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 2, 1999 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. 12,132,990 shares of Common Stock, $.0001 par value, as of August 13, 1999 SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES INDEX Page PART I FINANCIAL INFORMATION: Consolidated Condensed Balance Sheets, July 2, 1999 and January 1, 1999 2 Consolidated Condensed Statements of Operations - Thirteen Weeks Ended July 2, 1999 and July 3, 1998 and Twenty-six Weeks Ended July 2, 1999 and July 3, 1998 3 Consolidated Condensed Statements of Cash Flows - Twenty-six Weeks Ended July 2, 1999 and July 3, 1998 4 Notes to Consolidated Condensed Financial Statements 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II OTHER INFORMATION 13 SIGNATURES 16 I. FINANCIAL INFORMATION Item 1. Financial Statements SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) July 2, January 1, 1999 1999 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,282,000 $ 4,261,000 Accounts receivable (less allowance for doubtful accounts of $197,000 and $166,000, respectively) 31,579,000 23,071,000 Installment contracts receivable 165,000 211,000 Inventories 40,172,000 36,790,000 Deferred tax benefits 1,848,000 1,919,000 Prepayments and other 1,330,000 803,000 76,376,000 67,055,000 PROPERTY AND EQUIPMENT: Property and equipment, at cost 35,501,000 32,674,000 Less - accumulated depreciation 10,688,000 9,354,000 24,813,000 23,320,000 INTANGIBLES AND OTHER ASSETS Installment contracts receivable, less allowance for credit Losses of $308,000 and $295,000, respectively 11,665,000 11,130,000 Goodwill 14,402,000 14,995,000 Non-compete agreements 294,000 575,000 Investment in joint ventures 5,756,000 4,963,000 Other assets 723,000 730,000 32,840,000 32,393,000 $134,029,000 $122,768,000 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Floor plan notes payable $ 7,318,000 $ 20,556,000 Notes payable 20,000,000 - Current maturities of long-term debt 544,000 1,099,000 Accounts payable 9,676,000 4,393,000 Accrued liabilities 18,833,000 19,702,000 56,371,000 45,750,000 LONG-TERM DEBT 3,572,000 3,569,000 STOCKHOLDERS' EQUITY: Preferred stock, $.0001 par value, 1,000,000 shares authorized, None outstanding - - Common stock, $.0001 par value, 40,000,000 shares authorized, 15,638,890 issued at July 2, 1999 and at January 1, 1999 2,000 2,000 Treasury stock, at cost, 3,505,900 shares at July 2, 1999 and 3,000,300 shares at January 1, 1999 (29,354,000) (26,282,000) Capital in excess of par 37,682,000 37,682,000 Retained earnings 65,756,000 62,047,000 74,086,000 73,449,000 $134,029,000 $122,768,000 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 July 2, July 3, July 2, July 3, 1999 1998 1999 1998 Net revenues $69,750,000 $74,149,000 $143,296,000 $149,221,000 Cost of sales 57,997,000 58,582,000 118,714,000 121,259,000 Gross profit 11,753,000 15,567,000 24,582,000 27,962,000 Operating Expenses: Selling, general and adminstrative 8,531,000 8,887,000 17,581,000 16,865,000 Amortization of intangibles 96,000 147,000 193,000 310,000 8,627,000 9,034,000 17,774,000 17,175,000 Operating income 3,126,000 6,533,000 6,808,000 10,787,000 Interest expense 515,000 635,000 1,009,000 1,182,000 Interest income 70,000 232,000 172,000 494,000 Income before income taxes 2,681,000 6,130,000 5,971,000 10,099,000 Provision for income taxes 1,032,000 2,241,000 2,262,000 3,757,000 Net income $ 1,649,000 $ 3,889,000 $ 3,709,000 $ 6,342,000 Net income per common share: Basic $ 0.14 $ 0.28 $ 0.30 $ 0.46 Diluted $ 0.14 $ 0.28 $ 0.30 $ 0.45 Weighted average number of common shares: Basic 12,132,990 13,810,326 12,220,421 13,899,811 Diluted 12,132,990 13,943,830 12,220,421 14,017,944 SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Twenty-six Weeks Ended July 2, July 3, 1999 1998 Operating activities: Net income $ 3,709,000 $6,342,000 Adjustments to reconcile net income to net cash used in operating activities: Equity income of joint ventures (945,000) (382,000) Distribution from joint ventures 240,000 - Depreciation of property and equipment 1,334,000 1,203,000 Amortization of intangibles 367,000 502,000 Provision (credit) for deferred income taxes 71,000 438,000 (Gain) loss on sale of property and equipment 6,000 (30,000) Provision for doubtful accounts receivable 36,000 38,000 Origination of installment contracts (1,524,000) (1,793,000) Provision for credit losses on installment contracts 165,000 - Principal collected on originated installment contracts 871,000 384,000 Change in assets and liabilities, net of effect from purchase of subsidiary: Inventories (3,382,000) (3,819,000) Accounts receivable (8,544,000) (960,000) Prepayments and other (527,000) (292,000) Other assets 6,000 (24,000) Accounts payable 5,283,000 2,277,000 Accrued liabilities (869,000) (1,532,000) Net cash used in operating activities (3,703,000) 2,352,000 Investing activities: Purchase of subsidiary, net of cash acquired - (5,561,000) Capital expenditures (2,916,000) (1,031,000) Investments in joint ventures (88,000) - Increase in organizational and pre- operating costs - (415,000) Proceeds from sale of property and equipment 6,000 30,000 Sale of Retail Centers 584,000 Net cash used in investing activities (2,414,000) (6,977,000) Financing activities: Purchase of treasury stock (3,072,000) (8,363,000) Net borrowings on notes payable 6,762,000 5,780,000 Repayments on long-term debt (552,000) (528,000) Proceeds from exercise of stock options - 417,000 Net cash provided by (used in) financing activities 3,138,000 (2,694,000) Net increase (decrease) in cash and cash equivalents (2,979,000) (7,319,000) Cash and cash equivalents at the beginning of period 4,261,000 17,676,000 Cash and cash equivalents at the end of period $1,282,000 $10,357,000 Supplemental cash flow information: Cash paid for interest $1,009,000 $ 1,148,000 Cash paid for income taxes $3,207,000 $ 3,636,000 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 1, 1999, which has been derived from audited financial statements, and the unaudited interim consolidated condensed financial statements as of July 2, 1999, 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 1999 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 January 1, 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: July 2, January 1, 1999 1999 (Unaudited) Raw materials $10,495,000 $10,938,000 Work in progress 1,163,000 1,166,000 Finished goods 28,514,000 24,686,000 $40,172,000 $36,790,000 3. EARNINGS PER SHARE: The EPS results are as follows: Shares Available to Common Net Income Shareholders Earning Per Share Thirteen Weeks Ended July 2, 1999 Basic $1,649,000 12,132,990 $0.14 Dilutive effect of options issued - - - Diluted $1,649,000 12,132,990 $0.14 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 Shares Available to Common Net Income Shareholders Earning Per Share Twenty-six Weeks Ended July 2, 1999 Basic $3,709,000 12,220,421 $0.30 Dilutive effect of options issued - - - Diluted $3,709,000 12,220,421 $0.30 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 Options outstanding of 533,281 for the twenty-six weeks and thirteen weeks ended July 2, 1999 were not included in the tables above as they were antidilutive. 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 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 $89 million as of July 2, 1999. 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 of the Company. 5. LEGAL PROCEEDINGS: On March 1, 1999, the Company, without admitting any liability, entered into a settlement with HUD that requires the Company to correct construction and safety violations in homes manufactured at the North Carolina manufacturing facility. In addition, the settlement requires the Company to inspect 600 additional homes for possible violations. The Company has agreed to a one-year warranty extension of certain homes. 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 Company has been assessed a civil penalty by HUD of up to $300,000 in connection with the settlement; however, this penalty can be reduced by HUD depending on Company actions. The Company has been named, along with several other manufactured housing companies, as a defendant in a class action lawsuit filed 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 has not been specified. The Company believes the claims are without merit and plans to vigorously defend itself against these claims. However, the outcome of the litigation cannot be predicted and such 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 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 losses in excess of the amounts reserved. 6. TREASURY STOCK REPURCHASE In October 1998, the Company extended its stock repurchase program for an additional twelve months and increased the number of shares eligible for purchase from 3,000,000 to 4,000,000. From the inception of the program to July 2, 1999, the Company has repurchased 3,505,900 shares at a cost of $29,354,388, or an average cost of $8.37 per share. During the first quarter of 1999, the Company repurchased 505,600 shares at a cost of $3,072,350, or an average cost of $6.08 per share. The Company paid for these repurchases out of available cash. No shares were repurchased during the second quarter of 1999. 7. SEGMENT AND RELATED INFORMATION The Company has three primary reportable segments: manufacturing, retail operations, and component supply. 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 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 net income. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is 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 noncash items other than depreciation and amortization in reported profit or loss. There has been no change in the Company's basis of segmentation between January 1, 1999 and July 2, 1999. For segment purposes, there has been no material change in total assets between January 1, 1999 and July 2, 1999. 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. The following table presents information about segment profit or loss, dollars in thousands: Thirteen Weeks Ended Twenty-six Weeks Ended July 2, July 3, July 2, July 3, 1999 1998 1999 1998 Revenues: Manufacturing $57,895 $59,493 $119,536 $121,588 Retail operations 16,510 20,760 33,933 36,710 Component supply 14,561 14,177 28,650 29,660 Other operating segments 305 355 636 651 Eliminations (19,521) (20,636) (39,459) (39,388) Total revenues $69,750 $74,149 $143,296 $149,221 Gross profit: Manufacturing $ 6,005 $ 8,358 $ 13,076 $ 14,996 Retail operations 4,715 5,955 9,813 10,778 Component supply 1,161 1,340 2,323 2,850 Other operating segments (250) (84) (444) (261) Eliminations 122 (2) (186) (401) Gross profit $11,753 $15,567 $24,582 $27,962 Thirteen Weeks Ended Twenty-six Weeks Ended July 2, July 3, July 2, July 3, 1999 1998 1999 1998 Segment operating income: Manufacturing $ 2,280 $ 4,845 $ 5,898 $ 7,999 Retail operations (535) 245 (914) 889 Component supply 745 901 1,470 1,915 Corporate 200 (226) 53 (668) Other operating segments 436 768 301 652 3,126 6,533 6,808 10,787 Income/expenses not allocated to segments: Interest income,net (445) (403) (837) (688) Provision for income taxes (1,032) (2,241) (2,262) (3,757) Net income $ 1,649 $ 3,889 $ 3,709 $ 6,342 Revenue from segments below the quantitative thresholds is attributable to three other operating segments of the Company. Those segments include a trucking business, a finance 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. 8.SUBSEQUENT EVENT Subsequent to July 2, 1999, management decided to close the Company's manufactured housing facility located in North Carolina. The decision was based primarily on changes in local market conditions and operating results of the facility. In connection with the decision, the Company will incur losses on the impairment of the facility's assets and accrue certain other expenses related to the closure. These impairment losses and other expenses will approximate $6.0 million, pre-tax ($3.7 after-tax). During the twenty-six weeks ended July 2, 1999, and July 3, 1998, this facility generated 4.4% and 6.8%, respectively, of the total revenues of the Company. The impact of this facility on the operating income of the Company was a pre-tax loss of $1.3 million ($800,000 after-tax) and a pre-tax profit of $245,000 ($150,000 after-tax) during the twenty-six weeks ended July 2, 1999, and July 3, 1998, respectively. 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 2, 1999 as compared with twenty-six weeks and thirteen weeks ended July 3, 1998. Net Revenues Total net revenues (gross sales less volume discounts, returns and allowances) for the twenty-six weeks ended July 2, 1999 were $143.3 million, as compared with $149.2 million in the prior year period. For the thirteen weeks ended July 2, 1999, total net revenues were $69.8 million, as compared with $74.1 million for the comparable period a year ago. Net revenues from the wholesale sale of manufactured homes were $119.5 million (including intersegment revenues of $17.9 million) for the twenty-six weeks ended July 2, 1999, as compared with $121.6 million (including intersegment revenues of $15.3 million) for the prior year period, a decrease of 1.7%. The decline in revenues was attributable to a decline in the average wholesale price per home shipped, offset slightly by an increase in the number of homes shipped. Total homes shipped for the twenty-six weeks ended July 2, 1999 was 4,466, up 0.5% from the number of homes shipped in the prior year period. The average wholesale price per home for the twenty-six weeks ended July 2, 1999 was $26,765, as compared with $27,366 in the prior year period, a decline of 2.2%. For the thirteen weeks ended July 2, 1999, net revenues from the wholesale sale of manufactured homes were $57.9 million (including intersegment revenues of $8.7million), as compared with $59.5 million (including intersegment revenues of $8.7 million) for the prior year period, a decrease of 2.7%. The decline in revenues was attributable to a decline in the average wholesale price per home shipped, offset slightly by an increase in the number of homes shipped. Total homes shipped for the thirteen weeks ended July 2, 1999 was 2,183, up 0.6% from the number of homes shipped in the prior year period. The average wholesale price per home for the thirteen weeks ended July 2, 1999 was $26,521, as compared with $27,429 in the prior year period, a decline of 3.3%. Net revenues from the retail sale of manufactured homes were $33.9 million for the twenty-six weeks ended July 2, 1999, as compared with $36.7 million for the prior year period, a decrease of 7.6%. Total retail homes sold for the twenty- six weeks ended July 2, 1999 was 928, down 10.6% from the number of homes sold in the prior year period. The decline in retail revenues was attributable to a decrease in retail homes sold, offset by a slight increase in the average retail price per new homes sold during the twenty-six weeks ended July 2, 1999. For the thirteen weeks ended July 2, 1999, net revenues from the retail sale of manufactured homes were $16.5 million, as compared with $20.8 million for the prior year period, a decrease of 20.7%. Total retail homes sold for the thirteen weeks ended July 2, 1999 was 462, down 21.0% from the number of homes sold in the prior year period. The decline in retail revenues was attributable to a decrease in retail homes sold, offset by a slight increase in the average retail price per new homes sold during the thirteen weeks ended July 2, 1999. Net revenues from the component supply segment were $28.7 million (including intersegment revenues of $22.7 million) for the twenty-six weeks ended July 2, 1999, as compared with $29.7 million (including intersegment revenues of $23.0 million) for the prior year period, a decrease of 3.4%. The decline in supply sales was primarily attributable to a decline in intersegment sales to the manufacturing segment. For the thirteen weeks ended July 2, 1999, net revenues from the component supply segment were $14.6 million (including intersegment revenues of $11.3 million), as compared with $14.2 million (including intersegment revenues of $10.9 million) for the prior year period, a increase of 2.8%. The increase in supply sales was primarily attributable to an increase in intersegment sales to the manufacturing segment. Revenues from the retail finance subsidiary were $635,000 and $305,000, respectively, for the twenty-six weeks and thirteen weeks ended July 2, 1999, as compared with revenues of $568,000 and $268,000 for the comparable prior year periods. The increases were attributable to increased lending activity by the Company's wholly owned subsidiary, Wenco Finance, Inc. ("Wenco Finance"). Wenco Finance originats and servics 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, will continue to offer consumer financing for homes manufactured by the Company as well as for other homes sold through its retail centers and independent dealers. 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 2, 1999 was $24.6 million, or 17.2% of net revenues, as compared with $28.0 million, or 18.7% of net revenues, in the prior year period. The decline in gross profit percentage was attributable to a competitive manufactured housing market causing a decline in margins for both manufacturing and supply segments due to the inability to pass on increased labor and material costs, and a decline in retail margins on used homes For the thirteen weeks ended July 2, 1999, gross profit was $11.8 million, or 16.9% of net revenues, as compared with $15.6 million, or 21.0% of net revenues, in the prior year period. The decline in gross profit percentage was attributable to a decline in margins for both manufacturing and supply segments due to the inability to pass on increased labor and material costs, and a decline in retail margins on used 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 $17.6 million, or 12.3% of net revenues, during the twenty-six weeks ended July 2, 1999, as compared with $16.9 million, or 11.3% of net revenues, for the same period of the prior year. For the thirteen weeks ended July 2, 1999, selling, general and administrative expenses were $8.5 million, or 12.2% of net revenues, as compared with $8.9 million, or 12.0% 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. Interest Expense Interest expense for the twenty-six weeks ended July 2, 1999 was $1.0 million, as compared with $1.2 million in the prior year period. For the thirteen weeks ended July 2, 1999, interest expense was $515,000, as compared with $635,000 in the prior year period. The decrease in interest expense in the current year periods was a result of increased use of available cash, instead of floor plan financing, to fund the purchase of the Company's retail inventory. Interest Income Interest income for the twenty-six weeks ended July 2, 1999 was $172,000, as compared with $494,000 in the comparable prior year period. For the thirteen weeks ended July 2, 1999, interest income was $70,000, as compared with $232,000 in the prior year period. The decrease in interest income reflects lower average cash and cash equivalent balances during the current year periods, due to the Company financing a portion of its retail inventory with available cash. 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 2, 1999 was $2.3 million, or an effective tax rate of 37.9%, as compared with $3.8 million, or an effective tax rate 37.2% in the prior year period. For the thirteen weeks ended July 2, 1999, income tax expense was $1.0 million, or an effective tax rate of 38.5%, as compared with $2.2 million, or an effective tax rate of 36.6% in the prior year periods. Sale of Retail Centers During the second quarter, the Company sold three retail centers for an aggregate of $584,000 which approximated the book value of the three centers. Subsequent Event Subsequent to July 2, 1999, management decided to close the Company's manufactured housing facility located in North Carolina. The decision was based primarily on changes in local market conditions and operating results of the facility. In connection with the decision, the Company will incur losses on the impairment of the facility's assets and accrue certain other expenses related to the closure. These impairment losses and other expenses will approximate $6.0 million, pre-tax ($3.7 after-tax). During the twenty six weeks ended July 2, 1999 and July 3, 1998, this facility generated 4.4% and 6.8%, respectively, of the total revenues of the Company. The impact of this facility on the operating income of the Company was a pre-tax loss of $1.3 million ($800,000 after-tax) and a pre-tax profit of $245,000 ($150,000 after-tax) during the twenty-six weeks ended July 2, 1999, and July 3, 1998, respectively. 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. Cash Flows During the twenty-six weeks ended July 2, 1999, the Company's cash used by operations was approximately $3.2 million. Cash used by operations included origination of installment contracts of $1.5 million and increased accounts receivable, inventories and prepayments of $12.5 million. These amounts were partially offset by net income of $3.7 million and increased accounts payable of $5.3 million. In addition to cash used by operating activities, other significant uses of cash included capital expenditures of $2.8 million, purchase of treasury stock of $3.1 million, and repayments of long-term debt of $1.1 million. Other significant sources of cash included increased borrowings on notes payable of $7.3 million. 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 flow 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. At July 2, 1999, the Company's net working capital was $20.0 million, compared with $21.3 million at January 1, 1999. The decrease in net working capital was primarily a result of a decrease in cash and cash equivalents of $3.0 million, an increase in notes payable of $20.0 million, and an increase in accounts payable of $5.3 million, partially offset by a $8.5 million increase in accounts receivable, a $3.4 million increase in inventories, and a $13.2 million decrease in floor plan notes payable. The Company also has a $25 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 $20 million in outstanding borrowings under this line at July 2, 1999. 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 July 2, 1999, the Company's contingent repurchase liability under floor plan financing arrangements was approximately $89 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. However, in the current competitive manufactured housing market, the Company has recently been unable to pass on these increases and the Company's gross profit margins have declined. Year 2000 Compliance Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field and cannot distinguish dates after the year 2000. These date code fields will need to distinguish "Year 2000" dates from earlier dates and, as a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. Although the Company is currently working to resolve the potential impact of the Year 2000 issue on the computerized systems it utilizes internally, and with regard to its products and customers, at this time, the Company's systems are not Year 2000 compliant. During the fourth quarter of 1998, the Company commenced replacement of its current information technology system with a new system. The replacement, which is expected to be completed by the end of year 1999, is required to meet current and future needs of the Company's business as well as to make more efficient various administrative and operating functions. Because the Company did not undertake this replacement for reasons of Year 2000 compliance, the costs of this conversion have not been identified as Year 2000 compliance costs. The current upgrading of the Company's software program and operating systems will cost approximately $3.3 million. The Company anticipates it will fund such expenditures through a combination of equipment leasing and available cash. The Company believes that these new programs and systems will be Year 2000 compliant. The failure of the Company to make its systems Year 2000 compliant in a timely manner will have a material adverse effect on the Company. The Company relies upon various vendors, utility companies, telecommunications service companies, delivery service companies, and other service providers, which are outside of the Company's control. The company has not yet determined the extent to which the computer systems of such service providers are Year 2000 compliant, if at all. The failure of the Company's vendors to make their systems Year 2000 compliant in a timely manner will have a material adverse effect on the Company. "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, including the retail sale of manufactured homes; 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 that requires the Company to correct construction and safety violations in homes manufactured at the North Carolina manufacturing facility. In addition, the settlement requires the Company to inspect 600 additional homes for possible violations. The Company has agreed to a one-year warranty extension of certain homes. HUD claimed that the Company failed to comply with the consumer notification and defect correction requirements of the 1974 Act. The Company has been assessed a civil penalty by HUD of up to $300,000 in connection with the settlement; however, this penalty can be reduced by HUD depending on Company actions. The Company has been named, along with several other manufactured housing companies, as a defendant in a class action lawsuit filed 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 has not been specified. The Company believes the claims are without merit and plans to vigorously defend itself against these claims. However, the outcome of the litigation cannot be predicted and such 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 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 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 The Company held its Annual Meeting of Stockholders on June 1, 1999. At the meeting, the stockholders elected to serve as members of the Board of Directors of the Company, the persons whose names are below. The votes were as follows: Election of Directors: For: Withheld: Wendell L. Batchelor 7,819,790 1,461,656 Keith W. Brown 7,824,490 1,456,956 Jonathon O. Lee 7,824,190 1,457,256 Johnny R. Long 7,824,990 1,456,456 Paul J. Evanson 7,826,290 1,455,156 Joseph J. Incandela 7,824,990 1,456,456 Keith O. Holdbrooks 7,823,490 1,457,956 ** - Paul J. Evanson has subsequently notified the Company in letter dated July 12, 1999 of his resignation as a director due to increasing time demands at Florida Power and Light Company. 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. 10.23 Amended and Restated Employment Agreement with Keith W. Brown, dated as of June 14, 1996. 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: August 13, 1999 By: /s/ Wendell L. Batchelor Wendell L. Batchelor, Chairman and Chief Executive Officer Date: August 13, 1999 By: /s/ Keith W. Brown Keith W. Brown, Executive Vice President, Chief Financial Officer, Treasurer and Secretary