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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number 0-24210
AMERICAN HOMESTAR CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
TEXAS 76-0070846
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
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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)
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 [ ] No [X]
The number of outstanding shares of the registrant's common stock, par value
$.05 per share, was 18,423,886 on November 13, 2000.
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PART I - FINANCIAL INFORMATION
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PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2000 and September 30, 2000........... 2
Condensed Consolidated Statements of Operations - three months
ended September 30, 1999 and 2000 ................................................ 3
Condensed Consolidated Statements of Cash Flows - three months ended
September 30, 1999 and 2000....................................................... 4
Notes to Condensed Consolidated Financial Statements................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 15
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.............................................. 16
Item 6. Exhibits and Reports on Form 8-K....................................................... 16
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1
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PART I -- FINANCIAL INFORMATION
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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JUNE 30, SEPTEMBER 30,
2000 2000
------------------ -------------------
(UNAUDITED)
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ASSETS
Current assets:
Cash............................................................ $ 12,891,000 $ 23,655,000
Short term investments.......................................... 750,000 750,000
Cash in transit from financial institutions..................... 29,929,000 29,119,000
------------------ -------------------
Total cash and cash equivalents........................... 43,570,000 53,524,000
Inventories, net................................................ 90,481,000 77,180,000
Accounts receivable............................................. 37,814,000 34,488,000
Manufacturer incentives receivable.............................. 381,000 963,000
Deferred tax assets............................................. 9,111,000 8,929,000
Prepaid expenses and other current assets....................... 6,306,000 9,503,000
------------------ -------------------
Total current assets...................................... 187,663,000 184,587,000
Property, plant and equipment, net................................. 86,079,000 84,518,000
Goodwill (net of accumulated amortization of $3,928,000 and
$4,365,000, respectively)........................................ 64,339,000 63,902,000
Investment in affiliates........................................... 4,319,000 4,109,000
Restricted cash.................................................... 1,156,000 4,400,000
Deferred tax assets................................................ 6,642,000 6,642,000
Other assets....................................................... 12,035,000 15,145,000
------------------ -------------------
$ 362,233,000 $ 363,303,000
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and capital lease......... $ 2,399,000 $ 2,854,000
Floor plan payable, net of participations....................... 85,048,000 91,965,000
Accounts payable................................................ 28,873,000 25,643,000
Accrued expenses................................................ 22,601,000 29,771,000
Accrued warranty costs.......................................... 8,749,000 8,146,000
------------------ -------------------
Total current liabilities................................. 147,670,000 158,379,000
Notes payable and capital lease, less current installments......... 120,729,000 120,468,000
Other liabilities.................................................. 125,000 --
Minority interest in consolidated subsidiary....................... 807,000 844,000
Shareholders' equity:
Preferred stock, no par value, authorized 5,000,000 shares;
509,167 shares issued and outstanding......................... 6,110,000 6,110,000
Common stock, $0.05 par value; authorized 50,000,000 shares;
issued and outstanding 18,423,886 shares at September 30,
1999 and 2000, respectively................................... 921,000 921,000
Additional paid-in capital...................................... 62,519,000 62,519,000
Retained earnings............................................... 23,352,000 14,062,000
------------------ -------------------
Total shareholders' equity................................ 92,902,000 83,612,000
------------------ -------------------
$ 362,233,000 $363,303,000
================== ===================
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AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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THREE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------------ --------------------
(UNAUDITED) (UNAUDITED)
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Revenues:
Net sales............................................... $ 155,340,000 $ 114,475,000
Other revenues.......................................... 10,439,000 5,848,000
------------------ --------------------
Total revenues.................................... 165,779,000 120,323,000
------------------ --------------------
Costs and expenses:
Cost of sales........................................... 126,889,000 88,754,000
Selling, general and administrative..................... 35,221,000 34,787,000
Restructuring charge.................................... 2,323,000 565,000
------------------ --------------------
Total costs and expenses.......................... 164,433,000 124,106,000
------------------ --------------------
Operating income (loss)........................... 1,346,000 (3,783,000)
Interest expense........................................... (4,032,000) (4,996,000)
Other income (expense)..................................... (183,000) 17,000
------------------ --------------------
Loss before items shown below..................... (2,869,000) (8,762,000)
Income tax expense (benefit)............................... (1,234,000) 281,000
------------------ --------------------
Loss before items shown below..................... (1,635,000) (9,043,000)
Earnings (losses) in affiliate............................. 256,000 (210,000)
Minority interests......................................... (56,000) (37,000)
------------------ --------------------
Net loss.......................................... $ (1,435,000) $ (9,290,000)
================== ====================
Loss per share - basic and diluted:
Net loss per share................................ $ (0.08) $ (0.50)
================== ====================
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AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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THREE MONTHS ENDED
--------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------------- -----------------
(UNAUDITED) (UNAUDITED)
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Cash flows from operating activities:
Net loss....................................................... $ (1,435,000) $ (9,290,000)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................ 3,733,000 3,452,000
Minority interests in income of consolidated subsidiaries.... 56,000 37,000
(Earnings) losses in affiliates.............................. (256,000) 210,000
Restructuring charge......................................... 2,231,000 565,000
Deferred taxes............................................... (1,095,000) 182,000
Change in assets and liabilities:
Decrease in receivables.................................... 15,362,000 2,744,000
Decrease in inventories.................................... 12,527,000 13,301,000
Increase in prepaid expenses and other current assets...... (3,923,000) (3,197,000)
Decrease (increase) in other assets........................ 1,868,000 (2,565,000)
Decrease in accounts payable............................... (989,000) (3,230,000)
Increase (decrease) in accrued expenses and other
liabilities.............................................. (6,342,000) 5,877,000
------------------- -----------------
Net cash provided by operating activities........... 21,737,000 8,086,000
------------------- -----------------
Cash flows from investing activities -
purchases of property, plant and equipment..................... (3,649,000) (1,999,000)
------------------- -----------------
Net cash used in investing activities............... (3,649,000) (1,999,000)
------------------- -----------------
Cash flows from financing activities:
Participation in floor plan payable............................ (5,276,000) 20,034,000
Borrowings under floor plan payable............................ 33,943,000 35,505,000
Repayments of floor plan payable............................... (53,616,000) (48,622,000)
Borrowings under long-term debt................................ -- 194,000
Principal payments of long-term debt........................... (876,000) --
Increase in restricted cash.................................... -- (3,244,000)
Exercise of stock options...................................... 35,000 --
------------------- -----------------
Net cash provided by (used in) financing activities. (25,790,000) 3,867,000
------------------- -----------------
Net increase (decrease) in cash and cash equivalents.............. (7,702,000) 9,954,000
Cash and cash equivalents, beginning of period.................... 48,877,000 43,570,000
------------------- -----------------
Cash and cash equivalents, end of period.......................... $ 41,175,000 $53,524,000
=================== =================
Supplemental disclosures of cash flow information:
Cash paid for interest......................................... $ 2,659,000 $ 4,579,000
=================== =================
Cash paid for income taxes..................................... $ 700,000 $ 279,000
=================== =================
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(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
American Homestar Corporation and subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Because of the seasonal nature of the Company's business, operating
results for the three months ended September 30, 2000, respectively, are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2001. These condensed consolidated financial statements should
be read in conjunction with the financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K.
(2) LIQUIDITY
During the past sixteen month period, American Homestar Corporation has
experienced substantial losses, significant components of which are non-cash and
are typically non-recurring items. The Company's business plan for fiscal 2001
indicates that although the losses will be diminishing during the year, a
sizable loss is expected for fiscal 2001. During fiscal 2000, management
restructured American Homestar Corporation's business in response to
industry-wide over capacity and excess supply conditions. Fiscal 2000 results of
operations were impacted by a charge of approximately $44 million (pretax) as a
result of decisions and actions taken pursuant to the restructuring of the
retail and manufacturing operations.
Management believes that American Homestar Corporation will have adequate
debt financing availability and will have sufficient liquidity throughout fiscal
2001 to support continued operations. The full impact of the restructuring
efforts is not expected to effect the Company until the fourth quarter of fiscal
2001. Management's assessment of its liquidity and ability to sustain operations
is based on certain assumptions regarding industry and economic conditions.
There is no assurance that the Company's liquidity will not be impacted by
unforeseen conditions.
(3) 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
franchisees and independent dealers in the event of a default by such
franchisees or independent 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 18 months and for up to 26 months for franchisees).
Historically these repurchase activities have been negligible, however
during fiscal year 2000, due to recent increases in repurchases, the Company set
up a reserve for future losses of approximately $2.7 million related to such
repurchase liabilities. At September 30, 2000, this reserve had been reduced to
approximately $1.4 million as a result of repurchases made during the three
months ended September 30, 2000. At June 30, 2000 and September 30, 2000, the
Company was at risk to repurchase approximately $86.5 million and $80.0 million,
respectively, of manufactured homes. In addition, the Company's repurchase
responsibilities as to its franchisees in some cases extend to the products of
other manufacturers, as well as to homes which have been sold by the franchisees
without corresponding payment to the floor plan lender.
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(4) INVENTORIES
A summary of inventories follows:
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JUNE 30, SEPTEMBER 30,
2000 2000
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Manufactured homes:
New................................................................... $ 68,390,000 $ 65,236,000
Used.................................................................. 5,252,000 1,601,000
Furniture and supplies.................................................. 10,770,000 3,039,000
Raw materials and work-in-process....................................... 10,678,000 8,818,000
------------------ -------------------
95,090,000 78,694,000
Inventory valuation reserve............................................. (4,609,000) (1,514,000)
------------------ -------------------
$ 90,481,000 $ 77,180,000
================== ===================
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(5) INVESTMENTS IN AFFILIATED COMPANIES
In September 1995, the Company invested $2.5 million to provide one-half of
the initial capitalization of 21st Century Mortgage Corporation ("21st
Century"), a newly formed mortgage company which commenced operations in October
1995 and provided retail financing to manufactured home buyers. In June 2000,
the Company sold its 50% interest in 21st Century to Clayton and 21st Century
management and entered into a new joint venture, Homestar 21, LLC ("Homestar
21"), which is 50% owned by the Company and 50% owned by 21st Century. The
Company invested $2,400,000 in Homestar 21. Summary financial information for
21st Century for the three months ended September 30, 1999 and for Homestar 21,
for the three months ended September 30, 2000 follows:
21st Century
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THREE MONTHS
ENDED
SEPTEMBER 30,
1999
------------------
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Total revenues........................................ $ 4,195,000
Net income............................................ $ 513,000
==================
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Homestar 21
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THREE MONTHS
ENDED
SEPTEMBER 30,
2000
------------------
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Total revenues........................................ $ 110,000
Net income............................................ $ 86,000
==================
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In March 1999, the Company acquired 25% of the outstanding common stock of
HomeMax, Inc. ("HomeMax") from Zaring National Corporation 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 receives management fee income from HomeMax for support services.
Management fees received from HomeMax for the three months ended September 30,
1999 and 2000 were $193,000 and $12,000, respectively. Summary financial
information for HomeMax, on a stand-alone basis, for the three months ended
September 30, 1999 and 2000 follows:
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THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------------- ------------------
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Total revenues.......................................................... $ 4,355,000 $ 8,524,000
Net loss................................................................ $ (1,561,000) $ (1,012,000)
=================== ==================
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(6) RESTRUCTURING CHARGE
In August 2000, the Company announced the further consolidation of its
production in Alabama through the idling of its Lynn, Alabama manufacturing
facility. As a result, the Company recorded a restructuring charge of
approximately $565,000 and an inventory write-down which approximated $100,000
to cost of sales in the results of operations for the three months ended
September 30, 2000.
(7) LOSS PER SHARE
The weighted average common shares used for determining basic and diluted
loss per common share were 18,421,475 and 18,423,707 for the three months ended
September 30, 1999 and 2000, respectively. At September 30, 1999 and 2000,
potentially dilutive outstanding stock options were 115,100 and 38,704 shares,
respectively. These potentially dilutive options were not included in the loss
per share calculation for the three months ended September 30, 1999 and 2000 as
their effect would be anti-dilutive due to the net loss incurred in the
respective periods.
(8) LONG-TERM DEBT
The Company's amended 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 issued in 1998 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. The terms of the agreements, as amended during fiscal 2000,
provide for quarterly, rather than semi-annual, payments of interest and for
maintenance of certain financial covenants as well as possible increases in the
interest rate based on levels of the fixed charge coverage ratio. Because of the
operating losses reported by the Company during fiscal 2000, the Company would
not have been in compliance with the fixed charge coverage requirement during
fiscal 2000 had the noteholders not granted waivers of such technical defaults
through September 29, 2000. In addition, based on actual charge coverage ratios,
an additional 35, 60 and 125 basis points was added to the interest rate for the
second, third and fourth quarters, respectively, of fiscal 2000.
On September 29, 2000, the Company reached agreement with the noteholders
as to a temporary amendment, which covers the period from September 30, 2000
through, and including September 29, 2001. Under the terms of this amendment,
the Company must meet certain financial performance and condition tests based on
its fiscal 2001 Business Plan. The tests include meeting certain interest
coverage ratios, the maintenance of minimum levels of net worth and limitations
on the amount of net debt the Company may carry, expressed both in absolute
terms and in relation to shareholders' equity. In exchange, the Company has
agreed to additional quarterly interest payments of 1.75% per annum above the
stated rates on each note. An additional interest charge of 3.50% per annum will
be accrued for the one-year amendment period. At September 30, 2001, the Company
may elect to pay the additional 3.5% interest or add it to the principal balance
of the original debt. In addition, the Company was required to grant warrants,
which are exchangeable for Common Stock, beginning in January 2005. The
warrants, which represent a total of 10% of the outstanding Common Stock of the
Company (plus warrants to purchase 10% of currently outstanding options and
convertible securities, if the same are exercised or converted), are exercisable
at the par value ($0.05 per share) of the common stock. The warrants also have
anti-dilution protection and registration rights. While the warrants have yet to
be valued, the Company estimates that all these changes will increase the
effective cost of the senior notes from an original average rate of
approximately 7.8% to an effective average rate of as much
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as 13.8 %, adding approximately $6.7 million in interest charges for the period
of the amendment, of which only $2.0 million represents a current cash cost. The
Company is also required to hire a consultant or advisor during the one-year
amendment period to assist in improving overall performance.
The warrants granted will be valued and amortized as additional interest
expense over the remaining life of the outstanding debt. The impact of warrant
amortization on interest expense for the three months ended September 30, 2000
was deminimus since the warrants were issued on September 29, 2000. At September
30, 2000, the Company was in compliance with all debt covenants, as amended on
September 29, 2000.
(9) BUSINESS SEGMENTS
The Company operates primarily in three business segments -- retail sales,
manufacturing and financial services. The following table summarizes, for the
periods indicated, information about these segments:
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IN THOUSANDS) ADJUSTMENTS/
RETAIL MANUFACTURING OTHER ELIMINATIONS TOTAL
------------ ---------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues from external
customers.................... $ 98,350 $ 63,207 $ 4,222 $ -- $ 165,779
Intersegment revenues........ 98 46,041 2,672 (48,811) --
Interest expense............. 3,045 1,363 2,333 (2,709) 4,032
Depreciation and amortization 2,483 1,053 197 -- 3,733
Segment profit (loss) before
income taxes................. (3,396) 973 (527) 81 (2,869)
Segment assets............... 232,973 156,002 334,956 (305,726) 418,205
Expenditures for segment
assets....................... 550 1,161 438 -- 2,149
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Revenues from external
customers.................... $ 71,006 $ 45,952 $ 3,365 $ -- $ 120,323
Intersegment revenues........ -- 24,747 2,410 (27,157) --
Interest expense............. 3,496 1,068 2,780 (2,348) 4,996
Depreciation and amortization 1,847 1,269 336 -- 3,452
Segment profit (loss) before
income taxes............ (5,201) 405 (4,016) 50 (8,762)
Segment assets............... 159,582 201,613 228,720 (226,612) 363,303
Expenditures for segment
assets....................... 585 1,414 -- -- 1,999
</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.
(10) SUBSEQUENT EVENTS
On October 27, 2000, the Company announced that it is consolidating the
production of its three Texas manufacturing plants into two, and is therefore
temporarily idling its plant in Burleson, Texas. Costs associated with
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this temporary idling are not expected to be significant and will be reflected
in the results of operations for the second fiscal quarter ended December 31,
2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q 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 a national, vertically integrated manufactured housing
company 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 Mortgage Corporation ("21st Century") to originate, finance,
sell and service manufactured housing retail installment contracts. The Company
owned 50% of 21st Century through June 29, 2000. At such date, the Company sold
its 50% interest in 21st Century and entered into a new joint venture, Homestar
21, LLC, which is 50% owned by the Company and 50% owned by 21st Century. The
Company invested $2,400,000 in Homestar 21, LLC. The Company uses the equity
method of accounting for its investment in Homestar 21, LLC.
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.
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.
On February 8, 2000, the Company entered into a settlement agreement with
DWP and Dean W. Pollman, pursuant to which, among other things, the Company
acquired the remaining 20% interest in Pacific Northwest Homes, Inc.
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") for
$32.6 million. 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.
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
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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 eleven retail sales centers in
North Carolina, South Carolina and Kentucky.
MANUFACTURING AND RETAIL RESTRUCTURING
In response to industry conditions, the Company throughout fiscal 2000
thoroughly reviewed its operating structure. Losses incurred in certain of its
retail sales centers and diminishing profitability in its manufacturing
operations were the apparent result of industry-wide over capacity and excess
new home inventory levels and a cyclically ill-timed expansion by the Company
into non-core markets (outside of the core southwest base of operations) over
the period of three years. As a result of this review, the Company made
decisions to restructure both its manufacturing and retail operations. This
restructuring resulted in an approximately $43.6 million charge to operations in
fiscal 2000 for restructuring costs, asset impairment costs and other expenses
related to these actions.
In August 2000, the Company announced the further consolidation of its
production in Alabama through the temporary idling of its Lynn, Alabama
manufacturing facility. As a result, the Company recorded a $0.6 million
restructuring charge during the three months ended September 30, 2000. At
September 30, 2000, approximately all of the accrued restructuring charges
remained. The Company anticipates that its restructuring efforts will be
complete by March 31, 2001.
RESULTS OF OPERATIONS
The following table summarizes certain key sales statistics for the three
months ended September 30, 1999 and 2000:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------------ ----------------
<S> <C> <C>
Company-manufactured new homes sold at retail ....................... 1,430 1,386
Total new homes sold at retail....................................... 1,612 1,444
Internalization rate (1)............................................. 89% 96%
Previously-owned homes sold at retail................................ 572 508
Average retail selling price--new homes (HUD code)................... $ 55,097 $ 57,054
Average retail selling price--new homes (modular).................... $ 114,561 $ 115,046
Number of company-owned retail sales centers at end of period........ 124 98
Total manufacturing shipments ....................................... 3,077 1,899
Manufacturing shipments to independent retail sales centers, including
franchisees..................................................... 1,804 1,088
</TABLE>
(1) The internalization rate is the proportion of new homes sold by
Company-owned retail sales centers that are manufactured by the Company.
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<PAGE> 13
The following table summarizes the Company's operating results, expressed
as a percentage of revenues, for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTH ENDED
-------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------------ ----------------
<S> <C> <C>
Total revenues....................................................... 100.0% 100.0%
Gross profit......................................................... 23.5% 26.2%
Selling, general and administrative.................................. 21.2% 28.9%
Restructuring charge................................................. 1.4% 0.5%
Operating income (loss).............................................. 0.8% (3.1%)
Net loss............................................................. (0.9%) (7.7%)
</TABLE>
Three months ended September 30, 1999 compared to three months ended September
30, 2000
Net Sales. Net sales of manufactured homes were $114.5 million for the
three months ended September 30, 2000, a decrease of 26.3% from $155.3 million
for the three months ended September 30, 1999. The decrease was primarily due to
fewer retail sales centers and manufacturing plants in operation and a
corresponding decrease in production rates as a result of lower dealer and
end-user demand. The Company closed 13 retail sales centers and one plant during
the first quarter of fiscal 2001.
Other Revenues. Other revenues, which include revenues from transportation,
financial services and other operating activities, decreased to $5.8 million for
the three months ended September 30, 2000 compared to $10.4 million for the
three months ended September 30, 1999. Transportation revenues for the three
months ended September 30, 2000 were $2.4 million, a decrease of 12.9% from $2.7
million for the three months ended September 30,1999. Transportation is not a
key growth operation of the Company and has over time represented a declining
proportion of total revenues and net income. Other non-transportation revenues
decreased to $3.4 million for the three months ended September 30, 2000,
compared to $7.7 million for the three months ended September 30, 1999. This
decrease was the result of lower insurance revenues and other operating income
due to the lower sales volume.
Cost of Sales. Total costs of sales were $88.8 million, or 77.5% of net
sales, for the three months ended September 30, 2000 compared to $126.9 million,
or 81.7% of net sales, for the three months ended September 30, 1999. Cost of
manufactured homes sold were $86.8 million, or 75.8% of net sales, for the three
months ended September 30, 2000, as compared to $124.7 million, or 80.3% of net
sales, for the three months ended September 30, 1999. The decrease in cost of
sales was primarily due to lower sales volume. The decrease in cost of sales,
expressed as a percentage of net sales, was primarily the result of decreases in
material costs. Cost of sales attributable to transportation operations for the
three months ended September 30, 2000 was $2.0 million, or 84.0% of
transportation revenues, compared to $2.2 million, or 83.0% of transportation
revenues, for the three months ended September 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2000, were
$34.8 million, or 28.9% of total revenues, compared to $35.2 million, or 21.3%
of total revenues, for the three months ended September 30, 1999. The increase
in selling, general and administrative expenses as a percentage of total
revenues is attributable to fixed costs being spread over a lower volume of
sales. Also, $1.5 million was included in selling, general and administrative
expenses related to the separation agreement signed in August 2000 by the
Company's former chief executive officer.
Restructuring Charge. The Company incurred a restructuring charge during
the three months ended September 30, 2000 of $0.6 million due to the temporary
idling of its Lynn, Alabama manufacturing facility. Related to this
restructuring charge, the Company recorded a $0.1 million charge to cost of
sales to write down inventory.
12
<PAGE> 14
The Company incurred a restructuring charge during the three months ended
September 30, 1999 of $2.3 million due to the closing of one manufacturing
facility. Certain assets used in the affected operation were written down to
their net realizable value. The Company also incurred severance and other
benefit-related costs in connection with the restructuring of operations. The
restructuring charge is shown as a separate component of operating expenses. In
addition to the restructuring charge, the Company also took an inventory
write-down of approximately $0.7 million to allow for reduced selling prices and
selling concessions on the discontinued models of the closed manufacturing
facility at Company-owned retail sales centers and franchise locations. The
additional inventory charge is included in cost of sales for the three months
ended September 30, 1999.
Interest Expense. Interest expense increased to $5.0 million for the three
months ended September 30, 2000, from $4.0 million for the three months ended
September 30, 1999. This increase was primarily attributable to incremental
interest charges associated with certain amendments to the Company's senior
unsecured notes and to additional interest on the Company's floor plan financing
arrangement due to a higher net outstanding balance.
Income Taxes. For the three months ended September 30, 2000, the Company
recorded income tax expense of $0.3 million related to state income tax expense
for certain of its subsidiaries. The Company recognized a valuation allowance to
fully value the operating loss generated during the three months ended September
30, 2000 and, as a result, no federal income tax benefit was recorded. For the
three months ended September 30, 1999, an income tax benefit of $1.2 million, or
43.0% of loss before income taxes, minority interest and earnings in affiliates
was recorded. The income tax benefit was favorably affected by permanent
differences such as amortization expense.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $21.7 million and $8.1
million for the three months ended September 30, 1999 and 2000, respectively.
Decreases in inventories and accounts receivable and an increase in accrued
expenses contributed to the positive operating cash flows for the three months
ended September 30, 2000. Offsetting these items were increases in prepaid and
other current assets and other non-current assets. The decrease in accounts
receivable is attributable to the timing of cash receipts and lower sales
volumes. The decrease in inventories is the result of management initiatives to
reduce the levels of inventories carried by the Company. Also, the Company
received an income tax refund of approximately $7.5 million during the three
months ended September 30, 2000. This refund was recorded as a reduction of
other accrued income taxes, and as a result, the income tax refund accounted for
approximately $7.5 million of the increase in accrued expenses.
The Company had capital expenditures of $3.6 million and $2.0 million for
the three months ended September 30, 1999 and 2000, respectively. These
expenditures were used primarily to enhance and maintain existing retail sales
centers, manufacturing capacity and for leasehold improvements with respect to
the Company's franchisees.
At September 30, 2000, 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
0.5% 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 1.50% (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 September 30, 2000, the Company had net borrowings of
$92.0 million (gross borrowings of $93.5 million less participations of $1.5
million). In January 2000, the Associates announced that it would be
discontinuing retail and floor plan financing for the manufactured housing
industry. The Company does however have a contract with the Associates to
provide floor plan financing through July 2000. The Associates has acknowledged
this and assured the Company that it will continue to provide their floor plan
credit facility under the same terms. The Company is seeking to identify
alternative sources of floor plan financing. The Company has arranged a $12.5
million floor plan credit facility with Bombardier Capital for its HomeMax
affiliate and an additional $37.5 million from Bombardier Capital, which is
available to floor plan franchisees or pre-sold products from Company stores.
Currently the entire $37.5 million remains unused. The Company has had
discussions with other lenders who have potential interest in establishing floor
plan credit facilities for the Company, although the
13
<PAGE> 15
floor plan lending environment has tightened in the past year. The Company plans
to establish smaller floor plan credit facilities with several lenders so as not
to be as dependent on a single lender in the future.
The terms of the 7.25% Series A Senior Unsecured Notes as well as the 8.32%
Senior Unsecured Notes issued in July 1997, as amended, provide for the
maintenance of certain financial covenants as well as possible increases in the
interest rate based on levels of the fixed charge coverage ratio. Because of the
operating losses reported by the Company during fiscal year 2000, the Company
would not have been in compliance with the fixed charge coverage requirement at
March 31, 2000 had the noteholders not granted a waiver of such technical
defaults. The waiver was extended to September 29, 2000. In addition, based on
the levels of the fixed charge coverage ratios, an additional 30, 60 and 125
basis points was added to the interest rate for the second, third and fourth
quarters, respectively, of fiscal year 2000.
On September 29, 2000, the Company reached agreement with the noteholders
as to a temporary amendment, which covers the period from September 30, 2000
through, and including, September 29, 2001. Under the terms of this amendment,
the Company must meet certain financial performance and condition tests based on
its fiscal 2001 business plan. The tests include meeting certain interest
coverage ratios, the maintenance of minimum levels of net worth and limitations
on the amount of net debt the Company may carry, expressed both in absolute
terms and in relation to shareholders' equity. In exchange, the Company has
agreed to additional quarterly interest payments of 1.75% per annum above the
stated rates on each note. An additional interest charge of 3.50% per annum will
be accrued for the one-year amendment period. At September 30, 2001, the Company
may elect to pay the additional 3.5% interest or add it to the principal balance
of the original debt. In addition, the Company was required to grant warrants,
which are exchangeable for common stock, beginning in January 2005. The
warrants, which represent a total of 10% of the outstanding stock of the Company
(plus warrants to purchase 10% of currently outstanding options and convertible
securities, if the same are exercised or converted), are exercisable at the par
value ($0.05 per share) of the common stock. The warrants also have
anti-dilution protection and registration rights. While the warrants have yet to
be valued, the Company estimates that all these changes will increase the
effective cost of the senior notes from an original average rate of
approximately 7.8% to an effective average rate of as much as 13.8 %, adding
approximately $6.7 million in interest charges for the period of the amendment,
of which only $2.0 million represents a current cash cost. The Company is also
required to hire a consultant or advisor during the one-year amendment period to
assist in improving overall performance.
The warrants granted will be valued and amortized as additional interest
expense over the remaining life of the outstanding debt. The impact of warrant
amortization on interest expense for the three months ended September 30, 2000
was not material. At September 30, 2000, the Company was in compliance with all
debt covenants, as amended on September 29, 2000.
Based on its current business plan, management believes that current cash
resources, an income tax refund of approximately $7.5 million received during
the three months ended September 30, 2000, additional borrowing capacity and
future cash provided from operations will be sufficient to satisfy internal
working capital and capital expenditure requirements for the upcoming year.
Outside factors such as repurchases and possible credit enhancements to support
future floor plan lines are not currently estimable but may, if substantial,
place a strain on available cash resources. Management's current focus is on
improving performance, profitability and cash flow from continuing operations
through its restructuring and core reduction initiatives. In addition, the
Company is refining its cash management and resource management efforts to
insure that cash and liquidity is preserved.
SUBSEQUENT EVENTS
On October 26, 2000, the Company announced that its interim President and
Chief Executive Officer, one of the Company's outside directors, had resigned in
such capacities and as a director of the Company. The Company's Chairman was
appointed President and Chief Executive Officer.
On October 27, 2000, the Company announced that it is consolidating the
production of its three Texas manufacturing plants into two, and is therefore
temporarily idling its plant in Burleson, Texas. Costs associated with
14
<PAGE> 16
this temporary idling are not expected to be significant and will be reflected
in the results of operations for the second fiscal quarter ended December 31,
2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
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 Homestar 21, 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, Homestar 21'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 Homestar 21 obtains permanent financing, generally at fixed rates
of interest, in the asset-backed securities market. Homestar 21 attempts to
manage this risk by minimizing the warehousing period of unsecuritized loans.
Homestar 21 currently does not originate any loans with the intention of holding
them for investment.
15
<PAGE> 17
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for discussion of
warrants issued in connection with the Company's September 29, 2000 amended
senior noteholders agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT INDEX
<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 August 1999, Form 10-K
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
Separation Agreement dated August 18, 2000 by and between American 10.17 October 2000, Form 10-K
Homestar Corporation and Lawrence A. Dawson, Jr.
2000-B Amendment and Warrant Agreement dated as of September 29, 2000 to 10.20 October 2000, Form 10-K
8.32% Senior Notes due 2007
Form of Warrant to Purchase Common Stock dated September 29, 2000 issued 10.21 October 2000, Form 10-K
to 8.32% Senior Noteholders
Stock Purchase Agreement by and between the Company, 21st Century 10.22 October 2000, Form 10-K
Mortgage Corporation and XXI Holding Co., Inc. dated June 28, 2000
Financial Data Schedule 27 Filed herewith
</TABLE>
(b) REPORTS ON FORM 8-K -
None
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOMESTAR CORPORATION
Date: November 13, 2000 By: /s/ Craig A. Reynolds
-----------------------------------------
Craig A. Reynolds
Executive Vice President, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
17
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT REPORT WITH WHICH
DESCRIPTION NUMBER 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 August 1999, Form 10-K
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
Separation Agreement dated August 18, 2000 by and between American 10.17 October 2000, Form 10-K
Homestar Corporation and Lawrence A. Dawson, Jr.
2000-B Amendment and Warrant Agreement dated as of September 29, 2000 to 10.20 October 2000, Form 10-K
8.32% Senior Notes due 2007
Form of Warrant to Purchase Common Stock dated September 29, 2000 issued 10.21 October 2000, Form 10-K
to 8.32% Senior Noteholders
Stock Purchase Agreement by and between the Company, 21st Century 10.22 October 2000, Form 10-K
Mortgage Corporation and XXI Holding Co., Inc. dated June 28, 2000
Financial Data Schedule 27 Filed herewith
</TABLE>
