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FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 (Mark one) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
 For Quarterly period ended April 3, 2004 OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from ____________ to ____________ Commission file number 1-9751 CHAMPION ENTERPRISES, INC. 
  Michigan
    
    38-2743168(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 2701 Cambridge Court, Suite 300
Auburn Hills, MI 48326 
  Registrants telephone number, including area code: (248) 340-9090 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes   [X]     No  [   ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes   [X]     No  [   ] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. 70,433,454 shares of the registrants $1.00 par value Common Stock were
outstanding as of April 20, 2004.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Statements of OperationsConsolidated Balance SheetsConsolidated Statements of Cash FlowsConsolidated Statement of Shareholders EquityNotes to Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in Securities and Use of ProceedsItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESEXHIBIT INDEXRestated Articles of IncorporationCertification of Chief Executive OfficerCertification of Chief Financial OfficerSection 906 Certification of CEO and CFO    Table of Contents  
 PART I. FINANCIAL INFORMATION 
  CHAMPION ENTERPRISES, INC. 
 
 UnauditedThree Months EndedApril 3,
    
    March 29,2004
    
    2003Net sales
    
    $
    237,085
    
    
    $
    242,797Cost of sales
    
    
    202,484
    
    
    
    210,456Gross margin
    
    
    34,601
    
    
    
    32,341Selling, general and administrative expenses
    
    
    36,423
    
    
    
    48,663Mark-to-market charge for common stock warrant
    
    
    5,100
    
    
    
    Loss (gain) on debt retirement
    
    
    3,226
    
    
    
    (6,703
    )Operating loss
    
    
    (10,148
    )
    
    
    (9,619
    )Interest income
    
    
    340
    
    
    
    547Interest expense
    
    
    (5,371
    )
    
    
    (7,684
    )Loss from continuing operations
before income taxes
    
    
    (15,179
    )
    
    
    (16,756
    )Income tax expense (benefit)
    
    
    300
    
    
    
    (2,700
    )Loss from continuing operations
    
    
    (15,479
    )
    
    
    (14,056
    )Income (loss) from discontinued
operations, net of taxes
    
    
    1,156
    
    
    
    (7,369
    )Net loss
    
    $
    (14,323
    )
    
    $
    (21,425
    )Basic and diluted loss per share:Loss from continuing operations
    
    $
    (0.23
    )
    
    $
    (0.33
    )Income (loss) from discontinued operations
    
    
    0.02
    
    
    
    (0.13
    )Basic and diluted loss per share
    
    $
    (0.21
    )
    
    $
    (0.46
    )Weighted shares for basic and diluted EPS
    
    
    68,103
    
    
    
    54,525
 See accompanying Notes to Consolidated Financial Statements. Page 1




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CHAMPION ENTERPRISES, INC. 
 
 UnauditedApril 3, 2004
    
    January 3, 2004ASSETSCurrent assetsCash and cash equivalents
    
    $
    117,580
    
    
    $
    145,868Restricted cash
    
    
    6,631
    
    
    
    8,341Accounts receivable, trade
    
    
    32,153
    
    
    
    13,773Inventories
    
    
    112,467
    
    
    
    98,824Other current assets
    
    
    18,047
    
    
    
    18,325Total current assets
    
    
    286,878
    
    
    
    285,131Property, plant and equipment
    
    
    225,911
    
    
    
    224,807Less-accumulated depreciation
    
    
    131,347
    
    
    
    128,98694,564
    
    
    
    95,821Goodwill
    
    
    126,522
    
    
    
    126,537Non-current assets of discontinued operations
    
    
    22
    
    
    
    68Other non-current assets
    
    
    19,949
    
    
    
    20,743$
    527,935
    
    
    $
    528,300LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS EQUITYCurrent liabilitiesFloor plan payable
    
    $
    13,597
    
    
    $
    14,123Accounts payable
    
    
    33,278
    
    
    
    26,724Accrued warranty obligations
    
    
    38,851
    
    
    
    40,558Accrued volume rebates
    
    
    27,319
    
    
    
    31,293Accrued compensation and payroll taxes
    
    
    14,342
    
    
    
    17,400Accrued self-insurance
    
    
    31,083
    
    
    
    31,189Current liabilities of discontinued operations
    
    
    1,652
    
    
    
    3,173Other current liabilities
    
    
    47,913
    
    
    
    47,184Total
 current liabilities
    
    
    208,035
    
    
    
    211,644Long-term liabilitiesLong-term debt
    
    
    212,631
    
    
    
    245,468Other long-term liabilities
    
    
    52,777
    
    
    
    47,510265,408
    
    
    
    292,978Contingent liabilities (Note 8)Redeemable convertible preferred stock,no par value, 5,000 shares authorized, 21 shares
and 9 shares issued and outstanding, respectively
    
    
    20,750
    
    
    
    8,689Shareholders equityCommon stock, $1 par value, 120,000 shares authorized, 70,094
and 65,470 shares issued and outstanding, respectively
    
    
    70,094
    
    
    
    65,470Capital in excess of par value
    
    
    154,130
    
    
    
    125,386Accumulated deficit
    
    
    (189,933
    )
    
    
    (175,450
    )Accumulated other comprehensive income (loss)
    
    
    (549
    )
    
    
    (417
    )Total shareholders equity
    
    
    33,742
    
    
    
    14,989$
    527,935
    
    
    $
    528,300
 See accompanying Notes to Consolidated Financial Statements. Page 2




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CHAMPION ENTERPRISES, INC. 
 
 UnauditedThree Months EndedApril 3,
    
    March 29,2004
    
    2003Cash flows from operating activitiesLoss from continuing operations
    
    $
    (15,479
    )
    
    $
    (14,056
    )Adjustments to reconcile loss from continuing operations
to net cash used for operating activities:Depreciation and amortization
    
    
    2,985
    
    
    
    4,273Loss (gain) loss on debt retirement
    
    
    3,226
    
    
    
    (6,703
    )Mark-to-market charge for common stock warrant
    
    
    5,100
    
    
    
    Gain on disposal of fixed assets
    
    
    (25
    )
    
    
    (990
    )Increase/decreaseAccounts receivable
    
    
    (18,380
    )
    
    
    (9,568
    )Refundable income taxes
    
    
    277
    
    
    
    Inventories
    
    
    (13,643
    )
    
    
    (10,667
    )Cash collateral deposits
    
    
    
    
    
    
    9,600Accounts payable
    
    
    6,554
    
    
    
    3,143Accrued liabilities
    
    
    (7,413
    )
    
    
    (5,090
    )Other, net
    
    
    1,795
    
    
    
    1,495Net cash used for continuing operating activities
    
    
    (35,003
    )
    
    
    (28,563
    )Cash flows from discontinued operationsIncome (loss) from discontinued operations
    
    
    1,156
    
    
    
    (7,369
    )(Increase) decrease in net assets of discontinued operations
    
    
    (1,521
    )
    
    
    1,456Net cash used for discontinued operations
    
    
    (365
    )
    
    
    (5,913
    )Cash flows from investing activitiesAdditions to property, plant and equipment
    
    
    (1,880
    )
    
    
    (1,200
    )Acquisition deferred purchase price payments
    
    
    
    
    
    
    (2,500
    )Investments in and advances to unconsolidated subsidiaries
    
    
    (58
    )
    
    
    (202
    )Proceeds on disposal of fixed assets
    
    
    223
    
    
    
    3,842Net cash used for investing activities
    
    
    (1,715
    )
    
    
    (60
    )Cash flows from financing activities(Decrease) increase in floor plan payable, net
    
    
    (526
    )
    
    
    30Decrease in long-term debt
    
    
    (5,888
    )
    
    
    (146
    )Purchase of Senior Notes
    
    
    
    
    
    
    (20,554
    )Increase in deferred financing costs
    
    
    
    
    
    
    (1,783
    )Decrease in restricted cash
    
    
    1,710
    
    
    
    50,229Preferred stock issued, net
    
    
    12,000
    
    
    
    Common stock issued, net
    
    
    1,611
    
    
    
    300Dividends paid on preferred stock
    
    
    (112
    )
    
    
    (482
    )Net cash provided by financing activities
    
    
    8,795
    
    
    
    27,594Net decrease in cash and cash equivalents
    
    
    (28,288
    )
    
    
    (6,942
    )Cash and cash equivalents at beginning of period
    
    
    145,868
    
    
    
    77,381Cash and cash equivalents at end of period
    
    $
    117,580
    
    
    $
    70,439
 See accompanying Notes to Consolidated Financial Statements. Page 3




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CHAMPION ENTERPRISES, INC. 
 
 AccumulatedCommon stock
    
    Capital inexcess of
    
    Accumulated
    
    othercomprehensive
    
    
    
    
    
    TotalcomprehensiveShares
    
    Amount
    
    par value
    
    deficit
    
    income (loss)
    
    Total
    
    income (loss)Balance at January 3, 2004
    
    
    65,470
    
    
    $
    65,470
    
    
    $
    125,386
    
    
    $
    (175,450
    )
    
    $
    (417
    )
    
    $
    14,989Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,323
    )
    
    
    
    
    
    
    (14,323
    )
    
    $
    (14,323
    )Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )
    
    
    
    
    
    
    (160
    )Stock options and
benefit plans
    
    
    496
    
    
    
    496
    
    
    
    1,137
    
    
    
    
    
    
    
    
    
    
    
    1,633Amortization of preferred
stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    (61
    )Issuance for acquisition
deferred purchase price
payments
    
    
    276
    
    
    
    276
    
    
    
    1,724
    
    
    
    
    
    
    
    
    
    
    
    2,000Issuance for purchase and
retirement of debt
    
    
    3,852
    
    
    
    3,852
    
    
    
    25,944
    
    
    
    
    
    
    
    
    
    
    
    29,796Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (132
    )
    
    
    (132
    )
    
    
    (132
    )Balance at April 3, 2004
    
    
    70,094
    
    
    $
    70,094
    
    
    $
    154,130
    
    
    $
    (189,933
    )
    
    $
    (549
    )
    
    $
    33,742
    
    
    $
    (14,455
    )
 See accompanying Notes to Consolidated Financial Statements. Page 4




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CHAMPION ENTERPRISES, INC. 
 
  1.
    
    The Consolidated Financial Statements are unaudited, but in the
opinion of management include all adjustments necessary for a fair
presentation of the results of the interim period. All such
adjustments are of a normal recurring nature except for the loss
recorded in the first quarter of 2004 and the gain in the first quarter
of 2003 related to the partial retirement of Senior Notes due 2007 and
2009 discussed in Note 6, the mark-to-market charge recorded in the
first quarter of 2004 related to the change in estimated fair value of
a common stock warrant discussed in Note 7 and the charge to retained
earnings related to the induced conversion of the Series C Preferred
Stock recorded in the first quarter 2003 and discussed in Note 7.
Financial results of the interim period are not necessarily indicative
of results that may be expected for any other interim period or for the
fiscal year. The balance sheet as of January 3, 2004 was derived from
audited financial statements.The Company exited its consumer finance business in 2003 and as a result
that segment has been reported as discontinued operations for all periods
presented.For a description of significant accounting policies used by Champion
Enterprises, Inc. (the Company) in the preparation of its consolidated
financial statements, please refer to Note 1 of Notes to Consolidated
Financial Statements in the Companys Annual Report on Form 10-K for the
year ended January 3, 2004.The Company accounts for its stock-based employee compensation programs
under Accounting Principles Board (APB) Opinion No. 25. The additional
disclosures and pro forma information required by Statement of Financial
Accounting Standards (SFAS) No. 123 as amended by SFAS No. 148 follow.
If compensation costs for the Companys stock-based compensation plans
had been determined based on the fair value at the grant dates consistent
with the requirements of SFAS No. 123, pro forma net loss, loss per share
and stock-based compensation expense would have been the amounts
indicated below: Three Months EndedApril 3,
    
    March 29,2004
    
    2003(In thousands, except per share amounts)Net loss
 as reported
    
    $
    (14,323
    )
    
    $
    (21,425
    )Net loss  pro forma
    
    
    (14,460
    )
    
    
    (22,144
    )Basic and diluted loss per share  as reported
    
    
    (0.21
    )
    
    
    (0.46
    )Basic and diluted loss per share  pro forma
    
    
    (0.21
    )
    
    
    (0.48
    )Stock-based employee compensation expense,
net of related tax effects  as reported
    
    
    145
    
    
    
    86Stock-based employee compensation expense,
net of related tax effects  pro forma
    
    $
    282
    
    
    $
    805
  2.
    
    The following table provides information regarding activity for
restructuring reserves recorded in previous periods. Three Months Ended April 3, 20042003
    
    PriorClosures
    
    Closures(In thousands)Balance at beginning of year
    
    $
    4,280
    
    
    $
    3,793Cash payments:Warranty costs
    
    
    (434
    )
    
    
    (232
    )Other closing costs
    
    
    (383
    )
    
    
    (153
    )Reversals credited to earnings:Other closing costs
    
    
    (64
    )
    
    
    (29
    )Balance at end of quarter
    
    $
    3,399
    
    
    $
    3,379Period end balance comprised of:Warranty costs
    
    $
    2,156
    
    
    $
    3,004Other closing costs
    
    
    1,243
    
    
    
    375$
    3,399
    
    
    $
    3,379
 Page 5




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Warranty costs are expected to be paid over a three-year period after the
closures. Other closing costs are generally paid within one year of the
related closures, though certain lease payments at abandoned retail
locations are paid up to three years after the closures. Other closing
costs credited to earnings during the quarter ending April 3, 2004
consisted of adjustments to accruals for employee severance and lease
terminations.3.
    
    The provisions for income taxes (benefits) differ from the amount
of income tax determined by applying the applicable U.S. statutory
federal income tax rate to pretax loss from continuing operations as a
result of the following differences: Three Months EndedApril 3,
    
    March 29,2004
    
    2003(In thousands)Statutory U.S. tax rate
    
    $
    (5,300
    )
    
    $
    (5,900
    )Increase in rate resulting from:Deferred tax valuation allowance
    
    
    5,300
    
    
    
    2,900State taxes, net of federal tax effect
    
    
    100
    
    
    
    Other
    
    
    200
    
    
    
    300Total income tax provision (benefit)
    
    $
    300
    
    
    $
    (2,700
    )
  The Company currently provides a 100% valuation allowance for its
deferred tax assets. Deferred tax assets will continue to require a 100%
valuation allowance until the Company has demonstrated their
realizability through sustained profitability and/or from other factors.
Current federal income tax regulations provide for a two-year carryback
of net operating losses. The Company has no taxable income available
during this carryback period and, as a result, any net operating losses
incurred in 2004 and 2003 generate tax loss carryforwards that will be
available to offset certain future taxable income. The effective tax
rates for the three months ended April 3, 2004 and March 29, 2003
differ from the 35% federal statutory rate primarily
because of this 100% valuation allowance for deferred taxes partially
offset by a $3.0 million tax benefit, in 2003, for a reduction in the
valuation allowance, as discussed below.The amount of net deferred tax assets, the 100% valuation allowance and
the expected tax refund related to the 2002 federal income tax return
were estimated at December 28, 2002 based on year-end estimates of the
tax deductibility of certain costs and charges. Upon completion and
filing of the 2002 federal income tax return in April 2003, the Company
received tax refunds totaling $63.5 million in the second quarter of
2003. These refunds exceeded, by approximately $3.0 million, the
estimate made as of December 28, 2002, resulting in a
$3.0 million tax benefit which was recorded in the first quarter
of 2003.4.
    
    A summary of inventories by component follows: April 3,
    
    January 3,2004
    
    2004(In thousands)New manufactured homes
    
    $
    49,221
    
    
    $
    42,547Raw materials
    
    
    29,521
    
    
    
    25,953Work-in-process
    
    
    7,476
    
    
    
    6,204Other inventory
    
    
    26,249
    
    
    
    24,120$
    112,467
    
    
    $
    98,824
  Other inventory consists of pre-owned manufactured homes, land and park
spaces and improvements. Page 6




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5.
    
    The Companys manufacturing operations generally provide retail
homebuyers with a twelve-month warranty from the date of purchase.
Estimated warranty costs are accrued as cost of sales at the time of
sale. The warranty provision and reserves are based on estimates of
the amounts necessary to settle existing and future claims for homes
sold by the manufacturing operations as of the balance sheet date. The
following table summarizes the changes in accrued product warranty
obligations during the three months ended April 3, 2004. A portion of
warranty reserves was classified as other long-term liabilities in the
consolidated balance sheet. Accrued WarrantyObligations(In thousands)Reserves at January 3, 2004
    
    $
    47,058Warranty expense provided
    
    
    12,564Cash warranty payments
    
    
    (14,271
    )Reserves at April 3, 2004
    
    $
    45,351
  6.
    
    Long-term debt by component consisted of the following: April 3,
    
    January 3,2004
    
    2004(In thousands)7.625% Senior Notes due 2009
    
    $
    100,215
    
    
    $
    113,71511.25% Senior Notes due 2007
    
    
    97,510
    
    
    
    111,010Obligations under industrial revenue bonds
    
    
    12,430
    
    
    
    18,145Other debt
    
    
    2,476
    
    
    
    2,598$
    212,631
    
    
    $
    245,468
  During the three months ended April 3, 2004 the Company purchased and
retired $13.5 million of the Senior Notes due 2009 and $13.5 million of
the Senior Notes due 2007 in exchange for Company common stock totaling
3.9 million shares, resulting in a pretax loss of $3.2 million. Also
during the first quarter of 2004, the Company paid off a $5.7 million
obligation under an industrial revenue bond. During the three months
ended March 29, 2003, the Company purchased and retired $12.9 million of
its Senior Notes due 2009 and $15.0 million of the Senior Notes due 2007
for cash payments of $20.6 million, resulting in a pretax gain of $6.7
million.In January 2003, Champion Home Builders Co. (CHB), a wholly-owned
subsidiary of the Company, entered into a three-year, $75 million
revolving credit facility to be used in support of letters of credit and
for general corporate purposes. Under this facility, letter of credit
fees range from 2.5% to 3.5% annually on letters of credit issued and
borrowings bear interest at either the prime interest rate plus up to
0.5% or the Eurodollar rate plus 2.5% to 3.5%. In addition, there is an
annual fee of $0.1 million plus 0.375% of the unused portion of the
facility. Availability under the credit facility is subject to a
borrowing base calculated as percentages of eligible accounts receivable,
inventory and fixed assets. The facility agreement contains certain
financial covenants that require the Company, only in the event that its
liquidity, as defined, falls below $35 million, to maintain certain
levels of consolidated earnings before interest, taxes, depreciation,
amortization, non-cash restructuring costs and gains from extinguishment
of Senior Notes and certain ratios of earnings to fixed charges, as
defined. Liquidity, as defined, consists of the majority of the
Companys unrestricted cash and cash equivalents plus unused availability
under the facility. Fixed charges, as defined, consist primarily of
interest expense, capital expenditures, dividends paid in cash, required
principal payments of debt and lease payments paid or accrued during the
calculation period as well as cash losses under wholesale repurchase
obligations. In addition, the facility contains covenants that limit the
Companys ability to incur additional indebtedness and liens, sell assets
and, if liquidity falls below $35 million, make certain investments, pay
dividends and purchase or redeem its common stock. The line of credit
is collateralized by accounts receivable, inventories, property, plant,
and equipment, cash and other assets. As of April 3, 2004, facility
availability was $61.0 million, which was used in its entirety for
letters of credit issued under the facility, there were no borrowings
outstanding and the Companys liquidity was $110 million, which was in
excess of $35 million such that no financial covenants were in effect. Page 7




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The Company has two floor plan facilities with total availability of $21
million of which $13.6 million was outstanding at April 3, 2004. A $15
million floor plan financing facility contains a covenant requiring the
maintenance of a minimum of $35 million of liquidity, as defined in the
facility, at each fiscal month end. In the event of non-compliance with
this covenant, the lender could terminate the credit line and cause the
debt to become immediately due and payable. As of April 3, 2004, the
Company had approximately $10.1 million outstanding under this facility
and was in compliance with the covenant.7.
    
    During the first quarter of 2004, the preferred shareholder
exercised its right to purchase $12 million of Series B-2 preferred
stock. At April 3, 2004 redeemable convertible preferred stock
consisted of $8.75 million of Series C and $12 million of Series B-2
with mandatory redemption dates of April 2, 2009 and July 3, 2008,
respectively. Both Series have a 5% annual dividend that is payable
quarterly, at the Companys option, in cash or common stock.During the first quarter of 2003, the terms of the Series C preferred
stock were amended to accelerate the modification of the conversion price
to $5.66 and the preferred shareholder agreed to convert $16.25 million
of the Series C cumulative convertible preferred stock by March 12, 2003.
Upon conversion, 2.9 million shares of common stock were issued. This
amendment to the preferred stock terms was accounted for as an induced
conversion, resulting in a charge to retained earnings of $3.5 million
during the first quarter of 2003.In connection with the issuance of the Series C preferred stock in 2002,
the Company issued to the preferred shareholder a warrant, which is
currently exercisable based on approximately 2.2 million shares at a
strike price of $11.52 per share. Annually, on April 2 of each year, the
warrant strike price increases by $0.75 per share. The warrant expires
on April 2, 2009 and is exercisable only on a non-cash, net basis,
whereby the warrant holder would receive shares of common stock as
payment for any net gain upon exercise. During the first quarter of
2004, as a result of the increase in the Companys common stock price,
the Company recorded a $5.1 million mark-to-market charge for the change
in estimated fair value of this warrant.8.
    
    As is customary in the manufactured housing industry, the majority
of the Companys manufacturing sales to independent retailers are made
pursuant to repurchase agreements with lending institutions that
provide wholesale floor plan financing to the retailers. Pursuant to
these agreements, generally for a period of up to 24 months from
invoice date of the sale of the homes and upon default by the retailers
and repossession by the financial institution, the Company is obligated
to purchase the related floor plan loans or repurchase the homes from
the lender. The contingent repurchase obligation at April 3, 2004 was
estimated to be approximately $230 million, without reduction for the
resale value of the homes. This amount compares to approximately $245
million at the beginning of the year and approximately $260 million a
year earlier. Losses under repurchase obligations are determined by
the difference between the repurchase price and the estimated net
proceeds from the resale of the homes. Repurchase losses incurred on
homes repurchased totaled $0.1 million for the three months ended April
3, 2004 and $0.3 million for the three months ended March 29, 2003.
During the first quarter of 2003, wholesale repurchase reserves were
increased $3.2 million in connection with the extension of repurchase
terms to 24 months for certain national lenders and for the negative
effects of market conditions on the Companys largest independent
retailer. During the second quarter of 2003, the Company agreed to
extend both repurchase terms and the timing of required principal
curtailment payments by this independent retailer to respective floor
plan lenders resulting in a slightly higher repurchase exposure to the
Company for a longer period of time.At April 3, 2004 the Company was contingently obligated for approximately
$61.4 million under letters of credit, primarily comprised of $14.1
million to support insurance reserves, $12.6 million to support long-term
debt, $27.7 million to secure surety bonds and $5.0 million
to support floor plan facilities of independent retailers. Champion was also contingently
obligated for $34.1 million under surety bonds, generally to support
insurance and license and service bonding requirements. Approximately
$26.7 million of the letters of credit and $20.8 million of the surety
bonds support insurance reserves and long-term debt that are reflected as
liabilities in the consolidated balance sheet.At April 3, 2004 certain of the Companys subsidiaries were guarantors of
$5.6 million of debt of unconsolidated subsidiaries, none of which was
reflected in the consolidated balance sheet. These guarantees are
several or joint and several and are related to indebtedness of certain
manufactured housing community developments which are collateralized by
the properties being developed. Page 8




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The Company has provided various representations, warranties and other
standard indemnifications in the ordinary course of its business, in
agreements to acquire and sell business assets and in financing
arrangements. The Company is subject to various legal proceedings and
claims which arise in the ordinary course of its business.Management believes the ultimate liability with respect to these
contingent obligations will not have a material effect on the Companys
financial position, results of operations or cash flows.9.
    
    The Companys potentially dilutive securities consist of
outstanding stock options, deferred purchase price obligations,
convertible preferred stock and warrants. Dilutive securities were not
considered in determining the denominator for diluted earnings per
share (EPS) in any period presented because the effect on the net
loss would have been antidilutive. A reconciliation of the numerators
and denominators used in the Companys basic and diluted EPS
calculations follows: Three Months EndedApril 3,
    
    March 29,2004
    
    2003(In thousands)NumeratorNet loss
    
    $
    (14,323
    )
    
    $
    (21,425
    )Less: income from discontinued operations
    
    
    (1,156
    )
    
    
    Plus: loss from
discontinued operations
    
    
    
    
    
    
    7,369Less: preferred stock dividend
    
    
    (160
    )
    
    
    (286
    )Less: charge to retained earnings for
induced conversion of preferred stock
    
    
    
    
    
    
    (3,488
    )Loss from continuing operations
available to common shareholders
for basic and diluted EPS
    
    
    (15,639
    )
    
    
    (17,830
    )Income (loss) from discontinued operations
available to common shareholders
for basic and diluted EPS
    
    
    1,156
    
    
    
    (7,369
    )Net loss available to common
shareholders for basic and diluted EPS
    
    $
    (14,483
    )
    
    $
    (25,199
    )DenominatorShares for basic and diluted EPS -
weighted average shares outstanding
    
    
    68,103
    
    
    
    54,525
  10.
    
    The Company evaluates the performance of its manufacturing and
retail segments based on earnings (loss) before interest, income taxes
and general corporate expenses (EBIT). Reconciliations of segment
sales to consolidated net sales and segment earnings (loss) to
consolidated loss from continuing operations before income taxes
follow: Three Months EndedApril 3,
    
    March 29,2004
    
    2003(In thousands)Net salesManufacturing
    
    $
    209,856
    
    
    $
    209,197Retail
    
    
    49,829
    
    
    
    61,121Less: intercompany
    
    
    (22,600
    )
    
    
    (27,521
    )Consolidated net sales
    
    $
    237,085
    
    
    $
    242,797Loss from continuing operations before income taxesManufacturing EBIT
    
    $
    4,654
    
    
    $
    (6,846
    )Retail EBIT
    
    
    (253
    )
    
    
    (2,683
    )General corporate expenses
    
    
    (6,023
    )
    
    
    (7,272
    )Mark-to-market charge for common stock warrant
    
    
    (5,100
    )
    
    
    (Loss) gain on debt retirement
    
    
    (3,226
    )
    
    
    6,703Interest expense, net
    
    
    (5,031
    )
    
    
    (7,137
    )Intercompany eliminations
    
    
    (200
    )
    
    
    479Loss from continuing operations before income taxes
    
    $
    (15,179
    )
    
    $
    (16,756
    )
  Retail floor plan interest expense not charged to retail EBIT totaled
$0.3 million for the three months ended Page 9




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April 3, 2004 and $0.4 million for the three months ended March 29, 2003.11.
    
    In 2003 the Company exited its consumer finance business. Income
from discontinued operations for the quarter ended April 3, 2004
consisted primarily of a favorable adjustment from the settlement of
remaining contractual obligations. Loss from discontinued operations
for the three months ended March 29, 2003 consisted primarily of a $5.4
million charge to value its finance loans receivable at the lower of
cost or market as well as operating losses.12.
    
    Commencing July 2003, the Company engaged AlixPartners, LLC, a
consulting firm, one of whose Principals, Albert A. Koch, currently
serves as the Companys Chairman of the Board of Directors, President
and Chief Executive Officer. During the first quarter of 2004, the
Company recorded expenses of $0.4 million and paid fees of $0.7 million
to AlixPartners, LLC and AP Services, LLC, its affiliate, for services
rendered, including the services of Mr. Koch. The firm has been
engaged for various consulting projects, some of which are or were
based on hourly fees and expenses and another for which fees are
contingent upon results.13.
    
    In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 46, Consolidation of Variable Interest
Entities. Under previous practice, entities were included in
consolidated financial statements generally based on controlling voting
interests or in other special situations. Under this Interpretation,
certain previously unconsolidated entities (often referred to as
special purpose entities) will be included in the consolidated
financial statements of the primary beneficiary as a result of
non-voting financial interests, which are established through
contractual or other means. For variable interest entities created
after January 31, 2003, this Interpretation is effective immediately.
For any pre-existing variable interest entities, this interpretation is
effective beginning with the Companys fiscal 2004 first quarter. The
adoption of Interpretation No. 46 by the Company in the first quarter
of 2004 had no material impact on the Companys financial statements
for the quarter ended April 3, 2004.14.
    
    During the first quarter of 2004, the Company purchased and retired
$13.5 million of its Senior Notes due 2009 and $13.5 million of its
Senior Notes due 2007 in exchange for 3.9 million shares of Company
common stock. In addition, the Company issued 276,000 shares of common
stock in payment of $2.0 million of deferred purchase price
obligations.During the first quarter of 2003, the Company issued 642,000 shares of
common stock in payment of $2.0 million of deferred purchase price
obligations.15.
    
    Substantially all subsidiaries of CHB are guarantors and the
Company is a subordinated guarantor of the Senior Notes due 2007. In
addition, CHB is a guarantor and substantially all of its subsidiaries
are guarantors of the Senior Notes due 2009 on a basis subordinated to
their guarantees of the Senior Notes due 2007. The non-guarantor
subsidiaries include the Companys foreign operations, its development
companies and certain finance subsidiaries.Separate financial statements for each guarantor subsidiary are not
included in this filing because each guarantor subsidiary is 100%-owned
and the guarantees are full and unconditional, as well as joint and
several, for the Senior Notes due 2009 and for the Senior Notes due 2007.
There were no significant restrictions on the ability of the parent
company or any guarantor subsidiary to obtain funds from its subsidiaries
by dividend or loan.The following condensed consolidating financial information presents the
financial position, results of operations and cash flows of (i) the
Company (Parent) and CHB, as parents, as if they accounted for their
subsidiaries on the equity method; (ii) the guarantor subsidiaries, and
(iii) the non-guarantor subsidiaries. Page 10




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CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Three Months Ended April 3, 2004 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)Net sales
    
    $
    
    
    
    $
    59,495
    
    
    $
    191,154
    
    
    $
    9,036
    
    
    $
    (22,600
    )
    
    $
    237,085Cost of sales
    
    
    
    
    
    
    52,920
    
    
    
    164,635
    
    
    
    7,329
    
    
    
    (22,400
    )
    
    
    202,484Gross margin
    
    
    
    
    
    
    6,575
    
    
    
    26,519
    
    
    
    1,707
    
    
    
    (200
    )
    
    
    34,601Selling, general and
administrative expenses
    
    
    
    
    
    
    4,042
    
    
    
    30,952
    
    
    
    1,429
    
    
    
    
    
    
    
    36,423Mark-to-market charge for
common stock warrant
    
    
    5,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,100Loss on debt retirement
    
    
    462
    
    
    
    2,696
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    3,226Operating income (loss)
    
    
    (5,562
    )
    
    
    (163
    )
    
    
    (4,501
    )
    
    
    278
    
    
    
    (200
    )
    
    
    (10,148
    )Interest income
    
    
    2,068
    
    
    
    1,970
    
    
    
    321
    
    
    
    19
    
    
    
    (4,038
    )
    
    
    340Interest expense
    
    
    (2,068
    )
    
    
    (2,974
    )
    
    
    (4,366
    )
    
    
    (1
    )
    
    
    4,038
    
    
    
    (5,371
    )Income (loss) from continuing
operations before income taxes
    
    
    (5,562
    )
    
    
    (1,167
    )
    
    
    (8,546
    )
    
    
    296
    
    
    
    (200
    )
    
    
    (15,179
    )Income tax expense
    
    
    
    
    
    
    50
    
    
    
    50
    
    
    
    200
    
    
    
    
    
    
    
    300Income (loss) from
continuing operations
    
    
    (5,562
    )
    
    
    (1,217
    )
    
    
    (8,596
    )
    
    
    96
    
    
    
    (200
    )
    
    
    (15,479
    )Income (loss) from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    1,168
    
    
    
    (12
    )
    
    
    
    
    
    
    1,156Income (loss) before equity in
income
(loss) of consolidated subsidiaries
    
    
    (5,562
    )
    
    
    (1,217
    )
    
    
    (7,428
    )
    
    
    84
    
    
    
    (200
    )
    
    
    (14,323
    )Equity in income (loss) of
consolidated subsidiaries
    
    
    (8,561
    )
    
    
    (7,344
    )
    
    
    
    
    
    
    
    
    
    
    15,905
    
    
    
    Net income (loss)
    
    $
    (14,123
    )
    
    $
    (8,561
    )
    
    $
    (7,428
    )
    
    $
    84
    
    
    $
    15,705
    
    
    $
    (14,323
    )
 Page 11




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CHAMPION ENTERPRISES, INC.
Condensed Consolidating Balance Sheet
As of April 3, 2004 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)AssetsCurrent assetsCash and cash equivalents
    
    $
    
    
    
    $
    102,503
    
    
    $
    1,738
    
    
    $
    13,293
    
    
    $
    46
    
    
    $
    117,580Restricted cash
    
    
    
    
    
    
    6,422
    
    
    
    209
    
    
    
    
    
    
    
    
    
    
    
    6,631Accounts receivable, trade
    
    
    
    
    
    
    10,702
    
    
    
    27,248
    
    
    
    1,103
    
    
    
    (6,900
    )
    
    
    32,153Inventories
    
    
    
    
    
    
    13,776
    
    
    
    95,800
    
    
    
    2,641
    
    
    
    250
    
    
    
    112,467Other current assets
    
    
    
    
    
    
    9,072
    
    
    
    101,208
    
    
    
    524
    
    
    
    (92,757
    )
    
    
    18,047Total current assets
    
    
    
    
    
    
    142,475
    
    
    
    226,203
    
    
    
    17,561
    
    
    
    (99,361
    )
    
    
    286,878Property, plant and equipment, net
    
    
    
    
    
    
    27,518
    
    
    
    65,023
    
    
    
    2,023
    
    
    
    
    
    
    
    94,564Goodwill
    
    
    
    
    
    
    
    
    
    
    125,783
    
    
    
    739
    
    
    
    
    
    
    
    126,522Investment in consolidated
subsidiaries
    
    
    12,562
    
    
    
    310,840
    
    
    
    104,904
    
    
    
    6,865
    
    
    
    (435,171
    )
    
    
    Non-current assets of
discontinued operations
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Other non-current assets
    
    
    917
    
    
    
    3,875
    
    
    
    6,239
    
    
    
    8,718
    
    
    
    200
    
    
    
    19,949$
    13,479
    
    
    $
    484,708
    
    
    $
    528,174
    
    
    $
    35,906
    
    
    $
    (534,332
    )
    
    $
    527,935Liabilities, Redeemable
Convertible
Preferred Stock and Shareholders
EquityCurrent liabilitiesFloor plan payable
    
    $
    
    
    
    $
    
    
    
    $
    13,597
    
    
    $
    
    
    
    $
    
    
    
    $
    13,597Accounts payable
    
    
    
    
    
    
    8,017
    
    
    
    23,503
    
    
    
    1,712
    
    
    
    46
    
    
    
    33,278Accrued warranty obligations
    
    
    
    
    
    
    7,422
    
    
    
    30,615
    
    
    
    814
    
    
    
    
    
    
    
    38,851Accrued volume rebates
    
    
    
    
    
    
    7,294
    
    
    
    17,991
    
    
    
    2,134
    
    
    
    (100
    )
    
    
    27,319Current liabilities of
discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,652
    
    
    
    
    
    
    
    
    
    
    
    1,652Other current liabilities
    
    
    2,977
    
    
    
    118,984
    
    
    
    63,392
    
    
    
    502
    
    
    
    (92,517
    )
    
    
    93,338Total current liabilities
    
    
    2,977
    
    
    
    141,717
    
    
    
    150,750
    
    
    
    5,162
    
    
    
    (92,571
    )
    
    
    208,035Long-term liabilitiesLong-term debt
    
    
    100,215
    
    
    
    104,944
    
    
    
    7,472
    
    
    
    
    
    
    
    
    
    
    
    212,631Other long-term liabilities
    
    
    8,400
    
    
    
    22,845
    
    
    
    21,201
    
    
    
    131
    
    
    
    200
    
    
    
    52,777108,615
    
    
    
    127,789
    
    
    
    28,673
    
    
    
    131
    
    
    
    200
    
    
    
    265,408Intercompany balances
    
    
    (144,875
    )
    
    
    (17,045
    )
    
    
    494,688
    
    
    
    3,117
    
    
    
    (335,885
    )
    
    
    Redeemable convertible
preferred stock
    
    
    20,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,750Shareholders equityCommon stock
    
    
    70,094
    
    
    
    1
    
    
    
    59
    
    
    
    4
    
    
    
    (64
    )
    
    
    70,094Capital in excess of par value
    
    
    154,130
    
    
    
    613,336
    
    
    
    273,070
    
    
    
    34,832
    
    
    
    (921,238
    )
    
    
    154,130Accumulated deficit
    
    
    (198,212
    )
    
    
    (381,090
    )
    
    
    (419,066
    )
    
    
    (6,791
    )
    
    
    815,226
    
    
    
    (189,933
    )Accumulated other
comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (549
    )
    
    
    
    
    
    
    (549
    )Total shareholders equity
    
    
    26,012
    
    
    
    232,247
    
    
    
    (145,937
    )
    
    
    27,496
    
    
    
    (106,076
    )
    
    
    33,742$
    13,479
    
    
    $
    484,708
    
    
    $
    528,174
    
    
    $
    35,906
    
    
    $
    (534,332
    )
    
    $
    527,935
 Page 12




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CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended April 3, 2004 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)Net cash provided by (used for)
operating activities
    
    $
    7,042
    
    
    $
    (25,489
    )
    
    $
    (16,941
    )
    
    $
    199
    
    
    $
    186
    
    
    $
    (35,003
    )Net cash used for
discontinued
operations
    
    
    
    
    
    
    
    
    
    
    (353
    )
    
    
    (12
    )
    
    
    
    
    
    
    (365
    )Cash flows from investing activitiesAdditions to property plant and
equipment
    
    
    
    
    
    
    (422
    )
    
    
    (1,385
    )
    
    
    (73
    )
    
    
    
    
    
    
    (1,880
    )Investments in and advances to
unconsolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )
    
    
    
    
    
    
    (58
    )Investments in and advances
to consolidated subsidiaries
    
    
    (20,541
    )
    
    
    5,454
    
    
    
    14,976
    
    
    
    251
    
    
    
    (140
    )
    
    
    Proceeds on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    180
    
    
    
    43
    
    
    
    
    
    
    
    223Net cash provided by (used
for) investing activities
    
    
    (20,541
    )
    
    
    5,032
    
    
    
    13,771
    
    
    
    163
    
    
    
    (140
    )
    
    
    (1,715
    )Cash flows from financing activitiesDecrease in floor plan payable, net
    
    
    
    
    
    
    
    
    
    
    (497
    )
    
    
    (29
    )
    
    
    
    
    
    
    (526
    )Decrease in other long-term debt
    
    
    
    
    
    
    
    
    
    
    (5,888
    )
    
    
    
    
    
    
    
    
    
    
    (5,888
    )Decrease (increase) in restricted cash
    
    
    
    
    
    
    (6,112
    )
    
    
    7,822
    
    
    
    
    
    
    
    
    
    
    
    1,710Preferred stock issued, net
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,000Common stock issued, net
    
    
    1,611
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,611Dividends paid on preferred stock
    
    
    (112
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (112
    )Net cash provided by (used
for) financing activities
    
    
    13,499
    
    
    
    (6,112
    )
    
    
    1,437
    
    
    
    (29
    )
    
    
    
    
    
    
    8,795Net increase (decrease) in cash and
cash equivalents
    
    
    
    
    
    
    (26,569
    )
    
    
    (2,086
    )
    
    
    321
    
    
    
    46
    
    
    
    (28,288
    )Cash and cash equivalents at
beginning of period
    
    
    
    
    
    
    129,072
    
    
    
    3,824
    
    
    
    12,972
    
    
    
    
    
    
    
    145,868Cash and cash equivalents at
end of period
    
    $
    
    
    
    $
    102,503
    
    
    $
    1,738
    
    
    $
    13,293
    
    
    $
    46
    
    
    $
    117,580
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CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Three Months Ended March 29, 2003 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)Net sales
    
    $
    

    
    
    $
    49,142
    
    
    $
    213,140
    
    
    $
    8,515
    
    
    $
    (28,000
    )
    
    $
    242,797Cost of sales
    
    
    
    
    
    
    45,025
    
    
    
    186,264
    
    
    
    7,167
    
    
    
    (28,000
    )
    
    
    210,456Gross margin
    
    
    
    
    
    
    4,117
    
    
    
    26,876
    
    
    
    1,348
    
    
    
    
    
    
    
    32,341Selling, general and
administrative expenses
    
    
    
    
    
    
    10,878
    
    
    
    36,540
    
    
    
    1,245
    
    
    
    
    
    
    
    48,663Gain on debt retirement
    
    
    (5,425
    )
    
    
    (1,278
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,703
    )Operating income (loss)
    
    
    5,425
    
    
    
    (5,483
    )
    
    
    (9,664
    )
    
    
    103
    
    
    
    
    
    
    
    (9,619
    )Interest income
    
    
    3,106
    
    
    
    2,993
    
    
    
    526
    
    
    
    89
    
    
    
    (6,167
    )
    
    
    547Interest expense
    
    
    (3,106
    )
    
    
    (3,982
    )
    
    
    (6,750
    )
    
    
    (13
    )
    
    
    6,167
    
    
    
    (7,684
    )Income (loss) from continuing
operations before income
taxes
    
    
    5,425
    
    
    
    (6,472
    )
    
    
    (15,888
    )
    
    
    179
    
    
    
    
    
    
    
    (16,756
    )Income tax expense (benefit)
    
    
    
    
    
    
    
    
    
    
    (3,000
    )
    
    
    300
    
    
    
    
    
    
    
    (2,700
    )Income (loss) from
continuing operations
    
    
    5,425
    
    
    
    (6,472
    )
    
    
    (12,888
    )
    
    
    (121
    )
    
    
    
    
    
    
    (14,056
    )Income (loss) from
discontinued
operations
    
    
    
    
    
    
    
    
    
    
    (6,878
    )
    
    
    576
    
    
    
    (1,067
    )
    
    
    (7,369
    )Income (loss) before equity
in income (loss) of
consolidated subsidiaries
    
    
    5,425
    
    
    
    (6,472
    )
    
    
    (19,766
    )
    
    
    455
    
    
    
    (1,067
    )
    
    
    (21,425
    )Equity in income (loss) of
Consolidated subsidiaries
    
    
    (25,783
    )
    
    
    (19,311
    )
    
    
    
    
    
    
    
    
    
    
    45,094
    
    
    
    Net income (loss)
    
    $
    (20,358
    )
    
    $
    (25,783
    )
    
    $
    (19,766
    )
    
    $
    455
    
    
    $
    44,027
    
    
    $
    (21,425
    )
 Page 14




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##### Table of Contents



CHAMPION ENTERPRISES, INC.
Condensed Consolidating Balance Sheet
As of January 3, 2004 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)AssetsCurrent assetsCash and cash equivalents
    
    $
    
    
    
    $
    129,072
    
    
    $
    3,824
    
    
    $
    12,972
    
    
    $
    
    
    
    $
    145,868Restricted cash
    
    
    
    
    
    
    310
    
    
    
    8,031
    
    
    
    
    
    
    
    
    
    
    
    8,341Accounts receivable, trade
    
    
    
    
    
    
    5,952
    
    
    
    13,229
    
    
    
    892
    
    
    
    (6,300
    )
    
    
    13,773Inventories
    
    
    
    
    
    
    11,862
    
    
    
    85,182
    
    
    
    1,930
    
    
    
    (150
    )
    
    
    98,824Other current assets
    
    
    
    
    
    
    17,900
    
    
    
    92,872
    
    
    
    415
    
    
    
    (92,862
    )
    
    
    18,325Total current assets
    
    
    
    
    
    
    165,096
    
    
    
    203,138
    
    
    
    16,209
    
    
    
    (99,312
    )
    
    
    285,131Property, plant and equipment, net
    
    
    
    
    
    
    27,913
    
    
    
    65,831
    
    
    
    2,077
    
    
    
    
    
    
    
    95,821Goodwill
    
    
    
    
    
    
    
    
    
    
    125,783
    
    
    
    754
    
    
    
    
    
    
    
    126,537Investment in consolidated
subsidiaries
    
    
    18,441
    
    
    
    315,730
    
    
    
    110,039
    
    
    
    6,866
    
    
    
    (451,076
    )
    
    
    Non-current assets of
discontinued operations
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    68Other non-current assets
    
    
    1,095
    
    
    
    9,067
    
    
    
    1,809
    
    
    
    8,772
    
    
    
    
    
    
    
    20,743$
    19,536
    
    
    $
    517,806
    
    
    $
    506,668
    
    
    $
    34,678
    
    
    $
    (550,388
    )
    
    $
    528,300Liabilities, Redeemable Convertible
Preferred Stock and Shareholders
EquityCurrent liabilitiesFloor plan payable
    
    $
    
    
    
    $
    
    
    
    $
    14,094
    
    
    $
    29
    
    
    $
    
    
    
    $
    14,123Accounts payable
    
    
    
    
    
    
    6,774
    
    
    
    19,273
    
    
    
    777
    
    
    
    (100
    )
    
    
    26,724Accrued warranty obligations
    
    
    
    
    
    
    10,926
    
    
    
    28,858
    
    
    
    774
    
    
    
    
    
    
    
    40,558Accrued volume rebates
    
    
    
    
    
    
    9,580
    
    
    
    19,841
    
    
    
    1,872
    
    
    
    
    
    
    
    31,293Current liabilities of
discontinued operations
    
    
    
    
    
    
    
    
    
    
    3,177
    
    
    
    (4
    )
    
    
    
    
    
    
    3,173Other current liabilities
    
    
    1,078
    
    
    
    138,008
    
    
    
    48,764
    
    
    
    685
    
    
    
    (92,762
    )
    
    
    95,773Total current liabilities
    
    
    1,078
    
    
    
    165,288
    
    
    
    134,007
    
    
    
    4,133
    
    
    
    (92,862
    )
    
    
    211,644Long-term liabilitiesLong-term debt
    
    
    113,715
    
    
    
    118,444
    
    
    
    13,309
    
    
    
    
    
    
    
    
    
    
    
    245,468Other long-term liabilities
    
    
    3,300
    
    
    
    34,417
    
    
    
    9,659
    
    
    
    134
    
    
    
    
    
    
    
    47,510117,015
    
    
    
    152,861
    
    
    
    22,968
    
    
    
    134
    
    
    
    
    
    
    
    292,978Intercompany balances
    
    
    (113,635
    )
    
    
    (41,151
    )
    
    
    487,574
    
    
    
    2,959
    
    
    
    (335,747
    )
    
    
    Redeemable convertible
preferred stock
    
    
    8,689
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,689Shareholders equityCommon stock
    
    
    65,470
    
    
    
    1
    
    
    
    59
    
    
    
    4
    
    
    
    (64
    )
    
    
    65,470Capital in excess of par value
    
    
    125,386
    
    
    
    613,336
    
    
    
    273,160
    
    
    
    34,740
    
    
    
    (921,236
    )
    
    
    125,386Accumulated deficit
    
    
    (184,467
    )
    
    
    (372,529
    )
    
    
    (411,100
    )
    
    
    (6,875
    )
    
    
    799,521
    
    
    
    (175,450
    )Accumulated other
comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (417
    )
    
    
    
    
    
    
    (417
    )Total shareholders equity
    
    
    6,389
    
    
    
    240,808
    
    
    
    (137,881
    )
    
    
    27,452
    
    
    
    (121,779
    )
    
    
    14,989$
    19,536
    
    
    $
    517,806
    
    
    $
    506,668
    
    
    $
    34,678
    
    
    $
    (550,388
    )
    
    $
    528,300
 Page 15




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##### Table of Contents



CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 29, 2003 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)Net cash provided by (used for)
continuing operating activities
    
    $
    5,115
    
    
    $
    4,419
    
    
    $
    (37,806
    )
    
    $
    (232
    )
    
    $
    (59
    )
    
    $
    (28,563
    )Net cash used for discontinued
operations
    
    
    
    
    
    
    
    
    
    
    (2,317
    )
    
    
    (3,655
    )
    
    
    59
    
    
    
    (5,913
    )Cash flows from investing activitiesAcquisition deferred purchase price
payments
    
    
    
    
    
    
    
    
    
    
    (2,500
    )
    
    
    
    
    
    
    
    
    
    
    (2,500
    )Additions to property, plant and
equipment
    
    
    
    
    
    
    (146
    )
    
    
    (1,054
    )
    
    
    
    
    
    
    
    
    
    
    (1,200
    )Investments in and advances to
unconsolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (202
    )
    
    
    
    
    
    
    (202
    )Investments in and advances
to consolidated subsidiaries
    
    
    2,390
    
    
    
    (45,417
    )
    
    
    42,211
    
    
    
    816
    
    
    
    
    
    
    
    Proceeds on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    2,242
    
    
    
    1,600
    
    
    
    
    
    
    
    3,842Net cash provided by (used
for) investing activities
    
    
    2,390
    
    
    
    (45,563
    )
    
    
    40,899
    
    
    
    2,214
    
    
    
    
    
    
    
    (60
    )Cash flows from financing activitiesIncrease (decrease) in
floor plan payable, net
    
    
    
    
    
    
    
    
    
    
    106
    
    
    
    (76
    )
    
    
    
    
    
    
    30Decrease in other long-term debt
    
    
    
    
    
    
    
    
    
    
    (103
    )
    
    
    (43
    )
    
    
    
    
    
    
    (146
    )Purchase of Senior Notes
    
    
    (7,323
    )
    
    
    (13,231
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,554
    )Increase in deferred financing costs
    
    
    
    
    
    
    (1,783
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,783
    )Decrease in restricted cash
    
    
    
    
    
    
    49,174
    
    
    
    550
    
    
    
    505
    
    
    
    
    
    
    
    50,229Common stock issued, net
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300Dividends paid on preferred stock
    
    
    (482
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (482
    )Net cash provided by (used
for) financing activities
    
    
    (7,505
    )
    
    
    34,160
    
    
    
    553
    
    
    
    386
    
    
    
    
    
    
    
    27,594Net increase (decrease) in
cash and cash equivalents
    
    
    
    
    
    
    (6,984
    )
    
    
    1,329
    
    
    
    (1,287
    )
    
    
    
    
    
    
    (6,942
    )Cash and cash equivalents at
beginning of period
    
    
    
    
    
    
    68,628
    
    
    
    (1,913
    )
    
    
    10,666
    
    
    
    
    
    
    
    77,381Cash and cash equivalents at
end of period
    
    $
    
    
    
    $
    61,644
    
    
    $
    (584
    )
    
    $
    9,379
    
    
    $
    
    
    
    $
    70,439
 Page 16




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##### Table of Contents



Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations. CHAMPION ENTERPRISES, INC. Results of Operations
Three Months Ended April 3, 2004
versus the Three Months Ended March 29, 2003 Overview We are a leading producer of manufactured housing in the U.S. As of April
3, 2004, we operated 30 homebuilding facilities in 14 states and two provinces
in western Canada. At April 3, 2004, our manufactured homes were sold through
78 Company-owned sales centers in 21 states, through approximately 2,400
independent sales centers across the U.S. and western Canada and directly to an
estimated 500 builders and developers. Approximately 760 of the independent
retailer locations were members of our Champion Home Centers (CHC) retail
distribution network. Our results for the first quarter of 2004 showed improvements in the
manufacturing and retail segments as compared to results in the first quarter
of 2003, largely as a result of our restructuring actions in 2003 and prior
years to eliminate under-performing operations and rationalize our operations
and capacity for industry conditions. Since the industry downturn began in
mid-1999, we have closed and consolidated 38 manufacturing facilities,
including seven in 2003. Since mid-2000 we have closed 276 retail sales
locations, including 40 in 2003. During the quarter ended April 3, 2004, we continued to focus on improving
our financial position and reducing debt. During the quarter we purchased and
retired $27.0 million of our Senior Notes in exchange for payments of our
common stock totaling 3.9 million shares, resulting in a net pretax loss of
$3.2 million and also paid off a $5.7 million industrial revenue bond. Although our loss from continuing operations in the first quarter of 2004
increased by $1.4 million over the first quarter of 2003, manufacturing and
retail segment income improved by $11.5 million and $2.4 million, respectively,
and net interest expense was reduced by $2.1 million. First quarter 2004
results were adversely affected by a $5.1 million mark-to-market charge related
to our outstanding common stock warrant and by the loss on debt retirement of
$3.2 million versus a gain of $6.7 million in the first quarter of 2003. During the first quarter of 2004, our sales and operating results
continued to be affected by challenging industry conditions including limited
availability of consumer financing and floor plan inventory financing and high
sales levels of homes repossessed from consumers. Industry retail sales and
manufacturing shipments of new homes declined as a result of reduced levels of
available financing and the high number of repossessed homes that were in the
market. According to data reported by the Institute for Building Technology
and Safety, U.S. industry manufacturing shipments of HUD code homes for the
first two months of 2004 declined 12.5% from shipments in the comparable 2003
period. U.S. industry manufacturing shipments of HUD code homes in the full
year of 2003 were 62% lower than in 1999. The industrys U.S. manufacturing shipments and retail sales of new homes
in 2004 are expected to suffer from the factors described above. We expect our
manufacturing and retail sales volumes and margins to continue to be affected
until competitively priced consumer financing is more readily available,
consumer repossession levels decline and retail sales of new homes increase.
We are focusing on matching our manufacturing capacity and number of
Company-owned retail sales centers to industry conditions, improving or
eliminating under-performing manufacturing facilities and retail sales centers,
improving independent and Company-owned retailer inventory turnover, rewarding
independent retailers for retail selling of homes purchased from our
manufacturers and promoting sound business practices at our independent
retailers. We are seeking additional sources of consumer lending for our
retailers. We also seek to expand our manufacturers distribution network. We
continually review our manufacturing capacity and the number and locations of
Company-owned retail sales centers and will make further adjustments as deemed
necessary. Page 17




---



##### Table of Contents



Consolidated Results Three Months EndedApril 3,
    
    March 29,
    
    %2004
    
    2003
    
    Change(Dollars in millions)Net salesManufacturing
    
    $
    209.9
    
    
    $
    209.2
    
    
    
    Retail
    
    
    49.8
    
    
    
    61.1
    
    
    
    (18
    %)Less: Intercompany
    
    
    (22.6
    )
    
    
    (27.5
    )Total net sales
    
    $
    237.1
    
    
    $
    242.8
    
    
    
    (2
    %)Gross margin
    
    $
    34.6
    
    
    $
    32.4
    
    
    
    7
    %Selling, general and administrative expenses
(SG&A)
    
    
    36.4
    
    
    
    48.7
    
    
    
    (25
    %)Mark to market charge for common stock warrant
    
    
    5.1
    
    
    
    Loss (gain) on debt retirement
    
    
    3.2
    
    
    
    (6.7
    )Operating loss
    
    $
    (10.1
    )
    
    $
    (9.6
    )
    
    
    (5
    %)As a percent of salesGross margin
    
    
    14.6
    %
    
    
    13.3
    %SG&A
    
    
    15.4
    %
    
    
    20.0
    %Operating loss
    
    
    (4.3
    %)
    
    
    (4.0
    %)
 Net sales for the quarter ended April 3, 2004 decreased from the
comparable period in 2003 due primarily to operating fewer retail sales centers
and manufacturing facilities and decreasing manufacturing and retail sales
volumes, partially offset by sales price increases in both segments. At April
3, 2004, we were operating 30 manufacturing facilities and 78 sales centers
compared to 36 manufacturing facilities and 118 sales centers at March 29,
2003. Sales in the first three months of 2004 and 2003 were affected by
industry conditions including limited availability of consumer financing and
floor plan inventory financing and continuing high sales levels of consumer
repossessions. Gross margin for the three months ended April 3, 2004 increased $2.2
million from the comparable quarter of 2003, due primarily to reduced
manufacturing overhead costs resulting from the closure of under-performing
plants in 2003, partially offset by lower retail gross margin from lower retail
sales. First quarter of 2004 SG&A declined by $12.3 million or 25% versus the
first quarter of 2003 primarily due to the operation of 17% fewer manufacturing
facilities and 34% fewer sales centers. During the first quarter of 2004, a $5.1 million mark-to-market charge was
recorded for the change in estimated fair value of an outstanding common stock
warrant for 2.2 million shares as a result of a $4.04 increase in our common
stock price. Also during the first quarter of 2004, operating results included a loss on
extinguishment of debt totaling $3.2 million for the purchase and retirement of
$13.5 million of Senior Notes due 2009 and $13.5 million of Senior Notes due
2007 in exchange for 3.9 million shares of Company common stock. During the
first quarter of 2003, we purchased and retired $12.9 million of Senior Notes
due 2009 and $15.0 of Senior Notes due 2007 for cash totaling approximately
$20.6 million resulting in a gain of $6.7 million. Manufacturing Operations We evaluate the performance of our manufacturing segment based on earnings
(loss) before interest, income taxes and general corporate expenses (EBIT). Three Months EndedApril 3,
    
    March 29,
    
    %2004
    
    2003
    
    ChangeNet sales (in millions)
    
    $
    209.9
    
    
    $
    209.2
    
    
    
    EBIT (in millions)
    
    $
    4.7
    
    
    $
    (6.8
    )
    
    
    168
    %EBIT margin %
    
    
    2.2
    %
    
    
    (3.3
    %)Homes sold
    
    
    5,005
    
    
    
    5,671
    
    
    
    (12
    %)Floors sold
    
    
    9,724
    
    
    
    10,718
    
    
    
    (9
    %)Multi-section mix
    
    
    87
    %
    
    
    84
    %Average home price
    
    $
    40,500
    
    
    $
    35,500
    
    
    
    14
    %Manufacturing facilities at period end
    
    
    30
    
    
    
    36
    
    
    
    (17
    %)
 Page 18




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##### Table of Contents



Manufacturing net sales for the quarter ended April 3, 2004 increased
slightly compared to the first quarter of 2003 resulting from a 14% increase in
the average home selling price partially offset by selling 12% fewer homes. We
were operating 17% fewer manufacturing facilities at the end of the first
quarter of 2004 versus 2003. For the quarter ended April 3, 2004, our
shipments of HUD code homes declined 18% and our shipments of non-HUD code
homes, consisting primarily of modular and Canadian code homes, increased by
34% as compared to shipments in the first quarter of 2003. Year-to-date
manufacturing sales volume was affected by operating fewer manufacturing
facilities, a reduced number of Company-owned retail sales centers and industry
conditions, including the effects of limited availability of consumer financing
and floor plan inventory financing and high sales levels of homes repossessed
from consumers. Average manufacturing selling prices increased in the 2004
first quarter as compared to the year ago quarter as a result of selling a
greater proportion of multi-section homes and modular homes and to offset
rising material costs. Manufacturing EBIT in the first quarter of 2004 increased by $11.5 million
over the first quarter of 2003 on comparable sales while operating seven fewer
plants. Manufacturing gross margin improved by $5.7 million primarily due to
reduced manufacturing overhead costs resulting from the closure of
under-performing plants in 2003. Manufacturing SG&A was reduced by $5.8
million due to operating fewer plants in 2004, and inclusion of a $3.2 million
charge in 2003 to increase repurchase reserves offset partially by a 2003 gain
of $0.9 million from the sale of a closed facility. Although retailer orders can be cancelled at any time without penalty, and
unfilled orders are not necessarily an indication of future business, our
unfilled manufacturing orders for homes at April 3, 2004 totaled approximately
$50 million at the 30 plants operated, compared to $33 million at 36 plants at
March 29, 2003. Retail Operations We evaluate the performance of our retail segment based on EBIT. Three Months EndedApril 3,
    
    March 29,
    
    %2004
    
    2003
    
    ChangeNet sales (in millions)
    
    $
    49.8
    
    
    $
    61.1
    
    
    
    (18
    %)EBIT (in millions)
    
    $
    (0.3
    )
    
    $
    (2.7
    )
    
    
    91
    %EBIT margin %
    
    
    (0.5
    %)
    
    
    (4.4
    %)New homes sold
    
    
    482
    
    
    
    777
    
    
    
    (38
    %)Pre-owned homes sold
    
    
    304
    
    
    
    308
    
    
    
    (1
    %)Total homes sold
    
    
    786
    
    
    
    1,085
    
    
    
    (28
    %)% Champion-produced new homes sold
    
    
    91
    %
    
    
    97
    %New home multi-section mix
    
    
    92
    %
    
    
    83
    %Average new home price
    
    $
    93,500
    
    
    $
    72,400
    
    
    
    29
    %Average number of new homes sold per
sales center per month
    
    
    2.1
    
    
    
    2.2
    
    
    
    (5
    %)Average number of total homes sold per
sales center per month
    
    
    3.4
    
    
    
    3.1
    
    
    
    10
    %Average number of new homes in inventory
per sales center at period end
    
    
    13.2
    
    
    
    13.1Sales centers at period end
    
    
    78
    
    
    
    118
    
    
    
    (34
    %)
 Retail sales for the quarter ended April 3, 2004 decreased 18% versus the
comparable period last year due to operating fewer sales centers, partially
offset by a higher average selling price per home. During the quarter, we
operated an average of 78 sales centers, 34% lower than the average of 118
sales centers operated in the first quarter of 2003. The average number of
total homes sold per sales center improved as the increase in sales of
pre-owned homes more than offset the slight decrease in sales of new homes.
The 29% increase in average new home selling price resulted from the sale of a
greater proportion of larger, higher-priced multi-section homes, including
modular homes, and homes with more add-ons, improvements and amenities.
Additionally, our retail operations have increased selling prices to offset
increasing prices from the manufacturers due to rising material costs. Retail EBIT for the three months ended April 3, 2004 improved by $2.4
million compared to the same period in 2003 primarily due to reduced SG&A from
operating fewer sales centers in 2004 partially offset by less gross profit on
reduced sales. Page 19




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Discontinued Operations In 2003 we exited our consumer finance business. Income from discontinued
operations for the quarter ended April 3, 2004 consisted primarily of a
favorable adjustment from the settlement of remaining contractual obligations.
Losses for the three months ended March 29, 2003 consisted primarily of a $5.4
million charge to value our finance loans receivable at the lower of cost or
market as well as operating losses. Interest Expense Interest expense decreased by $2.3 million for the three months ended
April 3, 2004 versus the comparable period in 2003 due to reduced debt
outstanding under our Senior Notes due 2007 and 2009 as a result of debt
retirement in 2004 and 2003. Income Taxes We currently provide a 100% valuation allowance for our deferred tax
assets. Deferred tax assets will continue to require a 100% valuation
allowance until we have demonstrated their realizability through sustained
profitability and/or from other factors. Current federal income tax
regulations provide for a two-year carryback of net operating losses. We have
no taxable income available during this period and, as a result, any net
operating losses incurred in 2004 and 2003 will become tax loss carryforwards
that will be available to offset certain future taxable income. The effective
tax rate for the three months ended April 3, 2004 differed from the 35% federal
statutory rate primarily because of this 100% valuation allowance for deferred
taxes which offsets any deferred tax benefits resulting from tax loss
carryforwards in the period. During the quarter ended March 29, 2003, a tax benefit of $3.0 million was
recorded for the related reduction in the 100% valuation allowance resulting
from refunds totaling $63.5 million exceeding the estimate made as of December
28, 2002 by approximately $3.0 million. Contingent Repurchase Obligations We are contingently obligated under repurchase agreements with certain
lending institutions that provide floor plan financing to our independent
retailers. We use information, which is generally available only from the
primary national floor plan lenders, to estimate our contingent repurchase
obligations. With the exit of certain national floor plan lenders from the
industry and the shift to alternative inventory financing sources, this
estimate of our contingent repurchase obligation may not be precise. At April
3, 2004 we estimate our contingent repurchase obligation was approximately $230
million, without reduction for the resale value of the homes. As of April 3,
2004, our largest independent retailer, a nationwide retailer, had
approximately $12.1 million of inventory subject to repurchase for up to 30
months from date of invoice. As of April 3, 2004 our next 24 largest
independent retailers had an aggregate of approximately $40.9 million of
inventory subject to repurchase for up to 24 months from date of invoice, with
individual amounts ranging from approximately $0.7 million to $5.4 million per
retailer. For the three months ended April 3, 2004, we paid $0.4 million to
repurchase 13 homes and recorded related losses of $0.1 million. In the same
period last year, we paid $1.7 million and incurred losses of $0.3 million
related to the repurchase of 48 homes. Our estimated contingent repurchase
obligation has declined during the industry downturn due to reduced sales and
inventory at our independent retailers and due to an estimated 55% of
independent retailer inventory being financed away from the primary national
floor plan lenders. We do not always enter into repurchase agreements with
these alternative floor plan lenders. During the first quarter of 2003,
wholesale repurchase reserves were increased $3.2 million in connection with
the extension of repurchase terms to 24 months for certain national floor plan
lenders and for the negative effects of market conditions on our largest
independent retailer. During the second quarter of 2003, we agreed to extend
both repurchase terms and the timing of required principal curtailment payments
by this independent retailer to certain floor plan lenders resulting in a
slightly higher repurchase exposure to us for a longer period of time. Liquidity and Capital Resources Unrestricted cash balances totaled $117.6 million at April 3, 2004. For
the three months ended April 3, 2004, net cash of $35.0 million was used for
operating activities, including $25.4 million used to increase working capital.
During the quarter, accounts receivable increased by $18.4 million,
inventories increased by $13.6 million and accounts payable increased by $6.6
million as a result of typical seasonal factors in our business leading into
the beginning of our traditionally stronger selling months. Cash provided
during the quarter included $12.0 million from issuance of convertible
preferred stock, $1.6 million from stock option exercises and $1.7 million from
decreases in restricted cash balances. Cash uses during the quarter included
$1.9 million for capital expenditures and $5.9 million to reduce long-term
debt, primarily for paying off an industrial revenue bond. Also during the Page 20




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quarter we purchased and retired $13.5 million of our Senior Notes due 2009 and
$13.5 million of our Senior Notes due 2007 in exchange for 3.9 million shares
of the Companys common stock. We have a committed $75 million revolving credit facility for letters of
credit and general corporate purposes which expires in January 2006.
Availability under this credit facility is limited to a borrowing base, and is
collateralized by accounts receivable, inventories, property, plant and
equipment, cash and other assets. As of April 3, 2004, facility availability
was $61.0 million which was entirely used for letters of credit. We expect to
continue to utilize availability under this facility principally for letters of
credit. The facility contains financial covenants that are required in the
event that our liquidity, as defined, falls below $35 million. These covenants
include required earnings, as defined, of $45.2 million and a required ratio of
earnings to fixed charges, as defined, of 1.0 to 1 for each 12 month period
ending on a fiscal quarter. For the 12 months ended April 3, 2004, our earnings, as defined, were $4.6
million and our ratio of earnings to fixed charges was 0.1 to 1. At April 3,
2004 our liquidity, as defined, was $110.2 million, which was in excess of $35
million such that these financial covenants were not in effect. We expect over
the next 12 months to maintain liquidity at or in excess of the $35 million
threshold. Thus, while our operating results may continue to be below the
required levels of earnings and ratios of earnings to fixed charges, these
covenant requirements are not expected to be in effect. We continuously evaluate the most efficient use of our capital, including
without limitation, purchasing, refinancing or otherwise retiring our
outstanding indebtedness, debt exchanges, restructuring of obligations,
financings, and issuances of securities, whether in the open market or by other
means and to the extent permitted by our financing arrangements. We will
evaluate any such transactions in light of then existing market conditions.
The amounts involved in any such transactions, individually or in the
aggregate, may be material. The debt incurrence covenant in the indenture governing the Senior Notes
due 2007 currently limits additional debt to: i) a working capital line of
credit up to a borrowing base equal to 60% of otherwise unencumbered
inventories and 75% of otherwise unencumbered accounts receivable; ii)
warehouse financing meeting certain parameters up to $200 million; iii) other
debt up to $30 million; and iv) ordinary course indebtedness and contingent
obligations that includes non-speculative hedging obligations, floor plan
financing, letters of credit, surety bonds, bankers acceptances, repurchase
agreements related to retailer floor plan financing and guaranties of
additional debt otherwise permitted to be incurred. The resulting effect at
April 3, 2004, when combined with limits in our Senior Notes due 2009, was a
working capital line of credit limit of approximately $79 million of which no
more than approximately $79 million of cash borrowings could be secured debt. We have two floor plan facilities with total availability of $21 million,
of which $13.6 million was outstanding at April 3, 2004. A $15 million floor
plan financing facility contains a covenant requiring the maintenance of $35
million of liquidity, as defined in the facility, at each fiscal month end. If
we were to be out of compliance with this covenant, the lender could terminate
the credit line and cause the debt to become immediately due and payable. As
of April 3, 2004, we had approximately $10.1 million outstanding under this
facility and were in compliance with the covenant. We expect to spend less than $10 million in 2004 on capital expenditures.
We do not plan to pay cash dividends on our common stock in the near term. Contingent liabilities and obligations We had significant contingent liabilities and obligations at April 3,
2004, including estimated wholesale repurchase obligations totaling
approximately $230 million (without reduction for the resale value of the
homes), surety bonds and letters of credit totaling $95.5 million and
guarantees by certain of our consolidated subsidiaries of $5.6 million of debt
of unconsolidated subsidiaries. We have provided various representations, warranties and other standard
indemnifications in the ordinary course of our business, in agreements to
acquire and sell business assets and in financing arrangements. We are also
subject to various legal proceedings and claims which arise in the ordinary
course of our business. Management believes the ultimate liability with respect to these
contingent liabilities and obligations will not have a material effect on our
financial position, results of operations or cash flows. Summary of liquidity and capital resources At April 3, 2004, our unrestricted cash balances totaled $117.6 million
and we had unused availability of Page 21




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$7.4 million under our two floor plan
facilities and no unused availability under our $75 million credit facility.
Total cash available from these sources was approximately $125 million. In the
first quarter of 2004, continuing operating activities used cash of $35.0 million, and cash used for capital
expenditures was $1.9 million. Currently, we expect annual cash flow from
operating activities for 2004 and 2005 to be adequate to fund the operations
and capital expenditures of the Company. Annual capital expenditures are
currently expected to be less than $10 million in 2004 and 2005. In addition,
we have less than $2 million of scheduled cash payments for debt due in the
remainder of 2004 and 2005. Therefore, the level of cash availability is
projected to be substantially in excess of cash needed to operate our
businesses through 2005. In the event one or more of our capital resources
were to become unavailable, we would revise our operating strategies
accordingly. Critical Accounting Policies The preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) 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.
Assumptions and estimates of future earnings and cash flow are used in the
periodic analyses of the recoverability of goodwill, deferred tax assets, and
property, plant and equipment. Historical experience and trends are used to
estimate reserves, including reserves for self-insured risks, warranty costs
and wholesale repurchase losses. Following is a description of each accounting
policy requiring significant judgments and estimates: Reserves for Self-Insured Risks We are self-insured for a significant portion of our workers
compensation, general and products liability, auto liability, health and
property insurance. Under our current self-insurance programs, we are
generally responsible for up to $500,000 per claim for workers compensation
($750,000 per claim in California) and automobile liability claims, up to $1.5
million per claim for product liability and general liability claims and up to
$2.0 million per claim for property insurance claims including business
interruption losses. We maintain excess liability and property insurance with
outside insurance carriers to minimize our risks related to catastrophic
claims. Under our current self-insurance program we are responsible for 100%
of health insurance claims. Estimated insurance costs are accrued for incurred
claims and claims incurred but not yet reported. Factors considered in
estimating our insurance reserves are the nature of outstanding claims
including the severity of the claims, estimated costs to settle existing
claims, loss history, and inflation, as well as estimates provided by our
outside insurance broker and carrier, and third party actuaries. Significant
changes in the factors described above could have a material adverse impact on
future operating results. Warranty Reserves Our manufacturing operations generally provide the retail homebuyer with a
twelve-month warranty. Estimated warranty costs are accrued as cost of sales
at the time of sale. Our warranty reserve is based on estimates of the amounts
necessary to settle existing and future claims on homes sold by the
manufacturing operations as of the balance sheet date. Factors used to
calculate the warranty obligation are the estimated number of homes still under
warranty, including homes in retailer inventories and homes purchased by
consumers still within the twelve-month warranty period, and the historical
average costs incurred to service a home. Significant changes in these factors
could have a material adverse impact on future operating results. Property, Plant and Equipment The recoverability of property, plant and equipment is evaluated whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable, primarily based on estimated selling prices,
appraised values or projected undiscounted cash flows. Our cash flow estimates
are based on historical results adjusted for estimated current industry trends,
the economy and operating conditions. Additionally, we use estimates of fair
market values to establish impairment reserves for permanently closed
facilities that are held for sale. Past evaluations of closed facilities have
resulted in significant impairment charges. Significant changes in these
estimates and assumptions could result in additional impairment charges in the
future. Income Taxes: Deferred Tax Assets and Income Tax Refunds Deferred tax assets and liabilities are determined based on temporary
differences between the financial statement balances 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. We periodically evaluate the
realizability of our deferred tax assets based on the requirements established
in SFAS No. 109, Accounting for Income Taxes, which requires the recording of
a Page 22




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valuation allowance when it is more likely than not that some portion or all
of the deferred tax assets will not be realized. We incurred pretax losses in
2000 through 2003. Additionally, the manufactured housing industry continues
to be challenged by limited availability of consumer and floor plan financing
and high industry consumer
repossession levels resulting in a continued decline in manufacturing
shipments. We currently have a 100% valuation allowance against our deferred
tax assets. Deferred tax assets will continue to require a 100% valuation
allowance until the Company has demonstrated their realizability through
sustained profitability and/or from other factors. The valuation allowance
will be reversed to income in future periods to the extent that the related
deferred tax assets are realized as a reduction of taxes otherwise payable on
any future earnings or a portion or all of the valuation allowance is otherwise
no longer required. Goodwill We test for goodwill impairment in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets. We evaluate each reporting units fair value
versus its carrying value annually as of the end of each fiscal year or more
frequently if events or changes in circumstances indicate that the carrying
value may exceed the fair value of the reporting unit. When estimating a
units fair value, we calculate the present value of future cash flows based on
forecasted sales volumes, the number of retail sales centers and homebuilding
facilities in operation, current industry and economic conditions, historical
results and inflation. Past evaluations of goodwill have resulted in
significant impairment charges. Significant changes in the estimates and
assumptions used in calculating the fair value of goodwill or differences
between estimates and actual results could result in additional impairment
charges in the future. Wholesale Repurchase Reserves The majority of our manufacturing sales to independent retailers are made
pursuant to repurchase agreements with the providers of floor plan financing.
Potential losses under repurchase obligations are determined by calculating the
difference between the repurchase price and the estimated net resale value of
the homes. Probable losses under repurchase agreements are accrued based on
the historical number of homes repurchased, the cost of such repurchases and
the historical losses incurred as well as the current inventory levels held at
our independent retailers. In addition, we monitor the risks associated with
our independent retailers and consider these risks in our evaluation of the
wholesale repurchase reserves. Significant changes in these factors could have
a material adverse impact on future operating results. Impact of Recently Issued Accounting Pronouncements For information regarding the impact of recently issued accounting
pronouncements, see Note 13 of Notes to Consolidated Financial Statements in
Item 1 of this Report. Forward Looking Statements Certain statements contained in this Report, including our plans and
beliefs regarding availability of liquidity and financing, anticipated capital
expenditures, outlook for the manufactured housing industry in particular and
the economy in general, availability of wholesale and consumer financing and
characterization of and our ability to control our contingent liabilities,
could be construed to be forward looking statements within the meaning of the
Securities Exchange Act of 1934. In addition, we or persons acting on our
behalf may from time to time publish or communicate other items that could also
be construed to be forward looking statements. Statements of this sort are or
will be based on our estimates, assumptions and projections, and are subject to
risks and uncertainties, including those specifically listed below that could
cause actual results to differ materially from those included in the forward
looking statements. We do not undertake to update our forward looking
statements or risk factors to reflect future events or circumstances. The
following risk factors could materially affect our operating results or
financial condition. Significant leverage  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 1 of this Report, we have a significant amount of debt outstanding,
which consists primarily of long-term debt. This indebtedness could, among
other things: Page 23




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##### Table of Contents




    
    limit our ability to obtain future financing for working
capital, capital expenditures, acquisitions, debt service
requirements, surety bonds or other requirements;  
    
    require us to dedicate a substantial portion of our cash
flows from operations to the payment of principal
and interest on our indebtedness and reduce our ability to use our
cash flows for other purposes;  
    
    limit our flexibility in planning for, or reacting to,
changes in our business and the manufactured housing industry;  
    
    place us at a competitive disadvantage to competitors with
less indebtedness; and  
    
    make us more vulnerable in the event of a continued downturn
in our business or in general economic conditions. In addition, our future cash flows may be insufficient to meet our debt
service and other obligations. Our business may not generate cash flows from
operations in amounts sufficient to enable us 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 need to refinance all or a portion of our debt on or before
maturity. We may not be able to refinance any of our debt on commercially
reasonable terms or at all. If we are unable to refinance our debt
obligations, we could be in default under our debt agreements and our lenders
could accelerate our debt or take other actions which could restrict our
operations. General industry conditions  As a result of the continued downturn in the
manufactured housing industry, we have experienced a decline in sales and
incurred operating losses and costs for the closures or consolidations of
operations, fixed asset impairment charges and goodwill impairment charges. If
industry conditions continue to deteriorate, our sales could decline further
and our operating results and cash flows could suffer. Since mid-1999 the manufactured housing industry has experienced declining
manufacturing shipments and retail sales, tightened consumer credit standards,
reduced availability of consumer financing, high levels of homes repossessed
from consumers, higher interest rates on manufactured housing loans relative to
those generally available to site-built homebuyers, a reduced number of
consumer and floor plan lenders and reduced floor plan availability. We
estimate approximately half of the industry retail sales locations and
manufacturing facilities have closed since mid-1999 as a result of these
industry conditions. Since the beginning of the industry downturn, we have
closed a significant number of homebuilding facilities and retail sales
locations in an attempt to return to profitability. Since 2000, we have
reported significant net losses including goodwill impairment charges, a
valuation allowance of 100% of our deferred tax assets and restructuring
charges, which are each discussed in more detail in Item 7 of our Form 10-K for
2003. If the current downturn in the industry continues, our sales could
decline further, our operating results and cash flows could suffer and we may
incur further losses including additional costs for the closures or
consolidations of existing operations, fixed asset impairment charges and
goodwill impairment charges. Common stock and Senior Notes values  Our common stock price has been
volatile and may continue to be volatile given current industry and economic
conditions. Our Senior Notes have traded at significant discounts to face
value and may in the future trade at discounts. Our Companys closing common stock price was $27.38 on December 31, 1998,
before the industry downturn began in mid-1999. The trading value per share of
our stock has ranged from $1.65 to $11.47 during 2003 and the first three
months of 2004. Additionally, our two issuances of Senior Notes have traded at
discounts to their respective face values. The market prices of our common
stock and Senior Notes are affected by many factors including: general economic
and market conditions, interest rates, current manufactured housing industry
forecasts, Champions and our competitors operating results, our ability to
pay our debt obligations, consumer and wholesale financing availability, the
markets perception of our strategies and the overall market fluctuations
unrelated to our Company or the manufactured housing industry. All of these
factors may adversely impact the market prices of our common stock and Senior
Notes in the future. Fluctuations in operating results  The cyclical and seasonal nature of
the manufactured housing market has caused our sales and operating results to
fluctuate. We expect these fluctuations to continue in the future, which could
result in operating losses during downturns. Page 24




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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  Tightened credit standards and loan
terms, curtailed lending activity, and increased interest rates among consumer
lenders have reduced our sales. If consumer financing were to become further
curtailed or unavailable, our sales could decline further 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. Since 1999, consumer
lenders have tightened the credit underwriting standards and loan terms and

increased interest rates for loans to purchase manufactured homes, which have
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 become further
curtailed or unavailable, we would likely experience further retail and
manufacturing sales declines and our operating results and cash flows would
suffer. Floor plan financing availability  Reduced number of floor plan lenders
and reduced amount of credit available to manufactured housing retailers may
result in lower retail inventory levels as well as fewer sales centers. As a
result, our manufacturing sales could decline further and our operating results
and cash flows could suffer. Independent retailers of our manufactured homes generally finance their
inventory purchases with floor plan financing provided by lending institutions.
The number of floor plan lenders and their lending limits affect the
availability of wholesale financing to retailers. During the past five years
several major national floor plan lenders have exited the industry or curtailed
their floor plan operations. The remaining floor plan lenders or new floor
plan lenders entering the industry may change the terms of their loans as
compared to previously available terms for such floor plan loans. These
changes could include higher interest rates, lower advance rates, earlier or
more significant principal payments or longer repurchase periods for the
manufacturers. In addition, weaker retailers may not qualify for floor plan
financing at all. 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. Retail sales
to consumers at our independent retailers could also be affected by reduced
retail inventory levels or a reduced number of sales centers. 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. Page 25




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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 April 3, 2004 was
significant and includes significant contingent repurchase obligations relating
to our largest independent retail customers. For additional discussion see
Contingent Repurchase Obligations in Item 2 of this Report and in Item 7 of
our Form 10-K for 2003. 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 April 3, 2004, we also had contingent debt obligations related to
surety bonds and letters of credit. In addition, we had guarantees by certain
of our consolidated subsidiaries of debt of unconsolidated subsidiaries. For
additional detail and discussion, see Liquidity and Capital Resources in Item
2 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 2003, approximately 78% of our manufacturing shipments of homes
were made to independent retail locations throughout the United States and
western Canada. As is common in the industry, independent retailers may sell
manufactured homes produced by competing manufacturers. We may not be able to
establish relationships with new independent retailers or maintain good
relationships with independent retailers that sell our homes. Even if we do
establish and maintain relationships with independent retailers, these
retailers are not obligated to sell our manufactured homes exclusively, and may
choose to sell our competitors homes instead. The independent retailers with
whom we have relationships can cancel these relationships on short notice. In
addition, these retailers may not remain financially solvent as they are
subject to the same industry, economic, demographic and seasonal trends that we
face. If we do not establish and maintain relationships with solvent
independent retailers in the markets we serve, sales in those markets could
decline and our operating results and cash flows could suffer. Effect on liquidity  Current industry conditions and our recent operating
results have limited our sources of capital. If this situation does not
improve and if we are unable to locate alternative sources of capital, we may
be unable to maintain or expand our business. We depend on our cash balances, cash flows from operations, revolving
credit facility, and floor plan facilities to finance our operating
requirements, capital expenditures and other needs. The downturn in the
manufactured housing industry, combined with our recent operating results and
other changes, has decreased sources of financing. If our cash balances, cash flows from operations, and availability under
our revolving credit facility and floor plan facilities are insufficient to
finance our operations and alternative capital is not available or if surety
bonds become unavailable to us, we may not be able to expand our business or
maintain our existing operations, or we may need to curtail or limit our
existing operations. We have a significant amount of surety bonds representing collateral for
our self-insurance programs and for general operating purposes. We are
required to provide collateral in support of our surety bond programs in the
form of letters of credit. For additional detail and information concerning
the amounts of our surety bonds and letters of credit, see Note 8 of Notes to
Consolidated Financial Statements in Item 1 of this Report. If our current
surety bond provider were to terminate these programs, we would seek
alternative providers. The inability to retain our current provider or obtain
alternative bonding 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 manufactured 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. Page 26




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The manufactured 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.
Numerous companies produce manufactured homes in our markets. A number of our
manufacturing competitors also have captive retail distribution systems and
consumer finance operations. In addition, there are many independent
manufactured 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. As a result, our sales could decline and our
operating results and cash flows could suffer. Zoning  If the manufactured housing industry is not able to secure
favorable local zoning ordinances, our sales could decline and our operating
results and cash flows could suffer. 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, property owners often have resisted the adoption of zoning ordinances
permitting the location of manufactured homes in residential areas, which we
believe has restricted the growth of the industry. Manufactured homes may not
receive widespread acceptance and localities may not adopt zoning ordinances
permitting the development of manufactured home communities. If the
manufactured housing industry is unable to 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. Certain elements of our business strategy may not succeed  Our business
strategy may not adequately address the issues currently facing our Company and
the manufactured housing industry or correctly identify future trends in the
industry. Any failure of our business strategy could cause our sales to decline
and our operating results and cash flows to suffer. Since mid-1999, retail sales and manufacturing shipments of new
manufactured homes have decreased as a result of high consumer repossession
levels, tightened consumer credit standards, excess retail locations and
inventory, a reduced number of consumer lenders in the industry, higher
interest rates on consumer loans and a reduced number of floor plan lenders in
the industry. As a result, our sales have declined, we have experienced
operating losses and we have closed a significant number of manufacturing
facilities and retail sales centers. We are implementing strategies designed
to address these issues. These strategies may not be successful because the
reasons for the decline in demand or future trends in the industry may not be
correctly identified, and our operating results may not improve. In addition,
factors beyond our control, such as increased competition, reductions in
consumer demand or continued economic downturn, may offset any improved
operating results that are attributable to our strategy. Any failure of our
business strategy could cause our sales to decline and our operating results
and cash flows to suffer or cause us to incur additional and potentially
substantial losses to close and liquidate unsuccessful operations or lines of
business. 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 Notes, primarily the
Senior Notes due 2007, contain 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: Page 27




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
    
    incur additional indebtedness, contingent liabilities and liens;  
    
    issue additional preferred stock;  
    
    pay dividends or make other distributions on our common stock;  
    
    redeem or repurchase common stock and redeem, repay or repurchase subordinated debt;  
    
    make investments in subsidiaries that are not restricted subsidiaries;  
    
    enter into joint ventures;  
    
    use assets as security in other transactions;  
    
    sell certain assets or enter into sale and leaseback transactions;  
    
    restrict the ability of our restricted subsidiaries to pay dividends or make other distributions on their common stock;  
    
    engage in new lines of business;  
    
    guarantee or secure indebtedness;  
    
    consolidate with or merge with or into other companies; and  
    
    enter into transactions with affiliates. We have a $75 million revolving credit facility to use for letters of
credit and general corporate purposes. Availability under this credit facility
is limited to a borrowing base, and is collateralized by accounts receivable,
inventories, property, plant and equipment, cash and other assets. The
agreement contains certain financial covenants that require us, only in the
event that our liquidity, as defined, falls below $35 million, to maintain
certain levels of earnings, as defined, and certain ratios of earnings to fixed
charges, as defined in the agreement. In addition, the facility contains
covenants that limit our ability to incur additional indebtedness and liens,
sell assets and, if liquidity falls below $35 million, make certain
investments, pay dividends and purchase or redeem our common stock. For
additional detail and discussion concerning these financial covenants see
Liquidity and Capital Resources in Item 2 of this Report. One of our floor plan financing facilities contains a covenant requiring
the maintenance of $35 million of liquidity, as defined in the facility, at
each month end. If we were to be out of compliance with this covenant, the
lender could terminate the credit line and cause the related debt to become
immediately due and payable. For additional detail and discussion concerning
this facility and the amounts outstanding under this facility see Liquidity
and Capital Resources in Item 2 of this Report. 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 to be
accelerated, our assets might not be sufficient to repay our debt in full. Potential Dilution  Outstanding preferred stock that is convertible into
common stock and redeemable for common stock (and in some cases, at our option,
for cash), a warrant to acquire common stock, a deferred purchase price
obligation that is payable, at our option, in cash or common stock, and other
potential capital or debt reduction transactions could result in potential
dilution and impair the price of our common stock. At April 3, 2004 there was $8.75 million of Series C preferred stock
outstanding, which is convertible into common stock at a rate of $5.66 per
share, and $12 million of Series B-2 preferred stock outstanding, which is
convertible into common stock at a rate of $7.92 per share. The Series C and
B-2 preferred stock have mandatory redemption dates of April 2, 2009 and July
3, 2008, respectively. Our preferred shareholder has the right to redeem this
preferred stock for common stock, and, at our option, partially for cash. We pay a quarterly dividend on the preferred stock at a rate of 5% per
annum. The dividend is payable in cash or shares of our common stock, at our
option. The number of shares issuable in payment of these dividends depends on
the market value of the common stock at the time of issuance (subject to
certain limitations). As a result, assuming we elected to pay any dividend in
shares of common stock, the preferred shareholder would receive a greater
number of shares of common stock in payment of those dividends if our common
stock price decreases. We have a warrant outstanding which is exercisable based on approximately
2.2 million shares of common stock at a strike price currently of $11.52 per
share. The warrant strike price increases annually in April by $0.75 per
share. The warrant expires on April 2, 2009. The warrant is exercisable only
on a non-cash, net basis, whereby the warrant holder would receive shares of
common stock as payment for the net gain upon exercise. As of April 3, 2004, we had $8 million of a deferred purchase price
obligation which is payable in quarterly installments of $2 million through
January 3, 2005. Quarterly installments may be made in cash or shares of
common stock, at our option. The number of shares to be issued in any
quarterly payment depends on the market value of the common stock. As a
result, assuming we elected to pay any quarterly installment in shares of
common Page 28




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stock, as we have in the past, the recipients would receive a greater
number of shares of common stock in payment of those installments if our common
stock price decreases. In a series of transactions during the fourth quarter of 2003 and the
first quarter of 2004, we purchased and retired $71.7 million of our Senior
Notes due 2007 and 2009 in exchange for 10.4 million shares of our common
stock. To the extent that the preferred shareholder elects to convert or redeem
the preferred stock into common stock, or we elect to make dividend payments on
preferred stock or the deferred purchase price obligation payments in common
stock, or we reduce debt obligations through the issuance of common shares, our
then existing common shareholders would experience dilution in their percentage
ownership interests. The additional shares of common
stock that could be available for sale upon conversion or redemption of the
preferred stock, as dividends on the preferred stock, in payment of the
deferred purchase price obligation, or in payment of our outstanding debt, may
have a negative impact on the market price of our common stock. In addition,
sale of substantial amounts of our common stock in the public market by the
preferred shareholder, the recipients of the deferred purchase price payments,
or the exchangers of Senior Notes, or the perception that these sales might
occur, could depress the price of our common stock. Such selling shareholders
may determine the timing, structure and terms of any disposition of our common
stock, all of which could affect the market price of our common stock. We may seek additional sources of capital and financing in the future or
issue securities in connection with retiring our outstanding indebtedness, the
terms of which may result in additional potential dilution. Page 29




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Item 3. Quantitative and Qualitative Disclosures About Market Risk. Our floor plan borrowings and obligations under industrial revenue bonds
are subject to variable rates of interest based on the U.S. prime interest
rate, short-term tax exempt rate indices and LIBOR, respectively. Without
consideration of the minimum rate of interest on certain of the floor plan
borrowings, a 100 basis point increase in the underlying interest rates would
result in additional annual interest cost of approximately $0.3 million,
assuming average related debt of $26.0 million, the amount of outstanding
borrowings at April 3, 2004. 
 Item 4. Controls and Procedures. As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective to
cause material information required to be disclosed by the Company in the
reports that we file or submit under the Securities Exchange Act of 1934 to be
recorded, processed, summarized and reported within the time periods specified
in the Commissions rules and forms. During the quarter ended April 3, 2004,
there were no changes in our internal control over financial reporting which
materially affected, or would have been reasonably likely to have materially
affected, our internal control over financial reporting. Page 30




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings On August 26, 1999, a putative shareholder class action suit entitled Joel
Miller v. Champion Enterprises, Inc.(Joel Miller) was filed against the
Company and Walter R. Young in the U.S. District Court for the Eastern District
of Michigan. The complaint sought unspecified damages and costs for alleged
violations of federal securities laws. The plaintiffs generally alleged, among
other things, that the Company made false and misleading statements and omitted
other information regarding the financial condition of Ted Parker Homes Sales,
Inc. (Ted Parker), our former largest independent retailer, and the potential
impact on Champion of Ted Parker becoming insolvent. On June 13, 2001, the
U.S. District Court dismissed the case with prejudice and the plaintiffs filed
an appeal of that dismissal. On October 8, 2003 the U.S. Court of Appeals for
the 6th Circuit affirmed the judgment of the District Court. On December 30,
2003 the 6th Circuit Court denied the plaintiffs petition for rehearing. The
plaintiffs had until January 29, 2004 to file a petition for review by the
United States Supreme Court. No such petition was filed and we consider this
case closed. 
 Item 2. Changes in Securities and Use of Proceeds. On January 5, 2004 and April 5, 2004 we issued 275,996 shares and 193,047
shares of our common stock, respectively, in connection with each of the $2.0
million quarterly installment payments under convertible promissory notes
issued June 21, 2001. These notes represent a deferred purchase price
obligation of the Company. Although these shares of common stock were issued
in private placements in reliance on the exemption from registration contained
in Section 4(2) of the Securities Exchange Act of 1933, such shares of common
stock have been registered for resale under the Securities Exchange Act of
1933, pursuant to effective registration statements. On March 2, 2004, we completed the sale of 12,000 shares of Series B-2
Cumulative Convertible Preferred Stock to Fletcher International, Ltd.
(Fletcher), an accredited investor, in reliance upon Section 4(2) of the
Securities Act of 1933, as amended. The sale was pursuant to the exercise by
Fletcher of its right to purchase $12 million of preferred stock under an
agreement dated as of June 29, 2001, by and between Fletcher and
the Company. The Series B-2 preferred stock is convertible into our
common stock at a rate of $7.92 per share through the mandatory
redemption date of July 3, 2008. The aggregate purchase price for this preferred stock was $12 million and the
proceeds will be used for general corporate purposes. 
 Item 5. Other Information On June 30, 2003, in connection with the appointment of Albert A. Koch as
Chairman of the Board, President and Chief Executive Officer, the Company
entered into a letter agreement with AP Services, LLC, pursuant to which AP
Services provides interim management services to the Company, including the
services of Mr. Koch. Also on June 30, 2003, the Company entered into a letter
agreement with AlixPartners, LLC, pursuant to which AlixPartners provided
financial and operational consulting services to the Company. These agreements
were approved by all of the independent members of the Board. Mr. Koch is a
Principal of AlixPartners, LLC. The Board has formed a review committee comprised solely of independent
directors to (i) review, oversee and monitor the services provided to the
Company by AP Services and AlixPartners pursuant to the June 30, 2003
agreements or under other Board approved agreements; (ii) review, monitor and
approve invoices for services provided by either AP Services or AlixPartners
under Board approved agreements; (iii) review and make recommendations to the
full Board concerning any proposals for additional services to the Company by
AP Services or AlixPartners; (iv) review, monitor and take appropriate action
concerning any questions or issues that may arise in connection with services
provided by AP Services or AlixPartners; and (v) make regular reports to the
Board concerning the performance and progress of AP Services and AlixPartners
under all such Board approved agreements. In addition to the two June 30, 2003 agreements, the Board has approved
five agreements for AlixPartners to provide additional services and programs to
the Company. The fees for four of these agreements are based on hourly rates
and expenses and the fees for the other are contingent upon savings from that
program. These agreements were reviewed and approved by the independent review
committee and subsequently approved by the independent members of the Board.
These agreements are being monitored by the independent review committee. The
Company may consider entering into other agreements with AP Services or
AlixPartners. In all such cases, those agreements will go through the same
independent review, approval and monitoring processes. Page 31




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During the first quarter of 2004, we recorded expenses of $0.4 million and
paid fees of $0.7 million for services rendered under all of the arrangements
with AP Services and AlixPartners, including the services of Mr. Koch. 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    The following exhibits are filed as part of this report: Exhibit No.
    
    Description3.1
    
    Restated Articles of Incorporation of the Company, as amended.4.1
    
    Certificate of Rights and Preferences of Series B-2 Cumulative
Convertible Preferred Stock of Champion Enterprises, Inc., dated March
2, 2004 and filed as Exhibit 4.1 to the Companys Current Report on
Form 8-K dated March 3, 2004 and incorporated herein by reference.31.1
    
    Certification of Chief Executive Officer dated April 30, 2004,
relating to the Registrants Quarterly Report on Form 10-Q for the
quarter ended April 3, 2004.31.2
    
    Certification of Chief Financial Officer dated April 30, 2004,
relating to the Registrants Quarterly Report on Form 10-Q for the
quarter ended April 3, 2004.32.1
    
    Certification of Chief Executive Officer and Chief Financial
Officer of the Registrant, dated April 30, 2004, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, relating to the Registrants Quarterly Report on Form 10-Q
for the quarter ended April 3, 2004.
  (b)
    
    Current reports on Form 8-K  1)
    
    February 18, 2004 (two filings). Press release
filed under Item 5 and furnished under Item 12 announcing
Champion Enterprises, Inc. fourth quarter and year-to-date
2003 results with condensed consolidated financial
information.2)
    
    March 3, 2004. Champion Enterprises, Inc. filed
under Item 5 announcing that the Companys preferred
shareholder exercised its right to purchase $12 million of
Series B-2 preferred stock on March 3, 2004.3)
    
    April 21, 2004 (two filings). Press release
filed under Item 5 and furnished under Item 12 announcing
Champion Enterprises, Inc. first quarter 2004 results with
condensed consolidated financial information. Page 32




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. CHAMPION ENTERPRISES, INC.By:
    /s/  PHYLLIS A. KNIGHTPhyllis A. KnightExecutive Vice President and
Chief Financial Officer
(Principal Financial Officer) And:
    /s/  RICHARD HEVELHORSTRichard HevelhorstVice President and Controller
(Principal Accounting Officer) Dated: April 30, 2004 Page 33




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EXHIBIT INDEX Exhibit No.
    
    Description3.1
    
    Restated Articles of Incorporation of the Company, as amended.31.1
    
    Certification of Chief Executive Officer dated April 30, 2004,
relating to the Registrants Quarterly Report on Form 10-Q for the
quarter ended April 3, 2004.31.2
    
    Certification of Chief Financial Officer dated April 30, 2004,
relating to the Registrants Quarterly Report on Form 10-Q for the
quarter ended April 3, 2004.32.1
    
    Certification of Chief Executive Officer and Chief Financial
Officer of the Registrant, dated April 30, 2004, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, relating to the Registrants Quarterly Report on Form 10-Q
for the quarter ended April 3, 2004.