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 June 28, 1996 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to _______ Commission File Number: 0-21204 SOUTHERN ENERGY HOMES, INC. (Exact name of registrant as specified in its charter) Delaware 63-1083246 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Highway 41 North, P.O. Box 390, Addison, Alabama 35540 (Address of principal executive offices) (Zip Code) (205) 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. 15,101,706 shares of Common Stock, $.0001 par value, as of July 23, 1996 SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES INDEX Page PART I FINANCIAL INFORMATION: Consolidated Condensed Balance Sheets, June 28, 1996 and December 29, 1995 2 Consolidated Condensed Statements of Operations - Thirteen Weeks Ended June 28, 1996 and June 30, 1995, and Twenty-Six Weeks Ended June 28, 1996 and June 30, 1995 3 Consolidated Condensed Statements of Cash Flows - Twenty-Six Weeks Ended June 28, 1996 and June 30, 1995 4 Notes to Consolidated Condensed Financial Statements 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 PART II OTHER INFORMATION 9 SIGNATURES 11 I. FINANCIAL INFORMATION Item 1. Financial Statements SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) June 28, December 29, 1996 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 9,881,000 $16,750,000 Investments 350,000 2,076,000 Accounts receivable (less allowance for doubtful accounts of $163,000 in 1996 and 1995) 26,775,000 21,070,000 Installment contracts receivable - current 573,000 18,000 Inventories 14,460,000 11,226,000 Deferred tax benefits 2,188,000 1,269,000 Prepayments and other 2,020,000 623,000 56,247,000 53,032,000 PROPERTY AND EQUIPMENT: Property and equipment, at cost 19,586,000 17,521,000 Less - Accumulated depreciation (4,435,000) (3,690,000) 15,151,000 13,831,000 INSTALLMENT CONTRACTS RECEIVABLE, less allowance for credit losses of $898,000 and $0, respectively 21,231,000 638,000 INTANGIBLES AND OTHER ASSETS: Goodwill 7,721,000 7,509,000 Non-compete agreements 535,000 328,000 Organization and pre-operating costs 531,000 523,000 Other assets 39,000 38,000 8,826,000 8,398,000 $101,455,000 $75,899,000 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 50,000 $ 86,000 Note payable 3,500,000 - Accounts payable 12,077,000 4,947,000 Accrued liabilities 20,536,000 13,618,000 36,163,000 18,651,000 LONG-TERM DEBT - 6,000 STOCKHOLDERS' EQUITY: Preferred stock, $.0001 par value, 1,000,000 shares authorized, none outstanding Common stock, $.0001 par value, 20,000,000 shares authorized, 15,101,706 shares outstanding at 2,000 2,000 June 28, 1996 and 15,053,388 at December 29, 1995 Capital in excess of par 31,445,000 31,110,000 Retained earnings 33,845,000 26,130,000 65,292,000 57,242,000 $101,455,000 $75,899,000 The accompanying notes are an integral part of these consolidated condensed financial statements. SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Thirteen Weeks Ended Twenty-Six Weeks Ended Ended June 28, June 30, June 28, June 30, 1996 1995 1996 1995 NET SALES $83,921,000 $61,215,000 $155,032,000 $116,784,000 COST OF SALES 71,318,000 52,713,000 133,081,000 101,617,000 Gross profit 12,603,000 8,502,000 21,951,000 15,167,000 OPERATING EXPENSES: Selling 1,461,000 3,179,000 2,856,000 1,520,000 00 General and administrative 3,197,000 1,867,000 5,416,000 3,637,000 Provision for credit losses 704,000 - 898,000 - Amortization of intangibles 124,000 103,000 249,000 208,000 5,545,000 3,431,000 9,742,000 6,701,000 Operating income 7,058,000 5,071,000 12,209,000 8,466,000 INTEREST EXPENSE 2,000 89,000 3,000 138,000 INTEREST INCOME 123,000 201,000 337,000 348,000 Income before income taxes 7,179,000 5,183,000 12,543,000 8,676,000 PROVISION FOR INCOME TAXES 2,761,000 1,934,000 4,828,000 3,194,000 Net income $4,418,000 $3,249,000 $7,715,000 $5,482,000 NET INCOME PER SHARE $0.29 $0.23 $0.51 $0.39 WEIGHTED AVERAGE NUMBER OF COMMOM AND COMMON EQUIVALENT SHARES 15,071,239 14,161,336 15,062,406 14,161,336 The accompanying notes are an integral part of these consolidated condensed financial statements. SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Twenty-Six Weeks Ended June 28, June 30, 1996 1995 OPERATING ACTIVITIES: Net income $7,715,000 $5,482,000 Adjustments to reconcile net income to cash (used in) provided by operating activities Depreciation of property and equipment 745,000 497,000 Amortization of intangibles 249,000 208,000 Credit for deferred tax benefits (919,000) (158,000) Provision for doubtful accounts - 17,000 Accretion of discount on debt - 29,000 Provision for credit losses 898,000 - Originations of installment contracts (22,140,000) - Principal collected on originated installment contracts 94,000 - Change in assets and liabilities: Increase in inventory (3,234,000) (21,000) Increase in accounts receivable (5,705,000) (4,954,000) Increase in prepayments and other (934,000) (1,259,000) Increase in accounts payable 6,960,000 1,065,000 Increase in accrued liabilities 6,308,000 2,152,000 Net cash (used in) provided by operating activities (9,963,000) 3,058,000 INVESTING ACTIVITIES: Purchase of subsidiary, net of cash acquired (413,000) - Capital expenditures (2,012,000) (2,276,000) Maturities of investments 2,076,000 2,869,000 Purchase of investments (350,000) - Net cash (used in) provided by investing activities (699,000) 593,000 FINANCING ACTIVITIES: Net borrowings on note payable 3,500,000 - Repayments on long-term debt (42,000) (1,347,000) Proceeds from exercise of stock options 335,000 - Net cash (used in) provided by financing activities 3,799,000 (1,347,000) NET INCREASE (DECREASE) IN CASH (6,869,000) 2,304,000 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 16,750,000 4,004,000 CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $9,881,000 $6,308,000 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 3,000 $ 69,000 Income taxes paid $3,848,000 $3,395,000 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 29, 1995, which has been derived from audited financial statements, and the unaudited interim consolidated condensed financial statements as of June 28, 1996, have been prepared by the Company without audit, but in the opinion of management reflect all adjustments necessary for the fair presentation of the Company's financial position as of December 29, 1995 and June 28, 1996 and the results of operations for the thirteen and twenty-six week periods ended June 28, 1996 and June 30, 1995. Results of operations for the interim 1996 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 1995 Annual Report to Shareholders for the year ended December 29, 1995. 2. INVENTORIES: Inventories are valued at first-in, first-out ("FIFO") cost, which is not in excess of market. An analysis of inventories follows: June 28, December 29, 1996 1995 (Unaudited) Raw materials $12,409,000 $ 9,658,000 Work in progress 1,129,000 1,007,000 Finished goods 922,000 561,000 $14,460,000 $11,226,000 3. NET INCOME PER SHARE: Net income per common and common equivalent share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the periods. An analysis of weighted average shares outstanding follows: Thirteen Weeks Ended Twenty-Six Weeks Ended June 28, June 30, June 28, June 30, 1996 1995 1996 1995 Weighted average shares, excluding stock option effects 15,053,388 14,161,336 15,053,388 14,161,336 Weighted average effect of stock options 17,851 0 9,018 0 Weighted average shares 15,071,239 14,161,336 15,062,406 14,161,336 4. REPURCHASE AGREEMENTS: It is customary practice for companies in the manufactured home industry to enter into repurchase agreements with financial institutions which provide financing to dealers. Generally, the agreements provide for the repurchase of the manufactured homes from the financing institution in the event of repossession upon a dealer's default. The Company's contingent liability under such agreements is approximately $63.5 million as of June 28, 1996. Losses experienced under these agreements have not been significant and, in the opinion of management, any future losses under these agreements should not have a material effect on the accompanying financial statements. 5. STOCK SPLIT: On June 5, 1996, the Board of Directors of the Company voted to approve a three-for-two stock split of the Company's common stock, payable in the form of a 50% stock dividend on July 3, 1996 to shareholders of record on June 19, 1996. The stock split resulted in one additional share of common stock being issued for each two shares of common stock issued and outstanding on the record date. The par value of the common stock will remain unchanged at $.0001 per share. Cash was paid in lieu of issuing fractional shares. All share and per share amounts have been retroactively restated to reflect this split. 6. LEGAL PROCEEDINGS: The Company is the defendant in a lawsuit filed on March 27, 1996 in Fulton County Superior Court, Georgia by EurAm International, Inc., a sales agent for the Company. On April 29, 1996 the Company removed the case to the United States District Court for the Northern District of Georgia in Atlanta. In this lawsuit, the plaintiff alleges that the Company has caused a breach to a written agreement relating to the sale of the Company's modular homes in Germany, including alleged misrepresentations and faulty performance, resulting in damages alleged to amount to $25 million. The Company believes the claim is without merit and intends to vigorously defend the claim. In addition, the Company has been informed by Gesellschoft fur Bauen Und Wohnen Hannover MbH ("GBH"), a German housing authority, that it is proceeding to replace the Company with a local company to complete a contract that GBH had entered into with the Company for the purchase and erection of modular housing in Hannover, Germany. GBH has notified the Company that GBH intends to make a claim against the Company for any resulting damages due to the prospective shift in suppliers. The Company is actively negotiating with GBH to resolve the dispute. In the opinion of management, and in consultation with corporate counsel, any losses associated with these claims should not have a material effect on the Company's financial statements. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Twenty-six and thirteen weeks ended June 28, 1996 as compared with twenty-six and thirteen weeks ended June 30, 1995. Net Sales The Company manufactures its homes pursuant to dealer orders, and sales are recognized upon completion of the home. Net sales (gross sales less volume discounts, returns and allowances) for the twenty-six weeks ended June 28, 1996 were $155.0 million, which represented an increase of 32.8% over the same period of 1995. For the thirteen weeks ended June 28, 1996, net sales increased 37.1% to $83.9 million from $61.2 million in the comparable period a year ago. Total homes sold in the twenty-six and thirteen weeks ended June 28, 1996 were 5,650 and 3,030, up 26.9% and 30.3%, respectively, over the homes sold in the prior year periods. These increases are attributable primarily to increased capacity from a manufactured housing facility in Alabama, which started production in the fourth quarter of 1995. Gross Profit Gross profit consists of net sales less the cost of sales, which includes labor, materials and overhead. Gross profit for the twenty-six weeks ended June 28, 1996 was $22.0 million, or 14.2% of net sales as compared with $15.2 million, or 13.0% of net sales, in the prior year period. For the thirteen weeks ended June 28, 1996, gross profit increased to $12.6 million, or 15.0% of net sales, from $8.5 million, or 13.9% of net sales in the prior year period. The increase in gross profit percentage in the most recent quarter was attributable to lower raw material prices and increased labor efficiency, which was partially offset by increased warranty costs. Selling Expenses Selling expenses include primarily sales commissions, advertising expenses, salaries for support personnel and freight costs. Selling expenses were $3.2 million, or 2.1% of net sales, during the twenty-six weeks ended June 28, 1996, as compared with $2.9 million, or 2.5% of net sales, during the prior year period. For the quarter ended June 28, 1996, selling expenses were $1.5 million, or 1.8% of net sales, as compared with $1.5 million or 2.4% of net sales, for the same period of the prior year. The decrease in selling expense as a percentage of net sales was attributable primarily to savings in shipping costs arising from shipments through MH Transport, Inc., the Company's newly formed trucking subsidiary. General and Administrative General and administrative expenses include administrative salaries, executive and management bonuses, insurance costs and professional fees. For the twenty-six weeks ended June 28, 1996, general and administrative expenses were $5.4 million, or 3.5% of net sales, as compared with $3.6 million, or 3.1% of net sales, for the same period of 1995. For the quarter ended June 28, 1996 general and administrative expenses were $3.2 million, or 3.8% of net sales, as compared with $1.9 million or 3.1% of the net sales, in the prior year period. The increase in general and administrative expense is primarily attributable to increased reserves for legal and other expenses associated with the Company's sales initiatives in Germany and to additional employees hired in connection with the Company's expansion. Provision for Credit Losses Provision for credit losses for the twenty-six weeks ended June 28, 1996 was $898,000, as compared with $0 in the prior year period. For the thirteen weeks ended June 28, 1996 provision for credit losses was $704,000, as compared with $0 in the prior year period. The increase in the current year periods was a result of reserves established associated with the start-up of the Company's finance subsidiary. Interest Expense Interest expense for the twenty-six weeks ended June 28, 1996 was $3,000, as compared with $138,000 in the prior year period. For the thirteen weeks ended June 28, 1996, interest expense was $2,000, as compared with $89,000 in the prior year period. The decrease in the current year period was a result of the June 1995 full repayment of certain related party debt. Interest Income Interest income for the twenty-six weeks ended June 28, 1996 was $337,000, as compared with $348,000 in the prior year period. For the thirteen weeks ended June 28, 1996, interest income was $123,000, as compared with $201,000. The decrease in interest income in the current year periods reflects lower average cash and investment balances. Provision for Income Taxes Income taxes are provided based on the tax effect of revenue and expense transactions included in the determination of pre-tax book income. Income tax expense for the twenty-six weeks ended June 28, 1996 was $4.8 million, or an effective tax rate of 38.5% as compared with $3.2 million, or an effective tax rate of 36.8% in the prior year period. The increase in the effective tax rate is attributable in part to the Company's movement into a higher federal income tax bracket and also reflects a proportional shift in the Company's income from Alabama to other states which have higher tax rates than Alabama. LIQUIDITY AND CAPITAL RESOURCES Since its organization, the Company has financed its operations primarily from a combination of cash generated from operations, stock offerings and borrowings. At June 28, 1996, the Company's net working capital was $20.1 million, including $9.9 million in cash and cash equivalents and $350,000 in investments. The Company also has a $10.0 million unsecured line of credit from AmSouth Bank, N.A., which is renewable annually and bears interest at the London Interbank Offered Rate ("LIBOR") plus 1.5% (7.0% at June 28, 1996). The Company's ability to draw upon this line of credit is dependent upon meeting certain financial ratios and covenants. At June 28, 1996, the Company had $3,500,000 in outstanding borrowings under this line. The Company's finance subsidiary, Wenco Finance, Inc., also has a $10.0 million unsecured line of credit with a bank, which is guaranteed by the Company and is renewable annually and bears interest at LIBOR plus 1.5% (7.0% at June 28, 1996). The Company's ability to draw upon this line of credit is dependent upon meeting certain financial ratios and covenants. At June 28, 1996, the Company had no borrowings under this line. During the twenty-six weeks ended June 28, 1996, the Company's cash used in operating activities was approximately $10.0 million. Cash used in operating activities reflects originations of installment contracts of $22.1 million, increased inventory, accounts receivable and prepayments of approximately $10.4 million. These amounts were partially offset by net income of $7.7 million and an increase in accounts payable and accrued liabilities of approximately $13.3 million. Each of these increases was primarily related to sales growth. Other significant cash flows included capital expenditures of $2.0 million and short term borrowings of $3.5 million and maturities of investments of $2.1 million. In January 1996, the Company purchased a wood trim and moulding finishing Company in Haleyville, Alabama for $413,000. The Company does not anticipate any significant expenditures for capital improvements for this facility. 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 arrangement, 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 June 28, 1996, the Company's contingent repurchase liability under floor plan financing arrangements was approximately $63.5 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, these arrangements. During 1996, the Company plans to build a new corporate office facility adjacent to its Southern Energy plant in Addison, Alabama at a cost of approximately $1.6 million, and plans to provide additional capitalization for Wenco, its finance subsidiary. The amount of capital which the Company may commit to Wenco has not been established at this time and is dependent upon how quickly Wenco can move beyond its current start-up phase of operation. The Company believes that its cash flow generated from operations and available sources of credit will provide adequate cash to fund the Company's future working capital requirements and growth plans through at least December 1996. "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 finance subsidiary to originate and service consumer loans; the performance of those loans; 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. 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is the defendant in a lawsuit filed on March 27, 1996 in Fulton County Superior Court, Georgia by EurAm International, Inc., a sales agent for the Company. On April 29, 1996 the Company removed the case to the United States District Court for the Northern District of Georgia in Atlanta. In this lawsuit, the plaintiff alleges that the Company has caused a breach to a written agreement relating to the sale of the Company's modular homes in Germany, including alleged misrepresentations and faulty performance, resulting in damages alleged to amount to $25 million. The Company believes the claim is without merit and intends to vigorously defend the claim. In addition, the Company has been informed by Gesellschoft fur Bauen Und Wohnen Hannover MbH ("GBH"), a German housing authority, that it is proceeding to replace the Company with a local company to complete a contract that GBH had entered into with the Company for the purchase and erection of modular housing in Hannover, Germany. GBH has notified the Company that GBH intends to make a claim against the Company for any resulting damages due to the prospective shift in suppliers. The Company is actively negotiating with GBH to resolve the dispute. In the opinion of management, and in consultation with corporate counsel, any losses associated with these claims should not have a material effect on the Company's financial statements. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders on May 22, 1996. At the meeting, the stockholders approved the re- election of the Board of Directors of the Company and the Company's 1996 Option Plan for Non-Employee Directors. The votes were as follows: Election of Directors: For Withheld Wendell L. Batchelor 6,852,192 30,249 Keith W. Brown 6,852,192 30,249 Jonathan O. Lee 6,852,192 30,249 Johnny R. Long 6,852,192 30,249 Paul J. Evanson 6,852,192 30,249 Joseph J. Incandela 6,852,192 30,249 1996 Option Plan for Non-Employee Directors: For Against Abstain 6,817,642 38,574 26,225 Item 5. Other Information On June 5, 1996, the Board of Directors of the Company voted to approve a three-for-two stock split of the Company's common stock, payable in the form of a 50% stock dividend on July 3, 1996 to shareholders of record on June 19, 1996. The stock split resulted in one additional share of common stock being issued for each two shares of common stock issued and outstanding on the record date. The par value of the common stock will remain unchanged at $.0001 per share. Cash was paid in lieu of issuing fractional shares. All share and per share amounts have been retroactively restated to reflect this split. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Schedule 27 - Financial Data Schedule (b) Reports on Form 8-K None 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: July 30, 1996 By:/S/__________________ Wendell L. Batchelor,President and Chief Executive Officer Date: July 30, 1996 By:/S/__________________ Keith W. Brown, Chief Financial Officer, Treasurer and Secretary