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 July 3, 1998 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)
(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.
13,436,122 shares of Common Stock, $.0001 par value, as of August
14, 1998
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION:
Item 1 Financial Statements
Consolidated Condensed Balance Sheets,
July 3, 1998 and January 2, 1998
2
Consolidated Condensed Statements of Operations -
Thirteen Weeks
Ended July 3, 1998 and July 4,
1997 and Twenty-six Weeks
Ended July 3, 1998 and July 4,
1997 3
Consolidated Condensed Statements of Cash Flows -
Twenty-six
Weeks Ended July 3, 1998 and July
4, 1997 4
Notes to Consolidated Condensed Financial Statements
5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
8
PART II OTHER INFORMATION
12
Item 1 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security
Holders
Item 5 Other Information
13
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
15
I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
July 3, January 2,
1998 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,357,000 $ 17,676,000
Accounts receivable (less allowance
for doubtful accounts of 23,287,000 22,399,000
$213,000 and $180,000, respectively)
Installment contracts receivable - 186,000 165,000
current
Inventories 37,927,000 28,479,000
Deferred tax benefits 1,378,000 1,816,000
Prepayments and other 1,428,000 1,134,000
74,563,000 71,669,000
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 30,185,000 28,982,000
Less - accumulated depreciation 8,250,000 7,130,000
21,935,000 21,852,000
INTANGIBLES AND OTHER ASSETS
Installment contracts receivable, less
allowance for credit
losses of $242,000 and $696,000, 11,062,000 9,673,000
respectively
Goodwill 15,213,000 14,258,000
Non-compete agreements 639,000 421,000
Organization and pre-operating costs 1,082,000 825,000
Other assets 4,961,000 4,555,000
32,957,000 29,732,000
$129,455,000 $123,253,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 23,521,000 $ $ 15,932,000
Current maturities of long-term 544,000 1,106,000
debt
Accounts payable 5,726,000 3,449,000
Accrued liabilities 16,747,000 18,279,000
46,538,000 38,766,000
LONG-TERM DEBT 4,754,000 4,720,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value,
1,000,000 shares authorized, - -
none outstanding
Common stock, $.0001 par value,
40,000,000 shares authorized,
15,633,922 issued at July 3, 2,000 2,000
1998 and 15,572,326 shares
issued at January 2, 1998
Treasury stock, at cost, 2,024,800
shares at July 3, 1998 and (18,564,000) (10,201,000)
1,122,100 shares at January 2,
1998
Capital in excess of par 37,632,000 37,215,000
Retained earnings 59,093,000 52,751,000
78,163,000 79,767,000
$129,455,000 $123,253,000
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)
T Thirteen Weeks Twenty-six Weeks
Ended Ended
July 3, July 4, July 3, July 4,
1998 1997 1998 1997
Net revenues $74,149,000 $76,373,000 $149,221,000 $155,619,000
Cost of sales 58,582,000 64,817,000 121,259,000 131,198,000
Gross profit 15,567,000 11,556,000 27,962,000 24,421,000
Operating
Expenses:
Selling, general 8,887,000 5,898,000 16,865,000 12,181,000
and
administrative
Non-recurring - 2,146,000 - 2,146,000
charges
Amortization of 147,000 184,000 310,000 434,000
intangibles
9,034,000 8,228,000 17,175,000 14,761,000
Operating income 6,533,000 3,328,000 10,787,000 9,660,000
Interest expense 635,000 317,000 1,182,000 594,000
Interest income 232,000 28,000 494,000 71,000
Income before 6,130,000 3,039,000 10,099,000 9,137,000
income taxes
Provision for 2,241,000 1,202,000 3,757,000 3,517,000
income taxes
Net income $ 3,889,000 $ 1,837,000 $ 6,342,000 $ 5 ,620,000
Net income per
common share:
Basic $ 0.28 $ 0.12 $ 0.46 $ 0.37
Diluted $ 0.28 $ 0.12 $ 0.45 $ 0.36
Weighted average
number of common
shares:
Basic 13,810,326 15,352,116 13,899,811 15,394,959
Diluted 13,943,830 15,438,783 14,017,944 15,503,207
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
July 3, July 4,
1998 1997
Operating activities:
Net income $ 6,342,000 $ 5,620,000
Adjustments to reconcile net income to
net cash used in
Operating activities: - 2,146,000
Non-recurring charge
Equity income of joint ventures (382,000) -
Depreciation of property and 1,203,000 917,000
equipment
Amortization of intangibles 502,000 434,000
Provision (credit) for deferred 438,000 (464,000)
income taxes
Gain on sale of property and (30,000) -
equipment
Provision for doubtful accounts 38,000 (93,000)
Origination of installment contracts (1,793,000) (1,293,000)
Principal collected on originated 384,000 399,000
installment contracts
Change in assets and liabilities,
net of effect from purchase of
subsidiaries:
Inventories (3,819,000) (937,000)
Accounts receivable (960,000) (8,360,000)
Prepayments and other (292,000) (1,103,000)
Other assets (24,000) -
Accounts payable 2,277,000 2,424,000
Accrued liabilities (1,532,000) (534,000)
Net cash provided by (used in) 2,352,000 (844,000)
operating activities
Investing activities:
Purchase of subsidiary, net of cash (5,561,000) -
acquired
Capital expenditures (1,031,000) (3,344,000)
Investment in joint ventures - (2,500,000)
Increase in organizational and pre- (415,000) -
operating costs
Proceeds from sale of property and 30,000 -
equipment
Net cash used in investing (6,977,000) (5,844,000)
activities
Financing activities:
Purchase of treasury stock (8,363,000) (4,422,000)
Net borrowings on notes payable 5,780,000 630,000
Repayments on long-term debt (528,000) (78,000)
Borrowings on long-term debt - 5,518,000
Proceeds from exercise of stock 417,000 60,000
options
Net cash provided by (used in) (2,694,000) 1,708,000
financing activities
Net decrease in cash and cash equivalents (7,319,000) (4,980,000)
Cash and cash equivalents at the beginning 17,676,000 5,299,000
of period
Cash and cash equivalents at the end of $ 10,357,000 $ 319,000
period
Supplemental cash flow information:
Cash paid for interest $ 1,148,000 $ 496,000
Cash paid for income taxes $ 3,636,000 $ 3,820,000
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 January 2, 1998,
which has been derived from audited financial statements, and the
unaudited interim consolidated condensed financial statements as
of July 3, 1998, have been prepared by the Company without audit,
but in the opinion of management reflect all adjustments (which
include only normal recurring adjustments) necessary for the fair
presentation of the information set forth therein. Results of
operations for the interim 1998 period is 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 January 2, 1998.
2. RECLASSIFICATIONS:
In the second quarter of 1998, the Company reclassified several
accounts. Prior period amounts have been reclassified to conform
with the 1998 presentation. There was no effect on net income or
stockholder's equity as a result of these reclassifications.
3. INVENTORIES:
Inventories are valued at first-in, first-out ("FIFO") cost,
which is not in excess of market. An analysis of inventories
follows:
July 3, January 2,
1998 1998
(Unaudited)
Raw $11,351,000 $ 9,498,000
materials
Work in 1,084,000 1,089,000
progress
Finished 25,492,000 17,892,000
goods
$37,927,000 $28,479,000
4. NET INCOME PER SHARE:
Shares
Available
Net to Common Earning
Income Shareholde Per Share
rs
Thirteen Weeks
Ended
July 3, 1998
Basic $3,889,000
13,810,326 $0.28
Dilutive effect
of options issued - 133,504 -
Diluted $3,889,000 13,943,830
$0.28
July 4, 1997
Basic $1,837,000
15,352,116 $0.12
Dilutive effect
of options issued - 86,667 -
Diluted $1,837,000 15,438,783
$0.12
Twenty-Six Weeks
Ended
July 3, 1998
Basic $6,342,000 13,899,811 $0.46
Dilutive effect
of options issued - 118,133 (0.01)
Diluted $6,342,000 14,017,944 $0.45
July 4, 1997
Basic $5,620,000 15,394,959 $0.37
Dilutive effect
of options issued - 108,248 (0.01)
Diluted $5,620,000 15,503,207 $0.36
5. PENDING ACCOUNTING PRONOUNCEMENTS:
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-5, Reporting
on the Costs of Start-Up Activities. This SOP provides guidance
on the financial reporting of start-up costs and organization
costs. It requires costs of start-up activities and organization
costs to be expensed as incurred. This SOP is effective for
fiscal years beginning after December 15, 1998. Initial
application of this SOP will be reported as the cumulative effect
of a change in accounting principle.
6. BUSINESS COMBINATIONS:
During 1998, the Company completed the following acquisitions (in
millions):
Purchase Price
Fair Value Intangibles Liabilities Consideration
of Assets Recorded Assumed Given
Acquired
Date Seller
February 6, U.S. Homes of $0.8 $0.0 $0.8 $0.0
1998 Savannah
April 7, Rainbow 3.5 1.6 0.0 5.1
1998 Homes, Inc.
May 9-11, Hospitality
1998 Housing
Outlet Inc. 0.8 0.1 0.7 0.2
and Foothills
Housing, Inc.
July 2, 1998 Cedar Creek
Homes, LLC 0.3 0.2 0.3 0.2
$5.4 $1.9 $1.8 $5.5
The above acquisitions resulted in the purchase of 11 retail
sales centers. All acquisitions were accounted for under the
purchase method of accounting; thus the consolidated condensed
financial statements for the interim period reflect the
operations of the business acquired from the date of acquisition.
Aggregate consideration given for all acquisitions during 1998
consisted of approximately $5.5 million in cash. Total
intangibles recorded consisted of $0.3 million in non-compete
agreements and $1.6 million in goodwill. The Company amortizes
goodwill over 30 years and non-competes over 4 to 10 years.
7. 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 independent dealers.
Generally, the agreements provide for the repurchase of the
manufactured homes from the financing institution in the event of
repossession upon an independent dealer's default. The Company's
contingent liability under such agreements is approximately
$101.1 million as of July 3, 1998. 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.
8. LEGAL PROCEEDINGS:
The Company was a 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 alleged that the Company caused a breach of 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. This case settled in full in early July, 1998 with a
payment of $95,000 by the Company to the plaintiff and a joint
motion for dismissal with prejudice has been filed with the
Court. In the opinion of management, after consultation with its
legal counsel, there is no other material exposure associated
with this case.
In addition, the Company has been informed by Gesellschoft fur
Bauen Und Wohnen Hannover MbH ("GBH"), a German housing
authority, that it has chosen a local company to complete a
second project for the purchase and erection of modular housing
in Hannover, Germany. GBH testified in a 1997 deposition in the
EurAm case, described above, that the first project was completed
satisfactorily, although recently GBH has suggested it may have
warranty claims against the Company. GBH also claims the Company
is responsible for its additional costs on the second project.
The Company claims GBH is withholding monies due it from the
first project and disputes its liability for the warranty claims
on the first project and the extra costs on the second project.
GBH attempted on March 26, 1997 to draw on a Company letter of
credit but an Alabama state court issued a temporary restraining
order enjoining payment on the letter of credit. In January,
1998, the Alabama Supreme Court, without ruling on the merits of
whether GBH was committing fraud by drawing on the letter of
credit, issued an opinion allowing GBH to draw on the letter of
credit. GBH promptly drew on the Company's letter of credit in
the amount of $580,000. There has not been any discovery or
decision on the merits of the underlying transaction and whether
the Company has a valid claim to recover the money paid under the
letter of credit. After payment of the letter of credit, other
than potential warranty claims, management believes there is no
other material exposure to the Company with regard to GBH. At
this time there is no activity of any kind by GBH to assert any
claims against the Company.
The Company is a party to various other legal proceedings
incidental to its business. The majority of these legal
proceedings relate to employment matters or product warranty
liability claims for which management believes adequate reserves
are maintained. 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 excess of the amounts reserved.
9. TREASURY STOCK REPURCHASE:
In June 1998, the Company extended its stock repurchase program
for an additional twelve months and increased the number of
shares eligible for purchase from 2,000,000 to 3,000,000. From
the inception of the program to July 3, 1998, the Company has
repurchased 2,024,800 shares at a cost of $18,564,000, or an
average of $9.17 per share. The Company paid for these purchases
out of available cash.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Twenty-six weeks and thirteen weeks ended July 3, 1998 as
compared with twenty-six and thirteen weeks ended July 4, 1997.
Net Revenues
Total net revenues (gross sales less volume discounts, returns
and allowances plus finance revenues) and finance revenue for the
twenty-six weeks ended July 3, 1998 were $149.2 million, which
represented a decrease of 4.1% from $155.6 million in the prior
year period. For the thirteen weeks ended July 3, 1998, total
net revenues and finance revenues were $74.1 million, down 2.9%
from $76.4 million for the comparable period a year ago.
Net revenues from the wholesale sale of manufactured homes were
$113.0 million for the twenty-six weeks ended July 3, 1998, as
compared to $131.2 million for the prior year period, which
represented a decrease of 13.9%. For the thirteen weeks ended
July 3, 1998, manufactured housing segment revenues were $54.2
million, a decrease of 15.3% from revenues of $64.0 million for
the prior year period. The decrease in total manufacturing
revenue was attributable to a decrease in the number of homes
shipped, partially offset by an increase in the average wholesale
price per home shipped. Total homes shipped in the twenty-six
and thirteen weeks ended July 3, 1998 was 4,443 and 2,169,
respectively, down 9.7% in each period from the number of homes
sold in the comparable prior year periods. The decrease in homes
sold was attributable to lower than expected manufacturing
productivity resulting in a slower than normal ramp up in
production, and to the closing of the Company's Pennsylvania
facility in the fall of 1997. The average wholesale price per
home for the twenty-six and thirteen weeks ended July 3, 1998 was
$27,366 and $27,429, respectively, up 1.3% and 2.9%,
respectively, from the average of $27,003 and $26,668 for the
comparable prior year periods.
Net revenues from the retail sale of manufactured homes were
$35.7 million for the twenty-six weeks ended July 3, 1998, as
compared to $23.0 million for the prior year period, which
represented an increase of 55.2%. For the thirteen weeks ended
July 3, 1998, retail revenues were $19.7 million, an increase of
68.4% from revenues of $11.7 million for the prior year period.
Total retail homes sold in the twenty-six and thirteen weeks
ended July 3, 1998 was 1,038 and 585, respectively, up 67.2% and
88.7% respectively, from the number of homes sold in the
comparable prior year periods. The increase in retail revenues
and retail homes sold was attributable to an increase in the
total number of retail centers from 12 in each of the comparable
prior year periods to a total of 30 at July 3, 1998.
Revenues from the Company's retail finance subsidiary were
$568,000 and $268,000, respectively, for the twenty-six and
thirteen weeks ended July 3, 1998, as compared with revenues of
$1.4 million and $716,000 for the prior year periods. This
decrease was attributable to the decreased lending activity by
the Company's wholly owned subsidiary, Wenco Finance, Inc.
("Wenco Finance"). Wenco Finance originated and serviced
consumer loans primarily for homes manufactured by the Company.
In February 1997, the Company formed a joint venture with 21st
Century Mortgage Corporation ("21st Century"). The joint
venture, Wenco 21, continues to offer consumer financing for
homes manufactured by the Company as well as for other homes sold
through its retail centers and independent dealers. In light of
the shift in consumer finance activities to Wenco 21, Wenco
Finance limited its loan origination activities to previously
repossessed homes
Gross Profit
Gross profit consists of net revenues less the cost of sales,
which includes labor, materials, and overhead. Gross profit for
the twenty-six weeks ended July 3, 1998 increased to $28.0
million, or 18.7% of net revenues, from $24.4 million, or 15.7%
of net revenues, in the prior year period. For the thirteen
weeks ended July 3, 1998 gross profit was $15.6 million, or 21.0%
of net revenues, as compared with $11.6 million, or 15.1% of net
revenues in the prior year period. The increases in gross profit
are attributable to increased sales from the Company's retail
segment, which have a higher gross margin than sales to
independent dealers, and to higher margins on wholesale sales
attributable in part to favorable raw material prices, which were
partially offset by the decrease in the revenues from the
wholesale sales of manufactured homes.
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 $16.9 million,
or 11.3% of net revenues, during the twenty-six weeks ended July
3, 1998, as compared with $12.2 million, or 7.8% of net revenues,
for the same period of the prior year. For the thirteen weeks
ended July 3, 1998, selling, general and administrative expenses
were $8.9 million, or 11.9% of net revenues, as compared with
$5.9 million, or 7.7% of net revenues, for the same period of the
prior year. The increase in selling, general and administrative
expenses was attributable primarily to the higher level of
selling expenses generally associated with the Company's retail
operation, salary increases and the addition of new employees who
were hired in order to staff retail operations and to resolve
staffing shortages.
Non-Recurring Charge
During the second quarter of 1997, the Company recorded a $2.1
million non-recurring charge in connection with its decision to
close its manufactured housing facility located in Pennsylvania.
The decision was based primarily on changes in local market
conditions and operating results of the facility. The impact of
the facility on the operating income of the Company was
immaterial during the twenty-six weeks ended July 4, 1997.
Interest Expense
Interest expense for the twenty-six weeks ended July 3, 1998 was
$1,182,000, as compared with $594,000 in the prior year period.
For the thirteen weeks ended July 3, 1998, interest expense was
$635,000, as compared with $317,000 in the prior year period.
The increase in interest expense in the current year periods 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 twenty-six weeks ended July 3, 1998 was
$494,000, as compared with $71,000 in the comparable prior year
period. For the thirteen weeks ended July 3, 1998, interest
income was $232,000, as compared with $28,000 in the prior year
period. The increase in interest income in the current year
periods reflects higher average cash and cash equivalent
balances, as well as interest income from the $16.7 million
installment contracts receivable portfolio sold through an asset
backed securitization during the third quarter of 1997.
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. Income tax expense for the twenty-six weeks ended
July 3, 1998 was $3.8 million, or an effective tax rate of 37.2%,
as compared with $3.5 million, or an effective tax rate 38.5% in
the prior year period. For the thirteen weeks ended July 3,
1998, income tax expense was $2.2 million, or an effective tax
rate of 36.6%, as compared with $1.2 million, or an effective tax
rate of 39.6% in the prior year periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
During the twenty-six weeks ended July 3, 1998, the Company's
cash provided by operations was approximately $2.4 million. Cash
was provided by net income of $6.3 million and increased accounts
payable of $2.3 million. These amounts were partially offset by
cash used in operations, which included increased accounts
receivable, prepayments and other, and inventory totaling $5.1
million, a decrease in accrued liabilities of $1.5 million, and
originations of installment contracts of $1.8 million. In
addition to cash provided by operating activities, other
significant cash flows included purchase of subsidiary for $5.6
million, capital expenditures of $1.0 million, increased
organizational and pre-operating expenses of $415,000, purchase
of treasury stock of $8.4 million, increased borrowings on notes
payable of $5.8 million, repayments of long-term debt of $528,000
and proceeds from exercise of stock options of $417,000.
During the twenty-six weeks ended July 4, 1997, the Company's
cash used by operations was approximately $844,000. Cash used by
operations included increased accounts receivable, prepayments
and other, and inventory totaling $10.4 million, a decrease in
accrued liabilities of $534,000, and originations of installment
contracts of $1.3 million. These amounts were partially offset
by net income, after a $2.1 million non-recurring charge, of $5.6
million and increased accounts payable of $2.4 million. In
addition to cash provided by operating activities, other
significant cash flows included capital expenditures of $3.3
million, investment in joint ventures totaling $2.5 million,
borrowings on notes payable of $630,000, long term borrowings of
$5.5 million, and purchase of treasury stock of $4.4 million.
At July 3, 1998, the Company's net working capital was $28.0
million, including $10.4 million in cash and cash equivalents, as
compared with $32.9 million at January 2, 1998, including $17.7
million in cash and cash equivalents. The decrease in net
working capital was primarily a result of a decrease in cash and
cash equivalents of $7.3 million, an increase in accounts
receivable of $960,000, increased inventories of $3.8 million,
and decreased accrued liabilities of $1.5 million, partially
offset by decreased notes payable of approximately $5.8 million,
and increased accounts payable of $2.3 million. The Company also
has a $15.0 million unsecured line of credit which is renewable
annually and bears interest at the London Interbank Offered Rate
("LIBOR") plus 1.5%. The Company's ability to draw upon this
line of credit is dependent upon meeting certain financial ratios
and covenants. The Company has no borrowings outstanding under
this line at July 3, 1998.
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
independent 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 independent dealer. At
July 3, 1998, the Company's contingent repurchase liability under
floor-plan financing arrangements was approximately $101.1
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.
Expansion
In April 1998, the Company acquired substantially all of the
assets of a manufactured housing retailer in Kentucky and West
Virginia at a purchase price of approximately $5.2 million. In
May 1998, the Company acquired substantially all of the assets of
a manufactured housing retailer in South Carolina at a purchase
price of approximately $200,000. In June 1998, the Company
acquired substantially all the assets of a manufactured housing
retailer in Kentucky at a purchase price of approximately
$200,000.
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.
Year 2000 Compliance
The Company may be required to modify or replace some of the
computer systems that it uses in order to insure that the
Company's existing application software programs will be able to
accommodate this date value. The Company is currently in the
preliminary stages of assessing the costs of making its computer
systems year 2000 compliant. Accordingly, no determination can
be made at this time regarding the costs or timing of completion.
To the extent the Company's systems are not fully year 2000
compliant, there can be no assurance that potential systems
interruptions or the cost necessary to update software would not
have a material adverse effect on the Company's business,
financial condition, results of operations and business
prospects.
"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
The Company was a 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 alleged that the Company caused a breach of 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. This case settled in full in early July, 1998 with a
payment of $95,000 by the Company to the plaintiff and a joint
motion for dismissal with prejudice has been filed with the
Court. In the opinion of management, after consultation with its
legal counsel, there is no other material exposure associated
with this case.
In addition, the Company has been informed by Gesellschoft fur
Bauen Und Wohnen Hannover MbH ("GBH"), a German housing
authority, that it has chosen a local company to complete a
second project for the purchase and erection of modular housing
in Hannover, Germany. GBH has testified in a 1997 deposition in
the EurAm case, described above, that the first project was
completed satisfactorily, although recently GBH has suggested it
may have warranty claims against the Company. GBH also claims
the Company is responsible for its additional costs on the second
project. The Company claims GBH is withholding monies due it
from the first project and disputes its liability for the
warranty claims on the first project and the extra costs on the
second project. GBH attempted on March 26, 1997 to draw on a
Company letter of credit but an Alabama state court issued a
temporary restraining order enjoining payment on the letter of
credit. In January 1998, the Alabama Supreme Court, without
ruling on the merits of whether GBH was committing fraud by
drawing on the letter of credit, issued an opinion allowing GBH
to draw on the letter of credit. GBH promptly drew on the
Company's letter of credit in the amount of $580,000. There has
not been any discovery or decision on the merits of the
underlying transaction and whether the Company has a valid claim
to recover the money paid under the letter of credit. After
payment of the letter of credit, other than potential warranty
claims, management believes there is no other material exposure
to the Company with regard to GBH. At this time there is no
activity of any kind by GBH to assert any claims against the
Company.
The Company is a party to various other legal proceedings
incidental to its business. The majority of these legal
proceedings relate to employment matters or product warranty
liability claims for which management believes adequate reserves
are maintained. 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 excess of the amounts reserved.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 20,
1998. At the meeting, the stockholders elected to serve as
members of the Board of Directors of the Company the persons
whose names are listed below. The stockholders also approved an
amendment to amend the Company's 1993 Stock Option Plan to
increase from 907,814 to 1,500,000 the number of shares reserved
for issuance thereunder. The votes were as follows:
Election of Directors: For Withheld
Wendell L. Batchelor 12,033,198 120,082
Keith W. Brown 12,035,198 118,082
Jonathan O. Lee 12,035,998 117,282
Johnny R. Long 12,035,148 118,132
Paul J. Evanson 12,032,998 120,282
Joseph J. Incandela 12,032,998 120,282
Keith O. Holdbrooks 12,032,198 121,082
1993 Stock Option Plan: For 9,353,342 Against 2,757,299 Abstain 42,639
Item 5. Other Information
On June 26, 1998, the Board of Directors of the Company voted to
extend its stock repurchase program for an additional twelve
months and to increase the number of shares eligible for
repurchase from 2,000,000 to 3,000,000. Through July 3, 1998,
the Company has expended approximately $18.6 million for the
repurchase of 2,024,800 shares of its common stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are incorporated herein by reference.
3.1 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.)
3.2 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.)
10.10Lease 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.)
10.11Agreement 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.)
10.12Certificate 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.)
10.13Assignment 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.)
10.14Lease 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.)
10.15Agreement 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.)
10.16Lease 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.)
10.17Letter 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.)
10.18Deed 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.)
10.19Deed 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.)
10.20Southern 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.)
10.21Agreement and Plan of Reorganization of Southern Energy
Homes, Inc. a Delaware Corporation, and SE Management, Inc. an
Alabama Corporation, dated November 22, 1996.
10.22Amended and Restated Employment Agreement with Wendell
L. Batchelor, dated as of June 14, 1996.
10.23Amended and Restated Employment Agreement with Keith W.
Brown, dated as of June 14, 1996.
10.24Asset 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.)
10.25Asset 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.
Ex. 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: August 14, 1998 By: /s/ Wendell L. Batchelor
Wendell L. Batchelor,
Chairman, President
and Chief Executive Officer
Date: August 14, 1998 By: /s/ Keith W. Brown
Keith W. Brown, Executive Vice
President, Chief Financial
Officer, Treasurer and
Secretary