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 1, 1999 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.
12,132,990 shares of Common Stock, $.0001 par value, as of November 15, 1999
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION:
Condensed Consolidated Condensed Balance Sheets,
October 1, 1999 and January 1, 1999 2
Condensed Consolidated Statements of Operations -
Thirteen Weeks Ended October 1, 1999
and October 2, 1998 and Thirty-nine weeks
Ended October 1, 1999 and October 2, 1998 3
Condensed Consolidated Statements of Cash
Flows - Thirty-nine Weeks Ended October 1,
1999 and October 2, 1998 4
Notes to Condensed Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION 13
SIGNATURES 16
I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
October 1, January 1,
1999 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,901,000 $ 4,261,000
Accounts receivable (less allowance
for doubtful accounts of $216,000
and $166,000, respectively) 28,709,000 23,071,000
Installment contracts receivable 165,000 211,000
Inventories 34,766,000 36,790,000
Deferred tax benefits 2,468,000 1,919,000
Prepayments and other 948,000 803,000
70,957,000 67,055,000
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 36,632,000 32,674,000
Less - accumulated depreciation 11,346,000 9,354,000
25,286,000 23,320,000
INTANGIBLES AND OTHER ASSETS
Installment contracts receivable,
less allowance for credit Losses of
$227,000 and $295,000, respectively 11,674,000 11,130,000
Goodwill 11,437,000 14,995,000
Non-compete agreements 271,000 575,000
Investment in joint ventures 5,614,000 4,963,000
Other assets 723,000 730,000
29,719,000 32,393,000
$125,962,000 $122,768,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable $ 5,025,000 $ 20,556,000
Notes payable 20,000,000 -
Current maturities of long-term debt 544,000 1,099,000
Accounts payable 8,444,000 4,393,000
Accrued liabilities 17,634,000 19,702,000
51,647,000 45,750,000
LONG-TERM DEBT 3,296,000 3,569,000
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 1,
1999 and at January 1, 1999 2,000 2,000
Treasury stock, at cost, 3,505,900
shares at October 1, 1999 and
3,000,300 shares at January 1, 1999 (29,354,000) (26,282,000)
Capital in excess of par 37,682,000 37,682,000
Retained earnings 62,689,000 62,047,000
71,019,000 73,449,000
$125,962,000 $122,768,000
The accompanying notes are an integral part of these condensed
consolidated financial statements.
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Ended Thirty-nine weeks Ended
October 1 October 2, October 1, October 2,
1999 1998 1999 1998
Net revenues $63,856,000 $82,145,000 $207,151,000 $231,367,000
Cost of sales 53,569,000 67,777,000 172,283,000 189,036,000
Gross profit 10,287,000 14,368,000 34,868,000 42,331,000
Operating Expenses:
Selling, general and
administrative 8,365,000 10,025,000 25,944,000 26,891,000
Amortization of
intangibles 70,000 154,000 263,000 464,000
Non-Recurring Charge 6,387,000 -0- 6,387,000 -0-
14,822,000 10,179,000 32,594,000 27,355,000
Operating income (4,535,000) 4,189,000 2,274,000 14,976,000
Interest expense 500,000 685,000 1,510,000 1,848,000
Interest income 68,000 253,000 240,000 728,000
Income before income
taxes (4,967,000) 3,757,000 1,004,000 13,856,000
Provision for income
taxes (1,900,000) 1,419,000 362,000 5,176,000
Net income $(3,067,000) $ 2,338,000 $ 642,000 $ 8,680,000
Net income per common share:
Basic $(0.25) $ 0.18 $0.05 $ 0.63
Diluted $(0.25) $ 0.18 $0.05 $ 0.63
Weighted average number of common shares:
Basic 12,132,990 13,296,029 12,191,277 13,698,468
Diluted 12,132,990 13,341,276 12,191,277 13,793,985
The accompanying notes are an integral part of these condensed
consolidated financial statements
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-nine Weeks Ended
October 1, October 2,
1999 1998
Operating activities:
Net income $ 642,000 $8,680,000
Adjustments to reconcile net income to net
cash used in operating activities:
Equity income of joint ventures (985,000) (737,000)
Distribution from joint ventures 640,000 -
Depreciation of property and equipment 1,992,000 2,133,000
Non-recurring charge 6,387,000 -0-
Amortization of intangibles 263,000 688,000
Provision (credit) for deferred income
taxes (549,000) (5,000)
(Gain) loss on sale of property and
equipment (10,000) (34,000)
Provision for doubtful accounts receivable 55,000 58,000
Origination of installment contracts (2,037,000) (1,707,000)
Provision for credit losses on
installment contracts 317,000 180,000
Principal collected on originated
installment contracts 1,222,000 406,000
Change in assets and liabilities, net of effect from
purchase of subsidiary:
Inventories 774,000 (2,223,000)
Accounts receivable (5,693,000) (4,415,000)
Prepayments and other (180,000) (237,000)
Other assets (211,000) (3,000)
Accounts payable 4,051,000 6,736,000
Accrued liabilities (4,155,000) 2,203,000
Net cash provided by
operating activities 2,523,000 11,723,000
Investing activities:
Purchase of subsidiary, net of cash
acquired - (7,187,000)
Capital expenditures (3,958,000) (1,821,000)
Investments in joint ventures (88,000) -
Increase in organizational and pre-
operating costs - (488,000)
Proceeds from sale of property and
equipment 594,000 34,000
Net cash provided by
investing activities (3,452,000) (9,462,000)
Financing activities:
Purchases of treasury stock (3,072,000) (13,889,000)
Net borrowings on notes payable 4,469,000 6,891,000
Repayments on long-term debt (828,000) (884,000)
Proceeds from exercise of stock options - 454,000
Net cash provided by (used in)
financing activities 569,000 (7,428,000)
Net increase (decrease) in cash and cash
equivalents (360,000) (5,167,000)
Cash and cash equivalents at the beginning
of period 4,261,000 17,676,000
Cash and cash equivalents at the end of
period $3,901,000 $12,509,000
Supplemental cash flow information:
Cash paid for interest $1,510,000 $1,882,000
Cash paid for income taxes $3,612,000 $3,885,000
The accompanying notes are an integral part of these
consolidated condensed financial statements.
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated condensed balance sheet as of January 1, 1999, which has
been derived from audited financial statements, and the unaudited interim
consolidated condensed financial statements as of October 1, 1999, 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 1999 period 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 1, 1999.
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 1, January 1,
1999 1999
(Unaudited)
Raw materials $7,973,000 $10,938,000
Work in progress 802,000 1,166,000
Finished goods 25,991,000 24,686,000
$34,766,000 $36,790,000
3. EARNINGS PER SHARE:
The EPS results are as follows:
Shares Available
to Common
Net Income (Loss) Shareholders Earning (Loss) Per Share
Thirteen Weeks
Ended
October 1, 1999
Basic $(3,067,000) 12,132,990 $(0.25)
Dilutive effect
of options issued - - -
Diluted $(3,067,000) 12,132,990 $(0.25)
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
Shares Available
to Common
Net Income Shareholders Earning Per Share
Thirty-nine Weeks
Ended
October 1, 1999
Basic $642,000 12,191,277 $0.05
Dilutive effect
of options issued - - -
Diluted $642,000 12,191,277 $0.05
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
Options outstanding of 533,281 for the thirty-nine weeks and thirteen weeks
ended October 1, 1999 were not included in the tables above as they were
antidilutive.
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
$83 million as of October 1, 1999. 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 of the Company.
5. LEGAL PROCEEDINGS:
On March 1, 1999, the Company, without admitting any liability, entered into
a settlement with HUD that requires the Company to correct construction and
safety violations in homes manufactured at the North Carolina manufacturing
facility. In addition, the settlement requires the Company to inspect 600
additional homes for possible violations. The Company has agreed to a
one-year warranty extension of certain homes. HUD claimed that the Company
failed to comply with the consumer notification and defect correction
requirements of The National Manufactured Housing Construction and Safety
Standards Act of 1974. The Company has been assessed a civil penalty by HUD
of up to $300,000 in connection with the settlement; however, this penalty
can be reduced by HUD depending on Company actions.
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 cannot 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 losses in excess of the amounts reserved.
6. 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
October 1, 1999, the Company has repurchased 3,505,900 shares at a cost of
$29,354,388, or an average cost of $8.37 per share. During the first quarter
of 1999, the Company repurchased 505,600 shares at a cost of $3,072,350,
or an average cost of $6.08 per share. The Company paid for these
repurchases out of available cash. No shares were repurchased during
the second or third quarter of 1999.
7. NORTH CAROLINA CLOSURE
On July 26, 1999, management closed the Company's
manufactured housing facility located in North Carolina. The
decision was based primarily on changes in local market
conditions and operating results of the facility. The exit
plan began when the Company discontinued production on July
26, 1999, and will include the sale of existing inventories
and ultimate sale of the facility. Management expects to be
substantially complete with the exit plan by December 31,
1999. In connection with the decision to close the North
Carolina facility, the Company will incur losses on the
impairment of the facility's assets and accrued certain other
expenses related to the closure. The Company estimates that
the impairment losses consisting primarily of impairment of
goodwill, and other incremental expenses will approximate
$6.4 million, pre-tax. Although this amount represents
management's best estimate of total costs to close the
facility, the actual cost could ultimately differ from this
amount. The Company has recorded the exit costs as a non-
recurring charge in the accompanying statement of operations.
During the twenty-six weeks ended July 2, 1999 and July 3,
1998, this facility generated 4.4% and 6.8%, respectively, of
the total revenues of the Company. The impact of this
facility on the operating income of the Company was a pre-tax
loss of $1.3 million ($800,000 after-tax) and a pre-tax
profit of $245,000 ($150,000 after-tax) during the twenty-six
weeks ended July 2, 1999 and July 3, 1998, respectively.
8. SEGMENT AND RELATED INFORMATION
The Company has three primary reportable segments:
manufacturing, retail operations, and component supply. The
manufacturing segment produces manufactured homes for sale to
independent and company owned retail centers. The retail
operations segment sells to retail customers homes
which have been produced by various manufacturers including
the Company's manufacturing segment. The component supply
segment sells various supply products to the Company's
manufacturing segment and to third party customers.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
The Company evaluates performance based on total (external
and intersegment) revenues, gross profit, and net income.
The Company accounts for intersegment sales and transfers as
if the sales or transfers were to third parties, that is at
current market prices. The Company does not allocate income
taxes, interest income, and interest expense and unusual
items to all segments. In addition, not all segments have
significant noncash items other than depreciation and
amortization in reported profit or loss. There has been no
change in the Company's basis of segmentation between January
1, 1999 and October 1, 1999. For segment purposes,
there has been no material change in total assets between
January 1, 1999 and October 1, 1999.
The Company's reportable segments are strategic business
units that offer different products and services. They are
managed separately because each business requires different
operating and marketing strategies. The following table
presents information about segment profit or loss, dollars in
thousands:
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 1, October 2, October 1, October 2,
1999 1998 1999 1998
Revenues:
Manufacturing $48,868 $64,518 $168,404 $186,106
Retail 17,758 20,584 51,691 57,295
Component supply 11,118 15,113 39,768 44,773
Other operating
segments 296 207 932 858
Eliminations (14,184) (18,277) (53,644) (57,665)
Total revenures $63,856 $82,145 $207,151 $231,367
Gross profit:
Manufacturing $ 5,197 $ 7,763 $ 18,273 $ 22,759
Retail operations 4,757 6,226 14,570 17,004
Component supply 818 1,169 3,141 4,019
Other operating
segments (371) (478) (815) (739)
Eliminations (114) (312) (301) (712)
Gross profit $10,287 $14,368 $34,868 $42,331
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 1, October,2 October 1, October 2,
1999 1998 1999 1998
Segment operating income:
Manufacturing $(4,426) $ 4,322 $ 1,472 $ 12,321
Retail operations (495) (859) (1,409) 30
Component supply 401 727 1,871 2,642
Corporate (204) (721) (151) (1,389)
Other operating
segments 189 720 491 1,372
(4,535) 4,189 2,274 14,976
Income/expenses not allocated
to segments:
Interest income, net (432) (432) (1,270) (1,120)
Provision for income
taxes 1900 (1,419) (362) (5,176)
Net income (Loss) $(3,067) $ 2,338 $ 642 $ 8,680
Revenue from segments below the quantitative thresholds is attributable to
three other operating segments of the Company. Those segments include a
trucking business, a finance business, and a small insurance business.
None of those segments has ever met any of the quantitative thresholds for
determining reportable segments. The Corporate segment does not generate
any revenues, but does incur certain administrative elements.
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 1, 1999 as compared
with thirty-nine weeks and thirteen weeks ended October 2, 1998.
Net Revenues
Total net revenues (gross sales less volume discounts,
returns and allowances) for the thirty-nine weeks
ended October 1, 1999 were $207.1 million, as
compared with $231.4 million in the prior year period.
For the thirteen weeks ended October 2, 1999,
total net revenues were $63.8 million, as compared with
$82.1 million for the comparable period a year ago.
Net revenues from the wholesale sale of manufactured homes
were $168.4 million (including intersegment revenues of
$23.6 million) for the thirty-nine weeks ended
October 1, 1999, as compared with $186.1 million
(including intersegment revenues of $22.6 million) for
the prior year period, a decrease of 9.5%. The decline in
manufacturing revenue was primarily attributable to decreased
demand, resulting from excessive retail inventories industry
wide, and closure of the North Carolina plant in July of
1999. Total homes shipped for the thirty-nine weeks
ended October 1, 1999 was 6,256, down 7.8%
from the number of homes shipped in the prior year period.
The average wholesale price per home for the thirty-nine weeks ended
October 1, 1999 was $26,919, as compared with $27,408 in the prior year
period, a decline of 1.8%. For the thirteen weeks ended October 1,
1999, net revenues from the wholesale sale of manufactured
homes were $48.9 million (including intersegment
revenues of $5.7million), as compared with $64.5
million (including intersegment revenues of $7.2 million)
for the prior year period, a decrease of 24.2%. The
decline in manufacturing revenue was primarily attributable
to decreased demand, resulting from excessive retail
inventories industry wide, and closure of the North Carolina
plant in July of 1999. Total homes shipped for the thirteen weeks
ended October 1, 1999 was 1,790, down 23.6% from the number of homes
shipped in the prior year period. The average wholesale price per
home for the thirteen weeks ended October 1, 1999 was $27,300, as compared
with $27,525 in the prior year period.
Net revenues from the retail sale of manufactured homes were
$51.7 million for the thirty-nine weeks ended
October 1, 1999, as compared with $57.3 million for
the prior year period, a decrease of 9.8%. Total retail
homes sold for the thirty-nine weeks ended October 1, 1999 was1,397,
down 16.9% from the number of homes sold in the prior year period.
The decline in retail revenues was attributable to a decrease in retail
homes sold, partially offset by an slight increase in the
average retail price per new homes sold during the thirty-nine weeks
ended October 1, 1999. For the thirteen weeks ended October 1, 1999,
net revenues from the retail sale of manufactured homes were $17.8 million,
as compared with $20.6 million for the prior year period, a
decrease of 13.6%. Total retail homes sold for the
thirteen weeks ended October 1, 1999 was 469, down
27.1% from the number of homes sold in the prior year
period. The decline in retail revenues was attributable to a
decrease in retail homes sold, partially, offset by an
slight increase in the average retail price per new homes
sold during the thirteen weeks ended October 1, 1999.
Net revenues from the component supply segment were $39.8
million (including intersegment revenues of $31.1
million) for the thirty-nine weeks ended
October 1, 1999, as compared with $44.8 million
(including intersegment revenues of $35.1 million) for
the prior year period, a decrease of 11.2%. The decline
in supply sales was primarily attributable to a decline in
intersegment sales to the manufacturing segment. For the
thirteen weeks ended October 1, 1999, net revenues from
the component supply segment were $11.1 million (including
intersegment revenues of $8.5 million), as compared with
$15.1 million (including intersegment revenues of $12.1
million) for the prior year period, a decrease of 26.5%.
The decrease in supply sales was primarily attributable to
an decrease in intersegment sales to the manufacturing
segment.
Revenues from the retail finance subsidiary were $932,000
and $296,000, respectively, for the thirty-nine
weeks and thirteen weeks ended October 1, 1999, as
compared with revenues of $858,000 and $290,000 for
the comparable prior year periods. The increases were
attributable to increased lending activity by the Company's
wholly owned subsidiary, Wenco Finance, Inc. ("Wenco
Finance"). Wenco Finance originatesd and servicesd 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 consumer financing
for homes manufactured by the Company as well as for other
homes sold through its retail centers and independent
dealers.
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 1,
1999 was $34.9 million, or 16.8% of net revenues, as
compared with $42.3 million, or 18.3% of net revenues,
in the prior year period. The decline in gross profit
percentage resulted from the Company's
inability to pass on higher labor and material costs due to a
competitive manufactured housing market and a decline in
retail margins due to the competitive retail market.
For the thirteen weeks ended October 1, 1999,
gross profit was $10.3 million, or 16.1% of net revenues,
as compared with $14.4 million, or 17.5% of net
revenues, in the prior year period. The decline in gross
profit percentage resulted from the Company's
inability to pass on increased labor and material
costs, and a decline retail margins due to the competitive retail market.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include
primarily sales commissions, advertising expenses, freight
costs, salaries for support personnel, administrative
salaries, executive and management bonuses, insurance costs,
and professional fees. Selling, general and administrative
expenses were $25.9 million, or 12.5% of net revenues,
during the thirty-nine weeks ended October 1,
1999, as compared with $26.9 million, or 11.6% of net
revenues, for the same period of the prior year. For the
thirteen weeks ended October 1, 1999, selling, general
and administrative expenses were $8.4 million, or 13.1%
of net revenues, as compared with $10.0 million, or 12.2%
of net revenues, for the same period of the prior year. The
increase in selling, general and administrative expenses as a
percentage of sales were attributable primarily to a higher ratio of fixed
expenses at the retail centers, partially offset by a
reduction of variable selling expenses.
Interest Expense
Interest expense for the thirty-nine weeks ended
October 1, 1999 was $1.5 million, as compared with
$1.8 million in the prior year period. For the thirteen
weeks ended October 1, 1999, interest expense was
$500,000, as compared with $685,000 in the prior year
period. The decrease in interest expense in the current year
periods was a result of increased use of available cash,
instead of floor plan financing, to fund the purchase of the
Company's retail inventory.
Interest Income
Interest income for the thirty-nine weeks ended
October 1, 1999 was $240,000, as compared with
$728,000 in the comparable prior year period. For the
thirteen weeks ended October 1, 1999, interest income
was $68,000, as compared with $253,000 in the prior year
period. The decrease in interest income reflects lower
average cash and cash equivalent balances during the current
year periods, due to the Company financing a portion of its
retail inventory with available cash.
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 1, 1999
was $362,000 or an effective tax rate of
36.1%, as compared with $5.2 million, or an effective
tax rate 37.4% in the prior year period. For the thirteen
weeks ended October 1, 1999, credit provision for
income tax expense was $1.9 million, or an effective tax
rate of 38.2%, as compared with a provision for income tax
of $1.4 million, or an effective tax rate of 37.8% in
the prior year periods.
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 1,
1999, the Company's cash provided by operations was
approximately $2.5 million. Cash used by operations
included origination of installment contracts of $2.0
million, and increased accounts receivable of 5.7 million,
and decreased accrued liabilities of $2.1 million. These amounts were
partially offset by net income of $0.6 million and
increased accounts payable and decreased inventory of
$6.1 million. In addition to cash used by operating
activities, other significant uses of cash included capital
expenditures of $3.9 million, purchase of treasury stock
of $3.1 million, and repayments of long-term debt of $0.8
million. Other significant sources of cash included
increased borrowings on notes payable used for floor plan
finance at its retail operations of $4.5 million, .as well
as principal collected on its
originated installment contracts of $1.2 million and sale of
retail centers of $0.6 million.
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 origination's 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.
At October 1, 1999, the Company's net working
capital was $19.3 million, compared with $21.3 million at
January 1, 1999. The decrease in net working capital was
primarily a result of a decrease in inventory of $2.0 million
increase in notes payable of $4.5 million, and an
increase in accounts payable of $4.1 million, partially
offset by a $5.6 million increase in accounts
receivable, and a $2.1 million decrease in accrued
liabilities. The Company also has a $25 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. At October 1, 1999 the Company had $20 million
in outstanding borrowings under this line which
is used for floor plan finance at its retail operations.
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
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
dealer. At October 1, 1999, the Company's
contingent repurchase liability under floor plan financing
arrangements was approximately $83 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.
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. However, in the current
competitive manufactured housing market, the Company has
recently been unable to pass on these increases and the
Company's gross profit margins have declined.
Year 2000 Compliance
Many currently installed computer systems and software
products are coded to accept only two-digit 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 Company's systems
are not Year 2000 compliant.
During the fourth quarter of 1998, the Company commenced
replacement of its current information technology system with
a new system. The replacement, which is expected to be
completed by March 2000, 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 program and operating systems will cost
approximately $3.3 million. 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 couldwill 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 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 actual
results could differ materially from those projected in any
forward looking statements, due to, among other factors: 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 consumer finance subsidiary and 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, including the retail sale of manufactured homes;
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.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
"Not Applicable"
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 1, 1999, the Company, without admitting any
liability, entered into a settlement with HUD that requires
the Company to correct construction and safety violations in
homes manufactured at the North Carolina manufacturing
facility. In addition, the settlement requires the Company
to inspect 600 additional homes for possible violations. The
Company has agreed to a one-year warranty extension of
certain homes. HUD claimed that the Company failed to comply
with the consumer notification and defect correction
requirements of the 1974 Act. The Company has been assessed
a civil penalty by HUD of up to $300,000 in connection with
the settlement; however, this penalty can be reduced by HUD
depending on Company actions.
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 cannot 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 losses in
excess of the amounts reserved.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are incorporated herein by reference
(except as otherwise noted).
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. (filed as Exhibit 10.25 to the Company's
quarterly Report on Form 10-Q for the quarter ended October
2, 1998)
27 Financial Data Schedule.**
(b) Reports on Form 8-K None
** Filed herewith
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 15, 1999 By: /s/ Wendell L. Batchelor
Wendell L. Batchelor, Chairman and Chief
Executive Officer
Date: November 15, 1999 By: /s/ Keith W. Brown
Keith W. Brown, Executive Vice President,
Chief Financial Officer, Treasurer and
Secretary
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