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 July 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.

 

75,730,293 shares of the registrant’s $1.00 par value Common Stock were outstanding as of July 25, 2005.

 

 



 

 

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

 

 

 

July 2,
2005

 

July 3,
2004

 

July 2,
2005

 

July 3,
2004

 


Net sales

 


$317,100

 


$270,484

 


$561,375

 


$477,218

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

261,527

 

224,890

 

468,538

 

404,167

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

55,573

 

45,594

 

92,837

 

73,051

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

36,642

 

33,927

 

68,311

 

62,170

 

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

 


(500

)


(3,900

)


(4,300

)


1,200

 

Loss (gain) on debt retirement

 

901

 

(450

)

901

 

2,776

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

18,530

 

16,017

 

27,925

 

6,905

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

929

 

245

 

1,702

 

484

 

Interest expense

 

(4,628

)

(4,586

)

(9,209

)

(9,648

)

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations
before income taxes

 


14,831

 


11,676

 


20,418

 


(2,259

)

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

600

 

(11,400

)

900

 

(11,100

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

14,231

 

23,076

 

19,518

 

8,841

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations, net
of taxes

 


(751

)


356

 


(3,309

)


268

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$ 13,480

 

$ 23,432

 

$ 16,209

 

$ 9,109

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$ 0.19

 

$ 0.30

 

$ 0.25

 

$ 0.11

 

(Loss) income from discontinued operations

 

(0.01

)

0.01

 

(0.05

)

0.01

 

Basic income per share

 

$ 0.18

 

$ 0.31

 

$ 0.20

 

$ 0.12

 

 

 

 

 

 

 

 

 

 

 

Weighted shares for basic EPS

 

75,176

 

70,657

 

73,861

 

69,380

 

 

 

 

 

 

 

 

 

 

 

Diluted income (loss) per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$ 0.18

 

$ 0.29

 

$ 0.25

 

$ 0.11

 

(Loss) income from discontinued operations

 

(0.01

)

0.01

 

(0.05

)

0.00

 

Diluted income per share

 

$ 0.17

 

$ 0.30

 

$ 0.20

 

$ 0.11

 

 

 

 

 

 

 

 

 

 

 

Weighted shares for diluted EPS

 

76,042

 

72,253

 

74,756

 

71,152

 

See accompanying Notes to Consolidated Financial Statements.

 

1

 



 

 

CHAMPION ENTERPRISES, INC.

Consolidated Balance Sheets

(In thousands, except par value)

 

 

Unaudited
July 2, 2005

 

January 1, 2005

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

149,899

 

$

142,266

 

Restricted cash

 

 

528

 

 

529

 

Accounts receivable, trade

 

 

41,694

 

 

22,119

 

Inventories

 

 

80,886

 

 

71,616

 

Current assets of discontinued operations

 

 

9,780

 

 

35,463

 

Other current assets

 

 

13,736

 

 

13,535

 

Total current assets

 

 

296,523

 

 

285,528

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

198,397

 

 

207,216

 

Less-accumulated depreciation

 

 

120,190

 

 

126,259

 

 

 

 

78,207

 

 

80,957

 

 

 

 

 

 

 

 

 

Goodwill

 

 

126,564

 

 

126,591

 

Non-current assets of discontinued operations

 

 

4,701

 

 

7,747

 

Other non-current assets

 

 

13,371

 

 

16,219

 

 

$

519,366

 

$

517,042

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

 

33,673

 

 

13,819

 

Accrued warranty obligations

 

 

32,011

 

 

33,551

 

Accrued volume rebates

 

 

27,564

 

 

30,234

 

Accrued compensation and payroll taxes

 

 

20,264

 

 

19,659

 

Accrued self-insurance

 

 

26,797

 

 

25,988

 

Current liabilities of discontinued operations

 

 

5,422

 

 

21,411

 

Other current liabilities

 

 

29,984

 

 

31,696

 

Total current liabilities

 

 

175,715

 

 

176,358

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

Long-term debt

 

 

191,543

 

 

200,758

 

Long-term liabilities of discontinued operations

 

 

342

 

 

432

 

Other long-term liabilities

 

 

34,660

 

 

41,444

 

 

 

 

226,545

 

 

242,634

 

Contingent liabilities (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock,
no par value, 5,000 shares authorized, 0 shares
and 21 shares issued and outstanding, respectively

 

 



 

 



20,750

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Common stock, $1 par value, 120,000 shares authorized,
75,730 and 72,358 shares issued and outstanding, respectively

 

 


75,730

 

 


72,358

 

Capital in excess of par value

 

 

185,287

 

 

164,377

 

Accumulated deficit

 

 

(143,459

)

 

(159,375

)

Accumulated other comprehensive loss

 

 

(452

)

 

(60

)

Total shareholders’ equity

 

 

117,106

 

 

77,300

 

 

 

$

519,366

 

$

517,042

 

 

See accompanying Notes to Consolidated Financial Statements.

 

2

 



 

 

CHAMPION ENTERPRISES, INC.

Consolidated Statements of Cash Flows

(In thousands)

 

 

Unaudited
Six Months Ended

 

 

 

July 2,
2005

 

July 3,
2004

 

Cash flows from operating activities

 

 

 

 

 

 

 

Income from continuing operations

 

$

19,518

 

$

8,841

 

 

 

 

 

 

 

 

 

Adjustments to reconcile income from continuing operations
to net cash provided by (used for) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,063

 

 

5,342

 

Loss on debt retirement

 

 

901

 

 

2,776

 

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

 

 

(4,300

)

 

1,200

 

Gain on disposal of fixed assets

 

 

(1,599

)

 

(74

)

Decrease in allowance for tax adjustments

 

 

 

 

(12,000

)

Increase/decrease

 

 

 

 

 

 

 

Accounts receivable

 

 

(19,575

)

 

(16,150

)

Refundable income taxes

 

 

 

 

376

 

Inventories

 

 

(9,269

)

 

(17,776

)

Accounts payable

 

 

19,701

 

 

7,061

 

Accrued liabilities

 

 

(2,222

)

 

(6,025

)

Other, net

 

 

5,141

 

 

(1,343

)

Net cash provided by (used for) continuing operating activities

 

 

13,359

 

 

(27,772

)

 

 

 

 

 

 

 

 

Cash flows from discontinued operations

 

 

 

 

 

 

 

(Loss) income from discontinued operations

 

 

(3,309

)

 

268

 

Proceeds from sales of retail businesses

 

 

24,312

 

 

 

Change in net assets of discontinued operations

 

 

(12,232

)

 

(6,273

)

Net cash provided by (used for) discontinued operations

 

 

8,771

 

 

(6,005

)

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(5,290

)

 

(4,016

)

Investments in and advances to unconsolidated subsidiaries

 

 

(55

)

 

(109

)

Proceeds on disposal of fixed assets

 

 

5,056

 

 

203

 

Net cash used for investing activities

 

 

(289

)

 

(3,922

)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Decrease in floor plan payable, net

 

 

 

 

(29

)

Decrease in other long-term debt

 

 

(128

)

 

(5,939

)

Purchase of Senior Notes

 

 

(9,885

)

 

(10,395

)

Purchase of common stock warrant

 

 

(4,500

)

 

 

Decrease in restricted cash

 

 

1

 

 

7,710

 

Preferred stock issued, net

 

 

 

 

12,000

 

Common stock issued, net

 

 

597

 

 

4,512

 

Dividends paid on preferred stock

 

 

(293

)

 

(160

)

Net cash (used for) provided by financing activities

 

 

(14,208

)

 

7,699

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

7,633

 

 

(30,000

)

Cash and cash equivalents at beginning of period

 

 

142,266

 

 

145,868

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

149,899

 

$

115,868

 

 

See accompanying Notes to Consolidated Financial Statements.

 

3

 



 

 

CHAMPION ENTERPRISES, INC.

Consolidated Statement of Shareholders’ Equity

Unaudited Six Months Ended July 2, 2005

(In thousands)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Capital in

 

 

 

other

 

 

 

Total

 

 

 

Common stock

 

excess of

 

Accumulated

 

comprehensive

 

 

 

comprehensive

 

 

 

Shares

 

Amount

 

par value

 

Deficit

 

income (loss)

 

Total

 

income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2005

 

72,358

 

$

72,358

 

$

164,377

 

$

(159,375

)

$

(60

)

$

77,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

16,209

 

 

 

 

16,209

 

$

16,209

 

Preferred stock dividends

 

 

 

 

 

 

 

(293

)

 

 

 

(293

)

 

 

Stock options and
benefit plans

 


141

 

 


141

 

 


1,391

 

 


 

 


 

 


1,532

 

 


 

Issuance for acquisition
deferred purchase price
payments

 



171

 

 



171

 

 



1,829

 

 



 

 



 

 



2,000

 

 



 

Preferred stock conversion

 

3,060

 

 

3,060

 

 

17,690

 

 

 

 

 

 

20,750

 

 

 

 

Foreign currency translation
adjustments

 


 

 


 

 


 

 


 

 


(392

)

 


(392

)

 


(392)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at July 2, 2005

 

75,730

 

$

75,730

 

$

185,287

 

$

(143,459

)

$

(452

)

$

117,106

 

$

15,817

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

 

4

 



 

 

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.

 

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.

 

During the six months ended July 2, 2005, the Company sold 30 of its retail sales centers pursuant to a plan to dispose of the remainder of its retail operations except for its non-traditional retail operation in California. As a result retail operations, excluding this California operation, were classified as held for sale and, for the periods reported, 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.

 

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

 


 

July 2,
2005

 

 

 

July 3,
2004

 

 

 

(In thousands, except per share amounts)

 

Net income – as reported

 

$

13,480

 

 

 

$

23,432

 

Net income – pro forma

 

 

13,263

 

 

 

 

23,404

 

Basic income per share – as reported

 

 

0.18

 

 

 

 

0.31

 

Diluted income per share – as reported

 

 

0.17

 

 

 

 

0.30

 

Basic income per share – pro forma

 

 

0.18

 

 

 

 

0.30

 

Diluted income per share – pro forma

 

 

0.17

 

 

 

 

0.30

 

Stock-based employee compensation expense,
net of related tax effects – as reported

 

 


1,407

 

 

 

 


185

 

Stock-based employee compensation expense,
net of related tax effects – pro forma

 

$


1,624

 

 

 

$


213

 

 


 

Six Months Ended

 


 

July 2,
2005

 

 

 

July 3,
2004

 

 

 

(In thousands, except per share amounts)

 

Net income – as reported

 

$

16,209

 

 

 

$

9,109

 

Net income – pro forma

 

 

15,881

 

 

 

 

8,944

 

Basic income per share – as reported

 

 

0.20

 

 

 

 

0.12

 

Diluted income per share – as reported

 

 

0.20

 

 

 

 

0.11

 

Basic income per share – pro forma

 

 

0.20

 

 

 

 

0.11

 

Diluted income per share – pro forma

 

 

0.20

 

 

 

 

0.11

 

Stock-based employee compensation expense,
net of related tax effects – as reported

 

 


2,514

 

 

 

 


330

 

Stock-based employee compensation expense,
net of related tax effects – pro forma

 

$


$ 2,841

 

 

 

$


$ 495

 

 

 

5

 



 

 

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 fiscal years beginning after June 15, 2005. The Company 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 July 2, 2005. The effect of adopting the standard for the Company’s other stock-based compensation plans is not determinable. 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 relating to closures of manufacturing plants and retail sales centers.

 

 

 

 

Six Months Ended July 2, 2005

 



 

2004
Closures

 

Prior
Closures

 


Total

 

 

 

(In thousands)

 

Balance at beginning of year

 

$

810

 

$

3,611

 

$

4,421

 

Cash payments:

 

 

 

 

 

 

 

 

 

 

Warranty costs

 

 

 

 

(443

)

 

(443

)

Other closing costs

 

 

(528

)

 

(122

)

 

(650

)

Reversals credited to earnings:

 

 

 

 

 

 

 

 

 

 

Other closing costs

 

 

(190

)

 

(16

)

 

(206

)

Balance at July 2, 2005

 

$

92

 

$

3,030

 

$

3,122

 

 

 

 

 

 

 

 

 

 

 

 

Period end balance comprised of:

 

 

 

 

 

 

 

 

 

 

Warranty costs

 

$

 

$

2,149

 

$

2,149

 

Other closing costs

 

 

92

 

 

881

 

 

973

 

 

 

$

92

 

$

3,030

 

$

3,122

 

 

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 closing costs during the six months ended July 2, 2005 consisted of an adjustment to accruals for employee severance.

 

6

 



 

 

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

 

 

 

Six Months Ended

 

 

 

July 2,
2005

 

July 3,
2004

 

Continuing operations

 

(In thousands)

 

Statutory U.S. tax rate

 

$

7,200

 

$

(800

)

(Decrease) increase in rate resulting from:

 

 

 

 

 

 

 

Warrant mark-to-market and other permanent differences

 

 

(1,300

)

 

600

 

Deferred tax valuation allowance

 

 

(5,100

)

 

700

 

Decrease in allowance for tax adjustments

 

 

 

 

(12,000

)

Foreign and state taxes

 

 

100

 

 

400

 

Total income tax expense (benefit)

 

$

900

 

$

(11,100

)

 

 

 

Six Months Ended

 

 

 

July 2,
2005

 

July 3,
2004

 

Discontinued operations

 

(In thousands)

 

Statutory U.S. tax rate

 

$

(1,200

)

$

100

 

(Decrease) increase in rate resulting from:

 

 

 

 

 

 

 

Deferred tax valuation allowance

 

 

1,200

 

 

(100

)

Total income tax

 

$

 

$

 

 

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 certain future federal taxable income. These loss carryforwards expire in 2023 and 2024.

 

4.

A summary of inventories by component follows:

 

 

 

July 2,

 

January 1,

 

 

 

2005

 

2005

 

 

 

(In thousands)

 

New manufactured homes

 

$

22,547

 

$

18,749

 

Raw materials

 

 

29,107

 

 

30,908

 

Work-in-process

 

 

11,632

 

 

7,166

 

Other inventory

 

 

17,600

 

 

14,793

 

 

 

$

80,886

 

$

71,616

 

 

Other inventory consists of 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 primarily at the time of the manufacturing sale. Warranty provisions 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 six months ended July 2, 2005 and July 3, 2004. A portion of warranty reserves was classified as other long-term liabilities in the consolidated balance sheet.

 

 

7

 



 

 

 

 

 

Accrued Warranty Obligations

 

 

 

2005

 

2004

 

 

 

(In thousands)

 

Reserves at beginning of year

 

$

40,051

 

$

47,058

 

Warranty expense provided

 

 

24,365

 

 

24,302

 

Cash warranty payments

 

 

(25,905

)

 

(27,721

)

Reserves at end of quarter

 

$

38,511

 

$

43,639

 

 

6.

Long-term debt consisted of the following:

 

 

 

 

July 2,
2005

 

 

 

January 1,
2005

 

 

 

(In thousands)

 

7.625% Senior Notes due 2009

 

$

89,273

 

 

 

$

89,273

 

11.25% Senior Notes due 2007

 

 

88,430

 

 

 

 

97,510

 

Obligations under industrial revenue bonds

 

 

12,430

 

 

 

 

12,430

 

Other debt

 

 

1,410

 

 

 

 

1,545

 

 

 

$

191,543

 

 

 

$

200,758

 

 

During the quarter ended July 2, 2005, the Company purchased and retired $9.1 million of its Senior Notes due 2007 for cash payments of $9.9 million, resulting in a pretax loss of $0.9 million. During the quarter ended July 3, 2004, the Company purchased and retired $10.9 million of its Senior Notes due 2009 for cash payments of $10.4 million, resulting in a pretax gain of $0.5 million. During the first quarter of 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.

 

Champion Home Builders Co., a wholly-owned subsidiary of the Company, 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 July 2, 2005, availability under the facility was $61.6 million, there were $61.0 million of letters of credit issued and no borrowings outstanding, and the Company’s liquidity, as defined, was $138.5 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 January 1, 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

 

8

 



 

stock. Also at January 1, 2005, the preferred shareholder held a warrant that was issued by the Company, which was exercisable based on approximately 2.2 million shares at the strike price at April 2, 2005 of $12.27 per share. 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.

 

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 all of 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.

 

During the quarter and six months ended July 2, 2005, the Company recorded mark-to-market credits of $0.5 million and $4.3 million, respectively, for the change in estimated fair value of the warrant. During the quarter and six months ended July 3, 2004, the Company recorded mark-to-market adjustments of a $3.9 million credit and a $1.2 million charge, respectively.

 

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 July 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 $0.3 million and $0.2 million for the six months ended July 2, 2005 and July 3, 2004, respectively.

 

At July 2, 2005 the Company was contingently obligated for approximately $61.3 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 $29.9 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 July 2, 2005 certain of the Company’s subsidiaries were guarantors of $4.6 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.

 

 

9

 



 

 

9.     During the three and six months ended July 2, 2005 and July 3, 2004, the Company’s potentially dilutive securities consisted of outstanding stock options and awards, convertible preferred stock, a common stock warrant, and, in the 2004 periods, 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. A reconciliation of the numerators and denominators used in the Company’s basic and diluted EPS calculations follows:

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 2,
2005

 

July 3,
2004

 

July 2,
2005

 

July 3,
2004

 

Numerator

 

(In thousands)

 

Net income

 

$

13,480

 

$

23,432

 

$

16,209

 

$

9,109

 

Plus loss (less income) from discontinued operations

 

 


751

 

 


(356

)

 


3,309

 

 


(268

)

Less preferred stock dividend

 

 

(34

)

 

(259

)

 

(293

)

 

(419

)

Less amount allocated to participating
securities holders

 

 


(195

)

 


(1,594

)

 


(793

)

 


(545

)

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

 

 



14,002

 

 



21,223

 

 



18,432

 

 



7,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued operations

 

 


(751

)

 


356

 

 


(3,309

)

 


268

 

Less amount allocated to participating
securities

 

 


 

 


(25

)

 


 

 


(17

)

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

 

 



(751

)

 



331

 

 



(3,309

)

 

251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common
shareholders for basic and diluted EPS

 

 


$13,251

 

 


$21,554

 

 


$15,123

 

 


$8,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares for basic EPS--weighted average
shares outstanding

 

 


75,176

 

 


70,657

 

 


73,861

 

 


69,380

 

Plus effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred purchase price obligations

 

 

 

 

610

 

 

 

 

758

 

Stock options and awards

 

 

866

 

 

986

 

 

895

 

 

1,014

 

Shares for diluted EPS

 

 

76,042

 

 

72,253

 

 

74,756

 

 

71,152

 

 

 

10

 



 

 

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

 

 

 

July 2,
2005

 

July 3,
2004

 

Net sales

 

(In thousands)

 

Manufacturing

 

$

291,595

 

$

269,084

 

Retail

 

 

38,805

 

 

28,300

 

Less: intercompany

 

 

(13,300

)

 

(26,900

)

Consolidated net sales

 

$

317,100

 

$

270,484

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes:
Manufacturing segment income

 

 


$24,6

67

 


$17,5

67

Retail segment income

 

 

2,602

 

 

1,445

 

General corporate expenses

 

 

(8,738

)

 

(6,845

)

Mark-to-market credit for common stock warrant

 

 

500

 

 

3,900

 

(Loss) gain on debt retirement

 

 

(901

)

 

450

 

Interest expense, net

 

 

(3,699

)

 

(4,341

)

Intercompany eliminations

 

 

400

 

 

(500

)

Income from continuing operations before income taxes

 

$

14,831

 

$

11,676

 

 

 

 

Six Months Ended

 

 

 

July 2,
2005

 

July 3,
2004

 

Net sales

 

(In thousands)

 

Manufacturing

 

$

530,333

 

$

478,940

 

Retail

 

 

63,942

 

 

47,778

 

Less: intercompany

 

 

(32,900

)

 

(49,500

)

Consolidated net sales

 

$

561,375

 

$

477,218

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes:
Manufacturing segment income

 

 


$35,857

 

 


$22,221

 

Retail segment income

 

 

3,869

 

 

2,228

 

General corporate expenses

 

 

(16,800

)

 

(12,868

)

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

 

 

4,300

 

 

(1,200

)

Loss on debt retirement

 

 

(901

)

 

(2,776

)

Interest expense, net

 

 

(7,507

)

 

(9,164

)

Intercompany eliminations

 

 

1,600

 

 

(700

)

Income (loss) from continuing operations before income taxes

 

$

20,418

 

$

(2,259

)

 

11.    Discontinued operations include the Company’s traditional retail operations, excluding its California retail operations, and its former consumer finance business that was exited in 2003. For the three and six months ended July 2, 2005, revenues from discontinued retail operations were $6.2 million and $25.1 million, respectively. For the three and six months ended July 3, 2004, revenues from discontinued retail operations were $35.6 million and $66.0 million, respectively. (Loss) income from discontinued operations for the three and six months ended July 2, 2005 and July 3, 2004 consist of the following:

 

 

11

 



 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 2,
2005

 

July 3,
2004

 

July 2,
2005

 

July 3,
2004

 

 

 

(In thousands)

 

(Loss) income from retail operations

 

$

(739

)

$

388

 

$

(3,287

)

$

(849

)

(Loss) income from consumer finance business

 

 

(12

)

 

(32

)

 

(22

)

 

1,117

 

Total (loss) income from discontinued operations

 

$

(751

)

$

356

 

$

(3,309

)

$

268

 

 

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

 

 

 

 

 

July 2, 2005

 

 

 

January 1, 2005

 

 

 

 

(In thousands)

Assets:

 

 

 

 

 

 

 

 

 

 

Accounts receivable, trade

 

 

 

$

141

 

 

 

$

598

Inventories

 

 

 

 

9,167

 

 

 

 

33,964

Other current assets

 

 

 

 

472

 

 

 

 

901

Current assets of discontinued operations

 

 

 

$

9,780

 

 

 

$

35,463

Property, plant, and equipment, net

 

 

 

$

2,507

 

 

 

$

5,064

Other non-current assets

 

 

 

 

2,194

 

 

 

 

2,683

Non-current assets of discontinued

Operations

 

 

 

$

4,701

 

 

 

$

7,747

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Floor plan payable

 

 

 

$

29

 

 

 

$

11,835

Accounts payable

 

 

 

 

710

 

 

 

 

2,043

Other current liabilities

 

 

 

 

4,683

 

 

 

 

7,533

Current liabilities of discontinued operations

 

 

 

$

5,422

 

 

 

$

21,411

Long-term debt

 

 

 

$

342

 

 

 

$

432

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued retail operations for the six months ended July 2, 2005 included an operating loss of $2.1 million and a net loss of $1.2 million related to sales of 30 retail locations. In connection with the sales of retail businesses during 2005, intercompany profit of $1.4 million, which had been previously eliminated in consolidation, was recognized in the consolidated statement of operations and was not classified as discontinued operations. Retail assets sold consisted primarily of new homes and other inventory. The total sale price was cash of approximately $24.3 million and the buyers’ assumption of certain liabilities totaling approximately $1.2 million. In connection with these sales, the Company paid down $10.9 million of floor plan borrowings. On July 19, 2005, the Company’s remaining ten traditional retail locations were sold.

 

12.    During the quarter ended April 2, 2005, the Company issued 171,000 shares of common stock in payment of the final $2.0 million installment of deferred purchase price obligations. During the three and six months ended July 3, 2004, the Company issued 193,000 shares and 469,000 shares, respectively, of common stock in payment of deferred purchase price obligations of $2.0 million and $4.0 million, respectively. In addition, during the second quarter of 2004, the Company issued 29,000 shares of common stock in payment of preferred stock dividends totaling $0.3 million. During the first quarter of 2004, the Company purchased and retired $13.5 million of its Senior Notes due 2009 and $13.5 million of its Senior Notes due 2007 in exchange for 3.9 million shares of Company common stock.

 

 

12

 



 

 

13.    On July 18, 2005 the Company entered into an agreement to acquire New Era Building Systems, a leading modular homebuilder, and its affiliates, Castle Housing of Pennsylvania and Carolina Building Solutions, for cash consideration of $41 million and the assumption of certain liabilities, pending regulatory and the sellers’ shareholder approvals.

 

14.    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 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.

 

 

13

 



 

 

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Statement of Operations

For the Three Months Ended July 2, 2005

 

 

 

 

 

 

 

Guarantor

 

Non-guarantor

 

Consolidating

 

 

 

 

 

Parent

 

CHB

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Net sales

 

$

 

$

94,431

 

$

221,393

 

$

14,276

 

$

(13,000

)

$

317,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

78,780

 

 

184,910

 

 

11,237

 

 

(13,400

)

 

261,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

 

 

15,651

 

 

36,483

 

 

3,039

 

 

400

 

 

55,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and
administrative expenses

 

 


(111)

 

 


10,96

9

 


24,40

5

 


1,37

9

 


 

 


36,64

2

Mark-to-market credit for common stock warrant

 

 


(500)

 

 


 

 


 

 


 

 


 

 


(500)

 

Loss on debt retirement

 

 

 

 

901

 

 

 

 

 

 

 

 

901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

611

 

 

3,781

 

 

12,078

 

 

1,660

 

 

400

 

 

18,530

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1,743

 

 

1,766

 

 

4,261

 

 

97

 

 

(6,938

)

 

929

 

Interest expense

 

 

(1,743

)

 

(2,776

)

 

(7,025

)

 

 

 

6,916

 

 

(4,628

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from
continuing operations
before income taxes

 

 


611

 

 


2,771

 

 


9,314

 

 


1,757

 

 


378

 

 


14,831

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

 

50

 

 

550

 

 

 

 

600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

611

 

 

2,771

 

 

9,264

 

 

1,207

 

 

378

 

 

14,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from discontinued
operations

 

 


 

 


 

 


(989

)

 


216

 


22

 


(751

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before equity
in income of
consolidated
subsidiaries

 

 


611

 

 


2,771

 

 


8,275

 

 


1,423

 

 


400

 

 


13,480

 

Equity in income of
consolidated
subsidiaries

 

 


12,469

 

 


9,698

 

 


 

 


 

 


(22,167

)

 


 

Net income

 

$

13,080

 

$

12,469

 

$

8,275

 

$

1,423

 

$

(21,767

)

$

13,480

 

 

 

 

14

 



 

 

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Statement of Operations

For the Six Months Ended July 2, 2005

 

 

 

 

 

 

 

 

Guarantor

 

Non-guarantor

 

Consolidating

 

 

 

 

 

Parent

 

CHB

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(In thousands)

 

Net sales

 

$

 

$

169,239

 

$

399,906

 

$

24,230

 

$

(32,000

)

$

561,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

143,176

 

 

339,348

 

 

19,614

 

 

(33,600

)

 

468,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

 

 

26,063

 

 

60,558

 

 

4,616

 

 

1,600

 

 

92,837

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general,
and administrative
expenses

 

 


(1)

 

 


20,99

5

 


44,61

0

 


2,70

7

 


 

 


68,31

1

Mark-to-market credit
for common stock
warrant

 

 


(4,300)

 

 


 

 


 

 


 

 


 

 


(4,300)

 

Loss on debt
retirement

 

 

 

 

901

 

 

 

 

 

 

 

 

901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

4,301

 

 

4,167

 

 

15,948

 

 

1,909

 

 

1,600

 

 

27,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

3,458

 

 

3,458

 

 

1,514

 

 

188

 

 

(6,916

)

 

1,702

 

Interest expense

 

 

(3,458

)

 

(5,559

)

 

(7,108

)

 

 

 

6,916

 

 

(9,209

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from
continuing operations
before income taxes

 

 


4,301

 

 


2,066

 

 


10,354

 

 


2,097

 

 


1,600

 

 


20,418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

 

 

100

 

 

800

 

 

 

 

900

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from
continuing operations

 

 


4,301

 

 


2,066

 

 


10,254

 

 


1,297

 

 


1,600

 

 


19,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from
discontinued
operations

 

 


 

 


 

 


(3,251)

 

 


(58)

 

 


 

 


(3,309)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before equity
in income of
consolidated
subsidiaries

 

 


4,301

 

 


2,066

 

 


7,003

 

 


1,239

 

 


1,600

 

 


16,209

 

Equity in income of
consolidated
subsidiaries

 

 


10,308

 

 


8,242

 

 


 

 


 

 


(18,550

)

 


 

Net income

 

$

14,609

 

$

10,308

 

$

7,003

 

$

1,239

 

$

(16,950

)

$

16,209

 

 

 

 

 

 

 

 

15

 



 

 

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Balance Sheet

As of July 2, 2005

 

 

 

Parent

 

CHB

 

Guarantor
Subsidiaries

 

Non-guarantor
Subsidiaries

 

Consolidating
Eliminations

 

Consolidated

 

Assets

 

(In thousands)

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

124,799

 

$

6,387

 

$

18,712

 

$

1

 

$

149,899

 

Restricted cash

 

 

 

 

294

 

 

234

 

 

 

 

 

 

528

 

Accounts receivable, trade

 

 

 

 

13,953

 

 

27,907

 

 

1,589

 

 

(1,755

)

 

41,694

 

Inventories

 

 

 

 

17,001

 

 

63,612

 

 

3,073

 

 

(2,800

)

 

80,886

 

Current assets of

discontinued operations

 

 

 

 

 

 

 

9,780

 

 

 

 

 

 

9,780

 

Other current assets

 

 

 

 

9,791

 

 

3,627

 

 

418

 

 

(100

)

 

13,736

 

Total current assets

 

 

 

 

165,838

 

 

111,547

 

 

23,792

 

 

(4,654

)

 

296,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and

equipment, net

 

 

 

 

26,528

 

 

49,320

 

 

2,359

 

 

 

 

78,207

 

Goodwill

 

 

 

 

 

 

125,783

 

 

781

 

 

 

 

126,564

 

Investment in consolidated

subsidiaries

 

 

20,100

 

 

310,393

 

 

162,379

 

 

6,788

 

 

(499,660

)

 

 

Non-current assets of

discontinued operations

 

 

 

 

 

 

4,701

 

 

 

 

 

 

4,701

 

Other non-current assets

 

 

535

 

 

1,748

 

 

3,360

 

 

7,728

 

 

 

 

13,371

 

 

 

$

20,635

 

$

504,507

 

$

457,090

 

$

41,448

 

$

(504,314

)

$

519,366

 

Liabilities, Redeemable Convertible Preferred Stock and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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