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 2, 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 August
13, 1999
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION:
Consolidated Condensed Balance Sheets,
July 2, 1999 and January 1, 1999 2
Consolidated Condensed Statements of
Operations - Thirteen Weeks Ended July 2,
1999 and July 3, 1998 and Twenty-six Weeks
Ended July 2, 1999 and July 3, 1998 3
Consolidated Condensed Statements of Cash
Flows - Twenty-six Weeks Ended July 2,
1999 and July 3, 1998 4
Notes to Consolidated Condensed 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
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
July 2, January 1,
1999 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,282,000 $ 4,261,000
Accounts receivable (less allowance
for doubtful accounts of $197,000
and $166,000, respectively) 31,579,000 23,071,000
Installment contracts receivable 165,000 211,000
Inventories 40,172,000 36,790,000
Deferred tax benefits 1,848,000 1,919,000
Prepayments and other 1,330,000 803,000
76,376,000 67,055,000
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 35,501,000 32,674,000
Less - accumulated depreciation 10,688,000 9,354,000
24,813,000 23,320,000
INTANGIBLES AND OTHER ASSETS
Installment contracts receivable,
less allowance for credit
Losses of $308,000 and $295,000,
respectively 11,665,000 11,130,000
Goodwill 14,402,000 14,995,000
Non-compete agreements 294,000 575,000
Investment in joint ventures 5,756,000 4,963,000
Other assets 723,000 730,000
32,840,000 32,393,000
$134,029,000 $122,768,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable $ 7,318,000 $ 20,556,000
Notes payable 20,000,000 -
Current maturities of long-term debt 544,000 1,099,000
Accounts payable 9,676,000 4,393,000
Accrued liabilities 18,833,000 19,702,000
56,371,000 45,750,000
LONG-TERM DEBT 3,572,000 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 July 2, 1999
and at January 1, 1999 2,000 2,000
Treasury stock, at cost, 3,505,900
shares at July 2, 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 65,756,000 62,047,000
74,086,000 73,449,000
$134,029,000 $122,768,000
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 2, July 3, July 2, July 3,
1999 1998 1999 1998
Net revenues $69,750,000 $74,149,000 $143,296,000 $149,221,000
Cost of sales 57,997,000 58,582,000 118,714,000 121,259,000
Gross profit 11,753,000 15,567,000 24,582,000 27,962,000
Operating Expenses:
Selling, general
and adminstrative 8,531,000 8,887,000 17,581,000 16,865,000
Amortization of
intangibles 96,000 147,000 193,000 310,000
8,627,000 9,034,000 17,774,000 17,175,000
Operating income 3,126,000 6,533,000 6,808,000 10,787,000
Interest expense 515,000 635,000 1,009,000 1,182,000
Interest income 70,000 232,000 172,000 494,000
Income before
income taxes 2,681,000 6,130,000 5,971,000 10,099,000
Provision for income
taxes 1,032,000 2,241,000 2,262,000 3,757,000
Net income $ 1,649,000 $ 3,889,000 $ 3,709,000 $ 6,342,000
Net income per common
share:
Basic $ 0.14 $ 0.28 $ 0.30 $ 0.46
Diluted $ 0.14 $ 0.28 $ 0.30 $ 0.45
Weighted average number
of common shares:
Basic 12,132,990 13,810,326 12,220,421 13,899,811
Diluted 12,132,990 13,943,830 12,220,421 14,017,944
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
July 2, July 3,
1999 1998
Operating activities:
Net income $ 3,709,000 $6,342,000
Adjustments to reconcile net income to
net cash used in operating activities:
Equity income of joint ventures (945,000) (382,000)
Distribution from joint ventures 240,000 -
Depreciation of property and equipment 1,334,000 1,203,000
Amortization of intangibles 367,000 502,000
Provision (credit) for deferred
income taxes 71,000 438,000
(Gain) loss on sale of property and
equipment 6,000 (30,000)
Provision for doubtful accounts
receivable 36,000 38,000
Origination of installment contracts (1,524,000) (1,793,000)
Provision for credit losses on
installment contracts 165,000 -
Principal collected on originated
installment contracts 871,000 384,000
Change in assets and liabilities, net
of effect from purchase of subsidiary:
Inventories (3,382,000) (3,819,000)
Accounts receivable (8,544,000) (960,000)
Prepayments and other (527,000) (292,000)
Other assets 6,000 (24,000)
Accounts payable 5,283,000 2,277,000
Accrued liabilities (869,000) (1,532,000)
Net cash used in operating activities (3,703,000) 2,352,000
Investing activities:
Purchase of subsidiary, net of cash
acquired - (5,561,000)
Capital expenditures (2,916,000) (1,031,000)
Investments in joint ventures (88,000) -
Increase in organizational and pre-
operating costs - (415,000)
Proceeds from sale of property and
equipment 6,000 30,000
Sale of Retail Centers 584,000
Net cash used in investing activities (2,414,000) (6,977,000)
Financing activities:
Purchase of treasury stock (3,072,000) (8,363,000)
Net borrowings on notes payable 6,762,000 5,780,000
Repayments on long-term debt (552,000) (528,000)
Proceeds from exercise of stock options - 417,000
Net cash provided by (used in)
financing activities 3,138,000 (2,694,000)
Net increase (decrease) in cash and cash
equivalents (2,979,000) (7,319,000)
Cash and cash equivalents at the beginning
of period 4,261,000 17,676,000
Cash and cash equivalents at the end of
period $1,282,000 $10,357,000
Supplemental cash flow information:
Cash paid for interest $1,009,000 $ 1,148,000
Cash paid for income taxes $3,207,000 $ 3,636,000
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 1,
1999, which has been derived from audited financial
statements, and the unaudited interim consolidated condensed
financial statements as of July 2, 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:
July 2, January 1,
1999 1999
(Unaudited)
Raw materials $10,495,000 $10,938,000
Work in progress 1,163,000 1,166,000
Finished goods 28,514,000 24,686,000
$40,172,000 $36,790,000
3. EARNINGS PER SHARE:
The EPS results are as follows:
Shares Available
to Common
Net Income Shareholders Earning Per Share
Thirteen Weeks Ended
July 2, 1999
Basic $1,649,000 12,132,990 $0.14
Dilutive effect
of options
issued - - -
Diluted $1,649,000 12,132,990 $0.14
July 3, 1998
Basic $3,889,000 13,810,326 $0.28
Dilutive effect
of options
issued - 133,504 -
Diluted $3,889,000 13,943,830 $0.28
Shares Available
to Common
Net Income Shareholders Earning Per Share
Twenty-six Weeks Ended
July 2, 1999
Basic $3,709,000 12,220,421 $0.30
Dilutive effect
of options
issued - - -
Diluted $3,709,000 12,220,421 $0.30
July 3, 1998
Basic $6,342,000 13,899,811 $0.46
Dilutive effect
of options
issued - 118,133 (0.01)
Diluted $6,342,000 14,017,944 $0.45
Options outstanding of 533,281 for the twenty-six weeks and
thirteen weeks ended July 2, 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 $89 million as of July 2,
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 July 2,
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 quarter of 1999.
7. 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 homes to retail customers 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, 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
July 2, 1999. For segment purposes, there has been no
material change in total assets between January 1, 1999 and
July 2, 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 Twenty-six Weeks Ended
July 2, July 3, July 2, July 3,
1999 1998 1999 1998
Revenues:
Manufacturing $57,895 $59,493 $119,536 $121,588
Retail operations 16,510 20,760 33,933 36,710
Component supply 14,561 14,177 28,650 29,660
Other operating
segments 305 355 636 651
Eliminations (19,521) (20,636) (39,459) (39,388)
Total revenues $69,750 $74,149 $143,296 $149,221
Gross profit:
Manufacturing $ 6,005 $ 8,358 $ 13,076 $ 14,996
Retail operations 4,715 5,955 9,813 10,778
Component supply 1,161 1,340 2,323 2,850
Other operating
segments (250) (84) (444) (261)
Eliminations 122 (2) (186) (401)
Gross profit $11,753 $15,567 $24,582 $27,962
Thirteen Weeks Ended Twenty-six Weeks Ended
July 2, July 3, July 2, July 3,
1999 1998 1999 1998
Segment operating income:
Manufacturing $ 2,280 $ 4,845 $ 5,898 $ 7,999
Retail operations (535) 245 (914) 889
Component supply 745 901 1,470 1,915
Corporate 200 (226) 53 (668)
Other operating
segments 436 768 301 652
3,126 6,533 6,808 10,787
Income/expenses
not allocated to segments:
Interest income,net (445) (403) (837) (688)
Provision for income
taxes (1,032) (2,241) (2,262) (3,757)
Net income $ 1,649 $ 3,889 $ 3,709 $ 6,342
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.
8.SUBSEQUENT EVENT
Subsequent to July 2, 1999, management decided to close 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. In connection
with the decision, the Company will incur losses on the
impairment of the facility's assets and accrue certain other
expenses related to the closure. These impairment losses and
other expenses will approximate $6.0 million, pre-tax ($3.7
after-tax). 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.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Twenty-six weeks and thirteen weeks ended July 2, 1999 as
compared with twenty-six weeks and thirteen weeks ended July
3, 1998.
Net Revenues
Total net revenues (gross sales less volume discounts,
returns and allowances) for the twenty-six weeks ended July
2, 1999 were $143.3 million, as compared with $149.2 million
in the prior year period. For the thirteen weeks ended July
2, 1999, total net revenues were $69.8 million, as compared
with $74.1 million for the comparable period a year ago.
Net revenues from the wholesale sale of manufactured homes
were $119.5 million (including intersegment revenues of $17.9
million) for the twenty-six weeks ended July 2, 1999, as
compared with $121.6 million (including intersegment revenues
of $15.3 million) for the prior year period, a decrease of
1.7%. The decline in revenues was attributable to a decline
in the average wholesale price per home shipped, offset
slightly by an increase in the number of homes shipped.
Total homes shipped for the twenty-six weeks ended July 2,
1999 was 4,466, up 0.5% from the number of homes shipped in
the prior year period. The average wholesale price per home
for the twenty-six weeks ended July 2, 1999 was $26,765, as
compared with $27,366 in the prior year period, a decline of
2.2%. For the thirteen weeks ended July 2, 1999, net revenues
from the wholesale sale of manufactured homes were $57.9
million (including intersegment revenues of $8.7million), as
compared with $59.5 million (including intersegment revenues
of $8.7 million) for the prior year period, a decrease of
2.7%. The decline in revenues was attributable to a decline
in the average wholesale price per home shipped, offset
slightly by an increase in the number of homes shipped.
Total homes shipped for the thirteen weeks ended July 2, 1999
was 2,183, up 0.6% from the number of homes shipped in the
prior year period. The average wholesale price per home for
the thirteen weeks ended July 2, 1999 was $26,521, as
compared with $27,429 in the prior year period, a decline of
3.3%.
Net revenues from the retail sale of manufactured homes were
$33.9 million for the twenty-six weeks ended July 2, 1999, as
compared with $36.7 million for the prior year period, a
decrease of 7.6%. Total retail homes sold for the twenty-
six weeks ended July 2, 1999 was 928, down 10.6% 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, offset by a slight increase in the average retail
price per new homes sold during the twenty-six weeks ended
July 2, 1999. For the thirteen weeks ended July 2, 1999, net
revenues from the retail sale of manufactured homes were
$16.5 million, as compared with $20.8 million for the prior
year period, a decrease of 20.7%. Total retail homes sold
for the thirteen weeks ended July 2, 1999 was 462, down 21.0%
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, offset by a slight increase in the average
retail price per new homes sold during the thirteen weeks
ended July 2, 1999.
Net revenues from the component supply segment were $28.7
million (including intersegment revenues of $22.7 million)
for the twenty-six weeks ended July 2, 1999, as compared with
$29.7 million (including intersegment revenues of $23.0
million) for the prior year period, a decrease of 3.4%. The
decline in supply sales was primarily attributable to a
decline in intersegment sales to the manufacturing segment.
For the thirteen weeks ended July 2, 1999, net revenues from
the component supply segment were $14.6 million (including
intersegment revenues of $11.3 million), as compared with
$14.2 million (including intersegment revenues of $10.9
million) for the prior year period, a increase of 2.8%. The
increase in supply sales was primarily attributable to an
increase in intersegment sales to the manufacturing segment.
Revenues from the retail finance subsidiary were $635,000 and
$305,000, respectively, for the twenty-six weeks and thirteen
weeks ended July 2, 1999, as compared with revenues of
$568,000 and $268,000 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 originats and servics 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 twenty-six weeks ended July 2, 1999 was $24.6
million, or 17.2% of net revenues, as compared with $28.0
million, or 18.7% of net revenues, in the prior year period.
The decline in gross profit percentage was attributable to a
competitive manufactured housing market causing a decline in
margins for both manufacturing and supply segments due to the
inability to pass on increased labor and material costs,
and a decline in retail margins on used homes For the thirteen
weeks ended July 2, 1999, gross profit was $11.8 million, or
16.9% of net revenues, as compared with $15.6 million, or 21.0%
of net revenues, in the prior year period. The decline in gross
profit percentage was attributable to a decline in margins
for both manufacturing and supply segments due to the inability
to pass on increased labor and material costs, and a decline in
retail margins on used homes.
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 $17.6 million, or 12.3% of net revenues, during
the twenty-six weeks ended July 2, 1999, as compared with
$16.9 million, or 11.3% of net revenues, for the same period
of the prior year. For the thirteen weeks ended July 2,
1999, selling, general and administrative expenses were $8.5
million, or 12.2% of net revenues, as compared with $8.9
million, or 12.0% 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.
Interest Expense
Interest expense for the twenty-six weeks ended July 2, 1999
was $1.0 million, as compared with $1.2 million in the prior
year period. For the thirteen weeks ended July 2, 1999,
interest expense was $515,000, as compared with $635,000 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 twenty-six weeks ended July 2, 1999
was $172,000, as compared with $494,000 in the comparable
prior year period. For the thirteen weeks ended July 2,
1999, interest income was $70,000, as compared with $232,000
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 twenty-six weeks ended July 2, 1999 was $2.3 million, or
an effective tax rate of 37.9%, as compared with $3.8
million, or an effective tax rate 37.2% in the prior year
period. For the thirteen weeks ended July 2, 1999, income
tax expense was $1.0 million, or an effective tax rate of
38.5%, as compared with $2.2 million, or an effective tax
rate of 36.6% in the prior year periods.
Sale of Retail Centers
During the second quarter, the Company sold three retail
centers for an aggregate of $584,000 which approximated the
book value of the three centers.
Subsequent Event
Subsequent to July 2, 1999, management decided to close 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.
In connection with the decision, the Company will incur losses
on the impairment of the facility's assets and accrue certain
other expenses related to the closure. These impairment losses
and other expenses will approximate $6.0 million, pre-tax ($3.7
after-tax). 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.
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 2, 1999, the Company's
cash used by operations was approximately $3.2 million. Cash
used by operations included origination of installment
contracts of $1.5 million and increased accounts receivable,
inventories and prepayments of $12.5 million. These amounts
were partially offset by net income of $3.7 million and
increased accounts payable of $5.3 million. In addition to
cash used by operating activities, other significant uses of
cash included capital expenditures of $2.8 million, purchase
of treasury stock of $3.1 million, and repayments of
long-term debt of $1.1 million. Other significant sources of
cash included increased borrowings on notes payable of $7.3
million.
During the twenty-six weeks ended July 3, 1998, the Company's
cash provided by operations was approximately $2.4 million.
Cash was provided by net income of $6.3 million and increased
accounts payable of $2.3 million. These amounts were
partially offset by cash used in operations, which included
increased accounts receivable, prepayments and other, and
inventory totaling $5.1 million, a decrease in accrued
liabilities of $1.5 million, and originations of installment
contracts of $1.8 million. In addition to cash provided by
operating activities other significant cash flow included
purchase of subsidiary for $5.6 million, capital expenditures
of $1.0 million, increased organizational and pre-operating
expenses of $415,000, purchase of treasury stock of $8.4
million, increased borrowings on notes payable of $5.8
million, repayments of long-term debt of $528,000 and
proceeds from exercise of stock options of $417,000.
At July 2, 1999, the Company's net working capital was $20.0
million, compared with $21.3 million at January 1, 1999. The
decrease in net working capital was primarily a result of a
decrease in cash and cash equivalents of $3.0 million, an
increase in notes payable of $20.0 million, and an increase
in accounts payable of $5.3 million, partially offset by a
$8.5 million increase in accounts receivable, a $3.4 million
increase in inventories, and a $13.2 million decrease in
floor plan notes payable. 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. The Company has $20 million in outstanding
borrowings under this line at July 2, 1999.
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 July 2, 1999, the Company's contingent repurchase
liability under floor plan financing arrangements was
approximately $89 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 the end of 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 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 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 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, 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.
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 2. Changes in Securities and Use of Proceeds
"Not applicable"
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 1, 1999.
At the meeting, the stockholders elected to serve as members of the
Board of Directors of the Company, the persons whose names are
below. The votes were as follows:
Election of Directors: For: Withheld:
Wendell L. Batchelor 7,819,790 1,461,656
Keith W. Brown 7,824,490 1,456,956
Jonathon O. Lee 7,824,190 1,457,256
Johnny R. Long 7,824,990 1,456,456
Paul J. Evanson 7,826,290 1,455,156
Joseph J. Incandela 7,824,990 1,456,456
Keith O. Holdbrooks 7,823,490 1,457,956
** - Paul J. Evanson has subsequently notified the Company in
letter dated July 12, 1999 of his resignation as a director
due to increasing time demands at Florida Power and Light
Company.
Item 5. Other Information
"Not applicable"
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are incorporated herein by
reference (except as otherwise noted).
4.1 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.)
4.2 By-Laws of the Company. (Filed as Exhibit 3.2 to the
Registration Statement on Form S-1, Registration No. 33-
57420.)
4.1 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: August 13, 1999 By: /s/ Wendell L. Batchelor
Wendell L. Batchelor, Chairman and
Chief Executive Officer
Date: August 13, 1999 By: /s/ Keith W. Brown
Keith W. Brown, Executive Vice President,
Chief Financial Officer, Treasurer and
Secretary
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