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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-21204
SOUTHERN ENERGY HOMES, INC.
(Exact name of registrant as specified in its charter)
Delaware 63-1083246
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
144 Corporate Way, P.O. Box 390, Addison, Alabama 35540
- ------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (256) 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
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 19, 2003, was $8,860,412. The number of shares
of common stock outstanding at that date was 12,133,865 shares, $.0001 par
value.
Documents Incorporated By Reference
Part Item
---- ----
1. Southern Energy Homes, Inc. Definitive Proxy Statement with respect to its
May 20, 2003 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 sale of manufactured homes, and the operation of three component
supply divisions. The Company produces manufactured homes sold primarily in the
southeastern and southcentral United States. The Company operates five home
manufacturing facilities (four in Alabama and one in Texas) to produce homes
sold in 22 states. The Company's homes are currently marketed under four brand
names by 235 independent dealers at 424 independent dealer locations and 3
company-owned retail centers.
The Company manufactures homes that are 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 that are transported by independent trucking
companies to dealer locations.
The Company's homes range in size from 672 to 3,268 square feet and
sell at retail prices ranging from $20,000 to $108,000, excluding land. The
Company believes that its willingness to customize floor plans and design
features to match homebuyer preferences is the principal factor which
differentiates it from most of its competitors.
At the end of fiscal 1998, the Company had substantial retail sales
operations, consisting of 33 retail centers in seven states. As industry
conditions began to weaken during fiscal 1999, however, the Company responded,
among other ways, by closing or selling retail centers that did not meet profit
objectives. That process continued through the next three years, culminating in
the decision during fiscal 2002 to close most of the remaining retail centers
and focus on the Company's core manufacturing business. In fiscal 2002, eleven
retail centers were closed, and by the end of the year, the Company had closed
all but three of the retail centers that were formerly part of its retail
segment. These retail centers had been negatively affected by weak market
conditions, including excess retail capacity in the industry and restrictive
retail financing conditions, principally as a result of the withdrawal of
several lenders from the market (see "Discontinued Operations" below). The
decision to close the retail centers was based primarily on management's
evaluation of recent operating results and future prospects.
The component supply segment sells various supply products to the
Company's manufacturing segment and to third-party customers.
The Company provides home buyers with a source of financing for homes
sold by the Company, through Wenco 21, a joint venture between the Company and
21st Mortgage Corporation. Prior to the establishment of Wenco 21, the Company
originated financing for buyers through its subsidiary, Wenco Finance Inc. Since
the formation of Wenco 21, Wenco Finance has conducted minimal loan origination
operations. As part of its decision to redirect the Company's efforts to its
core manufacturing operations, the Company also sold the Wenco Finance business
in late 2002 (see "Discontinued Operations" below).
The manufactured housing market is highly cyclical and seasonal and is
affected by the same economic factors which have an impact on the broader
housing market. Historically, most sectors of the home building 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.
DESCRIPTION OF REPORTABLE SEGMENTS - CONTINUING OPERATIONS
MANUFACTURED HOMES
The Company produces a variety of single- and multi-section homes under
four 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. Although each
manufacturing facility is an operating segment, they are aggregated into one
segment for reporting purposes because they produce similar products using
similar production techniques and they sell their products to the same class of
customer. In addition, they are subject to the same regulatory environment and
their economic characteristics (measured in terms of profitability) are similar.
The four manufacturing divisions of the Company are listed below with the type,
size, and retail price of the homes that each produces:
2
Division Type Square Feet Retail Price Range
-------------------- --------- ----------- ------------------
Southern Energy Multi-section 1,421 - 3,268 $38,900 - $108,000
Southern Lifestyle Single and multi-section 908 - 2,381 22,500 - 97,900
Southern Homes Single and multi-section 672 - 2,450 20,000 - 65,000
Southern Texas Single and multi-section 1,088 - 2,432 20,000 - 57,500
The Company's manufacturing division accounted for 90.8%, 88.2% and
81.3% of the Company's net revenues for the fiscal years ended January 3, 2003,
December 28, 2001 and December 29, 2000, respectively.
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
that 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 five 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
offers extensive customization of floor plan designs to meet specific customer
preferences.
RETAIL OPERATIONS
The Company began its retail operations in November 1996 by acquiring a
group of retail companies operating in Alabama and Mississippi. During fiscal
1997, the Company expanded its retail operations by acquiring another retail
company with seven locations in South Carolina, and during 1998, the Company
added another 15 retail centers through acquisitions. However, beginning in
fiscal 1999, the industry began to weaken and in 2000 the Company began to close
unprofitable retail centers. During the latter part of fiscal 2002, the Company
made the decision to close most of its remaining retail centers, and completed
the closure of eleven centers by the end of December 2002. At January 3, 2003,
the Company had 3 retail sales centers; two in Alabama and one in South
Carolina. Each of the remaining three sales centers maintains a separate sales
force. The Company's three continuing retail centers accounted for 7%, 8% and
15% of the Company's net revenues for the fiscal years ended January 3, 2003,
December 28, 2001 and December 29, 2000, respectively (also see "Discontinued
Operations" below).
COMPONENT SUPPLY
The Company currently operates three component supply divisions. Classic Panel
Designs supplies laminated and other interior wall panels. Wind-Mar Supply
provides windows, doors and countertops. Trimmasters produces wood molding and
trim finishing, and is a provider of wood components and dining furniture. These
divisions sell products both to the Company's own manufactured housing segment
and to third-party customers. The Company's component supply division accounted
for 2%, 2% and 3% of the Company's net revenues for the fiscal years ended
January 3, 2003, December 28, 2001 and December 29, 2000, respectively.
HOME MANUFACTURING OPERATIONS
The Company's homes are currently manufactured by four operating
divisions using assembly line techniques at five facilities; two manufacturing
facilities are located in Addison, Alabama, and one is located in each of Double
Springs, Alabama, Lynn, Alabama and Fort Worth, Texas.
The Company's manufacturing 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 165 floor sections per week with
minimal labor additions. The Company plans to continue operating on a single
shift per day basis. During the fiscal year ended January 3, 2003, the Company
produced an average of 141 floor sections per week. This represented a 4%
decrease in floor section production from an average of 147 floor sections per
week in the fiscal year ended December 28, 2001. In the fiscal year ended
December 29, 2000, the Company produced an average of 174 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:
3
Year Ended
--------------------------------------------------------------------
January 3, 2003 December 28, 2001 December 29, 2000
--------------- ----------------- -----------------
Homes 4,203 4,411 5,504
Floor sections 7,334 7,620 9,041
Home Manufacturing facilities 5 5 5
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, turnover, labor efficiency and injury incentive compensation
system. The Company believes that these compensation systems help to focus
efforts on curtailing waste and inefficiencies in the production process, keep
qualified associates and maintain a safe workplace, 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 3.2% of the Company's purchases during each of
the past three 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 in the past the Company has been able to pass along a
significant portion of increased material costs, more recently the Company has
had difficulties in passing on the increased costs due to competitive
conditions.
Because the cost of transporting a manufactured home is significant,
substantially all of the Company's homes are sold to dealers within a 600 mile
radius of a manufacturing facility. The Company arranges, at the dealer's
expense, for the transportation of finished homes to dealer locations using
independent trucking companies. 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. The
Company's backlog of orders for manufactured homes as of March 1, 2003 was $0.7
million as compared with $1.0 million at March 1, 2002. Dealer orders are
subject to cancellation prior to commencement of production for a variety of
reasons, and the Company does not consider its backlog to be firm orders. In
addition, because the industry operates in an environment where order lead times
are extremely short, the Company does not view backlog at any point in time to
be indicative of the level of the Company's future revenues.
SALES NETWORK
At January 3, 2003, the Company sold manufactured homes through
approximately 235 independent dealers at approximately 424 independent dealer
locations and through 3 company-owned retail centers in 22 states principally in
the southeastern and south central United States.
Each of the Company's four home manufacturing divisions maintains a
separate sales force. At January 3, 2003, a total of 26 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 works to achieve the close working relationship between its
division management and the independent dealers they service, because it
considers this an important factor in the effective distribution of the
Company's products. 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 the fiscal year
ended January 3, 2003, the Company's largest dealer accounted for 3.8% of net
revenues and the ten largest dealers accounted for 31.3% of net revenues. In the
fiscal year ended December 28, 2001, the
4
Company's largest dealer accounted for 5.3% of net revenues, and the Company's
ten largest dealers accounted for 26.7% of net revenues. In the fiscal year
ended December. 29, 2000, the Company's largest dealer accounted for 6.2% of net
revenues and the Company's ten largest dealers accounted for 27.0% of net
revenues.
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.
WARRANTY, QUALITY CONTROL AND SERVICE
The Company endeavors to adhere 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.
The Company continuously works to enhance its quality assurance systems, placing
high emphasis on improving the value and appeal of the Company's homes and
reducing 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 less cost of all damaged/missing items and less
curtailments, plus certain administrative and shipping expenses. Repurchases
were $2.0 million, $4.2 million and $8.7 million for the years ended 2002, 2001,
and 2000 respectively. Losses on homes repurchased under these agreements were
$0.5 million, $0.9 million and $0.9 million in 2002, 2001 and 2000,
respectively. At January 3, 2003, the Company's contingent repurchase liability
under floor plan financing arrangements through independent dealers was
approximately $38 million. While homes that have been repurchased by the Company
under floor-plan financing arrangements are usually sold to other dealers, no
assurance can be given that the Company will be able to sell to other dealers
homes which it may be obligated to repurchase in the future under such
floor-plan financing arrangements or that the Company will not suffer losses
with respect to, and as a consequence of, those arrangements. No dealer
accounted for more than 6.2% of the Company's net revenues in any of the past
three fiscal years. See "Sales Network." The Company does not view any single
independent dealer as being a material customer. The Company also finances
substantially its entire retail inventory through funds generated from
operations.
COMPETITION
The manufactured housing industry is highly competitive at both the
manufacturing and retail levels, with competition based upon numerous 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. A number of firms with which the Company competes 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 south-central 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's Wenco 21 joint venture provides
consumer financing to customers, increasing contractions in consumer credit may
provide an advantage to those competitors with larger or more established
internal financing capabilities.
In addition, manufactured homes compete with other forms of housing,
including site-built and prefabricated homes. Historically, manufactured housing
has had a price advantage over these other forms of housing. That advantage has
deteriorated, however, as the credit market, at both the retail and wholesale
level, of the manufactured housing industry has continued to tighten, while
interest rates for site-built houses are at historic lows, thus increasing the
competitive pressures on manufactured housing.
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 recently
become more difficult to meet due to the departure of financial institutions
from
5
the market and dealers requiring principal and curtailment payments from the
manufacturers.
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 Housing Construction and Safety Standards Act of 1974
("1974 Act"). 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 hurricanes. 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 21, the Company's finance joint venture, is 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 21 to comply with any of these laws and regulations could have a
material adverse effect on the Company's business and results of operations.
EMPLOYEES
As of January 3, 2003, the Company employed 1,191 full-time employees
involved in the following functional areas: manufacturing, 929; sales, 60; field
service, 71; administration and clerical, 95; and management, 36. 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 60) is the Founder and Chairman of the
Company and a Director since the Company's incorporation in 1982. Mr. Batchelor
was Chief Executive Officer of the Company from 1982 until May 2002 and
President of the Company from 1982 to 1999. 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
6
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.
Keith O. Holdbrooks (age 42) was elected as the Company's Chief
Executive Officer in May of 2002 by the Company's Board of Directors and has
served as the Company's President since June 1999 and Chief Operating Officer
since August 1996. 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. From 1985 to 1989 Mr. Holdbrooks served as
salesman for Southern Lifestyle, a division of the Company.
James L. Stariha (age 41) joined the Company as its Chief Financial
Officer in January of 2003. From 1999 to 2002, Mr. Stariha served as Vice
President of Finance of BISYS Document Solutions, a subsidiary of the BISYS
Group, Inc., and from 1996 to 1999 served as Executive Vice President and Chief
Financial Officer of Healthcare Technology Delivery, Inc. From 1983 to 1996 Mr.
Stariha served in a variety of financial, marketing, and manufacturing positions
with Square D Company.
Dan Batchelor (age 50) serves as the Company's General Counsel and
Executive Vice President. Mr. Batchelor practiced commercial and tort litigation
and business law for almost twenty years before joining the Company in 1998. Mr.
Batchelor received his B.A. from the University of Virginia, 1974; J.D. from
Cumberland School of Law of Samford University, 1978; and LL.M. from the
University of Miami School of Law, 1979. He is admitted to practice in Alabama,
Georgia and Florida and various federal jurisdictions.
DISCONTINUED OPERATIONS
RETAIL OPERATIONS
As industry conditions began to weaken during fiscal 1999, the Company
began to close or sell retail centers that did not meet profit objectives. That
process continued, based on a case-by-case determination, through the next three
years, with fourteen of the 33 centers open at the end of fiscal 1998 having
been closed by the end of fiscal 2001. During the latter part of fiscal 2002,
management made the determination to close most of the fifteen retail centers
then remaining and essentially withdraw from any further significant retail
presence. In fiscal 2002, eleven retail centers were closed, and by the end of
the year, the Company had completed the closure of all but three of the retail
centers that were formerly part of its retail segment. Five of these eleven
centers were in Alabama, three were in South Carolina, two in Tennessee and one
in Kentucky. The decision to close the retail centers was based primarily on
management's evaluation of recent operating results and future prospects. These
centers had operating losses of $1.9 million (excluding disposal losses of $4.7
million), $2.9 million and $2.4 million for the fiscal years ended January 3,
2003, December 28, 2001 and December 29, 2000 respectively. The retail centers
that were closed had been negatively affected by weak market conditions,
including excess retail capacity in the industry, as well as restrictive retail
financing conditions, principally as a result of the withdrawal of several
lenders from the market. The decision to close the retail centers was based
primarily on management's evaluation of recent operating results and future
prospects of those centers, and was also part of a strategic decision to
concentrate the Company's resources on the primary manufacturing operations.
CONSUMER FINANCING
Home buyers normally secure financing from third-party lenders such as
banks or independent finance companies. The availability and cost of financing
is important to the Company's sales. Starting in late 1999, financing started to
become more restrictive and some lenders began to exit the market. In order to
provide home buyers with an additional source of financing, the Company's
wholly-owned subsidiary, Wenco Finance, Inc. ("Wenco Finance"), originated and
serviced consumer loans for homes manufactured by the Company during the period
January 1996 through February 1997. The Wenco Finance portfolio was sold in
December 2002. The loan portfolio had losses of $0.8 million (excluding disposal
loss of $5.7 million), $0.1 million and $1.3 million for the fiscal years ended
January 3, 2003, December 28, 2001 and December 29, 2000 respectively.
AVAILABLE INFORMATION
The Company makes available, free of charge through its website
(www.soenergyhomes.com), the annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after electronically filing such material with the
Securities and Exchange Commission.
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ITEM 2. PROPERTIES
The Company currently operates five home manufacturing facilities (four
in Alabama, and one in Texas) and three component supply facilities (all in
Alabama), as follows:
Building Leased or
Unit Location Square Feet Owned
- --------------------------------------- --------------------- ------------------ --------------------
Manufacturing
Southern Energy Addison, AL 72,000 Owned
Southern Lifestyle Addison, AL 62,500 Owned
Southern Homes
Plant #1 Double Springs, AL 60,000 Owned
Plant #4 Lynn, AL 90,000 Owned
Southern Energy Homes of Texas Fort Worth, TX 98,300 Owned
Component Supply
Classic Panel Hartselle, AL 24,000 Owned
Wind-Mar Supply Addison, AL 22,000 Owned
Trimmasters Haleyville, AL 50,000 Leased
The Company considers its manufacturing facilities to be adequate for
its present needs. Additional information concerning production capacity and
extent of utilization is discussed under "Home Manufacturing Operations" in Item
1 of this Report.
The Company currently operates 3 retail sales centers, two of which are
in Alabama and one of which is in South Carolina. Each of the retail centers are
currently leased for terms ranging from month to month to five years.
The Company owns its corporate headquarters building located in
Addison, Alabama consisting of approximately 15,400 square feet of office space.
Also see "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings incidental to its
business. The company typically issues a one-year warranty on new manufactured
homes. The majority of these legal proceedings are claims related to warranty on
manufactured homes or employment issues such as workers' compensation claims.
Management believes that adequate reserves are maintained for such claims. In
the opinion of management, after consultation with legal counsel, the ultimate
liability, if any, with respect to these proceedings will not materially affect
the financial position or results of operations of the Company; however, the
ultimate resolution of these matters, which could occur within one year, could
result in losses in excess of the amounts reserved.
ITEM 4. SUBMISSION 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 year 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
RECORD HOLDERS
As of March 19, 2003, there were approximately 112 record holders of
the Company's common stock. This number does not include those stockholders
holding stock in "nominee" or "street" name.
STOCK PRICE PERFORMANCE
The Company's common stock is publicly traded on the Nasdaq Stock
Market National Market System. The following table represents the high and low
bid price for each quarter of the last two fiscal years.
8
2002 2001
Bid Price Range Bid Price Range
High Low High Low
--------- --------- ---------- ----------
First Quarter $2.75 $2.25 $1.69 $0.81
Second Quarter 2.65 2.01 2.85 1.28
Third Quarter 2.41 1.25 3.15 1.26
Fourth Quarter 1.75 1.04 2.70 1.18
DIVIDENDS
It is the Company's current policy to retain any future earnings to
finance the continuing development of its business and not to pay dividends. 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 share and per share data)
Year Ended
-----------------------------------------------------------------------------------------------
January 3, December 28, December 29, December 31, January 1,
----------- ------------- ------------- ------------- ----------
2003 2001 2000 1999 1999
----- ----- ----- ---- ----
OPERATING DATA
Net revenues $ 138,514 $ 129,105 $ 156,347 $ 233,012 $ 289,222
Gross profit 25,628 26,682 26,552 43,188 59,457
Selling, general and
administrative 24,914 25,360 32,862 36,175 39,591
Amortization of intangibles (1) 53 299 425 320 607
Impairment charges (2) -- 2,240 5,818 7,073 934
Start-up costs (3) -- -- -- -- 739
Operating income (loss) from
continuing operations 661 (1,217) (12,553) (380) 17,586
Interest expense 593 893 1,464 1,058 1,541
Interest income 41 112 234 130 709
Income taxes (benefit) (800) -- (325) (1,020) 6,089
Income (loss) from continuing
operations 909 (1,998) (13,458) (288) 10,665
Income (loss) from discontinued
operations (8,550) (3,074) (3,654) (1,305) (862)
Cumulative effect of accounting
change (3) -- -- -- -- (507)
Net income (loss) (7,641) (5,072) (17,112) (1,593) 9,296
Net income (loss) from
continuing operations per share:
Basic $ 0.07 $ (0.17) $ (1.11) $ (0.02) $ 0.79
Diluted $ 0.07 $ (0.17) $ (1.11) $ (0.02) $ 0.78
Net income (loss) per share:
Basic $ (0.63) $ (0.42) $ (1.41) $ (0.13) $ 0.69
Diluted $ (0.63) $ (0.42) $ (1.41) $ (0.13) $ 0.68
Weighted average shares
outstanding:
Basic 12,133,865 12,133,298 12,132,990 12,176,705 13,440,607
Diluted 12,133,865 12,133,298 12,132,990 12,176,705 13,647,216
BALANCE SHEET DATA
Total assets $ 51,728 $ 73,659 $ 96,571 $ 122,014 $ 121,656
Short-term debt 32 10,677 10,964 28,049 29,182
Long-term debt -- -- -- 2,464 3,569
Stockholders' equity 38,960 46,601 51,672 68,784 73,449
The financial information for the periods above has been restated to reflect the
reclassification of the 2002 retail center closings and the consumer finance
segment as discontinued operations.
(1) On December 29, 2001, the Company adopted FASB Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which
eliminates amortization of goodwill and requires an annual impairment test.
9
(2) During 2001, the Company recorded a pre-tax charge of $1.6 million
associated with the impairment of intangible assets related to certain of the
Company's retail centers and a pre-tax charge of $602,000 related to impairment
of a joint venture. During 2000, the Company recorded a pre-tax charge of $6.0
million associated with the impairment of intangible assets and exit costs
related to certain of the Company's retail centers. During 1999, the Company
recorded pre-tax charges of $7.1 million associated with closing of its
manufacturing facility in North Carolina and three retail centers, one in
Kentucky and two in South Carolina. During 1998, the Company recorded an
additional pre-tax charge of $934,000 due to additional warranty, workmen's
compensation, and other costs incurred related to the closing of its
Pennsylvania facility.
(3) During 1998, the Company recorded pre-tax charges of $739,000 for the year
and $825,000 ($507,000 net of tax) for the cumulative effect of accounting
change due to the Company adopting a change in accounting principle requiring
the expensing of start-up costs in accordance with AICPA Statement of Position
98-5, Reporting on the Cost of Start-Up Activities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The Company uses accounting policies that it believes are appropriate to
accurately and fairly report its results of operations and financial position,
and it applies those accounting policies in a consistent manner. The preparation
of the Company's financial statements in conformity with generally accepted
accounting principles requires that the Company's management make estimates and
assumptions that may affect the reported amounts of assets, liabilities,
revenues and expenses. These estimates and assumptions are based on historical
and other factors believed to be reasonable under the circumstances. The Company
evaluates these estimates and assumptions on an ongoing basis. Actual results
can and frequently will differ from these estimates. It is possible that
materially different amounts would be reported under different conditions or
using different methods or assumptions.
The Company believes that the following accounting policies are the most
critical ones used in the preparation of its financial statements, because these
are the ones that involve the most significant judgments and estimates about the
effect of matters that are inherently uncertain.
PRODUCT WARRANTIES
The Company warrants its products against certain manufacturing defects for a
period of one year commencing at the time of retail sale. The estimated cost of
such warranties is accrued at the time of sale to the independent dealer based
on historical warranty costs incurred. Periodic adjustments to the accrual are
made when events occur that indicate changes are necessary.
LITIGATION
The Company is a party to various legal proceedings incidental to its business.
The Company typically issues a one-year warranty on new manufactured homes. The
majority of these legal proceedings are claims related to warranty on
manufactured homes or employment issues such as workers' compensation claims.
Management believes that adequate reserves are maintained for such claims. In
the opinion of management, after consultation with legal counsel, the ultimate
liability, if any, with respect to these proceedings will not materially affect
the financial position or results of operations of the Company; however, the
ultimate resolution of these matters, which could occur within one year, could
result in losses in excess of the amounts reserved.
INSURANCE ARRANGEMENTS
The Company is partially self-insured for workers compensation and health
insurance claims. The Company purchases insurance coverage for all workers
compensation claims in excess of $350,000 per occurrence, and for all health
care claims in excess of $75,000 per occurrence, with an annual aggregate
stop-loss limit of approximately $5.3 million for all claims. Amounts are
accrued currently for the estimated costs of claims incurred, including related
expenses. Management considers accrued liabilities for unsettled claims to be
adequate. However, there is no assurance that the amounts accrued will not vary
from the ultimate amounts incurred upon final disposition of all outstanding
claims. As a result, periodic adjustments to the reserves will be made as events
occur that indicate changes are necessary.
REPURCHASE AGREEMENTS
Substantially all of the Company's independent dealers finance their purchases
through "floor plan" arrangements under which a financial institution provides
the dealer with a loan for the purchase price of the home and maintains a
security interest in the home as collateral. In connection with a floor plan
arrangement, the financial institution 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 less cost of all damaged or missing items and less
certain curtailments, plus certain administrative and shipping expenses.
Repurchases were $2.0 million, $4.2 million and $8.7 million for the years ended
2002, 2001 and 2000 respectively. Losses on homes repurchased under these
agreements were $0.5 million, $0.9 million and $0.9 million in 2002, 2001 and
2000, respectively. At January 3, 2003, the Company's contingent repurchase
liability under floor plan financing arrangements through independent dealers
was approximately $38 million. Amounts are accrued currently for the estimated
losses to be incurred on homes repurchased. Management considers accrued
liabilities for future losses on home repurchases to be adequate. However, the
ultimate resolution could result in amounts different than the amounts reserved.
As a result, periodic adjustments to the reserves will be made as events occur
which indicate changes are necessary.
10
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those items. The Company's cash flow estimates are based
on historical results adjusted to reflect the Company's best estimate of future
market and operating conditions. Any material change affecting the assumptions
used to project the estimated undiscounted cash flows or our expectation of
future market conditions could result in a different conclusion. Assets for
which the carrying value is not fully recoverable are reduced to fair value.
RECOVERABILITY OF INVESTMENTS
Management periodically assesses the recoverability of the Company's investments
in joint ventures. The significant judgment required in management's
recoverability assessment is the determination of the fair value of the
investment. Since the investments are non-publicly traded investments,
management's assessment of fair value is based on the Company's analysis of the
investee's estimates of future operating results and the resulting cash flows.
Management's ability to accurately predict future cash flows is critical to the
determination of fair value.
In the event a decline in fair value of an investment occurs, management may be
required to make a determination as to whether the decline in market value is
other than temporary. Management's assessment as to the nature of a decline in
fair value is largely based on the Company's estimates of future operating
results, the resulting cash flows and intent to hold the investment. If an
investment is considered to be impaired and the decline in value is considered
to be other than temporary, an appropriate write-down is recorded.
DISCONTINUED OPERATIONS AND RESTRUCTURING RESERVES
During 2002, the Company established restructuring reserves for exit and
severance cost at a number of closed retail operations. These reserves required
the use of estimates. Though the Company believes that these estimates
accurately reflect the ultimate costs that will be incurred, actual results may
be different.
VOLUME INCENTIVES PAYABLE
Volume incentives are common practice in the industry in which the Company
operates and are accounted for as a reduction to gross sales. The volume
incentives payable is estimated and recorded when sales of products are made.
The payable is adjusted, if necessary, when information becomes available that
indicate revisions are needed.
RESULTS OF OPERATIONS
GENERAL
The Company continues to face a difficult competitive environment. Rapid
industry growth prior to 1998, particularly in retail sales expansion, resulted
in an increase in the overall number of dealers, an increase in manufacturing
output and an increase in the number of homes available at the retail level.
These larger inventories and the generally slower reduction of those inventories
led to increased price competition and reduced profits that have adversely
affected the entire industry during the past four years. Fiscal 2002 saw further
credit tightening and declines in overall economic conditions that have
compounded the situation, resulting in a significant reduction in the
availability of financing, at both the wholesale and retail levels, and
increasing repossession inventories.
The Company has responded to these adverse industry and general economic
conditions by taking a number of steps that have been effective in decreasing
costs and improving efficiency. In 2001 and 2002, these steps included closing
less efficient manufacturing facilities, consolidating divisions, and selling
unprofitable retail centers, as well as improving efficiency in the remaining
manufacturing plants, lowering labor costs and turnover, decreasing plant
injuries, and lowering warranty expenses by improved quality. Weak market
conditions still persist, however, including industry-wide excess retail
inventory and more restrictive retail financing conditions for consumers.
In 2002, the Company made a strategic decision to redirect its efforts to its
core manufacturing business. Eleven retail centers that formerly comprised the
bulk of the retail segment were closed, leaving only three retail centers
remaining. The closed retail centers had been negatively affected by both weak
market conditions and restrictive retail financing conditions, principally as a
result of the withdrawal of several lenders from the market. These centers were
sold or closed by the end of December 2002. The decision to close the retail
centers was based primarily on management's evaluation of recent operating
results and future prospects, and was also part of the determination that, in
light of those results and prospects, the Company's human and financial
resources could be more productively and efficiently deployed in the primary
base of its business, manufacturing. Five of these eleven centers were in
Alabama, three were in South Carolina, two in Tennessee and one in Kentucky.
These centers had operating losses of $1.9 million, $2.9 million and $2.4
million for the fiscal years ended January 3, 2003, December 28, 2001 and
December 29, 2000 respectively.
The Company also sold its consumer financing segment, principally consisting of
the Wenco loan portfolio in December 2002. The Wenco loan portfolio had a book
value of approximately $11.8 million. The loan portfolio was sold for $6.1
million in a cash transaction. The decision to sell the loan portfolio was also
prompted by and was a part of management's plan to eliminate
11
unprofitable business lines and thereby allow the Company to focus on its core
manufacturing business.
Accordingly, as required by FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FASB 144"), the operating results
and disposal of the eleven retail centers and the Wenco loan portfolio, which
were previously reported in the retail and consumer financing segments have been
classified in discontinued operations for all prior periods presented herein.
The Company recognized a $13.1 million loss ($8.5 million net of tax benefit) on
discontinued operations in the year ended January 3, 2003, which included $2.7
million of operating losses during the year (including $0.3 million for interest
allocated to retail centers based on average monthly inventory balances), $3.6
million to write down the carrying value of unsold homes in retail inventory,
$1.1 million for leasehold, severance, termination of leases and other related
costs and the $5.7 million loss on sale of the Wenco loan portfolio. As required
by FASB 144, any further operating losses, as well as adjustments to exit costs
accruals (if any), will be reported in discontinued operations as incurred, or
when circumstances warrant revisions of the related accounts.
YEAR ENDED JANUARY 3, 2003 AS COMPARED WITH YEAR ENDED DECEMBER 28, 2001
NET REVENUES
Total net revenues (consisting of gross revenues less volume discounts, dealer
interest, returns, and allowances) for the year ended January 3, 2003 from
continuing operations were $138.5 million, which represented an increase of 7.3%
from 2001 revenues of $129.1 million from continuing operations.
Net revenues from the manufactured home segment were $132.9 million (including
intersegment revenues of $6.7 million) for the year ended January 3, 2003 as
compared with $133.6 million (including intersegment revenues of $18.4 million)
for the prior year period, a decrease of $0.8 million, or 0.6%. Total homes
shipped in the year ended January 3, 2003 were 4,203, down 4.7% from the number
of homes shipped in the prior year period. The decrease in homes sold was
attributable to an overall industry decline in the Company's core market areas
and increased competition within these market areas. The average wholesale price
per home in 2002 was $30,012, as compared with $28,826 in 2001, an increase of
4.1%.
Net revenues from the retail sales segment from continuing operations were $9.2
million for the year ended January 3, 2003 as compared with $10.5 million for
the prior year period, a decrease of $1.3 million, or 12%. The decline in retail
revenue reflects both tighter consumer financing and other general economic
factors. The number of total homes (new and used) sold by the retail segment
from continuing operations in the year ended January 3, 2003 was 246, down 19.6%
from the number of homes sold in the prior year period. The average retail price
per new home in 2002 was $47,977 as compared with $46,593 in 2001, an increase
of 3.0%.
Net revenues from the component supply segment were $24.6 million (including
intersegment revenues of $21.8 million) for the year ended January 3, 2003, as
compared with $23.3 million (including intersegment revenues of $20.3 million)
for the prior year period, an increase of $1.3 million, or 5.5%.
OPERATING FACTS
FISCAL YEARS ENDED
January 3, December 28,
2003 2001 (1)
--------------- -----------------
Company owned retail centers (continuing 3 3
operations)
Retail units sold:
New Single-section 21 42
New Multi-section 137 167
Used homes 88 97
--------------- -----------------
Total 246 306
Wholesale units sold:
External customers 4,030 3,794
Intercompany 173 617
--------------- -----------------
4,203 4,411
Total homes sold 4,449 4,717
=============== =================
Internalization (2) 100% 95%
Average sales prices - retail (new) $47,977 $46,593
Average sales price - wholesale $30,012 $28,826
Floor sections produced 7,334 7,620
12
(1) Summary operating data for the fiscal year ended December 28, 2001 have
been restated to exclude discontinued operations of retail centers
closed in 2002.
(2) Represents the percentage of new homes sold at retail that are also
manufactured by the Company.
GROSS PROFIT
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, 2003
from continuing operations was $25.6 million, or 18.5% of net revenues, as
compared with $26.7 million, or 20.7% of net revenues, in the prior year period.
This decline in the gross profit percentage was attributable primarily to higher
labor costs and material prices, offset slightly by higher sales prices and
lower warranty expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include primarily sales
commissions, advertising expenses, freight costs, salaries for support
personnel, administrative compensation, insurance costs, and professional fees.
Selling, general and administrative expenses from continuing operations were
$24.9 million, or 18.0% of net revenues, during the year ended January 3, 2003,
as compared with $25.4 million, or 19.6% of net revenues, for the same period of
the prior year. The decrease in selling, general and administrative expenses as
a percentage of sales was attributable to the following factors: lower dealer
interest payments and lower administrative salaries, offset slightly by higher
insurance expenses.
IMPAIRMENT AND OTHER CHARGES
During 2001, the Company recorded an impairment charge of $1.6 million for the
remaining goodwill related to its retail operations segment. The decision was
based primarily on continued losses at the two retail centers where the goodwill
was recorded. Fair value was determined by management based on the best
information available such as the value received in connection with the closure
of other retail centers. The Company also recorded a charge related to its
investment in one of the Company's manufacturing joint ventures of $602,000 due
to losses of this joint venture. There was no impairment charge recognized in
continuing operations in 2002.
INTEREST EXPENSE
Interest expense for the year ended January 3, 2003 from continuing operations
was $0.6 million as compared with $0.9 million for the year ended December 28,
2001. The decline in interest expense in the current year was a result of lower
interest rates, 5.7% compared to 7.6%, through the Company's line of credit and
lower average borrowings.
INCOME TAXES
Income taxes are provided for based on the tax effect of revenue and expense
transactions included in the determination of pre-tax book income. Because the
Company has operated at a loss in recent fiscal years, management believes that
under the provisions of SFAS No. 109, it is no longer appropriate to record
deferred income tax benefits on current losses in excess of anticipated refunds
of taxes previously paid. In fiscal 2001, the Company established valuation
allowances against the tax benefits of substantially all net operating loss
carry forwards and deductible temporary differences between financial and
taxable income.
In March 2002, Congress passed an economic stimulus bill containing certain
temporary business tax incentives. The tax provisions in the stimulus bill
extended the net operating loss ("NOL") carryback period to five years for NOLs
arising in tax years ending in 2001 and 2002, and allowed use of NOL carrybacks
and carryforwards to offset 100 percent of alternative minimum taxable income
(AMTI). These NOL carryback provisions allowed the Company to carry its 2002 and
2001 losses back to 1996 and the years following. The bill also allows an
additional first-year depreciation deduction equal to 30 percent of the adjusted
basis of qualified property acquired after September 10, 2001, and before
September 11, 2004, and placed in service before 2005 (2006 for certain property
with recovery period of 10 years or longer and certain transportation property).
Qualified property includes MACRS property with a recovery period of 20 years or
less, computer software, water utility property and leasehold improvement
property.
During the fiscal year ended January 3, 2003, in which the Company recognized
significant losses from the closing of retail centers and the sale of the Wenco
Finance loan portfolio, the Company recorded a $4.5 million current tax benefit
from discontinued operations. The Company expects to file a federal carryback
refund claim in the second quarter of fiscal 2003. Recorded income tax benefits
for the year-end January 3, 2003 from continued operations was $0.8 million
compared to no income tax benefit from continuing operations recorded for the
year ended December 28, 2001. The tax benefit otherwise applicable to the 2001
net operating losses was completely offset by the valuation allowance for
deferred tax assets discussed above.
13
YEAR ENDED DECEMBER 28, 2001 AS COMPARED WITH YEAR ENDED DECEMBER 29, 2000
NET REVENUES
Total net revenues (gross revenues less volume discounts, dealer interest,
returns, and allowances) for the year ended December 28, 2001 from continuing
operations were $129.1 million, which represented a decline of 17.4% from 2000
revenues of $156.3 million.
Net revenues from the manufactured home segment were $133.6 million (including
intersegment revenues of $18.4 million) for the year ended December 28, 2001 as
compared with $150.7 million (including intersegment revenues of $22.4 million)
for the prior year period, a decrease of $17.1 million, or 11.3%. The decline in
sales to dealers was primarily attributable to decreased demand and the closure
of one Alabama manufacturing plant in December 2000 and one in February 2000.
Total homes shipped in the year ended December 28, 2001 were 4,411, down 19.9%
from the number of homes shipped in the prior year period. The decrease in homes
sold was attributable to an overall industry decline in the Company's core
market areas and increased competition within these market areas. The average
wholesale price per home in 2001 was $28,826, as compared with $26,055 in 2000,
a increase of 10.6%.
Net revenues from the retail sales segment from continuing operations were $10.5
million for the year ended December 28, 2001 as compared with $22.9 million for
the prior year period, a decrease of $12.4 million, or 54%. The decline in
retail revenue reflects both tighter consumer financing and other general
economic factors, and because the Company operated two fewer retail centers in
2001 than it did in 2000. The average retail price per new home in 2001 was
$46,593 as compared with $42,174 in 2000, a increase of 10.5%.
Net revenues from the component supply segment were $23.3 million (including
intersegment revenues of $20.3 million) for the year ended December 28, 2001, as
compared with $30.1 million (including intersegment revenues of $25.6 million)
for the prior year period, a decline of $6.8 million, or 22.6%. The decline in
supply sales was mainly due to the decline in sales volume in the manufactured
home segment.
GROSS PROFIT
Gross profit consists of net revenues less the cost of sales, which includes
labor, materials, and overhead. Gross profit for the year ended December 28,
2001 from continuing operations was $26.7 million, or 20.7% of net revenues, as
compared with $26.6 million, or 17.0% of net revenues, in the prior year period.
This increase in the gross profit percentage was attributable primarily to
increased sales prices, lower labor costs, lower warranty expenses and lower
material prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include primarily sales
commissions, advertising expenses, freight costs, salaries for support
personnel, administrative compensation, insurance costs, and professional fees.
Selling, general and administrative expenses from continuing operations were
$25.4 million, or 19.6% of net revenues, during the year ended December 28,
2001, as compared with $32.9 million, or 21.0% of net revenues, for the same
period of the prior year. The decrease in selling, general and administrative
expenses as a percentage of sales was attributable to the following factors:
decreased dealer interest payments, lower commissions, lower administrative
salaries, lower advertising and promotions expenses.
IMPAIRMENT CHARGES
Impairment charges of $2.2 million in 2001 were $3.6 million less than similar
charges of $5.8 million in 2000. During 2000, the Company decided to close
eleven of its 28 retail centers. In connection with the decision to close these
retail centers, the Company recorded a pre-tax charge of $5.8 million consisting
of the impairment of the intangible assets, exit costs related to rental
commitments and leasehold improvements.
INTEREST EXPENSE
Interest expense for the year ended December 28, 2001 from continuing operations
was $0.9 million as compared with $1.5 million for the year ended December 29,
2000. The decline in interest expense in the current year was a result of lower
interest rates and lower average borrowings.
INTEREST INCOME
Interest income for the year ended December 28, 2001 from continuing operations
was $0.1 million as compared with $0.2 million for the year ended December 29,
2000. The decline in interest income reflects lower average cash and cash
equivalent balances during the year ended December 28, 2001.
14
PROVISION FOR INCOME TAXES
No income tax benefits were recorded for the year-end December 28, 2001 compared
to an income tax benefit for the year ended December 29, 2000 of $325,000. The
tax benefit applicable to continuing operations in fiscal 2000 was substantially
less than the applicable federal and state statutory tax rate because the
Company established during fiscal 2000, a valuation allowance of $4.4 million
related to deferred income tax assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109. During 2001, the
valuation allowance was increased by $701,000 which effectively offset the tax
benefit from the loss on continuing operations. The Company has established
valuation allowances against the tax benefits of substantially all its net
operating loss carry forwards and deductible temporary differences between
financial and taxable income for all periods reflected in the accompanying
financial statements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company has various contractual obligations and commercial commitments
arising from operations. These obligations and commitments are more fully
described in this Annual Report on Form 10-K under various headings in
"Management's Discussion and Analysis" as well as in the notes to the audited
financial statements. The following table lists the aggregate maturities of
various classes of obligations and expiration amounts of various classes of
commitments related to continuing operations at January 3, 2003 (in millions):
Contractual Obligations Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
- ----------------------- ----- ---------------- --------- --------- -------------
Operating Leases $0.4 $0.1 $0.3 $ - $ -
Total Amounts Less Than 1
Other Commercial Commitments Committed Year 1-3 Years 4-5 Years Over 5 Years
- ---------------------------- ----------------- ---------------- ----------------- ---------------- ---------------
Letters of Credit $0.6 $ 0.6 $ - $ - $ -
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 less cost of all damaged/missing items and less certain
curtailments, plus certain administrative and shipping expenses. Repurchases
were $2.0 million, $4.2 million, and $8.7 million for the years ended 2002,
2001, and 2000 respectively. Losses on homes repurchased under these agreements
were $0.5 million, $0.9 million, and $0.9 million in 2002, 2001, and 2000,
respectively. At January 3, 2003, the Company's contingent repurchase liability
under floor plan financing arrangements through independent dealers was
approximately $38 million.
JOINT VENTURES
The Company owns interests in five joint ventures. Ownership interests range
from 30% to 50%. These joint ventures have total assets of $36.1 million and
total liabilities of $27.2. Because the Company is a limited partner or has an
interest in a limited liability company, the Company's exposure to loss is
generally limited to its investments and advances and any commitments to fund
operations of the investees. The Company and certain of its equity partners have
guaranteed certain debt for companies in which the Company owns various equity
interests. The guarantees are limited to various percentages of the outstanding
debt. At January 3, 2003, $4.0 million was outstanding under the various
guarantees, of which the Company had guaranteed $1.3 million. One of the
companies has a lease purchase agreement with a third party to sell a facility
financed by debt that the Company has guaranteed. The Company expects the
proceeds from the exercise of the purchase option to be used to pay off the debt
and to be released from the guaranty upon payoff in 2003.
The Company is also obligated to repurchase homes financed by Wenco 21, LLC upon
a third payment default for 50% of the outstanding loan balance. The Company's
potential exposure under this commitment is approximately $4.5 million. Losses
on homes repurchased under this obligation were not significant in fiscal 2002,
2001 and 2000.
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.
The Company lowered its outstanding balance on its line of credit from $10.6
million to zero during 2002.
15
During the year ended January 3, 2003, net cash provided by operating activities
of continuing operations was approximately $0.8 million. Net income from
continuing operations for the year was $0.9 million. Included in net income were
the following non-cash charges: amortization expenses of $0.4 million, provision
for doubtful accounts of $0.2 million and depreciation expense of $2.2 million.
Cash provided by operating activities also reflected decreased accounts
receivable of $1.5 million, decreased inventories of $0.9 million, and an
increase in accounts payable of $0.4 million, which were offset by an increase
in refundable income taxes of $3.8 million and a decrease in accrued liabilities
of $1.4 million. In addition to cash provided by operating activities, other
significant items affecting cash flows from continuing operations included
capital expenditures of $2.0 million, proceeds from the sale of property, plant
and equipment of $0.8 million, net repayments of notes payable of $10.6 million,
and net cash from joint ventures of $0.9 million.
In accordance with the Company's current revolving credit facility, the Company
applies all cash receipts to reduce the line of credit. At January 3, 2003 the
balance of the revolving credit facility was $0 and the Company's net working
capital from continuing operations was $13.2 million, including $7.0 million in
cash and cash equivalents, as compared with a negative working capital of $6.6
million at December 28, 2001, including $0.3 million in cash and cash
equivalents. The increase in net working capital was primarily attributable to
an increase in cash and cash equivalents of $6.6 million, an increase in
refundable income taxes and other assets of $3.8 million, a decrease in accrued
liabilities of $1.4 million and a decrease in notes payable of $10.6 million,
partially offset by a decrease in accounts receivable of $1.5 million, a
decrease in inventories of $0.9 million, and an increase in accounts payable of
$0.4 million.
During the year ended January 3, 2003, the Company's net cash flow from
discontinued operations was $16.7 million. The sale of the Wenco loan portfolio
for $6.1 million and sale of inventory and other assets from the closure of
eleven retail centers were the main contributing factors to the increase in
cash flow, offset by a net loss from discontinued operations of $8.6 million.
During the year ended December 28, 2001, the Company's net cash provided by
operating activities from continuing operations was approximately $14.7 million.
Although net loss from continuing operations for the year was $2.0 million, this
loss included the following non-cash charges: impairment charges of $2.2
million, depreciation expense of $2.3 million and amortization expense of $0.6
million. Cash provided by operating activities also included decreased
inventories of $5.4 million, increased accounts receivable of $0.8 million,
increased accounts payable of $0.1 million and a decrease in prepayment and
other assets of $6.5 million, partially offset by increased accrued liabilities
of $1.3 million. In addition to cash provided by operating activities from
continuing operations, other significant items affecting cash flows included
capital expenditures of $1.0 million, net repayments of notes payable of $12.2
million and payments for debt issuance costs of $1.0 million.
At December 28, 2001, the Company's net working capital from continuing
operations was a negative $6.6 million, including $0.3 million in cash and cash
equivalents, as compared with a negative $4.0 million at December 29, 2000,
including $6.0 million in cash and cash equivalents. The decrease in net working
capital was primarily attributable to a decrease in cash of $5.7 million, a
decrease in inventories of $5.4 million and a decrease in prepayments of $5.7
million, partially offset by increased accounts receivable of $0.8 million,
decreased notes payable of $12.2 million, accounts payable of $0.1 million and
accrued liabilities of $1.3 million.
During the year ended December 28, 2001, the Company's net cash flow from
discontinued operations was a negative $7.5 million. A net loss from
discontinued operations of $3.1 million and a decrease in accounts payable and
accrued expenses of $4.4 million were the main contributing factors to the
decrease in cash flow.
At January 3, 2003 the Company had a $40 million secured line of credit, which
matures on March 8, 2004 and bears interest at the prime rate plus 1%, which
amounted to 5.25% at January 3, 2003. At January 3, 2003 the Company's
availability on the line of credit (based on an asset base limitation) was $11
million. The Company's ability to draw upon this line of credit is dependent
upon its continued compliance with certain financial ratios and covenants. The
Company had outstanding borrowings of $0 and $10.7 million at January 3, 2003
and December 28, 2001, respectively.
CAPITAL EXPENDITURES
The Company does not currently plan to make any material capital expenditures
during the next twelve months.
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.
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK.
The following discussion about the Company's interest rate risk
includes "forward looking statements" that involve risks and uncertainties.
Actual results could differ materially from those projected in the forward
looking statements.
Historically the Company has not entered into derivatives contracts to either
hedge existing risk or for speculative purposes. The Company also does not and
has not entered into contracts involving derivative financial instruments or
derivative commodity instruments. Pertinent provisions of Regulation S-K call
for disclosures to clarify exposures to market risk associated with activities
in derivative financial instruments, other financial instruments and derivative
commodity instruments. The Regulation defines "other financial instruments" to
include trade accounts receivable, loans and structured notes. The Company does
not utilize derivative instruments to manage such risks. The Company's principal
credit agreement bears a floating interest rate of 1.0% over prime. Accordingly,
the Company is subject to market risk associated with changes in interest rates.
At January 3, 2003, nothing was outstanding under the credit agreement. With
respect to accounts receivable, most of the Company's sales of manufactured
homes are pre-sold, such that orders exist before construction begins. When
manufactured homes are sold to dealers as inventory, such homes are generally
paid from availability under the dealer's floor plan financing arrangement. In
the typical case, funds are wired to the Company from the dealer's floor plan
lender within 21 days of delivery to the dealer's lot. Management thus does not
perceive that the Company is subject to a material market risk with respect to
its non-interest bearing accounts receivable.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 Forward-looking statements in this Annual Report on Form 10-K, including
without limitation, statements relating to the adequacy of the Company's
resources, are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that such
forward-looking statements involve risks and uncertainties, which could cause
actual results to differ materially from those in any forward looking
statements, including without limitation: general economic conditions; the
cyclical and seasonal nature of housing markets; competitive pricing pressures
at both the wholesale and retail levels; changes in market demand; recent
management changes; the impact of cost reduction programs and other management
initiatives; availability of financing for prospective purchasers of the
Company's homes and availability of floor plan financing for dealers;
availability and pricing of raw materials; concentration of the Company's
business in certain regional markets; adverse weather conditions that reduce
retail sales; the possibility of plant shutdowns from weather or other causes;
availability of labor for the Company to meet operating requirements; the highly
competitive nature of the manufactured housing industry; Federal, state and
local regulation of the Company's business; the Company's contingent repurchase
liabilities with respect to dealer financing; the Company's reliance on
independent dealers; and other risks indicated from time to time in the
Company's filings with the Securities and Exchange Commission.
17
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Consolidated Balance Sheets
Southern Energy Homes, Inc. and Subsidiaries
JANUARY 3, DECEMBER 28,
2003 2001
------------ ----------------
ASSETS (Restated - see
Note 2)
CURRENT ASSETS:
Cash and cash equivalents $ 6,960,000 $ 328,000
Accounts receivable, less allowance for doubtful accounts of
$323,000 and $160,000, respectively 6,740,000 8,178,000
Inventories 7,280,000 8,166,000
Refundable income taxes 4,191,000 349,000
Prepayments and other 483,000 440,000
Current assets of discontinued operations 800,000 11,981,000
------------ ------------
26,454,000 29,442,000
------------ ------------
PROPERTY, PLANT, AND EQUIPMENT:
Property, plant and equipment, at cost 31,636,000 31,899,000
Less accumulated depreciation and amortization (15,613,000) (14,881,000)
------------ ------------
16,023,000 17,018,000
------------ ------------
INTANGIBLES AND OTHER NON-CURRENT ASSETS:
Goodwill, net 3,305,000 3,305,000
Investment in joint ventures 4,300,000 4,908,000
Other assets 958,000 1,509,000
Non-current assets of discontinued operations 688,000 17,477,000
------------ ------------
9,251,000 27,199,000
------------ ------------
$ 51,728,000 $ 73,659,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 32,000 $ 10,677,000
Accounts payable 1,662,000 1,271,000
Volume incentive payable 3,204,000 3,760,000
Accrued payroll related expenses 1,713,000 1,939,000
Accrued workers' compensation 1,886,000 2,277,000
Accrued warranty 2,143,000 2,440,000
Accrued other 1,808,000 1,692,000
Current liabilities of discontinued operations 320,000 3,002,000
------------ ------------
12,768,000 27,058,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 1,000,000 shares authorized, none outstanding -- --
Common stock, $.0001 par value, 40,000,000 shares authorized, 12,133,865
shares issued and outstanding 1,000 1,000
Capital in excess of par 8,330,000 8,330,000
Retained earnings 30,629,000 38,270,000
------------ ------------
38,960,000 46,601,000
------------ ------------
$ 51,728,000 $ 73,659,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
18
Consolidated Statements of Operations
Southern Energy Homes, Inc. and Subsidiaries
Year Ended
--------------------------------------------------------
January 3, December 28, December 29,
2003 2001 2000
--------------- ------------- -------------
(53 Weeks) (52 Weeks) (52 Weeks)
(Restated - (Restated -
see Note 2) see Note 2)
--------------- ------------- -------------
Net revenues $ 138,514,000 $ 129,105,000 $ 156,347,000
Cost of sales 112,886,000 102,423,000 129,795,000
------------- ------------- -------------
Gross profit 25,628,000 26,682,000 26,552,000
Operating expenses:
Selling, general and administrative 24,914,000 25,360,000 32,862,000
Amortization of intangibles 53,000 299,000 425,000
Impairment and other charges -- 2,240,000 5,818,000
------------- ------------- -------------
24,967,000 27,899,000 39,105,000
Operating income (loss) from continuing operations 661,000 (1,217,000) (12,553,000)
Interest expense (593,000) (893,000) (1,464,000)
Interest income 41,000 112,000 234,000
------------- ------------- -------------
Income (loss) from continuing operations before income taxes 109,000 (1,998,000) (13,783,000)
Benefit for income taxes 800,000 -- 325,000
------------- ------------- -------------
Income (loss) from continuing operations 909,000 (1,998,000) (13,458,000)
Loss from discontinued operations, net of tax benefit of $4.5
million for the fiscal year ended January 3, 2003 (8,550,000) (3,074,000) (3,654,000)
------------- ------------- -------------
Net loss $ (7,641,000) $ (5,072,000) $ (17,112,000)
============= ============= =============
PER SHARE DATA:
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.07 $ (0.17) $ (1.11)
Loss from discontinued operations (0.70) (0.25) (0.30)
------------- ------------- -------------
Net loss $ (0.63) $ (0.42) $ (1.41)
============= ============= =============
Weighted average number of common shares outstanding:
Basic and diluted 12,133,865 12,133,298 12,132,990
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
19
Consolidated Statements of Stockholders' Equity
Southern Energy Homes, Inc. and Subsidiaries
Common Stock Capital
-------------------------- in Excess Retained
Shares Amount of Par Earnings Total
---------- ------- ---------- ------------ ------------
BALANCE, DECEMBER 31, 1999 12,132,990 $1,000 $8,329,000 $ 60,454,000 $ 68,784,000
Net loss -- -- -- (17,112,000) (17,112,000)
---------- ------ ---------- ------------ ------------
BALANCE, DECEMBER 29, 2000 12,132,990 1,000 8,329,000 43,342,000 51,672,000
Exercise of stock options 875 -- 1,000 -- 1,000
Net loss -- -- -- (5,072,000) (5,072,000)
---------- ------ ---------- ------------ ------------
BALANCE, DECEMBER 28, 2001 12,133,865 1,000 8,330,000 38,270,000 46,601,000
Net loss -- -- -- (7,641,000) (7,641,000)
---------- ------ ---------- ------------ ------------
BALANCE, JANUARY 3, 2003 12,133,865 $1,000 $8,330,000 $ 30,629,000 $ 38,960,000
========== ====== ========== ============ ============
The accompanying are an integral part of these consolidated financial
statements.
20
Consolidated Statements of Cash Flows
Southern Energy Homes, Inc. and Subsidiaries
Year Ended
----------------------------------------------------------
January 3, December 28, December 29,
2003 2001 2000
------------- ------------- ---------------
(53 Weeks) (52 Weeks) (52 Weeks)
------------- ------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Restated - see (Restated - see
Note 2) Note 2)
Income (loss) from continuing operations $ 909,000 $ (1,998,000) $(13,458,000)
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating activities:
Equity (income) loss of joint ventures (329,000) (365,000) 293,000
Non-cash impairment charges -- 2,240,000 5,818,000
Depreciation of property, plant and equipment 2,240,000 2,327,000 2,379,000
(Gain) loss on sale of property, plant and equipment (44,000) 351,000 273,000
Amortization of debt issuance costs 370,000 290,000 --
Amortization of intangibles 53,000 299,000 425,000
Provision for doubtful accounts receivable 163,000 (8,000) (302,000)
Change in assets and liabilities:
Accounts receivable 1,478,000 836,000 5,102,000
Inventories 886,000 5,414,000 10,372,000
Prepayments and other (89,000) 6,497,000 (6,035,000)
Refundable income taxes (3,842,000) -- 6,542,000
Accounts payable 390,000 111,000 (2,230,000)
Accrued liabilities (1,354,000) (1,304,000) (3,454,000)
------------ ------------ ------------
Net cash provided by operating activities 831,000 14,690,000 5,725,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,023,000) (1,072,000) (1,294,000)
Investments in joint ventures (549,000) (146,000) (445,000)
Proceeds from sale of joint venture 1,250,000 -- --
Distributions from joint ventures 235,000 371,000 442,000
Proceeds from sale of property, plant and equipment 823,000 1,155,000 41,000
------------ ------------ ------------
Net cash provided by (used in) investing
activities (264,000) 308,000 (1,256,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on notes payable (10,645,000) (12,170,000) (8,208,000)
Payment of debt issuance costs (29,000) (1,002,000) --
Proceeds from exercise of stock options -- 1,000 --
------------ ------------ ------------
Net cash used in financing activities (10,674,000) (13,171,000) (8,208,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents
from in continuing operations (10,107,000) 1,827,000 (3,739,000)
Net cash provided by (used in) discontinued
operations 16,739,000 (7,544,000) 869,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,632,000 (5,717,000) (2,870,000)
Cash and cash equivalents at beginning of year 328,000 6,045,000 8,915,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 6,960,000 $ 328,000 $ 6,045,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 612,000 $ 1,947,000 $ 1,993,000
The accompanying notes are an integral part of these consolidated financial
statements.
21
Notes to Consolidated Financial Statements
Southern Energy Homes, Inc. and Subsidiaries
1. THE COMPANY AND BASIS OF PRESENTATION
Southern Energy Homes, Inc. (the "Company") has three reportable
segments: manufacturing, retail and component supply. 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. Retail sales are concentrated in the southeastern United States. The
component supply segment sells various supply products to the Company's
manufacturing segment and to third-party customers.
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 2002 fiscal year included 53
weeks. The 2001 and 2000 fiscal years included 52 weeks.
The Company's business is seasonal and cyclical with the potential for
significant fluctuations in 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 accounting
principles generally accepted in the United States 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. DISCONTINUED OPERATIONS
In 2002, the Company closed eleven retail centers that were formerly
part of the retail segment. These retail centers had been negatively affected by
weak market conditions and restrictive retail financing conditions, principally
as a result of the withdrawal of several lenders from the market. The decision
to close the retail centers was based primarily on management's evaluation of
recent operating results and future prospects. These centers were sold or closed
by the end of December 2002.
The Company also sold its consumer financing segment, principally
consisting of the Wenco loan portfolio, in December 2002. The Wenco loan
portfolio had a book value of approximately $11.8 million. The loan portfolio
was sold for $6.1 million in a cash transaction. The decision to sell the loan
portfolio was prompted by management's strategic plan to eliminate unprofitable
business lines and thereby allow the Company to focus on its core manufacturing
business.
Accordingly, as required by FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), the operating
results and disposal of the eleven retail centers and the Wenco loan portfolio,
which were previously reported in the retail and consumer financing segments,
have been classified in discontinued operations for all prior periods presented
herein. The Company recognized a $13.1 million loss ($8.5 million net of tax
benefit) on discontinued operations in the year ended January 3, 2003, which
included $2.7 million of operating losses during the year (including $0.3
million for interest allocated to these retail centers based on average monthly
inventory balances), $3.6 million to write-down the carrying value of unsold
homes in retail inventory, $1.1 million for leasehold, severance, termination of
leases and other related costs and the $5.7 million loss on sale of the Wenco
loan portfolio. As required by SFAS 144, any further operating losses, as well
as adjustments to exit costs accruals (if any), will be reported in discontinued
operations as incurred, or when circumstances warrant revisions of the related
accounts. Historical operating results of the discontinued operations were as
follows for the years ended:
January 3, December 28, December 29,
2003 2001 2001
---------- ------------- ------------
(In thousands)
Net revenues $ 16,836 $ 27,888 $ 27,803
Operational loss (2,662) (3,074) (3,654)
Disposal loss (10,388) -- --
---------- ------------- ------------
Net loss before tax $ (13,050) $ (3,074) $ (3,654)
========== ============= ============
Assets and liabilities of the discontinued operations have been reflected in the
consolidated balance sheets as current or non-current based on the original
classification of these accounts, net of any necessary valuation allowances.
Although we believe we have appropriately reduced the carrying value of the
assets to their estimated recoverable amounts, net of disposal cost where
appropriate, actual results could be different and the difference will be
reported in discontinued operations in future periods.
22
Net assets of the discontinued operations are as follows:
January 3, December 28,
2003 2001
-------------- ----------------
(In thousands)
CURRENT ASSETS:
Inventories $ 675 $ 11,473
Prepayments and other 125 508
-------------- ----------------
Total current assets: 800 11,981
NON-CURRENT ASSETS:
Installment contracts receivable 342 13,165
Property, plant and equipment 344 2,251
Other assets 2 2,061
-------------- ----------------
Total non-current assets: 688 17,477
Current liabilities (320) (3,002)
-------------- ----------------
Net assets of discontinued operations $ 1,168 $ 26,456
============== ================
There are no material contingent liabilities, including environmental
liabilities or litigation, related to the closed retail centers or the consumer
finance business discontinued in 2002.
3. 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.
INVESTMENTS IN JOINT VENTURES
The Company accounts for its investments of 50% or less in joint
ventures, where it does not have the ability to control, on the equity basis of
accounting. Therefore, the Company's share of income or loss is recorded as
equity income or loss from its ventures in the accompanying consolidated
statements of operations (see Note 5).
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.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled $1,631,000,
$1,493,000 and $1,916,000 for 2002, 2001 and 2000, respectively.
23
INVENTORIES
Inventories are valued at first-in, first-out ("FIFO") cost, which is
not in excess of market. An analysis of inventories (excluding those reported in
discontinued operations) follows:
January 3, December 28,
2003 2001
---------- ----------
Raw materials $3,725,000 $4,657,000
Work in progress 570,000 592,000
Finished goods 2,985,000 2,917,000
---------- ----------
$7,280,000 $8,166,000
========== ==========
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 (5-39 years for buildings and improvements, 3-10 years for
machinery and equipment, 5-10 years for office and computer equipment, and 7-10
years for leasehold improvements, which is the lesser of the lease term or the
asset's useful life). Cost of property, plant and equipment (excluding those
reported in discontinued operations) is as follows:
January 3, December 28,
2003 2001
----------- -----------
Land $ 403,000 $ 411,000
Buildings and improvements 13,900,000 14,827,000
Machinery and equipment 9,715,000 10,567,000
Office and computer equipment 4,665,000 4,733,000
Leasehold improvements 1,302,000 1,307,000
Construction-in-progress 1,651,000 54,000
----------- -----------
$31,636,000 $31,899,000
=========== ===========
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.
GOODWILL
On December 29, 2001, the Company adopted FASB Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which
eliminates amortization of goodwill and requires an annual impairment test. SFAS
No. 142 requires that impairment be tested at the reporting unit level, using a
two-step approach. The first step determines if goodwill is impaired by
comparing the fair value of the reporting unit as a whole to the book value. If
a deficiency exists, the se