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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 28, 2002
Commission file number 0-24210
AMERICAN HOMESTAR CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0070846
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2450 SOUTH SHORE BOULEVARD, SUITE 300, LEAGUE CITY, TEXAS 77573
(Address of principal executive offices, including zip code)
(281) 334-9700
(Registrant's telephone number, including area code)
Securities to be Registered Pursuant to Section 12(b) of the Act: None
Securities to be Registered Pursuant to Section 12(g):
Series C Common Stock, par value $.01 per share
Series M Common Stock, par value $.01 per share
(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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The estimated aggregate market value of voting and non-voting common equity held
by non-affiliates of the registrant is not determinable as there have been no
sales and no quoted bid and asked prices within 60 days prior to the date of
this filing.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
As of September 24, 2002 the registrant had 100 shares of Series M Common Stock,
par value $.01 per share, and 3,922,280 shares of Series C Common Stock, par
value $.01 per share, issued and outstanding, and 6,077,720 shares of Series C
Common Stock deemed issued, outstanding and held in constructive trust for the
benefit of shareholders to be determined in name and amount as the claims
process arising from the registrant's Third Amended and Restated Plan of
Reorganization is completed.
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TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . 9
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters . . 10
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . 25
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . 27
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . 34
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . 36
PART I
ITEM 1. BUSINESS
GENERAL
American Homestar Corporation ("American Homestar" or the "Company") is a
regional vertically integrated manufactured housing company, with operations in
manufacturing, retailing, transportation, financing and insurance. The Company
was incorporated in Texas in July 1983. The Company currently operates two new
home manufacturing facilities and sells homes through its dedicated distribution
channels, which include 40 retail sales centers, a smaller sales center in a
manufactured housing community and approximately 20 independent retail locations
in five states. A third manufacturing facility is currently used to refurbish
lender repossessions.
Starting in July 1994, the Company had undertaken a strategy of expanding
into several new regional markets (outside of its core Southwest base of
operations) by acquiring manufacturing capacity and growing its Company store
network (through acquisition and new formation) to support its expanded regional
presence. Many of the Company's competitors were growing and expanding their own
company store base in the same regional markets. By early 1999, overall demand
for manufactured housing had peaked after several years of consistent and
significant growth. At the same time, total manufacturing and retail capacity
had grown to the extent that it surpassed then current levels of end-user
demand. The result was lower per-plant and per-store volume and diminishing
profitability for the industry and the Company. Excess finished goods inventory
and excess manufacturing capacity gave rise to steadily increasing volume and
margin pressures. With mounting losses in its retail operations and diminishing
profitability in its manufacturing operations, the Company adopted a plan to
retract its operations, with the goal of discontinuing Company store operations
in all non-core markets and focusing management and resources on what it defined
as its core Southwest market (Texas and the surrounding states).
REORGANIZATION
On January 11, 2001, the Company and twenty-one (21) of its subsidiaries
filed separate voluntary petitions for reorganization under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court of the
Southern District of Texas (the "Bankruptcy Court"). On August 14, 2001, the
Bankruptcy Court confirmed the Third Amended Joint Plan of Reorganization of the
Company and its subsidiaries (the "Plan"). All conditions to the effectiveness
of the Plan were met and the Plan became effective on October 3, 2001 (the
"Effective Date").
Under the terms of the Plan, all equity interests in the Company were
cancelled as of the Effective Date, and all holders of outstanding shares of
Company stock, which had previously traded under the symbols HSTR and HSTRQ,
lost all rights to equity interests in and to the reorganized Company. Under
the Plan, the Company has the authority to issue 15 million shares of new Series
C common stock and is required to issue 10 million shares of Series C common
stock to its general unsecured creditors. Pursuant to the exemption set forth
in Section 1145 of the Bankruptcy Code, the Company issued new shares of Series
C common stock to persons holding allowed unsecured claims in the Company's
bankruptcy case and shares of Series M common stock to management under an
incentive program. The Company has issued 10 million shares of Series C common
stock and 100 shares of Series M common stock. As of June 28, 2002, 3,922,280
shares of Series C common stock had been issued to specific shareholders with
allowed claims and 6,077,720 shares were held in constructive trust for the
benefit of shareholders to be determined in name and amount as the claims
process is completed. The Company also has the authority to issue 7.5 million
shares of Series M common stock to management, 100 shares of which had been
issued as of June 28, 2002 and 4,999,900 shares underlie options authorized
under the Company's 2001 Management Incentive Program. Options for 4,949,900
shares have been approved and granted at an exercise price of $1.35 per share.
These options vest seven years from the date of grant and may vest earlier (up
to 20% per year) if certain annual performance criteria established by the Board
of Directors are met.
In connection with its reorganization, the Company adopted "Fresh-Start
Reporting" under American Institute of Certified Public Accountants ("AICPA")
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code," beginning September 29, 2001, which coincides with
the end of the Company's first fiscal quarter. The Company elected to use
September 29, 2001, its quarter end, as its Fresh-Start Reporting date versus
the Effective Date of the Plan, October 3, 2001, as interim activity was not
1
material to the Consolidated Fresh-Start Balance Sheet. Accordingly, all assets
and liabilities were restated to reflect their reorganization value, which
approximates the fair value of the assets and liabilities at the Effective Date
and its capital structure was recast in conformity with the Plan. The
adjustment to eliminate the accumulated deficits totaled $158 million of which
$139 million was forgiveness of debt and $19 million was from Fresh-Start
adjustments.
The results of operations and cash flows for the three months ended
September 29, 2001 include operations prior to the Company's emergence from
Chapter 11 proceedings (referred to as "Predecessor Company" for periods prior
to September 29, 2001). The results of operations and cash flows for the nine
months ended June 28, 2002 include operations subsequent to the Company's
emergence from Chapter 11 proceedings and reflect the effects of Fresh-Start
Reporting (referred to as "Successor Company" for periods subsequent to
September 29, 2001). As a result, the net income for the nine months ended June
28, 2002 is not comparable with prior periods and the net income for the fiscal
year ended June 28, 2002 is divided into Successor Company and Predecessor
Company and is also not comparable with prior periods. In addition, the Balance
Sheet as of June 28, 2002 is not comparable to prior periods for the reasons
discussed above.
The reorganization value of the Company's common equity of approximately
$30 million at September 29, 2001, was determined by an independent valuation
and financial specialist, after consideration of several factors and by using
various valuation methods including appraisals, cash flow multiples,
price/earnings ratios and other relevant industry information. The
reorganization value of the Company was allocated to various asset categories
pursuant to Fresh-Start accounting principles.
STRATEGY
In connection with its reorganization, the Company has significantly
downsized its operations and has focused on its core Southwest market where the
Company is based and where it has historically had its most favorable overall
results. The Company currently operates 40 retail sales centers and a smaller
sales center in a manufactured housing community. The Company also operates
three manufacturing plants, two of which produce new homes while the third
refurbishes lender repossessions. Additionally, the Company operates an
insurance agency, which sells homeowner's insurance, credit life insurance and
extended warranty coverage to its customers. The Company also has a 51%
ownership interest in a transport company, which specializes in the
transportation of manufactured and modular homes and offices. In addition, the
Company has a 50% interest in a finance company, which specializes in providing
chattel and land/home financing to the Company's customers. The Company recently
invested in a 50% owned mortgage brokerage business to allow it to better
control the placement of its traditional mortgage business and to realize a
portion of the net profits relating to this business. Most recently, the Company
has aligned itself with several subdivision developments to meet an emerging
market segment in its market region and to gain greater market share. Management
believes that its regional vertical integration strategy, which derives multiple
profit sources from each retail sale, will allow the Company to be more
successful, over time, than would otherwise be the case.
INDUSTRY
A manufactured home is a single-family residence that is constructed in a
controlled factory environment and transported to a home site. Total retail
sales of new manufactured homes in the United States were approximately $9.4
billion in 2001. From 1991 through 1998, the manufactured housing industry
experienced a significant increase in the number of homes sold. Factory
shipments increased from approximately 171,000 homes in 1991 to a cyclical high
of approximately 373,000 homes in 1998. In 1999, 2000, and 2001 factory
shipments declined to approximately 349,000, 251,000 and 193,000 respectively
and estimated shipments for the year 2002 are expected to decline even further.
In 2001, manufactured homes accounted for approximately 18% of all new
single-family homes completed in the United States, up slightly from
approximately 17% in 1991. Because of the lower cost of construction for
manufactured homes compared to site-built homes, manufactured housing has
historically served as one of the most affordable alternatives for the
homebuyer. The average retail price of a new manufactured home in 2001 was
$31.69 per square foot, as compared to $70.66 per square foot for a new
site-built home, excluding land costs. In recent years, demand has shifted
toward larger, multi-section homes, which accounted for approximately 75% of the
manufactured homes produced in 2001.
2
Manufactured homes have traditionally been an alternative for homebuyers
unable or unwilling to make larger down payments and higher monthly payments
associated with site-built homes. Changes in the sub-prime lending markets,
beginning in late 1998, led to interest rate increases for home-only ("chattel")
financing at a time when traditional site-built mortgage interest rates were
generally declining. This condition (rising chattel financing rates and
declining site-built mortgage rates) has negatively affected the relative
affordability of chattel-financed manufactured housing in the Company's core
market area where the costs of land and site-built construction are low compared
to other parts of the country. There has also been a decline in the number of
industry lenders who provide chattel financing for manufactured homes resulting
in higher credit standards being applied to prospective buyers and, therefore, a
decline in the number of prospective customers who qualify for new manufactured
home chattel financing.
In addition to the changes in the chattel lending environment described
above, new Texas legislation (HB 1869), effective January 1, 2002 requires any
land/home package to be closed and financed in the same manner as a traditional
mortgage financing for site-constructed housing. Chattel financing can be used
only in cases where the home is being sited on leased land. This has resulted in
a noticeable shift from traditional industry lenders to more conventional
mortgage loan providers at interest rates virtually the same as for
site-constructed homes. This has also resulted in a significant increase in
potential loan providers and has afforded the manufactured housing industry in
Texas with continued access to guaranteed loan programs of both the Federal
Housing Administration and the Department of Veterans Affairs as well as special
programs offered through the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation.
The Company believes that the recent significant changes in the lending
environment described above and, especially, the shift toward traditional
mortgage financing sources will enhance the relative affordability of its
products as compared to site-constructed homes.
RETAIL DISTRIBUTION
The Company currently sells its products through various retail
distribution channels, primarily Company-operated retail sales centers, but also
including independent retailers and subdivisions. Franchise operations were
discontinued as a part of the Company's reorganization. The following table sets
forth, for the periods indicated, certain data for shipments of homes
manufactured by the Company to Company-operated retail sales centers and to
independent retail sales centers, including franchisees, and the number of
Company-operated retail sales centers and the number of joint venture retail
sales centers:
YEARS ENDED THREE MONTHS NINE MONTHS
------------------ ENDED ENDED
JUNE 30, JUNE 29, SEPTEMBER 29, JUNE 28,
2000 2001 2001 2002
-------- -------- ------------- -------------
PREDECESSOR CO. SUCCESSOR CO.
--------------------------------- -------------
Manufacturing shipments to Company-operated
retail sales centers . . . . . . . . . . . . 4,569 1,824 292 1,014
Manufacturing shipments to independent retail
sales centers, (including franchisees for
Predecessor Company) . . . . . . . . . . . . 5,830 1,832 51 162
-------- -------- ------------- -------------
Total homes shipped. . . . . . . . . . . . 10,399 3,656 343 1,176
======== ======== ============= =============
Company-operated retail sales locations and
community sales centers at end of period . . 111 41 41 41
Joint venture retail sales centers . . . . . . 11 -- -- --
The Company employs a distinct merchandising and selling strategy in its
distribution channels. At each Company-operated retail sales center a broad
selection of fully furnished and professionally decorated model homes is
displayed in a landscaped setting. The Company's professional sales staff
receives continuous training on all of the Company's products and services and
is therefore able to provide customers with a positive buying experience. The
Company also provides merchandising support and uses regional print, radio and
occasional television advertising to promote customer awareness and enhance the
Company's quality image.
3
In fiscal 2002, 70% of the Company's new home retail sales were
multi-section homes and its average new home retail sales price was $53,584 for
Department of Housing and Urban Development ("HUD") code homes, compared to the
industry average of $48,800. The Company currently operates 40 retail centers,
of which 35 are in Texas, three are in Louisiana and two are in Oklahoma, along
with a small sales center in a Texas manufactured housing community.
The following table sets forth, for the periods indicated, certain
information relating to homes sold by Company-operated retail sales centers:
YEARS ENDED THREE MONTHS NINE MONTHS
---------------------- ENDED ENDED
JUNE 30, JUNE 29, SEPTEMBER 29, JUNE 28,
2000 2001 2001 2002
---------- ---------- --------------- ---------------
Predecessor Co. Successor Co.
--------------------------------------- ---------------
Average new home sales price - HUD code . . . $ 55,095 $ 54,823 $ 51,403 $ 53,584
Homes sold:
New homes. . . . . . . . . . . . . . . . 5,831 2,499 373 1,001
Previously-owned homes . . . . . . . . . 2,196 964 149 555
Percentage of new homes sold:
Single-section . . . . . . . . . . . . . 28% 29% 34% 28%
Multi-section. . . . . . . . . . . . . . 72% 71% 66% 72%
Percentage of new homes sold manufactured by:
Company. . . . . . . . . . . . . . . . . 89% 98% 100% 99%
Independent manufacturers. . . . . . . . 11% 2% 0% 1%
Independent Retailers. The Company currently sells to approximately twenty
independent retailers located in Colorado, Louisiana, New Mexico, Oklahoma and
Texas. The Company believes its relations with its existing independent
retailers are good. The Company has no written agreements with its independent
retailers and either party may terminate the relationship at any time. The
Company generally does not provide inventory financing arrangements for
independent retailer purchases, nor does it consign homes. In accordance with
customary business practice in the manufactured housing industry, the Company
has entered into repurchase agreements with various financial institutions and
other credit sources under which the Company has agreed, under certain
circumstances, to repurchase manufactured homes sold to independent dealers in
the event of a default by such independent dealer on their obligation to such
credit sources. Under the terms of such repurchase agreements, the Company
agrees to repurchase manufactured homes at declining prices over the periods of
the agreements (which generally range from 18 to 24 months). While repurchase
activity is very sporadic and cyclical, the Company provides for anticipated
repurchase losses. At June 28, 2002 the Company was at risk to repurchase
approximately $2.9 million of manufactured homes and has provided for estimated
net repurchase losses of approximately $0.2 million.
MANUFACTURING
The Company manufactures a broad selection of HUD code homes ranging from
traditional, lower-priced homes to distinctive, higher-priced homes. The Company
is starting to produce modular homes in its core market area. The Company's HUD
code homes retail from $16,900 to $125,400, excluding land costs. By providing
such a broad selection, the Company believes it can meet the financial and
aesthetic requirements of the full range of retail buyers. Additionally, the
Company believes it offers high quality homes that incorporate more innovative
architectural designs and features than are typically offered by its
competitors. Over the past several years, as the demand for multi-section homes
has increased, the Company has significantly increased its production of
multi-section homes to 73% of total homes manufactured in fiscal 2002, up from
50% in fiscal 1994.
4
The Company's manufacturing facilities generally operate on a one shift per
day, five-day per week basis. At June 28, 2002, the Company's two operating new
home production facilities had the capacity to produce approximately 20 floors
per day, and the production rate was approximately 10 floors per day (capacity
figures are estimates of management). A floor is a single section home or one
section of a multi-section home. The following table sets forth the total homes
and floors manufactured by the Company for the periods indicated:
YEARS ENDED THREE MONTHS NINE MONTHS
------------------ ENDED ENDED
JUNE 30, JUNE 29, SEPTEMBER 29, JUNE 28,
2000 2001 2001 2002
-------- -------- ------------- -------------
Predecessor Co. Successor Co.
--------------------------------- -------------
Homes manufactured:
Single-section . . . 2,225 535 111 306
Multi-section. . . . 8,174 3,121 232 870
-------- -------- ------------- -------------
Total homes manufactured. 10,399 3,656 343 1,176
======== ======== ============= =============
Total floors manufactured 19,160 6,777 575 2,046
======== ======== ============= =============
The principal materials used in the construction of the Company's homes
include lumber and lumber products, gypsum wallboard, steel, aluminum,
fiberglass, carpet, vinyl, fasteners, appliances, electrical items, windows and
doors. Generally, materials are readily available and are purchased by the
Company from numerous sources. The Company believes the materials used in the
manufacture of its homes are readily available at competitive prices from a wide
variety of suppliers. Accordingly, the Company does not believe the loss of any
single supplier would have a material adverse effect on its business. The
Company's direct or variable costs of operations can be significantly affected
by the availability and pricing of raw materials.
The Company generally builds a home only after an order has been received
and wholesale retailer financing arrangements for payment have been made. In
accordance with industry practice, dealers can cancel orders prior to the
commencement of production without penalty, and accordingly, the Company does
not consider its backlog of orders to be firm orders. Because of the
seasonality of the market for manufactured homes, the level of backlog at any
time is not necessarily indicative of the expected level of future orders. The
Company's backlog, as well as level of new orders, generally declines during the
winter months of December through February.
FINANCING
In June 2000, the Company invested $2.4 million to provide one-half of the
initial capitalization of Homestar 21, LLC ("Homestar 21"), a joint venture
owned 50% by the Company and 50% by 21st Mortgage Corporation ("21st Mortgage"),
a company not affiliated with the Company. Homestar 21 is a finance company,
specializing in providing chattel and non-conforming land/home financing to the
Company's customers. The Company accounts for its investment in Homestar 21
using the equity method.
In May 2002, the Company invested $31,500 to provide one-half of the
initial capitalization of American Homestar Mortgage, L.P. ("Homestar
Mortgage"), a joint venture owned 50% by the Company and 50% by Home Loan
Corporation ("Home Loan"), a company not affiliated with the Company. Homestar
Mortgage is a mortgage broker/loan originator for ultimate loan placement with
Home Loan and other mortgage banks. Homestar Mortgage will not bear any lending
risk on loans it originates. The Company accounts for its investment in Homestar
Mortgage using the equity method.
To ensure that the Company remains fully competitive and has access to all
retail financing products available, the Company maintains relationships with
several independent mortgage and chattel retail lenders. These relationships are
intended to spread the business more evenly among various lenders and to ensure
that financing is available from numerous sources. The Company believes that
these relationships afford it access to a broader range of competitive financing
programs which, in turn, may result in increased retail sales.
5
INSURANCE
Through its wholly-owned subsidiary, Western Insurance Agency, Inc.
("Western"), the Company offers to its retail customers a variety of insurance
products, including property and casualty insurance, credit life insurance and
extended service contracts. The Company acts as the agent and earns commissions
and profit-sharing bonuses, in favorable loss years, from insurance written for
purchasers of its manufactured homes.
Through its wholly-owned subsidiary, Lifestar Reinsurance Ltd. ("Lifestar")
the Company underwrote the risk as to credit life policies it sold and shared in
the profits of the property and casualty insurance it sold in years where actual
loss experience was favorable. The Company elected to cease operations in
Lifestar in May, 2002 because the life insurance underwriting activity was
producing steadily declining returns. Instead the Company will share in
favorable loss experience, if any, as to the life insurance as well as the
property and casualty insurance through new agreements between the insurers and
Western.
TRANSPORTATION
Roadmasters Transport Company, Inc. ("Roadmasters"), a 51% owned
subsidiary, provides manufactured housing transportation services, including
transportation of manufactured homes from the Company's manufacturing
facilities. Roadmasters operates through independent owner-operators, allowing
operations over a large geographic area with no investment in equipment. The
Company believes that its controlling ownership interest in Roadmasters provides
it with the ability to better control the delivery of homes to its retail sales
centers and to independent retailers, especially during peak sales and delivery
periods, as well as to profit from each home shipment.
COMPETITION
The manufactured housing industry is highly competitive and the capital
requirements for entry are relatively modest. Manufactured homes compete with
new and existing site-built homes, apartments, townhouses and condominiums.
Competition exists at both the manufacturing and retail levels and is based
primarily on price, product features, reputation for service and quality,
location, depth of field inventory, sales promotions, merchandising and terms
and availability of dealer and retail customer financing.
GOVERNMENT REGULATION
The Company's manufactured homes are subject to a number of federal, state
and local laws and codes. Construction of manufactured homes is governed by the
National Manufactured Home Construction and Safety Standards Act of 1974, as
amended (the "MHCSS Act"), and the regulations issued by the Department of
Housing and Urban Development ("HUD") thereunder, establishing comprehensive
national construction standards. These regulations cover all aspects of
manufactured home construction, including structural integrity, fire safety,
wind loads, thermal protection and ventilation. The Company's manufacturing
facilities and the plans and specifications of its manufactured homes have been
approved by a HUD-designated inspection agency. The Company's homes are
regularly checked by an independent, HUD-approved inspector for compliance
during construction. Failure to comply with applicable HUD regulations could
expose the Company to a wide variety of sanctions, including mandated closings
of Company manufacturing facilities. The Company believes its manufactured homes
meet or surpass all present HUD requirements.
The Company is subject to the Texas Industrialized Housing and Buildings
Act ("IHB"), which regulates the construction of modular buildings, both
residential and commercial, and modular components in the State of Texas. The
Company believes its modular homes meet or surpass all IHB requirements.
Manufactured, modular and site-built homes are all typically built with
particleboard, paneling and other products that contain various formaldehyde
resins. HUD regulates the allowable concentration of formaldehyde in certain
products used in manufactured homes and requires warnings to purchasers
concerning formaldehyde-associated risks. Certain components of manufactured
homes are subject to regulation by the Consumer Products 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
6
components of its homes. The CPSC, the Environmental Protection Agency and other
governmental agencies currently are re-evaluating the allowable standards for
formaldehyde emissions. The Company uses materials in its manufactured homes
that meet the current HUD standards for formaldehyde emissions and believes that
it otherwise complies with HUD and other applicable government regulations in
this regard.
The manufacturing operations of the Company are subject to the requirements
of the Occupational Safety and Health Act ("OSHA") and comparable state laws.
Regulations promulgated under OSHA by the Department of Labor require employers
of persons in manufacturing industries, including independent contractors, to
implement work practices, medical surveillance systems, and personnel protection
programs in order to protect employees from workplace hazards and exposure to
hazardous chemicals. Regulations such as OSHA's Process Safety Management (PSM)
standard require facility owners and their contractors to ensure that their
employees are adequately trained regarding safe work practices and informed of
known potential hazards. The Company has established comprehensive programs for
complying with health and safety regulations. While the Company believes that it
operates its manufacturing facilities safely and prudently, there can be no
assurance that accidents will not occur or that the Company will not incur
liability in connection with the operation of its business.
The Company's operations are also subject to the provisions of the Texas
Manufactured Housing Act, the Consumer Credit Act and the Truth-in-Lending Act,
as well as local zoning and housing regulations. A number of states require
manufactured home producers and retailers 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 operations of Roadmasters and
Western are subject to regulation by various federal, state and local
authorities.
A variety of laws affect the financing of manufactured homes by the
Company. The Truth-in-Lending Act and Regulation Z promulgated thereunder
require written disclosure of information relating to such financing, including
the amount of the annual percentage rate and financing charge. The Fair Credit
Act also requires certain disclosures to potential customers concerning credit
information used as a basis to deny credit. The Federal Equal Credit Opportunity
Act and Regulation B promulgated thereunder prohibit discrimination against any
credit applicant based on certain specified grounds. The Federal Trade
Commission has adopted or proposed various trade regulation rules dealing with
unfair credit and collection practices and the preservation of consumers' claims
and defenses. The Federal Trade Commission regulations also require disclosure
of a manufactured home's insulation specification. Installment sales contracts
eligible for inclusion in the Government National Mortgage Association Program
are subject to the credit underwriting requirements of the Federal Housing
Administration. The Real Estate Settlement Procedures Act and Regulation X
promulgated thereunder require certain disclosures regarding the nature and cost
of real estate settlements. Manufactured homes in Texas that are not to be
placed in a manufactured home rental community are subject to Texas House Bill
1869, which requires them to be closed and financed like traditional mortgage
loans. A variety of state laws also regulate the form of installment sales
contracts and the allowable charges pursuant to installment sales contracts. The
sale of insurance products by the Company is subject to various state insurance
laws and regulations, which govern allowable charges and other insurance
products.
The Company is also subject to the provisions of the Fair Debt Collection
Practices Act, which regulates the manner in which the Company collects payments
on installment sale contracts, and the Magnuson-Moss Warranty-Federal Trade
Commission Improvement Act, which regulates the descriptions of warranties on
products. The Company's collection activities and warranties are also subject to
state laws and regulations.
The transportation of manufactured homes on highways is subject to
regulation by various federal, state and local authorities. Such regulations may
prescribe size and road use limitations and impose lower than normal speed
limits and various other requirements.
The Company's operations are also subject to federal, state and local laws
and regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. The Company is
not aware of any pending litigation to which it is a party or claims that may
result in significant contingent liabilities related to environmental pollution
or asbestos. In addition, the Company does not believe it will be required under
existing environmental laws and enforcement policies to expend amounts that will
have a material adverse effect on its results of operations or financial
condition.
7
A significant portion of the Company's manufacturing labor force includes
persons who are not U.S. citizens, and the Company is subject to the regulations
of the Immigration and Naturalization Service ("INS"). The Company adheres to
the procedures required for the prevention of the hiring of illegal aliens, but,
nonetheless, the Company has from time to time experienced losses of a portion
of its labor force due to INS investigative operations, which losses have
temporarily decreased production at the affected manufacturing facilities.
In general, legislation is proposed from time to time that, if enacted,
would significantly affect the regulatory climate for manufactured and modular
homes. At present, it is not possible to predict what, if any, changes or
legislation may be adopted or the effect any such changes or legislation may
have on the Company or the manufactured housing industry as a whole.
EMPLOYEES
At June 28, 2002, the Company employed 770 persons, compared to 727 persons
at June 29, 2001. The Company does not have any collective bargaining agreements
and has not experienced any work stoppages as a result of labor disputes. The
Company considers its employee relations to be good. A significant portion of
the total compensation of management of the Company is derived from incentive
bonuses based on the operating income of the operating unit for which such
management is responsible, as well as the attainment of Company-wide performance
objectives. Many of the Company's managers are participants in the option grants
of Series M common stock under the Company's 2001 Management Incentive Program
established by the Plan.
OTHER INFORMATION ABOUT THE COMPANY
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934. During its reorganization, the Company did not prepare or
file annual or quarterly reports with the Securities and Exchange Commission but
instead filed Monthly Operating Reports with the Bankruptcy Court, as required
by the Bankruptcy Code. The Company also filed its Monthly Operating Reports,
its confirmed Plan and its audited Fresh-Start balance sheet with the Securities
and Exchange Commission. The Company intends to file the annual and quarterly
reports for the periods during reorganization with the Securities and Exchange
Commission as soon as practicable. The public may read and copy any materials
the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, NW, Washington D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains a website that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC at
http://www.sec.gov. The Company's website is www.americanhomestar.com.
8
ITEM 2. PROPERTIES
At June 28, 2002, the Company operated two new home manufacturing
facilities and one refurbishment facility in Texas, 40 retail sales centers, one
small sales center in a manufactured housing community and an administrative
office. Twenty-eight of the retail sales centers and the administrative office
are leased under various noncancellable operating leases with varying monthly
payments and varying expiration dates through March 2007. The Company owns the
remaining retail sales centers. The Company's retail sales centers consist of
tracts of land, ranging generally from 2.5 to 7.0 acres, on which manufactured
homes are displayed, each with a sales office containing approximately 2,000
square feet of office space. The Company's retail sales centers are located in
three states as follows: Louisiana (3), Oklahoma (2), and Texas (35), along with
one small sales center in a manufacturing housing community in Texas. The
Company believes that all facilities are adequately maintained and suitable for
their present use.
The Company owns all of its manufacturing facilities (including those
classified as assets held for sale) and substantially all of its manufacturing
equipment, fixtures, furniture and office equipment. The following table sets
forth certain information with respect to the Company's manufacturing
facilities:
DATE OPENED OR BUILDING
LOCATION ACQUIRED SQUARE FEET
- ---------------------------------------------------------------------------------
Active facilities:
Fort Worth, Texas. . . . . . . . . . . . . . . . . June 1985 137,000
Lancaster, Texas . . . . . . . . . . . . . . . . . December 1992 86,600
Burleson, Texas. . . . . . . . . . . . . . . . . . May 1993 94,500
Idle facilities reported as Assets held
for sale:
Henderson, North Carolina. . . . . . . . . . . . . September 1996 70,000
Vicksburg, Mississippi . . . . . . . . . . . . . . September 1996 118,700
Brilliant, Alabama . . . . . . . . . . . . . . . . June 1997 127,500
Guin, Alabama. . . . . . . . . . . . . . . . . . . June 1997 136,400
Lynn, Alabama. . . . . . . . . . . . . . . . . . . June 1997 150,000
Pendleton, Oregon (1). . . . . . . . . . . . . . . September 1996 146,000
(1) Currently leased to a third party
ITEM 3. LEGAL PROCEEDINGS
On the Effective Date of the Plan, most pending claims against the Company were
discharged and an injunction was issued barring any future claims arising from
events that occurred prior to October 3, 2001. In a few cases, litigation has
been reinstated solely for the purpose of determining the amount of a general
unsecured claim against the Company or a claim to be paid by the Company's
insurers. Since the Effective Date, there have been no other pending legal
proceedings, except for routine litigation incidental to the business, which
management believes is not material to its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Under the terms of the Plan, all equity interests in the Company were
cancelled as of the Effective Date, and all holders of outstanding shares of
Company stock, which had previously traded, on the NASDAQ National Market, under
the symbols HSTR and HSTRQ, lost all rights to equity interests in and to the
reorganized Company. Under the Plan, the Company has the authority to issue 15
million shares of new Series C common stock and is required to issue 10 million
shares of Series C common stock to its general unsecured creditors. As of
September 24, 2002, there were 76 specific record holders of the Company's
Series C common stock, which holders have been issued 3,922,280 shares of Series
C common stock. The remaining 6,077,720 shares are being held in constructive
trust for the benefit of shareholders to be determined in name and amount as the
claims process is completed. The Company anticipates that the shares of Series
C common stock will continue to be issued on an incremental basis as the
Bankruptcy court enters orders allowing and disallowing claims that have been
filed in the Company's bankruptcy case until 10 million shares are issued.
The Company also has the authority to issue 7.5 million shares of Series M
common stock to management, 100 shares of which had been issued as of September
24, 2002. Additionally, 4,949,900 shares of Series M common stock underlie
options granted to management under the 2001 Management Incentive Program at an
exercise price of $1.35 per share. These options vest seven years from the date
of grant and may vest earlier (up to 20% per year) if certain annual performance
criteria, established by the Board of Directors, are met.
All shares of the Company's new common stock are restricted as to sale
through April 2004. There have been no sales of Series C or Series M common
stock, and no quotations for such shares have been published on any securities
market.
DIVIDEND POLICY
The Company has not paid any cash dividends on its common stock since it
became a public reporting company. The Board of Directors intends to retain any
future earnings generated by the Company to support and finance operations and
does not intend to pay cash dividends on its common stock for the foreseeable
future. The payment of cash dividends in the future will be at the discretion
of the Board and will depend upon a number of factors such as the Company's
earnings levels, capital requirements, financial condition and any other factors
deemed relevant by the Board of Directors. The terms of certain indebtedness of
the Company may or may not restrict the Company's ability to pay dividends or
make additional distributions.
SALES OF UNREGISTERED SECURITIES
The following unregistered sales of the Company's old par value $0.05 per
share common stock (the "Old Common Stock") were made in reliance upon Section
4(2) of the Securities Act of 1933 based on isolated sales by the Company in
connection with acquisitions of related businesses, all of which were made prior
to the Company's reorganization. Under the Plan, all shares of Old Common Stock
were cancelled in connection with the Company's reorganization under Chapter 11.
Pursuant to the exemption set forth in Section 1145 of the Bankruptcy Code, the
Company issued 10 million new shares of Series C common stock to persons holding
allowed unsecured claims in the Company's bankruptcy case and shares of Series M
common stock to management.
On September 30, 1999, pursuant to certain earn out provisions of the
R-Anell Custom Homes, Inc. stock purchase agreement, the Company issued 375,000
shares of the Company's Series A convertible preferred stock (the "Old Series A
Stock"). Each share of Old Series A Stock was convertible into one share of the
Company's Old Common Stock from April 2, 2001 to October 1, 2001. These shares
were cancelled upon the effective date of the Plan.
On February 8, 2000, the Company entered into a settlement agreement with
DWP Management, Inc. pursuant to which, among other things, the Company acquired
the remaining 20% interest in Pacific Northwest Homes, Inc. The original note
payable was cancelled. The Company acquired the remaining 20% interest, for cash
and 134,167 of the Company's Old Series A Stock. These shares were cancelled
upon the effective date of the Plan.
10
ITEM 6. SELECTED FINANCIAL DATA
The financial information set forth under Statement of Operations Data and
Balance Sheet Data for each of the fiscal years ended May 31, 1998 and 1999, the
one month ended June 30, 1999, and the fiscal year ended June 30, 2000, and as
of the reporting periods then ended was derived from the Consolidated Financial
Statements of the Company (and its subsidiaries), which financial statements
have been audited by KPMG LLP, independent certified public accountants. The
financial information set forth under Statement of Operations Data and Balance
Sheet Data for the fiscal period ended June 29, 2001, three months ended
September 29, 2001 and nine months ended June 28, 2002 have been audited by Mann
Frankfort Stein & Lipp CPAs, L.L.P, independent certified public accountants.
The Consolidated Financial Statements as of June 30, 2000, June 29, 2001, three
month period ended September 29, 2001 and nine month period ended June 28, 2002
are included elsewhere herein. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto included in Item 8 of this Form 10-K (in thousands except per
share data).
ONE MONTH YEARS ENDED THREE MONTHS NINE MONTHS
YEARS ENDED ENDED --------------------- ENDED ENDED
MAY 31, JUNE 30, JUNE 30, JUNE 29, SEPTEMBER 29, JUNE 28,
1998 1999 1999 2000 2001 2001 2002
--------- --------- -------- --------- ---------- -------------- -------------
PREDECESSOR CO. SUCCESSOR CO.
------------------------------------------------------------------------------------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales. . . . . . . . . . . . . . . . . $481,947 $612,086 $49,272 $532,634 $ 217,375 $ 21,107 $ 64,234
Other revenues . . . . . . . . . . . . . . 31,992 41,957 3,493 41,402 24,399 5,137 18,584
--------- --------- -------- --------- ---------- -------------- ------------
Total revenues . . . . . . . . . . . . . 513,939 654,043 52,765 574,036 241,774 26,244 82,818
--------- --------- -------- --------- ---------- -------------- ------------
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . . 381,435 477,717 40,214 446,378 174,999 16,086 52,184
Selling, general and administrative. . . . 91,772 134,682 12,487 153,769 77,948 10,290 28,703
Restructuring charges, goodwill and asset
impairments(1) . . . . . . . . . . . . . -- -- -- 22,097 139,216 -- --
Acquisition costs(2) . . . . . . . . . . . 2,425 -- -- -- -- -- --
--------- --------- -------- --------- ---------- -------------- ------------
Total costs and expenses . . . . . . . 475,632 612,399 52,701 622,244 392,163 26,376 80,887
--------- --------- -------- --------- ---------- -------------- ------------
Operating income (loss). . . . . . . . 38,307 41,644 64 (48,208) (150,389) (132) 1,931
Interest expense . . . . . . . . . . . . . . (7,382) (13,845) (1,487) (18,366) (11,231) (214) (825)
Other income (expense) . . . . . . . . . . . (50) 110 19 (566) 813 88 245
--------- --------- -------- --------- ---------- -------------- ------------
Income (loss) before items shown
below. . . . . . . . . . . . . . . . 30,875 27,909 (1,404) (67,140) (160,807) (258) 1,351
Reorganization items:
Fresh-Start adjustments. . . . . . . . . . -- -- -- -- -- 18,863 --
Reorganization costs . . . . . . . . . . . -- -- -- -- (2,796) (1,433) --
--------- --------- -------- --------- ---------- -------------- ------------
Income (loss) before items shown
below. . . . . . . . . . . . . . . . 30,875 27,909 (1,404) (67,140) (163,603) 17,172 1,351
Income tax expense (benefit) . . . . . . . . 13,546 11,472 (462) (20,141) 16,239 20 247
--------- --------- -------- --------- ---------- -------------- ------------
Income (loss) before items shown
below. . . . . . . . . . . . . . . . 17,329 16,437 (942) (46,999) (179,842) 17,152 1,104
Earnings (losses) in affiliates. . . . . . . 1,211 1,602 49 (350) 492 145 409
Minority interest in income of consolidated
subsidiaries. . . . . . . . . . . . . . (223) (98) (20) (242) 142 (50) (249)
--------- --------- -------- --------- ---------- -------------- ------------
Income (loss) before items shown
below . . . . . . . . . . . . . . . 18,317 17,941 (913) (47,591) (179,208) 17,247 1,264
Extraordinary item, net of income tax
benefit(3). . . . . . . . . . . . . . . (634) -- -- -- -- 139,130 --
--------- --------- -------- --------- ---------- -------------- ------------
Net income (loss) . . . . . . . . . . $ 17,683 $ 17,941 $ (913) $(47,591) $(179,208) $ 156,377 $ 1,264
========= ========= ======== ========= ========== ============== ============
Earnings (loss) per share before
extraordinary item - basic and diluted. $ 1.01 $ 0.96 $ (0.05) $ (2.59) $ N/A $ N/A $ 0.13
Earnings (loss) per share - basic and
diluted . . . . . . . . . . . . . . . . $ 0.98 $ 0.96 $ (0.05) $ (2.59) $ N/A $ N/A $ 0.13
Weighted average shares outstanding -
basic and diluted . . . . . . . . . . . 18,135 18,669 18,586 18,423 N/A N/A 10,000,100
BALANCE SHEET DATA (END OF FISCAL YEAR):
Working capital. . . . . . . . . . . . . . . $ 58,867 $ 60,859 $ N/A $ 39,993 $ 27,094 $ 11,797 $ 32,134
Total assets . . . . . . . . . . . . . . . . 273,696 439,316 N/A 362,233 96,352 76,606 92,749
Total debt . . . . . . . . . . . . . . . . . 107,491 216,845 N/A 208,176 24,462 21,102 21,703
Shareholders' equity . . . . . . . . . . . . $ 98,463 $135,465 $ N/A $ 92,902 $ (91,327) $ 30,179 $ 49,813
_________________________________
(1) Restructuring charges, goodwill and asset impairments related to the closing or idling of manufacturing plants and
restructuring of the Company's retail operations in fiscal 2000. Such changes increased the diluted loss per share by
$0.81 for fiscal 2000. Restructuring changes, goodwill and asset impairments related to the closing or idling of
manufacturing plants and non-core retail operations in fiscal 2001.
(2) Acquisition costs are non-recurring transaction costs related to acquisition.
(3) Extraordinary losses on early extinguishments of debt in fiscal 1998 and extraordinary gain for forgiveness of debt in
fiscal 2002.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this document, the words "anticipate,"
"believe," "estimate," "should," and "expect" and similar expressions as they
relate to the Company or management of the Company are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risk factors described in the
Company's most recently filed registration statement. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. The Company does not intend to
update these forward-looking statements.
GENERAL
American Homestar is a regional vertically integrated manufactured housing
company with operations in manufacturing, retailing, home transportation
services, home financing and insurance. The Company has its principal operations
in Texas, although it also sells its products in neighboring states. The Company
manufactures a wide variety of manufactured homes from two of its three
manufacturing facilities. The third manufacturing facility is primarily engaged
in refurbishing manufactured homes obtained through lender repossessions.
The Company's products are sold through 40 Company-operated retail sales
centers in Texas, Louisiana and Oklahoma, one non-owned residential community in
Texas, and several independent dealers. In addition, the Company facilitates
installment financing by purchasers of manufactured homes from its retail sales
centers. The Company also offers retail customers a variety of insurance
products, including property casualty insurance, credit life insurance and
extended warranty coverage through both its Company-operated retail sales
centers and certain independent retailers. The Company also offers
transportation services to its customers.
REORGANIZATION
On January 11, 2001 (the "Petition Date"), American Homestar Corporation
(the "Company") and twenty-one (21) of its subsidiaries filed separate voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code ("Chapter 11") in the United States Bankruptcy Court for the Southern
District of Texas (the "Bankruptcy Court"). On August 14, 2001, the Bankruptcy
Court confirmed the Third Amended Joint Plan of Reorganization (the "Plan") of
the Company and its subsidiaries. On October 3, 2001, all conditions required
for the effectiveness of the Plan were met, and the Plan became effective
("Effective Date"), and the Company and its subsidiaries emerged from
bankruptcy.
SUMMARY OF PLAN
Under the Plan, the Company maintained its ongoing business operations
primarily in Texas, Louisiana and Oklahoma, and continued sales to independent
dealers in New Mexico, Arkansas and Colorado. The Company continued to use its
manufacturing facilities in North Texas and to operate approximately 40 retail
store operations. Moreover, through affiliated entities that were not subject to
the Plan, the Company continued its insurance, financial services and
transportation lines of business.
Treatment of Equity: Under the terms of the Plan, all equity interests in
the Company were cancelled as of the Effective Date, and all holders of
outstanding shares of Company stock, which had previously traded under the
symbols HSTR and HSTRQ, lost all rights to equity interests in and to the
reorganized Company. Under the Plan, the Company has the authority to issue 15
million shares of new Series C common stock and is required to issue 10 million
shares of Series C common stock to its general unsecured creditors. Pursuant to
the exemption set forth in Section 1145 of the Bankruptcy Code, the Company
issued new shares of Series C common stock to persons holding allowed unsecured
claims in the Company's bankruptcy case and shares of Series M common stock to
management under an incentive program. The Company has issued 10 million shares
of Series C common stock and 100 shares of Series M common stock. As of June
28, 2002, 3,922,280 shares of Series C common stock had been issued to specific
shareholders with allowed claims and 6,077,720 shares were held in constructive
trust for the benefit of shareholders to be determined in name and amount as the
claims process is completed. The Company also has the authority to issue 7.5
12
million shares of Series M common stock to management, 100 shares of which had
been issued as of June 28, 2002 and 4,999,900 shares underlie options authorized
under the Company's 2001 Management Incentive Program. Options for 4,949,900
shares have been approved and granted at an exercise price of $1.35 per share.
These options vest seven years from the date of grant and may vest earlier (up
to 20% per year) if certain annual performance criteria established by the Board
of Directors are met.
Treatment of Administrative and Priority Claims (other than tax claims):
The Bankruptcy Code sets forth various types of claims that are entitled to
priority treatment. These priority claims include, among others, the costs of
administration incurred during the bankruptcy case, certain consumer claims and
certain employee claims. The priority claims that are allowed by the Bankruptcy
Code will be paid in cash and in full.
Tax Claims: The Bankruptcy Code allows certain tax claims to be paid over a
period of up to 72 months following the date of the assessment of those taxes.
The Plan authorizes the Company and its subsidiaries to pay tax claims over a
period of up to 60 months, with interest.
Unsecured Claims: Holders of unsecured claims of $10,000 or less were given
varying options, depending upon the entity owing the unsecured claim. In
general, most holders of such claims are entitled to receive a small payment in
cash (typically 10% or 20% of the amount of their claim). Certain of the
Company's affiliates have discontinued or will discontinue doing business under
the terms of the Plan. Holders of unsecured claims against discontinued entities
could accept a pro rata distribution in three years when the liquidation value
of the subsidiary is determined. Very few creditors have elected this option.
The typical holder of an unsecured claim will receive Series C common stock in
the Company. The stock will be issued by the Company, without regard to which
subsidiary actually owing the claim.
Miscellaneous Secured Claims: The Company was given the option to return
the collateral for secured claims or to pay secured claims over an extended
period of time, with interest.
Secured Claims by Primary Lender: As part of the Plan, the Company and
several of its subsidiaries entered into a new financing arrangement with the
Company's principal secured lender. The arrangement provided for substantial
debt forgiveness by the secured lender and for the extension of a 36-month loan
revolving credit facility by the secured lender. The new loan is secured by
substantially all of the Company's inventory and real estate and by certain
other assets (including certain specified cash deposits of approximately $4.2
million at June 28, 2002, which is included in restricted cash on the balance
sheet included in the Company financial statements). The loan has a maximum
limit of $38 million, although the available amount under the loan varies based
on various covenants and other requirements. The Company estimates that the loan
has a maximum potential advancement of $23 to $24 million, of which $20.7
million was advanced as of June 28, 2002. In addition to this facility, the
secured lender issued certain other shorter-term loan accommodations to provide
for the acquisition of certain specified inventory by the Company or its
affiliates.
BASIS OF REPORTING
Upon emergence from Chapter 11, the Company adopted the provisions of
Statement of Position No. 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("Fresh-Start Reporting") as
promulgated by the AICPA. Accordingly, all assets and liabilities have been
restated to reflect their reorganization value, which approximates their fair
value at the Effective Date. In addition, the accumulated deficit of the Company
was eliminated and its capital structure was recast in conformity with the Plan,
and the Company has recorded the effects of the Plan and Fresh-Start Reporting
as of September 29, 2001. Activity between September 29, 2001, the date of the
Consolidated Fresh-Start Balance Sheet, and October 3, 2001, the Effective Date
of the Plan was not material. The adjustment to eliminate the accumulated
deficit totaled $158 million, of which $139 million was forgiveness of debt and
$19 million was from Fresh-Start adjustments.
The reorganization value of the Company's common equity of approximately
$30 million was determined by an independent valuation and financial specialist
after consideration of several factors and by using various valuation methods,
including appraisals, cash flow multiples, price/earnings ratios and other
relevant industry information. The reorganization value of the Company has been
allocated to various asset categories pursuant to Fresh-Start accounting
principles.
13
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND GENERAL
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts previously
reported have been reclassified to conform with the 2002 presentation. The
Company also owns a 50% interest in a joint venture (Homestar 21st, LLC), which
is accounted for under the equity method of accounting. The Company recently
formed a second 50% owned joint venture (American Homestar Mortgage), which will
also be accounted for under the equity method of accounting.
The Company's fiscal year ends on the Friday closest to June 30 and each
interim period ends on the Friday closest to the end of the respective calendar
period.
ACCOUNTING ESTIMATES
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 period. Actual results could differ from those estimates.
Significant estimates were made to determine the following amounts
reflected on the Company's Balance Sheets:
- Property Plant and Equipment is reflected at its estimated fair
market value at September 29, 2001, less accumulated depreciation
for the period subsequent to September 29, 2001. The
determination of periodic depreciation expense requires an
estimate of the remaining useful lives of each asset.
- Assets Held For Sale are reflected at estimated fair market
value.
- Warranty Reserves include an estimate of all future
warranty-related service expenses that will be incurred as to all
homes previously sold, which are still within the one-year
warranty period. These estimates are based on average historical
warranty expense per home, applied to the number of homes that
are still under warranty.
- Reserve for future repurchase losses reflects management's
estimate of both repurchase frequency and severity of net losses
related to agreements with various financial institutions and
other credit sources to repurchase manufacturing homes sold to
independent dealers in the event of a default by the independent
dealer or its obligation to such credit sources. Such estimates
are based on historical experience.
- Liquidation and Plan Reserve reflects management's estimate of
all costs and expenses to be incurred in administering and
satisfying plan obligations as well as the net cost to complete
the liquidation of all non-core operations.
- Claims Reserve reflects management's estimate of the cash
required to satisfy all remaining priority, tax, administrative
and convenience class claims. This reserve does not include the
remaining initial distribution that is reflected in another
liability account, has been escrowed, and is not subject to
estimation.
REVENUE RECOGNITION
Retail sales are recognized once full cash payment is received and the home
has been delivered to the customer.
Manufacturing sales to independent dealers and subdivision developers are
recognized as revenue when the following criteria are met:
- there is a firm retail commitment from the dealer;
14
- there is a financial commitment (i.e. an approved floor plan source,
cash or cashiers check received in advance);
- the home is completely finished;
- the home is invoiced; and
- the home has been shipped.
The Company also maintains used manufactured home inventory owned by
outside parties and consigned to the Company, for which the Company recognizes a
sales commission when received.
Premiums from credit life insurance policies reinsured by the Company's
credit life subsidiary, Lifestar Reinsurance, Ltd. ("Lifestar"), are recognized
as revenue over the life of the policy term. Premiums are ceded to Lifestar on
an earned basis.
Agency insurance commissions are recognized when received and acknowledged
by the underwriter as due.
Transportation revenues are recognized after the service has been performed
and invoiced to the customer.
INVENTORIES
Newly manufactured homes are valued at the lower of cost or market, using
the specific identification method. Used manufactured homes are valued at
estimated wholesale prices, not in excess of net realizable value. Raw materials
are valued at the lower of cost or market, using the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were recorded at cost at June 29, 2001 or, as
required by Fresh-Start Reporting, were reflected at management's estimate of
fair market value at September 29, 2001, and since that date additions are
recorded at cost. Depreciation on property, plant and equipment is recorded
using the straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized using the straight-line method over
the useful lives of the improvements or lease periods, whichever is shorter. The
Company has six manufacturing plants and several non-core retail sales centers
that are not in operation which are classified as assets held for sale and are
reflected at management's estimate of net realizable value.
The Company evaluates the recoverability of long-lived assets not held for
sale by measuring the carrying value of the assets against the estimated
undiscounted future cash flows in accordance with SFAS No. 121. At the time such
evaluations indicate that the undiscounted future cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the carrying values of such assets are adjusted to their estimated fair
values. Estimated fair values are determined using the present value of
estimated future cash flows. In conjunction with the SFAS No. 121 analysis
performed in fiscal years 2000 and 2001, the Company recorded long-term asset
impairments of approximately $4.8 million in fiscal 2000 and approximately $38.8
million in fiscal 2001.
GOODWILL
Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, was amortized on a straight-line basis over periods
ranging from 10 to 40 years. The Company assesses the recoverability of goodwill
by determining whether the amortization of the goodwill balance over the
remaining useful life can be recovered through undiscounted future operating
cash flows of the acquired operations.
The Company evaluates the recoverability of long-lived assets not held for
sale by measuring the carrying value of the assets against the estimated
undiscounted future cash flows in accordance with SFAS No. 121. At the time such
evaluations indicate that the undiscounted future cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their estimated fair values. Estimated fair
values are determined using the present value of estimated future cash flows.
In conjunction with the SFAS No. 121 analysis performed in fiscal years 2000 and
2001, the Company recorded goodwill write-off of approximately $14.6 million in
fiscal 2000 and approximatley $63.9 million in fiscal 2001.
15
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which such temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that included the enactment date. Because of the Company's recent
reorganization, all deferred tax assets (both short term and long term) have
been fully reserved as their realization is contingent upon future taxable
income.
RESERVES FOR FUTURE LOSSES ON CREDIT SALES
The Company makes a current provision for estimated future losses on credit
retail sales where the Company retains risk in the event of customer nonpayment
of installment sales contracts. Typically, the Company's period of exposure to
loss does not exceed the first two installment payments on an individual
contract. The amounts provided for estimated future losses on credit sales are
determined based on the Company's historical loss experience after giving
consideration to current economic conditions. In assessing current loss
experience and economic conditions, management may adjust the reserve for losses
on credit sales related to prior years' installment sales contracts. All
adjustments are recognized currently.
ACCRUED WARRANTY AND SERVICE COSTS
The Company makes a current provision for future service costs associated
with homes sold and for manufacturing defects for a period of one year from the
date of retail sale of the home. The estimated cost of these items is accrued
at the time of sale and is reflected in cost of sales in the consolidated
statements of operations. For the years ended June 30, 2000, June 29, 2001, the
three months ended September 29, 2001 and the nine months ended June 28, 2002,
warranty and service costs were $27.7 million, $ 10.6 million, $0.7 million,
$2.0 million respectively.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per share
reflects dilution from all contingently issuable shares from outstanding
options. Options granted under the Company's 2001 Management Incentive Program
are not reflected in diluted earnings per share as there have been no sales and
no quoted bid and asked prices for the stock. Per share data for periods ended
June 29, 2001, and September 29, 2001, have been omitted as the Company was in
bankruptcy during these periods and the amounts do not reflect the current
capital structure.
FINANCIAL INSTRUMENTS
Fair value estimates are made at discrete points in time based on relevant
market information. These estimates may be subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. The Company believes that the carrying amounts of
its current assets, current liabilities and long-term debt approximate the fair
value of such items.
CASH EQUIVALENTS
Cash equivalents consist of short-term investments with an original
maturity of three months or less, money market accounts and cash in transit from
financial institutions. Cash in transit from financial institutions presents no
risk to the Company regarding collectibility and is typically received within
two business days of month end.
CONCENTRATION OF CREDIT RISK
The Company maintains cash in several bank accounts, which at times exceed
federally insured limits. The Company monitors the financial condition of the
banks where it maintains accounts and has experienced no losses associated with
these accounts.
16
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangibles. The statement requires that goodwill not be
amortized but instead be tested at least annually for impairment and expensed
against earnings when the implied fair value of a reporting unit, including
goodwill, is less than its carrying amount. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001, and we do not expect its
adoption will have a material impact on our financial condition or results of
operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 will be effective for financial
statements issued for fiscal years beginning after June 15, 2002, and we do not
expect its adoption will have a material impact on our financial condition or
results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of OperationsReporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," as it relates to the accounting for the disposal of a
segment of a business (as previously defined in that Opinion). The provisions of
SFAS 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and we do not expect its adoption will have a
material impact on our financial condition or results of operations.
RESULTS OF OPERATIONS
The results of operations and cash flows for the three months ended
September 29, 2001, include operations prior to the Company's emergence from
Chapter 11 proceedings and the effects of Fresh-Start Reporting. The results of
operations and cash flows for the nine months ended June 28, 2002 include
operations subsequent to the Company's emergence from Chapter 11 proceedings and
reflect the on-going effects of Fresh-Start Reporting. As a result, the net
income for the nine months ended June 28, 2002 is not comparable with prior
periods and the net income for the twelve months ended June 28, 2002 is divided
into Successor Company and Predecessor Company periods and is also not
comparable with prior periods. In addition, the Balance Sheet as of June 28,
2002 is not comparable to prior periods for the reasons discussed above.
In connection with its reorganization, the Company has significantly
downsized its operations and has focused on its core Southwest market, where the
Company is based and where it has historically had its most favorable overall
results. The Company currently operates 40 retail sales centers and a sales
operation in a manufactured housing community. The Company also operates three
manufacturing plants, two of which are producing new homes while the third is
used to refurbish manufactured homes obtained through lender repossessions, and
an insurance agency, which sells homeowner's insurance, credit life insurance
and extended warranty coverage to its customers. In addition, from March 1995
to May 2002 the Company operated a reinsurance company, which reinsures the
credit life and extended warranty policies sold, and allowed the Company to
participate in additional homeowner insurance profits in years where losses are
lower than expected. The Company also has a 51% ownership interest in a
transport company, which specializes in the transportation of manufactured
homes, modular homes and offices, and a 50% interest in a finance company, which
specializes in providing chattel and land/home financing to the Company's
customers. The Company also has a 50% interest in a mortgage brokerage business
which is currently in formation. Management believes that its vertical
integration strategy, deriving multiple profit sources from each retail sale,
will allow the Company to be more successful, over time, than would otherwise be
the case.
Two significant recent events have, in management's opinion, had a
dampening effect on new home sales and revenues for the six months ended June
28, 2002. The withdrawal of several retail lenders from the national market has
had the effect of tightening credit standards applied to potential new home
buyers and, at least temporarily, reduced total potential demand for new homes.
Some previously qualified new homebuyers are currently able to purchase lender
repossessions but are not currently eligible for new home financing. In
17
addition, new Texas legislation (HB 1869) effective January 1, 2002, now
requires any land/home package to be closed and financed in a fashion nearly
identical to traditional mortgage financing for site-constructed housing. This
legislation has led to a much longer and more complex credit approval and loan
closing cycle than existed prior to January 1, 2002. While this change will not
necessarily result in a lower overall demand for manufactured housing in Texas,
it has had the effect of increasing the sales closing and revenue recognition
process from an average of 45-60 days to an average of more than 100 days. As a
result, management believes that the Company realized less revenue during the
six months ended June 28, 2002, than would have otherwise been the case without
lender withdrawal from the industry and the Texas law change. If the lending
environment remains stable, management believes that sales and revenues will
gradually improve over current levels as its sales-in-process mature toward the
longer closing and completion cycle and as its retail sales team adjusts to
these new lender and industry dynamics. Management believes that most of the
Company's competition in its core market region is experiencing similar market
pressures and is reducing both retail and manufacturing capacity. Management
believes that the Company is postured to take advantage of these changes because
it is reorganized and no longer distracted by the same relative leverage
positions and operational challenges as its competition. While management
believes that market share gains will be gradual but steady, there is no
assurance that these gains will materialize.
The following table summarizes certain key sales statistics for the Company
for the periods indicated:
YEARS ENDED THREE MONTHS NINE MONTHS
---------------------- ENDED ENDED
JUNE 30, JUNE 29, SEPTEMBER 29, JUNE 28,
2000 2001 2001 2002
---------- ---------- --------------- ---------------
Predecessor Co. Successor Co.
--------------------------------------- ---------------
Company-manufactured new homes sold at retail. . . . 5,193 2,447 373 994
Total new homes sold at retail . . . . . . . . . . . 5,831 2,499 373 1,001
Internalization rate (1) . . . . . . . . . . . . . . 89% 98% 100% 99%
Previously-owned homes sold at retail. . . . . . . . 2,196 964 149 555
Average retail selling price - new homes (HUD
code) . . . . . . . . . . . . . . . . . . . . . $ 55,095 $ 54,823 $ 51,403 $ 53,584
Company-operated retail sales centers and community
sales centers at end of period. . . . . . . . . 111 41 41 41
Total manufacturing shipments. . . . . . . . . . . . 10,399 3,656 343 1,176
Manufacturing shipments to independent retail sales
centers, including franchisees. . . . . . . . . 5,830 1,832 51 162
_____________________
(1) The proportion of new homes sold by Company-operated retail sales centers that are manufactured by the
Company.
18
The following table summarizes the Company's historical operating results,
expressed as a percentage of total revenues, for the periods indicated:
YEARS ENDED THREE MONTHS NINE MONTHS
-------------------- ENDED ENDED
JUNE 30, JUNE 29, SEPTEMBER 29, JUNE 28,
2000 2001 2001 2002
--------- --------- -------------- --------------
Predecessor Co. Successor Co.
------------------------------------ --------------
Total revenues . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Gross profit . . . . . . . . . . . . . . . . 22.2% 27.6% 38.7% 37.0%
Selling, general and administrative expenses
before acquisition costs. . . . . . . . 26.8% 32.2% 39.2% 34.7%
Restructuring costs. . . . . . . . . . . . . 3.8% 57.6% -- --
Operating income . . . . . . . . . . . . . . (8.4%) (62.2%) (0.5%) 2.3%
Income before income taxes and extraordinary
item. . . . . . . . . . . . . . . . . . (11.7%) (67.7%) 65.4% 1.6%
Income before extraordinary item . . . . . . (8.3%) (74.1%) 65.7% 1.5%
Net income . . . . . . . . . . . . . . . . . (8.3%) (74.1%) 595.9% 1.5%
Although the adoption of Fresh-Start Reporting significantly affected
comparability, certain Pre-and Post-reorganization period income and expense
items remain comparable and are addressed in the following analysis of results
of operations for the periods indicated.
NINE MONTHS ENDED JUNE 28, 2002 COMPARED TO NINE MONTHS ENDED JUNE 29, 2001
Net Sales. Net sales of manufactured homes were $64.2 million for the nine
months ended June 28, 2002, compared to $102.9 million for the nine months ended
June 29, 2001. The 38% decline in sales was attributable to the following:
Retail sales declined $14.1 million or (15% in units and 20% in dollars).
New home same store sales in the Company's core operations also declined 14%
from an average of 28 new home sales per store for the nine months ended June
29, 2001 to an average of 24 new home sales per store for the nine months ended
June 28, 2002. Management believes that the Texas law changes in financing
brought about by Texas HB 1869 and the recent exit of three retail lenders to
the industry are major factors in the decline of new home same store and average
sales in the nine months ended June 28, 2002. The remainder of the decline in
new home sales is attributable to the Company's reorganization and downsizing,
which resulted in fewer average company stores in the current period than in the
comparable period.
Manufacturing division sales to independent dealers were $6.4 million in
the nine months ended June 28, 2002, compared to $31.0 million in the nine
months ended June 29, 2001, a decline of 79%. This significant decline was the
result of two principal factors related to the Company's reorganization. One
factor was a reduction in average number of new home manufacturing facilities in
operation (two in the nine months ended June 28, 2002 compared to seven in the
nine months ended June 29, 2001). The other factor was a reduction in the
number of independent dealers purchasing products from the Company. There were
very few sales to independent dealers during the Company's reorganization (from
January 2001 through October 2001). Since the Company emerged from
reorganization in October 2001 and has re-established relationships with
industry floor plan lenders, sales to independent dealers and subdivision
developers have grown slowly. The Company believes such sales will continue to
increase gradually over time, aided by recent reductions of competitor capacity
in the Company's regional market area.
Other Revenues. Other revenues were $18.6 million for the nine months ended
June 28, 2002, compared to $18.6 million for the nine months ended June 29,
2001. Insurance-related revenues in the Company's agency and reinsurance
operations declined approximately $6.7 million (or 51%) primarily due to the
19
decline in retail sales and continuing lender restrictions as to the amounts of
insurance they will finance on each home sale. The decline in insurance
revenues was offset by a $6.7 million (or 123%) increase in transportation
revenues. During the nine months ended June 28, 2002, the Company's
transportation group expanded their operations to include commercial
transportation business (such as temporary classrooms and construction offices)
and ancillary services (such as on-site installation).
Cost of Sales. Cost of sales was $52.2 million (or 63% of revenues) for the
nine months ended June 28, 2002, compared to $86.2 million (or 71% of revenues)
for the nine months ended June 29, 2001. The 40% decline in dollar amount of
cost of sales is largely attributable to the 32% decline in total revenues.
Cost of sales (expressed as a percentage of revenues) in the Company's
retail division declined nearly 5% for the nine months ended June 28, 2002. The
most significant factor in the decline was the Company's exit from all non-core
markets by mid-fiscal year 2001. Margins in the non-core markets were
substantially lower than in the Company's core market area. Approximately 14% of
total retail sales during the nine months ended June 29, 2001 were from non-core
markets, while no non-core sales are reflected for the nine months ended June
28, 2002. The second factor in the decline was higher proportionate sales of
discounted inventory (both new and used) which the Company was able to purchase
on the open market as well as from its secured lender as part of the Company's
reorganization. While the number of such discounted homes in the Company's
inventory is declining, management believes that similar opportunities to
purchase discounted inventory may exist in the future.
Cost of sales (expressed as a percentage of revenues) in the Company's
manufacturing division declined nearly 8% in the nine months ended June 28,
2002. This decline was primarily attributable to greater manufacturing
efficiencies and the restoration of raw material purchase terms and discounts in
the nine months ended June 28, 2002. Terms, discounts and efficiencies were
negatively affected beginning in mid-fiscal 2001, while the Company was
undergoing reorganization.
Cost of sales (expressed as a percentage of revenues) were largely
unchanged in the Company's transportation operations in the nine months ended
June 28, 2002.
Selling, General and Administrative Expenses. Selling general and
administrative expenses were $28.7 million (or 35% of revenues) in the nine
months ended June 28, 2002, compared to $43.2 million (or 36% of revenues) in
the nine months ended June 29, 2001. These expenses declined principally as the
result of a decline in revenues. The less than proportionate decline in SG&A
expenses between the periods is due to the fact that fixed costs were not
reduced at the same short-term rate as the decline in revenues. Management
believes that the short-term maintenance of core market infrastructure and
capacity will be met with greater demand and profitability as the Company gains
market share in the current environment.
Restructuring Changes. There were no restructuring changes in the last nine
months of fiscal 2002 compared to $138.7 million in the last nine months of
fiscal 2001. These costs related to asset revaluations (goodwill write offs and
adjustment of carrying value to other assets to net realizable value) as well as
costs associated with idling and closing manufacturing facilities and non-core
retail centers.
Interest Expense. Interest expense was $0.8 million for the nine months
ended June 28, 2002, compared to $6.2 million for the nine months ended June 29,
2001. Lower interest expense in the current period was the result of
substantially lower average debt levels in the nine months ended June 28, 2002,
than in for the nine months ended June 28, 2002, due to the Company's
reorganization and attendant debt conversion to equity, as well as slightly
lower prevailing and average interest rates.
Reorganization Costs. In connection with the Company's Chapter 11 filing,
reorganization costs of $2.8 million were incurred for the nine months ended
June 29, 2001. These costs related primarily to professional fees and similar
type expenditures directly related to the Chapter 11 proceedings. No such costs
were incurred in the nine months ended June 28, 2002.
Income Taxes. Income tax expense was $0.2 million (on pretax income of $1.4
million) for the nine months ended June 28, 2002, compared to $16.0 million (on
a pretax loss of $154.8 million) for the nine months ended June 29, 2001. Tax
20
expense in the current period relates to taxes attributable to the Company's
transportation and reinsurance operations that file returns separate from the
Company's consolidated return. The tax expense for the nine months ended June
29, 2001 consists primarily of a valuation allowance to fully reserve the
deferred tax assets arising in prior years. The remainder of the tax expense
for the nine months ended June 29, 2001 relates to the Company's transportation
and reinsurance operations as described above.
Earnings in affiliates. The Company's 50% share in the after-tax earnings
of Homestar 21, LLC were $0.4 million for the nine months ended June 28, 2002,
compared to $0.7 million for the nine months ended June 29, 2001. The reduction
in income was primarily the result of fewer loan originations from diminished
retail volume.
Minority Interests. The Company owns 51% of its transportation operations
and therefore consolidates (or includes 100% of) the transportation company's
results in its financial statements. Because the Company only benefits by 51%
of the income, the remaining 49% is shown as a deduction on the Company's
consolidated income statement. This deduction was $0.2 million for the nine
months ended June 28, 2002, compared to a negative deduction (add-back) of $0.2
million for the nine months ended June 29, 2001. The negative deduction for the
nine months ended June 29, 2001 arose as a result of a loss in the
transportation company, which was restored to profitability in for the nine
months ended June 28, 2002.
YEAR ENDED JUNE 28, 2002 COMPARED TO JUNE 28, 2001
Net Sales. Net sales of manufactured homes were $85.3 million for the year
ended June 28, 2002, compared to $217.4 million for the year ended June 29,
2001. The 61% decline in sales was primarily attributable to the Company's
reorganization and downsizing including a significant reduction in the average
number of company sales centers and manufacturing facilities.
Retail sales declined $63.5 million (or 40% in units and 45% in dollars)
due primarily to a proportionate reduction in the average number of retail
stores operating for the year ended June 28, 2002, compared to the year ended
June 29, 2001. Same store sales of new homes in the Company's core operations
also declined 19% from an average of 42 new home sales per store in the year
ended June 29, 2001, to an average of 34 new home sales per store in the year
ended June 28, 2002. Management believes that the Texas law changes in
financing brought about by Texas HB 1869, beginning in January 2002, as well as
the recent exit of three major retail lenders to the industry, were significant
factors in the Company's same store sales decline.
Manufacturing division sales to independent dealers were $8.4 million for
the year ended June 28, 2002, compared to $76.9 million for the year ended June
29, 2001, a decline of 89%. This significant decline was the result of two
principal factors related to the Company's reorganization. One factor was the
reduction in average number of manufacturing facilities in operation (two for
the year ended June 28, 2002, compared to seven for the year ended June 29,
2001). The other factor was a reduction in the number of independent dealers
purchasing product from the Company. There were very few sales to independent
dealers during the Company's reorganization (from January 2001 through October
2001). Since the Company emerged from reorganization in October 2001 and has
re-established relationships with industry floor plan lenders, sales to
independent dealers and subdivision developers have grown slowly. The Company
believes such sales will continue to increase gradually over time, aided by
recent reductions of competitor capacity in the Company's regional market area.
Other Revenues. Other revenues were $23.7 million for the year ended June
28, 2002, compared to $24.4 million for the year ended June 29, 2001.
Insurance-related revenues in the Company's agency and reinsurance operations
declined approximately $7.3 million (or 45%) primarily due to the similar
proportionate decline in retail sales and continuing lender restrictions as to
the amounts of insurance they will finance on each home sale. The decline in
insurance revenues was largely offset by a $6.7 million (or 86%) increase in
transportation revenues. During for the year ended June 28, 2002, the Company's
transportation group expanded their operations to include commercial
transportation business (such as temporary classrooms and construction offices)
and ancillary services (such as on-site installation).
Cost of Sales. Cost of sales was $68.3 million (or 63% of revenues) for the
year ended June 28, 2002, compared to $175.0 million (or 72% of revenues) for
the year ended June 29, 2001. The 61% decline in dollar amount of cost of sales
21
is largely attributable to the 55% decline in total revenues. The improvement
in cost of sales (expressed as a percentage of revenues) is due to the following
factors:
Cost of sales (expressed as a percentage of revenues) in the Company's
retail division declined approximately 4% primarily as a result of the Company's
exit from all non-core markets (especially in the Carolinas) where lower margins
prevailed. This non-core business represented 14% of total retail sales for the
year ended June 29, 2001, while retail sales for the year ended June 28, 2002
were all from the Company's core market areas. Another factor was higher
proportionate sales of discounted inventory (both new and used), which the
Company was able to purchase on the open market as well as from its secured
lender as part of the Company's reorganization. While the number of such
discounted homes in the Company's inventory is declining, management believes
that similar opportunities to purchase discounted inventory may exist in the
future.
Cost of sales (expressed as a percentage of revenues) in the Company's
manufacturing division also declined more than 3%. This decline was primarily
attributable to greater manufacturing labor and material efficiencies and the
restoration of raw material purchase terms and discounts during the year ended
June 28, 2002. Terms, discounts and efficiencies were dramatically affected in
the year ended June 29, 2001, as the result of the Company's reorganization. The
Company also implemented a general price increase in February 2002, its first
since January 2001.
Cost of sales (expressed as a percentage of revenues) were largely
unchanged in the Company's transportation and insurance agency operations and
were down slightly in the Company's reinsurance operations, principally as the
result of slightly lower claims for the year ended June 28, 2002.
Selling, General and Administrative Expenses. Selling general and
administrative expenses were $39.0 million (or 36% of revenues) for the year
ended June 28, 2002, compared to $77.9 million (or 32% of revenues) for the year
ended June 29, 2001. These expenses declined principally as the result of the
decline in revenues. During the Company's reorganization, a substantial number
of sales centers and manufacturing operations were closed or sold to others,
giving rise to substantial reductions in fixed operating costs such as wages,
benefits, rents, utilities and property taxes.
Restructuring Charges. There were no restructuring charges for the year
ended June 28, 2002, compared to $139.2 million for the year ended June 29,
2001. These costs related to asset revaluations (goodwill write offs and
adjustment of carrying value of other assets to net realizable value) as well as
costs associated with idling and closing manufacturing facilities and non-core
retail centers.
Interest Expense. Interest expense was $1.0 million for the year ended June
28, 2002, compared to $11.2 million for the year ended June 29, 2001. As the
result of the Company's reorganization, interest expense on a substantial amount
of the Company's debt ceased in mid-fiscal 2001. Lower interest expense for the
year ended June 28, 2002 was the result of substantially lower average debt
levels ($80.5 million in fiscal 2002, as compared to $173.8 million in fiscal
2001) and lower prevailing and average interest rates for the year ended June
28, 2002, as compared to the year ended June 29, 2001.
Reorganization Costs. In connection with the Company's Chapter 11 filing,
reorganization and impairment costs of $2.8 million and $1.4 million were
incurred during the years ended June 29, 2001 and June 28, 2002, respectively.
These costs related primarily to professional fees and similar type expenditures
directly related to the Chapter 11 proceedings.
Income Taxes. Income tax expense for the year ended June 28, 2002 was $0.3
million on pretax loss (before Fresh-Start adjustments) of $0.3 million compared
to tax expense of $16.2 million on pretax losses of $164 million for the year
ended June 29, 2001. The tax expense in the current period is attributable to
the Company's transportation and reinsurance operations whose tax returns are
not included in the Company's consolidated tax returns. The most significant
source of the 2001 tax expense was the provision of a full ($15.8 million)
valuation allowance against the Company's deferred tax assets which arose in
prior periods. The remainder of the tax expense for the year ended June 29,
2001 was attributable to the Company's transportation and reinsurance operations
described above.
22
Earnings in Affiliates. The Company's 50% share in the after-tax earnings
of Homestar 21, LLC. was $0.6 million for the year ended June 28, 2002, compared
to $0.5 million for the year ended June 29, 2001.
Minority Interests. The Company owns 51% of its transportation operations
and therefore consolidates (or includes 100% of) the transportation company's
results in its financial statements. Because the Company only benefits by 51%
of the income, the remaining 49% is shown as a deduction on the Company's
consolidated income statement. This deduction was $0.3 million for the year
ended June 28, 2002, compared to a negative deduction (add-back) of $0.1 million
for the year ended June 29, 2001. The negative deduction for the year ended
June 29, 2001 arose as a result of a loss in the transportation company which
was restored to profitability for the year ended June 28, 2002.
YEAR ENDED JUNE 29, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000
Net Sales. Net sales of manufactured homes were $217.4 million for the year
ended June 29, 2001, compared to $532.6 million for the year ended June 30,
2000. The 59% decline in sales was primarily attributable to the Company's
reorganization and downsizing including a significant reduction in the average
number of company sales centers and manufacturing facilities in the year ended
June 29, 2001, as compared to the year ended June 30, 2000.
Retail sales declined $186.2 million (or 57% in both units and dollars) due
to several factors. The most significant factor was a 35% decline in the average
number of retail stores operating for the year ended June 29, 2001, compared to
the year ended June 30, 2000 (from 118 to 76). Average new home sales per store
also declined 21% (from 76 to 60). Same store sales in the Company's core
operations also declined 25% from an average of 56 new home sales per store in
the year ended June 30, 2000, to an average of 42 new home sales per store in
the year ended June 29, 2001. The Company's retail sales activity was
dramatically affected by the announcement of its reorganization, but gradually
improved to normal levels by the end of the year ended June 29, 2001.
Manufacturing division sales to independent dealers were $76.9 million for
the year ended June 29, 2001, compared to $205.9 million for the year ended June
30, 2000, a decline of 63%. This significant decline was the result of two
principal factors related to the Company's reorganization. One factor was the
reduction in average number of manufacturing facilities in operation (seven in
the year ended June 29, 2001, compared to 13 in the year ended June 30, 2000).
The other factor was a reduction in the number of independent dealers purchasing
products from the Company. There were largely no sales to independent dealers
during the Company's reorganization (from January 2001 through October 2001).
Other Revenues. Other revenues were $24.4 million for the year ended June
29, 2001, compared to $41.4 million for the year ended June 30, 2000, a decline
of $17 million or 41%. Other revenues in the retail division (consisting
primarily of commissions from both the sale of insurance and the sale of
consigned lender repossessions as well as franchise-related revenues) declined
$10.8 million or 72%. Insurance commission income declined proportionately with
retail sales, the sales of repossessions declined 45%, and the Company suspended
its franchise operations in mid-fiscal year 2001 in connection with its
reorganization.
Cost of Sales. Cost of sales was $175.0 million (or 72% of revenues) for
the year ended June 29, 2001, compared to $446.4 million (or 78% of revenues)
for the year ended June 30, 2000. The 61% decline in dollar amount of cost of
sales is largely attributable to the 58% decline in total revenues. The
reduction of cost of sales (expressed as a percentage of total revenues) was
due, in large measure, to the closing of all, lower margin, non-core retail
operations during the year ended June 29, 2001, as well as higher proportionate
sales of discounted inventory (both new and used) which the company was able to
purchase on the open market as well as from its secured lender as part of the
company's reorganization.
Selling, General and Administrative Expenses. Selling general and
administrative expenses were $77.9 million (or 32% of revenues) for the year
ended June 29, 2001, compared to $153.8 million (or 27% of revenues) for the
year ended June 30, 2000. These expenses declined as the result of the decline
in revenues. During the Company's reorganization, a substantial number of sales
centers and manufacturing operations were closed or sold to others, giving rise
to substantial reductions in fixed operating costs such as wages, benefits,
rents, utilities and property taxes. The Company retained the fixed costs
necessary to fund its core market infrastructure during reorganization when
revenues were temporarily disrupted.
23
Restructuring Charges. Restructuring charges for the year ended June 29,
2001 were $139.2 million, compared to $22.1 million for the year ended June 30,
2000. These costs related to asset revaluations (goodwill write offs and
adjustment of carrying value of other assets to net realizable value) as well as
costs associated with idling and closing manufacturing facilities and non-core
retail centers.
Interest Expense. Interest expense was $11.2 million for the year ended
June 29, 2001, compared to $18.4 million for the year ended June 30, 2000. As
the result of the Company's reorganization, interest expense on a substantial
amount of the Company's debt ceased in the year ended June 29, 2001. Lower
interest expense for the year ended June 29, 2001was the result of substantially
lower average debt levels ($173.8 million in the year ended June 29, 2001, as
compared to $212.3 million in the year ended June 30, 2000), and lower
prevailing and average interest rates in the year ended June 29, 2001, as
compared to the year ended June 30, 2000.
Reorganization Costs. In connection with the Company's Chapter 11 filing,
reorganization costs of $2.8 million were incurred for the year ended June 29,
2001. These costs related primarily to professional fees and similar type
expenditures directly related to the Chapter 11 proceedings. No reorganization
costs are reflected for the year ended June 30, 2000.
Income Taxes. Income tax expense for the year ended June 29, 2001 was
$16.2 million (on a pretax loss of $163.6 million) compared to tax benefit of
$20.1 million (on a pretax loss of $67.1 million) for the year ended June 30,
2000. The most significant source was the provision of a full ($15.8 million)
valuation allowance against the Company's deferred tax assets which arose in
prior periods. The remainder of the tax expense for the year ended June 29,
2001 was attributable to the Company's transportation and reinsurance operations
which are not included in the Company's consolidated tax returns. The tax
benefit for the year ended June 30, 2000 related to the loss carry-backs and
carry-forwards which the Company believed, at the time, it could fully utilize.
Earnings in Affiliates. The Company's 50% share in the after-tax earnings
of its finance company joint venture (21st Mortgage, LLC) was $0.5 million for
the year ended June 29, 2001, compared to a loss of $0.4 million for the year
ended June 30, 2000. The Company sold its interests in 21st Mortgage in June
2000 and formed a new joint venture (Homestar 21, LLC) to originate all new
business fro