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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1997
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Highway 41 North, P.O. Box 390, Addison, Alabama 35540
- ------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (205) 747-8589
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A
- ---------------------------------- -----------------------------------------
- ---------------------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001
------------------------------
Title of class
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock on the
Nasdaq Stock Market as of March 25, 1997, was $150,661,068.80. The number of
shares of common stock outstanding at that date was 15,437,801 shares, $.0001
par value.
Documents Incorporated By Reference
- -----------------------------------
Part Item
---- ----
1. Southern Energy Homes, Inc. Definitive
Proxy Statement with respect to its
June 4, 1997 Annual Meeting of
Stockholders III 10,11,12,13
PART I
SOUTHERN ENERGY HOMES, INC.
ITEM 1. BUSINESS
GENERAL
Southern Energy Homes, Inc. (the "Company") is engaged in: the
production and retail sale of manufactured homes and the retail financing of
manufactured homes. The Company produces manufactured homes sold primarily in
the southeastern and southcentral United States. The Company operates eleven
home manufacturing facilities (eight in Alabama, one in Texas, one in North
Carolina and one in Pennsylvania) to produce homes sold in 30 states. The
Company's homes are currently marketed under six brand names by 465 independent
dealers at 859 independent dealer locations and eight company-owned retail
centers.
The Company manufactures high quality homes, designed as primary
residences ready for immediate occupancy. The homes, most of which are
customized at the Company's factories to the home buyer's specifications, are
constructed by the Company in one or more sections which are transported by its
own or independent trucking companies to dealer locations.
The Company historically focused on the middle to higher priced range
of the manufactured housing market, but in 1993 expanded its product line to
include lower priced homes. The Company's homes range in size from 653 to 2,417
square feet and sell at retail prices ranging from $14,900 to $108,000,
excluding land.
The Company believes that its willingness to customize floor plans and
design features to match home buyer preferences is the principal factor which
differentiates it from most of its competitors.
Through its finance subsidiary and, more recently, through a finance
joint venture, the Company also provides home buyers with a source of financing
for homes sold by the Company.
MANUFACTURED HOMES
The Company produces a variety of single- and multi-section homes under
six brand names. The Company's homes are manufactured in sections, which
individually are transported to their destination. The finished homes may
consist of one or more sections. Multi-section products are joined at their
destination by the dealer or its contractor. The Company initially concentrated
on the medium to higher priced segments of the manufactured housing market. Over
the past several years, the Company has broadened its product line with lower
priced homes that sell at retail for less than $25,000. The six divisions of the
Company at which its homes were manufactured in 1996 and certain characteristics
of the homes are as follows:
Retail
Division Type Square Feet Price Range
- ---------------------------------------------------------------------------------------
Southern Energy Multi-section 1,312-2,417 $33,800-$108,000
Southern Life/style Single- and multi-section 858-2,296 23,200- 63,000
Southern Homes Single- and multi-section 653-1,968 14,880- 35,400
Southern Energy Homes
of Texas Single- and multi-section 1,088-2,128 26,600- 54,600
Southern Energy Homes
of North Carolina Single- and multi-section 765-2,075 21,500- 61,200
Southern Energy Homes
of Pennsylvania Single- and multi-section 924-2,016 29,900- 55,000
For the fiscal year ended January 3, 1997, the net revenues contributed
by each of the Company's six home manufacturing divisions were as follows:
Southern Energy - $57 million; Southern Life/Style - $71 million; Southern Homes
- - $90 million; Southern Energy Homes of Texas - $35 million; Southern Energy
Homes of North Carolina - $26 million; and Southern Energy Homes of Pennsylvania
- - $10 million.
The Company currently operates four component supply divisions. Classic
Panel Designs supplies laminated and other interior wall panels. Wind-Mar Supply
provides windows, doors and countertops. Trimmasters produces wood moulding and
trim finishing. Unique Dinettes produces kitchen and dining furniture. These
divisions sell products both to our manufactured housing divisions and to
third-party customers. For the fiscal year period ended January 3, 1997, .5% of
the Company's net revenues were attributable to sales of these ancillary
products to third-parties.
The Company's product development and engineering personnel design
homes in consultation with divisional management, sales representatives and
dealers. They also evaluate new materials and construction techniques in a
continuous program of product development and enhancement. With the use of
computer aided design technology, the Company has developed engineering systems
which permit customization of homes to meet the individual needs of prospective
buyers. These systems allow the Company to make modifications such as increasing
the length of a living room, moving a partition, changing the size and location
of a window or installing custom cabinets without significant impact upon
manufacturing productivity.
Each home contains two to four bedrooms, a living room, dining room,
kitchen and one to three bathrooms, and features a heating system, a stove and
oven, refrigerator, carpeting and draperies. The Company has traditionally
focused on designing manufactured homes with features that make them comparable
to site-built homes, including stone fireplaces and vaulted ceilings, thus
broadening the base of potential customers. In addition to offering the consumer
optional features such as dishwashers, oak cabinets and furniture packages as
well as a wide range of colors, moldings and finishes, the Company generally
permits extensive customization of floor plan designs to meet specific customer
preferences.
RETAIL FINANCING
Home buyers normally secure financing from third-party lenders such as
banks or independent finance companies. While the Company believes that consumer
financing has generally become more available in the manufactured housing
industry in recent years, the availability and cost of financing is important to
the Company's sales. In order to provide home buyers with an additional source
of financing, the Company's wholly owned subsidiary, Wenco Finance, Inc. ("Wenco
Finance") has been originating and servicing consumer loans for homes
manufactured by the Company. At January 3, 1997, the Company had $27.6 million
of installment contract receivables outstanding as compared with $655,000 at
December 29, 1995. In February 1997, the Company formed a joint venture with
21st Century Mortgage Corporation ("21st Century"). The joint venture, Wenco 21,
will continue to offer, through 21st Century, consumer financing for homes
manufactured by the Company as well as for other homes sold through its retail
centers and independent dealers. With marketing support and assistance from the
Company and Wenco 21, 21st Century will originate and service consumer loans and
will assign to Wenco 21 the net collections from those loans after deducting
service fees and costs, credit loss reserves, and principal and interest
payments due to third party investors or lenders. Wenco 21 will be obligated to
indemnify 21st Century against losses incurred in connection with the loans,
other than losses incurred as a result of negligence by 21st Century. In light
of the shift in consumer finance activities to Wenco 21, Wenco Finance has
suspended its loan origination activities and has engaged 21st Century to
service its existing loan portfolio. The Company expects that 21st Century and
Wenco 21, which is currently in a start-up phase of operation, will market the
new consumer loan program through the Company's retail centers and independent
dealer network. There can be no assurance that 21st Century and Wenco 21 will be
able to provide significant levels of financing for home buyers, or that such
financing activities will not adversely impact the Company's profitability.
HOME MANUFACTURING OPERATIONS
The Company's homes are currently manufactured by six operating
divisions using assembly line techniques at eleven facilities, four of which are
located in Addison, Alabama, two of which are located in Double Springs,
Alabama, two of which are located in Lynn, Alabama, one of which is located in
Fort Worth, Texas, one of which is located in Albemarle, North Carolina and one
of which is located in Hegins, Pennsylvania.
The Company's facilities operate on a one shift per day, five days per
week basis. The Company believes that these facilities have the capacity to
produce a total of approximately 485 floor sections per week with minimal labor
additions. The Company plans to continue to operate, like most of its
competitors, on a single shift per day basis. During the fiscal year ended
January 3, 1997, the Company produced an average of 315 floor sections per week.
This represented an 18% increase in floor section production from an average of
268 floor sections per week in the fiscal year ended December 29, 1995. In the
fiscal year ended December 30, 1994, the Company produced an average of 222
floor sections per week. The following table sets forth the total floor sections
and homes sold as well as the number of home manufacturing facilities operated
by the Company for the periods indicated:
Year Ended
-----------------------------------------------------
December 30, December 29, January 3,
1994 1995 1997
---- ---- ----
Homes 7,571 9,079 10,940
Floor sections 11,553 13,942 16,697
Home manufacturing
facilities(1) 8 10 10
(1) Production commenced at the Company's eleventh home manufacturing facility
in February 1997.
Each division operates as a separate strategic unit that is directed by
a general manager and has its own sales force. The general manager, production
managers and supervisory personnel of each division have an incentive
compensation system which is
directly tied to the operating profit of the division. In addition, production
personnel of each division have a productivity incentive compensation system.
The Company believes that these compensation systems help to focus efforts on
curtailing waste and inefficiencies in the production process and represent a
divergence from standard industry practices, which are typically designed to
reward personnel on production volume criteria.
The extent of customization of the home performed by the Company varies
to a significant degree with the price of the home. In the higher price range of
the market, the home buyer is often less sensitive to the price increase that is
associated with significant design modifications that might be desired. However,
the Company's experience in producing a customized home on a cost-effective
basis has allowed the Company to offer customized homes in all price ranges.
The principal materials used in the production of the Company's homes
include steel, aluminum, wood products, gypsum wallboard, fiberglass,
insulation, carpet, vinyl floor covering, fasteners and hardware items,
appliances, electrical items, windows and doors. These materials and components
are readily available and are purchased by the Company from numerous sources. No
supplier accounted for more than 4.2% of the Company's purchases during each of
the past two fiscal years. The Company believes that the size of its purchases
allows it to obtain favorable volume discounts. The Company's expenses can be
significantly affected by the availability and pricing of raw materials. Sudden
increases in demand for construction materials can greatly increase the costs of
materials. While such increases in costs can not always be reflected immediately
in the Company's prices, the Company in the past has been able to pass along a
significant portion of cost increases in its current prices.
Because the cost of transporting a manufactured home is significant,
substantially all of the Company's homes are sold to dealers within a 600 miles
radius of a manufacturing facility. The Company arranges, at the dealer's
expense, for the transportation of finished homes to dealer locations using its
own trucking subsidiary, MH Transport, Inc., and independent trucking companies.
The Company is using MH Transport to transport a majority of its homes.
Customary sales terms are cash-on-delivery or guaranteed payment from a floor
plan financing source. Dealers or other independent installers are responsible
for placing the home on site, making utility hook-ups and providing and
installing certain trim items.
Substantially all production is initiated against specific orders, and
the Company does not maintain any significant inventory of unsold completed
homes. The Company's backlog of orders for manufactured homes as of March 1,
1997 was $3.0 million as compared with $8.0 million at March 1, 1996. Dealer
orders are subject to cancellation prior to commencement of production for a
variety of reasons, and the Company does not consider its order backlog to be
firm orders.
SALES NETWORK
At January 3, 1997, the Company sold manufactured homes through
approximately 465 independent dealers at approximately 859 independent dealer
locations and through eight company-owned retail centers in 30 states
principally in the southeastern and southcentral United States. The Company
believes that the quality of its independent dealer network has been important
to the Company's performance.
Each of the Company's six home manufacturing divisions maintains a
separate sales force. At January 3, 1997, a total of 91 salespersons maintained
personal contact with the Company's independent dealers. The Company markets its
homes through product promotions tailored to specific dealer needs. In addition,
the Company advertises in local media and participates in regional manufactured
housing shows.
The Company believes the close working relationship between its
division management and the independent dealers they service has been an
important factor in the Company's growth. In order to promote dealer loyalty and
to enable dealers to penetrate retail markets, only one independent dealer
within a given local market may distribute homes manufactured by a division of
the Company. The Company does not have formal marketing agreements with its
independent dealers and substantially all of the Company's independent dealers
also sell homes of other manufacturers. The Company believes its relations with
its independent dealers are good and the Company has experienced relatively low
turnover in its established independent dealers in the past three years. In
fiscal 1996, the Company's largest dealer accounted for 5.4% of net revenues and
the ten largest dealers accounted for 25.7% of net revenues. In the fiscal year
ended December 29, 1995, the Company's largest dealer accounted for 5.0% of net
revenues, and the Company's ten largest dealers accounted for 24.0% of net
revenues. In the fiscal year ended December 30, 1994, the Company's largest
dealer accounted for 6.0% of net revenues and the Company's ten largest dealers
accounted for 27.6% of net revenues.
The Company recently acquired BR Holding Corp. and a group of retail
companies doing business as Blue Ribbon Homes ("BR Holding"). BR Holding sells
homes on a retail basis, primarily in the southeastern United States. At January
3, 1997, the Company had eight retail sales centers; seven in Alabama and one in
Mississippi. Each of the eight sales centers maintains a separate sales force.
Buyers of manufactured homes typically shop at a number of locations
prior to purchasing a home. The Company believes that it provides most of its
dealers with a marketing advantage because of the dealer's ability to represent
that the Company's homes can be customized to meet the individual preferences of
the customer.
The manufactured housing market is highly cyclical and seasonal and is
affected by the same economic factors which impact the broader housing market.
Historically, most sectors of the homebuilding industry have been affected by,
among other things, changes in general economic conditions, levels of consumer
confidence, employment and income, housing demand, availability of financing and
interest rate levels.
WARRANTY, QUALITY CONTROL AND SERVICE
The Company adheres to strict quality standards and continuously
refines its production procedures. In addition, in accordance with the
construction codes promulgated by the Department of Housing and Urban
Development ("HUD"), an independent HUD-approved, third-party inspector inspects
each of the Company's manufactured homes for compliance during construction at
the Company's manufacturing facilities. See "-Regulation."
The Company provides the initial home buyer with a HUD-mandated,
one-year limited warranty against manufacturing defects in the home's
construction. In addition, there are often direct warranties that are provided
by the manufacturer of components and appliances.
The Company has experienced quality assurance personnel at each of its
manufacturing facilities to provide on-site service to dealers and home buyers.
In order to respond more quickly to customer service requests and to maintain a
high level of customer satisfaction as the Company continues to grow, the
Company has increased its customer service staff. Enhanced quality assurance
systems are expected to contribute to the value and appeal of the Company's
homes and, over the long term, to reduce consumer warranty claims.
INDEPENDENT DEALER FINANCING
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 which provides the independent dealer
financing customarily requires the Company to enter into a separate repurchase
agreement with the financial institution under which the Company is obligated,
upon default by the independent dealer, to repurchase the homes at the Company's
original invoice price plus certain administrative and shipping expenses. At
January 3, 1997, the Company's contingent repurchase liability under floor plan
financing arrangements through independent dealers was approximately $91
million. While homes that have been repurchased by the Company under floor plan
financing arrangements are usually sold to other dealers and losses to date
under these arrangements have been insignificant, no assurance can be given that
the Company will be able to sell to other dealers homes which it may by
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. No dealer accounted for more than 6.0% of
the Company's net revenues in each of the past three fiscal years. See "-Sales
Network." The Company does not view any single independent dealer as being a
material customer. While the Company does not have access to financial
information regarding its independent dealers, it is not aware that any
independent dealer is experiencing financial difficulties. The Company also
finances substantially all of its retail inventory through floor plan
arrangements. Such borrowings totaled approximately $12.0 million at January 3,
1997.
COMPETITION
The manufactured housing industry is highly competitive at both the
manufacturing and retail levels, with competition based upon factors including
total price to the dealer, customization to homeowners' preferences, product
features, quality, warranty repair service and the terms of dealer and retail
customer financing. The Company does not view any of its competitors as being
dominant in the industry. A number of these firms are larger than the Company
and possess greater manufacturing and financial resources. In addition, there
are numerous firms producing manufactured homes in the southeastern and
southcentral United States, many of which are in direct competition with the
Company in the states where its homes are sold. Certain of the Company's
competitors provide retail customers with financing from captive finance
subsidiaries. While the Company believes consumer financing has generally become
more available in the manufactured housing industry in recent years, and
although the Company has recently formed its Wenco 21 joint venture to provide
consumer financing to customers through 21st Century, a contraction in consumer
credit could provide an advantage to those competitors with established internal
financing capabilities.
The capital requirements for entry as a producer in the manufactured
housing industry are relatively small. However, the Company believes that the
qualifications for obtaining inventory financing, which are based upon the
financial strength of the manufacturer and each of its dealers, have in recent
years become more difficult to meet.
Manufactured homes compete with new site-built homes, as well as
apartments, townhouses, condominiums and existing site-built and manufactured
homes.
The Company believes that its willingness to customize floor plans and
design features to match customer preferences is the principal factor which
differentiates it from most of its competitors in the manufactured housing
industry.
REGULATION
The Company's manufactured homes are subject to a number of federal,
state and local laws. Construction of manufactured housing is governed by the
National Manufactured Home Construction and Safety Standards Act of 1974. In
1976, HUD issued regulations under this Act establishing comprehensive national
construction standards. The HUD regulations cover all aspects of manufactured
home construction, including structural integrity, fire safety, wind loads,
thermal protection, plumbing and electrical. Such regulations preempt
conflicting state and local regulations. The Company's manufacturing facilities
and the plans and specifications of its manufactured homes have been approved by
a HUD-designated inspection agency. An independent, HUD-approved third-party
inspector checks each of the Company's manufactured homes for compliance during
at least one phase of construction. In 1994, HUD amended manufactured home
construction safety standards to improve the wind force resistance of
manufactured homes sold for occupancy in coastal areas prone to hurricances.
Failure to comply with the HUD regulations could expose the Company to a wide
variety of sanctions, including closing the Company's plants. The Company
believes its manufactured homes meet or surpass all present HUD requirements.
Manufactured, modular and site-built homes are all built with
particleboard, paneling and other products that contain formaldehyde resins.
Since February 1985, HUD has regulated the allowable concentration of
formaldehyde in certain products used in manufactured homes and required
manufacturers to warn purchasers concerning formaldehyde associated risks. The
Company currently uses materials in its manufactured homes that meet HUD
standards for formaldehyde emissions and that otherwise comply with HUD
regulations in this regard. In addition, certain components of manufactured
homes are subject to regulation by the Consumer Product Safety Commission
("CPSC") which is empowered to ban the use of component materials believed to be
hazardous to health and to require the manufacturer to repair defects in
components of its homes. The CPSC, the Environmental Protection Agency and other
governmental agencies are evaluating the effects of formaldehyde. In February
1983, the Federal Trade Commission adopted regulations requiring disclosure of
manufactured home's insulation specifications.
The Company's manufactured homes are also subject to local zoning and
housing regulations. A number of states require manufactured home producers to
post bonds to ensure the satisfaction of consumer warranty claims. A number of
states have adopted procedures governing the installation of manufactured homes.
Utility connections are subject to state and local regulation, and must be
complied with by the dealer or other person installing the home.
The Company is subject to the Magnuson-Moss Warranty Federal Trade
Commission Improvement Act, which regulates the descriptions of warranties on
products. The description and substance of the Company's warranties are also
subject to a variety of state laws and regulations.
Wenco Finance, the Company's finance subsidiary, is subject to a
number of state and local licensing requirements which are applicable to
businesses engaged in the origination and servicing of consumer loans. In
addition, both Wenco Finance and Wenco 21, the Company's new finance joint
venture with 21st Century, are also subject to a variety of federal and state
laws and regulations regulating consumer finance, including the Truth in Lending
Act, which regulates lending procedures and mandates certain loan disclosures
with respect to financing offered to consumers. Failure by Wenco Finance or
Wenco 21 to comply with any of these laws and regulations could have a material
adverse effect on the Company's business and results of operation.
MH Transport, the Company's trucking subsidiary, is subject to federal
and state laws and regulations which apply to motor vehicle carriers operating
in interstate and intrastate commerce. Failure by MH Transport to comply with
any of these laws and regulations could have a material adverse effect on the
Company's business and results of operations.
The Company believes that it is in compliance with the foregoing
existing government regulations.
RECENT ACQUISITIONS
On November 21, 1996, the Company acquired BR Holding Corp., a company
which operates a group of companies engaged in the retail sale of manufactured
homes, and is doing business as Blue Ribbon Homes ("BR Holding"). BR Holding
also operates an insurance agency which provides homeowner insurance for
manufactured homes. The Company paid $1,075,000 in cash and issued 332,814
shares of the Company's common stock (approximate market value on November 21,
1996 of $4,532,000). The acquisition was accounted for under the purchase method
of accounting; thus the Company's financial statements as of January 3, 1997 and
for the year then ended reflect the operations of BR Holding from the date of
acquisition. The total purchase price exceeded the fair value of net assets
acquired by $5,480,000, which amount is being amortized over 30 years as
goodwill. In addition, the Company entered into four year non-compete agreements
with the former stockholders of BR Holding for an aggregate amount of $50,000,
which amount is included in the cash purchase price noted above. The stock
purchase agreement requires the Company to make additional payments to the
seller contingent on future earnings performance of BR Holding. Any additional
payments will be made
20% in cash and 80% in shares of the Company's common stock and will be
accounted for as goodwill and amortized over the remaining recovery period of
the goodwill.
In July, 1996, the Company acquired Unique Dinettes, Inc. ("Unique"), a
manufacturer of ceramic tables and countertops. The total purchase price of
$434,000 was paid in cash, and exceeded the fair value of the acquired assets by
$44,000. The Unique acquisition was accounted for under the purchase method of
accounting.
In January 1996, the Company acquired Trimmasters, Inc.
("Trimmasters"), a manufacturer of trim moulding. The total purchase price of
$356,000 was paid in cash, and exceeded the fair value of the acquired assets by
$297,000. The Trimmasters acquisition was accounted for under the purchase
method of accounting.
EMPLOYEES
As of January 3, 1997, the Company employed 2,516 full-time employees
involved in the following functional areas: manufacturing, 2,049; sales, 91;
field service, 133; administration and clerical, 140; drivers, 78; and
management, 25. The Company's manufacturing operations require primarily
semi-skilled labor and personnel levels fluctuate with seasonal changes in
production volume.
None of the Company's employees are represented by a collective
bargaining agreement. The Company believes that it has a good relationship with
its employees, and it has never experienced any work stoppage.
EXECUTIVE OFFICERS
Information concerning the Executive Officers of the Company is as
follows. Executive Officers are elected annually by and serve at the pleasure of
the Board of Directors.
Wendell L. Batchelor (age 54) is the founder of the Company and has
been the Company's President, Chief Executive Officer and a Director since the
Company's incorporation in 1982. From 1971 to 1982, Mr. Batchelor was General
Manager of Shiloh Homes, a division of Winston Industries. Mr. Batchelor was
Sales Manager of Marietta Homes, a division of Winston Industries, from 1968 to
1971. From 1966 to 1968, Mr. Batchelor was a Sales Representative for Madrid
Homes. Mr. Batchelor has served in the past as Chairman of the Alabama
Manufacturer's Housing Institute.
Johnny R. Long (age 50) has been a Vice President of the Company
primarily responsible for purchasing and a Director since the Company's
incorporation in 1982. From 1976 to 1982, Mr. Long served as Purchasing Agent
for Shiloh Homes, a division of Winston Industries. Mr. Long was Purchasing
Agent for Bendix Homes from 1974 to 1976, for Commodore Homes from 1972 to 1974,
and for Chevelle Homes from 1966 to 1972.
Keith W. Brown (age 40) has served as the Company's Chief Financial
Officer since the Company's incorporation in 1982 and as a Director since 1989.
Mr. Brown served as the Company's Secretary from 1982 to January 1993 and
resumed that office in September 1993. He was elected Treasurer in January 1993.
From 1980 to 1982, Mr. Brown served as Controller for Shiloh Homes, a division
of Winston Industries.
Keith O. Holdbrooks (age 36) was elected as the Company's Chief
Operating Officer in August 1996 by the Company's board of directors. From 1991
to 1996, Mr. Holdbrooks served as General Manager for Southern Homes, a division
of the Company, and from 1989 to 1991 served as Sales Manager for Southern
Homes, and from 1985 to 1989 served as salesman for Southern Lifestyle, a
division of the Company.
ITEM 2. PROPERTIES
The Company's manufactured home segment currently operates eleven home
manufacturing facilities (eight in Alabama, and one in each of Texas, North
Carolina and Pennsylvania) and four component supply facilities (all in
Alabama). The facilities used by the Company's manufactured home segment are as
follows:
Building Leased or
Unit Location Square Feet Owned
- ---- -------- ----------- -----
Manufacturing
Southern Energy
Plant #1 Addison, AL 72,000 Owned
Plant #2 Addison, AL 55,000 Owned
Southern Life/style
Plant #1 Addison, AL 62,500 Owned
Plant #2 Addison, AL 54,000 Leased
Southern Homes
Plant #1 Double Springs, AL 60,000 Owned
Plant #2 Double Springs, AL 52,000 Owned
Plant #3 Lynn, AL 90,700 Owned
Plant #4 Lynn, AL 96,000 Owned
Southern Energy Homes
of Texas Fort Worth, TX 98,300 Owned
Southern Energy Homes
of North Carolina Albemarle, NC 77,000 Owned
Southern Energy Homes
of Pennsylvania Hegins, PA 85,000 Leased
Component Supply
Classic Panel Hartselle, AL 24,000 Owned
Wind-Mar Supply Addison, AL 22,000 Owned
Trimmasters Haleyville, AL 50,000 Leased
Unique Dinettes Haleyville, AL 50,000 Leased
The Company currently operates eight retail sales centers, seven of
which are in Alabama and one in Mississippi. Each of the lots are currently
leased and such lease terms range from one to five years.
The corporate headquarters is located at the Southern Energy facility
and occupies approximately 3,000 square feet of office space. The Company plans
to construct a new facility for its corporate headquarters by the end of 1997.
Each of the Company's manufacturing facilities, other than the
Company's facility in Pennsylvania and its new facility in Lynn, Alabama, is
operating near full capacity. During the fiscal year ended January 3, 1997, the
Company's Pennsylvania facility was operating at approximately 25% of its daily
capacity. The newly constructed facility in Lynn, Alabama has been operating at
approximately 20% of its daily capacity since its start-up in February 1997. MH
Transport owns and occupies an approximate 1,800 square foot office building in
Double Springs, Alabama.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations"
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit filed on March 27, 1996 in
Fulton County Superior Court, Georgia by EurAm International, Inc., a sales
agent for the Company. On April 29, 1996 the Company removed the case to the
United States District Court for the Northern District of Georgia in Atlanta. In
this lawsuit, the plaintiff alleges that the Company has breached an agreement
relating to the sale of the Company's modular homes in Germany, including
alleged misrepresentations and faulty performance, resulting in damages alleged
to amount to $25 million. The Company believes the claim is without merit and
intends to vigourously defend the claim, but the litigation is currently in
discovery and there can be no assurances as to its likely outcome.
In addition, the Company has been informed by Gesellschoft fur Bauen
Und Wohnen Hannover MbH ("GBH"), a German housing authority, that it has
replaced the Company with a local company to complete a contract that GBH had
entered into with the Company for the purchase and erection of modular housing
in Hannover, Germany. In connection with the contract, the Company posted a
$660,000 letter of credit in favor of GBH. GBH has made a claim against the
Company for damages of approximately $800,000 arising from the shift in
suppliers and has attempted to draw upon the letter of credit posted by the
Company. The Company has obtained a temporary restraining order preventing GBH
from drawing upon the letter of credit and the Company is actively negotiating
with GBH to resolve the dispute. In light of the fact that the negotiations with
GBH are ongoing, there can be no assurances as to the likely resolution of the
GBH claim.
The Company is a party to various other legal proceedings incidental to
its business. The majority of these legal proceedings relate to employment
matters or product warranty liability claims for which management believes
adequate reserves are maintained. In the opinion of management, after
consultation with legal counsel, the ultimate liability, if any, with respect to
these proceedings will not materially affect the financial position or results
of operations of the Company; however, the ultimate resolution of these matters,
which could occur within one year, could result in losses in excess of the
amounts reserved.
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Stockholders of the
Company during the fourth quarter of fiscal 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
RECENT SALES OF UNREGISTERED SECURITIES
On November 21, 1996, the registrant issued 332,814 shares of common
stock, $.0001 par value (the "Shares"), to the stockholders of BR Holding Corp.
("BR Holding") in connection with the registrant's acquisition of BR Holding.
The Shares were issued as consideration for the merger of BR Holding with a
wholly-owned subsidiary of the registrant. As a result of the merger, the
registrant acquired all the issued and outstanding capital stock of BR Holding.
The aggregate merger consideration given by the registrant was $5.6 million, of
which $1.1 million was paid in cash and $4.5 million was paid with the Shares.
The Shares were issued in a transaction exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The
Shares were issued to a limited number of individuals who were sophisticated (or
whose representative was sophisticated) about business and financial matters.
The registrant made available to the purchasers information about the business
and finances of the registrant, including reports filed by the registrant
pursuant to the Securities Exchange Act of 1934. The registrant also permitted
the purchasers to ask questions of and receive answers from its officers and
directors concerning the registrant's business and finances. The purchasers made
certain representations to the registrant as to, among other things, investment
intent and experience and sophistication as to business and financial matters.
RECORD HOLDERS
As of March 1, 1997, there were 74 record holders. This number does not
include those stockholders holding stock in "nominee" or "street" name.
STOCK PRICE PERFORMANCE
The Company's Common Stock has been publicly traded on the Nasdaq Stock
Market since March 12, 1993. The original price per share was $6.93.
1996 1995
Price Range Price Range
High Low High Low
First Quarter 11.75 9.00 7.07 5.60
Second Quarter 15.25 9.67 7.47 5.87
Third Quarter 16.25 10.00 11.33 8.17
Fourth Quarter 18.13 11.38 12.50 8.67
DIVIDENDS
It is the Company's current policy to retain future earnings to finance
the continuing development of its business. The company has not paid any
dividends since the initial public offering of its stock.
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Selected Financial Data
Southern Energy Homes, Inc. and subsidiaries
(Dollars in thousands, except per share data)
Year Ended Year Ended Year Ended Year Ended Nine Months Ended
January 3, December 29, December 30, December 31, December 30,
1997 1995 1994 1993 1992
Operating Data
- --------------
Net revenues $306,844 $241,268 $188,750 $143,618 $83,400
Gross profit 43,647 31,125 24,763 19,518 12,213
Selling, general
and administrative 17,634 13,272 10,633 7,795 4,744
Provision for credit
losses 1,177 - - -
-
Amortization 517 422 322 531 1,307
Non-recurring
charges(1) - - - 1,907 -
Operating income 24,319 17,431 13,808 9,285 6,162
Interest expense 131 146 237 654 1,512
Interest income 593 811 392 184 -
Provision for income
taxes 9,535 6,854 5,139 3,454 1,735
Net income 15,246 11,242 8,824 5,244 2,915
Net income per share $1.01 $0.79 $0.62 $0.40 $0.27
Weighted average
shares outstanding 15,122,578 14,300,466 14,161,135 13,094,010 10,749,999
January 3, December 29, December 30, December 31, December 31,
Balance Sheet Data 1997 1995 1994 1993 1992
- ------------------
Total assets $112,658 $75,899 $54,347 $43,340 $26,735
Long-term debt - 6 596 1,502 12,575
Stockholders' equity $ 77,377 $57,242 $38,559 $29,722 $ 613
(1) Upon completion of the Company's initial public offering, the Company
terminated all non-compete agreements and wrote off $1.9 million in
non-recurring charges.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Year Ended January 3, 1997 as Compared with Year Ended December 29, 1995
Total net revenues (gross sales less volume discounts, returns, and
allowances) and finance revenue for the year ended January 3, 1997 were $306.8
million, which represented an increase of 27.2% over the prior fiscal year.
During the fourth quarter of 1996 the Company entered into the retail sector of
the industry through the acquisition of BR Holding Corp. and a group of retail
companies doing business as Blue Ribbon Homes.
Net revenues of the manufactured home segment, which includes the
Company's retail operations, were $304.8 million for the year ended January 3,
1997 as compared with $241.2 million for the prior year period. Retail home
sales accounted for $4.0 million of the manufactured home segment revenues for
the year ended January 3, 1997. The average wholesale price per home in 1996 was
$28,000, as compared with $27,000 in 1995, an increase of 3.7%. Total homes sold
in the year ended January 3, 1997 was 10,940, up 20.5% over the number of homes
sold in the prior year period. The increase in homes sold was attributable
primarily to increased capacity from a manufactured housing facility in Alabama
which was added in the fourth quarter of 1995 and increased production from the
Texas plant.
Revenues from the Company's retail financing segment were $2.0 million
for the year ended January 3, 1997, as compared with $30,000 for the prior year
period. This increase was attributable to the increased lending activity by the
Company's wholly owned subsidiary, Wenco Finance, Inc. ("Wenco"). Wenco has been
originating and servicing consumer loans primarily for homes manufactured by the
Company. In February 1997, the Company formed a joint venture with 21st Century
Mortgage Corporation ("21st Century"). The joint venture, Wenco 21, will
continue to offer, through 21st Century, consumer financing for homes
manufactured by the Company as well as for other homes sold through its retail
centers and independent dealers. In light of the shift in consumer finance
activities to Wenco 21, Wenco has suspended its loan origination activities and
has engaged 21st Century to service its existing loan portfolio.
Gross profit consists of net revenues less the cost of sales, which
includes labor, materials, and overhead. Gross profit for the year ended January
3, 1997 was $43.6 million, or 14.2% of net revenues, as compared with $31.1
million, or 12.9% of net revenues, in the prior year period. This increase in
the gross profit percentage was attributable primarily to lower material prices
which were partially offset by increased warranty costs. The increase in
warranty expense was attributable primarily to an increase in the Company's
customer service staff and the expansion of the Company's service fleet.
Selling expenses include primarily sales commissions, advertising
expenses, salaries for support personnel, and freight costs. Selling expenses
were $7.0 million, or 2.3% of net revenues, during the year ended January 3,
1997, as compared with $5.7 million, or 2.4% of net revenues, during the prior
year period. The decrease in selling expense as a percentage of net revenues was
attributable primarily to savings in shipping costs realized from an increase in
shipments through MH Transport, the Company's trucking subsidiary, which reduced
the Company's reliance upon independent trucking companies.
General and administrative expenses include administrative salaries,
executive and management bonuses, insurance costs, and professional fees.
General and administrative expenses were $10.6 million, or 3.5% of net revenues,
for the year ended January 3, 1997, as compared with $7.6 million, or 3.1% of
net revenues, for the same period of 1995. The increase in general and
administrative expenses as a percentage of net revenues was attributable
primarily to salary increases and the addition of new employees who were hired
in order to resolve staffing shortages which have occurred as the Company
continues to expand.
The Company provides for estimated credit losses based on industry
experience, historical loss experience, current repossession trends and costs,
and management's assessment of the current credit quality of the loan portfolio.
The provision for credit
losses for the year ended January 3, 1997 was $1.2 million as compared with $0
for the year ended December 29, 1995. The increase in the provision for loan
losses was due to the increase in installment contracts receivable from $655,000
in 1995 to $27.6 million in 1996.
Interest income for the year ended January 3, 1997 was $593,000 as
compared with $811,000 for the year ended December 29, 1995. The decrease in
interest income reflects lower average investment balances during the year ended
January 3, 1997.
Income taxes are provided for based on the tax effect of revenue and
expense transactions included in the determination of pre-tax book income.
Income tax expense for the year ended January 3, 1997 was $9.5 million, or an
effective tax rate of 38.5%, compared with $6.9 million, or an effective tax
rate 37.9%, for the year ended December 29, 1995. The increase in effective tax
rate is attributable in part to the Company's movement into a higher federal
income tax bracket and also reflects a proportional shift in the Company's
income from Alabama to other states which have higher income tax rates than
Alabama.
Year Ended December 29, 1995 as Compared with Year Ended December 30, 1994
Net revenues for the year ended December 29, 1995 were $241.3 million,
which represented an increase of 27.8% over the same period of 1994. The average
price per home in 1995 was $27,000 as compared with $25,000 in 1994, an increase
of 8.0%. The total number of homes sold in the year ended December 29, 1995 was
9,079, up 20.0% over the number of homes sold in the prior year period. The
increase in the number of homes sold was attributable primarily to increased
capacity from a manufactured housing facility in North Carolina acquired during
the third quarter of 1994 and increased production from the Texas and Alabama
plants added during 1993 that were still in a start-up phase of operation during
the first six months of 1994.
Gross profit for the year ended December 29, 1995 was $31.1 million, or
12.9% of net revenues, as compared with $24.8 million, or 13.1% of net revenues,
in the prior year period. This decrease in the gross profit percentage was
attributable primarily to increased warranty and labor costs which were
partially offset by lower material prices. The increase in warranty expense as a
percentage of net revenues was attributable primarily to an increase in the
Company's customer service staff, the development of a regional customer service
center in Addison, Alabama, and the expansion of the Company's service fleet.
Selling expenses were $5.7 million, or 2.4% of net revenues,during the
year ended December 29, 1995, as compared with $4.8 million, or 2.6% of net
revenues, during the prior year period. The decrease in selling expenses as a
percentage of net revenues was attributable primarily to savings in shipping
costs realized from shipments through MH Transport, the Company's trucking
subsidiary, which reduced the Company's reliance upon independent trucking
companies.
General and administrative expenses were $7.6 million, or 3.1% of net
revenues, for the year ended December 29, 1995, as compared with $5.8 million,
or 3.1% of net revenues, for the same period of 1994. The increase in general
and administrative expenses was attributable primarily to additional employees
who were hired in order to resolve staffing shortages which had occurred as the
Company continued to expand.
Interest income for the year ended December 29, 1995 was $811,000 as
compared with $392,000 for the year ended December 30, 1994. The increase in
interest income reflected higher investment yield and higher average investment
balances.
Income tax expense for the year ended December 29, 1995 was $6.9
million, or an effective tax rate of 37.9%, compared with $5.1 million, or an
effective tax rate of 36.8%, for the year ended December 30, 1994. The increase
in effective tax rate was attributable in part to the Company's movement into a
higher federal income tax bracket and also reflected a proportional shift in the
Company's income from Alabama to other states which have higher income tax rates
than Alabama.
LIQUIDITY AND CAPITAL RESOURCES
Since its organization, the Company has financed its operations
primarily with cash generated from a combination of operations, stock offerings,
and borrowings.
Cash Flows
During the year ended January 3, 1997, the Company's cash used by
operations was approximately $9.2 million. Cash used by operations includes
originations of installment contracts of $27.5 million, increased inventory and
prepayments of $7.3 million, and decreased accounts payable of $1.2 million.
These amounts were partially offset by net income of $15.2 million, decreased
accounts receivable of $3.9 million, and increased accrued liabilities of $4.5
million. In addition to cash provided by operating activities, other significant
cash flows included capital expenditures of $5.5 million, borrowings of $3.1
million, maturities of investments of $2.1 million, and purchase of subsidiaries
for $1.2 million.
During the year ended December 29, 1995, the Company's cash provided by
operations was approximately $8.4 million. Cash provided by operations includes
net income of $11.2 million and increased accounts payable and accrued
liabilities of approximately $2.7 million. These amounts were partially offset
by an increase in accounts receivable of approximately $5.3 million and an
increase in inventories of approximately $1.3 million. Each of these increases
was primarily related to sales growth. In addition to cash provided by operating
activities, other significant cash flows included net proceeds from the issuance
of common stock of $7.2 million, capital expenditures of $5.2 million,
maturities of investments of $4.9 million, and repayments of long-term debt of
$1.5 million.
Subsequent to January 3, 1997, the Company formed a joint venture,
Wenco 21, with 21st Century, which through 21st Century will originate and
service retail installment contracts. The Company has made an initial capital
contribution of $500,000 to Wenco 21, representing a 50 percent ownership
interest of the joint venture. Under its joint venture agreement with 21st
Century, the Company may be called upon to make additional capital contributions
or loans in order to meet Wenco 21's capital requirements. The Company believes
that cash on hand,cash generated by its operations, and funds available under
its existing line of credit will be adequate to fund any such commitments.
At January 3, 1997, the Company's net working capital was $17.7
million, including $5.3 million in cash and cash equivalents, as compared with
$34.4 million at December 29, 1995, including $16.8 million in cash and cash
equivalents and $2.1 million in investments. The decrease in net working capital
was a result of a decrease in cash and cash equivalents of $11.5 million and
increased notes payable and accrued liabilities of $16.6 million, which was
partially offset by increased inventories of $15.8 million. The increase in
inventory and notes payable was primarily attributable to the homes held at the
recently acquired retail locations and the related floor-plan financing. The
Company also has a $10.0 million unsecured line of credit which is renewable
annually and bears interest at the London Interbank Offered Rate ("LIBOR") plus
1.5%. The Company's ability to draw upon this line of credit is dependent upon
meeting certain financial ratios and covenants. The Company has no outstanding
borrowings under this line.
Substantially all of the Company's dealers finance their purchases
through "floor-plan" arrangements under which a financial institution provides
the dealer with a loan for the purchase price of the home and maintains a
security interest in the home as collateral. In connection with a floor-plan
agreement, the financial institution which provides the dealer financing
customarily requires the Company to enter into a separate repurchase agreement
with the financial institution under which the Company is obligated, upon
default by the dealer, to repurchase the homes at the Company's original invoice
price plus certain administrative and shipping expenses less any principal
payments made by the dealer. At January 3, 1997, the Company's contingent
repurchase liability under floorplan financing arrangements was approximately
$91.2 million. While homes that have been repurchased by the Company under
floor-plan financing arrangements are usually sold to other dealers and losses
experienced to date under these arrangements have been insignificant, no
assurance can be given that the Company will be able to sell to other dealers
homes which it may be obligated to repurchase in the future under such floorplan
financing arrangements or that the Company will not suffer losses with respect
to, and as a consequence of, those arrangements.
During 1997, the Company plans to build a new corporate office facility
in Addison, Alabama at a cost of approximately $1.5 million and plans to acquire
or open more retail sales centers. The Company believes that cash on hand, cash
generated by operations, and funds available under its existing line of credit
will be adequate to fund its expansion plans.
Expansion
The Company has continued to demonstrate its ability to increase sales,
expand production capacity, and vertically integrate its operations through the
acquisition of additional manufacturing facilities and businesses.
In August 1995, the Company purchased a 90,700-square-foot
manufacturing facility in Lynn, Alabama for $150,000 and expended approximately
$800,000 for capital improvements to prepare the facility for full production.
Production commenced at this facility in October 1995.
In November 1995, the Company acquired substantially all of the assets
and assumed certain of the liabilities of a manufactured housing company located
in Hegins, Pennsylvania for approximately $942,000.
In January 1996, the Company acquired substantially all of the assets
and assumed all of the liabilities of a moulding company located in Haleyville,
Alabama for approximately $175,000.
In April 1996, the Company purchased an additional 96,000square-foot
manufacturing facility in Lynn, Alabama for approximately $425,000 and expended
approximately $2.0 million for capital improvements to prepare the facility for
full production. Production commenced at this facility in February 1997.
In July 1996, the Company acquired substantially all of the assets and
assumed all of the liabilities of a table and countertop company located in
Haleyville, Alabama for approximately $145,000.
In October 1996, the Company formed a joint venture with Belmont Homes
and Cavalier Homes to produce and supply cabinet doors to each of the
participant's manufacturing operations. The joint venture was capitalized by the
Company with $770,000.
In November 1996, the Company acquired a group of retail sales centers
in Alabama and Mississippi. The purchase price consisted of approximately $1.1
million in cash and $4.5 million of common stock issued. The Company is
obligated to make additional payments to the seller if the acquired business
meets certain earnings targets.
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 8. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Consolidated Balance Sheets
January 3, December 29,
1997 1995
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $5,299,000 $16,750,000
Investments - 2,076,000
Accounts receivable, less allowance for doubtful accounts of $362,000 and
$163,000, respectively 17,558,000 21,070,000
Installment contracts receivable 421,000 18,000
Inventories 27,019,000 11,226,000
Deferred tax benefits 1,829,000 1,269,000
Prepayments and other 890,000 623,000
---------------- ---------------
53,016,000 53,032,000
---------------- ---------------
Property, plant, and equipment:
Property, plant, and equipment, at cost 23,527,000 17,521,000
Less - accumulated depreciation (5,169,000) (3,690,000)
================ ===============
18,358,000 13,831,000
================ ===============
Intangibles and other non-current assets:
Installment contracts receivable, less allowance for credit losses of
$1,142,000 at January 3, 1997 26,064,000 637,000
Goodwill 13,093,000 7,509,000
Non-compete agreements 667,000 328,000
Organization and pre-operating costs 649,000 523,000
Other assets 811,000 39,000
---------------- ---------------
41,284,000 9,036,000
---------------- ---------------
$112,658,000 $75,899,000
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $12,025,000 $-
Current maturities of long-term debt - 86,000
Accounts payable 4,303,000 4,947,000
Volume incentive payable 8,541,000 5,761,000
Accrued payroll-related expenses 2,743,000 2,447,000
Accrued workers' compensation 2,426,000 1,262,000
Accrued warranty 1,944,000 2,088,000
Accrued legal and accounting 1,259,000 729,000
Accrued other 2,040,000 1,331,000
---------------- ---------------
35,281,000 18,651,000
---------------- ---------------
Long-term debt - 6,000
---------------- ---------------
Commitments and Contingencies
---------------- ---------------
Stockholder's equity:
Preferred stock, $.0001 par value, 1,000,000 shares authorized, none
outstanding - -
Common stock, $.0001 par value, 20,000,000 shares authorized, 15,437,801
shares outstanding at January 3, 1997; 15,053,388 shares outstanding at
December 29, 1995 2,000 1,000
Capital in excess of par 35,999,000 31,111,000
Retained earnings 41,376,000 26,130,000
---------------- ---------------
77,377,000 57,242,000
---------------- ---------------
$112,658,000 $75,899,000
================ ===============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
Consolidated Statements of Operations
Year Ended
January 3, December 29, December 30,
1997 1995 1994
(53 Weeks) (52 Weeks) (52 Weeks)
----------------- ----------------- -----------------
Net revenues $306,844,000 $241,268,000 $188,750,000
Cost of sales 263,197,000 210,143,000 163,987,000
----------------- ----------------- -----------------
Gross profit 43,647,000 31,125,000 24,763,000
----------------- ----------------- -----------------
Operating expenses:
Selling 7,015,000 5,712,000 4,846,000
General and administrative 10,619,000 7,560,000 5,787,000
Provision for credit losses 1,177,000
- -
Amortization of intangibles 517,000 422,000 322,000
----------------- ----------------- -----------------
19,328,000 13,694,000 10,955,000
Operating income 24,319,000 17,431,000 13,808,000
----------------- ----------------- -----------------
Interest expense 131,000 146,000 237,000
Interest income 593,000 811,000 392,000
----------------- ----------------- -----------------
Income before provision for income taxes 24,781,000 18,096,000 13,963,000
Provision for income taxes 9,535,000 6,854,000 5,139,000
Net income $15,246,000 $11,242,000 $8,824,000
================= ================= =================
Net income per share $1.01 $ 0.79 $
0.62
================= ================= =================
Weighted average number of common and common equivalent shares 15,122,578 14,300,466 14,161,135
================= ================= =================
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
Consolidated Statements of Stockholders' Equity
Common Stock
--------------------------------
Capital in Retained
Shares Amount Excess of Par Earnings Total
----------------- -------------- --------------- --------------- --------------------
Balance, December 31, 1993 14,159,436 $1,000 $23,657,000 $6,064,000 $29,722,000
Exercise of stock option 1,875 - 13,000 - 13,000
Net income - - - 8,824,000 8,824,000
----------------- -------------- --------------- --------------- --------------------
Balance, December 30, 1994 14,161,311 1,000 23,670,000 14,888,000 38,559,000
Net proceeds from issuance of
common stock 862,500 - 7,236,000 - 7,236,000
Exercise of stock options 29,577 - 205,000 - 205,000
Net income - - - 11,242,000 11,242,000
----------------- -------------- --------------- --------------- --------------------
Balance, December 29, 1995 15,053,388 1,000 31,111,000 26,130,000 57,242,000
Exercise of stock options 51,599 - 357,000 - 357,000
Issuance of common stock in
connection with acquisition 332,814 1,000 4,531,000 - 4,532,000
Net income - - - 15,246,000 15,246,000
----------------- -------------- --------------- --------------- --------------------
Balance, January 3, 1997 15,437,801 $2,000 $35,999,000 $41,376,000 $77,377,000
----------------- -------------- --------------- --------------- --------------------
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
Consolidated Statements of Cash Flows
Year Ended
January 3, December 29, December 30,
1997 1995 1994
(53 Weeks) (52 Weeks) (52 Weeks)
----------------- ----------------- -----------------
Operating activities:
Net income $15,246,000 $11,242,000 $8,824,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation of property,plant, and equipment 1,168,000 1,273,000 959,000
Provision (credit) for deferred income taxes (560,000) (158,000) 3,000
Gain on sale of property, plant, and equipment 37,000 13,000 2,000
Amortization of intangibles 517,000 422,000 322,000
Provision for doubtful accounts 210,000 22,000 31,000
Accretion of discount on debt - 78,000 103,000
Provision for credit losses 1,177,000 - -
Change in assets and liabilities, net of effect from
purchase of subsidiaries:
Accounts receivable 3,936,000 (5,277,000) (2,083,000)
Inventories (7,039,000) (1,260,000) (1,215,000)
Prepayments and other (255,000) (723,000) (127,000)
Accounts payable (1,174,000) 328,000 (529,000)
Accrued liabilities 4,525,000 2,418,000 1,834,000
Origination of installment contracts (27,497,000) - -
Principal collected on originated installment contracts 490,000 - -
----------------- ----------------- -----------------
Net cash provided by (used in) operating activities (9,219,000) 8,378,000 8,124,000
----------------- ----------------- -----------------
Investing activities:
Purchase of subsidiaries,net of cash acquired (1,217,000) (942,000) (5,745,000)
Capital expenditures (5,501,000) (5,161,000) (3,066,000)
Maturities of investments 2,076,000 4,924,000 -
Purchase of investments - - (7,000,000)
Investment in joint venture (770,000) - -
Increase in organization and pre-operating costs (305,000) (482,000) -
Proceeds from sale of property, plant, and equipment 68,000 42,000 8,000
----------------- ----------------- -----------------
Net cash used in investing activities (5,649,000) (1,619,000) (15,803,000)
----------------- ----------------- -----------------
Financing activities:
Net borrowings on notes payable 3,060,000 - -
Repayments of long-term debt - (1,454,000) (1,151,000)
Net proceeds from issuance of common stock - 7,236,000 -
Proceeds from exercise of stock options 357,000 205,000 13,000
----------------- ----------------- -----------------
Net cash provided by (used in) financing activities 3,417,000 5,987,000 (1,138,000)
----------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents (11,451,000) 12,746,000 (8,817,000)
Cash and cash equivalents at beginning of period 16,750,000 4,004,000 12,821,000
----------------- ----------------- -----------------
Cash and cash equivalents at end of period $5,299,000 $16,750,000 $4,004,000
----------------- ----------------- -----------------
Supplemental cash flow information:
Cash paid for interest $131,000 $ 78,000 $141,000
================= ================= =================
Cash paid for income taxes $9,369,000 $7,568,000 $5,400,000
================= ================= =================
Supplemental disclosures of non-cash investing activities:
During fiscal 1996 the Company purchased BR Holding Corp. for $5.6 million, of
which $4.5 million was paid through the issuance of 332,814 shares of the
Company's common stock. See Note 3. The accompanying notes to consolidated
financial statements are an integral part of these consolidated statements.
Notes to Consolidated Financial Statements
1. The Company and Basis of Presentation:
Southern Energy Homes, Inc. (the "Company") is primarily involved in
two industry segments: the production and retail sale of manufactured homes and
the retail financing of manufactured homes. The Company produces manufactured
homes, primarily on a custom basis, for wholesale to dealers located primarily
in the southeastern and south central regions of the United States. The Company
recently acquired its retail home sales operation through a merger with BR
Holding Corp. ("BR Holding"; see Note 3). BR Holding sells homes on a retail
basis, primarily in the southeastern United States. Wenco Finance, Inc., the
Company's wholly owned finance subsidiary ("Wenco"), has been originating and
servicing consumer loans primarily for homes manufactured by the Company. In
February 1997, the Company formed a joint venture with 21st Century Mortgage
Corporation ("21st Century"). The joint venture, Wenco 21, will continue to
offer, through 21st Century, consumer financing for homes manufactured by the
Company as well as for other homes sold through its retail centers and
independent dealers. In light of the shift in consumer finance activities to
Wenco 21, Wenco has suspended its loan origination activities and has engaged
21st Century to service its existing loan portfolio.
The Company is on a 52/53-week year with the fiscal year ending on the
Friday closest to the last day of December. The 1995 and 1994 fiscal years
included 52 weeks and the 1996 fiscal year included 53 weeks. All references to
years relate to fiscal years rather than calendar years.
The Company's business is seasonal and cyclical with the potential for
significant fluctuations in quarterly earnings being affected by factors
impacting the broader housing market, including the availability and cost of
customer financing and changes in the cost of construction materials.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
2. Summary of Significant Accounting Policies:
Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in the consolidated financial statements. The
Company accounts for its investments of 50% or less in joint ventures on the
equity basis of accounting. Therefore, the Company's share of income/loss is
recorded as an adjustment to the original investment.
In December 1996, the Company purchased a 33% interest in a
manufacturing joint venture with other manufactured home builders for $770,000.
The joint venture will manufacture cabinet doors for sale to participants in the
joint venture as well as thirdparty customers. As no significant activity
occurred from inception of the joint venture through year end, the investment is
carried at the cost of the original contribution by the Company.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers cash and
cash equivalents to include cash on hand and highly liquid debt instruments and
investments purchased with an original maturity of three months or less.
Investments
The Company classified its investments, which primarily represent U.S.
Treasury Notes, as available for sale. Investments classified as available for
sale are carried at fair value with unrealized gains and losses, net of deferred
income taxes, being reported as a separate component of stockholders' equity.
Inventories
Inventories are valued at first-in, first-out ("FIFO") cost, which is
not in excess of market. An analysis of inventories follows:
January 3, December 29,
1997 1995
-------------------------------
Raw materials $11,607,000 $ 9,658,000
Work in progress 1,108,000 1,007,000
Finished goods 14,304,000 561,000
-------------------------------
$27,019,000 $11,226,000
===============================
The increase in finished goods inventory was primarily attributable to
the acquisition in November 1996 of the Company's six retail sales centers and
the inventories held at those locations.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Depreciation is
computed on the straight-line, accelerated cost recovery system or modified
accelerated cost recovery system methods over the estimated service lives of
depreciable assets (10-31 years for buildings and improvements, 3-10 years for
machinery and equipment, 5-7 years for office equipment, and 710 years for
leasehold improvements, which is the lesser of the lease term or the asset's
useful life). Cost of property, plant, and equipment is as follows:
January 3, December 29,
1997 1995
-------------------------------
Land $ 493,000 $ 357,000
Buildings and improvements 10,465,000 9,150,000
Machinery and equipment 7,963,000 6,483,000
Office equipment 836,000 567,000
Leasehold improvements 1,140,000 735,000
Construction in progress 2,630,000 229,000
-------------------------------
$23,527,000 $17,521,000
===============================
Maintenance and repairs are charged to expense as incurred;
expenditures for renewals and betterments are capitalized. When assets are
retired or otherwise disposed of, the property, plant, and equipment accounts
are relieved of cost and accumulated depreciation and any resulting gain or loss
is credited or charged to income.
Allowance for Credit Losses
The allowance for credit losses is established to provide for possible
losses related to installment contracts receivable. The allowance for credit
losses is determined based on the Company's historical loss experience after
adjusting for current economic conditions. Management, after assessing the loss
experience and economic conditions, adjusts reserves through periodic
provisions.
Actual credit losses are charged to the allowance when incurred.
An analysis of the allowance for losses on installment contracts
receivable is as follows:
January 3,
1997
-------------
Balance, beginning of year $ 0
Provision for credit losses 1,177,000
Charge-offs (35,000)
------------
Balance, end of year $1,142,000
============
Intangible Assets
The intangible assets recorded by the Company in connection with
various acquisitions are amortized on a straight-line basis. As of January 3,
1997 and December 29, 1995, accumulated amortization of intangibles amounted to
$2,158,000 and $1,641,000, respectively. The applicable intangible amortization
periods are as follows:
Goodwill 30 years
Non-compete agreements 4 to 10 years
Organization and pre-operating costs 5 years
Long-Lived Assets
The Company continually evaluates whether events and circumstances have
occurred that indicate that the remaining balance of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used in the operations of the Company may be impaired and not be recoverable. In
performing this evaluation, the Company uses an estimate of the related cash
flows expected to result from the use of the asset and its eventual disposition.
When this evaluation indicates the asset has been impaired, the Company will
measure such impairment based on the asset's fair value and the amount of such
impairment is charged to earnings.
Volume Incentive Payable
The Company provides rebates to dealers based upon a predetermined
formula applied to the volume of homes sold to the dealer during the year. Such
rebates (reflected as a reduction of gross sales) are recorded at the time sales
to independent dealers are recognized.
Product Warranties
The Company warrants its products against certain manufacturing defects
for a period of up to five years 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 will be made as events occur which indicate changes
are necessary.
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 $300,000 per occurrence (with an
annual aggregate stop-loss limit of $2,000,000 for all claims), and for all
health-care claims in excess of $55,000 per occurrence (with an annual aggregate
stoploss limit of $2,900,000 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 which indicate
changes are necessary.
Income Taxes
The Company utilizes the asset and liability method of accounting for
deferred income taxes and recognizes deferred tax assets and liabilities for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Fair Value of Financial Instruments
Because of the short-term nature of the Company's financial instruments
and the low interest rate volatility associated with the installment contracts
receivable, the fair value of the Company's financial instruments at January 3,
1997 and December 29, 1995 approximated book value at those dates.
Revenue Recognition - Manufactured Housing
The Company manufactures its homes pursuant to dealer orders, and sales
to independent dealers and related transit costs are recognized upon completion
of the home. Almost all of the Company's sales to its independent dealers are
under floor-plan financing arrangements. Under these floor-plan financing
arrangements, the Company bills the dealers upon completion of manufacture and
at the same time transfers title. Consistent with these arrangements, the
Company typically does not allow independent dealers to cancel a purchase after
manufacture by the Company has commenced. The Company carries insurance which
covers possible damage to a home while on the Company's premises prior to
shipment and during shipment when transported by the Company's trucking
subsidiary. Independent trucking companies transporting the Company's homes
carry insurance to cover damage during shipment. With respect to its retail
operations, the Company records a retail home sale when the customer signs an
installment contract for the purchase of a manufactured home and the Company
receives the appropriate down payment.
Revenue Recognition - Retail Financing
Interest income from installment contract receivables is recognized
using the interest method. Accrual of interest income on installment contract
receivables is suspended when a loan is contractually delinquent for ninety days
or more. Interest accruals resume when the loan becomes contractually current,
and past-due interest income is recognized at that time. Most of the installment
contract receivables are with borrowers in the southern portion of the United
States and are collateralized by manufactured homes.
Net Income per Share
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents (whose
effects are dilutive) outstanding during the respective periods.
3. Business Combinations:
On November 21, 1996, the Company acquired the stock of BR Holding, a
holding company which operated a group of retail companies participating in the
retail sale of manufactured homes and was doing business as Blue Ribbon Homes.
BR Holding also operated an insurance agency which provides homeowner insurance
for manufactured homes. The Company paid $1,075,000 in cash and issued 332,814
shares of the Company's common stock (approximate market value on November 21,
1996 of $4,532,000). The acquisition was accounted for under the purchase method
of accounting; thus the financial statements as of January 3, 1997 and for the
year then ended reflect the operations of BR Holding from the date of
acquisition. The total purchase price exceeded the fair value of net assets
(assets of $9.9 million, less liabilities of $9.8 million) acquired by
$5,480,000, which amount is being amortized over 30 years as goodwill. In
addition, the Company entered into four-year non-compete agreements with the
former stockholders of BR Holding for an aggregate amount of $50,000, which
amount is included in the cash purchase price noted above. The stock purchase
agreement requires the Company to make additional payments to the seller
contingent on future earnings performance of BR Holding. Any additional payments
will be made 20% in cash and 80% in shares of the Company's common stock and
will be accounted for as goodwill and
amortized over the remaining recovery period of the goodwill. The results of
operations with respect to BR Holding were not significant and, accordingly, no
pro forma results have been provided.
In July 1996, the Company also acquired Unique Dinettes, Inc.
("Unique"), a manufacturer of ceramic tables and countertops. The total purchase
price of $434,000 was paid in all cash, and exceeded the fair value of the
acquired assets by $44,000. The Unique acquisition was accounted for under the
purchase method of accounting. The results of operations with respect to Unique
were not significant and pro forma results have not been provided.
In January 1996, the Company also acquired Trimmasters, Inc.
("Trimmasters"), a manufacturer of trim moulding. The total purchase price of
$356,000 was paid in all cash, and exceeded the fair value of the acquired
assets by $297,000. The Trimmasters acquisition was accounted for under the
purchase method of accounting. The results of operations with respect to
Trimmasters were not significant and pro forma results have not been provided.
On November 20, 1995, the Company acquired substantially all of the
assets and assumed certain of the liabilities of Imperial Homes Corporation,
Inc. ("Imperial-PA"). This transaction was accounted for under the purchase
method of accounting. The aggregate purchase price of approximately $2.5 million
was composed of approximately $950,000 in cash and the assumption of $1.5
million in liabilities. The financial statements as of December 29, 1995 and for
the year then ended reflected the operations of Imperial-PA from the date of
acquisition. The total purchase price exceeded the fair value of net assets
acquired by $459,000, which amount is being amortized over 30 years as goodwill.
In addition, the Company entered into tenyear noncompete agreements with the
former stockholders of Imperial-PA for an aggregate amount of $150,000, which
amount was included in the cash purchase price noted above.
4. Income Taxes:
The provision (benefit) for income taxes for the respective periods was
as follows:
January 3, December 29, December 30,
1997 1995 1994
Federal:
Current $9,294,000 $6,516,000 $4,646,000
Deferred (521,000) (142,000) 3,000
-------------------------------------------
8,773,000 6,374,000 4,649,000
-------------------------------------------
State:
Current 801,000 496,000 490,000
Deferred (39,000) (16,000) -
-------------------------------------------
762,000 480,000 490,000
-------------------------------------------
Total provision $9,535,000 $6,854,000 $5,139,000
===========================================
The provision for income taxes differed from the amounts computed by
applying the federal statutory rate of 35% in 1996 and 1995 and 34% in 1994 due
to the following:
January 3, December 29, December 30,
1997 1995 1994
Tax provision at the federal
statutory rate $8,671,000 $6,334,000 $4,747,000
State income taxes, net of
federal benefit 496,000 367,000 323,000
Goodwill amortization 58,000 57,000 55,000
Other 310,000 96,000 14,000
-----------------------------------------
$9,535,000 $6,854,000 $5,139,000
=========================================
Temporary differences which created deferred tax assets at January 3,
1997 and December 29, 1995 were as follows:
January 3, December 29,
1997 1995
---------------------------------
Warranty accrual $ 721,000 $ 695,000
Workers' compensation accrual 867,000 447,000
Legal and accounting accrual 457,000 258,000
Other (216,000) (131,000)
---------------------------------
$1,829,000 $1,269,000
=================================
5. Notes Payable:
The Company routinely finances its inventory of homes held by its
retail centers through floor-plan notes payable with a financial institution.
The notes normally require periodic payments of principal and interest, and full
payment when the home is sold to a customer. The maximum and average amounts of
borrowings outstanding under the notes payable during the year ended January 3,
1997 were $12,025,000 and $10,137,000, respectively. The weighted average
interest rate on these borrowings during 1996 was 9.13%
The Company has a $10 million unsecured bank line of credit which is
renewable annually and bears interest at the London Interbank Offered Rate
("LIBOR") plus 1.5% (5.44% at January 3, 1997). The Company's ability to draw
upon this line of credit is dependent upon meeting certain financial ratios and
covenants. The Company had no outstanding borrowings on this line at January 3,
1997 and December 29, 1995.
6. Commitments and Contingencies:
Repurchase Agreements
It is customary practice for companies in the manufactured housing
industry to enter into repurchase agreements with financial institutions which
provide financing to dealers. Generally, the agreements provide for the
manufacturer to repurchase manufactured homes from the financing institution in
the event of repossession upon a dealer's default. The Company's contingent
liability under such agreements was approximately $91 million as of January 3,
1997 and $62 million as of December 29, 1995. Losses experienced under these
agreements have not been significant and, in the opinion of management, any
future losses under these agreements will not have a material effect on the
financial condition of the Company.
Interest Reimbursement
The Company has agreements with certain dealers to reimburse them for
their interest costs incurred in connection with floorplan financing. Interest
expense related to these agreements is classified as a selling expense in the
accompanying consolidated statements of operations. For the years ended January
3, 1997, December 29, 1995, and December 30, 1994, interest expense related to
these agreements amounted to $735,000, $634,000, and $566,000, respectively.
Employee Benefit Plans
The Company maintains a stock option plan which authorizes a total of
407,814 shares of Company common stock for issuance to key employees and
advisors. The Company granted options to acquire 93,909, 138,654, and 97,026
shares of common stock in 1996, 1995, and 1994, respectively, at an exercise
price ranging from $6.67 to $6.93. The exercise price of each option
approximated the fair market value of the Company's common stock at the date of
grant.
The Company also maintains a stock option plan which authorizes a total
of 75,000 shares of Company common stock for issuance to the Company's outside
directors. In 1996, the Company granted options to acquire 15,000 shares of
common stock to certain outside directors at an exercise price of $11.625. The
exercise price of the options approximated the fair market value of the
Company's common stock at the date of grant.
The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation expense for the
Company's stock option plans for awards in 1996 and in 1995 been determined
under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," based on the fair market value at the grant date,
the Company's net income and income per share would have been reduced to the pro
forma amounts indicated below:
1996 1995
-------------------------------
Net income - as reported $15,246,000 $11,242,000
Net income - pro forma $14,993,000 $11,166,000
Net income per share - as reported $ 1.01 $ 0.79
Net income per share - pro forma $ 0.99 $ 0.78
The following table summarizes the changes in the number of shares
under option pursuant to the plans described above:
Weighted Weighted Weighted
January 3, average December 29, average December 30, average
1997 exercise price 1995 exercise price 1994 exercise price
-------------------------------------------------------------------------------------------------------
Outstanding at
beginning of year 285,032 $6.91 190,391 $6.93 95,240 $6.93
Granted 108,909 7.58 138,654 6.89 97,026 6.93
Exercised (51,599) 6.93 (29,577) 6.93 (1,875) 6.93
Forfeited (2,579) 6.93 (14,436) 6.93 - -
-------------------------------------------------------------------------------------------------------
Outstanding at
end of year 339,763 7.45 285,032 6.91 190,391 6.93
Exercisable at
end of year 194,931 7.28 106,952 6.93 47,620 6.93
-------------------------------------------------------------------------------------------------------
Weighted average
estimated fair
value of options
granted $6.21 $2.82 N/A
-------------------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: dividend yield of 0.0%; expected
volatility of 0.42%; risk-free interest rate of 6.09%; expected life of 5 years;
and vesting of 100% over a two-year period. The weighted average contractual
life of the options outstanding at January 3, 1997 is 9 years.
The Company maintains employment agreements with certain employees
which renew automatically for additional one-year periods unless terminated by
either of the parties. The agreements provide for minimum base salaries and
incentive compensation (as defined therein). In addition, the agreements provide
for payment of up to six months' salary and/or bonus under certain circumstances
(for example, termination without cause or upon death).
The Company offers a 401(k) retirement plan to employees having
completed one year of service, whereby eligible employees may contribute up to
20% of their annual compensation subject to limitations by the Internal Revenue
Service. The Company may match up to 100% of the employee contributions as
limited by the Internal Revenue Service. For the years ended January 3, 1997,
December 29, 1995, and December 30, 1994, the Company expensed $66,000, $63,000,
and $60,000, respectively, related to the plan.
Operating Leases
The Company leases certain manufacturing facilities under operating
leases. Rent expense under all leases was $404,000 for the year ended January 3,
1997, $150,000 for the year ended December 29, 1995, and $283,000 for the year
ended December 30, 1994. Future minimum lease payments at January 3, 1997 are
$693,000, $693,000, $677,000, $678,000, and $503,000 for each of the next five
years.
Litigation
The Company is a defendant in a lawsuit filed on March 27, 1996 in
Fulton County Superior Court, Georgia by EurAm International, Inc., a sales
agent for the Company. On April 29, 1996 the Company removed the case to the
United States District Court for the Northern District of Georgia in Atlanta. In
this lawsuit, the plaintiff alleges that the Company has breached an agreement
relating to the sale of the Company's modular homes in Germany, including
alleged misrepresentations and faulty performance, resulting in damages alleged
to amount to $25 million. The Company believes the claim is without merit and
intends to vigorously defend the claim, but the litigation is currently in
discovery and there can be no assurances as to its likely outcome.
In addition, the Company has been informed by Gesellschoft fur Bauen
Und Wohnen Hannover MbH ("GBH"), a German housing authority, that it has
replaced the Company with a local company to complete a contract that GBH had
entered into with the Company for the purchase and erection of modular housing
in Hannover, Germany. In connection with the contract, the Company posted a
$660,000 letter of credit in favor of GBH. In March 1997, GBH made a claim
against the Company for damages of approximately $800,000 arising from the shift
in suppliers and has attempted to draw upon the letter of credit posted by the
Company. The Company has obtained a temporary restraining order preventing GBH
from drawing upon the letter of credit and the Company is
actively negotiating with GBH to resolve the dispute. In light of the fact that
the negotiations with GBH are ongoing, there can be no assurances as to the
likely resolution of the GBH claim.
The Company is a party to various other legal proceedings incidental to
its business. The majority of these legal proceedings relate to employment
matters or product warranty liability claims for which management believes
adequate reserves are maintained. In the opinion of management, after
consultation with legal counsel, the ultimate liability, if any, with respect to
these proceedings will not materially affect the financial position or results
of operations of the Company; however, the ultimate resolution of these matters,
which could occur within one year, could result in losses in excess of the
amounts reserved.
7. Related Party Transactions:
The Company had sales to a development company affiliated with certain
stockholders who were also executive officers of the Company during the years
ended January 3, 1997, December 29, 1995, and December 30, 1994, which amounted
to $691,000, $1.4 million, and $1.5 million, respectively. Transactions with the
development company have been at prices and on terms no less favorable to the
Company than transactions with independent third parties.
8. Stock Split:
On June 4, 1996, the Board of Directors of the Company voted to approve
a 3-for-2 stock split of the Company's common stock, payable in the form of a
50% stock dividend on July 3, 1996 to stockholders of record on June 19, 1996.
The stock split resulted in one additional share of common stock being issued
for each two shares of common stock issued and outstanding on the record date.
The par value of the common stock remained unchanged at $.0001 per share. Cash
was paid in lieu of issuing fractional shares. All share and per share amounts
have been retroactively restated to reflect this split.
9. Summary of Unaudited Quarterly Financial Data:
Unaudited quarterly financial information is as follows:
Quarter Ended Year Ended
- ---------------------------------------------------------------------------------------------------------
March 29, June 28, September 29, January 3, January 3,
1996 1996 1996 1997 1997
-------------------------------------------------------------------------------------
Net revenues $71,111,000 $83,921,000 $77,414,000 $74,398,000 $306,844,000
Gross profit 9,348,000 12,603,000 10,924,000 10,772,000 43,647,000
Provision for
income taxes 2,067,000 2,761,000 2,509,000 2,198,000 9,535,000
Net income 3,297,000 4,418,000 4,017,000 3,514,000 15,246,000
Net income
per share $ 0.22 $ 0.29 $ 0.27 $0.23 $ 1.01
Weighted average
number of common
and common
equivalent shares 15,053,413 15,071,239 15,101,706 15,253,940 15,122,578
Quarter Ended Year Ended
- ---------------------------------------------------------------------------------------------------------
March 31, June 30, September 29, December 29, December 29,
1995 1995 1995 1995 1995
- ---------------------------------------------------------------------------------------------------------
Net revenues $55,569,000 $61,215,000 $58,460,000 $66,024,000 $241,268,000
Gross profit 6,665,000 8,502,000 7,910,000 8,048,000 31,125,000
Provision for
income taxes 1,260,000 1,934,000 1,755,000 1,905,000 6,854,000
Net income 2,233,000 3,249,000 3,064,000 2,696,000 11,242,000
Net income
per share $ 0.16 $ 0.23 $ 0.22 $ 0.18 $ 0.79
Weighted average
number of common
and common
equivalent shares 14,161,336 14,161,336 14,161,336 14,717,860 14,300,466
10. Subsequent Events:
Wenco has been originating and servicing consumer loans primarily for
homes manufactured by the Company. In February 1997, the Company formed a joint
venture, Wenco 21, with 21st Century. The Company has made an initial capital
contribution of $500,000 to Wenco 21, representing a 50% ownership interest of
the joint venture. Wenco 21 will continue to offer, through 21st Century,
consumer financing for homes manufactured by the Company as well as for other
homes sold through its retail centers and independent dealers. In light of the
shift in consumer finance activities to Wenco 21, Wenco has suspended its loan
origination activities and has engaged 21st Century to service its existing loan
portfolio.
Subsequent to January 3, 1997, the Company contracted to build a new
corporate office facility adjacent to its Southern Energy plant in Addison,
Alabama at a cost of approximately $1.5 million.
11. Business Segment Information:
The Company's operations by industry segment are presented in the table
below.
Year Ended
--------------------------------------------------------
January 3, December 29, December 30,
1997 1995 1994
--------------------------------------------------------
Net revenues:
Manufactured housing $304,865,000 $241,238,000 $188,750,000
Retail financing 1,979,000 30,000 -
--------------------------------------------------------
$306,844,000 $241,268,000 $188,750,000
--------------------------------------------------------
Operating income:
Manufactured housing $24,909,000 $17,468,000 $13,808,000
Retail financing (590,000) (37,000) -
--------------------------------------------------------
$24,319,000 $17,431,000 $13,808,000
--------------------------------------------------------
Identifiable assets:
Manufactured housing $78,155,000 $54,526,000 $41,709,000
Retail financing 27,635,000 746,000 81,000
--------------------------------------------------------
$105,790,000 $55,272,000 $41,790,000
--------------------------------------------------------
Report of Independent Public Accountants
Southern Energy Homes, Inc. and subsidiaries
To Southern Energy Homes, Inc.:
We have audited the accompanying consolidated balance sheets of
Southern Energy Homes, Inc. (a Delaware Corporation) and Subsidiaries as of
January 3, 1997 and December 29, 1995 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years ended
January 3, 1997, December 29, 1995, and December 30, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Southern Energy Homes, Inc. and Subsidiaries as of January 3, 1997 and December
29, 1995 and the results of their operations and their cash flows for each of
the years ended January 3, 1997, December 29, 1995, and December 30, 1994, in
conformity with generally accepted accounting principles.
Birmingham, Alabama
February 20, 1997 (except with respect to the matter discussed
in Note 6, as to which the date is March 27,
1997)
Statement of Management's Responsibility
Southern Energy Homes, Inc. and subsidiaries
The financial statements and related information herein were prepared
by the Company and were based on generally accepted accounting principles,
appropriate in the circumstances to reflect in all material respects the
consolidated financial position of the Company as of January 3, 1997 and
December 29, 1995, and the consolidated results of operations and cash flows for
the years ended January 3, 1997, December 29, 1995, and December 30, 1994. The
financial information presented elsewhere in this report has been prepared in a
manner consistent with the financial statement disclosures.
Management is responsible for the reliability and integrity of these
statements. In meeting this responsibility, management maintains an accounting
system and related internal controls to provide reasonable assurance that the
financial records are reliable for preparing financial statements and
maintaining accountability for assets. The Company's systems and controls are
also designed to provide reasonable assurance that assets are safeguarded and
that transactions are executed in accordance with management's authorizations
and recorded properly.
The Board of Directors has appointed an Audit Committee that meets
periodically with management and the independent public accountants.
Arthur Andersen LLP has audited the consolidated financial statements
in accordance with generally accepted auditing standards and their report
appears herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the Company's directors and concerning
compliance with Section 16(a) of the Securities Exchange Act of 1934 required by
this Item is incorporated by reference to the text appearing under Part I, Item
1 -- Business under the caption "Executive Officers" and by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held June 4, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on June 4, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on June 4, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on June 4, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Consolidated Balance Sheets as of January 3, 1997 and December 29, 1995
Consolidated Statements of Operations for each of the fiscal years
ended January 3, 1997, December 29, 1995 and December 30, 1994.
Consolidated Statements of Stockholders' Equity for each of the fiscal
years ended January 3, 1997, December 29, 1995 and December 30, 1994.
Consolidated Statements of Cash Flows for each of the fiscal years
ended January 3, 1997, December 29, 1995 and December 30, 1994.
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Statement of Management's Responsibility
(2) Financial Statement Schedules
No financial statement schedules are included since the information is
not applicable, not required, or is included in the financial
statements or notes thereto.
(3) Listing of Exhibits
The following exhibits are hereby incorporated by reference:
2.1 Asset Purchase Agreement, dated as of July 31, 1994, by and
among the Registrant, Imperial Manufactured Homes of N.C.,
Inc. ("Imperial") and the stockholders of Imperial. (Filed as
Exhibit 2.1 to the Current Report on Form 8-K dated August
14, 1994, File No. 0-21204.)
2.2 Real Estate Purchase Agreement, dated as of July 31, 1994,
between Imperial N.C. Associates and Lawyer's Title of North
Carolina, Inc. and Assignment of such Agreement to Southern
Energy Homes of North Carolina, Inc. (Filed as Exhibit 2.2 to
the Current Report on Form 8-K dated August 14, 1994, File
No. 0-21204.)
3.1 Certificate of Incorporation of the Company. (Filed as
Exhibit 3.1 to the Registration Statement on Form S-1,
Registration No. 33-57420.)
3.2 By-Laws of the Company. (Filed as Exhibit 3.2 to the
Registration Statement on Form S-1, Registration No.
33-57420.)
4.1 Specimen of Stock Certificate. (Filed as Exhibit 4.1 to the
Registration Statement on Form S-1, Registration No.
33-57420.)
4.7 Southern Development Council, Inc. Promissory Note. (Filed as
Exhibit 4.10 to the Registration Statement on form S-1,
Registration No. 33-57420.)
4.8 Stockholders' Agreement, dated as of June 8, 1989. (Filed as
Exhibit 4.12 to the Registration Statement on Form S-1,
Registration No. 33-57420.)
4.9 Form of First Amendment to Stockholders' Agreement, dated as
of January 13, 1993. (Filed as Exhibit 4.13 to the
Registration Statement on Form S-1, Registration No.
33-57420.)
*10.1 Employment Agreement with Wendell L. Batchelor, dated as of
June 8, 1989. (Filed as Exhibit 10.1 to the Registration
Statement on Form S-1, Registration No. 33-57420.)
*10.2 Employment Agreement with Keith Brown, dated June 8, 1989.
(Filed as Exhibit 10.2 to the Registration Statement on Form
S-1, Registration No. 33-57420.)
*10.3 Employment Agreement with Johnny R. Long, dated June 8, 1989.
(Filed as Exhibit 10.3 to the Registration Statement on Form
S-1, Registration No. 33-57420.)
*10.4 Southern Energy Homes, Inc. 1993 Stock Option Plan. (Filed as
Exhibit 10.4 to the Registration Statement on Form S-1,
Registration No. 33-57420.)
*10.5 Form of Southern Energy Homes, Inc. 401(k) Retirement Plan.
(Filed as Exhibit 10.5 to the Registration Statement on Form
S-1, Registration No. 33-57420.)
*10.6 Management Agreement, effective as of June 8, 1989, by and
between Lee Capital Holdings and Southern Energy Homes, Inc.
(Filed as Exhibit 10.14 to the Registration Statement on Form
S-1, Registration No. 33-57420.)
10.7 Southern Development Council, Inc. Loan Commitment Agreement.
(Filed as Exhibit 10.15 to the Registration Statement on Form
S-1, Registration No. 33-57420.)
10.8 Lease Agreement by and between Hillard Brannon and Southern
Energy Homes, Inc., dated July 30, 1992. (Filed as Exhibit
10.16 to the Registration Statement on Form S-1, Registration
No. 33-57420.)
10.9 Lease Agreement by and between Hillard Brannon and Southern
Energy Homes, Inc., dated November 16, 1989. (Filed as
Exhibit 10.17 to the Registration Statement on Form S-1,
Registration No. 33-57420.)
10.10 Lease Agreement by and between Robert Lowell Burdick, Nina
Burdick Vono, Carolyn Burdick Hunsaker, Jean Burdick Hall,
Mildred Burdick Marmont and Lane Burdick Adams, as Landlord,
and Southern Energy Homes, Inc. dated as of November 20,
1985, as amended. (Filed as Exhibit 10.23 to the Registration
Statement on Form S-1, Registration No. 33-57420.)
10.11 Agreement and Plan of Merger of Southern Energy Homes, Inc.,
a Delaware corporation, and Southern Energy Homes, Inc., an
Alabama corporation, dated as of January 15, 1993. (Filed as
Exhibit 10.25 to the Registration Statement on Form S-1,
Registration No. 33-57420.)
10.12 Certificate of Merger Merging Southern Energy Homes, Inc., an
Alabama corporation, with and into Southern Energy Homes,
Inc., a Delaware corporation, dated as of January 19, 1993.
(Filed as Exhibit 10.26 to the Registration Statement on Form
S-1, Registration No. 33-57420.)
10.13 Assignment of Lease and Rights dated June 29, 1993 between
B.B.H.L.P. Partnership and Southern energy Homes, Inc. (Filed
as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
quarter ended July 2, 1993, File No. 0-21204.)
10.14 Lease Agreement dated as of June 1, 1984 between The
Industrial Development Board of the Town of Addison, Alabama
and B.B.H.L.P. Partnership. (Filed as Exhibit 10.2 to the
Quarterly Report on form 10-Q for the quarter ended July 2,
1993, File No. 0-21204.)
10.15 Assignment of Lease and Rights dated June 19, 1993 between
B.B.H.L.P. and Southern Energy Homes, Inc. (Filed as Exhibit
10.3 to the Quarterly Report on Form 10-Q for the quarter
ended July 2, 1993, File No. 2-21204.)
10.16 Lease Agreement dated as of December 1, 1986 between The
Industrial Development Board of the Town of Addison, Alabama
and B.B.H.L.P. Partnership. (Filed as Exhibit 10.4 to the
Quarterly Report on Form 10-Q for the quarter ended July 2,
1993, File No. 0-21204.)
10.17 Letter Agreement dated May 18, 1993 and Master Note dated May
19, 1993 between the Company and AmSouth Bank, N.A. (Filed as
Exhibit 10.27 to the Registration Statement on Form S-1,
Registration No. 33-68954.)
10.18 Deed of Real Estate dated August 5, 1993 relating to the
Company's Plant No. 2 in Addison, Alabama. (Filed as Exhibit
10.27 to the Registration Statement on Form S-1, Registration
No. 33-68954.)
10.19 Deed of Real Estate dated July 30, 1993 relating to the
Company's manufacturing facility in Fort Worth, Texas. (Filed
as Exhibit 10.27 to the Registration Statement on Form S-1,
Registration No. 33-68954.)
*10.20 Southern Energy Homes, Inc. 1996 Option Plan for Non-employee
Directors. (Filed as Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the year ended December 29, 1995.)
10.21 Agreement and Plan of Reorganization of Southern Energy
Homes, Inc., a Delaware Corporation, and SE Management, Inc.,
an Alabama Corporation, dated November 21, 1996.
*10.22 Amended and Restated Employment Agreement with Wendell L.
Batchelor, dated as of June 14, 1996.
*10.23 Amended and Restated Employment Agreement with Keith W.
Brown, dated as of June 14, 1996.
21 List of Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule
-------------
* Management contract or compensatory plan or arrangement.
(b) The Company did not file a current report on form 8-K during the 4th Quarter
of fiscal 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Registrant
By:/S/ Wendell L. Batchelor
----------------------------------
Wendell L. Batchelor
Chaiman, President
and Chief Executive Officer
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/ Wendell L. Batchelor Chairman, President, March 27, 1997
- ------------------------------------
Wendell L. Batchelor Chief Executive Officer
and Director
/S/ Johnny R. Long Executive Vice President March 27, 1997
- ------------------------------------
Johnny R. Long and Director
/S/ Keith W. Brown Executive Vice President, March 27, 1997
- ------------------------------------ Chief Financial Officer,
Keith W. Brown Treasurer, Secretary
and Director
/S/ Keith O. Holdbrooks Executive Vice President March 27, 1997
- ------------------------------------ and Chief Operating Officer
Keith O. Holdbrooks
/S/ Paul J. Evanson Director March 27, 1997
- ------------------------------------
Paul J. Evanson
/S/ Joseph J. Incandela Director March 27, 1997
- ------------------------------------
Joseph J. Incandela
/S/ Jonathan O. Lee Director March 27, 1997
- ------------------------------------
Jonathan O. Lee