there can be no assurances to its likely outcome.
In addition, the Company has been informed by Geselleschoft fur Bauen Und Wohnen
Hannover MbH ("GBH"), a German housing authority, that GBH has replaced the
Company with a local company to complete a contract that GBH had entered into
with the Company for the purchase and erection of modular housing in Hannover,
Germany. In connection with the contract, the Company posted a $660,000 letter
of credit in favor of GBH. In March 1997, GBH made a claim against the Company
for damages of approximately $800,000 arising from the shift in suppliers and
has attempted to draw upon the letter of credit posted by the Company. The
Company has obtained a temporary restraining order-preventing GBH from drawing
upon the letter of credit and the Company is actively negotiating with GBH to
resolve the dispute. There can be no assurances as to the likely resolution of
the GBH claim.
The Company is a party to various other legal proceedings incidental to its
business. The majority of these legal proceedings relate to employment matters
or product warranty liability claims for which management believes adequate
reserves are maintained. In the opinion of management, after consultation with
legal counsel, the ultimate liability, if any, with respect to these proceedings
will not materially affect the financial position or results of operations of
the Company; however, the ultimate resolution of these matters, which could
occur within one year, could result in losses in excess of the amounts reserved.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are incorporated herein by reference.
4.1 Certificate of incorporation of the Company, as amended
(filed as Exhibit 4.1 to the registration on Form S-3 filed
with the Securities and Exchange Commission (August 6, 1997)
4.2 By-Laws of the Company. (Filed as Exhibit 3.2 to the
Registration Statement on Form S-1, Registration No.
33-57420)
4.3 Specimen of Stock Certificate. (Filed as Exhibit 4.1 to the
Registration Statement on Form S-1, Registration No.
33-57420)
4.4 Southern Development Council, Inc. Promissory Note. (Filed as
Exhibit 4.10 to the Registration Statement on Form S-1,
Registration No. 33-57420)
4.5 Stockholders' Agreement, dated as of June 8, 1989 (Filed as
Exhibit 4.12 to the Registration Statement on Form S-1,
Registration No. 33-57420)
4.6 Form of First Amendment to Stockholders' Agreement, dated as
of January 13, 1993. (Filed as Exhibit 4.13 to the
Registration Statement on Form S-1, Registration No.
33-57420)
(b) Reports on Form 8-K None
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN ENERGY HOMES, INC.
Date: November 14, 1997 By: /s/ Wendell L. Batchelor
----------------- --------------------------------
Wendell L. Batchelor, Chairman, President
and Chief Executive Officer
Date: November 14, 1997 By: /s/ Keith W. Brown
----------------- ------------------
Keith W. Brown, Executive Vice President,
Chief Financial Officer, Treasurer and
Secretary
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANYS
FINANCIAL STATEMENTS FOR THE PERIOD ENDED OCTOBER 3, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-END> OCT-03-1997
<CASH> 14,754
<SECURITIES> 0
<RECEIVABLES> 29,730
<ALLOWANCES> (362)
<INVENTORY> 26,769
<CURRENT-ASSETS> 75,328
<PP&E> 27,873
<DEPRECIATION> (6,643)
<TOTAL-ASSETS> 123,714
<CURRENT-LIABILITIES> 40,920
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 78,652
<TOTAL-LIABILITY-AND-EQUITY> 123,714
<SALES> 233,322
<TOTAL-REVENUES> 233,322
<CGS> 198,134
<TOTAL-COSTS> 198,134
<OTHER-EXPENSES> 19,509
<LOSS-PROVISION> (100)
<INTEREST-EXPENSE> 802
<INCOME-PRETAX> 14,977
<INCOME-TAX> 5,751
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,226
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.77
</TABLE>
