-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P+uLXt/kHOaxT8EbbzqMKWVCrOnTdKqpjXleETiOtXSN/UEg+Wyu/oE2Fm+A7BLw SpTPpwcjJ3FAytqN6wAEOg== 0000935799-97-000003.txt : 19970329 0000935799-97-000003.hdr.sgml : 19970329 ACCESSION NUMBER: 0000935799-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970328 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAMPION ENTERPRISES INC CENTRAL INDEX KEY: 0000814068 STANDARD INDUSTRIAL CLASSIFICATION: MOBILE HOMES [2451] IRS NUMBER: 382743168 STATE OF INCORPORATION: MI FISCAL YEAR END: 1225 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09751 FILM NUMBER: 97567042 BUSINESS ADDRESS: STREET 1: 2701 UNIVERSITY DR STREET 2: STE 320 CITY: AUBURN HILLS STATE: MI ZIP: 48326 BUSINESS PHONE: 8103409090 MAIL ADDRESS: STREET 1: 2701 UNIVERSITY DRIVE STREET 2: STE 320 CITY: AUBURN HILLS STATE: MI ZIP: 48326 10-K 1 ANNUAL REPORT ON FORM 10-K 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 28, 1996 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 University Drive, Suite 320, Auburn Hills, Michigan 48326 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (810)340-9090 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered Common Stock, $1 par value New York Stock Exchange Series A Preferred Stock Purchase Chicago Stock Exchange 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. ____ The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of March 7, 1997, based on the last sale price of $19.25 per share for the Common Stock on the New York Stock Exchange on such date, was approximately $845,296,106. As of March 7, 1997, the Registrant had 48,247,193 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 Share- holders' Meeting to be held April 29, 1997 .................... III PART I ITEM 1. BUSINESS. Established in 1953, Champion Enterprises, Inc. and its subsidiaries (collectively, the Registrant, Champion or the Company) operate in the manufactured housing and commercial vehicles industries. In 1996 manufactured housing sales were 96% of the Registrant's consolidated revenues and commercial vehicles sales were the other 4%. Based on 1996 sales revenues, the Registrant is the largest producer of manufactured homes in the U.S. At December 28, 1996 the Registrant had approximately 11,000 employees. During the past three years the Registrant has significantly expanded its manufactured housing operations through acquisitions, internal growth and, in 1996, its merger with Redman Industries, Inc.(Redman). On October 24, 1996, the Company issued 16.5 million shares of its common stock in exchange for all the issued and outstanding common stock of Redman, a publicly held company whose shares were traded on the NASDAQ. Redman was merged into and became a wholly owned subsidiary of the Company. Prior to the merger Champion and Redman, respectively, were the second and third largest producers of manufactured homes in the U.S. The merger was accounted for as a pooling of interests and, accordingly, the Registrant's financial statements have been restated to include the financial position and results of operations of Redman for all periods presented. The information in this Form 10-K is presented on a combined basis. The Registrant has acquired six manufactured housing companies during the past three years. In January 1994, Dutch Housing, Inc. (Dutch), a manufacturer of standardized homes at three plants in Michigan, was acquired. In February 1995, the Registrant acquired Chandeleur Homes, Inc. (Chandeleur), which operated two plants in Alabama, and Crest Ridge Homes, Inc. (Crest Ridge), which operated one plant in Texas. Both companies are manufacturers of standardized homes. In October 1995, the Registrant acquired New Horizon Manufactured Homes, Ltd., a one plant operation in Alberta, Canada. In March 1996, Grand Manor, Inc. (Grand Manor), a one plant operation in Georgia, was acquired. In April 1996, the Registrant acquired Homes of Legend, Inc., which operated three plants in Alabama. The Grand Manor and Homes of Legend Acquisitions are sometimes referred to in this Report as the "1996 acqusitions." In each of the last three years Dutch opened a new plant in Indiana. In 1996 Chandeleur, Crest Ridge and Grand Manor each opened a new plant. Also in 1996, Redman opened a new plant in Alabama. At the end of 1996, the Registrant had 49 manufactured housing production facilities. The Registrant's commercial vehicles operations consist of two plants in Michigan which produce mid-size buses. One of these plants was opened in 1995. The Registrant's three year goal through 1998 is to achieve a minimum compound annual growth in earnings per share of 20%, with 1995 results as the base year, and excluding nonrecurring charges. This goal is based on the growth in the manufactured housing industry to date, the Registrant's increased manufacturing capacity, its increased number of independent dealer locations, continued market share improvement and the results of its acquisitions. This goal is also based on a number of assumptions, many of which are beyond the Registrant's control, including continued growth in both the manufactured housing industry and the overall general economy, only modest changes in interest rates and continued availability of municipal funding for commercial vehicles. There can be no assurance that these assumptions will prove accurate and actual results may differ substantially from this goal. FORWARD LOOKING STATEMENTS Certain statements contained in this Report, including the estimate of manufactured housing industry shipments in 1997 and the Company's three year goal of compound annual growth in earnings per share of 20%, are forward looking statements within the meaning of the Securities Exchange Act of 1934. In addition, the Company from time to time may publish other forward looking statements. Such forward looking statements are based on management's estimates, assumptions and projections and are subject to risks and uncertainties that could cause actual results to differ materially from the anticipated results or other expectations discussed in the forward looking statements. Factors which could affect the forward looking statements and the Registrant in particular include the following. Long-term growth in the manufactured housing industry may be affected by the relative cost of manufactured housing versus other forms of housing, general economic trends including inflation and unemployment rates, consumer confidence, job growth and interest rates, and changes in demographics including new household formation, the number of Americans on fixed incomes and the availability and cost of financing. Changes in housing regulations, including HUD and local building codes, and local zoning regulations could also affect the manufactured housing industry. In the short-term, manufactured housing sales may be affected by inclement weather. Profitability of the Company may be affected by its ability to efficiently expand operations and to utilize production capacity. Additionally, raw materials comprise a significant portion of the Company's cost of sales. Profitability may be affected by the Company's ability to pass increased material costs, particularly lumber costs, to its customers. HOUSING Products Most of the manufactured homes produced by the Registrant 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 97% of the homes produced by the Registrant in 1996 were HUD code homes. The remaining 3% of homes produced by the Registrant were manufactured in Canada or were "modular homes". Modular homes are designed to meet local building codes similar to site built housing codes. Homes produced in Canada are constructed in accordance with applicable Canadian building standards. The Registrant produces a broad range of single and multi-section homes under various trade names and brand names and in a variety of floor plans and price ranges. The Registrant's manufactured homes generally range in size from 600 to 2,700 square feet. The Registrant also produces homes up to 6,100 square feet in size. The typical home manufactured by the Registrant includes two or three bedrooms, a living room or family room, dining room, kitchen, and two full bathrooms. During 1996 the Registrant's average wholesale price was $25,600, and wholesale prices ranged from $9,000 to over $100,000. Retail sales prices of the homes, without land, generally range from $14,000 to over $100,000, depending upon size, floor plan, features and options. 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, home appliances such as refrigerators and ranges, furnaces, plumbing and electrical fixtures and hardware. These components are presently available from several sources and the Registrant is not dependent upon any particular supplier. Prices of certain materials such as lumber can fluctuate significantly due to changes in demand and supply. The industry and the Registrant generally have been able to pass higher material costs on to the consumer in the form of surcharges and increased base prices. It is not certain, however, that any future price increases can be passed on to the consumer without affecting demand. The homes are manufactured in one or more sections on a permanently-affixed steel support chassis. The completed home contains carpeting, cabinets, appliances, wall and window coverings and electrical, heating and plumbing systems. When completed the homes are sold and transported to dealer retail sales lots or directly to the consumer's home site. Upon retail sale, the homes are transported to the home sites, placed and readied for occupancy by the dealer or its independent contractor. Multi-section homes are joined and finished at the homesite. Production The Registrant's homes are constructed in indoor facilities using an assembly-line process employing approximately 150 to 200 production employees at each facility. Each home is assembled in stages beginning with the construction of the chassis 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 the Registrant's purchasing power enable the Registrant to produce homes in one to two days at substantially less cost than conventional site-built housing. The Registrant's production schedule is based upon wholesale buyer (dealer) 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. Once such orders become firm, they are filled within 90 days. As of the end of December 1996, unfilled orders for housing, although not firm, totaled an estimated $34 million, compared to $55 million a year earlier, excluding the 1996 acquisitions in both periods. Although manufactured homes can be produced throughout the year in indoor facilities, demand for homes is usually affected by inclement weather, particularly during the cold winter months in northern areas of the U.S. and in Canada. The Registrant produces homes to fill existing wholesale and retail orders and, therefore, generally does not carry finished goods inventories except for homes awaiting delivery. Typically one to three weeks' supply of raw materials is maintained. Charges to transport manufactured homes increase with the distance from the factory to the dealer and home site. As a result, most of the retail outlets for a manufacturer's homes are located within a 250 to 500-mile radius of its manufacturing plants. Regional population and employment trends can significantly affect demand for products of manufacturers whose plants are located in the region; consequently, the Registrant considers current levels of, and expected changes in, such demand when deciding whether to expand existing facilities or open additional facilities. Market Manufactured housing competes for consumers' shelter dollars 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 the Manufactured Housing Institute (MHI), an industry trade association, manufactured housing accounted for an estimated 32% of new single-family homes sold in 1996, compared to 34% in 1995. Industry shipments of manufactured housing increased 7% in 1996 to 363,411 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. The affordability of manufactured housing is influenced by interest rates and the availability of financing. Although the Registrant does not believe there is a direct correlation between manufactured housing shipments and interest rate changes, 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. Generally, manufactured housing is less sensitive to interest rate changes than other housing. The Registrant believes 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 singles and married couples, as well as elderly or retired persons. These consumers are attracted by the comparatively low cost of fully or partially furnished housing, together with the low down payment requirements and the relative ease of financing. 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. The Registrant believes that a much larger market may exist, including apartment dwellers and persons who have traditionally purchased low-priced site-built homes. 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. These negative factors have lessened considerably in recent years with improved quality and appearance, increased financing availability and less restrictions. Competition According to the MHI, in 1996 there were approximately 90 producers of manufactured homes in the U.S. operating an estimated 313 production facilities. This total compares to 285 plants a year ago and 400 plants in 1986. The industry has continued to consolidate and in 1995 the top four companies had a combined market share of 50%, up from 41% in 1991. Capital requirements for entry into the manufactured housing industry are relatively low. 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. In 1996 the Registrant sold 61,796 homes of which 55.5% were multi-sectionals. The multi-section mix increased from 54.3% in 1995. Based on homes sold, in 1996 the Registrant's U.S. market share of HUD code homes was 16.5%, up from 15.4% in 1995. According to the MHI, the industry's U.S. multi-section mix was 52.2% in 1996, up from 48.8% in 1995. A multi-section home, including a double-section home, is counted as one home or "unit". Distribution The Registrant's products are distributed throughout the U.S. and Canada through over 3,200 retail outlets operated by independent dealers, some of which are operated by single firms having multiple outlets, as well as through 15 Registrant owned retail centers in the Northwest. The majority of the Registrant's dealers are independent and, as is common in the industry, sell manufactured homes produced by other manufacturers in addition to those produced by the Registrant. In 1996, no single independent dealer or distributor accounted for more than 10% of the Registrant's sales and less than 10% of the Regis- trant's manufactured housing production was shipped to retail sales centers it owned. The majority of independent dealer purchases are financed by lending institutions on a floor plan basis secured by a lien on such units. In accordance with trade practice, the Registrant enters into various repurchase agreements with the lending institutions providing such financing, as is more fully described in Note 10 of Notes to Consolidated Financial Statements. During 1996 the Registrant expanded its independent dealer distribution network by approximately 18%, of which the 1996 acquisitions accounted for 10 percentage points of the increase. The Registrant is continuing its expansion efforts and expects continued sales growth in 1997 from its existing dealer base as well as from new dealers. COMMERCIAL VEHICLES Products and production The Registrant manufactures mid-size buses ranging in length from 20 to 33 feet with seating capacity for 10 to 37 passengers. Buses are offered with a choice of interior or exterior storage areas, wheel-chair lifts, diesel, gasoline and alternative fuel engines and various seat types, arrangements and coverings. The Registrant's buses are marketed under the trade names Centurion, Challenger, CTS, Crusader, Commander, Commodore, Contender and Solo. The Registrant purchases chassis for its buses from motor vehicle manufacturers and produces the final product using assembly-line production techniques. A steel-cage frame consisting of steel tubes is attached to the chassis and an adhesive bonding technique is used to fasten the smooth exterior walls to the frame. The chief components and products used by the Registrant in its vehicle manufacturing operations, with the exception of the chassis, are presently available from several sources and the Registrant is not dependent upon any particular supplier. Orders for buses are subject to adjustment or cancellation until final approval of specifications is received from customers. Once such orders become firm, they are filled within 90 days unless a customer specifically requests completion at a later date. As of the end of December 1996, the level of firm, unfilled orders for buses totaled approximately $15 million, compared to approximately $4.5 million at the end of the prior year. Market, competition and distribution The demand for mid-size buses is affected by factors such as government regulations and spending programs, the need for short distance shuttle services, overall economic conditions and the general availability of financing. Lower operating costs, greater flexibility, and reduced capital investment is believed to make the Registrant's vehicles a practical alternative to larger mass-transit buses and smaller vans. Demand for mid-size buses is not seasonal in nature. The Registrant sells its buses to municipalities, public agencies and private businesses, which include shuttle fleets, nursing homes, churches, hotels, airports and universities. Although there are several producers of mid-size buses, the three largest producers together comprise about 55% of the market. The Registrant believes that it is the second or third largest producer of mid-size buses in the U.S. The Registrant distributes its buses through a network of 45 independent distributors in the U.S. and Canada and directly to municipalities and national accounts on a bid basis. ITEM 2. PROPERTIES. All of the Registrant's manufacturing facilities are one story with concrete floors and wood and steel superstructures. The Registrant owns all of its manufacturing facilities except for four housing facilities which are leased, and owns substantially all of the machinery and equipment used in each of its facilities. The Registrant believes its plant facilities are generally well maintained and, with completed and planned expansions, provide ample capacity to meet expected demand. The following table sets forth certain information with respect to the Registrant's manufacturing facilities, all of which are assembly-line operations. Approximate Location Square Feet Manufactured housing plants: Alabama: Guin 120,000 Boaz(7 plants)* 678,000 Talladega 163,000 Arizona Chandler 85,000 California: Corona** 208,000 Lindsay 156,000 Woodland** 99,000 Colorado: Berthoud 103,000 Florida: Plant City 92,000 Georgia: Thomasville(2 plants) 190,000 Richland 119,000 Idaho: Weiser 130,000 Indiana: LaGrange(4 plants)*** 326,000 Ridgeville 105,000 Topeka(4 plants) 388,000 Michigan: White Pigeon(3 plants) 190,000 Mississippi: Gulfport 78,000 Nebraska: Central City 130,000 York 146,000 New York: Sangerfield 114,000 North Carolina: Lillington(2 plants) 220,000 Maxton 132,000 Sanford 93,000 Oregon: Silverton 102,000 Woodburn 110,000 Pennsylvania: Claysburg 140,000 Ephrata 131,000 Tennessee: Henry 125,000 Texas: Athens 150,000 Breckenridge(2 plants) 229,000 Burleson 112,000 Washington: Chehalis** 103,000 Canada: Alberta: Medicine Hat 92,000 British Columbia: Penticton 74,000 Commercial vehicles plants: Michigan: Imlay City(2 plants) 230,000 *Includes former Redman components facility which is being equipped and readied to produce manufactured homes commencing in the second quarter of 1997. Also includes one leased facility of 60,000 square feet. **Leased facilities. ***Includes one plant opened January 1997. The Registrant leases its executive offices, which are located in Auburn Hills, Michigan. Other miscellaneous properties are also owned or leased, including 15 locations used in the retail sale of manufactured housing. ITEM 3. LEGAL PROCEEDINGS. In the ordinary course of business, the Registrant is involved in routine litigation incidental to its business. This litigation arises principally from the sale of its 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 the Registrant's management, none of such matters presently pending are material to the Registrant's overall financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On October 24, 1996 the Registrant held a Special Meeting of Shareholders to vote on a proposal to approve the share issuance, pursuant to the Agreement and Plan of Merger, dated as of August 19, 1996, by and among Champion Enterprises, Inc., Redman Industries, Inc. and RHI Acquisition Corp. The results were as follows: Votes For - 23,734,019 Votes Against - 47,096 Votes Withheld/Abstentions - 69,421 Nonvotes - 0 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. (a) The Registrant'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 1996 1st Quarter $15 1/2 $11 7/8 2nd Quarter 26 1/8 14 3/16 3rd Quarter 22 5/8 17 5/8 4th Quarter 23 1/4 18 1/4 1995 1st Quarter 9 3/4 6 25/32 2nd Quarter 9 3/4 7 3rd Quarter 10 5/16 7 1/2 4th Quarter $15 1/2 $ 9 1/4 Prior amounts have been restated for the effect of the two-for-one stock split in May 1996. (b) There were approximately 6,000 shareholders of record and 18,000 beneficial holders on March 7, 1997. (c) The Registrant has not paid cash dividends during the past two fiscal years. Consistent with its plan to improve shareholder value through investments in its businesses, the Company does not plan to pay cash dividends in the near term. PAGE ITEM 6. SELECTED FINANCIAL DATA. CHAMPION ENTERPRISES, INC. FIVE-YEAR HIGHLIGHTS (UNAUDITED) (In thousands, except per share amounts and units sold) FISCAL YEAR FISCAL YEAR DECEMBER FEBRUARY 1996 1995 1994 1993 1992 1992 OPERATIONS: Net sales: Housing $1,582,829 $1,355,085 $1,100,483 $739,603 $601,592 $497,747 Commercial vehicles 61,242 56,641 43,064 31,779 23,930 28,052 1,644,071 1,411,726 1,143,547 771,382 625,522 525,799 Cost of sales 1,392,788 1,199,579 979,370 664,474 546,896 462,273 Gross margin 251,283 212,147 164,177 106,908 78,626 63,526 Selling, general and administrative expenses 135,483 117,458 93,434 77,623 63,516 58,142 Operating income 115,800 94,689 70,743 29,285 15,110 5,384 Nonrecurring merger and other charges (22,000) - (2,700) (572) (1,308) (900) Interest income (expense), net 386 158 589 (1,836) (5,035) (5,993) Pretax income (loss) - continuing operations 94,186 94,847 68,632 26,877 8,767 (1,509) Income (loss) - continuing operations 53,586 56,285 45,130 18,951 6,194 (1,939) Income (loss) - dis- continued operations - - 1,908 (4,231) (2,904) (1,477) Extraordinary gain (loss) - - - (1,753) 420 - Net income (loss) 53,586 56,285 47,038 12,967 3,710 (3,416) Per share amounts:** Income (loss) - continuing operations 1.09* 1.14 0.92 0.44 0.17 (0.05) Income (loss) - discontinued operations - - 0.04 (0.10) (0.08) (0.04) Extraordinary gain (loss) - - - (0.04) 0.01 - Net income (loss) $ 1.09 $ 1.14 $ 0.96 $ 0.30 $ 0.10 $ (0.09) Weighted average shares outstanding** 49,363 49,515 48,900 42,954 37,820 37,381 Depreciation and amortization $14,883 $11,633 $8,429 $6,691 $7,032 $6,818 Capital expenditures $50,709 $20,448 $19,280 $10,981 $5,375 $3,808 FINANCIAL POSITION: Working capital $21,479 $26,433 $36,537 $35,046 $19,163 $16,610 Property and equipment, net 122,602 77,684 61,941 46,559 43,415 46,195 Total assets 472,350 378,159 301,255 208,111 179,832 190,965 Long-term liabilities 50,544 38,199 30,037 27,847 61,501 53,280 Shareholders' equity 226,634 176,142 133,266 81,741 22,316 17,920 Per share** $4.75 $3.73 $2.79 $1.76 $0.60 $0.49 Return (loss) on average equity 27%* 36% 44% 25% 19% (17)% OTHER STATISTICAL INFORMATION: Homes sold 61,796 53,955 44,453 32,607 29,249 25,461 Commercial vehicles sold 1,227 1,289 1,046 789 657 705
Prior amounts have been restated due to the October 1996 merger with Redman Industries, Inc., which was accounted for as a pooling of interests. See Note 1 of Notes to Consolidated Financial Statements. In October 1992 the Company changed its year end from the end of February to the end of December. * Earnings per share were $1.43 and return on equity was 35% excluding the 1996 nonrecurring merger and other charges. **Prior amounts have been restated for the two-for-one stock split in May 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS 1996 VERSUS 1995 Overview 1996 was a record year of growth in sales and profitability for Champion Enterprises, Inc. ("Champion" or "Company"). Historic highs were reached in consolidated sales of $1.6 billion, operating income of $116 million and earnings per share of $1.43 before nonrecurring charges. Champion underwent considerable change by acquiring two manufactured housing companies, combining three corporate staffs, expanding operations and merging with Redman Industries, Inc. ("Redman"). In the first quarter, Champion acquired Grand Manor, Inc. which operated one plant in Georgia. In the second quarter, the Company acquired Homes of Legend, Inc., a three plant operation in Alabama. Grand Manor and Homes of Legend are referred to in this discussion as the "1996 acquisitions". Bar Chart showing Consolidated Sales (in billions) 1994-$1.14 1995-$1.41 1996-$1.64 Three-Year Compound Annual Growth Rate (CAGR)=29% On October 24, 1996, Champion issued 16.5 million shares of its common stock in exchange for all the issued and outstanding common stock of Redman, a publicly held company whose shares were traded on the NASDAQ. Redman was then merged into and became a wholly owned subsidiary of Champion. Prior to the merger Champion was the second largest producer of manufactured homes in the U.S. and Redman was the third largest. The merger was accounted for as a pooling of interests which requires current and prior financial statements of the merged companies be restated on a combined basis. Accordingly, the financial statements and management's discussion and analysis for all periods in this Annual Report are presented on a combined basis. Nonrecurring and other charges associated with the merger were recorded in the fourth quarter of 1996. These charges are discussed below in the section "Other Matters". Bar Chart showing Earnings Per Share 1994-$0.92 1995-$1.14 1996-$1.43* *excluding nonrecurring charges of $0.34 per share Three-Year CAGR=48% Manufactured Housing (dollars in millions, except average home price) 1996 1995 % Change Net sales $ 1,582.8 $ 1,355.1 17% Gross margin 244.0 204.1 20% SG&A 130.6 112.4 16% Operating income $113.4 $91.7 24% Operating margin 7.2% 6.8% Homes sold 61,796 53,955 15% Average price $25,600 $25,100 2% 1996 manufactured housing results for Champion were significantly greater than 1995 results due to internal growth, acquisitions, manufacturing efficiencies and growth in the manufactured housing industry. Champion sold 61,796 homes, an increase of 15% over 1995. During the year the Company increased the number of manufactured home plants to 49 from 40. Five new plants were opened by existing operations and four plants were added by the 1996 acquisitions. Based on sales, Champion became the largest producer of manufactured homes in the U.S. with a 17% increase in sales to $1.58 billion. Sales by existing operations increased 11% on an 8% increase in homes sold. The 1996 acquisitions added sales of $80 million and accounted for 6.5 percentage points of the increase in unit shipments. The average price of a house sold increased 2% due primarily to increased sales of multi-section homes. The Company's multi-section mix (a measure of larger homes) rose from 54.3% to 55.5%. Excluding the 1996 acquisitions, the multi-section mix would have increased to 56.4%. The Company's 1996 U.S. market share based on homes sold as reported by the Manufactured Housing Institute ("MHI"), an industry trade association, increased to 16.5% from 15.4% in 1995 primarily due to the 1996 acquisitions. Industry shipments in 1996 rose 7% to 363,411 homes. Bar Chart showing Housing Operating Margins 1994-6.3% 1995-6.8% 1996-7.2% Manufactured housing operating income rose 24% to $113 million due to higher sales volume, the 1996 acquisitions and improved margins. Gross margin increased to 15.4% of sales from 15.1% in 1995 and operating margin increased to 7.2% of sales from 6.8%. These margin improvements were due to greater manufacturing efficiencies and the effects of higher volumes on fixed costs which resulted from increased demand for the Company's products and plant capacity additions. The 1996 acquisitions added operating income of $7.1 million for the year. Selling, general, and administrative expenses (SG&A) increased in dollars but remained at 8.3% of sales. The favorable effects of higher volumes on SG&A were offset by higher incentive bonuses due to increased profits. Although dealer orders can be cancelled at anytime without penalty, and unfilled orders are not necessarily an indication of future business, the Company's unfilled orders for housing at the end of December 1996 totaled $38 million. Unfilled orders excluding the 1996 acquisitions were $34 million, compared to $55 million a year earlier. Incoming orders were up 15% in the fourth quarter as compared to last year and capacity increased with the five new plants opened during 1996. Other Matters (dollars in millions) 1996 1995 Nonrecurring merger charges $22.0 $ - Net interest income 0.4 0.2 Income taxes $40.6 $38.6 Effective income tax rate 43% 41% During the fourth quarter the Company provided $22 million pretax or $16.8 million after tax ($0.34 per share) for the nonrecurring charges associated with the Redman merger. These charges include $9 million for severance costs associated with the planned closing of the Redman corporate headquarters and stock based compensation costs triggered by the change in control, $8 million for investment banking, legal and other fees and $5 million for adjusting the carrying value of certain facilities and other assets. Consolidated sales and income include the results of the commercial vehicles business which accounted for 3.7% of consolidated sales in 1996. Commercial vehicles sales increased 8% to $61 million on a unit shipment decrease of 5% to 1,227 mid-size buses. The average price of a bus increased by 13.6% primarily due to larger buses being produced. Operating income declined 20% to $2.4 million from $3.0 million due to excessive costs incurred on a large municipal order in the fourth quarter of 1996. Net interest income increased due to higher cash balances and lower debt balances in 1996. Income tax expense in 1996 increased due to a higher effective income tax rate caused by the nondeductible portion of the nonrecurring merger charges. In 1996 weighted average shares outstanding decreased resulting in additional earnings per share of $0.01 for each of the first three quarters and no effect on the fourth quarter. The treasury stock methodology applied to outstanding stock options in computing weighted average shares outstanding resulted in this increase in earnings per share. RESULTS OF FOURTH QUARTER 1996 VERSUS 1995 Overview Consolidated sales rose 20% to $426 million from $356 million in the prior year. Excluding the nonrecurring charges, operating income rose 18% to $27.7 million due to the 1996 acquisitions and higher volumes. Earnings per share excluding the $0.34 per share nonrecurring merger charges were $0.34, a 21% increase over 1995 earnings of $0.28 per share. Manufactured Housing (dollars in millions) 1996 1995 % Change Net sales $409.7 $341.4 20% Gross margin 60.6 51.5 18% SG&A 33.1 28.9 15% Operating income $27.5 $22.6 22% Operating margin 6.7% 6.6% Homes sold 15,709 13,329 18% Manufactured housing sales increased 20% on an 18% increase in homes sold. Excluding the 1996 acquisitions, sales increased 11% on an 8% unit shipment increase and operating income rose 10%. Industry shipments for the fourth quarter were even with last year. The multi-section mix in the fourth quarter was 56.1%. Operating margins improved due to higher volumes. For the quarter, the 1996 acquisitions added $30 million to revenues, 1,303 homes sold and $2.6 million to operating income. Other Matters Consolidated sales and income include the results of the commercial vehicles business. Commercial vehicles sales increased 11% to $15.9 million on a 4% increase in unit shipments. Commercial vehicles quarterly operating income was $0.2 million compared to $0.9 million last year. The decrease in income was due to excessive costs associated with a large municipal order. During the fourth quarter of 1996, nonrecurring charges of $22 million or $16.8 million after tax were recorded. Please refer to "Other Matters" in the "Results of Operations 1996 versus 1995". In 1996 weighted shares outstanding decreased due to the treasury stock methodology applied to outstanding stock options in computing weighted shares outstanding. However, earnings per share in the fourth quarter were not impacted. MANUFACTURED HOUSING INDUSTRY OUTLOOK Industry wholesale unit shipments of manufactured homes increased 7% in 1996, 12% in 1995 and 20% in 1994, according to the MHI. The Company's management estimates a 4 to 7% increase in industry shipments in 1997. Bar Chart showing Industry Growth (Homes Shipped) 1994-303,932 1995-339,601 1996-363,411 The manufactured housing industry has experienced several positive fundamental changes in the last several years. Historically a fragmented industry, many consolidations have taken place with Champion being the lead consolidator. In 1995 the top four companies accounted for 50% of unit shipments. Currently 80% of the top ten manufactured housing companies are publicly held. Since housing is a regional business, the Company's competitors vary by region. Also, since product quality and design have improved, manufactured homes may compete directly with site built homes resulting in a broader market for manufactured housing. In 1996 the industry sold 363,411 homes or 32% of all new single family homes sold in the U.S. Larger homes are being sold by the industry and multi-section homes increased to 52% of manufactured homes sold in 1996. Improved product combined with changing demographics has broadened the appeal of manufactured housing to more people. Bar chart showing Champion's market share 1994-13.9% 1995-15.4% 1996-16.5% Management believes that moderate changes in interest rates will not have a significant direct impact on demand for manufactured housing. However, to the extent that increased interest rates reduce job growth, slow the U.S. economy, or cause a loss in consumer confidence, demand for manufactured housing may be adversely affected. In the short term, the industry may be affected by inventory levels of manufactured housing retailers. Retail inventory levels have increased in recent months partially as a result of inclement weather conditions in many areas of the country. The weather has affected retail traffic as well as the retailers ability to deliver and set homes that are sold. As a result, the Company is currently experiencing lower levels of unfilled orders and some related production inefficiencies. Long-term industry growth will be affected by, among other things, the relative cost of manufactured housing versus other forms of housing, including rental housing, general economic trends, changes in demographics including new household formation, the number of Americans on fixed incomes, and the availability and cost of financing. Changes in regional markets and the U.S. economy as a whole will continue to affect overall housing industry cycles. Bar Chart showing Champion vs.Industry Multi-Section Mix 1994-Industry 49% -Champion 54% 1995-Industry 49% -Champion 54% 1996-Industry 52% -Champion 56% Management is encouraged by the favorable trends impacting the industry. The Company is positioned to take advantage of these trends by implementing strategies of serving particular market niches with broad geographic coverage, maintaining a decentralized organization and making selective acquisitions and expansions. RESULTS OF OPERATIONS 1995 VERSUS 1994 Overview 1995 results for Champion were significantly greater than 1994 results. Pretax income from continuing operations increased 38% to $94.8 million. Income from continuing operations increased 25% to $56.3 million, even though the Company's effective income tax rate increased to almost 41% from 34% in 1994. Assuming the same tax rate of 41% in both years, income from continuing operations would have increased 39% over 1994. Consolidated sales increased 23% to $1.4 billion due to acquisitions, plant expansions and growth in the manufactured housing industry. In February 1995, the Company acquired Chandeleur Homes, Inc. in Alabama and Crest Ridge Homes, Inc. in Texas ("1995 acquisitions"). Both companies are manufacturers of standardized homes and are located in the Southeast and Southwest, the leading markets for manufactured housing. In March 1995, Dutch Housing, Inc. commenced operations at a newly constructed plant in Indiana. In October 1995, Moduline International, Inc. completed its acquisition of New Horizon Manufactured Homes, Ltd. in Alberta, Canada. Manufactured Housing (dollars in millions, except average home price) 1995 1994 % Change Net sales $1,355.1 $ 1,100.5 23% Gross margin 204.1 158.2 29% SG&A 112.4 89.3 26% Operating income $91.7 $68.9 33% Operating margin 6.8% 6.3% Homes sold 53,955 44,453 21% Average price $25,100 $24,750 1% Internal growth and acquisitions in 1995 resulted in higher sales and earnings. Sales from existing operations increased 14% on a 9% increase in homes sold. The 1995 acquisitions added sales of $100 million on unit shipments of 5,543. The increase in average net selling price in 1995 was due to slight price increases and mix. The Company's multi-section mix was 54% in both years. According to the MHI, 1995 U.S. industry shipments rose 12% to 339,601 homes, of which 49% were multi-sectionals. The Company's 1995 U.S. market share based on homes sold rose to 15.4% from 13.9% in 1994. Operating income increased primarily due to higher sales volume and improved margins. The 1995 acquisitions accounted for $9.8 million, or 14 percentage points of the increase. Improved margins resulted from higher volumes per plant and greater production efficiencies due to increased demand for the Company's manufactured homes and to plant expansions completed during the last two years. In addition, as a percent of sales, material costs were lower in 1995 than in 1994, partially offset by higher service costs and SG&A. Other Matters (dollars in millions) 1995 1994 Environmental charge $ - $ 2.7 Net interest income 0.2 0.6 Income taxes $38.6 $23.5 Effective income tax rate 41% 34% Income from discontinued operations $ - $ 1.9 The 1994 environmental charge was recorded for the settlement of a potential environmental claim. Net interest income decreased in 1995 due to borrowings associated with the 1995 acquisitions. Income from discontinued operations in 1994 was due to the settlement of certain litigation. Consolidated sales and income include the results of the commercial vehicles business. Commercial vehicles net sales increased 32% to $57 million from the sale of 1,289 buses, an increase of 23%. Operating income increased 67% to $3.0 million. Also, in 1995 the commercial vehicles business commenced operations at its second bus manufacturing facility in Michigan. Income tax expense in 1995 increased due to higher pretax earnings and a higher effective tax rate. The 1994 tax provision reflected the utilization of the remaining net operating loss carry forwards, the benefit of which equaled 8% of pretax income. LIQUIDITY AND CAPITAL RESOURCES Cash and short-term investments totaled $19 million at December 28, 1996, compared to $22 million at December 30, 1995. In 1996 cash of $80 million was generated from operations before payment of nonrecurring merger charges totaling $11 million, $28 million was used for acquisition related payments, $51 million for capital expenditures and $13 million for common stock repurchases. The Company's current ratio was 1.1 to 1 at December 28, 1996 compared to 1.2 to 1 at December 30, 1995. The Company had virtually no debt at the end of 1996 and 1995. Working capital components have increased significantly due to acquisitions and higher volumes from new facilities. However, some of the increases are not evident on the balance sheet because of combining Redman's March 29, 1996 balance sheet with Champion's December 30, 1995, and the seasonal differences that occur between those two dates. Other current liabilities increased primarily due to $11 million in unexpended nonrecurring charges, offset by a $5 million reduction of deferred purchase price obligations for acquisitions. The Company has a $70 million unsecured line of credit, which expires in 1998 and includes $20 million of availability to cover letters of credit. At December 28, 1996, the Company had $14 million of letters of credit outstanding, generally to support insurance obligations and licensing and service bonding required by various states. The Company had no bank borrowings outstanding at December 28, 1996. However, borrowings may be required during 1997 for capital improvements and to meet seasonal working capital needs. The Company's 1997 plans include the opening of new manufactured housing plants throughout the country except the Northwest. In January 1997 the Company opened a new plant in Indiana. Currently, new plants are under construction in Alabama, North Carolina, and Nebraska. In addition, Moduline's retail sales operations will be expanded with the addition of up to four retail centers, increasing the number to 19. The Company plans to spend as much as $45 million in 1997 on capital expansions and improvements, including the new manufactured housing plants. Bar Chart showing Capital Expenditures (in millions) 1994-$19 1995-$20 1996-$51 The Company's return on equity for 1996 was 27% with virtually no debt (35% based on income before the nonrecurring merger charges). Consistent with its plan to improve shareholder value through investments in its businesses, the Company does not plan to pay cash dividends in the near term. Bar Chart showing Return on Equity 1994-44% 1995-36% 1996-35%* * before nonrecurring charges The Company believes that existing cash balances, cash flow from operations and additional availability under its line of credit are adequate to meet its anticipated financing needs, operating requirements and capital expenditures in the foreseeable future. However, management may explore other opportunities to raise capital to finance the growth of the Company. Bar Chart showing Cash Flow from Operations (in millions) 1994-$44 1995-$67 1996-$80* * before nonrecurring charges Impact of Inflation Inflation has not had a material effect on the Company's operations during the last three years. Lumber prices fluctuate, but during periods of rising lumber 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 Standards In October 1996, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 96-1 "Environmental Remediation Liabilities" (SOP 96-1) which is effective for years beginning after December 15, 1996. The Company believes that its accounting practices already comply with the provisions of SOP 96-1. 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 REGISTRANT The information set forth in the first part of the section entitled "Election of Directors" in the Registrant's Proxy Statement for the Annual Shareholders' Meeting to be held April 29, 1997 (the "Proxy Statement"), and under the caption "Certain Information Regarding Nominees" in such section of the Proxy Statement is incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Registrant, their ages, and the position or office held by each, are as follows: Position or Office Name Age Chairman of the Board of Directors, President and Chief Executive Officer Walter R. Young, Jr. 52 Executive Vice President and Chief Financial Officer A. Jacqueline Dout 42 Vice President, General Counsel and Secretary John J. Collins, Jr. 45 Treasurer Ragnar Bergethon 53 Controller Richard Hevelhorst 49 The executive officers of the Registrant serve at the pleasure of the Registrant's Board of Directors except for Mr. Walter R. Young, Jr., who is currently serving a three year term ending April 30, 2000, unless terminated earlier in accordance with the terms of a certain Letter Agreement between the Registrant and Mr. Young, dated April 27, 1990. Mr. Young joined the Registrant in April 1990 as President and Chief Executive Officer and was elected Chairman of the Board in April 1992. Prior to joining the Registrant in April 1994, Ms. Dout served as Vice President and Treasurer of Mallinkrodt Group, Inc., where she was employed for six years. Mr. Collins joined the Company in March 1997. For the past five years, he was Principal and Managing Director of Miller, Canfield, Paddock and Stone PLC and was the Resident Director of one of its offices. Prior to Mr. Bergethon joining the Registrant in January 1997, he was the Treasurer of Zenith Data Systems Corporation since 1989. Mr. Hevelhorst joined the Registrant as Controller in May 1995. Previously for the past five years he was employed in various financial and accounting positions at Evans Industries, Inc. and most recently was their Treasurer and Chief Financial Officer. There are no family relationships among any of the Registrant's executive officers. The information set forth under the caption "Compliance with Section 16(a) of The Exchange Act" in the section entitled "Additional Information" in the Registrant's Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the section entitled "Executive Compensation" in the Registrant'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 Registrant's Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not applicable. 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 Registrant's management contracts or compensation plans or arrangements for its executive officers. Exhibit No. Description 3.1 Restated Articles of Incorporation of the Registrant filed with the Registrant'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 Registrant filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29, 1996, and incorporated herein by reference. 3.3 Bylaws of the Registrant filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. 4.1 Article III of the Registrant's Restated Articles of Incorporation (increasing number of authorized shares of capital stock) - included in the Registrant's Amendment to Restated Articles of Incorporation filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29, 1996, and incorporated herein by reference. 4.2 The Registrant has issued certain receivable-backed notes (the "Notes") pursuant to a Trust Indenture dated as of August 1, 1987 between CAC Funding Corporation, as issuer, and First of America Bank - Detroit, N.A., as trustee. The Notes do not exceed 10 percent of the total assets of the Registrant and the Registrant agrees to furnish a copy of the Trust Indenture to the Commission upon request. 4.3 Form of Rights Certificate filed as Exhibit 1 to the Registrant's Registration Statement on Form 8-A dated January 12, 1996 and incorporated herein by reference. 4.4 Rights Agreement by and between the Registrant and Harris Trust and Savings Bank filed as Exhibit 2 to the Registrant'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 Registrant and University Development Company relating to the premises located at 2701 University Drive, Auburn Hills, Michigan, filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1992 and incorporated herein by reference. 10.2 Credit Agreement dated September 29, 1995 between the Registrant, Comerica Bank and The First National Bank of Chicago, filed as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.3 First Amendment, dated October 27, 1995, to Credit Agreement dated September 29, 1995 between the Registrant, Comerica Bank and The First National Bank of Chicago, filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.4 Second Amendment, dated September 17, 1996, to the Credit Agreement dated September 29, 1995 between the Registrant, Comerica Bank and The First National Bank of Chicago. 10.5 Third Amendment, dated December 2, 1996, to the Credit Agreement dated September 29, 1995 between the Registrant, Comerica Bank and The First National Bank of Chicago. 10.6 *Champion Enterprises, Inc. 1987 Stock Option Plan, as amended, filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1992 and incorporated herein by reference. 10.7 *Champion Enterprises, Inc. 1990 Nonqualified Stock Option Program, as amended through the Second Amendment, filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.8 *Third Amendment, dated June 18, 1996, to the Champion Enterprises, Inc. 1990 Nonqualified Stock Option Program. 10.9 *Fourth Amendment, dated December 3, 1996, to the Champion Enterprises, Inc. 1990 Nonqualified Stock Option Program. 10.10 *Champion Enterprises, Inc. Stock Plan for Directors, as amended, filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 and incorporated herein by reference. 10.11 *Champion Enterprises, Inc. 1993 Middle Management Stock Option Plan, filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 and incorporated herein by reference. 10.12 *First Amendment to the Champion Enterprises, Inc. 1993 Middle Management Stock Option Plan, filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.13 *Second Amendment, dated June 18, 1996, to the Champion Enterprises, Inc. 1993 Middle Management Stock Option Plan. 10.14 *Champion Enterprises, Inc. 1995 Stock Option and Incentive Plan, filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 dated May 1, 1995 and incorporated herein by reference. 10.15 *First Amendment to the Champion Enterprises, Inc. 1995 Stock Option and Incentive Plan, filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.16 *Champion Enterprises, Inc. 1995 Stock Retainer Plan for Non-employee Directors, filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-8 dated May 1, 1995 and incorporated herein by reference. 10.17 *Letter Agreement dated April 27, 1990 between the Registrant and Walter R. Young, Jr., filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 2, 1990 and incorporated herein by reference. 10.18 *Amendment dated August 31, 1995 to the Letter Agreement dated April 27, 1990 between the Registrant and Walter R. Young, Jr., filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.19 *Nonqualified Stock Option Agreement dated August 31, 1995 between the Registrant and Walter R. Young, Jr., filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.20 *Nonqualified Stock Option Agreement dated August 31, 1995 between the Registrant and Walter R. Young, Jr., filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.21 *Performance Share Award Agreement dated August 31, 1995 between the Registrant and Walter R. Young, Jr., filed as Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.22 *Letter Agreement dated March 15, 1994 between the Registrant and A. Jacqueline Dout, filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. 10.23 *Nonqualified Stock Option Agreements dated April 18, 1994 between the Registrant and A. Jacqueline Dout, filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. 10.24 *Change in Control Severance Agreement dated as of April 12, 1991 between the Registrant and Louis M. Balius, filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1993 and incorporated herein by reference. 10.25 *Letter Agreement dated February 12, 1997 between the Registrant and John J. Collins, Jr. 10.26 *Redman Industries, Inc. 1993 Stock Option Plan, filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 dated October 24, 1996 and incorporated herein by reference. 10.27 *Redman Industries, Inc. 1993 Incentive Holders' Stock Option Plan, filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-8 dated October 24, 1996 and incorporated herein by reference. 11 Statement Regarding Computation of Per Share Earnings. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Price Waterhouse LLP. 23.2 Consent of Ernst and Young LLP. 27.1 Financial Data Schedule. 99.1 Proxy Statement for the Registrant's 1997 Annual Meeting of Shareholders - filed by the Registrant pursuant to Regulation 14A and incorporated herein by reference. (b) A report on Form 8-K, dated October 24, 1996, was filed by the Registrant on November 6, 1996; such Report contained information under Item 2 (Acquisition or Disposition of Assets) and included under Item 7 financial statements of business acquired and pro forma financial information. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CHAMPION ENTERPRISES, INC. By: /s/A. JACQUELINE DOUT A. Jacqueline Dout Dated: March 21, 1997 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 Registrant and in the capacities and on the dates indicated. Signature Title Date /s/WALTER R. YOUNG, JR. Chairman of the Board of Walter R. Young, Jr. Directors, President and Chief Executive Officer March 21, 1997 (Principal Executive Officer) /s/A. JACQUELINE DOUT Executive Vice President March 21, 1997 A. Jacqueline Dout and Chief Financial Officer (Principal Financial Officer) /s/RICHARD HEVELHORST Controller March 21, 1997 Richard Hevelhorst (Principal Accounting Officer) /s/ROBERT W. ANESTIS Director March 21, 1997 Robert W. Anestis /s/FRANK J. FERACO Director March 21, 1997 Frank J. Feraco /s/SELWYN ISAKOW Director March 21, 1997 Selwyn Isakow /s/GEORGE R. MRKONIC Director March 21, 1997 George R. Mrkonic /s/JOHNSON S. SAVARY Director March 21, 1997 Johnson S. Savary /s/ROBERT W. STARK Director March 21, 1997 Robert W. Stark /s/CARL L. VALDISERRI Director March 21, 1997 Carl L. Valdiserri CHAMPION ENTERPRISES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Description Page Report of Independent Accountants F-2 Report of Independent Auditors F-3 Consolidated Statements of Income for the Periods Ended December 28, 1996, December 30, 1995 and December 31, 1994 F-4 Consolidated Balance Sheets as of December 28, 1996 and December 30, 1995 F-5 Consolidated Statements of Cash Flows for the Periods Ended December 28, 1996, December 30, 1995 and December 31, 1994 F-6 Consolidated Statements of Shareholders' Equity for the Periods Ended December 28, 1996, December 30, 1995 and December 31, 1994 F-7 Notes to Consolidated Financial Statements F-8 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. Report of Independent Accountants To the Board of Directors and Shareholders of Champion Enterprises, Inc. In our opinion, based upon our audits and the report of other auditors, the 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 28, 1996 and December 30, 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 1996, in conformity with generally accepted accounting principles. 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 did not audit the financial statements of Redman Industries, Inc. for the years ended March 29, 1996 and March 31, 1995, which statements reflect total assets of $156 million and $141 million, respectively, and total revenues of $614 million and $558 million for the years ended March 29, 1996 and March 31, 1995, respectively. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for Redman Industries, Inc., is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards 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 and the report of other auditors provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Detroit, Michigan February 7, 1997 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS SHAREHOLDERS AND BOARD OF DIRECTORS REDMAN INDUSTRIES, INC. We have audited the consolidated balance sheets of Redman Industries, Inc., as of March 29, 1996 and March 31, 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years then ended (not presented separately herein). 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Redman Industries, Inc., at March 29, 1996 and March 31, 1995, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG LLP Dallas, Texas May 17, 1996 CHAMPION ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) YEAR ENDED --------------------------------------- DEC. 28, DEC. 30, DEC. 31, 1996 1995 1994 NET SALES $1,644,071 $1,411,726 $1,143,547 Cost of sales 1,392,788 1,199,579 979,370 GROSS MARGIN 251,283 212,147 164,177 Selling, general and administrative expenses 135,483 117,458 93,434 OPERATING INCOME 115,800 94,689 70,743 Nonrecurring merger and other charges (22,000) - (2,700) Interest income 2,699 2,966 1,978 Interest expense (2,313) (2,808) (1,389) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 94,186 94,847 68,632 Income taxes 40,600 38,562 23,502 INCOME FROM CONTINUING OPERATIONS 53,586 56,285 45,130 Income from discontinued operations, net of income taxes of $1,105 - - 1,908 NET INCOME $53,586 $56,285 $47,038 PER SHARE AMOUNTS:* Income from continuing operations $1.09 $1.14 $ 0.92 Income from discontinued operations - - 0.04 Net income $1.09 $1.14 $ 0.96 Weighted average shares outstanding* 49,363 49,515 48,900 *Prior amounts have been restated for the effect of the two-for-one stock split in May 1996. See accompanying Notes to Consolidated Financial Statements. CHAMPION ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value) DEC. 28 DEC. 30 1996 1995 ASSETS CURRENT ASSETS: Cash, cash equivalents and short-term investments $19,357 $22,216 Accounts receivable, trade 75,776 75,171 Inventories 80,920 68,145 Deferred taxes and other current assets 40,598 24,719 Total current assets 216,651 190,251 PROPERTY AND EQUIPMENT: Land and improvements 21,972 13,586 Buildings and improvements 92,767 62,511 Machinery and equipment 61,137 47,051 175,876 123,148 Less-accumulated depreciation 53,274 45,464 122,602 77,684 GOODWILL: 135,912 110,968 Less-accumulated amortization 11,423 8,085 124,489 102,883 OTHER ASSETS 8,608 7,341 $472,350 $378,159 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $41,025 $38,611 Accrued dealer discounts 42,523 31,758 Accrued warranty obligations 35,146 28,606 Accrued compensation and payroll taxes 24,478 24,710 Accrued insurance 14,682 10,062 Other current liabilities 37,318 30,071 Total current liabilities 195,172 163,818 LONG-TERM LIABILITIES: Long-term debt 1,158 1,685 Deferred portion of purchase price 10,927 764 Other long-term liabilities 38,459 35,750 50,544 38,199 SHAREHOLDERS' EQUITY: Preferred stock, no par value, 5,000 authorized, none issued - - Common stock, $1 par value, 1996 - 75,000 authorized, 47,695 issued and outstanding; 1995 - 31,869 issued and outstanding 47,695 31,869 Capital in excess of par value 34,465 47,377 Retained earnings 145,471 97,872 Foreign currency translation adjustments (997) (976) Total shareholders' equity 226,634 176,142 $472,350 $378,159 See accompanying Notes to Consolidated Financial Statements. CHAMPION ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) YEAR ENDED - ------------------------------- DEC. 28 DEC. 30 DEC 31 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations $53,586 $56,285 $45,130 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 14,883 11,633 8,429 Deferred income taxes (11,542) (4,997) (11,787) Increase/decrease, net of acquisitions: Accounts receivable (9,046) (10,824) (16,851) Inventories (12,480) (4,134) (14,839) Merger reserve 11,221 - - Accounts payable 4,804 (5,033) 4,138 Accrued liabilities 13,631 14,136 23,188 Other, net 3,982 10,021 6,717 Total adjustments 15,453 10,802 (1,005) Net cash provided by continuing operating activities 69,039 67,087 44,125 CASH FLOWS FROM DISCONTINUED OPERATIONS: Income from discontinued operations - - 1,908 Decrease in net assets of discontinued operations 1,615 672 696 Net cash provided by discontinued operations 1,615 672 2,604 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (50,709) (20,448) (19,280) Proceeds from disposal of property and equipment 881 747 465 Purchases of short-term investments (25,660) (25,467) (9,827) Maturities of short-term investments 36,000 22,000 4,000 Acquisitions (18,778) (41,303) (36,481) Deferred purchase price payment (8,900) (2,600) - Other 18 (1,356) (46) Net cash used for investing activities (67,148) (68,427) (61,169) CASH FLOWS FROM FINANCING ACTIVITIES: Common stock issued, net 2,735 1,106 2,512 Common stock repurchased (13,222) (17,102) (1,781) Repayment of long-term debt (2,796) (991) (826) Tax benefit of stock options exercised 1,800 1,738 2,916 Net cash provided by (used for) financing activities (11,483) (15,249) 2,821 Net decrease in cash and cash equivalents (7,977) (15,917) (11,619) Cash and cash equivalents at beginning of period* 27,334 28,199 39,818 Cash and cash equivalents at end of period $19,357 $12,282 $28,199 ADDITIONAL CASH FLOW INFORMATION: Cash paid for: Interest $2,280 $2,233 $1,196 Income taxes $53,276 $38,400 $30,854 CASH FLOWS FROM ACQUISITIONS: Purchase price $35,500 $50,777 $40,000 Less: Deferred portion of purchase price (14,500) (9,635) (2,600) Less: Cash acquired (4,435) (827) (1,591) Plus: Acquisition costs and mortgage payoffs 2,213 988 672 $18,778 $41,303 $36,481
*The beginning cash balance for 1996 does not agree to the ending balance for 1995 due to the different accounting period used by Redman. See Note 1 in accompanying Notes. See accompanying Notes to Consolidated Financial Statements. CHAMPION ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) FOREIGN CAPITAL IN RETAINED CURRENCY COMMON STOCK EXCESS OF EARNINGS TRANSLATION SHARES AMOUNT PAR VALUE (DEFICIT) ADJUSTMENTS TOTAL BALANCE JANUARY 1, 1994 16,044 $16,044 $72,024 $(5,451) $ (876) $81,741 Net income - - - 47,038 - 47,038 Stock option and benefit plans 436 436 3,109 - - 3,545 Common stock repurchases (124) (124) (1,657) - - (1,781) Tax benefit of stock options - - 2,916 - - 2,916 Translation adjustments - - - - (193) (193) BALANCE DECEMBER 31, 1994 16,356 16,356 76,392 41,587 (1,069) 133,266 Net income - - - 56,285 - 56,285 Stock option and benefit plans 358 358 1,504 - - 1,862 Common stock repurchases (1,401) (1,401) (15,701) - - (17,102) Two-for-one stock split 7,629 7,629 (7,629) - - - Redman 100% stock dividend 8,927 8,927 (8,927) - - - Tax benefit of stock options - - 1,738 - - 1,738 Translation adjustments - - - - 93 93 BALANCE DECEMBER 30, 1995 31,869 31,869 47,377 97,872 (976) 176,142 Net income - - - 53,586 - 53,586 Less: net income of Redman for the quarter ended March 29, 1996 - - - (5,987) - (5,987) Stock option and benefit plans 538 538 4,031 - - 4,569 Common stock repurchases (179) (179) (3,276) - - (3,455) Two-for-one stock split 15,467 15,467 (15,467) - - - Tax benefit of stock options - - 1,800 - - 1,800 Translation adjustments - - - - (21) (21) BALANCE DECEMBER 28, 1996 47,695 $47,695 $34,465 $145,471 $(997) $226,634 See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1-BUSINESS COMBINATION AND BASIS OF PRESENTATION On October 24, 1996, Redman Industries, Inc. (Redman) was merged with and into Champion Enterprises, Inc. (the Company), and 16.5 million shares of the Company's common stock were issued in exchange for all of the outstanding common stock of Redman. The merger was accounted for as a pooling of interests, and accordingly, the accompanying financial statements have been restated to include the financial position and results of operations of Redman for all periods presented. Prior to the merger, Redman used a fiscal year ending on the Friday nearest March 31. The 1996 financial statements combine each company's year ended December 28, 1996. The restated financial statements for 1995 and 1994 combine the Company's financial statements for years ended December 30, 1995 and December 31, 1994 with Redman's financial statements for years ended March 29, 1996 and March 31, 1995, respectively. Due to the different fiscal year ends, Redman's results for the three months ended March 29, 1996 are included in the restated financial statements for both 1996 and 1995. For the three months ended March 29, 1996 Redman had net sales of $150 million and net income of $6 million. Redman's net income for this period is deducted from the opening balance of retained earnings at December 30, 1995 in the accompanying statement of shareholders' equity. Redman's net cash flow for this period is eliminated from the 1996 beginning cash balance in the statement of cash flows. Net sales and income from continuing operations of the combining companies for the last three years are as follows: (in millions, excluding nonrecurring charges in 1996) 1996 1995 1994 Net sales: Champion $ 986 $ 798 $ 586 Redman 658 614 558 $1,644 $1,412 $1,144 Net income: Champion $ 43.3 $ 32.3 $ 25.2 Redman 27.1 24.0 19.9 $ 70.4 $ 56.3 $ 45.1 Certain amounts from Redman's prior financial statements have been reclassified to conform to the Company's presentation. In connection with the merger, the Company recorded charges of $22 million in the quarter ended December 28, 1996. These charges are nonrecurring and include $9 million for severance costs associated with the planned closing of the Redman corporate headquarters and stock based compensation costs triggered by the change in control, $8 million for investment banking, legal, accounting and other fees, and $5 million for adjusting the carrying value of certain facilities and other assets. Costs of $10.7 million had been paid as of December 28, 1996, and the remaining cash costs of approximately $5.5 million will be paid in 1997. NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The Consolidated Financial Statements include the accounts of Champion Enterprises, Inc. and its wholly owned subsidiaries. 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. Business The Company is a leading producer of manufactured housing with operations and markets located throughout the U.S. and in western Canada. Less than 4% of the Company's consolidated sales are derived from its commercial vehicles business which produces mid-size buses. Revenue Recognition Sales revenue is recognized when wholesale floor plan financing or dealer credit approval is received and the product is shipped to independent dealers or, for Company-owned sales locations, upon transfer of title. Cash, Cash Equivalents and Short-Term Investments 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. Short-term investments, consisting of U.S. Treasury bills of $9.9 million at December 30, 1995, were carried at gross amortized cost (which approximates market value), had an original maturity of greater than 90 days and were held until maturity. Inventories Inventories are stated at the lower of cost or market, with cost determined under the first-in, first-out method. Depreciation Property and equipment are stated at cost. Depreciation is provided principally on the straight-line method over the following estimated useful lives: Years Land improvements 3-15 Buildings and improvements 8-33 Machinery and equipment 3-15 Year End The Company's fiscal year ends on the Saturday nearest December 31. Goodwill Goodwill is the excess of cost over fair value of net assets of businesses acquired and is amortized on the straight-line method over the expected periods to be benefited, which is generally 40 years. Amortization expense was $3.5 million, $2.8 million and $1.6 million in 1996, 1995 and 1994, respectively. Warranty Obligations The Company provides the home buyer with a twelve-month warranty from the date of retail purchase. Estimated warranty costs are accrued 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 and accruals. 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. Earnings Per Share In calculating earnings per share, the weighted average shares outstanding includes common stock equivalents. Earnings per share amounts and weighted average shares outstanding for all periods presented, including pro forma amounts, have been adjusted for the two-for-one stock split on May 31, 1996 as discussed in Note 6 of the Notes to Consolidated Financial Statements. NOTE 3 - INVENTORIES A summary of inventories by component at December 28, 1996 and December 30, 1995 follows: (in thousands) 1996 1995 Raw materials $50,847 $42,959 Work-in-process 8,048 6,905 Finished goods 22,025 18,281 _______ _______ $80,920 $68,145 NOTE 4 - ACQUISITIONS Grand Manor, Inc. and Homes of Legend, Inc. On March 29, 1996 the Company purchased the assets and assumed certain liabilities of Grand Manor, Inc., a privately held corporation with manufactured housing operations in Georgia. On April 26, 1996 the Company purchased the outstanding common stock of Homes of Legend, Inc., a privately held corporation with manufactured housing operations in Alabama, and purchased the assets and assumed certain liabilities of a related company. Under the terms of the purchase agreements, the total purchase price of these acquired companies was $35.5 million, with $21 million paid in 1996 and the balance of $14.5 million due during the next three years. The required cash payments were financed from existing cash balances and borrowings under the Company's bank line of credit. The acquisitions were accounted for using the purchase method and resulted in $26 million of goodwill. The results of operations of the acquired companies are included with those of the Company commencing on the respective acquisition dates. Following are the summarized unaudited pro forma combined results of operations for the years ended December 28, 1996 and December 30, 1995, assuming the acquisitions had taken place on December 31, 1995 and January 1, 1995, respectively. 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) 1996 1995 Net sales $1,677.7 $1,503.5 Income before income taxes 95.5 97.7 Income taxes 41.1 39.7 Net income 54.4 58.0 Per share $ 1.10 $ 1.17 Chandeleur Homes, Inc. and Crest Ridge Homes, Inc. On February 3, 1995 the Company purchased the assets and assumed certain liabilities of Chandeleur Homes, Inc. and Crest Ridge Homes, Inc., privately held corporations with manufactured housing operations in Alabama and Texas. The purchase price totaled $46.9 million. The acquisitions were accounted for using the purchase method and resulted in $45.5 million of goodwill. Chandeleur and Crest Ridge results of operations are included with those of the Company commencing February 3, 1995. Other 1995 Acquisitions New Horizon Manufactured Homes, Ltd., Alberta, Canada, was acquired in October 1995 for $3.2 million. In addition, a company which arranges transportation for a portion of the Company's manufactured housing business was acquired for $700,000 in February 1995. Prior year results for these acquisitions are immaterial. These acquisitions were accounted for using the purchase method and resulted in $2.5 million of goodwill. NOTE 5 - DEBT The Company has an agreement with two banks for an unsecured line of credit for $70 million, including $20 million of availability to cover letters of credit. At the Company's option, borrowings are subject to interest at either the bank's prime rate or the bank's Eurodollar rate plus 0.4% to 1.15%. In addition, the Company pays a commitment fee ranging from 0.125% to 0.4% on the unused portion of the facility and a letter of credit fee. The agreement expires on September 29, 1998, but may be extended for additional one year periods, subject to approval by the banks. The agreement contains covenants which, among other things, require maintenance of certain financial ratios and limit additional indebtedness and the payment of dividends without the prior consent of the banks. Letters of credit outstanding at year end totaled $14 million, generally to support insurance obligations and licensing and service bonding required by various states. There were no bank borrowings outstanding at December 28, 1996, December 30, 1995 or December 31, 1994. The maximum amount of aggregate short-term bank borrowings outstanding at any month end was $30 million, $31 million and $9 million during 1996, 1995 and 1994, respectively. During 1996, 1995 and 1994, aggregate short-term borrowings averaged $14 million, $15 million and $7 million, with average interest rates of 6.2%, 7.4% and 6.1%, respectively. NOTE 6 - SHAREHOLDERS' EQUITY On April 29, 1996 the shareholders approved a proposal to increase the number of authorized common shares to 75 million from 30 million. On May 1, 1995 the shareholders approved a proposal to increase the number of authorized common shares to 30 million from 15 million. In addition, the Board of Directors approved two-for-one splits of the Company's common stock effective May 31, 1996 and May 30, 1995. A total of 15.5 million shares and 7.6 million shares of common stock was issued in connection with the splits in 1996 and 1995, respectively. In February 1996 Redman paid a 100% stock dividend to its shareholders, resulting in an increase of 8.9 million shares of common stock outstanding. The Company repurchased shares under previously authorized programs which were rescinded in 1996, subsequent to the Redman merger. There are 5 million authorized shares of preferred stock, without par value, the issuance of which is subject to approval by the Board of Directors. The Board of Directors has 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. The Board of Directors has reserved 750,000 preferred shares for issuance in connection with the Shareholders Rights Plan (Rights Plan). The Rights Plan was adopted on January 9, 1996. Pursuant to the Rights Plan, the Board of Directors declared a distribution of one Preferred Stock Purchase Right on each outstanding share of common stock on February 5, 1996, the record date. Each Right entitles shareholders to buy one one-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 - 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 18% of their compensation to the plans. The Company makes matching contributions of 35% of the first 4% or 50% of the first 6% of employees' contributions. Company contributions vest either when made or ratably over five years. Amounts expensed under these plans were $2.8 million in 1996, $2.3 million in 1995 and $2.1 million in 1994. NOTE 8- INCOME TAXES Pretax income from continuing operations for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 was taxed under the following jurisdictions: (in thousands) 1996 1995 1994 Domestic $92,426 $92,727 $66,504 Foreign 1,760 2,120 2,128 Total $94,186 $94,847 $68,632 The provisions for income taxes from continuing operations were as follows: (in thousands) 1996 1995 1994 Current: Federal $45,306 $35,968 $28,822 Foreign 930 1,735 1,700 State 5,906 5,856 4,767 Total current 52,142 43,559 35,289 Deferred: Federal (10,530) (4,998) (10,745) Foreign (121) 149 620 State (891) (148) (1,662) Total deferred (11,542) (4,997) (11,787) Total provision $40,600 $38,562 $23,502 The provisions for income taxes differ from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income from continuing operations as a result of the following differences: (in thousands) 1996 1995 1994 Statutory U.S. tax rate $32,965 $33,197 $24,022 Increase (decrease) in rates resulting from: Higher rates on earnings of foreign operations 149 1,142 1,575 Merger costs 3,083 - - Recognize net operating loss - - (5,609) State taxes, net of federal benefit 3,180 3,774 1,990 Other 1,223 449 1,524 Total provision $40,600 $38,562 $23,502 Effective tax rates 43% 41% 34% Deferred tax assets and liabilities are comprised of the following as of December 28, 1996 and December 30, 1995: (in thousands) 1996 1995 Assets: Warranty reserve $16,231 $13,514 Insurance accruals 8,354 5,958 Environmental 1,318 1,454 Dealer discounts 1,063 1,053 Employee compensation 4,675 2,937 Reserve for repurchase 1,183 940 Loss carry forwards 438 536 Merger costs 4,500 - Other 4,079 3,926 Gross deferred tax assets 41,841 30,318 Liabilities: Depreciation 2,520 2,149 Canadian withholding 400 625 Safe harbor leases 3,839 6,177 Goodwill 2,962 1,870 Other 304 822 Gross deferred tax liabilities 10,025 11,643 Net assets $31,816 $18,675 Discontinued operations The 1994 provision for income taxes for discontinued operations was $1.1 million, an effective rate of 37%. This amount was higher than the U.S. statutory tax rate due to state tax charges. NOTE 9 - DISCONTINUED OPERATIONS In 1992 the Company sold certain assets and liabilities of its discontinued recreational vehicle (RV) segment. Remaining assets and liabilities of the RV segment are immaterial. During 1994 certain RV segment litigation was settled which resulted in an after tax gain of $1.9 million ($0.04 per share). NOTE 10 - CONTINGENT LIABILITIES It is customary practice for companies in the manufactured housing industry to enter into repurchase agreements with lending institutions which provide wholesale floor plan financing to dealers. A majority of the Company's sales are made pursuant to these agreements, which generally provide for repurchase of the Company's products from the lending institutions for the balance due them in the event of repossession upon a dealer's default. In addition, the Company has guaranteed, on a limited basis, obligations of certain dealers to a lending institution under a Company sponsored floor plan financing program. The contingent liabilities under these agreements are spread over many dealers and financial institutions and are reduced by the resale value of the homes which are required to be repurchased or repossessed. Losses incurred in connection with these agreements have been immaterial and estimated losses are provided for currently. The maximum potential repurchase obligation was approximately $540 million at December 28, 1996, excluding any resale value. 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. 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 materially affect the financial condition or results of operations of the Company. The Company is a party to environmental investigations and remediations and, along with other companies, has been named a potentially responsible party at one of these sites. In 1994 the Company accrued $2.7 million for its estimated share of remediation costs. The recorded liability has not been reduced by potential insurance recoveries. The Company has established accruals for matters that are in its view probable and reasonably estimable. Based on information presently available, management believes that existing accruals are sufficient to satisfy any known environmental liabilities. Further, any additional liability that may ultimately result from the resolution of these matters is not expected to have a material effect on the Company's financial position or results of operations. NOTE 11 - 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 $1.2 million in 1996, excluding amounts included in nonrecurring merger costs, $0.8 million in 1995 and $0.6 million in 1994. There were 1,525,000 and 860,000 shares reserved for future grants at December 28, 1996 and December 30, 1995, respectively. The following table summarizes the changes in outstanding stock options during the last three years (amounts have been adjusted for the effect of stock splits): Weighted Average Number Exercise of Shares Price Outstanding January 1, 1994 2,991,497 $2.10 Granted 2,051,842 6.22 Exercised (1,601,788) 1.58 Canceled (68,000) 2.77 Outstanding December 31, 1994 3,373,551 4.84 Granted 2,785,442 8.50 Exercised (848,063) 2.37 Canceled (367,590) 4.80 Outstanding December 30, 1995 4,943,340 7.33 Granted 719,396 15.08 Exercised (716,329) 6.33 Canceled (253,403) 7.56 Outstanding December 28, 1996 4,693,004 $8.65 The following table summarizes information about stock options outstanding at December 28, 1996: OPTIONS OUTSTANDING OPTIONS EXERCISABLE Weighted Average Average average exercise exercise Range of Number life price Number price exercise prices outstanding (years) per share exercisable per share $0.66 - $4.75 476,180 6.1 $3.23 311,060 $2.43 $5.34 - $9.19 3,147,110 5.8 7.43 703,110 6.35 $10.28 - $14.94 775,714 7.0 12.62 555,914 12.16 $15.94 - $22.63 294,000 9.9 19.95 - - 4,693,004 6.3 $8.65 1,570,084 $7.63
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock Based Compensation," established new accounting and reporting requirements for stock based employee compensation programs such as stock option and stock award plans. As permitted by Statement No. 123, the Company has elected to continue to account for its stock based plans under APB Opinion No. 25. If compensation cost for the Company's stock based compensation plans had been determined based on the fair values at the grant dates consistent with the method of Statement No. 123, the Company's pro forma net income and earnings per share would have been the amounts indicated below: 1996 1995 Net income (in thousands) $50,601 $55,252 Earnings per share $ 1.02 $ 1.13 In determining the pro forma amounts in accordance with Statement No. 123, the fair value of each stock option grant or award is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996 and 1995: 1996 1995 Risk free interest rate 5.6% 6.5% Expected life (years) 3.3 5.5 Expected volatility 43% 51% Expected dividend rate 0% 0% The weighted average per share fair value of stock options granted during 1996 and 1995 were $6.90 and $4.81, respectively, for options granted at market value, and $10.17 and $4.84, respectively, for options granted at less than market value. Total stock based compensation cost that would have been charged to income under Statement No. 123 was $5.8 million and $2.2 million for stock options and awards granted in 1996 and 1995, respectively, excluding amounts included in nonrecurring charges in 1996. The number of shares granted through stock awards in 1996 and 1995 were 29,010 and 124,800, respectively, with grant date fair values per share of $19.22 and $8.38, respectively. NOTE 12-QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (dollars in thousands, except per share amounts) First Second Third Fourth Quarter Quarter Quarter Quarter Total 1996 Net sales $342,765 $428,625 $447,111 $425,570 $1,644,071 Cost of sales 290,794 360,392 377,724 363,878 1,392,788 Selling, general and administrative expenses 29,257 36,541 35,727 33,958 135,483 Operating income 22,714 31,692 33,660 27,734 115,800 Nonrecurring merger and other charges - - - (22,000) (22,000) Interest income (expense), net 216 (145) 6 309 386 Income before income taxes 22,930 31,547 33,666 6,043 94,186 Net income 13,742 19,146 20,474 224 53,586 Net income per share $0.28 $0.39 $0.41 $0.00 $1.09 Homes sold 12,962 16,301 16,824 15,709 61,796 Commercial vehicles sold 246 320 338 323 1,227 1995 Net sales $328,127 $359,998 $368,006 $355,595 $1,411,726 Cost of sales 281,366 304,146 312,213 301,854 1,199,579 Selling, general and administrative expenses 27,010 30,706 29,484 30,258 117,458 Operating income 19,751 25,146 26,309 23,483 94,689 Interest income (expense), net 169 (342) 114 217 158 Income before income taxes 19,920 24,804 26,423 23,700 94,847 Net income 11,822 14,686 15,665 14,112 56,285 Net income per share $0.24 $0.30 $0.32 $0.28 $1.14 Homes sold 12,705 13,902 14,019 13,329 53,955 Commercial vehicles sold 325 302 351 311 1,289
Prior amounts have been restated due to the October 1996 merger with Redman Industries, Inc., which was accounted for as a pooling of interests. See Note 1 of Notes to Consolidated Financial Statements. Fourth quarter 1996 includes nonrecurring and other charges totaling $22 million ($16.8 million after tax or $0.34 per share) for the merger with Redman. Earnings per share have been restated for the effect of the two-for-one stock split in May 1996. 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. Certain amounts have been reclassified to conform to current period presentation. INDEX TO EXHIBITS Exhibit No. Description 3.1 Restated Articles of Incorporation of the Registrant filed with the Registrant'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 Registrant filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29, 1996, and incorporated herein by reference. 3.3 Bylaws of the Registrant filed as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. 4.1 Article III of the Registrant's Restated Articles of Incorporation (increasing number of authorized shares of capital stock) - included in the Registrant's Amendment to Restated Articles of Incorporation filed as Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 29, 1996, and incorporated herein by reference. 4.2 The Registrant has issued certain receivable-backed notes (the "Notes") pursuant to a Trust Indenture dated as of August 1, 1987 between CAC Funding Corporation, as issuer, and First of America Bank - Detroit, N.A., as trustee. The Notes do not exceed 10 percent of the total assets of the Registrant and the Registrant agrees to furnish a copy of the Trust Indenture to the Commission upon request. 4.3 Form of Rights Certificate filed as Exhibit 1 to the Registrant's Registration Statement on Form 8-A dated January 12, 1996 and incorporated herein by reference. 4.4 Rights Agreement by and between the Registrant and Harris Trust and Savings Bank filed as Exhibit 2 to the Registrant'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 Registrant and University Development Company relating to the premises located at 2701 University Drive, Auburn Hills, Michigan, filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1992 and incorporated herein by reference. 10.2 Credit Agreement dated September 29, 1995 between the Registrant, Comerica Bank and The First National Bank of Chicago, filed as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.3 First Amendment, dated October 27, 1995, to Credit Agreement dated September 29, 1995 between the Registrant, Comerica Bank and The First National Bank of Chicago, filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.4 Second Amendment, dated September 17, 1996, to the Credit Agreement dated September 29, 1995 between the Registrant, Comerica Bank and The First National Bank of Chicago. 10.5 Third Amendment, dated December 2, 1996, to the Credit Agreement dated September 29, 1995 between the Registrant, Comerica Bank and The First National Bank of Chicago. 10.6 *Champion Enterprises, Inc. 1987 Stock Option Plan, as amended, filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1992 and incorporated herein by reference. 10.7 *Champion Enterprises, Inc. 1990 Nonqualified Stock Option Program, as amended through the Second Amendment, filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.8 *Third Amendment, dated June 18, 1996, to the Champion Enterprises, Inc. 1990 Nonqualified Stock Option Program. 10.9 *Fourth Amendment, dated December 3, 1996, to the Champion Enterprises, Inc. 1990 Nonqualified Stock Option Program. 10.10 *Champion Enterprises, Inc. Stock Plan for Directors, as amended, filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 and incorporated herein by reference. 10.11 *Champion Enterprises, Inc. 1993 Middle Management Stock Option Plan, filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1994 and incorporated herein by reference. 10.12 *First Amendment to the Champion Enterprises, Inc. 1993 Middle Management Stock Option Plan, filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.13 *Second Amendment, dated June 18, 1996, to the Champion Enterprises, Inc. 1993 Middle Management Stock Option Plan. 10.14 *Champion Enterprises, Inc. 1995 Stock Option and Incentive Plan, filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 dated May 1, 1995 and incorporated herein by reference. 10.15 *First Amendment to the Champion Enterprises, Inc. 1995 Stock Option and Incentive Plan, filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.16 *Champion Enterprises, Inc. 1995 Stock Retainer Plan for Non-employee Directors, filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-8 dated May 1, 1995 and incorporated herein by reference. 10.17 *Letter Agreement dated April 27, 1990 between the Registrant and Walter R. Young, Jr., filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 2, 1990 and incorporated herein by reference. 10.18 *Amendment dated August 31, 1995 to the Letter Agreement dated April 27, 1990 between the Registrant and Walter R. Young, Jr., filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.19 *Nonqualified Stock Option Agreement dated August 31, 1995 between the Registrant and Walter R. Young, Jr., filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.20 *Nonqualified Stock Option Agreement dated August 31, 1995 between the Registrant and Walter R. Young, Jr., filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.21 *Performance Share Award Agreement dated August 31, 1995 between the Registrant and Walter R. Young, Jr., filed as Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference. 10.22 *Letter Agreement dated March 15, 1994 between the Registrant and A. Jacqueline Dout, filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. 10.23 *Nonqualified Stock Option Agreements dated April 18, 1994 between the Registrant and A. Jacqueline Dout, filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference. 10.24 *Change in Control Severance Agreement dated as of April 12, 1991 between the Registrant and Louis M. Balius, filed as Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 1993 and incorporated herein by reference. 10.25 *Letter Agreement dated February 12, 1997 between the Registrant and John J. Collins, Jr. 10.26 *Redman Industries, Inc. 1993 Stock Option Plan, filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-8 dated October 24, 1996 and incorporated herein by reference. 10.27 *Redman Industries, Inc. 1993 Incentive Holders' Stock Option Plan, filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-8 dated October 24, 1996 and incorporated herein by reference. 11 Statement Regarding Computation of Per Share Earnings. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Price Waterhouse LLP. 23.2 Consent of Ernst and Young LLP. 27.1 Financial Data Schedule. 99.1 Proxy Statement for the Registrant's 1997 Annual Meeting of Shareholders - filed by the Registrant 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 Public Relations Department, Champion Enterprises, Inc., 2701 University Drive, Suite 320, Auburn Hills, Michigan 48326. EX-10.4 2 SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of September 17, 1996 (this "Second Amendment"), to the Credit Agreement dated as of September 29, 1995, as amended by the First Amendment dated October 27, 1995 (the "Credit Agreement"), among Champion Enterprises, Inc. (the "Company"), Comerica Bank and The First National Bank of Chicago (the "Banks"), and Comerica Bank as agent for the Banks (in such capacity, the "Agent"). W I T N E S S E T H: WHEREAS, the Company, the Banks and the Agent are parties to the Credit Agreement; and WHEREAS, the Company wishes to amend the Credit Agreement to increase the Letter of Credit Maximum Amount, to increase the amount of loans the Company may make to its dealers, and to revise certain of the exhibits to the Credit Agreement; and WHEREAS, the Banks and the Agent have agreed to amend the Credit Agreement on the terms and subject to the conditions set forth below; NOW, THEREFORE, in consideration of the mutual agreements contained herein, it is hereby agreed as follows: ARTICLE I -- DEFINITIONS AND AMENDMENTS 1.1 Defined Terms. Capitalized terms used herein which are defined in the Credit Agreement are used herein with such defined meanings. 1.2 Amendments to Section 1. (a) Substitution of Certain Definition. Section 1.1 is hereby amended by deleting the definition of "Letter of Credit Maximum Amount" in its entirety and substituting therefor the corresponding new definition set forth below: "Letter of Credit Maximum Amount" shall mean Twenty Million Dollars ($20,000,000)." (b) Addition of Definitions. Section 1 is hereby amended by adding thereto the following definitions in their appropriate alphabetical place: "Redman" shall mean Redman Industries, Inc., a Delaware corporation. "Redman Acquisition" shall mean the acquisition by the Company of all of the common stock of Redman pursuant to a plan of merger among the Company, a Subsidiary, and Redman. 1.3 Addition of Section 6.14. Section 6.14 is hereby added to the Credit Agreement, to read in its entirety as follows: "6.14 Guaranty of Redman. Upon consummation of the Redman Acquisition, cause Redman to execute and deliver to the Agent on behalf of the Banks a counterpart of the Guaranty, and thereby become a Guarantor." 1.4 Amendment to Section 7.3. Section 7.3 is hereby amended by deleting the figure "$1,500,000" where it appears in the eleventh line and replacing it with the figure "$3,000,000". 1.5 Amendment to Section 7.9. Section 7.9 is hereby amended by substituting the word "of" for the word "or" in the third line thereof. ARTICLE II -- REPRESENTATIONS AND WARRANTIES; CONDITIONS PRECEDENT 2.1 Representations; No Default. On and as of the date hereof and after giving effect to this Second Amendment, the Company hereby (a) confirms, reaffirms and restates the representations and warranties set forth in Section 5 of the Credit Agreement, except to the extent that such representations and warranties relate solely to an earlier date in which case the Company confirms, reaffirms and restates such representations and warranties for such early date, provided that the references to the Credit Agreement therein shall be deemed to be to the Credit Agreement as amended by this Second Amendment, and (b) represents that no Event of Default has occurred and is continuing. 2.2 Effective Date. This Second Amendment shall become effective on the first date upon which the Agent shall have received counterparts of this Second Amendment executed by the Company, the Banks and the Agent. ARTICLE III - MISCELLANEOUS 3.1 Limited Effect. Except as expressly amended hereby, all of the provisions, covenants, terms and conditions of the Credit Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms. 3.2 Expenses. The Company shall reimburse the Agent for all of its costs and expenses (including legal expenses) incurred in connection with the preparation, execution and delivery of this Second Amendment. 3.3 Guarantors. Each Guarantor, by its execution of this Second Amendment, hereby consents to all transactions contemplated hereby and reaffirms and ratifies all of its obligations to the Agent and the Banks under the Guaranty. 3.4 Counterparts. This Second Amendment may be executed by one or more parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed and delivered by their proper and duly authorized officers or other agents as of the date first above written. COMPANY: CHAMPION ENTERPRISES, INC. By Its AGENT AND BANKS: COMERICA BANK, as Agent and as a Bank By Its THE FIRST NATIONAL BANK OF CHICAGO By Its GUARANTORS: CHAMPION MOTOR COACH, INC. By Its CHAMPION HOME BUILDERS CO. By Its MODULINE INTERNATIONAL, INC. By Its LAMPLIGHTER HOMES, INC. By Its DUTCH HOUSING, INC. By Its CHANDELEUR HOMES, INC. By Its CREST RIDGE HOMES, INC. By Its BUILDERS CREDIT CORPORATION By Is CHAMPION FINANCIAL CORPORATION By Its EX-10.5 3 THIRD AMENDMENT TO CREDIT AGREEMENT THIRD AMENDMENT TO CREDIT AGREEMENT, dated as of December 2, 1996 (this "Third Amendment"), to the Credit Agreement dated as of September 29, 1995, as amended by the First Amendment dated as of October 27, 1995 and the Second Amendment dated as of September 17, 1996 (the "Credit Agreement"), among Champion Enterprises, Inc. (the "Company"), Comerica Bank and The First National Bank of Chicago (the "Banks"), and Comerica Bank as agent for the Banks (in such capacity, the "Agent"). W I T N E S S E T H: WHEREAS, the Company, the Banks and the Agent are parties to the Credit Agreement; and WHEREAS, the Company wishes to amend the Credit Agreement to decrease the Applicable Margin, the Letter of Credit Fee and the Revolving Credit Committee Fee; and WHEREAS, the Banks and the Agent have agreed to amend the Credit Agreement on the terms and subject to the conditions set forth below; NOW, THEREFORE, in consideration of the mutual agreements contained herein, it is hereby agreed as follows: ARTICLE I -- DEFINITIONS AND AMENDMENTS 1.1 Defined Terms. Capitalized terms used herein which are defined in the Credit Agreement are used herein with such defined meanings. 1.2 Amendments to Section 1. (a) Substitution of Certain Definitions. Section 1.1 is hereby amended by deleting the definitions of "Applicable Margin", "Letter of Credit Fee" and "Revolving Credit Commitment Fee" in their entirety and substituting therefor the corresponding new definitions set forth below: "Applicable Margin" shall mean, as of the date of determination thereof, the following margins: "Letter of Credit Fee" shall mean a per annum fee on the aggregate face amount of all Letters of Credit, determined as follows: If Consolidated Funded Debt Ratio (x) is: x equal to or greater than 1.75 - the Letter of Credit Fee is 1.15% x equal to or greater than 1.25 but less than 1.75 - the Letter of Credit Fee is .90% x equal to or greater than .75 but less than 1.25 - the Letter of Credit Fee is .65% x equal to or greater than .40 but less than .75 - the Letter of Credit Fee is .50% x less than .40 - the Letter of Credit Fee is .40% "Revolving Credit Commitment Fee" shall mean a per annum fee on the unused portion of the Revolving Credit provided by the Revolving Credit Banks under this Agreement (determined as provided in Section 2.11), as follows: If Consolidated Funded Debt Ratio (x) is: x equal to or greater than 1.75 - the Revolving Credit Commitment Fee is .40% x equal to or greater than 1.25 but less than 1.75 - the Revolving Credit Commitment Fee is .30% x equal to or greater than .75 but less than 1.25 - the Revolving Credit Commitment Fee is .25% x equal to or greater than .40 but less than .75 - the Revolving Credit Commitment Fee is .15% x less than .40 - the Revolving Credit Commitment Fee is .125% ARTICLE II -- REPRESENTATIONS AND WARRANTIES; CONDITIONS PRECEDENT 2.1 Representations; No Default. On and as of the date hereof and after giving effect to this Third Amendment, the Company hereby (a) confirms, reaffirms and restates the representations and warranties set forth in Section 5 of the Credit Agreement, except to the extent that such representations and warranties relate solely to an earlier date in which case the Company confirms, reaffirms and restates such representations and warranties for such early date, provided that the references to the Credit Agreement therein shall be deemed to be to the Credit Agreement as amended by this Third Amendment, and (b) represents that no Event of Default has occurred and is continuing. 2.2 Effective Date. This Third Amendment shall become effective on the first date upon which the Agent shall have received counterparts of this Third Amendment executed by the Company, the Banks and the Agent. All changes in the Applicable Margin, the Letter of Credit Fee and the Revolving Credit Commitment shall be prospective only. ARTICLE III - MISCELLANEOUS 3.1 Limited Effect. Except as expressly amended hereby, all of the provisions, covenants, terms and conditions of the Credit Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms. 3.2 Expenses. The Company shall reimburse the Agent for all of its reasonable costs and expenses (including legal expenses) incurred in connection with the preparation, execution and delivery of this Third Amendment. 3.3 Guarantors. Each Guarantor, by its execution of this Third Amendment, hereby consents to all transactions contemplated hereby and reaffirms and ratifies all of its obligations to the Agent and the Banks under the Guaranty. 3.4 Counterparts. This Third Amendment may be executed by one or more parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be executed and delivered by their proper and duly authorized officers or other agents as of the date first above written. COMPANY: CHAMPION ENTERPRISES, INC. By Its AGENT AND BANKS: COMERICA BANK, as Agent and as a Bank By Its THE FIRST NATIONAL BANK OF CHICAGO By Its GUARANTORS: CHAMPION MOTOR COACH, INC. By Its CHAMPION HOME BUILDERS CO. By Its MODULINE INTERNATIONAL, INC. By Its LAMPLIGHTER HOMES, INC. By Its DUTCH HOUSING, INC. By Its CHANDELEUR HOMES, INC. By Its CREST RIDGE HOMES, INC. By Its BUILDERS CREDIT CORPORATION By Its CHAMPION FINANCIAL CORPORATION By Its EX-10.8 4 THIRD AMENDMENT TO THE CHAMPION ENTERPRISES, INC. 1990 NONQUALIFIED STOCK OPTION PROGRAM Pursuant to the resolution of the Board of Directors of Champion Enterprises, Inc. (the "Company"), on , 1996, the second sentence in Section 13 of the Company's 1990 Nonqualified Stock Option Plan, entitled "Non-Assignability", is amended and restated to read as follows: "Further, no shares of Company Common Stock acquired under the Program shall be sold or otherwise transferred until the expiration of six months after purchase; provided however, that the six-month transfer restriction, or the remaining portion thereof, as applicable, shall be waived in the event that a participant's employment is terminated by the Company due to the Company's June 1996 corporate reorganization, and the participant's employment termination occurs during such six-month period." This Third Amendment to the Company's 1990 Stock Option Program is hereby executed on , 1996. CHAMPION ENTERPRISES, INC. By: Walter R. Young, Jr. Chairman, President and Chief Executive Officer EX-10.9 5 FOURTH AMENDMENT TO THE CHAMPION ENTERPRISES, INC. 1990 NONQUALIFIED STOCK OPTION PROGRAM Pursuant to the resolution of the Board of Directors of Champion Enterprises, Inc. (the "Company") on December 3, 1996, the 1990 Nonqualified Stock Option Program (the "1990 Program") is amended as set forth below. 1. Section 6(b) of the 1990 Program is amended and restated in its entirety effective November 1, 1996 to read as follows: (b) Grants under the Program consist of a right to purchase a designated number of shares of the Company's Common Stock at a purchase price of not less than $1.00 per share, to be exercised on or before 67 days after the date of grant. Subject to the full exercise of his full rights under the Program, a participant shall be granted a nonqualified stock option to purchase additional shares of the Company's Common Stock at fair market value. Fair market value for purposes of the Program is deemed to constitute the closing price of the Company's Common Stock on the New York Stock Exchange on the last business day preceding the date of grant, as reported in The Wall Street Journal. At the discretion of the Chief Executive Officer, a participant may receive a stand-alone option under the Program that is not granted in connection with, or predicated upon the exercise of, an initial right, granted hereunder. A stand-alone option may be granted with an exercise price below fair market value but not below 40% of fair market value, as determined above. 2. Section 13 of the 1990 Program is amended and restated in its entirety effective November 1, 1996 to read as follows: 13. Non-Assignability. No right or option shall be transferable by a participant except by will or the laws of descent and distribution. Further, no shares of Company Common Stock acquired under the Program shall be sold or otherwise transferred until the expiration of six months after the date of purchase; provided, however, that the six-month transfer restriction, or the remaining portion, as applicable, shall be waived in the event that a participant's employment is terminated by the Company due to the Company's June 1996 corporate reorganization, and the participant's employment termination occurs during such six-month period. Notwithstanding the foregoing, options granted on or after November 1, 1996 may be subject to a transfer restriction of up to 24 months, to be determined at the discretion of the Board, as specified in a participant's Agreement. During the lifetime of a participant, a right or option shall be exercised only by the participant. No transfer of a right or option by will or by the laws of descent and distribution shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and a copy of the will or such evidence as the Company may deem necessary to establish the validity of the transfer and the acceptance by the transferee of the terms and conditions of the right or option. This Fourth Amendment to the Company's 1990 Nonqualified Stock Option Program is hereby executed on December , 1996. CHAMPION ENTERPRISES, INC. By: Walter R. Young, Jr. Chairman, President and Chief Executive Officer EX-10.13 6 SECOND AMENDMENT TO THE CHAMPION ENTERPRISES, INC. 1993 MIDDLE MANAGEMENT STOCK OPTION PLAN Pursuant to resolutions adopted by the Board of Directors of Champion Enterprises, Inc. (the "Company") on , 1996, the second sentence of Section 13 of the Company's 1993 Middle Management Stock Option Plan, entitled "Non-Assignability", shall be amended and restated to read as follows: "Further, no shares of Company Common Stock acquired under the initial grant portion of the Plan shall be sold or otherwise transferred until the expiration of two years after the date of purchase, and no shares acquired under the option portion of the Plan shall be sold or otherwise transferred until the expiration of six months after the date of exercise; provided, however, that the two-year initial purchase transfer restriction (or the remaining portion thereof) and the six-month transfer restriction (or the remaining portion thereof) following the exercise of the option granted hereunder, as applicable, shall be waived in the event that a participant's employment is terminated by the Company due to the Company's June 1996 corporate reorganization, and the participant's employment termination occurs during such restricted period." This Second Amendment to the Company's 1993 Middle Management Stock Option Plan is hereby executed on , 1996. CHAMPION ENTERPRISES, INC. By: Walter R. Young, Jr. Chairman, President and Chief Executive Officer EX-10.25 7 LETTER AGREEMENT WITH JOHN J. COLLINS, JR. February 12, 1997 John Collins 939 Yarmouth Bloomfield Hills, Michigan 48301 Dear John: This letter is to confirm my offer to join Champion Enterprises, Inc. and the major terms of employment. 1) The position is Corporate Secretary and General Counsel of Champion Enterprises, Inc., based in Auburn Hills, Michigan. You will report to Ms. A. Jacqueline Dout, Executive VP and CFO. For Corporate Governance and Ethics purposes, you will report to the Chairman of the Board of Directors. 2) The base pay is $190,000 annually, paid monthly. 3) The annual cash incentive plan is attached for 1997, which if we perform at budgeted levels should provide a cash incentive of $70,300 with potential up to 63% of base (or $119,700). For 1997, your bonus will not be prorated, and we guarantee a minimum bonus of $50,000 for 1997. 4) As an inducement to join us, you will receive a one-time cash incentive of $50,000, payable 60 days after your date of employment. 5) The equity program will be defined as separate agreements effective on your date of employment to cover a total of 100, shares of Champion Enterprises stock over the next five years as follows: A) 10,000 shares at 40% of market price on date of acceptance to be purchased within 60 days of employment. There is a two year restriction from date of exercise on these shares and if you leave the company during the two year period you lose the prorated amount remaining. You will have tax consequences of difference between purchase and market price. Once you exercise this portion, you will be eligible for the following: B) 10,000 shares at 40% of market price on date of acceptance. While the term of these options are ten years, if you leave the company during the first two years these options are forfeited on a prorated 24 month period. C) 80,000 shares at market value on date of acceptance to be vested and exercisable in equal prorate proportions (16,000) over five years on the 1st, 2nd, 3rd, 4th and 5th anniversary date. As a part of the option agreement, there will be a "change of control" provision that immediately vests the outstanding, unvested options. 6) You will be eligible for the company's normal medical/dental, life insurance and long term disability benefits. There is no defined benefits retirement program, but we do have a 401(k) tax deferred savings program. You will be responsible for paying approximately 20% of the premium for medical/dental coverage. You will be entitled to four weeks vacation per year. We do not pay cash in lieu of vacations. 7) For three years from your acceptance, if the company separates you for any reason (other than gross malfeasance or legal reasons), the company will provide up to 18 months base salary and benefits. This will be reduced from 18 months, if less than 18 months remain of the 36 month period. 8) You will be given a "change of control" agreement which will provide a minimum 18 months of base salary and incentives. This offer is effective until today, February 12, 1997 with employment to begin no later than Monday, March 3, 1997. If the terms are acceptable, please sign below and return one copy to me. I look forward to you joining the team, for I am sure that you will fine it personally and professionally rewarding. Very truly yours, /S/ WALTER R. YOUNG, JR. Walter R. Young, Jr. cc: Jackie Dout /S/ JOHN J. COLLINS, JR. John J. Collins, Jr. Dated: February 12, 1997 Corporate Secretary and General Counsel Champion Enterprises, Inc. 1977 Fiscal Year Incentive Plan Eligibility Must hold position at fiscal year end 1997 (January 3, 1998) The Plan This position will paid annually based upon the following: Measure Attainment Level Incentive EPS (% of Base Salary) Minimum $1.50 25% Level 1 $1.60 37% Level 2 $1.76 50% Maximum $1.92 63% Within the program, the incentive payout will increase between the attainment levels listed, but not as much as the next attainment level incentive. The maximum incentive level is 63% of base salary. Definition and Rules - - Payment will be made after audited year-end results are finalized. - - Payments on this plan are not eligible for benefit calculations. - - This Plan supersedes all other previous plans. Definitions: Base Pay: Annualized base pay as of January 3, 1998. EPS: Annual, audited and publicly reported. EPS adjusted only for excluding extraordinary gains or losses. The attainment measure is based on current operations as of December, 1996. Any acquisition or divestitures during the year may require appropriate modifications to these attainment measures. EX-11 8 COMPUTATION OF EARNINGS PER SHARE (in 000's, except per share amounts) FOURTH QUARTER ENDED YEAR ENDED ------------------------- ------------------------------ Dec. 28, Dec. 30, Dec. 28, Dec. 30, Dec. 31, 1996 1995 1996 1995 1994 EARNINGS Income from Continuing Operations $224 $14,112 $53,586 $56,285 $45,130 Income from Discontinued Operations 0 0 0 0 1,908 Net Income $224 $14,112 $53,586 $56,285 $47,038 SHARES USED FOR CALCULATING EARNINGS PER SHARE Average Shares Outstanding 47,564 47,525 47,515 47,886 47,601 Additional Shares Resulting from Assumed Exercise of Stock Options 1,840 2,632 1,848 1,629 1,299 ------- ------ ------ ------ ------ Total 49,404 50,157 49,363 49,515 48,900 PER SHARE AMOUNT Income from Continuing Operations $0.00 $0.28 $1.09 $1.14 $0.92 Income from discontinued Operations 0 0 0 0 .04 ------- ------ ------ ------ ------ Net Income $0.00 $0.28 $1.09 $1.14 $0.96 Note: This calculation is submitted in accordance with Securities and Exchange Act of 1934 Release No. 9083.
EX-21.1 9 SUBSIDIARIES OF THE REGISTRANT NAME OF SUBSIDIARY(S) [STATE OF INCORPORATION NAMES UNDER WHICH OR ORGANIZATION] BUSINESS DONE (b) Champion Home Builders Co. [Michigan] - Dutch Housing, Inc. [Michigan] - Chandeleur Homes, Inc. [Michigan] - Redman Industries, Inc. [Delaware] - Redman Homes, Inc. [Delaware] - Western Homes Corporation [Delaware] Silvercrest Homes ________________________________________ (a) Each subsidiary is wholly-owned by the Registrant, or by the subsidiary of the Registrant which is its immediate parent and under which it is listed in the above table. (b) In addition to its own name. EX-23.1 10 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-93052, 2-93052-99, 33-36511, 33-38470, 33-41957, 33-41959, 33-75244, 33-58973, 333-03439 and 333-14797) and the Prospectus constituting part of the Registration Statements on Form S-3 (Nos. 33-54192 and 33-82544) of Champion Enterprises, Inc. of our report dated February 7, 1997 appearing on page F-2 of this Form 10-K. /S/ PRICE WATERHOUSE LLP Detroit, Michigan March 26, 1997 EX-23.2 11 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 2-93052, 2-93052-99, 33-36511, 33-38470, 33-41957, 33-41959, 33-75244, 33-58973, 333-03439 and 333-14797 and the Prospectus constituting part of the Registration Statements on Form S-3 Nos. 33-54192 and 33-82544) of Champion Enterprises, Inc. of our report dated May 17, 1996, appearing on Page F-3 of this Form 10-K, with respect to the consolidated financial statements of Redman Industries, Inc. /S/ ERNST & YOUNG LLP Dallas, Texas March 26, 1997 EX-27.1 12 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDING DECEMBER 28, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 DEC-31-1995 12-MOS DEC-28-1996 DEC-28-1996 19,357 0 76,313 537 80,920 216,651 175,876 53,274 472,350 195,172 0 47,695 0 0 178,939 472,350 1,644,071 1,644,071 1,392,788 1,392,788 0 0 2,313 94,186 40,600 53,586 0 0 0 53,586 1.09 1.09
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