| CHAMPION ENTERPRISES INC Item 1A Risk Factors Significant debt – Our significant debt could limit our ability to obtain additional financing, require us to dedicate a substantial portion of our cash flows from operations for debt service and prevent us from fulfilling our debt obligations |
| If we are unable to pay our debt obligations when due, we could be in default under our debt agreements and our lenders could accelerate our debt or take other actions which could restrict our operations |
| As discussed in Note 6 of the “Notes to Consolidated Financial Statements” in Item 8 of this Report, we have a significant amount of debt outstanding, which consists primarily of long-term debt due in 2009 and 2012 |
| We may incur additional debt to finance acquisitions or for other purposes |
| This indebtedness could, among other things: • limit our ability to obtain future financing for working capital, capital expenditures, acquisitions, debt service requirements, surety bonds, or other requirements; • require us to dedicate a substantial portion of our cash flows from operations to the payment of principal and interest on our indebtedness and reduce our ability to use our cash flows for other purposes; 7 ______________________________________________________________________ • limit our flexibility in planning for, or reacting to, changes in our business and the factory-built housing industry; • place us at a competitive disadvantage to competitors with less indebtedness; and • make us more vulnerable in the event of a further downturn in our business or in general economic conditions |
| Our business may not generate cash flows from operations in amounts sufficient to pay our debt or to fund other liquidity needs |
| The factors that affect our ability to generate cash can also affect our ability to raise additional funds through the sale of equity securities, the refinancing of debt or the sale of assets |
| We may not be able to refinance any of our debt on commercially reasonable terms or at all |
| If we are unable to refinance our debt obligations, we could be in default under our debt agreements and our lenders could accelerate our debt or take other actions that could restrict our operations |
| Fluctuations in operating results – The cyclical and seasonal nature of the manufactured housing market has caused our sales and operating results to fluctuate |
| These fluctuations may continue in the future, which could result in operating losses during downturns |
| The manufactured housing industry is highly cyclical and is influenced by many national and regional economic and demographic factors, including: • terms and availability of financing for homebuyers and retailers; • consumer confidence; • interest rates; • population and employment trends; • income levels; • housing demand; and • general economic conditions, including inflation, and recessions |
| In addition, the manufactured housing industry is affected by seasonality |
| Sales during the period from March to November are traditionally higher than in other months |
| As a result of the foregoing factors, our sales and operating results fluctuate, and we expect that they will continue to fluctuate in the future |
| Moreover, we may experience operating losses during cyclical and seasonal downturns in the manufactured housing market |
| Consumer financing availability - Tight credit standards and loan terms, curtailed lending activity, and increased interest rates among consumer lenders could reduce our sales |
| If consumer financing were to become further curtailed, our sales could decline and our operating results and cash flows could suffer |
| The consumers who buy our homes have historically secured consumer financing from third party lenders |
| The availability, terms and costs of consumer financing depend on the lending practices of financial institutions, governmental regulations and economic and other conditions, all of which are beyond our control |
| A consumer seeking to finance the purchase of a manufactured home without land will generally pay a higher interest rate and have a shorter loan term than a consumer seeking to finance the purchase of land and the home |
| Manufactured home consumer financing is at times more difficult to obtain than financing for site-built homes |
| Between 1999 and 2003, consumer lenders tightened the credit underwriting standards and loan terms and increased interest rates for loans to purchase manufactured homes, which reduced lending volumes and caused our sales to decline |
| The poor performance of portfolios of manufactured housing consumer loans in recent years has made it more difficult for industry consumer finance companies to obtain long-term capital in the asset-backed securitization market |
| As a result, consumer finance companies have curtailed their industry lending and many have exited the manufactured housing market |
| Additionally, the industry has seen certain traditional real estate mortgage lenders tighten terms or discontinue financing for manufactured housing |
| If consumer financing for manufactured homes were to be further curtailed, we would likely experience retail and manufacturing sales declines and our operating results and cash flows would suffer |
| 8 ______________________________________________________________________ Floor plan financing availability – A reduction in floor plan credit availability or tighter loan terms to our independent retailers could cause our manufacturing sales to decline |
| Independent retailers of our manufactured homes generally finance their inventory purchases with floor plan financing provided by lending institutions |
| Reduced availability of floor plan lending or tighter floor plan terms may affect our independent retailers’ inventory levels of new homes, the number of retail sales centers and related wholesale demand |
| As a result, we could experience manufacturing sales declines or a higher level of retailer defaults and our operating results and cash flows could suffer |
| Contingent liabilities – We have, and will continue to have, significant contingent wholesale repurchase obligations and other contingent obligations, some of which could become actual obligations that we must satisfy |
| We may incur losses under these wholesale repurchase obligations or be required to fund these or other contingent obligations that would reduce our cash flows |
| In connection with a floor plan arrangement for our manufacturing shipments to independent retailers, the financial institution that provides the retailer financing customarily requires us to enter into a separate repurchase agreement with the financial institution |
| Under this separate agreement, generally for a period up to 24 months from the date of our sale to the retailer, upon default by the retailer and repossession of the home by the financial institution, we are generally obligated to purchase from the lender the related floor plan loan or the home at a price equal to the unpaid principal amount of the loan, plus certain administrative and handling expenses, reduced by the cost of any damage to the home and any missing parts or accessories |
| Our estimated aggregate contingent repurchase obligation at December 31, 2005 was significant and includes significant contingent repurchase obligations relating to our largest independent retail customers |
| For additional discussion see “Contingent Repurchase Obligations” in Item 7 and Note 13 of “Notes to Consolidated Financial Statements” in Item 8 of this Report |
| We may be required to honor some or all of our contingent repurchase obligations in the future, which would result in operating losses and reduced cash flows |
| At December 31, 2005, we also had contingent obligations related to surety bonds and letters of credit |
| For additional detail and discussion, see “Liquidity and Capital Resources” in Item 7 of this Report |
| If we were required to fund a material amount of these contingent obligations, we would have reduced cash flows and could incur losses |
| Dependence upon independent retailers – If we are unable to establish or maintain relationships with independent retailers who sell our homes, our sales could decline and our operating results and cash flows could suffer |
| During 2005, approximately 78prca of our manufacturing shipments of homes were made to independent retail locations throughout the United States and western Canada |
| With the divestiture of our traditional retail operations, the proportion of our manufacturing sales to independent retailers has increased |
| As is common in the industry, independent retailers may sell manufactured homes produced by competing manufacturers |
| We may not be able to establish relationships with new independent retailers or maintain good relationships with independent retailers that sell our homes |
| Even if we do establish and maintain relationships with independent retailers, these retailers are not obligated to sell our manufactured homes exclusively, and may choose to sell our competitors’ homes instead |
| The independent retailers with whom we have relationships can cancel these relationships on short notice |
| In addition, these retailers may not remain financially solvent as they are subject to the same industry, economic, demographic and seasonal trends that we face |
| If we do not establish and maintain relationships with solvent independent retailers in the markets we serve, sales in those markets could decline and our operating results and cash flows could suffer |
| Cost and availability of raw materials – Prices of certain materials can fluctuate significantly and availability of certain materials may be limited at times |
| Prices of certain materials such as lumber, insulation, steel, and drywall can fluctuate significantly due to changes in demand and supply |
| Additionally, availability of certain materials such as drywall and insulation may be limited at times resulting in higher prices and/or the need to find alternative suppliers |
| We generally have been able to maintain adequate supplies of materials and to pass higher material costs on to the retailers and consumers in the form of surcharges and base price increases |
| However, it is not certain that future price increases can be passed on 9 ______________________________________________________________________ to the consumer without affecting demand or that limited availability of materials will not impact our production capabilities |
| Effect on liquidity – Industry conditions and our operating results have limited our sources of capital during the past few years |
| If we are unable to locate alternative sources of capital when needed we may be unable to maintain or expand our business |
| We depend on our cash balances, our cash flows from operations, and our revolving credit facility to finance our operating requirements, capital expenditures and other needs |
| The downturn in the manufactured housing industry, combined with our operating results and other changes, limited our sources of financing during the past few years |
| If our cash balances, cash flows from operations, and availability under our revolving credit facility are insufficient to finance our operations and alternative capital is not available, we may not be able to expand our business and make acquisitions, or we may need to curtail or limit our existing operations |
| We have a significant amount of surety bonds and letters of credit representing collateral for our casualty insurance programs and for general operating purposes |
| For additional detail and information concerning the amounts of our surety bonds and letters of credit, see Note 13 of “Notes to Consolidated Financial Statements” in Item 8 of this Report |
| The inability to retain our current letter of credit and surety bond providers or to obtain alternative bonding or letter of credit sources could require us to post cash collateral, reduce the amount of cash available for our operations or cause us to curtail or limit existing operations |
| Competition – The factory-built housing industry is very competitive |
| If we are unable to effectively compete, our growth could be limited, our sales could decline and our operating results and cash flows could suffer |
| The factory-built housing industry is highly competitive at both the manufacturing and retail levels, with competition based, among other things, on price, product features, reputation for service and quality, merchandising, terms of retailer promotional programs and the terms of consumer financing |
| Some of our manufacturing competitors have captive retail distribution systems and consumer finance operations |
| In addition, there are many independent factory-built housing retail locations in most areas where we have retail operations |
| Because barriers to entry for manufactured housing retailers are low, we believe that it is relatively easy for new retailers to enter our markets as competitors |
| In addition, our products compete with other forms of low to moderate-cost housing, including site-built homes, panelized homes, apartments, townhouses and condominiums |
| If we are unable to effectively compete in this environment, our retail sales and manufacturing shipments could be reduced |
| Limitations on the number of sites available for placement of manufactured homes or on the operation of manufactured housing communities could reduce the demand for manufactured homes and our sales |
| Manufactured housing communities and individual home placements are subject to local zoning ordinances and other local regulations relating to utility service and construction of roadways |
| In the past, some property owners have resisted the adoption of zoning ordinances permitting the use of manufactured homes in residential areas, which we believe has restricted the growth of the industry |
| Manufactured homes may not receive widespread acceptance and localities may not adopt zoning ordinances permitting the development of manufactured home communities |
| If the manufactured housing industry is unable to secure favorable local zoning ordinances, our sales could decline and our operating results and cash flows could suffer |
| Dependence upon executive officers and other key personnel – The loss of any of our executive officers or other key personnel could reduce our ability to manage our businesses and achieve our business plan, which could cause our sales to decline and our operating results and cash flows to suffer |
| We depend on the continued services and performance of our executive officers and other key personnel |
| If we lose the service of any of our executive officers or other key personnel, it could reduce our ability to manage our businesses and achieve our business plan, which could cause our sales to decline and our operating results and cash flows to suffer |
| 10 ______________________________________________________________________ Restrictive covenants – The terms of our debt place operating restrictions on us and our subsidiaries and contain various financial performance and other covenants with which we must remain in compliance |
| If we do not remain in compliance with these covenants, certain of our debt facilities could be terminated and the amounts outstanding thereunder could become immediately due and payable |
| The documents governing the terms of our Senior Secured Credit Agreement and/or our Senior Notes due 2009 contain financial and non-financial covenants that place restrictions on us and our subsidiaries |
| The terms of our debt agreements include covenants that, to varying degrees, restrict our and our subsidiaries’ ability to: • engage in new lines of business; • incur indebtedness, contingent liabilities, guarantees, and liens; • pay dividends or issue common stock; • redeem or refinance existing indebtedness; • redeem or repurchase common stock and redeem, repay or repurchase subordinated debt; • make investments in subsidiaries that are not subsidiary guarantors; • enter into joint ventures; • sell certain assets or enter into sale and leaseback transactions; • acquire, consolidate with, or merge with or into other companies; and • enter into transactions with affiliates |
| If we fail to comply with any of these covenants, the lenders could cause our debt to become due and payable prior to maturity |
| If our debt were accelerated, our assets might not be sufficient to repay our debt in full |
| For additional detail and discussion concerning these financial covenants see “Liquidity and Capital Resources” in Item 7 of this Report |
| Our potential inability to integrate acquired operations could have a negative effect on our expenses and results of operations |
| In the past, we have grown through strategic acquisitions and we may engage in strategic acquisitions in the future to strengthen and expand our operating capabilities |
| The full benefits of these acquisitions, however, require integration of manufacturing, administrative, financial, sales, and marketing approaches and personnel |
| If we are unable to successfully integrate these acquisitions, we may not realize the benefits of the acquisitions, and our financial results may be negatively affected |
| A completed acquisition may adversely affect our financial condition and results of operations, including our capital requirements and the accounting treatment of these acquisitions |
| Completed acquisitions may also lead to significant unexpected liabilities after the consummation of these acquisitions |
| Potential Dilution - Potential capital, debt reduction, or acquisition transactions effected with issuances of our common stock could result in potential dilution and impair the price of our common stock |
| To the extent we decide to reduce debt obligations through the issuance of common stock and/or convertible preferred stock, our then existing common shareholders would experience dilution in their percentage ownership interests |
| We may seek additional sources of capital and financing in the future or issue securities in connection with retiring our outstanding indebtedness or making acquisitions, the terms of which may result in additional potential dilution |