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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 27, 2003 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission file number 0-24210
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 Registered Pursuant to Section 12(b) of the Act: None
Securities 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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The estimated aggregate market value of voting and non-voting common equity held
by non-affiliates of the registrant is not readily determinable as there have
been no sales and no quoted bid and asked prices as of the last business day of
the registrant's most recently completed second fiscal quarter.
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 23, 2003 the registrant had 100 shares of Series M Common Stock,
par value $.01 per share, and 6,780,364 shares of Series C Common Stock, par
value $.01 per share, issued and outstanding, and 3,219,636 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters. . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . 33
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 34
Item 9A Controls and Procedures. . . . . . . . . . . . . . . . . . . . 34
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . 35
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. . . . . . . . . . 42
Item 13. Certain Relationships and Related Transactions. . . . . . . . 43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 44
PART I
Unless otherwise indicated, "we," "us," "our," "American Homestar," "the
Company," "Management" and similar terms refer to American Homestar Corporation,
its subsidiaries and affiliates. Throughout this report, we use the term
"fiscal," as it applies to a year, to represent the fiscal year ending on the
Friday closest to June 30 of that year.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including items discussed in "Risks
Relating to Our Business" in Item 1 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7, contains statements
that relate to future plans, events, financial results or performance and which
are defined as forward-looking statements as defined under the Private
Securities Litigation Reform Act of 1995. These statements are based on the
beliefs of the Company's management, as well as assumptions made by management
and currently available information, that, if they never materialize or prove
incorrect, could cause our results to differ materially from those expressed or
implied by such forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue," or the negative of these terms or other
comparable terminology. All statements other than statements of historical fact
are statements that could be deemed forward-looking statements, including any
projections of earnings, revenue, synergies, accretion, margins, costs or other
financial items; any statements of the plans, strategies and objectives of
management for future operations, including the execution of integration and
restructuring plans; any statement concerning proposed new products, services,
developments or industry rankings; any statements regarding future economic
conditions or performance; any statements of belief; and any statements of
assumptions underlying any of the foregoing. These forward-looking statements
are only predictions, and may be inaccurate. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various risk factors included in this paragraph, as well as elsewhere in this
report and in other SEC filings. These risk factors include, without limitation,
ongoing weakness in the manufactured housing market, continued acceptance of
American Homestar's products, the availability of wholesale and retail financing
in the future and changes in retail inventory levels in the manufactured
housing. Although management believes that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements, and actual results, events or
performance may differ materially. You should not place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
American Homestar undertakes no obligation to publicly release the results of
any revisions to these forward-looking statements that may arise from changing
circumstances or unanticipated events.
ITEM 1. BUSINESS
GENERAL
American Homestar Corporation is a regional vertically integrated
manufactured housing company, with operations in manufacturing, retailing,
transportation, financing and insurance. We were incorporated in Texas in July
1983. Currently, we operate two new home manufacturing facilities and sell homes
through dedicated distribution channels, which include 31 retail sales centers
and three sales offices in manufactured housing communities. In approximately 34
additional manufactured housing communities we display homes that are ready for
sale and occupancy ("spec homes") and model homes, although we do not have an
on-site office. We also distribute homes through approximately 37 independent
retailers and developers located in five states. A third manufacturing facility
is currently used to refurbish lender repossessions.
Starting in July 1994, we adopted a strategy of expanding into several new
regional markets (outside of our core Southwest base of operations) by acquiring
manufacturing capacity and growing our Company-operated store network (through
acquisition and new formation) to support our expanded regional presence. Many
of our 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
2
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 our retail
operations and diminishing profitability in our manufacturing operations, we
adopted a plan to retract our operations, with the goal of discontinuing
operations in all non-core markets and focusing management and resources on what
we defined as our core Southwest market (Texas and surrounding states).
REORGANIZATION
On January 11, 2001, American Homestar Corporation 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, we have the authority to issue 15 million shares of Series C common
stock and are required to issue 10 million shares of Series C common stock to
our general unsecured creditors. Pursuant to the exemption set forth in Section
1145 of the Bankruptcy Code, we issued 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. As of
June 27, 2003, we had issued 10 million shares of Series C common stock, of
which 4,869,250 shares were issued to specific shareholders with allowed claims
under the Plan, and 5,130,750 shares were held in constructive trust for the
benefit of shareholders to be determined in name and amount as the claims
process is completed. We expect the claims process to be completed by April
2004. We also have 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 27, 2003,
and 4,999,900 shares underlie options authorized under the Company's 2001
Management Incentive Program. As of June 27, 2003, options for 4,899,900 shares
had 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 coincided with
the end of the Company's first quarter of our 2002 fiscal year. We elected to
use September 29, 2001, our quarter end, as our Fresh-Start Reporting date
versus the Effective Date of the Plan, October 3, 2001, as interim activity was
not material to the Consolidated Fresh-Start Balance Sheet. Accordingly, all
assets and liabilities of the Company were restated to reflect their
reorganization value, which approximates the fair value of the assets and
liabilities at the Effective Date, and our capital structure was recast in
conformity with the Plan. 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 and is reported in the results of
operations for the three months ended September 29, 2001.
The results of operations and cash flows for the three months ended
September 29, 2001 include operations prior to our emergence from Chapter 11
proceedings, which do not take into account the effects of Fresh-Start
Reporting, and the results of operations and cash flows for the nine months
ended June 28, 2002 include operations subsequent to our emergence from Chapter
11 proceedings and reflect the on-going effects of Fresh-Start Reporting
(American Homestar being referred to herein as "Predecessor Company" for periods
prior to September 29, 2001, and as "Successor Company" for periods subsequent
to September 29, 2001). As a result, the results of operations and cash flows
for the twelve months ended June 27, 2003 for the Successor Company are not
comparable to the results of operations and cash flows for the twelve months
ended June 28, 2002, as the earlier period includes three months of Predecessor
Company operations and cash flows, which do not reflect the effects of
Fresh-Start Reporting, and nine months of Successor Company operations and cash
flows, which do reflect the effects of Fresh-Start Reporting.
3
During our reorganization, we did not prepare or file annual and quarterly
reports with the Securities and Exchange Commission but instead filed Monthly
Operating Reports with the Bankruptcy Court, as required by the Bankruptcy Code.
We also filed our Monthly Operating Reports and our confirmed Plan with the
Securities and Exchange Commission. The reorganized Company has substantially
fewer assets, liabilities and operations than prior to our reorganization.
Additionally, the reorganized Company has entirely new ownership, as the Plan
cancelled all classes of equity securities issued by the Company prior to its
reorganization.
STRATEGY
We adopted a vertical integration strategy in 1991 and used that business
model as we grew in the 1990's. In connection with our reorganization, we
significantly downsized our operations and focused on our core Southwest market
where we are based and where we have historically had our most favorable overall
results. We currently operate 31 retail sales centers and three sales offices in
manufactured housing communities along with a marketing presence (displaying
model homes and spec homes without an on-site sales office) in approximately 34
manufactured housing communities. We also operate three manufacturing plants,
two of which produce new homes and the third refurbishes lender repossessions.
Additionally, we operate an insurance agency, which sells homeowner's insurance,
credit life insurance and extended warranty coverage to our customers. We also
have a 51% ownership interest in a transport company that specializes in the
transportation of manufactured and modular homes and offices. In addition, we
have a 50% interest in a finance company, which specializes in providing chattel
and land/home financing to our customers. In May 2002, we formed a mortgage
brokerage venture, of which we own a 50% interest, to allow us to better control
the placement of our traditional mortgage business and to realize a portion of
the net profits relating to that business. Subsequent to June 27, 2003, we
ceased operations in this mortgage brokerage venture and have focused on
relationships with a broader base of mortgage lenders. Most recently, we have
aligned with several subdivision developers to meet an emerging market segment
in our core market region and to gain greater market share. Management believes
that our regional vertical integration strategy, which derives multiple profit
sources from each retail sale and provides better control over critical
functions, will allow the Company to be more successful, over time, than would
otherwise be the case.
INDUSTRY
A manufactured home is a detached 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 $8.6 billion in 2002. 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, 2001 and
2002 factory shipments declined to approximately 349,000, 251,000, 193,000 and
168,000 respectively. In 2002, manufactured homes accounted for approximately
15% of all new single-family homes completed in the United States, compared to
approximately 23% in 1998 and 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 2002 was
$32.16 per square foot, as compared to $75.26 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 78% of the
manufactured homes produced in 2002.
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.
4
In addition to the changes in the chattel-lending environment described
above, recent Texas legislation (the 77th Legislature's HB 1869, effective
January 1, 2002) required any land/home package to be closed and financed in the
same manner as a traditional mortgage financing for site-constructed housing.
Chattel financing could be used only in cases where the home is sited on leased
land. Chattel financing is simpler for customers to understand and faster to
process than traditional mortgage financing. Effective June 18, 2003, SB 521
amended the provisions of HB 1869 to allow, at the owner's election, for chattel
financing of a manufactured home that is sited on land owned by the home owner.
We believe SB 521 should moderate the negative impact on manufactured home sales
in Texas by allowing homeowners to use chattel financing if they wish. The
recent availability of traditional mortgage financing (at generally lower
interest rates) to qualified customers is also an important factor in future
sales levels of manufactured homes.
DISTRIBUTION CHANNELS
We currently sell our products through various distribution channels. Most
of our homes are sold through company-operated retail sales centers, and through
on-site subdivision sales teams. We also sell homes to independent retailers
and, most recently, to community developers. Retail franchise operations were
discontinued as a part of the Company's reorganization. The following table sets
forth, for the periods indicated, certain data for (i) shipments of homes
manufactured by the Company to Company-operated retail sales centers and
subdivisions and (ii) shipments of homes manufactured by the Company to
independent retail sales centers and developers, and (iii) the current number of
Company-operated retail sales centers:
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 29, SEPTEMBER 29, JUNE 28, JUNE 27,
2001 2001 2002 2003
-------- ------------- ----------- --------
PREDECESSOR CO. SUCCESSOR CO.
----------------------- ---------------------
Manufacturing shipments to Company-operated
retail sales centers and subdivisions . . . 1,824 292 1,014 918
Manufacturing shipments to independent retail
sales centers and community developers. . . 1,832 51 162 330
-------- ------------- ----------- --------
Total homes shipped . . . . . . . . . . . . 3,656 343 1,176 1,248
======== ============= =========== ========
Company-operated retail sales centers and
community sales offices at end of period. . 41 41 41 34
We have sales offices in three manufactured housing communities and have a
marketing presence (displaying model homes and spec homes without an on-site
sales office) in approximately 34 manufactured housing communities. Each
Company-operated retail sales center carries a broad selection of fully
furnished and professionally decorated model homes displayed in a landscaped
setting. Our professional sales staff receives continuous training on all of our
products and services and is therefore able to provide customers with a positive
buying experience. We also provide merchandising support and use regional print,
radio and occasional television advertising to promote customer awareness and
enhance the Company's quality image.
In fiscal 2003, 79% of our new home retail sales were multi-section homes,
and our average new home retail sales price was $55,230 compared to the industry
average of $51,300. We currently operate 31 retail centers, of which 28 are in
Texas, one is in Louisiana and two are in Oklahoma. In addition, we have sales
offices in three manufactured housing communities and have a marketing presence
(displaying model homes and spec homes without an on-site sales office) in
approximately 34 manufactured housing communities.
5
The following table sets forth, for the periods indicated, certain
information relating to homes sold by Company-operated retail sales centers:
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 29, ,SEPTEMBER 29, JUNE 28 JUNE 27,
2001 2001 2002 2003
---------- ---------------- ------------- ----------
PREDECESSOR CO. SUCCESSOR CO.
---------------------------- -------------------------
Average new home sales price. . . . . . . . . $ 54,832 $ 51,403 $ 53,584 $ 55,230
Homes sold:
New homes . . . . . . . . . . . . . . . . 2,499 373 1,001 1,010
Previously-owned homes. . . . . . . . . . 964 149 555 564
Percentage of new homes sold:
Single-section. . . . . . . . . . . . . . 29% 34% 28% 21%
Multi-section . . . . . . . . . . . . . . 71% 66% 72% 79%
Percentage of new homes sold manufactured by:
Company . . . . . . . . . . . . . . . . . 98% 100% 99% 99%
Independent manufacturers . . . . . . . . 2% 0% 1% 1%
Independent Retailers. Independent retailers typically operate one or more
retail sales centers similar to those we may operate. They carry several display
models as well as some homes in inventory. We currently sell to approximately 37
independent retailers and developers located in Colorado, Louisiana, New Mexico,
Oklahoma and Texas. We believe our relations with existing independent retailers
are good. We have no written agreements with our independent retailers, except
for volume purchase discounts agreements, and either party may terminate the
relationship at any time. We generally do not provide inventory financing
arrangements for independent retailer purchases, nor do we consign homes.
Consistent with customary business practice in the manufactured housing
industry, we have entered into repurchase agreements with various financial
institutions and other credit sources under which we have 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, we agree 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 27, 2003, the Company was at risk to repurchase
approximately $1.2 million of manufactured homes and has provided for estimated
net repurchase losses of approximately $0.2 million.
Developers. We have recently expanded our distribution base through
relationships with several builder-developers that are developing manufactured
housing rental and owner communities in our market areas. In most of these
instances, we have written agreements with the developer that define the number
of homes we will supply, the specifications and prices of the homes and the
nature of our relationship. In some cases we provide up to five model homes and
assist, to varying degrees, in the marketing and sale of the homes and
homesites. We believe this will be a growing segment of our business in the
future and believe that our early, successful track record may provide us a
competitive advantage over others in our industry.
In March, 2003, the Company invested $50 for a 49.5% interest in Humble
Springs LTD, a land development joint venture. The other partners in the venture
are a land development company and certain of its affiliates, none of whom are
affiliated with the Company. This venture will develop a new manufactured
housing subdivision for homes to be rented and sold. We will be the exclusive
supplier of homes to the project and will share in the development profits. We
currently plan to enter into several other similar ventures with this same
developer in the future.
6
MANUFACTURING
We manufacture a broad selection of HUD-code homes ranging from
traditional, lower-priced homes to distinctive, higher-priced homes. We have
also started to produce modular (Industrialized Housing and Building or
IHB-code) homes in our core market area. HUD-code homes conform to national
construction standards promulgated and regulated by HUD. Modular homes conform
to a different construction standard (IHB-code) and are generally less zoning
restricted than HUD-code homes. We believe that the addition of modular homes
broadens our potential markets and will allow us to sell more homes, over time,
than by limiting our production and marketing strictly to HUD-code homes. Our
new homes retail from $18,700 to $120,800, excluding land costs.
The following table sets forth the total HUD code homes and the total
modular (IHB-code) homes manufactured by our two Texas new-home facilities
currently operating:
THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED
SEPTEMBER 29, JUNE 28, JUNE 27,
2001 2002 2003
------------- ----------- --------
HUD Code . . . . . . 340 1,163 1,164
IHB (Modular) - Code 3 13 84
------------- ----------- --------
Total. . . . . . . 343 1,176 1,248
============= =========== ========
By providing such a broad selection of homes, we believe we can meet the
financial and aesthetic requirements of the full range of retail buyers.
Additionally, we believe we offer high quality homes that incorporate more
innovative architectural designs and features than are typically offered by our
competitors. Over the past several years, as the demand for multi-section homes
has increased, we have significantly increased our production of multi-section
homes to 86% of total homes manufactured in fiscal 2003, up from 50% in fiscal
1994.
The Company's manufacturing facilities generally operate on a one shift per
day, five-day per week basis. At June 27, 2003, our two operating new-home
production facilities had the capacity to produce approximately 20 floors per
day, and the production rate was approximately nine 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:
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 29, SEPTEMBER 29, JUNE 28, JUNE 27,
2001 2001 2002 2003
-------- ------------- ----------- --------
PREDECESSOR CO. SUCCESSOR CO.
----------------------- ---------------------
Homes manufactured:
Single-section. . . . 535 111 306 173
Multi-section . . . . 3,121 232 870 1,075
-------- ------------- ----------- --------
Total homes manufactured. 3,656 343 1,176 1,248
======== ============= =========== ========
Total floors manufactured 6,777 575 2,046 2,319
======== ============= =========== ========
The principal materials used in the construction of our homes include
lumber and lumber products, gypsum wallboard, steel, aluminum, fiberglass,
carpet, vinyl, fasteners, appliances, electrical items, windows and doors.
Generally, the materials used in the manufacture of our homes are readily
available at competitive prices from a wide variety of suppliers. Accordingly,
we do not believe the loss of any single supplier would have a material adverse
effect on our business. Our direct or variable costs of operations, however, can
be significantly affected by the market-wide availability and pricing of raw
materials.
7
We generally build a home only after an order has been received and
acceptable payment arrangements 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 from independent dealers 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. Our backlog, as
well as level of new orders from independent dealers, generally declines during
the winter months (mid-November through February).
FINANCING
In June 2000, we invested $2.4 million to provide one-half of the initial
capitalization of Homestar 21, LLC ("Homestar 21"), which is a joint venture
that is owned 50% by the Company and 50% by 21st Mortgage Corporation ("21st
Mortgage"), a company not affiliated with us. Homestar 21 is a finance company,
specializing in providing chattel and non-conforming land/home financing to our
customers. We account for our investment in Homestar 21 using the equity method.
In May 2002, we invested $31,500 to provide one-half of the initial
capitalization of American Homestar Mortgage, L.P. ("Homestar Mortgage"), which
is a joint venture that is owned 50% by us and 50% by Home Loan Corporation
("Home Loan"), a company not affiliated with us. Homestar Mortgage is a mortgage
broker/loan originator for ultimate loan placement with Home Loan and other
mortgage banks. Homestar Mortgage bears no lending risk on loans it originates.
We account for our investment in Homestar Mortgage using the equity method. In
August 2003 (after year-end) we agreed, along with Home Loan, to cease
operations in Homestar Mortgage and to develop a broader network of preferred
lending relationships with several independent traditional mortgage lenders.
To ensure that we remain fully competitive and have access to all retail
financing products available, we maintain 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 several sources. We believe that these relationships afford us
access to a broader range of competitive financing programs that, in turn, may
result in increased retail sales.
INSURANCE
Through our wholly owned subsidiary, Western Insurance Agency, Inc.
("Western"), we offer our retail customers a variety of insurance products,
including property and casualty insurance, credit life insurance and extended
service contracts. We act as the agent and earn commissions and profit-sharing
bonuses, in favorable loss years, from insurance written for the purchasers of
manufactured homes we sell.
Through our wholly owned subsidiary, Lifestar Reinsurance Ltd. ("Lifestar")
we underwrote the risk on credit life policies we sold. We elected to cease
operations in Lifestar in May 2002 because the life insurance underwriting
activity was producing steadily declining returns. Instead we 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 our manufacturing facilities.
Roadmasters operates through independent owner-operators, allowing us to cover a
large geographic area with no investment in equipment. We believe that our
controlling ownership interest in Roadmasters provides us better control over
the delivery of homes to our retail sales centers and subdivisions and to
independent retailers and developers, especially during peak sales and delivery
periods, as well as to profit from each home shipment.
COMPETITION
The manufactured housing industry is highly competitive. Competition with
other housing manufacturers on both the manufacturing and retail levels is based
primarily on price, product features, reputation for service and
8
quality, retail inventory, merchandising, and the terms and availability of
wholesale and retail customer financing. Growth in manufacturing capacity during
the 1990s increased competition at both the manufacturing and retail levels and
resulted in both regional and national competitors increasing their presence in
the markets in which we compete. Overproduction of manufactured housing in these
regions could lead to greater competition and result in decreased margins, which
could have a material adverse effect on our results of operations.
In addition, manufactured homes compete with new and existing site-built
homes, apartments, townhouses and condominiums. The supply of such housing has
increased in recent years with the increased availability of construction and
low cost mortgage financing, which continues to reduce the demand for
manufactured homes. Manufactured homes also compete with resales of homes that
have been repossessed by financial institutions as a result of credit defaults
by dealers or customers. Repossession rates for manufactured homes have
increased in recent years and there can be no assurance that repossession rates
will not continue to increase, thereby adversely affecting our sales volume and
profit margins. The manufactured housing industry, as well as the site-built
housing development industry, has experienced consolidation in recent years,
which could result in the emergence of competitors, including developers of
site-built homes that have greater financial resources than we have. We are not
able to estimate the total number of retail and manufacturing competitors in our
marketing area.
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, that establish comprehensive
national construction standards. These regulations cover all aspects of
manufactured home construction, including structural integrity, fire safety,
wind loads, thermal protection and ventilation. Our manufacturing facilities and
the plans and specifications of our manufactured homes have been approved by a
HUD-designated inspection agency. Our homes are regularly inspected by an
independent HUD-approved inspector for compliance during construction. Failure
to comply with applicable HUD regulations could expose us to a wide variety of
sanctions, including mandated closings of our manufacturing facilities. We
believe our manufactured homes meet or surpass all present HUD requirements.
We are also 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. We believe our
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
components of its homes. The CPSC, the Environmental Protection Agency and other
governmental agencies currently are re-evaluating the allowable standards for
formaldehyde emissions. We use materials in our manufactured homes that meet the
current HUD standards for formaldehyde emissions and believe that we otherwise
comply 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. We have established comprehensive programs for
complying with health and safety regulations. While we believe that we operate
our manufacturing facilities safely and prudently, there can be no assurance
that accidents will not occur or that we will not incur liability in connection
with the operation of our business.
9
Our 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. 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.
We are also subject to the provisions of the Fair Debt Collection Practices
Act, which regulates the manner in which we collect payments on installment sale
contracts, and the Magnuson-Moss Warranty-Federal Trade Commission Improvement
Act, which regulates the descriptions of warranties on products Our 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.
Our 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. We are not aware
of any pending litigation to which we are a party or any claims that may result
in significant contingent liabilities related to environmental pollution or
asbestos. In addition, we do not believe we will be required under existing
environmental laws and enforcement policies to expend amounts that will have a
material adverse effect on our results of operations or financial condition.
A significant portion of the Company's manufacturing labor force includes
persons who are not U.S. citizens, and we are subject to the regulations of the
Immigration and Naturalization Service ("INS"). We adhere to the procedures
required for the prevention of the hiring of illegal aliens, but, nonetheless,
we have from time to time experienced losses of a portion of our labor force due
to INS investigative operations and these 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 27, 2003, we employed 672 people, compared to 770 at June 28, 2002.
Of our 672 employees, 217 were employed in retail, 375 in manufacturing, 34 in
transportation, 9 in insurance, and 37 in executive and administrative
10
positions. We do not have any collective bargaining agreements and have not
experienced any work stoppages as a result of labor disputes. We consider our
employee relations to be good.
A significant portion of the total potential compensation of senior and
middle 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 our
managers are participants in the option grants of Series M common stock under
the Company's 2001 Management Incentive Program established by the Plan.
RISKS RELATING TO OUR BUSINESS
If any of the following risks actually occur or worsen, they could
materially adversely affect our business, financial condition or operating
results.
EXCESS INVENTORIES AMONG RETAILERS COULD CONTINUE TO HAVE A NEGATIVE EFFECT ON
OUR SALES VOLUME AND PROFIT MARGINS.
The level of manufactured housing inventories and the existence of
repossessed homes in the market can have a significant impact on manufacturing
shipments and operating results, as evidenced in the manufactured housing
industry during the past three years. There is currently an imbalance among the
number of retail dealers, industry retail inventories and consumer demand for
manufactured homes. Considering current retail demand, it is estimated that
there may be as much as a six-month supply of manufactured homes in retailer
inventories industry-wide. Competition from resales of repossessed homes has
further extended this inventory adjustment period as more liberal lending
standards in the past resulted in loans to less-creditworthy customers. Many of
these customers are defaulting on these loans and the lenders are repossessing
the customers' homes and reselling them at prices often significantly below the
retail price of a new home, thereby increasing competition for manufacturers of
new homes. If these trends were to continue, or if retail demand were to
significantly weaken further, the excess inventory supply could result in
intense price competition and pressure on profit margins within the industry and
could have an adverse impact on our operating results.
THE CURRENT DOWNTURN IN THE MANUFACTURED HOUSING INDUSTRY HAS ADVERSELY AFFECTED
OUR OPERATING RESULTS. IF THE CURRENT DOWNTURN DOES NOT REVERSE, OUR SALES COULD
DECLINE AND WE MAY SUFFER FURTHER LOSSES.
Since mid-1999 the manufactured housing industry has experienced declining
manufacturing shipments, tightened consumer credit standards, excess retail
locations and inventory, reduced availability of consumer financing, high levels
of homes repossessed from consumers, higher interest rates on manufactured
housing loans relative to those generally available to site-built home buyers, a
reduced number of consumer and floor plan lenders, and reduced floor plan
availability in the industry. According to the Manufactured Housing Institute,
factory shipments declined from a cyclical high of approximately 373,000 homes
in 1998 to 168,000 in 2002. If the current downturn in the industry continues,
our sales could continue to decline and we may incur further losses including
additional closures or consolidations of existing operations.
OUR BUSINESS IS SEASONAL AND CYCLICAL AND THIS LEADS TO FLUCTUATIONS IN SALES,
PRODUCTION AND OPERATING RESULTS.
We have experienced, and expect to continue to experience, significant
variability in sales, production and net income as a result of seasonality in
our business. Demand in the manufactured housing industry generally declines
during the winter season, while sales and profits are generally highest during
the spring and summer months. The industry in which we operate is highly
cyclical and there can be substantial fluctuations in our manufacturing
shipments, retail sales and operating results, and the results for any prior
period may not be indicative of results for any future period. We are affected
by interest rates for manufactured homes and for sited homes and the
availability of financing for manufactured housing products, both of which have
had an adverse effect on our business in the past two fiscal years. Unemployment
trends, consumer confidence, general economic conditions and effects on
consumers from terrorist actions may also affect our business.
11
TIGHTENED CREDIT STANDARDS, CURTAILED LENDING ACTIVITY, TIGHTENED TERMS AND
INCREASED INTEREST RATES AMONG CONSUMER LENDERS HAVE REDUCED OUR SALES. IF
CONSUMER FINANCING WERE TO BECOME FURTHER CURTAILED OR UNAVAILABLE WE COULD
EXPERIENCE FURTHER SALES DECLINES.
The consumers who buy our homes have historically secured consumer
financing from third party lenders. The availability, terms and costs of
consumer financing depend on the lending practices of financial institutions,
governmental regulations and economic and other conditions, all of which are
beyond our control. A consumer seeking to finance the purchase of a manufactured
home without land will generally pay a higher interest rate and have a shorter
loan term than a consumer seeking to finance the purchase of land and the home.
Manufactured home consumer financing is at times more difficult to obtain than
financing for site-built homes. Since 1999, consumer lenders have tightened the
credit underwriting standards and loan terms and increased interest rates for
loans to purchase manufactured homes, which have reduced lending volumes and
caused our sales to decline. Conseco, Inc. has historically been one of the
largest consumer lenders in the manufactured housing industry. In October 2002,
Conseco discontinued providing financing for the manufactured housing industry
and filed a petition for bankruptcy in December 2002. The poor performance of
portfolios of manufactured housing consumer loans in recent years has made it
more difficult for industry consumer finance companies to obtain long-term
capital in the asset-backed securitization market. As a result, consumer finance
companies have curtailed their industry lending and some have exited the
manufactured housing market. If consumer financing for manufactured homes were
to become further curtailed or unavailable, we would likely experience further
retail and manufacturing sales declines.
REDUCED NUMBER OF FLOOR PLAN LENDERS AND REDUCED AMOUNT OF CREDIT ALLOWED MAY
AFFECT OUR ABILITY TO INVENTORY NEW HOMES.
During 2002 the industry's two largest floor plan lenders, Conseco and
Deutsche Financial Services who recently provided as much as approximately 45%
of the industry's wholesale financing, exited the business thereby reducing the
amount of credit available to industry retailers. The remaining floor plan
lenders or new floor plan lenders entering the industry may change the terms of
their loans as compared to the traditional terms of industry floor plan loans.
These changes could include higher interest rates, smaller advance rates,
earlier or more significant principal payments or longer repurchase periods for
the manufacturers. Although our floor plan debt levels are very low today,
further reductions in the availability of floor plan lending may adversely
affect our ability to carry a sufficient inventory level of new homes when our
current line matures in October 2004.
WE ARE AFFECTED BY OUR ABILITY TO SECURITIZE OR FUND LOANS.
We offer chattel and non-conforming land home mortgage loans to our
customers through Homestar 21. Homestar 21 in the past has entered into
asset-backed securitization transactions to obtain longer term funding for these
loans. The asset-backed securitization market for manufactured housing lenders
has continued to deteriorate in the past year in terms of access to the markets
as well as pricing and credit enhancement levels. If Homestar 21 is unable to
securitize its loans on terms that are economical, it will be required to seek
other sources of long term funding.
WE ARE AFFECTED BY THE ABILITY OF OUR CUSTOMERS TO REPAY THEIR LOANS.
Homestar 21 makes loans to borrowers that it believes are creditworthy
based on its credit guidelines. These customers may experience adverse
employment, financial, or life circumstances that affect their ability to repay
their loans. If customers do not repay their loans, the profitability and cash
flow from the loan portfolio could be adversely affected.
THE MANUFACTURED HOUSING INDUSTRY IS HIGHLY COMPETITIVE AND SOME OF OUR
COMPETITORS HAVE STRONGER BALANCE SHEETS AND CASH FLOW, AS WELL AS GREATER
ACCESS TO CAPITAL, THAN WE DO. THE RELATIVE STRENGTH OF OUR COMPETITORS COULD
RESULT IN DECREASED SALES VOLUME AND EARNINGS FOR US, WHICH COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The manufactured housing industry is highly competitive. Competition with
other housing manufacturers on both the manufacturing and retail levels is based
primarily on price, product features, reputation for service and
12
quality, retail inventory, merchandising, and the terms and availability of
wholesale and retail customer financing. Growth in manufacturing capacity during
the 1990s increased competition at both the manufacturing and retail levels and
resulted in both regional and national competitors increasing their presence in
the markets in which we compete. Overproduction of manufactured housing in these
regions could lead to greater competition and result in decreased margins, which
could have a material adverse effect on our results of operations. In addition,
manufactured homes compete with new and existing site-built homes, apartments,
townhouses and condominiums. The supply of such housing has increased in recent
years with the increased availability of construction financing, and this
reduces the demand for manufactured homes. Manufactured homes also compete with
resales of homes that have been repossessed by financial institutions as a
result of credit defaults by dealers or customers. Repossession rates for
manufactured homes have increased in recent years and there can be no assurance
that repossession rates will not continue to increase, thereby adversely
affecting our sales volume and profit margins. The manufactured housing
industry, as well as the site-built housing development industry, has
experienced consolidation in recent years, which could result in the emergence
of competitors, including developers of site-built homes that have greater
financial resources than we have. This could adversely affect our business.
OUR MARKET IS THE SOUTHWEST REGION WITH OUR PRIMARY FOCUS IN TEXAS, AND A
DECLINE IN DEMAND IN THAT AREA COULD HAVE A MATERIAL NEGATIVE EFFECT ON SALES.
A disproportionate decrease in general economic conditions in the Southwest
region of the U.S. versus other areas of the country would have a material
adverse effect on our results of operations.
THE LOSS OF OUR EXECUTIVE OFFICERS COULD REDUCE OUR ABILITY TO ACHIEVE OUR
BUSINESS PLAN AND COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND
OPERATING RESULTS.
American Homestar is dependent on the services and performance of our
executive officers, including our President and Chief Executive Officer, Finis
F. Teeter. The loss of the services of one or more of our executive officers
could have a material adverse effect upon the Company's business, financial
condition and results of operations, at least in the short term.
OTHER INFORMATION ABOUT THE COMPANY
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934. During our reorganization, we did not prepare or file
annual or quarterly reports with the Securities and Exchange Commission ("SEC")
but instead filed Monthly Operating Reports with the Bankruptcy Court, as
required by the Bankruptcy Code. We also filed our Monthly Operating Reports,
our confirmed Plan and our audited Fresh-Start balance sheet with the SEC. 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, and
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, http://www/sec.gov, that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. Our website is
www.americanhomestar.com.
13
ITEM 2. PROPERTIES
At June 27, 2003, we operated two new home manufacturing facilities and one
refurbishment facility in Texas, 31 retail sales centers, three sales offices in
manufactured housing communities and an administrative office. Twenty one 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. We own the remaining ten retail sales
centers. Our 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. Our
retail sales centers are located in three states as follows: Louisiana (1),
Oklahoma (2), and Texas (28), along with three sales offices in manufacturing
housing communities in Texas. We believe that all facilities are adequately
maintained and suitable for their present use.
We own all of our manufacturing facilities (including those classified as
assets held for sale) and substantially all of our 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
Brilliant, Alabama . . . . . . . . . . . . . June 1997 127,500
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 normal routine litigation incidental to the
business, which management believes is not material to our business or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
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 October 3, 2001, 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 23, 2003, there were 204 specific record
holders of the Company's Series C common stock, which holders have been issued
6,780,364 shares of Series C common stock. The remaining 3,219,636 shares are
deemed issued and being held in constructive trust for the benefit of
shareholders to be determined in name and amount as the claims process is
completed. The remaining 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 all 10 million shares of Series C common stock are issued. We expect the
claims process to be completed by April 2004.
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
23, 2003.
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
American Homestar 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 our 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
We have had no sales of unregistered securities during the last three
years.
15
ITEM 6. SELECTED FINANCIAL DATA
The financial information set forth under Statement of Operations Data and
Balance Sheet Data for the fiscal period ended May 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, nine
months ended June 28, 2002 and fiscal period ended June 27, 2003 have been
audited by Mann Frankfort Stein & Lipp CPAs, L.L.P., independent certified
public accountants. The Consolidated Financial Statements for the fiscal period
June 29, 2001, three month period ended September 29, 2001 and nine month period
ended June 28, 2002 and fiscal period ended June 27, 2003 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).
YEAR ONE MONTH THREE MONTHS NINE MONTHS
ENDED ENDED YEARS ENDED ENDED
----------------------
MAY 31, JUNE 30, JUNE 30, JUNE 29, SEPTEMBER 29,
1999 1999 2000 2001 2001
--------- ---------- ---------- ---------- ---------------
PREDECESSOR CO.
--------------------------------------------------------------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $612,086 $ 49,272 $ 532,634 $ 217,375 $ 21,107
Other revenues. . . . . . . . . . . . . . . . . . . . . . . 41,957 3,493 41,402 24,399 5,137
--------- ---------- ---------- ---------- ---------------
Total revenues. . . . . . . . . . . . . . . . . . . . 654,043 52,765 574,036 241,774 26,244
--------- ---------- ---------- ---------- ---------------
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 477,717 40,214 446,378 174,999 16,086
Selling, general and administrative . . . . . . . . . . . . 134,682 12,487 153,769 77,948 10,290
Restructuring charges, goodwill and asset
impairments(1) . . . . . . . . . . . . . . . . . . . . . -- -- 22,097 139,216
--------- ---------- ---------- ---------- ---------------
Total costs and expenses. . . . . . . . . . . . . . . 612,399 52,701 622,244 392,163 26,376
--------- ---------- ---------- ---------- ---------------
Operating income (loss) . . . . . . . . . . . . . . . 41,644 64 (48,208) (150,389) (132)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . (13,845) (1,487) (18,366) (11,231) (214)
Other income (expense) . . . . . . . . . . . . . . . . . . . . 110 19 (566) 813 88
--------- ---------- ---------- ---------- ---------------
Income (loss) before items shown
below. . . . . . . . . . . . . . . . . . . . . . . 27,909 (1,404) (67,140) (160,807) (258)
Reorganization items:
Fresh-Start adjustments . . . . . . . . . . . . . . . . . . -- -- -- -- 18,863
Reorganization costs. . . . . . . . . . . . . . . . . . . . -- -- -- (2,796) (1,433)
--------- ---------- ---------- ---------- ---------------
Income (loss) before items shown
below. . . . . . . . . . . . . . . . . . . . . . . 27,909 (1,404) (67,140) (163,603) 17,172
Income tax expense (benefit) . . . . . . . . . . . . . . . . . 11,472 (462) (20,141) 16,239 20
--------- ---------- ---------- ---------- ---------------
Income (loss) before items shown
below. . . . . . . . . . . . . . . . . . . . . . . 16,437 (942) (46,999) (179,842) 17,152
Earnings (losses) in affiliates. . . . . . . . . . . . . . . . 1,602 49 (350) 492 145
Minority interest in income of consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . (98) (20) (242) 142 (50)
--------- ---------- ---------- ---------- ---------------
Income (loss) before items shown
below. . . . . . . . . . . . . . . . . . . . . . . 17,941 (913) (47,591) (179,208) 17,247
Extraordinary item, net of income tax benefit(2) . . . . . . . -- -- -- -- 139,310
--------- ---------- ---------- ---------- ---------------
Net income (loss) . . . . . . . . . . . . . . . . . . $ 17,941 $ (913) $ (47,591) $(179,208) $ 156,377
========= ========== ========== ========== ===============
Earnings (loss) per share before extraordinary
item - basic and diluted. . . . . . . . . . . . . . . . . . $ 0.96 $ (0.05) $ (2.59) $ N/A $ N/A
Earnings (loss) per share - basic and diluted. . . . . . . . . $ 0.96 $ (0.05) $ (2.59) $ N/A $ N/A
Weighted average shares outstanding - basic and
diluted . . . . . . . . . . . . . . . . . . . . . . . . . . 18,669 18,586 18,423 N/A N/A
BALANCE SHEET DATA (END OF FISCAL YEAR):
Working capital. . . . . . . . . . . . . . . . . . . . . . . . $ 60,859 $ N/A $ 39,993 $ 27,094 $ 11,797
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 439,316 N/A 362,233 96,352 76,606
Total borrowings . . . . . . . . . . . . . . . . . . . . . . . 216,845 N/A 208,176 24,462 21,102
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . $135,465 $ N/A $ 92,902 $ (91,327) $ 30,179
NINE MONTHS YEAR
ENDED ENDED
JUNE 28 JUNE 27,
2002 2003
--------- ----------
SUCCESSOR CO.
---------------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,234 $ 71,847
Other revenues. . . . . . . . . . . . . . . . . . . . . . . 18,584 20,293
--------- ----------
Total revenues. . . . . . . . . . . . . . . . . . . . 82,818 92,140
--------- ----------
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 52,184 63,878
Selling, general and administrative . . . . . . . . . . . . 28,703 29,566
Restructuring charges, goodwill and asset
impairments(1) . . . . . . . . . . . . . . . . . . . . . -- --
--------- ----------
Total costs and expenses. . . . . . . . . . . . . . . 80,887 93,444
--------- ----------
Operating income (loss) . . . . . . . . . . . . . . . 1,931 (1,304)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . (825) (955)
Other income (expense) . . . . . . . . . . . . . . . . . . . . 245 363
--------- ----------
Income (loss) before items shown
below. . . . . . . . . . . . . . . . . . . . . . . 1,351 (1,896)
Reorganization items:
Fresh-Start adjustments . . . . . . . . . . . . . . . . . . -- --
Reorganization costs. . . . . . . . . . . . . . . . . . . . -- --
--------- ----------
Income (loss) before items shown
below. . . . . . . . . . . . . . . . . . . . . . . 1,351 (1,896)
Income tax expense (benefit) . . . . . . . . . . . . . . . . . 247 282
--------- ----------
Income (loss) before items shown
below. . . . . . . . . . . . . . . . . . . . . . . 1,104 (2,178)
Earnings (losses) in affiliates. . . . . . . . . . . . . . . . 409 606
Minority interest in income of consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . (249) (242)
--------- ----------
Income (loss) before items shown
below. . . . . . . . . . . . . . . . . . . . . . . 1,264 (1,814)
Extraordinary item, net of income tax benefit(2) . . . . . . . -- --
--------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . $ 1,264 $ (1,814)
========= ==========
Earnings (loss) per share before extraordinary
item - basic and diluted. . . . . . . . . . . . . . . . . . $ 0.13 $ (0.18)
Earnings (loss) per share - basic and diluted. . . . . . . . . $ 0.13 $ (0.18)
Weighted average shares outstanding - basic and
diluted . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 10,000
BALANCE SHEET DATA (END OF FISCAL YEAR):
Working capital. . . . . . . . . . . . . . . . . . . . . . . . $ 32,134 $ 33,370
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 92,749 70,935
Total borrowings . . . . . . . . . . . . . . . . . . . . . . . 21,703 7,398
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . $ 49,813 $ 48,905
________________________________
(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 charges,
goodwill and asset impairments related to the closing or idling of
manufacturing plants and non-core retail operations in fiscal 2001.
(2) Extraordinary gain for forgiveness of debt.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
American Homestar is a regional vertically integrated manufactured housing
company with operations in manufacturing, retailing, home transportation
services, home financing and insurance. Our principal operations are located in
Texas, although we also sell our products in neighboring states. We manufacture
a wide variety of manufactured homes from two of our three manufacturing
facilities. The third manufacturing facility is primarily engaged in
refurbishing manufactured homes obtained through lender repossessions.
Our products are sold through 31 Company-operated retail sales centers in
Texas, Louisiana and Oklahoma, Company-operated sales offices in three
manufactured housing communities in Texas, several developer-operated sales
centers in manufactured housing communities, and several independent dealers. In
addition, we facilitate both chattel and land-home installment financing by
purchasers of manufactured homes from our retail sales centers. We also offer
retail customers a variety of insurance products, including property casualty
insurance, credit life insurance and extended warranty coverage through both
Company-operated retail sales centers and certain independent retailers. We also
offer transportation services to our customers.
REORGANIZATION
On January 11, 2001, American Homestar Corporation and 21 of our
subsidiaries filed separate voluntary petitions for reorganization under Chapter
11 of the United States Bankruptcy Code 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 (the
"Effective Date"), all conditions required for the effectiveness of the Plan
were met, and the Plan became effective, and the Company and our subsidiaries
emerged from bankruptcy.
SUMMARY OF PLAN
Under the terms of the Plan, we maintained our ongoing business operations
primarily in Texas, Louisiana and Oklahoma, and continued sales to independent
dealers in New Mexico, Arkansas and Colorado. We continued to use our
manufacturing facilities in North Texas and to operate approximately 40 retail
store operations. Subsequent to our emergence from bankruptcy, we have reduced
the number of retail stores we operate to 31 stores. Moreover, through
affiliated entities that were not subject to the Plan, we continued our
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
27, 2003, 4,869,250 shares of Series C common stock had been issued to specific
shareholders with allowed claims and 5,130,750 shares were held in constructive
trust for the benefit of shareholders to be determined in name and amount as the
claims process is completed. Since June 27, 2003, we have issued 1,111,114
additional shares of Series C common stock pursuant to the claims process, and
3,219,636 shares of the 10 million remain to be issued. We expect the claims
process to be completed by April 2004. 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 27, 2003 and 4,999,900 shares underlie options
authorized under the Company's 2001 Management Incentive Program. Options for
4,899,900 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. As of June 27, 2003, options for 969,980
shares of Series M common stock have vested.
17
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. Under the terms of the Plan, we paid the priority
claims allowed by the Bankruptcy Code 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. Under the terms of the Plan, 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 were entitled to
receive a small payment in cash (typically 10% or 20% of the amount of their
claim). Certain of our affiliates have discontinued or will discontinue doing
business with us under the terms of the Plan. Holders of unsecured claims
against discontinued entities could accept a pro rata distribution once the
liquidation value of the subsidiary is determined. Very few creditors have
elected this option. The typical holder of an allowed unsecured claim of more
than $10,000 will receive shares of our Series C common stock. We will issue the
shares without regard to which of our subsidiaries actually owed the claim.
Miscellaneous Secured Claims. Under the terms of the Plan, we were 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 our
principal secured lender. The arrangement provided for substantial debt
forgiveness by the secured lender and for the extension of a 36-month revolving
credit facility by the secured lender. The inventory credit line originally
provided for borrowings up to a maximum limit of $38 million, although the
available amount under the loan varied based on various covenants and other
requirements. Maximum borrowings peaked at approximately $21 million. Under the
financing agreement, all net cash proceeds from the sale or lease of the
Company's idle facilities have been deposited into a restricted cash collateral
account, and those funds have been otherwise unavailable to the Company. In June
2003, we amended this inventory financing agreement with the lender to allow for
a pay-down, using approximately $5.7 million held by the lender in the
restricted cash collateral account. Proceeds from the future sale or lease of
idle facilities will also be available for further debt reduction, under certain
circumstances, at the Company's option. As part of this amendment, maximum
borrowings under the inventory credit line were also voluntarily reduced to $12
million. The loan is secured by substantially all of the Company's inventory and
real estate and by certain other assets. At June 27, 2003 the amount
outstanding under this credit facility was approximately $6.8 million.
BASIS OF REPORTING
Upon our emergence from bankruptcy protection in October 2001, we 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 of our assets and liabilities have
been restated to reflect their reorganization value, which approximates their
fair value at the Effective Date. In addition, our accumulated deficit was
eliminated and our capital structure was recast in conformity with the Plan,
and, as of September 29, 2001, we have recorded the effects of the Plan and
Fresh-Start Reporting. 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 our 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 our common equity of approximately $30 million,
as of the Effective Date, 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. We have allocated our
reorganization value to various asset categories pursuant to Fresh-Start
accounting principles.
18
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND GENERAL
The consolidated financial statements include the accounts of the Company
and our majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts previously
reported have been reclassified to conform to the 2003 presentation. We also own
a 50% interest in two financing joint ventures (Homestar 21st, LLC and American
Homestar Mortgage, L.P.) and a 49.5% interest in Humble Springs LTD, a land
development joint venture, which are accounted for under the equity method of
accounting.
Our fiscal year ends on the Friday closest to June 30.
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 our Balance Sheets:
- Property Plant and Equipment, according to provisions for
"Fresh-Start" Reporting, were reflected at their estimated fair market
value at September 29, 2001, and are reflected at cost for additions
subsequent to 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
that are still within their 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
19
following criteria are met:
- there is a firm retail commitment from the dealer;
- there is a financial commitment (e.g., an approved floor plan source,
cash or cashiers check received in advance or, in the case of certain
subdivision developers, a financial commitment acceptable to
management);
- 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 our 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. Lifestar ceased operations in May 2002.
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 reflected at management's estimate of
fair market value at September 29, 2001, as required by Fresh-Start Reporting.
Subsequent to September 29, 2001, 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. We have four manufacturing
plants and several non-core retail sales centers that are not in operation that
are classified as assets held for sale and are reflected at management's
estimate of net realizable value.
We evaluate 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. 144, which superceded 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, we adjust the carrying values of such assets 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, we 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. We assessed the recoverability of goodwill by
determining whether the amortization of the goodwill balance over the remaining
useful life could be recovered through undiscounted future operating cash flows
of the acquired operations. Goodwill was adjusted to zero in connection with the
restatement of assets and liabilities during our reorganization.
In June 2000,we evaluated 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
20
values are determined using the present value of estimated future cash flows.
In conjunction with the SFAS No. 121 analysis performed in fiscal year 2001, we
recorded goodwill write-off of approximately $63.9 million.
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 our 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 we retain risk in the event of customer nonpayment of
installment sales contracts. Typically, our 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 our 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
We make 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 year ended June 29, 2001, the three months ended September
29, 2001, the nine months ended June 28, 2002, and the year ended June 27, 2003,
warranty and service costs were $ 10.6 million, $0.7 million, $2.0 million, and
$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 our 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 our 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. We believe that the carrying amounts of our 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.
21
CONCENTRATION OF CREDIT RISK
We maintain cash in several bank accounts, which at times exceed federally
insured limits. We monitor the financial condition of the banks where we
maintain accounts and we have experienced no losses associated with these
accounts.
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 was effective for
fiscal years beginning after December 15, 2001, and its adoption has not had 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 was effective for financial
statements issued for fiscal years beginning after June 15, 2002, and its
adoption has not had 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 Operations Reporting 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 were effective for financial statements issued for fiscal years
beginning after December 15, 2001, and its adoption has not had a material
impact on our financial condition or results of operations.
In May 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44 and 64, Amendment
of FASB Statement No. 13, and Technical Corrections." This Statement rescinds
FASB Statements No. 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of Statement No. 4 and FASB Statement No. 64, Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds
FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This
Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS 145 is effective
for fiscal years beginning after May 15, 2002, and its adoption has not had a
material impact on our financial condition or results of operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002. We do not expect the adoption of
SFAS 146 will have a material effect on our financial condition or results of
operations.
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amends SFAS 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation. In addition, this statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and
22
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. We
will continue to account for stock-based compensation using the intrinsic method
as permitted by SFAS 123 and prominently disclose the additional information
required by SFAS 148 in our annual and interim reports.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities. This interpretation provides
guidance on the identification of, and financial reporting for, variable
interest entities. Variable interest entities are entities that lack the
characteristics of a controlling financial interest or lack sufficient equity to
finance its activities without additional subordinated financial support. FIN 46
requires a company to consolidate a variable interest entity if that company is
obligated to absorb the majority of the entity's expected losses or entitled to
receive the majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. FIN
46 is applicable immediately to variable interest entities created after January
31, 2003. For all variable interest entities created prior to February 1, 2003,
FIN 46 is applicable to periods beginning after June 15, 2003. We do not expect
that the adoption of FIN 46 will have a material effect on our financial
position or results of operation.
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 do not take into account 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
(the Company being referred to herein as "Predecessor Company" for periods prior
to September 29, 2001, and as "Successor Company" for periods subsequent to
September 29, 2001). As a result, the results of operations and cash flows for
the twelve months ended June 27, 2003 for the Successor Company are not
comparable to the results of operations and cash flows for the twelve months
ended June 28, 2002, as the earlier period includes three months of Predecessor
Company operations and cash flows, which do not reflect the effects of
Fresh-Start Reporting, and nine months of Successor Company operations and cash
flows, which do reflect the effects of Fresh-Start Reporting.
In connection with our reorganization, we have significantly downsized our
operations and have focused on our core Southwest market, where the Company is
based and where we have historically had our most favorable overall results. We
currently operate 31 retail sales centers and three sales offices in
manufactured housing communities, along with a marketing presence (displaying
model homes and spec homes without an on-site sales office) in approximately 34
manufactured housing communities. We operate three manufacturing plants, two of
which produce new homes and the third is used to refurbish lender repossessions.
We operate an insurance agency, which sells homeowner's insurance, credit life
insurance and extended warranty coverage to our customers and, from March 1995
to May 2002 operated a reinsurance company, which reinsured the credit life and
extended warranty policies sold, which allowed the Company to participate in
additional homeowner insurance profits in years where losses were lower than
expected. We have a 51% ownership interest in a transport company, which
specializes in the transportation of manufactured homes, modular homes and
offices. In customer finance, we have a 50% interest in a finance company which
specializes in providing chattel and land/home financing to the Company's
customers and a 50% interest in a mortgage brokerage business which allows us to
better control the placement of our traditional mortgage business and to realize
a portion of the net profits related to this business. 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 events have, in our opinion, had a dampening effect on new
home sales and revenues since January 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 addition, Texas legislation (HB
1869) effective January 1, 2002, required any land/home package to be closed and
financed in a fashion nearly identical to traditional mortgage financing for
site-constructed housing. This legislation led to a much longer and more
complex credit approval and
23
loan closing cycle than existed prior to January 1, 2002. While this change did
not necessarily result in a lower overall demand for manufactured housing in
Texas, it had the effect of lengthening 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 believed that the Company realized less revenue
during the six months ended June 28, 2002, and the year ended June 27, 2003,
than would have otherwise been the case without lender withdrawal from the
industry and the Texas law change. Effective June 18, 2003, SB 521 amended the
provisions of HB 1869 to allow for chattel financing, at the owner's option, of
a manufactured home that is sited on land owned by the home owner. We believe SB
521 should moderate the negative impact on manufactured home sales in Texas
caused by HB 1869. If the lending environment remains stable, management
believes that sales and revenues will gradually improve over current levels as
the sales-in-process mature toward the longer closing and completion cycle and
as our retail sales team adjusts to these new lender and industry dynamics. We
believe that most of our competition in our core market region experienced
similar market pressures and has reduced both retail and manufacturing capacity.
We also believe that the Company is postured to take advantage of these changes
because we are reorganized and no longer distracted by the same relative
leverage positions and operational challenges as much of our competition. While
we believe 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:
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 29, SEPTEMBER 29, JUNE 28, JUNE 27,
2001 2001 2002 2003
---------- --------------- ------------- ----------
Predecessor Co. Successor Co.
--------------------------- -------------------------
Company-manufactured new homes sold at retail. . . . . . . . 2,447 373 994 999
Total new homes sold at retail through retail sales centers. 2,499 373 1,001 1,010
Internalization rate (1) . . . . . . . . . . . . . . . . . . 98% 100% 99% 99%
Previously-owned homes sold at retail. . . . . . . . . . . . 964 149 555 564
Average retail selling price - new homes (HUD code). . . . . $ 54,823 $ 51,403 $ 53,584 $ 55,230
Company-operated retail sales centers and community sales
offices at end of period. . . . . . . . . . . . . . . . . 41 41 41 34
Total manufacturing shipments. . . . . . . . . . . . . . . . 3,656 343 1,176 1,248
Manufacturing shipments to independent retail sales centers
and developers. . . . . . . . . . . . . . . . . . . . . . 1,832 51 162 330
_______________________________
(1) The proportion of new homes manufactured by the Company that are sold by
Company-operated retail sales centers.
The following table summarizes our historical operating results, expressed
as a percentage of total revenues, for the periods indicated:
YEAR THREE MONTHS NINE MONTHS YEAR
ENDED ENDED ENDED ENDED
JUNE 29, SEPTEMBER 29, JUNE 28, JUNE 27,
2001 2001 2002 2003
--------- -------------- ------------ ---------
Predecessor Co. Successor Co.
------------------------- -----------------------
Total revenues . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Gross profit . . . . . . . . . . . . . . . . 27.6% 38.7% 37.0% 30.7%
Selling, general and administrative expenses
before acquisition costs . . . . . . . 32.2% 39.2% 34.7% 32.1%
Restructuring costs. . . . . . . . . . . . . 57.6% -- -- --
Operating income . . . . . . . . . . . . . . (62.2%) (0.5%) 2.3% (1.4)%
Income before income taxes and extraordinary
item . . . . . . . . . . . . . . . . . (67.7%) (65.4%) 1.6% (2.1)%
Income before extraordinary item . . . . . . (74.1%) (65.