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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR QUARTERLY PERIOD ENDED JUNE 29, 2002
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 1-9751
------
CHAMPION ENTERPRISES, INC.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2743168
- ---------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2701 Cambridge Court, Suite 300
Auburn Hills, MI 48326
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(Address of principal executive offices)
Registrant's telephone number, including area code: (248) 340-9090
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
49,161,188 shares of the registrant's $1.00 par value Common Stock were
outstanding as of August 2, 2002.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CHAMPION ENTERPRISES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited Unaudited
Three Months Ended Six Months Ended
--------------------------- ----------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 361,506 $ 428,202 $ 667,883 $ 754,514
Cost of sales 301,300 351,791 563,168 633,295
--------- --------- --------- ---------
Gross margin 60,206 76,411 104,715 121,219
Selling, general and administrative expenses 67,720 67,839 125,958 139,702
Goodwill impairment charges 97,000 -- 97,000 --
Closing-related expenses 4,900 1,000 4,900 8,700
Gain on debt retirement (5,870) -- (5,870) --
--------- --------- --------- ---------
Operating income (loss) (103,544) 7,572 (117,273) (27,183)
Interest income 601 766 1,219 1,343
Interest expense (7,648) (6,548) (13,083) (13,553)
--------- --------- --------- ---------
Income (loss) before income taxes (110,591) 1,790 (129,137) (39,393)
Income taxes (benefits) 88,700 1,300 82,000 (13,800)
--------- --------- --------- ---------
Net income (loss) $(199,291) $ 490 $(211,137) $ (25,593)
========= ========= ========= =========
Basic earnings (loss) per share $ (4.10) $ 0.01 $ (4.36) $ (0.54)
========= ========= ========= =========
Weighted shares for basic EPS 48,729 47,847 48,617 47,672
========= ========= ========= =========
Diluted earnings (loss) per share $ (4.10) $ 0.01 $ (4.36) $ (0.54)
========= ========= ========= =========
Weighted shares for diluted EPS 48,729 49,508 48,617 47,672
========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 2 of 40
CHAMPION ENTERPRISES, INC.
Consolidated Balance Sheets
(In thousands, except par value)
Unaudited December 29,
June 29, 2002 2001
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 85,636 $ 69,456
Restricted cash 17,777 648
Accounts receivable, trade 49,436 27,507
Inventories 171,457 172,276
Deferred tax assets -- 39,100
Other current assets 46,423 36,637
--------- ---------
Total current assets 370,729 345,624
--------- ---------
LOANS RECEIVABLE 6,145 --
PROPERTY, PLANT AND EQUIPMENT 303,574 307,741
Less-accumulated depreciation 139,007 130,311
--------- ---------
164,567 177,430
--------- ---------
GOODWILL, NET 165,964 258,967
OTHER NON-CURRENT ASSETS
Restricted cash 18,443 --
Deferred tax assets -- 55,700
Other non-current assets 26,190 20,431
--------- ---------
Total assets $ 752,038 $ 858,152
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Floor plan payable $ 10,745 $ 70,919
Accounts payable 67,312 47,559
Warehouse borrowings 2,103 --
Accrued warranty obligations 41,248 42,540
Accrued volume rebates 33,145 39,426
Accrued compensation and payroll taxes 20,634 22,639
Accrued insurance 23,421 19,089
Other current liabilities 55,239 50,342
--------- ---------
Total current liabilities 253,847 292,514
--------- ---------
LONG-TERM LIABILITIES
Long-term debt 344,867 224,926
Deferred portion of purchase price 14,000 18,000
Other long-term liabilities 31,291 30,678
--------- ---------
390,158 273,604
--------- ---------
CONTINGENT LIABILITIES (Note 7)
REDEEMABLE CONVERTIBLE PREFERRED STOCK,
no par value, 5,000 shares authorized, 45 and 20 shares
issued and outstanding, respectively 43,959 20,000
SHAREHOLDERS' EQUITY
Common stock, $1 par value, 120,000 shares authorized, 48,822
and 48,320 shares issued and outstanding, respectively 48,822 48,320
Capital in excess of par value 39,362 36,423
Retained earnings (deficit) (22,688) 189,262
Accumulated other comprehensive income (loss) (1,422) (1,971)
--------- ---------
Total shareholders' equity 64,074 272,034
--------- ---------
Total liabilities and shareholders' equity $ 752,038 $ 858,152
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 3 of 40
CHAMPION ENTERPRISES, INC.
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
Six Months Ended
-------------------------------------
June 29, 2002 June 30, 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(211,137) $ (25,593)
--------- ---------
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities:
Depreciation and amortization 11,563 18,337
Goodwill impairment charges 97,000 --
Deferred income taxes 94,800 --
Fixed asset impairment charges 1,900 6,500
Gain on debt retirement (5,870) --
Increase/decrease
Accounts receivable (21,929) (34,549)
Inventories 819 35,534
Accounts payable 19,753 26,749
Accrued liabilities 1,100 (1,672)
Other, net (6,229) 3,097
--------- ---------
Total adjustments 192,907 53,996
--------- ---------
Net cash provided by (used for) operating activities (18,230) 28,403
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (8,050) (10,233)
Increase in loans receivable (6,145) --
Additions to property and equipment (2,857) (3,229)
Investments in and advances to unconsolidated subsidiaries (1,139) (1,819)
Proceeds on disposal of fixed assets 3,069 1,494
--------- ---------
Net cash used for investing activities (15,122) (13,787)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in floor plan payable, net (60,174) (29,124)
Repayment of long-term debt (440) (333)
Proceeds from Senior Notes 145,821 --
Purchase of Senior Notes (23,750) --
Proceeds from warehouse borrowings 2,103 --
Increase in deferred financing costs (3,266) --
Increase in restricted cash (35,572) --
Preferred stock issued, net 23,810 --
Common stock issued, net 1,000 590
--------- ---------
Net cash provided by (used for) financing activities 49,532 (28,867)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,180 (14,251)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 69,456 50,143
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 85,636 $ 35,892
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 40
CHAMPION ENTERPRISES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. The Consolidated Financial Statements are unaudited, but in the opinion of
management include all adjustments necessary for a fair presentation of the
results of the interim period. All such adjustments are of a normal
recurring nature except for the goodwill impairment charge discussed in Note
2 and the deferred tax asset valuation allowance discussed in Note 3.
Financial results of the interim period are not necessarily indicative of
results that may be expected for any other interim period or for the fiscal
year. The balance sheet as of December 29, 2001 was derived from audited
financial statements. Certain prior period amounts have been reclassified to
conform to the current period presentation. Accumulated other comprehensive
income (loss) consists of foreign currency translation adjustments. The
Company's total comprehensive loss for the three and six months ended June
29, 2002 was $198.7 million and $210.6 million, respectively compared to its
total comprehensive income of $0.6 million for the three months ended June
30, 2001 and total comprehensive loss of $25.6 million for the six months
then ended.
2. During the quarter ending June 29, 2002 the Company's operating results were
affected by continuing challenging industry conditions including reductions
in chattel lending availability, the effects of Conseco Finance Corp.
exiting the floor plan lending business, high industry repossession levels
and the Texas legislation that limits the use of chattel financing to
purchase a manufactured home. As a result of these conditions and their
effects on our sales volume and operating results, in June 2002 the Company
announced the closure or consolidation of 33 under-performing retail sales
centers and one manufacturing facility. The continuation of these industry
conditions through the month of July 2002, together with unfavorable changes
in the economy, caused the Company to re-evaluate our manufacturing and
retail capacity and overall cost structure. On August 8, 2002, the Company
announced the closure or consolidation of 64 retail sales centers and seven
manufacturing facilities. These additional closures bring the total retail
closures in 2002 to 101 or
46% of the sales centers we were operating at the beginning of 2002.
As a result of the significant downsizing of our retail operations in
reaction to continuing challenging industry conditions and in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," we performed a test for goodwill impairment
using the present value of future cash flows method. The results of this
test indicated that the fair value of the retail goodwill was less than its
carrying value. Therefore, in the quarter ended June 29, 2002, we recorded
non-cash goodwill impairment charges of $97 million.
The change in the carrying amount of goodwill follows:
Six Months Ended June 29, 2002
---------------------------------------------------------
Manufacturing Retail Other Total
------------- ------ ----- -----
(In thousands)
Balance at December 29, 2001 $ 126,482 $ 131,571 $ 914 $ 258,967
Impairment charges -- (97,000) -- (97,000)
Goodwill acquired -- -- 4,099 4,099
Other changes 31 (133) -- (102)
--------- --------- --------- ---------
Balance at June 29, 2002 $ 126,513 $ 34,438 $ 5,013 $ 165,964
========= ========= ========= =========
3. SFAS No. 109, "Accounting for Income Taxes," requires the recording of a
valuation allowance when it is "more likely than not that some portion or
all of the deferred tax assets will not be realized." It further states,
"forming a conclusion that a valuation allowance is not needed is difficult
when there is negative evidence such as cumulative losses in recent years"
and places considerably more weight on historical results and less weight on
future projections. The Company incurred pretax losses in 2000 and 2001 and
through the first half of 2002 totaling $391 million, including goodwill
impairment charges of $97 million in 2002 and $190 million in 2000. The
industry continues to be challenged by limited availability of consumer
chattel financing, high industry repossession levels and reductions in
wholesale floor plan lending availability and a negative economic outlook
resulting in a continued decline in wholesale shipments and retail sales. In
the absence of specific favorable factors, application of SFAS No. 109
requires a 100% valuation allowance for any net deferred tax asset when a
company has cumulative financial accounting losses, excluding unusual items,
over several years. Accordingly, after consideration of these factors, in
the quarter ended June 29, 2002, the Company provided a 100% valuation
allowance against deferred tax assets, which totaled $120 million. The
valuation allowance will be reversed to income in future periods to the
extent that the related deferred tax assets are realized as a reduction of
taxes otherwise payable on any future earnings or a portion or all of the
valuation allowance is otherwise no longer required.
Because of provisions in the tax law which allow us to receive a carryback
refund for taxable losses incurred in 2002, in determining the amount of the
deferred tax asset valuation allowance we had to estimate the current tax
deductibility of certain costs and charges. These estimates are subject to
change. Any differences between these current estimates and actual values
determined at the end of this fiscal year will result in a change to the
valuation allowance which will be reflected in results of operations in the
third or fourth quarter of the year.
The income tax provision or benefit differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pretax loss as a result of the following differences:
Six Months Ended
--------------------------
June 29, June 30,
2002 2001
-------- ----------
(In thousands)
Statutory U.S. tax rate $ (45,200) $ (13,800)
Change in rate resulting from
Deferred tax valuation allowance 120,000 --
State taxes, net of federal benefit (3,700) (1,000)
Nondeductible goodwill amortization and impairment charges 10,300 800
Other 600 200
--------- ---------
Total income tax provision (benefit) $ 82,000 $ (13,800)
========= =========
Page 5 of 40
4. A summary of inventories by component follows:
June 29, December 29,
2002 2001
----------- ------------
(In thousands)
New manufactured homes $ 102,187 $ 102,090
Raw materials 33,175 32,207
Work-in-process 7,810 8,130
Other inventory 28,285 29,849
----------- -----------
$ 171,457 $ 172,276
=========== ===========
Other inventory consists of pre-owned manufactured homes, land and park
spaces and improvements.
5. A summary of other current and non-current assets by component follows:
June 29, December 29,
2002 2001
----------- -----------
(In thousands)
Other Current Assets
Refundable income taxes $ 18,840 $ 21,700
Deposits 15,558 2,708
Other current assets 12,025 12,229
----------- -----------
$ 46,423 $ 36,637
=========== ===========
Other Non-Current Assets
Investment in unconsolidated subsidiaries $ 9,057 $ 8,955
Other non-current assets 17,133 11,476
----------- -----------
$ 26,190 $ 20,431
=========== ===========
Deposits consist primarily of cash collateral deposited for surety
bonds and insurance purposes.
Page 6 of 40
6. Reconciliations of segment sales to consolidated sales and segment
EBITA (earnings (loss) before interest, taxes, goodwill amortization
and impairment charges, general corporate expenses and certain gains)
to consolidated operating income (loss) follow. Finance EBITA (loss)
includes operating costs and net interest income earned on loans
receivable.
Three Months Ended
--------------------------
June 29, June 30,
2002 2001
----------- ---------
(In thousands)
Net sales
Manufacturing $ 313,699 $ 351,199
Retail 96,607 129,403
Less: intercompany (48,800) (52,400)
----------- ---------
Consolidated net sales $ 361,506 $ 428,202
=========== =========
Operating income (loss)
Manufacturing EBITA $ 10,426 $ 19,372
Retail EBITA (loss) (13,802) (1,817)
Finance EBITA (loss) (1,927) -
Gain on debt retirement 5,870 -
General corporate expenses (7,111) (7,101)
Goodwill impairment charges (97,000) -
Goodwill amortization - (2,882)
----------- ---------
Consolidated operating income (loss) $ (103,544) $ 7,572
=========== =========
Six Months Ended
-------------------------
June 29, June 30,
2002 2001
----------- ---------
(In thousands)
Net sales
Manufacturing $ 580,351 $ 611,709
Retail 176,732 237,805
Less: intercompany (89,200) (95,000)
----------- ---------
Consolidated net sales $ 667,883 $ 754,514
=========== =========
Operating loss
Manufacturing EBITA $ 11,729 $ 8,916
Retail EBITA (loss) (21,880) (16,655)
Finance EBITA (loss) (1,927) -
Gain on debt retirement 5,870 -
General corporate expenses (14,065) (13,683)
Goodwill impairment charges (97,000) -
Goodwill amortization - (5,761)
----------- ---------
Consolidated operating loss $ (117,273) $ (27,183)
=========== =========
For the three and six months ended June 29, 2002, retail EBITA (loss)
includes $1.9 million of non-cash fixed asset impairment charges and $3.0
million of lease termination and other costs associated with closures of
retail sales centers. For the quarter ended June 30, 2001, manufacturing
EBITA includes $1.0 million of non-cash fixed asset impairment charges
related to closed plants. For the six month period ended June 30, 2001,
manufacturing EBITA includes $3.3 million of non-cash fixed asset impairment
charges related to closed plants, and retail EBITA (loss) includes $3.2
million of non-cash fixed asset impairment charges and $2.2 million of lease
termination and other costs associated with closures of retail sales
centers. Retail floor plan interest expense not charged to retail EBITA
(loss) totaled $0.9 million and $2.3 million for the three and six months
ended June 29, 2002 and $2.2 million and $4.9 million for the three and six
months ended June 30, 2001, respectively.
Page 7 of 40
7. As is customary in the manufactured housing industry, the majority of
Champion's manufacturing sales to independent retailers are made in
connection with repurchase agreements with lending institutions that provide
wholesale floor plan financing to the retailers. Pursuant to these
agreements, for a period of either 12 or 15 months from invoice date of the
sale of the homes and upon default by the retailer and repossession by the
financial institution, the Company is obligated to purchase the related
floor plan loans or repurchase the homes from the lender. The maximum
potential contingent repurchase obligation at June 29, 2002 was estimated to
be $270 million, without reduction for the resale value of the homes. This
amount compares to $300 million at the beginning of the year and $320
million a year ago. Repurchase losses incurred totaled $0.2 million and $0.5
million for the three and six months ended June 29, 2002, respectively, and
$1.3 million and $3.3 million for the three and six months ended June 30,
2001, respectively.
At June 29, 2002 the Company was contingently obligated for additional
purchase price of up to $42 million related to its 1999 acquisitions.
Management currently believes that none of this contingent purchase price
will require payment.
At June 29, 2002 Champion was contingently obligated for approximately $35
million under letters of credit and $43 million under surety bonds,
generally to support insurance, industrial revenue bond financing, and
license and service bonding requirements. The $35 million of letters of
credit and $21 million of the surety bonds support insurance reserves and
long-term debt that are reflected as liabilities in the Company's
consolidated balance sheet. As of June 29, 2002, the Company had fully
collateralized its letters of credit with restricted cash including $17.8
million to support insurance reserves and $18.4 million to support long-term
debt. In addition, the Company has deposited $9.6 million to secure surety
bonds.
At June 29, 2002, the Company is contingently liable for up to $15 million
under an unconditional guaranty of a $150 million warehouse facility of a
third party special purpose entity (which is included in our consolidated
financial statements). The warehouse facility, which has an outstanding
balance of $2.1 million at June 29, 2002, supports the Company's finance
company's operations and is included in the Company's consolidated balance
sheet.
At June 29, 2002 certain of the Company's subsidiaries were guarantors of
$6.6 million of debt of unconsolidated subsidiaries.
8. On April 2, 2002 the Company issued $25 million of Series C cumulative
convertible preferred stock and a warrant which was initially exercisable
based on approximately 1.1 million shares of common stock at a strike price
of $12.04 per share. In accordance with the terms of the warrant, on August
6, 2002 the number of shares under warrant and the strike price per share
were reset at 2.2 million shares and $10.02 per share, respectively.
Beginning on March 29, 2003, the warrant strike price will increase annually
by $0.75 per share. The warrant expires on April 2, 2009. The warrant is
exercisable only on a non-cash, net basis, whereby the warrant holder would
receive shares of common stock as payment for the net gain upon exercise.
The Series C preferred stock has a seven-year term and a 5% annual dividend
that is payable quarterly, at the Company's option, in cash or common stock.
The initial conversion price is $9.63 per share. On June 29, 2003, the
conversion price will be adjusted to 115% of the common stock's then market
value (subject to certain limitations), provided that such conversion price
shall not be greater than $10.83 per share or less than $5.66 per share.
Commencing March 29, 2004, this preferred stock is redeemable by the holder
for common stock, and, at the Company's option, partially for cash. The net
proceeds of this issuance of $23.8 million were used to fund a portion of
the cash collateral for the letters of credit discussed above. The preferred
stock is presented net of issuance costs which are amortized over a period
of two years from the date of issuance by charges to paid-in-capital.
The rights and preferences of the Company's Series B-1 cumulative
convertible preferred stock, which was issued in July 2001 and of which $20
million is outstanding, were amended on March 29, 2002 to provide, among
other things, for mandatory redemption on March 29, 2004. Such redemption
may be made for either common stock or cash, at the Company's option.
Additionally, the commencement date of the holder's optional redemption
period for the Series B-1 preferred stock was changed to April 2, 2002, from
July 2003, and the expiration date of the holder's rights to purchase an
additional $12 million of Series B-1 preferred stock was extended to
December 31, 2004 from March 2003. Optional redemptions may be made only for
common stock.
Page 8 of 40
On June 30, 2002 Champion paid quarterly dividends on the preferred stock by
issuing 77,000 shares of the company's common stock. These shares are
included in issued and outstanding shares at June 29, 2002.
9. The numerators used in the Company's basic earnings per share (EPS)
calculations consist of net income (loss) as reported in the financial
statements less the effect of preferred stock dividends. The numerator for
diluted EPS calculations is the numerator of basic EPS adjusted by adding
back the preferred stock dividend. In loss periods the dividend is not added
back because the effect would be antidilutive. The denominators used in the
Company's EPS calculations are as follows: weighted average shares
outstanding are used in calculating basic EPS. Weighted average shares
outstanding plus the effect of dilutive securities are used in calculating
diluted EPS. The Company's potential dilutive securities consist of
outstanding stock options, convertible preferred stock, warrants and $22
million of deferred purchase price which is payable, at the Company's
option, in cash or common stock. Dilutive securities were not considered in
determining the denominator for diluted EPS in either six-month period
presented and for the three months ended June 29, 2002 because the effect on
the net loss would be antidilutive. Calculations of basic and diluted EPS
follow:
Three Months Ended
------------------------------------
June 29, June 30,
2002 2001
----------- ----------
(In thousands, except per share amounts)
Numerator:
Net income (loss) $ (199,291) $ 490
Less: preferred stock dividend 563 -
----------- ---------
Income (loss) available to common shareholders $ (199,854) $ 490
=========== =========
Denominator:
Weighted average shares outstanding 48,729 47,847
Effect of dilutive securities - options - 1,661
----------- ---------
Shares for diluted EPS 48,729 49,508
=========== =========
Basic earnings (loss) per share $ (4.10) $ 0.01
=========== =========
Diluted earnings (loss) per share $ (4.10) $ 0.01
=========== =========
Six Months Ended
----------------------------------
June 29, June 30,
2002 2001
----------- ----------
(In thousands, except per share amounts)
Numerator:
Net loss $ (211,137) $ (25,593)
Less: preferred stock dividend 813 -
----------- ---------
Loss available to common shareholders $ (211,950) $ (25,593)
=========== =========
Denominator:
Weighted average shares outstanding 48,617 47,672
=========== ==========
Basic and diluted loss per share $ (4.36) $ (0.54)
=========== =========
10. During the quarter ended June 29, 2002, the Company terminated its revolving
credit agreement for a $75 million secured line of credit. As a result of
the termination of this credit facility, the guarantees by the Company's
subsidiaries of the Senior Notes due 2009 terminated. However, Champion Home
Builders Co. ("CHB"), a wholly-owned subsidiary of the Company, has agreed
to be a guarantor and substantially all of CHB's subsidiaries have agreed to
be guarantors, on a basis subordinated to their guarantees of the Senior
Notes due 2007, of the $170 million Senior Notes due 2009. Additionally, the
Company arranged to have a bank provide $35 million of letters of credit on
a fully cash collateralized basis.
In April 2002, CHB issued $150 million of Senior Notes due 2007 with
interest payable semi-annually at an
Page 9 of 40
annual rate of 11.25%. The net proceeds, net of deferred financing costs, of
approximately $145 million from the offering were used to acquire the
manufactured housing loan origination business of CIT Group/Sales Financing,
Inc. ("CIT"), to repay a portion of the Company's debt, including a
significant portion of the Company's floor plan payable, to provide working
capital for the Company's existing business segments and the Company's new
consumer financing business, and for general corporate purposes. The Notes
contain covenants, which among other things limit the Company's ability to
incur additional indebtedness, issue additional redeemable preferred stock,
pay dividends on or repurchase common stock, make certain investments and
incur liens on assets. Substantially all of CHB's wholly owned subsidiaries
are guarantors and the Company is a subordinated guarantor of the Senior
Notes due 2007. The Senior Notes due 2007 are effectively senior to the
Senior Notes due 2009.
A covenant in the Senior Notes due 2007 currently limits additional debt to
a working capital line of credit up to a borrowing base equal to 60% of
otherwise unencumbered inventories and 75% of otherwise unencumbered
accounts receivable; warehouse financing meeting certain parameters up to
$200 million; other debt up to $30 million; and ordinary course indebtedness
that includes non-speculative hedging obligations, floor plan financing,
letters of credit, surety bonds, bankers' acceptances, repurchase agreements
related to retailer floor plan financing and guaranties of additional debt
otherwise permitted to be incurred.
In April 2002, the Company arranged a $150 million warehouse facility for a
consolidated third party special purpose entity to support the finance
company's operations. Interest on borrowings under the warehouse facility is
at LIBOR plus 80 basis points and there is a facility fee that is payable
monthly based on an annual rate of 40 basis points of the entire facility.
The warehouse facility has a term of one year and contains covenants that
require the Company's maintenance of minimum interest coverage ratios and
tangible net worth, as defined therein; certain minimum unsecured debt
ratings from two of the national ratings agencies; and that the Company
perform certain other duties thereunder. Subsequent to quarter-end, the
consolidated third party special purpose entity entered into waiver
agreements to cure noncompliance with the minimum interest coverage ratio
covenant for the quarter ended June 29, 2002 and to cure noncompliance with
the minimum tangible net worth covenant as of June 29, 2002 and provide for
a lower minimum tangible net worth requirement through August 30, 2002.
During the third quarter of 2002, the Company will seek and will need to
obtain amendments to the performance covenants of the $150 million warehouse
facility in order to ensure our continuing compliance therewith. If the
Company cannot obtain such amendments, it would be in default under the
facility. Also, if the Company's operating results do not improve it may
again become noncompliant with one or more of the covenants, which, if not
cured or amended, would result in default under the facility. In an event of
default, the agent bank could discontinue making further advances under the
facility and enact alternate "waterfall" provisions thereunder that would
reduce or eliminate current payments to the consolidated third party special
purpose entity from the underlying consumer loans. If the agent were to
discontinue further advances, the Company would seek other sources of
capital for its consumer finance operations.
The Company has a $15 million floor plan financing facility that contains a
covenant requiring it to maintain minimum earnings before interest, taxes,
depreciation and amortization (EBITDA), as defined. If the Company's
operating results do not improve, it may not be in compliance with this
covenant, which could result in the lender terminating the credit line and
causing such debt to become immediately due and payable. As of June 29,
2002, the Company had approximately $2 million outstanding under this
facility.
In August 2002, Moody's Investors Service ("Moody's") and Standard & Poor's
announced that they have placed under review, for possible downgrade, the
Company's senior implied credit ratings and the ratings on the Company's
Senior Notes due 2007 and Senior Notes due 2009. Because the $150 million
warehouse facility arranged by the Company in April 2002 requires that we
maintain certain minimum unsecured debt ratings, a negative ratings action
by Moody's or Standard & Poor's could cause a default under that facility. A
negative ratings action also could affect the Company's ability to obtain or
maintain various forms of business credit, including but not limited to
letters of credit, surety bonds, trade payables and floor plan financing, or
could result in the Company having to place additional collateral related
thereto.
During the quarter ended June 29, 2002, the Company purchased and retired
$30 million of its Senior Notes due
Page 10 of 40
2009 for $23.8 million, resulting in a gain of $5.9 million before tax
or $3.6 million after tax. At June 29, 2002, the Company's outstanding
notes payable balance due 2009 totaled $170 million.
During the quarter and year-to-date periods ended June 29, 2002, the
Company repaid approximately $53 million and $60 million of its floor
plan borrowings, respectively.
11. In April 2002 the Company acquired CIT's manufactured housing consumer
loan origination business and entered into certain related agreements
for approximately $5 million. Through June 29, 2002 the Company's newly
acquired financing segment had originated $6.1 million of loans and had
applied $2.4 million of these loans to the warehouse facility,
resulting in $2.1 million of proceeds. The Company structures sales of
originated consumer loans to the warehouse facility, and intends to
structure asset-backed securitizations in the capital markets, as
collateralized financing transactions under generally accepted
accounting principles. The consolidated balance sheet reflects the
related consumer loans as receivables, and reflects proceeds from the
sales of consumer loans through the warehouse facility, and will
reflect securitization proceeds, as indebtedness. Finance segment EBITA
(loss) for the three months ended June 29, 2002 primarily represent
operating costs and are included in selling, general and administrative
expenses.
12. During the three and six months ended June 29, 2002, the Company
recorded charges totaling $4.9 million for fixed asset impairments and
lease termination and other costs related to closed retail sales
centers. During the quarter ended June 30, 2001, the Company closed two
homebuilding facilities, resulting in non-cash fixed asset impairment
charges of $1.0 million. For the year-to-date period ended June 30,
2001, non-cash fixed asset impairment charges and lease termination and
other costs related to closed operations totaled $8.7 million.
13. In June 2001 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets," which requires
that goodwill and other intangible assets with indefinite lives not be
amortized but instead be tested annually for impairment based on a
reporting unit's fair value versus its carrying value. The Company
adopted SFAS No. 142 in January 2002, which resulted in the cessation
of the amortization of goodwill commencing on the first day of our
fiscal year 2002. Following is a reconciliation, for the 2001 periods
presented, of the Company's net income (loss) and earnings (loss) per
share adjusted to exclude goodwill amortization expense, net of tax:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2001
------------------ ----------------
(In thousands except per share amounts)
Reported net income (loss) $ 490 $ (25,593)
Add back: Goodwill amortization
(net of taxes of $720 and $1,400, respectively) 2,165 4,361
--------- ----------
Adjusted net income (loss) $ 2,655 $ (21,232)
========= ==========
Basic earnings (loss) per share as reported $ 0.01 $ (0.54)
Goodwill amortization 0.05 0.09
--------- ----------
Adjusted basic earnings (loss) per share $ 0.06 $ (0.45)
========= ==========
Diluted earnings (loss) per share as reported $ 0.01 $ (0.54)
Goodwill amortization 0.04 0.09
--------- ----------
Adjusted diluted earnings (loss) per share $ 0.05 $ (0.45)
========= ==========
In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections," which no longer requires extinguishment of debt
to be characterized as an extraordinary gain. As a result of the
issuance of SFAS 145, the gain on debt retirement totaling $5.9 million
is included in the Company's operating loss for the three and six
months ended June 29, 2002 rather than as an extraordinary gain as
previously required under SFAS No.4.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal
Page 11 of 40
Activities," which requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is
incurred rather than recognized at the date of an entity's commitment
to an exit plan as currently required in accordance with Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The
Statement also establishes that fair value is the objective for initial
measurement of the liability. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption by the Company of SFAS No. 146 at the
beginning of fiscal 2003 will impact the manner in which the Company
reports certain restructuring activities, including facility closures,
employee severance and other exit activities. These charges will
generally be recognized when the liability is incurred.
14. In response to continued negative information about the economy,
consumer and floor plan financing availability for the industry, high
industry repossession levels, recent reductions in industry shipments
and incoming order rates at the Company's manufacturing facilities, the
Company, on August 8, 2002, announced the closing or consolidation of
64 retail sales centers and seven homebuilding facilities across the
country. These closures represent 35% of its current retail operations
and 15% of its manufacturing facilities. The closure of 64 additional
retail locations reduces the total number of retail locations it is
operating to 117. Third quarter pre-tax charges for the retail and
manufacturing closures will total approximately $44.1 million,
consisting primarily of non-cash fixed asset impairment charges of
$24.5 million, inventory write downs of $6.8 million, severance costs
of $4.3 million, additional warranty costs of $3.5 million, and retail
lease termination and other costs of $5.0 million. As a result of these
closures, employee reductions are estimated at 1,500, or 15% of the
total workforce.
15. Prior to April 2002, most of the subsidiaries included in the Company's
consolidated financial statements were directly wholly owned by
Champion Enterprises, Inc. In April 2002, CHB became the sole wholly
owned subsidiary of the Company and CHB became the sole shareholder of
almost all the other subsidiaries. At June 29, 2002, substantially all
of CHB's subsidiaries were guarantors of the $150 million Senior Notes
due 2007. Additionally, CHB has agreed to be a guarantor and
substantially all of CHB's subsidiaries have agreed to be guarantors,
on a basis subordinated to their guarantees of the Senior Notes due
2007, of the $170 million Senior Notes due 2009. The non-guarantor
subsidiaries include the Company's foreign operations and its
development companies.
Separate financial statements for each guarantor subsidiary are not
included in this filing because each guarantor subsidiary is
wholly-owned and was fully, unconditionally, jointly and severally
liable for the Senior Notes due 2007. There were no significant
restrictions on the ability of the parent company or any guarantor
subsidiary to obtain funds from its subsidiaries by dividend or loan.
The following condensed consolidating financial information presents
the financial position, results of operations and cash flows of (i) the
Company and CHB, as parents, as if they accounted for their
subsidiaries on the equity method; (ii) the guarantor subsidiaries, and
(iii) the non-guarantor subsidiaries.
Page 12 of 40
CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Three Months Ended June 29, 2002
Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ ------------- ------------
(In thousands)
Net sales $ - $ 74,508 $ 326,463 $ 9,335 $ (48,800) $ 361,506
Cost of sales - 63,994 278,544 7,562 (48,800) 301,300
--------- --------- --------- --------- --------- ---------
Gross margin - 10,514 47,919 1,773 - 60,206
Selling, general and
administrative expenses - 13,421 52,242 2,057 - 67,720
Goodwill impairment charges - - 97,000 - - 97,000
Closing-related expenses - - 4,900 - - 4,900
Gain on debt retirement (5,870) - - - - (5,870)
--------- --------- --------- --------- --------- ---------
Operating income (loss) 5,870 (2,907) (106,223) (284) - (103,544)
Interest income 3,329 - 299 33 (3,060) 601
Interest expense (3,329) (3,179) (4,151) (49) 3,060 (7,648)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 5,870 (6,086) (110,075) (300) - (110,591)
Income taxes 2,230 10,537 72,524 3,409 - 88,700
--------- --------- --------- --------- --------- ---------
Income (loss) before equity
in income (loss) of
consolidated subsidiaries 3,640 (16,623) (182,599) (3,709) - (199,291)
Equity in income (loss) of
consolidated subsidiaries (202,931) (186,308) - - 389,239 -
--------- --------- --------- --------- --------- ---------
Net loss $(199,291) $(202,931) $(182,599) $ (3,709) $ 389,239 $(199,291)
========= ========= ========= ========= ========= =========
Page 13 of 40
CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Six Months Ended June 29, 2002
Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ -------------- ------------
(In thousands)
Net sales $ - $ 139,845 $ 600,614 $ 16,624 $ (89,200) $ 667,883
Cost of sales - 121,975 516,776 13,617 (89,200) 563,168
--------- --------- --------- --------- --------- ---------
Gross margin - 17,870 83,838 3,007 - 104,715
Selling, general and
administrative expenses - 29,024 92,730 4,204 - 125,958
Goodwill impairment charges - - 97,000 - - 97,000
Closing-related expenses - - 4,900 - - 4,900
Gain on debt retirement (5,870) - - - - (5,870)
--------- --------- --------- --------- --------- ---------
Operating income (loss) 5,870 (11,154) (110,792) (1,197) - (117,273)
Interest income 7,193 - 832 205 (7,011) 1,219
Interest expense (7,193) (3,201) (9,585) (115) 7,011 (13,083)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 5,870 (14,355) (119,545) (1,107) - (129,137)
Income taxes 2,230 7,467 69,203 3,100 - 82,000
--------- --------- --------- --------- --------- ---------
Income (loss) before equity
in income (loss) of
consolidated subsidiaries 3,640 (21,822) (188,748) (4,207) - (211,137)
Equity in income (loss) of
consolidated subsidiaries (214,777) (192,955) - - 407,732 -
--------- --------- --------- --------- --------- ---------
Net loss $(211,137) $(214,777) $(188,748) $ (4,207) $ 407,732 $(211,137)
========= ========= ========= ========= ========= =========
Page 14 of 40
CHAMPION ENTERPRISES, INC.
Condensed Consolidating Balance Sheet
As of June 29, 2002
Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------- -------------- ------------
Assets (In thousands)
Current assets
Cash and cash equivalents $ - $ 72,908 $ 2,882 $ 9,846 $ - $ 85,636
Restricted cash - 16,500 624 653 - 17,777
Accounts receivable, trade - 12,044 47,246 2,346 (12,200) 49,436
Inventories - 13,151 159,705 2,020 (3,419) 171,457
Other current assets 9,600 11,719 94,767 1,540 (71,203) 46,423
--------- --------- --------- --------- --------- ---------
Total current assets 9,600 126,322 305,224 16,405 (86,822) 370,729
--------- --------- --------- --------- --------- ---------
Loans receivable - - 6,145 - - 6,145
Property and equipment, net - 41,717 119,881 2,969 - 164,567
Goodwill, net - - 164,410 1,554 - 165,964
Investment in consolidated
subsidiaries 278,957 388,811 91,768 4,828 (764,364) -
Restricted cash - 18,443 - - - 18,443
Other non-current assets 2,094 9,472 4,956 9,668 - 26,190
--------- --------- --------- --------- --------- ---------
$ 290,651 $ 584,765 $ 692,384 $ 35,424 $(851,186) $ 752,038
========= ========= ========= ========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities
Floor plan payable $ - $ - $ 10,345 $ 400 $ - $ 10,745
Accounts payable - 14,033 52,343 1,736 (800) 67,312
Warehouse borrowings - - 2,103 - - 2,103
Accrued warranty obligations - 5,523 34,975 750 - 41,248
Accrued volume rebates - 9,150 23,170 925 (100) 33,145
Other current liabilities 1,576 104,467 63,212 1,542 (71,503) 99,294
--------- --------- --------- --------- --------- ---------
Total current liabilities 1,576 133,173 186,148 5,353 (72,403) 253,847
--------- --------- --------- --------- --------- ---------
Long-term liabilities
Long-term debt 170,000 157,572 14,330 2,965 - 344,867
Deferred portion of purchase price - - 14,000 - - 14,000
Other long-term liabilities - 17,027 14,114 150 - 31,291
--------- --------- --------- --------- --------- ---------
170,000 174,599 42,444 3,115 - 390,158
--------- --------- --------- --------- --------- ---------
Intercompany balances 9,620 (122,727) 445,585 3,268 (335,746) -
Redeemable convertible
preferred stock 43,959 - - - - 43,959
Shareholders' equity
Common stock 48,822 1 60 3 (64) 48,822
Capital in excess of par value 39,362 613,336 225,646 30,022 (869,004) 39,362
Retained earnings (deficit) (22,688) (213,617) (207,499) (4,915) 426,031 (22,688)
Accumulated other
comprehensive income (loss) - - - (1,422) - (1,422)
--------- --------- --------- --------- --------- ---------
Total shareholders' equity 65,496 399,720 18,207 23,688 (443,037) 64,074
--------- --------- --------- --------- --------- ---------
$ 290,651 $ 584,765 $ 692,384 $ 35,424 $(851,186) $ 752,038
========= ========= ========= ========= ========= =========
Page 15 of 40
CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 29, 2002
Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------- ------------- ------------
(In thousands)
Net cash provided by (used
for) operating activities: $ (9,609) $ (2,734) $ (7,389) $ 1,502 $ -- $ (18,230)
--------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisitions -- -- (8,050) -- -- (8,050)
Increase in loans receivable -- -- (6,145) -- -- (6,145)
Additions to property and equipment -- (362) (2,359) (136) -- (2,857)
Investments in and advances to
unconsolidated subsidiaries -- -- -- (1,139) -- (1,139)
Investments in and advances
to consolidated subsidiaries (51,762) (33,134) 81,711 3,185 -- --
Proceeds on disposal of fixed assets -- -- 3,069 -- -- 3,069
--------- --------- --------- --------- --------- ---------
Net cash provided by (used
for) investing activities (51,762) (33,496) 68,226 1,910 -- (15,122)
--------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Increase (decrease) in floor
plan payable, net -- -- (60,251) 77 -- (60,174)
Payment of other long-term debt -- (25) (389) (26) -- (440)
Proceeds from Senior Notes -- 145,821 -- -- -- 145,821
Purchase of Senior Notes (23,750) -- -- -- -- (23,750)
Proceeds from warehouse borrowings -- -- 2,103 -- -- 2,103
Increase in deferred financing costs -- (1,466) (1,800) -- -- (3,266)
Increase in restricted cash (34,943) (624) (5) -- (35,572)
Preferred stock issued, net 23,810 -- -- -- -- 23,810
Common stock issued, net 1,000 -- -- -- -- 1,000
--------- --------- --------- --------- --------- ---------
Net cash provided by (used
for) financing activities 1,060 109,387 (60,961) 46 -- 49,532
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in
cash and cash equivalents (60,311) 73,157 (124) 3,458 -- 16,180
Cash and cash equivalents at
beginning of period 60,311 (249) 3,006 6,388 -- 69,456
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at
End of period $ -- $ 72,908 $ 2,882 $ 9,846 $ -- $ 85,636
========= ========= ========= ========= ========= =========
Page 16 of 40
CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2001
Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------- ------------- ------------
(In thousands)
Net sales $ -- $ 74,712 $ 396,948 $ 8,942 $ (52,400) $ 428,202
Cost of sales -- 64,628 332,137 7,426 (52,400) 351,791
--------- --------- --------- --------- --------- ---------
Gross margin -- 10,084 64,811 1,516 -- 76,411
Selling, general and
administrative expenses -- 13,324 52,379 2,136 -- 67,839
Closing-related expenses -- -- 1,000 -- 1,000
--------- --------- --------- --------- --------- ---------
Operating income (loss) -- (3,240) 11,432 (620) -- 7,572
Interest income 3,965 -- 869 50 (4,118) 766
Interest expense (3,965) (61) (6,554) (86) 4,118 (6,548)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes -- (3,301) 5,747 (656) -- 1,790
Income taxes (benefits) -- (1,210) 2,776 (266) -- 1,300
--------- --------- --------- --------- --------- ---------
Income (loss) before equity in
income (loss) of
consolidated subsidiaries -- (2,091) 2,971 (390) -- 490
Equity in income (loss) of
consolidated subsidiaries 490 -- -- -- (490) --
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 490 $ (2,091) $ 2,971 $ (390) $ (490) $ 490
========= ========= ========= ========= ========= =========
Page 17 of 40
CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2001
Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------- ------------- ------------
(In thousands)
Net sales $ -- $ 135,102 $ 699,077 $ 15,335 $ (95,000) $ 754,514
Cost of sales -- 122,077 593,194 13,024 (95,000) 633,295
--------- --------- --------- --------- --------- ---------
Gross margin -- 13,025 105,883 2,311 -- 121,219
Selling, general and
administrative expenses -- 24,685 110,669 4,348 -- 139,702
Closing-related expenses -- 1,000 7,700 -- 8,700
--------- --------- --------- --------- --------- ---------
Operating loss -- (12,660) (12,486) (2,037) -- (27,183)
Interest income 7,693 -- 1,449 110 (7,909) 1,343
Interest expense (7,693) (148) (13,445) (176) 7,909 (13,553)
--------- --------- --------- --------- --------- ---------
Loss before income taxes -- (12,808) (24,482) (2,103) -- (39,393)
Income tax benefit -- (4,730) (8,270) (800) -- (13,800)
--------- --------- --------- --------- --------- ---------
Loss before equity in
income (loss) of
consolidated subsidiaries -- (8,078) (16,212) (1,303) -- (25,593)
Equity in income (loss) of
consolidated subsidiaries (25,593) -- -- -- 25,593 --
--------- --------- --------- --------- --------- ---------
Net loss $ (25,593) $ (8,078) $ (16,212) $ (1,303) $ 25,593 $ (25,593)
========= ========= ========= ========= ========= =========
Page 18 of 40
CHAMPION ENTERPRISES, INC.
Condensed Consolidating Balance Sheet
As of December 29, 2001
Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------- ------------- ------------
Assets (In thousands)
Current assets
Cash and cash equivalents $ 60,311 $ (249) $ 3,006 $ 6,388 $ -- $ 69,456
Restricted cash -- -- -- 648 -- 648
Accounts receivable, trade -- 8,446 30,457 1,204 (12,600) 27,507
Inventories -- 13,694 158,138 2,263 (1,819) 172,276
Deferred taxes and other current assets 479 12,091 127,102 1,857 (65,792) 75,737
--------- --------- --------- --------- --------- ---------
Total current assets 60,790 33,982 318,703 12,360 (80,211) 345,624
--------- --------- --------- --------- --------- ---------
Property and equipment, net -- 44,793 129,633 3,004 -- 177,430
Goodwill, net -- -- 257,444 1,523 -- 258,967
Investment in consolidated
subsidiaries 440,786 1 130,900 4,438 (576,125) --
Deferred taxes and other assets 3,143 6,834 53,581 12,573 -- 76,131
--------- --------- --------- --------- --------- ---------
$ 504,719 $ 85,610 $ 890,261 $ 33,898 $(656,336) $ 858,152
========= ========= ========= ========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities
Floor plan payable $ -- $ -- $ 70,596 $ 323 $ -- $ 70,919
Accounts payable -- 10,839 35,929 791 -- 47,559
Accrued warranty obligations -- 5,888 35,955 697 -- 42,540
Accrued volume rebates -- 12,082 26,801 1,043 (500) 39,426
Other current liabilities 2,280 90,053 64,112 917 (65,292) 92,070
--------- --------- --------- --------- --------- ---------
Total current liabilities 2,280 118,862 233,393 3,771 (65,792) 292,514
--------- --------- --------- --------- --------- ---------
Long-term liabilities
Long-term debt 200,000 7,597 14,338 2,991 -- 224,926
Deferred portion of purchase price -- -- 18,000 -- -- 18,000
Other long-term liabilities -- 16,012 14,569 97 -- 30,678
--------- --------- --------- --------- --------- ---------
200,000 23,609 46,907 3,088 -- 273,604
--------- --------- --------- --------- --------- ---------
Intercompany balances 8,434 (87,936) 414,301 949 (335,748) --
Redeemable convertible
preferred stock 20,000 -- -- -- -- 20,000
Shareholders' equity
Common stock 48,320 1 259 13 (273) 48,320
Capital in excess of par value 36,423 29,914 214,152 28,756 (272,822) 36,423
Retained earnings 189,262 1,160 (18,751) (708) 18,299 189,262
Accumulated other
comprehensive income (loss) -- -- -- (1,971) -- (1,971)
--------- --------- --------- --------- --------- ---------
Total shareholders' equity 274,005 31,075 195,660 26,090 (254,796) 272,034
--------- --------- --------- --------- --------- ---------
$ 504,719 $ 85,610 $ 890,261 $ 33,898 $(656,336) $ 858,152
========= ========= ========= ========= ========= =========
Page 19 of 40
CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2001
Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
-------- -------- ------------ ------------- ------------- ------------
(In thousands)
Net cash provided by (used
for) operating activities: $ 1,894 $ 1,327 $ 26,723 $ (1,541) $ -- $ 28,403
-------- -------- -------- -------- ------------ --------
Cash flows from investing activities:
Acquisitions -- -- (10,233) -- -- (10,233)
Additions to property and equipment -- (386) (2,614) (229) -- (3,229)
Investments in and advances to
unconsolidated subsidiaries -- -- -- (1,819) -- (1,819)
Investments in and advances
to consolidated subsidiaries (13,467) 441 11,985 1,041 -- --
Proceeds on disposal of fixed assets -- -- 1,494 -- -- 1,494
-------- -------- -------- -------- ------------ --------
Net cash provided by (used
for) investing activities (13,467) 55 632 (1,007) -- (13,787)
-------- -------- -------- -------- ------------ --------
Cash flows from financing activities:
Decrease in floor plan payable, net -- -- (29,101) (23) -- (29,124)
Increase (decrease) in other
long-term debt -- (22) (348) 37 -- (333)
Common stock issued, net 590 -- -- -- -- 590
-------- -------- -------- -------- ------------ --------
Net cash provided by (used
for) financing activities 590 (22) (29,449) 14 -- (28,867)
-------- -------- -------- -------- ------------ --------
Net increase (decrease) in
cash and cash equivalents (10,983) 1,360 (2,094) (2,534) -- (14,251)
Cash and cash equivalents at
beginning of period 41,152 (1,413) 3,124 7,280 -- 50,143
-------- -------- -------- -------- ------------ --------
Cash and cash equivalents at
End of period $ 30,169 $ (53) $ 1,030 $ 4,746 $ -- $ 35,892
======== ======== ======== ======== ============ ========
Page 20 of 40
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
CHAMPION ENTERPRISES, INC.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 29, 2002
VERSUS THE THREE AND SIX MONTHS ENDED JUNE 30, 2001
CONSOLIDATED
Three Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------
Net sales (Dollars in millions)
Manufacturing $ 313.7 $ 351.2 (11%)
Retail 96.6 129.4 (25%)
Less: intercompany (48.8) (52.4)
--------- ----------
Total net sales $ 361.5 $ 428.2 (16%)
========= ==========
Gross margin $ 60.2 $ 76.4 (21%)
SG&A 67.7 67.8
Goodwill impairment charges 97.0 -
Closing-related expenses 4.9 1.0
Gain on debt retirement (5.9) -
--------- ----------
Operating income (loss) $ (103.5) $ 7.6
========= ==========
As a percent of sales
Gross margin 16.7% 17.8%
SG&A 18.7% 15.8%
Operating income (loss) (28.6%) 1.8%
Six Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------
Net sales
Manufacturing $ 580.4 $ 611.7 (5%)
Retail 176.7 237.8 (26%)
Less: intercompany (89.2) (95.0)
--------- ----------
Total net sales $ 667.9 $ 754.5 (11%)
========= ==========
Gross margin $ 104.7 $ 121.2 (14%)
SG&A 126.0 139.7 (10%)
Goodwill impairment charges 97.0 -
Closing-related expenses 4.9 8.7
Gain on debt retirement (5.9) -
--------- ----------
Operating loss $ (117.3) $ (27.2)
========= ==========
As a percent of sales
Gross margin 15.7% 16.1%
SG&A 18.9% 18.5%
Operating loss (17.6%) (3.6%)
Net sales for the quarter and year-to-date periods ended June 29, 2002 decreased
from the same periods in 2001 due primarily to our operating fewer retail sales
centers and decreasing manufacturing and retail sales volumes due to industry
conditions, partially offset by sales price increases in both the manufacturing
and retail segments. Sales in the first half of 2002 were affected by the
continuing reduction in chattel lending availability, the effects of Conseco
Finance Corp.
Page 21 of 40
("Conseco") withdrawing from the wholesale floor plan lending business,
continuing high industry repossession levels and Texas legislation, effective in
2002, which limits consumer use of chattel financing to purchase a manufactured
home. During the quarter we closed 33 retail sales centers and consolidated one
manufacturing facility. At June 29, 2002 we were operating 46 manufacturing
facilities and 181 sales centers compared to 49 manufacturing facilities and 230
sales centers at June 30, 2001.
Gross margin dollars for the three months ended June 29, 2002 declined $16.2
million from the comparable quarter of 2001, primarily due to lower sales volume
in the second quarter of 2002 versus the prior year. Gross margin declined as a
percent of sales due to a higher manufacturing overhead rate related to fixed
costs and inefficiencies from lower production volumes and lower backlogs, and
increased manufacturing material costs, partially offset by increased wholesale
and retail average sales prices. Gross margin dollars for the six months ended
June 29, 2002 declined $16.5 million from the comparable period of 2001
primarily due to the $87 million decline in consolidated net sales. Gross margin
for the six month period declined as a percent of sales due to the same factors
that affected the second quarter, as discussed above.
Second quarter 2002 selling, general and administrative expenses ("SG&A")
remained constant despite the decrease in sales volume, causing SG&A as a
percentage of sales to increase from 15.8% in 2001 to 18.7% in 2002. Expenses
from our newly acquired finance operation added $1.9 million to SG&A expense.
SG&A as a percentage of sales increased due to stable fixed costs versus lower
sales volumes. SG&A in 2001 included $2.9 million of goodwill amortization which
was not incurred in 2002 as a result of implementing SFAS No. 142 in January
2002. SG&A for the six-month period ended June 29, 2002 decreased 10% versus the
prior year. Lower SG&A is primarily due to the reduction in sales and operating
fewer manufacturing facilities and sales centers and the $5.8 million reduction
of goodwill amortization, which was eliminated in 2002 due to the implementation
of SFAS No. 142.
For the three and six months ended June 29, 2002, our operating loss includes
$1.9 million for fixed asset impairment charges and $3.0 million for lease
termination and other costs related to the closing of 33 retail sales centers in
the second quarter 2002. In the comparable quarter last year, our operating loss
included $1.0 million for fixed asset impairment charges. For the six months
ended June 30, 2001, operating loss included $6.5 million of fixed asset
impairment charges and $2.2 million of lease termination and other costs related
to the closing of four homebuilding facilities and 30 retail sales centers. In
the second quarter 2002, the Company purchased and retired $30 million of our
Senior Notes due 2009 for approximately $23.8 million plus accrued interest of
$1.0 million and recognized a gain on extinguishment of debt totaling $5.9
million.
During the quarter ended June 29, 2002, we re-evaluated our goodwill and
deferred tax assets and as a result recorded non-cash charges of $97 million
pre-tax for retail goodwill impairments and $120 million for a deferred tax
asset valuation allowance. See additional discussion under "Accounting Estimates
and Assumptions."
MANUFACTURING OPERATIONS
Three Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------
Net sales (in millions) $ 313.7 $ 351.2 (11%)
EBITA (in millions) $ 10.4 $ 19.4 (46%)
EBITA margin % 3.3% 5.5%
Homes sold 9,124 10,918 (16%)
Floors sold 16,778 19,516 (14%)
Multi-section mix 80% 76%
Average home price $ 33,000 $ 30,800 7%
Six Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------
Net sales (in millions) $ 580.4 $ 611.7 (5%)
EBITA (in millions) $ 11.7 $ 8.9 32%
EBITA margin % 2.0% 1.5%
Homes sold 16,869 19,128 (12%)
Floors sold 31,213 34,212 (9%)
Multi-section mix 81% 76%
Average home price $ 33,100 $ 30,700 8%
Manufacturing facilities at period end 46 49 (6%)
Page 22 of 40
Manufacturing net sales for the quarter ended June 29, 2002 decreased 11%
compared to the second quarter of 2001 as a result of selling 16% fewer homes
partially offset by a 7% increase in average selling prices. For the quarter,
shipments of HUD code homes declined 18% and shipments of non-HUD code homes
increased 8% from shipments in the second quarter of 2001. Wholesale shipments
of homes to our company-owned retailers and independent retailers were off 6%
and 18%, respectively, from shipment levels in the second quarter of 2001.
Manufacturing sales for the six months ended June 29, 2002 decreased 5% compared
to the same period last year due to a 12% decrease in the number of homes sold
partially offset by an 8% increase in average home selling price. Sales from our
four manufacturing facilities in Texas declined approximately $15 million and
$24 million, respectively, in the quarter and six month period ended June 29,
2002, as compared to the comparable periods of 2001. Manufacturing sales volume
was affected by the continuing reduction of chattel lending available to
consumers, the Texas legislation which limits consumer use of chattel financing
to purchase a manufactured home, a reduced number of company-owned retail sales
centers and the effects of Conseco withdrawing from the floor plan lending
business. Conseco had been the manufactured housing industry's largest floor
plan lender. In April 2002, Conseco stopped approving and funding new floor plan
requests. In May 2002, Conseco announced its intention to withdraw from the
floor plan lending business by December 31, 2002, and asked its retail customers
to pay off their floor plan balances by mid-July 2002, or enter into
arrangements to pay off their balances by December 31, 2002. We believe our
wholesale shipments in the quarter were impacted as independent retailers
transitioned to alternative floor plan lenders.
According to data reported by the National Conference of States on Building
Codes and Standards, U.S. industry wholesale shipments of HUD code homes for the
first and second quarters of 2002 were comparable to and declined 9.6% from,
respectively, shipments in the comparable 2001 periods. Of our total wholesale
shipments for the quarter, 85% were to independent retailers and
builders/developers and 15% were to our company-owned sales centers. Due to
market conditions, during the second quarter of 2002 we closed one manufacturing
facility.
Manufacturing EBITA in the second quarter of 2002 decreased $9 million from the
prior year, primarily due to reduced gross margin dollars, as a result of
reduced sales and increased material costs that were only partially offset by
increased selling prices. For the quarter ending June 29, 2002, manufacturing
EBITA as a percent of sales declined 2.2% from the comparable quarter of 2001
due to a higher overhead rate related to fixed costs and inefficiencies from
lower production volumes and lower backlogs, and SG&A which only declined
slightly from prior year levels.
Although retailer orders can be cancelled at any time without penalty, and
unfilled orders are not necessarily an indication of future business, our
unfilled wholesale orders for housing at June 29, 2002 totaled approximately $26
million at the 46 plants operated, compared to $43 million at 49 plants at June
30, 2001.
RETAIL OPERATIONS
Three Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------
Net sales (in millions) $ 96.6 $ 129.4 (25%)
EBITA (loss) (in millions) $ (13.8) $ (1.8) (660%)
EBITA (loss) margin % (14.3%) (1.4%)
New homes sold 1,430 2,183 (34%)
Pre-owned homes sold 376 529 (29%)
Total homes sold 1,806 2,712 (33%)
% Champion-produced new homes sold 96% 86%
New home multi-section mix 78% 72%
Average new home price $ 62,600 $ 55,900 12%
Average number of new homes sold per
sales center per month 2.4 3.2 (25%)
Page 23 of 40
Six Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------
Net sales (in millions) $ 176.7 $ 237.8 (26%)
EBITA (loss) (in millions) $ (21.9) $ (16.7) (31%)
EBITA (loss) margin % (12.4%) (7.0%)
New homes sold 2,624 4,007 (35%)
Pre-owned homes sold 723 1,042 (31%)
Total homes sold 3,347 5,049 (34%)
% Champion-produced new homes sold 95% 85%
New home multi-section mix 78% 71%
Average new home price $ 62,100 $ 55,700 11%
Average number of new homes sold per
sales center per month 2.1 2.8 (25%)
Average number of new homes in inventory
per sales center at period end 16 15 7%
Sales centers at period end 181 230 (21%)
Retail sales for the three and six months ended June 29, 2002 decreased 25% and
26%, respectively versus the same periods last year due to our operating fewer
retail sales centers and selling fewer homes per sales center, partially offset
by higher average selling prices. In the second quarter of 2002 we operated an
average of 198 sales centers, 14% lower than the average of 230 sales centers
operated in the second quarter of 2001. Sales per sales center through the first
six months of 2002 were affected by the continuing reduction of chattel lending
availability, the high level of competing repossession sales, the lengthening of
the sales cycle because of the industry shift to more real estate mortgages, and
the Texas legislation, effective in 2002, that limits consumer use of chattel
financing to purchase a manufactured home. Approximately 25% of our
company-owned retail sales centers are located in Texas. Our retail sales in
Texas declined approximately $15 million and $29 million, respectively, in the
quarter and six month periods ended June 29, 2002, versus the comparable periods
of 2001. Average selling prices increased due in part to selling a greater
proportion of higher priced, multi-section homes. Based on data reported by
Statistical Surveys, Inc., and our estimates, we believe that in