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 4, 2003 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.)
144 Corporate Way, 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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
12,143,865 shares of Common Stock, $.0001 par value, as of August 8, 2003
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SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
INDEX
Page
PART I FINANCIAL INFORMATION:
Item 1 Financial Statements
Consolidated Condensed Balance Sheets (unaudited),
July 4, 2003 and January 3, 2003 3
Consolidated Condensed Statements of Operations (unaudited) - Thirteen
Weeks Ended July 4, 2003 and June 28, 2002 and Twenty-six Weeks
Ended July 4, 2003 and June 28, 2002 4
Consolidated Condensed Statements of Cash Flows (unaudited) - Twenty-six
Weeks Ended July 4, 2003 and June 28, 2002 5
Notes to Consolidated Condensed Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3 Quantitative and Qualitative Disclosure of Market Risk 19
Item 4 Controls and Procedures 19
PART II OTHER INFORMATION:
Item 1 Legal Proceedings 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 6 Exhibits and Reports on Form 8-K 20
SIGNATURES 21
The Management's Discussion and Analysis included in this Form 10-Q contains
statements that are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are based upon the current
beliefs and expectations of Southern Energy Homes, Inc.'s management and are
subject to significant risks and uncertainties. These risks and uncertainties
could cause the Company's results to differ materially from those set forth in
such forward-looking statements. Such risks and uncertainties are described
herein and in the Company's Quarterly Report on Form 10-Q for the quarter ended
April 4, 2003, and the Annual Report on Form 10-K for the year ended January 3,
2003, filed with the Securities and Exchange Commission and available at the
Securities and Exchange Commission's internet site (www.sec.gov), to which
reference is hereby made.
2
I. FINANCIAL INFORMATION
Item 1. Financial Statements
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
July 4, January 3,
2003 2003
------------ ------------
ASSETS
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 11,381,000 $ 6,960,000
Accounts receivable (less allowance for doubtful accounts of
$334,000 and $188,000, respectively) 7,738,000 6,740,000
Inventories 7,641,000 7,280,000
Refundable income taxes -- 4,191,000
Prepayments and other 851,000 483,000
Current assets of discontinued operations 70,000 800,000
------------ ------------
27,681,000 26,454,000
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 31,784,000 31,636,000
Less accumulated depreciation (16,430,000) (15,613,000)
------------ ------------
15,354,000 16,023,000
INTANGIBLES AND OTHER ASSETS:
Goodwill 3,305,000 3,305,000
Investment in joint ventures 4,297,000 4,300,000
Other assets 759,000 958,000
Non-current assets of discontinued operations 221,000 688,000
------------ ------------
8,582,000 9,251,000
------------ ------------
$ 51,617,000 $ 51,728,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,272,000 $ 1,694,000
Accrued liabilities 11,399,000 10,754,000
Current liabilities of discontinued operations 40,000 320,000
------------ ------------
13,711,000 12,768,000
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 1,000,000 shares authorized,
none outstanding -- --
Common stock, $.0001 par value, 40,000,000 shares authorized,
12,143,865 and 12,133,865 issued and outstanding at July 4, 2003
and at January 3, 2003, respectively 1,000 1,000
Capital in excess of par 8,341,000 8,330,000
Retained earnings 29,564,000 30,629,000
------------ ------------
37,906,000 38,960,000
------------ ------------
$ 51,617,000 $ 51,728,000
============ ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen Weeks Twenty-six Weeks
------------------------------- ------------------------------
July 4, June 28, July 4, June 28,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Restated - (Restated -
see Note 2) see Note 2)
Net revenues $ 31,102,000 $ 39,656,000 $ 59,146,000 $ 70,761,000
Cost of sales 25,612,000 31,901,000 49,848,000 57,288,000
------------ ------------ ------------ ------------
Gross profit 5,490,000 7,755,000 9,298,000 13,473,000
Operating expenses:
Selling, general and administrative 5,148,000 6,325,000 10,376,000 11,752,000
------------ ------------ ------------ ------------
Operating income (loss) 342,000 1,430,000 (1,078,000) 1,721,000
Interest expense (116,000) (166,000) (261,000) (360,000)
Interest income 19,000 8,000 37,000 17,000
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes 245,000 1,272,000 (1,302,000) 1,378,000
Income tax benefit 330,000 -- 330,000 --
------------ ------------ ------------ ------------
Income (loss) from continuing operations 575,000 1,272,000 (972,000) 1,378,000
Income (loss) from discontinued operations (229,000) (1,017,000) (93,000) (1,921,000)
------------ ------------ ------------ ------------
Net income (loss) $ 346,000 $ 255,000 $ (1,065,000) $ (543,000)
============ ============ ============ ============
Basic and diluted earnings per share:
Income (loss) from continuing operations $ 0.05 $ 0.10 $ (0.08) $ 0.11
Income (loss) from discontinued operations (0.02) (0.08) (0.01) (0.15)
------------ ------------ ------------ ------------
Net loss $ 0.03 $ 0.02 $ (0.09) $ (0.04)
============ ============ ============ ============
Weighted average number of common shares:
Basic 12,140,643 12,133,865 12,137,217 12,133,865
Diluted 12,223,829 12,413,911 12,137,217 12,437,129
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
-------------------------------
July 4, June 28,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated -
see Note 2)
Income (loss) from continuing operations $ (972,000) $ 1,378,000
Adjustments to reconcile income (loss) from continuing operations to net
cash used in operating activities:
Equity in income of joint ventures (43,000) (230,000)
Depreciation of property and equipment 1,073,000 1,163,000
Amortization of intangibles 26,000 26,000
Gain on sale of property and equipment (139,000) (47,000)
Amortization of debt issuance costs 185,000 185,000
Provision for doubtful accounts receivable (10,000) 29,000
Change in assets and liabilities:
Inventories (361,000) 617,000
Accounts receivable (988,000) (3,669,000)
Refundable income taxes 4,191,000 646,000
Prepayments and other (381,000) (1,083,000)
Accounts payable 578,000 1,503,000
Accrued liabilities 645,000 247,000
------------ ------------
Net cash provided by operating activities 3,804,000 765,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (419,000) (319,000)
Investments in joint ventures (128,000) (379,000)
Distribution from joint ventures 175,000 185,000
Proceeds from sale of joint venture -- 1,250,000
Proceeds from sale of property and equipment 155,000 334,000
------------ ------------
Net cash (used in) provided by investing activities (217,000) 1,071,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on notes payable -- (4,474,000)
Payment of debt issuance costs -- (31,000)
Proceeds from exercise of stock options 11,000 --
------------ ------------
Net cash (used in) provided by financing activities 11,000 (4,505,000)
Net cash and cash equivalents provided by (used in) continuing operations 3,598,000 (2,669,000)
Net cash and cash equivalents provided by discontinued operations 823,000 2,508,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 4,421,000 (161,000)
------------ ------------
Cash and cash equivalents at the beginning of period 6,960,000 328,000
------------ ------------
Cash and cash equivalents at the end of period $ 11,381,000 $ 167,000
============ ============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
SOUTHERN ENERGY HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
The consolidated condensed balance sheet as of July 4, 2003, and the unaudited
consolidated condensed statements of operations for the thirteen and twenty-six
week periods ended of July 4, 2003 and June 28, 2002, have been prepared by the
Company without audit, but in the opinion of management reflect the adjustments
necessary (which include only normal recurring adjustments) for the fair
presentation of the information set forth therein. The consolidated condensed
balance sheet as of January 3, 2003 has been derived from audited financial
statements. Results of operations for the interim 2003 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 accounting principles generally accepted in the
United States 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 on Form 10-K for the fiscal year ended January 3, 2003, as filed
with the Securities and Exchange Commission.
STOCK-BASED COMPENSATION
Under fixed stock option plans, stock options may be granted to employees and
directors at exercise prices that are equal to, less than, or greater than the
fair market value of the Company's stock on the date of grant. Compensation
expense, equal to the difference in exercise price and fair market value on the
date of grant, is recognized over the vesting period for options granted at less
than fair market value.
In accordance with the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, as amended, the Company has elected to apply
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its stock based plans.
Accordingly, the Company has recognized no compensation expense for these plans
during the interim periods ended July 4, 2003 and June 28, 2002. Had the Company
accounted for its stock-based compensation plans based on the fair value of
awards granted consistent with the methodology of SFAS 123, the Company's
results of operations and related per share amounts for the interim periods
ended July 4, 2003 and June 28, 2002 would have been affected as indicated
below. The effects of applying SFAS 123 on a pro forma basis for the quarters
ended July 4, 2003 and June 28, 2002, are not likely to be representative of the
effects on reported pro forma net income for future years as options vest over
several years and as it is anticipated that additional grants will be made in
future years.
Thirteen weeks ended Twenty-six weeks ended
--------------------------------- ---------------------------------
July 4, 2003 June 28, 2002 July 4, 2003 June 28, 2002
------------ ------------- ------------ -------------
Net income (loss) - as reported $ 346,000 $ 255,000 $(1,065,000) $ (543,000)
Deduct: Total stock-based employee
compensation expense
determined under fair value
based method for all awards (61,000) (60,000) (106,000) (74,000)
----------- ----------- ----------- -----------
Net income (loss) -pro forma $ 285,000 $ 195,000 $(1,171,000) $ (617,000)
=========== =========== =========== ===========
As reported - net income (loss) per share $ 0.03 $ 0.02 $ (0.09) $ (0.04)
Pro forma - net income (loss) per share $ 0.02 $ 0.02 $ (0.10) $ (0.05)
PRODUCT WARRANTIES
The Company warrants its products against certain manufacturing defects for a
period of one year commencing at the time of retail sale. The estimated cost of
such warranties is accrued at the time of sale to the independent dealer based
on historical warranty costs incurred. Periodic adjustments to the accrual are
made when events occur that indicate changes are necessary. The following table
summarizes the changes in accrued product warranty obligations during the
thirteen and twenty-six weeks ended July 4, 2003. The accrued product warranty
obligation is classified as accrued liabilities in the condensed consolidated
balance sheets.
6
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
Description July 4, 2003 July 4, 2003
- ------------------------------- ------------ ------------
Balance at beginning of period $ 2,138,000 $ 2,143,000
Reserve for warranty costs 1,427,000 3,085,000
Payments (1,637,000) (3,300,000)
----------- -----------
Balance, end of period $ 1,928,000 $ 1,928,000
=========== ===========
2. DISCONTINUED OPERATIONS:
In 2002, the Company closed eleven retail centers that were formerly part of the
retail segment. These retail centers had been negatively affected by weak market
conditions and restrictive retail financing conditions, principally as a result
of the withdrawal of several lenders from the market. The decision to close the
retail centers was based primarily on management's evaluation of recent
operating results and future prospects. These centers were sold or closed by the
end of December 2002.
The Company also sold its consumer financing segment, principally consisting of
its Wenco loan portfolio, in December 2002. The Wenco loan portfolio had a book
value of approximately $11.8 million. The loan portfolio was sold for $6.1
million in a cash transaction. The decision to sell the loan portfolio was
prompted by management's strategic plan to eliminate unprofitable business lines
and thereby allow the Company to focus on its core manufacturing business.
Accordingly, as required by FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"), the operating results
and disposal of the eleven retail centers and the Wenco loan portfolio, which
were previously reported in the retail and consumer financing segments, have
been classified in discontinued operations for all prior periods presented
herein. Accordingly, the operating results for the interim periods ended June
28, 2002 reported herein differ from those previously reflected in Forms 10-Q
filed in 2002. The Company also recognized a loss of $229,000 from the closing
of a retail center in the second quarter of 2003. The operating results of this
retail center have been reported in discontinued operations in the quarter ended
July 4, 2003. Financial statements for prior periods have not been restated to
reflect this retail location in discontinued operations because it was not
material to any period. As required by SFAS 144, any further operating income or
losses, as well as adjustments to exit costs accruals (if any), will be reported
in discontinued operations as incurred, or when circumstances warrant revisions
of the related accounts.
Operating results of the discontinued operations were as follows:
Thirteen Weeks Ended Twenty-six Weeks Ended
---------------------------------- ------------------------------------
July 4, 2003 June 28, 2002 July 4, 2003 June 28, 2002
------------ ------------- ------------ -------------
Net revenues $ 643,000 $ 4,377,000 $ 1,792,000 $ 8,672,000
Net income (loss) $ (229,000) $(1,017,000) $ (93,000) $(1,921,000)
Assets and liabilities of the discontinued operations have been reflected in the
consolidated balance sheets as current or non-current based on the original
classification of these accounts, net of any necessary valuation allowances.
Although we believe we have appropriately reduced the carrying value of the
assets to their estimated recoverable amounts, net of disposal cost where
appropriate, actual results could be different and the difference will be
reported in discontinued operations in future periods.
Net assets of the discontinued operations are as follows:
July 4, 2003 January 3, 2003
------------ ---------------
CURRENT ASSETS:
Inventories $ 66,000 $ 675,000
Prepayments and other 4,000 125,000
----------- -----------
Total current assets: 70,000 800,000
NON-CURRENT ASSETS:
Installment contracts receivable 138,000 342,000
Property, plant and equipment 83,000 344,000
Other assets -- 2,000
----------- -----------
Total non - current assets: 221,000 688,000
Current liabilities (40,000) (320,000)
----------- -----------
Net assets of discontinued operations $ 251,000 $ 1,168,000
=========== ===========
7
There are no material contingent liabilities, including environmental
liabilities or litigation, related to the closed retail centers or the consumer
finance business discontinued in 2002.
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 4, January 3,
2003 2003
---------- ----------
Raw materials $3,465,000 $3,725,000
Work-in-progress 635,000 570,000
Finished goods 3,541,000 2,985,000
---------- ----------
$7,641,000 $7,280,000
========== ==========
4. EARNINGS PER SHARE:
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of shares
outstanding during the subject period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
are exercised or converted into common stock or result in the issuance of common
stock that will share in the earnings of the Company.
The following reconciliation details the numerators and denominators used to
calculate basic and diluted earnings per share for the respective periods:
Thirteen Weeks Ended Twenty-six Weeks Ended
---------------------------------- ----------------------------------
July 4, 2003 June 28, 2002 July 4, 2003 June 28, 2002
------------ ------------- ------------ -------------
Income (loss) from continuing operations $ 575,000 $ 1,272,000 $ (972,000) $ 1,378,000
Income (loss) from discontinued operations (229,000) (1,017,000) (93,000) (1,921,000)
------------ ------------ ------------ ------------
Net income (loss) $ 346,000 $ 255,000 $ (1,065,000) $ (543,000)
============ ============ ============ ============
Average shares outstanding:
Basic 12,140,643 12,133,865 12,137,217 12,133,865
Add: dilutive effect of options issued 83,186 280,046 -- 303,264
------------ ------------ ------------ ------------
Diluted 12,223,829 12,413,911 12,137,217 12,437,129
============ ============ ============ ============
Earnings per share - basic and diluted:
Income (loss) from continuing operations $ 0.05 $ 0.10 $ (0.08) $ 0.11
Income (loss) from discontinued operations (0.02) (0.08) (0.01) (0.15)
------------ ------------ ------------ ------------
Net loss $ 0.03 $ 0.02 $ (0.09) $ (0.04)
============ ============ ============ ============
8
5. INVESTMENTS IN JOINT VENTURES
The Company owns interests in five joint ventures all of which are accounted for
using the equity method. The Company owns a 39% interest in WoodPerfect, Ltd., a
manufacturing joint venture, which produces rafters used in the production of
homes manufactured by the Company and others. The Company owns a 50% interest in
Wenco 21, LLC, an entity that originates installment loans for the purchase of
homes manufactured by the Company and others. The Company also owns 33% of
WoodPerfect of Texas, Inc., which manufactures rafters used in the production of
manufactured homes. The Company owns a 33% interest in Hillsboro Manufacturing,
Inc., which manufactures laminate wallboard. The Company owns 33% of Lamraft LLP
which is a real estate holding company that leases facilities to a third party.
The Company owned 33% of Ridge Pointe Mfg., LLC, which manufactures cabinet
doors for sale to participants in the joint venture as well as third-party
customers. The Ridge Pointe Mfg., LLC interest was sold in May 2002.
The Company's investments in and advances to unconsolidated joint ventures
amounted to $4.3 million at July 4, 2003 and January 3, 2003. The Company's
equity in the net earnings of these ventures was $43,000 and $230,000 for the
twenty-six weeks ended July 4, 2003 and June 28, 2002, respectively. The Company
received cash distributions from joint venture investments of $175,000 and
$185,000 for the twenty-six weeks ended July 4, 2003 and June 28, 2002,
respectively, Retained earnings at July 4, 2003 and June 28, 2002, included
undistributed earnings of joint ventures of $0.6 million and $0.4 million,
respectively.
The Company's significant joint ventures are Wenco 21 and WoodPerfect, Ltd. The
Company accounts for both investments by the equity method of accounting.
A summary of the joint ventures' financial information is as follows:
As of
----------------------------------
July 4, 2003 January 3, 2003
------------ ---------------
Current assets $ 5,418,000 $ 5,855,000
Non-current assets 24,242,000 24,787,000
----------- -----------
Total assets 29,660,000 30,642,000
Current liabilities 2,516,000 2,470,000
Non-current liabilities 20,012,000 20,674,000
----------- -----------
Total liabilities 22,528,000 23,144,000
Stockholders' equity 7,132,000 7,498,000
Company equity investment 4,287,000 4,419,000
Thirteen Weeks Ended Twenty-six Weeks Ended
---------------------------------- ---------------------------------
July 4, 2003 June 28, 2002 July 4, 2003 June 28, 2002
------------ ------------- ------------ ------------
Revenues $ 8,425,000 $10,857,000 $14,140,000 $18,933,000
Cost of sales 7,299,000 9,251,000 12,465,000 16,267,000
----------- ----------- ----------- -----------
Gross profit 1,126,000 1,606,000 1,675,000 2,666,000
Operating income 85,000 422,000 96,000 709,000
Net income 101,000 417,000 114,000 698,000
6. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations, SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The adoption
of SFAS 143 did not have any impact in the first and second quarters of 2003 on
the Company's financial position, results of operations or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (Interpretation
46). Interpretation 46 addresses whether business enterprises
9
must consolidate the financial statements of entities known as "variable
interest entities". A variable interest entity is defined by Interpretation 46
to be a business entity which has one or both of the following characteristics:
(1) The equity investment at risk is not sufficient to permit the entity to
finance its activities without additional support from other parties, which is
provided through other interests that will absorb some or all of the expected
losses of the entity; and (2) The equity investors lack one or more of the
following essential characteristics of a controlling financial interest: (a)
direct or indirect ability to make decisions about the entity's activities
through voting rights or similar rights, (b) the obligation to absorb the
expected losses of the entity if they occur, which makes it possible for the
entity to finance its activities, or (c) the right to receive the expected
residual returns of the entity if they occur, which is the compensation for risk
of absorbing expected losses. Interpretation 46 does not require consolidation
by transferors to qualifying special purpose entities. Interpretation 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year, or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company is
currently assessing the impact of Interpretation 46. As discussed in Note 5, the
Company has a 50% interest in Wenco 21, LLC, an entity that originates
installment loans for the purchase of homes manufactured by the Company and
others. The Company began its involvement with Wenco 21 in February 1997. At
July 4, 2003, the Company has recorded investments on its balance sheet of
approximately $1.0 million associated with this investment. At July 4, 2003,
Wenco 21's carrying amount of consolidated assets of $22.0 million collateralize
$20.0 million of its obligations. The Company currently adjusts the carrying
value of this investment for any income or losses incurred by Wenco 21 through
earnings and its maximum exposure to loss as a result of its involvement with
the Wenco 21 is approximately $12.8 million. The Company has determined that the
Wenco 21 structure meets the definition of a variable interest entity, and the
Company is currently in the process of determining if it will need to
consolidate Wenco 21. The Company is also reviewing the structures of its other
investments in joint ventures (as described in Note 5) to determine if any of
the structures meet the definition of a variable interest entity and whether
these entities should be consolidated by the Company. Currently, these entities
are not anticipated to be variable interest entities and, therefore, the
entities will not need to be consolidated by the Company.
In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 addresses the recognition, measurement and
reporting of costs that are associated with exit and disposal activities,
including restructuring activities that are currently accounted for pursuant to
the guidance set forth in EITF No 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. SFAS 146
revises the accounting for certain lease termination costs and employee
termination benefits, which are generally recognized in connection with
restructuring activities. Adoption of this standard as of January 4, 2003 had no
impact on the Company's financial position, results of operations or cash flows
for the twenty-six weeks ended July 4, 2003.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 32 ("FIN 45"). FIN 45 clarifies the
requirements of FASB Statement No. 5, Accounting for Contingencies, relating to
a guarantor's accounting for, and disclosure of, specified types of guarantees.
FIN 45 requires that upon issuance of a guarantee, the entity (i.e., the
guarantor) must recognize a liability for the fair value of the obligation it
assumes under that guarantee. The disclosure provisions of FIN 45 are effective
for financial statements of interim or annual periods that end after December
15, 2002. FIN 45's provisions for initial recognition and measurement must be
applied on a prospective basis to guarantees issued or modified after December
31, 2002, irrespective of the guarantor's fiscal year end. The guarantor's
previous accounting for guarantees that were issued before the date of FIN 45's
initial application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of FIN 45. The Company has guarantees
that are subject to the disclosure provisions of FIN 45. See Note 7 "Repurchase
Agreements". The adoption of the prospective recognition and measurement aspects
of FIN 45 did not have a material effect on the Company's financial position,
results of operations or cash flows.
7. REPURCHASE AGREEMENTS:
Substantially all of the Company's independent 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 that provides the independent dealer
financing customarily requires the Company to enter into a separate repurchase
agreement with the financial institution, under which the
10
Company is obligated, upon default by the independent dealer, to repurchase the
homes at the Company's original invoice price less cost of all damaged/missing
items and less certain curtailments, plus certain administrative and shipping
expenses. Repurchases were $493,000 and $344,000 for the quarters ended July 4,
2003 and June 28, 2002, respectively. Losses on homes repurchased under these
agreements were $81,000 and $194,000 for the quarter ended July 4, 2003 and June
28, 2002 respectively. At July 4, 2003, the Company had a reserve of $250,000
for future repurchase losses. At July 4, 2003, the Company's contingent
repurchase liability under floor plan financing arrangements through independent
dealers was approximately $38 million. While homes that have been repurchased by
the Company under floor-plan financing arrangements are usually sold to other
dealers, no assurance can be given that the Company will be able to sell to
other dealers homes that 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. The Company
is also obligated to repurchase homes financed by its equity investee, Wenco 21
LLC, upon a third payment default for 50% to 65% of the outstanding loan
balance. The Company's contingent repurchase obligation under this commitment is
approximately $12.3 million.
8. LEGAL PROCEEDINGS:
The Company is a party to various legal proceedings incidental to its business.
The Company typically issues a one-year warranty on new manufactured homes. The
Company provides for warranty costs at the time of sale in the ordinary course
based on historical warranty experience. The majority of the Company's
outstanding legal proceedings are claims related to warranty on manufactured
homes or employment issues such as workers' compensation claims. Management
believes that adequate reserves are maintained for such claims. In the opinion
of management, after consultation with legal counsel, the ultimate liability, if
any, with respect to these proceedings will not materially affect the financial
position or results of operations of the Company; however, the ultimate
resolution of these matters, which could occur within one year, could result in
losses in excess of the amounts reserved. For the quarters ended July 4, 2003
and June 28, 2002, accrued litigation reserves, (in addition to normal warranty
and workmen's compensation claims reserves) were $1.1 million and $0.9 million,
respectively.
9. SEGMENT AND RELATED INFORMATION:
The Company has three reportable segments: manufacturing, retail operations and
component supply. The manufacturing segment produces manufactured homes for sale
to independent and company-owned retail centers. Although each manufacturing
facility is an operating segment, they are aggregated into one segment for
reporting purposes because they produce similar products using similar
production techniques and they sell their products to the same class of
customer. In addition, they are subject to the same regulatory environment and
their economic characteristics (measured on terms of profitability) are similar.
The retail operations segment sells homes, which have been produced by the
Company's manufacturing segment and various other manufacturers, to retail
customers. 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 segment
operating income. The Company accounts for intersegment sales and transfers as
if the sales or transfers were to third-parties, at current market prices. The
Company does not allocate income taxes to its segments. 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.
Revenue from segments below the quantitative thresholds is attributable to a
small insurance business. This segment has never met the quantitative thresholds
for determining reportable segments. The Corporate segment does not generate any
revenues, but does incur certain administrative expenses that are not allocated
to reportable segments.
The financial information for the period ended June 28, 2002 concerning
reportable segments has been restated to reflect the reclassification of the
eleven retail centers closed in 2002 and the consumer financing business as
discontinued operations (see Note 2).
11
The following table presents information about segment profit or loss
Thirteen Weeks Ended Twenty-six Weeks Ended
---------------------------------- ----------------------------------
July 4, 2003 June 28, 2002 July 4, 2003 June 28, 2002
------------ ------------- ------------ -------------
Net revenues:
Manufacturing $ 29,836,000 $ 38,907,000 $ 56,475,000 $ 67,782,000
Retail operations 1,014,000 1,860,000 2,441,000 4,708,000
Component supply 5,632,000 6,758,000 11,442,000 12,161,000
All other 46,000 51,000 1,000 138,000
Eliminations for intersegment
revenues:
Manufacturing (495,000) (1,848,000) (1,077,000) (3,180,000)
Component supply (4,931,000) (6,072,000) (10,136,000) (10,848,000)
------------ ------------ ------------ ------------
Total net revenues $ 31,102,000 $ 39,656,000 $ 59,146,000 $ 70,761,000
============ ============ ============ ============
Gross profit:
Manufacturing $ 5,223,000 $ 6,771,000 $ 8,400,000 $ 11,271,000
Retail operations 313,000 442,000 700,000 972,000
Component supply 155,000 571,000 572,000 1,082,000
All other (180,000) (167,000) (526,000) (365,000)
Eliminations (21,000) 138,000 152,000 513,000
------------ ------------ ------------ ------------
Gross profit $ 5,490,000 $ 7,755,000 $ 9,298,000 $ 13,473,000
============ ============ ============ ============
Segment operating income
(loss):
Manufacturing $ 1,297,000 $ 2,157,000 $ 773,000 $ 2,840,000
2,157,000
Retail operations (108,000) (489,000) (192,000) (798,000)
Component supply (52,000) 427,000 128,000 733,000
All other 45,000 5,000 70,000 56,000
Eliminations (21,000) 138,000 152,000 512,000
------------ ------------ ------------ ------------
Segment operating income 1,161,000 2,238,000 931,000 3,343,000
Corporate expenses not
allocated to segments (916,000) (966,000) (2,233,000) (1,965,000)
Tax benefit 330,000 -- 330,000 --
------------ ------------ ------------ ------------
Income (loss) from continuing
operations $ 575,000 $ 1,272,000 $ (972,000) $ 1,378,000
============ ============ ============ ============
Summary of segment assets:
July 4, January 3,
2003 2003
------------ ------------
Segment assets:
Manufacturing $ 18,599,000 $ 16,561,000
Retail operations 3,438,000 4,368,000
Component supply 3,578,000 3,583,000
Corporate 26,533,000 26,725,000
Other operating segments 200,000 9,000
Eliminations (1,022,000) (1,006,000)
Discontinued operations 291,000 1,488,000
------------ ------------
Consolidated $ 51,617,000 $ 51,728,000
============ ============
12
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS. Forward-looking statements in this Quarterly Report
on Form 10-Q, 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, which
could cause actual results to differ materially from those in any forward
looking statements, including without limitation: general economic conditions;
the cyclical and seasonal nature of housing markets; competitive pricing
pressures at both the wholesale and retail levels; changes in market demand; the
impact of cost reduction programs and other management initiatives; availability
of financing for prospective purchasers of the Company's homes and availability
of floor plan financing for dealers; the Company's contingent repurchase
liabilities with respect to dealer financing and retail buyer financing; the
adequacy of accruals for workers' compensation claims and insurance costs;
availability and pricing of raw materials; concentration of the Company's
business in certain regional markets; adverse weather conditions that reduce
retail sales; the possibility of plant shutdowns from weather or other causes;
availability of labor for the Company to meet operating requirements; the highly
competitive nature of the manufactured housing industry; federal, state and
local regulation of the Company's business; 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.
GENERAL
During the second quarter of fiscal 2003, negative economic factors that have
influenced financial performance of the entire manufactured housing industry
since approximately 1998 continued with more restrictive retail financing
conditions for consumers and slow retail sales.
The Company has taken a number of steps since 2000 to decrease costs and improve
efficiency and quality. These steps included closing less efficient
manufacturing facilities, consolidating divisions, and disposing of unprofitable
business lines. During the second quarter of fiscal 2003, unusual wet weather in
the Southeast contributed to slower retail sales. In light of this continued
difficult market conditions, the Company took measures during the second quarter
that are intended to reduce costs in the coming quarters to more closely match
sales volume, including consolidation and reduction of several administration
functions.
The Company sells the majority of the homes it produces through its network of
independent home dealers in 22 states.
DISCONTINUED OPERATIONS
The Company closed a retail center in South Carolina in the second quarter of
2003. The closure of this retail center was not material to the financial
results of the Company.
In 2002, the Company closed eleven retail centers that were formerly part of the
retail segment. These retail centers had been negatively affected by weak market
conditions and restrictive retail financing conditions, principally as a result
of the withdrawal of several lenders from the market. The decision to close the
retail centers was based primarily on management's evaluation of recent
operating results and future prospects. These centers were sold or closed by the
end of December 2002.
The Company also sold its consumer financing segment, principally consisting of
the Wenco loan portfolio, in December 2002. The Wenco loan portfolio had a book
value of approximately $11.8 million. The loan portfolio was sold for $6.1
million in a cash transaction. The decision to sell the loan portfolio was
prompted by management's strategic plan to eliminate unprofitable business lines
and thereby allow the Company to focus on its core manufacturing business.
Accordingly, as required by FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"), the operating results
and disposal of the eleven retail centers and the Wenco loan portfolio, which
were previously reported in the retail and consumer financing segments, have
been classified in discontinued operations for all prior periods presented
herein. The Company recognized a loss of $0.2 million from discontinued
operations in the quarter ended July 4, 2003, as compared to a loss of $1.0
million for the quarter ended June 28, 2002. As required by SFAS 144, any
further operating losses, as well
13
as adjustments to exit costs accruals (if any), will be reported in discontinued
operations as incurred, or when circumstances warrant revisions of the related
accounts.
CRITICAL ACCOUNTING POLICIES
The Company uses accounting policies that it believes are appropriate to
accurately and fairly report its results of operations and financial position,
and it applies those accounting policies in a consistent manner. The preparation
of the Company's financial statements in conformity with generally accepted
accounting principles requires that the Company's management make estimates and
assumptions that may affect the reported amounts of assets, liabilities,
revenues and expenses. These estimates and assumptions are based on historical
and other factors believed to be reasonable under the circumstances. The Company
evaluates these estimates and assumptions on an ongoing basis. Actual results
can and frequently will differ from these estimates. It is possible that
materially different amounts would be reported under different conditions or
using different methods or assumptions.
The Company believes that the following accounting policies are the most
critical ones used in the preparation of its financial statements, because these
are the ones that involve the most significant judgments and estimates about the
effect of matters that are inherently uncertain.
PRODUCT WARRANTIES
The Company warrants its products against certain manufacturing defects for a
period of one year commencing at the time of retail sale. The estimated cost of
such warranties is accrued at the time of sale to the independent dealer based
on historical warranty costs incurred. Periodic adjustments to the accrual are
made when events occur that indicate changes are necessary.
LITIGATION
The Company is a party to various legal proceedings incidental to its business.
The Company typically issues a one-year warranty on new manufactured homes. The
majority of these legal proceedings are claims related to warranty on
manufactured homes or employment issues such as workers' compensation claims.
Management believes that adequate reserves are maintained for such claims. In
the opinion of management, after consultation with legal counsel, the ultimate
liability, if any, with respect to these proceedings will not materially affect
the financial position or results of operations of the Company; however, the
ultimate resolution of these matters, which could occur within one year, could
result in losses in excess of the amounts reserved.
INSURANCE ARRANGEMENTS
The Company is partially self-insured for workers compensation and health
insurance claims. The Company purchases insurance coverage for all workers
compensation claims in excess of $350,000 per occurrence, and for all health
care claims in excess of $75,000 per occurrence, with an annual aggregate
stop-loss limit of approximately $5.3 million for all claims. Amounts are
accrued currently for the estimated costs of claims incurred, including related
expenses. Management considers accrued liabilities for unsettled claims to be
adequate. However, there is no assurance that the amounts accrued will not vary
from the ultimate amounts incurred upon final disposition of all outstanding
claims. As a result, periodic adjustments to the reserves will be made as events
occur that indicate changes are necessary.
REPURCHASE AGREEMENTS
Substantially all of the Company's independent 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 that 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 independent dealer, to repurchase the homes at the Company's
original invoice price less cost of all damaged/missing items and less certain
curtailments, plus certain administrative and shipping expenses. Repurchases
were $493,000 and $344,000 for the quarters ended July 4, 2003 and June 28, 2002
respectively. Losses on homes repurchased under these agreements were $81,000
and $194,000 for the quarter ended July 4, 2003 and June 28, 2002 respectively.
At July 4, 2003 the Company had a reserve of $250,000 for future repurchase
losses. At July 4, 2003, the Company's contingent repurchase liability under
floor plan financing arrangements through independent dealers was approximately
$38 million. While homes that have been repurchased by the Company under
floor-plan financing arrangements are usually sold to other dealers, there is no
assurance that the Company will be able
14
to sell to other dealers homes that 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.
The Company is also obligated to repurchase homes financed by Wenco 21, LLC in
the event of a third payment default for 50% to 65% of the outstanding loan
balance. The Company's contingent repurchase liability under this commitment is
approximately $12.3 million.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those items. The Company's cash flow estimates are based
on historical results adjusted to reflect the Company's best estimate of future
market and operating conditions. Any material change affecting the assumptions
used to project the estimated undiscounted cash flows or our expectation of
future market conditions could result in a different conclusion. Assets for
which the carrying value is not fully recoverable are reduced to fair value.
RECOVERABILITY OF INVESTMENTS
Management assesses the recoverability of the Company's investments in joint
ventures when impairment indicators are present. The significant judgment
required in management's recoverability assessment is the determination of the
fair value of the investment. Since the investments are non-publicly traded
investments, management's assessment of fair value is based on the Company's
analysis of the investee's estimates of future operating results and the
resulting cash flows. Management's ability to accurately predict future cash
flows is critical to the determination of fair value.
In the event a decline in fair value of an investment occurs, management may be
required to make a determination as to whether the decline in market value is
other than temporary. Management's assessment as to the nature of a decline in
fair value is largely based on the Company's estimates of future operating
results, the resulting cash flows and intent to hold the investment. If an
investment is considered to be impaired and the decline in value is considered
to be other than temporary, an appropriate write-down is recorded.
VOLUME INCENTIVES PAYABLE
Volume incentives are common practice in the industry in which the Company
operates and are accounted for as a reduction to gross sales. The volume
incentives payable is estimated and recorded when sales of products are made.
The payable is adjusted, if necessary, when information becomes available that
indicate revisions are needed.
RESULTS OF OPERATIONS
Twenty-six weeks and thirteen weeks ended July 4, 2003 as compared with
twenty-six weeks and thirteen weeks ended June 28, 2002.
Net Revenues
Total net revenues (consisting of gross sales less volume discounts, returns and
allowances) for the twenty-six weeks ended July 4, 2003 were $59.1 million, as
compared with $70.8 million in the prior year period. For the thirteen weeks
ended July 4, 2003, total net revenues were $31.1 million, as compared with
$39.7 million for the comparable period a year ago.
Net revenues from wholesale sales of manufactured homes were $56.5 million
(including intersegment revenues of $1.1 million) for the twenty-six weeks ended
July 4, 2003, as compared with $67.8 million (including intersegment revenues of
$3.2 million) for the prior year period, a decline of 16.7%. The decline in
sales to dealers were affected by the continuation of a soft economy, reduced
financing options for the independent dealer and the consumer, unusually wet
weather in key markets that affected demand and 25 weeks compared to 26 weeks of
production due to the fact that the July 4th vacation week fell in the first
half of 2003 versus the second half of 2002. Total homes shipped for the
twenty-six weeks ended July 4, 2003 was 1,742, down from the 2,190 homes shipped
in the prior year period. The average wholesale price per home for the
twenty-six weeks ended July 4, 2003 was $30,751, as compared with $29,376 in the
prior year period, an increase of 4.7%. For the thirteen weeks ended July 4,
2003, net revenues from the wholesale sale of manufactured homes were $29.8
million (including intersegment revenues of $0.5 million), as compared
15
with $38.9 million (including intersegment revenues of $1.8 million) for the
prior year period, a decline of 23.3%. The decline in sales to dealers was
affected by the continuation of a soft economy, reduced financing options for
the independent dealer and the consumer, unusually wet weather in our key
markets and 12 weeks compared to 13 weeks of production due to July 4th vacation
week falling in the second quarter of 2003 versus the third quarter of 2002.
Total homes shipped for the thirteen weeks ended July 4, 2003 was 901, down
26.9% from the number of homes shipped in the prior year period. The average
wholesale price per home for the thirteen weeks ended July 4, 2003 was $31,415,
as compared with $29,931 in the prior year period, an increase of 5.0%. The
increase in average wholesale price per home sold for both the thirteen and
twenty-six week periods was primarily a function of dealers' choices of various
options and custom home features, but also includes some modest price increases
in certain instances. These price increases are mostly in the form of surcharges
reflecting recent increased material costs, primarily lumber.
Net revenues from retail sales of manufactured homes were $2.4 million for the
twenty-six weeks ended July 4, 2003, as compared with $4.7 million for the prior
year period, a decrease of 48.2%. The decline in retail sales was primarily
attributable to competitive pressures and the fact that the Company operated one
less retail center during the twenty-six weeks ended July 4, 2003 compared to
the retail centers that were open during all or part of the same period in the
prior year. The decline in retail revenues was offset slightly by an increase in
the average retail price per home sold. The average retail price per new homes
sold during the twenty-six weeks ended July 4, 2003 was $61,005, as compared
with $50,861 in the prior year period, an increase of 19.9%. For the thirteen
weeks ended July 4, 2003, net revenues from the retail sale of manufactured
homes were $1.0 million, as compared with $1.9 million for the prior year
period, a decrease of 45.5%. The decline in retail sales was primarily
attributable to increased competition and the Company's operation of one fewer
retail center during the quarter ended July 4, 2003 compared to the prior year
period. The decline in retail revenues was offset slightly by an increase in the
average retail price per home sold. The average retail price per new homes sold
during the thirteen weeks ended July 4, 2003 was $62,335, as compared with
$54,663 in the prior year period, an increase of 14.0%. The increase in average
retail price per home sold for both the thirteen and twenty-six week periods was
primarily a function of customers' choices of various options and custom home
features, but also includes some modest price increases in certain instances due
to increased prices from the manufacturer.
Net revenues from the component supply segment were $11.4 million (including
intersegment revenues of $10.1 million) for the twenty-six weeks ended July 4,
2003, as compared with $12.2 million (including intersegment revenues of $10.8
million) for the prior year period, a decline of 5.9%. The decline in supply
sales was primarily attributable to the decline in intersegment sales to the
manufacturing segment. For the thirteen weeks ended July 4, 2003, net revenues
from the component supply segment were $5.6 million (including intersegment
revenues of $4.9 million), as compared with $6.8 million (including intersegment
revenues of $6.1 million) for the prior year period, a decline of 16.7%. The
decrease in supply sales was primarily attributable to the decline in
intersegment sales to the manufacturing segment.
16
Following are basic operating facts for the thirteen and twenty-six weeks ended
for July 4, 2003, and June 28, 2002 respectively:
OPERATING FACTS
Thirteen Weeks Ended Twenty-six Weeks Ended
----------------------- ------------------------
July 4, June 28, July 4, June 28,
2003 2002 (1) 2003 2002 (1)
------- ------- ------- -------
Company owned retail centers
(continuing operations) 2 3 2 3
Retail units sold:
New single-section 1 2 1 8
New multi-section 12 19 25 41
Used homes 7 6 16 18
------- ------- ------- -------
Total 20 27 42 67
Wholesale units sold:
External customers 886 1,187 1,711 2,108
Intercompany 15 46 31 82
------- ------- ------- -------
901 1,233 1,742 2,190
------- ------- ------- -------
Total homes sold 921 1,260 1,784 2,257
Average sales prices - retail (new) $62,335 $54,663 $61,005 $50,861
Average sales price - wholesale $31,415 $29,931 $30,751 $29,376
Floor sections produced 1,570 2,142 3,053 3,826
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
4, 2003 was $9.3 million, or 15.7% of net revenues, as compared with $13.5
million, or 19.0% of net revenues, in the prior year period. This decline in the
gross profit percentage was attributable primarily to lower sales volume that
resulted in an unfavorable variance on fixed overhead, higher material prices
and higher labor costs, due to increased customization. For the thirteen weeks
ended July 4, 2003, gross profit was $5.5 million, or 17.7% of net revenues, as
compared with $7.8 million, or 19.6% of net revenues, in the prior year period.
This decline in the gross profit percentage was attributable primarily to lower
sales volume that resulted in an unfavorable variance on fixed overhead, higher
material prices, and higher labor costs, due to increased customization.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include primarily sales
commissions, advertising expenses, freight costs, salaries for support
personnel, administrative compensation, executive and management bonuses,
insurance costs, and professional fees. Selling, general and administrative
expenses were $10.4 million, or 17.5% of net revenues, during the twenty-six
weeks ended July 4, 2003, as compared with $11.8 million, or 16.6% of net
revenues, for the same period of the prior year. For the thirteen weeks ended
July 4, 2003, selling, general and administrative expenses were $5.1 million, or
16.6% of net revenues, as compared with $6.3 million, or 15.9% of net revenues,
for the same period of the prior year. The decline in selling, general and
administrative expenses was attributable primarily to lower sales volume and
freight expenses, together with decreases in legal expenses and administrative
salaries.
INTEREST EXPENSE
Interest expense which includes amortization of debt issuance costs and facility
commitment fees, for the twenty-six weeks ended July 4, 2003 was $261,000, as
compared with $360,000 in the prior year period. For the thirteen weeks ended
July 4, 2003, interest expense was $116,000, as compared with $166,000 in the
prior year period. The decrease in interest expense in the current quarter was a
result of lower average borrowings, $0 in the second quarter of 2003 compared to
$8.6 million on the credit line for the same period of the prior year.
17
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. Because the
Company has operated at a loss in recent fiscal years, management believes that
under the provisions of SFAS 109, it is not appropriate to record income tax
benefits on current losses in excess of anticipated refunds of taxes previously
paid. As a result, the Company has established valuation allowances against the
net deferred tax benefits related to net operating loss carry forwards and other
net deductible temporary differences between financial and taxable income. The
valuation allowance may be reversed in future years if the Company returns to
profitability.
At January 3, 2003, the Company had no federal net operating loss carry forward.
State net operating loss carryforwards amounting to $48.2 million are available
to offset future taxable income in a number of states and they expire at various
dates in 2006 through 2022. The tax losses generated in 2002 and 2001 for
federal income tax purposes have been carried back under the temporary 5 year
net operating loss carry back rules applicable to 2002 and 2001. Accordingly,
the Company filed a carryback refund claim in 2003 and received federal income
tax refunds of $5.3 million with respect to the 2002 net operating loss. This
federal income tax refund was approximately $330,000 higher than expected due to
more favorable timing differences (primarily related to depreciation) than
originally calculated, resulting in an additional tax benefit of $330,000 in the
second quarter ending July 4, 2003.
LIQUIDITY AND CAPITAL RESOURCES
During the twenty-six weeks ended July 4, 2003, cash provided by operations was
approximately $3.8 million Net loss from continuing operations for the
twenty-six weeks was $1.0 million. Included in the net loss were non-cash
charges of amortization and depreciation expense of $1.1 million. Cash provided
by operating activities reflected a tax refund of $5.3 million, an increased
accounts payable of $0.6 million, and an increase in accrued liabilities of $0.6
million partially offset by an increase in accounts receivable of $1.0 million
and increased inventories of $0.4 million. In addition to cash provided by
operating activities, other significant items affecting cash flows from
continuing operations included capital expenditures of $0.4 million which were
partially offset by proceeds from sale of property and equipment of $0.2
million.
At July 4, 2003, the balance of the revolving credit facility was $0 and the
Company's net working capital from continuing operations was $13.9 million,
including $11.4 million in cash and cash equivalents, as compared with working
capital of $13.2 million at January 3, 2003, including $7.0 million in cash and
cash equivalents. The increase in net working capital was primarily attributable
to increases in cash and cash equivalents of $4.4 million (primarily from the
receipt of the federal income tax refund described above) accounts receivable of
$1.0 million, inventories of $0.4 million and prepayments and other of $0.4
million, partially offset by a decrease in refundable taxes of $4.2 million, and
increases in accounts payable of $0.6 million and in accrued liabilities of $0.6
million.
During the twenty-six weeks ended June 28, 2002, cash provided by operations was
approximately $0.8 million Net income from continuing operations for the
twenty-six weeks was $1.4 million. Included in net income were non-cash charges
of amortization and depreciation expense of $1.2 million. Cash provided by
operating activities also reflected increased accounts receivable of $3.7
million and increased prepayments and other of $1.1 million, partially offset by
an increase in accounts payable of $1.5 million, an increase in accrued
liabilities of $0.2 million and a decrease in inventories of $0.6 million. In
addition to cash provided by operating activities, other significant items
affecting cash flows from continuing operations included proceeds from the sale
of a joint venture of $1.3 million, proceeds from the sale of property and
equipment of $0.3 million partially offset by capital expenditures of $0.3
million.
At July 4, 2003, outstanding borrowings under the $10 million secured bank line
were $0 and availability on the line, which is dependent upon meeting certain
financial ratios and covenants, was $10 million. Management believes that
operating cash flows, together with borrowing capacity under the line, will
provide the Company with adequate liquidity and capital resources through the
remaining term of the bank line.
The Company does not presently have plans to make any material capital
expenditures in the next twelve months.
18
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.
Item 3.
Quantitative and Qualitative Disclosures of Market Risk.
Historically the Company has not entered into derivatives contracts to either
hedge existing risk or for speculative purposes. The Company also does not and
has not entered into contracts involving derivative financial instruments or
derivative commodity instruments. Although the Company's principal credit
agreement bears a floating interest rate of 1.0% over prime at July 4, 2003,
nothing was outstanding under the credit agreement. Accordingly, the Company
presently has no significant exposure to interest rate risks.
Item 4. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing of this quarterly report, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), of the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-4(c) under the Securities Exchange Act of 1934, as amended).
Following that evaluation, the Company's management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective
at that time. There have been no significant changes in the Company's internal
controls, other factors that could significantly affect internal controls, or
significant or material weaknesses with regard to the Company's internal
controls identified by the Company subsequent to that evaluation.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various legal proceedings incidental to its business.
The Company typically issues a one-year warranty on new manufactured homes. The
majority of these legal proceedings are claims related to warranty on
manufactured homes or employment issues such as workers' compensation claims.
Management believes that adequate reserves are maintained for such claims. In
the opinion of management, after consultation with legal counsel, the ultimate
liability, if any, with respect to these proceedings will not materially affect
the financial position or results of operations of the Company; however, the
ultimate resolution of these matters, which could occur within one year, could
result in losses in excess of the amounts reserved.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant's regular Annual Meeting of Stockholders was
held on May 20, 2003. Proxies for the Annual Meeting were
solicited pursuant to Regulation 14 under the Act.
(b) There was no solicitation in opposition to management's
nominees for directors as listed in the proxy statement, and
all of such nominees were elected.
(c) At the Annual Meeting the only proposal considered and voted
upon was the election of directors. The following seven
directors were elected to hold office until the 2004 Annual
Meeting or until their successors are elected and have
qualified. The numbers of votes cast were as follows:
Election of Directors:
Votes for Votes withheld
----------- --------------
Wendell L. Batchelor 10,902,156 21,480
Louis C. Henderson, Jr. 10,901,962 21,674
Keith O. Holdbrooks 10,898,156 25,480
Clinton O. Holdbrooks 10,902,306 21,330
Johnny R. Long 10,897,156 26,480
A.C. (Del) Marsh 10,903,962 19,674
James A. Taylor 10,903,962 19,674
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as a part of or furnished with this
report.
31.1 Certification
31.2 Certification
32.1 Certification of chief executive officer and chief financial
officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
July 4, 2003:
On April 28, 2003, Southern Energy Homes, Inc. filed a Form 8-K
reporting the issuance of its press release announcing financial
results for the quarter ended April 4, 2003.
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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 15, 2003 By: /s/ Keith O. Holdbrooks
--------------- -------------------------------------------
Keith O. Holdbrooks, Chief Executive Officer
Date: August 15, 2003 By: /s/ James L. Stariha
--------------- -------------------------------------------
James L. Stariha, Chief Financial Officer
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