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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 December 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 February 3, 2004 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
PAGE
----
Item 1. Financial Statements
Consolidated Statements of Operations for the three months
and six months ended December 26, 2003 and December 27, 2002 . . . . 2
Consolidated Balance Sheets
as of December 26, 2003 and June 27, 2003. . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
for the six months ended December 26, 2003 and December 27, 2002 . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . .. . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . 21
Item 4. Controls and Procedures. . . . . . . . . . . .. . . . . . . . . . . 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . .. . . . . . . . . . .22
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . .23
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . .24
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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Revenues:
Net sales. . . . . . . . . . . . . . . . . . . $ 14,775 $ 16,729 $ 33,815 $ 35,244
Other revenues . . . . . . . . . . . . . . . . 5,245 4,414 10,968 11,253
-------------- -------------- -------------- --------------
Total revenues . . . . . . . . . . . . . 20,020 21,143 44,783 46,497
Cost of sales Cost of sales. . . . . . . . . . . 14,159 14,725 31,510 32,257
-------------- -------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . 5,861 6,418 13,273 14,240
Selling, general and administrative. . . . . . . 7,242 7,457 15,130 15,417
-------------- -------------- -------------- --------------
Operating loss . . . . . . . . . . . . . (1,381) (1,039) (1,857) (1,177)
Interest expense . . . . . . . . . . . . . . . . (100) (269) (201) (557)
Other income . . . . . . . . . . . . . . . . . . 455 96 590 242
-------------- -------------- -------------- --------------
Loss before income taxes, earnings in
affiliates and minority interest . . . . (1,026) (1,212) (1,468) (1,492)
Income tax expense (benefit) . . . . . . . . . (171) 32 (82) 217
Earnings (loss) in affiliates. . . . . . . . . - 104 (15) 259
Minority interests . . . . . . . . . . . . . . (53) (29) (135) (174)
-------------- -------------- -------------- --------------
Net loss . . . . . . . . . . . . . . . . . . . . $ (908) $ (1,169) $ (1,536) $ (1,624)
============== ============== ============== ==============
Loss per share - basic and diluted:. . . . . . . $ (0.09) $ (0.12) (0.15) $ (0.16)
============== ============== ============== ==============
Weighted average shares outstanding - basic and
diluted: . . . . . . . . . . . . . . . . 10,000,100 10,000,100 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)
DECEMBER 26, JUNE 27,
2003 2003
(UNAUDITED) (AUDITED)
-------------- ----------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 10,420 $ 14,890
Cash - reserved for claims . . . . . . . . . . . . . . . . . . . . . . 2,874 4,341
Cash - restricted. . . . . . . . . . . . . . . . . . . . . . . . . . . 508 640
Accounts receivable - trade, net . . . . . . . . . . . . . . . . . . . 2,440 2,692
Accounts receivable - other, net . . . . . . . . . . . . . . . . . . . 193 141
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,140 30,025
Prepaid expenses, notes receivable and other current assets. . . . . . 989 943
-------------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 48,564 53,672
-------------- ----------
Notes receivable and other assets. . . . . . . . . . . . . . . . . . . 657 556
Investments in affiliates. . . . . . . . . . . . . . . . . . . . . . . 3,652 3,884
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 9,039 9,469
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . 3,354 3,354
-------------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,266 $ 70,935
============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,771 $ 6,826
Current installments of notes payable. . . . . . . . . . . . . . . . . 52 70
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,313 1,292
Warranty reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,658 1,687
Accrued and other liabilities. . . . . . . . . . . . . . . . . . . . . 3,460 4,817
Liquidation and plan reserve . . . . . . . . . . . . . . . . . . . . . 1,002 1,269
Claims reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,217 1,666
Initial distribution payable . . . . . . . . . . . . . . . . . . . . . 1,658 2,675
-------------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 16,131 20,302
-------------- ----------
Notes payable, less current installments . . . . . . . . . . . . . . . 405 502
Minority interest in consolidated subsidiary . . . . . . . . . . . . . 1,361 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 since September 29, 2001 (accumulated deficit of
$158 million eliminated at time of reorganization). . . . . . . . . (2,086) (550)
-------------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . 47,369 48,905
-------------- ----------
Total liabilities and shareholders' equity . . . . . . . . . . . $ 65,266 $ 70,935
============== ==========
See accompanying notes to consolidated financial statements
3
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 26, DECEMBER 27,
2003 2002
-------------- --------------
Cash flows from operations:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,536) $ (1,624)
Adjustments to reconcile net loss to net cash used by operations:
Loss (Gain) on sale of assets. . . . . . . . . . . . . . . . . (107) --
Depreciation and amortization. . . . . . . . . . . . . . . . . 303 321
Minority interests in income of consolidated subsidiaries. . . 135 174
Losses (earnings) in affiliates. . . . . . . . . . . . . . . . 16 (259)
Change in assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . 200 1,437
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . (1,114) (2,026)
Prepaid expenses, notes receivable and other current assets. (45) (377)
Notes receivable and other assets. . . . . . . . . . . . . . (101) (539)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 21 (477)
Accrued expenses and other liabilities . . . . . . . . . . . (1,388) (3,222)
-------------- --------------
Net cash used by operations. . . . . . . . . . . . . . . (3,616) (6,592)
-------------- --------------
Cash flows from investing activities:
Sales of property, plant and equipment. . . . . . . . . . . . . . 412 --
Purchases of property, plant and equipment. . . . . . . . . . . . (178) (235)
Dividend from unconsolidated affiliate. . . . . . . . . . . . . . 95 221
Net return of investment in affiliate . . . . . . . . . . . . . . 121 --
-------------- --------------
Net cash from (used for) investing activities. . . . . . 450 (14)
-------------- --------------
Cash flows from financing activities:
Borrowings under floor plan payable . . . . . . . . . . . . . . . 3,545 6,009
Repayments of floor plan payable. . . . . . . . . . . . . . . . . (4,600) (10,808)
Principal payments of long-term debt. . . . . . . . . . . . . . . (115) (310)
Payment of, and other changes in, plan obligations. . . . . . . . (1,733) (1,032)
Change in restricted cash . . . . . . . . . . . . . . . . . . . . 1,599 751
-------------- --------------
Net cash from (used for) financing activities. . . . . . (1,304) (5,390)
-------------- --------------
Net change in cash and cash equivalents . . . . . . . . . . . . . (4,470) (11,996)
Cash and cash equivalents at beginning of period. . . . . . . . . 14,890 32,250
-------------- --------------
Cash and cash equivalents at end of period. . . . . . . . . . . . $ 10,420 $ 20,254
============== ==============
Supplemental Cash Flow Information
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . $ 80 $ 280
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . 182 553
============== ==============
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 December 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.
Other revenue includes revenue from our transportation services company,
our insurance agency, commission income from the sale of repossessed homes,
income from the sale of wheels and axles and nominal other corporate income.
Transportation revenues are recognized after the service has been performed
and invoiced to the customer.
Insurance commissions are recognized when received and acknowledged by the
underwriter as due.
Other revenue items are recognized when received.
6
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
(2) INVENTORIES
A summary of inventories, net of valuation reserves follows (in thousands):
DECEMBER 26, JUNE 27,
2003 2003
------------- ---------
Manufactured homes:
New . . . . . . . . . . . . . . $ 22,509 $ 22,620
Used. . . . . . . . . . . . . . 1,792 1,994
Homesites:
Land. . . . . . . . . . . . . . 1,370 891
Improvements. . . . . . . . . . 3,339 2,345
Furniture and supplies. . . . . . 512 423
Raw materials and work-in-process 1,618 1,752
------------- ---------
Total . . . . . . . . . . . $ 31,140 $ 30,025
============= =========
7
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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):
DECEMBER 26, JUNE 27,
2003 2003
-------------- -------------
Total assets . . . . . . . . . . . . . . . . $ 19,450 $ 7,110
============== =============
Total liabilities. . . . . . . . . . . . . . 12,768 191
============== =============
Shareholders' equity . . . . . . . . . . . . $ 6,682 $ 6,919
============== =============
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
2003 2002 2003 2002
------------- ------------- -------------- -------------
Total revenues $ 527 $ 750 $ 1,128 $ 1,897
============= ============= ============== =============
Net income . . $ 17 $ 175 $ (46) $ 486
============= ============= ============== =============
8
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. Homestar Mortgage
has ceased operations and liquidated all assets. Summary unaudited financial
information for Homestar Mortgage, as of and for the periods indicated, is as
follows (in thousands):
DECEMBER 26, JUNE 27,
2003 2003
-------------- -------------
Total assets . . . . . . . . . . . . . . . . $ -- $ 263
============== =============
Total liabilities. . . . . . . . . . . . . . -- 5
============== =============
Shareholders' equity . . . . . . . . . . . . $ -- $ 258
============== =============
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
2003 2002 2003 2002
------------- ------------- -------------- -------------
Total revenues. . $ (11) $ 84 $ 137 $ 84
============= ============= ============== =============
Net income. . . . $ (17) $ 33 $ 17 $ 33
============= ============= ============== =============
9
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 December 26, 2003, American Homestar had contributed
a total of $312,000. 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):
DECEMBER 26, JUNE 27,
2003 2003
-------------- -------------
Total assets . . . . . . . . . . . . . . . . $ 799 $ 783
============== =============
Total liabilities. . . . . . . . . . . . . . $ 487 $ 487
============== =============
Owners' equity . . . . . . . . . . . . . . . $ 312 $ 296
============== =============
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
2003 2002 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 December 26, 2003
was $5.8 million and the balance at June 27, 2003 was $6.8 million. At December
26, 2003, $5.7 million was available under the inventory credit line. 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 $0.5 million at December 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
December 26, 2003 and for all prior periods as of and after September 29, 2001,
we were in compliance with all covenants.
10
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
December 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 December 26, 2003, and 4,999,900 shares underlie options authorized
under the Company's 2001 Management Incentive Program. As of December 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 December 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 and six months ended December 26, 2003 and December
27, 2002, respectively.
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net loss as reported $ (908) $ (1,169) $ (1,536) $ (1,624)
Deduct: total stock-based employee
compensation expense determined
under fair value based method for
awards, net of related tax effects (56) (61) (95) (122)
-------------- -------------- -------------- --------------
Net loss, pro forma $ (964) $ (1,230) $ (1,631) $ (1,746)
============== ============== ============== ==============
Loss per share
As reported $ (0.09) $ (0.12) $ (0.15) $ (0.16)
============== ============== ============== ==============
Pro forma $ (0.10) $ (0.12) $ (0.16) $ (0.17)
============== ============== ============== ==============
11
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) BUSINESS SEGMENTS
The Company operates primarily in five business segments-(i) retail; (ii)
manufacturing; (iii) transportation; (iv) insurance; and (v) corporate. The
following table summarizes, for the periods indicated, information about these
segments (in thousands):
ADJUSTMENTS/
RETAIL MANUFACTURING TRANSPORTATION INSURANCE CORPORATE ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------
THREE MONTHS ENDED
DECEMBER 26, 2003
Revenues from external
customers . . . . . . . . $12,440 $ 2,666 $ 4,507 $ 403 $ 4 $ -- $20,020
Intersegment revenues. . . . -- 6,561 -- -- -- (6,561) --
Interest expense . . . . . . 100 -- -- -- -- -- 100
Depreciation . . . . . . . . 65 60 12 1 8 -- 146
Segment profit (loss) before
income taxes and
earnings in affiliates. . (1,468) 710 158 187 (557) (56) (1,026)
Segment assets . . . . . . . 20,348 22,583 2,967 575 55,073 (36,280) 65,266
Expenditures for segment
assets. . . . . . . . . . 51 24 9 -- 5 -- 89
ADJUSTMENTS/
RETAIL MANUFACTURING TRANSPORTATION INSURANCE CORPORATE ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------
THREE MONTHS ENDED
DECEMBER 27, 2002
Revenues from external
customers . . . . . . . . $14,035 $ 2,747 $ 4,039 $ 315 $ 7 $ -- $21,143
Intersegment revenues. . . . -- 6,783 -- -- -- (6,783) --
Interest expense . . . . . . 269 -- -- -- -- -- 269
Depreciation . . . . . . . . 75 61 13 2 15 -- 166
Segment profit (loss) before
income taxes and
earnings in affiliates. . (1,185) 697 90 140 (925) (29) (1,212)
Segment assets . . . . . . . 30,287 27,532 2,695 1,087 51,627 (31,769) 81,459
Expenditures for segment
assets . . . . . . . . . . . 30 3 15 -- 16 -- 64
ADJUSTMENTS/
RETAIL MANUFACTURING TRANSPORTATION INSURANCE CORPORATE ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 26, 2003
Revenues from external
customers . . . . . . . . $28,790 $ 5,570 $ 9,656 $ 757 $ 10 $ -- $44,783
Intersegment revenues. . . . -- 14,210 -- -- -- (14,210) --
Interest expense . . . . . . 201 -- -- -- -- -- 201
Depreciation . . . . . . . . 131 123 27 2 20 -- 303
Segment profit (loss) before
income taxes and
earnings in affiliates. . (2,187) 1,533 412 335 (1,557) (4) (1,468)
Segment assets . . . . . . . 20,348 22,583 2,967 575 55,073 (36,280) 65,266
Expenditures for segment
assets . . . . . . . . . 88 44 38 3 5 -- 178
ADJUSTMENTS/
RETAIL MANUFACTURING TRANSPORTATION INSURANCE CORPORATE ELIMINATIONS TOTAL
--------------------------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 27, 2002
Revenues from external
Customers . . . . . . . . $31,008 $ 4,812 $ 10,024 $ 628 $ 25 $ -- $46,497
Intersegment revenues. . . . -- 15,521 -- -- -- (15,521) --
Interest expense . . . . . . 557 -- -- -- -- -- 557
Depreciation . . . . . . . . 148 122 18 5 28 -- 321
Segment profit (loss) before
income taxes and
earnings in affiliates. . (1,830) 1,461 572 262 (1,816) (141) (1,492)
Segment assets . . . . . . . 30,287 27,532 2,695 1,087 51,627 (31,769) 81,459
Expenditures for segment
assets . . . . . . . . . 101 5 58 -- 46 -- 210
12
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
13
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. This
third facility was sold on January 15, 2004. As a condition of the sale, we will
lease, and continue to use, this facility for at least one year from the date of
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 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.
14
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 two sales
centers in manufactured housing communities in Texas. In addition, we display
homes that are ready for sale and occupancy ("spec homes") and model homes in
approximately 34 additional manufactured housing communities, although we do not
have an on-site sales office at the communities. We also distribute homes
through approximately 48 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 developers 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 SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
2003 2002 2003 2002
Company-manufactured new homes sold at retail:
Single section. . . . . . . . . . . . . . . . . . 37 52 86 124
Multi-section . . . . . . . . . . . . . . . . . . 155 185 367 398
Total new homes sold at retail . . . . . . . . . . . 192 237 453 522
Previously-owned homes sold at retail. . . . . . . . 34 53 76 125
Average retail selling price - new homes, excluding
land:
Single section. . . . . . . . . . . . . . . . . . $ 35,202 $ 32,626 $ 32,963 $ 32,605
Multi-section . . . . . . . . . . . . . . . . . . $ 66,133 $ 61,064 $ 65,096 $ 60,437
Company-operated retail centers and community
sales offices at end of period. . . . . . . . . . 31 41 31 41
Total manufacturing shipments (homes). . . . . . . . 255 285 562 594
Manufacturing shipments to independent retail
sales centers and developers (homes). . . . . . . 65 80 143 124
The following table summarizes the Company's operating results, expressed
as a percentage of total revenues, for the periods indicated:
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
2003 2002 2003 2002
Total revenues . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Gross profit . . . . . . . . . . . . . . . . . . 29.3% 30.4% 29.6% 30.6%
Selling, general and administrative expenses . . 36.2% 35.3% 33.8% 33.2%
Operating loss . . . . . . . . . . . . . . . . . (6.9%) (4.9%) (4.1%) (2.5%)
Loss before income taxes, earnings in affiliates
and minority interest . . . . . . . . . . . . (5.1%) (5.7%) (3.3%) (3.2%)
Net loss . . . . . . . . . . . . . . . . . . . . (4.5%) (5.5%) (3.4%) (3.5%)
15
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE MONTHS ENDED DECEMBER 26, 2003 COMPARED TO THREE MONTHS ENDED DECEMBER 27,
2002
Net Sales. Net sales of manufactured homes were $14.8 million for the three
months ended December 26, 2003, compared to $16.7 million for the three months
ended December 27, 2002. The 11% decrease in net sales was as a result of a
decline in retail sales, generally consistent with an overall decline in new
home sales in Texas.
Retail sales declined $1.5 million (or 11%) for the three months ended
December 26, 2003. New home sales declined to 192 homes for the three months
ended December 26, 2003 from 237 homes for the three months ended December 27,
2002. Same store retail sales were approximately 6 homes per retail store in
each period. 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
unchanged at $2.7 million in the three month period ended December 26, 2003 when
compared to the three month period ended December 27, 2002. We believe such
sales to independent dealers and developers will increase gradually over time,
aided by recent reductions of competitor capacity in our regional market area
and our increasing emphasis on developer sales.
Other Revenues. Other revenues increased $0.8 million to $5.2 million for
the three months ended December 26, 2003, compared to $4.4 million for the three
months ended December 27, 2002. The increase in other revenues was due primarily
to an increase in our transportation company's delivery and set-up activity and
revenues.
Cost of Sales. Cost of sales was $14.2 million (or 71% of revenues) for the
three months ended December 26, 2003, compared to $14.7 million (or 70% of
revenues) for the three months ended December 27, 2002.
Cost of sales for homes sold at retail increased to 72% of retail revenues
for the three months ended December 26, 2003, compared to 70% of retail revenues
for the three months ended December 27, 2002 due to a lower proportion of used
home sales (which typically represent a lower cost of sales percentage) and to
slightly lower margins on both new and used home sales.
Cost of sales for homes sold to independent dealers and subdivision
developers (expressed as a percentage of manufacturing revenues) for the three
months ended December 26, 2003 was essentially unchanged at 86% when compared
to the three months ended December 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 $7.2 million (or 36% of revenues) in the three
months ended December 26, 2003, compared to $7.5 million (or 35% of revenues) in
the three months ended December 27, 2002. Lower fixed costs due to fewer retail
stores were partially offset by increases in merchandising costs and employee
benefits.
Interest Expense. Interest expense was $0.1 million for the three months
ended December 26, 2003, compared to $0.3 million for the three months ended
December 27, 2002. The decrease was attributable to the significant reduction of
the inventory-related (floor plan) debt from $15.9 million at December 27, 2002
to $5.8 million at December 26, 2003.
Other Income. Other income was $0.5 million for the three months ended
December 26, 2003, compared to $0.1 million for the three months ended December
27, 2002. The increase was due primarily to a $0.4 million refund of workers
comp premiums from a prior year.
16
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Income Taxes. We had an income tax benefit of $0.2 million (on pretax loss
of $1.0 million) for the three months ended December 26, 2003, compared an
income tax expense of $0.03 million (on a pretax loss of $1.2 million) for the
three months ended December 27, 2002. Tax expense in both periods relates to our
transportation operation which files tax returns separate from the Company's
consolidated return while the tax benefit in the current quarter resulted from a
tax refund of $0.2 million which related to a prior year but was received during
the quarter.
Earnings in Affiliates. Our 50% share in the after-tax earnings of Homestar
21, LLC was $8,500 for the three months ended December 26, 2003, compared to
$87,500 for the three months ended December 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 December 26, 2003, Homestar 21 reported
a smaller profit. In the current quarter our 50% share in the after tax earnings
of Homestar Mortgage was a loss of $8,500. Homestar Mortgage has ceased
operations and liquidated all assets. The loss in the current quarter arose from
refunds of origination fees received for loans which later experienced early
payment delinquency.
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 $53,000 for the three months ended December 26, 2003, compared to
$29,000 for the three months ended December 27, 2002. The increased deduction
for minority interests resulted from increased profits in our transportation
operations in the current period as compared to the prior year period.
SIX MONTHS ENDED DECEMBER 26, 2003 COMPARED TO SIX MONTHS ENDED DECEMBER 27,
2002
Net Sales. Net sales of manufactured homes were $33.8 million for the six
months ended December 26, 2003, compared to $35.2 million for the six months
ended December 27, 2002. The 4% decrease in net sales was as a result of a
decrease in retail home sales. The decrease in retail sales was partially offset
by an increase in manufactured wholesale shipments to independent dealers and
developers.
Retail sales declined $2.1 million (or 6.9%) for the six months ended
December 26, 2003. New home sales declined to 453 homes for the six months ended
December 26, 2003 from 522 homes for the six months ended December 27, 2002.
Same store sales at retail were approximately 15 homes per retail store for the
period ended December 26, 2003 compared to an average of 13 new homes per retail
store for the period ended December 27, 2002. 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 six months ended December 27,
2003, 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
$5.6 million in the six months period ended December 26, 2003, compared to $4.8
million in the six month period ended December 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 $0.2 million to $11 million for
the six months ended December 26, 2003, compared to $11.2 million for the six
months ended December 27, 2002. The decline in revenues was due primarily to a
decrease in our transportation company's delivery and set-up activity and
revenues.
Cost of Sales. Cost of sales was $31.5 million (or 70% of revenues) for the
six months ended December 26, 2003, compared to $32.3 million (or 69% of
revenues) for the six months ended December 27, 2002.
17
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cost of sales for homes sold at retail increased to 71.5% of retail
revenues for the six months ended December 26, 2003, compared to 69.3% of retail
revenues for the six months ended December 27, 2002 due to a lower proportion of
used home sales (which typically represent a lower cost of sales percentage) and
sales to developers, during the six months ended December 26, 2003, under a
special, limited low margin program which was not in place in the comparable
period last year.
Cost of sales for homes sold to independent dealers and developers
(expressed as a percentage of manufacturing revenues) for the six months ended
December 26, 2003 was essentially unchanged at 87% when compared to the six
months ended December 27, 2002. Significant increases in costs of lumber and
wood products during the six month period ended December 26, 2003 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 $15.1 million (or 33.8% of revenues) in the six
months ended December 26, 2003, compared to $15.4 million (or 33.2% of revenues)
in the six months ended December 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 $0.2 million for the six months
ended December 26, 2003, compared to $0.6 million for the six months ended
December 27, 2002. The decrease was attributable to the significant reduction of
the inventory-related (floor plan) debt from $15.9 million at December 27, 2002
to $5.8 million at December 26, 2003.
Other Income. Other income was $0.6 million for the six months ended
December 26, 2003, compared to $0.2 million for the six months ended December
27, 2002. The increase was due primarily to a $0.4 million refund of a prior
year insurance deposit.
Income Taxes. We had an income tax benefit of $0.1 million (on pretax loss
of $1.5 million) for the six months ended December 26, 2003, compared to an
income tax expense of $0.2 (on a pretax loss of $1.5 million) for the six
months ended December 27, 2002. Tax expense in both periods relates to our
transportation operation which files tax returns separate from the Company's
consolidated return while the tax benefit for the six months ended December 26,
2003 resulted from a tax refund of $0.2 million which related to a prior year
but was received during the period.
Earnings in Affiliates. Our 50% share in the after-tax earnings of Homestar
21, LLC was a loss of $23,000 for the six months ended December 26, 2003,
compared to income of $259,000 for the six months ended December 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 six months ended December
26, 2003, Homestar 21 reported a loss. In the current period our 50% share in
the after tax earnings of Homestar Mortgage was $8,500 compared to earnings of
$33,000 for the period ended December 27, 2002. Homestar Mortgage has ceased
operations and liquidated all assets.
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 $135,000 for the six months ended December 26, 2003, compared to
$174,000 for the six months ended December 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.
18
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES:
At December 26, 2003, we had operating cash and cash equivalents of $10.4
million, cash-reserved for claims of $2.9 million, and cash-restricted of $0.5
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 $0.5 million
held in a cash collateral account, which secures the Company's floor plan
through Associates Housing Financial LLC ("Associates").
During the six months ended December 26, 2003, cash used in operating
activities was $3.6.million. Of that, $1.2 million was used to fund operating
losses, $0.9 million was invested in receivables and inventory, and $1.4 million
was used to reduce accounts payable and accrued liability balances. We also
generated $0.2 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 $1.1 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 of approximately $5.3 million to our new shareholders. We
made payments of approximately $2.1 million and $0.5 million in April 2002 and
December 2002. In July 2003, we made a third payment of approximately $1.0
million from cash restricted for that purpose. In addition, we paid
approximately $0.7 million for other claims and obligations under the Plan of
Reorganization. At December 26, 2003 approximately $1.7 million is in escrow for
the balance of the initial distribution and approximately $1.2 million is
reserved for the balance of our estimate of all remaining cash obligations
related to the Plan of Reorganization.
We also further reduced our floor plan debt by $1.1 million. The balance
outstanding at December 27, 2003 under the floor plan credit facility with
Associates was $5.8 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 December 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.
19
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
20
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 $58,000.
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 six months ended December 26, 2003, 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 December 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 December 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.
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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 of the Company.
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
During the three months ended December 26, 2003, the Company filed the
following reports on Form 8-K:
1. On October 9, 2003 - regarding the election of Nathan P. Morton to the
Board of Directors; and
2. On October 10, 2003 - regarding the approval by the Board of Directors
of additional 5% vesting of common stock options.
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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: February 3, 2004 By: /s/ Craig A. Reynolds
------------------------------------
Craig A. Reynolds
Executive Vice President, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
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EXHIBIT INDEX
- --------------
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 of the Company.
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.
24