DRAFT 11/10/00 2:39 PM
\\BIRFS0001\VOL1\USERDATA\AUDIT\Southern Energy Homes\BC\10Q
2qtr1999.doc (Linda Elrod)
\\BIRFS0001\VOL1\USERDATA\AUDIT\SOZ368\BC\april3~1.doc
(ELRODLD)
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 September 29, 2000 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.)
144 Corporate Way, 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 10, 2000
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION:
Unaudited Consolidated Condensed Balance Sheets,
September 29, 2000 and December 31, 1999 2
Unaudited Consolidated Condensed Statements of Operations -
Thirteen Weeks Ended September 29, 2000 and
October 1, 1999 and Thirty-nine Weeks Ended
September 29, 2000 and October 1, 1999 3
Unaudited Consolidated Condensed Statements of Cash Flows -
Thirty-nine Weeks Ended September 29, 2000 and
October 1, 1999 4
Notes to Unaudited Consolidated Condensed Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
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)
September 29, December 31,
2000 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,118,000 $ 9,342,000
Accounts receivable (less allowance for
doubtful accounts of $168,000 and
$470,000, repectively 20,552,000 16,897,000
Inventories 29,523,000 35,376,000
Refundable income taxes 2,002,000 2,579,000
Deferred tax benefits 5,224,000 4,311,000
Prepayments and other 1,283,000 924,000
64,702,000 69,429,000
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 36,804.000 35,598,000
Less - accumulated depreciation (13,675,000) (11,967,000)
23,129,000 23,631,000
INTANGIBLES AND OTHER ASSETS
Installment contracts receivable (less
allowance for credit losses of $750,000
and $357,000 respectively) 10,451,000 11,597,000
Goodwill 6,633,000 10,657,000
Investment in joint ventures 5,732,000 5,728,000
Other assets 872,000 972,000
23,688,000 28,954,000
$111,519,00 $122,014,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable 30,507,000 29,182,000
Current maturities of long-term debt 0 1,101,000
Accounts payable 3,658,000 4,168,000
Accrued liabilities 14,271,000 16,315,000
48,436,000 50,766,000
LONG-TERM DEBT 0 2,464,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value,
1,000,000 shares authorized, none
outstanding - -
Common stock, $.0001 par value,
40,000,000 shares authorized, 12,132,990
issued and outstanding at September 29,
2000 and at December 31, 1999 1,000 1,000
Capital in excess of par 8,329,000 8,329,000
Retained earnings 54,753,000 60,454,000
63,083,000 68,784,000
$111,519,00 $122,014,000
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)
September 29, October 1, September 29, October 1,
2000 1999 2000 1999
Net revenues $44,270,000 $63,856,000 $142,063,000 $207,151,000
Cost of sales 36,443,000 53,569,000 18,696,000 172,283,000
Gross profit 7,827,000 10,287,000 23,367,000 34,868,000
Operating Expenses:
Selling, general
and administrative 8,954,000 8,365,000 24,608,000 25,944,000
Amortization of
intangibles 99,000 70,000 354,000 263,000
Impairment charges 0 6,387,000 4,382,000 6,387,000
9,053,000 14,822,000 29,344,000 32,594,000
Operating income (loss) (1,226,000) (4,535,000) (5,977,000) 2,274,000
Interest expense 679,000 500,000 1,880,000 1,510,000
Interest income 104,000 68,000 311,000 240,000
Income (loss) before
income taxes (1,801,000) (4,967,000) (7,546,000) 1,004,000
Provision (credit)
for income taxes (395,000) (1,900,000) (1,845,000) 362,000
Net income (loss) $(1,406,000) $(3,067,000) $(5,701,000) $ 642,000
Net income (loss)
per common share:
Basic and Diluted $ (0.12) $ (0.25) $ (0.47) $ 0.05
Weighted average
number of common
shares:
Basic and Diluted 12,132,990 12,132,990 12,132,990 12,191,277
The accompanying notes are an integral part of these consolidated condensed
financial statements.
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-nine Weeks Ended
September 29, October 1,
2000 1999
Operating activities:
Net income (loss) $(5,701,000) $642,000
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Equity (income) loss of joint ventures 182,000 (985,000)
Distribution from joint ventures 260,000 640,000
Depreciation of property and equipment 1,767,000 1,992,000
Amortization of intangibles 354,000 263,000
Impairment charge 4,382,000 6,387,000
Origination of installment contracts (2,647,000) (2,037,000)
Credit for doubtful accounts receivable (302,000) -
Provision for credit losses on installment
contracts 1,129,000 317,000
Principal collected on originated installment
contracts 2,664,000 1,222,000
Provision (credit) for deferred income taxes (913,000) (549,000)
Gain on sale of property and equipment 8,000 -
Other - 45,000
Change in assets and liabilities:
Inventories 5,853,000 774,000
Accounts receivable (3,353,000) (5,693,000)
Prepayments and other 196,000 (180,000)
Other assets 23,000 (211,000)
Accounts payable (510,000) 4,051,000
Accrued liabilities (2,403,000) (4,155,000)
Net cash provided by operating activities 989,000 2,523,000
Investing activities:
Capital expenditures (1,644,000) (3,958,000)
Investments in joint ventures (446,000) (88,000)
Proceeds from sale of property and equipment 117,000 594,000
Net cash used in investing activities (1,973,000) (3,452,000)
Financing Activities:
Purchase of treasury stock - (3,072,000)
Net borrowings on notes payable 1,325,000 4,469,000
Repayments on long-term debt (3,565,000) (828,000)
Net cash provided by (used in) financing
activities (2,240,000) 569,000
Net decrease in cash and cash equivalents (3,224,000) (360,000)
Cash and cash equivalent at the beginning
of period 9,342,000 4,261,000
Cash and cash equivalents at the end of period $6,118,000 $3,901,000
Supplemental cash flow information:
Cash paid for interest $1,881,000 $1,510,000
Cash paid for income taxes $27,000 $3,612,000
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 December 31, 1999,
which has been derived from audited financial statements, and the
unaudited interim consolidated condensed financial statements as
of September 29, 2000, have been prepared by the Company without
audit, but in the opinion of management reflect the adjustments
necessary (which include only normal recurring adjustments) for
the fair presentation of the information set forth therein.
Results of operations for the interim 2000 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 December 31, 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:
September 29, December 31,
2000 1999
(Unaudited)
Raw materials $6,764,000 $7,537,000
Work in progess 667,000 749,000
Finished goods 22,092,000 27,090,000
$29,523,000 $35,376,000
3. EARNINGS PER SHARE:
Basic Earnings Per Share (EPS) excludes dilution and is computed
by dividing income available to common stockholders by the
weighted average number of shares outstanding during the subject
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock are
exercised, converted into common stock, or result in the issuance
of common stock that will share in the earnings of the Company.
Outstanding options of 928,871 and 533,281 for the thirty-nine
weeks and thirteen weeks ended September 29, 2000 and October 1,
1999, respectively, were not included in the computation of
diluted shares available to common shareholders, as they were
antidilutive.
4. REPURCHASE AGREEMENTS:
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 September 29, 2000,
the Company's contingent repurchase liability under floor plan
financing arrangements was approximately $72 million. While homes
that have been repurchased by the Company under floor-plan
financing arrangements are usually sold to other dealers, 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.
5. LEGAL PROCEEDINGS:
On March 1, 1999, the Company, without admitting any liability,
entered into a settlement with HUD which required the Company to
correct construction and safety violations in homes manufactured
at a North Carolina manufacturing facility which the Company has
since closed. 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 settlement required the Company to
inspect 600 additional homes for possible violations. The
Company agreed to an extension for one year of the warranty
period for certain homes. The Company was assessed a civil
penalty by HUD of up to $300,000 in connection with the
settlement. The settlement provided that the monetary penalty
could be reduced by HUD depending on Company actions and its
performance under the settlement. As of March 31, 2000 the
Company had completed all repairs and inspections required by the
settlement and had paid a penalty of $150,000.
The Company was named, along with several other manufactured
housing companies, as a defendant in a class action lawsuit filed
in state court 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 was not specified. The Company
believes the claims are without merit and has vigorously defended
itself against them. The Defendants, including the Company, filed
a motion to dismiss the case in December 1998. During 1999 the
motion was granted and the case was dismissed. The Plaintiff's
appealed it and the Kentucky Court of appeals affirmed the lower
court's decision in September 2000. The Plaintiffs may seek
review by the Kentucky Supreme Court, but to this point, no
further appeal has been taken. Nevertheless, the outcome of
litigation and appellate proceedings cannot be predicted and
adverse rulings and outcomes could have a material adverse effect
on this Company.
The Company is a party to various other legal proceedings
incidental to its business. The company typically issues a one-
year warranty on new manufactured homes. The majority of these
legal proceedings are claims related to that warranty on
manufactured homes, or employment issues such as worker's
compensation claims. Management believes that adequate reserves
are maintained for such claims. 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. IMPAIRMENT AND OTHER CHARGES
During the second quarter of 2000, the Company decided to close
eight of its 29 retail centers. The decision was based primarily
on losses incurred at these centers over the last several months.
Three retail centers were closed in the second quarter of 2000,
three retail centers were closed in the third quarter 2000, one
retail center was closed in October 2000 and one retail center
was closed in November 2000. In connection with the decision to
close these retail centers in the second quarter, the Company
recorded a charge of $4.4 million ($3.2 million after tax)
consisting of the impairment of the intangible assets of $3.8
million and exit costs of $0.6 million associated with rental
commitments and leasehold improvements on retail centers which
the Company has committed to close. Although this amount
represents management's best estimate of total costs to close
these centers, the actual cost could ultimately differ from this
amount. During the thirty-nine weeks ended September 29, 2000
and October 1, 1999, these eight centers generated 3.3% and 3.7%,
respectively, of the total revenues of the Company. The impact
of these centers on the operating income of the Company,
excluding the impairment charges, was a pre-tax loss of $1.5
million ($1.1 million after-tax) and a pre-tax loss of $998,000
($638,000 after-tax) during the thirty-nine weeks ended September
29, 2000 and October 1, 1999, respectively. The company continues
to evaluate its unprofitable retail centers and future retail center
closings could happen which would incur further impairment charges.
7. SEGMENT AND RELATED INFORMATION
The Company has four primary reportable segments: manufacturing,
retail operations, component supply, and consumer financing. 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 consumer financing segment has
now restricted its loan origination activities and engaged 21st
Century to service its existing loan portfolio.
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 segment operating
income. The Company accounts for intersegment sales and
transfers as if the sales or transfers were to third parties, 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 non-
cash items other than depreciation and amortization in reported
segment operating profit or loss.
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.
During the fourth quarter of 1999, the Company made certain
changes to the composition of its internal segments. The
corresponding information for the thirty-nine and thirteen weeks
ended October 1, 1999 have been restated to conform to these
changes.
The following table presents information about segment profit or
loss, dollars in thousands:
Thirteen Weeks Ended Thirty-nine Weeks Ended
September 29, October 1, September 29, October 1,
2000 1999 2000 1999
Revenues:
Manufacturing $37,251 $48,868 $118,081 $168,404
Retail operations 12,718 $17,623 39,489 51,256
Component supply 7,412 11,118 25,092 39,768
Consumer financing 289 296 874 932
Other operating
segments 2,106 2,348 6,389 7,615
Eliminations (15,506) (16,397) (47,862) (60,824)
Total revenues 44,270 $63,856 $142,063 $207,151
Gross profit:
Manufacturing $4,251 $5,026 $11,118 $18,102
Retail operations 3,418 4,588 10,793 14,325
Component supply 663 823 1,951 3,144
Consumer financing 57 84 203 326
Other operating segments 1,535 1,815 5,108 6,171
Eliminations (2,097) (2,049) (5,806) (7,200)
Gross profit $7,827 $10,287 $23,367 $34,868
Segment operating income
(loss):
Manufacturing $1,369 $ (4,424) $3,257 $1,474
Retail operations (1,552) (548) (8,324) (1,479)
Component supply 327 407 948 1,877
Consumer financing (880) (67) (885) 10
Corporate (337) (204) (1,388) (151)
Other operating segments (153) 301 415 543
(1,226) (4,535) (5,977) 2,274
Income/expenses not
allocated to segments:
Interest (expense) (575) (432) (1,569) (1,270)
Benefit (provision)
for income taxes 395 1,900 1,845 (362)
Net income (loss) $(1,406) $(3,067) $(5,701) $642
Revenue from segments below the quantitative thresholds are
attributable to two other operating segments of the Company.
Those segments include a trucking 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. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") no. 101, "Revenue Recognition
in financial Statements," and its effective date was amended in
March 2000 by SAB No. 101A. SAB 101 draws on existing accounting
rules and provides specific guidance on how those accounting
rules should be applied to revenue recognition. The Company
expects to adopt the provisions of SAB 101 in the fourth quarter
of 2000 and is currently determining the impact, if any, on the
Company's financial statements.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
As a whole, the manufactured housing industry has been adversely
affected by uncontrollable economic factors, and has struggled
in the past several quarters. The current situation in the
manufactured housing industry is the result of many factors.
Rapid industry growth over the past 10 years resulted in an
increase in the overall number of dealers, an increase in
manufacturing output and an increase in the number of homes
available at the retail level. These larger inventories and the
generally slower reduction of those inventories has led to
increased price competition and reduced profits. Tightening
credit and increasing interest rates have compounded the
situation and negatively affected the industry's overall
financial performance, with virtually all manufacturers and
retailers being impacted. Southern Energy Homes has not been
excluded from this group; however, we have taken carefully
planned steps designed to decrease costs and improve efficiency.
In 1999 and 2000 these steps included closing manufacturing
facilities, consolidating divisions, and selling unprofitable
retail centers. We continue to monitor the situation and remain
prepared to take additional measures necessary to emerge
financially sound from this industry downturn and are prepared to
take advantage of any future opportunities presented by any
increase in the demand for affordable housing. We are confident
in the long-term future for the manufactured housing industry and
Southern Energy Homes, Inc.
In light of current industry conditions, the Company expects that
there will be future declines in wholesale and retail revenues
and related net profit margins, which could have a material
operating affect on the Company's operating results.
RESULTS OF OPERATIONS
Thirty-nine weeks and thirteen weeks ended September 29, 2000 as
compared with thirty-nine weeks and thirteen weeks ended October
1, 1999.
Net Revenues
Total net revenues (gross sales less volume discounts, returns
and allowances) for the thirty-nine weeks ended September 29,
2000 were $142.1 million, as compared with $207.2 million in the
prior year period. For the thirteen weeks ended September 29,
2000, total net revenues were $44.3 million, as compared with
$63.9 million for the comparable period a year ago.
Net revenues from the wholesale sale of manufactured homes were
$118.1 million (including intersegment revenues of $21.8 million)
for the thirty-nine weeks ended September 29, 2000, as compared
with $168.4 million (including intersegment revenues of $23.6
million) for the prior year period, a decrease of 29.9%. The
decline in sales to dealers was primarily attributable to
decreased demand, the closure of a manufacturing facility in
Alabama in August 1999, a fire which damaged and temporarily
closed two Alabama plants in February 2000, and a decline in the
average wholesale price per home shipped . Total homes shipped
for the thirty-nine weeks ended September 29, 2000 was 4,566,
down 27.0% from the number of homes shipped in the prior year
period. The average wholesale price per home for the thirty-nine
weeks ended September 29, 2000 was $25,861, as compared with
$26,919 in the prior year period, a decline of 3.9%. For the
thirteen weeks ended September 29, 2000, net revenues from the
wholesale sale of manufactured homes were $37.2 million
(including intersegment revenues of $7.6 million), as compared
with $48.9 million (including intersegment revenues of $5.7
million) for the prior year period, a decrease of 23.9%. The
decline in sales to dealers was primarily attributable to
decreased demand, the closure of two manufacturing facilities in
Alabama in August 1999 and one in the second quarter of 2000 and
a decline in the average wholesale price per home shipped. Total
homes shipped for the thirteen weeks ended September 29, 2000 was
1,449, down 19.1% from the number of homes shipped in the prior
year period. The average wholesale price per home for the
thirteen weeks ended September 29, 2000 was $25,708, as compared
with $27,300 in the prior year period, a decline of 5.8%.
Net revenues from the retail sale of manufactured homes were
$39.5 million for the thirty-nine weeks ended September 29, 2000,
as compared with $51.3 million for the prior year period, a
decrease of 23.0%. Total retail homes sold for the thirty-nine
weeks ended September 29, 2000 was 1,190, down 14.8% from the
number of homes sold in the prior year period. The decline in
retail sales was primarily attributable to increased competition
and the Company operating eight fewer retail centers, during the
thirty-nine weeks ended September 29, 2000, compared to the prior
year period. The decline in retail revenues was also attributable
to a decline in the average retail price per home sold. The
average retail price per home sold for the thirty-nine weeks
ended September 29, 2000 was $42,605, as compared with $45,230
in the prior year period, a decline of 5.8%. For the thirteen
weeks ended September 29, 2000, net revenues from the retail sale
of manufactured homes were $12.7 million, as compared with $17.6
million for the prior year period, a decrease of 27.8%. Total
retail homes sold for the thirteen weeks ended September 29, 2000
was 396, down 15.6% from the number of homes sold in the prior
year period. The decline in retail sales was primarily
attributable to increased competition and the Company operating
eight fewer retail centers, during the quarter ended September
29, 2000, compared to the prior year period. The decline in
retail revenues was also attributable to a decline in the average
retail price per home sold. The average retail price per home
sold in the quarter ended September 30, 2000 was $43,265, as
compared with $46,172 in the prior year period, a decline of
6.3%.
Net revenues from the component supply segment were $25.1 million
(including intersegment revenues of $21.3 million) for the thirty-
nine weeks ended September 29, 2000, as compared with $39.8
million (including intersegment revenues of $31.1 million) for
the prior year period, a decrease of 36.9%. The decline in
supply sales was primarily attributable to a decline in
intersegment sales to the manufacturing segment. For the thirteen
weeks ended September 29, 2000, net revenues from the component
supply segment were $7.4 million (including intersegment revenues
of $6.3 million), as compared with $11.1 million (including
intersegment revenues of $8.5 million) for the prior year period,
a decrease of 33.3%. The decline in supply sales was primarily
attributable to a decline in intersegment sales to the
manufacturing segment.
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 September 29, 2000 was $23.4 million,
or 16.4% of net revenues, as compared with $34.9 million, or
16.8% of net revenues, in the prior year period. The decline in
the gross profit percentage was attributable primarily to
increased competitive pricing. For the thirteen weeks ended
September 29, 2000, gross profit was $7.8 million, or 17.7% of
net revenues, as compared with $10.3 million, or 16.1% of net
revenues, in the prior year period. The increase in the gross
profit percentage was attributable primarily to lower material
prices, decline in warranty expenses and positive physical
inventory adjustments, (which reduced cost of sales) offset
slightly by increased competitive pricing.
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 $24.6 million,
or 17.3% of net revenues, during the thirty-nine weeks ended
September 29, 2000, as compared with $25.9 million, or 12.5% of
net revenues, for the same period of the prior year. For the
thirteen weeks ended September 29, 2000, selling, general and
administrative expenses were $9.0 million, or 20.2% of net
revenues, as compared with $8.4 million, or 13.1% of net
revenues, for the same period of the prior year. The increase in
selling, general and administrative expenses as a percentage of
sales was attributable to the following factors: aggregate
adjustments related to Wenco Financial of approximately $900,000
($705,000 after tax, $.06 per share), consisting of an increase
to the loan loss reserve of approximately $400,000 and write down
of repossessed inventories of approximately $500,000. Increase
in selling and administrative expenses were increased dealer
interest payments to remain competitive in market areas,
increased freight expenses due to fuel increases, and increased
legal fees
Interest Expense
Interest expense for the thirty-nine weeks ended September 29,
2000 was $1.9 million, as compared with $1.5 million in the prior
year period. For the thirteen weeks ended September 29, 2000,
interest expense was $679,000, as compared with $500,000 in the
prior year period. . The increase in interest expense in the
current quarter was a result of increased notes payable
associated with the floor-plan financing of the Company's retail
inventory and an increase in the interest rates.
Interest Income
Interest income for the thirty-nine weeks ended September 29,
2000 was $311,000 as compared with $240,000 in the comparable
prior year period. For the thirteen weeks ended September 29,
2000, interest income was $104,000, as compared with $68,000 in
the prior year period. The increase in interest income reflects
higher average cash and cash equivalent balances during the
quarter ended September 29, 2000.
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. Credit provision for income tax expense for the
thirty-nine weeks ended September 29, 2000 was $1.8 million, or
an effective tax rate of 24.5%, as compared with an income tax
expense of $362,000, or an effective tax rate 36% in the prior
year period. For the thirteen weeks ended September 29, 2000,
credit provision for income tax expense was $395,000, or an
effective tax rate of 21.9%, as compared with credit provision
for income tax expense of $1.9 million, or an effective tax rate
of 38.3% in the prior year period.
Impairment and Other Charges
During the second quarter of 2000, the Company decided to close
eight of its 29 retail centers. The decision was based primarily
on losses incurred at these centers over the last several months.
Three retail centers were closed in the second quarter of 2000,
three retail centers were closed in the third quarter 2000, one
retail center was closed in October 2000 and one retail center
was closed in November 2000. In connection with the decision to
close these retail centers, the Company recorded in the second
quarter, 2000 a charge of $4.4 million ($3.2 million after tax)
consisting of the impairment of the intangible assets of $3.8
million and exit costs of $0.6 million associated with rental
commitments and leasehold improvements on retail centers which
the Company has committed to close. Although this amount
represents management's best estimate of total costs to close
these centers, the actual cost could ultimately differ from this
amount. The Company has recorded the exit costs as an impairment
charge in the accompanying statement of operations for the thirty-
nine weeks ended. During the thirty-nine weeks ended September
29, 2000 and October 1, 1999, these eight centers generated 3.3%
and 3.7%, respectively, of the total revenues of the Company.
The impact of these centers on the operating income of the
Company, excluding the impairment charges, was a pre-tax loss of
$1.5 million ($1.1 million after-tax) and a pre-tax loss of
$998,000 ($638,000 after-tax) during the thirty-nine weeks ended
September 29, 2000 and October 1, 1999, respectively. The Company
continues to evaluate its unprofitable retail centers and future
retail center closings could happen which would incur further
impairment charges.
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.
The Company is continuing to monitor its cash position in light
of present trends. The Company recently paid off all of its long
term debt and lowered its outstanding balance on its line of
credit from $24.4 million to $20 million, while negotiating a new
$8.0 million line of credit with a wholesale lender to floorplan
a portion of the homes sold to Company retail centers.
Cash Flows
During the thirty-nine weeks ended September 29, 2000, net cash
provided by operations was approximately $1.0 million. Cash
provided by operations included decreased inventories of $5.9
million, principal collected on installment contracts of $2.7
million, depreciation of $1.8 million and provision for credit
losses on installment contracts of $1.1 million, partially offset
by originations of installment contracts of $2.6 million,
increased accounts receivable of $3.4 million, decreased accrued
liabilities of $2.4 million, and net loss of $5.7 million which
included an impairment charge of $4.4 million. Other significant
uses of cash included repayments of long-term debt of $3.6
million, and capital expenditures of $1.6 million, offset by net
borrowings on notes payable of $1.3 million.
During the thirty-nine weeks ended October 1, 1999, net cash
provided by operating activities was approximately $2.5 million.
Cash provided by operating activities included increased accounts
payable of $4.1 million, and principal collected on originated
installment contracts of $1.2 million and net income of $0.6
million after depreciation of $2.0 million and non-recurring
charges of $6.4 million. Cash provided by operations included
originations of installment contracts of $2.0 million, increased
accounts receivable of $5.7 million, and decreased accrued
liabilities of $4.2 million. Other significant uses of cash
included capital expenditures of $4.0 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
in retail operations of $4.5 million.
At September 29, 2000, the Company's net working capital was
$16.3 million, compared with $18.7 million at December 31, 1999.
The decrease in net working capital was primarily a result of a
decrease in cash and cash equivalents of $3.2 million, a decrease
in inventories of $5.9 million and an increase in notes payable
of $1.3 million, partially offset by an increase in accounts
receivable of $3.7 million and decreases in accrued liabilities
of $2.0 million and current maturities of long-term debt of $1.1
million. On February 28, 2000 the Company's primary lender
renewed the Company's bank line of credit. To provide additional
working capital, the maximum line was increased to $28.5 million.
The line is secured by the Company's accounts receivable.
Security for the line was extended to include the Company's raw
material inventories. The Company's ability to draw upon this
line of credit is dependent upon meeting certain financial ratios
and covenants. At the time of the renewal, certain other
modifications were made in the Loan Agreement governing the line.
The Debt Service Coverage Ratio was reduced substantially and a
negative pledge covenant was deleted by agreement to exclude any
application to the Company's real property. As noted in the
Company's most recent Form 10-K, the Company owns substantially
all of the real property on which it conducts its manufacturing
operations. The Lender further agreed that any one time non
recurring loss, as determined by generally accepted accounting
principles, would not be taken into account in any financial
covenant other than the tangible net worth covenant, which was
also reduced. The renewed line of credit matures on May 31, 2001
and bears interest at the London Interbank Offered Rate ("LIBOR")
plus 1.5%. The Company has $20.0 million in outstanding
borrowings under this line at September 29, 2000.
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 September 29, 2000,
the Company's contingent repurchase liability under floor plan
financing arrangements was approximately $72 million. While homes
that have been repurchased by the Company under floor-plan
financing arrangements are usually sold to other dealers, no
assurance can be given that the Company will be able to sell to
other dealers homes which it may be obligated to repurchase in
the future under such floor plan financing arrangements or that
the Company will not suffer losses with respect to, and as a
consequence of, those arrangements.
The company does not have any planned material capital
expenditures for the next twelve months.
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. Increased
competition in the industry has generally prevented the Company
from passing on such increases.
Item 3.
The following discussion about the Company's interest rate risk
includes "forward looking statements" that involve risks and
uncertainties. Actual results could differ materially from those
projected in the forward looking statements
Quantitative and Qualitative Disclosures Regarding Market Risk.
Historically the Company has not entered into derivatives
contracts to either hedge existing risk or for speculative
purposes. The Company also does not and has not entered into
contracts involving derivative financial instruments or
derivative commodity instruments. Pertinent provisions of
Regulation S-K call for disclosures to clarify exposures to
market risk associated with activities in derivative
financial instruments, other financials instruments and
derivative commodity instruments. The Regulation defines
"other financial instruments" to include trade accounts
receivable, loans and structured notes. The Company does
not utilize derivative instruments to manage such risks. The
Company's principal credit agreement bears a floating
interest rate of 1.5% over LIBOR. Accordingly, the Company
is subject to market risk associated with changes in
interest rates. At September 29, 2000, $20 million was
outstanding under the credit agreement. As of December 31,
1999, the principal amount outstanding under the credit
agreement was $25.0 million. Assuming that amount
outstanding, a 1% increase in the applicable interest rate
during 2000 would result in additional interest expense of
approximately $200,000, which would reduce cash flow and pre-
tax earnings dollar for dollar. Accounts receivable: Most
of the Company's sales of manufactured homes are pre-sold,
such that orders exist before construction begins. When
manufactured homes are sold to dealers as inventory, such
homes are paid for by dealer's floor plan financing, such
that funds ordinarily transfer to the Company from the
dealer's floor plan lender within 21 days. Management thus
does not perceive that the Company is subject to a material
market risk with respect to its accounts receivable.
"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, which could cause
actual results to differ materially from those in any forward
looking statements, 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 operating plans; the
availability of labor to implement those plans; the highly
competitive nature of the manufactured housing industry; Federal,
state and local regulation of the Company's business; the
Company's contingent repurchase liabilities with respect to
dealer financing; the Company's reliance on independent dealers;
and other risks indicated from time to time in the Company's
filings with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 1, 1999, the Company, without admitting any liability,
entered into a settlement with HUD which required the Company to
correct construction and safety violations in homes manufactured
at a North Carolina manufacturing facility which the Company has
since closed. 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 settlement required the Company to
inspect 600 additional homes for possible violations. The
Company agreed to an extension for one year of the warranty
period for certain homes. The Company was assessed a civil
penalty by HUD of up to $300,000 in connection with the
settlement. The settlement provided that the monetary penalty
could be reduced by HUD depending on Company actions and its
performance under the settlement. As of March 31, 2000 the
Company had completed all repairs and inspections required by the
settlement and had paid a penalty of $150,000.
The Company was named, along with several other manufactured
housing companies, as a defendant in a class action lawsuit filed
in state court 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 was not specified. The Company
believes the claims are without merit and has vigorously defended
itself against them. The Defendants, including the Company, filed
a motion to dismiss the case in December 1998. During 1999 the
motion was granted and the case was dismissed. The Plaintiff's
appealed it and the Kentucky Court of appeals affirmed the lower
court's decision in September 2000. The Plaintiffs may seek
review by the Kentucky Supreme Court, but to this point, no
further appeal has been taken. Nevertheless, the outcome of
litigation and appellate proceedings cannot be predicted and
adverse rulings and outcomes could have a material adverse effect
on this Company.
The Company is a party to various other legal proceedings
incidental to its business. The company typically issues a one-
year warranty on new manufactured homes. The majority of these
legal proceedings are claims related to that warranty on
manufactured homes, or employment issues such as worker's
compensation claims. Management believes that adequate reserves
are maintained for such claims. 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.
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
"Not applicable"
Item 5. Other Information
"Not applicable"
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are incorporated herein by reference(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 RegistrationStatement
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 (filed as Exhibit 10.22
to the Company's Annual Report on Form 10K for the year ended
January 3, 1997).
10.23 Amended and Restated Employment Agreement with Keith W.
Brown, dated as of June 14, 1996 (filed as Exhibit 10.23 to
the Company's Annual Report on Form 10K for the year ended
January 3, 1997).
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 10, 2000 By: /s/ Wendell L. Batchelor
Wendell L. Batchelor, Chairman
and Chief Executive Officer
Date: November 10, 2000 By: /s/ Keith W. Brown
Keith W. Brown, Executive Vice
President, Chief Financial
Officer, Treasurer and
Secretary
