##### Table of Contents



FORM 10-Q SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
 (Mark one) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934.
 For Quarterly period ended July 3, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE 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
    
    (I.R.S. Employerincorporation or organization)
    
    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. 71,281,060 shares of the registrants $1.00 par value Common Stock were
outstanding as of August 2, 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 StatementsCondensed Consolidating Statement of OperationsCondensed Consolidating Balance SheetCondensed Consolidating Statement of Cash FlowsCondensed Consolidating Statement of OperationsItem 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 2. Changes in Securities and Use of ProceedsItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESEXHIBIT INDEXCertification of Chief Executive Officer dated August 4, 2004Certification of Chief Financial Officer dated August 4, 2004Certification of Chief Executive Officer and Chief Financial Officer to Section 906    Table of Contents  
 
 PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. 
 CHAMPION ENTERPRISES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts) Unaudited
    
    UnauditedThree Months Ended
    
    Six Months EndedJuly 3,
    
    June 28,
    
    July 3,
    
    June 28,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    306,106
    
    
    $
    295,653
    
    
    $
    543,191
    
    
    $
    538,450Cost of sales
    
    
    252,495
    
    
    
    246,471
    
    
    
    454,979
    
    
    
    456,927Gross margin
    
    
    53,611
    
    
    
    49,182
    
    
    
    88,212
    
    
    
    81,523Selling, general and administrative expenses
    
    
    41,357
    
    
    
    43,219
    
    
    
    77,780
    
    
    
    91,882Mark-to-market (credit) charge for common
stock warrant
    
    
    (3,900
    )
    
    
    
    
    
    
    1,200
    
    
    
    (Gain) loss on debt retirement
    
    
    (450
    )
    
    
    (7,130
    )
    
    
    2,776
    
    
    
    (13,833
    )Operating income
    
    
    16,604
    
    
    
    13,093
    
    
    
    6,456
    
    
    
    3,474Interest income
    
    
    338
    
    
    
    339
    
    
    
    678
    
    
    
    886Interest expense
    
    
    (4,890
    )
    
    
    (7,179
    )
    
    
    (10,261
    )
    
    
    (14,863
    )Income (loss) from continuing operations
before income taxes
    
    
    12,052
    
    
    
    6,253
    
    
    
    (3,127
    )
    
    
    (10,503
    )Income tax (benefit) expense
    
    
    (11,400
    )
    
    
    300
    
    
    
    (11,100
    )
    
    
    (2,400
    )Income (loss) from continuing operations
    
    
    23,452
    
    
    
    5,953
    
    
    
    7,973
    
    
    
    (8,103
    )(Loss) income from discontinued operations, net
of taxes
    
    
    (20
    )
    
    
    (2,926
    )
    
    
    1,136
    
    
    
    (10,295
    )Net income (loss)
    
    $
    23,432
    
    
    $
    3,027
    
    
    $
    9,109
    
    
    $
    (18,398
    )Basic earnings (loss) per share:Income (loss) from continuing operations
    
    $
    0.31
    
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    (0.22
    )Income (loss) from discontinued operations
    
    
    0.00
    
    
    
    (0.05
    )
    
    
    0.02
    
    
    
    (0.18
    )Basic earnings (loss) per share
    
    $
    0.31
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    (0.40
    )Weighted shares for basic EPS
    
    
    70,657
    
    
    
    56,757
    
    
    
    69,380
    
    
    
    55,641Diluted earnings (loss) per share:Income (loss) from continuing operations
    
    $
    0.30
    
    
    $
    0.09
    
    
    $
    0.10
    
    
    $
    (0.22
    )Income (loss) from discontinued operations
    
    
    0.00
    
    
    
    (0.05
    )
    
    
    0.01
    
    
    
    (0.18
    )Diluted earnings (loss) per share
    
    $
    0.30
    
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    (0.40
    )Weighted shares for diluted EPS
    
    
    72,253
    
    
    
    61,624
    
    
    
    71,152
    
    
    
    55,641
 See accompanying Notes to Consolidated Financial Statements. Page 1 of 37




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CHAMPION ENTERPRISES, INC.
Consolidated Balance Sheets
(In thousands, except par value) UnauditedJuly 3, 2004
    
    January 3, 2004ASSETSCurrent assetsCash and cash equivalents
    
    $
    115,868
    
    
    $
    145,868Restricted cash
    
    
    631
    
    
    
    8,341Accounts receivable, trade
    
    
    30,673
    
    
    
    13,773Inventories
    
    
    119,104
    
    
    
    98,824Other current assets
    
    
    19,381
    
    
    
    18,325Total current assets
    
    
    285,657
    
    
    
    285,131Property, plant and equipment
    
    
    227,607
    
    
    
    224,807Less-accumulated depreciation
    
    
    134,083
    
    
    
    128,98693,524
    
    
    
    95,821Goodwill
    
    
    126,516
    
    
    
    126,537Non-current assets of discontinued operations
    
    
    15
    
    
    
    68Other non-current assets
    
    
    19,274
    
    
    
    20,743$
    524,986
    
    
    $
    528,300LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS EQUITYCurrent liabilitiesFloor plan payable
    
    $
    14,058
    
    
    $
    14,123Accounts payable
    
    
    33,806
    
    
    
    26,724Accrued warranty obligations
    
    
    37,139
    
    
    
    40,558Accrued volume rebates
    
    
    25,735
    
    
    
    31,293Accrued compensation and payroll taxes
    
    
    19,403
    
    
    
    17,400Accrued self-insurance
    
    
    30,703
    
    
    
    31,189Current liabilities of discontinued operations
    
    
    190
    
    
    
    3,173Other current liabilities
    
    
    42,526
    
    
    
    47,184Total current liabilities
    
    
    203,560
    
    
    
    211,644Long-term liabilitiesLong-term debt
    
    
    201,627
    
    
    
    245,468Other long-term liabilities
    
    
    36,816
    
    
    
    47,510238,443
    
    
    
    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, 71,059
and 65,470 shares issued and outstanding, respectively
    
    
    71,059
    
    
    
    65,470Capital in excess of par value
    
    
    158,503
    
    
    
    125,386Accumulated deficit
    
    
    (166,760
    )
    
    
    (175,450
    )Accumulated other comprehensive loss
    
    
    (569
    )
    
    
    (417
    )Total shareholders equity
    
    
    62,233
    
    
    
    14,989$
    524,986
    
    
    $
    528,300
 See accompanying Notes to Consolidated Financial Statements. Page 2 of 37




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CHAMPION ENTERPRISES, INC.
Consolidated Statements of Cash Flows
(In thousands) UnauditedSix Months EndedJuly 3,
    
    June 28,2004
    
    2003Cash flows from operating activitiesIncome (loss) from continuing operations
    
    $
    7,973
    
    
    $
    (8,103
    )Adjustments to reconcile income (loss) from continuing operations
to net cash (used for) provided by operating activities:Depreciation and amortization
    
    
    5,953
    
    
    
    8,376Loss (gain) on debt retirement
    
    
    2,776
    
    
    
    (13,833
    )Mark-to-market charge for common stock warrant
    
    
    1,200
    
    
    
    Gain on disposal of fixed assets
    
    
    (713
    )
    
    
    (1,834
    )Decrease in allowance for tax adjustments
    
    
    (12,000
    )
    
    
    Increase/decreaseAccounts receivable
    
    
    (16,900
    )
    
    
    (17,459
    )Refundable income taxes
    
    
    376
    
    
    
    60,749Inventories
    
    
    (20,280
    )
    
    
    (9,092
    )Cash collateral deposits
    
    
    
    
    
    
    9,600Accounts payable
    
    
    7,082
    
    
    
    8,280Accrued liabilities
    
    
    (10,485
    )
    
    
    (8,597
    )Other, net
    
    
    2,291
    
    
    
    5,218Net cash (used for) provided by continuing operating activities
    
    
    (32,727
    )
    
    
    33,305Cash flows from discontinued operationsIncome (loss) from discontinued operations
    
    
    1,136
    
    
    
    (10,295
    )(Increase) decrease in net assets of discontinued operations
    
    
    (2,983
    )
    
    
    10,280Net cash used for discontinued operations
    
    
    (1,847
    )
    
    
    (15
    )Cash flows from investing activitiesAdditions to property, plant and equipment
    
    
    (4,130
    )
    
    
    (3,055
    )Acquisition deferred purchase price payments
    
    
    
    
    
    
    (3,882
    )Investments in and advances to unconsolidated subsidiaries
    
    
    (109
    )
    
    
    (343
    )Proceeds on disposal of fixed assets
    
    
    1,240
    
    
    
    5,076Net cash used for investing activities
    
    
    (2,999
    )
    
    
    (2,204
    )Cash flows from financing activities(Decrease) increase in floor plan payable, net
    
    
    (65
    )
    
    
    2,306Proceeds from short-term borrowings
    
    
    
    
    
    
    7,000Decrease in other long-term debt
    
    
    (6,029
    )
    
    
    (326
    )Purchase of Senior Notes
    
    
    (10,395
    )
    
    
    (35,830
    )Increase in deferred financing costs
    
    
    
    
    
    
    (1,942
    )Decrease in restricted cash
    
    
    7,710
    
    
    
    50,229Preferred stock issued, net
    
    
    12,000
    
    
    
    Common stock issued, net
    
    
    4,512
    
    
    
    300Dividends paid on preferred stock
    
    
    (160
    )
    
    
    (768
    )Net cash provided by financing activities
    
    
    7,573
    
    
    
    20,969Net (decrease) increase in cash and cash equivalents
    
    
    (30,000
    )
    
    
    52,055Cash and cash equivalents at beginning of period
    
    
    145,868
    
    
    
    77,381Cash and cash equivalents at end of period
    
    $
    115,868
    
    
    $
    129,436
 See accompanying Notes to Consolidated Financial Statements. Page 3 of 37




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CHAMPION ENTERPRISES, INC.
Consolidated Statement of Shareholders Equity
Unaudited Three Months Ended July 3, 2004
(In thousands) 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
    )
    
    $
    14,989
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,109
    
    
    
    
    
    
    
    9,109
    
    
    $
    9,109Preferred stock dividends
    
    
    29
    
    
    
    29
    
    
    
    230
    
    
    
    (419
    )
    
    
    
    
    
    
    (160
    )
    
    
    Stock options and
benefit plans
    
    
    1,239
    
    
    
    1,239
    
    
    
    3,473
    
    
    
    
    
    
    
    
    
    
    
    4,712
    
    
    
    Amortization of preferred
stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    Issuance for acquisition
deferred purchase price
payments
    
    
    469
    
    
    
    469
    
    
    
    3,531
    
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    Issuance for purchase and
retirement of debt
    
    
    3,852
    
    
    
    3,852
    
    
    
    25,944
    
    
    
    
    
    
    
    
    
    
    
    29,796
    
    
    
    Foreign currency translation
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (152
    )
    
    
    (152
    )
    
    
    (152
    )Balance at July 3, 2004
    
    
    71,059
    
    
    $
    71,059
    
    
    $
    158,503
    
    
    $
    (166,760
    )
    
    $
    (569
    )
    
    $
    62,233
    
    
    $
    8,957
 See accompanying Notes to Consolidated Financial Statements. Page 4 of 37




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CHAMPION ENTERPRISES, INC.
Notes to Consolidated Financial Statements
(Unaudited)  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 decrease in
the allowance for tax adjustments discussed in Note 3 and the charge to
retained earnings related to the induced conversion of the Series C
Preferred Stock recorded in the first quarter of 2003 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 income (loss),
income (loss) per share and stock-based compensation expense would have
been the amounts indicated below: Three Months EndedJuly 3,
    
    June 28,2004
    
    2003(In thousands, except per share amounts)Net income  as reported
    
    $
    23,432
    
    
    $
    3,027Net income  pro forma
    
    
    23,404
    
    
    
    2,542Basic earnings per share  as reported
    
    
    0.31
    
    
    
    0.05Diluted earnings per share  as reported
    
    
    0.30
    
    
    
    0.04Basic earnings per share  pro forma
    
    
    0.30
    
    
    
    0.04Diluted earnings per share  pro forma
    
    
    0.30
    
    
    
    0.03Stock-based employee compensation expense,
net of related tax effects  as reported
    
    
    185
    
    
    
    187Stock-based employee compensation expense,
net of related tax effects  pro forma
    
    $
    213
    
    
    $
    672
 Six Months EndedJuly 3,
    
    June 28,2004
    
    2003(In thousands, except per share amounts)Net income (loss)  as reported
    
    $
    9,109
    
    
    $
    (18,398
    )Net income (loss)  pro forma
    
    
    8,944
    
    
    
    (19,602
    )Basic earnings (loss) per share  as reported
    
    
    0.12
    
    
    
    (0.40
    )Diluted earnings (loss) per share  as reported
    
    
    0.11
    
    
    
    (0.40
    )Basic earnings (loss) per share  pro forma
    
    
    0.11
    
    
    
    (0.42
    )Diluted earnings (loss) per share  pro forma
    
    
    0.11
    
    
    
    (0.42
    )Stock-based employee compensation expense,
net of related tax effects  as reported
    
    
    330
    
    
    
    273Stock-based employee compensation expense,
net of related tax effects  pro forma
    
    $
    495
    
    
    $
    1,477
 Page 5 of 37




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2.
    
    The following table provides information regarding activity for
restructuring reserves recorded in previous periods. Six Months Ended July 3, 20042003
    
    PriorClosures
    
    Closures(In thousands)Balance at beginning of year
    
    $
    4,280
    
    
    $
    3,793Cash payments:Warranty costs
    
    
    (786
    )
    
    
    (379
    )Other closing costs
    
    
    (638
    )
    
    
    (250
    )Reversals credited to earnings:Other closing costs
    
    
    (119
    )
    
    
    (65
    )Balance at July 3, 2004
    
    $
    2,737
    
    
    $
    3,099Period end balance comprised of:Warranty costs
    
    $
    1,804
    
    
    $
    2,857Other closing costs
    
    
    933
    
    
    
    242$
    2,737
    
    
    $
    3,099
  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 six months ending July 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: Six Months EndedJuly 3,
    
    June 28,2004
    
    2003(In thousands)Statutory U.S. tax rate
    
    $
    (1,100
    )
    
    $
    (3,700
    )Increase in rate resulting from:Deferred tax valuation allowance
    
    
    1,100
    
    
    
    700Decrease in allowance for tax adjustments
    
    
    (12,000
    )
    
    
    State taxes, net of federal tax effect
    
    
    200
    
    
    
    Other
    
    
    700
    
    
    
    600Total income tax benefit
    
    $
    (11,100
    )
    
    $
    (2,400
    )
  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.
The Company has net operating losses incurred in 2003 totaling $80
million that are available to offset certain future taxable income. The
effective tax rates for the six months ended July 3, 2004 and June 28,
2003 differ from the 35% federal statutory rate, in part, because of this
100% valuation allowance. The 2004 tax rate was also affected by the
decrease in the allowance for tax adjustments as a result of the
finalization of certain tax examinations. The 2003 tax rate was also
affected by a $3.0 million tax benefit 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. Page 6 of 37




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4.
    
    A summary of inventories by component follows: July 3,
    
    January 3,2004
    
    2004(In thousands)New manufactured homes
    
    $
    51,942
    
    
    $
    42,547Raw materials
    
    
    30,583
    
    
    
    25,953Work-in-process
    
    
    7,361
    
    
    
    6,204Other inventory
    
    
    29,218
    
    
    
    24,120$
    119,104
    
    
    $
    98,824
  Other inventory consists of pre-owned manufactured homes, land and park
spaces and improvements.  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 six months ended July 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
    
    
    24,302Cash warranty payments
    
    
    (27,721
    )Reserves at July 3, 2004
    
    $
    43,639
  6.
    
    Long-term debt by component consisted of the following: July 3,
    
    January 3,2004
    
    2004(In thousands)7.625% Senior Notes due 2009
    
    $
    89,273
    
    
    $
    113,71511.25% Senior Notes due 2007
    
    
    97,510
    
    
    
    111,010Obligations under industrial revenue bonds
    
    
    12,430
    
    
    
    18,145Other debt
    
    
    2,414
    
    
    
    2,598$
    201,627
    
    
    $
    245,468
  During the quarter ended July 3, 2004, the Company purchased and retired
$10.9 million of its Senior Notes due 2009 for cash payments of $10.4
million, resulting in a pretax gain of $0.5 million. During the first
quarter of 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 repaid a $5.7 million obligation under an industrial revenue
bond. During the six months ended June 28, 2003 the Company purchased
and retired $35.6 million of its Senior Notes due 2009 and $15.0 million
of the Senior Notes due 2007 for cash payments of $35.8 million,
resulting in a pretax gain of $13.8 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. 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. The line of credit is collateralized by accounts
receivable, inventories, property, plant, and equipment, cash and other
assets. As of July 3, 2004, facility availability was $61.3 million, of
which $59.8 was used for letters of credit, there were no borrowings
outstanding and the Companys liquidity was $107.5 million, which was in
excess of $35 million such that no financial covenants were in effect. Page 7 of 37




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The Company has two floor plan facilities with total availability of
$19.6 million of which $14.1 million was outstanding at July 3, 2004. A
$15 million floor plan financing facility contains a covenant requiring
the maintenance of a minimum $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 July 3, 2004, the
Company had approximately $10.8 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 July 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 quarter and six
months ended July 3, 2004, as a result of significant changes in the
Companys common stock price, the Company recorded mark-to-market
adjustments of a $3.9 million credit and a $1.2 million net charge,
respectively, for the change in estimated fair value of this warrant.8.
    
    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 July 3, 2004 was estimated to be approximately $260
million, without reduction for the resale value of the homes. 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
$0.2 million for the six months ended July 3, 2004 and $0.6 million for
the six months ended June 28, 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 July 3, 2004 the Company was contingently obligated for approximately
$60.1 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 $31.8 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 July 3, 2004 certain of the Companys subsidiaries were guarantors of
$5.7 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 of 37




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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.
    
    Earnings per share calculations for 2004 include an allocation of
income to participating securities pursuant to the provisions of EITF
03-6, Participating Securities and the Two-Class Method under FASB
Statement No. 128 as discussed in Note 13. Prior periods have been
restated, as necessary, to conform.The Companys potentially dilutive securities consist of outstanding
stock options and awards, deferred purchase price obligations,
convertible preferred stock and common stock warrants. Convertible
preferred stock and common stock warrants were not considered in
determining the denominator for diluted earnings per share (EPS) in any
period presented because the effect would have been antidilutive.
Outstanding stock options and deferred purchase price obligations were
not considered in determining the denominator for diluted earnings per
share (EPS) for the six months ended June 28, 2003 because the effect
would have been antidilutive. A reconciliation of the numerators and
denominators used in the Companys basic and diluted EPS calculations
follows: Three Months Ended
    
    Six Months EndedJuly 3,
    
    June 28,
    
    July 3,
    
    June 28,2004
    
    2003
    
    2004
    
    2003NumeratorNet income (loss)
    
    $
    23,432
    
    
    $
    3,027
    
    
    $
    9,109
    
    
    $
    (18,398
    )Plus loss (less income) from
discontinued
operations
    
    
    20
    
    
    
    2,926
    
    
    
    (1,136
    )
    
    
    10,295Less preferred stock dividend
    
    
    (259
    )
    
    
    (169
    )
    
    
    (419
    )
    
    
    (455
    )Less amount allocated to participating
securities holders
    
    
    (1,618
    )
    
    
    (217
    )
    
    
    (489
    )
    
    
    Less charge to retained earnings for
induced conversion of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,488
    )Income (loss) from continuing operations
available to common shareholders
for basic and diluted EPS
    
    
    21,575
    
    
    
    5,567
    
    
    
    7,065
    
    
    
    (12,046
    )(Loss) income from discontinued
operations
    
    
    (20
    )
    
    
    (2,926
    )
    
    
    1,136
    
    
    
    (10,295
    )Less amount allocated to participating
securities
    
    
    
    
    
    
    
    
    
    
    (73
    )
    
    
    (Loss) income from discontinued
operations available to common
shareholders for basic and diluted EPS
    
    
    (20
    )
    
    
    (2,926
    )
    
    
    1,063
    
    
    
    (10,295
    )Income (loss) available to common
shareholders for basic and diluted EPS
    
    $
    21,555
    
    
    $
    2,641
    
    
    $
    8,128
    
    
    $
    (22,341
    )DenominatorShares for basic EPSweighted average
shares outstanding
    
    
    70,657
    
    
    
    56,757
    
    
    
    69,380
    
    
    
    55,641Plus effect of dilutive securitiesDeferred purchase price obligations
    
    
    610
    
    
    
    4,811
    
    
    
    758
    
    
    
    Stock options and awards
    
    
    986
    
    
    
    56
    
    
    
    1,014
    
    
    
    Shares for diluted EPS
    
    
    72,253
    
    
    
    61,624
    
    
    
    71,152
    
    
    
    55,641
 Page 9 of 37




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10.
    
    The Company evaluates the performance of its manufacturing and
retail segments based on earnings (loss) before interest, income taxes
and general corporate expenses. Reconciliations of segment sales to
consolidated net sales and segment income (loss) to consolidated income
(loss) from continuing operations before income taxes follow: Three Months EndedJuly 3,
    
    June 28,2004
    
    2003(In thousands)Net salesManufacturing
    
    $
    269,083
    
    
    $
    263,067Retail
    
    
    63,923
    
    
    
    67,040Less: intercompany
    
    
    (26,900
    )
    
    
    (34,454
    )Consolidated net sales
    
    $
    306,106
    
    
    $
    295,653Income from continuing operations before income taxes:Manufacturing segment income
    
    $
    17,567
    
    
    $
    13,003Retail segment income (loss)
    
    
    2,033
    
    
    
    (737
    )General corporate expenses
    
    
    (6,846
    )
    
    
    (6,449
    )Mark-to-market credit for common stock warrant
    
    
    3,900
    
    
    
    Gain on debt retirement
    
    
    450
    
    
    
    7,130Interest expense, net
    
    
    (4,552
    )
    
    
    (6,840
    )Intercompany eliminations
    
    
    (500
    )
    
    
    146Income from continuing operations before income taxes
    
    $
    12,052
    
    
    $
    6,253
 Six Months EndedJuly 3,
    
    June 28,2004
    
    2003(In thousands)Net salesManufacturing
    
    $
    478,939
    
    
    $
    472,264Retail
    
    
    113,752
    
    
    
    128,161Less: intercompany
    
    
    (49,500
    )
    
    
    (61,975
    )Consolidated net sales
    
    $
    543,191
    
    
    $
    538,450Loss from continuing operations before income taxes:Manufacturing segment income
    
    $
    22,221
    
    
    $
    6,157Retail segment income (loss)
    
    
    1,780
    
    
    
    (3,420
    )General corporate expenses
    
    
    (12,869
    )
    
    
    (13,721
    )Mark-to-market charge for common stock warrant
    
    
    (1,200
    )
    
    
    (Loss) gain on debt retirement
    
    
    (2,776
    )
    
    
    13,833Interest expense, net
    
    
    (9,583
    )
    
    
    (13,977
    )Intercompany eliminations
    
    
    (700
    )
    
    
    625Loss from continuing operations before income taxes
    
    $
    (3,127
    )
    
    $
    (10,503
    )
  Retail floor plan interest expense not charged to retail segment income
(loss) totaled $0.3 million and $0.6 million for the three and six months
ended July 3, 2004, respectively, and $0.5 million and $0.9 million for
the three and six months ended June 28, 2003, respectively.11.
    
    In 2003, the Company exited its consumer finance business. Income
from discontinued operations for the six months ended July 3, 2004
consisted primarily of a favorable adjustment from the settlement of
remaining contractual obligations. Loss from discontinued operations
for the six months ended June 28, 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, served until
July 31, 2004 as the Companys Chairman of the Board of Directors, President
and Chief Executive Officer. During the three and six months ended
July 3, 2004, the Company recorded expenses of $1.4 million and $1.8
million and paid fees of $0.8 million and $1.5 million, respectively,
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. Page 10 of 37




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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. 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 three and six months ended July
3, 2004.In March 2004, the Emerging Issues Task Force (EITF) issued EITF
Abstract 03-6, Participating Securities and the Two-Class method under
FASB Statement No. 128 (EITF 03-6). EITF 03-6 requires the use of the
two-class method of computing earnings per share for those enterprises
with participating securities or multiple classes of common stock.
Participating securities are those securities that may participate in
dividends paid on common stock. Allocation of earnings is made according
to a pre-determined formula with, at times, an upper limit on the extent
of participation, regardless of whether earnings would actually be
distributed and whether there are limitations on a companys ability to
pay dividends. EITF 03-6 became effective on March 31, 2004. Prior
periods have been restated, as necessary, to conform.14.
    
    During the second quarter of 2004, the Company issued 29,000 shares
of common stock in payment of preferred stock dividends totaling $0.3
million. 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, during the three and six months ended July
3, 2004, the Company issued 193,000 shares and 469,000 shares,
respectively, of common stock in payment of $4.0 million of deferred
purchase price obligations. During the three and six months ended June
28, 2003, the Company issued 328,000 and 970,000 shares, respectively,
of common stock in payment of $4.0 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 11 of 37




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CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Three Months Ended July 3, 2004 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)Net sales
    
    $
    
    
    
    $
    77,307
    
    
    $
    243,679
    
    
    $
    12,020
    
    
    $
    (26,900
    )
    
    $
    306,106Cost of sales
    
    
    
    
    
    
    65,716
    
    
    
    203,880
    
    
    
    9,299
    
    
    
    (26,400
    )
    
    
    252,495Gross margin
    
    
    
    
    
    
    11,591
    
    
    
    39,799
    
    
    
    2,721
    
    
    
    (500
    )
    
    
    53,611Selling, general and
administrative expenses
    
    
    
    
    
    
    10,550
    
    
    
    29,058
    
    
    
    1,749
    
    
    
    
    
    
    
    41,357Mark-to-market credit for
common stock warrant
    
    
    (3,900
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,900
    )Gain on debt retirement
    
    
    (450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (450
    )Operating income (loss)
    
    
    4,350
    
    
    
    1,041
    
    
    
    10,741
    
    
    
    972
    
    
    
    (500
    )
    
    
    16,604Interest income
    
    
    1,837
    
    
    
    1,795
    
    
    
    314
    
    
    
    25
    
    
    
    (3,633
    )
    
    
    338Interest expense
    
    
    (1,837
    )
    
    
    (2,692
    )
    
    
    (3,994
    )
    
    
    
    
    
    
    3,633
    
    
    
    (4,890
    )Income (loss) from
continuing operations
before income taxes
    
    
    4,350
    
    
    
    144
    
    
    
    7,061
    
    
    
    997
    
    
    
    (500
    )
    
    
    12,052Income tax expense (benefit)
    
    
    
    
    
    
    50
    
    
    
    (11,950
    )
    
    
    500
    
    
    
    
    
    
    
    (11,400
    )Income (loss) from
continuing operations
    
    
    4,350
    
    
    
    94
    
    
    
    19,011
    
    
    
    497
    
    
    
    (500
    )
    
    
    23,452Loss from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    (5
    )
    
    
    
    
    
    
    (20
    )Income (loss) before equity
in income (loss) of
consolidated subsidiaries
    
    
    4,350
    
    
    
    94
    
    
    
    18,996
    
    
    
    492
    
    
    
    (500
    )
    
    
    23,432Equity in income (loss) of
consolidated subsidiaries
    
    
    19,582
    
    
    
    19,488
    
    
    
    
    
    
    
    
    
    
    
    (39,070
    )
    
    
    Net income (loss)
    
    $
    23,932
    
    
    $
    19,582
    
    
    $
    18,996
    
    
    $
    492
    
    
    $
    (39,570
    )
    
    $
    23,432
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CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Six Months Ended July 3, 2004 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)Net sales
    
    $
    
    
    
    $
    136,802
    
    
    $
    434,833
    
    
    $
    21,056
    
    
    $
    (49,500
    )
    
    $
    543,191Cost of sales
    
    
    
    
    
    
    118,636
    
    
    
    368,515
    
    
    
    16,628
    
    
    
    (48,800
    )
    
    
    454,979Gross margin
    
    
    
    
    
    
    18,166
    
    
    
    66,318
    
    
    
    4,428
    
    
    
    (700
    )
    
    
    88,212Selling, general and
administrative expenses
    
    
    
    
    
    
    14,592
    
    
    
    60,010
    
    
    
    3,178
    
    
    
    
    
    
    
    77,780Mark-to-market charge for
common stock warrant
    
    
    1,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,200Loss on debt retirement
    
    
    12
    
    
    
    2,696
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    2,776Operating (loss) income
    
    
    (1,212
    )
    
    
    878
    
    
    
    6,240
    
    
    
    1,250
    
    
    
    (700
    )
    
    
    6,456Interest income
    
    
    3,905
    
    
    
    3,765
    
    
    
    635
    
    
    
    44
    
    
    
    (7,671
    )
    
    
    678Interest expense
    
    
    (3,905
    )
    
    
    (5,666
    )
    
    
    (8,360
    )
    
    
    (1
    )
    
    
    7,671
    
    
    
    (10,261
    )(Loss) income from continuing
operations before income taxes
    
    
    (1,212
    )
    
    
    (1,023
    )
    
    
    (1,485
    )
    
    
    1,293
    
    
    
    (700
    )
    
    
    (3,127
    )Income tax expense (benefit)
    
    
    
    
    
    
    100
    
    
    
    (11,900
    )
    
    
    700
    
    
    
    
    
    
    
    (11,100
    )(Loss) income from
continuing operations
    
    
    (1,212
    )
    
    
    (1,123
    )
    
    
    10,415
    
    
    
    593
    
    
    
    (700
    )
    
    
    7,973Income (loss) from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    1,153
    
    
    
    (17
    )
    
    
    
    
    
    
    1,136(Loss) income before equity in
income (loss) of consolidated
subsidiaries
    
    
    (1,212
    )
    
    
    (1,123
    )
    
    
    11,568
    
    
    
    576
    
    
    
    (700
    )
    
    
    9,109Equity in income (loss) of
consolidated subsidiaries
    
    
    11,021
    
    
    
    12,144
    
    
    
    
    
    
    
    
    
    
    
    (23,165
    )
    
    
    Net income (loss)
    
    $
    9,809
    
    
    $
    11,021
    
    
    $
    11,568
    
    
    $
    576
    
    
    $
    (23,865
    )
    
    $
    9,109
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CHAMPION ENTERPRISES, INC.
Condensed Consolidating Balance Sheet
As of July 3, 2004 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)AssetsCurrent assetsCash and cash equivalents
    
    $
    
    
    
    $
    99,820
    
    
    $
    1,948
    
    
    $
    14,075
    
    
    $
    25
    
    
    $
    115,868Restricted cash
    
    
    
    
    
    
    422
    
    
    
    209
    
    
    
    
    
    
    
    
    
    
    
    631Accounts receivable, trade
    
    
    
    
    
    
    11,270
    
    
    
    28,174
    
    
    
    1,037
    
    
    
    (9,808
    )
    
    
    30,673Inventories
    
    
    
    
    
    
    15,296
    
    
    
    100,602
    
    
    
    2,656
    
    
    
    550
    
    
    
    119,104Other current assets
    
    
    
    
    
    
    10,581
    
    
    
    100,433
    
    
    
    924
    
    
    
    (92,557
    )
    
    
    19,381Total current assets
    
    
    
    
    
    
    137,389
    
    
    
    231,366
    
    
    
    18,692
    
    
    
    (101,790
    )
    
    
    285,657Property, plant and equipment, net
    
    
    
    
    
    
    27,072
    
    
    
    64,445
    
    
    
    2,007
    
    
    
    
    
    
    
    93,524Goodwill
    
    
    
    
    
    
    
    
    
    
    125,783
    
    
    
    733
    
    
    
    
    
    
    
    126,516Investment in consolidated
subsidiaries
    
    
    16,240
    
    
    
    312,284
    
    
    
    138,902
    
    
    
    6,815
    
    
    
    (474,241
    )
    
    
    Non-current assets of
discontinued operations
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    15Other non-current assets
    
    
    776
    
    
    
    3,466
    
    
    
    6,342
    
    
    
    8,690
    
    
    
    
    
    
    
    19,274$
    17,016
    
    
    $
    480,211
    
    
    $
    566,853
    
    
    $
    36,937
    
    
    $
    (576,031
    )
    
    $
    524,986Liabilities, Redeemable
Convertible
Preferred Stock and Shareholders
EquityCurrent liabilitiesFloor plan payable
    
    $
    
    
    
    $
    
    
    
    $
    14,058
    
    
    $
    
    
    
    $
    
    
    
    $
    14,058Accounts payable
    
    
    
    
    
    
    9,663
    
    
    
    24,219
    
    
    
    2,007
    
    
    
    (2,083
    )
    
    
    33,806Accrued warranty obligations
    
    
    
    
    
    
    7,398
    
    
    
    28,910
    
    
    
    831
    
    
    
    
    
    
    
    37,139Accrued volume rebates
    
    
    
    
    
    
    7,992
    
    
    
    16,220
    
    
    
    1,523
    
    
    
    
    
    
    
    25,735Current liabilities of
discontinued operations
    
    
    
    
    
    
    
    
    
    
    190
    
    
    
    
    
    
    
    
    
    
    
    190Other current liabilities
    
    
    841
    
    
    
    120,180
    
    
    
    64,063
    
    
    
    245
    
    
    
    (92,697
    )
    
    
    92,632Total current liabilities
    
    
    841
    
    
    
    145,233
    
    
    
    147,660
    
    
    
    4,606
    
    
    
    (94,780
    )
    
    
    203,560Long-term liabilitiesLong-term debt
    
    
    89,273
    
    
    
    104,944
    
    
    
    7,410
    
    
    
    
    
    
    
    
    
    
    
    201,627Other long-term liabilities
    
    
    4,501
    
    
    
    8,210
    
    
    
    23,975
    
    
    
    130
    
    
    
    
    
    
    
    36,81693,774
    
    
    
    113,154
    
    
    
    31,385
    
    
    
    130
    
    
    
    
    
    
    
    238,443Intercompany balances
    
    
    (153,373
    )
    
    
    (41,119
    )
    
    
    525,814
    
    
    
    4,283
    
    
    
    (335,605
    )
    
    
    Redeemable convertible
preferred stock
    
    
    20,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,750Shareholders equityCommon stock
    
    
    71,059
    
    
    
    1
    
    
    
    59
    
    
    
    4
    
    
    
    (64
    )
    
    
    71,059Capital in excess of par value
    
    
    158,503
    
    
    
    613,336
    
    
    
    275,175
    
    
    
    32,727
    
    
    
    (921,238
    )
    
    
    158,503Accumulated deficit
    
    
    (174,538
    )
    
    
    (350,394
    )
    
    
    (413,240
    )
    
    
    (4,244
    )
    
    
    775,656
    
    
    
    (166,760
    )Accumulated other
comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (569
    )
    
    
    
    
    
    
    (569
    )Total shareholders equity
    
    
    55,024
    
    
    
    262,943
    
    
    
    (138,006
    )
    
    
    27,918
    
    
    
    (145,646
    )
    
    
    62,233$
    17,016
    
    
    $
    480,211
    
    
    $
    566,853
    
    
    $
    36,937
    
    
    $
    (576,031
    )
    
    $
    524,986
 Page 14 of 37




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##### Table of Contents



CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended July 3, 2004 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)Net cash provided by (used for)
operating activities
    
    $
    1,167
    
    
    $
    (27,772
    )
    
    $
    (8,004
    )
    
    $
    1,997
    
    
    $
    (115
    )
    
    $
    (32,727
    )Net cash used for discontinued
operations
    
    
    
    
    
    
    
    
    
    
    (1,830
    )
    
    
    (17
    )
    
    
    
    
    
    
    (1,847
    )Cash flows from investing activitiesAdditions to property plant and
equipment
    
    
    
    
    
    
    (804
    )
    
    
    (3,175
    )
    
    
    (151
    )
    
    
    
    
    
    
    (4,130
    )Investments in and advances to
unconsolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (109
    )
    
    
    
    
    
    
    (109
    )Investments in and advances
to consolidated subsidiaries
    
    
    (7,124
    )
    
    
    (576
    )
    
    
    8,199
    
    
    
    (639
    )
    
    
    140
    
    
    
    Proceeds on disposal of fixed assets
    
    
    
    
    
    
    12
    
    
    
    1,177
    
    
    
    51
    
    
    
    
    
    
    
    1,240Net cash (used for) provided by
investing activities
    
    
    (7,124
    )
    
    
    (1,368
    )
    
    
    6,201
    
    
    
    (848
    )
    
    
    140
    
    
    
    (2,999
    )Cash flows from financing activitiesDecrease in floor plan payable, net
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    (29
    )
    
    
    
    
    
    
    (65
    )Decrease in other long-term debt
    
    
    
    
    
    
    
    
    
    
    (6,029
    )
    
    
    
    
    
    
    
    
    
    
    (6,029
    )Purchase of Senior Notes
    
    
    (10,395
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,395
    )(Increase) decrease in restricted cash
    
    
    
    
    
    
    (112
    )
    
    
    7,822
    
    
    
    
    
    
    
    
    
    
    
    7,710Preferred stock issued, net
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,000Common stock issued, net
    
    
    4,512
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,512Dividends paid on preferred stock
    
    
    (160
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )Net cash provided by (used
for) financing activities
    
    
    5,957
    
    
    
    (112
    )
    
    
    1,757
    
    
    
    (29
    )
    
    
    
    
    
    
    7,573Net (decrease) increase in cash and
cash equivalents
    
    
    
    
    
    
    (29,252
    )
    
    
    (1,876
    )
    
    
    1,103
    
    
    
    25
    
    
    
    (30,000
    )Cash and cash equivalents at
beginning of period
    
    
    
    
    
    
    129,072
    
    
    
    3,824
    
    
    
    12,972
    
    
    
    
    
    
    
    145,868Cash and cash equivalents at
end of period
    
    $
    
    
    
    $
    99,820
    
    
    $
    1,948
    
    
    $
    14,075
    
    
    $
    25
    
    
    $
    115,868
 Page 15 of 37




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##### Table of Contents



CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Three Months Ended June 28, 2003 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)Net sales
    
    $
    
    
    
    $
    60,793
    
    
    $
    257,258
    
    
    $
    11,577
    
    
    $
    (33,975
    )
    
    $
    295,653Cost of sales
    
    
    
    
    
    
    52,233
    
    
    
    219,856
    
    
    
    8,982
    
    
    
    (34,600
    )
    
    
    246,471Gross margin
    
    
    
    
    
    
    8,560
    
    
    
    37,402
    
    
    
    2,595
    
    
    
    625
    
    
    
    49,182Selling, general and
administrative expenses
    
    
    
    
    
    
    9,603
    
    
    
    32,100
    
    
    
    1,516
    
    
    
    
    
    
    
    43,219Gain on debt retirement
    
    
    (7,130
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,130
    )Operating income (loss)
    
    
    7,130
    
    
    
    (1,043
    )
    
    
    5,302
    
    
    
    1,079
    
    
    
    625
    
    
    
    13,093Interest income
    
    
    2,780
    
    
    
    2,951
    
    
    
    385
    
    
    
    9
    
    
    
    (5,786
    )
    
    
    339Interest expense
    
    
    (2,780
    )
    
    
    (3,874
    )
    
    
    (6,307
    )
    
    
    (4
    )
    
    
    5,786
    
    
    
    (7,179
    )Income (loss) from continuing
operations before income
taxes
    
    
    7,130
    
    
    
    (1,966
    )
    
    
    (620
    )
    
    
    1,084
    
    
    
    625
    
    
    
    6,253Income tax expense (benefit)
    
    
    403
    
    
    
    (9,521
    )
    
    
    10,423
    
    
    
    (1,005
    )
    
    
    
    
    
    
    300Income (loss) from
continuing operations
    
    
    6,727
    
    
    
    7,555
    
    
    
    (11,043
    )
    
    
    2,089
    
    
    
    625
    
    
    
    5,953Loss from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    (702
    )
    
    
    (478
    )
    
    
    (1,746
    )
    
    
    (2,926
    )Income (loss) before equity
in (loss) income of
consolidated subsidiaries
    
    
    6,727
    
    
    
    7,555
    
    
    
    (11,745
    )
    
    
    1,611
    
    
    
    (1,121
    )
    
    
    3,027Equity in (loss) income of
Consolidated subsidiaries
    
    
    (2,579
    )
    
    
    (10,134
    )
    
    
    
    
    
    
    
    
    
    
    12,713
    
    
    
    Net income (loss)
    
    $
    4,148
    
    
    $
    (2,579
    )
    
    $
    (11,745
    )
    
    $
    1,611
    
    
    $
    11,592
    
    
    $
    3,027
 Page 16 of 37




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##### Table of Contents



CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Six Months Ended June 28, 2003 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)Net sales
    
    $
    
    
    
    $
    109,935
    
    
    $
    470,398
    
    
    $
    20,092
    
    
    $
    (61,975
    )
    
    $
    538,450Cost of sales
    
    
    
    
    
    
    97,258
    
    
    
    406,120
    
    
    
    16,149
    
    
    
    (62,600
    )
    
    
    456,927Gross margin
    
    
    
    
    
    
    12,677
    
    
    
    64,278
    
    
    
    3,943
    
    
    
    625
    
    
    
    81,523Selling, general and
administrative expenses
    
    
    
    
    
    
    20,481
    
    
    
    68,640
    
    
    
    2,761
    
    
    
    
    
    
    
    91,882Gain on debt retirement
    
    
    (12,555
    )
    
    
    (1,278
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,833
    )Operating income (loss)
    
    
    12,555
    
    
    
    (6,526
    )
    
    
    (4,362
    )
    
    
    1,182
    
    
    
    625
    
    
    
    3,474Interest income
    
    
    5,886
    
    
    
    5,944
    
    
    
    911
    
    
    
    98
    
    
    
    (11,953
    )
    
    
    886Interest expense
    
    
    (5,886
    )
    
    
    (7,856
    )
    
    
    (13,057
    )
    
    
    (17
    )
    
    
    11,953
    
    
    
    (14,863
    )Income (loss) from continuing
operations before income
taxes
    
    
    12,555
    
    
    
    (8,438
    )
    
    
    (16,508
    )
    
    
    1,263
    
    
    
    625
    
    
    
    (10,503
    )Income tax expense (benefit)
    
    
    403
    
    
    
    (9,521
    )
    
    
    7,423
    
    
    
    (705
    )
    
    
    
    
    
    
    (2,400
    )Income (loss) from
continuing operations
    
    
    12,152
    
    
    
    1,083
    
    
    
    (23,931
    )
    
    
    1,968
    
    
    
    625
    
    
    
    (8,103
    )(Loss) income from
discontinued
operations
    
    
    
    
    
    
    
    
    
    
    (7,580
    )
    
    
    98
    
    
    
    (2,813
    )
    
    
    (10,295
    )Income (loss) before equity
in income (loss) of
consolidated subsidiaries
    
    
    12,152
    
    
    
    1,083
    
    
    
    (31,511
    )
    
    
    2,066
    
    
    
    (2,188
    )
    
    
    (18,398
    )Equity in (loss) income of
Consolidated subsidiaries
    
    
    (28,362
    )
    
    
    (29,445
    )
    
    
    
    
    
    
    
    
    
    
    57,807
    
    
    
    Net (loss) income
    
    $
    (16,210
    )
    
    $
    (28,362
    )
    
    $
    (31,511
    )
    
    $
    2,066
    
    
    $
    55,619
    
    
    $
    (18,398
    )
 Page 17 of 37




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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 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 18 of 37




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##### Table of Contents



CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 28, 2003 Guarantor
    
    Non-guarantor
    
    ConsolidatingParent
    
    CHB
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    Consolidated(In thousands)Net cash provided by (used for)Continuing operating activities
    
    $
    2,213
    
    
    $
    76,825
    
    
    $
    (47,411
    )
    
    $
    865
    
    
    $
    813
    
    
    $
    33,305Net (cash used) provided by for
discontinued operations
    
    
    
    
    
    
    
    
    
    
    (7,786
    )
    
    
    8,584
    
    
    
    (813
    )
    
    
    (15
    )Cash flows from investing activitiesAcquisition deferred purchase price
Payments
    
    
    
    
    
    
    
    
    
    
    (3,882
    )
    
    
    
    
    
    
    
    
    
    
    (3,882
    )Additions to property, plant and
equipment
    
    
    
    
    
    
    (418
    )
    
    
    (2,442
    )
    
    
    (195
    )
    
    
    
    
    
    
    (3,055
    )Investments in and advances to
unconsolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (343
    )
    
    
    
    
    
    
    (343
    )Investments in and advances
to consolidated subsidiaries
    
    
    20,854
    
    
    
    (67,913
    )
    
    
    58,431
    
    
    
    (11,372
    )
    
    
    
    
    
    
    Proceeds on disposal of fixed assets
    
    
    
    
    
    
    694
    
    
    
    2,782
    
    
    
    1,600
    
    
    
    
    
    
    
    5,076Net cash provided by (used
for) investing activities
    
    
    20,854
    
    
    
    (67,637
    )
    
    
    54,889
    
    
    
    (10,310
    )
    
    
    
    
    
    
    (2,204
    )Cash flows from financing activitiesIncrease (decrease) in
floor plan payable, net
    
    
    
    
    
    
    
    
    
    
    2,594
    
    
    
    (288
    )
    
    
    
    
    
    
    2,306Decrease in other long-term debt
    
    
    
    
    
    
    (83
    )
    
    
    (198
    )
    
    
    (45
    )
    
    
    
    
    
    
    (326
    )Proceeds from short-term borrowings
    
    
    
    
    
    
    7,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,000Purchase of Senior Notes
    
    
    (22,599
    )
    
    
    (13,231
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,830
    )Increase in deferred financing costs
    
    
    
    
    
    
    (2,342
    )
    
    
    400
    
    
    
    
    
    
    
    
    
    
    
    (1,942
    )Decrease in restricted cash
    
    
    
    
    
    
    49,174
    
    
    
    550
    
    
    
    505
    
    
    
    
    
    
    
    50,229Common stock issued, net
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300Dividends paid on preferred stock
    
    
    (768
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (768
    )Net cash provided by (used
for) financing activities
    
    
    (23,067
    )
    
    
    40,518
    
    
    
    3,346
    
    
    
    172
    
    
    
    
    
    
    
    20,969Net increase (decrease) in
cash and cash equivalents
    
    
    
    
    
    
    49,706
    
    
    
    3,038
    
    
    
    (689
    )
    
    
    
    
    
    
    52,055Cash and cash equivalents at
beginning of period
    
    
    
    
    
    
    68,628
    
    
    
    (1,913
    )
    
    
    10,666
    
    
    
    
    
    
    
    77,381Cash and cash equivalents at
end of period
    
    $
    
    
    
    $
    118,334
    
    
    $
    1,125
    
    
    $
    9,977
    
    
    $
    
    
    
    $
    129,436
 Page 19 of 37




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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 and Six Months Ended July 3, 2004
versus the Three and Six Months Ended June 28, 2003 Overview We are a leading producer of manufactured housing in the United States.
As of July 3, 2004, we operated 29 homebuilding facilities in 14 states and two
provinces in western Canada. At July 3, 2004, our manufactured homes were sold
through 79 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. More than 800 of the independent
retailer locations were members of our Champion Home Centers (CHC) retail
distribution network. Our results for the second quarter of 2004 showed improvements in the
manufacturing and retail segments as compared to results in the second 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 in light of industry conditions. Since the industry downturn
began in mid-1999, we have closed and consolidated 39 manufacturing facilities,
including one in 2004 and seven in 2003. Since mid-2000 we have closed 276
retail sales locations, including 40 in 2003. Our pretax income from continuing operations in the second quarter of
2004 increased by $5.8 million over the second quarter of 2003, with
manufacturing and retail segment income improving by $4.6 million and $2.8
million, respectively, and net interest expense was lower by $2.3 million.
Second quarter 2004 results were favorably affected by a $3.9 million
mark-to-market credit related to our outstanding common stock warrant and by
the $12.0 million decrease in our allowance for tax adjustments. The second
quarter 2004 gain on debt retirement of $0.5 million was $6.7 million less than
debt retirement gains recorded in the second quarter of 2003. During the six months ended July 3, 2004, we continued to focus on
improving our financial position and reducing debt. During the first six
months, we purchased and retired $37.9 million of our Senior Notes in exchange
for payments of our common stock totaling 3.9 million shares and cash totaling
$10.4 million, resulting in a net pretax loss of $2.8 million. We also repaid
a $5.7 million industrial revenue bond. Since the beginning of 2003, we have
reduced indebtedness by $178.7 million. During the second 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 five months of 2004 declined 4.9% 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, before the current downturn began. 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 20 of 37




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##### Table of Contents



Consolidated Results Three Months EndedJuly 3,
    
    June 28,
    
    %2004
    
    2003
    
    Change(Dollars in millions)Net salesManufacturing
    
    $
    269.1
    
    
    $
    263.1
    
    
    
    2
    %Retail
    
    
    63.9
    
    
    
    67.0
    
    
    
    (5
    %)Less: Intercompany
    
    
    (26.9
    )
    
    
    (34.4
    )Total net sales
    
    $
    306.1
    
    
    $
    295.7
    
    
    
    4
    %Gross margin
    
    $
    53.6
    
    
    $
    49.2
    
    
    
    9
    %Selling, general and administrative expenses
(SG&A)
    
    
    41.4
    
    
    
    43.2
    
    
    
    (4
    %)Mark to market credit for common stock warrant
    
    
    (3.9
    )
    
    
    Gain on debt retirement
    
    
    (0.5
    )
    
    
    (7.1
    )Operating income
    
    $
    16.6
    
    
    $
    13.1
    
    
    
    27
    %As a percent of net salesGross margin
    
    
    17.5
    %
    
    
    16.6
    %SG&A
    
    
    13.5
    %
    
    
    14.6
    %Operating income
    
    
    5.4
    %
    
    
    4.4
    %
 Six Months EndedJuly 3,
    
    June 28,
    
    %2004
    
    2003
    
    Change(Dollars in millions)Net SalesManufacturing
    
    $
    478.9
    
    
    $
    472.3
    
    
    
    1
    %Retail
    
    
    113.8
    
    
    
    128.2
    
    
    
    (11
    %)Less: Intercompany
    
    
    (49.5
    )
    
    
    (62.0
    )Total net sales
    
    $
    543.2
    
    
    $
    538.5
    
    
    
    1
    %Gross margin
    
    $
    88.2
    
    
    $
    81.5
    
    
    
    8
    %Selling, general and administrative expenses
(SG&A)
    
    
    77.8
    
    
    
    91.8
    
    
    
    (15
    %)Mark to market charge for common stock warrant
    
    
    1.2
    
    
    
    Loss (gain) on debt retirement
    
    
    2.7
    
    
    
    (13.8
    )Operating income
    
    $
    6.5
    
    
    $
    3.5
    
    
    
    86
    %As a percent of net salesGross margin
    
    
    16.2
    %
    
    
    15.1
    %SG&A
    
    
    14.3
    %
    
    
    17.1
    %Operating income
    
    
    1.2
    %
    
    
    0.6
    %
 Net sales for the quarter and year to date periods ended July 3, 2004
increased from the comparable periods in 2003 due primarily to increased selling
prices per home and changes in mix, partially offset by lower sales volume as a
result of operating fewer retail sales centers and manufacturing facilities.
At July 3, 2004, we were operating 29 manufacturing facilities and 79 sales
centers compared to 34 manufacturing facilities and 115 sales centers at June
28, 2003. Sales in the first six 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 and six months ended July 3, 2004 increased
$4.4 million and $6.7 million, respectively, from the comparable periods of
2003, due primarily to improved manufacturing gross profit from production
efficiencies and reduced overhead costs resulting from the closure of
under-performing plants in 2003, partially offset by lower retail gross margin
from lower retail sales. SG&A for the three and six months ended July 3, 2004 decreased $1.9
million and $14.1 million, respectively, from the comparable periods of 2003,
primarily due to the operation of, on average, 16% fewer manufacturing
facilities and 33% fewer sales centers. Page 21 of 37




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During the quarter and six months ended July 3, 2004, as a result of
significant changes in the Companys
common stock price, the Company recorded mark-to-market adjustments of a $3.9
million credit and a $1.2 million net charge, respectively, for the change in
estimated fair value of our outstanding common stock warrants. During the
three months ended July 3, 2004, operating results included a gain of $0.5
million from the purchase and retirement of $10.9 million of Senior Notes for
cash payments totaling $10.4 million. During the six months ended July 3,
2004, operating results included a net loss of $2.8 million for the purchase
and retirement of $37.9 million of Senior Notes in exchange for 3.9 million
shares of Company common stock and $10.4 million of cash. During the second
quarter of 2003, operating results included a $7.1 million gain on
extinguishment of debt from the purchase and retirement of $22.7 million of
Senior Notes for $15.3 million of cash. During the first half of 2003,
operating results included a gain of $13.8 million from the purchase and
retirement of $50.6 million of Senior Notes for cash totaling $35.8 million. Manufacturing Operations We evaluate the performance of our manufacturing segment based on earnings
(loss) before interest, income taxes and general corporate expenses. Three Months EndedJuly 3,
    
    June 28,
    
    %2004
    
    2003
    
    ChangeManufacturing segment net sales (in millions)
    
    $
    269.1
    
    
    $
    263.1
    
    
    
    2
    %Manufacturing segment income (in millions)
    
    $
    17.6
    
    
    $
    13.0
    
    
    
    35
    %Manufacturing segment margin %
    
    
    6.5
    %
    
    
    4.9
    %Homes sold
    
    
    6,354
    
    
    
    6,925
    
    
    
    (8
    %)Floors sold
    
    
    12,037
    
    
    
    13,131
    
    
    
    (8
    %)Multi-section mix
    
    
    83
    %
    
    
    85
    %Average home price, excluding delivery
    
    $
    40,800
    
    
    $
    36,500
    
    
    
    12
    %
 Six Months EndedJuly 3,
    
    June 28,
    
    %2004
    
    2003
    
    ChangeManufacturing segment net sales (in millions)
    
    $
    478.9
    
    
    $
    472.3
    
    
    
    1
    %Manufacturing segment income (in millions)
    
    $
    22.2
    
    
    $
    6.2
    
    
    
    261
    %Manufacturing segment margin %
    
    
    4.6
    %
    
    
    1.3
    %Homes sold
    
    
    11,359
    
    
    
    12,596
    
    
    
    (10
    %)Floors sold
    
    
    21,761
    
    
    
    23,849
    
    
    
    (9
    %)Multi-section mix
    
    
    85
    %
    
    
    84
    %Average home price, excluding delivery
    
    $
    40,700
    
    
    $
    36,100
    
    
    
    13
    %Manufacturing facilities at period end
    
    
    29
    
    
    
    34
    
    
    
    (15
    %)
 Manufacturing net sales for the quarter ended July 3, 2004 increased
slightly compared to the second quarter of 2003 resulting from a 12% increase
in the average home selling price partially offset by selling 8% fewer homes.
We were operating 15% fewer manufacturing facilities at the end of the second
quarter of 2004 versus 2003. For the quarter ended July 3, 2004, our shipments
of HUD code homes declined 15% and our shipments of non-HUD code homes,
consisting primarily of modular and Canadian code homes, increased by 23% as
compared to shipments in the second quarter of 2003. Year-to-date
manufacturing sales volume was affected by operating fewer manufacturing
facilities, selling to a reduced number of Company-owned retail sales centers
and the negative effects of current industry conditions. Average manufacturing
selling prices increased in the 2004 second quarter as compared to the year ago
quarter, despite a lower multi-section mix, as a result of selling a greater
proportion of modular homes and increasing prices to offset rising material
costs. Manufacturing segment income in the second quarter of 2004 increased by
$4.6 million, or 35%, over the second quarter of 2003 on 2% growth in sales
while operating five fewer plants. Manufacturing gross margin improved by $6.0
million primarily due to production efficiencies and reduced manufacturing
overhead costs resulting from the closure of under-performing plants in 2003.
In the second quarter of 2004, manufacturing SG&A increased by $1.5 million despite operating fewer
plants due to increased sales and marketing costs. In addition, 2003 SG&A
included a gain of $0.8 million from the sale of a closed plant. For the six
months ended July 3, 2004, segment income improved by $16.0 million resulting
from an increase of $11.6 million in gross profit and lower SG&A expenses.
Reduced SG&A expenses resulted from operating fewer plants in 2004 and a $3.2
million charge in 2003 to increase repurchase reserves, offset partially by
higher sales and marketing costs in 2004 and a gain of $1.6 million in 2003 Page 22 of 37




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##### Table of Contents



from the sale of two idle manufacturing facilities. 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 July 3, 2004 totaled approximately
$90 million at the 29 plants operated, compared to $48 million at 34 plants
operated at June 28, 2003. Retail Operations We evaluate the performance of our retail segment based on earnings (loss)
before interest, income taxes and general corporate expenses. Three Months EndedJuly 3,
    
    June 28,
    
    %2004
    
    2003
    
    ChangeRetail segment net sales (in millions)
    
    $
    63.9
    
    
    $
    67.0
    
    
    
    (5
    %)Retail segment income (loss) (in millions)
    
    $
    2.0
    
    
    $
    (0.7
    )
    
    
    376
    %Retail segment margin %
    
    
    3.2
    %
    
    
    (1.1
    %)New homes sold
    
    
    623
    
    
    
    821
    
    
    
    (24
    %)Pre-owned homes sold
    
    
    287
    
    
    
    292
    
    
    
    (2
    %)Total homes sold
    
    
    910
    
    
    
    1,113
    
    
    
    (18
    %)% Champion-produced new homes sold
    
    
    89
    %
    
    
    93
    %New home multi-section mix
    
    
    90
    %
    
    
    85
    %Average new home price
    
    $
    95,500
    
    
    $
    75,400
    
    
    
    27
    %Average number of new homes sold per
sales center per month
    
    
    2.6
    
    
    
    2.3
    
    
    
    13
    %Average number of total homes sold per
sales center per month
    
    
    3.9
    
    
    
    3.2
    
    
    
    21
    %
 Six Months EndedJuly 3,
    
    June 28,
    
    %2004
    
    2003
    
    ChangeRetail segment net sales (in millions)
    
    $
    113.8
    
    
    $
    128.2
    
    
    
    (11
    %)Retail segment income (loss) (in millions)
    
    $
    1.8
    
    
    $
    (3.4
    )
    
    
    152
    %Retail segment margin %
    
    
    1.6
    %
    
    
    (2.7
    %)New homes sold
    
    
    1,105
    
    
    
    1,598
    
    
    
    (31
    %)Pre-owned homes sold
    
    
    591
    
    
    
    600
    
    
    
    (2
    %)Total homes sold
    
    
    1,696
    
    
    
    2,198
    
    
    
    (23
    %)% Champion-produced new homes sold
    
    
    90
    %
    
    
    95
    %New home multi-section mix
    
    
    91
    %
    
    
    84
    %Average new home price
    
    $
    94,600
    
    
    $
    73,900
    
    
    
    28
    %Average number of new homes sold per
sales center per month
    
    
    2.4
    
    
    
    2.3
    
    
    
    2
    %Average number of total homes sold per
sales center per month
    
    
    3.6
    
    
    
    3.1
    
    
    
    16
    %Average number of new homes in inventory
per sales center at period end
    
    
    13.3
    
    
    
    14.7
    
    
    
    (10
    %)Sales centers at period end
    
    
    79
    
    
    
    115
    
    
    
    (31
    %)
 Retail sales for the three and six months ended July 3, 2004 decreased 5%
and 11%, respectively, versus the comparable periods last year due to selling
less homes as a result of operating fewer sales centers, partially offset by a
higher average selling price per home. During the second quarter of 2004, we
operated an average of 78.5 sales centers, 33% lower than the average of 116.5
sales centers operated in the second quarter of 2003. The average number of
total homes sold per sales center improved for the quarter and year-to-date
periods of 2004 primarily as a result of selling more repossessed homes
purchased from finance companies. The 27% 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. Page 23 of 37




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##### Table of Contents



Retail segment income (loss) for the three and six months ended July 3,
2004 improved by $2.8 million and $5.2 million,
respectively, compared to the same periods in 2003 primarily due
to reduced SG&A from operating fewer sales centers in 2004 partially offset by
the impact of reduced sales. In addition, 2004 second quarter results include
a $0.6 million gain from the sale of a closed sales center. Discontinued Operations In 2003, we exited our consumer finance business. Income from discontinued
operations for the six months ended July 3, 2004 consisted primarily of a
favorable adjustment from the settlement of remaining contractual obligations
during the first quarter. Losses for the six months ended June 28, 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. Restructuring Charges In the second quarter of 2004, we closed one manufacturing facility and
during the six months ended June 28, 2003 we closed three manufacturing
facilities and three retail sales centers but incurred no significant
restructuring costs. As of July 3, 2004, accrued but unpaid restructuring
costs totaled $5.8 million compared to $6.8 million at April 3, 2004 and $8.1
million at January 3, 2004, primarily consisting of warranty reserves for
closed manufacturing plants. Interest Expense Interest expense decreased by $2.3 million and $4.6 million for the three
and six months ended July 3, 2004, respectively, versus comparable periods in
2003 due to reduced debt outstanding under our Senior Notes due 2007 and 2009
and the retirement of an industrial revenue bond in 2004. 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. We have net operating losses incurred
in 2003 totaling $80 million that are available to offset certain future
taxable income. The effective tax rate for the six months ended July 3, 2004
differs from the 35% federal statutory rate, in part, because of this 100%
valuation reserve. The 2004 rate was also affected by the $12 million decrease
in the allowance for tax adjustments as a result of the finalization of certain
tax examinations. During the six months ended June 28, 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, received during the second
quarter of 2003, 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 July
3, 2004, we estimate our contingent repurchase obligation was approximately
$260.0 million, before reduction for the resale value of the homes. As of July
3, 2004, our largest independent retailer, a nationwide retailer, had
approximately $10.4 million of inventory subject to repurchase for up to 30
months from date of invoice. As of July 3, 2004, our next 24 largest
independent retailers had an aggregate of approximately $44.6 million of
inventory subject to repurchase for up to 24 months from date of invoice, with
individual amounts ranging from approximately $0.6 million to $5.9 million per
retailer. For the six months ended July 3, 2004, we paid $0.7 million to
repurchase 23 homes and recorded related losses of $0.2 million. In the same
period last year, we paid $3.4 million and incurred losses of $0.6 million
related to the repurchase of 100 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 60% 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
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for a longer period of time. Liquidity and Capital Resources Unrestricted cash balances totaled $115.9 million at July 3, 2004. For
the six months ended July 3, 2004, net cash of $32.7 million was used for
operating activities, including $30.1 million invested in working capital.
During the period, accounts receivable increased by $16.9 million, inventories
increased by $20.3 million and accounts payable increased by $7.1 million as a
result primarily of typical seasonal factors in our business related to our
stronger selling months. Cash provided during the period included $12.0
million from issuance of convertible preferred stock, $4.5 million from stock
option exercises, $1.2 million from the disposal of fixed assets and $7.7
million from decreases in restricted cash balances. Cash uses during the
period included $4.1 million for capital expenditures, $10.4 million for the
purchase of Senior Notes due 2009 and $6.0 million to reduce other long-term
debt, primarily to repay an industrial revenue bond. Also during the period
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. This facility 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 July 3, 2004, facility availability
was $61.3 million of which $59.8 was 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 in effect only 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 July 3,
2004, our earnings, as defined, were $20.5 million and our ratio of earnings to
fixed charges was 0.5 to 1. At July 3, 2004, our liquidity, as defined, was
$107.5 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 transaction 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 guarantees of
additional debt otherwise permitted to be incurred. The resulting effect at
July 3, 2004, when combined with limits in our Senior Notes due 2009, was a
working capital line of credit limit of approximately $87 million of which no
more than approximately $29 million could be secured debt, as defined. We have two floor plan facilities with total availability of $19.6
million, of which $14.1 million was outstanding at July 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 July 3, 2004, we had approximately $10.8 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. Page 25 of 37




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Contingent liabilities and obligations We had significant contingent liabilities and obligations at July 3, 2004,
including estimated wholesale repurchase obligations totaling approximately
$260.0 million (without reduction for the resale value of the homes), surety
bonds and letters of credit totaling $91.9 million and guarantees by certain of
our consolidated subsidiaries of $5.7 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 July 3, 2004, our unrestricted cash balances totaled $115.9 million and
we had unused availability of $5.5 million under our two floor plan facilities
and $1.5 million of availability under our $75 million credit facility. Total
cash available from these sources was approximately $123 million. In the first
six months of 2004, continuing operating activities used cash of $32.7 million,
and cash used for capital expenditures was $4.1 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 not to exceed $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. Page 26 of 37




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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 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 Page 27 of 37




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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:  
    
    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 current trends in the industry continue, 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. The trading value per share of our stock has ranged from $1.65 to $11.68
during 2003 and the first six months Page 28 of 37




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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. These fluctuations may continue in the future, which could result in
operating losses during downturns. The manufactured housing industry is highly cyclical and is influenced by
many national and regional economic and demographic factors, including:  
    
    terms and availability of financing for homebuyers and retailers;
    
    consumer confidence;
    
    interest rates;
    
    population and employment trends;
    
    income levels;
    
    housing demand; and
    
    general economic conditions, including inflation and recessions. In addition, the manufactured housing industry is affected by seasonality.
Sales during the period from March to November are traditionally higher than
in other months. As a result of the foregoing factors, our sales and operating
results fluctuate, and we expect that they will continue to fluctuate in the
future. Moreover, we may experience operating losses during cyclical and
seasonal downturns in the manufactured housing market. Consumer
financing availability - 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 Page 29 of 37




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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. 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
July 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 July 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 Page 30 of 37




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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. 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. Page 31 of 37




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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:  
    
    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 $75.0 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 $35.0 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 $35.0 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 $35.0 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 July 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 $12.0 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. Page 32 of 37




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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 July 3, 2004, we had $6.0 million of a deferred purchase price
obligation which is payable in quarterly installments of $2.0 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 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 33 of 37




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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 $26.5 million, the amount of outstanding
borrowings at July 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 July 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 34 of 37




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PART II. OTHER INFORMATION 
 Item 2. Changes in Securities and Use of Proceeds. On January 5, 2004, April 5, 2004 and July 6, 2004 we issued 275,996
shares, 193,047 shares and 214,361 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 were used for general corporate purposes. 
 Item 4. Submission of Matters to a Vote of Security Holders On April 27, 2004 the Registrant held its 2004 Annual Meeting of
Shareholders at which the following matters were submitted to a vote of
security holders with results as follows: 1. Election of Directors Nominee
    
    Votes For
    
    Votes WithheldRobert W. Anestis
    
    
    62,832,501
    
    
    
    1,432,627Eric S. Belsky
    
    
    63,106,932
    
    
    
    1,158,196Selwyn Isakow
    
    
    62,605,556
    
    
    
    1,659,572Brian D. Jellison
    
    
    62,195,311
    
    
    
    2,069,817Albert A. Koch
    
    
    62,835,709
    
    
    
    1,429,419G. Michael Lynch
    
    
    62,606,854
    
    
    
    1,658,274
 
 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 services of Mr. Koch
provided under the AP Services agreement ended on July 31, 2004. 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
seven agreements for AlixPartners to provide additional services and programs
to the Company. The fees for six 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. Page 35 of 37




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During the three and six months ended July 3, 2004, we recorded expenses
of $1.4 million and $1.8 million and paid fees of $0.8 million and $1.5
million, respectively, 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.
    
    Description31.1
    
    

Certification
of Chief Executive Officer dated August 4, 2004,
relating to the Registrants Quarterly Report on Form 10-Q for the
quarter ended July 3, 2004.31.2
    
    

Certification
of Chief Financial Officer dated August 4, 2004,
relating to the Registrants Quarterly Report on Form 10-Q for the
quarter ended July 3, 2004.32.1
    
    
    Certification of Chief Executive Officer and Chief Financial
Officer of the Registrant, dated August 4, 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 July 3, 2004.
 (b) Current reports on Form 8-K  1)
    
    April 21, 2004. Press release filed under Item 5
announcing Champion Enterprises, Inc. first quarter 2004
results with condensed consolidated financial information.2)
    
    June 16, 2004. Amendment and restatement of the
Code of Ethics of Champion Enterprises, Inc. filed under Item
10.3)
    
    July 2, 2004. Amendment to current report on
Form 8-K (Item 5) filed February 18, 2004.4)
    
    July 13, 2004. Press release filed under Item 5
announcing that William C. Griffiths was named president and
chief executive officer of the Company effective August 1,
2004. In connection with this appointment, the Company
entered into an Executive Employment Agreement with Mr.
Griffiths.5)
    
    July 23, 2004. Press release filed under Item 5
announcing Champion Enterprises, Inc. second quarter 2004
results with condensed consolidated financial information. Page 36 of 37




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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 andChief Financial Officer(Principal Financial Officer)And:
    
    /s/ RICHARD HEVELHORSTRichard HevelhorstVice President and Controller(Principal Accounting Officer)
 Dated: August 4, 2004 Page 37 of 37




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EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    

Certification
of Chief Executive Officer dated August 4, 2004,
relating to the Registrants Quarterly Report on Form 10-Q for the
quarter ended July 3, 2004.31.2
    
    

Certification
of Chief Financial Officer dated August 4, 2004,
relating to the Registrants Quarterly Report on Form 10-Q for the
quarter ended July 3, 2004.32.1
    
    
    Certification of Chief Executive Officer and Chief Financial
Officer of the Registrant, dated August 4, 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 July 3, 2004.