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 2, 1998 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)
(256) 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.
12,638,590 shares of Common Stock, $.0001 par value, as of
November 13, 1998
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION:
Item 1 Financial Statements
Consolidated Condensed Balance Sheets,
October 2, 1998 and January 2, 19 2
Consolidated Condensed Statements of Operations -
Thirteen Weeks Ended October 2, 1998 and October
3, 1997 and Thirty-nine Weeks Ended October 2,
1998 and October 3, 1997 3
Consolidated Condensed Statements of Cash Flows -
Thirty-nine Weeks Ended October 2, 1998 and
October 3, 1997 4
Notes to Consolidated Condensed Financial
Statements 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION 12
Item 1 Legal Proceedings
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES 15
I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
October 2, January 2,
1998 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,509,000 $ 17,676,000
Accounts receivable (less
allowance for doubtful accounts of
$209,000 and $180,000, respectively) 26,723,000 22,399,000
Installment contracts receivable
- current 184,000 165,000
Inventories 37,360,000 28,479,000
Deferred tax benefits 1,821,000 1,816,000
Prepayments and other 1,373,000 1,134,000
79,970,000 71,669,000
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 31,110,000 28,982,000
Less - accumulated depreciation 8,880,000 7,130,000
22,230,000 21,852,000
INTANGIBLES AND OTHER ASSETS
Installment contracts receivable,
less allowance for credit
losses of $470,000 and $696,000,
respectively 10,775,000 9,673,000
Goodwill 15,261,000 14,258,000
Non-compete agreements 626,000 421,000
Organization and pre-operating
costs 1,097,000 825,000
Other assets 5,295,000 4,555,000
33,054,000 29,732,000
$135,254,000 $123,253,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 24,632,000 $$ 15,932,000
Current maturities of long-term
debt 544,000 1,106,000
Accounts payable 10,185,000 3,449,000
Accrued liabilities 20,483,000 18,279,000
55,844,000 38,766,000
LONG-TERM DEBT 4,398,000 4,720,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par
value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.0001 par value,
40,000,000 shares authorized,
15,638,890 issued at October 2,
1998 and 15,572,326 shares
issued at January 2, 1998 2,000 2,000
Treasury stock, at cost,
2,637,800 shares at October 2,
1998 and 1,122,100 shares at
January 2, 1998 (24,090,000) (10,201,000)
Capital in excess of par 37,669,000 37,215,000
Retained earnings 61,431,000 52,751,000
75,012,000 79,767,000
$135,254,000 $123,253,000
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 Thirty-nine WeeksEnded
October 2, October 3, October 2, October 3,
1998 1997 1998 1997
Net revenues $82,120,000 $75,737,000 $231,341,000 $231,356,000
Cost of sales 67,751,000 63,642,000 189,010,000 194,840,000
Gross profit 14,369,000 12,095,000 42,331,000 36,516,000
Operating Expenses:
Selling, general
and administrative 10,026,000 5,774,000 26,891,000 17,955,000
Non-recurring
charges - - - 2,146,000
Amortization of
intangibles 154,000 202,000 464,000 636,000
10,180,000 5,976,000 27,355,000 20,737,000
Operating income 4,189,000 6,119,000 14,976,000 15,779,000
Interest expense 685,000 416,000 1,848,000 1,010,000
Interest income 253,000 137,000 728,000 208,000
Income before
income taxes 3,757,000 5,840,000 13,856,000 14,977,000
Provision for
income taxes 1,419,000 2,234,000 5,176,000 5,751,000
Net income $ 2,338,000 $ 3,606,000 $ 8,680,000 $ 9 ,226,000
Net income per
common share:
Basic $ 0.18 $ 0.25 $ 0.63 $ 0.61
Diluted $ 0.18 $ 0.24 $ 0.63 $ 0.60
Weighted average
number of common
shares:
Basic 13,296,029 14,693,233 13,698,468 15,161,050
Diluted 13,341,276 14,822,184 13,793,985 15,317,807
The accompanying notes are an integral part of these consolidated
financial statements.
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-nine Weeks Ended
October 2, October 3,
1998 1997
Operating activities:
Net income $ 8,680,000 $ 9,226,000
Adjustments to reconcile net income to
net cash used in
Operating activities:
Gain on sale of installment - (775,000)
contracts - 2,146,000
Non-recurring charge
Equity income of joint ventures (737,000) -
Depreciation of property and
equipment 2,133,000 1,474,000
Amortization of intangibles 688,000 636,000
(Credit) for deferred income taxes (5,000) (464,000)
Gain on sale of property and
equipment (34,000) -
Provision (credit) for doubtful
accounts 58,000 (39,000)
Provision (credit) for credit
losses 180,000 (100,000)
Origination of installment
contracts (1,707,000) (543,000)
Principal collected on originated
installment contracts 406,000 482,000
Change in assets and liabilities,
net of effect from purchase of
subsidiaries:
Inventories (2,223,000) 98,000
Accounts receivable (4,415,000) (11,907,000)
Prepayments and other (237,000) (132,000)
Other assets (3,000) -
Accounts payable 6,736,000 4,252,000
Accrued liabilities 2,203,000 (817,000)
Net cash provided by (used in)
operating activities 11,723,000 3,537,000
Investing activities:
Purchase of subsidiary, net of cash
acquired (7,187,000) -
Capital expenditures (1,821,000) (4,664,000)
Investment in joint ventures - (3,511,000)
Increase in organizational and pre-
operating costs (488,000) -
Proceeds from sale of property and
equipment 34,000 -
Net cash provided by (used in)
investing activities (9,462,000) (8,175,000)
Financing activities:
Purchases of treasury stock (13,889,000) (8,296,000)
Net borrowings on notes payable 6,891,000 80,000
Repayments on long-term debt (884,000) (252,000)
Borrowings on long-term debt - 5,633,000
Proceeds from exercise of stock
options 454,000 182,000
Proceeds from sale of installment
contracts - 16,736,000
Net cash provided by (used in)
financing activities (7,428,000) 14,083,000
Net increase (decrease) in cash and cash
equivalents (5,167,000) 9,445,000
Cash and cash equivalents at the
beginning of period 17,676,000 5,299,000
Cash and cash equivalents at the end of
period $ 12,509,000 $14,754,000
Supplemental cash flow information:
Cash paid for interest $ 1,882,000 $ 909,000
Cash paid for income taxes $ 3,885,000 $ 6,621,000
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 2, 1998,
which has been derived from audited financial statements, and the
unaudited interim consolidated condensed financial statements as
of October 2, 1998, 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 set forth therein.
Results of operations for the interim 1998 period is 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 2, 1998.
2. RECLASSIFICATIONS:
In the second quarter of 1998, the Company reclassified several
accounts. Prior period amounts have been reclassified to conform
with the 1998 presentation. There was no effect on net income or
stockholder's equity as a result of these reclassifications.
3. INVENTORIES:
Inventories are valued at first-in, first-out ("FIFO") cost,
which is not in excess of market. An analysis of inventories
follows:
October 2, January 2,
1998 1998
Raw materials $11,580,000 $ 9,498,000
Work in progress 1,107,000 1,089,000
Finished goods 24,673,000 17,892,000
$37,360,000 $28,479,000
4. NET INCOME PER SHARE:
Shares
Available
Net to Common Earning
Income Shareholders Per Share
Thirteen Weeks
Ended
October 2, 1998
Basic $2,338,000 13,296,029 $0.18
Dilutive effect
of options issued - 45,247 -
Diluted $2,338,000 13,341,276 $0.18
October 3, 1997
Basic $3,606,000 14,693,233 $0.25
Dilutive effect
of options issued - 128,951 (0.01)
Diluted $3,606,000 14,822,184 $0.24
Thirty-Nine Weeks
Ended
October 2, 1998
Basic $8,680,000 13,698,468 $0.63
Dilutive effect
of options issued - 95,517 -
Diluted $8,680,000 13,793,985 $0.63
October 2, 1997
Basic $9,226,000 15,161,050 $0.61
Dilutive effect
of options issued - 156,757 (0.01)
Diluted $9,226,000 15,317,807 $0.60
5. PENDING ACCOUNTING PRONOUNCEMENTS:
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-5, Reporting
on the Costs of Start-Up Activities, which is effective for
fiscal years beginning after December 15, 1998. This SOP
provides guidance on the financial reporting of start-up costs
and organization costs and generally requires such costs to be
expensed as incurred. Initial application of this SOP will
require previously deferred costs to be expensed and such change
will be reported as the cumulative effect of a change in
accounting principle.
6. BUSINESS COMBINATIONS:
During 1998, the Company completed the following acquisitions (in
millions):
Fair
Value of Purchase Price
Assets Intangibles Liabilities Consideration
Acquired Recorded Assumed Given
Date Seller
February U.S. Homes
1998 of Savannah $0.8 $0.0 $0.8 $0.0
April Rainbow
1998 Homes, Inc. 3.5 1.6 0.0 5.1
May 1998 Hospitality
Housing
Outlet Inc.
and
Foothills
Housing,
Inc. 0.8 0.1 0.7 0.2
July 1998 Cedar Creek
Homes, LLC 0.3 0.1 - 0.4
July 1998 Ken & Tina
Earp 0.2 - - 0.2
September Family
1998 Housing,
Inc. 0.6 0.1 - 0.7
September Baw, Inc.
1998 0.6 - - 0.6
$6.8 $1.9 $1.5 $7.2
The above acquisitions resulted in the purchase of 15 retail
sales centers. All acquisitions were accounted for under the
purchase method of accounting; thus the consolidated condensed
financial statements for the interim period reflect the
operations of the businesses acquired from the dates of
acquisition. Aggregate consideration given for all acquisitions
during 1998 consisted of approximately $7.2 million in cash and
liabilities assumed amounted to $1.5 million. Total intangibles
recorded consisted of $0.3 million in non-compete agreements and
$1.6 million in goodwill. The Company amortizes goodwill over 30
years and non-competes over the life of the agreements which are
generally 4 to 10 years.
7. 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 $85.0
million as of October 2, 1998. 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.
8. LEGAL PROCEEDINGS:
The Company has entered into a contract with Gesellschoft fur
Bauen Und Wohnen Hannover MbH ("GBH"), a German housing
authority, which provided for the construction of two modular
home projects. GBH has informed the Company that it has
chosen a local company to complete the second project. GBH
originally indicated that the first project was completed
satisfactorily, but subsequently asserted warranty claims against
the Company. GBH also claims the Company is responsible for its
additional costs on the second project. The Company claims GBH
is withholding monies due it from the first project and disputes
its liability for the warranty claims on the first project and
the extra costs on the second project. GBH attempted on March
26, 1997 to draw on a Company letter of credit but an Alabama
state court issued a temporary restraining order enjoining
payment on the letter of credit. In January, 1998, the Alabama
Supreme Court, without ruling on the merits of whether GBH was
committing fraud by drawing on the letter of credit, issued an
opinion allowing GBH to draw on the letter of credit. GBH
promptly drew on the Company's letter of credit in the amount of
$580,000. There has not been any discovery or decision on the
merits of the underlying transaction and whether the Company has
a valid claim to recover the money paid under the letter of
credit. After payment of the letter of credit, other than
potential warranty claims, management believes there is no other
material exposure to the Company with regard to GBH. At this
time there is no activity of any kind by GBH to assert any claims
against the Company.
The Company has been named, along with several other manufactured
housing companies, as a defendant in a class action lawsuit filed
in Kentucky in September 1998, claiming wrongful conduct,
fraudulent misrepresentation and that manufactured housing units
are unsafe and/or dangerous for residential use. The amount of
the damages has not been specified. The Company believes the
claims are without merit and plans to vigorously defend itself
against these claims. However, the outcome of the litigation can
not be predicted and such outcome could have a material adverse
effect on the Company.
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 excess of the amounts reserved.
9. TREASURY STOCK REPURCHASE:
In October 1998, the Company extended its stock repurchase
program for an additional twelve months and increased the number
of shares eligible for purchase from 3,000,000 to 4,000,000.
From the inception of the program to November 13, 1998, the
Company has repurchased 3,000,300 shares at a cost of
$26,282,000, or an average cost of $8.76 per share. The Company
paid for these purchases out of available cash.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Thirty-nine weeks and thirteen weeks ended October 2, 1998 as
compared with thirty-nine and thirteen weeks ended October 3,
1997.
Net Revenues
Total net revenues (gross sales less volume discounts, returns
and allowances plus finance revenues) for the thirty-nine weeks
ended October 2, 1998 were $231.3 million, as compared with
$231.4 million in the prior year period. For the thirteen weeks
ended October 2, 1998, total net revenues were $82.1 million, up
8.4% from $75.7 million for the comparable period a year ago.
Net revenues from the wholesale sale of manufactured homes were
$173.1 million for the thirty-nine weeks ended October 2, 1998,
as compared to $194.3 million for the prior year period, which
represented a decrease of 10.9%. The decrease in total
manufacturing revenue was primarily attributable to a decrease in
the number of homes sold. Total homes shipped in the thirty-nine
weeks ended October 2, 1998 was 6,786, down 6.4%, from the
comparable prior year. The decrease in homes sold in the thirty-
nine weeks ended October 2, 1998 was attributable to decreases in
demand for manufactured homes at the wholesale level and to the
closing of the Company's Pennsylvania facility in the fall of
1997. For the thirteen weeks ended October 2, 1998, manufactured
housing segment revenues were $60.2 million, a decrease of 3.5%
from revenues of $62.4 million for the prior year period. The
decrease in total manufacturing revenue was primarily
attributable to a decrease in the average wholesale price per
home. Total homes shipped in the thirteen weeks ended October 2,
1998 were 2,343, up .1%, from the comparable prior year. The
average wholesale price per home for the thirty-nine and thirteen
weeks ended October 2, 1998 was $27,408 and $27,525,
respectively, up .4% and down 1.5%, respectively, from the
average of $27,301 and $27,931 for the comparable prior year
periods.
Net revenues from the retail sale of manufactured homes were
$57.3 million for the thirty-nine weeks ended October 2, 1998, as
compared to $35.7 million for the prior year period, which
represented an increase of 60.5%. For the thirteen weeks ended
October 2, 1998, retail revenues were $21.6 million, an increase
of 68.8% from revenues of $12.8 million for the prior year
period. Total retail homes sold in the thirty-nine and thirteen
weeks ended October 2, 1998 amounted to 1,681 and 643,
respectively, up 66.4% and 61.2% respectively, from the number of
homes sold in the comparable prior year periods. The increase in
retail revenues and retail homes sold was attributable to an
increase in the total number of retail centers from 12 in each of
the comparable prior year periods to a total of 34 at October 2,
1998.
Revenues from the Company's retail finance subsidiary were
$858,000 and $290,000, respectively, for the thirty-nine and
thirteen weeks ended October 2, 1998, as compared with revenues
of $1.4 million and $463,000 for the comparable prior year
periods. The decreases were attributable to the decreased
lending activity by the Company's wholly owned subsidiary, Wenco
Finance, Inc. ("Wenco Finance"). Wenco Finance originated and
serviced 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, continues to offer 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 Finance has limited its loan origination activities to
previously repossessed homes.
Gross Profit
Gross profit consists of net revenues less the cost of sales,
which includes labor, materials, and overhead. Gross profit for
the thirty-nine weeks ended October 2, 1998 increased to $42.3
million, or 18.3% of net revenues, from $36.5 million, or 15.8%
of net revenues, in the prior year period. For the thirteen
weeks ended October 2, 1998 gross profit was $14.4 million, or
17.5% of net revenues, as compared with $12.1 million, or 16.0%
of net revenues in the prior year period. The increases in gross
profit percentages are attributable to increased sales from the
Company's retail segment, which have a higher gross margin than
sales to independent dealers, and to higher gross margins on
wholesale sales attributable in part to favorable raw material
prices.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include primarily
sales commissions, advertising expenses, freight costs, salaries
for support personnel, administrative compensation, insurance
costs, and professional fees. Selling, general and administrative
expenses were $26.9 million, or 11.6% of net revenues, during the
thirty-nine weeks ended October 2, 1998, as compared with $18.0
million, or 7.8% of net revenues, for the same period of the
prior year. For the thirteen weeks ended October 2, 1998,
selling, general and administrative expenses were $10.0 million,
or 12.2% of net revenues, as compared with $5.8 million, or 7.6%
of net revenues, for the same period of the prior year. The
increase in selling, general and administrative expenses was
attributable primarily to the higher level of selling expenses
generally associated with the Company's retail operation, general
salary increases and the addition of new employees who were hired
in order to staff retail operations.
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. The impact of
the facility on the operating income of the Company was
immaterial during the thirty-nine weeks ended October 3, 1997.
Interest Expense
Interest expense for the thirty-nine weeks ended October 2, 1998
was $1.8 million, as compared with $1.0 million in the prior year
period. For the thirteen weeks ended October 2, 1998, interest
expense was $685,000, as compared with $416,000 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 thirty-nine weeks ended October 2, 1998
was $728,000, as compared with $208,000 in the comparable prior
year period. For the thirteen weeks ended October 2, 1998,
interest income was $253,000, as compared with $137,000 in the
prior year period. The increase in interest income in the
current year periods reflects higher average cash and cash
equivalent 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 thirty-nine weeks ended
October 2, 1998 was $5.2 million, or an effective tax rate of
37.4%, as compared with $5.8 million, or an effective tax rate
38.4% in the prior year period. For the thirteen weeks ended
October 2, 1998, income tax expense was $1.4 million, or an
effective tax rate of 37.8%, as compared with $2.2 million, or an
effective tax rate of 38.3% in the prior year periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
During the thirty-nine weeks ended October 2, 1998, the Company's
cash provided by operations was approximately $11.7 million.
Cash was provided by net income of $8.7 million and increased
accounts payable and accrued liabilities totaling $8.9 million.
These amounts were partially offset by cash used in operations,
which included increased accounts receivable, prepayments and
other, and inventory totaling $6.9 million and a decrease in
originations of installment contracts of $1.7 million. Other
cash flows included purchases of subsidiaries for $7.2 million,
capital expenditures of $1.8 million, increased organizational
and pre-operating expenses of $488,000, purchase of treasury
stock of $13.9 million, increased borrowings on notes payable of
$6.9 million, repayments of long-term debt of $884,000 and
proceeds from exercise of stock options of $455,000.
During the thirty-nine weeks ended October 3, 1997, the Company's
cash provided by operations was approximately $3.5 million. Cash
used by operations included increased accounts receivable,
prepayments and other, and inventory totaling $11.9 million, a
decrease in accrued liabilities of $817,000, and originations of
installment contracts of $543,000. These amounts were partially
offset by net income, after a $2.1 million non-recurring charge,
of $9.2 million and increased accounts payable of $4.3 million.
In addition to cash provided by operating activities, other
significant cash flows included capital expenditures of $4.7
million, investment in joint ventures totaling $3.5 million, long
term borrowings of $5.6 million, proceeds from the sale of
installment contracts of $16.7 million and purchase of treasury
stock of $8.3 million.
At October 2, 1998, the Company's net working capital was $24.1
million, including $12.5 million in cash and cash equivalents, as
compared with $32.9 million at January 2, 1998, including $17.7
million in cash and cash equivalents. The decrease in net
working capital was primarily a result of a decrease in cash and
cash equivalents of $5.2 million, and increased accrued
liabilities of $2.1million, partially offset by decreased notes
payable of approximately $8.7 million, increased accounts payable
of $6.7 million, increased accounts receivable of $4.4 million,
and increased inventories of $8.8 million. The Company also has
a $25.0 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 $7,000,000 in borrowings
outstanding under this line at October 2, 1998.
Substantially all of the Company's 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
October 2, 1998, the Company's contingent repurchase liability
under floor-plan financing arrangements was approximately $85.0
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
In April 1998, the Company acquired substantially all of the
assets of a manufactured housing retailer in Kentucky and West
Virginia at a purchase price of approximately $5.1 million. In
May 1998, the Company acquired substantially all of the assets of
a manufactured housing retailer in South Carolina at a purchase
price of approximately $200,000. In July 1998, the Company
acquired substantially all the assets of a manufactured housing
retailer in Kentucky at a purchase price of approximately
$460,000. Also in July 1998, the Company acquired property in
Kentucky at a purchase price of $220,000. In September 1998,
the Company acquired substantially all the assets of two
manufactured housing retailers one in Tennessee and one in
Georgia at a purchase price of approximately $1.3 million. In
the foregoing acquisitions, the Company assumed liabilities of
$1.5 million. See Note 6 of Notes to the Consolidated Financial
Statements.
Capital Expenditures
In October 1998, the Company approved the expenditure of $3.3
million to upgrade the Company's software programs and operating
systems. The Company anticipates it will fund these expenditures
through a combination of equipment leasing and available cash.
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.
Year 2000 Compliance
Many currently installed computer systems and software products
are coded to accept only two-digits entries in the date code
field and cannot distinguish dates after the year 2000. These
date code fields will need to distinguish "Year 2000" dates from
earlier dates and, as a result, many companies' software and
computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. Although the Company
is currently working to resolve the potential impact of the Year
2000 issue on the computerized systems it utilizes internally,
and with regard to its products and customers, at this time, the
Companies systems are not Year 2000 compliant.
Beginning in the fourth Quarter of 1998, the Company will
commence replacement of its current information technology system
with a new system. The replacement, which is expected to be
completed in mid-calendar year 1999, is required to meet current
and future needs of the Company's business as well as to make
more efficient various administrative and operating functions.
Because the Company did not undertake this replacement for
reasons of Year 2000 compliance, the costs of this conversion
have not been identified as Year 2000 compliance costs. The
current upgrading of the Company's software programs and
operating systems will cost approximately $3.3 million. Although
the Company has not yet determined how it will fund the systems
upgrade, the Company anticipates it will fund such expenditures
through a combination of equipment leasing and available cash.
The Company believes that these new programs and systems will be
Year 2000 compliant.
The failure of the Company to make its systems Year 2000
compliant in a timely manner will have a material adverse effect
on the Company.
The Company relies upon various vendors, utility companies,
telecommunications service companies, delivery service companies
and other service providers, which are outside of the Company's
control. The failure of such service providers to make their
systems Year 2000 compliant could have a material adverse effect
on the Company's financial condition and results of operations.
The Company has not yet determined the extent to which the
computer systems of such service providers are Year 2000
compliant, if at all. The failure of the Company's vendors to
make their systems Year 2000 compliant in a timely manner will
have a material adverse effect on the Company.
"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; the failure of the Company or its vendors to
make their systems Year 2000 compliant in a timely manner; 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 has entered into a contract with Gesellschoft fur
Bauen Und Wohnen Hannover MbH ("GBH"), a German housing
authority, which provided for the construction of two modular
home projects. GBH has informed the Company that it has
chosen a local company to complete the second project. GBH
originally indicated that the first project was completed
satisfactorily, but subsequently asserted warranty claims against
the Company. GBH also claims the Company is responsible for its
additional costs on the second project. The Company claims GBH
is withholding monies due it from the first project and disputes
its liability for the warranty claims on the first project and
the extra costs on the second project. GBH attempted on March
26, 1997 to draw on a Company letter of credit but an Alabama
state court issued a temporary restraining order enjoining
payment on the letter of credit. In January, 1998, the Alabama
Supreme Court, without ruling on the merits of whether GBH was
committing fraud by drawing on the letter of credit, issued an
opinion allowing GBH to draw on the letter of credit. GBH
promptly drew on the Company's letter of credit in the amount of
$580,000. There has not been any discovery or decision on the
merits of the underlying transaction and whether the Company has
a valid claim to recover the money paid under the letter of
credit. After payment of the letter of credit, other than
potential warranty claims, management believes there is no other
material exposure to the Company with regard to GBH. At this
time there is no activity of any kind by GBH to assert any claims
against the Company.
The Company has been named, along with several other manufactured
housing companies, as a defendant in a class action lawsuit filed
in Kentucky in September 1998, claiming wrongful conduct,
fraudulent misrepresentation and that manufactured housing units
are unsafe and/or dangerous for residential use. The amount of
the damages has not been specified. The Company believes the
claims are without merit and plans to vigorously defend itself
against these claims. However, the outcome of the litigation can
not be predicted and such outcome could have a material adverse
effect on the Company.
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 excess of the amounts reserved.
Item 5. Other Information
In October 1998, the Company extended its stock repurchase
program for an additional twelve months and increased the number
of shares eligible for purchase from 3,000,000 to 4,000,000.
From the inception of the program to November 13, 1998, the
Company has repurchased 3,000,300 shares at a cost of
$26,282,000, or an average cost of $8.76 per share. The Company
paid for these purchases out of available cash.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are incorporated herein by reference.
3.1 Certificate of incorporation of the Company, as amended
(filed as Exhibit 3.1 to the Registration Statement on Form S-3,
Registration No. 333-32933.)
3.2 By-Laws of the Company. (Filed as Exhibit 3.2 to the
Registration Statement on Form S-1, Registration No. 33-57420.)
4.1 Specimen of Stock Certificate. (Filed as Exhibit 4.1 to the
Registration Statement on Form S-1, Registration No. 33-57420.)
4.2 Southern Development Council, Inc. Promissory Note. (Filed
as Exhibit 4.10 to the Registration Statement on Form S-1,
Registration No. 33-57420.)
4.3 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.)
4.4 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.)
10.1 Employment Agreement with Wendell L. Batchelor, dated as of
June 8, 1989. (Filed as Exhibit 10.1 to the Registration
Statement on Form S-1, Registration No. 33-57420.)
10.2 Employment Agreement with Keith Brown, dated as of June 8,
1989. (Filed as Exhibit 10.2 to the Registration Statement on
Form S-1, Registration No. 33-57420.)
10.3 Employment Agreement with Johnny R. Long, dated as of June
8, 1989. (Filed as Exhibit 10.3 to the Registration Statement on
Form S-1, Registration No. 33-57420.)
10.4 Southern Energy Homes, Inc. 1993 Stock Option Plan. (Filed
as Exhibit 10.4 to the Registration Statement on Form S-1,
Registration No. 33-57420.)
10.5 Form of Southern Energy Homes, Inc. 401(k) Retirement Plan.
(Filed as Exhibit 10.5 to the Registration Statement on Form S-1,
Registration No. 33-57420.)
10.6 Management Agreement, effective as of June 8, 1989, by and
between Lee Capital Holdings and Southern Energy Homes, Inc.
(Filed as Exhibit 10.14 to the Registration Statement on Form S-
1, Registration No. 33-57420.)
10.7 Southern Development Council, Inc. Loan Commitment
Agreement. Filed as Exhibit 10.15 to the Registration Statement
on Form S-1, Registration No. 33-57420.)
10.8 Lease Agreement by and between Hillard Brannon and Southern
Energy Homes, Inc., dated July 30, 1992. (Filed as Exhibit 10.16
to the Registration Statement on Form S-1, Registration No. 33-
57420.)
10.9 Lease Agreement by and between Hillard Brannon and Southern
Energy Homes, Inc., dated November 16, 1989. (Filed as Exhibit
10.17 to the Registration Statement on Form S-1, Registration No.
33-57420.)
10.10 Lease Agreement by and between Robert Lowell Burdick,
Nina Burdick Vono, Carolyn Burdick Hunsaker, Jean Burdick Hall,
Mildred Burdick Marmont and Lane Burdick Adams as Landlord, and
Southern Energy Homes, Inc., dated as of November 20, 1985.
(Filed as Exhibit 10.23 to the Registration Statement on Form S-
1, Registration No. 33-57420.)
10.11 Agreement and Plan of Merger of Southern Energy Homes,
Inc., a Delaware corporation, and Southern Energy Homes, Inc., an
Alabama corporation, dated as of January 15, 1993. (Filed as
Exhibit 10.25 to the Registration Statement on Form S-1,
Registration No. 33-57420.)
10.12 Certificate of Merger Merging of Southern Energy Homes,
Inc., an Alabama corporation, with and into Southern Energy
Homes, Inc., a Delaware corporation, dated as of January 19,
1993. (Filed as Exhibit 10.26 to the Registration Statement on
Form S-1, Registration No. 33-57420.)
10.13 Assignment of Lease and Rights dated June 29, 1993
between B.B.H.L.P Partnership and Southern Energy Homes, Inc.
(Filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for
the quarter ended July 2, 1993, File No. 0-21204.)
10.14 Lease Agreement dated as of June 1, 1984 between the
Industrial Development Board of the town of Addison, Alabama and
B.B.H.L.P Partnership. (Filed as Exhibit 10.2 to the Quarterly
Report on Form 10-Q for the quarter ended July 2, 1993, File No.
0-21204.)
10.15 Agreement Of Lease and Rights dated June 19, 1993
between B.B.H.L.P and Southern Energy Homes, Inc. (Filed as
Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter
ended July 2, 1993, File No. 0-21204.)
10.16 Lease Agreement dated as of December 1,1986 between the
Industrial Development Board of the town of Addison, Alabama and
B.B.H.L.P Partnership. (Filed as Exhibit 10.4 to the Quarterly
Report on Form 10-Q for the quarter ended July 2, 1993, File No.
0-21204.)
10.17 Letter Agreement dated May 18, 1993 and Master Note
dated May 19, 1993 between the Company and AmSouth Bank, N.A.
(Filed as Exhibit 10.27 to the Registration Statement on Form S-
1, Registration No. 33-68954.)
10.18 Deed of Real Estate dated August 5, 1993 relating to
the Company's Plant No. 2 in Addison, Alabama. (Filed as Exhibit
10.27 to the Registration Statement on Form S-1, Registration No.
33-68954.)
10.19 Deed of Real Estate dated July 30, 1993 relating to the
Company's manufacturing facility in Fort Worth, Texas. (Filed as
Exhibit 10.27 to the Registration Statement on Form S-1,
Registration No. 33-68954.)
10.20 Southern Energy Homes, Inc.1996 Option Plan for Non-
employee Directors. (Filed as Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the year ended December 29, 1995.)
10.21 Agreement and Plan of Reorganization of Southern Energy
Homes, Inc. a Delaware Corporation, and SE Management, Inc. an
Alabama Corporation, dated November 22, 1996.
10.22 Amended and Restated Employment Agreement with Wendell
L. Batchelor, dated as of June 14, 1996.
10.23 Amended and Restated Employment Agreement with Keith W.
Brown, dated as of June 14, 1996.
10.24 Asset Purchase Agreement, dated as of December 3, 1997,
by and among the Registrant, A&G, Inc. and the sole stockholder
of A&G, Inc. (Filed as Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended January 2, 1998.)
10.25 Asset Purchase Agreement, dated as of April 3, 1998,
by and among Southern Energy S. C. Retail Corp., Rainbow Homes,
Inc. and the sole stockholder of Rainbow Homes, Inc.
27 Financial Data Schedule.
(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: November 13, 1998 By: /s/ Wendell L. Batchelor
Wendell L. Batchelor, Chairman, President
and Chief Executive Officer
Date: November 13, 1998 By: /s/ Keith W. Brown
Keith W. Brown, Executive Vice President,
Chief Financial Officer, Treasurer and
Secretary
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