AMERICAN HOMESTAR CORP, 10-K, 1999-08-26

AMERICAN HOMESTAR CORP
10-K, 1999-08-26
PREFABRICATED WOOD BLDGS & COMPONENTS

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 1999

Commission file number 0-24210

AMERICAN HOMESTAR CORPORATION
(Exact name of registrant as specified in its charter)

TEXAS 76-0070846
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)

2450 SOUTH SHORE BOULEVARD, SUITE 300, LEAGUE CITY, TEXAS 77573
(Address of principal executive offices, including zip code)

(281) 334-9700
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g):

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $0.05 par value Nasdaq National Market

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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].

The aggregate market value of voting stock held by non-affiliates of the
registrant on August 13, 1999 (based on the last sale price on the Nasdaq
National Market as of such date) was $78,148,881. For purposes of this
disclosure only, the registrant has assumed that its directors, executive
officers and beneficial owners of 5% or more of the registrants common stock are
affiliates of the registrant.

As of August 13, 1999, the registrant had 18,420,163 shares of Common Stock
issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement with respect to the 1999 annual meeting of
shareholders of the registrant are incorporated by reference into Part III of
this report.

================================================================================

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I
PAGE
----
<S> <C> <C>
Item 1. Business........................................................................... 1
Item 2. Properties......................................................................... 9
Item 3. Legal Proceedings.................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders................................ 9

PART II

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.............. 10
Item 6. Selected Financial Data............................................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......................... 19
Item 8. Financial Statements and Supplementary Data........................................ 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure......................................................................... 20

PART III

Item 10. Directors and Executive Officers of the Registrant................................. 21
Item 11. Executive Compensation............................................................. 21
Item 12. Security Ownership of Certain Beneficial Owners and Management..................... 21
Item 13. Certain Relationships and Related Transactions..................................... 21

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................... 22
</TABLE>

<PAGE> 3

PART I

ITEM 1. BUSINESS

GENERAL

American Homestar Corporation ("American Homestar" or the "Company") is one
of the leading vertically integrated manufactured housing companies in the
United States, with operations in manufacturing, retailing, financing and
insurance. The Company currently operates 14 manufacturing facilities in seven
states and sells homes through its dedicated distribution channels, which
include 125 Company-owned retail sales centers, 12 joint venture retail sales
centers and 80 franchised retail sales centers, and through more than 300
independent retail locations in 28 states. The Company's operations are
strategically located in the Southwest, Southeast, Deep South, Rocky Mountain
and Pacific Northwest regions of the United States, which represent many of the
largest markets for manufactured housing. The Company provides financing to its
retail customers through its affiliate, 21st Century Mortgage Corporation ("21st
Century"), and also provides insurance products to its retail customers.

American Homestar has realized significant growth in its operations and
profitability since its initial public offering in July 1994. Since that time,
the Company has grown from three manufacturing facilities to 14 and from 25
Company-owned retail sales centers to 125. Revenues have increased from $119
million in fiscal 1994 to $654 million in fiscal 1999, representing a compounded
annual growth rate ("CAGR") of 41%, while diluted earnings per share have
increased from $0.45 to $0.96 during the same period, representing a CAGR of
17%. During the same period, shipments increased from 2,228 homes to 12,311
homes, representing a CAGR of 47%.

STRATEGY

The Company's primary strategic objectives are to maintain high growth in
profitability and to generate superior long-term returns by leveraging the
benefits of vertical integration and increasing market share. In order to
achieve these objectives, the Company is pursuing the following initiatives:

o INCREASE VERTICAL INTEGRATION AND INTERNALIZATION

The cornerstone of American Homestar's strategy is the vertical integration
of its operations, which includes the combination of manufacturing, retailing,
financing and insuring of its products. Vertical integration allows the Company
to increase its profit margins on the manufacture and sale of its products, and
provides the ability to realize additional sources of income from financing the
sales of and insuring the Company's products. Management believes that vertical
integration allows the Company to better control the quality, design,
manufacture and distribution of its homes, more effectively plan its inventory
requirements, better coordinate the servicing of its products and promptly
respond to changes in retail demand. An important element of the Company's
vertical integration strategy is to maximize the percentage of new homes,
manufactured by the Company to be sold through the Company's dedicated
distribution channels. This percentage for Company-owned retail sales centers
(the "internalization rate") has increased from 38% in fiscal 1994 to 85% in
fiscal 1999.

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o INCREASE MANUFACTURING CAPACITY IN TANDEM WITH RETAIL EXPANSION

Each American Homestar manufacturing facility produces homes targeted to a
specific price range. This specialization maximizes production efficiency and
improves the economies of scale derived from significant production volumes in a
single facility. The Company clusters its manufacturing facilities within
regions in order to supply a wide range of homes to each market it serves. As
the Company's dedicated retail distribution increases in existing markets,
capacity in existing plants will be expanded to take advantage of manufacturing
efficiencies and economies of scale and to provide the full product offering of
American Homestar to its retail sales centers and franchisees. Due to lower than
expected sales in the last half of fiscal 1999, the Company is now placing less
emphasis on growing the Company-store base and more on expanding the Company's
retail franchise network. The Company also intends to expand its manufacturing
capacity as overall demand for its products increases and as strategic
acquisition opportunities arise.

o GROW FINANCING OPERATIONS IN MEASURED FASHION WHILE REMAINING FULLY
COMPETITIVE

For the past several years the Company has focused on growing 21st Century
Mortgage, believing that an internal retail financing capability was an
important element of its overall growth strategy and vertical integration plan.
Management still believes that prudent and conservative growth of 21st Century's
loan portfolio is an important source of recurring future income. In response to
an increasingly competitive retail lending environment, however, the Company has
recently expanded its relationships with independent, third party, retail
lenders to insure that it can offer a broad range of fully competitive retail
financing products to its customers. 21st Century is currently one of the five
"preferred lenders" to whom the Company sells retail installment contracts. The
Company's insurance products also represent an opportunity for additional
sources of current and recurring income through both commissions and
underwriting profits.

INDUSTRY

A manufactured home is a single-family residence that is constructed in a
controlled factory environment and transported to a home site. Total retail
sales of new manufactured homes in the United States were approximately $16.3
billion in 1998. From 1991 through 1998, the manufactured housing industry
experienced a significant increase in the number of homes sold. Factory
shipments increased from approximately 171,000 homes in 1991 to approximately
373,000 homes in 1998. Manufactured housing has also significantly increased its
share of the new home market. In 1998, manufactured homes accounted for
approximately one-fourth of all new single-family homes completed in the United
States, up from approximately one-sixth in 1991. Because of the lower cost of
construction for manufactured homes compared to site-built homes, manufactured
housing has historically served as one of the most affordable alternatives for
the home buyer. The average retail price of a new manufactured home in 1998 was
$30.21 per square foot, as compared to $62.29 per square foot for a new
site-built home, excluding land costs. In recent years, demand has shifted
toward larger, multi-section homes, which accounted for more than one-half of
the manufactured homes produced in 1998.

Manufactured homes have traditionally been an attractive means for home
buyers to overcome the obstacles of large down payments and high monthly
mortgage payments. Financing has become readily available to qualified
manufactured home buyers from a variety of lenders. A number of these lenders
have established securitization programs for consumer loans. Both the Federal
Housing Administration's and the Department of Veterans Affairs' guaranteed loan
programs permit loans for the purchase of manufactured housing. In addition, the
Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation accept manufactured housing mortgage loans and allow these mortgage
loans to be pooled with traditional real estate mortgage loans. Also,
manufactured homes may be financed as secured personal property loans in
instances where the buyer does not own the land upon which the home will be
sited.

RETAIL DISTRIBUTION

The Company sells its products through dedicated retail distribution
channels which include Company-owned retail sales centers, joint venture retail
sales centers, franchisees and independent retailers. The following table sets
forth for the periods indicated certain data for shipments of homes manufactured
by the Company to Company-owned retail sales centers and to independent retail
sales centers, including franchisees, and the number of Company-owned retail
sales centers and the number of joint venture retail sales centers:

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<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Homes shipped to Company-owned retail sales centers ........ 3,762 4,647 5,934
Homes shipped to independent retail sales centers,
including franchisees .................................. 5,251 6,076 6,377
------ ------ ------

Total homes shipped ................................. 9,013 10,723 12,311
====== ====== ======

Company-owned retail sales centers ......................... 54 86 125
Joint venture retail sales centers ......................... -- -- 12
</TABLE>

Dedicated Distribution. The Company employs a distinct merchandising and
selling strategy in its dedicated distribution channels. At each Company-owned
retail sales center a broad selection of fully furnished and professionally
decorated model homes is displayed in a landscaped setting. The Company's
professional sales staff receives extensive training on all of the Company's
products and services, and is able to provide customers with superior service.
The Company also provides merchandising support and uses regional print, radio
and television advertising to promote customer awareness and enhance its quality
image.

In fiscal 1999, 67% of the Company's new home retail sales were
multi-section homes and its average new home retail sales price was $55,008 for
Department of Housing and Urban Development ("HUD") code homes, compared to the
industry average of $43,800. Since the beginning of fiscal 1994, the Company has
increased the number of Company-owned retail sales centers from 21 to 125 as of
May 31, 1999.

The following table sets forth for the periods indicated certain
information relating to homes sold by Company-owned retail sales centers:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Average new home sales price - HUD code: ......... $45,902 $48,154 $55,008
Average new home sales price - modular: .......... -- -- $87,834
Homes sold:
New homes ................................. 4,506 5,211 6,560
Previously-owned homes .................... 1,314 1,725 2,256
Percentage of new homes sold:
Single-section ............................ 46% 45% 33%
Multi-section ............................. 54% 55% 67%
Percentage of new homes sold manufactured by:
Company ................................... 74% 84% 85%
Independent manufacturers ................. 26% 16% 15%
</TABLE>

The Company has increased the percentage of new homes sold by Company-owned
retail sales centers that are manufactured by the Company from 38% in fiscal
1994 to 85% in fiscal 1999. As the Company's manufacturing facilities continue
to increase their production, the Company expects this percentage to increase.
In addition to selling homes manufactured by the Company, many Company-owned
retail sales centers sell homes manufactured by other companies as well as
previously-owned manufactured homes.

Franchise System. The Company initiated its Oak Creek Village national,
branded franchise program in September 1997 to accelerate distribution of the
Company's products by converting existing independent retail sales centers into
franchisees and by encouraging entrepreneurs with considerable industry or
business experience to open new retail sales centers as franchisees. Since the
program's inception, the Company has entered into franchise arrangements
covering 80 retail sales centers. The Company believes that its franchise
program offers an attractive alternative for independent retailers. The benefits
for a Company franchisee include (i) a protected territory for specific
products; (ii) access to the Company's manufacturing, retailing and financing
expertise; (iii) minimal personal investment in the retail sales center;

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(iv) the potential to open additional retail sales centers; and (v) the ability
in many cases to benefit from television advertising and regional and national
promotions.

The Company generally enters into a franchise agreement when an independent
retailer converts to a franchise or when a franchisee secures a location. The
franchise agreement provides for a term of five years with one five-year renewal
option. Under conditions of the franchise agreement, the franchisee is required
to purchase all products through the Company or through Company-approved
suppliers. The Company has the right to terminate any franchise agreement under
specified circumstances, including a franchisee's failure to adhere to the
Company's standards. The current franchise agreement contains a right of first
refusal for the Company to purchase the franchise.

In order to assist an independent retailer in the conversion to an Oak
Creek Village, the Company may finance improvements to the franchisee's retail
sales center. In such cases the lease is controlled by the Company and the costs
of such improvements are added to the lease payment. The franchisee is required
to finance its own inventory, but the Company may assist franchisees in finding
floor plan financing at attractive rates. All franchisees are required to
operate their Oak Creek Villages in compliance with applicable Company policies,
standards and specifications. The Company monitors each franchisee's operations
and results and assists the franchisee in order to optimize its performance.

The Company believes that the success of a retail sales center is dependent
on the professionalism and knowledge of its managerial and sales staff, and
therefore, has developed an extensive regionalized training program covering
management skills and knowledge, the proper sequence of a sale and general, as
well as specific, product features and benefits. Management training provides
employees with a complete review of the administrative process as well as a
comprehensive understanding of the Company's retailing strategy and sales
approach. The Company has a full-time training staff, which travels to regional
training sites and to individual sales centers to provide on-site, one-on-one
supplementary training as needed. The Company believes its general approach to
marketing, the appearance of its sales locations and the professionalism of its
sales management and staff are among its most distinguishing features.

Independent Retailers. The independent retailer network is an important
part of the Company's sales and distribution strategy and is especially
important in new regional markets in which the Company has a limited number of
Company-owned retail sales centers or franchisees. The Company believes its
relations with its independent retailers are excellent. The Company has no
written agreements with its independent retailers and the relationship may be
terminated at any time by either party. The Company generally does not provide
inventory financing arrangements for independent retailer purchases, nor does it
consign homes. However, as is customary in the industry, lenders financing
independent retailers require the Company to execute contingent repurchase
agreements, which provide that, in the event of a retailer's default under the
retailer's inventory financing arrangements, the Company will repurchase homes
for the amount remaining unpaid to the lender, excluding interest and
repossession costs. During the last three fiscal years, the Company has incurred
no significant losses resulting from these contingent obligations. As of May 31,
1999, the Company's contingent repurchase liability was approximately $108
million.

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MANUFACTURING

The Company manufactures a broad selection of both HUD code and modular
homes ranging from traditional, lower-priced homes to distinctive, higher-priced
homes. The Company's HUD code homes retail from $17,000 to $116,500, excluding
land costs, while the Company's modular homes retail from $55,000 to $205,000,
excluding land costs. By providing such a broad selection, the Company believes
it can meet the financial and aesthetic requirements of the full range of retail
buyers. Additionally, the Company believes it offers high quality homes that
incorporate more innovative architectural designs and features than are
typically offered by its competitors. Over the past few years, as the demand for
multi-section homes has increased, the Company has significantly increased its
production of multi-section homes to 73% of total homes manufactured for fiscal
1999 from 50% in fiscal 1994.

The Company's manufacturing facilities generally operate on a one shift per
day, five day per week basis. At May 31, 1999, the Company's facilities had the
capacity to produce 140 floors per day, and its production rate was 98 floors
per day (capacity figures are estimates of management). A floor is a single
section home or one section of a multi-section home. The following table sets
forth the total homes and floors manufactured by the Company for the periods
indicated:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Homes manufactured:
Single-section ........................ 3,497 3,276 3,326
Multi-section ......................... 5,516 7,447 8,985
------ ------ ------

Total homes manufactured ................... 9,013 10,723 12,311
====== ====== ======

Total floors manufactured .................. 14,848 18,566 21,739
====== ====== ======
</TABLE>

The principal materials used in the construction of the Company's homes
include lumber and lumber products, gypsum wallboard, steel, aluminum,
fiberglass, carpet, vinyl, fasteners, appliances, electrical items, windows and
doors. Generally, materials are readily available and are purchased by the
Company from numerous sources. The Company believes the materials used in the
manufacture of its homes are readily available at competitive prices from a wide
variety of suppliers. Accordingly, the Company does not believe the loss of any
single supplier would have a material adverse effect on its business. The
Company's direct or variable costs of operations can be significantly affected
by the availability and pricing of raw materials.

The Company generally builds a home only after a specific order has been
received and wholesale retailer financing arrangements for payment have been
made. In accordance with industry practice, dealers can cancel orders prior to
the commencement of production without penalty, and accordingly, the Company
does not consider its backlog of orders to be firm orders. Because of the
seasonality of the market for manufactured homes, the level of backlog at any
time is not necessarily indicative of the expected level of future orders. The
Company's backlog, as well as level of new orders, generally declines during the
winter months of December through February.

FINANCING

In 1995, the Company formed 21st Century together with Clayton Homes, Inc.
("Clayton") and three former executive officers of Clayton. Clayton is a leader
in manufactured home financing through its finance subsidiary, Vanderbilt
Mortgage and Finance, Inc. American Homestar, Clayton and the management of 21st
Century own 50%, 25% and 25%, respectively, of 21st Century, and the Company has
an option to purchase the stock owned by Clayton and the management of 21st
Century under certain conditions after September 15, 2000. 21st Century provides
retail sales financing through the Company's dedicated distribution channels and
is the primary lender for all Company-owned retail sales centers. 21st Century
is also adding to its growing loan portfolio through direct marketing efforts to
capture re-finance business and by offering private label financing through
joint ventures with other manufactured housing producers and retailers.
Financing through 21st Century extends the profits of a home sale through a
recurring income stream received over the life of loans originated. As of May
31, 1999, 21st Century's loan servicing portfolio was approximately $538 million
and for the year ended May 31, 1999, 21st Century had loan originations of
approximately $220 million.

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To insure that the Company remains fully competitive and has access to all
retail financing products available, the Company has recently expanded its
relationships with several independent retail lenders. This new strategy is
designed to spread the business more evenly among 21st Century and the Company's
independent lenders and to ensure that each retail lender is able to fund an
acceptable share of approved loans. The Company believes that this strategy
affords it access to a variety of competitive financing programs which, in turn,
may result in increased retail sales.

INSURANCE

Through its wholly-owned subsidiary, Western Insurance Agency, Inc.
("Western"), the Company offers to its retail customers a variety of insurance
products, including property/casualty insurance, credit life insurance and
extended service contracts. The Company acts as agent and earns commissions from
insurance written for purchasers of its manufactured homes. In addition, the
Company's wholly-owned subsidiary, Lifestar Reinsurance, Ltd., reinsures credit
life policies placed by Western. The amount underwritten at May 31, 1999 was
approximately $255 million. Through reinsurance, the Company also earns
underwriting fees and investment income. The Company's reinsurance operations
are managed by American Bankers Life Assurance Company of Florida pursuant to a
management contract.

ACQUISITIONS

During fiscal 1998 and fiscal 1999, the Company made a number of strategic
acquisitions, the most significant of which are as follows:

o In June 1997, the Company acquired Brilliant Holding Corporation and
its subsidiaries ("Brilliant"), a manufacturer of single- and
multi-section homes with three plants in Alabama. Brilliant sells its
homes to nearly 200 independent retailers located in 14 states.

o In June 1997, the Company acquired N.C. Mobile Home Corporation ("N.C.
Homes"), which operated 12 retail sales centers in North Carolina and
one retail sales center in Virginia.

o In January 1998, the Company acquired Davis Homes, Inc. ("Davis
Homes"), which operated three retail centers in Alabama.

o In July 1998, the Company acquired First Value Homes, Inc. ("First
Value"), which operated two retail centers in North Carolina.

o In September 1998, the Company acquired DWP Management, Inc. ("DWP"),
and its related companies, Value Homes, Inc., Value Mobile Homes, Inc.
of Washington, Premiere Manufactured Homes, Inc., Premiere
Manufactured Homes, Inc. of Washington, Park Place Homes, Inc.,
Kilroy's M. H., Inc. and Premiere Homes of Moses Lake, Inc., which
operated six retail centers in Washington, Oregon and New Mexico.

o In December 1998, the Company acquired R-Anell Custom Homes, Inc. and
its related manufacturing companies, Gold Medal Homes, Inc. and Gold
Medal Homes of North Carolina, Inc. (collectively, "R-Anell"). R-Anell
produces manufactured and modular homes in three facilities located in
North Carolina and sells its homes through approximately 100
independent and Company-owned retail sales centers located primarily
in North Carolina, South Carolina and Virginia.

o In March, 1999, the Company acquired 25% of the outstanding common
stock of HomeMax, Inc. ("HomeMax") from Zaring National Corporation
("Zaring") in exchange for a $4.4 million note, and the Company loaned
HomeMax $4 million in exchange for a subordinated note convertible
into an additional 25% of HomeMax's common stock. The Company also
received an option to acquire all of the remaining HomeMax common
stock after three years at a predefined price. Zaring may require, or
the Company may elect, earlier exercise of this option if HomeMax
meets certain performance goals within the three-year period. In
connection with this transaction, the Company entered into a
Management and Consulting Agreement with Zaring and HomeMax pursuant
to which the Company will manage the HomeMax operations, and the
Company, Zaring and HomeMax entered into a Securityholders Agreement
providing for the joint control of HomeMax by the Company and Zaring
and certain restrictions on the capital stock of HomeMax. HomeMax
currently operates twelve retail sales centers in North Carolina,
South Carolina and Kentucky.

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While the Company's historical primary market area has been the Southwest,
particularly Texas and the surrounding states, the Company's recent expansion
has given it a national presence with operations now encompassing the Southwest,
Southeast, Deep South, Rocky Mountain and Pacific Northwest regions of the
United States.

TRANSPORTATION

Roadmasters Transport Company, Inc. ("Roadmasters"), a 51% owned
subsidiary, and Brilliant Carriers, Inc. ("Carriers"), a wholly-owned
subsidiary, provide manufactured housing transportation services and are the
primary transporters of manufactured homes from the Company's manufacturing
facilities. Roadmasters and Carriers lease their equipment from independent
owner-operators, which allows them to cover a large geographic area without a
significant investment in equipment. The Company believes that its controlling
ownership interests in Roadmasters and Carriers provide it with the ability to
better control the delivery of homes to its retail sales centers and to
independent retailers, especially during peak sales and delivery periods, as
well as to profit from each home shipment.

SIGNIFICANT SUPPLIERS

In fiscal 1997, fiscal 1998 and fiscal 1999, Redman Homes, Inc. ("Redman")
supplied approximately 18%, 10% and 5%, respectively, of the homes sold by
Company-owned retail sales centers. The Company's supply relationship with
Redman is terminable at will by either party. While the Company believes that it
can replace any independent manufacturer by substituting its own products and
the products of other manufacturers, any such loss could have an adverse effect
on the Company's results of operations.

COMPETITION

The manufactured housing industry is highly competitive and the capital
requirements for entry are relatively small. Manufactured homes compete with new
and existing site-built homes, apartments, townhouses and condominiums.
Competition exists at both the manufacturing and retail levels and is based
primarily on price, product features, reputation for service and quality,
location, depth of field inventory, sales promotions, merchandising and terms
and availability of dealer and retail customer financing.

GOVERNMENT REGULATION

The Company's manufactured homes are subject to a number of federal, state
and local laws and codes. Construction of manufactured homes is governed by the
National Manufactured Home Construction and Safety Standards Act of 1974 ("MHCSS
Act") and the regulations issued by the HUD thereunder, establishing
comprehensive national construction standards. These regulations cover all
aspects of manufactured home construction, including structural integrity, fire
safety, wind loads, thermal protection and ventilation. The Company's
manufacturing facilities and the plans and specifications of its manufactured
homes have been approved by a HUD-designated inspection agency. The Company's
homes are regularly checked by an independent, HUD-approved inspector for
compliance during construction. Failure to comply with applicable HUD
regulations could expose the Company to a wide variety of sanctions, including
mandated closings of Company manufacturing facilities. The Company believes its
manufactured homes meet or surpass all present HUD requirements.

Manufactured, modular and site-built homes are all typically built with
particle board, paneling and other products that contain various formaldehyde
resins. HUD regulates the allowable concentration of formaldehyde in certain
products used in manufactured homes and requires warnings to purchasers
concerning formaldehyde-associated risks. Certain components of manufactured
homes are subject to regulation by the Consumer Products Safety Commission
("CPSC"), which is empowered to ban the use of component materials believed to
be hazardous to health and to require the manufacturer to repair defects in
components of its homes. The CPSC, the Environmental Protection Agency and other
governmental agencies currently are re-evaluating the allowable standards for
formaldehyde emissions. The Company currently uses materials in its manufactured
homes that meet the current HUD standards for formaldehyde emissions and
believes that it otherwise complies with HUD and other applicable government
regulations in this regard.

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<PAGE> 10

The Company's operations are also subject to the provisions of the Texas
Manufactured Housing Act, the Consumer Credit Act and the Truth-in-Lending Act,
as well as local zoning and housing regulations. A number of states require
manufactured home producers and retailers to post bonds to ensure the
satisfaction of consumer warranty claims. A number of states have adopted
procedures governing the installation of manufactured homes. Utility connections
are subject to state and local regulation and must be complied with by the
dealer or other person installing the home. The operations of Roadmasters and
Western are subject to regulation by various federal, state and local
authorities.

A variety of laws affect the financing of manufactured homes by the
Company. The Truth-in-Lending Act and Regulation Z promulgated thereunder
require written disclosure of information relating to such financing, including
the amount of the annual percentage rate and financing charge. The Fair Credit
Act also requires certain disclosures to potential customers concerning credit
information used as a basis to deny credit. The Federal Equal Credit Opportunity
Act and Regulation B promulgated thereunder prohibit discrimination against any
credit applicant based on certain specified grounds. The Federal Trade
Commission has adopted or proposed various trade regulation rules dealing with
unfair credit and collection practices and the preservation on consumers' claims
and defenses. The Federal Trade Commission regulations also require disclosure
of a manufactured home's insulation specification. Installment sales contracts
eligible for inclusion in the Government National Mortgage Association Program
are subject to the credit underwriting requirements of the Federal Housing
Administration. A variety of state laws also regulate the form of installment
sales contracts and the allowable charges pursuant to installment sales
contracts. The sale of insurance products by the Company is subject to various
state insurance laws and regulations, which govern allowable charges and other
insurance products.

The Company is also subject to the provisions of the Fair Debt Collection
Practices Act, which regulates the manner in which the Company collects payments
on installment sale contracts, and the Magnuson-Moss Warranty-Federal Trade
Commission Improvement Act, which regulates the descriptions of warranties on
products. The Company's collection activities and warranties are also subject to
state laws and regulations.

The transportation of manufactured homes on highways is subject to
regulation by various federal, state and local authorities. Such regulations may
prescribe size and road use limitations and impose lower than normal speed
limits and various other requirements.

The Company's operations are also subject to federal, state and local laws
and regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. The Company is
not aware of any pending litigation to which it is a party or claims that may
result in significant contingent liabilities related to environmental pollution
or asbestos. In addition, the Company does not believe it will be required under
existing environmental laws and enforcement policies to expend amounts that will
have a material adverse effect on its results or operations or financial
condition.

A significant portion of the Company's manufacturing labor force includes
persons who are not U.S. citizens, and the Company is subject to the regulations
of the Immigration and Naturalization Service ("INS"). The Company adheres to
the procedures required for the prevention of the hiring of illegal aliens, but,
nonetheless, the Company has from time to time experienced losses of a portion
of its labor force due to INS investigative operations, which losses have
temporarily decreased production at the affected manufacturing facilities.

In general, legislation is proposed from time to time that, if enacted,
would significantly affect the regulatory climate for manufactured and modular
homes. At present, it is not possible to predict what, if any, changes or
legislation may be adopted or the effect any such changes or legislation may
have on the Company or the manufactured housing industry as a whole.

EMPLOYEES

As of May 31, 1999, the Company employed 5,049 persons. The Company does
not have any collective bargaining agreements and has not experienced any work
stoppages as a result of labor disputes. The Company considers its employee
relations to be good.

A significant portion of the total compensation of management of the
Company is derived from incentive bonuses based on the operating income of the
operating unit for which such management is responsible, as well as the
attainment of

8
<PAGE> 11

margin goals. Many of the Company's managers are also shareholders and all are
eligible to participate in the Company's 1994 Amended and Restated Stock
Compensation Plan.

ITEM 2. PROPERTIES

At May 31, 1999, the Company operated 14 manufacturing facilities, 125
retail sales centers and had two administrative offices. Fifty-two of the retail
sales centers and both administrative offices are leased. The Company's retail
sales centers consist of tracts of land, ranging from 2.5 to 7.0 acres, on which
manufactured homes are displayed, each with a sales office containing
approximately 2,000 square feet of office space. The Company's retail sales
centers are located in 16 states as follows: Alabama (7), Arkansas (2), Colorado
(4), Idaho (1), Kentucky (3), Louisiana (6), Mississippi (2), New Mexico (6),
North Carolina (23), Oklahoma (4), Oregon (5), South Carolina (4), Tennessee
(3), Texas (49), Utah (1) and Washington (5). The Company believes that all
facilities are adequately maintained and suitable for their present use.

The Company owns all of its manufacturing facilities and substantially all of
its manufacturing equipment, fixtures, furniture and office equipment. The
following table sets forth certain information with respect to the Company's
manufacturing facilities:

<TABLE>
<CAPTION>
DATE OPENED OR BUILDING
LOCATION ACQUIRED SQUARE FEET
-------- -------------- -----------
<S> <C> <C>
Fort Worth, Texas................ June 1985 137,000
Lancaster, Texas................. December 1992 86,600
Burleson, Texas.................. May 1993 94,500
Henderson, North Carolina........ September 1996 70,000
Boise, Idaho..................... September 1996 90,100
Stayton, Oregon.................. September 1996 97,500
Gering, Nebraska................. September 1996 73,000
Vicksburg, Mississippi........... September 1996 118,700
Brilliant, Alabama............... June 1997 127,500
Guin, Alabama.................... June 1997 136,400
Lynn, Alabama.................... June 1997 150,000
Denver, North Carolina........... December 1998 104,000
Denver, North Carolina........... December 1998 92,000
Cherryville, North Carolina...... December 1998 231,000
</TABLE>

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in routine litigation arising in the ordinary
course of business. In the opinion of the Company, such matters will not have a
material adverse effect on the financial condition or the results of operations
of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

MANAGEMENT

The information in the section entitled "Management" in the Company's Proxy
Statement to be delivered to shareholders in connection with the Company's
Annual Meeting to be held on October 15, 1999 (the "Proxy Statement") is
incorporated herein by reference in response to this item.

9
<PAGE> 12

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

PRICE RANGE OF COMMON STOCK

The Company's common stock is quoted on the Nasdaq National Market under
the symbol "HSTR." The following table sets forth, for the periods indicated,
the high and low sales price per share of the Company's common stock as reported
on the Nasdaq National Market. The following share prices have been adjusted to
reflect the three-for-two stock split effected October 31, 1997.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED MAY 31, 1998:
First quarter.......................................... $ 16.75 $ 12.08
Second quarter......................................... 17.17 13.00
Third quarter.......................................... 22.25 14.00
Fourth quarter......................................... 25.00 18.50

FISCAL YEAR ENDED MAY 31, 1999:
First quarter.......................................... $ 25.81 $ 15.38
Second quarter......................................... 22.00 15.75
Third quarter.......................................... 16.13 7.38
Fourth quarter......................................... 8.00 5.81
</TABLE>

As of August 13, 1999, there were 197 record holders of the Company's
common stock. On August 13, 1999, the reported last sale price of the Company's
common stock as reported by the Nasdaq National Market was $6.25 per share.

DIVIDEND POLICY

The Company has not paid any dividends on the common stock since it became
a public reporting company. The Company does not anticipate paying cash
dividends on the common stock in the foreseeable future and intends to continue
its present policy of retaining earnings for reinvestment in the operations of
the Company. The terms of certain indebtedness of the Company restrict its
ability to pay dividends or make distributions.

RECENT SALES OF UNREGISTERED SECURITIES

The following unregistered sales of the Company's common stock were made in
reliance upon Section 4(2) of the Securities Act of 1933 based on isolated sales
by the Company in connection with acquisitions of related businesses.

On July 13, 1998, the Company acquired the assets and liabilities of First
Value for cash, a note payable and 163,540 shares of the Company's common stock.
See Note 2 of the Notes to the Company's Consolidated Financial Statements
included herein.

On September 14, 1998, the Company acquired the assets and liabilities of
DWP for cash, a note payable and 175,095 shares of the Company's common stock.
See Note 2 of the Notes to the Company's Consolidated Financial Statements
included herein.

On December 29, 1998, the Company acquired the assets and liabilities of
R-Anell for cash, a note payable and 658,540 shares of the Company's common
stock. See Note 2 of the Notes to the Company's Consolidated Financial
Statements included herein.

10
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data includes the accounts of American
Homestar and Brilliant. Brilliant was acquired by the Company effective June
1997, and the acquisition was accounted for as a pooling of interests.
Accordingly, the Company's Consolidated Financial Statements have been restated
for all periods prior to the acquisition to combine the previously separate
entities. See Notes 1 and 2 of the Notes to the Company's Consolidated Financial
Statements included herein. The financial information set forth under Statement
of Operations Data and Balance Sheet Data for and as of the end of each of the
five fiscal years ended May 31, 1999 was derived from the Consolidated Financial
Statements of the Company (and its subsidiaries), which financial statements
have been audited by KPMG LLP, independent certified public accountants. The
Consolidated Financial Statements as of May 31, 1998 and 1999, and for each of
the years in the three-year period ended May 31, 1999 and the report thereon,
are included elsewhere herein. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes thereto included in Item 8 of this Form 10-K.

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales ............................................ $ 183,117 $ 274,145 $ 383,132 $ 481,947 $ 612,086
Other revenues ....................................... 16,311 22,487 26,305 31,992 41,957
--------- --------- --------- --------- ---------

Total revenues ................................... 199,428 296,632 409,437 513,939 654,043
--------- --------- --------- --------- ---------

Costs and expenses:
Cost of sales ........................................ 151,641 219,853 307,611 381,435 477,717
Selling, general and ................................. 34,127 55,233 70,644 91,772 134,682
administrative
Acquisition costs(1) ................................. -- -- -- 2,425 --
--------- --------- --------- --------- ---------

Total costs and expenses ......................... 185,768 275,086 378,255 475,632 612,399
--------- --------- --------- --------- ---------

Operating income ................................. 13,660 21,546 31,182 38,307 41,644
Interest expense ........................................ (2,011) (4,071) (5,703) (7,382) (13,845)
Other income (expense) .................................. 185 262 178 (50) 110
--------- --------- --------- --------- ---------
Income before items shown below .................. 11,834 17,737 25,657 30,875 27,909
Income tax expense ...................................... 4,615 7,076 10,512 13,546 11,472
--------- --------- --------- --------- ---------
Income before items shown below .................. 7,219 10,661 15,145 17,329 16,437
Earnings in affiliates ................................. -- 188 549 1,211 1,602
Minority interest in income of
consolidated subsidiaries ........................... (204) (297) (314) (223) (98)
--------- --------- --------- --------- ---------
Income before items shown below .................. 7,015 10,552 15,380 18,317 17,941
Extraordinary item, net of income tax
benefit(2) ........................................... -- -- (347) (634) --
--------- --------- --------- --------- ---------
Net income ....................................... $ 7,015 $ 10,552 $ 15,033 $ 17,683 $ 17,941
========= ========= ========= ========= =========
</TABLE>

11
<PAGE> 14

<TABLE>
<S> <C> <C> <C> <C> <C>
Earnings per share before
extraordinary item - diluted(1) ........... $ 0.49 $ 0.68 $ 0.88 $ 1.01 $ 0.96
Earnings per share - diluted .............. $ 0.49 $ 0.68 $ 0.86 $ 0.98 $ 0.96

Weighted average shares outstanding -
diluted ................................... 14,396 15,578 17,564 18,135 18,669

BALANCE SHEET DATA (END OF FISCAL YEAR)
Working capital ........................... $ 20,373 $ 39,655 $ 24,260 $ 58,867 $ 60,859
Total assets .............................. 93,832 126,233 211,021 273,696 439,316
Total debt ................................ 35,000 31,781 81,578 107,491 216,485
Shareholders' equity ...................... 34,668 62,167 77,709 98,463 135,465
</TABLE>

FOOTNOTES TO SELECTED FINANCIAL DATA

(1) Acquisition costs are non-recurring transaction costs related to the
Brilliant acquisition. Such costs reduced diluted earnings per share by
$0.11 for fiscal 1998.

(2) Extraordinary losses on early extinguishment of debt in fiscal 1997 and
1998.

12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This Form 10-K contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this document, the words "anticipate,"
"believe," "estimate," "should," and "expect" and similar expressions as they
relate to the Company or management of the Company are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risk factors described in the
Company's most recently filed registration statement. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. The Company does not intend to
update these forward-looking statements.

GENERAL

American Homestar is one of the fastest growing vertically integrated
manufactured housing companies in the United States with operations in
manufacturing, retailing, financing and insurance.

The Company, which started as a retailer in 1971, embarked on its vertical
integration strategy in fiscal 1993 by entering into a joint venture with Oak
Creek Homes, Inc. ("Oak Creek"), a manufacturer and long time supplier, to start
up and operate two manufacturing facilities in its core southwest market region.
In August 1993 (early fiscal 1994), the Company acquired Oak Creek and, thereby
added manufacturing to its growing retail base. In September 1995, the Company
formed 21st Century to originate, finance, sell and service manufactured housing
retail installment contracts. The Company owns 50% of 21st Century today, with
an option to purchase the remaining 50% in September 2000, and uses the equity
method of accounting for its investment in 21st Century.

In September 1996, the Company exercised its option to acquire Guerdon
Holdings, Inc. ("Guerdon") after managing Guerdon's operations under a
management agreement since March 1996. Guerdon produces manufactured homes in
four facilities located in Oregon, Idaho, Nebraska and Mississippi, and sells
its homes to over 150 independent retailers located in 17 states in the Pacific
Northwest Rocky Mountain and South Central regions of the United States.

In September 1996, the Company acquired Heartland Homes, Inc.
("Heartland"), a single plant manufacturer of low-to medium-priced homes in
North Carolina. Concurrent with the Heartland acquisition, the Company also
purchased the assets of Manu-Fac Homes Inc. ("Manu-Fac"), a contractually
affiliated group of 15 independent retailers, which have since become
franchisees of the Company.

In June 1997, the Company acquired Brilliant Holding Corporation
("Brilliant"), which operated three manufacturing plants in Northern Alabama.
Also in June 1997, the Company acquired N.C. Homes, Inc., which operated twelve
retail sales centers in North Carolina and one in Virginia.

In January 1998, the Company acquired Davis Homes, which operated three
retail sales centers in Alabama. In July 1998, the Company acquired First Value,
which operated two retail sales centers in North Carolina. In September 1998,
the Company acquired DWP, which operated six retail sales centers in Washington,
Oregon and New Mexico.

In December 1998, the Company acquired R-Anell, which produces manufactured
and modular homes in three facilities located in North Carolina and sells its
homes through approximately 100 independent and Company-owned retail sales
centers located primarily in North Carolina, South Carolina and Virginia.

In March 1999, the Company acquired 25% of the outstanding common stock of
HomeMax from Zaring in exchange for a $4.4 million note, and the Company loaned
HomeMax $4 million in exchange for a subordinated note convertible into an
additional 25% of HomeMax's common stock. The Company also received an option to
acquire all of the remaining HomeMax common stock after three years at a
predefined price. Zaring may require, or the Company may elect, earlier exercise
of this option if HomeMax meets certain performance goals within the three-year
period. In connection with this transaction, the Company entered into a
Management and Consulting Agreement with Zaring and HomeMax pursuant to which
the Company will manage the HomeMax operations. In addition the Company, Zaring
and HomeMax entered a Securityholders Agreement providing for the joint control
of HomeMax by the Company and Zaring and certain

13
<PAGE> 16

restrictions on the capital stock of HomeMax. HomeMax currently operates twelve
retail sales centers in North Carolina, South Carolina and Kentucky.

VERTICAL INTEGRATION AND INTERNALIZATION

The Company's growth strategy is based on an increasing degree of vertical
integration over time. Vertical integration allows the Company to increase its
profit margins on the manufacture and sale of its products, and provides the
ability to realize additional sources of income from financing the sales and
insuring the Company's products.

14
<PAGE> 17

RESULTS OF OPERATIONS

The following table summarizes certain key sales statistics for the Company
for the periods indicated:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Company-manufactured new homes sold at retail .............. 3,319 4,377 5,560
Total new homes sold at retail ............................. 4,506 5,211 6,560
Internalization rate (1) ................................... 74% 84% 85%
Previously-owned homes sold at retail ...................... 1,314 1,725 2,256
Average retail selling price -- new homes (HUD code) ....... $45,902 $48,154 $55,008
Company-owned retail sales centers at end of period ........ 54 86 125
Total manufacturing shipments .............................. 9,013 10,723 12,311
Manufacturing shipments to independent retail sales
centers, including franchisees ............................ 5,251 6,076 6,377
</TABLE>

(1) The internalization rate is the proportion of new homes sold by
Company-owned retail sales centers that are manufactured by the Company.

The following table summarizes the Company's historical operating results,
expressed as a percentage of total revenues, for the periods indicated:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Total revenues ............................................. 100.0% 100.0% 100.0%
Gross profit ............................................... 24.6% 25.8% 27.0%
Selling, general and administrative expenses before
acquisition costs ...................................... 16.9% 17.9% 20.6%
Acquisition costs .......................................... -- 0.5% --
Operating income ........................................... 7.6% 7.4% 6.4%
Income before extraordinary item ........................... 3.8% 3.6% 2.7%
Net income ................................................. 3.7% 3.4% 2.7%
</TABLE>

Year ended May 31, 1999 compared to year ended May 31, 1998

During the second half of fiscal 1999, the Company experienced
disappointing levels of retail sales which had a carryover effect to the other
operations of the Company (manufacturing, finance and insurance). The lower than
expected level of sales resulted in net income which, for the first time since
the Company became public, was substantially lower than net income in the
comparable periods of the prior year. The Company attributes its lower than
expected sales primarily to three factors: a highly competitive retail
environment, the lack of a full range of competitive retail financing programs
and management and personnel challenges and inadequacies at the retail level
caused by the Company's substantial growth.

In response, management is now placing less emphasis on building or
acquiring Company-owned retail sales centers and more on expanding the Company's
retail franchise network. In addition, senior management is focusing on
developing a broader range of retail financing alternatives and on recruiting,
training, developing and retaining retail management and sales personnel.
Management's stated goal is to improve retail sales performance and
profitability, even at more modest volume levels and to steadily improve overall
operating results. Management is committed to the goal of building long term
shareholder value.

15
<PAGE> 18

Net Sales. Net sales of manufactured homes were $612.1 million in fiscal
year ended May 31, 1999, compared to $481.9 million in fiscal 1998. The increase
is primarily the result of a 27% increase in the number of new and
previously-owned homes sold at retail as well as a 14% increase in the average
selling price of new HUD code homes. The weighted average number of new homes
sold per retail sales center in the core Nationwide Housing Corporation
("Nationwide") operations decreased from 69 in fiscal 1998 to 60 in fiscal 1999.
The Company added 39 new Company-owned retail sales centers in fiscal 1999.

Other Revenues. Transportation revenues in fiscal 1999 were $11.6 million,
an increase of 12% from $10.4 million in fiscal 1998. Transportation is not a
key growth area of the Company and has over time represented a declining
proportion of total revenues and operating income. Other non-transportation
revenues increased to $30.3 million in fiscal year 1999, compared to $21.6
million in fiscal 1998. The increase in other revenues is primarily due to
increased commissions and premiums generated by the Company's insurance
operations. Revenues from insurance operations increased to $17.5 million in
fiscal 1999 compared to $14.8 million in fiscal 1998.

Cost of Sales. Cost of manufactured homes sold was $477.7 million, or 78.0%
of net sales, in fiscal 1999, as compared to $381.4 million, or 79.1% of net
sales in fiscal 1998. The increase in cost of sales was primarily due to higher
sales volume. The decrease in cost of sales, expressed as a percentage of net
sales, was primarily the result of an increase in the internalization rate from
84% in fiscal 1998 to 85% in fiscal 1999. Cost of sales attributable to
transportation operations in fiscal 1999 were $9.5 million, or 81.8% of
transportation revenues, an increase of 13.1% from $8.4 million, or 80.9% of
transportation revenues in fiscal 1998.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses in fiscal 1999, were $135.0 million, or 20.6% of total
revenues, as compared to $91.8 million, or 17.9% of total revenues in fiscal
1998. The increase in selling, general and administrative expenses is
attributable to increased sales, manufacturing and insurance activities as well
as an increase in fixed costs and expenses associated with new retail sales
centers and expanded manufacturing capacity.

Acquisition Costs. During fiscal 1998, the Company incurred $2.4 million in
costs related to the Brilliant acquisition. These acquisition related costs
primarily consisted of transaction costs and severance and termination
agreements with two former officers of Brilliant.

Interest Expense. Interest expense increased 87.6% to $13.8 million in
fiscal 1999, from $7.4 million in fiscal 1998. This increase is primarily
attributable to increased borrowings associated with the Company's private
placement of 7.25% Series A and 7.14% Series B Senior Unsecured Notes totaling
$51 million in September 1998, and increased gross borrowings under its floor
plan credit facility to support a higher level of aggregate inventory due to the
addition of new retail sales centers.

Income Taxes. The income tax provision, as a percentage of income before
income taxes, minority interest, earnings in affiliate and extraordinary items,
was 41.1% and 43.8% for fiscal years 1999 and 1998 respectively. The decrease
was primarily the result of nondeductible acquisition costs related to the
Brilliant acquisition.

Extraordinary Loss. In connection with the private placement of $61 million
of 8.32% senior unsecured notes in July 1997 (fiscal year 1998), the Company
repaid existing secured bank debt of approximately $31 million. Consequently, in
fiscal year 1998 the Company recorded an extraordinary loss of $634,000 (net of
income tax benefit) which represented the write-off of unamortized debt issue
costs as well as a prepayment penalty associated with the early repayment of the
bank debt.

16
<PAGE> 19

Year Ended May 31, 1998 Compared to Year Ended May 31, 1997

Net Sales. Net sales of manufactured homes were $481.9 million in fiscal
year ended May 31, 1998, compared to $383.1 million in fiscal 1997. The increase
was primarily the result of a 19% increase in the number of new and
previously-owned homes sold at retail as well as a 5% increase in the average
selling price of new homes. A decline in the average number of new homes sold
per retail sales center from 93 in fiscal 1997 to 69 in fiscal 1998 was
primarily attributable to retail management changes necessitated by the
restructuring of the Company's retail operations and average new homes sold from
the recently acquired operations of NC Homes being significantly lower than the
average historically generated by the Company's retail locations in Texas and
the surrounding states. The Company added 32 new Company-owned retail sales
centers in fiscal 1998, 12 of which were NC Homes retail sales centers.

Other Revenues. Transportation revenues in fiscal 1998 were $10.4 million,
a decrease of 24% from $13.6 million in fiscal 1997. This decrease was primarily
due to increased competition among manufactured home transporters, particularly
in Texas and surrounding states. Transportation is not a key growth area of the
Company and has over time represented a declining proportion of total revenues
and operating income. Other revenues increased to $21.6 million in fiscal year
1998, compared to $12.7 million in fiscal 1997. Normal recurring revenues from
insurance operations increased to $8.6 million in fiscal 1998, compared to $5.3
million in fiscal 1997. Other revenues also included $6.2 million in earned
physical damage insurance premiums which for the first time were ceded to the
Company's insurance subsidiary under a new reinsurance contract.

Cost of Sales. Cost of manufactured homes sold was $381.4 million, or 79.1%
of net sales, in fiscal 1998, as compared to $307.6 million, or 80.3% of net
sales in fiscal 1997. The increase in cost of sales was primarily due to higher
sales volume. The decrease in cost of sales, expressed as a percentage of net
sales, was primarily the result of an increase in the internalization rate from
74% in fiscal 1997 to 84% in fiscal 1998. Cost of sales attributable to
transportation operations in fiscal 1998 were $8.4 million, or 80.9% of
transportation revenues, a decrease of 25% from $11.2 million, or 82.3% of
transportation revenues in fiscal 1997.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses in fiscal 1998, were $91.8 million, or 17.9% of total
revenues, as compared to $70.6 million, or 17.3% of total revenues in fiscal
1997. The increase in selling, general and administrative expenses is
attributable to increased sales, manufacturing and insurance activities as well
as an increase in fixed costs and expenses associated with new retail sales
centers and expanded manufacturing capacity. Selling, general and administrative
expenses also included $5.9 million in claims and expenses related to the $6.2
million in earned premiums under the previously described new reinsurance
contract.

Interest Expense. Interest expense increased 29% to $7.4 million in fiscal
1998, from $5.7 million in fiscal 1997. This increase was primarily attributable
to increased borrowings associated with the Company's private placement of 8.32%
Senior Unsecured Notes totaling $61 million in July 1997, and increased gross
borrowings under its floor plan credit facility to support a higher level of
inventory due to the addition of new retail sales centers.

Income Taxes. The income tax provision, as a percentage of income before
income taxes, minority interest, earnings in affiliate and extraordinary items,
was 43.8% and 39.4% for fiscal years 1998 and 1997 respectively. The increase
was primarily the result of nondeductible acquisition costs related to the
Brilliant acquisition as well as nondeductible goodwill related to the
acquisitions of Guerdon and NC Homes.

17
<PAGE> 20

benefit) which represented the write-off of unamortized debt issue costs as well
as a prepayment penalty associated with the early repayment of the bank debt.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by (used in) operating activities was $3.0 million, $17.3
million and ($19.6) million in fiscal 1997, 1998 and 1999, respectively. The
increase in inventories and accounts receivable accounted for the majority of
cash used in operations for the twelve months ended May 31, 1999.

The Company had capital expenditures of $10.6 million, $14.7 million and
$28.5 million in fiscal 1997, 1998 and 1999, respectively. These expenditures
were used primarily for the acquisition and building of new Company-owned retail
sales centers and to expand manufacturing capacity. The Company paid $4.6
million, net of cash acquired, $6.0 million, net of cash acquired, and $21.2
million, net of cash acquired, to purchase First Value, DWP and R-Anell,
respectively.

At May 31, 1999, the Company had a $125 million floor plan credit facility
with Associates Housing Finance LLC. (the "Associates"). The facility, similar
to a revolving credit facility, bears interest at a rate of prime less 0.50% and
is used to finance the purchase of inventory of new homes at Company-owned
retail sales centers. The Company is able to purchase participations in the
floor plan credit facility, effectively reducing its net borrowings under the
facility. These participations earn interest at a rate of prime less 0.75% (with
such interest income reported as a reduction of total interest expense) and are
immediately available to the Company in cash as the Company redeems them. At May
31, 1999, the Company had net borrowings of $86.7 million (gross borrowings of
$141.0 million less participations of $54.3 million).

On September 30, 1998, the Company completed the private placement of $46
million of 7.25% Series A Senior Unsecured Notes and $5 million of 7.14% Series
B Senior Unsecured Notes with an average life of eight years and a final
maturity in September 2008. Such notes require semi-annual interest payments and
equal annual principal reductions beginning in 2004. Proceeds from the notes
were used to fund acquisitions and expansion with the remainder used for general
corporate purposes.

Management believes that current cash resources, additional borrowing
capacity and future cash provided from operations will be sufficient to satisfy
internal working capital and capital expenditure requirements for the
foreseeable future. Management's current focus is on improving performance and
profitability in existing operations rather than substantial near term growth.

INFLATION AND SEASONALITY

Inflation in recent years has been modest and has primarily affected the
Company's manufacturing costs in the areas of labor, manufacturing overhead and
raw materials other than lumber. The price of lumber is affected more by the
imbalances between supply and demand than by inflation. Historically, the
Company believes it has been able to minimize the effects of inflation by
increasing the selling prices of its products, improving its manufacturing
efficiency and increasing its employee productivity. In addition, the Company's
business is seasonal, with weakest demand typically occurring during the
Company's third fiscal quarter (December through February) and the strongest
demand typically occurring during the Company's last fiscal quarter (March
through May). Over the history of the Company's operations, management has not
observed any correlation between interest rate fluctuations and increases or
decreases in sales based solely on such fluctuations.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 1 of the Notes to the Company's Consolidated Financial Statements.

18
<PAGE> 21

IMPACT OF YEAR 2000

Beginning in calendar year 1998, the Company commenced replacement of its
then current information technology system with a new system. The replacement,
which is expected to be substantially completed in calendar year 1999, is
required to meet current and future needs of the Company's business as well as
to make various administrative and operating functions more efficient. 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 costs of upgrading the Company's software programs,
operating hardware and network systems is estimated to be approximately $3.3
million, with approximately $2.5 million having been spent to date, and the
Company believes that these new programs and systems will not be subject to the
Year 2000 problem. Costs incurred to date for external consultants for Year 2000
compliance specific costs are approximately $70,000 and management estimates an
additional $47,000 will be required.

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. There is no
assurance that such parties will not suffer a Year 2000 business disruption,
which could have a material adverse effect on the Company's financial condition
and results of operations.

The Company has implemented a detailed Year 2000 Project plan to assess the
Company's internal business-critical systems upon which the Company depends.
This includes information technology systems and applications ("IT"), as well as
non-IT systems and equipment with embedded technology, such as fax machines and
telephone systems. The main internal IT systems include accounting systems such
as general ledgers. Detailed testing of the Company's internal IT systems is
complete and some remedial work has also been completed. The Company completed
its analysis of internal IT systems by May 31, 1999 (the end of its fiscal year)
and expects all corrective action and verification to be complete by September
30, 1999. Any problems actually encountered by the Company in addressing its
Year 2000 issue that are beyond the Company's control could have adverse effects
on the Company's future operations, results of operations or financial
condition. The Company is developing a Year 2000 contingency plan to mitigate
the effects of business disruption stemming from either internal system failures
or an interruption in critical services or supplies from external sources over
which the Company has no control. The plan is expected to be complete by
September 30, 1999.

The Company believes that the worst case scenario relative to Year 2000
issues would be a significant disruption of production due to wide-spread
failures of vendors and suppliers to provide critical materials and services,
including utilities. Because of the broad geographical disbursement of the
Company's manufacturing facilities and the diversification of vendors for most
materials, the Company believes that such disruptions are unlikely. Where the
Company is dependent on a few suppliers to supply a crucial supply or component,
measures have been taken, where possible, to identify alternative vendors who
can supply the required materials.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to market risks related to fluctuations in interest
rates on its net variable rate debt, which consists of its liability for
flooring of manufactured housing retail inventories, net of participations. The
Company does not use interest rate swaps, futures contracts or options on
futures, or other types of derivative financial instruments.

For fixed rate debt, changes in interest rates generally affect the fair
market value, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence fair market value,
but do affect future earnings and cash flows. The Company does not have an
obligation to prepay fixed rate debt prior to maturity, and as a result,
interest rate risk and changes in fair market value should not have a
significant impact on such debt until the Company would be required to refinance
it. Holding the variable rate debt balance constant, each one percentage point
increase in interest rates occurring on the first day of the year would result
in an increase in interest expense for the coming year of approximately $0.9
million.

19
<PAGE> 22

The Company's financial instruments are not currently subject to foreign
currency risk or commodity price risk. The Company does not believe that future
market interest rate risks related to its marketable investments or debt
obligations will have a material impact on the Company or the results of its
future operations.

The Company has no financial instruments held for trading purposes. The
Company originates loans through its 50%-owned affiliate 21st Century, most of
which are at fixed rates of interest, in the ordinary course of business and
periodically securitizes them to obtain permanent financing for such loan
originations. Accordingly, 21st Century's loans held for sale are exposed to
risk from changes in interest rates between the time loans are originated and
the time at which 21st Century obtains permanent financing, generally at fixed
rates of interest, in the asset-backed securities market. 21st Century attempts
to manage this risk by minimizing the warehousing period of unsecuritized loans.
Loans held for investment, approximately $700,000 at May 31, 1999, also are
subject to interest rate risk. 21st Century currently does not originate any
loans with the intention of holding them for investment.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is listed under Item 14 (a) and
begins at page F-1 hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

20
<PAGE> 23

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the directors and executive officers of the
Company is set forth in the Proxy Statement under the heading "Election of
Directors," which information is incorporated herein by reference. The
information concerning disclosure of delinquent Form 3, 4 or 5 filers is set
forth in the Proxy Statement under the heading "Section 16 Requirements," which
information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference. Information contained in the Proxy Statement
under the caption "Executive Compensation - Report of the Board of Directors on
Executive Compensation and - Stock Performance Chart" is incorporated by
reference herein.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Principal
Shareholders and Management Ownership," which information is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the heading "Certain Transactions,"
which information is incorporated herein by reference.

21
<PAGE> 24

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) (1) FINANCIAL STATEMENTS

Report of Independent Auditors

Consolidated Balance Sheets as of May 31, 1998 and 1999

Consolidated Statements of Operations for the years ended May 31,
1997, 1998 and 1999

Consolidated Statements of Shareholders' Equity for the years
ended May 31, 1997, 1998 and 1999

Consolidated Statements of Cash Flows for the years ended May 31,
1997, 1998 and 1999

Notes to the Consolidated Financial Statements

(2) SUPPLEMENTARY SCHEDULE TO FINANCIAL STATEMENTS

Schedule II - Valuation and Qualifying Accounts

(3) EXHIBITS

The exhibits filed as part of this report are listed under
"Exhibits" at subsection (c) of Item 14

(b) REPORTS ON FORM 8-K

A Form 8-K/A was filed on behalf of the Company during the last
quarter of the Company's 1999 fiscal year to report the financial
statements for an Item 2 acquisition of assets that was first
reported in January 1999.

<TABLE>
<CAPTION>
EXHIBIT REPORT WITH WHICH
DESCRIPTION NO. EXHIBIT WAS FILED
- ----------- ------- ------------------------
<S> <C> <C>
Stock Purchase and Plan of Reorganization, dated May 26, 1998, among 2.1 December 1998, Form 8-K
American Homestar Corporation, R-Anell Custom Homes, Inc., Gold Medal
Homes, Inc., Gold Medal Homes of North Carolina, Inc. and certain security
holders of R-Anell Custom Homes, Inc., Gold Medal Homes, Inc. and Gold
Medal Homes of North Carolina, Inc.

First Amendment to the Stock Purchase and Plan of Reorganization, dated 2.2 December 1998, Form 8-K
August 31, 1998, among American Homestar Corporation, R-Anell Custom Homes,
Inc., Gold Medal Homes, Inc., Gold Medal Homes of North Carolina, Inc. and
certain security holders of R-Anell Custom Homes, Inc., Gold Medal Homes,
Inc. and Gold Medal Homes of North Carolina, Inc.

Second Amendment to the Stock Purchase and Plan of Reorganization, dated 2.3 December 1998, Form 8-K
August 31, 1998, among American Homestar Corporation, R-Anell Custom Homes,
Inc., Gold Medal Homes, Inc., Gold Medal Homes of North Carolina, Inc. and
certain security holders of R-Anell Custom Homes, Inc., Gold Medal Homes,
Inc. and Gold Medal Homes of North Carolina, Inc.
</TABLE>

22
<PAGE> 25

<TABLE>
<CAPTION>
EXHIBIT REPORT WITH WHICH
DESCRIPTION NO. EXHIBIT WAS FILED
- ----------- ------- ------------------------
<S> <C> <C>
Restated Articles of Incorporation of American Homestar Corporation. 3.1 S-1 Registration Statement
No. 33-78630

Articles of Amendment to the Restated Articles of Incorporation 3.2 Filed herewith

Amended and Restated Bylaws of American Homestar Corporation. 3.3 S-1 Registration Statement
No. 33-78630

Form of certificate evidencing ownership of Common Stock of American 4.1 S-1 Registration Statement
Homestar Corporation. No. 33-78630

Note Purchase Agreement, 8.32% Senior Unsecured Notes due July 7, 2007 10.1 August 1997, Form 10-Q

Note Purchase Agreement, 7.25% Series A and 7.14% Series B Senior 10.2 November 1998, Form 10-Q
Unsecured Notes due September 15, 2008

Amended and Restated Securities Purchase Agreement by and among Zaring 10.3 February 1999, Form 10-Q
National Corporation ("Zaring"), HomeMax, Inc. ("HomeMax"), HomeMax
Operating Properties, L.L.C. ("HOP") and American Homestar Corporation
dated as of March 15, 1999.

Securityholders Agreement by and among Zaring, HomeMax, HOP and American 10.4 February 1999, Form 10-Q
Homestar Corporation dated March 15, 1999.

Promissory Note dated March 15, 1999 in the original principal amount of 10.5 February 1999, Form 10-Q
$4,411,177 payable to Zaring.

Management and Consulting Agreement by and among Zaring, HomeMax and 10.6 February 1999, Form 10-Q
American Homestar Corporation dated March 15, 1999.

Nonqualified Stock Option Agreement, dated November 15, 1996 between 10.7 February 1997, Form 10-Q
Finis F. Teeter and American Homestar Corporation.

Nonqualified Stock Option Agreement, dated November 15, 1996 between 10.8 February 1997, Form 10-Q
Laurence A. Dawson, Jr. and American Homestar Corporation.

Amendment to Life Reinsurance Contract, dated December 31, 1996, by and 10.9 February 1997, Form 10-Q
between Lifestar Reinsurance Limited and American Bankers Life Assurance
Company of Florida

Amendment to The Associates (formerly Ford Finance Company, Inc.) 10.10 November 1996, Form 10-Q
Inventory Financing Agreement

Employment Agreement dated November 15, 1996 by and between American 10.11 February 1997, Form 10-Q
Homestar Corporation and Laurence A. Dawson, Jr.

Employment Agreement dated November 15, 1996 by and between American 10.12 February 1997, Form 10-Q
Homestar Corporation and Finis F. Teeter

Employment Agreement dated September 15, 1998 by and between American 10.13 August 1998, Form 10-Q
Homestar Corporation and Craig A. Reynolds

Employment Agreement dated September 15, 1998 by and between American 10.14 August 1998, Form 10-Q
Homestar Corporation and Charles N. Carney, Jr.

Employment Agreement dated July 10, 1997 by and between American 10.15 August 1997, Form 10-Q
Homestar Corporation and Ronald McCaslin

The Company's Market Capitalization Enhancement Stock Option Plan 10.16 1998 Definitive
Proxy Statement

The Company's 1994 Amended and Restated Stock Compensation Plan 10.17 1996 Definitive
Proxy Statement
None 11

None 12

None 13

None 16

None 18
</TABLE>

23
<PAGE> 26

<TABLE>
<CAPTION>
EXHIBIT REPORT WITH WHICH
DESCRIPTION NO. EXHIBIT WAS FILED
- ----------- ------- ------------------------
<S> <C> <C>
List of Subsidiaries 21 Filed herewith

None 22

Consent of KPMG LLP 23 Filed herewith

Consent of Deloitte & Touche L.L.P. 23.1 Filed herewith

Financial Data Schedule 27 Filed herewith

None 99
</TABLE>

24
<PAGE> 27

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

AMERICAN HOMESTAR CORPORATION

Date: August 26, 1999 By: /s/ Laurence A. Dawson, Jr., President
------------------------------------------
Laurence A. Dawson, Jr., President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ FINIS F. TEETER Chairman of the Board and August 26, 1999
--------------------------------- Co-Chief Executive Officer
Finis F. Teeter (Principal Executive Officer)

/s/ LAURENCE A. DAWSON, JR. President, Co-Chief Executive August 26, 1999
--------------------------------- Officer and Director
Laurence A. Dawson, Jr. (Principal Executive Officer)

/s/ CRAIG A. REYNOLDS Executive Vice President, Chief August 26, 1999
--------------------------------- Financial Officer, Secretary
Craig A. Reynolds and Director (Principal Financial
and Accounting Officer)

/s/ CHARLES N. CARNEY, JR. Executive Vice President August 26, 1999
--------------------------------- and Director
Charles N. Carney, Jr.

/s/ JACKIE H. HOLLAND Vice President, Treasurer August 26, 1999
--------------------------------- and Director
Jackie H. Holland

/s/ RONALD E. MCCASLIN Executive Vice President August 26, 1999
--------------------------------- and Director
Ronald E. McCaslin

/s/ WILLIAM O. HUNT Director August 26, 1999
---------------------------------
William O. Hunt

/s/ JACK L. McDONALD Director August 26, 1999
---------------------------------
Jack L. McDonald

/s/ DALE V. KESLER Director August 26, 1999
---------------------------------
Dale V. Kesler

/s/ MILLARD E. BARRON Director August 26, 1999
---------------------------------
Millard E. Barron

</TABLE>

25
<PAGE> 28

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................................................. F-2

Independent Auditors' Report............................................................................. F-3

Consolidated Balance Sheets as of May 31, 1998 and 1999.................................................. F-4

Consolidated Statements of Operations for the years ended May 31, 1997, 1998 and 1999.................... F-5

Consolidated Statements of Shareholders' Equity for the years ended May 31, 1997, 1998 and 1999.......... F-6

Consolidated Statements of Cash Flows for the years ended May 31, 1997, 1998 and 1999.................... F-7

Notes to Consolidated Financial Statements............................................................... F-8

Financial Statement Schedule II - Valuation and Qualifying Accounts...................................... F-27
</TABLE>

F-1
<PAGE> 29

Independent Auditors' Report

The Board of Directors
American Homestar Corporation:

We have audited the consolidated financial statements of American Homestar
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits. We did not audit the consolidated financial
statements of Brilliant Holding Corporation (see Note 1 of Notes to Consolidated
Financial Statements), included in the Company's consolidated financial
statements for fiscal 1997, which statements reflect total revenues constituting
17% of the consolidated totals for the year ended May 31, 1997. These
consolidated financial statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Brilliant Holding Corporation, is based solely on the report of the
other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of American Homestar Corporation and
subsidiaries as of May 31, 1998 and 1999, and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 1999, in conformity with generally accepted accounting principles. Also, in
our opinion, based on our audits and the report of the other auditors, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

/s/ KPMG LLP

Houston, Texas
July 6, 1999

F-2
<PAGE> 30

Independent Auditors' Report

To Brilliant Holding Corporation:

We have audited the consolidated balance sheets of Brilliant Holding Corporation
and subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years then
ended (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Brilliant Holding Corporation and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.

/s/ Deloitte & Touche LLP

Birmingham, Alabama
April 11, 1997 (June 5, 1997 as to the Note 12)

F-3
<PAGE> 31

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MAY 31,
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash .................................................................. $ 20,852,000 $ 6,865,000
Cash in transit from financial institutions ........................... 35,289,000 44,414,000
------------ ------------

Total cash and cash equivalents ................................... 56,141,000 51,279,000
Inventories, net ...................................................... 74,076,000 118,681,000
Accounts receivable ................................................... 22,468,000 48,965,000
Manufacturer incentives receivable .................................... 2,839,000 543,000
Deferred tax assets ................................................... 4,405,000 4,488,000
Prepaid expenses and other current assets ............................. 9,952,000 12,925,000
------------ ------------

Total current assets .............................................. 169,881,000 236,881,000
Property, plant and equipment, net ....................................... 58,984,000 94,826,000
Goodwill (net of accumulated amortization of $9,173,000 and
$11,403,000, respectively) .......................................... 36,952,000 87,324,000
Investment in affiliates ................................................. 4,826,000 8,610,000
Other assets ............................................................. 3,053,000 11,675,000
------------ ------------
$273,696,000 $439,316,000
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and capital lease ............... $ 941,000 $ 3,086,000
Floor plan payable, net of participations ............................. 43,463,000 86,671,000
Accounts payable ...................................................... 27,840,000 36,391,000
Accrued expenses ...................................................... 32,510,000 41,406,000
Accrued warranty costs ................................................ 6,260,000 8,368,000
------------ ------------

Total current liabilities ......................................... 111,014,000 175,922,000
Notes payable and capital lease, less current installments ............... 63,087,000 126,728,000
Deferred tax liabilities ................................................. 199,000 362,000
Minority interest in consolidated subsidiaries ........................... 933,000 839,000
Shareholders' equity:
Preferred stock, no par value; authorized 5,000,000 shares; no shares
issued .............................................................. -- --
Common stock, $0.05 par value; authorized 50,000,000 shares; issued and
outstanding 17,274,667 and 18,412,900 shares, respectively .......... 864,000 921,000
Additional paid-in capital ............................................ 43,468,000 62,472,000
Retained earnings ..................................................... 54,131,000 72,072,000
------------ ------------
Total shareholders' equity ........................................ 98,463,000 135,465,000
Commitments and contingencies
------------ ------------
$273,696,000 $439,316,000
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 32

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Net sales .......................................... $ 383,132,000 $ 481,947,000 $ 612,086,000
Other revenues ..................................... 26,305,000 31,992,000 41,957,000
------------- ------------- -------------
Total revenues ................................. 409,437,000 513,939,000 654,043,000
------------- ------------- -------------
Costs and expenses:
Cost of sales ...................................... 307,611,000 381,435,000 477,717,000
Selling, general and administrative ................ 70,644,000 91,772,000 134,682,000
Acquisition costs .................................. -- 2,425,000 --
------------- ------------- -------------
Total costs and expenses ....................... 378,255,000 475,632,000 612,399,000
------------- ------------- -------------
Operating income ............................... 31,182,000 38,307,000 41,644,000
Interest expense ...................................... (5,703,000) (7,382,000) (13,845,000)
Other income (expense) ................................ 178,000 (50,000) 110,000
------------- ------------- -------------
Income before items shown below ................ 26,657,000 30,875,000 27,909,000
Income tax expense .................................... 10,512,000 13,546,000 11,472,000
------------- ------------- -------------
Income before items shown below ................ 15,145,000 17,329,000 16,437,000
Earnings in affiliates ................................ 549,000 1,211,000 1,602,000
Minority interests .................................... (314,000) (223,000) (98,000)
------------- ------------- -------------
Income before items shown below ................ 15,380,000 18,317,000 17,941,000
Extraordinary item (net of income tax benefit of
$197,000 and $412,000, respectively) ............... (347,000) (634,000) --
============= ============= =============
Net income ..................................... $ 15,033,000 $ 17,683,000 $ 17,941,000
============= ============= =============

Earnings per share - basic:
Income before extraordinary item ................... $ 0.91 $ 1.07 $ 1.00
Extraordinary item, net of income tax benefit ...... (0.02) (0.04) --
============= ============= =============
Net income per share ........................... $ 0.89 $ 1.03 $ 1.00
============= ============= =============

Earnings per share - diluted:
Income before extraordinary item ................... $ 0.88 $ 1.01 $ 0.96
Extraordinary item, net of income tax benefit ...... (0.02) (0.03) --
============= ============= =============
Net income per share ........................... $ 0.86 $ 0.98 $ 0.96
============= ============= =============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 33

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED SHAREHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS EQUITY
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT MAY 31, 1996 ................. 16,868,000 $ 845,000 $ 39,229,000 $ 22,093,000 $ 62,167,000
Exercise of stock options ................ 78,000 3,000 488,000 -- 491,000
Compensation related to sale of common
stock.................................. -- -- 23,000 -- 23,000
Other .................................... -- -- (5,000) -- (5,000)
Net income ............................... -- -- -- 15,033,000 15,033,000
------------- ------------- ------------- ------------- -------------

BALANCES AT MAY 31, 1997 ................. 16,946,000 848,000 39,735,000 37,126,000 77,709,000
Exercise of stock options ................ 91,000 4,000 784,000 -- 788,000
Conforming of fiscal year ends ........... -- -- -- (678,000) (678,000)
Stock issued for acquisitions ............ 238,000 12,000 2,949,000 -- 2,961,000
Net income ............................... -- -- -- 17,683,000 17,683,000
------------- ------------- ------------- ------------- -------------

BALANCES AT MAY 31, 1998 ................. 17,275,000 864,000 43,468,000 54,131,000 98,463,000
Exercise of stock options ................ 140,000 7,000 671,000 -- 678,000
Stock issued for acquisitions ............ 998,000 50,000 18,333,000 -- 18,383,000
Net income ............................... -- -- -- 17,941,000 17,941,000
============= ============= ============= ============= =============

BALANCES AT MAY 31, 1999 ................. 18,413,000 $ 921,000 $ 62,472,000 $ 72,072,000 $ 135,465,000
============= ============= ============= ============= =============
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 34

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $ 15,033,000 $ 17,683,000 $ 17,941,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization ................................... 4,060,000 5,634,000 10,069,000
Provision for doubtful accounts, net ............................ 50,000 -- --
Minority interests in income of consolidated
subsidiaries .................................................. 314,000 223,000 98,000
Compensation expense on sale of common stock .................... 23,000 -- --
Earnings in affiliates .......................................... (549,000) (1,211,000) (1,602,000)
Deferred taxes .................................................. (286,000) 163,000 (1,067,000)
Extraordinary item .............................................. 347,000 634,000 --
Conforming of year ends ......................................... -- (678,000) --
Change in assets and liabilities, net of acquisitions:
Income tax receivable ......................................... (121,000) -- --
Increase in receivables ....................................... (236,000) (8,106,000) (15,740,000)
Increase in inventories ....................................... (14,720,000) (6,016,000) (26,929,000)
Increase in prepaid expenses and other current assets ......... (241,000) (5,726,000) (2,337,000)
Decrease (increase) in other assets ........................... 562,000 (636,000) (2,783,000)
Increase in accounts payable .................................. 4,521,000 5,924,000 4,692,000
Increase (decrease) in accrued expenses ....................... (2,762,000) 9,364,000 (1,944,000)
Decrease in other liabilities ................................. (3,004,000) -- --
------------- ------------- -------------
Net cash provided by (used in) operating
activities ................................................ 2,991,000 17,252,000 (19,602,000)
------------- ------------- -------------

Cash flows from investing activities:
Payment for purchase of acquisitions, net of cash acquired ........ (6,613,000) (2,812,000) (38,368,000)
Purchases of property, plant and equipment ........................ (10,628,000) (14,715,000) (28,512,000)
------------- ------------- -------------
Net cash used in investing activities ....................... (17,241,000) (17,527,000) (66,880,000)
------------- ------------- -------------

Cash flows from financing activities:
Bank overdraft .................................................... (1,177,000) -- --
Participation in floor plan payable ............................... 8,637,000 (20,657,000) (13,212,000)
Borrowings under floor plan payable ............................... 154,864,000 168,093,000 239,855,000
Repayments of floor plan payable .................................. (137,105,000) (160,891,000) (195,795,000)
Proceeds from long-term debt borrowings ........................... 48,830,000 61,000,000 52,998,000
Principal payments of long-term debt .............................. (51,205,000) (35,265,000) (2,904,000)
Exercise of stock options ......................................... 491,000 788,000 678,000
Other ............................................................. (63,000) -- --
------------- ------------- -------------
Net cash provided by financing activities ................... 23,272,000 13,068,000 81,620,000
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ................. 9,022,000 12,793,000 (4,862,000)
Cash and cash equivalents at beginning of year ....................... 34,326,000 43,348,000 56,141,000
============= ============= =============
Cash and cash equivalents at end of year ............................. $ 43,348,000 $ 56,141,000 $ 51,279,000
============= ============= =============

Supplemental Cash Flow Information
Income taxes paid ................................................. $ 10,181,000 $ 11,721,000 $ 13,299,000
Interest paid ..................................................... 5,823,000 6,747,000 14,218,000
============= ============= =============

Supplemental Non-cash Investing and Financing Activities
Purchase of property, plant and equipment through the
issuance of notes payable ....................................... $ 4,500,000 $ 2,020,000 $ 1,418,000
============= ============= =============
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE> 35

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION AND GENERAL

The consolidated financial statements include the accounts of American
Homestar Corporation and its majority-owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.

The Company owns 50% of the outstanding common stock of 21st Century
Mortgage Corporation ("21st Century") and 25% of the outstanding common stock of
HomeMax, Inc. ("HomeMax") which are accounted for under the equity method of
accounting.

NATURE OF OPERATIONS

The Company is a vertically integrated manufactured housing company. As of
May 31, 1999, the Company manufactured a wide variety of manufactured homes from
its fourteen manufacturing facilities which are sold through 125 Company-owned
retail sales centers in Texas, North Carolina, Alabama, Louisiana, New Mexico,
Oklahoma, Colorado, Idaho, Mississippi, Tennessee, Utah, Arkansas, Washington,
South Carolina, Kentucky and Oregon as well as a network of retail franchisees
and independent dealers. In addition, the Company facilitates installment
financing by purchasers of manufactured homes from its retail sales centers. The
Company also offers retail customers, through both its Company-owned retail
sales centers and certain independent retailers, a variety of insurance
products, including property casualty insurance, credit life insurance and
extended warranty coverage.

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.

REVENUE RECOGNITION

Retail sales are recognized when cash payment is received, or in the case
of credit sales (which represent the majority of the Company's retail sales),
when a down payment is received and the Company and the customer enter into an
installment sales contract which is accepted by a financing company. The Company
manufactures its homes based on dealer orders; sales to independent dealers are
recognized as revenue when title transfers to the buyer, which is the date of
shipment. Almost all the Company's sales to dealers are financed through the
dealer's floor plan financing arrangements. Dealers are not permitted to cancel
purchases without penalty once the manufacturing process commences.

The Company also maintains used manufactured home inventory owned by
outside parties for which the Company receives a sales commission when sold to
consumers.

Premiums from credit life insurance policies reinsured by the Company's
credit life subsidiary, Lifestar Reinsurance, Ltd. ("Lifestar"), are recognized
as revenue over the life of the policy term. Premiums are ceded to Lifestar on
an earned basis.

INVENTORIES

Newly manufactured homes are valued at the lower of cost or market, using
the specific identification method. Used manufactured homes are valued at
estimated wholesale prices, not in excess of net realizable value.

Raw materials are valued at the lower of cost or market, using the
first-in, first-out method.

F-8
<PAGE> 36

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are carried at cost. The Company has one
plant which is classified as an asset to be disposed of and is being carried at
management's estimate of fair market value at the time of acquisition.
Depreciation on property, plant and equipment is provided by the straight-line
method over the estimated useful lives of the related assets. Leasehold
improvements are amortized using the straight-line method over the useful lives
of the improvements or lease periods, whichever is shorter.

GOODWILL

Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over periods
ranging from 10 to 40 years. The Company assesses the recoverability of goodwill
by determining whether the amortization of the goodwill balance over the
remaining useful life can be recovered through undiscounted future operating
cash flows of the acquired operations.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which such temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that included the enactment date.

RESERVES FOR FUTURE LOSSES ON CREDIT SALES

The Company makes a current provision for estimated future losses on credit
retail sales where the Company retains risk in the event of customer nonpayment
of installment sales contracts. Typically, the Company's period of exposure to
loss does not exceed the first two installment payments on an individual
contract. The amounts provided for estimated future losses on credit sales are
determined based on the Company's historical loss experience after giving
consideration to current economic conditions. In assessing current loss
experience and economic conditions, management may adjust the reserve for losses
on credit sales related to prior years' installment sales contracts. All
adjustments are recognized currently.

ACCRUED WARRANTY AND SERVICE COSTS

The Company makes a current provision for future service costs associated
with homes sold and for manufacturing defects for a period of one year from the
date of sale of the home. The estimated cost of these items is accrued at the
time of sale and is reflected in selling, general and administrative expenses in
the consolidated statements of operations. For the years ended May 31, 1997,
1998 and 1999, warranty and service costs were $11,400,000, $18,009,000 and
$23,331,000, respectively.

RESERVES FOR CONTINGENT REPURCHASE AGREEMENTS

Reserves for contingent repurchase agreements are established for losses
based on the Company's historical loss experience, and actual losses are charged
to the reserve when incurred. Management, in assessing the loss experience,
adjusts the reserves through periodic provisions. The Company has not incurred
losses related to contingent repurchase agreements for the years ended May 31,
1997, 1998 and 1999.

F-9
<PAGE> 37

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

EARNINGS PER SHARE

Basic earnings per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per share
reflects dilution from all contingently issuable shares from outstanding
options. A reconciliation of such earnings per share for the years ended May 31,
1997, 1998 and 1999 is as follows:

<TABLE>
<CAPTION>
Per Share
Income Shares Amounts
------ ------ ---------
<S> <C> <C> <C>
MAY 31, 1997
Basic EPS
Net income .................................. $15,033,000 16,890,593 $0.89
=====

Effects of dilutive securities - options .... 673,732
-----------
Diluted EPS ................................. $15,033,000 17,564,325 $0.86
=========== =========== =====

MAY 31, 1998
Basic EPS
Net income .................................. $17,683,000 17,196,426 $1.03
=====

Effects of dilutive securities - options .... 938,966
-----------
Diluted EPS ................................. $17,683,000 18,135,392 $0.98
=========== =========== =====

MAY 31, 1999
Basic EPS
Net income .................................. $17,941,000 17,931,850 $1.00
=====

Effects of dilutive securities - options .... 736,659
----------
Diluted EPS ................................. $17,941,000 18,668,509 $0.96
=========== =========== =====
</TABLE>

FINANCIAL INSTRUMENTS

Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. The Company believes that the carrying amounts of its
current assets, current liabilities and long-term debt approximate the fair
value of such items.

CASH EQUIVALENTS

Cash equivalents consist of short-term investments with an original
maturity of three months or less, money market accounts and cash in transit from
financial institutions. Cash in transit from financial institutions presents no
risk to the Company regarding collectibility and is typically collected within
90 days. In addition, the Company has never experienced a loss because of a
failure to collect amounts due from these financial institutions. Approximately
86% and 67% of the cash in transit from financial institutions balance at May
31, 1998 and 1999, respectively, is due from three lenders, of which 51% and
24%, respectively, is due from the Company's mortgage affiliate, 21st Century.

RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other

F-10
<PAGE> 38

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

contracts. Under the standard, entities are required to carry all derivative
instruments in the statement of financial position at fair value. The accounting
for changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If certain conditions are
met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair values, cash flows, or foreign currencies. If the
hedging exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedging effectiveness, as well as the
ineffective portion of the gain or loss, is reported in earnings immediately.
Accounting for foreign currency hedges is similar to the accounting for fair
value and cash flow hedges. If the derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change.

SFAS 133 is required to be adopted for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company has not determined the impact
that SFAS 133 will have on the financial statements and believes that the
determination will not be meaningful until closer to the date of initial
adoption.

RECLASSIFICATIONS

Certain prior years' amounts have been reclassified to conform to
classifications used in 1999.

(2) ACQUISITIONS

On September 3, 1996, the Company acquired all of the common stock of
Heartland Homes, Inc. ("Heartland") and certain operating assets of Manu-Fac
Homes, Inc. ("Manu-Fac") for a combination of cash and notes totaling $8.5
million. Heartland is a single-plant manufactured housing producer in Henderson,
North Carolina. Heartland markets its homes through 65 independent retailers in
North Carolina and three surrounding states. Manu-Fac was a contractually
affiliated group of independent retailers throughout North Carolina, operating
under the CHOICENTER or WESTWOOD Homes trade names. In connection with the
acquisition of such assets of Manu-Fac, these retailers became franchisees of
Associated Retailers Group, Inc., a wholly-owned subsidiary of the Company, and
continue to operate under the CHOICENTER or WESTWOOD trade names. The results of
the acquired operations of Heartland and Manu-Fac have been included with those
of the Company from the date of acquisition. The excess purchase price over the
estimated fair value of net assets acquired as of the acquisition date of $6.2
million has been recorded as goodwill and is being amortized over 25 years. The
estimated fair value of assets acquired and liabilities assumed in these
acquisitions is summarized as follows:

<TABLE>
<CAPTION>
<S> <C>
Current assets ......................... $ 2,628,000
Property, plant and equipment .......... 3,030,000
Goodwill ............................... 6,201,000
Current liabilities .................... (2,906,000)
Notes payable .......................... (189,000)
-----------
$ 8,764,000
===========

Consideration:
Cash ................................ $ 6,530,000
Notes payable ....................... 2,000,000
Transaction costs ................... 234,000
-----------
$ 8,764,000
===========
</TABLE>

On September 24, 1996, the Company completed the acquisition of Guerdon
Holdings, Inc. and its subsidiary, Guerdon Homes, Inc. (collectively "Guerdon").
Guerdon produces manufactured homes in four facilities located in Oregon, Idaho,
Nebraska and Mississippi, and sells its homes through approximately 150
independent retailers

F-11
<PAGE> 39

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

located primarily in the Pacific Northwest, Rocky Mountain, and South Central
regions of the United States. The results of the acquired operations of Guerdon
have been included with those of the Company from the date of the acquisition.
The excess purchase price over the estimated fair value of the net assets
acquired as of the acquisition date of $23.9 million has been recorded as
goodwill and is being amortized over 40 years. The estimated fair value of
assets acquired and liabilities assumed in this acquisition is summarized as
follows:

<TABLE>
<S> <C>
Current assets .................... $ 6,699,000
Property, plant and equipment ..... 8,551,000
Goodwill .......................... 23,880,000
Deferred taxes .................... 2,777,000
Current liabilities ............... (17,843,000)
Notes payable ..................... (22,722,000)
------------
$ 1,342,000
============

Consideration:
Cash ........................... $ 620,000
Transaction costs .............. 722,000
------------
$ 1,342,000
============
</TABLE>

On June 10, 1997, Brilliant Holding Corporation and its subsidiaries
("Brilliant") were acquired by the Company, and 711,149 shares of the Company's
common stock and options to purchase 38,852 shares of the Company's common stock
were issued in exchange for all of Brilliant's outstanding common stock and
options. This transaction was accounted for as a pooling of interests. Prior to
the acquisition, Brilliant used a fiscal year ending on December 31. The
restated consolidated financial statements for the years ended May 31, 1996 and
1997 combine the Company's consolidated financial statements for the years ended
May 31, 1996 and 1997 with Brilliant's consolidated financial statements for the
years ended December 31, 1995 and 1996, respectively. Due to the different
fiscal year ends, retained earnings includes an adjustment to record Brilliant's
net loss for the five months ended May 31, 1997, which will not be included in
the restated consolidated financial statements for any fiscal period.

A summary of Brilliant's results of operations for the five months ended
May 31, 1997 follows:

<TABLE>
<S> <C>
Net sales $ 28,984,000
Total costs and expenses $ 29,845,000
Net loss $ (678,000)
================
</TABLE>

On June 16, 1997, the Company completed the acquisition of N.C. Mobile Home
Corporation ("NC Homes"), which operated 12 retail sales centers in North
Carolina and one in Virginia. The results of the acquired operations of NC Homes
have been included with those of the Company from the date of the acquisition.
The excess purchase price over the estimated fair value of the net assets
acquired as of the acquisition date of $3.6 million has been recorded as
goodwill and is being amortized over 25 years. The fair value of assets acquired
and liabilities assumed is summarized as follows:

<TABLE>
<S> <C>
Current assets ............... $7,994,000
Other assets ................. 282,000
Goodwill ..................... 3,571,000
</TABLE>

F-12
<PAGE> 40

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Floor plan payable ..................... (6,691,000)
Accounts payable ....................... (442,000)
Accrued liabilities .................... (214,000)
-----------
$ 4,500,000
===========
Consideration:
Cash ................................... $ 1,000,000
Note payable ........................... 1,500,000
Common stock ........................... 2,000,000
-----------
$ 4,500,000
===========
</TABLE>

On January 6, 1998, the Company completed the acquisition of Davis Homes,
Inc. which operated three retail sales centers in Alabama. The results of the
acquired operations of Davis Homes, Inc. have been included with those of the
Company from the date of the acquisition. The excess purchase price over the
estimated fair value of the net assets acquired as of the acquisition date of
$2.1 million has been recorded as goodwill and is being amortized over 25 years.
The estimated fair value of assets acquired and liabilities assumed is
summarized as follows:

<TABLE>
<S> <C>
Current assets ......................... $ 2,187,000
Other assets ........................... 518,000
Goodwill ............................... 2,075,000
Floor plan payable ..................... (1,976,000)
Accrued liabilities .................... (121,000)
-----------
$ 2,683,000
===========
Consideration:
Cash ................................... $ 1,472,000
Note payable ........................... 247,000
Common stock ........................... 964,000
-----------
$ 2,683,000
===========
</TABLE>

F-13
<PAGE> 41

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On July 13, 1998, the Company completed the acquisition of First Value
Homes, Inc. ("First Value") which operated two retail sales centers in North
Carolina. The results of the acquired operations of First Value have been
included with those of the Company effective July 1, 1998. The excess purchase
price over the estimated fair value of the net assets acquired as of the
acquisition date of $6.7 million has been recorded as goodwill and is being
amortized over 25 years. The estimated fair value of assets acquired and
liabilities assumed is summarized as follows:

<TABLE>
<S> <C>
Current assets ......................... $ 4,730,000
Other assets ........................... 1,783,000
Goodwill ............................... 6,719,000
Floor plan payable ..................... (3,024,000)
Accrued liabilities .................... (904,000)
Accounts payable ....................... (349,000)
Notes payable and capital leases ....... (315,000)
-----------
$ 8,640,000
===========

Consideration:
Cash ................................... $ 4,633,000
Common stock ........................... 4,007,000
-----------
$ 8,640,000
===========
</TABLE>

On September 14, 1998, the Company completed the acquisition of DWP
Management, Inc. ("DWP") and its related companies, Value Homes, Inc., Value
Mobile Homes, Inc. of Washington, Premiere Manufactured Homes, Inc., Premiere
Manufactured Homes, Inc. of Washington, Park Place Homes, Inc., Kilroy's M. H.,
Inc. and Premiere Homes of Moses Lake, Inc. which operated six retail sales
centers in Washington, Oregon and New Mexico. The previous owner retained a 20%
interest in the newly formed corporations, Pacific Northwest Homes, Inc. and
Pacific II Northwest Homes, Inc. The results of the acquired operations of DWP
have been included with those of the Company effective September 1, 1998. The
excess purchase price over the estimated fair value of the net assets acquired
as of the acquisition date of $11.9 million has been recorded as goodwill and is
being amortized over 25 years. The original purchase price was subject to
adjustments based on the actual net worth of the companies acquired as of
December 31, 1998. As a result, the original purchase price was reduced by
$612,000 which also reflected a retroactive adjustment to the note payable. The
Company believes it may be entitled to further purchase price adjustments and
has determined that it has a right of offset against the note payable for any
such reductions. Further purchase price adjustments, if any, will be accounted
for as a reduction of goodwill with a corresponding reduction in the note
payable and/or the common stock given as part of the initial purchase. The
estimated fair value of assets acquired and liabilities assumed is summarized as
follows:

<TABLE>
<S> <C>
Current assets .................. $ 12,775,000
Other assets .................... 2,077,000
Goodwill ........................ 11,901,000
Floor plan payable .............. (8,866,000)
Accrued liabilities ............. (4,789,000)
Minority interests .............. (174,000)
Accounts and notes payable ...... (637,000)
------------
$ 12,287,000
============
</TABLE>

F-14
<PAGE> 42

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Consideration:
Cash ......................... $ 6,000,000
Note payable ................. 3,288,000
Common stock ................. 2,999,000
-----------
$12,287,000
===========
</TABLE>

On December 29, 1998, the Company completed the acquisition of R-Anell
Custom Homes, Inc. and its related manufacturing companies, Gold Medal Homes,
Inc. and Gold Medal Homes of North Carolina, Inc. (collectively, "R-Anell").
R-Anell produces manufactured and modular homes in three facilities located in
North Carolina and sells its homes through approximately 100 independent and
Company-owned retail sales centers located primarily in North Carolina, South
Carolina and Virginia. The results of the acquired operations of R-Anell have
been included with those of the Company from the date of acquisition. The excess
purchase price over the estimated fair value of net assets acquired as of the
acquisition date of $29.5 million has been recorded as goodwill and is being
amortized over 40 years. The final determination of the purchase price, which is
subject to certain performance targets, will be made in fiscal 2000. The
estimated fair value of assets acquired and liabilities assumed in these
acquisitions is summarized as follows:

<TABLE>
<S> <C>
Current assets ......................... $ 9,439,000
Property, plant and equipment .......... 11,073,000
Goodwill ............................... 29,521,000
Current liabilities .................... (11,156,000)
Notes payable .......................... (6,300,000)
------------
$ 32,577,000
============

Consideration:
Cash ................................ $ 21,167,000
Common stock ........................ 11,113,000
Transaction costs ................... 297,000
------------
$ 32,577,000
============
</TABLE>

In March 1999, the Company acquired 25% of the outstanding common stock of
HomeMax from Zaring National Corporation ("Zaring") in exchange for a $4.4
million note, and the Company loaned HomeMax $4 million in exchange for a
subordinated note convertible into an additional 25% of HomeMax's common stock.
The Company also received an option to acquire all of the remaining HomeMax
common stock after three years at a predefined price. Zaring may require, or the
Company may elect, earlier exercise of this option if HomeMax meets certain
performance goals within the three-year period. In connection with this
transaction, the Company entered into a Management and Consulting Agreement with
Zaring and HomeMax pursuant to which the Company will manage the HomeMax
operations. In addition the Company, Zaring and HomeMax entered a
Securityholders Agreement providing for the joint control of HomeMax by the
Company and Zaring and certain restrictions on the capital stock of HomeMax.
HomeMax currently operates twelve retail sales centers in North Carolina, South
Carolina and Kentucky.

The pro forma effects related to the NC Homes, Davis Homes, First Value,
DWP and R-Anell acquisitions are not significant.

F-15
<PAGE> 43

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) INVENTORIES

A summary of inventories follows:

<TABLE>
<CAPTION>
MAY 31,
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Manufactured homes:
New ................................. $ 50,208,000 $ 82,564,000
Used ................................ 6,744,000 9,179,000
Furniture and supplies ................. 5,884,000 10,176,000
Raw materials and work-in-process ...... 11,240,000 16,762,000
------------ ------------
$ 74,076,000 $118,681,000
============ ============
</TABLE>

Substantially all the Company's new and used manufactured homes were
pledged as collateral against its floor plan credit facility (see note 6).

(4) PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment follows:

<TABLE>
<CAPTION>
MAY 31,
USEFUL -----------------------------
LIVES 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Land ............................................. -- $ 5,477,000 $ 9,684,000
Land improvements ................................ 15 years 1,459,000 135,000
Buildings ........................................ 5-30 years 28,584,000 46,749,000
Machinery and equipment .......................... 5-10 years 7,716,000 12,905,000
Furniture and equipment .......................... 5 years 6,997,000 12,301,000
Vehicles ......................................... 3 years 926,000 2,324,000
Leasehold improvements ........................... 5-13 years 15,890,000 26,374,000
Construction in progress ......................... -- 1,295,000 5,854,000
------------ ------------

68,344,000 116,326,000
Assets to be disposed of ......................... -- 2,959,000 2,920,000
Less accumulated depreciation and amortization ... 12,319,000 24,420,000
------------ ------------

$ 58,984,000 $ 94,826,000
============ ============
</TABLE>

(5) OTHER ASSETS

A summary of other assets follows:

<TABLE>
<CAPTION>
MAY 31,
---------------------------
1998 1999
----------- -----------
<S> <C> <C>
Notes receivables .......................................... $ -- $ 4,226,000
Dealer receivables ......................................... -- 3,254,000
Deposits and prepaid expenses .............................. 1,503,000 2,193,000
Debt issue costs ........................................... 595,000 1,087,000
Net cash surrender value of company-owned life insurance ... 538,000 108,000
Other ...................................................... 417,000 807,000
----------- -----------
$ 3,053,000 $11,675,000
=========== ===========
</TABLE>

F-16
<PAGE> 44

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Of the $4,226,000 notes receivable balance at May 31, 1999, $4,000,000 is a
note receivable from an affiliated company (see note 2).

(6) NOTES AND FLOOR PLAN PAYABLE

The Company has a $125 million floor plan credit facility with Associates
Housing Finance LLC. ("Associates") to finance a major portion of its
manufactured home inventory until such inventory is sold and contract proceeds
are received. Amounts outstanding under the credit facility bear interest at
prime less 0.50% (7.25% at May 31, 1999) with the Company's participations in
the credit facility earning interest at prime less 0.75% (7.00% at May 31,
1999). The floor plan debt is secured by substantially all of the Company's
manufactured home inventory and cash in transit from financial institutions. The
Company may increase or decrease the participation at any time and may require
Associates to re-purchase all of its participation.

Amounts due under the floor plan credit facility follows:

<TABLE>
<CAPTION>
MAY 31,
--------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Floor plan payable .......................... $ 84,573,000 $ 140,993,000
Participations in floor plan payable ........ (41,110,000) (54,322,000)
------------- -------------

Net floor plan payable ............. $ 43,463,000 $ 86,671,000
============= =============
</TABLE>

A summary of notes payable follows:

<TABLE>
<CAPTION>
MAY 31,
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Senior notes payable to financial institutions in annual installments of
$10,166,667 beginning July 10, 2002, plus interest at 8.32%, due
July 10, 2007 ............................................................. $ 61,000,000 $ 61,000,000
Senior notes payable to financial institutions in annual installments
of $10,200,000 beginning September 15, 2004, plus interest at
7.24%, due September 15, 2008 ............................................. -- 51,000,000
Industrial revenue bond payable to a county authority in quarterly
installments of $135,000, plus interest at 5.33%, due December 1,
2009 ....................................................................... -- 5,825,000
Notes payable in annual installments of $1,470,392, plus interest at
prime, due March 15, 2002 .................................................. -- 4,411,000
Notes payable in one installment of $3,324,653, plus interest at 7.5%,
due September 4, 2001 ...................................................... -- 3,102,000
Note payable in annual installments of $500,000 with final payment of
$383,000, plus interest at 7.5%, due June 16, 2000 ......................... 1,383,000 883,000
Note payable in monthly installments of $6,985, including interest at
7.25% due February, 2009; secured by land .................................. -- 585,000
Note payable to a SBA certified development company in monthly
installments of $4,408, plus interest at 8.07%, due July 13, 2014 ......... -- 438,000
Note payable in monthly installments of $5,000, including interest at
10% due July, 2008; secured by land ........................................ -- 384,000
Note payable in monthly installments of $18,815, including interest at
5.25% due January, 2001; secured by land ................................... -- 201,000
</TABLE>

F-17
<PAGE> 45

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
MAY 31,
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Note payable in annual installments of $150,000 and $165,000, plus
interest at 9% due April, 2000; secured by land ............................ 315,000 165,000
Note payable in monthly installments of $1,934, including interest at
10% due November, 2010; secured by land .................................... 165,000 158,000
Note payable in monthly installments of $2,167, including interest at
10% due September, 2004; secured by land ................................... 157,000 150,000
Note payable to a SBA certified development company in monthly
installments of $2,047, plus interest at 7.62%, due July 13, 2004 ......... -- 101,000
Note payable in monthly installments of $1,170, including interest at
9.5% due July, 2012; secured by land ....................................... 105,000 100,000
Note payable in monthly installments of $1,000, including interest at
8% due May, 2003; secured by land .......................................... -- 94,000
Note payable to a bank in monthly installments of $3,429, including
interest at 10% through July 2001; secured by land ......................... 109,000 75,000
Notes payable in monthly installments of $1,686, including interest at
10.5% due May 2002; secured by land ........................................ 65,000 51,000
Note payable in monthly installments of $2,500, including interest at
8% due June, 2000; secured by land ......................................... 59,000 32,000
Notes payable, $750,000 due on September 3, 1997 with quarterly
installments of $187,500 thereafter, plus interest at 8.5% ................ 188,000 --
Other .......................................................................... 482,000 1,059,000
------------ ------------

Total ................................................................. 64,028,000 129,814,000
Less current installments ...................................................... 941,000 3,086,000
------------ ------------
Notes payable, less current installments .............................. $ 63,087,000 $126,728,000
============ ============
</TABLE>

The aggregate maturities of notes payable for each of the five years
subsequent to May 31, 1999 follow:

<TABLE>
<S> <C>
2000 ......................... $ 3,086,000
2001 ......................... 2,991,000
2002 ......................... 5,526,000
2003 ......................... 10,838,000
2004 ......................... 10,921,000
Thereafter ................... 96,452,000
------------
$129,814,000
============
</TABLE>

On July 15, 1997, the Company completed the private placement of $61
million of 8.32% Senior Unsecured Notes with an average life of 7.5 years and a
final maturity in July 2007. The Company used the net proceeds from this debt to
repay approximately $25 million in existing secured bank indebtedness and
approximately $6 million in secured debt of Brilliant. Consequently, the Company
recorded an extraordinary loss of $634,000 (net of income tax benefit), which
represents the write-off of unamortized debt issue costs as well as a prepayment
penalty associated with the early repayment of the bank debt.

On September 30, 1998, the Company completed the private placement of $46
million of 7.25% Series A Senior Unsecured Notes and $5 million of 7.14% Series
B Senior Unsecured Notes with an average life of eight years and a final
maturity in September 2008. Such notes require semi-annual interest payments and
equal annual principal reductions beginning in 2004. Proceeds from the notes
were used to fund acquisitions and expansions with the remainder used for
general corporate purposes.

F-18
<PAGE> 46

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company's loan agreements related to the 8.32% Senior Unsecured Notes
issued in July 1997 and the 7.25% Series A and 7.14% Series B Senior Unsecured
Notes described above contain certain requirements as to net working capital,
consolidated net worth, disposition of assets, additional long-term debt,
redemption of common stock, payment of dividends and prepayment of subordinated
debt. At May 31, 1999, the Company was in compliance with all such restrictions.

(7) INCOME TAXES

The provision for income taxes related to operations in the consolidated
statements of operations is summarized below:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Federal-current expense ................ $ 9,139,000 $ 11,191,000 $ 8,322,000
Federal-deferred expense (benefit) ..... (115,000) 134,000 877,000
State-current expense .................. 1,504,000 2,192,000 2,083,000
State-deferred expense (benefit) ....... (16,000) 29,000 190,000
------------ ------------ ------------
Total ........................... $ 10,512,000 $ 13,546,000 $ 11,472,000
============ ============ ============
</TABLE>

The Company files a consolidated return for federal tax purposes;
accordingly, taxes at statutory rates are computed based on earnings before
earnings in affiliates and minority interests. The provision for income taxes
related to operations varied from the amount computed by applying the U.S.
federal statutory rate as a result of the following:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense .................. $ 9,077,000 $ 10,806,000 $ 9,768,000
State income tax, net of federal tax benefit ..... 961,000 1,444,000 1,486,000
Nondeductible goodwill ........................... 148,000 273,000 524,000
Nondeductible pooling costs ...................... -- 626,000 --
Other, net ....................................... 326,000 397,000 (306,000)
------------ ------------ ------------
Total ..................................... $ 10,512,000 $ 13,546,000 $ 11,472,000
============ ============ ============
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:

<TABLE>
<CAPTION>
MAY 31,
---------------------------
1998 1999
----------- -----------
<S> <C> <C>
Current deferred taxes:
Inventory costs capitalized for tax purposes ...... $ 395,000 $ 501,000
Liabilities not deductible until paid ............. 3,230,000 4,081,000
Other ............................................. 780,000 (94,000)
=========== ===========

Current deferred tax assets .................. $ 4,405,000 $ 4,488,000
=========== ===========
</TABLE>

F-19
<PAGE> 47

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C> <C>
Noncurrent deferred taxes:
Noncurrent deferred tax assets:
Plant and equipment, principally due to differences in
depreciation and estimated costs to dispose of
manufacturing facilities ................................ $ 198,000 $ 0
Noncurrent deferred tax liabilities:
Goodwill .................................................. (285,000) (218,000)
Plant and equipment, principally due to differences in
depreciation ............................................ (112,000) (144,000)
--------- ---------
Noncurrent net deferred tax liability .................. $(199,000) $(362,000)
========= =========
</TABLE>

Management of the Company considers it more likely than not that all the
deferred tax assets will be realized due to sufficient taxable income in future
years.

(8) INVESTMENT IN AFFILIATED COMPANIES

In September 1995, the Company invested $2.5 million to provide one-half of
the initial capitalization of 21st Century, a newly formed mortgage company
which commenced operations in October 1995 and provides retail financing to
manufactured home buyers. 21st Century is 50% owned by the Company with the
remaining 50% ownership divided equally between 21st Century's management and
Clayton Homes, Inc. ("Clayton"). The Company has an option to purchase the stock
owned by Clayton and the management of 21st Century after September 15, 2000.
Summary financial information for 21st Century, derived from its audited
financial statements, for the years ended May 31, 1998 and 1999 follows:

<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Total assets ................. $30,240,000 $23,205,000
=========== ===========

Total liabilities ............ $22,407,000 $12,157,000
Shareholders' equity ......... $ 7,833,000 $11,049,000
=========== ===========

Total revenues ............... $11,634,000 $18,323,000
Net income ................... $ 2,422,000 $ 3,215,000
=========== ===========
</TABLE>

In March 1999, the Company acquired a 25% interest in HomeMax. The
Company's share of HomeMax's net operating loss for the period of ownership was
$130,000. The Company receives management fee income from HomeMax for support
services. Management fees received from HomeMax for the year ended May 31, 1999
were $130,000.

(9) STOCK COMPENSATION PLANS

The Company has a 1994 Amended and Restated Stock Compensation Plan (the
"Plan") whereby employees, directors and advisors are eligible to receive awards
under the Plan. The Plan is administered by a committee of the Board of
Directors (the "Committee"). An aggregate of 2,250,000 shares of common stock
have been authorized and reserved for issuance under the Plan pursuant to the
exercise of options or grant of restricted stock awards. Restricted stock awards
will give the recipient the right to receive a specified amount of shares of
common stock contingent upon remaining a Company employee for a specified
period, as determined by the Committee.

F-20
<PAGE> 48

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Options will become immediately exercisable and all restrictions will
immediately lapse with respect to any award of restricted stock in the event of
a change or threatened change in control of the Company and in the event of
certain mergers and reorganizations of the Company. The options will expire no
later than ten years after the date of grant. The exercise price for incentive
stock options under the Plan may not be less than the fair value of the common
stock on the date of grant. The exercise price for non-qualified options granted
under the Plan will be at the discretion of the Committee.

Option activity for the Plan follows:

<TABLE>
<CAPTION>
1994 STOCK WEIGHTED
COMPENSATION AVERAGE
PLAN EXERCISE PRICE
------------ --------------
<S> <C> <C>
Outstanding, May 31, 1996 ......... 1,252,734 $ 5.40
Granted ...................... 714,444 9.26
Options exercised ............ (77,826) 5.04
Canceled ..................... (90,174) 7.77
---------

Outstanding, May 31, 1997 ......... 1,799,178 6.84
Granted ...................... 256,625 14.81
Options exercised ............ (91,210) 4.91
Canceled ..................... (273,510) 8.05
---------

Outstanding, May 31, 1998 ......... 1,691,083 8.13
Granted ...................... 339,376 15.18
Options exercised ............ (140,292) 4.93
Canceled ..................... (49,847) 11.63
---------

Outstanding, May 31, 1999 ......... 1,840,320 $ 9.57
=========
</TABLE>

A summary of the Plan at May 31, 1999 follows:

<TABLE>
<CAPTION>
EXERCISE PRICES
-------------------------------------------------------------------
$3.41--$6.24 $6.70--$9.07 $9.20--$19.13 TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Options outstanding ......................... 595,194 611,202 633,924 1,840,320
Weighted average exercise price -
options outstanding ...................... $ 4.77 $ 8.78 $ 14.85 $ 9.57
Options exercisable ......................... 372,323 217,628 30,639 620,590
Weighted average exercise price -
options exercisable ...................... $ 4.68 $ 8.45 $ 11.76 $ 6.35
Weighted average remaining
contractual life (years) ................. 1.57 4.93 4.91 3.66
</TABLE>

During fiscal 1997, the Company granted each co-chief executive officer a
non-qualified stock option to purchase 140,625 shares of the Company's common
stock at $9.07 per share, the then fair market value of the Company's common
stock, under a Non-Qualified Stock Option Agreement. Each option is exercisable
after November 15, 2005 and terminates on November 15, 2006. However, each
option may be exercisable earlier according to the following schedule:

<TABLE>
<S> <C>
46,875 shares If the Company's market capitalization
equals or exceeds $300 million at any time
on or prior to November 15, 2000 which was
exceeded during fiscal 1998.
</TABLE>

F-21
<PAGE> 49

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
46,875 shares If the Company's market capitalization
equals or exceeds $400 million at any time
on or prior to November 15, 2000 which was
exceeded during fiscal 1998.

46,875 shares If the Company's market capitalization
equals or exceeds $500 million at any time
on or prior to November 15, 2000.
</TABLE>

The Company has a Market Capitalization Enhancement Stock Option Plan (the
"Enhancement Plan") whereby key executive officers and non-employee directors
are eligible to receive awards under the Enhancement Plan. The Enhancement Plan
is administered by the Committee. An aggregate of 1,200,000 shares of common
stock have been authorized and reserved for issuance under the Enhancement Plan
pursuant to the exercise of options.

During fiscal 1999, the Company granted certain key executive employees of
the Company and non-employee directors of the Company non-qualified stock
options to purchase a total of 825,000 shares of the Company's common stock at
$15.38 per share, the then fair market value of the Company's common stock. The
options granted are exercisable according to the following schedule and
terminate on August 31, 2008.

<TABLE>
As of the First Date on Which the
Cumulative Company's Market Capitalization Equals
Percent Exercisable (%) or Exceeds
------------------------ --------------------------------------
<S> <C>
20 $500 million

40 $600 million

60 $700 million

80 $800 million

90 $900 million

100 $1 billion
</TABLE>

As permitted under Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company accounts for
stock based compensation in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, no
compensation cost has been recognized in fiscal 1997, 1998 and 1999 related to
stock option grants. Had compensation cost been determined on the basis of SFAS
123, net income and earnings per share would have been as follows:

F-22
<PAGE> 50
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Net income:
As reported .................. $ 15,033,000 $ 17,683,000 $ 17,941,000
Pro forma .................... 14,692,000 16,806,000 16,717,000

Basic Earnings per Share:
As reported .................. $ 0.89 $ 1.03 $ 1.00
Pro forma .................... $ 0.87 $ 0.98 $ 0.93

Diluted Earnings per Share:
As reported .................. $ 0.86 $ 0.98 $ 0.96
Pro forma .................... $ 0.84 $ 0.93 $ 0.89
</TABLE>

The fair value of each common stock option grant is estimated on the date
of the grant using the Black Scholes option-pricing model with the following
assumptions used for grants from all plans in fiscal 1997, 1998 and 1999:

<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Expected life (years) .................. 4-9 years 4-9 years 4-9 years
Risk-free interest rate ................ 6.40%-6.66% 5.41%-5.55% 4.55%-5.72%
Expected volatility .................... .557 .584 .774
Expected dividend rate ................. 0.0% 0.0% 0.0%
</TABLE>

(10) EMPLOYMENT AGREEMENTS

The Company entered into employment agreements, effective October 1, 1996,
with the co-chief executive officers of the Company. Each agreement specifies a
base salary of $235,000 per year plus an annual bonus of 2.25% of the Company's
after-tax consolidated net income. Pursuant to these agreements, each co-chief
executive officer was granted a stock option to purchase 93,750 shares of common
stock pursuant to the Company's 1994 Stock Compensation Plan (see note 9). In
addition, each co-chief executive officer was granted a Non-Qualified Stock
Option to purchase 140,625 shares of common stock at $9.07 per share, the fair
value of the Company's common stock on the date of grant, under the Option
Agreements (see note 9).

(11) RELATED PARTY BALANCES AND TRANSACTIONS

MOAMCO Properties, Inc. (MOAMCO), an entity owned by the Company's Chairman
and Co-Chief Executive Officer, owns and leases to the Company, under operating
leases, land, improvements and buildings related to three sales centers. During
the years ended May 31, 1997, 1998 and 1999, the Company paid MOAMCO
approximately $78,000, $78,000 and $82,000, respectively, for these operating
leases (see note 12).

21st Century pays the Company a fee based on the interest rate charged on
the installment sales contracts and the loan volume received from each retail
center. During the years ended May 31, 1997, 1998 and 1999, 21st Century paid
the Company $500,000, $1,300,000 and $2,324,000, respectively.

(12) COMMITMENTS AND CONTINGENCIES

REPURCHASE AGREEMENTS

The Company has entered into repurchase agreements with various financial
institutions and other credit sources pursuant to which the Company has agreed,
under certain circumstances, to repurchase manufactured homes sold to
independent dealers in the event of a default by a dealer on its obligation to
such credit sources. Under the terms of such repurchase agreements, the Company
agrees to repurchase manufactured homes at declining prices over the periods of
the agreements (which generally range from 12 to 15 months). As of May 31, 1999
and 1998, the Company was at risk to repurchase approximately $107.7 million and
$80.9 million, respectively, of manufactured homes.

LEGAL MATTERS

The Company is involved in various legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's financial
condition or results of operations.

F-23
<PAGE> 51

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SAVINGS PLAN

During 1992, the Company adopted the American Homestar Corporation 401(k)
Retirement Plan (the "Savings Plan") whereby all employees of the Company are
eligible to participate in the Savings Plan who have completed one year of
service and have reached the age of twenty and one-half. The Savings Plan is
administered by a Plan Administrator appointed by the Company. Eligible
employees may contribute a portion of their annual compensation up to the legal
maximum established by the Internal Revenue Service for each plan year. The
Company's matching contributions are at the discretion of the Company and may be
made up to a maximum of 3% each plan year. Employee contributions are
immediately vested. Company contributions vest over the first six years of
employment. Amounts contributed by the Company to the Savings Plan for the years
ended May 31, 1997, 1998 and 1999 were $185,000, $263,000, and $363,000,
respectively.

WORKERS COMPENSATION LIABILITY

The Company has rejected the insurance coverage provided by the Texas
Workers' Compensation Act. While the Company maintains excess indemnity
insurance, the Company's portion of self-insured retention is $250,000 per
occurrence. Management, in assessing loss experience, adjusts the reserve
through periodic provisions. In other states, the Company is self-insured for
workers compensation up to predetermined amounts above which third party
insurance applies.

LEASES

The Company is obligated under various noncancelable operating lease
agreements with varying monthly payments and varying expiration dates through
2004. Rental expense under operating leases for the years ended May 31, 1997,
1998 and 1999 were $2,644,000, $3,505,000 and $5,047,000, respectively.

Aggregate annual rental payments, that include amounts due to related
parties, on future lease commitments at May 31, 1999 were as follows:

<TABLE>
<CAPTION>
TOTAL LEASE AMOUNTS DUE
COMMITMENTS RELATED PARTIES
----------------- ----------------
<S> <C> <C>
2000...................................................... $ 4,192,000 $ 86,000
2001...................................................... 2,491,000 --
2002...................................................... 1,527,000 --
2003...................................................... 1,018,000 --
2004...................................................... 196,000 --
Thereafter................................................ 252,000 --
--------------- ----------------
$ 9,676,000 $ 86,000
=============== ================
</TABLE>

(13) CONCENTRATIONS OF RISK

For the years ended May 31, 1997, 1998 and 1999, the Company had one
producer that supplied 18%, 10% and 5%, respectively, of the new houses sold by
Company-owned retail sales centers. The Company has a credit facility with one
lender to finance the majority of its new home inventory. The loss of this
lender could have a material adverse effect on the Company's operations. A
majority of the Company-owned retail sales centers are located in Texas.

F-24
<PAGE> 52

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(14) BUSINESS SEGMENTS

The Company operates primarily in three business segments, retail sales,
manufacturing of manufactured housing and financial services. The following
table summarizes, for the periods indicated, information about these segments:

YEARS ENDED MAY 31,
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADJUSTMENTS/
RETAIL MANUFACTURING OTHER ELIMINATIONS TOTAL
--------- ------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
1999

Revenues from external customers ....... $ 413,402 $ 223,179 $ 17,462 $ -- $ 654,043
Intersegment revenues .................. 2,987 188,423 8,019 (199,429) --
Interest expense ....................... 10,454 3,628 7,882 (8,119) 13,845
Depreciation and amortization .......... 4,810 4,257 1,002 -- 10,069
Segment profit before income taxes ..... (829) 32,781 (2,573) (1,470) 27,909
Segment assets ......................... 220,954 163,858 267,836 (213,332) 439,316
Expenditures for segment assets ........ 19,642 6,463 2,407 -- 28,512

1998

Revenues from external customers ....... $ 282,969 $ 216,172 $ 14,798 $ -- $ 513,939
Intersegment revenues .................. 2,908 138,437 6,610 (147,955) --
Interest expense ....................... 5,872 3,423 4,500 (6,413) 7,382
Depreciation and amortization .......... 2,421 3,046 167 -- 5,634
Segment profit before income taxes ..... 5,741 25,572 1,091 (1,529) 30,875
Segment assets ......................... 141,590 125,646 172,739 (166,279) 273,696
Expenditures for segment assets ........ 9,399 4,048 1,268 -- 14,715

1997

Revenues from external customers ....... $ 238,317 $ 165,838 $ 5,282 $ -- $ 409,437
Intersegment revenues .................. 3,206 111,844 683 (115,733) --
Interest expense ....................... 4,864 3,899 -- (3,060) 5,703
Depreciation and amortization .......... 1,544 2,386 130 -- 4,060
Segment profit before income taxes ..... 9,630 17,415 772 (1,160) 26,657
Segment assets ......................... 139,253 106,811 68,738 (103,781) 211,021
Expenditures for segment assets ........ 4,140 6,452 36 -- 10,628
</TABLE>

Intersegment revenues are primarily sales by the manufacturing segment to
the retail segment and are transferred at market price. Earnings in affiliates
in the consolidated statements of operations relates to the financial services
segment. The adjustment to intersegment revenue is made to eliminate
intercompany sales between the manufacturing and retail segments. The interest
expense adjustment is made to eliminate intersegment interest between the
corporate and manufacturing and retail segments and to net the interest expense
on the floor plan credit facility against the interest earned. The segment
assets adjustment is primarily made up of an adjustment to eliminate
subsidiary's equity at the corporate level, a reclass of the floor plan
participation balance and the elimination of intercompany receivables.

F-25
<PAGE> 53

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(15) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following presents a summary of the unaudited quarterly financial
information for the years ended May 31, 1998 and 1999:

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
Revenues ................................ $124,732 $125,014 $117,331 $146,862 $513,939
Operating income ........................ 7,054 9,710 9,230 12,313 38,307
Net income .............................. 1,820 4,819 4,480 6,564 17,683
Earnings per share-basic ................ 0.11 0.28 0.26 0.38 1.03
Earnings per share-diluted .............. 0.10 0.27 0.25 0.36 0.98

1999
Revenues ................................ $147,531 $169,022 $151,400 $186,090 $654,043
Operating income ........................ 11,460 12,373 6,239 11,572 41,644
Net income .............................. 5,784 5,757 1,816 4,584 17,941
Earnings per share-basic ................ 0.33 0.32 0.10 0.26 1.00
Earnings per share-diluted .............. 0.31 0.31 0.10 0.25 0.96
</TABLE>

F-26
<PAGE> 54

SCHEDULE II

AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
ADDITIONS
--------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION YEAR EXPENSES ACCOUNTS OTHER (1) DEDUCTIONS YEAR
- ----------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Year ended May 31, 1997
Warranty and service ...... $ 2,634,000 $11,400,000 $ -- $ 3,832,000 $11,510,000 $ 6,356,000

Year ended May 31, 1998
Warranty and service ...... $ 6,356,000 $18,009,000 $ -- $ -- $18,105,000 $ 6,260,000

Year ended May 31, 1999
Warranty and service ...... $ 6,260,000 $23,331,000 $ -- $ 980,000 $22,203,000 $ 8,368,000
</TABLE>

(1) Amount represents acquired reserve for warranty and service costs.

F-27
<PAGE> 55

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
2.1 Stock Purchase and Plan of Reorganization, dated May 26, 1998, among
American Homestar Corporation, R-Anell Custom Homes, Inc., Gold Medal
Homes, Inc., Gold Medal Homes of North Carolina, Inc. and certain security
holders of R-Anell Custom Homes, Inc., Gold Medal Homes, Inc. and Gold
Medal Homes of North Carolina, Inc.

2.2 First Amendment to the Stock Purchase and Plan of Reorganization, dated
August 31, 1998, among American Homestar Corporation, R-Anell Custom Homes,
Inc., Gold Medal Homes, Inc., Gold Medal Homes of North Carolina, Inc. and
certain security holders of R-Anell Custom Homes, Inc., Gold Medal Homes,
Inc. and Gold Medal Homes of North Carolina, Inc.

2.3 Second Amendment to the Stock Purchase and Plan of Reorganization, dated
August 31, 1998, among American Homestar Corporation, R-Anell Custom Homes,
Inc., Gold Medal Homes, Inc., Gold Medal Homes of North Carolina, Inc. and
certain security holders of R-Anell Custom Homes, Inc., Gold Medal Homes,
Inc. and Gold Medal Homes of North Carolina, Inc.
</TABLE>

<PAGE> 56

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of American Homestar Corporation.

3.2 Articles of Amendment to the Restated Articles of Incorporation

3.3 Amended and Restated Bylaws of American Homestar Corporation.

4.1 Form of certificate evidencing ownership of Common Stock of American
Homestar Corporation.

10.1 Note Purchase Agreement, 8.32% Senior Unsecured Notes due July 7, 2007

10.2 Note Purchase Agreement, 7.25% Series A and 7.14% Series B Senior
Unsecured Notes due September 15, 2008

10.3 Amended and Restated Securities Purchase Agreement by and among Zaring
National Corporation ("Zaring"), HomeMax, Inc. ("HomeMax"), HomeMax
Operating Properties, L.L.C. ("HOP") and American Homestar Corporation
dated as of March 15, 1999.

10.4 Securityholders Agreement by and among Zaring, HomeMax, HOP and American
Homestar Corporation dated March 15, 1999.

10.5 Promissory Note dated March 15, 1999 in the original principal amount of
$4,411,177 payable to Zaring.

10.6 Management and Consulting Agreement by and among Zaring, HomeMax and
American Homestar Corporation dated March 15, 1999.

10.7 Nonqualified Stock Option Agreement, dated November 15, 1996 between
Finis F. Teeter and American Homestar Corporation.

10.8 Nonqualified Stock Option Agreement, dated November 15, 1996 between
Laurence A. Dawson, Jr. and American Homestar Corporation.

10.9 Amendment to Life Reinsurance Contract, dated December 31, 1996, by and
between Lifestar Reinsurance Limited and American Bankers Life Assurance
Company of Florida

10.10 Amendment to The Associates (formerly Ford Finance Company, Inc.)
Inventory Financing Agreement

10.11 Employment Agreement dated November 15, 1996 by and between American
Homestar Corporation and Laurence A. Dawson, Jr.

10.12 Employment Agreement dated November 15, 1996 by and between American
Homestar Corporation and Finis F. Teeter

10.13 Employment Agreement dated September 15, 1998 by and between American
Homestar Corporation and Craig A. Reynolds

10.14 Employment Agreement dated September 15, 1998 by and between American
Homestar Corporation and Charles N. Carney, Jr.

10.15 Employment Agreement dated July 10, 1997 by and between American
Homestar Corporation and Ronald McCaslin

10.16 The Company's Market Capitalization Enhancement Stock Option Plan

10.17 The Company's 1994 Amended and Restated Stock Compensation Plan

11 None

12 None

13 None

16 None

18 None
</TABLE>

<PAGE> 57

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
21 List of Subsidiaries
22 None
23 Consent of KPMG LLP
23.1 Consent of Deloitte & Touche L.L.P.
27 Financial Data Schedule
99 None
</TABLE>

<PAGE> 1

EXHIBIT 21

LIST OF SUBSIDIARIES

American Homestar Corporation
HSTR General Holdings, Inc.
HSTR Retail Holdings, Inc.
Nationwide Housing Systems, L.P.
Nationwide Housing Properties, L.P.
Nationwide West, L.P.
Nationwide NC Homes, Inc.
Nationwide of Alabama, Inc.
Associated Retailers Holdings, Inc.
Associated Retailers Group, L.P.
First Value Homes, Inc.
Pacific Northwest Homes, Inc.
Pacific II Northwest Homes, Inc.
Instant Living Homes, Inc.
Paradise Mortgage, Inc.
Roadmasters Transport Company, Inc. (51% owned)
American Homestar Financial Services, Inc.
Western Insurance Agency, Inc.
Lifestar Reinsurance, Ltd.
21st Century Mortgage Corporation (50% owned)
Homexpress, Inc.
HSTR Manufacturing Holdings, Inc.
Oak Creek Housing Properties, L.P.
Oak Creek Homes, L.P.
American Homestar of Burleson, L.P.
American Homestar of Lancaster, L.P.
American Homestar West, Inc.
American Homestar of North Carolina, Inc.
American Homestar of Alabama, Inc.
Gold Medal Homes N. C., Inc.
Gold Medal Homes, Inc.
R-Anell Custom Homes, Inc.
Brilliant Carriers, Inc.

<PAGE> 1

EXHIBIT 23

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
American Homestar Corporation:

We consent to the incorporation by reference in the registration
statement (No. 333-2037) on Form S-8 of American Homestar Corporation
and subsidiaries of our report dated July 7, 1999, relating to the
consolidated balance sheets of American Homestar Corporation and
subsidiaries as of May 31, 1998 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for each
of the years in the three-year period ended May 31, 1999, and the
related schedule, which report appears in the May 31, 1999 annual
report on Form 10-K of American Homestar Corporation.

/s/ KPMG Peat Marwick LLP

Houston, Texas
August 26, 1999

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
American Homestar Corporation:

We consent to the use in this Annual Report of American Homestar Corporation on
Form 10-K of our report dated April 11, 1997 (June 5, 1997 as to Note 12),
relating to the financial statements of Brilliant Holding Corporation and
subsidiaries (not presented separately herein) for the years ended December 31,
1996 and 1995.

/s/ Deloitte & Touche LLP

Birmingham, Alabama
August 26, 1999

<ARTICLE> 5
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<CURRENCY> U.S. DOLLAR

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> 1
<CASH> 51,279,000
<SECURITIES> 0
<RECEIVABLES> 48,965,000
<ALLOWANCES> 0
<INVENTORY> 118,681,000
<CURRENT-ASSETS> 236,881,000
<PP&E> 94,826,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 439,316,000
<CURRENT-LIABILITIES> 175,922,000
<BONDS> 0
0
0
<COMMON> 921,000
<OTHER-SE> 134,544,000
<TOTAL-LIABILITY-AND-EQUITY> 439,316,000
<SALES> 612,086,000
<TOTAL-REVENUES> 654,043,000
<CGS> 477,717,000
<TOTAL-COSTS> 612,399,000
<OTHER-EXPENSES> 110,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,845,000
<INCOME-PRETAX> 27,909,000
<INCOME-TAX> 11,472,000
<INCOME-CONTINUING> 17,941,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,941,000
<EPS-BASIC> 1.00
<EPS-DILUTED> 0.96

</TABLE>