19
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 July 4, 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.
14,615,674 shares of Common Stock, $.0001 par value, as of
August 11, 1997
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION:
Consolidated Condensed Balance Sheets,
July 4, 1997 and January 3, 1997 2
Consolidated Condensed Statements of Operations -
Thirteen Weeks
Ended July 4, 1997 and June 28, 1996 and Twenty-six Weeks
Ended July 4, 1997 and June 28, 1996 3
Consolidated Condensed Statements of Cash Flows - Twenty-six
Weeks Ended July 4, 1997 and June 28, 1996 4
Notes to Consolidated Condensed Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION 11
SIGNATURES 13
I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
July 4, January 3,
1997 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $319,000 $5,299,000
Accounts receivable (less allowance
for doubtful accounts of 26,194,000 17,558,000
$179,000 and $362,000,
respectively)
Installment contracts receivable - 435,000 421,000
current
Inventories 27,804,000 27,019,000
Deferred tax benefits 2,293,000 1,829,000
Prepayments and other 1,483,000 890,000
58,528,000 53,016,000
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 26,553,000 23,527,000
Less - accumulated depreciation 6,105,000 5,169,000
20,448,000 18,358,000
INTANGIBLES AND OTHER ASSETS
Installment contracts receivable,
less allowance for credit
losses of $1,013,000 and 26,944,000 26,064,000
$1,142,000, respectively
Goodwill 12,540,000 13,093,000
Non-compete agreements 477,000 667,000
Organization and pre-operating 601,000 649,000
costs
Other assets 3,378,000 811,000
43,940,000 41,284,000
$122,916,000 $112,658,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 12,655,000 $ 12,025,000
Current maturities of long-term 1,300,000 -
debt
Accounts payable 6,727,000 4,303,000
Accrued liabilities 19,295,000 18,953,000
39,977,000 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 14,975,674 2,000 2,000
shares outstanding at July 4,
1997 and 15,437,801 issued and
outstanding at January 3, 1997
Treasury Stock, at cost, 485,000
shares at July 4, 1997 and no (4,422,000) -
shares at January 3, 1997
Capital in excess of par 36,223,000 35,999,000
Retained earnings 46,996,000 41,376,000
78,799,000 77,377,000
$122,916,000 $112,658,000
The accompanying notes are an integral part of these consolidated
condensed financial statements.
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
July 4, June 28, July 4, June 28,
1997 1996 1997 1996
NET REVENUES $76,879,000 $83,921,000 $156,995,000 $155,032,000
COST OF SALES 65,753,000 71,318,000 133,371,000 133,081,000
Gross profit 11,126,000 12,603,000 23,624,000 21,951,000
OPERATING
EXPENSES:
Selling 2,683,000 1,520,000 5,608,000 3,179,000
General and 2,785,000 3,197,000 5,776,000 5,416,000
administrative
Non- 2,146,000 - 2,146,000 -
recurring
charges
Provision - 704,000 - 898,000
for credit
losses
Amortization 184,000 124,000 434,000 249,000
of intangibles
7,798,000 5,545,000 13,964,000 9,742,000
3,328,000 7,058,000 9,660,000 12,209,000
Operating
income
INTEREST 317,000 2,000 594,000 3,000
EXPENSE
INTEREST 28,000 123,000 71,000 337,000
INCOME
Income before 3,039,000 7,179,000 9,137,000 12,543,000
income taxes
PROVISION FOR
INCOME TAXES 1,202,000 2,761,000 3,517,000 4,828,000
Net income $1,837,000 $4,418,000 $5,620,000 $7,715,000
NET INCOME PER
COMMON SHARE $0.12 $0.29 $0.37 $0.51
WEIGHTED
AVERAGE NUMBER
OF COMMON AND
COMMON 15,352,116 15,071,239 15,394,959 15,062,406
EQUIVALENT
SHARES
The accompanying notes are an integral part of these consolidated
condensed financial statements.
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
July 4, June 28,
1997 1996
OPERATING ACTIVITIES:
Net income $5,620,000 $7,715,000
Adjustments to reconcile net income to net
cash used in
Operating activities:
Non-recurring charge 2,146,000 -
Depreciation of property and equipment 917,000 745,000
Amortization of intangibles 434,000 249,000
Credit for deferred tax benefits (464,000) (919,000)
Provision for doubtful accounts (93,000) -
Provision for credit losses - 898,000
Origination of installment contracts (1,293,000) (22,140,000)
Principal collected on originated 399,000 94,000
installment contracts
Change in assets and liabilities:
Increase in inventories (937,000) (3,234,000)
Increase in accounts receivable (8,360,000) (5,705,000)
Increase in prepayments and other (1,103,000) (934,000)
Increase in accounts payable 2,424,000 6,960,000
Decrease in accrued liabilities (534,000) 6,308,000
Net cash used in operating activities (844,000) (9,963,000)
INVESTING ACTIVITIES:
Purchase of subsidiary, net of cash - (413,000)
acquired
Capital expenditures (3,344,000) (2,012,000)
Maturities of investments - 2,076,000
Purchase of investments - (350,000)
Investment in joint ventures (2,500,000) -
Net cash used in investing (5,844,000) (699,000)
activities
FINANCING ACTIVITIES:
Repurchase of common stock (4,422,000) -
Net borrowings on notes payable 630,000 3,500,000
Repayments on long-term debt (78,000) (42,000)
Borrowings on long-term debt 5,518,000 -
Proceeds from exercise of stock options 60,000 335,000
Net cash provided by financing 1,708,000 3,799,000
activities
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,980,000) (6,869,000)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF 5,299,000 16,750,000
THE PERIOD
CASH AND CASH EQUIVALENTS AT THE END OF THE 319,000 9,881,000
PERIOD
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $496,000 $3,000
Income taxes paid $3,820,000 $3,848,000
The accompanying notes are an integral part of these consolidated
condensed financial statements.
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 July 4, 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:
July 4, January 3,
1997 1997
(Unaudited)
Raw materials $11,831,000 $11,607,000
Work in progress 1,277,000 1,108,000
Finished goods 14,696,000 14,304,000
$27,804,000 $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:
Twenty-six Weeks Ended Twenty-six Weeks Ended
July 4, 1997 June 28, 1996
Dilutive Dilutive
Effect Effect
of of
Options Options
Basic Issued Diluted Basic Issued Diluted
Net income $5,620,000 - $5,620,000 $7,715,000 - $7,715,000
Shares
available to
Common 15,394,959 108,248 15,503,207 15,062,406 147,647 15,210,053
shareholders
Earnings per $0.37 - $0.36 $0.51 - $0.51
share
Thirteen Weeks Ended July 4, 1997 Thirteen Weeks Ended June 28,1996
Dilutive Dilutive
Effect Effect
of of
Options Options
Basic Issued Diluted Basic Issued Diluted
Net income $1,837,000 - $1,837,000 $4,418,000 - $4,418,000
Shares
available to
Common 15,352,116 86,667 15,438,783 15,071,239 157,506 15,260,681
shareholders
Earnings per $0.12 - $0.12 $0.29 - $.029
share
4. REPURCHASE AGREEMENTS:
It is customary practice for companies in the manufactured home
industry to enter 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 July 4, 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.
In January 1997, the Company contracted to build a new corporate
office facility adjacent to its Southern Energy plant in Addison,
Alabama at a cost of approximately $1.5 million. Construction
began in April 1997 and is scheduled for completion by September
1997.
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
twenty-six weeks ended July 4, 1997 and June 28, 1996, this
facility generated 1.4% and 3.8%, respectively, of the total
revenues of the Company. The impact of this facility on the
operating income of the Company was immaterial during the twenty-
six weeks ended July 4, 1997 and June 28, 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).
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Twenty-six and thirteen weeks ended July 4, 1997 as compared with
twenty-six and thirteen weeks ended June 28, 1996.
Net Revenues
Total net revenues (gross sales less volume discounts, returns
and allowances) for the twenty-six weeks ended July 4, 1997 were
$157.0 million, which represented an increase of 1.3% over the
prior year period. For the thirteen weeks ended July 4, 1997,
total net revenues were $76.9 million, down 8.3% from $83.9
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 Homes.
Net revenues of the manufactured home segment, which includes the
Company's retail operations, were $155.6 million for the twenty-
six weeks ended July 4, 1997 as compared with $154.5 million for
the prior year period. Retail home sales accounted for $23.0
million of the manufactured home segment revenues for the twenty-
six weeks ended July 4, 1997. Sales to dealers accounted for
approximately $132.6 million of manufactured home segment
revenues for the twenty-six weeks ended July 4, 1997. For the
thirteen weeks ended July 4, 1997, manufactured home segment
revenues were $76.2 million, as compared with $83.4 million for
the prior year period. Retail home sales accounted for $11.7
million of the manufactured home segment revenues for the
thirteen weeks ended July 4, 1997. The decrease in total
manufacturing revenue was attributable to a decrease 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 twenty-six and thirteen weeks ended July 4,
1997 was 4,919 and 2,403, down 12.9% and 20.7%, 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 $1.4
million for the twenty-six weeks ended July 4, 1997, as compared
with $564,000 for the prior year period. For the thirteen weeks
ended July 4, 1997, revenues from the Company's retail financing
segment were $716,000, as compared with $474,000 for the
comparable period a year ago. These increases were 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 twenty-six weeks ended July 4, 1997 increased to $23.6
million, or 15.0% of net revenues, from $22.0 million, or 14.2%
of net revenues in the prior year period. For the thirteen weeks
ended July 4, 1997, gross profit was $11.1 million, or 14.5% of
net revenues, as compared with $12.6 million, or 15.0% of net
revenues in the prior year period. The decrease in gross profit
percentage in the current year quarter was attributable to
decreased efficiencies associated with lower production levels,
which resulted from a decrease in backlog of orders.
Selling Expenses
Selling expenses include primarily sales commissions, advertising
expenses, salaries for support personnel and freight costs.
Selling expenses were $5.6 million, or 3.6% of net revenues,
during the twenty-six weeks ended July 4, 1997, as compared with
$3.2 million or 2.1% of net revenues, for the same period of the
prior year. For the thirteen weeks ended July 4, 1997, selling
expenses were $2.7 million, or 3.5% of net revenues, as compared
with $1.5 million, or 1.8% 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 twenty-six weeks ended July 4, 1997,
general and administrative expenses were $5.8 million, or 3.7% of
net revenues, as compared with $5.4 million, or 3.5% of net
revenues, for the same period of 1996. For the thirteen weeks
ended July 4, 1997, general and administrative expenses were $2.8
million, or 3.6% of net revenues, as compared with $3.2 million,
or 3.8% of net revenues in the prior year period. The decrease
in general and administrative expense in the most recent quarter
is attributable to decreased legal expenses associated with the
Company's international efforts.
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
twenty-six weeks ended July 4, 1997 and June 28, 1996, this
facility generated 1.4% and 3.8%, respectively, of the total
revenues of the Company. The impact of this facility on the
operating income of the Company was immaterial during the twenty-
six weeks ended July 4, 1997 and June 28, 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 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. There was no
provision for credit losses for the twenty-six or thirteen weeks
ended July 4, 1997 as compared with $898,000 and $704,000,
respectively.
Interest Expense
Interest expense for the twenty-six weeks ended July 4, 1997 was
$594,000, as compared with $3,000 in the prior year period. For
the thirteen weeks ended July 4, 1997, interest expense was
$317,000, as compared with $2,000 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.
Interest Income
Interest income for the twenty-six weeks ended July 4, 1997 was
$71,000, as compared with $337,000 in the comparable prior year
period. For the thirteen weeks ended July 4, 1997, interest
income was $28,000 as compared with $123,000 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 twenty-six weeks ended
July 4, 1997 was $3.5 million, or an effective tax rate of 38.5%
as compared with $4.8 million, or an effective tax rate of 38.5%
in the prior year period. For the thirteen weeks ended July 4,
1997, income tax expense was $1.2 million, or an effective tax
rate of 39.6%, as compared with $2.8 million, or an effective tax
rate of 38.5% in the prior year period.
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 twenty-six weeks ended July 4, 1997, the Company's
cash used by operations was approximately $844,000. Cash used by
operations included increased accounts receivable, prepayments
and other, and inventory totaling $10.4 million, a decrease in
accrued liabilities of $998,000, and origination's of installment
contracts of $1.3 million. These amounts were partially offset
by net income, after a $2.1 million non-recurring charge, of $5.6
million and increased accounts payable of $2.4 million.
Cash used by investing activities included capital expenditures
of $3.3 million and investment in joint ventures totaling $2.5
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.
Cash provided from financing activities included long-term
borrowings of $5.5 million and short-term borrowings of $630,000,
which was partially offset by the repurchase of 485,000 shares of
the Company's common stock, for aggregate consideration of $4.4
million.
During the twenty-six weeks ended June 28, 1996, cash used in
operating activities was approximately $10.0 million. Cash used
in operating activities reflects origination of installment
contracts of $22.1 million and increased inventory, accounts
receivable and prepayments of approximately $10.4 million. These
amounts were partially offset by net income of $7.7 million and
an increase in accounts payable and accrued liabilities of
approximately $13.3 million. Each of these increases was
primarily related to sales growth during the prior year. Other
significant cash flows included capital expenditures of $2.0
million and short-term borrowings of $3.5 million and maturities
of investments of $2.1 million.
At July 4, 1997, the Company's net working capital was $18.6
million, including $319,000 in cash and 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 accounts receivable of $8.6
million, an increase in prepayments and other of $1.1 million,
and an increase in inventories of $937,000, which was partially
offset by a decrease in cash and cash equivalents of $5.0 million
and increased short-term borrowings of $630,000. The Company
also has 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 July 4, 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 certain administrative and shipping expenses
less any principal payments made by the independent dealer. At
July 4, 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.
The Company is building a new corporate office facility in
Addison, Alabama at a cost of approximately $1.5 million and
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.
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 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 (approximately market
value on March 31, 1997 of $148,000) was made for earnings
targets achieved through December 31, 1996.
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.
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
Amendment of Certificate of Incorporation
The Corporation's certificate of Incorporation, as amended, was
amended on June 23, 1997 to increase the number of authorized
shares. Prior to such amendment, the Company had 21,000,000
shares authorized, of which 1,000,000 were shares of Preferred
Stock and 20,000,000 were shares of Common Stock. Following the
amendment, the Company had 41,000,000 shares authorized, of
which, 1,000,000 are shares of Preferred Stock and 40,000,000 and
shares of Common Stock.
Recent sales of Unregistered Securities
On April 30, 1997, the registrant issued 14,256 shares of common
stock, $.0001 par value (the "shares), to the stockholders of BR
Holding Corp. ("BR Holding) in connection with the registrant's
acquisition of BR Holding. The shares were issued as
consideration for the merger of BR Holding with a wholly owned
subsidiary of the registrant. As a result of the merger, the
registrant acquired all the issued and outstanding capital stock
of BR Holding. The aggregate additional consideration given by
the registrant was $207,000, of which $41,000 was paid in cash
and $148,000 was paid with shares.
The shares were issued in a transaction exempt from the
registration requirements of the Securities Act of 1933 pursuant
to Section 4(2) thereof. The Shares were issued to a limited
number of individuals who were sophisticated (or whose
representative was sophisticated) about business and financial
matters. The registrant made available to the purchaser's
information about the business and finances of the registrant,
including reports filed by the registrant pursuant to the
Securities Act of 1934. The registrant also permitted the
purchasers to ask questions of and receive answers from its
officers and directors concerning the registrant's business and
finances. The purchasers made certain representations to the
registrant as to, among other things, investment intent and
experience and sophistication as to business and financial
matters.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on June 4,
1997. At the meeting, the stockholders elected to serve as
members of the Board of Directors of the Company the persons
whose names are listed below. The stockholders also approved an
amendment to amend the Company's 1993 Stock Option Plan to
increase from 407,814 to 907,814 the number of shares reserved
for issuance thereunder and approved an amendment to the
Company's certificate of incorporation to increase from
21,000,000 to 41,000,000 the number of authorized shares. The
votes were as follows:
Election of Directors: For Withheld
Wendell L. Batchelor 11,521,394 24,037
Keith W. Brown 11,521,394 24,037
Jonathan O. Lee 11,521,394 24,037
Johnny R. Long 11,521,394 24,037
Paul J. Evanson 11,521,394 24,037
Joseph J. Incandela 11,521,394 24,037
1993 Stock Option Plan: For 11,333,736 Against 189,117
Abstain 22,578
Increase of authorized shares: For 11,048,099
Against 476,354 Abstain 20,978
Item 5. Other Information
On April 23, 1997, the Board of Directors of the Company voted to
approve the repurchase of up to 2,000,000 shares of its common
stock in the market from time to time over the next twelve
months. Through July 29, 1997, the Company has expended
approximately $7.7 million for the repurchase of 845,000 shares
of its common stock.
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
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: August 13, 1997 By: /s/ Wendell L. Batchelor
Wendell L. Batchelor,
Chairman, President
and Chief Executive Officer
Date: August 13, 1997 By: /s/ Keith W. Brown
Keith W. Brown, Executive Vice
President, Chief Financial
Officer, Treasurer and
Secretary
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