-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TGdRVohbxg9egtbHQVhJl8FQ79CtSdcl1y6JjSd0BZaF7HunZEOczxOmKUYFLgfH csVPeVMdZCscB8p0jYuCAw== 0000903893-97-000570.txt : 19970404 0000903893-97-000570.hdr.sgml : 19970404 ACCESSION NUMBER: 0000903893-97-000570 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970103 FILED AS OF DATE: 19970403 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN ENERGY HOMES INC CENTRAL INDEX KEY: 0000896397 STANDARD INDUSTRIAL CLASSIFICATION: PREFABRICATED WOOD BLDGS & COMPONENTS [2452] IRS NUMBER: 631083246 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21204 FILM NUMBER: 97574204 BUSINESS ADDRESS: STREET 1: HIGHWAY 41 NORTH STREET 2: P O BOX 269 CITY: ADDISON STATE: AL ZIP: 35540 BUSINESS PHONE: 2057471544 10-K 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 3, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 0-21204 SOUTHERN ENERGY HOMES, INC. (Exact name of registrant as specified in its charter) Delaware 63-1083246 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Highway 41 North, P.O. Box 390, Addison, Alabama 35540 - ------------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (205) 747-8589 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered N/A - ---------------------------------- ----------------------------------------- - ---------------------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0001 ------------------------------ Title of class 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of such stock on the Nasdaq Stock Market as of March 25, 1997, was $150,661,068.80. The number of shares of common stock outstanding at that date was 15,437,801 shares, $.0001 par value. Documents Incorporated By Reference - ----------------------------------- Part Item ---- ---- 1. Southern Energy Homes, Inc. Definitive Proxy Statement with respect to its June 4, 1997 Annual Meeting of Stockholders III 10,11,12,13 PART I SOUTHERN ENERGY HOMES, INC. ITEM 1. BUSINESS GENERAL Southern Energy Homes, Inc. (the "Company") is engaged in: the production and retail sale of manufactured homes and the retail financing of manufactured homes. The Company produces manufactured homes sold primarily in the southeastern and southcentral United States. The Company operates eleven home manufacturing facilities (eight in Alabama, one in Texas, one in North Carolina and one in Pennsylvania) to produce homes sold in 30 states. The Company's homes are currently marketed under six brand names by 465 independent dealers at 859 independent dealer locations and eight company-owned retail centers. The Company manufactures high quality homes, designed as primary residences ready for immediate occupancy. The homes, most of which are customized at the Company's factories to the home buyer's specifications, are constructed by the Company in one or more sections which are transported by its own or independent trucking companies to dealer locations. The Company historically focused on the middle to higher priced range of the manufactured housing market, but in 1993 expanded its product line to include lower priced homes. The Company's homes range in size from 653 to 2,417 square feet and sell at retail prices ranging from $14,900 to $108,000, excluding land. The Company believes that its willingness to customize floor plans and design features to match home buyer preferences is the principal factor which differentiates it from most of its competitors. Through its finance subsidiary and, more recently, through a finance joint venture, the Company also provides home buyers with a source of financing for homes sold by the Company. MANUFACTURED HOMES The Company produces a variety of single- and multi-section homes under six brand names. The Company's homes are manufactured in sections, which individually are transported to their destination. The finished homes may consist of one or more sections. Multi-section products are joined at their destination by the dealer or its contractor. The Company initially concentrated on the medium to higher priced segments of the manufactured housing market. Over the past several years, the Company has broadened its product line with lower priced homes that sell at retail for less than $25,000. The six divisions of the Company at which its homes were manufactured in 1996 and certain characteristics of the homes are as follows:
Retail Division Type Square Feet Price Range - --------------------------------------------------------------------------------------- Southern Energy Multi-section 1,312-2,417 $33,800-$108,000 Southern Life/style Single- and multi-section 858-2,296 23,200- 63,000 Southern Homes Single- and multi-section 653-1,968 14,880- 35,400 Southern Energy Homes of Texas Single- and multi-section 1,088-2,128 26,600- 54,600 Southern Energy Homes of North Carolina Single- and multi-section 765-2,075 21,500- 61,200 Southern Energy Homes of Pennsylvania Single- and multi-section 924-2,016 29,900- 55,000
For the fiscal year ended January 3, 1997, the net revenues contributed by each of the Company's six home manufacturing divisions were as follows: Southern Energy - $57 million; Southern Life/Style - $71 million; Southern Homes - - $90 million; Southern Energy Homes of Texas - $35 million; Southern Energy Homes of North Carolina - $26 million; and Southern Energy Homes of Pennsylvania - - $10 million. The Company currently operates four component supply divisions. Classic Panel Designs supplies laminated and other interior wall panels. Wind-Mar Supply provides windows, doors and countertops. Trimmasters produces wood moulding and trim finishing. Unique Dinettes produces kitchen and dining furniture. These divisions sell products both to our manufactured housing divisions and to third-party customers. For the fiscal year period ended January 3, 1997, .5% of the Company's net revenues were attributable to sales of these ancillary products to third-parties. The Company's product development and engineering personnel design homes in consultation with divisional management, sales representatives and dealers. They also evaluate new materials and construction techniques in a continuous program of product development and enhancement. With the use of computer aided design technology, the Company has developed engineering systems which permit customization of homes to meet the individual needs of prospective buyers. These systems allow the Company to make modifications such as increasing the length of a living room, moving a partition, changing the size and location of a window or installing custom cabinets without significant impact upon manufacturing productivity. Each home contains two to four bedrooms, a living room, dining room, kitchen and one to three bathrooms, and features a heating system, a stove and oven, refrigerator, carpeting and draperies. The Company has traditionally focused on designing manufactured homes with features that make them comparable to site-built homes, including stone fireplaces and vaulted ceilings, thus broadening the base of potential customers. In addition to offering the consumer optional features such as dishwashers, oak cabinets and furniture packages as well as a wide range of colors, moldings and finishes, the Company generally permits extensive customization of floor plan designs to meet specific customer preferences. RETAIL FINANCING Home buyers normally secure financing from third-party lenders such as banks or independent finance companies. While the Company believes that consumer financing has generally become more available in the manufactured housing industry in recent years, the availability and cost of financing is important to the Company's sales. In order to provide home buyers with an additional source of financing, the Company's wholly owned subsidiary, Wenco Finance, Inc. ("Wenco Finance") has been originating and servicing consumer loans for homes manufactured by the Company. At January 3, 1997, the Company had $27.6 million of installment contract receivables outstanding as compared with $655,000 at December 29, 1995. In February 1997, the Company formed a joint venture with 21st Century Mortgage Corporation ("21st Century"). The joint venture, Wenco 21, will continue to offer, through 21st Century, consumer financing for homes manufactured by the Company as well as for other homes sold through its retail centers and independent dealers. With marketing support and assistance from the Company and Wenco 21, 21st Century will originate and service consumer loans and will assign to Wenco 21 the net collections from those loans after deducting service fees and costs, credit loss reserves, and principal and interest payments due to third party investors or lenders. Wenco 21 will be obligated to indemnify 21st Century against losses incurred in connection with the loans, other than losses incurred as a result of negligence by 21st Century. In light of the shift in consumer finance activities to Wenco 21, Wenco Finance has suspended its loan origination activities and has engaged 21st Century to service its existing loan portfolio. The Company expects that 21st Century and Wenco 21, which is currently in a start-up phase of operation, will market the new consumer loan program through the Company's retail centers and independent dealer network. There can be no assurance that 21st Century and Wenco 21 will be able to provide significant levels of financing for home buyers, or that such financing activities will not adversely impact the Company's profitability. HOME MANUFACTURING OPERATIONS The Company's homes are currently manufactured by six operating divisions using assembly line techniques at eleven facilities, four of which are located in Addison, Alabama, two of which are located in Double Springs, Alabama, two of which are located in Lynn, Alabama, one of which is located in Fort Worth, Texas, one of which is located in Albemarle, North Carolina and one of which is located in Hegins, Pennsylvania. The Company's facilities operate on a one shift per day, five days per week basis. The Company believes that these facilities have the capacity to produce a total of approximately 485 floor sections per week with minimal labor additions. The Company plans to continue to operate, like most of its competitors, on a single shift per day basis. During the fiscal year ended January 3, 1997, the Company produced an average of 315 floor sections per week. This represented an 18% increase in floor section production from an average of 268 floor sections per week in the fiscal year ended December 29, 1995. In the fiscal year ended December 30, 1994, the Company produced an average of 222 floor sections per week. The following table sets forth the total floor sections and homes sold as well as the number of home manufacturing facilities operated by the Company for the periods indicated: Year Ended ----------------------------------------------------- December 30, December 29, January 3, 1994 1995 1997 ---- ---- ---- Homes 7,571 9,079 10,940 Floor sections 11,553 13,942 16,697 Home manufacturing facilities(1) 8 10 10 (1) Production commenced at the Company's eleventh home manufacturing facility in February 1997. Each division operates as a separate strategic unit that is directed by a general manager and has its own sales force. The general manager, production managers and supervisory personnel of each division have an incentive compensation system which is directly tied to the operating profit of the division. In addition, production personnel of each division have a productivity incentive compensation system. The Company believes that these compensation systems help to focus efforts on curtailing waste and inefficiencies in the production process and represent a divergence from standard industry practices, which are typically designed to reward personnel on production volume criteria. The extent of customization of the home performed by the Company varies to a significant degree with the price of the home. In the higher price range of the market, the home buyer is often less sensitive to the price increase that is associated with significant design modifications that might be desired. However, the Company's experience in producing a customized home on a cost-effective basis has allowed the Company to offer customized homes in all price ranges. The principal materials used in the production of the Company's homes include steel, aluminum, wood products, gypsum wallboard, fiberglass, insulation, carpet, vinyl floor covering, fasteners and hardware items, appliances, electrical items, windows and doors. These materials and components are readily available and are purchased by the Company from numerous sources. No supplier accounted for more than 4.2% of the Company's purchases during each of the past two fiscal years. The Company believes that the size of its purchases allows it to obtain favorable volume discounts. The Company's expenses can be significantly affected by the availability and pricing of raw materials. Sudden increases in demand for construction materials can greatly increase the costs of materials. While such increases in costs can not always be reflected immediately in the Company's prices, the Company in the past has been able to pass along a significant portion of cost increases in its current prices. Because the cost of transporting a manufactured home is significant, substantially all of the Company's homes are sold to dealers within a 600 miles radius of a manufacturing facility. The Company arranges, at the dealer's expense, for the transportation of finished homes to dealer locations using its own trucking subsidiary, MH Transport, Inc., and independent trucking companies. The Company is using MH Transport to transport a majority of its homes. Customary sales terms are cash-on-delivery or guaranteed payment from a floor plan financing source. Dealers or other independent installers are responsible for placing the home on site, making utility hook-ups and providing and installing certain trim items. Substantially all production is initiated against specific orders, and the Company does not maintain any significant inventory of unsold completed homes. The Company's backlog of orders for manufactured homes as of March 1, 1997 was $3.0 million as compared with $8.0 million at March 1, 1996. Dealer orders are subject to cancellation prior to commencement of production for a variety of reasons, and the Company does not consider its order backlog to be firm orders. SALES NETWORK At January 3, 1997, the Company sold manufactured homes through approximately 465 independent dealers at approximately 859 independent dealer locations and through eight company-owned retail centers in 30 states principally in the southeastern and southcentral United States. The Company believes that the quality of its independent dealer network has been important to the Company's performance. Each of the Company's six home manufacturing divisions maintains a separate sales force. At January 3, 1997, a total of 91 salespersons maintained personal contact with the Company's independent dealers. The Company markets its homes through product promotions tailored to specific dealer needs. In addition, the Company advertises in local media and participates in regional manufactured housing shows. The Company believes the close working relationship between its division management and the independent dealers they service has been an important factor in the Company's growth. In order to promote dealer loyalty and to enable dealers to penetrate retail markets, only one independent dealer within a given local market may distribute homes manufactured by a division of the Company. The Company does not have formal marketing agreements with its independent dealers and substantially all of the Company's independent dealers also sell homes of other manufacturers. The Company believes its relations with its independent dealers are good and the Company has experienced relatively low turnover in its established independent dealers in the past three years. In fiscal 1996, the Company's largest dealer accounted for 5.4% of net revenues and the ten largest dealers accounted for 25.7% of net revenues. In the fiscal year ended December 29, 1995, the Company's largest dealer accounted for 5.0% of net revenues, and the Company's ten largest dealers accounted for 24.0% of net revenues. In the fiscal year ended December 30, 1994, the Company's largest dealer accounted for 6.0% of net revenues and the Company's ten largest dealers accounted for 27.6% of net revenues. The Company recently acquired BR Holding Corp. and a group of retail companies doing business as Blue Ribbon Homes ("BR Holding"). BR Holding sells homes on a retail basis, primarily in the southeastern United States. At January 3, 1997, the Company had eight retail sales centers; seven in Alabama and one in Mississippi. Each of the eight sales centers maintains a separate sales force. Buyers of manufactured homes typically shop at a number of locations prior to purchasing a home. The Company believes that it provides most of its dealers with a marketing advantage because of the dealer's ability to represent that the Company's homes can be customized to meet the individual preferences of the customer. The manufactured housing market is highly cyclical and seasonal and is affected by the same economic factors which impact the broader housing market. Historically, most sectors of the homebuilding industry have been affected by, among other things, changes in general economic conditions, levels of consumer confidence, employment and income, housing demand, availability of financing and interest rate levels. WARRANTY, QUALITY CONTROL AND SERVICE The Company adheres to strict quality standards and continuously refines its production procedures. In addition, in accordance with the construction codes promulgated by the Department of Housing and Urban Development ("HUD"), an independent HUD-approved, third-party inspector inspects each of the Company's manufactured homes for compliance during construction at the Company's manufacturing facilities. See "-Regulation." The Company provides the initial home buyer with a HUD-mandated, one-year limited warranty against manufacturing defects in the home's construction. In addition, there are often direct warranties that are provided by the manufacturer of components and appliances. The Company has experienced quality assurance personnel at each of its manufacturing facilities to provide on-site service to dealers and home buyers. In order to respond more quickly to customer service requests and to maintain a high level of customer satisfaction as the Company continues to grow, the Company has increased its customer service staff. Enhanced quality assurance systems are expected to contribute to the value and appeal of the Company's homes and, over the long term, to reduce consumer warranty claims. INDEPENDENT DEALER FINANCING Substantially all of the Company's independent dealers finance their purchases through "floor plan" arrangements under which a financial institution provides the dealer with a loan for the purchase price of the home and maintains a security interest in the home as collateral. In connection with a floor plan arrangement, the financial institution which provides the independent dealer financing customarily requires the Company to enter into a separate repurchase agreement with the financial institution under which the Company is obligated, upon default by the independent dealer, to repurchase the homes at the Company's original invoice price plus certain administrative and shipping expenses. At January 3, 1997, the Company's contingent repurchase liability under floor plan financing arrangements through independent dealers was approximately $91 million. While homes that have been repurchased by the Company under floor plan financing arrangements are usually sold to other dealers and losses to date under these arrangements have been insignificant, no assurance can be given that the Company will be able to sell to other dealers homes which it may by obligated to repurchase in the future under such floor plan financing arrangements or that the Company will not suffer losses with respect to, and as a consequence of, those arrangements. No dealer accounted for more than 6.0% of the Company's net revenues in each of the past three fiscal years. See "-Sales Network." The Company does not view any single independent dealer as being a material customer. While the Company does not have access to financial information regarding its independent dealers, it is not aware that any independent dealer is experiencing financial difficulties. The Company also finances substantially all of its retail inventory through floor plan arrangements. Such borrowings totaled approximately $12.0 million at January 3, 1997. COMPETITION The manufactured housing industry is highly competitive at both the manufacturing and retail levels, with competition based upon factors including total price to the dealer, customization to homeowners' preferences, product features, quality, warranty repair service and the terms of dealer and retail customer financing. The Company does not view any of its competitors as being dominant in the industry. A number of these firms are larger than the Company and possess greater manufacturing and financial resources. In addition, there are numerous firms producing manufactured homes in the southeastern and southcentral United States, many of which are in direct competition with the Company in the states where its homes are sold. Certain of the Company's competitors provide retail customers with financing from captive finance subsidiaries. While the Company believes consumer financing has generally become more available in the manufactured housing industry in recent years, and although the Company has recently formed its Wenco 21 joint venture to provide consumer financing to customers through 21st Century, a contraction in consumer credit could provide an advantage to those competitors with established internal financing capabilities. The capital requirements for entry as a producer in the manufactured housing industry are relatively small. However, the Company believes that the qualifications for obtaining inventory financing, which are based upon the financial strength of the manufacturer and each of its dealers, have in recent years become more difficult to meet. Manufactured homes compete with new site-built homes, as well as apartments, townhouses, condominiums and existing site-built and manufactured homes. The Company believes that its willingness to customize floor plans and design features to match customer preferences is the principal factor which differentiates it from most of its competitors in the manufactured housing industry. REGULATION The Company's manufactured homes are subject to a number of federal, state and local laws. Construction of manufactured housing is governed by the National Manufactured Home Construction and Safety Standards Act of 1974. In 1976, HUD issued regulations under this Act establishing comprehensive national construction standards. The HUD regulations cover all aspects of manufactured home construction, including structural integrity, fire safety, wind loads, thermal protection, plumbing and electrical. Such regulations preempt conflicting state and local regulations. The Company's manufacturing facilities and the plans and specifications of its manufactured homes have been approved by a HUD-designated inspection agency. An independent, HUD-approved third-party inspector checks each of the Company's manufactured homes for compliance during at least one phase of construction. In 1994, HUD amended manufactured home construction safety standards to improve the wind force resistance of manufactured homes sold for occupancy in coastal areas prone to hurricances. Failure to comply with the HUD regulations could expose the Company to a wide variety of sanctions, including closing the Company's plants. The Company believes its manufactured homes meet or surpass all present HUD requirements. Manufactured, modular and site-built homes are all built with particleboard, paneling and other products that contain formaldehyde resins. Since February 1985, HUD has regulated the allowable concentration of formaldehyde in certain products used in manufactured homes and required manufacturers to warn purchasers concerning formaldehyde associated risks. The Company currently uses materials in its manufactured homes that meet HUD standards for formaldehyde emissions and that otherwise comply with HUD regulations in this regard. In addition, certain components of manufactured homes are subject to regulation by the Consumer Product Safety Commission ("CPSC") which is empowered to ban the use of component materials believed to be hazardous to health and to require the manufacturer to repair defects in components of its homes. The CPSC, the Environmental Protection Agency and other governmental agencies are evaluating the effects of formaldehyde. In February 1983, the Federal Trade Commission adopted regulations requiring disclosure of manufactured home's insulation specifications. The Company's manufactured homes are also subject to local zoning and housing regulations. A number of states require manufactured home producers to post bonds to ensure the satisfaction of consumer warranty claims. A number of states have adopted procedures governing the installation of manufactured homes. Utility connections are subject to state and local regulation, and must be complied with by the dealer or other person installing the home. The Company is subject to the Magnuson-Moss Warranty Federal Trade Commission Improvement Act, which regulates the descriptions of warranties on products. The description and substance of the Company's warranties are also subject to a variety of state laws and regulations. Wenco Finance, the Company's finance subsidiary, is subject to a number of state and local licensing requirements which are applicable to businesses engaged in the origination and servicing of consumer loans. In addition, both Wenco Finance and Wenco 21, the Company's new finance joint venture with 21st Century, are also subject to a variety of federal and state laws and regulations regulating consumer finance, including the Truth in Lending Act, which regulates lending procedures and mandates certain loan disclosures with respect to financing offered to consumers. Failure by Wenco Finance or Wenco 21 to comply with any of these laws and regulations could have a material adverse effect on the Company's business and results of operation. MH Transport, the Company's trucking subsidiary, is subject to federal and state laws and regulations which apply to motor vehicle carriers operating in interstate and intrastate commerce. Failure by MH Transport to comply with any of these laws and regulations could have a material adverse effect on the Company's business and results of operations. The Company believes that it is in compliance with the foregoing existing government regulations. RECENT ACQUISITIONS On November 21, 1996, the Company acquired BR Holding Corp., a company which operates a group of companies engaged in the retail sale of manufactured homes, and is doing business as Blue Ribbon Homes ("BR Holding"). BR Holding also operates an insurance agency which provides homeowner insurance for manufactured homes. The Company paid $1,075,000 in cash and issued 332,814 shares of the Company's common stock (approximate market value on November 21, 1996 of $4,532,000). The acquisition was accounted for under the purchase method of accounting; thus the Company's financial statements as of January 3, 1997 and for the year then ended reflect the operations of BR Holding from the date of acquisition. The total purchase price exceeded the fair value of net assets acquired by $5,480,000, which amount is being amortized over 30 years as goodwill. In addition, the Company entered into four year non-compete agreements with the former stockholders of BR Holding for an aggregate amount of $50,000, which amount is included in the cash purchase price noted above. The stock purchase agreement requires the Company to make additional payments to the seller contingent on future earnings performance of BR Holding. Any additional payments will be made 20% in cash and 80% in shares of the Company's common stock and will be accounted for as goodwill and amortized over the remaining recovery period of the goodwill. In July, 1996, the Company acquired Unique Dinettes, Inc. ("Unique"), a manufacturer of ceramic tables and countertops. The total purchase price of $434,000 was paid in cash, and exceeded the fair value of the acquired assets by $44,000. The Unique acquisition was accounted for under the purchase method of accounting. In January 1996, the Company acquired Trimmasters, Inc. ("Trimmasters"), a manufacturer of trim moulding. The total purchase price of $356,000 was paid in cash, and exceeded the fair value of the acquired assets by $297,000. The Trimmasters acquisition was accounted for under the purchase method of accounting. EMPLOYEES As of January 3, 1997, the Company employed 2,516 full-time employees involved in the following functional areas: manufacturing, 2,049; sales, 91; field service, 133; administration and clerical, 140; drivers, 78; and management, 25. The Company's manufacturing operations require primarily semi-skilled labor and personnel levels fluctuate with seasonal changes in production volume. None of the Company's employees are represented by a collective bargaining agreement. The Company believes that it has a good relationship with its employees, and it has never experienced any work stoppage. EXECUTIVE OFFICERS Information concerning the Executive Officers of the Company is as follows. Executive Officers are elected annually by and serve at the pleasure of the Board of Directors. Wendell L. Batchelor (age 54) is the founder of the Company and has been the Company's President, Chief Executive Officer and a Director since the Company's incorporation in 1982. From 1971 to 1982, Mr. Batchelor was General Manager of Shiloh Homes, a division of Winston Industries. Mr. Batchelor was Sales Manager of Marietta Homes, a division of Winston Industries, from 1968 to 1971. From 1966 to 1968, Mr. Batchelor was a Sales Representative for Madrid Homes. Mr. Batchelor has served in the past as Chairman of the Alabama Manufacturer's Housing Institute. Johnny R. Long (age 50) has been a Vice President of the Company primarily responsible for purchasing and a Director since the Company's incorporation in 1982. From 1976 to 1982, Mr. Long served as Purchasing Agent for Shiloh Homes, a division of Winston Industries. Mr. Long was Purchasing Agent for Bendix Homes from 1974 to 1976, for Commodore Homes from 1972 to 1974, and for Chevelle Homes from 1966 to 1972. Keith W. Brown (age 40) has served as the Company's Chief Financial Officer since the Company's incorporation in 1982 and as a Director since 1989. Mr. Brown served as the Company's Secretary from 1982 to January 1993 and resumed that office in September 1993. He was elected Treasurer in January 1993. From 1980 to 1982, Mr. Brown served as Controller for Shiloh Homes, a division of Winston Industries. Keith O. Holdbrooks (age 36) was elected as the Company's Chief Operating Officer in August 1996 by the Company's board of directors. From 1991 to 1996, Mr. Holdbrooks served as General Manager for Southern Homes, a division of the Company, and from 1989 to 1991 served as Sales Manager for Southern Homes, and from 1985 to 1989 served as salesman for Southern Lifestyle, a division of the Company. ITEM 2. PROPERTIES The Company's manufactured home segment currently operates eleven home manufacturing facilities (eight in Alabama, and one in each of Texas, North Carolina and Pennsylvania) and four component supply facilities (all in Alabama). The facilities used by the Company's manufactured home segment are as follows:
Building Leased or Unit Location Square Feet Owned - ---- -------- ----------- ----- Manufacturing Southern Energy Plant #1 Addison, AL 72,000 Owned Plant #2 Addison, AL 55,000 Owned Southern Life/style Plant #1 Addison, AL 62,500 Owned Plant #2 Addison, AL 54,000 Leased Southern Homes Plant #1 Double Springs, AL 60,000 Owned Plant #2 Double Springs, AL 52,000 Owned Plant #3 Lynn, AL 90,700 Owned Plant #4 Lynn, AL 96,000 Owned Southern Energy Homes of Texas Fort Worth, TX 98,300 Owned Southern Energy Homes of North Carolina Albemarle, NC 77,000 Owned Southern Energy Homes of Pennsylvania Hegins, PA 85,000 Leased Component Supply Classic Panel Hartselle, AL 24,000 Owned Wind-Mar Supply Addison, AL 22,000 Owned Trimmasters Haleyville, AL 50,000 Leased Unique Dinettes Haleyville, AL 50,000 Leased
The Company currently operates eight retail sales centers, seven of which are in Alabama and one in Mississippi. Each of the lots are currently leased and such lease terms range from one to five years. The corporate headquarters is located at the Southern Energy facility and occupies approximately 3,000 square feet of office space. The Company plans to construct a new facility for its corporate headquarters by the end of 1997. Each of the Company's manufacturing facilities, other than the Company's facility in Pennsylvania and its new facility in Lynn, Alabama, is operating near full capacity. During the fiscal year ended January 3, 1997, the Company's Pennsylvania facility was operating at approximately 25% of its daily capacity. The newly constructed facility in Lynn, Alabama has been operating at approximately 20% of its daily capacity since its start-up in February 1997. MH Transport owns and occupies an approximate 1,800 square foot office building in Double Springs, Alabama. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in a lawsuit filed on March 27, 1996 in Fulton County Superior Court, Georgia by EurAm International, Inc., a sales agent for the Company. On April 29, 1996 the Company removed the case to the United States District Court for the Northern District of Georgia in Atlanta. In this lawsuit, the plaintiff alleges that the Company has breached an agreement relating to the sale of the Company's modular homes in Germany, including alleged misrepresentations and faulty performance, resulting in damages alleged to amount to $25 million. The Company believes the claim is without merit and intends to vigourously defend the claim, but the litigation is currently in discovery and there can be no assurances as to its likely outcome. In addition, the Company has been informed by Gesellschoft fur Bauen Und Wohnen Hannover MbH ("GBH"), a German housing authority, that it has replaced the Company with a local company to complete a contract that GBH had entered into with the Company for the purchase and erection of modular housing in Hannover, Germany. In connection with the contract, the Company posted a $660,000 letter of credit in favor of GBH. GBH has made a claim against the Company for damages of approximately $800,000 arising from the shift in suppliers and has attempted to draw upon the letter of credit posted by the Company. The Company has obtained a temporary restraining order preventing GBH from drawing upon the letter of credit and the Company is actively negotiating with GBH to resolve the dispute. In light of the fact that the negotiations with GBH are ongoing, there can be no assurances as to the likely resolution of the GBH claim. The Company is a party to various other legal proceedings incidental to its business. The majority of these legal proceedings relate to employment matters or product warranty liability claims for which management believes adequate reserves are maintained. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to these proceedings will not materially affect the financial position or results of operations of the Company; however, the ultimate resolution of these matters, which could occur within one year, could result in losses in excess of the amounts reserved. ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Stockholders of the Company during the fourth quarter of fiscal 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS RECENT SALES OF UNREGISTERED SECURITIES On November 21, 1996, the registrant issued 332,814 shares of common stock, $.0001 par value (the "Shares"), to the stockholders of BR Holding Corp. ("BR Holding") in connection with the registrant's acquisition of BR Holding. The Shares were issued as consideration for the merger of BR Holding with a wholly-owned subsidiary of the registrant. As a result of the merger, the registrant acquired all the issued and outstanding capital stock of BR Holding. The aggregate merger consideration given by the registrant was $5.6 million, of which $1.1 million was paid in cash and $4.5 million was paid with the Shares. The Shares were issued in a transaction exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The Shares were issued to a limited number of individuals who were sophisticated (or whose representative was sophisticated) about business and financial matters. The registrant made available to the purchasers information about the business and finances of the registrant, including reports filed by the registrant pursuant to the Securities Exchange Act of 1934. The registrant also permitted the purchasers to ask questions of and receive answers from its officers and directors concerning the registrant's business and finances. The purchasers made certain representations to the registrant as to, among other things, investment intent and experience and sophistication as to business and financial matters. RECORD HOLDERS As of March 1, 1997, there were 74 record holders. This number does not include those stockholders holding stock in "nominee" or "street" name. STOCK PRICE PERFORMANCE The Company's Common Stock has been publicly traded on the Nasdaq Stock Market since March 12, 1993. The original price per share was $6.93. 1996 1995 Price Range Price Range High Low High Low First Quarter 11.75 9.00 7.07 5.60 Second Quarter 15.25 9.67 7.47 5.87 Third Quarter 16.25 10.00 11.33 8.17 Fourth Quarter 18.13 11.38 12.50 8.67 DIVIDENDS It is the Company's current policy to retain future earnings to finance the continuing development of its business. The company has not paid any dividends since the initial public offering of its stock. ITEM 6. SELECTED FINANCIAL DATA Five-Year Selected Financial Data Southern Energy Homes, Inc. and subsidiaries (Dollars in thousands, except per share data)
Year Ended Year Ended Year Ended Year Ended Nine Months Ended January 3, December 29, December 30, December 31, December 30, 1997 1995 1994 1993 1992 Operating Data - -------------- Net revenues $306,844 $241,268 $188,750 $143,618 $83,400 Gross profit 43,647 31,125 24,763 19,518 12,213 Selling, general and administrative 17,634 13,272 10,633 7,795 4,744 Provision for credit losses 1,177 - - - - Amortization 517 422 322 531 1,307 Non-recurring charges(1) - - - 1,907 - Operating income 24,319 17,431 13,808 9,285 6,162 Interest expense 131 146 237 654 1,512 Interest income 593 811 392 184 - Provision for income taxes 9,535 6,854 5,139 3,454 1,735 Net income 15,246 11,242 8,824 5,244 2,915 Net income per share $1.01 $0.79 $0.62 $0.40 $0.27 Weighted average shares outstanding 15,122,578 14,300,466 14,161,135 13,094,010 10,749,999 January 3, December 29, December 30, December 31, December 31, Balance Sheet Data 1997 1995 1994 1993 1992 - ------------------ Total assets $112,658 $75,899 $54,347 $43,340 $26,735 Long-term debt - 6 596 1,502 12,575 Stockholders' equity $ 77,377 $57,242 $38,559 $29,722 $ 613
(1) Upon completion of the Company's initial public offering, the Company terminated all non-compete agreements and wrote off $1.9 million in non-recurring charges. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Year Ended January 3, 1997 as Compared with Year Ended December 29, 1995 Total net revenues (gross sales less volume discounts, returns, and allowances) and finance revenue for the year ended January 3, 1997 were $306.8 million, which represented an increase of 27.2% over the prior fiscal year. During the fourth quarter of 1996 the Company entered into the retail sector of the industry through the acquisition of BR Holding Corp. and a group of retail companies doing business as Blue Ribbon Homes. Net revenues of the manufactured home segment, which includes the Company's retail operations, were $304.8 million for the year ended January 3, 1997 as compared with $241.2 million for the prior year period. Retail home sales accounted for $4.0 million of the manufactured home segment revenues for the year ended January 3, 1997. The average wholesale price per home in 1996 was $28,000, as compared with $27,000 in 1995, an increase of 3.7%. Total homes sold in the year ended January 3, 1997 was 10,940, up 20.5% over the number of homes sold in the prior year period. The increase in homes sold was attributable primarily to increased capacity from a manufactured housing facility in Alabama which was added in the fourth quarter of 1995 and increased production from the Texas plant. Revenues from the Company's retail financing segment were $2.0 million for the year ended January 3, 1997, as compared with $30,000 for the prior year period. This increase was attributable to the increased lending activity by the Company's wholly owned subsidiary, Wenco Finance, Inc. ("Wenco"). Wenco has been originating and servicing consumer loans primarily for homes manufactured by the Company. In February 1997, the Company formed a joint venture with 21st Century Mortgage Corporation ("21st Century"). The joint venture, Wenco 21, will continue to offer, through 21st Century, consumer financing for homes manufactured by the Company as well as for other homes sold through its retail centers and independent dealers. In light of the shift in consumer finance activities to Wenco 21, Wenco has suspended its loan origination activities and has engaged 21st Century to service its existing loan portfolio. Gross profit consists of net revenues less the cost of sales, which includes labor, materials, and overhead. Gross profit for the year ended January 3, 1997 was $43.6 million, or 14.2% of net revenues, as compared with $31.1 million, or 12.9% of net revenues, in the prior year period. This increase in the gross profit percentage was attributable primarily to lower material prices which were partially offset by increased warranty costs. The increase in warranty expense was attributable primarily to an increase in the Company's customer service staff and the expansion of the Company's service fleet. Selling expenses include primarily sales commissions, advertising expenses, salaries for support personnel, and freight costs. Selling expenses were $7.0 million, or 2.3% of net revenues, during the year ended January 3, 1997, as compared with $5.7 million, or 2.4% of net revenues, during the prior year period. The decrease in selling expense as a percentage of net revenues was attributable primarily to savings in shipping costs realized from an increase in shipments through MH Transport, the Company's trucking subsidiary, which reduced the Company's reliance upon independent trucking companies. General and administrative expenses include administrative salaries, executive and management bonuses, insurance costs, and professional fees. General and administrative expenses were $10.6 million, or 3.5% of net revenues, for the year ended January 3, 1997, as compared with $7.6 million, or 3.1% of net revenues, for the same period of 1995. The increase in general and administrative expenses as a percentage of net revenues was attributable primarily to salary increases and the addition of new employees who were hired in order to resolve staffing shortages which have occurred as the Company continues to expand. The Company provides for estimated credit losses based on industry experience, historical loss experience, current repossession trends and costs, and management's assessment of the current credit quality of the loan portfolio. The provision for credit losses for the year ended January 3, 1997 was $1.2 million as compared with $0 for the year ended December 29, 1995. The increase in the provision for loan losses was due to the increase in installment contracts receivable from $655,000 in 1995 to $27.6 million in 1996. Interest income for the year ended January 3, 1997 was $593,000 as compared with $811,000 for the year ended December 29, 1995. The decrease in interest income reflects lower average investment balances during the year ended January 3, 1997. Income taxes are provided for based on the tax effect of revenue and expense transactions included in the determination of pre-tax book income. Income tax expense for the year ended January 3, 1997 was $9.5 million, or an effective tax rate of 38.5%, compared with $6.9 million, or an effective tax rate 37.9%, for the year ended December 29, 1995. The increase in effective tax rate is attributable in part to the Company's movement into a higher federal income tax bracket and also reflects a proportional shift in the Company's income from Alabama to other states which have higher income tax rates than Alabama. Year Ended December 29, 1995 as Compared with Year Ended December 30, 1994 Net revenues for the year ended December 29, 1995 were $241.3 million, which represented an increase of 27.8% over the same period of 1994. The average price per home in 1995 was $27,000 as compared with $25,000 in 1994, an increase of 8.0%. The total number of homes sold in the year ended December 29, 1995 was 9,079, up 20.0% over the number of homes sold in the prior year period. The increase in the number of homes sold was attributable primarily to increased capacity from a manufactured housing facility in North Carolina acquired during the third quarter of 1994 and increased production from the Texas and Alabama plants added during 1993 that were still in a start-up phase of operation during the first six months of 1994. Gross profit for the year ended December 29, 1995 was $31.1 million, or 12.9% of net revenues, as compared with $24.8 million, or 13.1% of net revenues, in the prior year period. This decrease in the gross profit percentage was attributable primarily to increased warranty and labor costs which were partially offset by lower material prices. The increase in warranty expense as a percentage of net revenues was attributable primarily to an increase in the Company's customer service staff, the development of a regional customer service center in Addison, Alabama, and the expansion of the Company's service fleet. Selling expenses were $5.7 million, or 2.4% of net revenues,during the year ended December 29, 1995, as compared with $4.8 million, or 2.6% of net revenues, during the prior year period. The decrease in selling expenses as a percentage of net revenues was attributable primarily to savings in shipping costs realized from shipments through MH Transport, the Company's trucking subsidiary, which reduced the Company's reliance upon independent trucking companies. General and administrative expenses were $7.6 million, or 3.1% of net revenues, for the year ended December 29, 1995, as compared with $5.8 million, or 3.1% of net revenues, for the same period of 1994. The increase in general and administrative expenses was attributable primarily to additional employees who were hired in order to resolve staffing shortages which had occurred as the Company continued to expand. Interest income for the year ended December 29, 1995 was $811,000 as compared with $392,000 for the year ended December 30, 1994. The increase in interest income reflected higher investment yield and higher average investment balances. Income tax expense for the year ended December 29, 1995 was $6.9 million, or an effective tax rate of 37.9%, compared with $5.1 million, or an effective tax rate of 36.8%, for the year ended December 30, 1994. The increase in effective tax rate was attributable in part to the Company's movement into a higher federal income tax bracket and also reflected a proportional shift in the Company's income from Alabama to other states which have higher income tax rates than Alabama. LIQUIDITY AND CAPITAL RESOURCES Since its organization, the Company has financed its operations primarily with cash generated from a combination of operations, stock offerings, and borrowings. Cash Flows During the year ended January 3, 1997, the Company's cash used by operations was approximately $9.2 million. Cash used by operations includes originations of installment contracts of $27.5 million, increased inventory and prepayments of $7.3 million, and decreased accounts payable of $1.2 million. These amounts were partially offset by net income of $15.2 million, decreased accounts receivable of $3.9 million, and increased accrued liabilities of $4.5 million. In addition to cash provided by operating activities, other significant cash flows included capital expenditures of $5.5 million, borrowings of $3.1 million, maturities of investments of $2.1 million, and purchase of subsidiaries for $1.2 million. During the year ended December 29, 1995, the Company's cash provided by operations was approximately $8.4 million. Cash provided by operations includes net income of $11.2 million and increased accounts payable and accrued liabilities of approximately $2.7 million. These amounts were partially offset by an increase in accounts receivable of approximately $5.3 million and an increase in inventories of approximately $1.3 million. Each of these increases was primarily related to sales growth. In addition to cash provided by operating activities, other significant cash flows included net proceeds from the issuance of common stock of $7.2 million, capital expenditures of $5.2 million, maturities of investments of $4.9 million, and repayments of long-term debt of $1.5 million. Subsequent to January 3, 1997, the Company formed a joint venture, Wenco 21, with 21st Century, which through 21st Century will originate and service retail installment contracts. The Company has made an initial capital contribution of $500,000 to Wenco 21, representing a 50 percent ownership interest of the joint venture. Under its joint venture agreement with 21st Century, the Company may be called upon to make additional capital contributions or loans in order to meet Wenco 21's capital requirements. The Company believes that cash on hand,cash generated by its operations, and funds available under its existing line of credit will be adequate to fund any such commitments. At January 3, 1997, the Company's net working capital was $17.7 million, including $5.3 million in cash and cash equivalents, as compared with $34.4 million at December 29, 1995, including $16.8 million in cash and cash equivalents and $2.1 million in investments. The decrease in net working capital was a result of a decrease in cash and cash equivalents of $11.5 million and increased notes payable and accrued liabilities of $16.6 million, which was partially offset by increased inventories of $15.8 million. The increase in inventory and notes payable was primarily attributable to the homes held at the recently acquired retail locations and the related floor-plan financing. The Company also has a $10.0 million unsecured line of credit which is renewable annually and bears interest at the London Interbank Offered Rate ("LIBOR") plus 1.5%. The Company's ability to draw upon this line of credit is dependent upon meeting certain financial ratios and covenants. The Company has no outstanding borrowings under this line. Substantially all of the Company's dealers finance their purchases through "floor-plan" arrangements under which a financial institution provides the dealer with a loan for the purchase price of the home and maintains a security interest in the home as collateral. In connection with a floor-plan agreement, the financial institution which provides the dealer financing customarily requires the Company to enter into a separate repurchase agreement with the financial institution under which the Company is obligated, upon default by the dealer, to repurchase the homes at the Company's original invoice price plus certain administrative and shipping expenses less any principal payments made by the dealer. At January 3, 1997, the Company's contingent repurchase liability under floorplan financing arrangements was approximately $91.2 million. While homes that have been repurchased by the Company under floor-plan financing arrangements are usually sold to other dealers and losses experienced to date under these arrangements have been insignificant, no assurance can be given that the Company will be able to sell to other dealers homes which it may be obligated to repurchase in the future under such floorplan financing arrangements or that the Company will not suffer losses with respect to, and as a consequence of, those arrangements. During 1997, the Company plans to build a new corporate office facility in Addison, Alabama at a cost of approximately $1.5 million and plans to acquire or open more retail sales centers. The Company believes that cash on hand, cash generated by operations, and funds available under its existing line of credit will be adequate to fund its expansion plans. Expansion The Company has continued to demonstrate its ability to increase sales, expand production capacity, and vertically integrate its operations through the acquisition of additional manufacturing facilities and businesses. In August 1995, the Company purchased a 90,700-square-foot manufacturing facility in Lynn, Alabama for $150,000 and expended approximately $800,000 for capital improvements to prepare the facility for full production. Production commenced at this facility in October 1995. In November 1995, the Company acquired substantially all of the assets and assumed certain of the liabilities of a manufactured housing company located in Hegins, Pennsylvania for approximately $942,000. In January 1996, the Company acquired substantially all of the assets and assumed all of the liabilities of a moulding company located in Haleyville, Alabama for approximately $175,000. In April 1996, the Company purchased an additional 96,000square-foot manufacturing facility in Lynn, Alabama for approximately $425,000 and expended approximately $2.0 million for capital improvements to prepare the facility for full production. Production commenced at this facility in February 1997. In July 1996, the Company acquired substantially all of the assets and assumed all of the liabilities of a table and countertop company located in Haleyville, Alabama for approximately $145,000. In October 1996, the Company formed a joint venture with Belmont Homes and Cavalier Homes to produce and supply cabinet doors to each of the participant's manufacturing operations. The joint venture was capitalized by the Company with $770,000. In November 1996, the Company acquired a group of retail sales centers in Alabama and Mississippi. The purchase price consisted of approximately $1.1 million in cash and $4.5 million of common stock issued. The Company is obligated to make additional payments to the seller if the acquired business meets certain earnings targets. Inflation The Company believes that the relatively moderate rate of inflation over the past few years has not had a significant impact on its sales or profitability. The Company has in the past been able to pass on most of the increases in its costs by increasing selling prices, although there can be no assurance that the Company will be able to do so in the future. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets
January 3, December 29, 1997 1995 ---------------- --------------- ASSETS Current assets: Cash and cash equivalents $5,299,000 $16,750,000 Investments - 2,076,000 Accounts receivable, less allowance for doubtful accounts of $362,000 and $163,000, respectively 17,558,000 21,070,000 Installment contracts receivable 421,000 18,000 Inventories 27,019,000 11,226,000 Deferred tax benefits 1,829,000 1,269,000 Prepayments and other 890,000 623,000 ---------------- --------------- 53,016,000 53,032,000 ---------------- --------------- Property, plant, and equipment: Property, plant, and equipment, at cost 23,527,000 17,521,000 Less - accumulated depreciation (5,169,000) (3,690,000) ================ =============== 18,358,000 13,831,000 ================ =============== Intangibles and other non-current assets: Installment contracts receivable, less allowance for credit losses of $1,142,000 at January 3, 1997 26,064,000 637,000 Goodwill 13,093,000 7,509,000 Non-compete agreements 667,000 328,000 Organization and pre-operating costs 649,000 523,000 Other assets 811,000 39,000 ---------------- --------------- 41,284,000 9,036,000 ---------------- --------------- $112,658,000 $75,899,000 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $12,025,000 $- Current maturities of long-term debt - 86,000 Accounts payable 4,303,000 4,947,000 Volume incentive payable 8,541,000 5,761,000 Accrued payroll-related expenses 2,743,000 2,447,000 Accrued workers' compensation 2,426,000 1,262,000 Accrued warranty 1,944,000 2,088,000 Accrued legal and accounting 1,259,000 729,000 Accrued other 2,040,000 1,331,000 ---------------- --------------- 35,281,000 18,651,000 ---------------- --------------- Long-term debt - 6,000 ---------------- --------------- Commitments and Contingencies ---------------- --------------- Stockholder's equity: Preferred stock, $.0001 par value, 1,000,000 shares authorized, none outstanding - - Common stock, $.0001 par value, 20,000,000 shares authorized, 15,437,801 shares outstanding at January 3, 1997; 15,053,388 shares outstanding at December 29, 1995 2,000 1,000 Capital in excess of par 35,999,000 31,111,000 Retained earnings 41,376,000 26,130,000 ---------------- --------------- 77,377,000 57,242,000 ---------------- --------------- $112,658,000 $75,899,000 ================ ===============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. Consolidated Statements of Operations
Year Ended January 3, December 29, December 30, 1997 1995 1994 (53 Weeks) (52 Weeks) (52 Weeks) ----------------- ----------------- ----------------- Net revenues $306,844,000 $241,268,000 $188,750,000 Cost of sales 263,197,000 210,143,000 163,987,000 ----------------- ----------------- ----------------- Gross profit 43,647,000 31,125,000 24,763,000 ----------------- ----------------- ----------------- Operating expenses: Selling 7,015,000 5,712,000 4,846,000 General and administrative 10,619,000 7,560,000 5,787,000 Provision for credit losses 1,177,000 - - Amortization of intangibles 517,000 422,000 322,000 ----------------- ----------------- ----------------- 19,328,000 13,694,000 10,955,000 Operating income 24,319,000 17,431,000 13,808,000 ----------------- ----------------- ----------------- Interest expense 131,000 146,000 237,000 Interest income 593,000 811,000 392,000 ----------------- ----------------- ----------------- Income before provision for income taxes 24,781,000 18,096,000 13,963,000 Provision for income taxes 9,535,000 6,854,000 5,139,000 Net income $15,246,000 $11,242,000 $8,824,000 ================= ================= ================= Net income per share $1.01 $ 0.79 $ 0.62 ================= ================= ================= Weighted average number of common and common equivalent shares 15,122,578 14,300,466 14,161,135 ================= ================= =================
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. Consolidated Statements of Stockholders' Equity
Common Stock -------------------------------- Capital in Retained Shares Amount Excess of Par Earnings Total ----------------- -------------- --------------- --------------- -------------------- Balance, December 31, 1993 14,159,436 $1,000 $23,657,000 $6,064,000 $29,722,000 Exercise of stock option 1,875 - 13,000 - 13,000 Net income - - - 8,824,000 8,824,000 ----------------- -------------- --------------- --------------- -------------------- Balance, December 30, 1994 14,161,311 1,000 23,670,000 14,888,000 38,559,000 Net proceeds from issuance of common stock 862,500 - 7,236,000 - 7,236,000 Exercise of stock options 29,577 - 205,000 - 205,000 Net income - - - 11,242,000 11,242,000 ----------------- -------------- --------------- --------------- -------------------- Balance, December 29, 1995 15,053,388 1,000 31,111,000 26,130,000 57,242,000 Exercise of stock options 51,599 - 357,000 - 357,000 Issuance of common stock in connection with acquisition 332,814 1,000 4,531,000 - 4,532,000 Net income - - - 15,246,000 15,246,000 ----------------- -------------- --------------- --------------- -------------------- Balance, January 3, 1997 15,437,801 $2,000 $35,999,000 $41,376,000 $77,377,000 ----------------- -------------- --------------- --------------- --------------------
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. Consolidated Statements of Cash Flows
Year Ended January 3, December 29, December 30, 1997 1995 1994 (53 Weeks) (52 Weeks) (52 Weeks) ----------------- ----------------- ----------------- Operating activities: Net income $15,246,000 $11,242,000 $8,824,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation of property,plant, and equipment 1,168,000 1,273,000 959,000 Provision (credit) for deferred income taxes (560,000) (158,000) 3,000 Gain on sale of property, plant, and equipment 37,000 13,000 2,000 Amortization of intangibles 517,000 422,000 322,000 Provision for doubtful accounts 210,000 22,000 31,000 Accretion of discount on debt - 78,000 103,000 Provision for credit losses 1,177,000 - - Change in assets and liabilities, net of effect from purchase of subsidiaries: Accounts receivable 3,936,000 (5,277,000) (2,083,000) Inventories (7,039,000) (1,260,000) (1,215,000) Prepayments and other (255,000) (723,000) (127,000) Accounts payable (1,174,000) 328,000 (529,000) Accrued liabilities 4,525,000 2,418,000 1,834,000 Origination of installment contracts (27,497,000) - - Principal collected on originated installment contracts 490,000 - - ----------------- ----------------- ----------------- Net cash provided by (used in) operating activities (9,219,000) 8,378,000 8,124,000 ----------------- ----------------- ----------------- Investing activities: Purchase of subsidiaries,net of cash acquired (1,217,000) (942,000) (5,745,000) Capital expenditures (5,501,000) (5,161,000) (3,066,000) Maturities of investments 2,076,000 4,924,000 - Purchase of investments - - (7,000,000) Investment in joint venture (770,000) - - Increase in organization and pre-operating costs (305,000) (482,000) - Proceeds from sale of property, plant, and equipment 68,000 42,000 8,000 ----------------- ----------------- ----------------- Net cash used in investing activities (5,649,000) (1,619,000) (15,803,000) ----------------- ----------------- ----------------- Financing activities: Net borrowings on notes payable 3,060,000 - - Repayments of long-term debt - (1,454,000) (1,151,000) Net proceeds from issuance of common stock - 7,236,000 - Proceeds from exercise of stock options 357,000 205,000 13,000 ----------------- ----------------- ----------------- Net cash provided by (used in) financing activities 3,417,000 5,987,000 (1,138,000) ----------------- ----------------- ----------------- Net increase (decrease) in cash and cash equivalents (11,451,000) 12,746,000 (8,817,000) Cash and cash equivalents at beginning of period 16,750,000 4,004,000 12,821,000 ----------------- ----------------- ----------------- Cash and cash equivalents at end of period $5,299,000 $16,750,000 $4,004,000 ----------------- ----------------- ----------------- Supplemental cash flow information: Cash paid for interest $131,000 $ 78,000 $141,000 ================= ================= ================= Cash paid for income taxes $9,369,000 $7,568,000 $5,400,000 ================= ================= =================
Supplemental disclosures of non-cash investing activities: During fiscal 1996 the Company purchased BR Holding Corp. for $5.6 million, of which $4.5 million was paid through the issuance of 332,814 shares of the Company's common stock. See Note 3. The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. Notes to Consolidated Financial Statements 1. The Company and Basis of Presentation: Southern Energy Homes, Inc. (the "Company") is primarily involved in two industry segments: the production and retail sale of manufactured homes and the retail financing of manufactured homes. The Company produces manufactured homes, primarily on a custom basis, for wholesale to dealers located primarily in the southeastern and south central regions of the United States. The Company recently acquired its retail home sales operation through a merger with BR Holding Corp. ("BR Holding"; see Note 3). BR Holding sells homes on a retail basis, primarily in the southeastern United States. Wenco Finance, Inc., the Company's wholly owned finance subsidiary ("Wenco"), has been originating and servicing consumer loans primarily for homes manufactured by the Company. In February 1997, the Company formed a joint venture with 21st Century Mortgage Corporation ("21st Century"). The joint venture, Wenco 21, will continue to offer, through 21st Century, consumer financing for homes manufactured by the Company as well as for other homes sold through its retail centers and independent dealers. In light of the shift in consumer finance activities to Wenco 21, Wenco has suspended its loan origination activities and has engaged 21st Century to service its existing loan portfolio. The Company is on a 52/53-week year with the fiscal year ending on the Friday closest to the last day of December. The 1995 and 1994 fiscal years included 52 weeks and the 1996 fiscal year included 53 weeks. All references to years relate to fiscal years rather than calendar years. The Company's business is seasonal and cyclical with the potential for significant fluctuations in quarterly earnings being affected by factors impacting the broader housing market, including the availability and cost of customer financing and changes in the cost of construction materials. The preparation of financial statements in conformity with generally accepted accounting principles 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 reporting period. Actual results could differ from those estimates. 2. Summary of Significant Accounting Policies: Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in the consolidated financial statements. The Company accounts for its investments of 50% or less in joint ventures on the equity basis of accounting. Therefore, the Company's share of income/loss is recorded as an adjustment to the original investment. In December 1996, the Company purchased a 33% interest in a manufacturing joint venture with other manufactured home builders for $770,000. The joint venture will manufacture cabinet doors for sale to participants in the joint venture as well as thirdparty customers. As no significant activity occurred from inception of the joint venture through year end, the investment is carried at the cost of the original contribution by the Company. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers cash and cash equivalents to include cash on hand and highly liquid debt instruments and investments purchased with an original maturity of three months or less. Investments The Company classified its investments, which primarily represent U.S. Treasury Notes, as available for sale. Investments classified as available for sale are carried at fair value with unrealized gains and losses, net of deferred income taxes, being reported as a separate component of stockholders' equity. Inventories Inventories are valued at first-in, first-out ("FIFO") cost, which is not in excess of market. An analysis of inventories follows: January 3, December 29, 1997 1995 ------------------------------- Raw materials $11,607,000 $ 9,658,000 Work in progress 1,108,000 1,007,000 Finished goods 14,304,000 561,000 ------------------------------- $27,019,000 $11,226,000 =============================== The increase in finished goods inventory was primarily attributable to the acquisition in November 1996 of the Company's six retail sales centers and the inventories held at those locations. Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Depreciation is computed on the straight-line, accelerated cost recovery system or modified accelerated cost recovery system methods over the estimated service lives of depreciable assets (10-31 years for buildings and improvements, 3-10 years for machinery and equipment, 5-7 years for office equipment, and 710 years for leasehold improvements, which is the lesser of the lease term or the asset's useful life). Cost of property, plant, and equipment is as follows: January 3, December 29, 1997 1995 ------------------------------- Land $ 493,000 $ 357,000 Buildings and improvements 10,465,000 9,150,000 Machinery and equipment 7,963,000 6,483,000 Office equipment 836,000 567,000 Leasehold improvements 1,140,000 735,000 Construction in progress 2,630,000 229,000 ------------------------------- $23,527,000 $17,521,000 =============================== Maintenance and repairs are charged to expense as incurred; expenditures for renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the property, plant, and equipment accounts are relieved of cost and accumulated depreciation and any resulting gain or loss is credited or charged to income. Allowance for Credit Losses The allowance for credit losses is established to provide for possible losses related to installment contracts receivable. The allowance for credit losses is determined based on the Company's historical loss experience after adjusting for current economic conditions. Management, after assessing the loss experience and economic conditions, adjusts reserves through periodic provisions. Actual credit losses are charged to the allowance when incurred. An analysis of the allowance for losses on installment contracts receivable is as follows: January 3, 1997 ------------- Balance, beginning of year $ 0 Provision for credit losses 1,177,000 Charge-offs (35,000) ------------ Balance, end of year $1,142,000 ============ Intangible Assets The intangible assets recorded by the Company in connection with various acquisitions are amortized on a straight-line basis. As of January 3, 1997 and December 29, 1995, accumulated amortization of intangibles amounted to $2,158,000 and $1,641,000, respectively. The applicable intangible amortization periods are as follows: Goodwill 30 years Non-compete agreements 4 to 10 years Organization and pre-operating costs 5 years Long-Lived Assets The Company continually evaluates whether events and circumstances have occurred that indicate that the remaining balance of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used in the operations of the Company may be impaired and not be recoverable. In performing this evaluation, the Company uses an estimate of the related cash flows expected to result from the use of the asset and its eventual disposition. When this evaluation indicates the asset has been impaired, the Company will measure such impairment based on the asset's fair value and the amount of such impairment is charged to earnings. Volume Incentive Payable The Company provides rebates to dealers based upon a predetermined formula applied to the volume of homes sold to the dealer during the year. Such rebates (reflected as a reduction of gross sales) are recorded at the time sales to independent dealers are recognized. Product Warranties The Company warrants its products against certain manufacturing defects for a period of up to five years commencing at the time of retail sale. The estimated cost of such warranties is accrued at the time of sale to the independent dealer based on historical warranty costs incurred. Periodic adjustments to the accrual will be made as events occur which indicate changes are necessary. Insurance Arrangements The Company is partially self-insured for workers' compensation and health insurance claims. The Company purchases insurance coverage for all workers' compensation claims in excess of $300,000 per occurrence (with an annual aggregate stop-loss limit of $2,000,000 for all claims), and for all health-care claims in excess of $55,000 per occurrence (with an annual aggregate stoploss limit of $2,900,000 for all claims). Amounts are accrued currently for the estimated costs of claims incurred, including related expenses. Management considers accrued liabilities for unsettled claims to be adequate; however, there is no assurance that the amounts accrued will not vary from the ultimate amounts incurred upon final disposition of all outstanding claims. As a result, periodic adjustments to the reserves will be made as events occur which indicate changes are necessary. Income Taxes The Company utilizes the asset and liability method of accounting for deferred income taxes and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Fair Value of Financial Instruments Because of the short-term nature of the Company's financial instruments and the low interest rate volatility associated with the installment contracts receivable, the fair value of the Company's financial instruments at January 3, 1997 and December 29, 1995 approximated book value at those dates. Revenue Recognition - Manufactured Housing The Company manufactures its homes pursuant to dealer orders, and sales to independent dealers and related transit costs are recognized upon completion of the home. Almost all of the Company's sales to its independent dealers are under floor-plan financing arrangements. Under these floor-plan financing arrangements, the Company bills the dealers upon completion of manufacture and at the same time transfers title. Consistent with these arrangements, the Company typically does not allow independent dealers to cancel a purchase after manufacture by the Company has commenced. The Company carries insurance which covers possible damage to a home while on the Company's premises prior to shipment and during shipment when transported by the Company's trucking subsidiary. Independent trucking companies transporting the Company's homes carry insurance to cover damage during shipment. With respect to its retail operations, the Company records a retail home sale when the customer signs an installment contract for the purchase of a manufactured home and the Company receives the appropriate down payment. Revenue Recognition - Retail Financing Interest income from installment contract receivables is recognized using the interest method. Accrual of interest income on installment contract receivables is suspended when a loan is contractually delinquent for ninety days or more. Interest accruals resume when the loan becomes contractually current, and past-due interest income is recognized at that time. Most of the installment contract receivables are with borrowers in the southern portion of the United States and are collateralized by manufactured homes. Net Income per Share Net income per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents (whose effects are dilutive) outstanding during the respective periods. 3. Business Combinations: On November 21, 1996, the Company acquired the stock of BR Holding, a holding company which operated a group of retail companies participating in the retail sale of manufactured homes and was doing business as Blue Ribbon Homes. BR Holding also operated an insurance agency which provides homeowner insurance for manufactured homes. The Company paid $1,075,000 in cash and issued 332,814 shares of the Company's common stock (approximate market value on November 21, 1996 of $4,532,000). The acquisition was accounted for under the purchase method of accounting; thus the financial statements as of January 3, 1997 and for the year then ended reflect the operations of BR Holding from the date of acquisition. The total purchase price exceeded the fair value of net assets (assets of $9.9 million, less liabilities of $9.8 million) acquired by $5,480,000, which amount is being amortized over 30 years as goodwill. In addition, the Company entered into four-year non-compete agreements with the former stockholders of BR Holding for an aggregate amount of $50,000, which amount is included in the cash purchase price noted above. The stock purchase agreement requires the Company to make additional payments to the seller contingent on future earnings performance of BR Holding. Any additional payments will be made 20% in cash and 80% in shares of the Company's common stock and will be accounted for as goodwill and amortized over the remaining recovery period of the goodwill. The results of operations with respect to BR Holding were not significant and, accordingly, no pro forma results have been provided. In July 1996, the Company also acquired Unique Dinettes, Inc. ("Unique"), a manufacturer of ceramic tables and countertops. The total purchase price of $434,000 was paid in all cash, and exceeded the fair value of the acquired assets by $44,000. The Unique acquisition was accounted for under the purchase method of accounting. The results of operations with respect to Unique were not significant and pro forma results have not been provided. In January 1996, the Company also acquired Trimmasters, Inc. ("Trimmasters"), a manufacturer of trim moulding. The total purchase price of $356,000 was paid in all cash, and exceeded the fair value of the acquired assets by $297,000. The Trimmasters acquisition was accounted for under the purchase method of accounting. The results of operations with respect to Trimmasters were not significant and pro forma results have not been provided. On November 20, 1995, the Company acquired substantially all of the assets and assumed certain of the liabilities of Imperial Homes Corporation, Inc. ("Imperial-PA"). This transaction was accounted for under the purchase method of accounting. The aggregate purchase price of approximately $2.5 million was composed of approximately $950,000 in cash and the assumption of $1.5 million in liabilities. The financial statements as of December 29, 1995 and for the year then ended reflected the operations of Imperial-PA from the date of acquisition. The total purchase price exceeded the fair value of net assets acquired by $459,000, which amount is being amortized over 30 years as goodwill. In addition, the Company entered into tenyear noncompete agreements with the former stockholders of Imperial-PA for an aggregate amount of $150,000, which amount was included in the cash purchase price noted above. 4. Income Taxes: The provision (benefit) for income taxes for the respective periods was as follows: January 3, December 29, December 30, 1997 1995 1994 Federal: Current $9,294,000 $6,516,000 $4,646,000 Deferred (521,000) (142,000) 3,000 ------------------------------------------- 8,773,000 6,374,000 4,649,000 ------------------------------------------- State: Current 801,000 496,000 490,000 Deferred (39,000) (16,000) - ------------------------------------------- 762,000 480,000 490,000 ------------------------------------------- Total provision $9,535,000 $6,854,000 $5,139,000 =========================================== The provision for income taxes differed from the amounts computed by applying the federal statutory rate of 35% in 1996 and 1995 and 34% in 1994 due to the following: January 3, December 29, December 30, 1997 1995 1994 Tax provision at the federal statutory rate $8,671,000 $6,334,000 $4,747,000 State income taxes, net of federal benefit 496,000 367,000 323,000 Goodwill amortization 58,000 57,000 55,000 Other 310,000 96,000 14,000 ----------------------------------------- $9,535,000 $6,854,000 $5,139,000 ========================================= Temporary differences which created deferred tax assets at January 3, 1997 and December 29, 1995 were as follows: January 3, December 29, 1997 1995 --------------------------------- Warranty accrual $ 721,000 $ 695,000 Workers' compensation accrual 867,000 447,000 Legal and accounting accrual 457,000 258,000 Other (216,000) (131,000) --------------------------------- $1,829,000 $1,269,000 ================================= 5. Notes Payable: The Company routinely finances its inventory of homes held by its retail centers through floor-plan notes payable with a financial institution. The notes normally require periodic payments of principal and interest, and full payment when the home is sold to a customer. The maximum and average amounts of borrowings outstanding under the notes payable during the year ended January 3, 1997 were $12,025,000 and $10,137,000, respectively. The weighted average interest rate on these borrowings during 1996 was 9.13% The Company has a $10 million unsecured bank line of credit which is renewable annually and bears interest at the London Interbank Offered Rate ("LIBOR") plus 1.5% (5.44% at January 3, 1997). The Company's ability to draw upon this line of credit is dependent upon meeting certain financial ratios and covenants. The Company had no outstanding borrowings on this line at January 3, 1997 and December 29, 1995. 6. Commitments and Contingencies: Repurchase Agreements It is customary practice for companies in the manufactured housing industry to enter into repurchase agreements with financial institutions which provide financing to dealers. Generally, the agreements provide for the manufacturer to repurchase manufactured homes from the financing institution in the event of repossession upon a dealer's default. The Company's contingent liability under such agreements was approximately $91 million as of January 3, 1997 and $62 million as of December 29, 1995. Losses experienced under these agreements have not been significant and, in the opinion of management, any future losses under these agreements will not have a material effect on the financial condition of the Company. Interest Reimbursement The Company has agreements with certain dealers to reimburse them for their interest costs incurred in connection with floorplan financing. Interest expense related to these agreements is classified as a selling expense in the accompanying consolidated statements of operations. For the years ended January 3, 1997, December 29, 1995, and December 30, 1994, interest expense related to these agreements amounted to $735,000, $634,000, and $566,000, respectively. Employee Benefit Plans The Company maintains a stock option plan which authorizes a total of 407,814 shares of Company common stock for issuance to key employees and advisors. The Company granted options to acquire 93,909, 138,654, and 97,026 shares of common stock in 1996, 1995, and 1994, respectively, at an exercise price ranging from $6.67 to $6.93. The exercise price of each option approximated the fair market value of the Company's common stock at the date of grant. The Company also maintains a stock option plan which authorizes a total of 75,000 shares of Company common stock for issuance to the Company's outside directors. In 1996, the Company granted options to acquire 15,000 shares of common stock to certain outside directors at an exercise price of $11.625. The exercise price of the options approximated the fair market value of the Company's common stock at the date of grant. The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation expense for the Company's stock option plans for awards in 1996 and in 1995 been determined under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," based on the fair market value at the grant date, the Company's net income and income per share would have been reduced to the pro forma amounts indicated below: 1996 1995 ------------------------------- Net income - as reported $15,246,000 $11,242,000 Net income - pro forma $14,993,000 $11,166,000 Net income per share - as reported $ 1.01 $ 0.79 Net income per share - pro forma $ 0.99 $ 0.78 The following table summarizes the changes in the number of shares under option pursuant to the plans described above:
Weighted Weighted Weighted January 3, average December 29, average December 30, average 1997 exercise price 1995 exercise price 1994 exercise price ------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 285,032 $6.91 190,391 $6.93 95,240 $6.93 Granted 108,909 7.58 138,654 6.89 97,026 6.93 Exercised (51,599) 6.93 (29,577) 6.93 (1,875) 6.93 Forfeited (2,579) 6.93 (14,436) 6.93 - - ------------------------------------------------------------------------------------------------------- Outstanding at end of year 339,763 7.45 285,032 6.91 190,391 6.93 Exercisable at end of year 194,931 7.28 106,952 6.93 47,620 6.93 ------------------------------------------------------------------------------------------------------- Weighted average estimated fair value of options granted $6.21 $2.82 N/A -------------------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: dividend yield of 0.0%; expected volatility of 0.42%; risk-free interest rate of 6.09%; expected life of 5 years; and vesting of 100% over a two-year period. The weighted average contractual life of the options outstanding at January 3, 1997 is 9 years. The Company maintains employment agreements with certain employees which renew automatically for additional one-year periods unless terminated by either of the parties. The agreements provide for minimum base salaries and incentive compensation (as defined therein). In addition, the agreements provide for payment of up to six months' salary and/or bonus under certain circumstances (for example, termination without cause or upon death). The Company offers a 401(k) retirement plan to employees having completed one year of service, whereby eligible employees may contribute up to 20% of their annual compensation subject to limitations by the Internal Revenue Service. The Company may match up to 100% of the employee contributions as limited by the Internal Revenue Service. For the years ended January 3, 1997, December 29, 1995, and December 30, 1994, the Company expensed $66,000, $63,000, and $60,000, respectively, related to the plan. Operating Leases The Company leases certain manufacturing facilities under operating leases. Rent expense under all leases was $404,000 for the year ended January 3, 1997, $150,000 for the year ended December 29, 1995, and $283,000 for the year ended December 30, 1994. Future minimum lease payments at January 3, 1997 are $693,000, $693,000, $677,000, $678,000, and $503,000 for each of the next five years. Litigation The Company is a defendant in a lawsuit filed on March 27, 1996 in Fulton County Superior Court, Georgia by EurAm International, Inc., a sales agent for the Company. On April 29, 1996 the Company removed the case to the United States District Court for the Northern District of Georgia in Atlanta. In this lawsuit, the plaintiff alleges that the Company has breached an agreement relating to the sale of the Company's modular homes in Germany, including alleged misrepresentations and faulty performance, resulting in damages alleged to amount to $25 million. The Company believes the claim is without merit and intends to vigorously defend the claim, but the litigation is currently in discovery and there can be no assurances as to its likely outcome. In addition, the Company has been informed by Gesellschoft fur Bauen Und Wohnen Hannover MbH ("GBH"), a German housing authority, that it has replaced the Company with a local company to complete a contract that GBH had entered into with the Company for the purchase and erection of modular housing in Hannover, Germany. In connection with the contract, the Company posted a $660,000 letter of credit in favor of GBH. In March 1997, GBH made a claim against the Company for damages of approximately $800,000 arising from the shift in suppliers and has attempted to draw upon the letter of credit posted by the Company. The Company has obtained a temporary restraining order preventing GBH from drawing upon the letter of credit and the Company is actively negotiating with GBH to resolve the dispute. In light of the fact that the negotiations with GBH are ongoing, there can be no assurances as to the likely resolution of the GBH claim. The Company is a party to various other legal proceedings incidental to its business. The majority of these legal proceedings relate to employment matters or product warranty liability claims for which management believes adequate reserves are maintained. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to these proceedings will not materially affect the financial position or results of operations of the Company; however, the ultimate resolution of these matters, which could occur within one year, could result in losses in excess of the amounts reserved. 7. Related Party Transactions: The Company had sales to a development company affiliated with certain stockholders who were also executive officers of the Company during the years ended January 3, 1997, December 29, 1995, and December 30, 1994, which amounted to $691,000, $1.4 million, and $1.5 million, respectively. Transactions with the development company have been at prices and on terms no less favorable to the Company than transactions with independent third parties. 8. Stock Split: On June 4, 1996, the Board of Directors of the Company voted to approve a 3-for-2 stock split of the Company's common stock, payable in the form of a 50% stock dividend on July 3, 1996 to stockholders of record on June 19, 1996. The stock split resulted in one additional share of common stock being issued for each two shares of common stock issued and outstanding on the record date. The par value of the common stock remained unchanged at $.0001 per share. Cash was paid in lieu of issuing fractional shares. All share and per share amounts have been retroactively restated to reflect this split. 9. Summary of Unaudited Quarterly Financial Data: Unaudited quarterly financial information is as follows:
Quarter Ended Year Ended - --------------------------------------------------------------------------------------------------------- March 29, June 28, September 29, January 3, January 3, 1996 1996 1996 1997 1997 ------------------------------------------------------------------------------------- Net revenues $71,111,000 $83,921,000 $77,414,000 $74,398,000 $306,844,000 Gross profit 9,348,000 12,603,000 10,924,000 10,772,000 43,647,000 Provision for income taxes 2,067,000 2,761,000 2,509,000 2,198,000 9,535,000 Net income 3,297,000 4,418,000 4,017,000 3,514,000 15,246,000 Net income per share $ 0.22 $ 0.29 $ 0.27 $0.23 $ 1.01 Weighted average number of common and common equivalent shares 15,053,413 15,071,239 15,101,706 15,253,940 15,122,578 Quarter Ended Year Ended - --------------------------------------------------------------------------------------------------------- March 31, June 30, September 29, December 29, December 29, 1995 1995 1995 1995 1995 - --------------------------------------------------------------------------------------------------------- Net revenues $55,569,000 $61,215,000 $58,460,000 $66,024,000 $241,268,000 Gross profit 6,665,000 8,502,000 7,910,000 8,048,000 31,125,000 Provision for income taxes 1,260,000 1,934,000 1,755,000 1,905,000 6,854,000 Net income 2,233,000 3,249,000 3,064,000 2,696,000 11,242,000 Net income per share $ 0.16 $ 0.23 $ 0.22 $ 0.18 $ 0.79 Weighted average number of common and common equivalent shares 14,161,336 14,161,336 14,161,336 14,717,860 14,300,466
10. Subsequent Events: Wenco has been originating and servicing consumer loans primarily for homes manufactured by the Company. In February 1997, the Company formed a joint venture, Wenco 21, with 21st Century. The Company has made an initial capital contribution of $500,000 to Wenco 21, representing a 50% ownership interest of the joint venture. Wenco 21 will continue to offer, through 21st Century, consumer financing for homes manufactured by the Company as well as for other homes sold through its retail centers and independent dealers. In light of the shift in consumer finance activities to Wenco 21, Wenco has suspended its loan origination activities and has engaged 21st Century to service its existing loan portfolio. Subsequent to January 3, 1997, the Company contracted to build a new corporate office facility adjacent to its Southern Energy plant in Addison, Alabama at a cost of approximately $1.5 million. 11. Business Segment Information: The Company's operations by industry segment are presented in the table below.
Year Ended -------------------------------------------------------- January 3, December 29, December 30, 1997 1995 1994 -------------------------------------------------------- Net revenues: Manufactured housing $304,865,000 $241,238,000 $188,750,000 Retail financing 1,979,000 30,000 - -------------------------------------------------------- $306,844,000 $241,268,000 $188,750,000 -------------------------------------------------------- Operating income: Manufactured housing $24,909,000 $17,468,000 $13,808,000 Retail financing (590,000) (37,000) - -------------------------------------------------------- $24,319,000 $17,431,000 $13,808,000 -------------------------------------------------------- Identifiable assets: Manufactured housing $78,155,000 $54,526,000 $41,709,000 Retail financing 27,635,000 746,000 81,000 -------------------------------------------------------- $105,790,000 $55,272,000 $41,790,000 --------------------------------------------------------
Report of Independent Public Accountants Southern Energy Homes, Inc. and subsidiaries To Southern Energy Homes, Inc.: We have audited the accompanying consolidated balance sheets of Southern Energy Homes, Inc. (a Delaware Corporation) and Subsidiaries as of January 3, 1997 and December 29, 1995 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years ended January 3, 1997, December 29, 1995, and December 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southern Energy Homes, Inc. and Subsidiaries as of January 3, 1997 and December 29, 1995 and the results of their operations and their cash flows for each of the years ended January 3, 1997, December 29, 1995, and December 30, 1994, in conformity with generally accepted accounting principles. Birmingham, Alabama February 20, 1997 (except with respect to the matter discussed in Note 6, as to which the date is March 27, 1997) Statement of Management's Responsibility Southern Energy Homes, Inc. and subsidiaries The financial statements and related information herein were prepared by the Company and were based on generally accepted accounting principles, appropriate in the circumstances to reflect in all material respects the consolidated financial position of the Company as of January 3, 1997 and December 29, 1995, and the consolidated results of operations and cash flows for the years ended January 3, 1997, December 29, 1995, and December 30, 1994. The financial information presented elsewhere in this report has been prepared in a manner consistent with the financial statement disclosures. Management is responsible for the reliability and integrity of these statements. In meeting this responsibility, management maintains an accounting system and related internal controls to provide reasonable assurance that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The Company's systems and controls are also designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorizations and recorded properly. The Board of Directors has appointed an Audit Committee that meets periodically with management and the independent public accountants. Arthur Andersen LLP has audited the consolidated financial statements in accordance with generally accepted auditing standards and their report appears herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Information concerning the Company's directors and concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this Item is incorporated by reference to the text appearing under Part I, Item 1 -- Business under the caption "Executive Officers" and by reference from the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held June 4, 1997. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is incorporated by reference from the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 4, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item is incorporated by reference from the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 4, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item is incorporated by reference from the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 4, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K (a) The following documents are filed as part of this report: (1) Financial Statements Consolidated Balance Sheets as of January 3, 1997 and December 29, 1995 Consolidated Statements of Operations for each of the fiscal years ended January 3, 1997, December 29, 1995 and December 30, 1994. Consolidated Statements of Stockholders' Equity for each of the fiscal years ended January 3, 1997, December 29, 1995 and December 30, 1994. Consolidated Statements of Cash Flows for each of the fiscal years ended January 3, 1997, December 29, 1995 and December 30, 1994. Notes to Consolidated Financial Statements Report of Independent Public Accountants Statement of Management's Responsibility (2) Financial Statement Schedules No financial statement schedules are included since the information is not applicable, not required, or is included in the financial statements or notes thereto. (3) Listing of Exhibits The following exhibits are hereby incorporated by reference: 2.1 Asset Purchase Agreement, dated as of July 31, 1994, by and among the Registrant, Imperial Manufactured Homes of N.C., Inc. ("Imperial") and the stockholders of Imperial. (Filed as Exhibit 2.1 to the Current Report on Form 8-K dated August 14, 1994, File No. 0-21204.) 2.2 Real Estate Purchase Agreement, dated as of July 31, 1994, between Imperial N.C. Associates and Lawyer's Title of North Carolina, Inc. and Assignment of such Agreement to Southern Energy Homes of North Carolina, Inc. (Filed as Exhibit 2.2 to the Current Report on Form 8-K dated August 14, 1994, File No. 0-21204.) 3.1 Certificate of Incorporation of the Company. (Filed as Exhibit 3.1 to the Registration Statement on Form S-1, Registration No. 33-57420.) 3.2 By-Laws of the Company. (Filed as Exhibit 3.2 to the Registration Statement on Form S-1, Registration No. 33-57420.) 4.1 Specimen of Stock Certificate. (Filed as Exhibit 4.1 to the Registration Statement on Form S-1, Registration No. 33-57420.) 4.7 Southern Development Council, Inc. Promissory Note. (Filed as Exhibit 4.10 to the Registration Statement on form S-1, Registration No. 33-57420.) 4.8 Stockholders' Agreement, dated as of June 8, 1989. (Filed as Exhibit 4.12 to the Registration Statement on Form S-1, Registration No. 33-57420.) 4.9 Form of First Amendment to Stockholders' Agreement, dated as of January 13, 1993. (Filed as Exhibit 4.13 to the Registration Statement on Form S-1, Registration No. 33-57420.) *10.1 Employment Agreement with Wendell L. Batchelor, dated as of June 8, 1989. (Filed as Exhibit 10.1 to the Registration Statement on Form S-1, Registration No. 33-57420.) *10.2 Employment Agreement with Keith Brown, dated June 8, 1989. (Filed as Exhibit 10.2 to the Registration Statement on Form S-1, Registration No. 33-57420.) *10.3 Employment Agreement with Johnny R. Long, dated June 8, 1989. (Filed as Exhibit 10.3 to the Registration Statement on Form S-1, Registration No. 33-57420.) *10.4 Southern Energy Homes, Inc. 1993 Stock Option Plan. (Filed as Exhibit 10.4 to the Registration Statement on Form S-1, Registration No. 33-57420.) *10.5 Form of Southern Energy Homes, Inc. 401(k) Retirement Plan. (Filed as Exhibit 10.5 to the Registration Statement on Form S-1, Registration No. 33-57420.) *10.6 Management Agreement, effective as of June 8, 1989, by and between Lee Capital Holdings and Southern Energy Homes, Inc. (Filed as Exhibit 10.14 to the Registration Statement on Form S-1, Registration No. 33-57420.) 10.7 Southern Development Council, Inc. Loan Commitment Agreement. (Filed as Exhibit 10.15 to the Registration Statement on Form S-1, Registration No. 33-57420.) 10.8 Lease Agreement by and between Hillard Brannon and Southern Energy Homes, Inc., dated July 30, 1992. (Filed as Exhibit 10.16 to the Registration Statement on Form S-1, Registration No. 33-57420.) 10.9 Lease Agreement by and between Hillard Brannon and Southern Energy Homes, Inc., dated November 16, 1989. (Filed as Exhibit 10.17 to the Registration Statement on Form S-1, Registration No. 33-57420.) 10.10 Lease Agreement by and between Robert Lowell Burdick, Nina Burdick Vono, Carolyn Burdick Hunsaker, Jean Burdick Hall, Mildred Burdick Marmont and Lane Burdick Adams, as Landlord, and Southern Energy Homes, Inc. dated as of November 20, 1985, as amended. (Filed as Exhibit 10.23 to the Registration Statement on Form S-1, Registration No. 33-57420.) 10.11 Agreement and Plan of Merger of Southern Energy Homes, Inc., a Delaware corporation, and Southern Energy Homes, Inc., an Alabama corporation, dated as of January 15, 1993. (Filed as Exhibit 10.25 to the Registration Statement on Form S-1, Registration No. 33-57420.) 10.12 Certificate of Merger Merging Southern Energy Homes, Inc., an Alabama corporation, with and into Southern Energy Homes, Inc., a Delaware corporation, dated as of January 19, 1993. (Filed as Exhibit 10.26 to the Registration Statement on Form S-1, Registration No. 33-57420.) 10.13 Assignment of Lease and Rights dated June 29, 1993 between B.B.H.L.P. Partnership and Southern energy Homes, Inc. (Filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended July 2, 1993, File No. 0-21204.) 10.14 Lease Agreement dated as of June 1, 1984 between The Industrial Development Board of the Town of Addison, Alabama and B.B.H.L.P. Partnership. (Filed as Exhibit 10.2 to the Quarterly Report on form 10-Q for the quarter ended July 2, 1993, File No. 0-21204.) 10.15 Assignment of Lease and Rights dated June 19, 1993 between B.B.H.L.P. and Southern Energy Homes, Inc. (Filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended July 2, 1993, File No. 2-21204.) 10.16 Lease Agreement dated as of December 1, 1986 between The Industrial Development Board of the Town of Addison, Alabama and B.B.H.L.P. Partnership. (Filed as Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended July 2, 1993, File No. 0-21204.) 10.17 Letter Agreement dated May 18, 1993 and Master Note dated May 19, 1993 between the Company and AmSouth Bank, N.A. (Filed as Exhibit 10.27 to the Registration Statement on Form S-1, Registration No. 33-68954.) 10.18 Deed of Real Estate dated August 5, 1993 relating to the Company's Plant No. 2 in Addison, Alabama. (Filed as Exhibit 10.27 to the Registration Statement on Form S-1, Registration No. 33-68954.) 10.19 Deed of Real Estate dated July 30, 1993 relating to the Company's manufacturing facility in Fort Worth, Texas. (Filed as Exhibit 10.27 to the Registration Statement on Form S-1, Registration No. 33-68954.) *10.20 Southern Energy Homes, Inc. 1996 Option Plan for Non-employee Directors. (Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 29, 1995.) 10.21 Agreement and Plan of Reorganization of Southern Energy Homes, Inc., a Delaware Corporation, and SE Management, Inc., an Alabama Corporation, dated November 21, 1996. *10.22 Amended and Restated Employment Agreement with Wendell L. Batchelor, dated as of June 14, 1996. *10.23 Amended and Restated Employment Agreement with Keith W. Brown, dated as of June 14, 1996. 21 List of Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule ------------- * Management contract or compensatory plan or arrangement. (b) The Company did not file a current report on form 8-K during the 4th Quarter of fiscal 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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. SOUTHERN ENERGY HOMES, INC. Registrant By:/S/ Wendell L. Batchelor ---------------------------------- Wendell L. Batchelor Chaiman, President and Chief Executive Officer Date: March 27, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /S/ Wendell L. Batchelor Chairman, President, March 27, 1997 - ------------------------------------ Wendell L. Batchelor Chief Executive Officer and Director /S/ Johnny R. Long Executive Vice President March 27, 1997 - ------------------------------------ Johnny R. Long and Director /S/ Keith W. Brown Executive Vice President, March 27, 1997 - ------------------------------------ Chief Financial Officer, Keith W. Brown Treasurer, Secretary and Director /S/ Keith O. Holdbrooks Executive Vice President March 27, 1997 - ------------------------------------ and Chief Operating Officer Keith O. Holdbrooks /S/ Paul J. Evanson Director March 27, 1997 - ------------------------------------ Paul J. Evanson /S/ Joseph J. Incandela Director March 27, 1997 - ------------------------------------ Joseph J. Incandela /S/ Jonathan O. Lee Director March 27, 1997 - ------------------------------------ Jonathan O. Lee
EX-10.21 2 AGREEMENT AND PLAN OF REORGANIZATION Exhibit 10.21 =================================================================== AGREEMENT AND PLAN OF REORGANIZATION AMONG Southern Energy Homes, Inc., and Retail Acquisition Corp., and BR Holding Corp., BR Chilton Co., Inc., BR Mississippi, Inc., BR Marshall Co., Inc., BR Tuscaloosa Co., Inc., SC Tuscaloosa Co., Inc., TH Center, Inc., SE Management, Inc., BR Agency, Inc. and those Shareholders of BR Holding Corp. named herein DATED: As of November 21, 1996 =================================================================== AGREEMENT AND PLAN OF REORGANIZATION TABLE OF CONTENTS ARTICLE 1. DESCRIPTION OF TRANSACTIONS 1.1 Agreement to Consummate Transactions 1.2 Time and Place of Closing 1.3 Consummation of Transactions 1.4 Merger Consideration 1.5 Effect of Transactions 1.6 Knowledge ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND STOCKHOLDERS 2.1 Organization and Qualification of Seller 2.2 Subsidiaries 2.3 Capitalization of Seller 2.4 Authorization of Transaction 2.5 Compliance of Transaction With Laws 2.6 Financial Statements 2.7 Title to Properties; Liens; Condition of Properties 2.8 Payment of Taxes 2.9 Absence of Undisclosed Liabilities 2.10 Collectibility of Accounts Receivable 2.11 Inventories 2.12 Absence of Certain Change 2.13 Ordinary Course 2.14 Other Stockholder Businesses 2.15 Trade Names, Trademarks and Copyrights 2.16 Trade Secrets and Customer Lists 2.17 Contracts and Commitments 2.18 Employees and Employee Benefits 2.19 Reserved 2.20 Permits; Burdensome Agreements 2.21 Borrowings and Guarantees 2.22 Banking Relations and Powers of Attorney 2.23 Insurance 2.24 Warranty or Other Claims 2.25 Compliance with Laws 2.26 Litigation 2.27 Minute Books 2.28 Finder's Fee 2.29 Transactions with Interested Persons 2.30 Absence of Sensitive Payments 2.31 Disclosure of Material Information ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF BUYER 3.1 Organization of Buyer 3.2 Capitalization of Buyer 3.3 Authorization of Transaction 3.4 Buyer's Common Stock ARTICLE 4. COVENANTS OF SELLER AND STOCKHOLDERS 4.1 Conduct of Business 4.2 Authorization from Others 4.3 Breach of Representations and Warranties 4.4 Consummation of Agreement 4.5 Buyer's Due Diligence 4.6 Financial Statements of Seller and Subsidiaries 4.7 Expansion of Subsidiaries' Business. ARTICLE 5. COVENANTS OF BUYER 5.1 Authorization from Others 5.2 Consummation of Agreement 5.3 Dealer Volume Incentive Program 5.4 Conduct of Business of Subsidiaries ARTICLE 6. CONDITIONS TO OBLIGATIONS OF BUYE 6.1 Shareholder Authorization 6.2 Dissenting Stockholders 6.3 Representations; Warranties; Covenants 6.4 Resignations of Officers and Directors 6.5 Opinion of Seller's Counsel 6.6 Securities Law Compliance 6.7 Employment/Non-Competition Contracts 6.8 RESERVED 6.9 Approval of Buyer's Board of Directors 6.10 Approval of Buyer's Advisors 6.11 Absence of Certain Litigation 6.12 Buyer's Due Diligence ARTICLE 7. CONDITIONS TO OBLIGATIONS OF SELLER AND STOCKHOLDERS 7.1 Shareholder Authorization 7.2 Representations; Warranties; Covenants 7.3 Opinion of Buyer's Counsel 7.4 Real Estate Development Agreement 7.5 Securities Law Compliance ARTICLE 8. TERMINATION OF AGREEMENT 8.1 Termination 8.2 Effect of Termination 8.3 Right to Proceed ARTICLE 9. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING 9.1 Survival of Warranties ARTICLE 10. INDEMNIFICATION 10.1 Indemnification by Stockholders 10.2 Indemnification by Buyer 10.3 Notice; Defense of Claims 10.4 Payment of Claims; Arbitration ARTICLE 11. COMPLIANCE WITH SECURITIES LAWS 11.1 Delivery of Information 11.2 Acknowledgment of Receipt of Information 11.3 RESERVED 11.4 Compliance with Securities Laws 11.5 Report 11.6 Statements, True and Correct 11.7 Covenants of Buyer ARTICLE 12. REGISTRATION 12.1 Required Registration 12.2 Participation of Selling Stockholders 12.3 Conditions of Buyer's Obligations to Register Shares 12.4 Expenses 12.5 Financial Information 12.6 Exclusive Obligation to Register 12.7 State Securities Laws 12.8 Indemnification ARTICLE 13. MISCELLANEOUS 13.1 Fees and Expenses 13.2 Notices 13.3 Entire Agreement 13.4 Assignability 13.5 Publicity and Disclosures 13.6 Confidentiality 13.7 Governing Law; Severability 13.8 Counterparts 13.9 Effect of Table of Contents and Headings AGREEMENT AND PLAN OF REORGANIZATION AGREEMENT entered into as of the 21st day of November, 1996, by and between Southern Energy Homes, Inc., a Delaware corporation, with its principal place of business located at Highway 41 North, P. O. Box 390, Addison, Alabama 35540 ("Buyer"), SEH Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Buyer ("Acquisition Corp."), BR Holding Corp., a Delaware corporation, with its principal place of business located in Northport, Alabama (the "Seller"), each of the following wholly-owned subsidiaries of Seller: BR Chilton Co., Inc., BR Mississippi, Inc., BR Marshall Co., Inc., BR Tuscaloosa Co., Inc., SC Tuscaloosa Co., Inc., TH Center, Inc., SE Management, Inc., and BR Agency, Inc. (collectively, the "Subsidiaries"), and W. Thomas Deas, James M. Moore, III, W. David Deas, J. M. Deas, Jr., James Miller Deas, Thomas Deas, Jr. and Gregory C. Vogel (collectively, the "Stockholders"). WHEREAS, the parties hereto wish to adopt a plan and agreement of reorganization in order to effectuate the merger of Acquisition Corp. with and into Seller (the "Merger") in accordance with the laws of the States of Delaware and Alabama and in accordance with a Certificate of Merger (the "Certificate of Merger") substantially in the form attached hereto as Exhibit A, so that upon consummation of the Merger, Seller will be a wholly-owned subsidiary of Buyer, and Acquisition Corp. will cease to exist; and WHEREAS, it is the intent of the parties that the transaction qualify as a tax-free reorganization within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law. NOW, THEREFORE, in order to consummate said plan of reorganization and in consideration of the mutual agreements herein, the parties hereto agree as follows: ARTICLE 1. DESCRIPTION OF TRANSACTIONS. 1.1 Agreement to Consummate Transactions. Subject to the terms and conditions of this Agreement and of the Merger Agreement, Buyer, Seller and the Stockholders agree to consummate or cause to be consummated the transactions contemplated by Sections 1.2 through 1.5 of this Agreement and agree that the consummation of each of those transactions is conditional upon the consummation of each of the other transactions. 1.2 Time and Place of Closing. The closing of the transactions provided for in this Agreement (herein called the "Closing") shall be held at the offices of Hubbard, Smith, McIlwain, Brakefield & Shattuck, P.C., 808 Lurleen Wallace Blvd., North, Tuscaloosa, Alabama, on November 21, 1996 or at such other place, date or time as may be fixed by mutual agreement of the parties. 1.3 Consummation of Transactions. If at the Closing no condition exists which would permit any of the parties to terminate this Agreement or if a condition then exists and the party entitled to terminate because of that condition waives its right to do so in writing in accordance with the notice provisions of this Agreement, then the transactions shall be consummated on such date, and then and thereupon Acquisition Corp. and Seller will execute and immediately file the Certificate of Merger with the Secretary of State of the State of Delaware in accordance with the provisions of the business corporation law of the States of Delaware. Upon the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, the merger of Acquisition Corp. into Seller will become effective (the time of such filing being hereinafter referred to as the "Effective Time of Merger"). 1.4 Merger Consideration. Subject to the terms and conditions hereof, the Buyer shall pay to the Seller the following consideration in connection with the Merger (all as more particularly described below): (i) Five Million Five Hundred Seventy Six Thousand Six Hundred Forty Dollars ($5,576,640) primarily in the form of Buyer Common Stock (the "Fixed Amount"); (ii) an additional amount equal to the amount, if any, of Seller EBIT (as defined below in paragraph (d) of this Section 1.4) for the period beginning as of September 20, 1996 and ending as of December 31, 1996 as reviewed or audited by Buyer's independent public accountants (the "Stub Period Earnings Amount"); and (iii) additional contingent amounts, payable subject to and contingent upon Seller and the Subsidiaries achieving certain Seller EBIT targets for the twelve (12) month periods ending December 31, 1997 and December 31, 1998, determined in accordance with the Contingent Payment Schedule attached hereto as Exhibit C and incorporated herein by this reference (the "Contingent Amounts"); The Stockholders hereby authorize and appoint W. Thomas Deas and Gregory C. Vogel as joint escrow agent (the "Escrow Agent") to receive and accept delivery of the cash and the Fixed Payment Shares included in the Fixed Amount and do hereby direct the Buyer to deliver such cash and Fixed Payment Shares to the Escrow Agent at the Closing. In the event that W. Thomas Deas or Gregory C. Vogel dies, resigns is otherwise unable to serve in the capacity of Escrow Agent, a successor shall be appointed by a majority of the Stockholders and notice of such appointment shall be given to the Buyer. As of the Effective Time of Merger, by virtue of the Merger and without any further action: (a) Fixed Amount. Each share of Seller common stock, $.01 par value, issued and outstanding immediately prior to the Effective Time of Merger (herein "BR Common Stock") shall entitle the holder thereof to receive in payment therefor at the Closing: (1) that amount of cash via federal funds wire transfer as is determined by dividing the sum of (a) One Million Seventy -Five Thousand Three Hundred Twenty-eight Dollars ($1,075,328) by (b) the number of shares of BR Common Stock outstanding at the Effective Time of Merger; and (2) that number of duly authorized, validly issued, fully paid and non-assessable shares of the Voting Common Stock of Southern Energy Homes, Inc., a Delaware Corporation ("Buyer Common Stock") as is determined by dividing the sum of (a) Four Million Five Hundred One Thousand Three Hundred Twelve Dollars ($4,501,312) by (b) the fair market value of Buyer Common Stock (the "Fixed Payment Shares"), as determined by taking the average of the closing prices for Buyer Common Stock as reported by the Nasdaq National Market for the ten (10) trading days immediately preceding the third trading day before the date of the Closing, and then dividing the result by the number of shares of BR Common Stock outstanding at the Effective Time of Merger; provided, however, that such number of shares of Buyer Common Stock shall be rounded to the nearest whole number. (b) Stub Period Earnings Amount. In addition to the consideration set forth above, each share of BR Common Stock shall entitle the holder thereof to receive on March 31, 1997 as additional payment therefor: (1) that amount of cash via federal funds wire transfer as is determined by dividing (a) twenty (20%) percent of the Stub Period Earnings Amount by (b) the number of shares of BR Common Stock outstanding at the Effective Time of Merger; and (2) that number of duly authorized, validly issued, fully paid and non-assessable shares of Buyer Common Stock as is determined by dividing eighty (80%) percent of the Stub Period Earnings Amount by the fair market value of Buyer Common Stock (the "Stub Period Payment Shares"), as determined by taking the average of the closing prices for said Common Stock as reported by the Nasdaq National Market for the twenty (20) trading days immediately preceding the third trading day before March 31, 1997, the date on which payment of the Stub Period Earnings Amount is due and payable. (c) Contingent Amount. In addition to the consideration set forth above, each share of BR Common Stock shall entitle the holder thereof to receive on March 31, 1998, with respect to the Contingent Amount, if any, for the twelve (12) month period ending December 31, 1997, and on March 31, 1999, with respect to the Contingent Amount, if any, for the twelve month period ending December 31, 1998, as additional payment therefor: (1) that amount of cash via federal funds wire transfer as is determined by dividing (a) twenty (20%) percent of the Contingent Amount for 1997 or 1998, as the case may be, by (b) the number of shares of BR Common Stock outstanding at the Effective Time of Merger; and (2) that number of duly authorized, validly issued, fully paid and non-assessable shares of Buyer Common Stock as is determined by dividing eighty (80%) percent of the Contingent Amount for 1997 or 1998, as the case may be, by the fair market value of Buyer Common Stock (the "Contingent Payment Shares"), as determined by taking the average of the closing prices for said Buyer Common Stock as reported by the Nasdaq National Market for the twenty (20) days immediately preceding the third trading day before the date on which the Contingent Amount is due and payable hereunder (the "Contingent Payment Trading Period"). (d) For purposes of this Section 1.4 and Exhibit B, "Seller EBIT" means Consolidated Earnings (defined in subparagraph (e) of this Section 1.4) before interest (other than (i) floor plan interest incurred with respect to inventory and (ii) interest incurred with respect to money borrowed or capital expenditures made in connection with the expansion of the Seller's or the Subsidiaries' operations, which interest in neither case shall be greater than the cost of funds to Buyer), taxes, management fees and any administrative fees paid to Buyer. (e) For purposes of this Agreement, the "Fixed Payment Shares," the "Stub Period Payment Shares" and the "Contingent Payment Shares" are sometimes collectively hereinafter referred to as the "Purchase Shares." For purposes of this Agreement, "Consolidated Earnings" means the consolidated earnings of the Seller and the Subsidiaries. (f) Each share of Acquisition Corp. common stock, $.01 par value, issued and outstanding immediately prior to the Effective Time of Merger, shall be converted into an issued and outstanding share of BR Common Stock. (g) In the event that Buyer, prior to the Closing, declares any dividend payable in shares of Buyer Common Stock to shareholders of record as of a date prior to the Closing, or splits or combines the outstanding shares of the Buyer Common Stock, then an appropriate proportional adjustment shall be made in the number of Purchase Shares specified above. 1.5 Effect of Transactions. As a result of the foregoing transactions, after the Merger Buyer will own all of the issued and outstanding stock of Seller and the persons who were holders of BR Common Stock immediately prior to the Merger will have received Buyer Common Stock and the cash consideration, as set forth in Section 1.4 above. 1.6 Knowledge. "Knowledge" where used in this Agreement shall refer to the knowledge, information and belief of the entity referred to and their respective officers and directors. ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND STOCKHOLDERS. Each of the Seller, the Subsidiaries and the Stockholders hereby represents and warrants to Buyer as follows: 2.1 Organization and Qualification of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full power and authority to own or lease its properties and to conduct its business in the manner and in the places where such properties are owned or leased or such business is conducted by it. The copies of Seller's Certificate of Incorporation or equivalent document as amended to date (the "Charter"), certified by the Secretary of State of the State of Delaware, and of Seller's by-laws as amended to date, certified by its Secretary (or the equivalent), and heretofore delivered to Buyer's counsel, are complete and correct. Seller is duly qualified to do business as a foreign corporation in those jurisdictions in which such qualification is required, and Seller is not required to be licensed or qualified to conduct its business or own its property in any other jurisdiction. 2.2 Subsidiaries. The issued and outstanding capital stock of the Subsidiaries is as follows, and all of such capital stock is owned of record and beneficially by the Seller: Name of State of Issued and Amount Owned by Corporation Incorporation Outstanding Stock Seller BR Chilton Co., Inc. Alabama 1,000 100% BR Mississippi, Inc. Alabama 1,000 100% BR Marshall Co., Inc. Alabama 1,000 100% BR Tuscaloosa Co., Inc. Alabama 1,000 100% BR Agency, Inc. Alabama 1,000 100% SC Tuscaloosa Co., Inc. Alabama 1,000 100% TH Center, Inc. Alabama 1,000 100% SE Management, Inc. Alabama 1,000 100% Neither Seller nor any Subsidiary owns any securities issued by any other business organization or governmental authority, except U.S. Government securities. The Subsidiaries are corporations duly organized, validly existing and in good standing under the laws of the State of Alabama with full power and authority to own or lease their respective properties and to conduct their respective businesses in the manner and in the places where such properties are owned or leased or such businesses are conducted. The copies of the Certificate of Incorporation (or equivalent document), as amended to date (the "Charter"), and by-laws of each Subsidiary, as amended to date, certified by the Secretary of State of the state of Alabama or its Secretary (or the equivalent) and heretofore delivered to Buyer's counsel, are complete and correct. Each of the Subsidiaries is duly qualified to do business as a foreign corporation in every jurisdiction in which such qualification is required. Neither Seller nor any of the Subsidiaries is a partner or participant in any joint venture or partnership of any kind. Seller has good and marketable title to all of the issued and outstanding shares of capital stock of each of the Subsidiaries, free of all claims, liens, encumbrances or restrictions of any kind, and there are no outstanding options, warrants or agreements of any kind for the issuance or sale of, or outstanding shares of securities convertible into, any additional shares of stock of any of the Subsidiaries. 2.3 Capitalization of Seller. The authorized capital stock of Seller consists of 3,000 shares of Common Stock, .01 par value, of which 1,000 shares are validly issued and outstanding, fully paid and non-assessable. The Stockholders collectively are the record and beneficial owners of all of the issued and outstanding capital stock of Seller, free and clear of all claims, liens, encumbrances or restrictions of any kind. Except as set forth on Schedule 2.3 hereto, there are no (a) outstanding warrants, options or other rights to purchase or acquire, or preemptive rights with respect to the issuance or sale of, the capital stock of Seller or any Subsidiary, (b) other securities of Seller or any Subsidiary directly or indirectly convertible into or exchangeable for shares of capital stock of Seller or any Subsidiary, or (c) restrictions on the transfer of the Seller's capital stock. 2.4 Authorization of Transaction. Subject to the affirmative vote of Seller's stockholders referred to in Section 6.1, all necessary action, corporate or otherwise, has been taken by Seller to authorize the execution, delivery and performance of this Agreement and the Merger Agreement and the transactions contemplated hereby and thereby, and this Agreement and the Merger Agreement are the valid and binding obligations of Seller enforceable in accordance with their terms, subject to laws of general application affecting creditors' rights generally. All necessary action, corporate or otherwise has been taken by each Subsidiary to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby, and this Agreement is the valid and binding obligation of each Subsidiary enforceable in accordance with its terms, subject to laws of general application affecting creditors' rights generally. 2.5 Compliance of Transaction With Laws. To the best Knowledge of the Seller, each Subsidiary, and the Stockholders, neither Seller nor any Subsidiary is in violation of its Charter or by-laws as of the date hereof; and, the execution, delivery and performance of this Agreement and the Merger Agreement and the transactions contemplated hereby and thereby (a) do not require any approval or consent of, or filing with, any governmental agency or authority in the United States of America or otherwise which has not been obtained and which is not in full force and effect as of the date hereof, (b) will not conflict with or constitute a breach or violation of the respective Charters or by-laws of Seller or any Subsidiary and (c) will not result in a violation of any law or regulation to which they are subject. 2.6 Financial Statements. Attached as Schedule 2.6 hereto are the following unaudited financial statements of each Subsidiary from inception, all of which statements are complete and correct and fairly present the financial position of each Subsidiary as of October 31, 1996 and the results of their operations on the applicable basis for the periods covered thereby and have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved and prior periods. The most recent balance sheets of the Subsidiaries included in the above financial statements are sometimes collectively referred to hereinafter as the "Base Balance Sheets". 2.7 Title to Properties; Liens; Condition of Properties. (a) Set forth on Schedule 2.7 hereto is a listing of all the real property owned by Seller or any Subsidiary at the date hereof, all the leases whereunder Seller or any Subsidiary leases real or personal property at the date hereof and a complete description of the machinery and equipment used or owned by Seller or any Subsidiary. Except as specifically disclosed in Schedule 2.7, Seller and its Subsidiaries have good and marketable title in fee simple to all of their real and personal property, including property described in said Schedule, and all of their leases are valid and subsisting and fully assignable by Seller or its Subsidiaries (as the case may be) and no default exists under any thereof. None of such real property or other property or assets is subject to any mortgage, pledge, lien, conditional sale agreement, security title, encumbrance or other charge except as specifically disclosed in said Schedule. (b) Except as otherwise specified in Schedule 2.7 hereto: (i) the buildings, machinery and equipment of Seller and each Subsidiary are adequate to conduct the business of the Subsidiaries as presently conducted, are in reasonably good repair, have been well maintained, substantially conform in all material respects with all applicable ordinances, regulations and zoning or other laws and do not, to the best Knowledge of the Seller, each Subsidiary and the Stockholders , encroach on property of others, and such machinery and equipment is in good working order; and (ii) as of the date hereof, neither Seller, any Subsidiary, nor any Stockholder knows of any pending or overtly threatened change of any such ordinance, regulation or zoning or other law and there is no pending or threatened condemnation of any such property. 2.8 Payment of Taxes. Seller and each Subsidiary have filed all federal, state and local income, excise or franchise tax returns, real estate and personal property tax returns, sales and use tax returns and other tax returns required to be filed by them and have paid all taxes owing by them except taxes which have not yet accrued or otherwise become due for which adequate provision has been made in the pertinent financial statements referred to in Section 2.6 above. All transfer, excise and other taxes payable to any jurisdiction by reason of the consummation of the transactions contemplated by this Agreement shall be paid or provided for by the Stockholders after the Closing out of the consideration payable by Buyer hereunder. The provisions for taxes reflected in the above-mentioned financial statements are adequate to cover any and all tax liabilities of Seller and each Subsidiary in respect of their respective businesses, properties and operations during the periods covered by said financial statements and all prior periods. Neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the best knowledge of Seller, each Subsidiary and each Stockholder, threatening to assert, against Seller and any Subsidiary any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith. 2.9 Absence of Undisclosed Liabilities. As of the respective dates of the Base Balance Sheets, neither Seller nor any Subsidiary had any material liabilities of any nature, whether accrued, absolute, contingent or otherwise (including without limitation liabilities as guarantor or otherwise with respect to obligations of others, or liabilities for taxes due or then accrued or to become due), except (a) liabilities stated or adequately reserved against on the respective Base Balance Sheets, (b) liabilities not in excess of $5,000 individually or $50,000 in the aggregate arising in the ordinary course of business since the date of the respective Base Balance Sheets and (c) liabilities disclosed in Schedule 2.9 hereto. There is no fact which materially adversely affects or, to the best Knowledge of the Seller, any Subsidiary or any Stockholder, may in the future (so far as can now be reasonably foreseen) materially adversely affect, the business, properties, operations or condition of Seller or any Subsidiary on a consolidated basis which has not been specifically disclosed herein or in a Schedule furnished herewith. 2.10 Collectibility of Accounts Receivable. All of the accounts receivable of Seller and its Subsidiaries shown or reflected on their respective Base Balance Sheets or existing at the time of the Closing, less a reserve for bad debts in the amount shown on their respective Base Balance Sheets, are or will be at the Closing valid and enforceable claims, fully collectible and subject to no set off or counterclaim. Neither Seller nor any Subsidiary has any accounts or loans receivable from any person, firm or corporation which is affiliated with any of them or from any director, officer or employee of any of them. 2.11 Inventories. All finished goods contained in the inventories of Seller and each Subsidiary reflected on their respective Base Balance Sheets or existing at the Closing are or will be at the Closing of a quality and quantity saleable in the ordinary course of the business of Seller and each Subsidiary at prevailing market prices without discounts. All inventory items shown on the respective Base Balance Sheets or existing at the Closing are or will be priced at lower of cost (FIFO basis) or market and reflect write-downs to realizable values in the case of items which have become obsolete or unsaleable (except at prices less than cost) through regular distribution channels in the ordinary course of the business of Seller and its Subsidiaries. Subject to write-downs complying with the preceding sentence, the values of the inventories stated in the respective Base Balance Sheets reflect the normal inventory valuation policies of Seller and its Subsidiaries and were determined in accordance with generally accepted accounting principles, practices and methods consistently applied. Purchase commitments for inventory are not in excess of normal requirements and none are at prices materially in excess of current market prices. Sales commitments for inventory are all at prices in excess of prices used in valuing inventory after allowing for selling expenses and a normal profit margin. Since the date of the respective Base Balance Sheets, no inventory items have been sold or disposed of except through sales in the ordinary course of business at prices no less than prevailing market prices, and in no event less than cost. 2.12 Absence of Certain Changes. Except as disclosed in Schedule 2.12 hereto, since the date of the respective Base Balance Sheets there has not been: (a) any change in the financial condition, properties, assets, liabilities, business or operations of Seller or any Subsidiary which change in conjunction with all other such changes, whether or not arising in the ordinary course of business, has been materially adverse with respect to Seller or any Subsidiary ; (b) any contingent liability incurred by Seller or any Subsidiary as guarantor or otherwise with respect to the obligations of others; (c) any mortgage, encumbrance or lien placed on any of the properties of Seller or any Subsidiary which remains in existence on the date hereof or at the time of Closing; (d) any obligation or liability incurred by Seller or any Subsidiary other than obligations and liabilities incurred in the ordinary course of business; (e) any purchase, sale or other disposition, or any agreement or other arrangement for the purchase, sale or other disposition, of any of the properties or assets of Seller or any Subsidiary other than in the ordinary course of business; (f) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the properties, assets or business of Seller and its Subsidiaries on a consolidated basis; (g) any declaration, setting aside or payment of any dividend on, or the making of any other distribution in respect of, the capital stock of Seller or any Subsidiary other than a wholly-owned Subsidiary, or any direct or indirect redemption, purchase or other acquisition by Seller of its own capital stock or by any such Subsidiary of its own capital stock; (h) any labor trouble or claim of unfair labor practices involving Seller or any Subsidiary; any change in the compensation payable or to become payable by Seller or any Subsidiary to any of their officers, employees or agents other than normal merit increases in accordance with their usual practices, or any bonus payment or arrangement made to or with any of such officers, employees or agents; (i) any change with respect to the management or supervisory personnel of Seller or any Subsidiary; (j) any payment or discharge of a material lien or liability of Seller or any Subsidiary except those (i) on any Base Balance Sheet, or (ii) incurred in the ordinary course of business thereafter; or (k) any obligation or liability incurred by Seller or any Subsidiary to any of their officers, directors or shareholders or any loans or advances made by Seller or any Subsidiary to any of their officers, directors or shareholders, except transactions between Seller and a Subsidiary and normal compensation and expense allowances payable to officers. 2.13 Ordinary Course. Between the date of the respective Base Balance Sheets and the date of this Agreement, Seller and its Subsidiaries have conducted their respective businesses only in the ordinary course. From the date hereof until the Closing, Seller and its Subsidiaries have continued to conduct their respective businesses only in the ordinary course. 2.14 Other Stockholder Businesses. (a) Other than as disclosed in Schedule 2.14(a) to this Agreement, none of the Stockholders has, directly or indirectly, owned, operated, managed, been employed by or consulted with, directly or indirectly, any retail seller of manufactured homes, other than the Seller and the Subsidiaries. Each corporation, partnership or other business entity listed on Schedule 2.14(a) is referred to individually as an "Unaffiliated Stockholder Company" and collectively as the "Unaffiliated Stockholder Companies". Each Unaffiliated Stockholder Company listed on Schedule 2.14(a) as being now or previously having been in the business of retail sales of new manufactured housing or insurance products in the manufactured housing industry is hereafter referred to as an "Unaffiliated Stockholder Retailer." (b) Attached as Schedule 2.14(b) hereto are the following unaudited financial statements of each Unaffiliated Stockholder Retailer, all of which statements are complete and correct and fairly present the financial position of each Unaffiliated Stockholder Retailer, on the date of such statements and the results of its operations on the applicable basis for the periods covered thereby and have been prepared in accordance with the generally accepted accounting principles consistently applied throughout the periods involved and prior periods: The most recent balance sheets of the Unaffiliated Stockholder Retailers included in the above financial statements are sometimes collectively referred to hereinafter as the "Unaffiliated Stockholder Retailers Base Balance Sheets". (c) Each Unaffiliated Stockholder Company has filed all federal, state and local income, excise or franchise tax returns, real estate and personal property tax returns, sales and use tax returns and other tax returns required to be filed by it and has paid all taxes owing by it except taxes which have not yet accrued or otherwise become due for which adequate provision has been made in the pertinent financial statements referred to in this Section 2.14. As of the respective dates of the Unaffiliated Stockholder Retailers Base Balance Sheets, no Unaffiliated Stockholder Retailer had any material liability of any nature, whether accrued, absolute, contingent or otherwise (including without limitation liabilities as guarantor or otherwise with respect to obligations of others, or liabilities for taxes due or then accrued or to become due), except (a) liabilities stated or adequately reserved against on the respective Unaffiliated Stockholder Retailers Base Balance Sheets, (b) liabilities not in excess of $5,000 individually or $50,000 in the aggregate arising in the ordinary course of business since the date of the respective Unaffiliated StockholderRetailers Base Balance Sheets and (c) liabilities disclosed in Schedule 2.14(c); (d) Except as disclosed in Schedule 2.14(d) hereto, since the date of the respective Unaffiliated Stockholder Retailer Base Balance Sheet there has not been: any change in the liabilities of an Unaffiliated Stockholder Retailer which has been materially adverse with respect to such Unaffiliated Retailer Company; any contingent liability incurred by any Unaffiliated Retailer Company as guarantor or otherwise with respect to the obligations of others; any encumbrance or lien placed on any properties of an Unaffiliated Retailer Company; or any obligation or liability incurred by an Unaffiliated Retailer Company other than obligations and liabilities incurred in the ordinary course of business; (e) Except for matters described in Schedule 2.14(e) hereto, there is no litigation pending or, to the Knowledge of Seller, any Subsidiary or Stockholder, threatened against any Unaffiliated Stockholder Company, and there are no outstanding court orders, court decrees or court stipulations to which any Unaffiliated Stockholder Company is a party which would likely result in any materially adverse change in the financial condition of any Unaffiliated Stockholder Company. Neither Seller, any Subsidiary, nor any Stockholder has reason to believe that any such action, suit, proceeding or investigation may be brought against any Unaffiliated Stockholder Company. (f) None of this Agreement, any exhibit thereto or certificate issued pursuant hereto contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements herein or therein not misleading, relating to the business or affairs of any Unaffiliated Stockholder Company. None of Seller, any Subsidiary or any Stockholder has made an untrue statement of a material fact or omitted to state a material fact to Buyer or its agents, necessary to make the statements made not misleading, relating to the business or affairs of any Unaffiliated Stockholder Company. 2.15 Trade Names, Trademarks and Copyrights. (a) All trade names, registered trademarks, service marks, trademark applications, service mark applications and copyrights owned by or licensed to Seller or any Subsidiary are listed on Schedule 2.15 hereto and have been duly registered in, filed in or issued by the United States Register of Copyrights or the corresponding offices of other countries identified on said Schedule, and have been properly maintained and renewed in accordance with all applicable provisions of law and administrative regulations in the United States and the State of Alabama. Except as set forth in said Schedule, use of said trade names, trademarks, service marks or copyrights does not require the consent of any other person and the same are freely transferable (except as otherwise provided by law) and are owned exclusively by Seller or a Subsidiary free and clear of any attachments, liens, encumbrances or, to the best Knowledge of Seller and each Subsidiary, free of any adverse claims. (b) Except as set forth in Schedule 2.15, to the best Knowledge of Seller, each Subsidiary and each Stockholder: (i) no other person has an interest in or right or license to use, or the right to license others to use, any of said trade names, registered trademarks, service marks or copyrights; (ii) there are no claims or demands of any other person pertaining thereto and no proceedings have been instituted, or are pending or threatened, which challenge the rights of Seller or any Subsidiary in respect thereof; (iii) none of the trade names, trademarks, service marks or copyrights listed in said Schedule is being infringed by others, or is subject to any outstanding order, decree, judgment or stipulation; and (iv) no proceeding charging Seller or any Subsidiary with infringement of any adversely held trade name, trademark, service mark or copyright has been filed or is threatened to be filed. (c) To the best Knowledge of Seller, each Subsidiary and the Stockholders, there are no trademarks, service marks, trademark applications, service mark applications or copyrights, other than those referred to in paragraph (a) required for the conduct of the business of Seller or any Subsidiary in the manner now conducted. To the best knowledge of Seller, each Subsidiary and each Stockholder, neither Seller nor any Subsidiary has infringed or is infringing upon any trade name, trademark, service mark or copyright of any other person. No director, officer or employee of Seller or any Subsidiary owns, directly or indirectly, in whole or in part, any trademark, trade name, service mark, copyright, registration or application therefor or interest therein which Seller or any Subsidiary has used, is presently using, or the use of which is necessary for their respective businesses as now conducted. 2.16 Trade Secrets and Customer Lists. Seller and each Subsidiary has the right to use, free and clear of any claims or rights of others, except claims or rights described in Schedule 2.16 hereto, all trade secrets, customer lists, and other information required for or used in the sale or marketing of all products formerly or presently sold by Seller or any Subsidiary. Neither Seller nor any Subsidiary is using or in any way making use of any confidential information or trade secrets of any third party, including without limitation a former employer of any present or past employee of Seller or any Subsidiary. 2.17 Contracts and Commitments. (a) Except for contracts, commitments, plans, agreements and licenses described in Schedule 2.17 hereto, neither Seller nor any Subsidiary is a party to or subject to: (i) any contract or agreement for the purchase of any material or equipment, except purchase orders in the ordinary course for less than $2,500 each, such orders not exceeding in the aggregate $10,000; (ii) any other contracts or agreements creating any obligations of Seller or any Subsidiary after the date of the respective Base Balance Sheets of $5,000 or more with respect to any such contract or agreement, other than sales and purchase commitments in the ordinary course of business; (iii) any contract or agreement providing for the purchase of all or substantially all of its requirements of a particular product from a supplier; (iv) any contract or agreement which by its terms or by law does not terminate or is not terminable without penalty by Seller or such Subsidiary or any successor or assign of them within one year after the date hereof; (v) any contract or agreement for the sale or lease of its products not made in the ordinary course of business; (vi) any contract with any sales agent or distributor of products of Seller or any Subsidiary; (vii) any contract containing covenants limiting the freedom of Seller or any Subsidiary to compete in any line of business or with any person or entity; (viii) any contract or agreement for the purchase of any fixed asset for a price in excess of $5,000, whether or not such purchase is in the ordinary course of business; (ix) any license agreement (as licensor or licensee); or (x) any contract or agreement with any officer, director or stockholder of Seller or any Subsidiary or with any persons or organizations controlled by or affiliated with any of them. (b) Neither Seller nor any Subsidiary is in material default under any such contracts, commitments, plans, agreements or licenses described in said Schedule or has Knowledge of any termination, cancellation, limitation or modification or change in any business relationship with any material supplier or customer. For purposes hereof, a supplier or customer is material if it accounts for more than two (2%) percent of the orders or sales, as the case may be, of Seller and its Subsidiaries on a consolidated basis. 2.18 Employees and Employee Benefits. (a) Except as shown on Schedule 2.18 hereto, there are no currently effective consulting or employment agreements or other material agreements with individual consultants or employees to which Seller or any Subsidiary is a party. Complete and accurate copies of all such written agreements have been delivered to Buyer. Also shown on such Schedule are the name and current rate of compensation (including bonuses) of each officer, employee or agent of Seller or any Subsidiary whose annual rate of compensation, including bonuses and other remunerative payments of any kind, is in excess of $40,000. (b) Except as specifically disclosed on Schedule 2.18 hereto, neither Seller nor any Subsidiary is a party to any pension, retirement, profit sharing, savings, bonus, incentive, deferred compensation, group health insurance or group life insurance plan or obligation, or to any collective bargaining agreement or other contract, written or oral, with any trade or labor union, employees' association or similar organization. With respect to each plan described on the Schedule, Seller has furnished to Buyer complete and accurate copies of the plan, the Internal Revenue Service determination letter, if any, all plan applications and amendments, the most recent plan actuarial reports and all reports of or regarding such plan required by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and any regulations issued thereunder. (c) With respect to each plan which is subject to ERISA: (i) the value of such plan's assets equals or exceeds the total value of all vested and unvested employee benefits under such plan; (ii) there is no "accumulated funding deficiency," and no "reportable event" or "prohibited transaction" has occurred (as such terms are defined in ERISA); (iii) Seller and each Subsidiary, has incurred no liability to the Pension Benefit Guaranty Corporation with respect to such plans; (iv) such plan meets all applicable requirements of ERISA and Section 401(a) of the Internal Revenue Code; and (v) Seller and each Subsidiary, has properly and timely made all required governmental filings with respect to such plan. (d) There are no strikes or labor disputes pending or to the best Knowledge of Seller and each Subsidiary, threatened by, or to the best Knowledge of Seller and each Subsidiary, any attempts at union organization of, any of the employees of Seller or any Subsidiary. 2.19 Reserved. 2.20 Permits; Burdensome Agreements. Seller and each Subsidiary hold all licenses, permits and franchises which are required to permit them to conduct their businesses and all such licenses, permits and franchises are listed in Schedule 2.20 hereto and are and will be after the Closing valid and in full force and effect and Buyer shall have full benefit of the same. To the best Knowledge of Seller and each Subsidiary, neither Seller nor any Subsidiary is subject to or bound by any agreement, judgment, decree or order which may materially and adversely affect business or prospects, its condition, financial or otherwise, or any of its assets or property. 2.21 Borrowings and Guarantees. Except as shown on Schedule 2.21 hereto, there are no agreements and undertakings pursuant to which Seller or any Subsidiary, (a) is borrowing or is entitled to borrow any money (b) is lending or has committed itself to lend any money, or (c) is a guarantor or surety with respect to the obligations of any person. Complete and accurate copies of all such written agreements have been delivered to Buyer. 2.22 Banking Relations and Powers of Attorney. All of the arrangements which Seller or any Subsidiary has with any banking institution, whether or not in Seller's or a Subsidiary's name, are accurately described in Schedule 2.22 hereto indicating with respect to each of such arrangements the type of arrangement maintained (such as checking account, borrowing arrangements, safe deposit box, etc.) and the person or persons authorized in respect thereof. Neither Seller nor any Subsidiary has any outstanding power of attorney. 2.23 Insurance. The physical properties and assets of Seller and each Subsidiary are insured to the extent disclosed in Schedule 2.23 hereto and all other material insurance policies and arrangements of Seller and each Subsidiary are disclosed in said Schedule. Said insurance is adequate and customary for the business engaged in by Seller and each Subsidiary. 2.24 Warranty or Other Claims. Except as disclosed on Schedule 2.24 hereto, neither Seller, any Subsidiary nor any Stockholder knows or has reason to know of any existing or threatened claims, or any facts upon which a claim could be based, against Seller or any Subsidiary for services or merchandise which are defective or fail to meet any service or product warranties. No claim has been asserted against Seller or any Subsidiary for renegotiation or price redetermination of any business transaction, and neither Seller, any Subsidiary nor any Stockholder has knowledge of any facts upon which any such claim could be based. 2.25 Compliance with Laws. To the best Knowledge of the Seller, each Subsidiary and the Stockholders, Seller and each Subsidiary are and have in the past been in material compliance with all laws and regulations which apply to the conduct of their respective businesses, including, without limitation, all laws and regulations relating to employment, occupational safety, consumer protection, and environmental matters. 2.26 Litigation. Except for matters described in Schedule 2.26 hereto, there is no litigation pending or, to the Knowledge of Seller, any Subsidiary or any Stockholder, threatened against Seller or any Subsidiary , and there are no outstanding court orders, court decrees, or court stipulations to which Seller or any Subsidiary is a party which question this Agreement or affect the transactions contemplated hereby, or which would likely result in any materially adverse change in the business, properties, operations, prospects, assets or in the condition, financial or otherwise, of Seller or any Subsidiary. Neither Seller any Subsidiary, nor any Stockholder has reason to believe that any such action, suit, proceeding or investigation may be brought against Seller or any Subsidiary. 2.27 Minute Books. The minute books of Seller and each Subsidiary delivered to the Buyer accurately record all actions taken by their respective shareholders, boards of directors and committees thereof in their respective capacities. 2.28 Finder's Fee. Neither Seller nor any Subsidiary has incurred or become liable for any broker's commission or finder's fee relating to or in connection with the transactions contemplated by this Agreement. 2.29 Transactions with Interested Persons. No officer, supervisory employee, director or stockholder of Seller or any Subsidiary, or their respective spouses or children, owns directly or indirectly on an individual or joint basis, any material interest in, or serves as an officer or director of, any customer, competitor or supplier of Seller or any Subsidiary, or any organization which has a material contract or arrangement with Seller or any Subsidiary. 2.30 Absence of Sensitive Payments. To the best Knowledge of the Seller, each Subsidiary and the Stockholders, neither Seller nor any Subsidiary, nor any of their respective directors, officers, agents, stockholders or employees, whether or not on behalf of Seller or any Subsidiary: (a) has made or has agreed to make any contributions, payments or gifts of funds or property to any governmental official, employee or agent where either the payment or the purpose of such contribution, payment or gift was or is illegal under the laws of the United States, any state thereof, or any other jurisdiction (foreign or domestic); (b) has established or maintained any unrecorded fund or asset for any purpose, or has made any false or artificial entries on any of its books or records for any reason; or (c) has made or has agreed to make any contribution or expenditure, or has reimbursed any political gift or contribution or expenditure made by any other person to candidates for public office, whether federal, state or local (foreign or domestic) where such contributions were or would be a violation of applicable law. 2.31 Disclosure of Material Information. Neither this Agreement nor any exhibit thereto or certificate issued pursuant hereto contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements herein or therein not misleading, relating to the business or affairs of Seller or any Subsidiary. Neither Seller, any Subsidiary, nor any Stockholder has made an untrue statement of a material fact or omitted to state a material fact to Buyer or its agents, necessary to make the statements made not misleading, relating to the business or affairs of the Seller or any Subsidiary. There is no fact which could materially adversely affect the business, condition (financial or otherwise) or prospects of Seller or any Subsidiary which has not been set forth herein. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and warrants to Seller, the Subsidiaries and each of the Stockholders as follows: 3.1 Organization of Buyer. Each of Buyer and Acquisition Corp. is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and Buyer is qualified to do business in the State of Alabama with full corporate power to own or lease its properties and to conduct its business in the manner and in the places where such properties are owned or leased or such business is conducted by it. 3.2 Capitalization of Buyer. The authorized capital stock of Buyer consists of 20,000,000 shares of Voting Common Stock, $.0001 par value, of which 15,104,987 shares were issued and outstanding as of November 20, 1996, and 1,000,000 shares of Non-Voting Preferred Stock, $.0001 par value, of which no shares are issued and outstanding. The authorized capital stock of Acquisition Corp. consists of 3,000 shares of Common Stock, $.01 par value, of which 100 are issued and outstanding on this date, and no shares of Preferred Stock. All of the presently issued and outstanding capital stock of Buyer and Acquisition Corp. have been duly authorized and validly issued and are fully paid and non-assessable. 3.3 Authorization of Transaction. All necessary action, corporate or otherwise, has been taken by Buyer and Acquisition Corp. to authorize the execution, delivery and performance of this Agreement, and the same is the valid and binding obligation of Buyer enforceable in accordance with its terms, subject to laws of general application affecting creditor's rights generally. 3.4 Buyer's Common Stock. The Purchase Shares to be delivered pursuant to this Agreement and the Certificate of Merger will be, when delivered in accordance herewith and therewith, duly authorized, validly issued, fully paid and non-assessable. ARTICLE 4. COVENANTS OF SELLER AND STOCKHOLDERS. Each of the Seller, the Subsidiaries and the Stockholders hereby covenants and agrees with Buyer as follows: 4.1 Conduct of Business. Between the date of this Agreement and the Closing, Seller and each Subsidiary shall do the following, unless Buyer shall otherwise consent in writing: (a) conduct its business only in the ordinary course and refrain from changing or introducing any method of management or operations except in the ordinary course of business and consistent with prior practices; (b) refrain from making any purchase, sale or disposition of any asset or property other than in the ordinary course of business, from purchasing any capital asset costing more than $10,000 and from mortgaging, pledging, subjecting to a lien or otherwise encumbering any of its properties or assets; (c) refrain from incurring any contingent liability as a guarantor or otherwise with respect to the obligations of others, and from incurring any other contingent or fixed obligations or liabilities except those that are usual and normal in the ordinary course of business; (d) refrain from making any change or incurring any obligation to make a change in its Charter or by-laws or authorized or issued capital stock, except as contemplated by this Agreement; (e) refrain from declaring, setting aside or paying any dividend or making any other distribution in respect of their capital stock, or making any direct or indirect redemption, purchase or other acquisition of capital stock, of Seller or any Subsidiary other than a wholly-owned Subsidiary; (f) refrain from entering into any employment contract (other than as may be contemplated by this Agreement) or making any change in the compensation payable or to become payable to any of its officers, employees or agents; (g) refrain from prepaying any loans from its stockholders, officers or directors (if any) or making any change in its borrowing arrangements; (h) use its good faith efforts to prevent any change with respect to its banking arrangements; (i) use its good faith efforts to keep intact its business organization, to keep available its present officers, agents and employees and to preserve the goodwill of all suppliers, customers and others having business relations with it; (j) have in effect and maintain at all times all insurance of the kind, in the amount and with the insurers set forth in the Schedule of Insurance heretofore delivered to Buyer or equivalent insurance with any substitute insurers approved by Buyer; and 4.2 Authorization from Others. Prior to the Closing, Seller will have exercised good faith efforts to obtain and will cause its Subsidiaries to have obtained all authorizations, consents and permits of others required to permit the consummation by Seller and its Subsidiaries of the transactions contemplated by this Agreement. 4.3 Breach of Representations and Warranties. Promptly upon the occurrence of, or promptly upon Seller's becoming aware of the impending or threatened occurrence of, any event which would cause or constitute a breach, or would have caused or constituted a breach had such event occurred or been known to Seller or any Subsidiary prior to the date hereof, of any of the representations and warranties of Seller contained in or referred to in this Agreement, Seller shall give detailed written notice thereof to Buyer and shall use its good faith efforts to prevent or promptly remedy the same. 4.4 Consummation of Agreement. Seller, each Subsidiary and each Stockholder shall use its or their best efforts to perform and fulfill all conditions and obligations on its or their part to be performed and fulfilled under this Agreement and the Merger Agreement, to the end that the transactions contemplated by this Agreement and the Merger Agreement shall be fully carried out. To this end Seller and each Subsidiary will obtain all necessary approvals of its stockholders and Board of Directors to the transactions contemplated hereby. 4.5 Buyer's Due Diligence. It is understood that Buyer's due diligence investigation of the Seller and the Subsidiaries may include, but not be limited to, review of financial statements, contracts and leases, assets, liabilities, products, inventory, methods of accounting, and financial and other business records of the Seller and the Subsidiaries, investigation of customers and suppliers, and inspection and an examination of the retail facilities owned or leased by the Subsidiaries, including an environmental assessment of the properties. The Seller, each Subsidiary and each Stockholder shall make all relevant information concerning the Seller and each Subsidiary , including, without limitation, the foregoing, reasonably available to the Buyer and its agents, and will provide Buyer and its agents reasonable access to the Subsidiaries' premises and officers. Buyer shall coordinate closely such activities with the Stockholders and their counsel and disclose such activities to the Stockholders and their counsel, and shall conduct all such inquires with appropriate discretion and sensitivity to the Subsidiaries' relationships with their employees, customers, and suppliers. 4.6 Financial Statements of Seller and Subsidiaries. It is necessary for Buyer's independent public accountants to prepare and audit the financial statements of the Seller and the Subsidiaries with respect to the last three fiscal years and any interim period. The Seller and the Subsidiaries shall cooperate with the Buyer's independent public accountants in connection with the preparation and audit of such financial statements, including, without limitation, providing such financial and other information and making such certifications to such independent public accounts as such accountants deem reasonably necessary in connection with the preparation and audit of such financial statements. 4.7 Expansion of Subsidiaries' Business. Buyer and Seller acknowledge that it is the intention of the parties to expand the business of the Subsidiaries into Northern and Central Alabama, as well as Mississippi. In order to implement such expansion, Seller shall submit a detailed business plan to Buyer with respect to such expansion for consideration and approval by Buyer's Board of Directors. Buyer reserves the right to make the final decision with respect to such expansion; provided, however, that Buyer shall not unreasonably withhold its approval of any such expansion plan. ARTICLE 5. COVENANTS OF BUYER. Buyer hereby covenants and agrees with Seller and each of the Stockholders as follows: 5.1 Authorization from Others. Prior to the Closing Buyer will have obtained all authorizations, consents and permits of others required to permit the consummation by Buyer and Acquisition Corp. of the transactions contemplated by this Agreement. 5.2 Consummation of Agreement. The Buyer shall use its best efforts to perform and fulfill all conditions and obligations on its part to be performed or fulfilled under this Agreement, to the end that the transactions contemplated by this Agreement and the Merger Agreement shall be fully carried out. To this end, Buyer will obtain any approvals of its stockholders or Board of Directors which may be required in order to consummate the transactions contemplated hereby. The Buyer shall use all reasonable efforts to give the Seller and the Stockholders notice prior to the Closing of any material facts of which the Buyer has actual Knowledge which represent or constitute a material breach or default by the Seller, any Subsidiary or any Stockholder or any Unaffiliated Stockholder Company under this Agreement, whether or not such breach or default would give rise to a claim for indemnification under Article 10 hereof. The Buyer's failure to give any such notice shall not, however, in any way limit, constitute a defense to, or otherwise adversely affect, the right of the Buyer or any Buyer Indemnified Party (as defined in Section 10.1) to such indemnification with respect to any matter or claim in accordance with the terms of Article 10 hereof. 5.3 Dealer Volume Incentive Program. For a period beginning as of the date of the Closing and ending December 31, 1998, Buyer shall provide to the Subsidiaries Dealer Volume Incentive Program terms in accordance with Exhibit C hereto. 5.4 Conduct of Business of Subsidiaries. Following the Closing, Buyer shall endeavor to cause the Subsidiaries to maintain a reasonably varied mix of products, unless Buyer determines, in the good faith exercise of its discretion, that market conditions are such that altering the product mix of the Subsidiaries would be more advantageous commercially. Immediately following the Closing, the Buyer shall use all reasonable commercial efforts to obtain the release of the personal guaranties of the Stockholders for those debts of the Subsidiaries listed on Schedule 5.4 hereof. The Buyer shall also indemnify and hold the Stockholders harmless from and against any damages, liabilities, losses and expenses (including reasonable counsel fees) of any kind or nature whatsoever which may be sustained or suffered by a Stockholder with respect to those debts in the amounts not to exceed the amounts specified in Schedule 5.4 hereof. ARTICLE 6. CONDITIONS TO OBLIGATIONS OF BUYER. The obligations of Buyer to consummate this Agreement and the transactions contemplated hereby are subject to the condition that on or before the Closing the actions required by this Article 6 will have been accomplished. 6.1 Shareholder Authorization. This Agreement, the Certificate of Merger and the transactions contemplated hereby shall have been duly approved by the affirmative vote of the requisite percentage of the outstanding shares of Seller's voting stock under the laws of Seller's jurisdiction of incorporation. 6.2 Dissenting Stockholders. Holders of not more than 10% of the shares of the Common Stock of Seller shall have taken steps to preserve the rights of dissenting stockholders afforded by the laws of the state of incorporation of Seller, and Seller shall have delivered to Buyer a true and correct list of the names, addresses and numbers of shares held by each holder of dissenting shares of Seller and the steps taken by each such holder as required by the laws of Seller's jurisdiction of incorporation governing appraisal rights. 6.3 Representations; Warranties; Covenants. Each of the representations and warranties of Seller, the Subsidiaries and the Stockholders contained in Article 2 shall be true and correct as though made on and as of the Closing; Seller, each Subsidiary and the Stockholders shall, on or before the Closing, have performed all of their respective obligations hereunder which by the terms hereof are to be performed on or before the Closing; and Seller, each Subsidiary and the Stockholders shall have delivered to Buyer a certificate dated as of the Closing to the foregoing effect and further confirming that the conditions set forth in Section 6.1 with respect to shareholder authorization and in Section 6.2 with respect to dissenting shares of Seller have been fulfilled. 6.4 Resignations of Officers and Directors. Buyer shall have received the written resignations of such of the officers and directors of Seller and the Subsidiaries as Buyer shall have designated in a writing delivered to Seller prior to the Closing, which resignations will be effective no later than the Closing. 6.5 Opinion of Seller's Counsel. (a) At the Closing, Buyer shall have received from Messrs. Hubbard, Smith, McIlwain, Brakefield & Shattuck, P.C. counsel for Seller, an opinion dated as of the Closing, in form and substance satisfactory to Buyer and its counsel. 6.6 Securities Law Compliance. The obligations and conditions required to be satisfied prior to Closing under Article 11 of this Agreement shall have been satisfied and Buyer's counsel, Brown, Rudnick, Freed & Gesmer, shall have determined that the issuance of the Purchase Shares in connection with the transaction will not violate the Securities Act of 1933, or state securities laws, as more fully detailed in Article 11. 6.7 Employment/Non-Competition Contracts. Each of W. Thomas Deas, James M. Moore, III and Gregory C. Vogel shall have executed and delivered to Buyer employment contracts substantially in the form of Exhibit D hereto. Each of the Stockholders shall have executed and delivered to Buyer non-competition agreements substantially in the form of Exhibit E hereto. 6.8 RESERVED. 6.9 Approval of Buyer's Board of Directors. There shall have been no determination by the Board of Directors of Buyer, acting in good faith, that the consummation of the transactions contemplated by this Agreement and the Merger Agreement have become inadvisable or impracticable by reason of the institution or overt threat by any person or any federal, state or other governmental authority of material litigation, proceedings or other action against Buyer, Seller Subsidiary , or by reason of any material adverse change in the assets, business, financial condition or prospects of the Seller or the Subsidiaries. 6.10 Approval of Buyer's Advisors. All actions, proceedings, instruments and documents required to carry out this Agreement and the Certificate of Merger and all related legal matters contemplated by this Agreement and the Certificate of Merger shall have been approved by counsel for Buyer, provided that the approval of such counsel shall not be unreasonably withheld. In addition, Buyer shall have received in form and substance reasonably satisfactory to it, and shall forward two complete copies of all reports and opinions to the Stockholders and their counsel upon receipt, reports and opinions on such financial and legal matters in connection with the transaction as it deems pertinent, including, without limitation, a satisfactory report from Arthur Andersen LLP, independent public accountants, regarding the financial statements of the Seller and the Subsidiaries and the Companies. 6.11 Absence of Certain Litigation. There shall not be any (a) injunction, restraining order or order of any nature issued by any court of competent jurisdiction which directs that this Agreement, the Merger or any material transaction contemplated hereby shall not be consummated as herein provided, (b) suit, action or other proceeding by the United States (or any agency thereof) or by any state (or any agency thereof) pending before any court or governmental agency, or threatened to be filed or initiated, wherein such complainant seeks the restraint or prohibition of the Merger or the consummation of any material transaction contemplated by this Agreement or asserts the illegality thereof, or (c) suit, action or other proceeding by a private party pending before any court or governmental agency, or threatened to be filed or initiated, which, in the reasonable opinion of counsel for Buyer, is likely to result in the restraint or prohibition of the consummation of any material transaction contemplated hereby or is likely to result in the entry of a judgment and the payment (or indemnification) of material damages from or other material relief against any of the parties or against any directors or officers of Buyer, in connection with the consummation of any material transaction contemplated hereby. 6.12 Buyer's Due Diligence. The results of Buyer's due diligence investigation with respect to the Seller and the Subsidiaries shall be satisfactory to Buyer in its sole discretion. Execution of this Agreement by Buyer will acknowledge Buyer's receipt of all information requested of Seller and the Subsidiaries in conducting Buyer's due diligence investigation. ARTICLE 7. CONDITIONS TO OBLIGATIONS OF SELLER AND STOCKHOLDERS. The obligations of Seller, the Subsidiaries and the Stockholders to consummate this Agreement and the transactions contemplated hereby are subject to the condition that on or before the Closing the actions required by this Article 7 will have been accomplished. 7.1 Shareholder Authorization. This Agreement, the Certificate of Merger and the transactions contemplated hereby shall have been duly approved by the affirmative vote of the requisite percentage of the outstanding shares of Acquisition Corp.'s Common Stock. 7.2 Representations; Warranties; Covenants. Each of the representations and warranties of Buyer contained in Article 3 shall be true and correct as though made on and as of the Closing; Buyer shall, on or before the Closing, have performed all of its obligations hereunder which by the terms hereof are to be performed on or before the Closing; and Buyer shall have delivered to Seller a certificate of the President or any Vice President of Buyer dated as of the Closing to such effect. 7.3 Opinion of Buyer's Counsel. At the Closing, Seller shall have received from Brown, Rudnick, Freed & Gesmer, counsel for Buyer, an opinion dated as of the Closing, in form and substance reasonably satisfactory to Seller and its counsel. 7.4 Real Estate Development Agreement. Buyer shall have executed and delivered to an entity to be formed by W. David Deas, James Miller Deas and W. Thomas Deas, Jr., a Real Estate Development Agreement in the form of Exhibit G hereto. 7.5 Securities Law Compliance. The obligations and conditions required to be satisfied prior to Closing under Article 11 of this Agreement shall have been satisfied and Buyer's counsel, Brown, Rudnick, Freed & Gesmer, shall have determined that the issuance of the Purchase Shares in connection with the transaction will not violate the Securities Act of 1933, or state securities laws, as more fully detailed in Article 11. ARTICLE 8. TERMINATION OF AGREEMENT. 8.1 Termination. At any time prior to the Closing, this Agreement may be terminated (a) by mutual consent of the parties with the approval of their respective Board of Directors, notwithstanding prior approval of this Agreement by the stockholders of any party, (b) by either party if there has been a material misrepresentation, breach of warranty or breach of covenant by the other party in its representations, warranties and covenants set forth herein, (c) by Buyer if the conditions stated in Article 6 have not been satisfied at or prior to the Closing or (d) by Seller if the conditions stated in Article 7 have not been satisfied at or prior to the Closing. 8.2 Effect of Termination. If this Agreement shall be terminated as above provided, all obligations of the parties hereunder shall terminate without liability of either party to the other. In the event that this Agreement is so terminated, each party will return all papers, documents, financial statements and other data furnished to it by or with respect to each other party to such other party (including any copies thereof made by the first party). 8.3 Right to Proceed. Anything in this Agreement to the contrary notwithstanding, if any of the conditions specified in Article 6 hereof have not been satisfied, Buyer shall have the right to proceed with the transactions contemplated hereby without waiving its rights hereunder, and if any of the conditions specified in Article 7 hereof have not been satisfied, Seller shall have the right to proceed with the transactions contemplated hereby without waiving its rights hereunder. ARTICLE 9. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING. 9.1 Survival of Warranties. All representations, warranties, agreements, covenants and obligations herein or in any schedule, certificate or financial statement delivered by either party to the other party incident to the transactions contemplated hereby are material, shall be deemed to have been relied upon by the other party and, subject to the limitations of Article 10 below, shall survive the Closing regardless of any investigation and shall not merge in the performance of any obligation by either party hereto. ARTICLE 10. INDEMNIFICATION. 10.1 Indemnification by Stockholders. Each of the Stockholders jointly and severally (together, the "Seller Indemnifying Party") agrees, subject to the provision set forth in subparagraphs 10.1 (a), (b), and (c) and (d) below, to defend, indemnify and hold Buyer, its officers, directors, employees, agents, subsidiaries and affiliates (together, the "Buyer Indemnified Party") harmless from and against any damages, liabilities, losses and expenses (including reasonable counsel fees) of any kind or nature whatsoever which may be sustained or suffered by a Buyer Indemnified Party based upon a breach of any representation, warranty or covenant made by any Seller Indemnifying Party in this Agreement or in any exhibit, certificate or financial statement delivered hereunder, or by reason of any claim, action or proceeding asserted or instituted arising out of or related to any matter or thing covered by such representations, warranties or covenants, including without limitation amounts which a Buyer Indemnified Party has paid or which are payable with respect to tax liabilities of Seller or any of the Subsidiaries or any of the Companies for periods prior to the Closing and other liabilities of Seller or any of the Subsidiaries not disclosed to a Buyer Indemnified Party or existing in breach of the Seller Indemnifying Party's warranties or covenants hereunder; provided, however, that: (a) indemnification shall be payable by a Seller Indemnifying Party only if and to the extent that the aggregate amount of all claims for indemnification by the Buyer Indemnified Party hereunder shall exceed $50,000; provided, however, that the foregoing deductible shall not be applied to (i) claims arising out of or relating to a breach of the representations and warranties contained in Section 2.8 of this Agreement (relating to tax matters) and (ii) claims arising out of or relating to a breach of the representations and warranties contained in Section 2.2 of this Agreement (relating to ownership of the Stock of the Subsidiaries). (b) no indemnification shall be payable with respect to claims asserted by a Buyer Indemnified Party more than two years after the Closing, provided, however, that (i) with respect to claims arising out of or relating to a breach of the representations and warranties contained in Section 2.8 of this Agreement (relating to tax matters), indemnification shall be payable to the Buyer Indemnified Party, provided notice is given by the Buyer Indemnified Party to the Seller Indemnifying Party within the statute of limitations period applicable to the tax matter at issue, and (ii) with respect to claims arising out of a relating to a breach of the representations and warranties contained in Section 2.2 of this Agreement (relating to ownership of the capital stock of the Subsidiaries), there shall be no time limitation within which notice must be given to the Seller Indemnifying Party other than any statutes of limitation generally applicable to contracts which would be generally applicable under the laws of the State of Delware; and, (c) Buyer Indemnified Party does hereby waive any right to seek punitive damages against any Seller Indemnifying Party (and any officer, director, employee, agent or affiliate of such Seller Indemnified Party), except with respect to claims involving fraud or criminal conduct on the part of a Seller Indemnifying Party. 10.2 Indemnification by Buyer. Buyer (the "Buyer Indemnifying Party") agrees to defend, indemnify and hold the Stockholders (the "Seller Indemnified Party") harmless from and against any damages, liabilities, losses and expenses (including reasonable counsel fees) of any kind or nature whatsoever which may be sustained or suffered by any of them based upon a breach of any representation, warranty or covenant made by the Buyer Indemnifying Party in this Agreement or in any exhibit, certificate or financial statement delivered hereunder, or by reason of any claim, action or proceeding asserted or instituted growing out of any matter or thing covered by such representations, warranties or covenants, provided, however, that: (a) indemnification shall be payable by the Buyer Indemnifying Party only if and to the extent that the aggregate amount of all claims for indemnification by the Seller Indemnified Party hereunder shall exceed $50,000; (b) no indemnification shall be payable to the Seller Indemnified Party more than two years after the Closing; provided however, that with respect to claims arising out of or relating to Buyer's obligation to obtain release of the personal guaranties of the Stockholders in accordance with Section 5.4 of this Agreement, indemnification shall be payable to the Seller Indemnified Party, provided notice is given by Seller Indemnified Party to the Buyer Indemnified Party within the statute of limitations for contracts which would be generally applicable under the laws of the State of Delaware; and, (c) the Seller Indemnified Party does hereby waive any right to seek punitive damages against any Buyer Indemnifying Party, except with respect to claims involving fraud or criminal conduct on the part of Buyer Indemnifying Party. 10.3 Notice; Defense of Claims. An Indemnified Party shall give prompt written notice to the Indemnifying Party of each claim for indemnification hereunder after receipt of notice or Knowledge thereof, specifying the amount and nature of the claim, and of any matter which is likely to give rise to an indemnification claim. Each Indemnifying Party shall have the right to participate at its own expense in the defense of any such matter or its settlement. If, in the opinion of Buyer, its financial condition or business or the financial condition or business of Seller acquired by Buyer would not be impaired thereby, Buyer may authorize a Seller Indemnifying Party to take over the defense of such matter so long as such defense is expeditious. Except as provided herein, failure to give notice of a matter which may give rise to an indemnification claim shall not affect the rights of an Indemnified Party to collect such claim from an Indemnifying Party. 10.4 Payment of Claims; Arbitration. Indemnification claims shall be paid or otherwise satisfied by the Indemnifying Party within 30 days after notice thereof is given by the Indemnified Party, unless within said 30-day period the Indemnifying Party indicates in a writing delivered to the Indemnified Party that it disputes the nature or amount of the claim, in which event the dispute, upon the election of any party hereto after said 30-day period, shall be referred to the American Arbitration Association to be settled by arbitration in Birmingham, Alabama in accordance with the then current commercial arbitration rules of said Association, and judgment upon the award rendered by the Arbitrator may be entered in any court having jurisdiction thereof. Unless otherwise determined by the arbitrator, the fees and expenses of the arbitrator shall be borne 50% by the Buyer and 50% by the Seller Indemnifying Party. ARTICLE 11. COMPLIANCE WITH SECURITIES LAWS. 11.1 Delivery of Information. (a) At or prior to the Closing, Buyer shall have delivered to each of the Stockholders a set of documents (the "Buyer Disclosure Documents") consisting of an explanatory letter and a copy of each of the following documents: (i) Buyer's Annual Report on Form 10-K for the fiscal year ended December 29, 1995 (without exhibits); (ii) Buyer's Annual Report to Stockholders for the fiscal year ended December 29, 1995; (iii) Buyer's definitive Proxy Statement dated April 21, 1996 (iv) Buyer's Quarterly Reports on Form 10-Q for the quarters ended March 29, and June 28 and September 27, 1996; and (v) any report or document delivered to the stockholders pursuant to subparagraph (c) below. (b) Buyer represents and warrants that Buyer Disclosure Documents, taken as a whole, do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) Buyer shall deliver to each of the Stockholders, prior to the Closing, a copy of each report or other document filed by Buyer pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, between the date hereof and the date of Closing. (d) At or prior to the Closing, Seller shall have delivered to each of the Stockholders such information concerning the Seller, if any, as is required in the opinion of counsel for Buyer in order for the offer and sale of the Purchase Shares to qualify for exemption from registration under the Securities Act of 1933, as amended (the "1933 Act") pursuant to Regulation D thereunder or such other exemption as counsel for Buyer may determine to be applicable ("Seller Disclosure Documents"). 11.2 Acknowledgment of Receipt of Information. At or prior to the Closing, each Stockholder shall have delivered to Buyer an investment letter, substantially in the form of Exhibit G, stating: (a) that he has received and carefully reviewed the Buyer Disclosure Documents and any Seller Disclosure Documents; (b) that he has had the opportunity to ask questions of, and receive answers from, Buyer and Seller and their officers and others acting on their behalf concerning the matters covered by the Buyer Disclosure Documents and any Seller Disclosure Documents and the business, operations and financial condition of Buyer and Seller; (c) that he has obtained all information which he or his representative deem necessary or appropriate to enable him to evaluate fully the transactions contemplated by this Agreement; (d) that he has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of an investment in Buyer's Common Stock pursuant to this Agreement; and (e) that he is taking the Purchase Shares for investment, that such Purchase Shares are restricted securities, and that he will not dispose of such Purchase Shares except as provided therein. 11.3 RESERVED 11.4 Compliance with Securities Laws. Counsel for Buyer shall have determined that the issuance of the Purchase Shares to the Stockholders in connection with the transaction: (a) will be exempt from registration under the Securities Act of 1933 (the "1933 Act") by reason of being a transaction not involving a public offering; and (b) will be exempt from registration or qualification (other than simple notice) under the securities or "blue-sky" laws of every jurisdiction in the United States in which any Stockholder has an address on the records of Seller on the record date used to determine the Seller's stockholders entitled to vote on the transaction. 11.5 Reports. Since January 1, 1993, or the date of organization, if later, Buyer has filed all reports and statements, together with any amendments required to be made with respect thereto, that it was required to file with (i) the SEC, including, but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K, and proxy statements and any applicable state securities or banking authorities. 11.6 Statements, True and Correct. No statement, certificate, instrument or other writing furnished or to be furnished by Seller to Buyer pursuant to this Agreement or any other document, agreement or instrument referred to herein contains or will contain any untrue statement of material fact or will omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any documents that Buyer is required to file with any regulatory authority in connection with the transactions provided for herein will comply as to form and all material respects with the provisions of applicable Law. 11.7 Covenants of Buyer. From the date of this Agreement, until the earlier of the effective time, or the termination of this Agreement, Buyer covenants and agrees and that it will not do or agree or commit to do, any of following without prior written consent of the Chief Executive Officer, President or Chief Financial Officer of Seller, which consent shall not be unreasonably withheld: (a) Fail to file timely any report required to be filed by it with Regulatory Authorities including the SEC; or (b) Take any action that would cause the Buyer Common Stock to cease to be traded on the NASDAQ. ARTICLE 12. REGISTRATION. 12.1 Required Registration. (a) Fixed Payment and Stub Period Payment Shares. If at any one time during the period beginning one hundred eighty (180) days following the Closing and ending on the second anniversary of the Closing, Buyer receives a written request from one or more of the Stockholders who received Fixed Payment Shares and Stub Period Payment Shares, in connection with this transaction, to file a registration statement under the 1933 Act for a public offering of not less than 50% of the aggregate Fixed Payment Shares and Stub Period Payment Shares, Buyer will promptly use its reasonable efforts to cause a registration statement to be filed with the Securities and Exchange Commission with respect to the number of such shares specified in the request, and will use its reasonable efforts to cause such registration statement to become effective under the 1933 Act. Buyer shall prepare and file with the Securities and Exchange Commission, as soon as reasonably practicable, any necessary amendments to the Registration Statement or supplements to the prospectus included therein. Buyer shall not be required to cause more than one registration statement to be filed with respect to any Fixed Payment Shares and Stub Period Payment Shares pursuant to this Section 12.1. (b) 1997 Contingent Payment Shares. If at any one time during the period beginning one hundred eighty (180) days following the issuance of the Contingent Payment Shares, with respect to the twelve (12) month period ending December 31, 1997 (the "1997 Contingent Payment Shares"), and ending on the second anniversary of such issuance, Buyer receives a written request from one or more of the Stockholders who received 1997 Contingent Payment Shares, in connection with this transaction, to file a registration statement under the 1933 Act for a public offering of not less than fifty (50%) percent of the 1997 Contingent Payment Shares, Buyer will use its reasonable efforts to cause a registration statement to be filed with the Securities and Exchange Commission with respect to the number of such shares specified in the request and will use its reasonable efforts to cause such registration statement to become effective under the 1933 Act. Buyer shall prepare and file with the Securities and Exchange Commission, as soon as reasonably practicable, any necessary amendments to the Registration Statement or supplements to the prospectus included therein. Buyer shall not be required to cause more than one registration statement to be filed with respect to the 1997 Contingent Payment Shares pursuant to this Section 12.1. (c) 1998 Contingent Payment Shares. If at any one time during the period beginning one hundred eighty (180) days following the issuance of the Contingent Payment Shares, with respect to the twelve (12) month period ending December 31, 1998 (the "1998 Contingent Payment Shares"), and ending on the second anniversary of such issuance, Buyer receives a written request from one or more of the Stockholders who received 1998 Contingent Payment Shares, in connection with this transaction, to file a registration statement under the 1933 Act for a public offering of not less than fifty (50%) percent of the 1998 Contingent Payment Shares, Buyer will use its reasonable efforts to cause a registration statement to be filed with the Securities and Exchange Commission with respect to the number of such shares specified in the request and will use its reasonable efforts to cause such registration statement to become effective under the 1933 Act. Buyer shall prepare and file with the Securities and Exchange Commission, as soon as reasonably practicable, any necessary amendments to the Registration Statement or supplements to the prospectus included therein. Buyer shall not be required to cause more than one registration statement to be filed with respect to the 1998 Contingent Payment Shares pursuant to this Section 12.1. 12.2 Participation of Selling Stockholders. A stockholder requesting registration under Section 12.1 hereof shall mail a notice thereof to the other stockholders of Buyer holding any Purchase Shares eligible for inclusion in such registration statement and shall afford them equal opportunity to participate in such public offering; and the stockholder or stockholders making the original request under Section 12.1 shall represent and warrant to Buyer that it has complied with this requirement. (As used herein, the term "Selling Stockholders" shall mean the stockholders making the original request under Section 12.1 and any other stockholders who elect to participate in the public offering.) Buyer shall promptly furnish to each Selling Stockholder such number of copies of the Registration Statement (including any amendments thereto), any preliminary prospectus and the final prospectus (including any supplements thereto) as any Selling Stockholder may reasonably request. 12.3 Conditions of Buyer's Obligations to Register Shares. Buyer's obligation under Section 12.1 to cause a registration statement or amendment to be filed shall be subject to the following conditions: (a) The Selling Stockholders shall have provided such consents, representations and information and executed such documents as may reasonably be required in connection with such registration; (b) The Selling Stockholders shall have agreed in writing not to sell any of Buyer's Common Stock (or any rights with respect thereto) during any Contingent Payment Trading Period; (c) Buyer will be entitled to include any other shares of its Common Stock to be offered either by it or by any of its stockholders in any registration statement filed pursuant to Section 12.1; (d) In no event will any of the Selling Stockholders be entitled to request registration under Section 12.1 within a period of ninety (90) days following the effective date of any other registration statement filed by Buyer (other than a registration statement covering the offer and sale of Common Stock to its employees and subsidiaries) regardless of whether or not any of the Selling Stockholders participated in such registration statement; (e) Notwithstanding any other provision of this Agreement, to the extent the provisions of subparagraph (d) of this Section 12.3 have the effect of reducing the time period during which Selling Stockholders would otherwise be entitled to request registration of their Shares under Section 12.1, the period during which the Selling Stockholders may request registration, and during which Buyer shall have a duty hereunder to register said Shares, shall be extended by the number of days equal to the aforementioined reduction. (f) All sales of Buyer's Common Stock by any of the Selling Stockholders in any registered offering, other than a firm commitment underwritten offering, shall be made through a coordinating broker acceptable to Buyer which acceptance by Buyer shall not be unreasonably withheld; (g) All sales of Buyer's Common Stock by any of the Selling Stockholders in any registered firm commitment underwritten offering shall be made through an underwriter acceptable to Buyer which acceptance by Buyer shall not be unreasonably withheld; and (h) On and after the one hundredth eightieth day following the effective date of any registration statement filed pursuant to Section 12.1, Buyer may, without further notice to any Selling Stockholder, take action to deregister any shares of its Common Stock registered by such registration statement and not yet sold. (i) Buyer shall at the time it is filing a registration statement pursuant to a request made hereunder be eligible to file a registration statement on either Form S-3 or Form S-1 (or any successor form to any such forms). Buyer shall not take or omit to take any action for the purpose of rendering itself ineligible to file a registration statement on Form S-1 or Form S-3. 12.4 Expenses. The expenses of registration of the Purchase Shares of the Selling Stockholders pursuant to Section 12.1 will be paid by Buyer. For purposes of this Section 12.4, the term "expenses" shall include federal, state and other registration and qualification fees, legal fees and expenses for Buyer's counsel, auditing and accounting expenses incurred by Buyer in connection with the registration and printing and other related expenses, but shall exclude any legal fees for counsel to the Selling Stockholders and any underwriting discounts and selling commissions relating to the Purchase Shares sold by the Selling Stockholders. 12.5 Financial Information. Notwithstanding the foregoing, in connection with any registration provided for in this Agreement, Buyer will not be obligated to furnish any information, financial or otherwise, other than the information required and in the form and format which is customarily required at the time of the execution of this Agreement to accomplish any registration of the type provided for in this Agreement, unless otherwise required by the Securities and Exchange Commission; it being understood, that as of the date hereof, it is not customary in connection with registrations of the type provided for in this Agreement for the registrant to furnish audited financial information for interim quarterly periods. In the event that additional financial statements or other information is so otherwise required and is not readily available, then the reasonable salary and related reasonable overhead expenses of employees of Buyer for time expended by such employees in the preparation of such financial or other information will be reimbursed to Buyer by the Selling Stockholders, pro rata. 12.6 Exclusive Obligation to Register. Except as provided in this Article 12, Buyer will have no obligation to any of the Stockholders to register under the 1933 Act any Common Stock received by any of such stockholders pursuant to this Agreement. 12.7 State Securities Laws. In connection with the registered offering of any Buyer common Stock pursuant to this Agreement, Buyer will take such action as may be necessary to qualify or register the shares to be sold under the securities or "blue-sky" laws of such jurisdictions as may be reasonably requested by the Selling Stockholders; provided, however, that Buyer will not be obligated to qualify as a foreign corporation to do business under the laws of any such jurisdiction in which it is not then qualified or to file any general consent to service of process. 12.8 Indemnification. In connection with any registration statement filed pursuant to this Article 12: (a) To the extent permitted by law, Buyer will indemnify and hold harmless each Selling Stockholder against any losses, claims, damages or liabilities, joint or several, to which they may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained or incorporated by reference in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein, and will reimburse each Selling Stockholder for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 12.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without Buyer's consent (which consent shall not be unreasonably withheld) nor shall Buyer be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in connection with such registration statement, preliminary prospectus, final prospectus or amendment or supplement thereto in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any Selling Stockholder. (b) To the extent permitted by law, each Selling Stockholder will indemnify and hold harmless Buyer, each of its directors, each of its officers who have signed such registration statement, each person, if any, who controls Buyer within the meaning of the 1933 Act, any underwriter (within the meaning of the 1933 Act) (in the case of an underwritten public offering) and each other Selling Stockholder against any losses, claims, damages or liabilities to which Buyer or any such director, officer, controlling person, or Selling Stockholder may become subject, under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained or expressly incorporated by reference in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendment or supplement thereto, or arise out of or based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in such registration statement, preliminary prospectus, final prospectus, or amendments or supplements thereto, in reliance upon and in conformity with written information furnished by such Selling Stockholder expressly for use in connection with such registration; and such Selling Stockholder will reimburse any legal or other expenses reasonably incurred by Buyer or any such director, officer, controlling person, underwriter or Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action. It is agreed that the indemnity agreement contained in this subsection 12.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the indemnifying Selling Stockholder (which consent shall not be unreasonably withheld). (c) Promptly after receipt by a party who may be indemnified under this Section 12.8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 12.8, notify the indemnifying party in writing of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties. The failure to promptly notify any indemnifying party of the commencement of any such action, if prejudicial to his ability to defend such action, shall relieve such indemnifying party of any liability to the party eligible for indemnification under this Section 12.8, but the omission so to notify the indemnifying party will not relieve him of any liability which he may have to any indemnified party other than under this Section 12.8. ARTICLE 13. MISCELLANEOUS. 13.1 Fees and Expenses. Each of the parties will bear its own expenses in connection with the negotiation and the consummation of the transactions contemplated by this Agreement, and no expenses of Seller, any Subsidiary or the Stockholders relating in any way to the transactions contemplated hereby shall be charged to or paid by Buyer or included in any account of Seller or any Subsidiary as of the Closing. 13.2 Notices. Any notice or other communication in connection with this Agreement shall be deemed to be delivered if in writing (or in the form of a telegram) addressed as provided below and if either (a) actually delivered at said address, or (b) in the case of a letter, three business days shall have elapsed after the same shall have been deposited in the United States mail, postage prepaid and registered or certified, return receipt requested: If to Seller or the Stockholders, to: Mr. W. Thomas Deas P.O. Box 567 Northport, AL 35476 with a copy to: W. Marcus Brakefield, Esquire Hubbard, Smith, McIlwain, Brakefield & Shattuck, P.C. 808 Lurleen Wallace Blvd., North P.O. Box 2427 Tuscaloosa, AL 35403-2427 If to Buyer or Acquisition Corp., to: Southern Energy Homes, Inc. Highway 41 North P.O. Box 390 Addison, AL 35540 Attn: Keith Brown, Chief Financial Officer with a copy to: Paul J. Hartnett, Jr., Esquire Brown, Rudnick, Freed & Gesmer, P.C. One Financial Center Boston, MA 02111 and in any case at such other address as the addressee shall have specified by written notice. All periods of notice shall be measured from the date of delivery thereof. 13.3 Entire Agreement. This Agreement (including all exhibits or schedules appended to this Agreement and all documents delivered pursuant to or referred to in this Agreement, all of which are hereby incorporated herein by reference) constitutes the entire agreement between the parties, and all promises, representations, understandings, warranties and agreements with reference to the subject matter hereof and inducements to the making of this Agreement relied upon by any party hereto, have been expressed herein or in the documents incorporated herein by reference. 13.4 Assignability. This Agreement shall be binding upon, and shall be enforceable by and inure to the benefit of, the parties named herein and their respective personal representatives successors and assigns. Buyer may make an assignment of this Agreement upon written notice to Seller, although no such assignment shall relieve Buyer of any liabilities or obligations under this Agreement. Neither Seller, any Subsidiary nor any Stockholder may assign this Agreement without the prior written consent of Buyer. 13.5 Publicity and Disclosures. No press releases or any public disclosure, either written or oral, of the transactions contemplated by this Agreement shall be made without the prior knowledge and written consent of Buyer and Stockholders. 13.6 Confidentiality. Each party agrees that it will keep confidential and not disclose or divulge any confidential, proprietary or secret information which they may obtain from the other party in connection with the transactions contemplated herein, or pursuant to inspection rights granted hereunder, unless such information is or hereafter becomes public information. 13.7 Governing Law; Severability. This Agreement shall be deemed a contract made under the laws of the State of Delaware and, together with the rights and obligations of the parties hereunder, shall be construed under and governed by the laws of such state (other than the choice of law provisions thereof). The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision hereof. 13.8 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 13.9 Effect of Table of Contents and Headings. Any table of contents, title of an article or section heading herein contained is for convenience of reference only and shall not affect the meaning of construction of any of the provisions hereof. [SIGNATURE PAGES FOLLOW] IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed in multiple counterparts as of the date set forth above by their duly authorized representatives. BUYER: Southern Energy, Homes, Inc. BY: ____________________________ Keith W. Brown, CFO SEH Acquisition Corp. BY: ______________________________ Keith W. Brown, President STOCKHOLDERS: ------------------------------- W. Thomas Deas ------------------------------- James M. Moore, III ------------------------------- W. David Deas ------------------------------- J.M. Deas, Jr. ------------------------------- James Miller Deas ------------------------------- Thomas Deas, Jr. ------------------------------- Gregory C. Vogel SELLER: BR Holding Corp. BY: ____________________________ W. Thomas Deas, President SUBSIDIARIES: BR Chilton Co., Inc. BY: ____________________________ W. Thomas Deas, Vice President BR Mississippi, Inc. BY: ____________________________ W. Thomas Deas, Vice President BR Marshall Co., Inc. BY: ____________________________ W. Thomas Deas, Vice President BR Tuscaloosa Co., Inc. BY: ____________________________ W. Thomas Deas, Vice President SC Tuscaloosa Co., Inc. BY: ____________________________ W. Thomas Deas, Vice President TH Center, Inc. BY: ____________________________ W. Thomas Deas, Vice President SE Management, Inc. BY: ____________________________ W. Thomas Deas, Vice President BR Agency, Inc. BY: ____________________________ W. Thomas Deas, President AGREEMENT AND PLAN OF REORGANIZATION LIST OF SCHEDULES AND EXHIBITS Reference at Page ------- SCHEDULES Schedule 2.3 - Options, Warrants and Convertible Securities Schedule 2.6 - Financial Statements of Subsidiaries Schedule 2.7 - Property, Leases and Equipment Schedule 2.9 - Absence of Undisclosed Liabilities Schedule 2.12 - Changes in Financial Condition Schedule 2.14(a) - Unaffiliated Stockholder Companies Schedule 2.14(b) - Financial Statements of Unaffiliated Stockholder Retailers Schedule 2.14(c) - Absence of Undisclosed Liabilities of Unaffiliated Stockholder Retailers Schedule 2.14(d) - Changes in Financial Condition of Unaffiliated Stockholder Retailers Schedule 2.14(e) - Litigation of Unaffiliated Stockholder Companies Schedule 2.15 - Trade Names, Trademarks and Copyrights Schedule 2.16 - Trade Secrets and Customer Lists Schedule 2.17 - Contracts and Commitments Schedule 2.18 - Employee Benefit Plans Schedule 2.20 - Licenses, Permits or Franchises Schedule 2.21 - Borrowings Schedule 2.22 - Banking Arrangements Schedule 2.23 - Insurance Schedule 2.24 - Warranty or other Claims Schedule 2.26 - Litigation Schedule 5.4 - Guaranteed Debt EXHIBITS Reference at Page ------- Exhibit A: Certificate of Merger Exhibit B: Contingent Payment Schedule Exhibit C: Dealer Volume Incentive Program Terms Exhibit D: Employment Contracts Exhibit E: Non Competition Agreements Exhibit F: Real Estate Development Agreement Exhibit G: Investment Letter EXHIBIT B CONTINGENT PAYMENT SCHEDULE For the 12 month period ended December 31, 1997 Seller EBIT (1) Multiple Contingent Amount (2) --------------- ---------- -------------------- Less than $2,500,700 @0 X $ -0- Between $2,500,701 and $3,037,800 @2 X $ 2 to $1,074,200 Between $3,037,801 and $3,557,800 @2.25 X $1,208,477 to $2,378,475 $3,557,801 or more @2.5 X $2,642,753 to Computed Multiple For the 12 month period ended December 31, 1998 Seller EBIT (1) Contingent Amount --------------- ----------------- Less than $3,562,500 $ -0- Between $3,562,501 and $4,145,000 $1,700,000 Between $4,145,001 and $5,016,000 $2,350,000 $5,016,001 or more $3,070,000 (1) Seller EBIT - Consolidated Earnings (defined below) before interest (other than (i) floor plan interest incurred with respect to inventory and (ii) interest incurred with respect to capital raised or capital expenditures made in connection with the expansion of the Seller's or the Subsidiaries' operations, which in neither case shall be greater than the cost of funds to Buyer), taxes, management fees and any administrative fees paid to Buyer. (2) Contingent Amount is EBIT less $2,500,700 times applicable multiple. (3) "Consolidated Earnings" means the consolidated earnings of the Seller and the Subsidiaries. EX-10.22 3 AMEND AND RESTATED EMPLOYMENT AGREEMENT Exhibit 10.22 SOUTHERN ENERGY HOMES, INC. AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT, amended and restated effective as of the 14th day of June, 1996 by and between Southern Energy Homes, Inc., a Delaware corporation (hereinafter called the "Company"), and Wendell L. Batchelor (hereinafter called the "Executive"). WHEREAS, the Executive has served since June 8, 1989 as the President and Chief Executive Officer of the Company and its predecessor, Southern Energy Homes, Inc., an Alabama corporation ("SEH-Alabama"), pursuant to that Employment Agreement dated as of June 8, 1989 by and between the Executive and SEH-Alabama, as amended by an Amendment to Employment Agreement dated as of January 1, 1993 (as so amended, the "Original Agreement"); WHEREAS, since August 17, 1996 the Executive has also served as the Chairman of the Board of the Company; WHEREAS, in light of the Executive's performance and his contributions to the growth and profitability of the Company, the Company is prepared to increase the Executive's Base Salary and to amend and restate the Original Agreement to reflect such increase and the Executive's position as Chairman of the Board; WHEREAS, the Executive is prepared to so amend and restate the Original Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree to amend and restate the Original Agreement pursuant to Section 8.1 of the Original Agreement as follows: 1. Employment. The Company hereby agrees to employ the Executive as Chairman of the Board, President and Chief Executive Officer of the Company and the Executive hereby agrees to accept such employment, under and subject to the terms and conditions hereinafter set forth. 2. Duties. The Executive agrees to perform faithfully such duties as are consistent with his position as the Chairman of the Board, President and Chief Executive Officer of the Company as may be assigned to him from time to time by the Board of Directors of the Company, and shall report to the Board of Directors. The Company shall provide the Executive with such support personnel and office facilities as the Board of Directors shall deem reasonably necessary to permit the Executive to perform the duties assigned to him hereunder. The Executive agrees, during the Term (as hereinafter defined), to devote his full business time and efforts to the performance of his duties hereunder to the exclusion of all other business activities. The foregoing shall not prohibit the Executive from acting as a passive investor in such investments and enterprises as the Executive may choose, provided, however, that such activity does not interfere with the performance of his duties hereunder and does not involve the use of the Company resources or personnel. 3. Compensation. In consideration of the services rendered by the Executive under this Agreement, the Company shall pay the Executive compensation as follows: (a) Base Salary: The Company shall pay the Executive a base salary (the "Base Salary") of Thirty Six Thousand Six Hundred and Sixty Seven Dollars ($36,667.00) per month during the term of this Agreement. The Executive's Base Salary shall be paid in arrears on a weekly, bi-weekly or monthly basis in accordance with such Company payroll policy and practice as may obtain from time to time. The Base Salary may be reviewed from time to time by the Board of Directors to determine whether, in light of the scope of the Executive's duties and his performance, it may be appropriate to increase the Base Salary. (b) Incentive Compensation: In addition to his Base Salary, the Executive shall be entitled to receive incentive bonus compensation as set forth on the attached Schedule A. 4. Insurance and Other Benefits. During the Term of this Agreement the Executive shall be entitled to the following benefits: (a) health and medical insurance, disability insurance and life insurance benefits comparable in cost and coverage to the benefits presently provided by the Company to the Executive as of the date hereof; (b) automobile expense allowance which is permitted under, and is in accordance with, policies which may be established with respect thereto by the Board of Directors from time to time; (c) travel and entertainment allowances which are permitted under, and are in accordance with, policies which may be established with respect thereto by the Board of Directors from time to time; (d) paid vacation and holidays as permitted under, and in accordance with, policies which may be established with respect thereto by the Board of Directors from time to time; and (e) paid sick leave as permitted under, and in accordance with, policies which may be established with respect thereto by the Board of Directors from time to time. 5. Term. The term of employment under this Agreement (the "Term") shall continue until June 30, 1997, and shall thereafter automatically renew for additional one (1) year periods unless sooner terminated (i) by either of the parties hereto by notice not less than ninety (90) days prior to the date of renewal of (ii) as provided in Section 6. 6. Termination. 6.1 Termination by the Company. This Agreement and the employment of the Executive by the Company may be terminated by the Company in accordance with the provisions of this Section 6.1, as follows: (a) If the Executive has been convicted of, or pleads guilty or nolo contendere to a felony, or to a misdemeanor involving moral turpitude, the Company may terminate the Executive's employment immediately upon the occurrence of such conviction or plea. (b) If the Executive has, in the good faith determination of the Board of Directors, (i) engaged in willful misconduct with respect to the Company, or (ii) grossly neglected his duties to the Company, the Company may terminate the Executive's employment immediately by notice, which notice shall specify in reasonable detail the alleged misconduct or neglect. (c) If the Executive has, in the good faith determination of the Board of Directors, (i) engaged in misconduct with respect to the Company, (ii) neglected his duties to the Company, (iii) failed substantially in areas of his direct responsibility to achieve satisfactory operating results over repeated quarterly periods, or (iv) failed substantially to exercise reasonably prudent skills in the performance of his duties hereunder, but in such cases the alleged misconduct, neglect or failure is not willful or gross, but is worse than mere mediocre or ordinary performance, the Company may terminate the Executive's employment immediately by written notice of the same to the Executive, specifying in reasonable detail the alleged misconduct, neglect or failure. (d) The Company may also terminate the Executive's employment without assignment of cause upon thirty (30) days prior written notice. In the event of termination under paragraphs (a) or (b) of this Section 6.1, all salary, incentive bonus compensation and other benefit obligations of the Company under Sections 3 and 4 of this Agreement shall cease effective with termination of employment. In the event of termination under paragraph (c) of this Section 6.1, all salary, incentive bonus compensation and other benefit obligations of the Company shall cease as of the last day of the month in which the termination occurs, provided, however that the Executive shall be paid a severance benefit equal to one (1) months Base Salary, payable on the last day of the month in which the termination occurs. In the event of termination under paragraph (d) of this Section 6.1, all salary, incentive bonus compensation and other benefit obligations of the Company shall cease as of the last day of the month in which the termination occurs, provided, however that the Executive shall be paid a severance benefit equal to six (6) months Base Salary payable in six (6) equal monthly installments on the last day of the each of the six (6) months following the month in which the termination occurs. 6.2 Death. In the event of the death of the Executive during the term of this Agreement, his employment by the Company shall be deemed to terminate as of the date of his death and a death benefit equal to six (6) months Base Salary shall be payable in six (6) equal monthly installments to the Executive's estate, commencing with the month following the date of the Executive's death. All other payments and benefits shall cease as of the last day of the month in which the Executive's death occurred. 6.3 Permanent Disability. In the event that the Executive suffers Permanent Disability (as hereinafter defined), the Company may terminate the Executive's employment by notice to the Executive and in the event of such termination, the Executive shall be entitled to receive a disability severance benefit equal to six (6) months Base Salary payable in six (6) equal monthly installments commencing on the last day of the month in which such termination occurs. All other payments and benefits, except for disability insurance benefits provided pursuant to Section 4(a) hereof, shall cease as of the last day of the calendar month in which such termination occurs. For the purposes hereof, "Permanent Disability" shall be determined by a qualified physician and shall mean the inability of the Executive, due to physical or mental illness, disability or infirmity, to perform his duties hereunder for a period which has continued, or could reasonably be expected to continue, for a period of four consecutive months. Permanent Disability shall not be considered grounds for termination by the Company under Section 6.1(a), (b) or (c) above. 7. Relocation. The Company agrees that it shall not require that the Executive relocate from his residence in the State of Alabama. 8. Notices. All notices hereunder, to be effective, shall be in writing and shall be delivered by hand or mailed by certified or registered mail, postage and fees prepaid, as follows: (i) If to the Company to: Southern Energy Homes, Inc. c/o Lee Capital Holdings One International Place Boston, Massachusetts 02110 Attn: Jonathan O. Lee With a copy to: Paul J. Hartnett, Jr. Hutchins & Wheeler 101 Federal Street Boston, Massachusetts 02110 (ii) If to Executive to: Wendell L. Batchelor P.O. Box 390 Addison, Alabama 35540 With a copy to: John R. Wynn Lanier, Ford, Shaves and Payne, P.C. 200 West Court Square Suite 5000 P.O. Box 2087 Huntsville, Alabama 35804-0527 unless and until notice of another or different address shall be given as provided herein. 8. Miscellaneous. 8.1 Modification. This Agreement, together with the Noncompetion Agreement, constitutes the entire agreement between the parties hereto with regard to the subject matter hereof, superseding all prior understandings and agreements, whether written or oral. This Agreement may not be amended or revised except by a writing signed by the parties. 8.2 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, although the obligations of the Executive are personal and may be performed only by him. 8.3 Captions. Captions herein have been inserted solely for convenience of reference and in no way define, limit or describe the scope or substance of any provision of this Agreement. 8.4 Severability. The provisions of this Agreement are severable, and invalidity of any provision shall not affect the validity of any other provision. In the event that any court of competent jurisdiction shall determine that any provision of this Agreement or the application thereof is unenforceable because of the duration or scope thereof, the parties hereto agree that said court in making such determinations shall have the power to reduce the duration and scope of such provision to the extent necessary to make if enforceable, and that the Agreement in its reduced form shall be valid and enforceable to the full extent permitted by law. 8.5 Arbitration. Any and all disputes arising hereunder shall be subject to binding arbitration in Washington, D.C., in accordance with the Commercial Rules of the American Arbitration Association, as then amended and in effect, and any award thereunder shall be binding and conclusive and may be entered for judgment in any court of competent jurisdiction. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day and year first above written. SOUTHERN ENERGY HOMES, INC. By: ___________________________ Keith W. Brown, Treasurer EXECUTIVE: ------------------------------- Wendell L. Batchelor SCHEDULE A This Schedule A is to the Amended and Restated Employment Agreement between Southern Energy Homes, Inc. (the "Company") and Wendell L. Batchelor (the "Executive"), dated as of June 14, 1996 (the "Agreement"), and sets forth the terms of Executive's incentive bonus compensation as provided in Section 3(b) of the Agreement. Terms not otherwise defined in this Schedule A shall have the respective meanings set forth in the Agreement. During the Term of this Agreement, the Executive shall be entitled to incentive bonus compensation equal to 2% of the Net Income (as hereinafter defined) of the Company for the period in which such incentive bonus compensation is earned. Incentive bonus compensation shall be paid monthly in arrears, provided that incentive bonus compensation earned for any period which does not constitute a full calendar month shall be pro rated based on the number of days in such period and the number of days in the applicable month. For the purpose of this Schedule A, Net Income shall mean net operating income before interest expense, taxes and amortization for organizational expenses, goodwill or covenants not to compete and without reduction for any management fees payable to Lee Capital Holdings. Net Income shall be determined in accordance with generally accepted accounting principles consistently applied. EX-10.23 4 AMEND AND RESTATED EMPLOYMENT AGREEMEN Exhibit 10.23 SOUTHERN ENERGY HOMES, INC. AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT, amended and restated effective as of the 14th day of June, 1996 by and between Southern Energy Homes, Inc., a Delaware corporation (hereinafter called the "Company"), and Keith W. Brown (hereinafter called the "Executive"). WHEREAS, the Executive has served since June 8, 1989 as the Controller and Chief Financial Officer of the Company and its predecessor, Southern Energy Homes, Inc., an Alabama corporation ("SEH-Alabama"), pursuant to that Employment Agreement dated as of June 8, 1989 by and between the Executive and SEH-Alabama, as amended by an Amendment to Employment Agreement dated as of January 1, 1993 (as so amended, the "Original Agreement"); WHEREAS, in light of the Executive's performance and his contributions to the growth and profitability of the Company, the Company is prepared to increase the Executive's Base Salary and to amend and restate the Original Agreement to reflect such increase and the Executive's position as Controller and Chief Financial Officer; WHEREAS, the Executive is prepared to so amend and restate the Original Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree to amend and restate the Original Agreement pursuant to Section 8.1 of the Original Agreement as follows: 1. Employment. The Company hereby agrees to employ the Executive as Controller and Chief Financial Officer of the Company and the Executive hereby agrees to accept such employment, under and subject to the terms and conditions hereinafter set forth. 2. Duties. The Executive agrees to perform faithfully such duties as are consistent with his position as the Controller and Chief Financial Officer of the Company as may be assigned to him from time to time by the Board of Directors of the Company, and shall report to the Board of Directors. The Company shall provide the Executive with such support personnel and office facilities as the Board of Directors shall deem reasonably necessary to permit the Executive to perform the duties assigned to him hereunder. The Executive agrees, during the Term (as hereinafter defined), to devote his full business time and efforts to the performance of his duties hereunder to the exclusion of all other business activities. The foregoing shall not prohibit the Executive from acting as a passive investor in such investments and enterprises as the Executive may choose, provided, however, that such activity does not interfere with the performance of his duties hereunder and does not involve the use of the Company resources or personnel. 3. Compensation. In consideration of the services rendered by the Executive under this Agreement, the Company shall pay the Executive compensation as follows: (a) Base Salary: The Company shall pay the Executive a base salary (the "Base Salary") of Eleven Thousand Two Hundred and Fifty Dollars ($11,250.00) per month during the term of this Agreement. The Executive's Base Salary shall be paid in arrears on a weekly, bi-weekly or monthly basis in accordance with such Company payroll policy and practice as may obtain from time to time. The Base Salary may be reviewed from time to time by the Board of Directors to determine whether, in light of the scope of the Executive's duties and his performance, it may be appropriate to increase the Base Salary. (b) Incentive Compensation: In addition to his Base Salary, the Executive shall be entitled to receive incentive bonus compensation as set forth on the attached Schedule A. 4. Insurance and Other Benefits. During the Term of this Agreement the Executive shall be entitled to the following benefits: (a) health and medical insurance, disability insurance and life insurance benefits comparable in cost and coverage to the benefits presently provided by the Company to the Executive as of the date hereof; (b) automobile expense allowance which is permitted under, and is in accordance with, policies which may be established with respect thereto by the Board of Directors from time to time; (c) travel and entertainment allowances which are permitted under, and are in accordance with, policies which may be established with respect thereto by the Board of Directors from time to time; (d) paid vacation and holidays as permitted under, and in accordance with, policies which may be established with respect thereto by the Board of Directors from time to time; and (e) paid sick leave as permitted under, and in accordance with, policies which may be established with respect thereto by the Board of Directors from time to time. 5. Term. The term of employment under this Agreement (the "Term") shall continue until June 30, 1997, and shall thereafter automatically renew for additional one (1) year periods unless sooner terminated (i) by either of the parties hereto by notice not less than ninety (90) days prior to the date of renewal of (ii) as provided in Section 6. 6. Termination. 6.1 Termination by the Company. This Agreement and the employment of the Executive by the Company may be terminated by the Company in accordance with the provisions of this Section 6.1, as follows: (a) If the Executive has been convicted of, or pleads guilty or nolo contendere to a felony, or to a misdemeanor involving moral turpitude, the Company may terminate the Executive's employment immediately upon the occurrence of such conviction or plea. (b) If the Executive has, in the good faith determination of the Board of Directors, (i) engaged in willful misconduct with respect to the Company, or (ii) grossly neglected his duties to the Company, the Company may terminate the Executive's employment immediately by notice, which notice shall specify in reasonable detail the alleged misconduct or neglect. (c) If the Executive has, in the good faith determination of the Board of Directors, (i) engaged in misconduct with respect to the Company, (ii) neglected his duties to the Company, (iii) failed substantially in areas of his direct responsibility to achieve satisfactory operating results over repeated quarterly periods, or (iv) failed substantially to exercise reasonably prudent skills in the performance of his duties hereunder, but in such cases the alleged misconduct, neglect or failure is not willful or gross, but is worse than mere mediocre or ordinary performance, the Company may terminate the Executive's employment immediately by written notice of the same to the Executive, specifying in reasonable detail the alleged misconduct, neglect or failure. (d) The Company may also terminate the Executive's employment without assignment of cause upon thirty (30) days prior written notice. In the event of termination under paragraphs (a) or (b) of this Section 6.1, all salary, incentive bonus compensation and other benefit obligations of the Company under Sections 3 and 4 of this Agreement shall cease effective with termination of employment. In the event of termination under paragraph (c) of this Section 6.1, all salary, incentive bonus compensation and other benefit obligations of the Company shall cease as of the last day of the month in which the termination occurs, provided, however that the Executive shall be paid a severance benefit equal to one (1) months Base Salary, payable on the last day of the month in which the termination occurs. In the event of termination under paragraph (d) of this Section 6.1, all salary, incentive bonus compensation and other benefit obligations of the Company shall cease as of the last day of the month in which the termination occurs, provided, however that the Executive shall be paid a severance benefit equal to six (6) months Base Salary payable in six (6) equal monthly installments on the last day of the each of the six (6) months following the month in which the termination occurs. 6.2 Death. In the event of the death of the Executive during the term of this Agreement, his employment by the Company shall be deemed to terminate as of the date of his death and a death benefit equal to six (6) months Base Salary shall be payable in six (6) equal monthly installments to the Executive's estate, commencing with the month following the date of the Executive's death. All other payments and benefits shall cease as of the last day of the month in which the Executive's death occurred. 6.3 Permanent Disability. In the event that the Executive suffers Permanent Disability (as hereinafter defined), the Company may terminate the Executive's employment by notice to the Executive and in the event of such termination, the Executive shall be entitled to receive a disability severance benefit equal to six (6) months Base Salary payable in six (6) equal monthly installments commencing on the last day of the month in which such termination occurs. All other payments and benefits, except for disability insurance benefits provided pursuant to Section 4(a) hereof, shall cease as of the last day of the calendar month in which such termination occurs. For the purposes hereof, "Permanent Disability" shall be determined by a qualified physician and shall mean the inability of the Executive, due to physical or mental illness, disability or infirmity, to perform his duties hereunder for a period which has continued, or could reasonably be expected to continue, for a period of four consecutive months. Permanent Disability shall not be considered grounds for termination by the Company under Section 6.1(a), (b) or (c) above. 7. Relocation. The Company agrees that it shall not require that the Executive relocate from his residence in the State of Alabama. 8. Notices. All notices hereunder, to be effective, shall be in writing and shall be delivered by hand or mailed by certified or registered mail, postage and fees prepaid, as follows: (i) If to the Company to: Southern Energy Homes, Inc. c/o Lee Capital Holdings One International Place Boston, Massachusetts 02110 Attn: Jonathan O. Lee With a copy to: Paul J. Hartnett, Jr. Hutchins & Wheeler 101 Federal Street Boston, Massachusetts 02110 (ii) If to Executive to: Wendell L. Batchelor P.O. Box 390 Addison, Alabama 35540 With a copy to: John R. Wynn Lanier, Ford, Shaves and Payne, P.C. 200 West Court Square Suite 5000 P.O. Box 2087 Huntsville, Alabama 35804-0527 unless and until notice of another or different address shall be given as provided herein. 8. Miscellaneous. 8.1 Modification. This Agreement, together with the Noncompetion Agreement, constitutes the entire agreement between the parties hereto with regard to the subject matter hereof, superseding all prior understandings and agreements, whether written or oral. This Agreement may not be amended or revised except by a writing signed by the parties. 8.2 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, although the obligations of the Executive are personal and may be performed only by him. 8.3 Captions. Captions herein have been inserted solely for convenience of reference and in no way define, limit or describe the scope or substance of any provision of this Agreement. 8.4 Severability. The provisions of this Agreement are severable, and invalidity of any provision shall not affect the validity of any other provision. In the event that any court of competent jurisdiction shall determine that any provision of this Agreement or the application thereof is unenforceable because of the duration or scope thereof, the parties hereto agree that said court in making such determinations shall have the power to reduce the duration and scope of such provision to the extent necessary to make if enforceable, and that the Agreement in its reduced form shall be valid and enforceable to the full extent permitted by law. 8.5 Arbitration. Any and all disputes arising hereunder shall be subject to binding arbitration in Washington, D.C., in accordance with the Commercial Rules of the American Arbitration Association, as then amended and in effect, and any award thereunder shall be binding and conclusive and may be entered for judgment in any court of competent jurisdiction. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day and year first above written. SOUTHERN ENERGY HOMES, INC. By: ___________________________ Jonathan O. Lee, Chairman of the Board EXECUTIVE: ------------------------------- Keith W. Brown EX-21 5 SUBSIDIARIES OF SOUTHERN ENERGY HOMES, INC. Exhibit 21 SUBSIDIARIES OF SOUTHERN ENERGY HOMES, INC. DIRECT SUBSIDIARIES: 1. Al/Tex Homes, Inc., d/b/a Southern Energy Homes of Texas. 2. Southern Energy Homes of North Carolina, Inc., d/b/a Imperial Homes. 3. WENCO Finance, Inc. 4. MH Transport, Inc. 5. Southern Energy Homes of Pennsylvania, Inc., d/b/a Energy Homes 6. BR Holding Corp. INDIRECT SUBSIDIARIES: 1. BR Agency, Inc., a wholly owned subsidiary of BR Holding Corp. EX-23 6 CONSENT OF ARTHUR ANDERSRN LLP Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report, incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-77222. /S/ ARTHUR ANDERSEN LLP Birmingham, Alabama March 26, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
5 YEAR JAN-03-1997 DEC-30-1996 JAN-03-1997 5,299 0 17,558 362 27,019 53,016 23,527 5,169 112,658 35,281 0 0 0 2 77,375 112,658 306,844 306,844 263,197 263,197 18,151 1,177 (462) 24,781 9,535 15,246 0 0 0 15,246 1.01 1.01
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