1
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 QUARTER ENDED JUNE 30, 2001
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
2701 Cambridge Court, Suite 300, Auburn Hills, MI 48326
- -------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
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.
47,948,527 shares of the registrant's $1.00 par value Common Stock were
outstanding as of August 3, 2001.
Page 1 of 16
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CHAMPION ENTERPRISES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
<Table>
<Caption>
Unaudited Unaudited
Three Months Ended Six Months Ended
--------------------- ----------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
--------- --------- --------- -----------
Net sales $428,202 $533,211 $ 754,514 $1,068,520
Cost of sales 351,791 447,791 633,295 899,129
--------- --------- ---------- -----------
Gross margin 76,411 85,420 121,219 169,391
Selling, general and
administrative expenses 68,839 73,254 148,402 148,055
--------- --------- ---------- -----------
Operating income (loss) 7,572 12,166 (27,183) 21,336
Interest expense, net 5,782 6,844 12,210 13,813
--------- --------- ---------- -----------
Income (loss) before income taxes 1,790 5,322 (39,393) 7,523
Income taxes (benefits) 1,300 2,500 (13,800) 3,400
--------- --------- ---------- -----------
Net income (loss) $ 490 $ 2,822 $ (25,593) $ 4,123
========= ========= ========== ===========
Basic earnings (loss) per share $ 0.01 $ 0.06 $ (0.54) $ 0.09
========= ========= ========== ===========
Weighted shares for basic EPS 47,847 47,255 47,672 47,251
========= ========= ========== ===========
Diluted earnings (loss) per share $ 0.01 $ 0.06 $ (0.54) $ 0.09
========= ========= ========== ===========
Weighted shares for diluted EPS 49,508 47,337 47,672 47,346
========= ========= ========== ===========
See accompanying Notes to Consolidated Financial Statements.
Page 2 of 16
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CHAMPION ENTERPRISES, INC.
Consolidated Balance Sheets
(In thousands, except par value)
Unaudited
June 30, December 30,
2001 2000
----------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 35,892 $ 50,143
Accounts receivable, trade 65,681 31,132
Inventories 182,231 217,765
Deferred taxes and other current assets 77,181 77,493
----------- -----------
Total current assets 360,985 376,533
----------- -----------
PROPERTY AND EQUIPMENT
Cost 308,227 320,873
Less-accumulated depreciation 120,989 113,596
----------- -----------
187,238 207,277
----------- -----------
GOODWILL
Cost 320,590 320,656
Less-accumulated amortization 52,432 46,686
----------- -----------
268,158 273,970
----------- -----------
DEFERRED TAXES AND OTHER ASSETS 79,999 84,276
----------- -----------
Total assets $ 896,380 $ 942,056
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Floor plan payable $ 85,074 $ 114,198
Accounts payable 69,852 43,103
Accrued warranty obligations 47,081 49,304
Accrued volume rebates 39,489 45,552
Accrued compensation and payroll taxes 21,688 19,034
Other current liabilities 79,421 71,662
----------- -----------
Total current liabilities 342,605 342,853
----------- -----------
LONG-TERM LIABILITIES
Long-term debt 225,286 225,634
Deferred portion of purchase price 20,000 39,157
Other long-term liabilities 35,843 37,603
----------- -----------
281,129 302,394
----------- -----------
CONTINGENT LIABILITIES (Note 6)
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 5,000 shares
authorized, none issued - -
Common stock, $1 par value, 120,000 shares
authorized, 47,947 and 47,357 shares issued
and outstanding, respectively 47,947 47,357
Capital in excess of par value 33,980 33,116
Retained earnings 192,057 217,650
Accumulated other comprehensive income (1,338) (1,314)
----------- -----------
Total shareholders' equity 272,646 296,809
----------- -----------
Total liabilities and shareholders' equity $ 896,380 $ 942,056
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
Page 3 of 16
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CHAMPION ENTERPRISES, INC.
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
Six Months Ended
--------------------
June 30, July 1,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(25,593) $ 4,123
--------- ---------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 18,337 19,957
Fixed asset impairment charges 6,500 -
Increase/decrease
Accounts receivable (34,549) (6,455)
Inventories 35,534 16,588
Accounts payable 26,749 17,806
Accrued liabilities (1,672) (6,682)
Net cash charges to independent retailer
bankruptcy reserve - (4,126)
Other, net 3,097 (6,613)
--------- ---------
Total adjustments 53,996 30,475
--------- ---------
Net cash provided by operating activities 28,403 34,598
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred and contingent purchase price payments (10,233) (10,165)
Additions to property and equipment (3,229) (9,159)
Investments in and advances to
unconsolidated subsidiaries (1,819) (552)
Proceeds on disposal of fixed assets 1,494 2,179
--------- ---------
Net cash used for investing activities (13,787) (17,697)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in floor plan payable, net (29,124) (7,833)
Repayment of long-term debt (333) (624)
Common stock issued, net 590 49
Common stock repurchased - (863)
--------- ---------
Net cash used for financing activities (28,867) (9,271)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (14,251) 7,630
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 50,143 12,847
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35,892 $ 20,477
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 16
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CHAMPION ENTERPRISES, INC.
Notes to Consolidated Financial Statements
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. 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 30, 2000 was derived from audited financial statements.
Accumulated other comprehensive income consists of foreign currency
translation adjustments.
Prior year manufacturing segment delivery revenue has been reclassified
to net sales from cost of sales in accordance with the Financial
Accounting Standards Board (FASB) Emerging Issues Task Force No. 00-10
"Accounting for Shipping and Handling Fees and Costs," which was
adopted by the Company in the fourth quarter of 2000.
2. For each of the dates indicated, inventories consisted of the following
(in thousands):
June 30, December 30,
2001 2000
---------- -------------
New and pre-owned manufactured homes $114,751 $143,892
Raw materials and work-in-process 41,626 44,980
Other inventory 25,854 28,893
---------- -----------
$182,231 $217,765
========== ===========
3. The income tax provision (benefit) differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income
tax rate to pretax income (loss) as a result of the following
differences (in thousands):
Six Months Ended
---------------------------
June 30, July 1,
2001 2000
--------- ----------
Statutory U.S. tax rate $(13,800) $ 2,600
Change in rate resulting from:
State taxes, net (1,000) 200
Other 1,000 600
--------- ----------
Total provision (benefit) $(13,800) $ 3,400
========= ==========
Effective tax rate 35% 45%
========= ==========
4. The Company has a revolving credit agreement, maturing in May 2003,
with a group of banks for a $75 million secured line of credit. The
facility may be increased to $90 million upon a majority vote of the
bank group. The agreement allows for letters of credit up to $35
million. Availability under the credit agreement is limited to a
borrowing base calculated based on qualifying assets. For the second
quarter of 2001, the calculated borrowing base averaged $73 million and
the June 2001 calculated borrowing base was $75 million. As of June 30
2001, the Company had no cash borrowings and $35 million of letters of
credit outstanding under the facility.
Page 5 of 16
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5. Reconciliations of segment sales to consolidated sales and segment
EBITA (earnings (loss) before interest, taxes, goodwill amortization
and general corporate expenses) to consolidated operating income (loss)
follow (in thousands):
Three Months Ended
------------------------
June 30, July 1,
2001 2000
---------- -----------
Net sales
Manufacturing $ 351,199 $ 439,277
Retail 129,403 166,934
Less: intercompany (52,400) (73,000)
---------- -----------
Consolidated net sales $ 428,202 $ 533,211
========== ===========
Operating income
Manufacturing EBITA $ 19,372 $ 19,917
Retail EBITA (loss) (1,817) 4,225
General corporate expenses (7,101) (6,999)
Intercompany profit elimination - 3,500
Loss from independent retailer bankruptcy - (5,000)
Goodwill amortization (2,882) (3,477)
---------- -----------
Consolidated operating income $ 7,572 $ 12,166
========== ===========
Six Months Ended
------------------------
June 30, July 1,
2001 2000
---------- -----------
Net sales
Manufacturing $ 611,709 $ 875,079
Retail 237,805 334,441
Less: intercompany (95,000) (141,000)
---------- -----------
Consolidated net sales $ 754,514 $1,068,520
========== ===========
Operating income (loss)
Manufacturing EBITA $ 8,916 $ 33,015
Retail EBITA (loss) (16,655) 9,480
General corporate expenses (13,683) (12,753)
Intercompany profit elimination - 3,500
Loss from independent retailer bankruptcy - (5,000)
Goodwill amortization (5,761) (6,906)
---------- -----------
Consolidated operating income (loss) $ (27,183) $ 21,336
========== ===========
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. In the three and six months ended July 1, 2000, manufacturing
EBITA includes $1.7 million of employee termination benefits paid upon
the closure of three homebuilding facilities and a $4.4 million gain
from a property insurance settlement. Retail floor plan interest
expense not charged to retail EBITA totaled $2.2 million and $4.9
million for the three and six months ended June 30, 2001 and $3.2
million and $6.6 million for the three and six months ended July 1,
2000, respectively.
Page 6 of 16
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6. 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 repurchase obligation at June 30, 2001
was $320 million, without reduction for the resale value of the homes.
This amount compares to $430 million at the beginning of the year and
$560 million a year ago. Losses incurred upon the repurchase of homes
totaled $3.3 million for the six months ended June 30, 2001 and $2.0
million for the same period a year ago.
At June 30, 2001 the Company was contingently obligated for additional
purchase price of up to $80 million related to its 1999 and 1998
acquisitions. Management currently believes that payment of none of
this contingent purchase price is reasonably possible.
Champion is contingently obligated for approximately $35 million under
letters of credit and $48 million under surety bonds as of June 30,
2001.
7. During the quarter ended June 30, 2001, Champion closed two
homebuilding facilities, resulting in non-cash fixed asset impairment
charges of $1.0 million which were recorded in selling, general and
administrative expenses. For the year-to-date period, non-cash fixed
asset impairment charges and lease termination and other costs related
to closed operations totaled $9.7 million.
8. Substantially all of the Company's subsidiaries are guarantors of
indebtedness under the $200 million Senior Notes. Separate financial
statements for each guarantor subsidiary are not included in this
filing because each guarantor subsidiary is fully, unconditionally,
jointly and severally liable for the Senior Notes. In addition, the
parent company issuer has no independent assets or operations and the
non-guarantor subsidiaries of the Company, individually or in the
aggregate, are minor in relation to consolidated totals of the Company.
There are no significant restrictions on the ability of the parent
company or any guarantor subsidiary to obtain funds from its
subsidiaries by dividend or loan.
9. During June 2001, Champion restructured the payment terms of a deferred
purchase price liability totaling $32 million that was originally
scheduled for payment in cash in June 2002. In July, 2001 $6 million of
the obligation was paid in cash. The remaining $26 million is due in
quarterly installments of $2 million without interest, and is payable,
at Champion's option, in cash or common stock. A payment is not due
following the quarter ended March 2002.
Page 7 of 16
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10. Subsequent to quarter end, Champion issued $20 million of a newly
designated class of convertible preferred stock. The preferred stock
has a seven-year term with a 5% annual dividend, which is payable in
either cash or common stock, at Champion's option, and is convertible
into common stock at a conversion price of $15.93 per share during the
first six months. Six months after issuance the conversion price will
be adjusted to 120% of the common stock's market value, subject to
certain limitations. Following 24 months of issuance, the preferred
stock is redeemable by the investor in either cash or common stock at
the Company's option. At the investor's option, an additional $12
million of preferred stock can be purchased over the next 21 months on
similar terms.
11. In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets," which requires that goodwill not be amortized but
instead be tested for impairment based on a reporting unit's fair value
versus its carrying value. During the third and fourth quarters of
2001, the Company will perform the transitional impairment tests
required in order to determine each reporting unit's fair value, and
thus the impact to the Company's financial statements. Champion will
adopt SFAS 142 in January 2002. The adoption of this pronouncement will
eliminate goodwill amortization expense, which currently approximates
$0.18 per diluted share annually or $0.045 per quarter.
Page 8 of 16
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
CHAMPION ENTERPRISES, INC.
THREE AND SIX MONTHS ENDED JUNE 30, 2001
VERSUS THREE AND SIX MONTHS ENDED JULY 1, 2000
CONSOLIDATED
(Dollars in millions)
Three Months Ended
---------------------
June 30, July 1, %
2001 2000 Change
--------- --------- ------
Net sales
Manufacturing $ 351.2 $ 439.3 (20%)
Retail 129.4 166.9 (22%)
Less: intercompany (52.4) (73.0)
--------- ---------
Total net sales $ 428.2 $ 533.2 (20%)
========= =========
Gross margin $ 76.4 $ 85.4 (11%)
SG&A 68.8 73.2 (6%)
--------- ---------
Operating income $ 7.6 $ 12.2
========= =========
As a percent of sales
Gross margin 17.8% 16.0%
SG&A 16.1% 13.7%
Operating income 1.8% 2.3%
Six Months Ended
---------------------
June 30, July 1, %
2001 2000 Change
--------- --------- ------
Net sales
Manufacturing $ 611.7 $ 875.1 (30%)
Retail 237.8 334.4 (29%)
Less: intercompany (95.0) (141.0)
--------- ---------
Total net sales $ 754.5 $1,068.5 (29%)
========= =========
Gross margin $ 121.2 $ 169.4 (28%)
SG&A 148.4 148.1 -
--------- ---------
Operating income (loss) $ (27.2) $ 21.3
========= =========
As a percent of sales
Gross margin 16.1% 15.9%
SG&A 19.7% 13.9%
Operating income (loss) (3.6%) 2.0%
Consolidated revenues decreased 20% for the quarter and 29% year-to-date. The
effects of challenging industry conditions, including tightened consumer credit
standards and high consumer repossession levels continue to impact net sales. As
a result of these conditions we are operating fewer manufacturing facilities and
retail sales centers than a year ago. During the past twelve months we have
closed and consolidated eight manufacturing facilities and 83 sales centers.
Gross margin dollars for the three and six months ended June 30, 2001 were $9
million and $48 million less than in 2000, respectively. The decrease in gross
margin dollars for the quarter is due to the $105 million decline in
consolidated net sales, partially offset by reduced material cost of sales and
the net effect of the following items that occurred last year. Gross margin
dollars for the three months ended July 1, 2000 included a $5 million charge for
additional write down of the repurchased homes from the 1999 independent
retailer bankruptcy and $1.7 million of employee termination benefits paid
Page 9 of 16
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upon the closure of three homebuilding facilities, partially offset by a $3.5
million reduction in the intercompany profit in inventory as a result of lower
manufacturing margins and declining inventories at the retail segment. Second
quarter 2001 gross margin as a percent of sales improved versus the prior year
primarily due to the prior year items mentioned above and current quarter lower
material costs. The decrease in gross margin dollars for the six months is
primarily due to the $314 million decline in consolidated net sales partially
offset by lower material costs in the current period and the second quarter 2000
items discussed above.
Second quarter 2001 selling, general and administrative expenses ("SG&A")
include a $1 million non-cash fixed asset impairment charge due to the closure
of two manufacturing facilities, but are lower than in 2000 due to operating
fewer homebuilding facilities and sales centers and the reduction in sales. SG&A
for the three months ended July 1, 2000 were reduced by a $4.4 million gain from
a property insurance settlement. The increase in quarterly SG&A as a percentage
of sales is also due to these items plus the impact of lower sales on fixed SG&A
costs. SG&A for the six month period ended June 30, 2001 was comparable to the
prior year. Lower SG&A in the current year from operating fewer manufacturing
facilities and sales centers and the reduction in sales was offset by $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 and the prior year gain of $4.4 million.
MANUFACTURING OPERATIONS
Three Months Ended
--------------------
June 30, July 1, %
2001 2000 Change
------- ------- -------
Net sales (in millions) $ 351.2 $ 439.3 (20%)
EBITA (in millions) $ 19.4 $ 19.9 (3%)
EBITA margin % 5.5% 4.5%
Homes sold 10,918 14,961 (27%)
Floors sold 19,516 25,609 (24%)
Multi-section mix 76% 69%
Average home price $30,800 $28,100 10%
Six Months Ended
--------------------
June 30, July 1, %
2001 2000 Change
------- ------- -------
Net sales (in millions) $ 611.7 $ 875.1 (30%)
EBITA (in millions) $ 8.9 $ 33.0 (73%)
EBITA margin % 1.5% 3.8%
Homes sold 19,128 30,312 (37%)
Floors sold 34,212 51,310 (33%)
Multi-section mix 76% 67%
Average home price $30,700 $27,600 11%
Manufacturing facilities at period end 49 57 (14%)
Manufacturing sales declined 20% and 30% for the three and six month periods
ended June 30, 2001, respectively. Challenging market conditions continue to
affect sales volume with Champion's wholesale homes and floors sold declining
36.9% and 33.3% this year versus the same period last year. According to data
reported by the National Conference of States on Building Codes and Standards,
U.S. industry wholesale shipments for the first half of 2001 decreased 34.7% in
homes and 32.0% in floors from the comparable 2000 period. Our average home
wholesale price increased 10% versus the same quarter last year, primarily due
to the increase in multi-section mix. Of our total wholesale shipments for the
quarter, 87% were to independent retailers and 13% were to company-operated
sales centers. Due to market conditions, we closed two manufacturing facilities
in this year's second quarter in addition to two facilities we closed in the
first quarter.
Page 10 of 16
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Second quarter manufacturing EBITA declined only 3% despite a 20% decline in
sales. Manufacturing EBITA for the second quarter 2001 was favorably affected by
lower material costs, partially offset by a $1 million fixed asset impairment
charge from the closure of two manufacturing facilities. Segment EBITA for the
three months ended July 1, 2000 includes $1.7 million of employee termination
benefits paid upon the closure of three homebuilding facilities and a $4.4
million gain from a property insurance settlement.
Segment EBITA has declined by $24 million or 73% for the six months ended June
30, 2001 versus the same period in 2000 primarily due to lower gross margin
dollars from the 30% reduction in manufacturing sales, $3.3 million of fixed
asset impairment charges for the closure of four homebuilding facilities and the
prior year $4.4 million insurance settlement gain. These items are partially
offset by reduced material costs in the current period and the prior year $1.7
million charge for employee termination costs. EBITA margins as a percentage of
sales have declined for the same reasons mentioned above.
Although dealer orders can be cancelled at anytime without penalty, and unfilled
orders are not necessarily an indication of future business, the Company's
unfilled orders for wholesale housing at June 30, 2001 totaled approximately $43
million, compared to $15 million at December 30, 2000 and $28 million a year
ago.
RETAIL OPERATIONS
Three Months Ended
---------------------
June 30, July 1, %
2001 2000 Change
--------- --------- ---------
Net sales (in millions) $ 129.4 $ 166.9 (22%)
EBITA (loss) (in millions) $ (1.8) $ 4.2 (143%)
EBITA margin % (1.4%) 2.5%
New homes sold 2,183 3,176 (31%)
Pre-owned homes sold 529 713 (26%)
Total homes sold 2,712 3,889 (30%)
% Champion-produced new homes sold 86% 69%
New multi-section mix 72% 61%
Average new home price $ 55,900 $ 49,700 12%
Average number of new homes sold
per sales center per month 3.2 3.7 (14%)
Six Months Ended
---------------------
June 30, July 1, %
2001 2000 Change
--------- --------- ---------
Net sales (in millions) $ 237.8 $ 334.4 (29%)
EBITA (loss) (in millions) $ (16.7) $ 9.5 (276%)
EBITA margin % (7.0%) 2.8%
New homes sold 4,007 6,491 (38%)
Pre-owned homes sold 1,042 1,619 (36%)
Total homes sold 5,049 8,110 (38%)
% Champion-produced new homes sold 85% 69%
New multi-section mix 71% 59%
Average new home price $ 55,700 $ 48,500 15%
Average number of new homes sold
per sales center per month 2.8 3.8 (26%)
Average number of new homes in
inventory per sales center
at period end 15 18 (17%)
Sales centers at period end 230 291 (21%)
Retail sales decreased 22% and 29% for the three and six month periods ended
June 30, 2001, respectively. The sales decline is primarily due to challenging
industry conditions and a decline in the number of sales centers. We operated
230 sales centers at June 30, 2001 compared to 291 one year ago.
Page 11 of 16
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Based on data reported by Statistical Surveys, Inc., we believe that industry
retail sales of new homes in the first five months of 2001 dropped approximately
37% from prior year levels. Our average new home selling price increased by 12%
versus the same quarter last year, primarily due to the sale of a greater
proportion of higher-priced, multi-section homes.
Retail EBITA for the quarter ended June 30, 2001 declined $6 million compared to
the same quarter last year primarily due to reduced gross margin from the $38
million reduction in retail sales. In addition, retail segment gross margin as a
percentage of sales has decreased due to the Company's efforts to reduce
inventory and sell older homes. Our company-owned stores have reduced the
average number of new homes in inventory per sales center to 15 new homes at
June 30, 2001 compared to 18 new homes last quarter and a year ago. Retail EBITA
for the six months ended June 30, 2001 decreased by $26 million compared to the
same period a year ago. The decline in the segment margin is primarily due to
the $97 million reduction in sales and $5.4 million of costs to close 30 sales
centers. Additionally, reduced income from loan origination fees, insurance and
other commissions as a result of lower sales volume impacted margins.
REPURCHASE OBLIGATIONS
The Company enters into repurchase agreements with lending institutions that
provide wholesale floor plan financing to independent retailers. At June 30,
2001 the maximum contingent repurchase obligation was approximately $320
million, without reduction for the resale value of the homes. For the six months
ended June 30, 2001, Champion paid $17.0 million and incurred losses of $3.3
million for the repurchase of 562 homes resulting from defaults by independent
retail companies. In the same period last year, the Company incurred losses of
$2.0 million and paid $6.4 million for the repurchase of 220 homes.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $36 million at June 30, 2001. For the six months ended
June 30, 2001, cash provided by operations was $28 million. Expenditures during
2001 included $3 million for capital improvements, $10 million for payments
related to 1998 acquisitions, and $2 million for investments in and advances to
unconsolidated subsidiaries. Approximately $29 million was used to reduce the
Company's floor plan payable.
During 2001, accounts receivable and accounts payable increased due to
seasonality and year end levels generally being low due to the holidays and
vacations. Inventories and floor plan payable decreased during the six month
period ended June 30, 2001 due to continued efforts to reduce inventories
throughout our retail organization in response to industry conditions.
The Company has a $75 million revolving credit agreement, maturing in May 2003,
with a group of banks. The facility may be increased to $90 million upon a
majority vote of the bank group. The agreement allows for letters of credit up
to $35 million. Availability under the credit agreement is limited to a
borrowing base calculated based on qualifying assets. For the second quarter of
2001, the calculated borrowing base averaged $73 million and the June 2001
calculated borrowing base was $75 million. At the end of June 2001, there were
$35 million of letters of credit and no cash borrowings outstanding under the
credit facility, resulting in loan availability of $40 million. Through June
2001, we were in compliance with the agreement's financial performance covenants
and believe that we will be in compliance throughout 2001.
In June 2001 we restructured the payment terms of a deferred purchase price
liability totaling $32 million that was originally scheduled for payment in cash
in June 2002. In July 2001, $6 million of the obligation was paid in
Page 12 of 16
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cash. The remaining $26 million is due in quarterly installments of $2 million
without interest, and is payable, at our option, in cash or common stock. A
payment is not due following the quarter ended March 2002.
In July 2001 Champion issued $20 million of a newly designated class of
convertible preferred stock. The preferred stock has a seven-year term with a 5%
annual dividend, which is payable in either cash or common stock, at Champion's
option, and is convertible into common stock at a conversion price of $15.93 per
share during the first six months. Six months after issuance the conversion
price will be adjusted to 120% of the common stock's market value, subject to
certain limitations. Following 24 months of issuance, the preferred stock is
redeemable by the investor in either cash or common stock at the Company's
option. At the investor's option, an additional $12 million of preferred stock
can be purchased over the next 21 months on similar terms.
Champion plans to spend less than $10 million in 2001 on capital expenditures.
Borrowings under the bank credit facility may be necessary in the future for
capital improvements and to meet seasonal working capital needs. The Company
does not plan to pay cash dividends in the near term.
Currently, there are five primary national floor plan lenders, which finance a
substantial portion of floor plan borrowings of Company-owned and independent
retailers. We finance most of the new home inventory at our Company-owned stores
through borrowings from floor plan lenders.
Conseco Finance (Conseco) is our primary floor plan lender, with $59 million of
borrowings outstanding at the end of the quarter. In March 2001, we reached an
agreement with Conseco to reduce our floor plan borrowings with them to $60
million by June 30, 2001 and $40 million by September 30, 2001. Since June 2000
we have reduced our floor plan borrowings with Conseco by over $60 million
through inventory reductions and proceeds from new floor plan lines of credit
with two other financial institutions. Additional reductions of Conseco floor
plan borrowings will occur by reducing inventory, obtaining additional financing
from other lenders and using cash from operations.
The Company believes that its cash balances, including the proceeds from the
July 2001 preferred stock issuance, cash flows from operations and availability
under its bank line of credit facility and floor plan arrangements will be
adequate to meet its anticipated financing needs, operating requirements and
capital expenditures for the next twelve months. We are seeking alternative
finance sources in order to further reduce our floor plan borrowings with
Conseco. We may also seek additional sources of capital. However, there can be
no assurance that we will be able to secure additional floor plan borrowings or
additional capital. In the event the Company is required to further reduce its
total floor plan borrowings or the availability under its credit facility or
operating cash flow is insufficient to finance its operations and alternative
financing or capital is unavailable, there could be an adverse impact on our
liquidity.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report, including the Company's plans,
anticipated capital expenditures, new market initiatives, and the adequacy of
cash to meet financing needs, could be construed as forward looking statements
within the meaning of the Securities Exchange Act of 1934. In addition, Champion
or persons acting on its behalf may from time to time publish or communicate
other items which could also be construed to be forward looking statements.
Statements of this sort are or will be based on the Company's estimates,
assumptions and projections, and are subject to risks and uncertainties,
including those contained in Champion's most recently filed Annual Report on
Form 10-K, that could cause actual results to differ materially from those
included in the forward looking statements.
Page 13 of 16
14
If one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect, actual results may vary materially from those
expected, estimated or projected. The Company does not undertake to update its
forward looking statements or risk factors to reflect future events or
circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's floor plan borrowings at June 30, 2001 were $85 million and
are subject to interest primarily based on the U.S. prime interest rate. A 100
basis point increase in the prime rate would result in additional annual
interest cost of $0.9 million, assuming average floor plan borrowings of $85
million.
Page 14 of 16
15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On May 1, 2001 the registrant held its 2001 Annual Meeting of
Shareholders at which the following matters were submitted to a vote of security
holders with results as follows:
1. Election of Directors
Nominee Votes For Votes Withheld
------- ---------- --------------
Robert W. Anestis 36,793,656 4,866,666
Selwyn Isakow 36,869,436 4,790,886
Brian D. Jellison 41,030,666 629,656
Ellen R. Levine 41,001,961 658,361
George R. Mrkonic 36,817,952 4,842,370
Carl L. Valdiserri 36,838,876 4,821,446
Walter R. Young 36,782,257 4,878,065
2. Proposal to Re-approve the Performance Goals Under the 1995 Stock
Option and Incentive Plan
Votes for - 37,363,848
Votes against - 4,233,146
Votes withheld/abstentions - 63,328
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
Exhibit No. Description
- ----------- -----------
11 Statement Regarding Computation of Per Share Earnings.
(b) On April 18, 2001; May 16, 2001; June 19, 2001; July 9, 2001 and July
19, 2001 Champion filed current reports on Form 8-K.
Page 15 of 16
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHAMPION ENTERPRISES, INC.
By: /s/ ANTHONY S. CLEBERG
----------------------------
Anthony S. Cleberg
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
And: /s/ RICHARD HEVELHORST
-----------------------------
Richard Hevelhorst
Vice President and Controller
(Principal Accounting Officer)
Dated: August 9, 2001
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Exhibit Index
Exhibit No. Description
- ----------- -----------
11 Statement Regarding Computation of Per Share Earnings.