UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number 0-24210
AMERICAN HOMESTAR CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0070846
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2450 SOUTH SHORE BOULEVARD, SUITE 300, LEAGUE CITY, TEXAS 77573
(Address of principal executive offices, including zip code)
(281) 334-9700
(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 [ ] No [ X ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ X ] No [ ]
The Company has 100 shares of Series M common stock, par value $.01 per share,
outstanding as of March 28, 2002. The Company is required to issue up to 10
million shares of Series C common stock, par value $.01 per share, to general
unsecured creditors in connection with the Company's Third Amended and Restated
Plan of Reorganization. The Company will issue shares of Series C common stock
as the claims review and adjustment process is completed.
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - September 29, 2001 and December 28, 2001
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Operations - three months ended December 28, 2001
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows - three months ended December 28, 2001
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . 15
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 16
1
PART I - FINANCIAL INFORMATION
On January 11, 2001, American Homestar Corporation (the "Company") and
twenty-one (21) of its subsidiaries/affiliates filed separate voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court of the Southern District of Texas
(the "Bankruptcy Court"). On August 14, 2001, the Bankruptcy Court confirmed
the Third Amended Joint Plan of Reorganization of the Company and its
subsidiaries (the "Plan"). All conditions to the effectiveness of the Plan were
met and the Plan became effective on October 3, 2001 (the "Effective Date").
Under the terms of the Reorganization Plan, all equity interests in the
Company were cancelled as of the Effective Date, and all holders of outstanding
shares of Company stock, which had previously traded under the symbols HSTR and
HSTRQ, lost all rights to equity interests in and to the reorganized Company.
Under the Plan, the Company has the authority to issue 15 million shares of
Series C common stock and is required to issue 10 million shares of newly
authorized Series C common shares to its general unsecured creditors. Those
shares will be issued upon the Company's completion of its claims review and
adjustment process. The Company also has the authority to issue 7.5 million
shares of Series M common stock to management under an incentive program.
In connection with its reorganization, the Company adopted "Fresh-Start
Reporting" under American Institute of Certified Public Accountants ("AICPA")
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code," beginning September 29, 2001, which coincides with
the end of the Company's first fiscal quarter. The Company elected to use
September 29, 2001, its quarter end, as its Fresh-Start Reporting date versus
the Effective Date of the Plan, October 3, 2001 as interim activity was
immaterial. Accordingly, all assets and liabilities were restated to reflect
their reorganization value, which approximates the fair value of the assets and
liabilities at the Effective Date. In addition, the accumulated deficit of the
Company was eliminated and its capital structure was recast in conformity with
the Plan. Accordingly, the Company recorded the effects of the Plan and
Fresh-Start Reporting as of September 29, 2001. The Company included its
Fresh-Start Balance Sheet as Exhibit 99.1 to the Form 8-K the Company filed
with the Securities Exchange Commission on March 20,2002.
During its reorganization, the Company did not prepare or present annual
and quarterly reports with the Securities and Exchange Commission but instead
filed Monthly Operating Reports with the Bankruptcy Court, as required by the
Bankruptcy Code. The Company also filed its Monthly Operating Reports as well as
its confirmed Plan with the Securities and Exchange Commission. The reorganized
Company has substantially less assets, liabilities and operations than prior to
its reorganization. Additionally, the reorganized Company has entirely new
ownership, as the Plan cancelled all classes of equity securities issued by the
Company prior to its reorganization. For these reasons, historical data,
normally provided, are not presented, as such data is not comparable to current
data.
2
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
SEPTEMBER 29, DECEMBER 28,
2001 2001
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 15,314 $ 15,922
Cash - reserved for claims. . . . . . . . . . . . . . . . . 4,453 3,015
Cash - restricted . . . . . . . . . . . . . . . . . . . . . 8,563 8,611
Accounts receivable - trade, net. . . . . . . . . . . . . . 2,251 3,160
Accounts receivable - other, net. . . . . . . . . . . . . . 332 8
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 22,884 23,315
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . 1,201 1,031
Notes receivable. . . . . . . . . . . . . . . . . . . . . . 285 285
Other current assets. . . . . . . . . . . . . . . . . . . . 1,076 546
-------------- -------------
Total current assets. . . . . . . . . . . . . . . . . . . 56,359 55,893
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 383 476
Investments in affiliates, at equity. . . . . . . . . . . . . 3,037 2,895
Notes receivable. . . . . . . . . . . . . . . . . . . . . . . 321 283
Property, plant and equipment . . . . . . . . . . . . . . . . 10,463 10,325
Assets held for sale. . . . . . . . . . . . . . . . . . . . . 6,043 6,043
-------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . $ 76,606 $ 75,915
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan payable. . . . . . . . . . . . . . . . . . . . . $ 19,622 $ 19,990
Current installments of notes payable . . . . . . . . . . . 331 260
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 2,412 1,677
Accrued salaries and benefits . . . . . . . . . . . . . . . 825 1,100
Accrued federal and state taxes payable . . . . . . . . . . 56 145
Other reserves. . . . . . . . . . . . . . . . . . . . . . . 5,142 5,173
Other taxes . . . . . . . . . . . . . . . . . . . . . . . . 653 885
Warranty reserve. . . . . . . . . . . . . . . . . . . . . . 2,145 2,019
Customer deposits . . . . . . . . . . . . . . . . . . . . . 922 926
Accrued other liabilities . . . . . . . . . . . . . . . . . 3,687 3,429
Deferred income . . . . . . . . . . . . . . . . . . . . . . 337 383
Liquidation and plan reserve. . . . . . . . . . . . . . . . 1,877 1,797
Claims reserve. . . . . . . . . . . . . . . . . . . . . . . 4,453 3,015
Initial distribution payable. . . . . . . . . . . . . . . . 2,100 2,100
-------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . 44,562 42,899
Notes payable, less current installments. . . . . . . . . . . 1,149 1,110
Minority interest in consolidated subsidiary. . . . . . . . . 716 746
SHAREHOLDERS' EQUITY
Common stock series C, par value $0.01 (15,000,000 shares. -- --
authorized, 10,000,000 shares to be issued)
Common stock series M, par value $0.01 (7,500,000 shares. . -- --
authorized, 100 shares outstanding)
Additional paid-in capital. . . . . . . . . . . . . . . . . . 30,179 30,179
Retained earnings . . . . . . . . . . . . . . . . . . . . . . - 981
-------------- -------------
Total shareholders' equity. . . . . . . . . . . . . . . . 30,179 31,160
Total liabilities and shareholders' equity. . . . . . . . $ 76,606 $ 75,915
============== =============
See accompanying notes to consolidated financial statements
3
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
Three Months Ended
DECEMBER 28,
2001
(UNAUDITED)
Revenues:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,393
Other revenues. . . . . . . . . . . . . . . . . . . . . . . 5,664
--------------------
Total revenues. . . . . . . . . . . . . . . . . . . . . . 29,057
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 19,078
Selling and administration expenses . . . . . . . . . . . . 8,893
--------------------
Total costs and expenses. . . . . . . . . . . . . . . . . . 27,971
--------------------
Operating income. . . . . . . . . . . . . . . . . . . . . . 1,086
Interest expense. . . . . . . . . . . . . . . . . . . . . . . (276)
Other income. . . . . . . . . . . . . . . . . . . . . . . . . 71
--------------------
Income before taxes . . . . . . . . . . . . . . . . . . . . 881
Income tax. . . . . . . . . . . . . . . . . . . . . . . . . . --
--------------------
Income before minority interests and earnings in affiliates 881
Minority interests. . . . . . . . . . . . . . . . . . . . . . (30)
Earnings in affiliate . . . . . . . . . . . . . . . . . . . . 130
--------------------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 981
====================
See accompanying notes to consolidated financial statements
4
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 28,
2001
(UNAUDITED)
--------------------
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 981
Depreciation. . . . . . . . . . . . . . . . . . . . . 156
Minority interests in loss of consolidated subsidiary 30
Earnings in affiliates. . . . . . . . . . . . . . . . (130)
Change in current working capital:
Increase in receivables . . . . . . . . . . . . . . (585)
Increase in inventories . . . . . . . . . . . . . . (431)
Decrease in prepaid expenses and other assets . . . 645
Decrease in accounts payable and accrued expenses . (522)
Payment of Plan Obligations . . . . . . . . . . . . (1,438)
--------------------
Net cash used in operating activities . . . . . . (1,294)
--------------------
Cash flows from investing activities -
Purchases of property, plant and equipment. . . . . . . (18)
Dividend from Unconsolidated Affiliate. . . . . . . . . 272
--------------------
Net cash provided by investing activities . . . . 254
--------------------
Cash flows from financing activities:
Borrowing under floor plan payable. . . . . . . . . . . 11,737
Repayment of floor plan payable . . . . . . . . . . . . (11,369)
Principal payment of notes payable. . . . . . . . . . (110)
Decrease in restricted and reserved cash. . . . . . . 1,390
--------------------
Net cash provided by financing activities . . . . 1,648
--------------------
Net increase in cash and cash equivalents . . . . . . . . 608
Cash and cash equivalents at beginning of period. . . . . 15,314
--------------------
Cash and cash equivalents at end of period. . . . . . . . $ 15,922
====================
Supplemental cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . $ 290
====================
See accompanying notes to consolidated financial statements
5
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) REORGANIZATION AND BASIS OF REPORTING
REORGANIZATION
The Company recently completed its formal reorganization under Chapter 11
of the US Bankruptcy Code. Its Plan of Reorganization ("the Plan") was
confirmed on August 14, 2001 and became effective October 3, 2001 (the
"Effective Date").
In connection with its reorganization, the Company has significantly
downsized its operations and has focused on its core Southwest market where the
Company is based and where it has historically had its most favorable overall
results. The Company currently operates 38 retail sales centers and has smaller
sales operations in two manufactured housing communities. The Company also
operates three manufacturing plants, two of which are producing new homes while
the third is used to refurbish lender repossessions. The Company also operates
an insurance agency, which sells homeowner's insurance, credit life insurance
and extended warranty coverage to its customers. In addition, the Company
operates a reinsurance company, which reinsures the credit life and extended
warranty policies sold by the Company, allowing the Company to participate in
additional homeowner insurance profits in years where claims are lower than
expected. The Company also has a 51% ownership interest in a transport company,
which specializes in the transportation of manufactured and modular homes and
offices. Additionally, the Company has a 50% interest in a finance company,
which specializes in providing chattel and land/home financing to the Company's
customers. Management believes that its vertical integration strategy, which
derives multiple profit sources from each retail sale, will allow the Company to
be more successful, over time, than would otherwise be the case.
BASIS OF REPORTING
Upon emergence from its Chapter 11 proceedings, the Company (referred to as
"Successor Company" when compared to periods prior to September 29, 2001
"Predecessor Company") adopted the provisions of Statement of Position No. 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("Fresh-Start Reporting") as promulgated by the AICPA. Accordingly, all assets
and liabilities were restated to reflect their reorganization value, which
approximated their fair value at the Effective Date. In addition, the
accumulated deficit of the Company was eliminated and its capital structure was
recast in conformity with the Plan, and as such, the Company recorded the
effects of the Plan and Fresh-Start Reporting as of September 29, 2001.
Activity between September 29, 2001, the date of the Consolidated Balance Sheet,
and October 3, 2001, the Effective Date of the Plan was not material to the
Consolidated Balance Sheet.
The reorganization value of the Company's common equity of approximately
$30 million at September 29, 2001 was determined by an independent valuation and
financial specialist, after consideration of several factors and by using
various valuation methods including appraisals, cash flow multiples,
price/earnings ratios and other relevant industry information. The
reorganization value of the Company was allocated to various asset categories
pursuant to Fresh-Start accounting principles.
The accompanying unaudited consolidated financial statements of the Company
and its subsidiaries have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Because of the seasonal nature of the
Company's business, operating results for the three months ended December 28,
2001, are not necessarily indicative of the results that may be expected for the
fiscal year ending June 28, 2002. These consolidated financial statements
should be read in conjunction with the financial statement and the notes thereto
included in the Company's Form 8-K filed March 20, 2002.
6
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS 144 replaces SFAS 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
other related provisions. SFAS 144 provides updated guidance concerning the
recognition (continued) and measurement of an impairment loss for certain types
of long-lived assets. It also expands the scope of a discontinued operation to
include a component of an entity, and it eliminates the current exemption to
consolidation when control over a subsidiary is likely to be temporary. SFAS 144
is effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those years. The adoption of the
provisions of SFAS 144 will have no impact on the Company's results of
operations, financial position or cash flows.
(2) LIQUIDITY
Management believes that American Homestar Corporation has adequate debt
financing availability and will have sufficient liquidity throughout fiscal 2002
to support continued operations and meet all obligations under the Plan.
Management's assessment of its liquidity and ability to sustain operations is
based on certain assumptions regarding industry and economic conditions. There
is no assurance that the Company's liquidity will not be impacted by unforeseen
conditions.
(3) REPURCHASE AGREEMENTS
The Company has entered into repurchase agreements with various financial
institutions and other credit sources pursuant to which the Company has agreed,
under certain circumstances, to repurchase manufactured homes sold to
independent dealers in the event of a default by such independent dealers on
their obligation to such credit sources. Under the terms of such repurchase
agreements, the Company agrees to repurchase manufactured homes at declining
prices over the periods of the agreements (which generally range from 18 to 24
months).
While repurchase activity is very sporadic and cyclical, the Company
provides for anticipated repurchase losses. At December 28, 2001, the Company
was at risk to repurchase up to $1.7 million of manufactured homes and has
provided for estimated net repurchase losses of approximately $135,000.
(4) INVENTORIES
A summary of inventories follows (in thousands):
SEPTEMBER 29, DECEMBER 28,
2001 2001
-------------- -------------
Manufactured homes:
New . . . . . . . . . . . . . . $ 20,194 $ 20,559
Used. . . . . . . . . . . . . . 897 1,312
Furniture and supplies. . . . . . 98 104
Raw materials and work-in-process 1,695 1,340
-------------- -------------
$ 22,884 $ 23,315
============== =============
7
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) INVESTMENTS IN AFFILIATED COMPANY
Homestar 21, LLC ("Homestar 21") is 50% owned by the Company and 50% owned
by 21st Mortgage, a company not affiliated with the Company. The Company
accounts for this investment in Homestar 21 using the equity method. The
Company invested $2.4 million in Homestar 21 during fiscal 2000. Summary
financial information for Homestar 21, as of and for the three months ended
December 28, 2001 follows (in thousands):
DECEMBER 28,
2001
-------------
Total assets . . . . . . . . . . . $ 43,231
Total liabilities. . . . . . . . . $ 37,442
Total equity . . . . . . . . . . . $ 5,789
Total revenue (three months ended) $ 651
Net income (three months ended). . $ 259
(6) NOTES AND FLOOR PLAN PAYABLE
The Company finances the purchase of its display models and inventory homes
through a floor plan credit facility with Associates Housing Finance LLC
("Associates"). Although the maximum allowance under the line of credit is $38
million with various sub-limits for each category of inventory financed, the
Company anticipates that the loan has a maximum potential advancement of $23 to
$24 million. The line is contractually committed until October 2, 2004. The
balance outstanding at December 28, 2001 was approximately $20.0 million,
consisting of $16.3 million in revolving debt and $3.7 million under two
liquidating lines. As the liquidating lines are paid down, additional borrowing
capacity is added to the revolving lines. The revolving portions of the line
carry an annual interest rate of prime plus 1%. The liquidating portions of the
line carry no interest for the first six months (until April 3, 2002) and
thereafter accrue interest at a rate of prime plus 1% per annum. The floor plan
payable is secured by substantially all of the Company's inventory, real estate
and by certain other assets (including certain specific cash deposits,
approximately $3.4 million at December 28, 2001 included in restricted cash).
In addition to traditional subjective covenants, there are two financial
covenant tests the Company is required to meet under its floor plan agreements.
One test is floor plan debt compared to total assets (as defined). The other
test is a minimum cash balances requirements. At December 28, 2001, the Company
was in compliance with all covenants.
In addition to the floor plan payable the Company also has other notes
payable, primarily to non-financial institutions secured by real estate with
interest rates ranging from 7.25% to 10.50%. None of these notes payable have
covenant requirements.
8
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the related amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of December
28, 2001 are as follows (in thousands):
DECEMBER 28,
2001
--------------
Current Deferred Taxes:
Uniform Capitalization of Inventory. . . . . $ 84
Inventory Reserve. . . . . . . . . . . . . . 609
Allowance for doubtful accounts. . . . . . . 2,161
Liabilities not deductible until paid. . . . 1,348
Net operating loss carry forward . . . . . . 4,653
--------------
Total before valuation allowance . . . . . . 8,855
Valuation allowance. . . . . . . . . . . . . $ (8,855)
--------------
Current deferred tax assets. . . . . . . . $ --
==============
Non-current deferred taxes:
Goodwill amortization and write-offs . . . . 14,864
Plant and equipment depreciation differences 1,800
Impairment of assets . . . . . . . . . . . . 8,626
Other non-current. . . . . . . . . . . . . . 100
Net operating loss carry forward . . . . . . 28,108
--------------
Total before valuation allowance . . . . . . 53,498
Valuation allowance. . . . . . . . . . . . . $ (53,498)
--------------
Non-current deferred tax asset . . . . . . $ --
==============
At December 28, 2001, the Company has net operating loss carryforwards of
approximately $94 million for income tax purposes that will expire from 2010
through 2021. As a result of the reorganization, the ultimate utilization of
the Company's net operating losses could possibly be limited and/or restricted.
For financial reporting purposes, a valuation allowance of $62.4 million
has been recognized to offset the deferred tax assets related to these
carryforwards and other deferred tax assets that may not be realized.
The income tax benefit for the three month period ended December 28, 2001
differs from the federal statutory rate principally due to income tax benefits
recorded by Lifetstar Reinsurance Limited and Roadmasters Transportation
Company, subsidiaries that do not consolidate their financial reporting with the
Company for income tax purposes. A provision was not recorded for federal or
state income tax due to net operating losses that have not previously been
benefited. (See note 10)
(8) SHAREHOLDERS' EQUITY AND PRO-FORMA EARNINGS PER SHARE
Pursuant to the Plan, all shares and rights to shares of stock in the
Predecessor Company were cancelled as of the Effective Date. Pursuant to the
exemption set forth in Section 1145 of the Bankruptcy Code, the Company will
issue new shares of Series C common stock to persons holding allowed unsecured
claims in the Company's bankruptcy case and shares of Series M common stock to
management under an incentive program. Under the Plan, the Successor Company
has authority to issue 15 million shares of Series C common stock and 7.5
million shares of Series M common stock. It is anticipated that 10 million
9
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares of Series C common stock will be issued for resolution of claims. As of
September 29, 2001, no shares of Series C common stock and 100 shares of series
M common stock were issued and outstanding. The Successor Company anticipates
that the shares of Series C Common Stock will be distributed beginning in April
2002, and that the distribution will continue on an incremental basis as the
Bankruptcy Court enters orders allowing and disallowing claims that have been
filed in the Company's bankruptcy case. The Plan provides that up to one-third
of the Company's newly issued shares (consisting of shares of Series M common
stock) can be awarded to management under an incentive program established by
the Plan. As such 4,999,900 shares of Series M common stock are reserved for
option grants to management. Options for 4,949,900 shares have been approved at
an exercise price of $1.35 per share. Those options vest seven years from date
of grant unless certain annual performance criteria are met sooner. Because the
exercise price of the options is equal to the current market price of the shares
under option, the options are not dilutive. Therefore, pro-forma basic and
diluted shares outstanding were 10,000,100 and pro-forma basic and diluted
earnings per share for the three months ended December 28, 2001 was $0.10.
(9) BUSINESS SEGMENTS
The Company operates primarily in three business segments- (i) retail
sales; (ii) manufacturing; and (iii) corporate, which consists of transportation
services, financial services and the corporate group. The following table
summarizes for the three months ended December 28, 2001 information about these
segments (in thousands):
RETAIL MANUFACTURING ADJUSTMENTS/
RETAIL MANUFACTURING CORPORATE ELIMINATIONS TOTAL
------- -------------- ----------- ------------ -------
Revenues from external customers. . $20,640 $ 2,753 $ 5,664 $ -- $ 29,057
Intersegment revenues . . . . . . . -- 10,730 -- (10,730) --
Interest expense. . . . . . . . . . 276 -- -- -- 276
Depreciation. . . . . . . . . . . . 59 60 37 -- 156
Segment profit (loss) before income 357 1,132 (324) (284) 881
taxes and earnings in affiliates
Segment assets. . . . . . . . . . . 33,783 27,424 42,533 (27,825) 75,915
Expenditures for segment assets . . 8 -- 10 -- 18
Intersegment revenues consist primarily of sales by the manufacturing
segment to the retail segment and are transferred at market price. The
adjustment to intersegment revenue and segment profit is made to eliminate
intercompany sales and profit between the manufacturing and retail segments. The
segment assets adjustment consists primarily of an adjustment to eliminate
subsidiaries' equity at the corporate level and the elimination of intercompany
receivables.
Earnings in affiliates in the consolidated statements of operations relates
to the financial services segment.
(10) SUBSEQUENT EVENTS
On March 9, 2002, The Job Creation and Worker Assistance Act of 2002 (the
"Act") was signed into law. Among other things, the Act extended the eligible
periods to which certain losses (those arising in fiscal years ending in 2001 or
2002) could be carried back for federal income tax purposes from two years to
five years. The Company reported a significant taxable loss for its fiscal year
ended June 30, 2001. Management believes that, under the Act, the Company is
eligible to carry that loss back to its tax years ended in May 1997 and May
1998. In those years, the Company reported taxable income and paid federal
taxes. Management is currently in the process of determining its loss
carry-back and potential refund, preliminarily estimated at $18.1 million. The
actual recovery amount is contingent upon proper application for the carry-back
and final review and approval of the Government. When the actual amount is
determined, it will be reflected as an adjustment to Shareholders' Equity in
accordance with Fresh Start Reporting.
10
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE QUARTER ENDED DECEMBER 28, 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this document, the words "anticipate,"
"believe," "estimate," "should," and "expect" and similar expressions as they
relate to the Company or management of the Company are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward-looking statements.
GENERAL:
American Homestar is a regional, vertically integrated manufactured housing
Company with operations in manufacturing, retailing, home transportation
services, financing and insurance. The Company has its principal operation in
Texas, although it also sells its products in neighboring states. The Company
refers to this regional market as its core Southwest market.
The Company recently completed its formal reorganization under Chapter 11
of the U.S. Bankruptcy Code. The Company's plan of reorganization was confirmed
on August 14, 2001 and became effective October 3, 2001. In connection with its
reorganization the Company adopted Fresh Start accounting under AICPA Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," beginning September 29, 2001, which coincides with the
beginning of its second fiscal quarter. The application of Fresh Start
accounting required the Company to restate its assets at fair value and to
reflect appropriate post-reorganization liabilities including reserves for
claims that will become due under the Plan. The difference between total
assets, on a restated basis, and total liabilities became initial contributed
capital, subject to upward or downward adjustment based on the appraised value
of the Company. The Company's appraised value at September 29, 2001 was
approximately $30 million, therefore no additional valuation adjustment was
necessary.
In connection with its reorganization, the Company has significantly
downsized its operations and has focused on its core Southwest market, where the
Company is based and where it has historically had its most favorable overall
results. The Company currently operates 38 retail sales centers and has smaller
sales operations in two manufactured housing communities. The Company also
operates three manufacturing plants, two of which are producing new homes while
the third is used to refurbish lender repossessions. The Company also operates
an insurance agency, which sells homeowner's insurance, credit life insurance
and extended warranty coverage to its customers. In addition, the Company
operates a reinsurance company, which reinsures the credit life and extended
warranty policies sold, and allows the Company to participate in additional
homeowner insurance profits in years where losses are lower than expected. The
Company also has a 51% ownership interest in a transport company, which
specializes in the transportation of manufactured homes, modular homes and
offices. The Company also has a 50% interest in a finance company, which
specializes in providing chattel and land/home financing to the Company's
customers. Management believes that its vertical integration strategy, deriving
multiple profit sources from each retail sale, will allow the Company to be more
successful, over time, than would otherwise be the case.
11
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 28, 2001
- ------------------------------------------------------------
The results of operations for this quarter reflect operating results for
the Company's first fiscal quarter following its reorganization. While
traditional discussion and analysis compares the current quarter with the same
quarter in the previous year, such an analysis is not meaningful for this period
due to the dramatic downsizing and other changes in the Company and its base of
operations as a result of its reorganization. This discussion and analysis
addresses the significant factors that reflect in the Company's operating
results for the quarter.
The following table summarizes certain key sales and operating statistics
for the period:
THREE MONTHS ENDED
DECEMBER 28,
2001
-------------------
Company manufactured new homes sold at retail
Single section. . . . . . . . . . . . . . . . . . . . . 115
Multi-section . . . . . . . . . . . . . . . . . . . . . 242
-------------------
Total new homes sold at retail. . . . . . . . . . . . . . 357
Previously owned homes sold at retail . . . . . . . . . . 111
Average retail selling price - new homes (excluding land)
Single section. . . . . . . . . . . . . . . . . . . . . $ 34,990
Multi section . . . . . . . . . . . . . . . . . . . . . $ 64,081
Retail outlets at end of period (including communities) . 40
Total manufacturing shipments (homes) . . . . . . . . . . 411
Manufacturing shipments to independent dealers (homes). . 77
The following table summarizes the Company's operating results, expressed
as a percentage of total revenues, for the period indicated:
THREE MONTHS ENDED
DECEMBER 28,
2001
--------------------
Total revenues. . . . . . . . . . . . . . . 100.0%
Gross profit . . . . . . . . . . . . . . . . 34.3%
Selling, general and administrative expenses 30.6%
Operating income . . . . . . . . . . . . . . 3.7%
Net income . . . . . . . . . . . . . . . . . 3.6%
Net Sales: Net sales for the quarter were $23.4 million. Retail sales
were $20.6 million, primarily attributable to the sale of 357 new homes from the
Company's retail centers and communities. The Company averaged 8.6 new home
sales per retail location during the quarter (or nearly 3 per month), which is
low by historical standards but, in the opinion of management, generally in line
with current industry performance. Of the 357 new homes sold at retail, 90 were
sold from pre-reorganization stock (discounted to market, therefore, with a
greater than average gross profit margin) and 267 were sold from stock produced
after the Company began its reorganization. The Company also sold 77 homes
(representing $2.8 million in sales) from its manufacturing facilities to, or
through, independent retailers. Management believes that both the number and
proportion of homes sold to independent dealers will increase gradually, but
steadily, as the Company gains industry lender (dealer inventory financing)
support for its products now that its reorganization is complete. Retail sales
of used homes for the quarter were $1.7 million.
Other Revenues: Other revenues were $5.7 million for the quarter, of which
$2.9 million related to the Company's transportation operations, $2.3 million
related to the Company's insurance operations, with the remainder primarily
attributable to commissions from the sale of consigned lender repossession
homes.
Cost of Sales: Cost of Sales for the quarter was $19.1 million or 65.7% of
total revenues. Of the total cost of sales, $14.1 million related to the net
cost of the homes that were retailed to homeowners during the quarter including
the accessories and options sold with the homes. The remainder is associated
with the actual production costs (primarily material and labor) attendant to the
homes sold to independent dealers, warranty and service costs, direct costs
(principally line haul payments to the owner-operators) associated with our
transportation services and direct costs (principally commissions and claims
losses) attributable to premiums ceded to the reinsurance company.
12
Selling, General and Administrative Expenses: SG&A expenses were $8.9
million, or 30.6% of total revenue including approximately $.2 million in
non-cash (depreciation) charges. Annualized SG&A expenses have been
significantly reduced as a result of downsizing and cost reduction measures
before, during and since the Company began its reorganization in January 2001.
Excluding depreciation expense, SG&A expenses totaled $8.7 million or 30.1% of
revenues. Of the total SG&A expenses, $6.3 million related to the Company's
retailing operations and represents variable costs such as delivery,
installation and sales commissions as well as fixed operating costs including
occupancy - related costs as to the Company's 40 retail outlets and the costs of
administration and control of the retail group. In addition, $0.7 million of
SG&A expense related directly to the Company's manufacturing operations such as
sales costs, engineering and product support costs and occupancy and
administration costs at each of the Company's three plants. The balance of the
SG&A expenses related to Corporate administration and control, general expenses
of the transportation operations, insurance agency operations and reinsurance
operations.
Interest: Interest expense for the quarter was approximately $276,000 and
is primarily attributable to the Company's inventory financing arrangement
through Associates Housing Finance, LLC ("Associates"). While the Company is
liquidating older (pre-reorganization) inventory with no interest charges until
April 2002, it is adding to new (replacement stock) inventory upon which
interest charges accrue. At December 28, 2001, total floor plan debt was
approximately $20.0 million, of which only $16.3 million was interest bearing.
Interest on this debt accrues at an annual rate of prime plus 1 percent.
Other income: Other income for the quarter was approximately $71,000 and
is primarily attributed to interest earned on cash investments.
Taxes: At December 28, 2001 the Company had net operating loss
carryforwards of approximately $94 million, for income tax purposes, that will
expire from 2010 through 2021. These loss carryforwards benefit the current
fiscal year; however, because of the Company's reorganization, the ultimate
utilization of these carryforwards in future years could be limited or
restricted.
LIQUIDITY AND CAPITAL RESOURCES:
At December 28, 2001, the Company had operating cash and cash equivalents
of $15.9 million, cash - reserved for claims of $3.0 million, and cash -
restricted of $8.6 million. The reserved cash balance was for payment of
certain claims under the Plan. Of the restricted cash, $3.4 million is held in
a cash collateral account, which secures the Company's floor plan line through
Associates, and the remaining $5.2 million are cash collateral accounts pledged
to secured third-party beneficiaries. The Company has released its claims to
those accounts pledged to third-party beneficiaries and expects that such
beneficiaries will take possession of the cash in those accounts.
Under the Plan, the Company is required to make an initial distribution to
its new shareholders of approximately $5.3 million. Of the distribution, $2.2
million will come from operating cash (escrowed on January 2, 2002), $1.0 will
come from proceeds of notes receivable and $2.1 million will come from an
expected federal income tax refund. On the December 28, 2001 balance sheet, the
$1.0 million notes receivable and the $2.1 million federal income tax refund
have been fully reserved as proceeds from those assets will be used for the
initial distribution to shareholders.
Also under the Plan, the Company identified certain non-core assets
(principally idle factories in non-core markets) for which there are no current
intentions to reactivate these facilities for future core operations.
Management estimates the fair market value of these assets to be approximately
$6.0 million. The Company has reported these assets as Assets held for sale,
and is actively seeking to sell or lease these properties. Net cash proceeds
resulting from these activities will be deposited in the restricted cash
collateral account.
13
The Company finances the purchase of its display model and inventory homes
through a floor plan credit facility with Associates. Although the maximum line
of credit is $38 million with various sub-limits for each category of inventory
financed, the Company anticipates that the loan has a maximum potential
advancement of $23 to $24 million. The line is contractually committed until
October 2, 2004. The balance outstanding at December 28, 2001 was $20.0
million consisting of $16.3 million in revolving debt and $3.7 million under
liquidating lines. As the liquidating lines are paid down, additional borrowing
capacity is added to the revolving lines. The revolving portions of the line
carry an annual interest rate of prime plus 1%. The liquidating portions of the
line carry no interest for the first six months (until April 3, 2002) and
thereafter accrue interest at a rate of prime plus 1% per annum. Management
believes that it will liquidate much of the inventory on the liquidating
portions of this credit facility before such time that interest will accrue.
Management also believes that this floor plan line is sufficient to meet its
inventory financing needs for the foreseeable future.
In accordance with customary business practice in the manufactured housing
industry, the Company has entered into repurchase agreements with various
financial institutions and other credit sources pursuant to which the Company
has agreed, under certain circumstances, to repurchase manufactured homes sold
to independent dealers in the event of a default by such independent dealer on
their obligation to such credit sources. Under the terms of such repurchase
agreements, the Company agrees to repurchase manufactured homes at declining
prices over the periods of the agreements (which generally range from 18 to 24
months). While repurchase activity is very sporadic and cyclical, the Company
provides for anticipated repurchase losses. At December 28, 2001 the Company
was at risk to repurchase approximately $1.7 million of manufactured homes and
has provided for estimated net repurchase losses of approximately $135,000.
The Company believes that its current cash position, along with its floor
plan facility, its expected federal income tax recovery related to its
additional loss carry back (see note 10), coupled with expected cash flow from
operations will be sufficient to meet cash flow needs for the foreseeable
future.
EVENTS OF, AND SUBSEQUENT TO, SEPTEMBER 11, 2001:
The events of September 11, 2001 resulted in an interruption in retail
sales traffic but the effect was short-lived and did not have any identifiable
significant impact on general business activity or sales.
In October 2001, the bankruptcy of Enron Corp. and related employee layoffs
had an immediate employment impact in one of the Company's major market areas.
The possible economic "ripple effects" of this event are not yet completely
known.
In January 2002, a new Texas law (HB 1869) became effective. This affected
the local manufactured housing industry because it eliminated a popular and
easier (chattel mortgage) financing option in all cases where the homeowner was
placing his home on owned or purchased land. This type of business has
traditionally represented approximately 70% of all financing in the Southwest
region. Chattel financing is expected to be only 30% of all future business in
the Southwest region. Instead land/home financing or traditional mortgage
loans, under one of several government programs, will be the primary financing
vehicles for the Company's products in the future.
Management believes that job growth and consumer confidence are the two
principal economic factors that drive housing demand. Management also believes
that potential disruption from any of the above events may be mitigated by the
fact that the manufactured housing industry, in general, is beginning to emerge
from a very difficult industry environment. Improving industry dynamics may
partially offset any decline or delay in product demand resulting from general
economic factors or the recent law change in Texas. While management believes
that any short term impact of the above events may be mitigated, management will
continue to monitor all leading indicators, as well as actual sales activity,
and will continue to be proactive as to indicated trends.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in interest
rates on its net variable rate debt, which consists of its liability for
flooring of manufactured housing retail inventories. The Company does not use
interest rate swaps, futures contracts or options on futures, or other types of
derivative financial instruments.
14
For fixed rate debt, changes in interest rates generally affect the fair
market value, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence fair market value,
but do affect future earnings and cash flows. The Company does not have an
obligation to prepay fixed rate debt prior to maturity, and as a result,
interest rate risk and changes in fair market value should not have a
significant impact on such debt until the Company would be required to refinance
it. Based on the current level of variable rate debt, each one-percentage point
increase (decrease) in interest rates would result in an increase (decrease) of
approximately $200,000 per year or $50,000 per quarter.
The Company's financial instruments are not currently subject to foreign
currency risk or commodity price risk. The Company does not believe that future
market interest rate risks related to its marketable investments or debt
obligations will have a material impact on the Company or the results of its
future operations.
The Company has no financial instruments held for trading purposes. The
Company originates loans through its 50% owned affiliate, Homestar 21, most of
which are at fixed rates of interest, in the ordinary course of business and
periodically securitizes them to obtain permanent financing for such loan
originations. Accordingly, Homestar 21's loans held for sale are exposed to
risk from changes in interest rates between the time loans are originated and
the time at which Homestar 21 obtains permanent financing, generally at fixed
rates of interest, in the asset-backed securities market. Homestar 21 attempts
to manage this risk by minimizing the warehousing period of unsecuritized loans.
Homestar 21 currently does not originate any loans with the intention of holding
them for investment.
15
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the Plan, all shares and rights to shares of stock in the
predecessor Company were cancelled as of the Effective Date. Pursuant to the
exemption set forth in Section 1145 of the Bankruptcy Code, the Company will
issue new shares of Series C common stock to persons holding allowed unsecured
claims in the Company's bankruptcy case and shares of Series M common stock to
management under an incentive program. Under the Plan, the Successor Company
has authority to issue 15 million shares of Series C common stock and 7.5
million shares of Series M common stock. It is anticipated that 10 million
shares of Series C common stock will be issued for resolution of claims. As of
December 28, 2001, no shares of Series C common stock and 100 shares of series M
common stock were issued and outstanding. The Successor Company anticipates that
the shares of Series C Common Stock will be distributed beginning in April 2002,
and that the distribution will continue on an incremental basis as the
Bankruptcy Court enters orders allowing and disallowing claims that have been
filed in the Company's bankruptcy case. The Plan provides that up to one-third
of the Company's newly issued shares (consisting of shares of Series M common
stock) can be awarded to management under an incentive program established by
the Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Debtors' Third Amended and Restated Plan of Reorganization.
(Incorporated by reference to Exhibit 99.2 to the Company's Current
Report on Form 8-K filed on January 8, 2002)
3.1 Amended and Restated Articles of Incorporation of the Company.
(Incorporated by reference to the Company's Registration Statement No.
33-78630)
3.2 Amended and Restated Bylaws of the Company. (Incorporated by reference
to the Company's Registration Statement No. 33-78630)
(b) REPORTS ON FORM 8-K -
March 20, 2002 - Fresh-Start Balance Sheet
January 25, 2002 - Dismissal and appointment of principal accountants
January 8, 2002 - Monthly operating reports and confirmed Plan of
Reorganization
July 17, 2001 - Monthly operating reports
January 23, 2001 - Commencement of Chapter 11 proceedings
16
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.
AMERICAN HOMESTAR CORPORATION
Date: March 28, 2002 By: /s/ Craig A. Reynolds
------------------------
Craig A. Reynolds
Executive Vice President, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
17