UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number 0-24210
AMERICAN HOMESTAR CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 76-0070846
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2450 SOUTH SHORE BOULEVARD, SUITE 300, LEAGUE CITY, TEXAS 77573
(Address of principal executive offices, including zip code)
(281) 334-9700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of October 31, 2002 the registrant had 100 shares of Series M Common Stock,
par value $.01 per share, and 3,922,280 shares of Series C Common Stock, par
value $.01 per share, issued and outstanding, and 6,077,720 shares of Series C
Common Stock deemed issued, outstanding and held in constructive trust for the
benefit of shareholders to be determined in name and amount as the claims
process is completed.
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - June 28, 2002 and September 27, 2002. . . . . . 3
Consolidated Statements of Operations - three months ended September 29, 2001
and September 27, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows - three months ended September 29, 2001
and September 27, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . 18
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . 19
1
PART I - FINANCIAL INFORMATION
On January 11, 2001, American Homestar Corporation (the "Company") and
twenty-one (21) of its subsidiaries filed separate voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court of the Southern District of Texas (the
"Bankruptcy Court"). On August 14, 2001, the Bankruptcy Court confirmed the
Third Amended Joint Plan of Reorganization of the Company and its subsidiaries
(the "Plan"). All conditions to the effectiveness of the Plan were met and the
Plan became effective on October 3, 2001 (the "Effective Date").
Under the terms of the Plan, all equity interests in the Company were
cancelled as of the Effective Date, and all holders of outstanding shares of
Company stock, which had previously traded under the symbols HSTR and HSTRQ,
lost all rights to equity interests in and to the reorganized Company. Under
the Plan, the Company has the authority to issue 15 million shares of new Series
C common stock and is required to issue 10 million shares of Series C common
stock to its general unsecured creditors. Pursuant to the exemption set forth
in Section 1145 of the Bankruptcy Code, the Company issued new shares of Series
C common stock to persons holding allowed unsecured claims in the Company's
bankruptcy case and shares of Series M common stock to management under an
incentive program. As of September 27, 2002, the Company had issued 10 million
shares of Series C common stock, of which 3,922,280 shares were issued to
specific shareholders with allowed claims under the Plan, and 6,077,720 shares
were held in constructive trust for the benefit of shareholders to be determined
in name and amount as the claims process is completed. The Company also has the
authority to issue 7.5 million shares of Series M common stock to management,
100 shares of which had been issued as of September 27, 2002 and 4,999,900
shares underlie options authorized under the Company's 2001 Management Incentive
Program. As of September 27, 2002, options for 4,949,900 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 fiscal quarter, 2002. The Company elected to use
September 29, 2001, its quarter end, as its Fresh-Start Reporting date versus
the Effective Date of the Plan, October 3, 2001, as interim activity was not
material to the Consolidated Fresh-Start Balance Sheet. Accordingly, all assets
and liabilities were restated to reflect their reorganization value, which
approximates the fair value of the assets and liabilities at the Effective Date
and its capital structure was recast in conformity with the Plan. The
adjustment to eliminate the accumulated deficits totaled $158 million of which
$139 million was forgiveness of debt and $19 million was from Fresh-Start
adjustments and is reported in the results of operations for the three months
ended September 29, 2001.
During its reorganization, the Company 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. The Company also filed its Monthly Operating Reports and its
confirmed Plan with the Securities and Exchange Commission. The reorganized
Company has substantially fewer assets, liabilities and operations than prior to
its reorganization. Additionally, the reorganized Company has entirely new
ownership, as the Plan cancelled all classes of equity securities issued by the
Company prior to its reorganization.
The results of operations and cash flows for the three months ended
September 29, 2001 include operations prior to the Company's emergence from
Chapter 11 proceedings (referred to as "Predecessor Company" for periods prior
to September 29, 2001). The results of operations and cash flows for the three
months ended September 27, 2002 include operations subsequent to the Company's
emergence from Chapter 11 proceedings and reflect the effects of Fresh-Start
Reporting (referred to as "Successor Company" for periods subsequent to
September 29, 2001). As a result, the net income for the three months ended
September 27, 2002 for the Successor Company is not comparable to the net income
for the three months ended September 29, 2001 for the Predecessor Company.
2
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
JUNE 28, SEPTEMBER 27,
2002 2002
(AUDITED) (UNAUDITED)
--------------- --------------
SUCCESSOR CO. SUCCESSOR CO.
--------------- --------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 32,250 $ 25,057
Cash - reserved for claims. . . . . . . . . . . . . . . . . . . . . . 6,244 6,041
Cash - restricted . . . . . . . . . . . . . . . . . . . . . . . . . . 4,190 4,293
Accounts receivable - trade, net. . . . . . . . . . . . . . . . . . . 2,692 2,903
Accounts receivable - other, net. . . . . . . . . . . . . . . . . . . 287 287
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,006 28,257
Prepaid expenses, notes receivable and other current assets . . . . . 792 1,506
--------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . 73,461 68,344
--------------- --------------
Notes receivable and other assets . . . . . . . . . . . . . . . . . . 555 600
Investments in affiliates, at equity. . . . . . . . . . . . . . . . . 3,205 3,360
Property, plant and equipment, net. . . . . . . . . . . . . . . . . . 10,149 10,140
Assets held for sale. . . . . . . . . . . . . . . . . . . . . . . . . 5,379 5,379
--------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,749 $ 87,823
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan payable. . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,689 $ 18,264
Current installments of notes payable . . . . . . . . . . . . . . . . 370 419
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,315 1,429
Warranty reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,818 1,771
Accrued other liabilities . . . . . . . . . . . . . . . . . . . . . . 7,265 5,709
Liquidation and plan reserve. . . . . . . . . . . . . . . . . . . . . 3,626 3,166
Claims reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,067 2,864
Initial distribution payable. . . . . . . . . . . . . . . . . . . . . 3,177 3,177
--------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 41,327 36,799
--------------- --------------
Notes payable, less current installments. . . . . . . . . . . . . . . 644 556
Minority interest in consolidated subsidiary. . . . . . . . . . . . . 965 1,110
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . -- --
SHAREHOLDERS' EQUITY
Common stock series C, par value $0.01; 15,000,000 shares authorized
10,000,000 shares issued and outstanding at June 28, 2002
and September 27, 2002. . . . . . . . . . . . . . . . . . . . . . . 100 100
Common stock series M, par value $0.01; 7,500,000 shares authorized,
100 shares issued and outstanding at June 28, 2002 and
September 27, 2002. . . . . . . . . . . . . . . . . . . . . . . . . -- --
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . 48,449 48,449
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 1,264 809
--------------- --------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . 49,813 49,358
--------------- --------------
Total liabilities and shareholders' equity. . . . . . . . . . . . $ 92,749 $ 87,823
=============== ==============
See accompanying notes to consolidated financial statements
3
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 27,
2001 2002
(AUDITED) (UNAUDITED)
--------------- ---------------
PREDECESSOR CO. SUCCESSOR CO.
--------------- ---------------
Revenues:
Net sales . . . . . . . . . . . . . . . . . . $ 21,107 $ 18,515
Other revenues. . . . . . . . . . . . . . . . 5,137 6,839
--------------- ---------------
Total revenues. . . . . . . . . . . . . . . 26,244 25,354
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . 16,086 17,532
Selling, general and administrative . . . . . 10,290 7,960
--------------- ---------------
Total costs and expenses. . . . . . . . . . 26,376 25,492
--------------- ---------------
Operating loss. . . . . . . . . . . . . . . (132) (138)
Interest expense. . . . . . . . . . . . . . . . (214) (288)
Other income. . . . . . . . . . . . . . . . . . 88 146
--------------- ---------------
Loss before items shown below . . . . . . . (258) (280)
Reorganization items:
Fresh-Start adjustments . . . . . . . . . . . 18,863 --
Reorganization costs. . . . . . . . . . . . . (1,433) --
--------------- ---------------
Income (loss) before items shown below. . . 17,172 (280)
Income tax expense. . . . . . . . . . . . . . 20 185
--------------- ---------------
Income (loss) before items shown below. . . 17,152 (465)
Earnings in affiliates. . . . . . . . . . . . . 145 155
Minority interests. . . . . . . . . . . . . . . (50) (145)
--------------- ---------------
Income (loss) before items shown below. . . 17,247 (455)
Extraordinary item:
Gain on forgiveness of debt . . . . . . . . 139,130 --
--------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . $ 156,377 $ (455)
=============== ===============
Earnings (loss) per share - basic and diluted:
Income (loss). . . . . . . . . . . . . . . . N/A $ (0.05)
=============== ===============
Weighted average shares
Outstanding - basic and diluted . . . . . . . N/A 10,000,100
=============== ===============
See accompanying notes to consolidated financial statements
4
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 27,
2001 2002
(AUDITED) (UNAUDITED)
--------------- ---------------
PREDECESSOR CO. SUCCESSOR CO.
--------------- ---------------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 156,377 $ (455)
Adjustments to reconcile net income (loss) to net cash provided by
(used in)
operating activities:
Fresh-Start adjustments . . . . . . . . . . . . . . . . . . . . . . (18,863) --
Extraordinary item - Gain on forgiveness of debt. . . . . . . . . . (139,130) --
Depreciation and amortization . . . . . . . . . . . . . . . . . . 748 155
Minority interests in income of consolidated subsidiaries . . . . 50 145
Losses (earnings) in affiliates . . . . . . . . . . . . . . . . . (145) (155)
Change in assets and liabilities:
Change in receivables . . . . . . . . . . . . . . . . . . . . . 1,396 (211)
Change in inventories . . . . . . . . . . . . . . . . . . . . . 584 (1,251)
Change in prepaid expenses, notes receivable and other current
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 903 (714)
Changes in notes receivable and other assets. . . . . . . . . . (95) (45)
Change in accounts payable. . . . . . . . . . . . . . . . . . . (2,216) 114
Change in accrued expenses and other liabilities. . . . . . . . 1,527 (2,063)
Payment of Plan obligations . . . . . . . . . . . . . . . . . . -- (203)
--------------- ---------------
Net cash provided by (used in) operating activities . . . . . 1,136 (4,683)
--------------- ---------------
Cash flows from investing activities:
Purchases of property, plant and equipment. . . . . . . . . . . . . (76) (146)
--------------- ---------------
Net cash provided by (used in) investing activities . . . . . (76) (146)
--------------- ---------------
Cash flows from financing activities:
Borrowings under floor plan payable . . . . . . . . . . . . . . . . 9,368 3,493
Repayments of floor plan payable. . . . . . . . . . . . . . . . . . (12,843) (5,918)
Proceeds from long-term debt borrowings . . . . . . . . . . . . . . 214 --
Principal payments of long-term debt. . . . . . . . . . . . . . . . (99) (39)
Change in restricted cash . . . . . . . . . . . . . . . . . . . . . (4,563) 100
--------------- ---------------
Net cash provided by (used in) financing activities . . . . . . (7,923) (2,364)
--------------- ---------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . (6,863) (7,193)
Cash and cash equivalents at beginning of period. . . . . . . . . . . 22,177 32,250
--------------- ---------------
Cash and cash equivalents at end of period. . . . . . . . . . . . . . $ 15,314 $ 25,057
=============== ===============
Supplemental Cash Flow Information
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 25 $ 85
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 296
=============== ===============
See accompanying notes to consolidated financial statements
5
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) REORGANIZATION AND BASIS OF REPORTING
REORGANIZATION
The Company successfully reorganized under Chapter 11 of the US Bankruptcy
Code. Its Plan of Reorganization (the "Plan") was confirmed on August 14, 2001
and became effective October 3, 2001 (the "Effective Date").
In connection with its reorganization, the Company significantly downsized
its operations and focused on its core Southwest market where the Company is
based and where it has historically had its most favorable overall results. The
Company currently operates 38 retail sales centers and four sales centers in
manufactured housing communities. The Company also operates three manufacturing
plants, two of which produce new homes while the third refurbishes lender
repossessions. Additionally, the Company operates an insurance agency, which
sells homeowner's insurance, credit life insurance and extended warranty
coverage to its customers. The Company also has a 51% ownership interest in a
transport company, which specializes in the transportation of manufactured and
modular homes and offices. In addition, the Company has a 50% interest in a
finance company, which specializes in providing chattel and land/home financing
to the Company's customers. The Company recently invested in a 50% owned
mortgage brokerage business to allow it to better control the placement of its
traditional mortgage business and to realize a portion of the net profits
relating to this business. Most recently, the Company has aligned itself with
several subdivision developments to meet an emerging market segment in its
market region and to gain greater market share. Management believes that its
regional vertical integration strategy, which derives multiple profit sources
from each retail sale, will allow the Company to be more successful, over time,
than would otherwise be the case.
BASIS OF REPORTING
Upon emergence from Chapter 11, the Company adopted the provisions of
Statement of Position No. 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("Fresh-Start Reporting") as
promulgated by the AICPA. Accordingly, all assets and liabilities have been
restated to reflect their reorganization value, which approximates their fair
value at the Effective Date. In addition, the accumulated deficit of the Company
was eliminated and its capital structure was recast in conformity with the Plan,
and the Company has recorded the effects of the Plan and Fresh-Start Reporting
as of September 29, 2001. Activity between September 29, 2001, the date of the
Consolidated Fresh-Start Balance Sheet, and October 3, 2001, the Effective Date
of the Plan, was not material to the consolidated Fresh-Start balance sheet. 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 month
period ended September 29, 2001. The results of operations and cash flows for
the three months ended September 29, 2001 include operations prior to the
Company's emergence from Chapter 11 proceedings (referred to as "Predecessor
Company") and the effects of Fresh-Start Reporting. The results of operations
and cash flows for the three months ended September 27, 2002 include operations
subsequent to the Company's emergence from Chapter 11 proceedings and reflect
the on-going effects of Fresh-Start Reporting. As a result, the net income for
the three months ended September 27, 2002 for the Successor Company is not
comparable with the net income for the three months ended September 29, 2001 for
the Predecessor Company.
The reorganization value of the Company's common equity of approximately
$30 million was determined by an independent valuation and financial specialist
after consideration of several factors and by using various valuation methods
including appraisals, cash flow multiples, price/earnings ratios and other
relevant industry information. The reorganization value of the Company has been
allocated to various asset categories pursuant to Fresh-Start accounting
principles.
6
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The accompanying unaudited consolidated financial statements of the Company
and its subsidiaries have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Because of the seasonal
nature of the Company's business, operating results for the three months ended
September 27, 2002, are not necessarily indicative of the results that may be
expected for the fiscal year ending June 27, 2003. These consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's annual report on Form 10-K for fiscal
year ended June 28, 2002, and those reports filed previously with the SEC.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
Significant estimates were made to determine the following amounts
reflected on the Company's Balance Sheet:
- Property Plant and Equipment, according to provisions for "Fresh-Start
Reporting", were reflected at their estimated fair market value at
September 29, 2001 and 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, which are still within the one-year warranty period. These
estimates are based on average historical warranty expense per home,
applied to the number of homes that are still under warranty.
- Reserve for future repurchase losses reflects management's estimates
of both repurchase frequency and severity of net loss 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 estimates of all
future 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 estimates 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.
7
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
REVENUE RECOGNITION
Retail sales are recognized once full cash payment is received and the home
has been delivered to the customer.
Manufacturing sales to independent dealers and subdivision developers are
recognized as revenue when the following criteria are met:
- there is a firm retail commitment from the dealer;
- there is a financial commitment (e.g., an approved floor plan source,
cash or cashiers check received in advance);
- the home is completely finished;
- the home is invoiced; and
- the home has been shipped.
The Company also maintains used manufactured home inventory owned by
outside parties and consigned to the Company, for which the Company recognizes a
sales commission when the commission is received.
Premiums from credit life insurance policies reinsured by the Company's
credit life subsidiary, Lifestar Reinsurance, Ltd. ("Lifestar"), were recognized
as revenue over the life of the policy term. Premiums were ceded to Lifestar on
an earned basis. Lifestar ceased operations in May 2002. Lifestar's results are
reflected in the period ended September 29, 2001, but not in the period ended
September 27, 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangibles. The statement requires that goodwill not be
amortized but instead be tested at least annually for impairment and expensed
against earnings when the implied fair value of a reporting unit, including
goodwill, is less than its carrying amount. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001, and management does not expect
its adoption will have a material impact on the Company's financial condition or
results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 will be effective for financial
statements issued for fiscal years beginning after June 15, 2002, and management
does not expect its adoption will have a material impact on the Company's
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 are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and management does not expect its adoption
will have a material impact on the Company's financial condition or results of
operations.
8
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(2) LIQUIDITY
Management believes that American Homestar Corporation has adequate debt
financing availability and will have sufficient liquidity throughout fiscal 2003
and for the foreseeable future thereafter to support continued operations and
meet all obligations under the Plan. Management's assessment of its liquidity
and ability to sustain operations is based on certain assumptions regarding
industry and economic conditions, which although believed to be reasonable, may
turn out to be inaccurate. There is no assurance that the Company's liquidity
will not be impacted by unforeseen circumstances.
(3) REPURCHASE AGREEMENTS
The Company has entered into repurchase agreements with various financial
institutions and other credit sources pursuant to which the Company has agreed,
under certain circumstances, to repurchase manufactured homes sold to
independent dealers in the event of a default by such independent dealers on
their obligation to such credit sources. Under the terms of such repurchase
agreements, the Company has agreed 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 September 27, 2002 and September
29, 2001, the Company was at risk to repurchase up to $2.4 million and $1.7
million of manufactured homes and provided for estimated net repurchase losses
of approximately $180,000 and $135,000, respectively.
(4) INVENTORIES
A summary of inventories follows (in thousands):
JUNE 28, SEPTEMBER 27,
2002 2002
--------- --------------
Manufactured homes:
New . . . . . . . . . . . . . . $ 22,987 $ 23,694
Used. . . . . . . . . . . . . . 1,995 2,350
Furniture and supplies. . . . . . 468 717
Raw materials and work-in-process 1,556 1,496
--------- --------------
$ 27,006 $ 28,257
========= ==============
9
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(5) INVESTMENTS IN AFFILIATED COMPANY
Homestar 21, LLC ("Homestar 21") is 50% owned by the Company and 50% owned
by 21st Mortgage, a company not affiliated with the Company. Homestar 21 is a
finance company that specializes in providing chattel and land/home financing to
the Company's customers. The Company accounts for its investment in Homestar 21
using the equity method. The Company invested $2.4 million in Homestar 21
during fiscal 2000. Summary unaudited financial information for Homestar 21, as
of and for the periods indicated, is as follows (in thousands):
JUNE 28, SEPTEMBER 27,
2002 2002
-------------- --------------
Total assets. . . . $ 17,494 $ 6,658
============== ==============
Total liabilities . $ 11,147 $ --
Owners' equity. . . $ 6,347 $ 6,658
============== ==============
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 27,
2001 2002
-------------- --------------
PREDECESSOR CO. SUCCESSOR CO.
-------------- --------------
Total revenues. . . $ 892 $ 1,147
Net income. . . . . $ 290 $ 311
============== ==============
In May 2002, the Company invested $31,500 to provide one-half of the
initial capitalization of American Homestar Mortgage, L.P. ("Homestar
Mortgage"), a joint venture owned 50% by the Company and 50% by Home Loan
Corporation ("Home Loan"), a Company not affiliated with the Company. Homestar
Mortgage will operate as a mortgage broker/loan originator for ultimate
placement with Home Loan and other mortgage banks. Homestar Mortgage will not
bear any lending risk on loans it originates. Homestar Mortgage did not obtain
its license and regulatory approval until October 8, 2002 and was therefore not
operating during the three-month period ended September 27, 2002. The Company
accounts for its investment in Homestar Mortgage using the equity method.
Summary unaudited financial information for Homestar Mortgage as of and for the
period indicated, is as follows (in thousands):
JUNE 28, SEPTEMBER 27,
2002 2002
-------------- --------------
Total assets. . . $ 63 $ 63
============== ==============
Total liabilities $ -- $ --
Owners' equity. . $ 63 $ 63
============== ==============
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 27,
2001 2002
-------------- --------------
PREDECESSOR CO. SUCCESSOR CO.
-------------- --------------
Total revenues. . $ -- $ --
Net income. . . . $ -- $ --
============== ==============
10
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) NOTES AND FLOOR PLAN PAYABLE
On October 3, 2001, the Company entered into a floorplan credit facility
with Associates Housing Financial LLC ("Associates") to finance the purchase of
its display models and inventory homes. The maximum allowance under the line of
credit is $38 million with various sub-limits for each category of inventory
financed and the line is contractually committed until October 2, 2004. The
balance outstanding at September 27, 2002 was $18.3 million, consisting of
revolving debt. Two liquidating lines, with a combined balance of $1.4 million,
were paid off during the three-month period ended September 27, 2002. As the
Company paid down the liquidating lines, additional borrowing capacity became
available under the revolving lines. The revolving portions of the line carry an
annual interest rate of prime plus 1%. The liquidating portions of the original
line carried no interest for the first six months (which expired April 3, 2002)
and thereafter accrued interest at a rate of prime plus 1% per annum. The floor
plan payable is secured by substantially all of the Company's inventory, real
estate and by certain other assets (including certain specific cash deposits,
approximately $4.3 million at September 27, 2002 included in restricted cash).
In addition to traditional subjective covenants, there are two financial
covenant tests the Company is required to meet under its floor plan agreements.
One test is floor plan debt compared to total assets (as defined). The other
test is a minimum cash balances requirements. At September 27, 2002 and for all
prior periods as of and after September 29, 2001, the Company was in compliance
with all covenants.
In addition to the floor plan payable, the Company also has other notes
payable, primarily to non-financial institutions, which are secured by real
estate and have interest rates ranging from 7.25% to 10.00%. None of these
notes payable has covenant requirements.
(7) SHAREHOLDERS' EQUITY AND PRO-FORMA EARNINGS PER SHARE
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. As of September 27, 2002, the Company had issued 10 million
shares of Series C common stock, of which 3,922,280 shares were issued to
specific shareholders with allowed claims under the Plan, and 6,077,720 shares
were held in constructive trust for the benefit of shareholders to be determined
in name and amount as the claims process is completed. The Company also has the
authority to issue 7.5 million shares of Series M common stock to management,
100 shares of which had been issued as of September 27, 2002 and 4,999,900
shares underlie options authorized under the Company's 2001 Management Incentive
Program. As of September 27, 2002, options for 4,949,900 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.
11
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(8) BUSINESS SEGMENTS
The Company operates primarily in three business segments-(i) retail sales;
(ii) manufacturing; and (iii) corporate, which consists of transportation
services, financial services and the corporate group. The following table
summarizes, for the periods indicated, information about these segments (in
thousands):
ADJUSTMENTS/
RETAIL MANUFACTURING CORPORATE ELIMINATIONS TOTAL
--------------------------------------------------------------------
PREDECESSOR COMPANY
--------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 29, 2001
Revenues from external customers $ 18,969 $ 2,138 $ 5,137 $ -- $26,244
Intersegment revenues. . . . . . -- 9,616 -- (9,616) --
Interest expense . . . . . . . . 214 -- -- -- 214
Depreciation . . . . . . . . . . 445 274 29 -- 748
Segment profit (loss) before
income taxes and earnings in
affiliates . . . . . . . . . (712) 356 (246) 344 (258)
Segment assets . . . . . . . . . 32,810 26,676 42,714 (25,594) 76,606
Expenditures for segment assets. -- 42 34 -- 76
ADJUSTMENTS/
RETAIL MANUFACTURING CORPORATE ELIMINATIONS TOTAL
--------------------------------------------------------------------
SUCCESSOR COMPANY
--------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 27, 2002
Revenues from external customers $ 16,450 $ 2,065 $ 6,839 $ -- $25,354
Intersegment revenues. . . . . . -- 8,738 -- (8,738) --
Interest expense . . . . . . . . 288 -- -- -- 288
Depreciation . . . . . . . . . . 73 61 21 -- 155
Segment profit (loss) before
income taxes and earnings in
affiliates . . . . . . . . . (645) 763 (286) (112) (280)
Segment assets . . . . . . . . . 34,076 27,310 58,337 (31,900) 87,823
Expenditures for segment assets. 72 2 72 -- 146
Intersegment revenues consist primarily of sales by the manufacturing
segment to the retail segment and are transferred at market price. The
adjustment to intersegment revenue and segment profit is made to eliminate
intercompany sales and profit between the manufacturing and retail segments. The
segment assets adjustment consists primarily of an adjustment to eliminate
subsidiaries' equity at the corporate level and the elimination of intercompany
receivables.
Earnings in affiliates in the consolidated statements of operations relates
to the financial services segment.
12
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this document, the words "anticipate,"
"believe," "estimate," "should," and "expect" and similar expressions as they
relate to the Company or management of the Company are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward-looking statements.
GENERAL:
American Homestar is a regional, vertically integrated manufactured housing
company with operations in manufacturing, retailing, home transportation
services, home financing and insurance. The Company has its principal
operations in Texas, although it also sells its products in neighboring states.
The Company refers to this regional market as its core Southwest market. The
Company manufactures a wide variety of manufactured homes from two of its three
manufacturing facilities. The third manufacturing facility is primarily engaged
in refurbishing manufactured homes obtained through lender repossessions.
The Company successfully reorganized under Chapter 11 of the U.S.
Bankruptcy Code. The Company's plan of reorganization (the "Plan") was confirmed
on August 14, 2001 and became effective October 3, 2001. In connection with its
reorganization, the Company adopted Fresh-Start accounting under AICPA Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," beginning September 29, 2001, which coincided with the
beginning of the Company's second quarter in fiscal 2002. The application of
Fresh-Start accounting required the Company to restate its assets at fair value
and to reflect appropriate post-reorganization liabilities including reserves
for claims that will become due under the Plan. The difference between total
assets, on a restated basis, and total liabilities became initial contributed
capital, and was subject to upward or downward adjustment based on the appraised
value of the Company. The Company's appraised value at September 29, 2001, was
approximately $30 million, therefore no additional valuation adjustment was
necessary.
In connection with its reorganization, the Company significantly downsized
its operations and focused on its core Southwest market where the Company is
based and where it has historically had its most favorable overall results. The
Company currently operates 38 retail sales centers and four sales centers in
manufactured housing communities. The Company also operates three manufacturing
plants, two of which produce new homes while the third refurbishes lender
repossessions. Additionally, the Company operates an insurance agency, which
sells homeowner's insurance, credit life insurance and extended warranty
coverage to its customers. The Company also has a 51% ownership interest in a
transport company, which specializes in the transportation of manufactured and
modular homes and offices. In addition, the Company has a 50% interest in a
finance company, which specializes in providing chattel and land/home financing
to the Company's customers. The Company recently invested in a 50% owned
mortgage brokerage business to allow the Company to better control the placement
of its traditional mortgage business and to realize a portion of the net profits
relating to this business. Most recently, the Company has aligned itself with
several subdivision developments to meet an emerging market segment in its core
Southwest market region and to gain greater market share. Management believes
that its regional vertical integration strategy, which derives multiple profit
sources from each retail sale, will allow the Company to be more successful,
over time, than would otherwise be the case.
13
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
- -----------------------
The results of operations and cash flows for the three months ended
September 29, 2001, include operations prior to the Company's emergence from
Chapter 11 proceedings and the effects of Fresh-Start Reporting. As a result,
the consolidated statement of operations and consolidated statement of cash flow
for the three months ended September 27, 2002 (the "Successor Company"), are not
comparable with the statements for the three months ended September 29, 2001
(the "Predecessor Company").
In management's opinion, two significant recent events had a dampening
effect on new home sales and revenues for the three months ended September 27,
2002. The withdrawal of several retail lenders from the national market early
in calendar year 2002 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 homebuyers, who previously would have been qualified
to purchase new homes, are currently able to purchase lender repossessions but
are not currently eligible for new home financing. In addition, new Texas
legislation (HB 1869) effective January 1, 2002, now requires any land/home
package to be closed and financed in a fashion nearly identical to traditional
mortgage financing for site-constructed housing. This legislation has led to a
much longer and more complex credit approval and loan closing cycle than existed
prior to January 1, 2002. While this change will not necessarily result in a
lower overall demand for manufactured housing in Texas, it has had the effect of
increasing the sales closing and revenue recognition process from an average of
45-60 days to an average of more than 100 days. As a result, management
believes that the Company realized less revenue during the three months ended
September 27, 2002, than would have otherwise been the case without lender
withdrawal from the industry and the Texas law change. If the lending
environment remains stable, management believes that sales and revenues will
gradually improve over recent levels as its sales-in-process mature toward the
longer closing and completion cycle and as its retail sales team adjusts to
these new lender and industry dynamics. Management believes that most of the
Company's competitors in its core market region are experiencing similar market
pressures and are reducing both retail and manufacturing capacity. Management
believes that the Company is postured to take advantage of these changes because
it is reorganized and no longer distracted by the same relative leverage
positions and operational challenges as its competitors. While management
believes that market share gains will be gradual but steady, there is no
assurance that these gains will materialize.
The following table summarizes certain key sales and operating statistics
for the periods:
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 27,
2001 2002
-------------- --------------
PREDECESSOR CO. SUCCESSOR CO.
-------------- --------------
Company-manufactured new homes sold at retail:
Single section. . . . . . . . . . . . . . . 127 72
Multi-section . . . . . . . . . . . . . . . 246 213
Total new homes sold at retail. . . . . . . . . 373 285
Previously-owned homes sold at retail . . . . . 149 168
Average retail selling price - new homes (HUD
Code, excluding land):
Single section. . . . . . . . . . . . . . . $ 33,840 $ 32,590
Multi-section . . . . . . . . . . . . . . . $ 60,671 $ 59,935
Company-operated retail centers and community
sales centers at end of period. . . . . . . . 41 42
Total manufacturing shipments (homes) . . . . . 343 309
Manufacturing shipments to independent
retail sales centers (homes). . . . . . . . . 51 44
14
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table summarizes the Company's operating results, expressed
as a percentage of total revenues, for the periods indicated:
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 29, SEPTEMBER 27
2001 2002
-------------- -------------
PREDECESSOR CO. SUCCESSOR CO.
-------------- -------------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 38.7% 30.9%
Selling, general and administrative expenses
before acquisition costs . . . . . . . . . . . . . . . . . 39.2% 31.4%
Operating income . . . . . . . . . . . . . . . . . . . . . . (0.5%) (0.5%)
Income before income taxes, earnings in affiliates, minority
interest and extraordinary item. . . . . . . . . . . . . . 65.4% (1.1%)
Income before extraordinary item . . . . . . . . . . . . . . 65.7% (1.8%)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . 595.9% (1.8%)
Although the adoption of Fresh-Start Reporting significantly affected
comparability, certain Pre-and Post-reorganization period income and expense
items remain comparable and are addressed in the following analysis of results
of operations for the periods indicated.
THREE MONTHS ENDED SEPTEMBER 27, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
29, 2001
Net Sales. Net sales of manufactured homes were $18.5 million for the
three months ended September 27, 2002, compared to $21.1 million for the three
months ended September 29, 2001. The 12% decline in net sales was as a result
of decline in retail sales.
Retail sales declined $2.5 million (or 13% in both units and in dollars).
New home same store sales in the Company's core operations also declined 24%
from an average of 9 new home sales per store for the three months ended
September 29, 2001 to an average of 7 new home sales per store for the three
months ended September 27, 2002. Management believes that the new Texas law (HB
1869) and the exit of three retail lenders from the industry are major factors
in the decline of new home same store and average sales in the three months
ended September 27, 2002.
Manufacturing division sales were $2.1 million in both periods. For the
three months ended September 29, 2001, all sales were to independent dealers.
For the three months ended September 27, 2002 approximately 50% of manufacturing
division sales were to subdivision developers. The Company believes such sales
to independent dealers and subdivision developers will increase gradually over
time, aided by recent reductions of competitor capacity in the Company's
regional market area and the Company's new emphasis on subdivision developer
sales.
Other Revenues. Other revenues were $6.8 million for the three months ended
September 27, 2002, compared to $5.1 million for the three months ended
September 29, 2001. Insurance-related revenues in the Company's agency and
reinsurance operations declined approximately $1.9 million (or 69%) as a result
of Lifestar Reinsurance Ltd., ("Lifestar") which contributed approximately $2.0
million in revenues for the three months ended September 29, 2001, however,
ceasing operations in May 2002. The decline in insurance revenues was more than
offset by a $3.6 million (or 150%) increase in transportation revenues. The
Company's transportation group has expanded its operations to include commercial
transportation business (such as temporary classrooms and construction offices)
and ancillary services (such as on-site installation).
Cost of Sales. Cost of sales was $17.5 million (or 69% of revenues) for the
three months ended September 27, 2002, compared to $16.1 million (or 61% of
revenues) for the three months ended September 29, 2001. The 8%
15
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
increase as a percent of revenues in cost of sales was primarily the result of
Lifestar, which had operations in the prior year period, however, ceased
activity in May 2002. Excluding revenues generated from this operation for the
three months ended September 29, 2001 would have resulted in a cost of sales of
66% versus the reported 61% for said period.
Cost of sales for homes sold at retail, expressed as a percentage of
revenues, were unchanged for the three months ended September 27, 2002, compared
to the three months ended September 29, 2001.
Cost of sales for homes sold to independent dealers and subdivision
developers, expressed as a percentage of revenues, in the Company's
manufacturing division increased nearly 3% in the three months ended September
27, 2002, compared to the three months ended September 29, 2001. For the current
period, approximately 50% of the manufacturing sales were to new subdivision
developer customers, while all sales for the prior year period were to
independent dealer customers. Margins on subdivision units sold are lower as the
Company begins to penetrate and compete in the new subdivision developer market.
Management believes the expected increase in production volume as a result of
the new subdivision developer market will offset the negative impact to
manufacturing margins.
Cost of sales for Roadmasters, expressed as a percentage of revenues,
increased 1% in the Company's transportation operations in the three months
ended September 27, 2002, as compared to the prior year three month period,
primarily as a result of increases in contract driver pay and house set up
costs.
Selling, General and Administrative Expenses. Selling general and
administrative expenses were $8.0 million (or 31% of revenues) in the three
months ended September 27, 2002, compared to $10.3 million (or 39% of revenues)
in the three months ended September 29, 2001. The decrease is related to costs
associated with Lifestar which ceased activities in May 2002.
Interest Expense. Interest expense was $0.3 million for the three months
ended September 27, 2002, compared to $0.2 million for the three months ended
September 29, 2001. The increase was attributable to higher average interest
bearing debt levels largely offset by lower interest rates in the current
period.
Reorganization Costs. In connection with the Company's Chapter 11 filing,
reorganization costs of $1.4 million were incurred for the three months ended
September 29, 2001. These costs related primarily to professional fees and other
expenditures directly related to the Chapter 11 proceedings.
Income Taxes. Income tax expense was $0.2 million (on pretax loss of $0.3
million) for the three months ended September 27, 2002, compared to $20,000 (on
a pretax income of $17.2 million) for the three months ended September 29,
2001. Tax expense in the current period relates to taxes attributable to the
Company's transportation operation which file tax returns separate from the
Company's consolidated return. The tax expense for the three months ended
September 29, 2001 consists primarily of a valuation allowance to fully reserve
the deferred tax assets arising in prior years. The remainder of the tax
expense for the three months ended September 29, 2001 relates to the Company's
transportation and reinsurance operations as described above.
Earnings in affiliates. The Company's 50% share in the after-tax earnings
of Homestar 21, LLC was $155,000 for the three months ended September 27, 2002,
compared to $145,000 for the three months ended September 29, 2001.
Minority Interests. The Company owns 51% of its transportation operations
and therefore consolidates (or includes 100% of) the transportation company's
results in its financial statements. Because the Company only benefits by 51% of
the income, the remaining 49% is shown as a deduction on the Company's
consolidated income statement. This deduction was $145,000 for the three months
ended September 27, 2002, compared to $50,000 for the three months ended
September 29, 2001. The increased deduction for minority interests resulted from
increased profits in the current period as compared to the prior year period in
the Company's transportation operations.
16
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES:
At September 27, 2002, the Company had operating cash and cash equivalents
of $25.1 million, cash - reserved for claims of $6.0 million, and cash -
restricted of $4.3 million. The reserved cash balance was for payment of an
initial distribution to shareholders and management's estimate of cash required
to pay remaining claims under the Plan. The restricted cash represents $4.3
million held in a cash collateral account, which secures the Company's floor
plan financing through Associates Housing Financial LLC ("Associates").
Under the floor plan credit facility with Associates, although the maximum
line of credit is $38 million with various sub-limits for each category of
inventory financed, the Company estimates that the loan currently has a maximum
potential advancement of $23 to $24 million. The line is contractually
committed until October 2, 2004. The balance outstanding at September 27, 2002
was $18.3 million in revolving debt. The revolving line carries an annual
interest rate of prime plus 1%. Management believes that this floor plan credit
facility, coupled with available cash, is sufficient to meet its inventory
financing needs for the foreseeable future.
Under the Plan, the Company was required to make an initial distribution to
its new shareholders of approximately $5.3 million. A distribution of
approximately $2.1 million was made in April 2002 and approximately $3.2 million
is held in escrow for the remainder of the distribution. The Company anticipates
that the next distribution will be made in December 2002.
Also under the Plan, the Company identified certain non-core assets
(principally idle factories in non-core markets) where there are no current
intentions to reactivate these facilities for future core operations. At
September 27, 2002, management estimated the fair market value of these assets
to be approximately $5.4 million. The Company has reported these assets as
"Assets held for sale" and is actively seeking to sell or lease these
properties. Net cash proceeds, if any, resulting from the sale or lease of these
properties will be deposited in the restricted cash collateral account.
In accordance with customary business practice in the manufactured housing
industry, the Company has entered into repurchase agreements with various
financial institutions and other credit sources pursuant to which the Company
has agreed, under certain circumstances, to repurchase manufactured homes sold
to independent dealers in the event of a default by such independent dealer on
their obligation to such credit sources. Under the terms of such repurchase
agreements, the Company agrees to repurchase manufactured homes at declining
prices over the periods of the agreements (which generally range from 18 to 24
months). While repurchase activity is very sporadic and cyclical, the Company
provides for anticipated repurchase losses. At September 27, 2002, the Company
was at risk to repurchase approximately $2.4 million of manufactured homes and
has provided for estimated net repurchase losses of approximately $180,000.
The Company believes that its current cash position, along with its floor
plan facility, and expected cash flow from operations will be sufficient to
support the Company's cash and working capital requirements for the foreseeable
future.
INFLATION AND SEASONALITY
Inflation in recent years has been modest and has primarily affected the
Company's manufacturing costs in the areas of labor, manufacturing overhead and
raw materials other than lumber. The price of lumber is affected more by the
imbalances between supply and demand than by inflation. Historically, the
Company believes it has been able to minimize the effects of inflation by
increasing the selling prices of its products, improving its manufacturing
efficiency and increasing its employee productivity. In addition, the Company's
business is seasonal, with weakest demand typically from mid-November through
February and the strongest demand typically from March through mid-November.
Over the history of the Company's operations, management has not observed any
correlation between interest rate fluctuations and increases or decreases in
sales based solely on such fluctuations.
17
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in interest
rates on its variable rate debt, which consists of its liability for floor plan
of manufactured housing retail inventories and a bank line of credit in its
transportation company. The Company does not use interest rate swaps, futures
contracts or options on futures, or other types of derivative financial
instruments.
For fixed rate debt, changes in interest rates generally affect the fair
market value, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence fair market value,
but do affect future earnings and cash flows. The Company does not have an
obligation to prepay fixed rate debt prior to maturity, and as a result,
interest rate risk and changes in fair market value should not have a
significant impact on such debt until the Company would be required to refinance
it. Based on the current level of variable rate debt, each one percentage point
increase (decrease) in interest rates occurring on the first day of the year
would result in an increase in interest expense for the coming year of
approximately $0.2 million.
The Company's financial instruments are not currently subject to foreign
currency risk or commodity price risk. The Company does not believe that future
market interest rate risks related to its marketable investments or debt
obligations will have a material impact on the Company or the results of its
future operations.
The Company has no financial instruments held for trading purposes. The
Company originates loans through its 50% owned affiliate Homestar 21, most of
which are at fixed rates of interest, in the ordinary course of business and
periodically securitizes them to obtain permanent financing for such loan
originations. Accordingly, Homestar 21 loans held for sale are exposed to risk
from changes in interest rates between the time loans are originated and the
time at which Homestar 21 obtains permanent financing, generally at fixed rates
of interest, in the asset-backed securities market. Homestar 21 attempts to
manage this risk by minimizing the warehousing period of unsecuritized loans.
Homestar 21 currently does not originate any loans with the intention of holding
them for investment.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings. There have been no significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of the Company's most recent evaluation.
18
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) REPORTS ON FORM 8-K
None.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOMESTAR CORPORATION
Date: October 31, 2002 By: /s/ Craig A. Reynolds
-----------------------------------
Craig A. Reynolds
Executive Vice President, Chief
Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
20
CERTIFICATIONS
I, Finis F. Teeter, certify that:
- --------------------------------------
1. I have reviewed this quarterly report on Form 10-Q of American
Homestar Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions and about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 31, 2002
/s/ Finis F. Teeter
-----------------------------------
Finis F. Teeter
President, Chief Executive Officer and
Director (Principal Executive Officer)
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I, Craig A. Reynolds, certify that:
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1. I have reviewed this quarterly report on Form 10-Q of American
Homestar Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions and about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
.
Date: October 31, 2002
/s/ Craig A. Reynolds
----------------------------------
Craig A. Reynolds
Executive Vice-President, Chief Financial
Officer and Secretary
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
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EX. NO. DESCRIPTION
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99.1 Management's certifications required pursuant to Sec. 906 of the
Sarbanes-Oxley Act of 2002.
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