UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 26, 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 Exchange Act Rule 12b-2).
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 November 4, 2003 the registrant had 100 shares of Series M Common Stock,
par value $.01 per share, and 6,780,364 shares of Series C Common Stock, par
value $.01 per share, issued and outstanding, and 3,219,636 shares of Series C
Common Stock deemed issued, outstanding and held in constructive trust for the
benefit of shareholders to be determined in name and amount as the claims
process is completed.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three months ended
September 26, 2003 and September 27, 2002 . . . . . . . . . . . . . . 2
Consolidated Balance Sheets
as of September 26, 2003 and June 27, 2003 . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the three months ended
September 26, 2003 and September 27, 2002 . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . 17
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 18
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
CERTIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION) (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
--------------- ---------------
Revenues:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . $ 19,040 $ 18,515
Other revenues. . . . . . . . . . . . . . . . . . . . . . 5,723 6,839
--------------- ---------------
Total revenues. . . . . . . . . . . . . . . . . . . . . 24,763 25,354
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 17,351 17,532
Selling, general and administrative . . . . . . . . . . . 7,889 7,960
--------------- ---------------
Total costs and expenses. . . . . . . . . . . . . . . . 25,240 25,492
Operating loss. . . . . . . . . . . . . . . . . . . . . (477) (138)
Interest expense. . . . . . . . . . . . . . . . . . . . . . (101) (288)
Other income. . . . . . . . . . . . . . . . . . . . . . . . 135 146
--------------- ---------------
Loss before income taxes, earnings in affiliates
and minority interest . . . . . . . . . . . . . . . . . (443) (280)
Income tax expense . . . . . . . . . . . . . . . . . . . 89 185
Earnings (loss) in affiliates . . . . . . . . . . . . . . (14) 155
Minority interests . . . . . . . . . . . . . . . . . . . (82) (145)
--------------- ---------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $ (628) $ (455)
=============== ===============
Loss per share - basic and diluted: . . . . . . . . . . . . $ (0.06) $ (0.05)
=============== ===============
Weighted average shares outstanding - basic and diluted:. . 10,000,100 10,000,100
=============== ===============
See accompanying notes to consolidated financial statements
2
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
SEPTEMBER 26, JUNE 27,
2003 2003
(UNAUDITED) (AUDITED)
--------------- ----------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 11,353 $ 14,890
Cash - reserved for claims . . . . . . . . . . . . . . . . . . . . . . 3,023 4,341
Cash - restricted. . . . . . . . . . . . . . . . . . . . . . . . . . . 421 640
Accounts receivable - trade, net . . . . . . . . . . . . . . . . . . . 3,492 2,692
Accounts receivable - other, net . . . . . . . . . . . . . . . . . . . 319 141
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,646 30,025
Prepaid expenses, notes receivable and other current assets. . . . . . 1,395 943
--------------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 50,649 53,672
--------------- ----------
Notes receivable and other assets. . . . . . . . . . . . . . . . . . . 557 556
Investments in affiliates. . . . . . . . . . . . . . . . . . . . . . . 3,879 3,884
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 9,131 9,469
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . 3,354 3,354
--------------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,570 $ 70,935
=============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,188 $ 6,826
Current installments of notes payable. . . . . . . . . . . . . . . . . 52 70
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,212 1,292
Warranty reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,687 1,687
Accrued and other liabilities. . . . . . . . . . . . . . . . . . . . . 4,430 4,817
Liquidation and plan reserve . . . . . . . . . . . . . . . . . . . . . 976 1,269
Claims reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,365 1,666
Initial distribution payable . . . . . . . . . . . . . . . . . . . . . 1,658 2,675
--------------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . 17,568 20,302
--------------- -----------
Notes payable, less current installments . . . . . . . . . . . . . . . 417 502
Minority interest in consolidated subsidiary . . . . . . . . . . . . . 1,308 1,226
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 . . . . . . . . . . . . . . 100 100
Common stock series M, par value $0.01; 7,500,000 shares authorized,
100 shares issued and outstanding . . . . . . . . . . . . . . . . . . -- --
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 49,355 49,355
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (1,178) (550)
--------------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . 48,277 48,905
--------------- ----------
Total liabilities and shareholders' equity . . . . . . . . . . . . $ 67,570 $ 70,935
=============== ==========
See accompanying notes to consolidated financial statements
3
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
--------------- ---------------
Cash flows from operations:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (628) $ (455)
Adjustments to reconcile net loss to net cash used by operations:
Loss (Gain) on sale of assets . . . . . . . . . . . . . . . . . . (104) --
Depreciation and amortization . . . . . . . . . . . . . . . . . . 157 155
Minority interests in income of consolidated subsidiaries . . . . 82 145
Losses (earnings) in affiliates . . . . . . . . . . . . . . . . . 14 (155)
Change in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . (978) (211)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (621) (1,251)
Prepaid expenses, notes receivable and other current assets . . (452) (714)
Notes receivable and other assets . . . . . . . . . . . . . . . (1) (45)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . (80) 114
Accrued expenses and other liabilities . . . . . . . . . . . . (681) (2,063)
--------------- ---------------
Net cash used by operations . . . . . . . . . . . . . . . . . (3,292) (4,480)
--------------- ---------------
Cash flows from investing activities:
Sales of property, plant and equipment . . . . . . . . . . . . . . 374 --
Purchases of property, plant and equipment . . . . . . . . . . . . (89) (146)
Investment in affiliate . . . . . . . . . . . . . . . . . . . . . . (8) --
--------------- ---------------
Net cash from (used for) investing activities . . . . . . . . 277 (146)
--------------- ---------------
Cash flows from financing activities:
Borrowings under floor plan payable . . . . . . . . . . . . . . . . 1,145 3,493
Repayments of floor plan payable . . . . . . . . . . . . . . . . . (1,783) (5,918)
Principal payments of long-term debt . . . . . . . . . . . . . . . (103) (39)
Payment of, and other changes in, Plan obligations . . . . . . . . (1,318) (203)
Change in restricted cash . . . . . . . . . . . . . . . . . . . . . 1,537 100
--------------- ---------------
Net cash from (used for) financing activities . . . . . . . . (522) (2,567)
--------------- ---------------
Net change in cash and cash equivalents . . . . . . . . . . . . . . . (3,537) (7,193)
--------------- ---------------
Cash and cash equivalents at beginning of period . . . . . . . . . . 14,890 32,250
Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 11,353 $ 25,057
=============== ===============
Supplemental Cash Flow Information
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 85
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 296
=============== ===============
See accompanying notes to consolidated financial statements
4
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
Unless otherwise indicated, "we," "us," "our," "American Homestar," "the
Company," "Management" and similar terms refer to American Homestar Corporation,
its subsidiaries and affiliates. Throughout this report, we use the term
"fiscal," as it applies to a year, to represent the fiscal year ending on the
Friday closest to June 30 of that year.
American Homestar Corporation is a regional vertically integrated
manufactured housing company, with operations in manufacturing, retailing,
transportation, financing and insurance. We were incorporated in Texas in July
1983.
The accompanying 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"). In the opinion of management,
all normal recurring adjustments considered necessary for a fair presentation
have been included. The consolidated financial statements do not include certain
financial and footnote information required by generally accepted accounting
principles for complete financial statements and, therefore, should be read in
conjunction with the Company's annual report on Form 10-K for the fiscal year
ended June 27, 2003. Because of the seasonal nature of our business, results of
operations for the three months ended September 26, 2003 are not necessarily
indicative of the results that may be expected for the full fiscal year. Certain
amounts previously reported have been reclassified to conform to the fiscal 2004
presentation.
On January 11, 2001, American Homestar Corporation and twenty-one (21) of
its subsidiaries filed separate voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court of the Southern District of Texas (the "Bankruptcy Court"). On August 14,
2001, the Bankruptcy Court confirmed the Third Amended Joint Plan of
Reorganization of the Company and its subsidiaries (the "Plan of
Reorganization"). All conditions to the effectiveness of the Plan of
Reorganization were met and the Plan of Reorganization became effective on
October 3, 2001 (the "Effective Date"). Upon our emergence from bankruptcy
protection in October 2001, we adopted the provisions of Statement of Position
No. 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("Fresh-Start Reporting") as promulgated by the AICPA.
Accordingly, all of our assets and liabilities have been restated to reflect
their reorganization value, which approximates their fair value at the Effective
Date. In addition, our accumulated deficit was eliminated and our capital
structure was recast in conformity with the Plan of Reorganization.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
Significant estimates were made to determine the following amounts
reflected on our Balance Sheet:
- 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.
5
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- Warranty reserve is an estimate of all future warranty-related service
expenses that will be incurred as to all homes previously sold that
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 obligations under the Plan of Reorganization 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.
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 payment for the used home is received.
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 January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities. This interpretation provides
guidance on the identification of, and financial reporting for, variable
interest entities. Variable interest entities are entities that lack the
characteristics of a controlling financial interest or lack sufficient equity to
finance their activities without additional subordinated financial support. FIN
46 requires a company to consolidate a variable interest entity if that company
is obligated to absorb the majority of the entity's expected losses or entitled
to receive the majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. FIN
46 is applicable immediately to variable interest entities created after January
31, 2003. For all variable interest entities created prior to February 1, 2003,
FIN 46 is applicable to periods beginning after June 15, 2003. We do not expect
that the adoption of FIN 46 will have a material effect on our financial
position or results of operation.
6
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) INVENTORIES
A summary of inventories, net of valuation reserves follows (in thousands):
SEPTEMBER 26, JUNE 27,
2003 2003
-------------- ---------
Manufactured homes:
New. . . . . . . . . . . . . . . $ 22,315 $ 22,620
Used . . . . . . . . . . . . . . 1,821 1,994
Homesites:
Land . . . . . . . . . . . . . . 1,227 891
Improvements . . . . . . . . . . 2,900 2,345
Furniture and supplies. . . . . . 474 423
Raw materials and work-in-process 1,909 1,752
-------------- ---------
Total. . . . . . . . . . . . $ 30,646 $ 30,025
============== =========
(3) INVESTMENT IN AFFILIATED COMPANIES
In fiscal 2000, the Company invested $2.4 million to provide one-half of
the initial capitalization of Homestar 21, LLC ("Homestar 21"), a joint venture
owned 50% by the Company and 50% by 21st Mortgage, 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. Summary financial
information for Homestar 21, derived from the unaudited financial statements of
21st Mortgage, as of and for the periods indicated, is as follows (in
thousands):
SEPTEMBER 26, JUNE 27,
2003 2003
--------------- --------------
Total assets. . . . . . . . . . . $ 14,384 $ 7,110
=============== ==============
Total liabilities . . . . . . . . 7,528 191
=============== ==============
Shareholders' equity. . . . . . . $ 6,856 $ 6,919
=============== ==============
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
--------------- --------------
Total revenues. . . . . . . . . . $ 601 $ 1,147
=============== ==============
Net income. . . . . . . . . . . . $ (63) $ 311
=============== ==============
7
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 operated as a mortgage broker/loan originator for ultimate placement
with Home Loan and other mortgage banks. The Company accounts for its investment
in Homestar Mortgage using the equity method. In July 2003 we reached agreement
with Home Loan to cease operations effective July 31, 2003. Summary unaudited
financial information for Homestar Mortgage, as of and for the periods
indicated, is as follows (in thousands):
SEPTEMBER 26, JUNE 27,
2003 2003
-------------- --------------
Total assets. . . . . . $ 292 $ 263
============== ==============
Total liabilities . . . $ -- $ 5
============== ==============
Owners' equity. . . . . $ 292 $ 258
============== ==============
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
-------------- --------------
Total revenues. . . . . $ 147 $ --
============== ==============
Net income. . . . . . . $ 34 $ --
============== ==============
8
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In March 2003, the Company invested $50 for a 49.5% interest in Humble
Springs LTD, a land development joint venture. The other partners in the venture
are a land development company and certain of its affiliates, none of which are
affiliated with the Company. Under the terms of the partnership agreement, the
land developer agreed to guarantee all debt of the partnership and the Company
agreed to provide for the cash needs of the venture (to a maximum of $547,000)
in the form of additional capital contributions for which the Company will
receive a preferred return upon completion of the development project. The
Company has the right, but not the obligation, to cure any loan defaults of the
partnership. In such case, the Company would assume the other partners'
ownership interests. As of September 26, 2003, American Homestar had contributed
a total of $304,000. The Company accounts for its investment in Humble Springs
LTD using the equity method. Summary unaudited financial information for Humble
Springs LTD, as of and for the periods indicated, is as follows (in thousands):
SEPTEMBER 26, JUNE 27,
2003 2003
-------------- --------------
Total assets . . . . . . . . . . . $ 792 $ 783
============== ==============
Total liabilities. . . . . . . . . $ 488 $ 487
============== ==============
Owners' equity . . . . . . . . . . $ 304 $ 296
============== ==============
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
-------------- --------------
Total revenues . . . . . . . . . . $ -- $ --
============== ==============
Net income . . . . . . . . . . . . $ -- $ --
============== ==============
(4) Notes and Floor Plan Payable
On October 3, 2001, we entered into a floor plan credit facility with
Associates Housing Financial LLC ("Associates") to finance the purchase of its
display models and inventory homes. The balance outstanding at September 26,
2003 was $6.2 million and the balance at June 27, 2003 was $6.8 million. The
maximum allowance under the inventory credit line is $12 million. This revolving
line is contractually committed until October 2, 2004.
The floor plan payable is secured by substantially all of our inventory,
real estate and by certain other assets (including certain specific cash
deposits consisting of approximately $0.4 million at September 26, 2003 included
in restricted cash). In addition to traditional subjective covenants, there are
two financial covenant tests we are required to meet under our floor plan
facility. One test is floor plan debt compared to total assets (as defined in
the credit facility). The other test is a minimum cash balances requirements. At
September 26, 2003 and for all prior periods as of and after September 29, 2001,
we were in compliance with all covenants.
9
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) SHAREHOLDERS' EQUITY AND PRO-FORMA EARNINGS PER SHARE
Under the Plan of Reorganization, we have the authority to issue 15 million
shares of new Series C common stock and are required to issue 10 million shares
of Series C common stock to our general unsecured creditors. Pursuant to the
exemption set forth in Section 1145 of the Bankruptcy Code, we issued new shares
of Series C common stock to persons holding allowed unsecured claims and shares
of Series M common stock to management under an incentive program. As of
September 26, 2003, we had issued 10 million shares of Series C common stock, of
which 6,780,364 shares were issued to specific shareholders with allowed claims
under the Plan of Reorganization, and 3,219,636 shares were held in constructive
trust for the benefit of shareholders to be determined in name and amount as the
claims process is completed. We also have the authority to issue 7.5 million
shares of Series M common stock to management, 100 shares of which had been
issued as of September 26, 2003, and 4,999,900 shares underlie options
authorized under the Company's 2001 Management Incentive Program. As of
September 26, 2003, there are options outstanding, that the board of directors
has approved and granted, to purchase 4,681,900 shares of Series M common stock
at an exercise price of $1.35 per share. These options vest seven years from the
date of grant and may vest earlier (up to 20% per year) if certain annual
performance criteria established by the Board of Directors are met. As of
September 26, 2003, options for 967,980 shares were vested.
We account for grants to employees and directors under the provisions of
APB Opinion No. 25 and related interpretations. Had compensation expense for the
Plan of Reorganization been determined based upon the fair value method as
prescribed in SFAS No. 123, the loss would have changed to the following pro
forma amounts for the three months ended September 26, 2003 and June 27, 2003,
respectively.
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 26, JUNE 27,
2003 2003
-------------------- --------------------
Net loss as reported $ (628) $ (455)
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (39) (44)
-------------------- --------------------
Net loss, pro forma $ (667) $ (499)
==================== ====================
Loss per share
As reported $ (0.06) $ (0.05)
==================== ====================
Pro forma $ (0.07) $ (0.05)
==================== ====================
10
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) BUSINESS SEGMENTS
The Company operates primarily in three business segments-(i) retail; (ii)
manufacturing; and (iii) corporate, which consists of transportation services,
financial services and the corporate group. The following table summarizes, for
the periods indicated, information about these segments (in thousands):
ADJUSTMENTS/
RETAIL MANUFACTURING CORPORATE ELIMINATIONS TOTAL
-------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 26, 2003
Revenues from external customers $ 15,868 $ 2,899 $ 5,996 $ -- $24,763
Intersegment revenues. . . . . . -- 7,649 -- (7,649) --
Interest expense . . . . . . . . 101 -- -- -- 101
Depreciation . . . . . . . . . . 67 63 27 -- 157
Segment profit (loss) before
income taxes and earnings in
affiliates. . . . . . . . . . (720) 823 (596) 50 (443)
Segment assets . . . . . . . . . 24,334 24,306 55,621 (36,691) 67,570
Expenditures for segment assets. 37 20 32 -- 89
ADJUSTMENTS/
RETAIL MANUFACTURING CORPORATE ELIMINATIONS TOTAL
-------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 27, 2002
Revenues from external customers $ 16,450 $ 2,065 $ 6,839 $ -- $25,354
Intersegment revenues. . . . . . -- 8,738 -- (8,738) --
Interest expense . . . . . . . . 288 -- -- -- 288
Depreciation . . . . . . . . . . 73 61 21 -- 155
Segment profit (loss) before
income taxes and earnings in
affiliates. . . . . . . . . . (645) 763 (286) (112) (280)
Segment assets . . . . . . . . . 34,076 27,310 58,337 (31,900) 87,823
Expenditures for segment assets. 72 2 72 -- 146
Intersegment revenues consist primarily of sales by the manufacturing
segment to the retail segment and are transferred at market price. The
adjustment to intersegment revenues and segment profit is made to eliminate
intercompany sales and profit between the manufacturing and retail segments. The
segment assets adjustment consists primarily of an adjustment to eliminate
subsidiaries' equity at the corporate level and the elimination of intercompany
receivables.
Earnings in affiliates in the consolidated statements of operations relates
to the financial services segment.
11
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 that could cause actual results to differ
materially. These risks and uncertainties include the following items:
- Excess inventories among retailers.
- Continuing downturn in the manufactured housing industry.
- Seasonal and cyclical nature of our business.
- Tightened credit standards, curtailed lending activity, tightened
terms and increased interest rates among consumer lenders.
- Ability to obtain floor plan financing.
- Ability to securitize or fund loans.
- Ability of our customers to repay their loans.
- Relative strength of our competitors.
- Concentrated market in the Southwest region with our primary focus in
Texas.
- Ability to attract and retain our executive officers and other key
personnel.
OVERVIEW:
American Homestar is a regional vertically integrated manufactured housing
company with operations in manufacturing, retailing, home transportation
services, home financing and insurance. Our principal operations are located in
Texas, although we also sell our products in neighboring states. We manufacture
a wide variety of manufactured homes from two of our three manufacturing
facilities. The third manufacturing facility is primarily engaged in
refurbishing manufactured homes obtained through lender repossessions and this
facility has been recently listed for sale.
On January 11, 2001, American Homestar Corporation and 21 of our
subsidiaries filed separate voluntary petitions for reorganization under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of Texas (the "Bankruptcy Court"). On August 14, 2001,
the Bankruptcy Court confirmed the Third Amended Joint Plan of Reorganization
(the "Plan of Reorganization") of the Company and its subsidiaries. On October
3, 2001 (the "Effective Date"), all conditions required for the effectiveness of
the Plan of Reorganization were met, and the Plan became effective, and the
Company and our subsidiaries emerged from bankruptcy.
12
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
In connection with our reorganization, we significantly downsized our
operations and focused on our core Southwest market where we are based and where
we have historically had our most favorable overall results. We currently
operate 31 retail sales centers in Texas, Louisiana and Oklahoma and four sales
centers in manufactured housing communities in Texas. In approximately 34
additional manufactured housing communities we display homes that are ready for
sale and occupancy ("spec homes") and model homes, although we do not have an
on-site sales office. We also distribute homes through approximately 37
independent retailers and developers located in five states. We operate three
manufacturing plants, two of which produce new homes while the third refurbishes
lender repossessions. Additionally, we operate an insurance agency, which sells
homeowner's insurance, credit life insurance and extended warranty coverage to
its customers. We also have a 51% ownership interest in a transport company,
which specializes in the transportation of manufactured and modular homes and
offices. We also have a 50% interest in a finance company, which specializes in
providing chattel and land/home financing to our customers. Most recently, we
have aligned with several subdivision developments to meet an emerging market
segment in our core Southwest market region and to gain greater market share. We
believe that our regional vertical integration strategy, which derives multiple
profit sources from each retail sale, will allow us to be more successful, over
time, than would otherwise be the case.
RESULTS OF OPERATIONS
The following table summarizes certain key sales and operating statistics
for the periods:
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 26, SEPTEMBER 27,
2003 2002
-------------- --------------
Company-manufactured new homes sold at retail:
Single section . . . . . . . . . . . . . . . . . . . 49 72
Multi-section. . . . . . . . . . . . . . . . . . . . 212 213
Total new homes sold at retail . . . . . . . . . . . . . . 261 285
Previously-owned homes sold at retail. . . . . . . . . . . 102 168
Average retail selling price - new homes, excluding land:
Single section . . . . . . . . . . . . . . . . . . . $ 31,273 $ 32,590
Multi-section. . . . . . . . . . . . . . . . . . . . $ 64,338 $ 59,935
Company-operated retail centers and community
sales offices at end of period . . . . . . . . . . . . 35 42
Total manufacturing shipments (homes). . . . . . . . . . . 307 309
Manufacturing shipments to independent retail
sales centers and developers (homes) . . . . . . . . . 78 44
The following table summarizes the Company's operating results, expressed
as a percentage of total revenues, for the periods indicated:
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 26, SEPTEMBER 27
2003 2002
-------------- -------------
Total revenues . . . . . . . . . . . . . . . . . 100.0% 100.0%
Gross profit . . . . . . . . . . . . . . . . . . 29.9% 30.9%
Selling, general and administrative expenses . . 31.9% 31.4%
Operating loss . . . . . . . . . . . . . . . . . (1.9%) (0.5%)
Loss before income taxes, earnings in affiliates
and minority interest. . . . . . . . . . . . (1.8%) (1.1%)
Net loss . . . . . . . . . . . . . . . . . . . . (2.5%) (1.8%)
13
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE MONTHS ENDED SEPTEMBER 26, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
27, 2002
Net Sales. Net sales of manufactured homes were $19.0 million for the three
months ended September 26, 2003, compared to $18.5 million for the three months
ended September 27, 2002. The 3% increase in net sales was as a result of an
increase in manufacturing wholesale shipments to independent dealers and
developers. The increase in manufacturing sales was partially offset by a
decline in retail home sales.
Retail sales declined $0.6 million (or 3%) for the three months ended
September 26, 2003, compared to $2.1 million in the three months ended September
27, 2002. New home sales declined to 261 homes for the three months ended
September 26, 2003 from 285 homes for the three months ended September 27, 2002.
Same store sales at retail were approximately 8 homes per retail store in each
period. The quarter ended September 26, 2003 marked the second consecutive
quarter of an improving trend in same store retail sales. The decline in total
number of new home sales was attributable to closing underperforming retail
centers since September 2002. While no stores were closed in the current
quarter, management continues to monitor all stores to ensure that sales are at
or above pre-determined minimum acceptable levels.
Manufacturing division sales to independent dealers and developers were
$2.9 million in the three months period ended September 26, 2003, compared to
$2.1 million in the three month period ended September 27, 2002. We believe such
sales to independent dealers and subdivision developers will increase gradually
over time, aided by recent reductions of competitor capacity in our regional
market area and our emphasis on subdivision developer sales.
Other Revenues. Other revenues decreased $1.1 million to $5.7 million for
the three months ended September 26, 2003, compared to $6.8 million for the
three months ended September 27, 2002. The decline in revenues was due primarily
to a decrease in Roadmasters delivery and set-up activity and revenues.
Cost of Sales. Cost of sales was $17.4 million (or 70% of revenues) for the
three months ended September 26, 2003, compared to $17.5 million (or 69% of
revenues) for the three months ended September 27, 2002.
Cost of sales for homes sold at retail increased to 71% of retail revenues
for the three months ended September 26, 2003, compared to 69% of retail
revenues for the three months ended September 27, 2002 due to a lower proportion
of used home sales (which typically represent a lower cost of sales percentage)
and sales to subdivision developers, in the current quarter, under a special,
limited low margin program which was not in place in the comparable quarter last
year. The above increases in cost of sales (expressed as a percent of revenues)
were partially offset by slightly lower costs of sales attributable to new
homes.
Cost of sales for homes sold to independent dealers and subdivision
developers (expressed as a percentage of manufacturing revenues) for the three
months ended September 26, 2003 was essentially unchanged at 76% when compared
to the three months ended September 27, 2002. Significant increases in costs of
lumber and wood products during the quarter were included in the wholesale
selling prices of our homes as a temporary wood products surcharge.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $7.9 million (or 32% of revenues) in the three
months ended September 26, 2003, compared to $8.0 million (or 31% of revenues)
in the three months ended September 27, 2002. Lower fixed costs due to fewer
retail stores were largely offset by increases in advertising and other
merchandising costs.
Interest Expense. Interest expense was $0.1 million for the three months
ended September 26, 2003, compared to $0.3 million for the three months ended
September 27, 2002. The decrease was attributable to the significant reduction
of the inventory-related (floor plan) debt from $18.3 million at September 27,
2002 to $6.2 million at September 26, 2003.
14
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Income Taxes. Income tax expense was $0.1 million (on pretax loss of $0.4
million) for the three months ended September 26, 2003, compared to $0.2 (on a
pretax loss of $0.3 million) for the three months ended September 27, 2002. Tax
expense in both periods relates to our transportation operation which files tax
returns separate from the Company's consolidated return.
Earnings in Affiliates. Our 50% share in the after-tax earnings of Homestar
21, LLC was a loss of $31,000 for the three months ended September 26, 2003,
compared to income of $155,000 for the three months ended September 27, 2002. In
prior periods, Homestar 21 has reported income from origination and rate
buy-down points which were recorded as revenues when each loan was sold. Due to
a change in the method in which these loans are now financed, the points are now
amortized over the life of the loan. As a result of the elimination of the
origination and rate buy-down points income for the three months ended September
26, 2003, Homestar 21 reported a loss. In the current quarter our 50% share in
the after tax earnings of Homestar Mortgage was $17,000; Homestar Mortgage had
no earnings for the three months ended September 27, 2002, as it did not begin
operations until November 2002.
Minority Interests. We own 51% of our transportation operations and
therefore consolidate (or include 100% of) the transportation company's results
in our financial statements. Because we only benefit from 51% of the income, the
remaining 49% is shown as a deduction on our consolidated income statement. This
deduction was $82,000 for the three months ended September 26, 2003, compared to
$145,000 for the three months ended September 27, 2002. The decreased deduction
for minority interests resulted from decreased profits in our transportation
operations in the current period as compared to the prior year period.
LIQUIDITY AND CAPITAL RESOURCES:
At September 26, 2003, we had operating cash and cash equivalents of $11.4
million, cash-reserved for claims of $3.0 million, and cash-restricted of $0.4
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 of Reorganization. The restricted cash represents $0.4 million
held in a cash collateral account, which secures the Company's floor plan
through Associates Housing Financial LLC ("Associates").
During the three months ended September 26, 2003, net cash used in
operating activities was $3.3 million. Of that, $0.5 million was used to fund
operating losses, $1.6 million was invested in receivables and inventory, $0.4
million was used to prepay expenses and $0.8 million was used to reduce accounts
payable and accrued liability balances. We also generated $0.3 million from the
sale of idle assets after deducting maintenance-level capital expenditures
during the period. We continued to further reduce inventory-related debt by $0.6
million and long-term, real estate related debt by $0.1 million.
Under the Plan of Reorganization, the Company was required to make an
initial distribution to its new shareholders of approximately $5.3 million.
Payments of approximately $2.1 million and $0.5 million were made in April 2002
and December 2002. In July 2003, a third payment of approximately $1.0 million
was made from cash restricted for that purpose. In addition, we paid
approximately $0.3 million for other claims under the Plan of Reorganization. At
September 26, 2003 approximately $1.7 million is in escrow for the balance of
the initial distribution and approximately $1.3 million is reserved for the
balance of our estimate of all remaining cash obligations related to the Plan of
Reorganization.
15
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
We also further reduced our floor plan debt by $0.6 million. The balance
outstanding at September 27, 2003 under the floor plan credit facility with
Associates was $6.2 million. This revolving line carries an annual interest rate
of prime plus 1%. The line is contractually committed until October 2, 2004. We
believe that this floor plan credit facility is sufficient to meet our inventory
financing needs until October 2004. We are currently exploring alternatives to
this line of credit and we plan to secure new lines of credit before October
2004.
In accordance with customary business practice in the manufactured housing
industry, we have entered into repurchase agreements with various financial
institutions and other credit sources pursuant to which we have agreed, under
certain circumstances, to repurchase manufactured homes sold to independent
dealers in the event of a default by such independent dealer on their obligation
to such credit sources. Under the terms of such repurchase agreements, 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, we provide for anticipated
repurchase losses. At September 26, 2003, we were at risk to repurchase
approximately $1.2 million of manufactured homes and we have provided for
estimated net repurchase losses of approximately $0.2 million.
We believe that our current cash position and expected cash flow from
operations and the liquidation of excess inventory, along with our floor plan
facility, will be sufficient to support our cash and working capital
requirements for the foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS
We have not participated in any off-balance sheet arrangements.
INFLATION AND SEASONALITY
Inflation in recent years has been modest and has primarily affected our
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, we believe we have been able
to minimize the effects of inflation by increasing the selling prices of our
products, improving our manufacturing efficiency and increasing our employee
productivity. In addition, our business is seasonal, with weakest demand
typically from mid-November through February and the strongest demand typically
from March through mid-November.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest rates on
our variable rate debt, which consists of our liability for floor plan of
manufactured housing retail inventories. We do 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. We do 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 we would be required to refinance it. Based on the current level of
variable-rate debt, each one percentage point increase (or decrease) in interest
rates occurring on the first day of the year would result in an increase (or
decrease) in interest expense for the coming year of approximately $62,000.
Our financial instruments are not currently subject to foreign currency
risk or commodity price risk. We do not believe that future market interest rate
risks related to our marketable investments or debt obligations will have a
material impact on the Company or the results of our future operations.
We do not hold any financial instruments for trading purposes. We originate
loans through our 50%-owned affiliate, Homestar 21, most of which are at fixed
rates of interest. In the past, these loans were temporarily warehoused and
periodically sold to investors through the asset-backed securities market. Under
this prior arrangement our affiliate assumed a short-term interest rate risk
until each loan was sold. During the current quarter, this process changed.
Rather than selling these loans, our affiliate now holds the loans and will
periodically borrow funds, at fixed rates, to finance the new loans added to its
portfolio. Under this new arrangement our affiliate will assume a short-term
interest rate risk until each loan is financed through periodic, fixed rate
borrowings. We believe this new arrangement is preferable because it may produce
greater "spreads" and may be a more reliable and stable source of long term
financing for the loans our affiliate originates and holds.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
September 26, 2003, the end of the quarter covered by this report, the Company
carried out an evaluation under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. In designing and evaluating the
Company's disclosure controls and procedures, the Company and its management
recognize that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and the Company's management necessarily was required to apply its
judgment in evaluating and implementing possible controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. There was no change in the
Company's internal control over financial reporting that occurred during the
quarter ended September 26, 2003 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting. The Company reviews its disclosure controls and procedures, which may
include its internal controls over financial reporting, on an ongoing basis, and
may from time to time make changes aimed at enhancing their effectiveness and to
ensure that the Company's systems evolve with its business.
17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) for
Finis F. Teeter, Chief Executive Officer of the Company.
31.2 Certification pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) for
Craig A. Reynolds, Chief Financial Officer
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 for Finis F.
Teeter, Chief Executive Officer, and Craig A. Reynolds, Chief
Financial Officer of the Company.
(b) REPORTS ON FORM 8-K
None.
18
SIGNATURE
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: November 4, 2003 By: /s/ Craig A. Reynolds
-----------------------------------------
Craig A. Reynolds
Executive Vice President, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
19
EXHIBIT INDEX
- --------------
EX. NO. DESCRIPTION
-----------
31.1 Certification pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) for
Finis F. Teeter, Chief Executive Officer of the Company.
31.2 Certification pursuant to Rule 13a-14(a) (17 CFR 240.13a-14(a)) for
Craig A. Reynolds, Chief Financial Officer
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 for Finis F.
Teeter, Chief Executive Officer, and Craig A. Reynolds, Chief
Financial Officer of the Company.
20