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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2000 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, Michigan 48326
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 340-9090
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $1 par value New York Stock Exchange
Series A Preferred Stock Chicago Stock Exchange
Purchase Rights Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 such shorter period that the Registrant has been
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 9, 2001, based on the last sale price of $5.11 per share
for the Common Stock on the New York Stock Exchange on such date, was
approximately $104,940,759. As of March 9, 2001, the Registrant had 47,544,011
shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Report
Document into which it is incorporated
Proxy Statement for Annual Shareholders' Meeting
to be held May 1, 2001 ....................... III
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PART I
ITEM 1. BUSINESS.
General
Established in 1953, Champion Enterprises, Inc. and its subsidiaries
(collectively, Champion or the Company) primarily produces and sells
manufactured homes. As of December 30, 2000, the Company was operating 53
manufacturing plants in 17 states and western Canada and 260 retail locations in
28 states. We had approximately 12,000 employees at year end.
Champion led the U.S. manufactured housing industry in wholesale sales revenues
for the last five years and led the industry in the number of wholesale homes
sold for the last three years. This leadership determination was based on data
obtained from industry members' press releases, filings with the Securities and
Exchange Commission (SEC), and data from an annual survey by Manufactured Home
Merchandiser (MHM), an industry trade publication. Champion is the third largest
retailer of manufactured housing in the U.S. based on the number of retail
locations reported by industry members in press releases and SEC filings.
From 1994 to 1999 we significantly expanded our manufactured housing production
operations through acquisitions, internal growth and, in 1996, our merger with
Redman Industries, Inc.(Redman), a publicly-held company. As a result of this
growth, Champion's manufactured housing wholesale revenues increased from less
than $300 million in 1993 (excluding Redman sales) to over $2 billion in 1999.
During 1998 and 1999 we significantly expanded our retail operations by
completing the acquisitions of 15 retail organizations which operated 178 sales
centers.
Commencing in mid-1999, the industry's excess retail locations and inventory
levels, tightened consumer credit standards, high consumer repossession levels,
higher interest rates and other factors affected our results as discussed in
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations. Based on data reported by the National Conference of States on
Building Codes and Standards (NCSBCS), industry wholesale shipments of homes in
2000 declined 28% from 1999 levels. Based on data reported by Statistical
Surveys, Inc., 2000 industry retail sales of homes were an estimated 19% lower
than 1999 sales. As a result of this industry downturn, during 2000 we idled
seven manufacturing facilities and closed 62 retail sales centers. During the
first quarter of 2001, we closed two more manufacturing facilities and 30
additional retail sales centers. Since mid-1999 we have closed 17 homebuilding
facilities, two of which have been sold.
The industry's U.S. wholesale shipments in 2001 could continue to suffer from
the factors previously noted. Champion's wholesale and retail sales and margins
are expected to be impacted until industry consumer financing is more readily
available, consumer repossessions return to normal levels, and retail sales of
new homes increase. We are focusing on improving retailer inventory turnover,
rewarding retailers for retail selling of homes purchased, and promoting
retailer sound business practices. We continually review our manufacturing
capacity and the number and locations of our Company-operated retail sales
centers and will make further adjustments, consolidations and closures, if
necessary.
Recent Growth
From 1994 to 1999 we acquired eight manufactured housing companies including:
Dutch Housing, Inc. in Michigan and Indiana in 1994; Chandeleur Homes, Inc. in
Alabama, Crest Ridge Homes, Inc. in Texas and New Horizon Manufactured Homes,
Ltd. in Alberta, Canada in 1995; Grand Manor, Inc. in Georgia and Homes of
Legend, Inc. in Alabama in 1996; Fleming County Industries, Inc. in Kentucky in
1998; and Homes of Merit, Inc. in Florida in 1999. In addition, from 1996
through 1999 the Company opened 17 new production facilities.
In 1998 and 1999 we acquired 15 retail organizations. Among those acquired were
Southern Showcase Housing, Inc. and Accent Homes, Inc., both headquartered in
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North Carolina; Advantage Homes, Inc. in California; Iseman Homes, Inc.
headquartered in South Dakota; Manufactured Home Buyers Group, A-1 Homes, and
Heartland Homes in Texas; Homes America Group headquartered in Nevada;
Manufactured Housing of Louisiana; Tom Terry Enterprises, Inc. in Nevada;
Oklahoma Lifestyle; Trading Post Mobile Homes, Inc. in Kentucky; and Care Free
Homes, Inc. based in Utah.
In 2000 we formed a new division, Genesis Homes (Genesis), to develop homes and
marketing programs to attract small to medium-sized builders and developers.
Genesis produces modular and manufactured housing in 12 of Champion's existing
homebuilding facilities, which provides nationwide market presence. Champion
sold approximately 2,000 homes through 200 local builders and developers in
2000, which accounted for an estimated 7% of our wholesale revenues.
In 1999 we formed Champion Development Corp. (CDC) to make minority interest
investments in manufactured housing developments. CDC formed a joint venture
with Sun Communities, Inc., a publicly-held real estate investment trust. As of
December 2000, CDC had investments in 16 properties in seven states. Certain
Company-owned retailers also have interests in various community developments.
We formed HomePride Finance Corp. (HomePride) in 1999 to establish relationships
with major lending institutions in order to offer special consumer lending
programs to Champion-owned and key independent retailers. HomePride facilitates
the provision of consumer credit and competitive interest rates to these
retailers by consolidating significant loan origination volume. HomePride also
helps Genesis builders and developers obtain financing.
During 2000 we entered into an agreement with Homestore.com(TM), the leading
home and real estate network for consumers and real estate professionals on the
Internet, through which Homestore.com will provide a full range of web based
on-line marketing and services to Champion-owned retailers and independent
retailers who are members of our Champion Home Centers distribution network.
Segment Information
Financial information about the Company's manufacturing and retail segments is
included in Note 11 of Notes to Consolidated Financial Statements. Our foreign
operations consist of two manufacturing facilities in Canada. During each of the
last three years these Canadian operations accounted for less than 5% of our
manufacturing segment total sales, identifiable assets and earnings before
interest, taxes and goodwill amortization.
Products
Most of the manufactured homes that we produce are constructed to building
standards in accordance with the National Manufactured Home Construction and
Safety Standards promulgated by the U.S. Department of Housing and Urban
Development (HUD code homes). Approximately 96% of the homes we produced in 2000
were HUD code homes. The remaining 4% of homes we produced were manufactured in
Canada or were modular homes. Homes produced in Canada are constructed in
accordance with applicable Canadian building standards. Modular homes are
designed to meet local building codes.
Champion produces a broad range of single-section and multi-section homes under
various trade names and brand names and in a variety of floor plans and price
ranges. The homes that we manufacture generally range in size from 400 to 4,000
square feet and typically include two to four bedrooms, a living room or family
room, dining room, kitchen, and two full bathrooms. In 2000 we produced and sold
52,442 homes, of which 71% were multi-section compared to 66% in 1999. According
to NCSBCS data, the industry's U.S. multi-section mix was 70% in 2000, compared
to 65% in 1999.
During 2000 our average wholesale home price was $28,500, excluding delivery,
and wholesale prices ranged from $10,000 to over $100,000. Retail sales prices
of the homes, without land, generally range from $15,000 to over $150,000,
depending upon size, floor plan, features and options. During 2000 the average
new home
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retail selling price was $49,600 for homes sold by Company-operated retail sales
centers.
The chief components and products used in manufactured housing are generally the
same kind and quality as those used by other housing builders, including
conventional site-builders. These components include lumber, plywood, chipboard,
drywall, steel, vinyl floor coverings, insulation, exterior siding (wood, vinyl
and metal), windows, shingles, kitchen appliances, furnaces, plumbing and
electrical fixtures and hardware. These components are presently available from
several sources and the Company is not dependent upon any particular supplier.
Prices of certain materials such as lumber, insulation, and drywall can
fluctuate significantly due to changes in demand and supply. The industry and
the Company generally have been able to pass higher material costs on to the
consumer in the form of surcharges and base price increases. It is not certain,
however, that any future price increases can be passed on to the consumer
without affecting demand.
The completed home has carpeting, cabinets, appliances, wall coverings, window
treatments, and electrical, heating and plumbing systems. Optional factory
installed features include fireplaces and skylights. Upon completion and factory
sale of the home, it is transported to a retail sales center or directly to the
consumer's home site. In connection with the retail sale of the home to the
consumer, the home is transported to the home site, placed on a foundation and
readied by the retailer for occupancy. The sections of a multi-section home are
joined and the interior and exterior seams are finished at the home site.
Production
Our manufactured homes are constructed in indoor facilities using an
assembly-line process employing approximately 150 to 250 production employees at
each facility. The homes are manufactured in one or more sections (also known as
floors) on a permanently affixed steel support chassis. Each home is assembled
in stages beginning with the construction of the chassis, then adding other
constructed and purchased components, and ending with a final quality control
inspection. The efficiency of the assembly-line process, protection from the
elements of weather, and quantity discounts resulting from increased purchasing
power enables the Company to produce homes in one to two days at substantially
less cost than conventional site-built housing. According to 1999 data reported
by the U.S. Department of Commerce (USDOC), manufactured housing costs
approximately $29.46 per square foot, compared to $68.80 per square foot for
site-built housing.
The production schedules of our manufacturing facilities are based upon
wholesale buyer (retailer) orders which fluctuate from week to week, are subject
to cancellation at any time without penalty and are not necessarily an
indication of future business. Retailers place orders for retail stocking
(inventory) purposes or for customer specified orders. Before scheduling homes
for production, orders and availability of financing are confirmed with the
retailer and floor plan lender. Orders are generally filled within 90 days of
receipt, depending upon the level of unfilled orders and requested delivery
dates. As of the end of December 2000, unfilled orders for wholesale housing
totaled an estimated $15 million, compared to $49 million a year earlier.
Although manufactured homes can be produced throughout the year in indoor
facilities, demand for homes is usually affected by inclement weather and by the
cold winter months in northern areas of the U.S. and in Canada.
We produce homes to fill existing wholesale and retail orders and, therefore,
generally our manufacturing plants do not carry finished goods inventories
except for homes awaiting delivery. Typically a one to three weeks' supply of
raw materials is maintained.
Charges to transport manufactured homes increase with the distance from the
factory to the retailer and home site. As a result, most of the retail stores
for a manufacturer's homes are located within a 250 to 500 mile radius of its
manufacturing plants.
Independent Retailers
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During 2000, 84% of our wholesale shipments were to independent retail locations
throughout the U.S. and western Canada, including more than 1,000 locations that
have joined either the Alliance of Champions or Champion Home Centers retail
distribution networks. In 2000 we built on the success of our Alliance of
Champions program, and expanded our Champion Home Center (CHC) branding. CHC
retailers are required to stock 80% of their inventory with Champion-built
homes, identify their stores with CHC retail signs and maintain specified
consumer satisfaction standards.
We continually seek to increase sales at our existing independent retailers by
improving throughput of our homes, as well as by finding new independent
retailers to carry our homes. During 1998 we commenced our Alliance of Champions
marketing program for selected Champion independent retailers with a record of
success and a commitment to grow. The Alliance program was introduced to help
assure the continued growth of well managed, independent retailers of our homes.
The program assures supply of a broad range of quality products from Champion's
manufacturing facilities and provides training in sales, management and home
installation, as well as enhanced marketing programs.
As is common in the industry, our independent retailers may sell manufactured
homes produced by other manufacturers in addition to those produced by the
Company. Some independent retailers operate multiple sales centers. In 2000, no
single independent retailer or distributor accounted for more than 10% of our
manufacturing sales. The majority of independent retailer home purchases are
financed by lending institutions on a floor plan basis secured by a lien on such
homes. A manufacturing facility generally receives payment from the lending
institution 7 to 15 days after a home is sold to an independent retailer. In
accordance with trade practice, the Company enters into various repurchase
agreements with the lending institutions providing retailer financing, as is
more fully described in Note 1 of Notes to Consolidated Financial Statements.
Company-Operated Retail Sales Centers
We had 260 retail locations in 28 states as of December 30, 2000, compared to
280 sales locations a year earlier. During the first quarter of 2001, 30 of
these retail sales centers were closed due to market conditions. Our retail
sales in 2000 totaled $607 million, down from $787 million in 1999. Purchases by
Company-owned retailers accounted for 16% of wholesale home shipments made by
our manufacturing operations in 2000. Of the total new homes sold by
Company-owned retailers in 2000, 73% were Champion-produced compared to 62% in
1999. Each of our Company-owned retailers does business autonomously under its
own name and carries and sells homes based on availability from suppliers and
marketability for their local area.
Each of our Company-operated retail sales centers has a sales office, which is
generally a factory-built home, and a variety of model homes of various sizes,
floor plans, features and prices. Customers may purchase a home from an
inventory of homes maintained at the location, including a model home, or may
order a home that will be built at a manufacturing facility. Many sales centers
also sell pre-owned homes that are obtained through trade-ins or repossessed
homes sold on a consignment basis for consumer finance companies. At December
2000 Company-owned sales centers had an average inventory of 18 new homes per
location, down from 20 a year earlier. Company-owned retailers generally finance
their inventories of homes under floor plan financing arrangements similar to
those discussed above under "Independent Retailers".
Our Company-operated sales centers are generally located on a main road or
highway for high visibility. Model homes may be displayed in a residential
setting with sidewalks and landscaping. Each sales center usually employs a
manager and three or four commissioned salespersons. Our Company-owned retailers
use radio and television advertising in areas where they have a concentration of
sales centers. Most retail customers finance the purchase of their home through
a lending institution. The sales center often assists in arranging financing and
insurance on the home, for which a fee is received. The sales centers may also
sell additional accessories in connection with the sale of the home, such as
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central air conditioning, decks, skirting and additional appliances. Retailers
also often arrange for necessary permits and utility connections.
Market
Manufactured housing competes in suburban and rural areas with other forms of
new low-cost housing such as site-built housing, prefabricated and modular
homes, condominiums, and with existing housing such as pre-owned homes and
apartments. According to statistics published by NCSBCS and the USDOC, for the
past five years manufactured housing wholesale shipments accounted for an
estimated 22% of all new single-family housing starts and 28% of all new
single-family homes sold. Industry wholesale shipments of manufactured housing
decreased 28% in 2000 to 250,550 homes, according to data reported by NCSBCS.
Data reported by Statistical Surveys, Inc. indicates that industry retail home
sales in 2000 were down 19% from 1999 levels to an estimated 278,000 new homes.
The market for manufactured housing is affected by a number of different
factors, including consumer confidence, job creation, general economic growth
and the overall affordability of manufactured housing versus other forms of
housing. In addition, demographic trends, such as changes in population growth,
and competition affect the demand for housing products. Interest rates and the
availability of financing influence the affordability of manufactured housing.
There can be no assurance that a rise in overall interest rates would not have
an adverse impact on the general economy and, therefore, the market for
manufactured housing.
We believe the segment of the housing market in which manufactured housing is
most competitive includes consumers with household incomes under $40,000. This
segment has a high representation of young single persons and married couples,
as well as elderly or retired persons. The comparatively low cost of fully or
partially furnished housing attracts these consumers. Persons in rural areas,
where fewer housing alternatives exist, and those who presently live in
manufactured homes make up a significant portion of the demand for new
manufactured housing.
We believe that a much larger market may exist, including apartment dwellers and
persons who have traditionally purchased low-priced site-built homes. Our
Genesis operations target this market. In the past, a number of factors have
restricted demand for manufactured housing, including less-favorable financing
terms for manufactured housing compared to site-built housing, the effects of
restrictive zoning on the availability of certain locations for home placement
and, in some cases, an unfavorable public image. Certain of these negative
factors have lessened considerably in recent years with improved quality and
appearance of manufactured housing.
Competition
The manufactured housing industry is highly competitive at both the
manufacturing and retail levels, with competition based upon several factors,
including price, product features, reputation for service and quality, depth of
field inventory, promotion, merchandising and the terms of retailer and retail
customer financing. Capital requirements for entry into the manufactured housing
industry are relatively low.
According to NCSBCS, in December 2000 there were approximately 70 producers of
manufactured homes in the U.S. We estimate that these producers were operating
approximately 250 production facilities. This total compares to 300 plants a
year ago and 216 plants in 1991. In 1999 the top five companies had combined
market share of approximately 62%, according to data from a survey by MHM. Based
on industry data reported by NCSBCS, in 2000 the Company's U.S. wholesale market
share of HUD code homes sold was 20.1%, up from 19.9% in 1999.
We believe there are an estimated 7,000 industry retail locations throughout the
U.S. We sell our homes through our Company-owned sales centers and our
independent retailers, which include more than 1,000 locations that have joined
either the Alliance of Champions or Champion Home Centers retail distribution
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networks.
Forward Looking Statements
Certain statements contained in this Report, including our plans and beliefs
regarding goals, ability to implement retail and manufacturing strategies and
the affect of those strategies, availability of liquidity and financing, new
market initiatives and strategies, anticipated capital expenditures, outlook for
the manufactured housing industry in particular and the economy in general,
characterization of and our ability to control our contingent liabilities,
demographic trends, and our ability to maintain supply and distribution networks
could be construed to be forward looking statements within the meaning of the
Securities Exchange Act of 1934. In addition, Champion or persons acting on our
behalf may from time to time publish or communicate other items that 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 specifically listed below
that could cause actual results to differ materially from those included in the
forward looking statements. The Company does not undertake to update its forward
looking statements or risk factors to reflect future events or circumstances.
The following risk factors could affect the Company's operating results.
GENERAL INDUSTRY CONDITIONS - THE CURRENT DOWNTURN IN THE MANUFACTURED HOUSING
INDUSTRY HAS ADVERSELY AFFECTED OUR OPERATING RESULTS. IF THE CURRENT DOWNTURN
DOES NOT IMPROVE, OUR SALES COULD DECLINE AND WE MAY SUFFER FURTHER LOSSES.
The manufactured housing industry has experienced declining sales since mid-1999
as a result of excess retail locations and inventory levels, tightened consumer
credit standards, high consumer repossession levels, higher interest rates and
other factors, which may take another year or longer to normalize. Based on
reports published by NCSBCS, during 2000 industry wholesale shipments of
manufactured housing decreased 28%. According to data reported by Statistical
Surveys, Inc., during 2000 industry retail sales of new homes declined an
estimated 19%. In addition, we estimate approximately 2,500 retail locations, or
about 25% of the total industry, and 85 manufacturing facilities, or 25% of
industry manufacturing facilities, have closed since mid-1999. As a result, in
2000 we reported a pretax loss of $30.6 million, excluding goodwill impairment
charges. We also performed an analysis of the recoverability of goodwill. The
assessment was performed using lower volume and growth assumptions than
previously assumed due to the continued downturn in the industry and lowered
future expectations. The recoverability analysis resulted in the recording of
pretax goodwill impairment charges of $189.7 million primarily related to our
prior retail acquisitions. If the current downturn in the industry does not
improve, our sales could decline and we may suffer further losses.
INTEREST RATES; THIRD-PARTY FINANCING - TIGHTENED CREDIT STANDARDS AND INCREASED
INTEREST RATES AMONG WHOLESALE AND RETAIL HOME LENDERS HAVE REDUCED OUR SALES.
IF SUCH WHOLESALE AND RETAIL FINANCING WERE TO BECOME FURTHER CURTAILED OR
UNAVAILABLE, WE MAY EXPERIENCE FURTHER SALES DECLINES.
Champion-owned and independent retailers and the consumers who buy our homes
typically secure wholesale and retail financing, respectively, from third-party
lenders. The availability, terms and costs of both wholesale and retail
financing depend on the lending practices of financial institutions,
governmental policies and economic and other conditions, all of which are beyond
our control. A consumer seeking to finance the purchase of a manufactured home
without land will generally pay a higher interest rate and have a shorter loan
maturity than will a consumer seeking to finance the purchase of land and the
home. Manufactured home retail financing is at times more difficult to obtain
than financing for site-built homes. In particular, since 1999, retail lenders
have tightened the credit underwriting standards and increased interest rates
for loans to purchase manufactured homes, which in turn has reduced our sales.
Further, lenders to our independent retailers have increased their underwriting
standards recently, which may impair the ability of our retailers to finance the
purchase of homes from us. If either consumer or retailer financing were to
become further curtailed or unavailable, we may experience further sales
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declines.
ZONING - IF THE MANUFACTURED HOME INDUSTRY IS UNABLE TO GAIN WIDESPREAD
ACCEPTANCE OR SECURE FAVORABLE LOCAL ZONING ORDINANCES, OUR SALES COULD DECLINE
AND OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE
MATERIALLY ADVERSELY AFFECTED.
Limitations on the number of sites available for placement of manufactured homes
or on the operation of manufactured housing communities could negatively affect
the demand for manufactured homes and our sales. Manufactured housing
communities and individual home placements are subject to local zoning
ordinances and other local regulations relating to utility service and
construction of roadways. In the past, property owners often have resisted the
adoption of zoning ordinances permitting the location of manufactured homes in
residential areas, which we believe has restricted the growth of the industry.
Manufactured homes may not receive widespread acceptance and localities may not
adopt zoning ordinances permitting the development of manufactured home
communities. If the manufactured housing industry is unable to gain widespread
acceptance or secure favorable local zoning ordinances, our sales could decline
and our business, results of operations and financial condition could be
materially adversely affected.
FLUCTUATIONS IN OPERATING RESULTS - THE CYCLICAL AND SEASONAL NATURE OF THE
HOUSING MARKET CAUSES OUR REVENUES AND OPERATING RESULTS TO FLUCTUATE. WE EXPECT
THIS FLUCTUATION TO CONTINUE IN THE FUTURE, WHICH COULD RESULT IN OPERATING
LOSSES DURING PERIODS OF CYCLICAL DOWNTURNS IN THE HOUSING MARKET.
The manufactured housing industry is highly cyclical and is influenced by many
national and regional economic and demographic factors, including:
- consumer confidence;
- interest rates;
- availability of financing for homebuyers and retailers;
- regional population and employment trends;
- housing demand; and
- general economic conditions, including inflation and recessions.
These factors have in the past, and in the future may, negatively impact our
business. In addition to these factors, the housing industry is affected by
seasonality. Sales during the period from March to November are traditionally
higher than in other months. As a result of economic, demographic and seasonal
trends, our revenues and operating results fluctuate, and we expect them to
continue to fluctuate in the future. We may experience operating losses during
periods of cyclical downturns in the housing market.
COMPETITION - THE MANUFACTURED HOUSING INDUSTRY IS VERY COMPETITIVE. IF WE ARE
UNABLE TO EFFECTIVELY ADDRESS THIS COMPETITION, OUR GROWTH COULD BE LIMITED AND
OUR SALES COULD DECLINE.
The manufactured housing industry is highly competitive at both the
manufacturing and retail levels, with competition based upon several factors,
including price, product features, reputation for service and quality, and depth
of retail inventory. Numerous companies produce manufactured homes in our
markets. A number of our manufacturing competitors also have their own retail
distribution systems. In addition, there are many independent manufactured
housing retail locations in most areas where we have retail operations. Since
barriers to entry for manufactured housing retailers are very low, we believe
that it is easy for new retailers to enter into our markets as competitors. In
addition, our products compete with other forms of low to moderate-cost housing,
including site-built, prefabricated and modular homes, apartments, townhouses
and condominiums. If we are unable to effectively address this competition our
retail sales and wholesale shipments could be reduced. As a result, our growth
could be limited and our sales could decline.
CERTAIN ELEMENTS OF OUR BUSINESS STRATEGY MAY NOT SUCCEED - OUR BUSINESS
STRATEGY MAY NOT ADEQUATELY ADDRESS THE ISSUES CURRENTLY FACING OUR COMPANY AND
THE
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MANUFACTURED HOUSING INDUSTRY OR CORRECTLY IDENTIFY FUTURE TRENDS IN THE
INDUSTRY. ANY FAILURE OF OUR BUSINESS STRATEGY COULD CAUSE OUR SALES TO DECLINE.
During 1999 and 2000, retail sales and wholesale shipments of new manufactured
homes decreased as a result of excess retail locations and inventory levels,
tightened consumer credit standards, high consumer repossession levels, higher
interest rates and other factors. As a result, our operating results have been
adversely affected and we have closed a significant number of manufacturing
facilities and retail sales centers. We are implementing a strategy designed to
address these issues. This strategy may not be successful because the reasons
for the decline in demand or future trends in the industry may not be correctly
identified, and our operating results may not improve. For example, our modified
sales rebate programs and retailer training programs may be unsuccessful in
increasing the frequency of inventory turnover and reducing excess inventories
and our corresponding contingent repurchase obligation. In addition, factors
beyond our control, such as increased competition, reductions in consumer demand
or an economic downturn, may offset any improved operating results that are
attributable to our strategy. Any failure of our business strategy could cause
our sales to decline.
DEPENDENCE UPON INDEPENDENT RETAILERS - IF WE ARE UNABLE TO ESTABLISH OR
MAINTAIN RELATIONSHIPS WITH SOLVENT INDEPENDENT RETAILERS WHO SELL OUR HOMES,
OUR SALES COULD DECLINE.
During 2000, 84% of our wholesale shipments of homes were made to independent
retail locations throughout the United States and western Canada. As is common
in the industry, independent retailers may sell manufactured homes produced by
competing manufacturers. We may not be able to establish relationships with new
independent retailers or maintain good relationships with independent retailers
that sell our homes. Even if we do establish and maintain relationships with
independent retailers, these retailers are not obligated to sell our
manufactured homes exclusively, and may choose to sell our competitors' homes
instead. The independent retailers with whom we have relationships can cancel
these relationships on short notice. In addition, these retailers may not remain
financially solvent as they are subject to the same industry, economic,
demographic and seasonal trends that we face. If we do not establish and
maintain relationships with solvent independent retailers in one or more of our
markets, sales in those markets could decline.
EFFECT ON LIQUIDITY - CURRENT INDUSTRY CONDITIONS AND OUR RECENT OPERATING
RESULTS HAVE LIMITED OUR SOURCES OF CAPITAL. IF THIS SITUATION DOES NOT IMPROVE
AND IF WE NEED TO LOCATE ALTERNATIVE SOURCES OF CAPITAL, BUT ARE UNABLE TO DO
SO, WE MAY NOT BE ABLE TO EXPAND OUR BUSINESS, AND WE MAY NEED TO LIMIT OUR
OPERATIONS.
We depend on our cash balances, cash flows from operations, our bank line of
credit facility and floor plan facilities to finance our operating requirements,
capital expenditures and other needs. The downturn in the manufactured housing
industry together with our recent operating results have limited availability
under our bank line of credit facility and decreased sources for floor plan
financing.
During 2000, our bank credit facility was changed from a $200 million unsecured
facility to a $75 million secured facility. Availability under the facility is
limited to a borrowing base calculated based on qualifying accounts receivable
and inventories as defined in the facility. At the end of February 2001, the
calculated borrowing base was $63 million and there were $33 million of letters
of credit and $15 million of borrowings outstanding under the facility. As a
result, remaining borrowing availability at February 2001 month end was $15
million.
During the past two years some of the manufactured housing industry floor plan
lenders have elected to exit or reduce their participation in the market. We
currently finance most of the new home inventory at Champion-owned stores
through borrowings from Conseco Finance. In July 2000, Conseco Finance made a
verbal request that we reduce our floor plan borrowings with them in order to
meet
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certain of its concentration requirements. Since receiving this request, we have
reduced our total floor plan borrowings with Conseco Finance from over $121
million in July 2000 to $81 million at March 23, 2001. Conseco Finance has
recently requested that we continue to reduce our floor plan borrowings with
them to $60 million by June 30, 2001 and to $40 million by September 30, 2001.
In an effort to meet this request we are reducing retail inventory, obtaining
alternate floor plan financing and seeking additional finance sources. If the
availability under our floor plan borrowings or credit line facility or cash
flow from operations is insufficient to finance our operations and alternative
capital is not available, we may not be able to expand our business, and we may
need to limit our operations.
CONTINGENT LIABILITIES - WE HAVE, AND WILL CONTINUE TO HAVE, SIGNIFICANT
CONTINGENT REPURCHASE OBLIGATIONS, SOME OF WHICH MAY BECOME ACTUAL OBLIGATIONS
THAT NEED TO BE PAID OR FINANCED.
As is customary for retailers throughout the manufactured housing industry, most
of our independent retailers finance their wholesale purchases of homes through
floor plan arrangements under which a financial institution provides the
retailer with a loan for the purchase price of the home and maintains a security
interest in the home as collateral. In connection with a floor plan arrangement,
the financial institution that provides the retailer financing customarily
requires us to enter into a separate repurchase agreement with the financial
institution. Under this separate agreement, we are obligated, for a period of 12
months to 15 months from the date of the sale, upon default by the retailer and
repossession of the home by the financial institution, to purchase from the
lender the related floor plan loan or the home at a price equal to the unpaid
principal amount of the loan, plus certain administrative and handling expenses,
reduced by the amount of any damage to the home and any missing appliances. Our
maximum potential repurchase obligation at December 30, 2000 was $430 million,
exclusive of any resale value of the homes, compared to $630 million a year
earlier. During 2000, we paid $19.1 million and incurred losses of $6.0 million
under repurchase agreements related to 660 homes resulting from defaults by 86
independent retail companies. We may be required to honor some or all of our
repurchase obligations in the future and we may suffer additional losses with
respect to, and as a consequence of, these repurchase agreements.
SIGNIFICANT LEVERAGE - OUR SIGNIFICANT DEBT COULD ADVERSELY AFFECT OUR FINANCIAL
HEALTH AND PREVENT US FROM FULFILLING OUR DEBT OBLIGATIONS. IF WE ARE UNABLE TO
PAY OUR DEBT OBLIGATIONS WHEN DUE, WE COULD BE IN DEFAULT UNDER OUR DEBT
AGREEMENTS AND OUR LENDERS COULD ACCELERATE OUR DEBT OR TAKE OTHER ACTIONS WHICH
COULD RESTRICT OUR OPERATIONS.
We have a significant amount of debt, which at the end of February, 2001,
consisted of long-term debt of $226 million and floor plan payables of $108
million. We also had contingent debt obligations with respect to $33 million of
letters of credit and $45 million of surety bonds. This indebtedness could have
important consequences on the Company. For example, it could:
- limit our ability to obtain future financing for working capital,
capital expenditures, acquisitions, debt service requirements, surety
bonds or other requirements;
- require us to dedicate a substantial portion of our cash flows from
operations to the payment of principal and interest on our
indebtedness and reduce our ability to use our cash flows for other
purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the manufactured housing industry;
- place us at a competitive disadvantage because we have more
indebtedness than some of our competitors; and
- make us more vulnerable in the event of a continued downturn in our
business or in general economic conditions.
In addition, our future cash flows may be insufficient to meet our debt
obligations. The factors that affect our ability to generate cash can also
affect our ability to raise additional funds to meet our debt service and other
11
obligations through the sale of equity securities, the refinancing of debt, or
the sale of assets. Our business may not generate sufficient cash flows from
operations and borrowings may not be available to us under our revolving credit
facility in an amount sufficient to enable us to pay our debt or to fund other
liquidity needs. Borrowings under our revolving credit facility and floor plan
facilities bear interest at floating rates so increases in the prevailing
interest rates may also affect our ability to meet our debt service obligations.
We may need to refinance all or a portion of our debt on or before maturity. We
may not be able to refinance any of our debt, including our revolving credit
facility, on commercially reasonable terms or at all. If we are unable to
refinance our debt obligations, we could be in default under our debt
agreements, and our lenders could accelerate our debt or take other actions
which could restrict our operations.
RESTRICTIVE COVENANTS - THE TERMS OF OUR DEBT PLACE RESTRICTIONS ON US AND OUR
SUBSIDIARIES, REDUCING OPERATIONAL FLEXIBILITY.
The documents governing the terms of certain of our indebtedness contain
covenants that place restrictions on us and our subsidiaries. Our bank credit
facility and certain floor plan facilities include covenants that restrict our
and our subsidiaries' ability to, among other things:
- incur capital expenditures, including payments under capitalized
leases, in each fiscal year;
- incur additional indebtedness, guarantees, leases and liens;
- use proceeds from the sale of certain assets;
- make advances, investments and loans;
- pay dividends, repurchase our common stock or make other distributions
on our common stock;
- enter into transactions with affiliates;
- enter into joint ventures;
- merge with, consolidate into or acquire other companies;
- make changes to our business; and
- make changes in our management.
Our credit facilities include financial performance covenants that require the
Company to maintain specified levels of earnings and net worth.
If we fail to comply with any of these covenants, the lenders could cause our
debt to become due and payable prior to maturity. If this debt were to
accelerate, our assets might not be sufficient to repay our debt in full.
DEPENDENCE UPON WALTER R. YOUNG AND OTHER KEY PERSONNEL - THE LOSS OF ANY OF OUR
EXECUTIVE OFFICERS COULD REDUCE OUR ABILITY TO ACHIEVE OUR BUSINESS PLAN AND
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS.
We depend on the continued services and performance of our executive officers,
including our Chairman, President and Chief Executive Officer, Walter R. Young.
If we lose the service of Mr. Young or any of our executive officers, it could
reduce our ability to achieve our business plan and could have a material
adverse effect on our business and operating results.
12
Executive Officers of the Company
The executive officers of the Company, their ages, and the position or office
held by each, are as follows:
Name Age Position or Office
---- --- ------------------
Walter R. Young 56 Chairman of the Board of Directors,
President and Chief Executive Officer
Anthony S. Cleberg 48 Executive Vice President and Chief
Financial Officer
Philip C. Surles 59 Chief Operating Officer
M. Mark Cole 39 President, Retail Operations
Donald D. Williams 56 Chief Marketing and Information Officer
John J. Collins, Jr. 49 Senior Vice President, General Counsel
and Secretary
Richard P. Hevelhorst 53 Vice President and Controller
The executive officers serve at the pleasure of the Company's Board of Directors
except for Mr. Young, who is currently serving in accordance with the terms of a
Letter Agreement dated April 27, 1990, as amended. The Letter Agreement
terminates on April 30, 2004 unless terminated earlier pursuant to the
agreement. Mr. Young joined Champion in 1990 as President and Chief Executive
Officer and was elected Chairman of the Board in 1992.
In 2000 Mr. Cleberg joined Champion from Washington Group International, a
publicly-held engineering and construction firm, where for the previous three
years he was the Executive Vice President and Chief Financial Officer. Previous
to Washington Group International, he worked for Honeywell Inc. for 15 years in
various senior financial positions, leaving as Corporate Vice President,
Business Development.
Mr. Surles joined Champion upon the October 1996 merger with Redman Industries,
Inc., a leading manufactured housing company. Prior to his appointment to Chief
Operating Officer in May 1997, he served as the Company's President,
Southwestern Region and in various executive capacities with Redman for 20
years.
Mr. Cole joined Champion in 1998 upon the acquisition of Southern Showcase
Housing, Inc., a manufactured housing retailer, where he was President for eight
years. He was promoted to Champion's President, Retail Operations in September
1998.
Prior to joining Champion as Chief Marketing Officer in March 1999, Mr. Williams
was employed by Young & Rubicam Brazil, an advertising agency, where he was
Executive Vice President and Account Managing Director since 1989. In January
2001 he was promoted to Chief Marketing and Information Officer.
Mr. Collins joined the Company in 1997 as Vice President, General Counsel and
Secretary. For the previous five years, he was Principal and Managing Director
of Miller, Canfield, Paddock and Stone PLC, a law firm which provided legal
services to the Company for the past four years, and was the Resident Director
of one of its offices. Mr. Collins was promoted to Senior Vice President,
General Counsel and Secretary in April 2000.
Mr. Hevelhorst joined Champion in 1995 as Controller and was promoted to the
position of Vice President and Controller in 1999.
13
ITEM 2. PROPERTIES.
All of our manufacturing facilities are one story with concrete floors and wood
and steel superstructures and generally range from 80,000 to 150,000 square
feet. We own all of our manufacturing facilities except for six housing
facilities which are leased, four of which are under capital leases.
Substantially all of the machinery and equipment used in our manufacturing
facilities is owned. We believe our plant facilities are generally well
maintained and provide ample capacity to meet expected demand.
The following table sets forth certain information as of December 30, 2000 with
respect to our homebuilding facilities, all of which are assembly-line
operations.
United States
-------------
Alabama Guin
Boaz (4 plants)
Arizona Chandler (2 plants)*
California Corona*
Lindsay
Woodland*
Colorado Berthoud
Florida Bartow (3 plants)*
Lake City (3 plants)*
Plant City
Georgia Thomasville
Richland
Idaho Weiser
Indiana LaGrange (4 plants)
Ridgeville
Topeka (4 plants)
Kentucky Flemingsburg
Michigan White Pigeon (2 plants)
Nebraska Central City
York (2 plants)**
New York Sangerfield*
North Carolina Lillington (2 plants)**
Pembroke
Sanford
Oregon Silverton
Woodburn
Pennsylvania Claysburg
Ephrata
Tennessee Henry
Texas Athens (2 plants)
Breckenridge
Burleson (2 plants)
Canada
------
Alberta Medicine Hat
British Columbia Penticton
In addition, the Company owns 12 idled manufacturing facilities in seven states
at December 30, 2000.
* Includes one leased facility.
** A facility at each location was closed in the first quarter of 2001.
14
Our Company-operated retail sales centers generally range in size from one and
one-half acre to four acres, although some locations are up to ten acres. The
following table sets forth the 260 Company-operated retail locations by state as
of December 30, 2000:
Number of Number of
Retail Retail
State Locations State Locations
----- --------- ----- ---------
Arizona 9 New Mexico 1
California 4 North Carolina 29
Colorado 2 North Dakota 1
Georgia 2 Ohio 1
Idaho 11 Oklahoma 7
Indiana 5 Oregon 12
Iowa 2 South Carolina 24
Kansas 5 South Dakota 4
Kentucky 19 Tennessee 8
Louisiana 6 Texas 64
Mississippi 4 Utah 10
Missouri 1 Virginia 6
Nebraska 2 Washington 10
Nevada 8 Wyoming 3
30 of these retail locations were closed during the first quarter of 2001.
Most of our Company-operated retail locations are leased, with aggregate lease
payments totaling approximately $12 million in 2000. Sales center lease terms
generally range from monthly to five years. Our executive offices, which are
located in Auburn Hills, Michigan, and other miscellaneous offices and
properties are also leased.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, the Company is involved in routine
litigation incidental to its business. This litigation arises principally from
the sale of our products and in various governmental agency proceedings arising
from occupational safety and health, wage and hour, and similar employment and
workplace regulations. In the opinion of management, none of such matters
presently pending are material to Champion's overall financial position or
results of operations.
On August 26, 1999, a putative shareholder class action suit entitled Joel
Miller v. Champion Enterprises, Inc. was filed against the Company and Walter R.
Young in the U.S. District Court for the Eastern District of Michigan. The
complaint seeks unspecified damages and costs for alleged violations of federal
securities laws. The plaintiff generally alleges, among other things, that the
Company made false and misleading statements and omitted other information
regarding the financial condition of Ted Parker Homes Sales, Inc. (Ted Parker),
our former largest independent retailer, and the potential impact on Champion of
Ted Parker becoming insolvent. There are similar actions that have been filed
and are being consolidated with the Joel Miller action. We are vigorously
defending against these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of Champion's security holders during
the fourth quarter of 2000.
15
PART II
ITEM 5. MARKET FOR CHAMPION'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) Champion's common stock is listed on the New York, Chicago and Pacific Stock
Exchanges as ChampEnt and has a ticker symbol of CHB. Quarterly stock prices
were as follows:
HIGH LOW
---- ---
2000
----
1st Quarter $ 8.4375 $ 5.3125
2nd Quarter 7.75 4.00
3rd Quarter 6.625 4.125
4th Quarter 4.1875 2.3125
1999
----
1st Quarter 27.375 18.50
2nd Quarter 21.6875 18.125
3rd Quarter 18.875 8.1875
4th Quarter $ 10.25 $ 7.875
(b) There were approximately 6,000 shareholders of record and 8,000 beneficial
holders on March 9, 2001.
(c) Champion has not paid cash dividends during the past three fiscal years.
Consistent with our plan to improve shareholder value through investments in our
businesses, the Company does not plan to pay cash dividends in the near term.
16
ITEM 6. SELECTED FINANCIAL INFORMATION
NINE-YEAR HIGHLIGHTS (UNAUDITED)
(Dollars and weighted shares in thousands, except per share amounts)
2000 1999 1998 1997 1996 1995 1994 1993 1992
OPERATIONS
Net sales
Manufacturing $1,564,026 $2,068,627 $1,986,317 $1,733,162 $1,645,024 $1,410,890 $1,138,027 $759,544 $616,686
Retail 606,708 787,011 561,659 60,624 33,202 27,200 34,702 30,661 27,241
Less: intercompany (249,000) (291,000) (215,000) (39,300) (23,800) (19,800) (23,600) (21,900) (19,800)
Net sales 1,921,734 2,564,638 2,332,976 1,754,486 1,654,426 1,418,290 1,149,129 768,305 624,127
Cost of sales 1,619,903 2,164,868** 1,931,397 1,503,028 1,410,397 1,214,217 990,905 664,861 545,507
Gross margin 301,831 399,770 401,579 251,458 244,029 204,073 158,224 103,444 78,620
Selling, general and
administrative
expenses (SG&A) 305,286 292,188** 231,295 135,028 130,629 112,396 89,289 74,732 62,617
Nonrecurring charges 189,700* -- -- -- 22,000*** -- 2,700 572 1,308
Operating income
(loss) (193,155) 107,582 170,284 116,430 91,400 91,677 66,235 28,140 14,695
Net interest
income (expense) (27,177) (25,540) (13,486) 941 525 298 673 (1,770) (4,985)
Pretax income (loss)-
continuing
operations (220,332) 82,042 156,798 117,371 91,925 91,975 66,908 26,370 9,710
Income (loss)-
continuing
operations (147,332)* 50,042 94,198 70,771 52,225*** 54,475 43,808 18,470 7,137
Income (loss)-
discontinued
operations -- -- -- 4,500 1,361 1,810 3,230 (3,750) (3,847)
Extraordinary gain
(loss) -- -- -- -- -- -- -- (1,753) 420
Net income (loss) ($147,332) $50,042 $94,198 $75,271 $53,586 $56,285 $47,038 $12,967 $3,710
Diluted earnings
(loss) per share
Income (loss)-
continuing
operations ($3.12)* $1.02 $1.91 $1.45 $1.06*** $1.10 $0.90 $0.43 $0.19
Income (loss)-
discontinued
operations -- -- -- 0.09 0.03 0.04 0.06 (0.09) (0.10)
Extraordinary gain
(loss) -- -- -- -- -- -- -- (0.04) 0.01
Net income (loss) ($3.12) $1.02 $1.91 $1.54 $1.09 $1.14 $0.96 $0.30 $0.10
17
Diluted weighted
shares outstanding 47,252 48,889 49,284 48,875 49,327 49,389 48,900 42,954 37,820
FINANCIAL INFORMATION
EBITDA, as defined
below $36,851 $145,472 $197,195 $133,521 $127,863 $102,971 $77,023 $35,075 $22,752
Depreciation and
amortization 40,306 37,890 26,911 17,091 14,463 11,294 8,088 6,363 6,749
Capital expenditures 15,035 50,390 49,120 38,266 50,094 19,854 18,762 10,601 4,840
Net property, plant
and equipment 207,277 222,898 190,963 143,519 119,994 75,271 59,783 44,578 41,480
Total assets 942,056 1,182,940 1,021,672 501,250 461,222 367,872 290,090 204,490 177,349
Long-term debt 225,634 224,357 121,629 1,813 1,158 1,685 2,536 3,440 42,018
Shareholders' equity 296,809 444,262 405,246 280,416 226,634 176,142 133,266 81,741 22,316
Per share $6.27 $9.39 $8.40 $6.02 $4.75 $3.73 $2.79 $1.76 $0.60
Return (loss) on
average equity (40%) 12% 27% 30% 27% 36% 44% 25% 19%
OTHER STATISTICAL
INFORMATION
Number of employees
at year end 12,000 15,000 14,000 11,300 10,700 8,700 7,600 6,200 5,200
Homes sold
Wholesale 52,442 71,761 70,359 64,285 61,796 53,955 44,453 32,607 29,249
Retail - new 11,483 15,853 11,738 983 541 477 644 637 580
Retail - pre-owned 2,863 4,102 2,867 87 28 36 51 62 74
Wholesale
multi-section mix 71% 66% 63% 58% 56% 54% 54% 51% 46%
Certain amounts have been reclassified to conform to current period
presentation.
The Company made significant acquisitions of manufacturing companies in 1994
through 1996 and in 1999. The Company made significant acquisitions of retail
companies in 1998 and 1999.
The Company measures cash flows under generally accepted accounting principles
(GAAP), as well as using EBITDA, which is not a GAAP measure. EBITDA, as used by
the Company, consists of operating income (loss) (income or loss before interest
and income taxes) before nonrecurring charges, depreciation and amortization.
Nonrecurring charges consist of non-cash goodwill impairment charges of $189.7
million in 2000 and merger and other charges of $22.0 million related to the
merger with Redman Industries, Inc. in 1996. EBITDA as defined by the Company
may not be comparable to similarly titled measures used by other companies.
Although EBITDA is not a measure of performance calculated in accordance with
GAAP, the Company believes it is a generally recognized measure of performance
used in the housing industry and by analysts who issue reports on companies in
the housing industry. Nevertheless, EBITDA should not be considered in isolation
or as a substitute for operating income (loss), net income (loss), net cash
provided by operating activities or any other measure for determining the
Company's operating performance or liquidity that is calculated in accordance
with GAAP.
* Includes goodwill impairment charges of $189.7 million ($127.8 million after
tax of $2.70 per share).
18
** Cost of sales and SG&A expenses include $26.5 million and $7.1 million,
respectively, related to the bankruptcy of the Company's former largest
independent retailer in 1999. Previously, the $33.6 million of losses related
to the bankruptcy were presented as a separate component of operating income.
***Includes nonrecurring merger and other charges of $22.0 million ($16.8
million after tax or $0.34 per share) due to the 1996 merger with Redman
Industries, Inc., which was accounted for as a pooling of interests.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Champion Enterprises, Inc. (Champion or the Company) is the leading producer of
manufactured housing in the U.S. and the industry's third largest retailer based
on the number of retail locations. In 2000, 1999 and 1998 Champion led the U.S.
manufactured housing industry in wholesale revenues and wholesale shipments of
homes. As of December 30, 2000, the Company was operating 53 homebuilding
facilities in 17 states and western Canada and 260 retail sales centers in 28
states. Champion homes are also sold by independent retail locations throughout
the U.S. and western Canada, including more than 1,000 members of the Champion
Home Centers or Alliance of Champions retail distribution networks.
In 2000 Champion's revenues and profits were affected by challenging industry
conditions, including excess retail locations and inventory, tightened consumer
credit standards, high consumer repossession levels, and higher interest rates.
According to data reported by the National Conference of States on Building
Codes and Standards (NCSBCS), 2000 U.S. industry wholesale shipments of HUD code
homes(1) and floors(2) decreased 28.1% and 25.9%, respectively, from 1999
levels. Based on data reported by Statistical Surveys, Inc., we believe that
industry retail sales of new homes in 2000 dropped 19% from a year ago.
As a result of this industry downturn, during 2000 we idled seven manufacturing
facilities and closed 62 retail sales centers. During the first quarter of 2001,
we closed two more manufacturing facilities and 30 additional retail sales
centers. Since the start of the industry downturn in mid-1999, we have closed 17
homebuilding facilities, two of which have been sold.
The industry's U.S. wholesale shipments in 2001 could continue to suffer from
the factors previously noted. Champion's wholesale and retail sales and margins
are expected to be impacted until industry consumer financing is more readily
available, consumer repossessions return to normal levels, and retail sales of
new homes increase. We are focusing on improving retailer inventory turnover,
rewarding retailers for retail selling of homes purchased, and promoting
retailer sound business practices. We continually review our manufacturing
capacity and the number and locations of our Company-operated retail sales
centers and will make further adjustments, consolidations and closures, if
necessary.
In the fourth quarter of 2000, the Company recorded non-cash goodwill impairment
charges of $189.7 million ($127.8 million after tax or $2.70 per share). Of this
total, $180.0 million was for retail operations and $9.7 million for
manufacturing operations. The amortization period for retail goodwill was also
reduced from 40 to 20 years. For additional information see the section on
Goodwill Impairment Charges.
During 2000 we entered into an agreement with Homestore.com, the leading home
and real estate network for consumers and real estate professionals on the
Internet. Under the agreement Homestore.com will provide a full range of web
based on-line marketing and services to our Company-owned and independent
retailers who are members of our Champion Home Centers distribution network.
--------
(1) U.S. manufactured homes are constructed in accordance with the Federal
Manufactured Home Construction and Safety Standards, as administered by the U.S.
Department of Housing and Urban Development (HUD). The HUD code regulates
manufactured home design and construction, strength and durability, fire
resistance and energy efficiency. Other building codes apply to modular homes
and homes built in Canada.
(2) A floor is a section of a home. A single-section home is comprised of one
floor and a multi-section home is comprised of two or more floors.
20
In 2000 we formed Genesis Homes (Genesis) to develop homes and marketing
programs to attract small to medium-sized builders and developers. Genesis
produces modular and manufactured housing in 12 of Champion's existing
homebuilding facilities, which provides nationwide market presence. Champion
sold approximately 2,000 homes through 200 local builders and developers in
2000, which accounted for an estimated 7% of our wholesale revenues.
In 1999 Champion's former largest independent retail customer declared
bankruptcy. Sales to this retailer represented 3.5% of Champion's wholesale home
shipments in 1998 and 2.7% for the first six months of 1999. In the bankruptcy
proceedings the Company repurchased 1,850 homes for approximately $70 million
which were financed through floor plan borrowings. Pretax charges of $33.6
million were recorded in the third quarter of 1999 for the estimated losses
associated with the bankruptcy, consisting of $26.5 million to write down the
repurchased homes to estimated net resale value and $7.1 million to write off
uncollectible receivables. In the second quarter of 2000, a loss of $5 million
was recorded for an additional write down of the value of the remaining
repurchased homes. Substantially all the repurchased homes had been liquidated
by the end of the third quarter of 2000. The repurchase losses associated with
this bankruptcy were unusually large due to the following factors: the number of
homes that were repurchased, most of which were larger, costlier multi-section
homes; the amount of unrecoverable volume rebates; the competitive market place
in which the homes were located, which had an excess number of retail locations
and inventories; the effects of tightening consumer credit standards on the
consumers' ability to finance purchases of the homes; and the effects of
negative publicity associated with the bankruptcy on the Company's ability to
liquidate the homes.
RESULTS OF OPERATIONS 2000 VERSUS 1999
CONSOLIDATED
(Dollars in millions)
2000 1999 % change
------- ------- --------
Net sales
Manufacturing $ 1,564 $ 2,069 (24%)
Retail 607 787 (23%)
Less: intercompany (249) (291)
------- -------
Total net sales $ 1,922 $ 2,565 (25%)
======= =======
Gross margin $ 302 $ 400 (24%)
SG&A 305 292 4%
Goodwill impairment charges (190) --
------- -------
Operating income (loss) $ (193) $ 108
======= =======
As a percent of sales
Gross margin 15.7% 15.6%
SG&A 15.9% 11.4%
Champion's 2000 consolidated revenues decreased 25% from 1999 levels due to
challenging industry conditions which affected both retail sales and wholesale
shipments. These conditions included excess retail locations and inventory,
tightened consumer credit standards, high consumer repossession levels and
higher interest rates.
Gross margin dollars in 2000 were $98 million less than in 1999. Approximately
$100 million in reduced gross margin was due to the $643 million reduction in
consolidated sales. Also affecting gross margin dollars and as a percentage of
sales in 2000 were manufacturing inefficiencies from low production volume, the
$5 million additional charge for further write down of the repurchased homes
from the 1999 independent retailer bankruptcy, and approximately $5 million of
costs to reduce inventory and sell older homes at Company-owned sales centers,
partially offset by lower material costs. Gross margin in 1999 was reduced by
$26.5 million from the write down of repurchased homes to estimated net resale
value related to the independent retailer bankruptcy.
21
SG&A in 2000 rose as a result of marketing programs, fixed asset impairment
charges and other costs for the closing and consolidation of seven manufacturing
facilities and 62 sales centers, and impairment charges related to developments.
Costs for marketing and advertising programs increased $20 million. Non-cash
fixed asset impairment charges totaled $10.5 million and retail lease
termination costs were $1.8 million. Also affecting 2000 SG&A costs were an
increase in the provision for wholesale repurchase losses of $4 million
(excluding losses associated with the 1999 independent retailer bankruptcy),
$6.9 million of property insurance gains and lower SG&A due to reduced sales and
fewer manufacturing facilities in operation. In addition to these items, as a
percentage of sales SG&A increased in 2000 due to the effects of lower sales
volume on fixed costs, particularly in the retail segment. SG&A in 1999 included
$7.1 million for the write off of uncollectible receivables as a result of the
independent retailer bankruptcy.
Operating income (loss) in 2000 and 1999 was comprised of the following:
% OF % of
(Dollars in millions) 2000 SALES 1999 sales
--------------------- ---- ----- ---- -----
Manufacturing EBITA before
losses from independent
retailer bankruptcy $ 51 3.3% $132 6.4%
Retail segment EBITA (loss) (9) (1.5%) 51 6.5%
General corporate expenses (30) (23)
Intercompany profit in inventory 4 (4)
Goodwill amortization (14) (14)
Goodwill impairment charges (190) -
Losses from independent
retailer bankruptcy (5) (34)
----- ----
Operating income (loss) $(193) $108
===== ====
Segment EBITA consists of earnings (loss) before interest, taxes, goodwill
amortization, goodwill impairment charges and losses associated with the 1999
independent retailer bankruptcy.
Manufacturing segment sales to the retail segment and related manufacturing
profits are included in the manufacturing segment. Retail segment results
include retail profits from the sale of homes to consumers but do not include
any manufacturing segment profits associated with the homes sold. Intercompany
transactions between the operating segments are eliminated in consolidation,
including intercompany profit in inventory which represents the amount of
manufacturing segment gross margin in Champion-produced inventory at
Company-owned retailers. In 2000 a credit was required for the reduction in
intercompany profit in inventory resulting from lower manufacturing segment
gross margins and declining inventories at the retail segment. In 1999 an
elimination was required due to the increased number of Champion-produced homes
in inventory at Company-owned retailers.
General corporate expenses increased $6.5 million in 2000 due primarily to
non-cash fixed asset impairment charges of $4.0 million related to development
operations, of which $1.5 million was recognized upon the sale of a majority
interest in certain developments, and $2.5 million was recognized due to
insufficient estimated future cash flows from a wholly-owned development. In
addition, equity method losses from our minority interests in unconsolidated
development operations increased by $1 million.
22
Income tax benefits were recorded in 2000 resulting from the pretax loss,
compared to income tax charges recorded in 1999 due to taxable income. The
effective income tax rate decreased to 33% in 2000 from 39% a year earlier due
to the nondeductible portion of the goodwill impairment charges.
MANUFACTURING OPERATIONS
2000 1999 % change
------ ------ --------
Net sales (in millions) $ 1,564 $ 2,069 (24%)
EBITA before loss from independent
retailer bankruptcy (in millions) $ 51 $ 132 (61%)
EBITA margin % 3.3% 6.4%
Homes sold 52,442 71,761 (27%)
Floors sold 90,458 120,496 (25%)
Multi-section mix 71% 66%
Average home price $28,500 $ 27,600 3%
Manufacturing facilities at year end 53 60 (12%)
Manufacturing revenues in 2000 decreased because of challenging market
conditions, with Champion's wholesale homes and floors sold declining 26.9% and
24.9%, respectively, from a year earlier. Our U.S. wholesale shipments of HUD
code homes decreased 27.5% from a year earlier, which resulted in a U.S. market
share of 20.1% in 2000 compared to 19.9% in 1999. Wholesale shipments of
single-section homes decreased 36.1% from 1999 levels, while multi-section sales
were down 22.3%. The increased average wholesale selling price per home resulted
primarily from the higher multi-section mix. Manufacturing sales to
Company-owned retailers accounted for 16% of total homes sold in 2000, up from
14% in 1999.
Manufacturing EBITA in 2000 declined $81 million as compared to 1999 excluding
the losses from the 1999 independent retailer bankruptcy. Approximately $60
million of this decline was due to reduced gross margin from lower manufacturing
sales of $505 million, and $20 million was due to higher marketing and
advertising costs. Manufacturing margins were also affected by manufacturing
inefficiencies resulting from low volume, partially offset by lower material
costs. In addition, 2000 manufacturing EBITA was impacted by fixed asset
impairment charges of $2.5 million related to plant closings, $6.9 million for
property insurance gains and an increase in the provision for wholesale
repurchase losses of $4 million (excluding losses associated with the 1999
independent retailer bankruptcy).
Although retailer orders can be cancelled at any time without penalty, and
unfilled orders are not necessarily an indication of future business, the
Company's unfilled wholesale orders for housing at December 30, 2000 totaled
approximately $15 million, compared to $49 million a year earlier. At the end of
2000, Champion was operating 53 homebuilding facilities, compared to 60 at the
end of 1999. Champion closed two of these manufacturing facilities in the first
quarter of 2001 and may consider other adjustments to manufacturing capacity in
response to changes in market conditions.
RETAIL OPERATIONS
2000 1999 % change
------- ------- --------
Net sales (in millions) $ 607 $ 787 (23%)
EBITA (loss)(in millions) $ (9) $ 51
EBITA margin % (1.5%) 6.5%
New homes sold 11,483 15,853 (28%)
Pre-owned homes sold 2,863 4,102 (30%)
Total homes sold 14,346 19,955 (28%)
% Champion-produced new homes sold 73% 62%
New multi-section mix 62% 55%
Average new home price $49,600 $46,300 7%
Average number of new homes in
inventory per sales center at year end 18 20 (10%)
Sales centers at year end 260 280 (7%)
23
Retail sales decreased in 2000 due to challenging industry conditions. During
the year 62 sales centers were closed or consolidated, primarily in the second
half, bringing the year end total to 260 locations in 28 states.
Retail EBITA in 2000 declined $60 million as compared to 1999. Approximately $39
million of this decline was due to reduced gross margin from lower retail sales
of $180 million and an estimated $5 million was due to costs to reduce inventory
and sell older homes. Retail EBITA also included $4.0 million for fixed asset
impairment charges and $1.8 million for lease termination costs related to sales
center closures. In addition, retail margins were impacted by a highly
competitive market and reduced loan origination income from lower rates and
volume.
GOODWILL IMPAIRMENT CHARGES
The Company evaluates the recoverability of long-lived assets not held for sale
by measuring the carrying value of the assets against the associated estimated
undiscounted future cash flows in accordance with SFAS No. 121. At the time such
evaluations indicate that the undiscounted future cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their estimated fair values. Estimated fair
values are determined using the present value of estimated future cash flows.
Industry conditions in 2000, including excess retail locations and inventory,
tightened consumer credit standards, high consumer repossession levels and
higher interest rates for purchasers of manufactured housing, resulted in lower
sales volumes and sales center closures for the Company's acquired retail
businesses. Beginning in the second half of 1999, retail finance companies began
tightening credit eligibility requirements and increasing down payment
requirements for consumer loans in the manufactured housing industry. We
monitored these changes throughout 1999 and through the third quarter of 2000
with an expectation that underwriting standards would be relaxed and/or other
lenders would enter the marketplace to compete. During this period an increasing
number of repossessed manufactured homes were also becoming available in the
market. These factors contributed to declining retail sales of new homes in the
industry and at Company-owned retailers. In the first half of 2000, almost all
of our acquisitions were sufficiently profitable such that the carrying value of
the related goodwill continued to appear to be recoverable. In the third quarter
of 2000, certain of the Company's retail acquisitions incurred operating losses,
and we closed and consolidated 29 under performing retail sales centers.
However, our long-term forecast for these retailers was sufficiently profitable
that the goodwill appeared to be recoverable. These long-term forecasts were
based on past operating results, management plans, and expectations for the
industry.
In the fourth quarter of 2000 industry conditions continued to worsen. The
Company's retail losses continued into October. By late November it appeared
that retail traffic for the month dropped by approximately 45%, retail financing
continued to tighten and a significant retail operating loss for the month was
forecasted. On December 1, 2000, October industry wholesale shipments were
released showing a 32% decline from 1999 levels. Third quarter industry retail
data showed declines of approximately 25% and October appeared to decline 30%.
It became apparent to management that additional lenders were not coming into
the market and tightened underwriting standards were going to prevail longer
term. During the fourth quarter management committed to close 25 additional
under performing sales centers. The culmination of these factors suggested that
a detailed review regarding the recoverability of long-lived assets was
required.
In the evaluation process we forecasted cash flows over the next 20 years using
assumptions for each retail company. The resulting cash flows were discounted to
present value using a discount factor that approximated the Company's blended
cost of capital of 13%. The assessment was performed using lower volume and
growth assumptions than previously assumed due to the continued downturn in the
industry and lowered future expectations. The key assumptions in our 20 year
forecast for Company-owned retailers with impaired goodwill included the
following:
24
- Average number of new homes sold per month per sales center ranging from
2.5 to 5.0. Average selling price per new home ranging from $40,000 to
$52,000. Average gross profit and other income ranging from 26% to 29% of
sales. Average variable SG&A ranging from 5% to 7% of sales. Average
monthly fixed SG&A per retail sales center ranging from $25,000 to $40,000.
- For the next one to two years, an expectation of an uncertain U.S. economy,
declining consumer confidence and a mild recessionary trend.
- Over the longer term, expected lower growth for our Company-owned retailers
in terms of number of sales centers operated and the number of homes sold
per location and slight improvement in consumer financing availability,
relative interest rates and industry retail sales.
As a result of the recoverability analysis, the Company recorded non-cash pretax
goodwill impairment charges of $189.7 million, consisting of $180.0 million for
seven retail companies that were acquired in 1998 and 1999 and $9.7 million for
two manufacturing companies that were acquired in 1996 and 1998.
In conjunction with the SFAS No. 121 analysis discussed above, the estimated
useful life of our goodwill was reviewed. We initially selected 40 years for
both our manufacturing and retail acquisitions based on the long-term nature of
the manufactured housing industry and its significance to the housing market in
the U.S. Our traditional consumer base consists of individuals with annual
household incomes under $40,000. These individuals comprise the largest
demographic segment of the manufactured housing market. The Company believes
these consumers are attracted to manufactured homes by their low cost as
compared to site-built homes. According to 1999 data reported by USDOC, the
retail cost of manufactured housing is approximately $29.46 per square foot, as
compared to $68.80 per square foot for site-built housing. We believe the
affordability of manufactured housing more readily enables people who would
otherwise rent alternative forms of housing to own their residence. Accordingly,
given the affordable nature of Champion's homes for consumers as compared to
renting, the Company believed that for the next 40 years consumers would be
available, and would continue to purchase our products. We believed the
resulting volume of retail sales at our acquired retail businesses would
generate sufficient cash flows to realize the recorded goodwill.
Late in the fourth quarter, we evaluated the appropriateness of the 40 year
useful life we originally assigned to goodwill for our retail acquisitions.
Given the culmination of the factors which required the Company to evaluate the
recoverability of the goodwill as previously discussed, in conjunction with the
changes transpiring in the retail distribution channel, we believed an
adjustment to a 20 year useful life was appropriate.
Other factors considered were as follows:
- Retail sales center volume and profits are sensitive to market conditions
including the number of sales centers and the level of retail inventory in
the market area. This is evidenced by a number of restructurings in the
latter half of 2000 at Company-owned retailers, including the closure of 62
sales centers (approximately 20% of the total), management changes and
sales force turnover.
- Retail sales center volume and profitability are affected by relationships
and programs with consumer finance companies and floor plan lenders. At the
time of the acquisitions, ample consumer and floor plan financing was
available at advantageous rates. Subsequently, consumer credit underwriting
standards have tightened and interest rates have risen. Further, floor plan
financing availability has declined and costs have risen. These changes in
industry lending practices have adversely affected retail sales and
profitability.
- It became clear to the Company that the business model for the traditional
retail distribution channel will be impacted by Internet strategies. In
mid-2000 we entered into an agreement with Homestore.com, the leading home
and real estate network for consumers and real estate professionals on the
Internet. Under the agreement Homestore.com will provide a full range of
web based on-line marketing and services to our Company-owned retailers and
independent retailers who are
25
members of our Champion Home Centers distribution network.
- Primarily as a result of industry conditions, an estimated 25% of the
industry's retail locations have gone out of business during the past two
years.
The combination of these factors indicated substantially more volatility in the
retail segment as compared to the manufacturing segment. Therefore, we concluded
that a period of 20 years is a more reasonable estimate of the useful life for
our retail goodwill.
REPURCHASE OBLIGATIONS
Each month the Company reviews its contingent repurchase obligation for
independent retailers to assess the adequacy of the reserve for repurchase
losses. This analysis is based on the combination of current and historical
experience, reports received from four of the primary national floor plan
lenders that provide approximately 65% of all floor plan financing for our
independent retailers, and information regarding our retailers obtained from
management at our manufacturing facilities.
The maximum repurchase obligation is calculated as the total amount that would
be paid upon the default of all of our independent retailers, without reduction
for the resale value of the repurchased homes. Potential losses under repurchase
obligations are determined by the difference between the repurchase price and
the estimated net resale value of the homes.
Each month the Company uses the information from these four primary lenders to
determine the amount subject to repurchase and the estimated potential loss for
each of our 25 largest independent retailers. As of February 28, 2001, our
largest independent retailer, a nationwide retailer who we consider to be low
risk, had $23.5 million of inventory subject to repurchase, with associated
potential repurchase loss estimated at $4.7 million. Each of our next 24 largest
independent retailers had from $1.5 million to $6.0 million of inventory subject
to repurchase as of February 28, 2001.
A summary of actual repurchase activity for the last three years, excluding the
$38.6 million losses associated with the 1999 independent retailer bankruptcy,
was as follows (dollars in millions):
2000 1999 1998
---- ---- ----
Maximum repurchase obligation
at end of year $ 430 $ 630 $ 760
Number of retailer defaults 86 63 50
Number of homes repurchased 660 480 165
Total repurchase price $19.1 $14.2 $ 4.9
Total repurchase losses incurred $ 6.0 $ 2.9 $ 0.4
To reduce potential losses from repurchase obligations, in the fourth quarter of
1999 we initiated a change to our program for the payment of volume rebates to
our independent retailers. The majority of our sales to independent retailers
are currently made under rebate programs that result in little or no loss
exposure for volume rebates.
DEFERRED TAX ASSETS
At December 30, 2000, the Company had gross deferred tax assets of $101 million.
We believe that our deferred tax assets will be realized based on an analysis of
historical performance and forecasted future performance. The Company has been
profitable for eight of the last nine years, generating pretax earnings of $82
million, $157 million and $117 million in 1999, 1998 and 1997, respectively. The
carryforward period of 20 years allows for the gross deferred tax assets to be
realized through cumulative taxable income of $262 million or an average of $13
million per year. Despite current industry conditions, we believe that a minimum
expectation of $13 million in average annual taxable income over the next 20
years is reasonable.
26
RESULTS OF FOURTH QUARTER 2000 VERSUS 1999
(Dollars in millions) 2000 1999 % change
--------- --------- --------
Net sales
Manufacturing $ 310 $ 474 (34%)
Retail 124 175 (29%)
Less: intercompany (47) (63)
-------- --------
Total net sales $ 387 $ 586 (34%)
======== ========
Gross margin $ 57 $ 90 (37%)
SG&A 82 74 11%
Goodwill impairment charges (190) --
-------- --------
Operating income (loss) $ (215) $ 16
======== ========
Manufacturing EBITA $ 3 $ 20
Retail EBITA (loss) (15) 5
General corporate expenses (10) (6)
Goodwill amortization (3) (3)
Goodwill impairment charges (190) --
-------- --------
Operating income (loss) $ (215) $ 16
======== ========
As a percent of sales
Gross margin 14.7% 15.3%
SG&A 21.1% 12.6%
Manufacturing EBITA margin % 1.0% 4.3%
Retail EBITA margin % (12.3%) 2.7%
Manufacturing
Homes sold 9,737 16,211 (40%)
Floors sold 17,466 27,456 (36%)
Multi-section mix 77% 68%
Retail
New homes sold 2,216 3,378 (34%)
Pre-owned homes sold 594 979 (39%)
% Champion-produced new homes sold 79% 64%
Challenging industry market conditions and a significant drop in consumer retail
traffic and sales affected Champion's results for the fourth quarter ended
December 30, 2000. Fourth quarter U.S. industry wholesale shipments were off 38%
from a year earlier according to NCSBCS, while industry retail sales were down
27% based on data provided by Statistic Surveys, Inc.
Gross margin dollars for the fourth quarter of 2000 were $33 million lower than
in 1999 primarily due to lower consolidated sales of $199 million. Gross margin
as a percentage of sales was lower in 2000 because of manufacturing
inefficiencies from lower production volume and competitive market conditions in
the retail segment.
SG&A in the fourth quarter of 2000 was $8 million higher than in 1999 primarily
due to $6.5 million of non-cash fixed asset impairment charges and $1.1 million
of retail lease termination costs. As a percent of revenues, SG&A also rose in
2000 due to the effects of lower volume on fixed costs.
27
OPERATIONS
For the quarter, the Company's manufacturing revenues decreased due to
challenging market conditions. Manufacturing EBITA for the quarter was $17
million lower than in 1999 primarily from lower gross margin due to reduced
sales of $164 million. Higher marketing costs in the quarter and $1.5 million of
fixed asset impairment charges were offset by lower SG&A from operating fewer
plants than a year ago. During the fourth quarter of both 2000 and 1999, two
manufacturing facilities were closed.
Challenging industry conditions and lower sales volume per store affected retail
revenues and profitability in the fourth quarter of 2000. Retail EBITA for the
quarter was $20 million lower than in 1999. Of this decline, approximately $10
million was from lower gross margin due to the $51 million reduction in sales,
$2.5 million for fixed asset impairment charges and $1.1 million for lease
termination costs. Fourth quarter of 2000 results were also affected by costs to
reduce inventories and by lower loan origination fees. During the fourth quarter
of 2000, 24 sales centers were closed or consolidated, compared to 14 closures
in the three-month period in 1999.
RESULTS OF OPERATIONS 1999 VERSUS 1998
(Dollars in millions, except average home price)
1999 1998 % change
--------- --------- --------
Net sales
Manufacturing $ 2,069 $ 1,986 4%
Retail 787 562 40%
Less: intercompany (291) (215)
--------- ---------
Total net sales $ 2,565 $ 2,333 10%
========= =========
Gross margin $ 400 401 -%
SG&A 292 231 26%
--------- ---------
Operating income $ 108 $ 170 (37%)
========= =========
As a percent of sales
Gross margin 15.6% 17.2%
SG&A 11.4% 9.9%
Manufacturing
Homes sold 71,761 70,359 2%
Floors sold 120,496 115,519 4%
Multi-section mix 66% 63%
Average home price $ 27,600 $ 27,000 2%
Manufacturing facilities at year end 60 60
Retail
New homes sold 15,853 11,738 35%
Pre-owned homes sold 4,102 2,867 43%
% Champion-produced
new homes sold 62% 49%
Average new home price $ 46,300 $ 45,100 3%
Sales centers at year end 280 246
28
Operating income in 1999 and 1998 was comprised of the following:
% of % of
(Dollars in millions) 1999 sales 1998 sales
------ ----- ------ -----
Manufacturing EBITA before
loss from independent
retailer bankruptcy $ 132 6.4% $ 165 8.3%
Retail EBITA 51 6.5% 47 8.4%
General corporate expenses (23) (23)
Intercompany profit in inventory (4) (10)
Goodwill amortization (14) (9)
Loss from independent
retailer bankruptcy (34) --
----- -----
Operating income $ 108 $ 170
===== =====
In January 1999 the Company acquired Homes of Merit, Inc. (Homes of Merit),
Florida's largest producer of manufactured homes with six manufacturing
facilities. Heartland Homes, a housing retailer with nine sales centers in
Texas, was also acquired in early January. In June 1999 Utah-based Care Free
Homes, Inc., a retailer with seven housing centers, was acquired. We also
acquired a manufactured housing community developer in 1999. These acquired
businesses had 1998 sales of approximately $200 million. Throughout 1998
Champion acquired 14 manufactured housing retail organizations, which operated
163 sales locations at the time of acquisition, and one homebuilding facility.
The 1999 bankruptcy of the Company's former largest independent retailer
resulted in the repurchase of inventory for $70 million and pretax charges of
$33.6 million. See further discussion of this bankruptcy in "Overview".
Revenues in 1999, particularly in the second half of the year, were affected by
market conditions, including the industry's excess number of retailers, excess
retail inventory and tightened consumer credit standards.
Gross margin in 1999 was comparable to the 1998 amount. Gross margin in 1999
increased approximately $37 million due to the $232 million increase in
consolidated sales, but was reduced by $26.5 million due to the write down of
repurchased inventory from the independent retailer bankruptcy. Gross margin in
1999 was also affected by manufacturing inefficiencies resulting from low
production volume and plant closures during the second half of the year.
SG&A in 1999 increased $61 million as compared to 1998, primarily due to the
expansion of Company-operated retail sales centers and the $7.1 million write
off of receivables related to the independent retailer bankruptcy. Also
contributing to higher SG&A were the 1999 acquisitions and $2 million for the
commencement of marketing programs. As a percent of sales, SG&A also increased
in 1999 due to expanded retail operations and the effects of lower retail sales
volume per store.
Interest expense was higher in 1999 due to amounts outstanding on the Company's
Senior Notes and inventory floor plan obligations. The Senior Notes were
primarily used to reduce bank borrowings, which were incurred to finance
acquisitions in 1998 and 1999. Floor plan liabilities were higher in 1999 due to
the increase in the number of Company-owned stores.
Income tax expense decreased in 1999 due to lower taxable income, with the
effective tax rate declining to 39% from 40% in 1998 due to lower state tax
rates related to certain acquisitions.
Intercompany profit in inventory eliminations of $4.4 million and $10.2 million
were required in 1999 and 1998, respectively, due to the increase in
Champion-produced inventory at Company-owned retailers. This increase was due to
acquired retailers transitioning to Champion-produced homes as well as inventory
requirements at new sales centers. The eliminations were lower in 1999 due to
fewer acquisitions and inventory reductions at Company-owned stores during the
year.
29
Manufacturing revenues increased due to the Homes of Merit acquisition, with
wholesale homes and floors sold rising 2.0% and 4.3%, respectively, from 1998
levels. Excluding Homes of Merit, 1999 net sales and wholesale homes and floors
sold declined 2.5%, 3.6% and 2.4%, respectively, from the previous year.
Multi-section homes sold rose 7.8% and single-section homes sold decreased 7.7%
from 1998 levels. The increased average wholesale selling price per home
resulted primarily from the higher multi-section mix. Manufacturing sales to
Company-operated sales centers accounted for 14% of total homes sold in 1999, up
from 11% in 1998.
Champion's U.S. wholesale shipments of HUD code homes increased 1.4% from a year
earlier, which resulted in a U.S. market share improvement to 19.9% in 1999 from
18.3% in 1998. Excluding Homes of Merit, HUD code homes sold by the Company
decreased 4.1%. According to data reported by NCSBCS, in 1999 U.S. industry
wholesale shipments of HUD code homes and floors decreased 6.5% and 4.3%,
respectively, from 1998 levels.
Manufacturing EBITA, before the loss from the retailer bankruptcy, declined $33
million in 1999 as compared to 1998. In 1999 higher manufacturing gross profit
of approximately $10 million from increased sales of $83 million was offset by
operating inefficiencies resulting from low volume, approximately $7 million of
costs to close and consolidate eight facilities, and market conditions,
particularly in the second half of the year. Margins in 1998 benefited from
production efficiencies resulting from high levels of unfilled orders and
product mix and pricing.
Retail sales substantially increased in 1999 due to a full year of operations
from the 1998 and 1999 acquisitions and expansions, partially offset by lower
sales volume per store. The average number of retail locations operated by the
Company increased in 1999 to 276 from 175 in 1998. The number of sales centers
at the end of 1999 totaled 280, for a net increase of 34 stores during the year.
Retail EBITA in 1999 was $4 million higher than in 1998. Increased gross margin
dollars from $225 million of higher retail sales were offset by higher SG&A
costs from a greater number of sales centers. Also affecting margins in 1999
were competitive pricing in key markets and lower sales volume per store.
Margins in 1998 benefited from higher sales volume per store. Startup and
expansion costs also affected margins in both years.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $50 million at December 30, 2000, up from $13 million at
January 1, 2000. During the year $115 million of cash was generated from
operations and $55 million was used to reduce debt. Proceeds from the sale of
property, plant and equipment were approximately $4 million. Cash totaling $10
million was used for acquisition-related payments and $15 million for capital
improvements.
In 2000 $0.9 million was used to repurchase 117,000 shares of Company common
stock, pursuant to a Board of Directors' authorization in February 1999 for up
to 3.0 million shares. Before the program was suspended in June 2000, 1.9
million shares had been repurchased.
Year end 2000 trade accounts receivable decreased due to the reduction in
December 2000 sales from December 1999 levels. Year end inventories and floor
plan payable decreased due to the liquidation of homes repurchased in 1999 upon
the independent retailer bankruptcy, 20 fewer sales centers at the end of 2000
as compared to 1999 and efforts to reduce inventories throughout our retail
organization in response to industry conditions. Deferred taxes and other assets
substantially increased due to the expected future tax benefits related to the
goodwill impairment charges.
The Company has a revolving credit agreement, maturing in May 2003, with a group
of banks. In June 2000 our bank credit facility was amended to reduce the
facility to $100 million from $200 million and to provide more flexible terms.
As of September 30, 2000, the Company received a waiver of certain of the
facility's financial performance covenants for the period October 1, 2000
through November 15, 2000. On November 20,
30
2000, the facility was amended to a secured line of credit and to provide more
flexible financial performance covenants. The November amendment temporarily
reduced the facility size to $45 million and limited advances under the facility
to a borrowing base calculated based on qualifying accounts receivable and
inventories, as defined in the amendment. On February 13, 2001, the credit
facility was amended to provide more flexible financial performance covenants.
For the four months from October 2000 to January 2001, the calculated borrowing
base averaged $70 million and the February 2001 calculated borrowing base was
$63 million. On March 1, 2001, the facility automatically increased to $75
million. The facility may be further increased to $90 million upon a majority
vote of the bank group. The agreement allows for letters of credit up to $35
million. At the end of February 2001, there were $33 million of letters of
credit and $15 million of borrowings outstanding under the credit facility. As
of December 30, 2000, and through February 2001, we were in compliance with the
agreement's financial performance covenants. Based on our forecasts and
projections, we believe that we will be in compliance with the financial
performance covenants throughout 2001.
On May 3, 1999 the Company completed an offering of $200 million of unsecured
Senior Notes due May 15, 2009 with interest payable semi-annually at an annual
rate of 7.625%. The net proceeds from the offering totaling $197.3 million were
primarily used to reduce bank debt that resulted from acquisitions.
Champion plans to spend less than $15 million in 2001 on capital expenditures
for facility maintenance. Borrowings may be required during 2001 for capital
improvements and to meet seasonal working capital needs. Consistent with its
plan to improve shareholder value through investments in its operating
businesses, the Company does not plan to pay cash dividends in the near term.
During the past year some of the manufactured housing industry floor plan
lenders have elected to exit or reduce their participation in the market.
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, of which Conseco Finance (Conseco)
is the primary lender. In July 2000, Conseco made a verbal request of the
Company to reduce its floor plan borrowings with Conseco in order to meet
certain of its concentration requirements. Our total floor plan borrowings with
Conseco at that time were $121 million. In March 2001, we received a request
from Conseco to reduce our floor plan borrowings with them to $60 million by
June 30, 2001 and $40 million by September 30, 2001. As of March 23, 2001, our
total floor plan borrowings with Conseco were $81 million. Additional reductions
of our retail inventories and borrowings from Conseco will occur upon the
liquidation of inventory at the 30 retail sales centers that we closed during
the first quarter of 2001, additional planned inventory reductions and a $7
million transfer of floor plan financing to another lender.
As a result of efforts to diversify our floor plan borrowings, in November 2000
and February 2001, we obtained floor plan lines of credit with two financial
institutions totaling $25 million. We continue to review the most effective
means to finance our retail inventories from a variety of sources.
The Company believes that its cash balances, cash flows from operations,
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. The Company 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 is insufficient to finance its operations and alternative
financing or capital is unavailable, there could be an adverse impact on our
liquidity.
31
IMPACT OF INFLATION
Inflation has not had a material effect on Champion's operations during the last
three years. Commodity prices, including lumber, fluctuate; however, during
periods of rising commodity prices the Company has been able to pass the
increased costs to its customers in the form of surcharges and base price
increases.
IMPACT OF RECENTLY-ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No.
101 draws on existing accounting rules and provides specific guidance on how
those accounting rules should be applied to revenue recognition. Our revenue
recognition policies were in compliance with SAB No. 101; therefore, adoption of
SAB No. 101 in the fourth quarter of 2000 had no effect on our reported results
of operations, financial position or cash flows.
The Financial Accounting Standards Board (FASB) Emerging Issues Task Force
(EITF) No. 00-10 "Accounting for Shipping and Handling Fees and Costs" was
adopted in the fourth quarter of 2000. The adoption of EITF 00-10 resulted in
the reclassification of manufacturing segment delivery revenue to net sales from
cost of sales. Prior year net sales and cost of sales amounts have been
reclassified accordingly. Delivery costs are and have been included in cost of
sales. The net amount of delivery revenue reclassified to net sales was $56
million, $76 million and $79 million in 2000, 1999 and 1998, respectively.
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
was subsequently amended by SFAS Nos. 137 and 138. SFAS 133, as amended, did not
have a material impact on our results of operations, financial position or cash
flows, and did not require the recording of a transition adjustment upon
adoption in January 2001.
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's floor plan borrowings at December 30, 2000 were $114
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 $1.1 million, assuming average floor plan borrowings of
$114 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and schedules filed herewith are set forth on
the Index to Financial Statements and Financial Statement Schedules on page F-1
of the separate financial section of this Report and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information set forth in the first part of the section entitled
"Election of Directors" in the Company's Proxy Statement for the Annual
Shareholders' Meeting to be held May 1, 2001 (the "Proxy Statement") is
incorporated herein by reference.
The information set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the section entitled "Additional Information"
in the Company's Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the section entitled "Executive
Compensation" in the Company's Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the captions "Principal Shareholders"
and "Security Ownership of Management" in the section entitled "Additional
Information" in the Company's Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Other Information
Regarding Management" in the section entitled "Additional Information" in the
Company's Proxy Statement is incorporated herein by reference.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The financial statements, supplementary financial information, and
financial statement schedules filed herewith are set forth on the Index to
Financial Statements and Financial Statement Schedules on page F-1 of the
separate financial section of this Report, which is incorporated herein by
reference.
The following exhibits are filed as part of this Report. Those exhibits
with an asterisk (*) designate the Company's management contracts or
compensation plans or arrangements for its executive officers.
Exhibit No. Description
3.1 Restated Articles of Incorporation of the Company, filed with
the Company's Annual Report on Form 10-K for the fiscal year
ended December 30, 1995 and incorporated herein by reference.
3.2 Amendment to Restated Articles of Incorporation of the Company,
filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 28, 1997 and incorporated herein by
reference.
3.3 Article III of the Company's Restated Articles of Incorporation
(increasing number of authorized shares of capital stock),
included in the Company's Amendment to Restated Articles of
Incorporation, filed as Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1997 and
incorporated herein by reference.
3.4 Certificate of Correction to Articles of Incorporation of the
Company, filed as Exhibit 3.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 2, 1999 and
incorporated herein by reference.
3.5 Bylaws of the Company as amended through February 22, 1999,
filed as Exhibit 3.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 2, 1999 and incorporated
herein by reference.
4.1 Indenture dated as of May 3, 1999 between the Company, the
Subsidiary Guarantors and Bank One Trust Company, NA (formerly
The First National Bank of Chicago), as Trustee, filed as
Exhibit 4.1 to the Company's Form S-4 Registration Statement No.
333-84227 dated July 30, 1999 and incorporated herein by
reference.
4.2 Supplemental Indenture dated as of July 30, 1999 between the
Company, the Subsidiary Guarantors and Bank One Trust Company,
NA (formerly The First National Bank of Chicago), as Trustee,
filed as Exhibit 4.2 to the Company's Form S-4 Registration
Statement No. 333-84227 dated July 30, 1999 and incorporated
herein by reference.
4.3 Supplemental Indenture dated as of October 4, 1999 between the
Company, the Subsidiary Guarantors and Bank One Trust Company,
NA, as Trustee, filed as Exhibit 4.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 1, 2000
and incorporated herein by reference.
4.4 Supplemental Indenture dated as of February 10, 2000 between the
Company, the Subsidiary Guarantors and Bank One Trust Company,
NA, as Trustee, filed as Exhibit 4.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 1, 2000
and incorporated herein by reference.
34
4.5 Registration Rights Agreement dated as of April 28, 1999 between
the Company; Credit Suisse First Boston Corporation; Donaldson,
Lufkin & Jenrette Securities Corporation; and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, as Initial Purchasers,
filed as Exhibit 4.3 to the Company's Form S-4 Registration
Statement No. 333-84227 dated July 30, 1999 and incorporated
herein by reference.
4.6 Form of Rights Certificate, filed as Exhibit 1 to the Company's
Registration Statement on Form 8-A dated January 12, 1996 and
incorporated herein by reference.
4.7 Rights Agreement by and between the Company and Harris Trust and
Savings Bank, filed as Exhibit 2 to the Company's Registration
Statement on Form 8-A dated January 12, 1996 and incorporated
herein by reference.
10.1 Lease Agreement dated November 21, 1991 between the Company and
University Development Company relating to the premises located
at 2701 Cambridge Court (formerly University Drive), Auburn
Hills, Michigan, filed as Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 1992
and incorporated herein by reference.
10.2 First Amendment dated December 29, 1997 to the Lease Agreement
dated November 21, 1991 between the Company and University
Development Company relating to the premises located at 2701
Cambridge Court (formerly University Drive), Auburn Hills,
Michigan, filed as Exhibit 10.2 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998 and
incorporated herein by reference.
10.3 Credit Agreement by and among the Company; the guarantors party;
the banks party; PNC Bank, National Association, as
Administrative Agent; Bank One Capital Markets, Inc., as
Syndication Agent; Comerica Bank, as Documentation Agent; and
National City Bank, Keybank National Association, Bank of
America, N.A. and Wachovia Bank, N.A., as Co-Agents dated as of
May 5, 1998, as amended by Amendment No. 1 to Credit Agreement,
dated as of December 18, 1998; as amended by Amendment No. 2 to
Credit Agreement, dated as of March 31, 1999; as amended by
Amendment No. 3 to Credit Agreement, dated as of July 1, 1999;
as amended by Amendment No. 4 to Credit Agreement, dated as of
February 14, 2000; as amended by Amendment No. 5 to Credit
Agreement, dated as of June 15, 2000; and as amended by
Amendment No. 6 to Credit Agreement dated as of November 20,
2000.
10.4 Seventh Amendment dated February 13, 2001 to the Credit
Agreement dated May 5, 1998 by and among the Company; the
guarantors party; the banks party; PNC Bank, National
Association, as Agent; Bank One, Michigan, as Syndication Agent;
Comerica Bank, as Documentation Agent; and National City Bank,
Harris Trust and Savings Bank, Keybank, National Association,
Bank of America, N.A., and Wachovia Bank, N.A., as Co-Agents.
10.5 *Champion Enterprises, Inc. 1993 Management Stock Option Plan,
as amended and restated as of October 27, 1998, filed as Exhibit
10.6 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 2, 1999 and incorporated herein by reference.
10.6 *Champion Enterprises, Inc. 1995 Stock Option and Incentive
Plan, filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-8 dated May 1, 1995 and incorporated herein
by reference.
10.7 *First Amendment to the Champion Enterprises, Inc. 1995 Stock
Option and Incentive Plan, filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995 and incorporated herein by reference.
35
10.8 *Second Amendment dated April 28, 1998 to the Champion
Enterprises, Inc. 1995 Stock Option and Incentive Plan, filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1999 and incorporated herein by
reference.
10.9 *Third Amendment dated October 27, 1998 to the Champion
Enterprises, Inc. 1995 Stock Option and Incentive Plan, filed as
Exhibit 10.10 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 2, 1999 and incorporated herein by
reference.
10.10 *Fourth Amendment dated April 27, 1999 to the Champion
Enterprises, Inc. 1995 Stock Option and Incentive Plan, filed as
Exhibit 10.2 to the Company's Report on Form 10-Q for the
quarter ended April 3, 1999 and incorporated herein by
reference.
10.11 *Management Stock Purchase Plan, filed as Exhibit 4.1 to the
Company's Form S-8 dated September 17, 1998 and incorporated
herein by reference.
10.12 *Deferred Compensation Plan, filed as Exhibit 4.2 to the
Company's Form S-8 dated September 17, 1998 and incorporated
herein by reference.
10.13 *Corporate Officer Stock Purchase Plan, filed as Exhibit 4.1 to
the Company's Form S-8 dated February 26, 1999 and incorporated
herein by reference.
10.14 *Consent in Lieu of a Special Meeting of the Deferred
Compensation Committee dated January 1, 1999 to amend the
Corporate Officer Stock Purchase Plan, filed as Exhibit 10.33 to
the Company's Annual Report on Form 10-K for the fiscal year
ended January 2, 1999 and incorporated herein by reference.
10.15 *2000 Stock Compensation Plan for Nonemployee Directors, filed
as Exhibit 4.1 to the Company's Registration Statement on Form
S-8 dated December 28, 2000 and incorporated herein by
reference.
10.16 *First Amendment to the 2000 Stock Compensation Plan for
Nonemployee Directors, filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-8 dated December 28, 2000 and
incorporated herein by reference.
10.17 *Salesperson Retention Plan, filed as Exhibit 99(a) to the
Company's Registration Statement on Form S-3 dated January 19,
2001 and incorporated herein by reference.
10.18 *Letter Agreement dated April 27, 1990 between the Company and
Walter R. Young, filed as Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 2, 1990 and
incorporated herein by reference.
10.19 *Amendment dated August 31, 1995 to the Letter Agreement dated
April 27, 1990 between the Company and Walter R. Young, filed as
Exhibit 10.15 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 30, 1995 and incorporated herein
by reference.
10.20 *Letter Agreement dated October 17, 2000 between the Company and
Anthony S. Cleberg.
10.21 *Change in Control Severance Agreement dated November 30, 2000
between the Company and Anthony S. Cleberg.
10.22 *Letter Agreement dated May 1, 1997 between the Company and
Philip
36
C. Surles, filed as Exhibit 10.31 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998 and
incorporated herein by reference.
10.23 *Change in Control Severance Agreement dated June 13, 1997
between the Company and Philip C. Surles, filed as Exhibit 10.32
to the Company's Annual Report on Form 10-K for the fiscal year
ended January 3, 1998 and incorporated herein by reference.
10.24 *Confidentiality and Noncompetition Agreement dated June 13,
1997 between the Company and Philip C. Surles, filed as Exhibit
10.33 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 3, 1998 and incorporated herein by reference.
10.25 *Amendment to Change in Control Severance Agreement dated
February 18, 1999 between the Company and Philip C. Surles,
filed as Exhibit 10.20 to the Company's Annual Report on Form
10-K for the fiscal year ended January 2, 1999 and incorporated
herein by reference.
10.26 *Employment and Noncompetition Agreement dated January 8, 1998
between the Company and M. Mark Cole, filed as Exhibit 10.26 to
the Company's Annual Report on Form 10-K for the fiscal year
ended January 2, 1999 and incorporated herein by reference.
10.27 *Letter Agreement dated September 11, 1998 between the Company
and M. Mark Cole, filed as Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 2, 1999
and incorporated herein by reference.
10.28 Lease dated June 30, 1997 between Southern Showcase Housing,
Inc., a subsidiary of the Company, and MMG Investments LLC,
filed as Exhibit 10.35 to the Company's Annual Report on Form
10-K for the fiscal year ended January 1, 2000 and incorporated
herein by reference.
10.29 Amendment dated July 1, 1998 to Lease dated June 30, 1997
between Southern Showcase Housing, Inc. and MMG Investments LLC,
filed as Exhibit 10.36 to the Company's Annual Report on Form
10-K for the fiscal year ended January 1, 2000 and incorporated
herein by reference.
10.30 *Letter Agreement dated September 28, 1998 between the Company
and Donald D. Williams, filed as Exhibit 10.37 to the Company's
Annual Report on Form 10-K for the fiscal year ended January 1,
2000 and incorporated herein by reference.
10.31 *Letter Agreement dated February 12, 1997 between the Company
and John J. Collins, Jr., filed as Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1996 and incorporated herein by reference.
10.32 *Letter Agreement dated April 7, 2000 between the Company and
John J. Collins, Jr.
10.33 *Change in Control Severance Agreement dated March 3, 1997
between the Company and John J. Collins, Jr., filed as Exhibit
10.28 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 3, 1998 and incorporated herein by reference.
10.34 *Amendment to Change in Control Severance Agreement dated
February 18, 1999 between the Company and John J. Collins, Jr.,
filed as Exhibit 10.16 to the Company's Annual Report on Form
10-K for the fiscal year ended January 2, 1999 and incorporation
herein by reference.
10.35 *Agreement and General Release dated September 5, 2000 between
the Company and Joseph H. Stegmayer.
37
10.36 *Consulting Agreement dated September 5, 2000 between the
Company and Joseph H. Stegmayer.
11 Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Proxy Statement for the Company's 2001 Annual Meeting of
Shareholders, filed by the Company pursuant to Regulation 14A
and incorporated herein by reference.
(b) On November 21, 2000 and December 14, 2000 the Company filed
current reports on Form 8-K. Subsequent to year end on March 20, 2001, the
Company filed a current report on Form 8-K.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: March 28, 2001 Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/WALTER R. YOUNG Chairman of the Board of Directors, March 28, 2001
----------------------- President and Chief Executive Officer
Walter R. Young (Principal Executive Officer)
/s/ANTHONY S. CLEBERG Executive Vice President and March 28, 2001
----------------------- Chief Financial Officer
Anthony S. Cleberg (Principal Financial Officer)
/s/RICHARD HEVELHORST Vice President and Controller March 28, 2001
----------------------- (Principal Accounting Officer)
Richard Hevelhorst
/s/ROBERT W. ANESTIS Director March 28, 2001
-----------------------
Robert W. Anestis
/s/SELWYN ISAKOW Director March 28, 2001
-----------------------
Selwyn Isakow
/s/BRIAN D. JELLISON Director March 28, 2001
-----------------------
Brian D. Jellison
/s/ELLEN R. LEVINE Director March 28, 2001
-----------------------
Ellen R. Levine
/s/GEORGE R. MRKONIC Director March 28, 2001
-----------------------
George R. Mrkonic
/s/CARL L. VALDISERRI Director March 28, 2001
-----------------------
Carl L. Valdiserri
39
CHAMPION ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULES
Description Page
----------- ----
Report of Independent Accountants F-2
Consolidated Statements of Operations for the Periods
Ended December 30, 2000, January 1, 2000, and
January 2, 1999 F-3
Consolidated Balance Sheets as of December 30, 2000
and January 1, 2000 F-4
Consolidated Statements of Cash Flows for the
Periods Ended December 30, 2000, January 1, 2000,
and January 2, 1999 F-5
Consolidated Statements of Shareholders' Equity for the Periods Ended
December 30, 2000, January 1, 2000, and January 2, 1999 F-6
Notes to Consolidated Financial Statements F-7
All financial statement schedules are omitted either because they are
not applicable or the required information is immaterial or is shown in the
Notes to Consolidated Financial Statements.
F-1
40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Champion Enterprises, Inc.
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under item 14(a) on page F-1 present fairly, in all material
respects, the financial position of Champion Enterprises, Inc. and its
subsidiaries at December 30, 2000 and January 1, 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 30, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Detroit, Michigan
February 13, 2001
41
CHAMPION ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended
-----------------------------------------
December 30, January 1, January 2,
2000 2000 1999
-----------------------------------------
NET SALES $ 1,921,734 $ 2,564,638 $ 2,332,976
Cost of sales 1,619,903 2,138,368 1,931,397
Cost of sales - loss from
independent retailer bankruptcy -- 26,500 --
----------- ----------- -----------
GROSS MARGIN 301,831 399,770 401,579
Selling, general and
administrative expenses 305,286 292,188 231,295
Goodwill impairment charges 189,700 -- --
----------- ----------- -----------
OPERATING INCOME (LOSS) (193,155) 107,582 170,284
Interest income 2,647 2,830 2,347
Interest expense (29,824) (28,370) (15,833)
----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (220,332) 82,042 156,798
Income tax expense (benefits) (73,000) 32,000 62,600
----------- ----------- -----------
NET INCOME (LOSS) ($ 147,332) $ 50,042 $ 94,198
=========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE ($3.12) $ 1.04 $ 1.97
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE ($3.12) $ 1.02 $ 1.91
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
42
CHAMPION ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
December 30, January 1,
2000 2000
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 50,143 $ 12,847
Accounts receivable, trade 31,132 66,636
Inventories 217,765 301,885
Deferred taxes and other
current assets 77,493 72,344
----------- -----------
Total current assets 376,533 453,712
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 38,191 36,816
Buildings and improvements 180,860 181,492
Machinery and equipment 101,822 99,461
----------- -----------
320,873 317,769
Less-accumulated depreciation 113,596 94,871
----------- -----------
207,277 222,898
----------- -----------
GOODWILL 320,656 511,588
Less-accumulated amortization 46,686 37,716
----------- -----------
273,970 473,872
----------- -----------
DEFERRED TAXES AND OTHER ASSETS 84,276 32,458
----------- -----------
$ 942,056 $ 1,182,940
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Floor plan payable $ 114,198 $ 170,553
Accounts payable 43,103 42,160
Accrued warranty obligations 49,304 55,476
Accrued volume rebates 45,552 54,237
Accrued compensation and payroll taxes 19,034 26,848
Other current liabilities 71,662 79,902
----------- -----------
Total current liabilities 342,853 429,176
----------- -----------
LONG-TERM LIABILITIES
Long-term debt 225,634 224,357
Deferred portion of purchase price 39,157 45,200
43
Other long-term liabilities 37,603 39,945
----------- -----------
302,394 309,502
----------- -----------
CONTINGENT LIABILITIES (NOTE 9)
SHAREHOLDERS' EQUITY
Preferred stock, no par value,
5,000 authorized, none issued -- --
Common stock, $1 par value,
120,000 authorized,
2000 - 47,357 issued and outstanding;
1999 - 47,304 issued and outstanding; 47,357 47,304
Capital in excess of par value 33,116 33,160
Retained earnings 217,650 364,982
Accumulated other comprehensive income (1,314) (1,184)
----------- -----------
Total shareholders' equity 296,809 444,262
----------- -----------
$ 942,056 $ 1,182,940
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
44
CHAMPION ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
------------------------------------
December 30, January 1, January 2,
2000 2000 1999
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($147,332) $ 50,042 $ 94,198
--------- --------- ---------
Adjustments to reconcile net income (loss)
to net cash provided by
continuing operating activities
Depreciation and amortization 40,306 37,890 26,911
Goodwill impairment charges 189,700 -- --
Certain other asset impairment charges 10,500 -- --
Deferred income taxes (43,700) (9,900) (400)
Increase/decrease, net of acquisitions
Accounts receivable 35,504 (1,039) 1,312
Inventories 82,428 18,386 (51,244)
Accounts payable 943 (8,203) 14,471
Accrued liabilities (22,003) (1,804) 26,212
Independent retailer bankruptcy (12,177) 27,763 --
Other, net (19,457) (13,199) (5,671)
--------- --------- ---------
Total adjustments 262,044 49,894 11,591
--------- --------- ---------
Net cash provided by continuing
operating activities 114,712 99,936 105,789
--------- --------- ---------
CASH FLOWS FROM DISCONTINUED OPERATIONS
Proceeds on disposal -- -- 9,710
Increase in net assets -- -- (459)
--------- --------- ---------
Net cash provided by discontinued operations -- -- 9,251
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (10,165) (79,131) (260,183)
Additions to property,
plant and equipment (15,035) (50,390) (49,120)
Investments in and advances to
unconsolidated subsidiaries (659) (10,776) --
Proceeds on the disposal of property,
plant and equipment 3,745 996 --
--------- --------- ---------
Net cash used for investing activities (22,114) (139,301) (309,303)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in
floor plan payable, net (56,355) (44,953) 29,555
Increase (decrease) in
other long-term debt 1,584 12,240 (1,884)
Common stock repurchased (863) (22,520) --
Common stock issued, net 332 4,433 7,040
45
Proceeds from senior notes -- 197,300 --
Increase (decrease) in
long-term bank debt, net -- (118,000) 118,000
Tax benefit of stock options exercised -- 1,000 5,100
Deferred financing costs -- (1,116) --
--------- --------- ---------
Net cash provided by (used for)
financing activities (55,302) 28,384 157,811
--------- --------- ---------
Net increase (decrease) in
cash and cash equivalents 37,296 (10,981) (36,452)
Cash and cash equivalents
at beginning of period 12,847 23,828 60,280
--------- --------- ---------
Cash and cash equivalents
at end of period $ 50,143 $ 12,847 $ 23,828
========= ========= =========
ADDITIONAL CASH FLOW INFORMATION
Cash paid for interest $ 30,151 $ 27,617 $ 14,919
Cash paid for income taxes $ 4,977 $ 49,692 $ 53,259
CASH FLOWS FROM ACQUISITIONS
Guaranteed purchase price $ 165 $ 71,600 $ 285,675
Less: Unpaid portion of
guaranteed purchase price -- -- (17,577)
Less: Cash acquired -- (18,999) (15,193)
Plus: Payment of deferred and
contingent portions of purchase price 10,000 26,079 5,100
Plus: Acquisition costs -- 451 2,178
--------- --------- ---------
$ 10,165 $ 79,131 $ 260,183
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
46
CHAMPION ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Capital in other Total
Common stock excess of Retained comprehensive comprehensive
Shares Amount par value earnings income Total income
------ ------ ----------- -------- ------------- ----- -------------
Balance January 3, 1998 46,600 $ 46,600 $ 14,338 $ 220,742 $ (1,264) $ 280,416
Net income -- -- -- 94,198 -- 94,198 $ 94,198
Stock option and benefit plans 1,208 1,208 12,579 -- -- 13,787
Tax benefit of stock options -- -- 5,100 -- -- 5,100
Issuance for acquisition 462 462 11,632 -- -- 12,094
Foreign currency
translation adjustments -- -- -- -- (349) (349) (349)
--------- --------- --------- --------- --------- --------- ---------
Balance January 2, 1999 48,270 48,270 43,649 314,940 (1,613) 405,246 $ 93,849
=========
Net income -- -- -- 50,042 -- 50,042 $ 50,042
Stock option and benefit plans 814 814 9,251 -- -- 10,065
Common stock repurchases (1,780) (1,780) (20,740) -- -- (22,520)
Tax benefit of stock options -- -- 1,000 -- -- 1,000
Foreign currency
translation adjustments -- -- -- -- 429 429 429
--------- --------- --------- --------- --------- --------- ---------
Balance January 1, 2000 47,304 47,304 33,160 364,982 (1,184) 444,262 $ 50,471
=========
Net loss -- -- -- (147,332) -- (147,332) $(147,332)
Stock option and benefit plans 170 170 702 -- -- 872
Common stock repurchases (117) (117) (746) -- -- (863)
Foreign currency
translation adjustments -- -- -- -- (130) (130) (130)
--------- --------- --------- --------- --------- --------- ---------
Balance December 30, 2000 47,357 $ 47,357 $ 33,116 $ 217,650 $ (1,314) $ 296,809 $(147,462)
========= ========= ========= ========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of Champion
Enterprises, Inc. and its wholly-owned subsidiaries (the Company). All
significant intercompany transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain amounts in the prior years' financial statements
have been reclassified to conform to current year presentation.
BUSINESS
The Company is the industry's leading producer of manufactured housing with
operations and markets located throughout the U.S. and in western Canada. The
Company is also a leading retailer of manufactured housing with sales centers in
28 states.
REVENUE RECOGNITION
For wholesale shipments to independent retailers, sales revenue is recognized
when wholesale floor plan financing or retailer credit approval has been
received, the home is shipped and title is transferred. For wholesale shipments
to independent retailers, the Company has no obligation to install or set up the
home upon retail sale to the consumer-homebuyer. As is customary in the
manufactured housing industry, the majority of the Company's wholesale shipments
to independent retailers are financed by the retailers under floor plan
agreements with financing companies (lenders). In connection with these floor
plan agreements, the Company generally has separate agreements with the lenders
that require the Company, for a period of either 12 or 15 months from invoice
date of the sale of the homes, upon default by the retailer and repossession of
the homes by the lender, to purchase the related floor plan loans or repurchase
the homes from the lender. The repurchase price is equal to the unpaid balance
of the floor plan loans, plus certain administrative costs incurred by the
lender to repossess the homes, less any damage to the homes or any missing parts
or accessories. Estimated losses for repurchase obligations are accrued for
currently. See Note 9.
Wholesale shipments to independent retailers that are subject to repurchase
agreements are not consignment sales or financings because the Company does not
provide financing for sales to independent retailers; retailers do not have the
right to return homes purchased from the Company; retailers are responsible to
the floor plan lenders for interest costs; and, the Company does not refund a
portion of the original net selling price representative of interest cost on the
retailers' floor plan obligations.
For retail sales to consumers from Company-owned retail sales centers, sales
revenue is recognized when the home has been delivered, set-up and accepted by
the consumer, title has been transferred and either funds have been released by
the finance company (financed deals) or cash has been received from the
homebuyer (cash deals).
The Company's revenue recognition policies were in compliance with Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements"
issued by the Securities and Exchange Commission. Therefore adoption of SAB No.
101 by the Company in the fourth quarter of 2000 had no effect on the Company's
reported results of operations, financial position or cash flows.
The Financial Accounting Standards Board (FASB) Emerging Issues Task Force
(EITF) No. 00-10 "Accounting for Shipping and Handling Fees and Costs" was
adopted in the fourth quarter of 2000. The adoption of EITF 00-10 resulted in
the reclassification of manufacturing segment delivery revenue to net sales from
cost of sales. Prior year net sales and cost of sales have been reclassified
accordingly. Delivery costs are and have been included in cost of sales. The net
amount of delivery revenue reclassified to net sales was $56 million, $76
million and $79 million in 2000, 1999 and 1998, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments which have original maturities
less than 90 days at the time of their purchase. These investments are carried
at cost which approximates market value because of their short maturities.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method for manufacturing operations and the
specific identification method for retail operations.
YEAR END
The Company's fiscal year ends on the Saturday nearest December 31.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (PP&E) are stated at cost. Depreciation is
provided principally on the straight-line method over the following estimated
useful lives: land improvements - 3 to 15 years; buildings and improvements - 8
to 33 years; and machinery and equipment - 3 to 15 years. Depreciation expense
was $26.6 million, $24.3 million and $17.7 million in 2000, 1999 and 1998,
respectively. The recoverability of PP&E is evaluated whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable, primarily based on estimated selling price, appraised value or
projected undiscounted cash flows. In 2000 the Company recorded PP&E impairment
charges of $10.5 million. See Note 11.
48
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets of
businesses acquired and is amortized on the straight-line method over the
expected periods to be benefited, which through 2000, was generally 40 years.
Commencing in 2001, remaining goodwill from retail acquisitions will be
amortized over 20 years. Amortization expense was $13.7 million, $13.6 million,
and $9.2 million in 2000, 1999 and 1998, respectively. The recoverability of
goodwill is evaluated whenever events or changes in circumstances indicate that
the carrying amount of goodwill may not be recoverable, primarily based on each
business' projected undiscounted cash flows. In 2000 the Company recorded
goodwill impairment charges of $189.7 million. See Note 13.
UNCONSOLIDATED SUBSIDIARIES
The Company uses the equity method to account for its minority interests in
certain manufactured housing community development companies. The Company's net
investment in these companies totaled $6.2 million and $9.7 million at December
30, 2000 and January 1, 2000, respectively. Equity method losses from these
companies totaling $2.0 million in 2000 and $1.1 million in 1999 were recorded
in general and administrative expenses.
WARRANTY OBLIGATIONS
The Company's manufacturing operations provide the retail homebuyer with a
twelve-month warranty from the date of retail purchase. Estimated warranty costs
are accrued as cost of sales at the time of sale.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the non-current portion of self-insurance
and warranty reserves, compensation programs and other reserves.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the differences
between the financial statement amounts and the tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
STOCK BASED COMPENSATION PROGRAMS
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 SFAS No. 123 are included in Note 10.
ADVERTISING
Advertising costs are expensed as incurred. Total advertising expense was
approximately $24 million, $15 million and $10 million in 2000, 1999 and 1998,
respectively.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
was subsequently amended by SFAS Nos. 137 and 138. SFAS 133, as amended, did not
have a material impact on the Company's results of operations, financial
position or cash flows, and did not require the recording of a transition
adjustment upon adoption by the Company in January 2001.
NOTE 2 - INVENTORIES
A summary of inventories by component at December 30, 2000 and January 1, 2000
follows:
(In thousands) 2000 1999
---- ----
New and pre-owned manufactured homes $ 143,892 $ 225,730
Raw materials and work-in-process 44,980 59,062
Other inventory 28,893 17,093
---------- -----------
$ 217,765 $ 301,885
========== ===========
NOTE 3 - BUSINESS COMBINATIONS
In 1999 the Company acquired two manufactured housing retail organizations, one
manufactured housing company with six homebuilding facilities and one
manufactured housing communities developer. In 1998 the Company acquired 14
manufactured housing retail organizations and one manufactured homebuilding
facility. The aggregate purchase price for these acquisitions consisted of total
guaranteed purchase price of $365 million and total contingent purchase price of
up to $226 million potentially payable through 2003 based upon post-acquisition
performance of the acquired businesses. In connection with the 1998 acquisitions
the Company assumed $105 million of floor plan liabilities.
The acquisitions were recorded using the purchase method and resulted in the
recording of initial goodwill of $377 million. Recognition of additional
purchase price related to contingent amounts results in the recording of a
corresponding amount of goodwill. During 2000, 1999 and 1998 contingent purchase
price of $6 million, $23 million and $35 million, respectively, was recorded.
During 2000, 1999 and 1998 the Company made net cash payments of $10 million,
$79 million and $253 million, respectively, and in 1998 issued common stock
valued at $12 million, for these and other miscellaneous acquisitions.
49
The results of operations of acquisitions are included with those of the Company
from the respective acquisition dates. Following are the summarized unaudited
pro forma combined results of operations for the year ended January 2, 1999,
assuming the 1999 and 1998 acquisitions had taken place at the beginning of the
fiscal year. Pro forma results of operations are not presented for the year
ended January 1, 2000 because the significant acquisitions occurred in January
1999, and their full year results of operations are included in the Company's
actual results. The preacquisition results of operations for other 1999
acquisitions are immaterial. The unaudited pro forma results are not necessarily
indicative of future earnings or earnings that would have been reported had the
acquisitions been completed when assumed.
(In millions, except per share amounts)
1998
----
Net sales $2,645
======
Income before income taxes $ 167
Income taxes 67
------
Net income $ 100
======
Per diluted share $ 2.03
======
NOTE 4 - EARNINGS PER SHARE
The numerator used in the Company's earnings per share (EPS) calculations is net
income (loss) as reported in the financial statements. The denominators used in
the Company's EPS calculations are as follows. Weighted average shares
outstanding are used in calculating basic EPS. Weighted average shares
outstanding plus the effect of dilutive securities are used in calculating
diluted EPS. The Company's dilutive securities consist of its outstanding stock
options. Dilutive securities were not considered in determining diluted EPS in
2000 because the effect on the net loss would have been anti-dilutive. The
amount of potentially dilutive securities that were excluded from the
determination of diluted EPS in 2000 was 76,000 shares. A reconciliation of the
denominators follows:
(In thousands)
2000 1999 1998
---- ---- ----
Weighted average shares outstanding 47,252 48,227 47,780
Effect of dilutive securities-options - 662 1,504
------ ------ ------
Shares for diluted EPS 47,252 48,889 49,284
====== ====== ======
NOTE 5 - DEBT
On May 3, 1999 the Company completed an offering of $200 million of unsecured
Senior Notes due May 15, 2009, with interest payable semi-annually at an annual
rate of 7.625%. The net proceeds from the offering totaling $197.3 million were
primarily used to reduce bank debt.
The Company has a revolving credit agreement, maturing in May 2003, with a group
of banks for a secured line of credit that totaled $45 million as of December
30, 2000. Effective March 1, 2001 the line of credit automatically increased to
$75 million. At the Company's request and upon a majority approval by the bank
group, the line of credit may be further increased to $90 million. 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 accounts
receivable and inventories, as defined therein. For the four months from October
2000 to January 2001 the calculated borrowing base averaged $70 million and the
February 2001 calculated borrowing base was $63 million. As of December 30,
2000, the Company had no cash borrowings and $33 million of letters of credit
outstanding under the facility.
Borrowings under the credit agreement bear interest at the bank's prime rate
plus 1%. The Company's letters of credit fees are 3% annually and commitment
fees are 0.625% annually on the unused portion of the facility. The agreement
contains covenants which, among other things, limit additional indebtedness and
capital spending and require maintenance of minimum consolidated cash flows from
operations and net worth, as defined. The amount of unrestricted retained
earnings at December 30, 2000 was $57 million. Under the credit agreement, the
Company has pledged as collateral certain of its current assets, including
certain accounts receivable and inventories, other personal property and
intangible assets, subject to negative pledge limitations in the Company's
Senior Notes. In February 2001, the revolving credit line was amended to provide
more flexible financial performance covenants.
Floor plan liabilities are borrowings from various financial institutions
secured principally by retail inventories of manufactured homes. Interest on
these liabilities generally ranges from the prime rate to the prime rate plus up
to 3%.
50
NOTE 6 - SHAREHOLDERS' EQUITY
The Company has 120 million shares of common stock authorized. In addition,
there are five million authorized but unissued shares of preferred stock,
without par value, the issuance of which is subject to approval by the Board of
Directors. The Board has the authority to fix the number, rights, preferences
and limitations of the shares of each series, subject to applicable laws and the
provisions of the Articles of Incorporation.
In February 1999 the Board of Directors authorized a common stock repurchase
program for up to 3.0 million shares. Pursuant to this authorization, the
Company repurchased 117,000 shares of its common stock during 2000 and 1.8
million shares in 1999 for $0.9 million and $22.5 million, respectively. In June
2000, the program was suspended.
The Board of Directors has reserved 750,000 preferred shares for issuance in
connection with the 1996 Shareholders Rights Plan. Each outstanding share of the
Company's common stock is entitled to one Preferred Stock Purchase Right. Each
Right entitles shareholders to buy one two-hundredth share of preferred stock
for $140 and becomes exercisable only if a third party acquires or announces an
intention to acquire 20% or more of the Company's common stock. The Rights
expire on February 5, 2006 unless redeemed or exercised.
NOTE 7 - INCOME TAXES
Pretax income (loss) for the fiscal years ended December 30, 2000, January 1,
2000, and January 2, 1999 was taxed under the following jurisdictions:
(In thousands) 2000 1999 1998
---- ---- ----
Domestic ($219,664) $ 79,090 $155,716
Foreign (668) 2,952 1,082
--------- -------- --------
Total ($220,332) $ 82,042 $156,798
========= ======== ========
The provisions for income taxes (benefits) were as follows:
(In thousands) 2000 1999 1998
---- ---- ----
Current
Federal ($24,000) $36,000 $54,400
Foreign (100) 1,400 600
State (5,200) 4,500 8,000
-------- ------- -------
Total current (29,300) 41,900 63,000
-------- ------- -------
Deferred
Federal (39,400) (9,100) (300)
Foreign (100) 100 (50)
State (4,200) (900) (50)
-------- ------- -------
Total deferred (43,700) (9,900) (400)
-------- ------- -------
Total provision (benefits) ($73,000) $32,000 $62,600
======== ======= =======
The provisions for income taxes (benefits) differ 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:
(Dollars in thousands) 2000 1999 1998
---- ---- ----
Statutory U.S. tax rate ($77,100) $28,700 $54,900
Increase (decrease) in rate resulting from
State taxes, net of federal benefit (7,600) 2,900 5,200
Nondeductible goodwill impairment 9,900 - -
Other 1,800 400 2,500
-------- ------- -------
Total provision (benefits) ($73,000) $32,000 $62,600
======== ======= =======
Effective tax rate 33% 39% 40%
======== ======= =======
51
Deferred tax assets and liabilities are comprised of the following as of
December 30, 2000 and January 1, 2000:
(In thousands) 2000 1999
---- ----
Assets
Warranty reserve $ 20,900 $ 24,800
Insurance accruals 10,400 9,200
Goodwill 46,700 -
Employee compensation 6,000 5,700
Loss from independent retailer bankruptcy 900 7,800
Acquisition-related reserves 3,500 3,500
Volume rebates 5,000 2,300
Other 4,200 9,900
---------- ----------
Gross deferred tax assets 97,600 63,200
---------- ----------
Liabilities
Depreciation 6,100 2,600
Canadian withholding 500 500
Safe harbor leases 400 1,800
Goodwill - 11,300
---------- ----------
Gross deferred tax liabilities 7,000 16,200
---------- ----------
Net deferred tax assets $ 90,600 $ 47,000
========== ==========
Net deferred tax assets
Current $ 30,600 $ 42,400
Non-current 60,000 4,600
---------- ----------
$ 90,600 $ 47,000
========== ==========
NOTE 8 - RETIREMENT PLANS
The Company and certain of its subsidiaries sponsor defined contribution
retirement and savings plans covering most employees. Full time employees of
participating companies are eligible to participate in a plan after completing
one year of service. Participating employees may contribute from 1% to 17% of
their compensation to the plans. The Company generally makes matching
contributions of 50% of the first 6% of employees' contributions. Company
contributions vest when made. Amounts expensed under these plans were $3.6
million in 2000, $4.7 million in 1999, and $3.4 million in 1998.
NOTE 9 - CONTINGENT LIABILITIES
The majority of the Company's manufacturing sales to independent retailers are
made pursuant to repurchase agreements. The contingent obligations under these
agreements are spread over many retailers and financial institutions, and are
reduced by the resale value of the homes which may be repurchased. The maximum
repurchase obligation is calculated as the total amount that would be paid upon
the default of all the Company's independent retailers, without reduction for
the resale value of the repurchased homes. The maximum potential repurchase
obligation was approximately $430 million at December 30, 2000, compared to $630
million at January 1, 2000. Potential losses under repurchase obligations are
determined by the difference between the repurchase price and the estimated net
resale value of the homes. Repurchase losses totaled $6.0 million in 2000, $2.9
million in 1999, excluding the losses from the bankruptcy discussed below, and
$0.4 million in 1998.
In 1999 Champion's former largest independent retailer declared bankruptcy. In
the bankruptcy proceedings the Company repurchased 1,850 homes for approximately
$70 million which were financed through floor plan borrowings. Pretax charges of
$33.6 million were recorded in the third quarter of 1999 for the estimated
losses associated with the bankruptcy, consisting of $26.5 million to write down
the repurchased homes to estimated net resale value (included in cost of sales)
and $7.1 million to write off uncollectible receivables (included in selling,
general and administrative expenses). Previously, the $33.6 million of losses
related to the bankruptcy were presented as a separate component of operating
income. In the second quarter of 2000, a loss of $5 million was recorded for an
additional write down of the value of the remaining repurchased homes (in cost
of sales). Substantially all the repurchased homes had been liquidated by the
end of the third quarter of 2000.
At December 30, 2000 the Company was contingently obligated for additional
purchase price of up to $133 million related to its 1999 and 1998 acquisitions.
Management currently believes that payment of $1 million of this contingent
purchase price is reasonably possible.
Under the Company's insurance programs, coverage is obtained for catastrophic
exposures as well as those risks required to be insured by law. The Company
retains a significant portion of risk of certain losses related primarily to
medical benefits, workers' compensation and general, product and auto liability
and has established reserves for its retained portion of these risks.
The Company is subject to various legal proceedings and claims which arise in
the ordinary course of its business. Management believes the ultimate liability
with respect to these actions will not have a material effect on the Company's
financial position or
52
results of operations.
At December 30, 2000, the Company was contingently obligated for approximately
$40 million under surety bonds and $33 million under letters of credit,
generally to support insurance, industrial revenue bond financing, and licensing
and service bonding requirements.
NOTE 10 - STOCK OPTION AND INCENTIVE PLANS
The Company has various stock option and incentive plans and agreements whereby
stock options are made available to key employees and directors. Stock options
may be granted below, at or above fair market value and generally expire six or
ten years from the grant date. Some options become exercisable immediately and
others over a period of up to five years. Under the Company's 1995 Stock Option
and Incentive Plan, grants may be made of stock options, stock awards, stock
appreciation rights and other stock based incentives. In addition to these
plans, other nonqualified stock options and awards have been granted to
executive officers and key employees and in connection with acquisitions.
Amounts charged to expense in connection with the grants and awards under these
plans and agreements totaled $0.8 million in 2000, $4.6 million in 1999 and $6.8
million in 1998. There were 4,850,000, 2,183,000 and 745,000 shares reserved for
future grants and awards at December 30, 2000, January 1, 2000 and January 2,
1999, respectively.
The following table summarizes the changes in outstanding stock options during
the last three years:
Number Weighted average
of shares exercise price
(in thousands) per share
-------------- ---------
Outstanding at January 3, 1998 4,117 $ 9.62
Granted 3,899 20.54
Exercised (1,305) 7.75
Canceled or forfeited (784) 19.13
------ ------
Outstanding at January 2, 1999 5,927 15.95
Granted 1,956 16.07
Exercised (652) 5.57
Canceled or forfeited (359) 19.57
------ ------
Outstanding at January 1, 2000 6,872 16.78
Granted 1,923 4.20
Exercised (4) 2.78
Canceled or forfeited (3,328) 20.47
------ ------
OUTSTANDING AT DECEMBER 30, 2000 5,463 $10.12
====== ======
The following table summarizes information regarding stock options outstanding
at December 30, 2000:
Options Outstanding Options Exercisable
-------------------------------------- ---------------------------
Average Average
Number Weighted exercise Number exercise
Range of of shares average price per of shares price per
exercise prices (in thousands) life (years) share (in thousands) share
--------------- -------------- ------------ ----- -------------- -----
$1.25-$7.00 2,282 5.5 $ 4.17 606 $ 4.03
$7.01-$14.00 1,633 4.7 8.87 1,545 8.86
$14.01-$21.00 1,044 6.8 18.45 540 17.98
$21.01-$28.50 504 7.7 23.85 161 24.35
--------- --------- -------- ---------- ---------
5,463 5.7 $ 10.12 2,852 $ 10.44
========= ========= ======== ========== =========
As of January 1, 2000, exercisable shares totaled 1,919,000 with a weighted
average exercise price of $12.53 per share. As of
53
January 2, 1999, exercisable shares totaled 1,547,000 with a weighted average
exercise price of $8.69 per share.
The number of shares issued through stock awards in 2000, 1999 and 1998 was
24,800, 91,119 and 34,400, respectively, with award date fair values per share
of $6.88, $19.07 and $24.63, respectively.
As permitted by SFAS Statement No. 123, the Company has elected to continue to
account for its stock based plans under APB Opinion No. 25. 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 method of SFAS No. 123,
pro forma net income (loss) and earnings (loss) per share would have been the
amounts indicated below:
2000 1999 1998
---- ---- ----
Net income (loss) (in millions) ($147.0) $41.8 $ 90.8
Basic EPS (loss) (3.11) 0.87 1.90
Diluted EPS (loss) ($3.11) $0.87 $ 1.84
In determining the pro forma amounts in accordance with SFAS No. 123, the fair
value of each stock option grant or award is estimated as of the grant date
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
Risk free interest rate 5.7% 5.9% 5.2%
Expected life (years) 3.4 3.3 4.4
Expected volatility 37% 37% 38%
Expected dividend -- -- --
The weighted average per share fair value of stock options granted during 2000,
1999 and 1998 was $1.52, $6.97 and $9.01, respectively, for options granted at
market value, and $1.93, $11.17 and $13.11, respectively, for options granted at
less than market value. Total stock based compensation costs that would have
been charged to income under SFAS No. 123 were $0.2 million, $18.1 million and
$12.4 million in 2000, 1999 and 1998, respectively. In 2000, SFAS No. 123 pro
forma compensation costs were reduced by the reversal of prior year pro forma
compensation costs totaling $7.4 million for forfeitures of unvested options
during the year.
NOTE 11 - SEGMENT INFORMATION
The Company operates principally in two segments in the manufactured housing
industry: (1) production and wholesale distribution and (2) retail selling. The
accounting policies of the segments are the same as those described in Note 1
"Summary of Significant Accounting Policies". Manufacturing segment sales to the
retail segment and related manufacturing profits are included with the
manufacturing segment. Retail segment results include retail profits from the
sale of homes to consumers but do not include any manufacturing segment profits
associated with the homes sold. Intercompany transactions between reportable
operating segments are eliminated in consolidation. Each segment's results
include corporate office costs that are directly and exclusively incurred for
the segment. General corporate expenses include the costs and equity method
losses from development operations. Intercompany profit in inventory represents
the change in manufacturing segment gross profit in Champion-produced inventory
at Company-owned retailers.
The Company evaluates the performance of its segments and allocates resources to
them primarily based on earnings before interest, taxes, goodwill amortization
and general corporate expenses (EBITA), excluding goodwill impairment charges
and losses associated with the 1999 independent retailer bankruptcy. The Company
also evaluates the performance of its segments based on return on net capital
employed (working capital plus net fixed assets).
Expenditures during 2000 for long-lived assets were $7 million for the
manufacturing segment and $7 million for the retail segment. In addition,
corporate expenditures for long-lived assets totaled $1 million. These amounts
compare to $65 million, $43 million and $4 million for the manufacturing, retail
and corporate segments, respectively, in 1999, and $38 million, $325 million and
$1 million, respectively, in 1998, including goodwill for each segment.
Reconciliations of segment sales to consolidated sales, segment EBITA to
consolidated operating income (loss) and segment depreciation expense to
consolidated depreciation expense in 2000, 1999 and 1998, and segment assets to
consolidated assets as of December 30, 2000, January 1, 2000 and January 2,
1999, were as follows:
54
(In thousands)
Net sales 2000 1999 1998
---- ---- ----
Manufacturing $ 1,564,026 $ 2,068,627 $ 1,986,317
Retail 606,708 787,011 561,659
Less: intercompany (249,000) (291,000) (215,000)
------------ ------------ ------------
Consolidated net sales $ 1,921,734 $ 2,564,638 $ 2,332,976
============ ============ ============
Operating income (loss)
Manufacturing EBITA
before losses from independent
retailer bankruptcy $ 50,974 $ 132,110 $ 164,863
Retail EBITA (loss) (9,109) 51,372 47,259
General corporate expenses (30,803) (24,255) (22,419)
Intercompany profit in inventory 4,200 (4,400) (10,200)
Goodwill amortization (13,717) (13,645) (9,219)
Goodwill impairment charges (189,700) - -
Losses from independent retailer bankruptcy (5,000) (33,600) -
------------ ------------ ------------
Consolidated operating income (loss) $ (193,155) $ 107,582 $ 170,284
============ ============ ============
Total assets
Manufacturing $ 392,404 $ 498,259 $ 421,670
Retail 367,905 632,067 546,460
Corporate and developments 197,584 88,154 74,346
Intercompany elimination (15,837) (35,540) (20,804)
------------ ------------ ------------
Consolidated total assets $ 942,056 $ 1,182,940 $ 1,021,672
============ ============ ============
Depreciation expense
Manufacturing $ 18,418 $ 18,066 $ 14,487
Retail 7,181 5,381 2,649
Corporate and developments 990 798 556
------------ ------------ ------------
Consolidated depreciation expense $ 26,589 $ 24,245 $ 17,692
============ ============ ============
Included in 2000 manufacturing segment EBITA are non-cash fixed asset impairment
charges of $2.5 million related to plant closures and $6.9 million of property
insurance gains. Included in 2000 retail segment EBITA are non-cash fixed asset
impairment charges of $4.0 million related to sales center closures. Included in
2000 general corporate expenses are $4.0 million of non-cash fixed asset
impairment charges related to development operations, $1.5 million of which was
recognized upon the sale of a majority interest in certain developments, and
$2.5 million of which was recognized due to insufficient estimated future cash
flows from a wholly-owned development.
All cash balances and deferred tax assets are classified as corporate assets.
Retail floor plan interest expense not charged to retail segment EBITA totaled
$13.2 million, $12.5 million and $6.7 million in 2000, 1999 and 1998,
respectively.
NOTE 12 - LEASES
Most of the Company's retail sales locations and certain of its other facilities
are leased under terms that range from monthly to five years. Rent expense was
$15.0 million in 2000, $11.0 million in 1999 and $5.5 million in 1998.
NOTE 13 - GOODWILL IMPAIRMENT CHARGES
The Company evaluates the recoverability of long-lived assets not held for sale
by measuring the carrying value of the assets against the estimated undiscounted
future cash flows in accordance with SFAS No. 121. At the time such evaluations
indicate that the undiscounted future cash flows of certain long-lived assets
are not sufficient to recover the carrying value of such assets, the assets are
adjusted to their estimated fair values. Estimated fair values are determined
using the present value of estimated future cash flows.
Industry conditions in 2000, including excess number of retail locations and
inventory levels, tightened consumer credit standards, high consumer
repossession levels, and higher interest rates for purchasers of manufactured
housing, resulted in lower sales volumes and sales center closures for the
Company's acquired retail businesses.
55
Beginning in the second half of 1999, consumer finance companies began
tightening credit eligibility requirements and increasing down payment
requirements for consumer loans in the manufactured housing industry. The
Company monitored these changes throughout 1999 and through the third quarter of
2000 with an expectation that underwriting standards would be relaxed and/or
other lenders would enter the marketplace to compete. During this period an
increasing number of repossessed manufactured homes were also becoming available
in the market. These factors contributed to declining retail sales of new homes
in the industry and at Company-owned retailers. In the first half of 2000,
almost all of the Company's acquisitions were sufficiently profitable such that
the carrying value of the goodwill continued to appear to be recoverable. In the
third quarter of 2000 certain of the Company's retail acquisitions incurred
operating losses and the Company closed and consolidated 29 under performing
retail sales centers; however, the Company's long-term forecast for these
retailers was sufficiently profitable that the goodwill appeared to be
recoverable. These long-term forecasts were based on past operating results,
management plans, and expectations for the industry.
In the fourth quarter of 2000, industry conditions continued to worsen. The
Company's retail losses continued into October. By late November it appeared
that the month's retail traffic dropped by approximately 45%, consumer financing
continued to tighten and a significant operating loss was forecasted for the
retail segment. On December 1, 2000, industry wholesale shipment data for
October were released showing a 32% decline from 1999. Third quarter industry
retail data showed declines of approximately 25% and October appeared to also
decline. It became apparent to management that additional lenders were not
coming into the market and tightened underwriting standards were going to
prevail longer term. During the fourth quarter management committed to close 25
additional under performing sales centers. The culmination of these factors
suggested to the Company that a detailed review regarding the recoverability of
long-lived assets was required. The assessment was performed using lower volume
and growth assumptions than previously assumed due to the continued downturn in
the industry and lowered future expectations. As a result of this assessment, in
the fourth quarter of 2000, the Company recorded non-cash pretax goodwill
impairment charges of $189.7 million, consisting of $180.0 million for seven
acquired retail companies and $9.7 million for two acquired manufacturing
companies.
NOTE 14 - SUBSIDIARIES' GUARANTY OF INDEBTEDNESS
Substantially all the Company's subsidiaries are guarantors of the 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
and 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.
56
NOTE 15 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollars in thousands, First Second Third Fourth
except per share amounts) Quarter Quarter Quarter Quarter Total
2000
Net sales
Manufacturing $ 435,802 $ 439,277 $ 378,449 $ 310,498 $ 1,564,026
Retail 167,507 166,934 148,619 123,648 606,708
Less: intercompany (68,000) (73,000) (61,000) (47,000) (249,000)
Total net sales 535,309 533,211 466,068 387,146 1,921,734
Cost of sales 451,338 447,791 390,359 330,415 1,619,903
Gross margin 83,971 85,420 75,709 56,731 301,831
Selling, general and
administrative expenses 74,801 73,254 75,420 81,811 305,286
Goodwill impairment charges -- -- -- (189,700) (189,700)
Operating income (loss) 9,170 12,166 289 (214,780) (193,155)
Interest expense, net 6,969 6,844 6,762 6,602 27,177
Pretax income (loss) 2,201 5,322 (6,473) (221,382) (220,332)
Net income (loss) 1,301 2,822 (3,973) (147,482) (147,332)
Basic earnings (loss) per share 0.03 0.06 (0.08) (3.12) (3.12)
Diluted earnings (loss) per share $ 0.03 $ 0.06 ($ 0.08) ($ 3.12) ($ 3.12)
Homes sold
Wholesale 15,351 14,961 12,393 9,737 52,442
Retail - new 3,315 3,176 2,776 2,216 11,483
Retail - pre-owned 906 713 650 594 2,863
Wholesale multi-section mix 66% 69% 73% 77% 71%
Locations at period end
Manufacturing facilities 59 57 55 53 53
Sales centers 285 291 270 260 260
1999
Net sales
Manufacturing $ 528,952 $ 552,005 $ 514,348 $ 473,322 $ 2,068,627
Retail 185,154 214,995 211,516 175,346 787,011
Less: intercompany (70,000) (82,000) (76,000) (63,000) (291,000)
Total net sales 644,106 685,000 649,864 585,668 2,564,638
Cost of sales 533,079 561,293 574,424 496,072 2,164,868
Gross margin 111,027 123,707 75,440 89,596 399,770
Selling, general and
administrative expenses 70,293 69,633 78,628 73,634 292,188
Operating income (loss) 40,734 54,074 (3,188) 15,962 107,582
57
Interest expense, net 5,979 6,250 6,533 6,778 25,540
Pretax income (loss) 34,755 47,824 (9,721) 9,184 82,042
Net income (loss) 21,155 29,224 (5,921) 5,584 50,042
Basic earnings (loss) per share 0.44 0.60 (0.12) 0.12 1.04
Diluted earnings (loss) per share $ 0.43 $ 0.59 ($ 0.12) $ 0.12 $ 1.02
Homes sold
Wholesale 18,830 19,160 17,560 16,211 71,761
Retail - new 3,833 4,343 4,299 3,378 15,853
Retail - pre-owned 996 1,090 1,037 979 4,102
Wholesale multi-section mix 65% 66% 67% 68% 66%
Locations at period end
Manufacturing facilities 65 65 62 60 60
Sales centers 268 282 291 280 280
In the fourth quarter of 2000, the Company recorded goodwill impairment charges
of $189.7 million ($127.8 million after tax or $2.70 per diluted share).
In connection with the 1999 bankruptcy of the Company's former largest
independent retailer, the Company recorded losses totaling $38.6 million
consisting of $26.5 million in cost of sales and $7.1 million in SG&A in the
third quarter of 1999 and $5.0 million in cost of sales in the second quarter of
2000. Previously, the $33.6 million loss recorded in the third quarter of 1999
was presented as a separate component of operating income and the $5.0 million
loss recorded in the second quarter of 2000 was included in SG&A. See Note 9.
The adoption of EITF No. 00-10 in the fourth quarter of 2000 resulted in the
reclassification of manufacturing segment delivery revenue to net sales from
cost of sales. Net sales and cost of sales for each quarter of 2000 and 1999
have been restated accordingly. See "Revenue Recognition" in Note 1.
Per share amounts are based on the weighted average shares outstanding for each
period. Quarterly amounts may not add to annual amounts due to changes in shares
outstanding.
58
INDEX TO EXHIBITS
Exhibit No. Description
3.1 Restated Articles of Incorporation of the Company, filed with
the Company's Annual Report on Form 10-K for the fiscal year
ended December 30, 1995 and incorporated herein by reference.
3.2 Amendment to Restated Articles of Incorporation of the Company,
filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 28, 1997 and incorporated herein by
reference.
3.3 Article III of the Company's Restated Articles of Incorporation
(increasing number of authorized shares of capital stock),
included in the Company's Amendment to Restated Articles of
Incorporation, filed as Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1997 and
incorporated herein by reference.
3.4 Certificate of Correction to Articles of Incorporation of the
Company, filed as Exhibit 3.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended January 2, 1999 and
incorporated herein by reference.
3.5 Bylaws of the Company as amended through February 22, 1999,
filed as Exhibit 3.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended January 2, 1999 and incorporated
herein by reference.
4.1 Indenture dated as of May 3, 1999 between the Company, the
Subsidiary Guarantors and Bank One Trust Company, NA (formerly
The First National Bank of Chicago), as Trustee, filed as
Exhibit 4.1 to the Company's Form S-4 Registration Statement No.
333-84227 dated July 30, 1999 and incorporated herein by
reference.
4.2 Supplemental Indenture dated as of July 30, 1999 between the
Company, the Subsidiary Guarantors and Bank One Trust Company,
NA (formerly The First National Bank of Chicago), as Trustee,
filed as Exhibit 4.2 to the Company's Form S-4 Registration
Statement No. 333-84227 dated July 30, 1999 and incorporated
herein by reference.
4.3 Supplemental Indenture dated as of October 4, 1999 between the
Company, the Subsidiary Guarantors and Bank One Trust Company,
NA, as Trustee, filed as Exhibit 4.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 1, 2000
and incorporated herein by reference.
4.4 Supplemental Indenture dated as of February 10, 2000 between the
Company, the Subsidiary Guarantors and Bank One Trust Company,
NA, as Trustee, filed as Exhibit 4.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 1, 2000
and incorporated herein by reference.
59
4.5 Registration Rights Agreement dated as of April 28, 1999 between
the Company; Credit Suisse First Boston Corporation; Donaldson,
Lufkin & Jenrette Securities Corporation; and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, as Initial Purchasers,
filed as Exhibit 4.3 to the Company's Form S-4 Registration
Statement No. 333-84227 dated July 30, 1999 and incorporated
herein by reference.
4.6 Form of Rights Certificate, filed as Exhibit 1 to the Company's
Registration Statement on Form 8-A dated January 12, 1996 and
incorporated herein by reference.
4.7 Rights Agreement by and between the Company and Harris Trust and
Savings Bank, filed as Exhibit 2 to the Company's Registration
Statement on Form 8-A dated January 12, 1996 and incorporated
herein by reference.
10.1 Lease Agreement dated November 21, 1991 between the Company and
University Development Company relating to the premises located
at 2701 Cambridge Court (formerly University Drive), Auburn
Hills, Michigan, filed as Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 1992
and incorporated herein by reference.
10.2 First Amendment dated December 29, 1997 to the Lease Agreement
dated November 21, 1991 between the Company and University
Development Company relating to the premises located at 2701
Cambridge Court (formerly University Drive), Auburn Hills,
Michigan, filed as Exhibit 10.2 to the Company's Annual Report
on Form 10-K for the fiscal year ended January 3, 1998 and
incorporated herein by reference.
10.3 Credit Agreement by and among the Company; the guarantors party;
the banks party; PNC Bank, National Association, as
Administrative Agent; Bank One Capital Markets, Inc., as
Syndication Agent; Comerica Bank, as Documentation Agent; and
National City Bank, Keybank National Association, Bank of
America, N.A. and Wachovia Bank, N.A., as Co-Agents dated as of
May 5, 1998, as amended by Amendment No. 1 to Credit Agreement,
dated as of December 18, 1998; as amended by Amendment No. 2 to
Credit Agreement, dated as of March 31, 1999; as amended by
Amendment No. 3 to Credit Agreement, dated as of July 1, 1999;
as amended by Amendment No. 4 to Credit Agreement, dated as of
February 14, 2000; as amended by Amendment No. 5 to Credit
Agreement, dated as of June 15, 2000; and as amended by
Amendment No. 6 to Credit Agreement dated as of November 20,
2000.
10.4 Seventh Amendment dated February 13, 2001 to the Credit
Agreement dated May 5, 1998 by and among the Company; the
guarantors party; the banks party; PNC Bank, National
Association, as Agent; Bank One, Michigan, as Syndication Agent;
Comerica Bank, as Documentation Agent; and National City Bank,
Harris Trust and Savings Bank, Keybank, National Association,
Bank of America, N.A., and Wachovia Bank, N.A., as Co-Agents.
60
10.5 *Champion Enterprises, Inc. 1993 Management Stock Option Plan,
as amended and restated as of October 27, 1998, filed as Exhibit
10.6 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 2, 1999 and incorporated herein by reference.
10.6 *Champion Enterprises, Inc. 1995 Stock Option and Incentive
Plan, filed as Exhibit 10.1 to the Company's Registration
Statement on Form S-8 dated May 1, 1995 and incorporated herein
by reference.
10.7 *First Amendment to the Champion Enterprises, Inc. 1995 Stock
Option and Incentive Plan, filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 30, 1995 and incorporated herein by reference.
10.8 *Second Amendment dated April 28, 1998 to the Champion
Enterprises, Inc. 1995 Stock Option and Incentive Plan, filed as
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1999 and incorporated herein by
reference.
10.9 *Third Amendment dated October 27, 1998 to the Champion
Enterprises, Inc. 1995 Stock Option and Incentive Plan, filed as
Exhibit 10.10 to the Company's Annual Report on Form 10-K for
the fiscal year ended January 2, 1999 and incorporated herein by
reference.
10.10 *Fourth Amendment dated April 27, 1999 to the Champion
Enterprises, Inc. 1995 Stock Option and Incentive Plan, filed as
Exhibit 10.2 to the Company's Report on Form 10-Q for the
quarter ended April 3, 1999 and incorporated herein by
reference.
10.11 *Management Stock Purchase Plan, filed as Exhibit 4.1 to the
Company's Form S-8 dated September 17, 1998 and incorporated
herein by reference.
10.12 *Deferred Compensation Plan, filed as Exhibit 4.2 to the
Company's Form S-8 dated September 17, 1998 and incorporated
herein by reference.
10.13 *Corporate Officer Stock Purchase Plan, filed as Exhibit 4.1 to
the Company's Form S-8 dated February 26, 1999 and incorporated
herein by reference.
10.14 *Consent in Lieu of a Special Meeting of the Deferred
Compensation Committee dated January 1, 1999 to amend the
Corporate Officer Stock Purchase Plan, filed as Exhibit 10.33 to
the Company's Annual Report on Form 10-K for the fiscal year
ended January 2, 1999 and incorporated herein by reference.
61
10.15 *2000 Stock Compensation Plan for Nonemployee Directors, filed
as Exhibit 4.1 to the Company's Registration Statement on Form
S-8 dated December 28, 2000 and incorporated herein by
reference.
10.16 *First Amendment to the 2000 Stock Compensation Plan for
Nonemployee Directors, filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-8 dated December 28, 2000 and
incorporated herein by reference.
10.17 *Salesperson Retention Plan, filed as Exhibit 99(a) to the
Company's Registration Statement on Form S-3 dated January 19,
2001 and incorporated herein by reference.
10.18 *Letter Agreement dated April 27, 1990 between the Company and
Walter R. Young, filed as Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended March 2, 1990 and
incorporated herein by reference.
10.19 *Amendment dated August 31, 1995 to the Letter Agreement dated
April 27, 1990 between the Company and Walter R. Young, filed as
Exhibit 10.15 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 30, 1995 and incorporated herein
by reference.
10.20 *Letter Agreement dated October 17, 2000 between the Company and
Anthony S. Cleberg.
10.21 *Change in Control Severance Agreement dated November 30, 2000
between the Company and Anthony S. Cleberg.
10.22 *Letter Agreement dated May 1, 1997 between the Company and
Philip C. Surles, filed as Exhibit 10.31 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 3, 1998
and incorporated herein by reference.
10.23 *Change in Control Severance Agreement dated June 13, 1997
between the Company and Philip C. Surles, filed as Exhibit 10.32
to the Company's Annual Report on Form 10-K for the fiscal year
ended January 3, 1998 and incorporated herein by reference.
10.24 *Confidentiality and Noncompetition Agreement dated June 13,
1997 between the Company and Philip C. Surles, filed as Exhibit
10.33 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 3, 1998 and incorporated herein by reference.
10.25 *Amendment to Change in Control Severance Agreement dated
February 18, 1999 between the Company and Philip C. Surles,
filed as Exhibit 10.20 to the Company's Annual Report on Form
10-K for the fiscal year ended January 2, 1999 and incorporated
herein by reference.
62
10.26 *Employment and Noncompetition Agreement dated January 8, 1998
between the Company and M. Mark Cole, filed as Exhibit 10.26 to
the Company's Annual Report on Form 10-K for the fiscal year
ended January 2, 1999 and incorporated herein by reference.
10.27 *Letter Agreement dated September 11, 1998 between the Company
and M. Mark Cole, filed as Exhibit 10.28 to the Company's Annual
Report on Form 10-K for the fiscal year ended January 2, 1999
and incorporated herein by reference.
10.28 Lease dated June 30, 1997 between Southern Showcase Housing,
Inc., a subsidiary of the Company, and MMG Investments LLC,
filed as Exhibit 10.35 to the Company's Annual Report on Form
10-K for the fiscal year ended January 1, 2000 and incorporated
herein by reference.
10.29 Amendment dated July 1, 1998 to Lease dated June 30, 1997
between Southern Showcase Housing, Inc. and MMG Investments LLC,
filed as Exhibit 10.36 to the Company's Annual Report on Form
10-K for the fiscal year ended January 1, 2000 and incorporated
herein by reference.
10.30 *Letter Agreement dated September 28, 1998 between the Company
and Donald D. Williams, filed as Exhibit 10.37 to the Company's
Annual Report on Form 10-K for the fiscal year ended January 1,
2000 and incorporated herein by reference.
10.31 *Letter Agreement dated February 12, 1997 between the Company
and John J. Collins, Jr., filed as Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1996 and incorporated herein by reference.
10.32 *Letter Agreement dated April 7, 2000 between the Company and
John J. Collins, Jr.
10.33 *Change in Control Severance Agreement dated March 3, 1997
between the Company and John J. Collins, Jr., filed as Exhibit
10.28 to the Company's Annual Report on Form 10-K for the fiscal
year ended January 3, 1998 and incorporated herein by reference.
10.34 *Amendment to Change in Control Severance Agreement dated
February 18, 1999 between the Company and John J. Collins, Jr.,
filed as Exhibit 10.16 to the Company's Annual Report on Form
10-K for the fiscal year ended January 2, 1999 and incorporation
herein by reference.
10.35 *Agreement and General Release dated September 5, 2000 between
the Company and Joseph H. Stegmayer.
10.36 *Consulting Agreement dated September 5, 2000 between the
Company and Joseph H. Stegmayer.
63
11 Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Proxy Statement for the Company's 2001 Annual Meeting of
Shareholders, filed by the Company pursuant to Regulation 14A
and incorporated herein by reference.
Champion Enterprises, Inc. will, for a nominal charge, provide a copy of any of
the above exhibits to any shareholder upon written request addressed to the
Investor Relations Department, Champion Enterprises, Inc., 2701 Cambridge Court,
Suite 300, Auburn Hills, Michigan 48326.