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 April 2, 2005

 

OR

 

o

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 of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

2701 Cambridge Court, Suite 300

Auburn Hills, MI 48326

(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 by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). 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.

 

75,685,743 shares of the registrant’s $1.00 par value Common Stock were outstanding as of April 22, 2005.

 



 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

CHAMPION ENTERPRISES, INC.

 

 

Consolidated Statements of Operations

 

(In thousands, except per share amounts)

 

 

 

Unaudited

 

 

 

 

 

Three Months Ended

 

 

 

 

 

April 2, 2005

 

 

 

April 3, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

244,275

 

 

 

$

206,734

 

 

 

Cost of sales

 

 

207,011

 

 

 

 

179,277

 

 

 

Gross margin

 

 

37,264

 

 

 

 

27,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expenses

 

 

31,669

 

 

 

 

28,243

 

 

 

Mark-to-market (credit) charge for common stock warrant

 

 

(3,800

)

 

 

 

5,100

 

 

 

Loss on debt retirement

 

 

 

 

 

 

3,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

9,395

 

 

 

 

(9,112

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

773

 

 

 

 

232

 

 

 

Interest expense

 

 

(4,581

)

 

 

 

(5,062

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

5,587

 

 

 

 

(13,942

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

300

 

 

 

 

300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

5,287

 

 

 

 

(14,242

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of taxes

 

 

(2,558

)

 

 

 

(81

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,729

 

 

 

$

(14,323

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share (Note 9):

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.06

 

 

 

$

(0.21

)

 

 

Loss from discontinued operations

 

 

(0.03

)

 

 

 

 

 

 

Basic income (loss) per share

 

$

0.03

 

 

 

$

(0.21

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted shares for basic EPS

 

 

72,547

 

 

 

 

68,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share (Note 9):

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

0.06

 

 

 

$

(0.21

)

 

 

Loss from discontinued operations

 

 

(0.03

)

 

 

 

 

 

 

Diluted income (loss) per share

 

$

0.03

 

 

 

$

(0.21

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted shares for diluted EPS

 

 

73,345

 

 

 

 

68,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

Page 1 of 33

 



 

 

CHAMPION ENTERPRISES, INC.

Consolidated Balance Sheets

(In thousands, except par value)

 

 

 

Unaudited

 

 

 

 

 

 

 

April 2, 2005

 

 

 

January 1, 2005

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

142,119

 

 

$

142,266

 

Restricted cash

 

 

4,694

 

 

 

529

 

Accounts receivable, trade

 

 

34,245

 

 

 

22,119

 

Inventories

 

 

83,869

 

 

 

71,616

 

Current assets of discontinued operations

 

 

14,751

 

 

 

35,463

 

Other current assets

 

 

13,003

 

 

 

13,535

 

Total current assets

 

 

292,681

 

 

 

285,528

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

196,344

 

 

 

207,216

 

Less-accumulated depreciation

 

 

118,345

 

 

 

126,259

 

 

 

 

77,999

 

 

 

80,957

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

126,583

 

 

 

126,591

 

Non-current assets of discontinued operations

 

 

6,478

 

 

 

7,747

 

Other non-current assets

 

 

15,726

 

 

 

16,219

 

 

$

519,467

 

 

$

517,042

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

28,664

 

 

$

13,819

 

Accrued warranty obligations

 

 

32,691

 

 

 

33,551

 

Accrued volume rebates

 

 

27,345

 

 

 

30,234

 

Accrued compensation and payroll taxes

 

 

14,238

 

 

 

19,659

 

Accrued self-insurance

 

 

26,684

 

 

 

25,988

 

Current liabilities of discontinued operations

 

 

9,051

 

 

 

21,411

 

Other current liabilities

 

 

36,094

 

 

 

31,696

 

Total current liabilities

 

 

174,767

 

 

 

176,358

 

Long-term liabilities

 

 

 

 

 

 

 

 

Long-term debt

 

 

200,710

 

 

 

200,758

 

Long-term liabilities of discontinued operations

 

 

417

 

 

 

432

 

Other long-term liabilities

 

 

40,492

 

 

 

41,444

 

 

 

 

241,619

 

 

 

242,634

 

Contingent liabilities (Note 8)

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock,
no par value, 5,000 shares authorized, 21 shares
and 21 shares issued and outstanding, respectively

 

 

20,750

 

 

 

20,750

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Common stock, $1 par value, 120,000 shares authorized,
72,583 and 72,358 shares issued and outstanding, respectively

 

 

72,583

 

 

 

72,358

 

Capital in excess of par value

 

 

166,821

 

 

 

164,377

 

Accumulated deficit

 

 

(156,905

)

 

 

(159,375

)

Accumulated other comprehensive loss

 

 

(168

)

 

 

(60

)

Total shareholders’ equity

 

 

82,331

 

 

 

77,300

 

 

 

$

519,467

 

 

$

517,042

 

See accompanying Notes to Consolidated Financial Statements.

 

 

Page 2 of 33

 



 

 

CHAMPION ENTERPRISES, INC.

Consolidated Statements of Cash Flows

(In thousands)

 

 

Unaudited

 

 

 

Three Months Ended

 

 

 

April 2, 2005

 

April 3, 2004

 

Cash flows from operating activities

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

5,287

 

$

(14,242

)

Adjustments to reconcile income (loss) from continuing operations to net cash used for

continuing operating activities:

 

 

 

 

 

 

 

Depreciation

 

 

2,539

 

 

2,670

 

Loss on debt retirement

 

 

 

 

3,226

 

Mark-to-market (credit) charge for common stock warrant

 

 

(3,800

)

 

5,100

 

(Gain) loss on disposal of fixed assets, net

 

 

(1,595

)

 

37

 

Increase/decrease

 

 

 

 

 

 

 

Accounts receivable

 

 

(12,126

)

 

(17,944

)

Refundable income taxes

 

 

 

 

277

 

Inventories

 

 

(12,253

)

 

(13,631

)

Accounts payable

 

 

14,845

 

 

6,520

 

Accrued liabilities

 

 

(1,814

)

 

(5,018

)

Other, net

 

 

3,825

 

 

501

 

Net cash used for continuing operating activities

 

 

(5,092

)

 

(32,504

)

 

 

 

 

 

 

 

 

Cash flows from discontinued operations

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

(2,558

)

 

(81

)

Proceeds from sales of retail businesses

 

 

19,568

 

 

 

Decrease (increase) in net assets of discontinued operations

 

 

(9,995

)

 

(3,355

)

Net cash provided by (used for) discontinued operations

 

 

7,015

 

 

(3,436

)

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(2,468

)

 

(1,880

)

Proceeds on disposal of fixed assets

 

 

4,746

 

 

223

 

Investments in and advances to unconsolidated subsidiaries

 

 

(55

)

 

(58

)

Net cash provided by (used for) investing activities

 

 

2,223

 

 

(1,715

)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Decrease in floor plan payable, net

 

 

 

 

(29

)

Decrease in long-term debt

 

 

(51

)

 

(5,813

)

(Increase) decrease in restricted cash

 

 

(4,165

)

 

1,710

 

Preferred stock issued, net

 

 

 

 

12,000

 

Common stock issued, net

 

 

182

 

 

1,611

 

Dividends paid on preferred stock

 

 

(259

)

 

(112

)

Net cash (used for) provided by financing activities

 

 

(4,293

)

 

9,367

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(147

)

 

(28,288

)

Cash and cash equivalents at beginning of period

 

 

142,266

 

 

145,868

 

Cash and cash equivalents at end of period

 

$

142,119

 

$

117,580

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

 

Page 3 of 33

 



 

 

CHAMPION ENTERPRISES, INC.

Consolidated Statement of Shareholders’ Equity

Unaudited Three Months Ended April 2, 2005

(In thousands)

 

 

 

 

Common stock

 

Capital in excess of

 

Accumulated

 

Accumulated other comprehensive

 

 

 

 

 

Shares

 

Amount

 

par value

 

deficit

 

income (loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2005

 

72,358

 

$

72,358

 

$

164,377

 

$

(159,375

)

$

(60

)

$

77,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

2,729

 

 

 

 

2,729

 

Preferred stock dividends

 

 

 

 

 

 

 

(259

)

 

 

 

(259

)

Stock options and benefit plans

 

54

 

 

54

 

 

615

 

 

 

 

 

 

669

 

Issuance for acquisition deferred purchase price payments

 

171

 

 

171

 

 

1,829

 

 

 

 

 

 

2,000

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

(108

)

 

(108

)

Balance at April 2, 2005

 

72,583

 

$

72,583

 

$

166,821

 

$

(156,905

)

$

(168

)

$

82,331

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

Page 4 of 33

 



 

 

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 statement of the results of the interim period. All such adjustments are of a normal recurring nature. 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 January 1, 2005 was derived from audited financial statements.

 

During the quarter ended April 2, 2005, the Company sold 22 of its retail sales centers and committed to a plan to dispose of the remainder of its retail operations except for its Advantage Homes operation in California. As a result the remaining non-Advantage operations were classified as held for sale. For the periods reported, retail operations, excluding Advantage Homes, are classified as discontinued operations. Also included in discontinued operations is the Company’s former consumer finance business that was exited in the third quarter of 2003.

 

For a description of significant accounting policies used by Champion Enterprises, Inc. (“the Company”) in the preparation of its consolidated financial statements, please refer to Note 1 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended January 1, 2005.

 

Certain amounts reported in previous periods have been reclassified to conform to the 2005 presentation.

 

The Company accounts for its stock-based employee compensation programs under Accounting Principles Board (“APB”) Opinion No. 25. The additional disclosures and pro forma information required by Statement of Financial Accounting Standards (“SFAS”) No. 123 as amended by SFAS No. 148 follow. If compensation costs for the Company’s stock-based compensation plans had been determined based on the fair value at the grant dates consistent with the requirements of SFAS No. 123, pro forma net income (loss), income (loss) per share, and stock-based compensation expense would have been as indicated below:

 

 

 

 

Three Months Ended

 

 

 

April 2,
2005

 

April 3,
2004

 

 

 

(In thousands, except per share amounts)

 

Net income (loss) – as reported

 

$


2,729

 

$


(14,323

)

Net income (loss) – pro forma

 

 

2,618

 

 

(14,460

)

Basic income (loss) per share – as reported

 

 

0.03

 

 

(0.21

)

Diluted income (loss) per share – as reported

 

 

0.03

 

 

(0.21

)

Basic income (loss) per share – pro forma

 

 

0.03

 

 

(0.21

)

Diluted income (loss) per share – pro forma

 

 

0.03

 

 

(0.21

)

Stock-based employee compensation expense,

 

 

 

 

 

 

 

net of related tax effects – as reported

 

 

1,107

 

 

145

 

Stock-based employee compensation expense, net of related

tax effects – pro forma

 

$


1,218

 

$


282

 

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment.” Under previous practice, the reporting entity could account for share-based payment under the provisions of APB Opinion No. 25 and disclose share-based compensation as accounted for under the provisions of SFAS No. 123. Under the provisions of SFAS No. 123R, a public entity is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. In April 2005, the Securities and Exchange Commission (“SEC”) postponed the effective date of SFAS No. 123R until the fiscal year beginning after June 15, 2005. The Company

 

Page 5 of 33

 



 

expects to adopt SFAS No. 123R in January 2006. Once the standard is adopted, the Company currently expects full-year 2006 diluted net earnings per share to be reduced by less than $.01 for stock options outstanding at April 2, 2005. Application of this pronouncement requires significant judgment regarding the inputs to an option-pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking over the expected term of the award. As a result, the actual impact of adoption on earnings for 2006 could differ significantly from the Company’s current estimate. The Company is currently considering the modified prospective method of transition, which would be first effective for the Company’s 2006 fiscal first quarter.

 

2. The following table provides information regarding current year activity for restructuring reserves recorded in previous periods for closures of manufacturing plants and retail sales centers.

 

 

 

Three Months Ended April 2, 2005

 

 

 

2004
Closures

 

Prior
Closures

 

Total

 

 

 

(In thousands)

 

Balance at beginning of year

 

$

810

 

$

3,611

 

$

4,421

 

Cash payments:

 

 

 

 

 

 

 

 

 

 

Warranty costs

 

 

 

 

(211

)

 

(211

)

Other closing costs

 

 

(421

)

 

(51

)

 

(472

)

Reversals credited to earnings:

 

 

 

 

 

 

 

 

 

 

Warranty costs

 

 

 

 

 

 

 

Other closing costs

 

 

(190

)

 

 

 

(190

)

Balance at April 2, 2005

 

$

199

 

$

3,349

 

$

3,548

 

 

 

 

 

 

 

 

 

 

 

 

Period end balance comprised of:

 

 

 

 

 

 

 

 

 

 

Warranty costs

 

$

 

$

2,381

 

$

2,381

 

Other closing costs

 

 

199

 

 

968

 

 

1,167

 

 

 

$

199

 

$

3,349

 

$

3,548

 

 

 

 

 

 

 

 

 

 

 

 

 

Warranty costs are expected to be paid over a three-year period after the related closures. Other closing costs are generally paid within one year of the related closures, though certain lease payments at abandoned retail locations are paid up to three years after the closures. The reversal of other closing costs during the three months ended April 2, 2005 consisted of an adjustment to accruals for employee severance.

 

 

Page 6 of 33

 



 

 

3.      The provisions for income tax differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income (loss) from continuing operations as a result of the following differences:

 

 

 

Three Months Ended

 

 

 

April 2, 2005

 

April 3, 2004

 

 

 

(In thousands)

 

Statutory U.S. tax rate

 

$

2,000

 

$

(4,900

)

(Decrease) increase in rate resulting from:

 

 

 

 

 

 

 

Warrant mark-to-market and other permanent

 

 

(1,200

)

 

1,900

 

Deferred tax valuation allowance

 

 

(800

)

 

3,000

 

Foreign and state taxes

 

 

300

 

 

300

 

Total income tax expense

 

$

300

 

$

300

 

 

 

 

 

 

 

 

 

The Company currently provides a 100% valuation allowance for its deferred tax assets. Deferred tax assets will continue to require a 100% valuation allowance until the Company has demonstrated their realizability through sustained profitability and/or from other factors. As of January 1, 2005, the Company had available federal net operating loss carryforwards of approximately $120 million for tax purposes to offset future federal taxable income. These loss carryforwards expire in 2023 and 2024.

 

4.

A summary of inventories by component follows:

 

 

 

April 2, 2005

 

January 1, 2005

 

 

 

(In thousands)

 

New manufactured homes

 

$

26,190

 

$

18,749

 

Raw materials

 

 

31,297

 

 

30,908

 

Work-in-process

 

 

9,443

 

 

7,166

 

Other inventory

 

 

16,939

 

 

14,793

 

 

 

$

83,869

 

$

71,616

 

 

 

 

 

 

 

 

 

 

Other inventory consists of pre-owned manufactured homes, land and park spaces and improvements.

 

5.      The Company’s manufacturing operations generally provide retail homebuyers with a twelve-month warranty from the date of purchase. Estimated warranty costs are accrued as cost of sales at the time of sale. The warranty provision and reserves are based on estimates of the amounts necessary to settle existing and future claims for homes sold by the manufacturing operations as of the balance sheet date. The following table summarizes the changes in accrued product warranty obligations during the three months ended April 2, 2005. A portion of warranty reserves was classified as other long-term liabilities in the consolidated balance sheet.

 

 

 

Accrued Warranty Obligations

 

 

 

2005

 

2004

 

 

 

(In thousands)

 

Reserves at beginning of quarter

 

$

40,051

 

$

47,058

 

Warranty expense provided

 

 

12,579

 

 

12,564

 

Cash warranty payments

 

 

(13,439

)

 

(14,271

)

Reserve at end of quarter

 

$

39,191

 

$

45,351

 

 

 

Page 7 of 33

 



 

 

6.

Long-term debt by component consisted of the following:

 

 

 

April 2, 2005

 

 

 

January 1, 2005

 

 

 

(In thousands)

 

7.625% Senior Notes due 2009

 

$

89,273

 

 

 

$

89,273

 

11.25% Senior Notes due 2007

 

 

97,510

 

 

 

 

97,510

 

Obligations under industrial revenue bonds

 

 

12,430

 

 

 

 

12,430

 

Other debt

 

 

1,497

 

 

 

 

1,545

 

 

 

$

200,710

 

 

 

$

200,758

 

 

 

 

 

 

 

 

 

 

 

 

During the three months ended April 3, 2004, the Company purchased and retired $13.5 million of the Senior Notes due 2009 and $13.5 million of the Senior Notes due 2007 in exchange for Company common stock totaling 3.9 million shares, resulting in a pretax loss of $3.2 million. Also during the first quarter of 2004, the Company repaid a $5.7 million obligation under an industrial revenue bond.

 

CHB has a three-year, $75 million revolving credit facility currently used for the issuance of letters of credit. Under this facility, as amended January 24, 2005, letter of credit fees range from 1.75% to 2.25% annually and borrowings bear interest at either the prime interest rate plus up to 0.5% or the Eurodollar rate plus 2.0% to 2.5%. In addition, there is an annual fee of $0.1 million plus 0.375% of the unused portion of the facility. Availability under the facility is determined by a monthly borrowing base calculation based on percentages of eligible accounts receivable, inventory, fixed assets, and, if necessary, cash on deposit. The facility agreement contains certain financial covenants that require the Company, only in the event that its liquidity, as defined, falls below $35 million, to maintain certain levels of consolidated earnings before interest, taxes, depreciation, amortization, non-cash restructuring costs and gains from extinguishment of Senior Notes and certain ratios of earnings to fixed charges, as defined. Liquidity, as defined, consists of the majority of the Company’s unrestricted cash and cash equivalents plus unused availability under the facility. Fixed charges, as defined, consist primarily of interest expense, capital expenditures, dividends paid in cash, required principal payments of debt and lease payments paid or accrued during the calculation period as well as cash losses under wholesale repurchase obligations. In addition the facility contains covenants that limit the Company’s ability to incur additional indebtedness and liens, sell assets and, if liquidity falls below $35 million, make certain investments, pay dividends and purchase or redeem its common stock. The line of credit is collateralized by accounts receivable, inventories, fixed assets, cash, and other assets. As of April 2, 2005, there were $60.3 million of letters of credit issued under the facility, there were no borrowings outstanding and the Company’s liquidity, as defined, was $132.5 million, which was in excess of $35 million such that no other financial covenants were in effect.

 

7.      During the first quarter of 2004, the preferred shareholder exercised its right to purchase $12 million of Series B-2 preferred stock. At April 2, 2005 redeemable convertible preferred stock consisted of $8.75 million of Series C and $12 million of Series B-2 with mandatory redemption dates of April 2, 2009 and July 3, 2008, respectively. Both Series had a 5% annual dividend that was payable quarterly, at the Company’s option, in cash or common stock.

 

In connection with the issuance of the Series C preferred stock in 2002, the Company issued to the preferred shareholder a warrant, which was exercisable based on approximately 2.2 million shares at a strike price of $12.27 per share at April 2, 2005. The warrant would have expired on April 2, 2009 and was exercisable only on a non-cash, net basis, whereby the warrant holder would have received shares of common stock as payment for any net gain upon exercise. During the three months ended April 2, 2005 and April 3, 2004, as a result of changes in the Company’s common stock price, the Company recorded a mark-to-market credit of $3.8 million and a charge of $5.1 million, respectively, for the change in estimated fair value of the warrant.

 

On April 18, 2005, the Company repurchased and subsequently cancelled the common stock warrant in exchange for a cash payment of $4.5 million and the preferred shareholder elected to immediately convert the outstanding Series B-2 and Series C preferred stock into 3.1 million shares of common stock under the terms of the respective preferred stock agreements.

 

 

Page 8 of 33

 



 

 

8.      The majority of the Company’s manufacturing sales to independent retailers are made pursuant to repurchase agreements with lending institutions that provide wholesale floor plan financing to the retailers. Pursuant to these agreements, generally for a period of up to 24 months from invoice date of the sale of the homes and upon default by the retailers 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 contingent repurchase obligation at April 2, 2005 was estimated to be approximately $250 million, without reduction for the resale value of the homes. Losses under repurchase obligations are determined by the difference between the repurchase price and the estimated net proceeds from the resale of the homes. Losses incurred on homes repurchased totaled $0.1 million for both the three months ended April 2, 2005 and April 3, 2004.

 

At April 2, 2005 the Company was contingently obligated for approximately $60.6 million under letters of credit, primarily comprised of $14.5 million to support insurance reserves, $12.6 million to support long-term debt, $27.7 million to secure surety bonds, and $5.0 million to support floor plan facilities of independent retailers. Champion was also contingently obligated for $31.8 million under surety bonds, generally to support insurance and license and service bonding requirements. Approximately $27.2 million of the letters of credit and $20.8 million of the surety bonds support insurance reserves and long-term debt that are reflected as liabilities in the consolidated balance sheet.

 

At April 2, 2005 certain of the Company’s subsidiaries were guarantors of $5.5 million of debt of unconsolidated subsidiaries, none of which was reflected in the consolidated balance sheet. These guarantees are several or joint and several and are related to indebtedness of certain manufactured housing community developments which are collateralized by the properties being developed.

 

The Company has provided various representations, warranties, and other standard indemnifications in the ordinary course of its business, in agreements to acquire and sell business assets, and in financing arrangements. The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business.

 

Management believes the ultimate liability with respect to these contingent obligations will not have a material effect on the Company’s financial position, results of operations or cash flows.

 

 

Page 9 of 33

 



 

 

9.At the end of the quarter, the Company’s potentially dilutive securities in 2005 and 2004 consisted of outstanding stock options and awards, convertible preferred stock, a common stock warrant, and, in 2004, deferred purchase price obligations. Convertible preferred stock and common stock warrants were not considered in determining the denominator for diluted earnings per share (“EPS”) in any period presented because the effect would have been antidilutive. Additionally, outstanding stock options and awards and deferred purchase price obligations were not considered in determining the denominator for diluted EPS for the three months ended April 3, 2004 because the effect would have been antidilutive. A reconciliation of the numerators and denominators used in the Company’s basic and diluted EPS calculations follows:

 

 

 

Three Months Ended

 

 

 

April 2, 2005

 

April 3, 2004

 

 

 

(In thousands)

 

Numerator:

 

 

 

 

 

 

 

Net income (loss)

 

$

2,729

 

$

(14,323

)

Plus loss from discontinued operations

 

 

2,558

 

 

81

 

Less preferred stock dividends

 

 

(259

)

 

(160

)

Less amount allocated to participating securities holders

 

 

(343

)

 

 

Income (loss) from continuing operations available to common
shareholders for basic and diluted EPS

 

 

4,685

 

 

(14,402

)

 

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

(2,558

)

 

(81

)

Less amount allocated to participating securities.

 

 

-

 

 

-

 

Loss from discontinued operations available to common
shareholders for basic and diluted EPS

 

 

(2,558

)

 

(81

)

 

 

 

 

 

 

 

 

Income (loss) available to common
shareholders for basic and diluted EPS

 

$

2,127

 

$

(14,483

)

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Shares for basic EPS - weighted average shares outstanding

 

 

72,547

 

 

68,103

 

Plus effect of dilutive securities

 

 

 

 

 

 

 

Stock options and awards

 

 

798

 

 

 

Shares for diluted EPS

 

 

73,345

 

 

68,103

 

 

 

Page 10 of 33

 



 

 

10.The Company evaluates the performance of its manufacturing and retail segments based on income before interest, income taxes, and general corporate expenses. Reconciliations of segment sales to consolidated net sales and segment income to consolidated income (loss) from continuing operations before income taxes follow:

 

 

 

Three Months Ended

 

 

 

April 2, 2005

 

April 3, 2004

 

Net sales

 

(In thousands)

 

Manufacturing

 

$

238,738

 

$

209,856

 

Retail

 

 

25,137

 

 

19,478

 

Less: intercompany

 

 

(19,600

)

 

(22,600

)

Consolidated net sales

 

$

244,275

 

$

206,734

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes:

 

 

 

 

 

 

 

Manufacturing segment income

 

$

11,190

 

$

4,654

 

Retail segment income

 

 

1,267

 

 

783

 

General corporate expenses

 

 

(8,062

)

 

(6,023

)

Mark-to-market credit (charge) for common stock warrant

 

 

3,800

 

 

(5,100

)

Loss on debt retirement

 

 

 

 

(3,226

)

Interest expense, net

 

 

(3,808

)

 

(4,830

)

Intercompany eliminations

 

 

1,200

 

 

(200

)

Income (loss) from continuing operations before income taxes

 

$

5,587

 

$

(13,942

)

 

 

 

 

 

 

 

 

 

11.    Discontinued operations include the Company’s retail operations, excluding Advantage Homes, and its former consumer finance business that was exited in 2003. For the three months ended April 2, 2005 and April 3, 2004, revenues from discontinued retail operations were $18.9 million and $30.4 million, respectively. (Loss) income from discontinued operations for the quarters ended April 2, 2005 and April 3, 2004 consist of the following:

 

 

 

 

 

Three Months Ended

 

 

 

 

 

April 2, 2005

 

April 3, 2004

 

 

 

 

 

(In thousands)

 

Loss from retail operations

 

 

 

$

(2,548

)

$

(1,237

)

(Loss) income from consumer finance business

 

 

 

 

(10

)

 

1,156

 

Total loss from discontinued operations

 

 

 

$

(2,558

)

$

(81

)

 

 

 

 

 

 

 

 

 

 

 

 

Page 11 of 33

 



 

 

The assets and liabilities of discontinued operations consisted of the following:

 

 

 

 

 

April 2, 2005

 

 

 

January 1, 2005

 

 

 

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

Accounts receivable, trade

 

 

 

$

167

 

 

 

$

598

Inventories

 

 

 

 

13,507

 

 

 

 

33,964

Other current assets

 

 

 

 

1,077

 

 

 

 

901

Current assets of discontinued operations

 

 

 

$

14,751

 

 

 

$

35,463

Property, plant, and equipment, net

 

 

 

$

3,851

 

 

 

$

5,064

Other non-current assets

 

 

 

 

2,627

 

 

 

 

2,683

Non-current assets of discontinued

operations

 

 

 

$

6,478

 

 

 

$

7,747

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Floor plan payable

 

 

 

$

1,568

 

 

 

$

11,835

Accounts payable

 

 

 

 

1,134

 

 

 

 

2,043

Other current liabilities

 

 

 

 

6,349

 

 

 

 

7,533

Current liabilities of discontinued operations

 

 

 

$

9,051

 

 

 

$

21,411

Long-term debt

 

 

 

$

417

 

 

 

$

432

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued retail operations for the quarter ended April 2, 2005 included an operating loss of $1.6 million and a net loss of $1.0 million related to sales of retail businesses during the quarter and asset impairment charges related to a sale that was completed in April 2005. During the quarter ended April 2, 2005, the Company completed six transactions in which the assets and businesses of 22 of its retail sales centers were sold. The 22 retail sales centers had sales of $10.4 million for the three months ended April 2, 2005. The assets sold consisted primarily of new homes and other inventory. The total sale price was cash of approximately $19.6 million and the buyers’ assumption of certain liabilities totaling approximately $1.0 million. The Company recorded a loss of approximately $0.2 million from these transactions. In connection with one of these sales, the Company paid down $10.3 million of floor plan borrowings.

On April 15 2005, the Company sold the assets and business of eight retail sales centers for cash of $1.6 million, the buyer’s assumption of certain liabilities totaling $0.3 million and the buyer’s pay down of floor plan borrowings of $1.6 million. The assets sold consisted primarily of inventory of new and pre-owned homes. During the quarter ended April 2, 2005 the Company recorded impairment charges of approximately $0.8 million related to the assets sold.

In connection with the sales of retail businesses during 2005, intercompany profit of $1.6 million was recognized in the consolidated statement of operations that is not classified as discontinued operations.

Income from discontinued consumer finance business for the three months ended April 3, 2004 consisted primarily of a favorable adjustment from the settlement of remaining contractual obligations.

 

12.    During the first quarter of 2004, the Company purchased and retired $27.0 million of its Senior Notes in exchange for 3.9 million shares of Company common stock. In addition, during the three months ended April 2, 2005 and April 3, 2004, the Company issued 171,000 shares and 276,000 shares of common stock, respectively, in payment of deferred purchase price obligations of $2.0 million each.

 

13.    Substantially all subsidiaries of CHB are guarantors and the Company is a subordinated guarantor of the Senior Notes due 2007. In addition, CHB is a guarantor and substantially all of its subsidiaries are guarantors of the Senior

 

Page 12 of 33

 



 

Notes due 2009 on a basis subordinated to their guarantees of the Senior Notes due 2007. The non-guarantor subsidiaries include the Company’s foreign operations, its development companies and certain finance subsidiaries.

 

Separate financial statements for each guarantor subsidiary are not included in this filing because each guarantor subsidiary is 100%-owned and the guarantees are full and unconditional, as well as joint and several, for the Senior Notes due 2009 and 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 (“Parent”) 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 13 of 33

 



 

 

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Statement of Operations

For the Three Months Ended April 2, 2005

 

 

 

Parent

 

CHB

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 

Consolidating
Eliminations

 

Consolidated

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

74,808

 

$

178,513

 

$

9,954

 

$

(19,000

)

$

244,275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

64,396

 

 

154,438

 

 

8,377

 

 

(20,200

)

 

207,011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

 

 

10,412

 

 

24,075

 

 

1,577

 

 

1,200

 

 

37,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and

Administrative expenses

 

 

110

 

 

10,026

 

 

20,205

 

 

1,328

 

 

 

 

31,669

 

Mark-to-market credit for common stock warrant

 

 

(3,800

)

 

 

 

 

 

 

 

 

 

(3,800

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

3,690

 

 

386

 

 

3,870

 

 

249

 

 

1,200

 

 

9,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,715

 

 

1,692

 

 

(2,747

)

 

91

 

 

22

 

 

773

 

Interest expense

 

 

(1,715

)

 

(2,783

)

 

(83

)

 

 

 

 

 

(4,581

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from

continuing operations

before income taxes

 

 

3,690

 

 

(705

)

 

1,040

 

 

340

 

 

1,222

 

 

5,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

 

50

 

 

250

 

 

 

 

300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from

continuing operations

 

 

3,690

 

 

(705

)

 

990

 

 

90

 

 

1,222

 

 

5,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued

operations, net of taxes

 

 

 

 

 

 

(2,262

)

 

(274

)

 

(22

)

 

(2,558

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before equity

in income of consolidated

subsidiaries

 

 

3,690

 

 

(705

)

 

(1,272

)

 

(184

)

 

1,200

 

 

2,729

 

Equity in (loss) income of

consolidated subsidiaries

 

 

(2,161

)

 

(1,456

)

 

 

 

 

 

3,617

 

 

 

Net income (loss)

 

$

1,529

 

$

(2,161

)

$

(1,272

)

$

(184

)

$

4,817

 

$

2,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 14 of 33

 



 

 

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Balance Sheet

As of April 2, 2005

 

 

 


Parent -

 

CHB

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 

Consolidating
Eliminations

 


Consolidated

 

Assets

 

(In thousands)

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

120,731

 

$

4,155

 

$

17,231

 

$

2

 

$

142,119

 

Restricted cash

 

 

 

 

4,460

 

 

234

 

 

 

 

 

 

4,694

 

Accounts receivable, trade

 

 

 

 

11,948

 

 

22,631

 

 

1,586

 

 

(1,920

)

 

34,245

 

Inventories

 

 

 

 

17,536

 

 

66,279

 

 

2,854

 

 

(2,800

)

 

83,869

 

Current assets of

discontinued operations

 

 

 

 

 

 

 

 

14,751

 

 

 

 


 

 

14,751

 

Other current assets

 

 

 

 

8,554

 

 

4,302

 

 

447

 

 

(300

)

 

13,003

 

Total current assets

 

 

 

 

163,229

 

 

112,352

 

 

22,118

 

 

(5,018

)

 

292,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant, and equipment,

net

 

 

 

 

26,373

 

 

49,290

 

 

2,336

 

 

 

 

77,999

 

Goodwill

 

 

 

 

 

 

125,783

 

 

800

 

 

 

 

126,583

 

Investment in consolidated

subsidiaries

 

 

5,787

 

 

309,960

 

 

163,724

 

 

6,791

 

 

(486,262

)

 

 

Non-current assets of discontinued

operations

 

 

 

 

 

 

5,687

 

 

791

 

 


 

 

6,478

 

Other non-current assets

 

 

650

 

 

2,653

 

 

4,604

 

 

7,819

 

 

 

 

15,726

 

 

 

$

6,437

 

$

502,215

 

$

461,440

 

$

40,655

 

$

(491,280

)

$

519,467

 

Liabilities, Redeemable Convertible Preferred Stock, and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

9,342

 

$

18,035

 

$

1,287

 

$

 

$

28,664

 

Accrued warranty

obligations

 

 

 

 

7,660

 

 

24,277

 

 

754

 

 


 

 

32,691

 

Accrued volume rebates

 

 

 

 

8,983

 

 

17,666

 

 

1,993

 

 

(1,297

)

 

27,345

 

Current liabilities of

discontinued operations

 

 

 

 

 

 

9,051

 

 

 

 


 

 

9,051

 

Other current liabilities

 

 

2,656

 

 

24,981

 

 

48,466

 

 

1,113

 

 

(200

)

 

77,016

 

Total current liabilities

 

 

2,656

 

 

50,966

 

 

117,495

 

 

5,147

 

 

(1,497

)

 

174,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

89,273

 

 

104,879

 

 

6,558

 

 

 

 

 

 

200,710

 

Long-term liabilities of

discontinued operations

 

 

 

 

 

 

417

 

 

 

 


 

 

417

 

Other long-term liabilities

 

 

5,000

 

 

8,125

 

 

27,249

 

 

118

 

 

 

 

40,492

 

 

 

 

94,273

 

 

113,004

 

 

34,224

 

 

118

 

 


 

 

241,619

 

Intercompany balances

 

 

(182,962

)

 

59,508

 

 

457,553

 

 

4,658

 

 

(338,757

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable convertible

preferred stock

 

 

20,750

 

 

 

 

 

 

 

 


 

 

20,750

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

72,583

 

 

1

 

 

62

 

 

3

 

 

(66

)

 

72,583

 

Capital in excess of par value

 

 

166,821

 

 

613,336

 

 

323,527

 

 

32,526

 

 

(969,389

)

 

166,821

 

Accumulated deficit

 

 

(167,684

)

 

(334,600

)

 

(471,367

)

 

(1,683

)

 

818,429

 

 

(156,905

)

Accumulated other

comprehensive loss

 

 

 

 

 

 

(54

)

 

(114

)

 


 

 

(168

)

Total shareholders’

equity

 

 

71,720

 

 

278,737

 

 

(147,832

)

 

30,732

 

 

(151,026

)

 

82,331

 

 

 

$

6,437

 

$

502,215

 

$

461,440

 

$

40,655

 

$

(491,280

)

$

519,467

 

 

Page 15 of 33

 



 

 

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended April 2, 2005

 

 

 

Parent

 

CHB

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 

Consolidating
Eliminations

 

Consolidated

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used for) provided

by continuing operating

activities

 

$

(2,187

)

$

8,978

 

$

(16,359

)

$

5,141

 

$

(665

)

$

(5,092

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used

for) discontinued operations

 

 

 

 

 

 

7,289

 

 

(274

)

 

 

 

7,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing

activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions to property, plant,

and equipment

 

 

 

 

(382

)

 

(1,874

)

 

(212

)

 

 

 

(2,468

)

Investments in and advances

to unconsolidated

subsidiaries

 

 

 

 

 

 

 

 

(55

)

 

 

 

(55

)

Investments in and advances

to consolidated subsidiaries

 

 

2,264

 

 

(4,235

)

 

7,131

 

 

(5,346

)

 

186

 

 

 

Proceeds on disposal of fixed

assets

 

 

 

 

144

 

 

4,206

 

 

396

 

 

 

 

 

4,746

 

Net cash provided by (used

for) investing activities

 

 

2,264

 

 

(4,473

)

 

9,463

 

 

(5,217

)

 

186

 

 

2,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing

Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decrease in long-term debt

 

 

 

 

 

 

(51

)

 

 

 

 

 

(51

)

Increase in restricted cash

 

 

 

 

(4,151

)

 

(14

)

 

 

 

 

 

(4,165

)

Common stock issued, net

 

 

182

 

 

 

 

 

 

 

 

 

 

182

 

Dividends paid on preferred

stock

 

 

(259

)

 

 

 

 

 

 

 

 

 

(259

)

Net cash used for financing

activities

 

 

(77

)

 

(4,151

)

 

(65

)

 

 

 

 

 

(4,293

)