UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number: 0-21204
SOUTHERN ENERGY HOMES, INC.
(Exact name of registrant as specified in its charter)
Delaware
63-1083246
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Industry Lane, P.O. Box 390, Addison, Alabama 35540
Address of principal executive offices) (Zip Code)
(256) 747-8589
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
12,132,990 shares of Common Stock, $.0001 par value, as of May 10, 2000
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION:
Consolidated Condensed Balance Sheets,
March 31, 2000 and December 31, 1999 2
Consolidated Condensed Statements of Operations - Thirteen
Weeks Ended March 31, 2000 and April 2, 1999 3
Consolidated Condensed Statements of Cash Flows - Thirteen
Weeks Ended March 31, 2000 and April 2, 1999 4
Notes to Consolidated Condensed Financial Statements 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
11
SIGNATURES
14
I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
|
|
March 31,
2000 |
|
December 31,
1999 |
|
ASSETS |
|
CURRENT ASSETS: |
|
|
|
|
Cash and cash equivalents |
$3,193,000 |
|
$9,342,000 |
|
Accounts receivable (less allowance for doubtful accounts of $492,000 and $470,000, respectively) |
22,252,000 |
|
16,897,000 |
|
Inventories
Refundable income taxes |
33,226,000
2,602,000 |
|
35,376,000
2,579,000 |
|
Deferred tax benefits |
4,288,000 |
|
4,311,000 |
|
Prepayments and other |
1,628,000 |
|
924,000 |
|
|
67,189,000 |
|
69,429,000 |
|
|
|
|
|
|
PROPERTY AND EQUIPMENT: |
|
|
|
|
Property and equipment, at cost |
36,226,000 |
|
35,598,000 |
|
Less - accumulated depreciation |
12,589,000 |
|
11,967,000 |
|
|
23,637,000 |
|
23,631,000 |
|
|
|
|
|
|
INTANGIBLES AND OTHER ASSETS |
|
|
|
|
Installment contracts receivable (less allowance for credit |
|
|
|
|
losses of $357,000 and $357,000, respectively) |
10,785,000 |
|
11,597,000 |
|
Goodwill |
10,548,000 |
|
10,657,000 |
|
Investment in joint ventures |
5,261,000 |
|
5,728,000 |
|
Other assets |
947,000 |
|
972,000 |
|
|
27,541,000 |
|
28,954,000 |
|
|
$118,367,000 |
|
$122,014,000 |
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
CURRENT LIABILITIES: |
|
|
|
|
Notes payable |
32,149,000 |
|
29,182,000 |
|
Current maturities of long-term debt |
0 |
|
1,101,000 |
|
Accounts payable |
4,634,000 |
|
4,168,000 |
|
Accrued liabilities |
13,698,000 |
|
16,315,000 |
|
|
50,481,000 |
|
50,766,000 |
|
LONG-TERM DEBT |
0 |
|
2,464,000 |
|
|
|
|
|
|
STOCKHOLDERS' EQUITY: |
|
|
|
|
Preferred stock, $.0001 par value, 1,000,000 shares authorized,
none outstanding |
- |
|
- |
|
Common stock, $.0001 par value, 40,000,000 shares authorized,
12,132,990 issued and outstanding at March 31, 2000 and at December 31, 1999 |
1,000 |
|
1,000 |
|
Capital in excess of par |
8,329,000 |
|
8,329,000 |
|
Retained earnings |
59,556,000 |
|
60,454,000 |
|
|
67,886,000 |
|
68,784,000 |
|
|
$118,367,000 |
|
$122,014,000 |
The accompanying notes are an integral part of these consolidated condensed financial statements.
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Thirteen Weeks Ended |
|
|
March 31,
2000 |
|
April 2,
1999 |
|
|
|
|
|
|
Net revenues |
$46,137,000 |
|
$73,545,000 |
|
|
|
|
|
|
Cost of sales |
39,025,000 |
|
60,717,000 |
|
|
|
|
|
|
Gross profit |
7,112,000 |
|
12,828,000 |
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
Selling, general and administrative |
7,673,000 |
|
8,953,000 |
|
Amortization of intangibles |
127,000 |
|
192,000 |
|
|
7,800,000 |
|
9,145,000 |
|
|
|
|
|
|
Operating income (loss) |
(688,000) |
|
3,683,000 |
|
|
|
|
|
|
Interest expense |
554,000 |
|
495,000 |
|
Interest income |
134,000 |
|
102,000 |
|
|
|
|
|
|
Income (loss) before income taxes |
(1,108,000) |
|
3,290,000 |
|
|
|
|
|
|
Provision (credit) for income taxes |
(210,000) |
|
1,230,000 |
|
|
|
|
|
|
Net income (loss) |
$ (898,000) |
|
$ 2,060,000 |
|
|
|
|
|
|
Net income (loss) per common share: |
|
|
|
|
Basic and Diluted |
$ (.07) |
|
$ 0.17 |
|
|
|
|
|
|
Weighted average number of common
Shares: |
|
|
|
|
Basic and Diluted |
12,132,990 |
|
12,307,852 |
|
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited) |
|
|
Thirteen Weeks Ended |
|
|
March 31,
2000 |
|
April 2,
1999 |
|
Operating activities: |
|
|
|
|
Net income (loss) |
$(898,000) |
|
$2,060,000 |
|
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
Equity (income) loss of joint ventures |
207,000 |
|
(423,000) |
|
Distribution from joint ventures |
260,000 |
|
240,000 |
|
Depreciation of property and equipment |
622,000 |
|
694,000 |
|
Amortization of intangibles |
127,000 |
|
192,000 |
|
Provision (credit) for deferred income taxes |
23,000 |
|
(58,000) |
|
Gain on sale of property and equipment |
(4,000) |
|
(5,000) |
|
Provision for doubtful accounts receivable |
24,000 |
|
18,000 |
|
Origination of installment contracts |
(1,297,000) |
|
(966,000) |
|
Provision for credit losses on installment contracts |
127,000 |
|
159,000 |
|
Principal collected on originated installment contracts
Sale of Installment contracts |
1,060,000
922,000 |
|
672,000
0 |
|
Change in assets and liabilities: |
|
|
|
|
Inventories |
2,150,000 |
|
(1,841,000) |
|
Accounts receivable |
(5,379,000) |
|
(9,975,000) |
|
Prepayments and other |
(720,000) |
|
(694,000) |
|
Accounts payable |
466,000 |
|
5,372,000 |
|
Accrued liabilities |
(2,617,000) |
|
1,220,000 |
|
|
|
|
|
|
Net cash used in operating activities |
(4,927,000) |
|
(3,335,000) |
|
|
|
|
|
|
Investing activities: |
|
|
|
|
Capital expenditures |
(663,000) |
|
(2,214,000) |
|
Proceeds from sale of property and equipment |
39,000 |
|
5,000 |
|
|
|
|
|
|
Net cash used in investing activities |
(624,000) |
|
(2,209,000) |
|
|
|
|
|
|
Financing activities: |
|
|
|
|
Purchase of treasury stock |
0 |
|
(3,072,000) |
|
Net borrowings on notes payable |
2,967,000 |
|
4,630,000 |
|
Repayments on long-term debt |
(3,565,000) |
|
(275,000) |
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
(598,000) |
|
1,283,000 |
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
(6,149,000) |
|
(4,261,000) |
|
|
|
|
|
|
Cash and cash equivalents at the beginning of period |
9,342,000 |
|
4,261,000 |
|
|
|
|
|
|
Cash and cash equivalents at the end of period |
$3,193,000 |
|
$ - |
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
Cash paid for interest |
$ 554,000 |
|
$ 498,000 |
|
Cash paid for income taxes |
$ 5,000 |
|
$ 461,000 |
The accompanying notes are an integral part of these consolidated condensed financial statements.
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The consolidated condensed balance sheet as of December 31, 1999, which has been derived from audited financial statements, and the unaudited interim consolidated condensed financial statements as of March 31, 2000, have been prepared by the
Company without audit, but in the opinion of management reflect the adjustments necessary (which include only normal recurring adjustments) for the fair presentation of the information set forth therein. Results of operations for the interim 2000 period
are not necessarily indicative of results expected for the full year. While certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange Commission, the Company believes that the disclosures herein are adequate to make the information presented not misleading. These financial statements should be read in
conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report to Stockholders for the fiscal year ended December 31, 1999.
2. INVENTORIES:
Inventories are valued at first-in, first-out ("FIFO") cost, which is not in excess of market. An analysis of inventories follows:
|
|
March 31,
2000 |
|
December 31, 1999 |
|
|
(Unaudited) |
|
|
|
|
|
|
Raw materials |
$7,215,000 |
|
$7,537,000 |
|
Work in progress |
748,000 |
|
749,000 |
|
Finished goods |
25,263,000 |
|
27,090,000 |
|
|
$33,226,000 |
|
$35,376,000 |
3. EARNINGS PER SHARE:
Basic Earnings Per Share (EPS) excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding during the subject period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock are exercised or converted into common stock or result in the issuance of common stock that then shares in the earnings of the Company.
Outstanding options of 604,708 and 598,964 for the quarters ended March 31, 2000 and April 2, 1999, respectively, were not included in the computation of diluted shares available to common shareholders, as they were antidilutive. The
majority of common options outstanding were at prices, which exceed the common stock market price.
4. REPURCHASE AGREEMENTS:
Substantially all of the Company's dealers finance their purchases through "floor-plan" arrangements under which a financial institution provides the dealer with a loan for the purchase price of the home and maintains a security interest in the
home as collateral. In connection with a floor-plan agreement, the financial institution which provides the dealer financing customarily requires the Company to enter into a separate repurchase agreement with the financial institution under which the
Company is obligated, upon default by the dealer, to repurchase the homes at the Company's original invoice price plus certain administrative and shipping expenses less any principal payments made by the dealer. At March 31, 2000, the Company's contingent
repurchase liability under floor plan financing arrangements was approximately $82 million. While homes that have been repurchased by the Company under floor-plan financing arrangements are usually sold to other dealers and losses experienced to date
under these arrangements have been insignificant, no assurance can be given that the Company will be able to sell to other dealers homes which it may be obligated to repurchase in the future under such floor plan financing arrangements or that the Company
will not suffer losses with respect to, and as a consequence of, those arrangements.
5. LEGAL PROCEEDINGS:
On March 1, 1999, the Company, without admitting any liability, entered into a settlement with HUD which required the Company to correct construction and safety violations in homes manufactured at a North Carolina manufacturing facility which the
Company has since closed. HUD claimed that the Company failed to comply with the consumer notification and defect correction requirements of the National Manufactured Housing Construction and Safety Standards Act of 1974. The settlement required the
Company to inspect 600 additional homes for possible violations. The Company agreed to an extension for one year of the warranty period for certain homes. The Company was assessed a civil penalty by HUD of up to $300,000 in connection with the settlement.
The settlement provided that the monetary penalty could be reduced by HUD depending on Company actions and its performance under the settlement. As of March 31, 2000 the Company had completed all repairs and inspections required by the settlement and had
paid a penalty of $150,000.
The Company was named, along with several other manufactured housing companies, as a defendant in a class action lawsuit filed in state court in Kentucky in September 1998, claiming wrongful conduct, fraudulent misrepresentation and
that manufactured housing units are unsafe and/or dangerous for residential use. The amount of the damages was not specified. The Company believes the claims are without merit and has vigorously defended itself against them. The Defendants, including the
Company, filed a motion to dismiss the case in December, 1998. During 1999 the motion was granted and the case was dismissed. It is currently being appealed by the Plaintiffs in the Kentucky Court of Appeals. Nevertheless, the outcome of the litigation
can not be predicted and an adverse outcome could have a material adverse effect on the Company.
The Company is a party to various other legal proceedings incidental to its business. The company typically issues a one year warranty on new manufactured homes. The majority of these legal proceedings are claims related to that
warranty on manufactured homes, or employment issues such as worker's compensation claims. Management believes that adequate reserves are maintained for such claims. In the opinion of management, after consultation with legal counsel, the ultimate
liability, if any, with respect to these proceedings will not materially affect the financial position or results of operations of the Company; however, the ultimate resolution of these matters, which could occur within one year, could result in losses in
excess of the amounts reserved.
6. SEGMENT AND RELATED INFORMATION
The Company has four primary reportable segments: manufacturing, retail operations, component supply and consumer financing. The manufacturing segment produces manufactured homes for sale to independent and company-owned retail centers. The retail
operations segment sells homes to retail customers which have been produced by various manufacturers including the Company's manufacturing segment. The component supply segment sells various supply products to the Company's manufacturing segment and to
third party customers. The consumer financing segment originated and serviced consumer loans primarily for homes manufactured by the Company through February 1997. The consumer financing segment has now restricted its loan origination activities and
engaged 21st Century to service its existing loan portfolio.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on total (external and intersegment) revenues, gross
profit, and segment operating income. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, at current market prices. The Company does not allocate income taxes, interest income, interest expense and
unusual items to all segments. In addition, not all segments have significant non-cash items other than depreciation and amortization in reported segment operating profit or loss.
The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different operating and marketing strategies.
During the fourth quarter of 1999, the Company made certain changes to the composition of its internal segments. The corresponding information for April 2, 1999 has been restated to conform to these changes.
The following table presents information about segment profit or loss, dollars in thousands:
|
|
March 31, 2000 |
|
April 2, 1999 |
|
|
|
|
|
|
Revenues: |
|
|
|
|
Manufacturing |
$38,705 |
|
$61,641 |
|
Retail operations |
13,066 |
|
17,273 |
|
Component supply
Consumer financing |
8,450
308 |
|
14,089
331 |
|
Other operating segments |
2,032 |
|
2,547 |
|
Eliminations |
(16,424) |
|
(22,336) |
|
Total revenues |
$46,137 |
|
$73,545 |
|
|
|
|
|
|
Gross profit: |
|
|
|
|
Manufacturing |
$ 2,774 |
|
$ 7,070 |
|
Retail operations |
3,639 |
|
5,060 |
|
Component supply
Consumer financing |
521
95 |
|
1,160
135 |
|
Other operating segments |
1,720 |
|
2,107 |
|
Eliminations |
(1,637) |
|
(2,704) |
|
Gross profit |
$7,112 |
|
$12,828 |
|
|
|
|
|
|
Segment operating income (loss): |
|
|
|
|
Manufacturing |
$ 322 |
|
$ 3,619 |
|
Retail operations |
(1,037) |
|
(381) |
|
Component supply
Consumer financing |
196
(32) |
|
725
(24) |
|
Corporate |
(527) |
|
(147) |
|
Other operating segments |
390 |
|
(109) |
|
|
(688) |
|
3,683 |
|
Income/expenses not allocated to segments: |
|
|
|
|
Interest income, net |
(420) |
|
(393) |
|
Benefit (provision) for income taxes |
210 |
|
(1,230) |
|
Net income (loss) |
(898) |
|
$ 2,060 |
|
|
|
|
|
Revenue from segments below the quantitative thresholds are attributable to two other operating segments of the Company. Those segments include a trucking business and a small insurance business. None of those
segments has ever met any of the quantitative thresholds for determining reportable segments. The Corporate segment does not generate any revenues, but does incur certain administrative elements.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
As a whole, the manufactured housing industry has been adversely affected by many uncontrollable economic factors, and has struggled in the past few quarters and will likely continue to struggle for the next few quarters as well. The current situation
in the manufactured housing industry is the result of many factors. For starters, the industry grew rapidly in the past 10 years, which has resulted in an increase in overall number of dealers, in manufacturing output and in the number of homes available
on the retail level. This, in turn, has led to larger inventories and a generally slower reduction of those inventories. It has also led to increased price competition, which has reduced profits. This, compounded by tightening credit and increasing
interest rates, has had an overall negative affect on the industry's financial performance, with virtually all manufacturers and retailers being impacted. Southern Energy Homes has not been excluded from this group, but has taken carefully planned steps
designed to decrease costs and improve efficiency. In 1999, this included closing manufacturing facilities, consolidating divisions, reducing workforce and selling unprofitable retail centers. We will continue to carefully monitor the situation and remain
prepared to take whatever additional measures become necessary to emerge from this industry downturn financially sound and prepared to take advantage of future opportunities as the demand for affordable housing continues to rise. We are confident in the
long-term future for the manufactured housing industry and Southern Energy Homes, Inc.
RESULTS OF OPERATIONS
Thirteen weeks ended March 31, 2000 as compared with thirteen weeks ended April 2, 1999.
Net Revenues
Total net revenues (gross revenues less volume discounts, returns, and allowances) for the quarter ended March 31, 2000 were $46.1 million, compared with $73.5 million for the comparable prior period, a decrease of 37.3%.
Net revenues from the wholesale sale of manufactured homes were $38.7 million (including intersegment revenues of 7.8 million) for the quarter ended March 31, 2000, as compared with $61.6 million (including intersegment revenues of $9.2 million) for
the prior year period, a decrease of 37.2%. The decline in sales to dealers was primarily attributable to decreased demand and the closure of the North Carolina manufacturing facility in July 1999, the closure of a manufacturing facility in Alabama in
August 1999, and a fire which damaged and temporarily closed two Alabama plants in February 2000. Total homes shipped in the quarter ended March 31, 2000 was 1,499, down 34.6% from the number of homes shipped in the prior year period. The decline in
revenues was also attributable to a decline in the average wholesale price per home shipped. The average wholesale price per home in the quarter ended March 31, 2000 was $25,821, as compared with $27,000 in the prior year period, a decline of 4.4%.
Net revenues from the retail sale of manufactured homes were $13.3 million for the quarter ended March 31, 2000, as compared with $17.4 million for the prior year period, a decline of 23.6%. Total retail homes sold in the quarter ended March 31, 2000
was 380, down 18.5% from the number of homes sold in the prior year period. The decline in retail sales was primarily attributable to increased competition and the Company operating five fewer retail centers, during the quarter ended March 31, 2000,
compared to the prior year period. The decline in retail revenues was also attributable to a decline in the average retail price per home sold. The average retail price per home sold in the quarter ended March 31, 2000 was $42,562, as compared with
$44,782 in the prior year period, a decline of 5.0%.
Net revenues from the component supply segment were $8.5 million (including intersegment revenues of $7.1 million) for the quarter ended March 31, 2000, as compared with $14.1 million (including intersegment revenues of $11.3 million) for the prior
year period, a decrease of 40.0%. The decline in supply sales was primarily attributable to the decline in intersegment sales to the manufacturing segment.
Revenues from the retail finance subsidiary were $308,000 for the quarter ended March 31, 2000, as compared with $331,000 for the prior year period.
Gross Profit
Gross profit consists of net revenues less the cost of sales, which includes labor, materials, and overhead. Gross profit for the quarter ended March 31, 2000 was $7.1 million, or 15.4% of net revenues, as compared with $12.8 million, or 17.4% of net
revenues, in the prior year period. This decline in the gross profit percentage was attributable primarily to increased competitive pricing at wholesale, the inability to pass on increased material prices due to competitive conditions in the industry,
labor and fixed costs inefficiencies brought on by having to operate at lower capacities and increased warranty expenses as a percent of net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include primarily sales commissions, advertising expenses, freight costs, salaries for support personnel, administrative salaries, executive and management bonuses, insurance costs, and
professional fees. Selling, general and administrative expenses were $7.7 million or 16.6% of net revenues, for the quarter ended March 31, 2000, as compared with $9.0 million, or 12.2% of net revenues, for the same period of the prior year. The increase
in selling, general and administrative expenses as a percentage of sales was attributable primarily to the higher level of fixed expenses generally associated with the Company's retail operation, increased dealer interest payments to remain competitive in
market areas, increased freight expenses due to fuel increases and increased legal fees. The percentage of net revenues consumed by these expense items also increased because net revenue decreased. Thus, though the dollar amounts of these expense items
actually decreased from $9.0 million to $7.7 million, the percentage of net revenue consumed nevertheless increased.
Interest Expense
Interest expense for the quarter ended March 31, 2000 was $554,000, as compared with $495,000 for the quarter ended April 2, 1999. The increase in interest expense in the current quarter was a result of increased notes payable associated with the floor
plan financing of the Company's retail inventory.
Interest Income
Interest income for the quarter ended March 31, 2000 was $134,000, as compared with $102,000 for the quarter ended April 2, 1999. The increase in interest income reflects higher average cash and cash equivalent balances during the quarter ended March
31, 2000.
Provision for Income Taxes
Income taxes are provided for based on the tax effect of revenue and expense transactions included in the determination of pre-tax book income. Credit provision for income tax for the quarter ended March 31, 2000 was $210,000, or an effective tax rate
of 19.0%, compared with a provision for income tax expense of $1.2 million, or an effective tax rate 37.4%, for the quarter ended April 2, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since its organization, the Company has financed its operations primarily with cash generated from a combination of operations, stock offerings, and borrowings.
During the quarter ended March 31, 2000, the Company's cash used by operations was approximately $4.9 million. Cash was used by operations for purposes which included: absorbing the net loss of $898,000; origination of installment
contracts of $1.3 million, increased accounts receivable and prepayments of $6.1 million, and decreased accrued liabilities of $2.6 million. These amounts were partially offset by decreased inventories of $2.2 million, principal collected on originated
installment contracts of $2.2 million and increased accounts payable of $466,000. In addition to cash provided by operating activities, other significant uses of cash included capital expenditures of $663,000 and repayments of long-term debt of $3.6
million, partially offset by net borrowings on notes payable of $3.0 million.
During the quarter ended April 2, 1999, the Company's cash used by operations was approximately $3.3 million. Cash was used by operations for purposes which included origination of installment contracts of $966,000 and accounts
receivable, inventories and prepayments of $12.5 million. These amounts were partially offset by net income of $2.1 million and accounts payable and accrued liabilities of $6.6 million. In addition to cash used by operating activities, other significant
uses of cash included capital expenditures of $2.2 million, purchase of treasury stock in the amount of $3.1 million, and repayments of long-term debt of $275,000. Other significant sources of cash included increased borrowings on notes payable of $4.6
million.
At March 31, 2000, the Company's net working capital was $16.7 million, compared with $18.7 million at December 31, 1999. The Company had cash and cash equivalents of $3.2 million at March 31, 2000. The decrease in net working capital
was primarily due to repayments of long term debt and additional borrowings on notes payable. On February 28, 2000 the Company's primary lender renewed the Company's bank line of credit. To provide additional working capital, the maximum line was
increased to $28.5 million. The line is secured by the Company's accounts receivable. Security for the line was extended to include the Company's raw material inventories. The Company's ability to draw upon this line of credit is dependent upon meeting
certain financial rations and covenants. At the time of the renewal, certain other modifications were made in the Loan Agreement governing the line. The Debt Service Coverage Ratio was reduced substantially and a negative pledge covenant was deleted by
agreement to exclude any application to Company's real property. As noted in the Company's most recent Form 10-K, Company owns substantially all of the real property on which it conducts its manufacturing operations. The Lender further agreed that any one
time non recurring loss, as determined by generally accepted accounting principles, would not be taken into account in any financial covenant other than the tangible net worth covenant, which was also reduced. The renewed line of credit matures on May 31,
2001 and bears interest at the London Interbank Offered Rate ("LIBOR") plus 1.5%. The Company has $24.3 million in outstanding borrowings under this line at March 31, 2000.
Substantially all of the Company's dealers finance their purchases through "floor-plan" arrangements under which a financial institution provides the dealer with a loan for the purchase price of the home and maintains a security interest in the home as
collateral. In connection with a floor-plan agreement, the financial institution which provides the dealer financing customarily requires the Company to enter into a separate repurchase agreement with the financial institution under which the Company is
obligated, upon default by the dealer, to repurchase the homes at the Company's original invoice price plus certain administrative and shipping expenses less any principal payments made by the dealer. At March 31, 2000, the Company's contingent repurchase
liability under floor plan financing arrangements was approximately $82 million. While homes that have been repurchased by the Company under floor-plan financing arrangements are usually sold to other dealers and losses experienced to date under these
arrangements have been insignificant, no assurance can be given that the Company will be able to sell to other dealers homes which it may be obligated to repurchase in the future under such floor plan financing arrangements or that the Company will not
suffer losses with respect to, and as a consequence of, those arrangements.
Inflation
The Company believes that the relatively moderate rate of inflation over the past few years has not had a significant impact on its sales or profitability. The Company has in the past been able to pass on most of the increases in its
costs by increasing selling prices, although there can be no assurance that the Company will be able to do so in the future. . Increased competition in the industry has generally prevented the Company from passing on such increases.
Year 2000 Compliance
The Company uses a wide range of software and related technologies throughout its business that were affected by the date change in the Year 2000. This date change required modification of portions of the Company's software so that
its computer systems would probably recognize dates beyond December 31, 1999. The Company believes that with the upgrades or modifications made to existing software and conversion to new software, the impact of the Year 2000 issue was mitigated.
The Company has completed validating of all systems that have customer impact or financial impact on the Company and no Year 2000 problems have been encountered. The Company does not expect any problems or issues related to Year 2000 going forward
.
Item 3.
The following discussion about the Company's interest rate risk includes "forward looking statements" that involve risks and uncertainties. Actual results could differ materially from those projected in the forward looking statements.
Quantitative and Qualitative Disclosures Regarding Market Risk.
Historically the Company has not entered into derivatives contracts to either hedge existing risk or for speculative purposes. The Company also does not and has not entered into contracts involving derivative financial instruments
or derivative commodity instruments. Pertinent provisions of Regulation S-K call for disclosures to clarify exposures to market risk associated with activities in derivative financial instruments, other financials instruments and derivative commodity
instruments. The Regulation defines "other financial instruments" to include trade accounts receivable , loans and structured notes. The Company does not utilize derivative instruments to manage such risks. The Company's principal credit agreement bears a
floating interest rate of 1.5% over LIBOR. Accordingly, the Company is subject to market risk associated with changes in interest rates. At March 31, 2000, $24.2 million was outstanding under the credit agreement. As of December 31, 1999, the principal
amount outstanding under the credit agreement was $25.0 million. Assuming that amount outstanding, a 1% increase in the applicable interest rate during 2000 would result in additional interest expense of approximately $242,000, which would reduce cash
flow and pre-tax earnings dollar for dollar. Accounts receivable: Most of the Company's sales of manufactured homes are pre-sold, such that orders exist before construction begins. When manufactured homes are sold to dealers as inventory, such homes are
paid for by dealer's floor plan financing, such that funds ordinarily transfer to the Company from the dealer's floor plan lender within 21 days. Management thus does not perceive that the Company is subject to a material market risk with respect to its
accounts receivable.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Forward-looking statements in this report, including without limitation, statements relating to the adequacy of the Company's resources, are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including without limitation: the cyclical and seasonal nature of housing markets; the
availability of financing for prospective purchasers of the Company's homes; the amount of capital that the Company may commit to its Wenco 21 joint venture to make available consumer loans; the performance of the loans held by the Company's finance
subsidiary; the availability and pricing of raw materials; the concentration of the Company's business in certain regional markets; the Company's ability to execute and manage its expansion plans; the availability of labor to implement those plans; the
highly competitive nature of the manufactured housing industry; Federal, state and local regulation of the Company's business; the Company's contingent repurchase liabilities with respect to dealer financing; the Company's reliance on independent dealers;
and other risks indicated from time to time in the Company's filings with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 1, 1999, the Company, without admitting any liability, entered into a settlement with HUD which required the Company to correct construction and safety violations in homes manufactured at a North Carolina manufacturing facility which the
Company has since closed. HUD claimed that the Company failed to comply with the consumer notification and defect correction requirements of the National Manufactured Housing Construction and Safety Standards Act of 1974. The settlement required the
Company to inspect 600 additional homes for possible violations. The Company agreed to an extension for one year of the warranty period for certain homes. The Company was assessed a civil penalty by HUD of up to $300,000 in connection with the settlement.
The settlement provided that the monetary penalty could be reduced by HUD depending on Company actions and its performance under the settlement. As of March 31, 2000 the Company had completed all repairs and inspections required by the settlement and had
paid a penalty of $150,000.
The Company was named, along with several other manufactured housing companies, as a defendant in a class action lawsuit filed in state court in Kentucky in September 1998, claiming wrongful conduct, fraudulent misrepresentation and
that manufactured housing units are unsafe and/or dangerous for residential use. The amount of the damages was not specified. The Company believes the claims are without merit and has vigorously defended itself against them. The Defendants, including the
Company, filed a motion to dismiss the case in December, 1998. During 1999 the motion was granted and the case was dismissed. It is currently being appealed by the Plaintiffs in the Kentucky Court of Appeals. Nevertheless, the outcome of the litigation
can not be predicted and an adverse outcome could have a material adverse effect on the Company.
The Company is a party to various other legal proceedings incidental to its business. The company typically issues a one year warranty on new manufactured homes. The majority of these legal proceedings are claims related to that
warranty on manufactured homes, or employment issues such as worker's compensation claims. Management believes that adequate reserves are maintained for such claims. In the opinion of management, after consultation with legal counsel, the ultimate
liability, if any, with respect to these proceedings will not materially affect the financial position or results of operations of the Company; however, the ultimate resolution of these matters, which could occur within one year, could result in losses in
excess of the amounts reserved.
Item 2. Changes in Securities and Use of Proceeds
"Not applicable"
Item 3. Defaults upon Senior Securities
"Not applicable"
Item 4. Submission of Matters to a Vote of Security Holders
"Not applicable"
Item 5. Other Information
"Not applicable"
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are incorporated herein by reference (except as otherwise noted).
4.1 Certificate of incorporation of the Company, as amended (filed as Exhibit 3.1 to the Registration Statement on
Form S-3, Registration No. 333-32933.)
4.2 By-Laws of the Company. (Filed as Exhibit 3.2 to the Registration Statement on Form S-1, Registration No.
33-57420.)
4.1 Specimen of Stock Certificate. (Filed as Exhibit 4.1 to the Registration Statement on Form S-1, Registration No.
33-57420.)
4.2 Southern Development Council, Inc. Promissory Note. (Filed as Exhibit 4.10 to the Registration Statement on Form
S-1, Registration No. 33-57420.)
4.3 Stockholders' Agreement, dated as of June 8, 1989 (Filed as Exhibit 4.12 to the Registration Statement on Form S-1,
Registration No. 33-57420.)
4.4 Form of First Amendment to Stockholders' Agreement, dated as of
January 13, 1993. (Filed as Exhibit 4.13 to the Registration Statement on Form S-1, Registration No.
33-57420.)
10.1 Employment Agreement with Wendell L. Batchelor, dated as of June 8, 1989. (Filed as Exhibit 10.1 to the Registration
Statement on Form S-1, Registration No. 33-57420.)
10.2 Employment Agreement with Keith Brown, dated as of June 8, 1989. (Filed as Exhibit 10.2 to the Registration Statement
on Form S-1, Registration No. 33-57420.)
10.3 Employment Agreement with Johnny R. Long, dated as of June 8, 1989. (Filed as Exhibit 10.3 to the Registration
Statement on Form S-1, Registration No. 33-57420.)
10.4 Southern Energy Homes, Inc. 1993 Stock Option Plan. (Filed as Exhibit 10.4 to the Registration Statement on Form S-1,
Registration No. 33-57420.)
10.5 Form of Southern Energy Homes, Inc. 401(k) Retirement Plan. (Filed as Exhibit 10.5 to the Registration Statement on
Form S-1, Registration No. 33-57420.)
10.6 Management Agreement, effective as of June 8, 1989, by and between Lee Capital Holdings and Southern Energy Homes,
Inc. (Filed as Exhibit 10.14 to the Registration Statement on Form S-1, Registration No. 33-57420.)
10.7 Southern Development Council, Inc. Loan Commitment Agreement. Filed as Exhibit 10.15 to the Registration
Statement on Form S-1, Registration No. 33-57420.)
10.8 Lease Agreement by and between Hillard Brannon and Southern Energy Homes, Inc., dated July 30, 1992. (Filed as Exhibit
10.16 to the Registration Statement on Form S-1, Registration No. 33-57420.)
10.9 Lease Agreement by and between Hillard Brannon and Southern Energy Homes, Inc., dated November 16, 1989. (Filed as
Exhibit 10.17 to the Registration Statement on Form S-1, Registration No. 33-57420.)
10.10 Lease Agreement by and between Robert Lowell Burdick, Nina Burdick Vono, Carolyn Burdick Hunsaker, Jean Burdick Hall,
Mildred Burdick Marmont and Lane Burdick Adams as Landlord, and Southern Energy Homes, Inc., dated as of
November 20, 1985. (Filed as Exhibit 10.23 to the Registration Statement on Form S-1, Registration
No. 33-57420.)
10.11 Agreement and Plan of Merger of Southern Energy Homes, Inc., a Delaware corporation, and Southern Energy Homes,
Inc., an Alabama corporation, dated as of January 15, 1993. (Filed as Exhibit 10.25 to the Registration
Statement on Form S-1, Registration No. 33-57420.)
10.12 Certificate of Merger Merging of Southern Energy Homes, Inc., an Alabama corporation, with and into Southern Energy
Homes, Inc., a Delaware corporation, dated as of January 19, 1993. (Filed as Exhibit 10.26 to the
Registration Statement on Form S-1, Registration No. 33-57420.)
10.13 Assignment of Lease and Rights dated June 29, 1993 between B.B.H.L.P Partnership and Southern Energy Homes, Inc.
(Filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended July 2, 1993, File No. 0-21204.
)
10.14 Lease Agreement dated as of June 1, 1984 between the Industrial Development Board of the town of Addison,
Alabama and B.B.H.L.P Partnership. (Filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended
July 2, 1993, File No. 0-21204.)
10.15 Agreement Of Lease and Rights dated June 19, 1993 between B.B.H.L.P and Southern Energy Homes, Inc. (Filed as Exhibit
10.3 to the Quarterly Report on Form 10-Q for the quarter ended July 2, 1993, File No. 0-21204.)
10.16 Lease Agreement dated as of December 1,1986 between the Industrial Development Board of the town of Addison,
Alabama and B.B.H.L.P Partnership. (Filed as Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended
July 2, 1993, File No. 0-21204.)
10.17 Letter Agreement dated May 18, 1993 and Master Note dated May 19, 1993 between the Company and AmSouth Bank, N.A.
(Filed as Exhibit 10.27 to the Registration Statement on Form S-1, Registration No. 33-68954.)
10.18 Deed of Real Estate dated August 5, 1993 relating to the Company's Plant No. 2 in Addison, Alabama. (Filed as
Exhibit 10.27 to the Registration Statement on Form S-1, Registration No. 33-68954.)
10.19 Deed of Real Estate dated July 30, 1993 relating to the Company's manufacturing facility in Fort Worth, Texas.
(Filed as Exhibit 10.27 to the Registration Statement on Form S-1, Registration No. 33-68954.)
10.20 Southern Energy Homes, Inc.1996 Option Plan for
Non-employee Directors. (Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the
year ended December 29, 1995.)
10.21 Agreement and Plan of Reorganization of Southern Energy Homes, Inc. a Delaware Corporation, and SE Management, Inc.
an Alabama Corporation, dated November 22, 1996.
10.22 Amended and Restated Employment Agreement with Wendell L. Batchelor, dated as of June 14, 1996 (file as Exhibit 10.22
to the Company's Annual Report on Form 10K for the year ended January 3, 1997).
10.23 Amended and Restated Employment Agreement with Keith W. Brown, dated as of June 14, 1996 (filed as Exhibit 10.23 to
the Company's Annual Report on Form 10K for the year ended January 3, 1997).
10.24 Asset Purchase Agreement, dated as of December 3, 1997, by and among the Registrant, A&G, Inc. and the sole
stockholder of A&G, Inc. (Filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the
year ended January 2, 1998.)
10.25 Asset Purchase Agreement, dated as of April 3, 1998, by and among Southern Energy S. C. Retail Corp., Rainbow Homes,
Inc. and the sole stockholder of Rainbow Homes, Inc. (filed as Exhibit 10.25 to the Company's
quarterly Report on Form 10-Q for the quarter ended October 2, 1998)
27 Financial Data Schedule.**
(b) Reports on Form 8-K None
** Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SOUTHERN ENERGY HOMES, INC.
Date: May 12, 2000 By: /s/ Wendell L. Batchelor
Wendell L. Batchelor, Chairman
and Chief
Executive Officer
Date: May 12, 2000 By: /s/ Keith W. Brown
Keith W.
Brown, Executive Vice
President, Chief Financial
Officer,
Treasurer and
Secretary
