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 March 28, 2003
[ ] 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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 May 2, 2003 the registrant had 100 shares of Series M Common Stock, par
value $.01 per share, and 4,869,250 shares of Series C Common Stock, par value
$.01 per share, issued and outstanding, and 5,130,750 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 set
forth under the Third Amended Joint Plan of Reorganization is completed.
PART I - FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - June 28, 2002 and March 28, 2003 . . .3
Consolidated Statements of Operations - three months ended
March 29, 2002 and March 28, 2003. . . . . . . . . . . . . . . . .4
Consolidated Statements of Operations - three months ended
September 29, 2001, six months ended March 29, 2002 and
nine months ended March 28, 2003 . . . . . . . . . . . . . . . . .5
Consolidated Statements of Cash Flows - three months ended
September 29, 2001, six months ended March 29, 2002 and
nine months ended March 28, 2003 . . . . . . . . . . . . . . . . .6
Notes to Consolidated Financial Statements . . . . . . . . . . . . .7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . 25
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . 25
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 26
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 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 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 March 28, 2003, the Company 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. 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 March 28, 2003, and 4,999,900 shares
underlie options authorized under the Company's 2001 Management Incentive
Program. As of March 28, 2003, options for 4,864,900 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 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 the Company's 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, which do not take into account the effects of
Fresh-Start Reporting (the Company being referred to herein as "Predecessor
Company" for periods prior to September 29, 2001). The results of operations and
cash flows for the six months ended March 29, 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
"Successor Company" for periods subsequent to September 29, 2001). As a result,
the results of operations and cash flows for the nine months ended March 28,
2003 for the Successor Company are not comparable to the results of operations
and cash flows for the nine months ended March 29, 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 six months of Successor
Company operations and cash flows, which do reflect the effects of Fresh-Start
Reporting.
2
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
JUNE 28, MARCH 28,
2002 2003
(UNAUDITED)
-------------- --------------
SUCCESSOR CO. SUCCESSOR CO.
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 32,250 $ 16,761
Cash - reserved for claims. . . . . . . . . . . . . . . . . . . . . . 6,244 5,029
Cash - restricted . . . . . . . . . . . . . . . . . . . . . . . . . . 4,190 4,570
Accounts receivable - trade, net. . . . . . . . . . . . . . . . . . . 2,692 2,893
Accounts receivable - other, net. . . . . . . . . . . . . . . . . . . 287 200
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,006 29,189
Prepaid expenses, notes receivable and other current assets . . . . . 792 1,050
-------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . 73,461 59,692
-------------- --------------
Notes receivable and other assets . . . . . . . . . . . . . . . . . . 555 654
Investments in affiliates, at equity. . . . . . . . . . . . . . . . . 3,205 3,363
Property, plant and equipment, net. . . . . . . . . . . . . . . . . . 10,149 9,876
Assets held for sale. . . . . . . . . . . . . . . . . . . . . . . . . 5,379 5,404
-------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,749 $ 78,989
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan payable. . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,689 $ 13,908
Current installments of notes payable . . . . . . . . . . . . . . . . 370 162
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,315 1,314
Warranty reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,818 1,693
Accrued other liabilities . . . . . . . . . . . . . . . . . . . . . . 7,265 4,670
Liquidation and plan reserve. . . . . . . . . . . . . . . . . . . . . 3,626 2,794
Claims reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,067 2,354
Initial distribution payable. . . . . . . . . . . . . . . . . . . . . 3,177 2,675
-------------- --------------
Total current liabilities 41,327 29,570
-------------- --------------
Notes payable, less current installments. . . . . . . . . . . . . . . 644 524
Minority interest in consolidated subsidiary. . . . . . . . . . . . . 965 1,161
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 March 28, 2003. . . . . . . . . . . . . . . . . . . . . . . . . 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 -- --
March 28, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . 48,449 48,449
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 1,264 (815)
-------------- --------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . 49,813 47,734
-------------- --------------
Total liabilities and shareholders' equity. . . . . . . . . . . . $ 92,749 $ 78,989
============== ==============
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
MARCH 29, MARCH 28,
2002 2003
(UNAUDITED) (UNAUDITED)
--------------- --------------
SUCCESSOR CO. SUCCESSOR CO.
--------------- --------------
Revenues:
Net sales . . . . . . . . . . . . . . . . . . $ 19,122 $ 18,579
Other revenues. . . . . . . . . . . . . . . . 6,255 4,270
--------------- --------------
Total revenues. . . . . . . . . . . . . . . 25,377 22,849
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . 15,471 15,988
Selling, general and administrative . . . . . 9,795 7,242
--------------- --------------
Total costs and expenses. . . . . . . . . . 25,266 23,230
--------------- --------------
Operating income (loss) . . . . . . . . . . 111 (381)
Interest expense. . . . . . . . . . . . . . . . 235 221
Other income. . . . . . . . . . . . . . . . . . 24 68
--------------- --------------
Income (loss) before items shown below. . . (100) (534)
Reorganization items:
Fresh-Start adjustments . . . . . . . . . . . -- --
Reorganization costs. . . . . . . . . . . . . -- --
--------------- --------------
Income (loss) before items shown below. . . (100) (534)
Income tax expense. . . . . . . . . . . . . . 72 19
--------------- --------------
Income (loss) before items shown below. . . (172) (553)
Earnings in affiliates. . . . . . . . . . . . . 125 120
Minority interests. . . . . . . . . . . . . . . (57) (22)
--------------- --------------
Income (loss) before items shown below. . . (104) (455)
Extraordinary item:
Gain on forgiveness of debt . . . . . . . . -- --
--------------- --------------
Net income (loss) . . . . . . . . . . . . . . . $ (104) $ (455)
=============== ==============
Earnings (loss) per share - basic and diluted:
Income (loss) . . . . . . . . . . . . . . . . $ (0.01) $ (0.05)
=============== ==============
Weighted average shares
Outstanding - basic and diluted . . . . . . . 10,000,100 10,000,100
=============== ==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 29, MARCH 29, MARCH 28,
2001 2002 2003
(UNAUDITED) (UNAUDITED)
--------------- --------------- -------------
PREDECESSOR CO. SUCCESSOR CO. SUCCESSOR CO.
--------------- --------------- -------------
Revenues:
Net sales . . . . . . . . . . . . . . . . . . $ 21,107 $ 42,515 $ 53,823
Other revenues. . . . . . . . . . . . . . . . 5,137 11,919 15,523
--------------- --------------- -------------
Total revenues. . . . . . . . . . . . . . . 26,244 54,434 69,346
Costs and expenses:
Cost of sales 16,086 33,400 48,245
Selling, general and administrative . . . . . 10,290 19,837 22,659
--------------- --------------- -------------
Total costs and expenses. . . . . . . . . . 26,376 53,237 70,904
--------------- --------------- -------------
Operating income (loss) . . . . . . . . . . (132) 1,197 (1,558)
Interest expense. . . . . . . . . . . . . . . . 214 511 778
Other income. . . . . . . . . . . . . . . . . . 88 95 310
--------------- --------------- -------------
Income (loss) before items shown below. . . (258) 781 (2,026)
Reorganization items:
Fresh-Start adjustments . . . . . . . . . . . 18,863 -- --
Reorganization costs. . . . . . . . . . . . . (1,433) -- --
--------------- --------------- -------------
Income (loss) before items shown below. . . 17,172 781 (2,026)
Income tax expense. . . . . . . . . . . . . . 20 72 236
--------------- --------------- -------------
Income (loss) before items shown below. . . 17,152 709 (2,262)
Earnings in affiliates. . . . . . . . . . . . . 145 255 379
Minority interests. . . . . . . . . . . . . . . (50) (87) (196)
--------------- --------------- -------------
Income (loss) before items shown below. . . 17,247 877 (2,079)
Extraordinary item:
Gain on forgiveness of debt . . . . . . . . 139,130 -- --
--------------- --------------- -------------
Net income (loss) . . . . . . . . . . . . . . . $ 156,377 $ 877 $ (2,079)
=============== =============== =============
Earnings (loss) per share - basic and diluted:
Income (loss) . . . . . . . . . . . . . . . . N/A $ 0.09 $ (0.21)
=============== =============== =============
Weighted average shares
Outstanding - basic and diluted . . . . . . . N/A 10,000,100 10,000,100
=============== =============== =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 29, MARCH 29, MARCH 28,
2001 2002 2003
(UNAUDITED) (UNAUDITED)
--------------- --------------- -------------
PREDECESSOR CO. SUCCESSOR CO. SUCCESSOR CO.
--------------- --------------- -------------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ 156,377 $ 877 $ (2,079)
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) -- --
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . -- -- (5)
Depreciation and amortization. . . . . . . . . . . . . . . . . . . 748 303 482
Minority interests in income of consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . 50 87 196
Earnings in affiliates . . . . . . . . . . . . . . . . . . . . . . (145) (255) (379)
Change in assets and liabilities:
Change in receivables. . . . . . . . . . . . . . . . . . . . . . 1,396 (684) (114)
Change in inventories. . . . . . . . . . . . . . . . . . . . . . 584 (3,118) (2,183)
Change in prepaid expenses, notes receivable and
other current assets . . . . . . . . . . . . . . . . . . . . . 903 755 (258)
Changes in notes receivable and other assets . . . . . . . . . . (95) 227 (99)
Change in accounts payable . . . . . . . . . . . . . . . . . . . (2,216) (413) (1)
Change in accrued expenses and other liabilities . . . . . . . . 1,527 (2,833) (3,552)
Payment of Plan obligations. . . . . . . . . . . . . . . . . . . -- (441) (1,215)
--------------- --------------- -------------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . . . . . . . 1,136 (5,495) (9,207)
--------------- --------------- -------------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment. . . . . . . . . -- -- 79
Purchases of property, plant and equipment . . . . . . . . . . . . . (76) (114) (308)
Dividend from unconsolidated affiliate . . . . . . . . . . . . . . . -- 272 221
--------------- --------------- -------------
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . . . . . . . . . (76) 158 (8)
--------------- --------------- -------------
Cash flows from financing activities:
Borrowings under floor plan payable. . . . . . . . . . . . . . . . . 9,368 20,019 8,104
Repayments of floor plan payable . . . . . . . . . . . . . . . . . . (12,843) (18,891) (14,885)
Proceeds from long-term debt borrowings. . . . . . . . . . . . . . . 214 -- --
Principal payments of long-term debt . . . . . . . . . . . . . . . . (99) (181) (328)
Change in restricted cash. . . . . . . . . . . . . . . . . . . . . . (4,563) 2,457 835
--------------- --------------- -------------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . . . . . . (7,923) 3,404 (6,274)
--------------- --------------- -------------
Net decease in cash and cash equivalents . . . . . . . . . . . . . . . (6,863) (1,933) (15,489)
Cash and cash equivalents at beginning of period . . . . . . . . . . . 22,177 15,314 32,250
--------------- --------------- -------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 15,314 $ 13,381 $ 16,761
=============== =============== =============
Supplemental Cash Flow Information
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . $ 25 $ -- $ 310
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 533 761
=============== =============== =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
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 33 retail sales centers and three sales centers in
manufacturing housing communities, along with a marketing presence (displaying
model homes and spec homes with no sales center) in approximately 30
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. In May 2002, the Company acquired a 50% ownership
interest in a formation stage 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 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, which do not take into account
the effects of Fresh-Start Reporting (the Company being referred to herein as
"Predecessor Company" for periods prior to September 29, 2001). The results of
operations and cash flows for the six months ended March 29, 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 "Successor Company" for periods subsequent to September
29, 2001). As a result, the results of operations and cash flows for the nine
months ended March 28, 2003 for the Successor Company is not comparable with the
results of operations and cash flows for the nine months ended March 29, 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
six months of Successor Company operations and cash flows, which do reflect the
effects of Fresh-Start Reporting.
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
7
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
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. Certain amounts previously
reported have been reclassed to conform with the 2003 presentation. Because of
the seasonal nature of the Company's business, operating results for the nine
months ended March 28, 2003, 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.
8
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 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 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 three and nine month periods ended March 29, 2002, but not in
the three and nine month periods ended March 28, 2003.
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.
9
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
ultimately show 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 March 28, 2003 and June 28, 2002,
the Company was at risk to repurchase up to $1.2 million and $2.9 million of
manufactured homes and provided for estimated net repurchase losses of
approximately $0.2 million and $0.2 million, respectively.
(4) INVENTORIES
A summary of inventories follows (in thousands):
JUNE 28, MARCH 28,
2002 2003
--------- ----------
Manufactured homes:
New . . . . . . . . . . . . . . . . . . . . . . . $ 22,987 $ 22,466
Used. . . . . . . . . . . . . . . . . . . . . . . 1,995 2,648
Furniture, supplies and homesites . . . . . . . . . 468 2,081
Raw materials and work-in-process . . . . . . . . . 1,556 1,994
--------- ----------
$ 27,006 $ 29,189
========= ==========
10
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(5) INVESTMENTS IN AFFILIATED COMPANIES
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, MARCH 28,
2002 2003
-------------- --------------
Total assets. . . . . . . . . . . . . . . $ 17,494 $ 6,809
============== ==============
Total liabilities . . . . . . . . . . . . $ 11,147 $ 192
Owners' equity. . . . . . . . . . . . . . $ 6,347 $ 6,617
============== ==============
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 29, MARCH 28,
2002 2003
-------------- --------------
SUCCESSOR CO. SUCCESSOR CO.
-------------- --------------
Total revenues. . . . . . . . . . . . . . $ 655 $ 631
Net income. . . . . . . . . . . . . . . . $ 251 $ 228
============== ==============
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 29, MARCH 29, MARCH 28,
2001 2002 2003
-------------- -------------- --------------
PREDECESSOR CO. SUCCESSOR CO. SUCCESSOR CO.
-------------- -------------- --------------
Total revenues. . . . . . $ 892 $ 1,306 $ 2,528
Net income. . . . . . . . $ 290 $ 510 $ 714
============== ============== ==============
11
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 obtained its
license and regulatory approval on October 8, 2002 and began operations in
November 2002. The Company accounts for its investment in Homestar Mortgage
using the equity method. Summary of unaudited financial information for Homestar
Mortgage as of and for the period indicated, is as follows (in thousands):
JUNE 28, MARCH 28,
2002 2003
-------------- --------------
Total assets. . . . . . . . . . . . . . . $ 63 $ 141
============== ==============
Total liabilities . . . . . . . . . . . . $ -- $ 34
Owners' equity. . . . . . . . . . . . . . $ 63 $ 107
============== ==============
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 29, MARCH 28,
2002 2003
-------------- --------------
PREDECESSOR CO. SUCCESSOR CO.
-------------- --------------
Total revenues. . . . . . . . . . . . . . $ -- $ 140
Net income. . . . . . . . . . . . . . . . $ -- $ 11
============== ==============
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 29, MARCH 29, MARCH 28,
2001 2002 2003
-------------- -------------- --------------
PREDECESSOR CO. SUCCESSOR CO. SUCCESSOR CO.
-------------- -------------- --------------
Total revenues. . . . . . $ -- $ -- $ 224
Net income. . . . . . . . $ -- $ -- $ 44
============== ============== ==============
(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 March 28, 2003 was $13.9 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
$4.6 million at March 28, 2003 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 March 28, 2003 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 8.00% to 10.00%. None of these notes payable
has covenant requirements.
12
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(7) SHAREHOLDERS' EQUITY AND 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 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 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 March 28, 2003, the Company 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. 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 March 28, 2003 and 4,999,900 shares
underlie options authorized under the Company's 2001 Management Incentive
Program. As of March 28, 2003, options for 4,864,900 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.
The Company applies APB Opinion 25 and related Interpretations in
accounting for stock options. In compliance with SFAS No. 123, the Company has
elected to provide the pro forma disclosure. As such, the Company's net income
and earnings per share for nine months ended March 28, 2003 adjusted to reflect
pro forma amounts are indicated below:
NINE MONTHS
ENDED
MARCH 28, 2003
----------------
Net income
As reported. . . . . . . . . . . . . . . . . . . . $ (2,079)
Pro forma. . . . . . . . . . . . . . . . . . . . . $ (2,189)
Earnings per share
As reported. . . . . . . . . . . . . . . . . . . . $ (0.21)
Pro forma. . . . . . . . . . . . . . . . . . . . . $ (0.22)
The fair value of stock options granted in 2002 was estimated on the date
of grant using the "minimum value" method as the stock was not trading as of
August 16, 2002. The weighted average fair values and related assumptions were:
NINE MONTHS
ENDED
MARCH 28, 2003
----------------
Weighted average fair value. . . . . . . . . . . . . $ 1.35
Market interest rate . . . . . . . . . . . . . . . . $ 4.35%
13
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):
QUARTER COMPARISON:
ADJUSTMENTS/
RETAIL MANUFACTURING CORPORATE ELIMINATIONS TOTAL
---------------------------------------------------------------------
SUCCESSOR COMPANY
---------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 29, 2002
Revenues from external customers $ 17,431 $ 1,691 $ 6,255 $ -- $25,377
Intersegment revenues. . . . . . -- 11,389 -- (11,389) --
Interest expense . . . . . . . . 235 -- -- -- 235
Depreciation . . . . . . . . . . 78 61 9 -- 148
Segment profit (loss) before
income taxes and earnings in
affiliates . . . . . . . . . (12) 746 (557) (277) (100)
Segment assets . . . . . . . . . 36,211 28,980 57,051 (29,041) 93,201
Expenditures for segment assets. 63 6 2 -- 71
ADJUSTMENTS/
RETAIL MANUFACTURING CORPORATE ELIMINATIONS TOTAL
---------------------------------------------------------------------
SUCCESSOR COMPANY
---------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 28, 2003
Revenues from external customers $ 14,428 $ 3,732 $ 4,689 $ -- $22,849
Intersegment revenues. . . . . . -- 7,065 -- (7,065) --
Interest expense . . . . . . . . 221 -- -- -- 221
Depreciation . . . . . . . . . . 73 61 27 -- 161
Segment profit (loss) before
income taxes and earnings in
affiliates . . . . . . . . . (540) 781 (789) 14 (534)
Segment assets . . . . . . . . . 27,852 28,971 54,508 (32,342) 78,989
Expenditures for segment assets. 45 18 10 -- 73
14
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
YEAR TO DATE COMPARISON:
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
---------------------------------------------------------------------
SIX MONTHS ENDED
MARCH 29, 2002
Revenues from external customers $ 38,071 $ 4,444 $ 11,919 $ -- $54,434
Intersegment revenues. . . . . . -- 22,118 -- (22,118) --
Interest expense . . . . . . . . 511 -- -- -- 511
Depreciation . . . . . . . . . . 137 121 45 -- 303
Segment profit (loss) before
income taxes and earnings in
affiliates . . . . . . . . . 345 1,878 (881) (561) 781
Segment assets . . . . . . . . . 36,211 28,980 57,051 (29,041) 93,201
Expenditures for segment assets. 71 6 37 -- 114
ADJUSTMENTS/
RETAIL MANUFACTURING CORPORATE ELIMINATIONS TOTAL
---------------------------------------------------------------------
SUCCESSOR COMPANY
---------------------------------------------------------------------
NINE MONTHS ENDED
MARCH 28, 2003
Revenues from external customers $ 44,446 $ 8,544 $ 16,356 $ -- $69,346
Intersegment revenues. . . . . . -- 22,586 -- (22,586) --
Interest expense . . . . . . . . 778 -- -- -- 778
Depreciation . . . . . . . . . . 221 183 78 -- 482
Segment profit (loss) before
income taxes and earnings in
affiliates . . . . . . . . . (2,371) 2,241 (1,771) (125) (2,026)
Segment assets . . . . . . . . . 27,852 28,971 54,508 (32,342) 78,989
Expenditures for segment assets. 147 23 138 -- 308
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 operations.
15
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. 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.
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 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.
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 33 retail sales centers and three sales centers in
manufactured housing communities, along with a marketing presence (displaying
model homes and spec homes with no sales center) in approximately 30
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. In May 2002, the Company acquired a 50% ownership
interest in a formation stage mortgage brokerage business to allow the Company
to better control the placement of the Company's 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.
16
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, which do not take into account the effects of
Fresh-Start Reporting, (the Company being referred herein to as "Predecessor
Company" for periods prior to September 29, 2001). The results of operations and
cash flows for the six months ended March 29, 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
"Successor Company" for periods subsequent to September 29, 2001). As a result,
the results of operations and cash flows for the nine months ended March 28,
2003 for the Successor Company are not comparable to the results of operations
and cash flows for the nine months ended March 29, 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 six months of Successor
Company operations and cash flows, which do reflect the effects of Fresh-Start
Reporting.
In management's opinion, two significant recent events had a dampening
effect on new home sales and revenues for the nine months ended March 28, 2003.
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 nine months ended
March 28, 2003, than would have otherwise been the case without the combined
effect caused by 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.
17
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table summarizes certain key sales and operating statistics
for the periods:
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 29, MARCH 28,
2002 2003
-------------- ------------
SUCCESSOR CO. SUCCESSOR CO.
-------------- ------------
Company-manufactured new homes sold at retail:
Single section. . . . . . . . . . . . . . . 78 47
Multi-section . . . . . . . . . . . . . . . 218 196
Total new homes sold at retail. . . . . . . . . 296 243
Previously-owned homes sold at retail . . . . . 116 42
Average retail selling price - new homes (HUD
Code, excluding land):
Single section. . . . . . . . . . . . . . . $ 33,344 $ 32,339
Multi-section . . . . . . . . . . . . . . . $ 60,316 $ 63,798
Company-operated retail centers and community
sales centers at end of period. . . . . . . . 41 36
Total manufacturing shipments (homes) . . . . . 402 334
Manufacturing shipments to independent
retail sales centers and developers (homes) . 40 122
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 29, MARCH 29, MARCH 28,
2001 2002 2003
-------------- -------------- ------------
PREDECESSOR CO. SUCCESSOR CO. SUCCESSOR CO.
-------------- -------------- ------------
Company-manufactured new homes sold at retail:
Single section. . . . . . . . . . . . . . . 127 193 171
Multi-section . . . . . . . . . . . . . . . 246 460 594
Total new homes sold at retail. . . . . . . . . 373 653 765
Previously-owned homes sold at retail . . . . . 149 227 167
Average retail selling price - new homes (HUD
Code, excluding land):
Single section. . . . . . . . . . . . . . . $ 33,840 $ 33,591 $ 32,533
Multi-section . . . . . . . . . . . . . . . $ 60,671 $ 62,567 $ 61,518
Company-operated retail centers and community
sales centers at end of period. . . . . . . . 41 41 36
Total manufacturing shipments (homes) . . . . . 343 813 928
Manufacturing shipments to independent
retail sales centers and developers (homes) . 51 117 246
18
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
MARCH 29, MARCH 28,
2002 2003
SUCCESSOR CO. SUCCESSOR CO.
-------------- -------------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.0% 30.0%
Selling, general and administrative expenses
before acquisition costs . . . . . . . . . . . . . . . . . . . . 38.6% 31.7%
Operating income (loss). . . . . . . . . . . . . . . . . . . . . . . 0.4% (1.7%)
Income (loss) before income taxes, earnings in affiliates, minority
interest and extraordinary item. . . . . . . . . . . . . . . . . (0.7%) (2.3%)
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . (0.4%) (2.0%)
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 29, MARCH 29, MARCH 28,
2001 2002 2003
PREDECESSOR CO. SUCCESSOR CO. SUCCESSOR CO.
-------------- -------------- -------------
Total revenues . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Gross profit . . . . . . . . . . . . . . . . . . . . 38.7% 38.6% 30.4%
Selling, general and administrative expenses
before acquisition costs . . . . . . . . . . . . 39.2% 36.4% 32.7%
Operating income (loss). . . . . . . . . . . . . . . (0.5%) 2.2% (2.2%)
Income (loss) before income taxes, earnings in
affiliates, minority interest and extraordinary
item . . . . . . . . . . . . . . . . . . . . . . 65.4% 1.3% (2.9%)
Income before extraordinary item . . . . . . . . . . 65.7% 1.6% (3.0%)
Net income (loss). . . . . . . . . . . . . . . . . . 595.9% 1.6% (3.0%)
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 MARCH 28, 2003 COMPARED TO THREE MONTHS ENDED MARCH 29, 2002
Net Sales. Net sales of manufactured homes were $18.6 million for the
three months ended March 28, 2003, compared to $19.1 million for the three
months ended March 29, 2002. The 2.8% decline in net sales was principally as a
result of a decline in retail sales, generally consistent with an overall
decline in new home sales in Texas and was partially offset by an increase in
manufacturing wholesale shipments to independent dealers and developers.
Retail sales declined $3.0 million (or 17.9% in units and 17.2% in
dollars). New home same store sales in the Company's core operations also
declined 25% from an average of eight new home sales per store for the three
months ended March 29, 2002 to an average of six new home sales per store for
the three months ended March 28, 2003. 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 March 28, 2003.
19
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Manufacturing division sales were $3.7 million for the three month period
ended March 28, 2003 compared to $1.7 million for the three month period ended
March 29, 2002. For the three months ended March 29, 2002, substantially all
sales were to independent dealers. For the three months ended March 28, 2003
approximately 87% of manufacturing division shipments were to subdivision
developers. The Company believes such sales to independent dealers and
especially to 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 recent emphasis on subdivision developer relationships and
sales.
Roadmasters, the Company's transportation division, recorded manufactured
homes sales of $0.4 million for the three months ended March 28, 2003. These
sales resulted from a bargain purchase of distressed manufactured home inventory
and, the nearly concurrent sale of the inventory to an existing Roadmasters'
customer.
Other Revenues. Other revenues were $4.3 million for the three months ended
March 28, 2003, compared to $6.3 million for the three months ended March 29,
2002. Insurance-related revenues in the Company's agency and reinsurance
operations declined approximately $1.7 million (or 69%) as a result of Lifestar
Reinsurance Ltd., ("Lifestar"), which contributed approximately $1.7 million in
revenues for the three months ended March 29, 2002, but ceased operations in May
2002. Transportation operations revenues declined $0.3 million also as a result
of a decline in manufactured housing industry production and sales activity.
Cost of Sales. Cost of sales was $16.0 million (or 70% of revenues) for the
three months ended March 28, 2003, compared to $15.5 million (or 61% of
revenues) for the three months ended March 29, 2002. The 9% increase as a
percent of revenues in cost of sales was primarily attributable to Lifestar,
which had operations in the prior year period, but ceased activity in May 2002.
Excluding Lifestar revenues for the three months ended March 29, 2002 would have
resulted in a cost of sales of 65% versus the 61% reported for said period.
Cost of sales for homes sold at retail, expressed as a percentage of retail
revenues, increased 5.0% for the three months ended March 28, 2003, compared to
the three months ended March 29, 2002. Cost of sales in the three months ended
March 29, 2002 were lower as a result of a higher proportionate sales of
discounted inventory (both new and used), which the Company was able to purchase
on the open market as well as from its secured lender as a part of the Company's
reorganization.
Cost of sales for homes sold to independent dealers and subdivision
developers, expressed as a percentage of amnufacturing revenues, in the
Company's manufacturing division decreased 2% in the three months ended March
28, 2003, compared to the three months ended March 29, 2002, primarily as a
result of a reduction in material costs.
Cost of sales for the Company's transportation operations, expressed as a
percentage of transportation revenues, were unchanged in the three months ended
March 28, 2003, as compared to the prior year three month period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $7.2 million (or 32% of revenues) in the three
months ended March 28, 2003, compared to $9.8 million (or 39% of revenues) in
the three months ended March 29, 2002. The decrease in dollars is related to
selling, general and administrative expenses associated with Lifestar (which
ceased activities in May 2002) as well as a decrease in variable selling
expenses resulting from lower retail sales.
Interest Expense. Interest expense was unchanged at $0.2 million for both
the three months ended March 28, 2003 and the three months ended March 29, 2002.
Income Taxes. Income tax expense was $0.02 million (on pretax loss of $0.5
million) for the three months ended March 28, 2003, compared to $0.07 million
(on a pretax loss of $0.1 million) for the three months ended March 29, 2002.
Tax expense in both periods relates to taxes attributable to the Company's
transportation operation, which files tax returns separate from the Company's
consolidated return.
Earnings in affiliates. The Company's 50% share in the after-tax earnings
of Homestar 21, LLC and American Homestar Mortgage, L.P. were $114,000 and
$6,000, respectively, for the three months ended March 28, 2003,
20
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
compared to $125,000 for the three months ended March 29, 2002, all from
Homestar 21, as American Homestar Mortgage did not begin operations until
November 2002.
Minority Interests. The Company owns 51% of its transportation operations
and therefore consolidates (or includes 100% of) the transportation company's
results in the Company's 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 $22,000 for the
three months ended March 28, 2003, compared to $57,000 for the three months
ended March 29, 2002. 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.
SIX MONTHS ENDED MARCH 28, 2003 COMPARED TO SIX MONTHS ENDED MARCH 29, 2002
Net Sales. Net sales of manufactured homes were $34.5 million for the six
months ended March 28, 2003, compared to $42.5 million for the six months ended
March 29, 2002. The 19% decline in net sales was principally as a result of a
decline in retail sales, generally consistent with the overall decline in new
home sales in Texas and was partially offset by an increase in manufacturing
wholesale shipments to independent dealers and developers.
Retail sales declined $10 million (or 31% in units and 27% in dollars). New
home same store sales in the Company's core operations also declined 29% from an
average of 17 new home sales per store for the six months ended March 29, 2002
to an average of 12 new home sales per store for the six months ended March 28,
2003. 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 six months ended March 28, 2003.
Manufacturing division sales were $6.5 million in the six months period
ended March 28, 2003 compared to $4.4 million in the six month period ended
March 29, 2002. For the six months ended March 29, 2002, substantially all sales
were to independent dealers. For the six months ended March 28, 2003
approximately 82% of manufacturing division shipments were to subdivision
developers. The Company believes such sales to independent dealers and
especially to 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 recent emphasis on subdivision developer relationships and
sales.
Roadmasters, the Company's transportation division, recorded manufactured
homes sales of $0.8 million for the six month period ended March 28, 2003. These
sales resulted from a bargain purchase of distressed manufactured home inventory
and, the nearly concurrent sale of the inventory to an existing Roadmasters'
customer.
Other Revenues. Other revenues were $8.7 million for the six months ended
March 28, 2003, compared to $11.9 million for the six months ended March 29,
2002. Insurance-related revenues in the Company's agency and reinsurance
operations declined approximately $3.7 million (or 70%) as a result of Lifestar
Reinsurance Ltd. ("Lifestar"), which contributed approximately $3.6 million in
revenues for the six months ended March 29, 2002, but ceased operations in May
2002. The decline in insurance revenues was partially offset by a $0.4 million
(or 6%) increase in transportation revenues.
Cost of Sales. Cost of sales was $30.7 million (or 70% of revenues) for the
six months ended March 28, 2003, compared to $33.4 million (or 61% of revenues)
for the six months ended March 29, 2002. The 9% increase as a percent of
revenues in cost of sales was primarily attributable to Lifestar, which had
operations in the prior year period, but ceased activity in May 2002. Excluding
Lifestar revenues generated from this operation for the six months ended March
29, 2002 would have resulted in a cost of sales of 66% versus the 61% reported
for said period.
Cost of sales for homes sold at retail, expressed as a percentage of retail
revenues, increased 3% for the six months ended March 28, 2003, compared to the
six months ended March 29, 2002. Cost of sales in the six months ended March
29, 2002 were lower as a result of a higher proportionate sales of discounted
inventory (both new and used), which the Company was able to purchase on the
open market as well as from its secured lender as a part of the Company's
reorganization.
21
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cost of sales for homes sold to independent dealers and subdivision
developers, expressed as a percentage of manufacturing revenues, in the
Company's manufacturing division decreased 1% in the six months ended March 28,
2003, compared to the six months ended March 29, 2002, primarily as a result of
a reduction in material costs.
Cost of sales for the Company's transportation operations, expressed as a
percentage of transportation revenues, decreased 1% in the six months ended
March 28, 2003, as compared to the prior year six month period primarily as a
result of decreases in contract driver pay as a percent of revenues.
Selling, General and Administrative Expenses. Selling general and
administrative expenses were $14.7 million (or 33% of revenues) in the six
months ended March 28, 2003, compared to $19.8 million (or 36% of revenues) in
the six months ended March 29, 2002. The decrease is related to costs associated
with Lifestar, which ceased activities in May 2002.
Interest Expense. Interest expense was $0.5 million for both the six months
ended March 28, 2003 and for the six months ended March 29, 2002.
Reorganization Costs. In connection with the Company's Chapter 11 filing,
reorganization costs of $1.4 million were incurred during the three months ended
September 29, 2001. These costs related primarily to professional fees and other
expenditures directly related to the Chapter 11 proceedings. There were no
reorganization costs for the six month period ended March 29, 2002 or the six
month period ended March 28, 2003.
Income Taxes. Income tax expense was $0.05 million (on pretax loss of $1.7
million) for the six months ended March 28, 2003, compared to $0.07 million (on
a pretax income of $0.8 million) for the six months ended March 29, 2002. Tax
expense in both periods relates to taxes attributable to the Company's
transportation operation, which files tax returns separate from the Company's
consolidated return.
Earnings in affiliates. The Company's 50% share in the after-tax earnings
of Homestar 21, LLC and American Homestar Mortgage, L.P. were $202,000 and
$22,000, respectively for the six months ended March 28, 2003, compared to
$255,000 for the six months ended March 29, 2002, all from Homestar 21, as
American Homestar Mortgage did not begin operations until November 2002.
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 $51,000 for the six months
ended March 28, 2003, compared to $87,000 for the six months ended March 29,
2002. 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.
NINE MONTHS ENDED MARCH 28, 2003 COMPARED TO NINE MONTHS ENDED MARCH 29, 2002
Net Sales. Net sales of manufactured homes were $53.8 million for the nine
months ended March 28, 2003, compared to $63.6 million for the nine months ended
March 29, 2002. The 15% decline in net sales was principally as a result of a
decline in retail sales, generally consistent with the overall decline in new
home sales in Texas and was partially offset by an increase in manufacturing
wholesale shipments to independent dealers and developers.
Retail sales declined $12.6 million (or 25% in units and 22% in dollars).
New home same store sales in the Company's core operations also declined 23%
from an average of 26 new home sales per store for the nine months ended March
29, 2002 to an average of 20 new home sales per store for the nine months ended
March 28, 2003. 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 nine months ended March 28,
2003.
Manufacturing division sales were $8.5 million in the nine months period
ended March 28, 2003 compared to $6.6 million in the nine months period ended
March 29, 2002. For the nine months ended March 29, 2002, substantially all
sales were to independent dealers. For the nine months ended March 28, 2003
approximately 81% of manufacturing division shipments were to subdivision
developers. The Company believes such sales to independent
22
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
dealers and especially to 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 recent emphasis on subdivision developer
relationships and sales.
Roadmasters, the Company's transportation division, recorded manufactured
homes sales of $0.8 million for the nine months period ended March 28, 2003.
These sales resulted from a bargain purchase of distressed manufactured home
inventory and, the nearly concurrent sale of the inventory to an existing
Roadmasters' customer.
Other Revenues. Other revenues were $15.5 million for the nine months ended
March 28, 2002, compared to $17.1 million for the nine months ended March 29,
2002. Insurance-related revenues in the Company's agency and reinsurance
operations declined approximately $5.6 million (or 70%) as a result of Lifestar
Reinsurance Ltd. ("Lifestar"), which contributed approximately $5.6 million in
revenues for the nine months ended March 29, 2002, but ceased operations in May
2002. The decline in insurance revenues was partially offset by a $4.0 million
(or 44%) increase in transportation revenues. The Company's transportation group
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 $48.2 million (or 70% of revenues) for the
nine months ended March 28, 2003, compared to $49.5 million (or 61% of revenues)
for the nine months ended March 29, 2002. The 9% increase as a percent of
revenues in cost of sales was primarily attributable to Lifestar, which had
operations in the prior year period, however, but ceased activity in May 2002.
Excluding Lifestar revenues generated from this operation for the six months
ended December 28, 2001 would have resulted in a cost of sales of 66% versus the
61% reported for said period.
Cost of sales for homes sold at retail, expressed as a percentage of retail
revenues, increased 2% for the nine months ended March 28, 2003, compared to the
nine months ended March 29, 2002. Cost of sales in the nine months ended March
29, 2002 were lower as a result of a higher proportionate sales of discounted
inventory (both new and used), which the Company was able to purchase on the
open market as well as from its secured lender as a part of the Company's
reorganization.
Cost of sales for homes sold to independent dealers and subdivision
developers, expressed as a percentage of manufacturing revenues, in the
Company's manufacturing division decreased 2% in the nine months ended March 28,
2003, compared to the nine months ended March 29, 2002, primary as a result of a
reduction in material costs.
Cost of sales for the Company's transportation operations, expressed as a
percentage of transportation revenues, were unchanged in the nine months ended
March 28, 2003, as compared to the prior year nine month period.
Selling, General and Administrative Expenses. Selling general and
administrative expenses were $22.7 million (or 33% of revenues) in the nine
months ended March 28, 2003, compared to $30.1 million (or 37% of revenues) in
the nine months ended March 29, 2002. The decrease is related to costs
associated with Lifestar, which ceased activities in May 2002.
Interest Expense. Interest expense was $0.8 million for the nine months
ended March 28, 2003, compared to $0.7 million for the nine months ended March
29, 2002.
Reorganization Costs. In connection with the Company's Chapter 11 filing,
reorganization costs of $1.4 million were incurred during the three months ended
September 29, 2001. These costs related primarily to professional fees and other
expenditures directly related to the Chapter 11 proceedings. There were no
reorganization costs for the six month period ended March 29, 2002 or the nine
month period ended March 28, 2003.
Income Taxes. Income tax expense was $0.2 million (on pretax loss of $2.0
million) for the nine months ended March 28, 2003, compared to $0.09 million (on
a pretax income of $18.0 million) for the nine months ended March 29, 2002. Tax
expense in both periods relates to taxes attributable to the Company's
transportation operation, which files tax returns separate from the Company's
consolidated return.
23
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Earnings in affiliates. The Company's 50% share in the after-tax earnings
of Homestar 21, LLC and American Homestar Mortgage, L.P. were $357,000 and
$22,000, respectively, million for the nine months ended March 28, 2003,
compared to $0.4 million for the nine months ended March 29, 2002, all from
Homestar 21, as American Homestar Mortgage did not begin operations until
November 2002.
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 $196,000 for the nine months
ended March 28, 2003, compared to $137,000 for the nine months ended March 29,
2002. 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.
LIQUIDITY AND CAPITAL RESOURCES:
At March 28, 2003, the Company had operating cash and cash equivalents of
$16.8 million, cash - reserved for claims of $5.0 million, and cash - restricted
of $4.6 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 $4.6 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 March 28, 2003 was
$13.9 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.
The Company is making planned investments to establish an increasing number
of ready-for-sale homes in many established and start-up manufactured housing
subdivisions across the Company's entire market region. Management believes such
conscious cash investment in inventory will better position the Company in the
marketplace and result in increased retail sales and margins over time.
Under the Plan, the Company was required to make an initial distribution to
its new shareholders of approximately $5.3 million which was placed in an escrow
account in April 2002. Distributions of approximately $2.1 million and $0.5
million were made from the escrow account in April 2002 and December 2002,
respectively, and approximately $2.8 million is held in escrow for the remainder
of the distribution. The Company anticipates that the next distribution will be
made by mid-2003.
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 March
28, 2003, 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 March 28, 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.
24
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, raw
materials other than lumber and certain petroleum-based materials. The price of
lumber and certain petroleum-based materials are 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.
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 (decrease) in interest expense for the coming year
of approximately $0.1 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 conducted
a comprehensive risk assessment and an evaluation, under the supervision and
with the participation of management, (including the 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 the Chief Financial Officer concluded that the Company's 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.
25
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) REPORTS ON FORM 8-K
January 24, 2003 - Changes to Board of Directors
26
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: May 2, 2003 By: /s/ Craig A. Reynolds
-----------------------------------------
Craig A. Reynolds
Executive Vice President, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
27
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: May 2, 2003
/s/ Finis F. Teeter
-------------------------------
Finis F. Teeter
President, Chief Executive Officer and
Director
(Principal Executive Officer)
28
I, Craig A. Reynolds, 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: May 2, 2003
/s/ Craig A. Reynolds
-----------------------------
Craig A. Reynolds
Executive Vice-President, Chief Financial
Officer and Secretary
(Principal Financial and Accounting Officer)
29
EXHIBIT INDEX
- -------------
EX. NO. DESCRIPTION
-----------
99.1 Management's certifications required pursuant to Sec. 906 of the
Sarbanes-Oxley Act of 2002.
99.2 American Homestar Corporation's Code of Business Conduct and
Ethics, adopted December 17, 2002.
30