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 31, 2004
[ ] 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 2, 2005 the registrant had 67,600 shares of Series M Common
Stock, par value $.01 per share, and 6,652,778 shares of Series C Common Stock,
par value $.01 per share, outstanding.
FINANCIAL INFORMATION
PAGE
----
Item 1. Financial Statements
Consolidated Statements of Operations for the three months
and six months ended December 31, 2004 and December 26, 2003 . . . 2
Consolidated Balance Sheets
as of December 31, 2004 and July 2, 2004 . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows
for the six months ended December 31, 2004 and December 26, 2003 . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . 22
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . 22
PART II - OTHER INFORMATION
Item 2, Unregistered Sales of Equity Securities and Use of Proceeds. . . . 23
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 23
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
CERTIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenues:
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $ 16,283 $ 14,756 $ 37,280 $ 33,522
Other revenues . . . . . . . . . . . . . . . . . . . . . . 697 757 1,568 1,604
-------------- -------------- -------------- --------------
Total revenues . . . . . . . . . . . . . . . . . . . . . 16,980 15,513 38,848 35,126
Cost of sales Cost of sales . . . . . . . . . . . . . . . . 12,124 10,399 27,414 23,386
-------------- -------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . 4,856 5,114 11,434 11,740
Selling, general and administrative. . . . . . . . . . . . . 6,213 6,652 12,873 14,010
Gain on sale of assets . . . . . . . . . . . . . . . . . . . - 3 487 107
-------------- -------------- -------------- --------------
Operating loss . . . . . . . . . . . . . . . . . . . . . (1,357) (1,535) (952) (2,163)
Interest expense . . . . . . . . . . . . . . . . . . . . . . (41) (100) (79) (201)
Other income . . . . . . . . . . . . . . . . . . . . . . . . 170 452 223 483
-------------- -------------- -------------- --------------
Loss before income taxes, earnings in
affiliates and discontinued operations . . . . . . . . . (1,228) (1,183) (808) (1,881)
Income tax expense (benefit) . . . . . . . . . . . . . . . . - (220) - (220)
Earnings (loss) in affiliates. . . . . . . . . . . . . . . . (29) - (63) (15)
-------------- -------------- -------------- --------------
Income (loss) before discontinued
operations . . . . . . . . . . . . . . . . . . . . . . . (1,257) (963) (871) (1,676)
Discontinued operations, net of taxes and minority interest. - 55 - 140
-------------- -------------- -------------- --------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,257) $ (908) $ (871) $ (1,536)
============== ============== ============== ==============
Loss per share - basic and diluted:. . . . . . . . . . . . . $ (0.13) $ (0.09) $ (0.09) $ (0.15)
============== ============== ============== ==============
Weighted average shares outstanding - basic and
diluted: . . . . . . . . . . . . . . . . . . . . . . . . 9,820,755 10,000,100 9,934,434 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 31, JULY 2,
2004 2004
(UNAUDITED) (AUDITED)
-------------- ----------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 14,277 $ 13,989
Certificate of Deposit- pledged. . . . . . . . . . . . . . . . . . . . 502 --
Accounts receivable - trade, less allowance for losses of $60 and $70
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,031 1,944
Accounts receivable - other, net . . . . . . . . . . . . . . . . . . . 133 66
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,532 28,470
Prepaid expenses, notes receivable and other current assets. . . . . . 2,172 959
-------------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 44,647 45,428
-------------- ----------
Notes receivable and other assets. . . . . . . . . . . . . . . . . . . 365 160
Investments in affiliates. . . . . . . . . . . . . . . . . . . . . . . 922 860
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 7,404 7,437
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . 912 2,937
-------------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,250 $ 56,822
============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Floor plan payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,283 $ 1,430
Current installments of notes payable. . . . . . . . . . . . . . . . . 5 18
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 934 1,173
Warranty reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,621 1,653
Accrued and other liabilities. . . . . . . . . . . . . . . . . . . . . 3,665 4,513
-------------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . 8,508 8,787
-------------- ----------
Notes payable, less current installments . . . . . . . . . . . . . . . 88 187
Commitments and contingencies. . . . . . . . . . . . . . . . . . . . . -- --
SHAREHOLDERS' EQUITY
Common stock series C, par value $0.01; 15,000,000 shares authorized,
7,926,775 shares outstanding at December 31, 2004 and
10,000,000 shares outstanding at July 2, 2004. . . . . . . . . . . . 100 100
Common stock series M, par value $0.01; 7,500,000 shares authorized,
67,600 shares outstanding at December 31, 2004 and July 2, 2004 . . 1 1
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 49,445 49,445
Treasury Stock, at cost, 2,072,092 shares. . . . . . . . . . . . . . . (1,323) --
Accumulated deficit since September 29, 2001 (accumulated deficit of
$158 million eliminated at time of reorganization) . . . . . . . . . (2,569) (1,698)
-------------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . 45,654 47,848
-------------- ----------
Total liabilities and shareholders' equity . . . . . . . . . . . . $ 54,250 $ 56,822
============== ==========
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 31, DECEMBER 26,
2004 2003
-------------- --------------
Cash flows from operations:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (871) $ (1,536)
Adjustments to reconcile net loss to net cash used by operations:
Gain on sale of assets. . . . . . . . . . . . . . . . . . . . . (487) (107)
Depreciation and amortization . . . . . . . . . . . . . . . . . 265 261
Losses in affiliates. . . . . . . . . . . . . . . . . . . . . . 62 16
Change in assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . (154) 106
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 2,938 (1,222)
Prepaid expenses, notes receivable and other current assets . (1,214) (19)
Notes receivable and other assets . . . . . . . . . . . . . . (205) (85)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . (239) 250
Accrued expenses and other liabilities. . . . . . . . . . . . (879) (1,534)
Change in assets of discontinued operation. . . . . . . . . . - (268)
-------------- --------------
Net cash used for operations. . . . . . . . . . . . . . . . (784) (4,138)
-------------- --------------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment . . . . . . . 255 412
Proceeds from sale of assets held for sale. . . . . . . . . . . . 2,428 -
Purchases of property, plant and equipment. . . . . . . . . . . . (403) (126)
Dividend from unconsolidated affiliate. . . . . . . . . . . . . . - 95
Net return of investment in affiliate . . . . . . . . . . . . . . (124) 121
-------------- --------------
Net cash from investing activities. . . . . . . . . . . . . 2,156 502
-------------- --------------
Cash flows from financing activities:
Borrowings under floor plan payable . . . . . . . . . . . . . . . 1,089 3,545
Repayments of floor plan payable. . . . . . . . . . . . . . . . . (236) (4,600)
Principal payments of long-term debt. . . . . . . . . . . . . . . (112) (115)
Payment of, and other changes in, plan obligations. . . . . . . - (1,466)
Purchase treasury stock . . . . . . . . . . . . . . . . . . . . . (1,323) -
Change in restricted cash . . . . . . . . . . . . . . . . . . . . (502) 1,599
-------------- --------------
Net cash used for financing activities. . . . . . . . . . . (1,084) (1,037)
-------------- --------------
Net change in cash and cash equivalents . . . . . . . . . . . . . 288 (4,673)
Cash and cash equivalents at beginning of period. . . . . . . . . 13,989 14,473
-------------- --------------
Cash and cash equivalents at end of period. . . . . . . . . . . . $ 14,277 $ 9,800
============== ==============
Supplemental Cash Flow Information
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . $ - $ 80
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . 87 182
============== ==============
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,
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 July 2, 2004. Because of the seasonal nature of our business, results of
operations for the three months ended December 31, 2004 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.
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:
- New home inventory is reflected at lower of cost or market. Management
must estimate the market value of such inventory.
- The determination of periodic depreciation expense requires an
estimate of the remaining useful lives of each asset.
- Assets held for sale are reflected at estimated fair market value.
- Warranty 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.
5
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
REVENUE RECOGNITION
Retail sales are recognized once full cash payment is received and the home
has been delivered to the customer.
Manufacturing sales to independent dealers and subdivision developers are
recognized as revenue when the following criteria are met:
- there is a financial commitment acceptable to management (e.g. an
approved floor plan source, cash or cashiers check received in advance
or, a firm retail commitment from the dealer);
- 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 insurance agency, commission income
from the sale of repossessed homes, income from the sale of wheels and axles and
nominal other corporate income.
Agency insurance commissions are recognized when received and acknowledged
by the underwriter as due.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. FIN 46,
Consolidation of Variable Interest Entities. A revised interpretation, FIN 46R,
was issued in December 2003. This interpretation provides guidance on the
identification of, and financial reporting for, variable interest entities.
Variable interest entities are entities that lack the characteristics of a
controlling financial interest or lack sufficient equity to finance its
activities without additional subordinated financial support. FIN 46R 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 46R 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 46R is
applicable immediately to variable interest entities created after January 31,
2003. For all variable interest entities created prior to February 1, 2003, FIN
46R is applicable to periods beginning after June 15, 2003. We have a minority
interest in two joint ventures that, by virtue of the other partners' guarantee
of the partnership indebtedness, are variable interest entities. We are not the
primary beneficiary of these variable interest entities and, accordingly, we use
the equity method of accounting for our investment in these ventures. The
adoption of FIN 46R did not 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 31, JULY 2,
2004 2004
------------- ---------
Manufactured homes:
New . . . . . . . . . . . . . . $ 18,217 $ 19,872
Used. . . . . . . . . . . . . . 1,248 1,445
Homesites:
Land. . . . . . . . . . . . . . 1,294 1,405
Improvements. . . . . . . . . . 1,944 2,488
Furniture and supplies. . . . . . 246 618
Raw materials and work-in-process 2,583 2,642
------------- ---------
Total . . . . . . . . . . . $ 25,532 $ 28,470
============= =========
6
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) DEFERRED INCOME TAX ASSETS
At July 2, 2004, the Company had deferred income tax assets of
approximately $31 million which represents potential income tax savings as and
if the Company generates future taxable income. At July 2, 2004 we provided a
full valuation allowance as to these assets. The ultimate realization of these
deferred income tax assets depends upon the generation of future taxable income
during the periods in which temporary differences become deductible and before
our net operating loss carry-forward expires in 2024. Due to the most recent
historical operating results of the Company, we are unable to conclude, on a
more likely than not basis, that all deferred income tax assets will be
realized. In addition, a significant change in ownership of our Series C common
stock, during any three year period in the future, could severely impair these
deferred income tax assets and/or severely limit our ability to realize them.
Accordingly, we continue to recognize a full valuation allowance to reduce the
net deferred income tax assets to an amount we believe will more likely than not
be realized.
(4) DISCONTINUED OPERATIONS
On February 25, 2004, the Company sold its 51% interest in Roadmasters
Transport Company, Inc. ("Roadmasters") to Roadmasters for approximately $1.4
million, which was slightly more than the carrying value of the Company's
investment in Roadmasters. Concurrent with the sale, the Company entered into a
three-year transportation agreement with Roadmasters under which Roadmasters
will continue to provide transportation services to the Company at competitive
rates. Summary unaudited information for Roadmasters, as of and for the periods
indicated, is as follows (in thousands):
DECEMBER 31, JULY 2,
2004 2004
------------- --------
Total assets . . . . $ -- $ --
============= ========
Total liabilities. . $ -- $ --
============= ========
Shareholders' equity $ -- $ --
============= ========
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Total revenues $ -- $ 4,507 $ -- $ 9,657
============= ============= ============= =============
Net income . . $ -- $ 108 $ -- $ 275
============= ============= ============= =============
7
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5) 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, an entity not affiliated with
the Company. Homestar 21 was a finance company that specialized in providing
chattel and land/home financing to the Company's customers.
On March 23, 2004, the Company and 21st Mortgage entered into an agreement
to dissolve Homestar 21. As a liquidating distribution, the Company and 21st
Mortgage each received approximately $3.2 million, which was slightly more than
the carrying value of its investment. The Company accounts for its former
investment in Homestar 21 using the equity method.
Concurrent with the dissolution of Homestar 21, the Company entered into an
Origination Fee Agreement with 21st Mortgage that provides the Company the
opportunity to earn origination fees on certain new loans in the future as the
Company meets quarterly sales targets as to the sale of 21st Mortgage
repossessions. 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 31, JULY 2,
2004 2004
------------- --------
Total assets . . . . $ -- $ --
============= ========
Total liabilities. . -- --
============= ========
Shareholders' equity $ -- $ --
============= ========
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2004 2003 2004 2003
------------- ------------- ------------- --------------
Total revenues $ -- $ 527 $ -- $ 1,128
============= ============= ============= ==============
Net income . . $ -- $ 17 $ -- $ (46)
============= ============= ============= ==============
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. ("Former Homestar
Mortgage"), a joint venture owned 50% by the Company and 50% by Home Loan
Corporation ("Home Loan"), an entity not affiliated with the Company. The Former
Homestar Mortgage operated as a mortgage broker/loan originator for ultimate
placement with Home Loan and other mortgage banks. The Company accounts for its
former investment in the Former 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 the Former Homestar
Mortgage, as of and for the periods indicated, is as follows (in thousands):
DECEMBER 31, JULY 2,
2004 2004
------------- --------
Total assets. . . $ -- $ --
============= ========
Total liabilities $ -- $ --
============= ========
Owners' equity. . $ -- $ --
============= ========
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2004 2003 2004 2003
------------- -------------- ------------- -------------
Total revenues $ -- $ (11) $ -- $ 137
============= ============== ============= =============
Net income . . $ -- $ (17) $ -- $ 17
============= ============== ============= =============
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. As of December 31, 2004, American Homestar had contributed a total of
$450,000. In the event of a new cash loss to the partnership, the other
partners have agreed to reimburse American Homestar for their proportionate
share of the additional capital contributions and the accrued preferred return.
Also under the terms of the partnership agreement 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.
By virtue of the other partners' guarantee of the partnership indebtedness,
Humble Springs, LTD is a variable interest entity. Given the proportional
sharing of net cash losses, if any, based on ownership percentages, we are not
the primary beneficiary of this variable interest entity. Accordingly, we use
the equity method of accounting for our investment in Humble Springs. Summary
unaudited financial information for Humble Springs, LTD, as of and for the
periods indicated is as follows (in thousands):
DECEMBER 31, JULY 2,
2004 2004
------------- --------
Total assets. . . $ 888 $ 817
============= ========
Total liabilities $ 438 $ 488
============= ========
Owners' equity. . $ 450 $ 329
============= ========
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Total revenues $ -- $ -- $ -- $ --
============= ============= ============= =============
Net income . . $ -- $ -- $ -- $ --
============= ============= ============= =============
10
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In January 2004, we invested $50 for a 49.5% interest in 114 Starwood
Development, 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 American Homestar. Under the terms of the partnership
agreement, the land developer agreed to guarantee all debt of the partnership
and we agreed to provide for the cash needs of the venture (to a maximum of
$500,000) in the form of additional capital contributions for which we will
receive a preferred return upon completion of the development project. As of
December 31, 2004 American Homestar has made additional capital contributions of
approximately $499,000. In the event of a net cash loss to the partnership, the
other partners have agreed to reimburse American Homestar for their
proportionate share of the additional capital contributions and the accrued
preferred return. Also under the terms of our partnership agreement we have the
right, but not the obligation, to cure any loan defaults of the partnership. In
such case, we would assume the other partners' ownership interests.
By virtue of the other partners' guarantee of the partnership indebtedness,
114 Starwood Development, LTD is a variable interest entity. Given the
proportional sharing of net cash losses, if any, based on ownership percentages,
we are not the primary beneficiary of this variable interest entity.
Accordingly, we use the equity method of accounting for our investment in
Starwood. Summary unaudited financial information for 114 Starwood Development,
LTD, as of and for the periods indicated is as follows (in thousands):
DECEMBER 31, JULY 2,
2004 2004
------------- --------
Total assets. . . $ 4,105 $ 3,142
============= ========
Total liabilities $ 3,732 $ 2,644
============= ========
Owners' equity. . $ 373 $ 498
============= ========
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2004 2003 2004 2003
-------------- ------------- -------------- -------------
Total revenues $ 86 $ -- $ 145 $ --
============== ============= ============== =============
Net income . . $ (59) $ -- $ (125) $ --
============== ============= ============== =============
11
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In April 2004, we invested $31,500 to provide one-half of the initial
capitalization of a new entity also named American Homestar Mortgage, L.L.P.
("Homestar Mortgage") which is a joint venture that is owned 50% by us and 50%
by Community Home Loan LLC, a company not affiliated with us. Homestar Mortgage
is currently in the process of obtaining licenses necessary to operate as a
mortgage broker/loan originator. The Company accounts for its investment in
Homestar Mortgage using the equity method. Summary unaudited financial
information for Homestar Mortgage, as of and for the periods indicated is as
follows (in thousands):
DECEMBER 31, JULY 2,
2004 2004
------------- --------
Total assets. . . $ 63 $ 63
============= ========
Total liabilities $ -- $ --
============= ========
Owners' equity. . $ 63 $ 63
============= ========
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Total revenues $ -- $ -- $ -- $ --
============= ============= ============= =============
Net income . . $ -- $ -- $ -- $ --
============= ============= ============= =============
(6) NOTES AND FLOOR PLAN PAYABLE
On March 15, 2004 the Company received a commitment for an inventory
financing (floorplan) credit facility through 21st Mortgage Corporation. The
balance outstanding at December 31, 2004 was $2.3 million and the balance at
July 2, 2004 was $1.4 million. The total credit line is $15 million although
maximum borrowings, at any time, are subject to a borrowing base calculation
based on the age of the inventory used as collateral. Advances under this line
bear interest at the greater of prime plus 1% per annum or 7% per annum. This
credit facility is secured by some of the Company's new home inventory and
display models
12
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(7) SHAREHOLDERS' EQUITY AND PRO-FORMA EARNINGS PER SHARE
On January 11, 2001, the Company and twenty-one (21) of its subsidiaries
filed separate voluntary petitions for reorganization under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court of the
Southern District of Texas. 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").
Under the terms of the Plan of Reorganization, all equity interests in the
Company were cancelled as of the Effective Date, and all holders of outstanding
shares of Company stock, which had previously traded under the symbols HSTR and
HSTRQ, lost all rights to equity interests in and to the reorganized Company.
Under the Plan, the Company has the authority to issue 15 million shares of new
Series C common stock and is required to issue 10 million shares of Series C
common stock to its general unsecured creditors. Pursuant to the exemption set
forth in Section 1145 of the Bankruptcy Code, the Company issued new shares of
Series C common stock to persons holding allowed unsecured claims in the
Company's bankruptcy case and shares of Series M common stock to management
under an incentive program. As of December 31, 2004 the Company has issued 10
million shares of Series C common stock (some of which was subsequently canceled
or acquired by the Company) and 67,600 shares of Series M common stock. The
Company has the authority to issue 7.5 million shares of Series M common stock
to management; as of December 31, 2004 67,600 shares had been issued and
4,932,400 shares underlie options authorized under the Company's 2001 Management
Incentive Program. As of December 31, 2004, there are options outstanding to
purchase 4,854,900 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 31, 2004, options for 67,500
shares had been exercised and options to purchase 1,626,090 additional 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 31, 2004 and December
26, 2003, respectively.
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2004 2003 2004 2003
-------------------- -------------------- ------------------ ------------------
Net income (loss) as reported $ (1,257) $ (908) $ (871) $ (1,536)
Deduct: total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects . . . (61) (56) (122) (95)
-------------------- -------------------- ------------------ ------------------
Net income (loss), pro forma. $ (1,318) $ (964) $ (993) $ (1,631)
==================== ==================== ================== ==================
Income (loss) per share
As reported . . . . . . . $ (0.13) $ (0.09) $ (0.09) $ (0.15)
==================== ==================== ================== ==================
Pro forma . . . . . . . . $ (0.13) $ (0.10) $ (0.10) $ (0.16)
==================== ==================== ================== ==================
13
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(8) TREASURY STOCK
Of the 10,000,000 Series C shares issued in connection with the Company's
reorganization, some shares have been reacquired by the Company through separate
and unrelated transactions as follows:
- In July 2004, we received 1,133 shares which were voluntarily returned
to the Company and cancelled.
- In July 2004, we purchased 20,233 shares in connection with the
resolution of an unrelated dispute and these shares are currently held
in treasury.
- In December 2004, we purchased 2,051,859 shares in connection with an
unsolicited offer from a shareholder and these shares are currently
held in treasury.
- In January 2005, (subsequent to balance sheet date), we purchased
1,341,597 shares in connection with an unsolicited offer from a
shareholder and these shares are currently held in treasury.
The Company has not solicited any offers and does not currently have a
formal stock purchase plan in place.
(9) DILUTED PER SHARE DATA
For the three month and six month periods ended December 31, 2004, options
to purchase shares of 4,854,900 were excluded from the computations of diluted
earnings per share. For the three month and six month periods ended December
26, 2003, options to purchase shares of 4,691,900 were excluded from the
computations of diluted earnings per share. These options were not included in
the computation of diluted earnings per share because the exercise prices of the
options were greater than the average market price of the common shares.
14
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) BUSINESS SEGMENTS
The Company operates primarily in four business segments-(i) retail; (ii)
manufacturing; (iii) insurance; and (iv) corporate. The following table
summarizes, for the periods indicated, information about these segments (in
thousands):
ADJUSTMENTS/
RETAIL MANUFACTURING INSURANCE CORPORATE ELIMINATIONS TOTAL
---------------------------------------------------------------------------
THREE MONTHS ENDED
DECEMBER 31, 2004
Revenues from external customers. . $11,624 $ 4,990 $ 348 $ 18 $ -- $16,980
Intersegment revenues . . . . . . . -- 6,590 -- -- (6,590) --
Interest expense. . . . . . . . . . 41 -- -- -- -- 41
Depreciation. . . . . . . . . . . . 75 49 1 11 -- 136
Segment profit (loss) before income
taxes and earnings in affiliates. (1,261) 734 144 (825) (20) (1,228)
Segment assets. . . . . . . . . . . 17,562 22,825 1,185 49,156 (36,478) 54,250
Expenditures for segment assets . . 221 65 -- 12 -- 298
ADJUSTMENTS/
RETAIL MANUFACTURING INSURANCE CORPORATE ELIMINATIONS TOTAL
---------------------------------------------------------------------------
THREE MONTHS ENDED
DECEMBER 26, 2003
Revenues from external customers. . $12,440 $ 2,666 $ 403 $ 4 $ -- $15,513
Intersegment revenues . . . . . . . -- 6,561 -- -- (6,561) --
Interest expense. . . . . . . . . . 100 -- -- -- -- 100
Depreciation. . . . . . . . . . . . 65 60 1 8 -- 134
Segment profit (loss) before income
taxes and earnings in affiliates. (1,468) 710 187 (557) (55) (1,183)
Segment assets. . . . . . . . . . . 20,348 22,583 575 55,073 (36,280) 62,299
Expenditures for segment assets . . 51 24 -- 5 -- 80
ADJUSTMENTS/
RETAIL MANUFACTURING INSURANCE CORPORATE ELIMINATIONS TOTAL
---------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 31, 2004
Revenues from external customers . $26,812 $ 11,263 $ 737 $ 36 $ -- $38,848
Intersegment revenues . . . . . . . -- 12,595 -- -- (12,595) --
Interest expense. . . . . . . . . . 79 -- -- -- -- 79
Depreciation. . . . . . . . . . . . 146 97 2 20 -- 265
Segment profit (loss) before income
taxes and earnings in affiliates. (1,919) 2,000 314 (1,348) 145 (808)
Segment assets. . . . . . . . . . . 17,562 22,825 1,185 49,156 (36,478) 54,250
Expenditures for segment assets . . 267 100 - 36 -- 403
ADJUSTMENTS/
RETAIL MANUFACTURING INSURANCE CORPORATE ELIMINATIONS TOTAL
---------------------------------------------------------------------------
SIX MONTHS ENDED
DECEMBER 26, 2003
Revenues from external customers. . $28,790 $ 5,570 $ 756 $ 10 $ -- $35,126
Intersegment revenues . . . . . . . -- 14,210 -- -- (14,210) --
Interest expense. . . . . . . . . . 201 -- -- -- -- 201
Depreciation. . . . . . . . . . . . 131 123 2 20 -- 276
Segment profit (loss) before income
taxes and earnings in affiliates. (2,187) 1,533 335 (1,557) (5) (1,881)
Segment assets. . . . . . . . . . . 20,348 22,583 575 55,073 (36,280) 62,299
Expenditures for segment. . . . . . 88 44 3 5 -- 140
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.
15
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain" forward-looking statements" as defined
under the Private Securities Litigation Reform Act of 1995 and information
relating to the Company that are based on the reasonable 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," "intend," "estimate," "expect," "will," and "should"
and similar expressions as they relate to the Company or management of the
Company are intended to identify forward-looking statements. All statements
that address operating performance, events or developments that we expect or
anticipate will occur in the future are 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. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. These risks and
uncertainties regarding forward-looking statements 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.
- 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.
- Failure to comply with laws or regulations applicable to or affecting
us.
- Failure to meet the requirements of the Sarbanes-Oxley Act of 2002.
OVERVIEW:
American Homestar is a regional vertically integrated manufactured housing
company with operations in manufacturing, retailing, 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
leased manufacturing facility is primarily engaged in refurbishing manufactured
homes obtained through lender repossessions. We also operate 30 retail sales
centers in Texas, Louisiana and Oklahoma and maintain a marketing presence in
approximately 33 additional manufactured housing communities where 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 103 independent retailers and developers located in five
states. 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 50% interest in a mortgage brokerage business that is
currently in the process of obtaining licenses necessary to operate as a
mortgage broker/loan originator. We have also aligned with several subdivision
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.
16
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Company-manufactured new homes sold at retail:
Single section . . . . . . . . . . . . . . . . . . . . 64 37 142 86
Multi-section. . . . . . . . . . . . . . . . . . . . . 129 155 293 316
Total new homes sold at retail . . . . . . . . . . . . . . 193 192 435 402
Previously-owned homes sold at retail. . . . . . . . . . . 95 90 210 192
Average retail selling price - new homes, excluding land:
Single section . . . . . . . . . . . . . . . . . . . . $ 29,845 $ 35,202 $ 29,498 $ 32,963
Multi-section. . . . . . . . . . . . . . . . . . . . . $ 64,940 $ 66,133 $ 67,057 $ 65,096
Company-operated retail centers and community
sales offices at end of period . . . . . . . . . . . . 30 31 30 31
Total manufacturing shipments (homes). . . . . . . . . . . 339 255 674 562
Manufacturing shipments to independent retail
sales centers and developers (homes) . . . . . . . . . . 148 65 312 143
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 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Total revenues . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Gross profit . . . . . . . . . . . . . . . . . . 28.6% 33.0% 29.4% 33.4%
Selling, general and administrative expenses . . 36.6% 42.9% 33.1% 40.0%
Operating loss . . . . . . . . . . . . . . . . . (8.0%) (9.9%) (2.5%) (6.2%)
Loss before income taxes, earnings in affiliates
and discontinued operations. . . . . . . . . . (7.2%) (7.6%) (2.1%) (5.4%)
Net loss . . . . . . . . . . . . . . . . . . . . (7.4%) (5.9%) (2.2%) (4.4%)
17
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THREE MONTHS ENDED DECEMBER 26,
2003
Net Sales. Net sales of manufactured homes were $16.3 million for the three
months ended December 31, 2004, compared to $14.8 million for the three months
ended December 26, 2003. The 10% increase in net sales was a result of an
increase in manufacturer sales to developers and independents. The increase in
manufacturing sales was partially offset by a slight decline in retail home
sales.
Retail sales declined $0.8 million (or 7%) for the three months ended
December 31, 2004 compared to the three months ended December 26, 2003. New
home sales were 193 homes for the three months ended December 31, 2004 compared
to 192 homes for the three months ended December 26, 2003. Same store retail
sales were approximately 6 homes per retail store in each period. While new
home unit sales remained stable the decline in sales dollars resulted from a
larger proportion of single section homes (with lower average selling prices)
sold 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
increased $2.3 million (or 87%) in the three month period ended December 31,
2004 when compared to the three month period ended December 26, 2003. The
increase in manufacturing sales in the current quarter was largely attributable
to homes produced for a large subdivision project.
Other Revenues. Other revenues, principally commissions from the sale of
insurance and lender repossessions, were $0.7 million for the three months ended
December 31, 2004, compared to $0.8 million for the three months ended December
26, 2003.
Cost of Sales. Cost of sales was $12.1 million (or 71% of revenues) for the
three months ended December 31, 2004, compared to $10.4 million (or 67% of
revenues) for the three months ended December 26, 2003.
Cost of sales for homes sold at retail increased to 74% of retail revenues
for the three months ended December 31, 2004, compared to 72% of retail revenues
for the three months ended December 26, 2003. This increase in retail cost of
sales was due in part to the liquidation of older single section homes at cost
and the introduction of a new special value series (slightly lower margin)
product offering.
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 31, 2004 was slightly higher at 87% when compared to 86%
for the three months ended December 26, 2003. During the current quarter
significant increases in the cost of building materials were offset by
improvements in direct labor efficiencies and volume leverage against fixed
manufacturing costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $6.2 million (or 37% of revenues) in the three
months ended December 31, 2004, compared to $6.7 million (or 43% of revenues) in
the three months ended December 26, 2003. Lower fixed costs due to fewer retail
stores were partially offset by increases in other selling expenses.
Interest Expense. Interest expense was $41,000 for the three months ended
December 31, 2004, compared to $100,000 for the three months ended December 26,
2003. The decrease was attributable to the significant reduction of the
inventory-related (floor plan) debt from $5.8 million at December 26, 2003 to
$2.3 million at December 31, 2004.
Other Income. Other income was $0.2 million for the three months ended
December 31, 2004, compared to $0.4 million for the three months ended December
26, 2003. Other income for the three months ended December 26, 2003 included a
one time refund of workers compensation premiums
18
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Income Taxes. No income tax benefit was recognized in the current period
because our deferred tax assets continue to be fully reserved. However there
was a tax benefit of $0.2 million due to a tax refund in the three months ended
December 26, 2003.
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. On March 23,
2004, the Company and its partner in the venture, 21st Mortgage, dissolved and
liquidated Homestar 21. In the quarter ended December 26, 2003 our 50% share in
the after tax earnings of the Former Homestar Mortgage was a loss of $8,500.
The Former Homestar Mortgage had no earnings for the three months ended December
31, 2004, as it ceased operations effective July 31, 2003.
Our 49.5% share in the earnings of 114 Starwood LLP for the three months
ended December 31, 2004 was a loss of $30,000. Starwood had no earnings for
the three months ended December 26, 2003 as the Company did not invest in
Starwood until January 2004.
Discontinued Operations: We sold our 51% interest in Roadmasters, a
transportation company, during the year ended July 2, 2004. Operating results
for Roadmasters for the three months ended December 26, 2003 are now reported as
discontinued operations.
SIX MONTHS ENDED DECEMBER 31, 2004 COMPARED TO SIX MONTHS ENDED DECEMBER 26,
2003
Net Sales. Net sales of manufactured homes were $37.3 million for the six
months ended December 31, 2004, compared to $33.5 million for the six months
ended December 26, 2003. The 11% increase in net sales was as a result of a
increase of manufacturer sales to independents and developers.
Retail sales declined $1.9 million (or 6.9%) for the six months ended
December 31, 2004 compared to the six months ended December 26, 2003. New home
sales increased to 435 homes for the six months ended December 31, 2004 from 402
homes for the six months ended December 26, 2003. Same store sales at retail
were approximately 15 homes per retail store in each period. While new home
unit sales increased the decline in sales dollars resulted from a larger
proportion of single section homes (with lower average selling prices) sold in
the current period. 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
$11.3 million in the six months period ended December 31, 2004, compared to $5.6
million in the six month period ended December 26, 2003. The increase in
manufacturing sales in the current period was largely attributable to homes
produced for a large subdivision project.
Other Revenues. Other revenues, principally commissions from the sale of
insurance and lender repossessions, were unchanged at $1.6 million for the six
months ended December 31, 2004 and for the six months ended December 26, 2003.
Cost of Sales. Cost of sales was $27.4 million (or 71% of revenues) for the
six months ended December 31, 2004, compared to $23.4 million (or 67% of
revenues) for the six months ended December 26, 2003.
Cost of sales for homes sold at retail increased to 74% of retail revenues
for the six months ended December 31, 2004, compared to 72% of retail revenues
for the six months ended December 26, 2003. The increase in retail cost of
sales was due primarily to the liquidation of older single sections homes at
cost and the introduction of a new special value series (slightly lower margin)
product offering in the second quarter. In addition, we experienced increased
homesite construction cost overruns in the six months ended December 31, 2004
compared to the six months ended December 26, 2003.
19
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cost of sales for homes sold to independent dealers and developers
(expressed as a percentage of manufacturing revenues) for the six months ended
December 31, 2004 was essentially unchanged at 86% when compared to the six
months ended December 26, 2003. Significant increases in costs of building
materials during the six month period ended December 31, 2004 were offset by
improvements in direct labor efficiencies and volume leverage against fixed
manufacturing costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12.9 million (or 33% of revenues) in the six
months ended December 31, 2004, compared to $14.0 million (or 40% of revenues)
in the six months ended December 26, 2003. Lower fixed costs due to fewer retail
stores were partially offset by increases in other net selling expenses.
Gain on Sale of Assets: Gain on sale of assets was $0.5 million for the
six months ended December 31, 2004 primarily as a result of selling a former
manufacturing plant (classified as assets held for sale) for $2.4 million.
Interest Expense. Interest expense was $0.1 million for the six months
ended December 31, 2004, compared to $0.2 million for the six months ended
December 26, 2003. The decrease was attributable to the significant reduction of
the inventory-related (floor plan) debt from $5.8 million at December 26, 2003
to $2.3 million at December 31, 2004.
Other Income. Other income was $0.2 million for the six months ended
December 31, 2004, compared to $0.5 million for the six months ended December
26, 2003. Other income for the three months ended December 26, 2003 included a
one time refund of workers compensation premiums.
Income Taxes. No income tax benefit was recognized in the current period
because our deferred tax assets continue to be fully reserved. However there
was a tax benefit of $0.2 million due to a tax refund in the six months ended
December 26, 2003.
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. On
March 23, 2004, the Company and its partner in the venture, 21st Mortgage
dissolved and liquidated Homestar 21. In the six months ended December 26,
2003 our 50% share in the after tax earnings of the Former Homestar Mortgage was
$8,500. The Former Homestar Mortage had no earnings for the six months ended
December 31, 2004, as it ceased operations effective July 31, 2003.
Our 49.5% share in the earnings of 114 Starwood LLP for the six months
ended December 31, 2004 was a loss of $63,000. Starwood had no earnings for the
six months ended December 26, 2003 as the Company did not invest in Starwood
until January 2004.
Discontinued Operations. We sold our 51% interest in Roadmasters, a
transportation company, during the year ended July 2, 2004. Operating results
for the six months ended December 26, 2003 are now reported as discontinued
operations.
LIQUIDITY AND CAPITAL RESOURCES:
At December 31, 2004, we had unrestricted operating cash and cash
equivalents of $14.3 million.
During the six months ended December 31, 2004, operating cash increased by
$0.3 million. Principal sources of cash were $2.9 million from the sale of
excess inventory (both subdivision "spec" and retail center display models),
$2.4 million from the sale of idle assets, and $0.9 million from net borrowings
under our floorplan credit facility. Principal uses of cash during the six
months ended December 31, 2004 were $1.3 million for the repurchase of Series C
common stock, which we hold as treasury shares, $1.0 million prepayment of
annual premiums relating to our property casualty and general liability
insurance, $1.7 million for working capital, and $1.0 million to fund operating
losses. We also purchased a $0.5 million certificate of deposit which was
pledged to our bank as collateral for a one-year irrevocable letter of credit.
20
AMERICAN HOMESTAR CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
The balance outstanding at December 31, 2004 under the floor plan credit
facility with 21st Mortgage was at our targeted level of $2.3 million. While we
do not presently require these funds, we wanted to activate the credit facility.
This revolving line carries an annual interest rate of the greater of prime plus
1% per annum or 7% per annum. This credit facility is secured by some of the
Company's new home inventory and display models.
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 31, 2004, we were at risk to repurchase
approximately $2.2 million of manufactured homes and we have provided for
estimated net repurchase losses of approximately $0.1 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, steel and certain petroleum-based materials. The price of
lumber, steel 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.
21
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 $23,000.
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.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
December 31, 2004, 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 31, 2004 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.
22
PART II
OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------
(d) Maximum
Number (or
(c) Total Number Approximate
of Shares Dollar Value) of
Purchased as Part Shares that May Yet
(a) Total Number (b) Average of Publicly be Purchased Under
of Shares Price Paid Announced Plans the Plans or
Period Purchased Per Share or Programs Programs
- -------------------- ---------------- ------------ ----------------- -------------------
October 2, 2004 to
November 5, 2004 -- -- -- --
November 6, 2004 to
December 3, 2004 -- -- -- --
December 4, 2004 to
December 31, 2004 2,051,859 $0.63 -- --
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Shareholders of American Homestar Corporation
was held on October 18, 2004.
b) The following nominees were elected Directors until the next Annual
Meeting of Shareholders and until their respective successors shall
have been elected and qualified.
Nathan P. Morton Series I Director
Richard N. Grasso Series C Director
Ellis L. McKinley Series C Director
c) The tabulation of votes for each Director nominee was as follows:
For Withheld
--------- ---------
Nathan P. Morton 4,756,663 2,574,390
Richard N. Grasso 4,691,529 2,571,924
Ellis L. McKinley 4,689,063 2,574,390
By unanimous written consent on July 21, 2004, the holders of Series M
common stock elected Finis F. Teeter and Richard F. Dahlson to serve as Series M
Directors until their successors are elected and qualified.
23
ITEM 6. EXHIBITS
(a) The following exhibits are filed as part of this report:
Exhibit 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
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 2, 2005 By: /s/ Craig A. Reynolds
-----------------------------------------
Craig A. Reynolds
Executive Vice President, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
25
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.
26