CHAMPION ENTERPRISES INC - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark one)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.

FOR QUARTERLY PERIOD ENDED JUNE 29, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE TRANSITION PERIOD FROM ____________ TO ____________

Commission file number 1-9751
------

CHAMPION ENTERPRISES, INC.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Michigan 38-2743168
- ---------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

2701 Cambridge Court, Suite 300
Auburn Hills, MI 48326
-------------------------------------------------------------------------------
(Address of principal executive offices)

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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

49,161,188 shares of the registrant's $1.00 par value Common Stock were
outstanding as of August 2, 2002.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

CHAMPION ENTERPRISES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)

Unaudited Unaudited
Three Months Ended Six Months Ended
--------------------------- ----------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------

Net sales $ 361,506 $ 428,202 $ 667,883 $ 754,514

Cost of sales 301,300 351,791 563,168 633,295
--------- --------- --------- ---------

Gross margin 60,206 76,411 104,715 121,219

Selling, general and administrative expenses 67,720 67,839 125,958 139,702
Goodwill impairment charges 97,000 -- 97,000 --
Closing-related expenses 4,900 1,000 4,900 8,700
Gain on debt retirement (5,870) -- (5,870) --
--------- --------- --------- ---------

Operating income (loss) (103,544) 7,572 (117,273) (27,183)

Interest income 601 766 1,219 1,343
Interest expense (7,648) (6,548) (13,083) (13,553)
--------- --------- --------- ---------

Income (loss) before income taxes (110,591) 1,790 (129,137) (39,393)

Income taxes (benefits) 88,700 1,300 82,000 (13,800)
--------- --------- --------- ---------

Net income (loss) $(199,291) $ 490 $(211,137) $ (25,593)
========= ========= ========= =========

Basic earnings (loss) per share $ (4.10) $ 0.01 $ (4.36) $ (0.54)
========= ========= ========= =========

Weighted shares for basic EPS 48,729 47,847 48,617 47,672
========= ========= ========= =========

Diluted earnings (loss) per share $ (4.10) $ 0.01 $ (4.36) $ (0.54)
========= ========= ========= =========

Weighted shares for diluted EPS 48,729 49,508 48,617 47,672
========= ========= ========= =========

See accompanying Notes to Consolidated Financial Statements.

Page 2 of 40

CHAMPION ENTERPRISES, INC.
Consolidated Balance Sheets
(In thousands, except par value)

Unaudited December 29,
June 29, 2002 2001
------------- ------------
ASSETS

CURRENT ASSETS
Cash and cash equivalents $ 85,636 $ 69,456
Restricted cash 17,777 648
Accounts receivable, trade 49,436 27,507
Inventories 171,457 172,276
Deferred tax assets -- 39,100
Other current assets 46,423 36,637
--------- ---------
Total current assets 370,729 345,624
--------- ---------

LOANS RECEIVABLE 6,145 --

PROPERTY, PLANT AND EQUIPMENT 303,574 307,741
Less-accumulated depreciation 139,007 130,311
--------- ---------
164,567 177,430
--------- ---------

GOODWILL, NET 165,964 258,967

OTHER NON-CURRENT ASSETS
Restricted cash 18,443 --
Deferred tax assets -- 55,700
Other non-current assets 26,190 20,431
--------- ---------
Total assets $ 752,038 $ 858,152
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Floor plan payable $ 10,745 $ 70,919
Accounts payable 67,312 47,559
Warehouse borrowings 2,103 --
Accrued warranty obligations 41,248 42,540
Accrued volume rebates 33,145 39,426
Accrued compensation and payroll taxes 20,634 22,639
Accrued insurance 23,421 19,089
Other current liabilities 55,239 50,342
--------- ---------
Total current liabilities 253,847 292,514
--------- ---------

LONG-TERM LIABILITIES
Long-term debt 344,867 224,926
Deferred portion of purchase price 14,000 18,000
Other long-term liabilities 31,291 30,678
--------- ---------
390,158 273,604
--------- ---------
CONTINGENT LIABILITIES (Note 7)

REDEEMABLE CONVERTIBLE PREFERRED STOCK,
no par value, 5,000 shares authorized, 45 and 20 shares
issued and outstanding, respectively 43,959 20,000

SHAREHOLDERS' EQUITY
Common stock, $1 par value, 120,000 shares authorized, 48,822
and 48,320 shares issued and outstanding, respectively 48,822 48,320
Capital in excess of par value 39,362 36,423
Retained earnings (deficit) (22,688) 189,262
Accumulated other comprehensive income (loss) (1,422) (1,971)
--------- ---------
Total shareholders' equity 64,074 272,034
--------- ---------
Total liabilities and shareholders' equity $ 752,038 $ 858,152
========= =========

See accompanying Notes to Consolidated Financial Statements.

Page 3 of 40

CHAMPION ENTERPRISES, INC.
Consolidated Statements of Cash Flows
(In thousands)

Unaudited
Six Months Ended
-------------------------------------
June 29, 2002 June 30, 2001
------------- -------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(211,137) $ (25,593)
--------- ---------
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities:
Depreciation and amortization 11,563 18,337
Goodwill impairment charges 97,000 --
Deferred income taxes 94,800 --
Fixed asset impairment charges 1,900 6,500
Gain on debt retirement (5,870) --
Increase/decrease
Accounts receivable (21,929) (34,549)
Inventories 819 35,534
Accounts payable 19,753 26,749
Accrued liabilities 1,100 (1,672)
Other, net (6,229) 3,097
--------- ---------
Total adjustments 192,907 53,996
--------- ---------
Net cash provided by (used for) operating activities (18,230) 28,403
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (8,050) (10,233)
Increase in loans receivable (6,145) --
Additions to property and equipment (2,857) (3,229)
Investments in and advances to unconsolidated subsidiaries (1,139) (1,819)
Proceeds on disposal of fixed assets 3,069 1,494
--------- ---------
Net cash used for investing activities (15,122) (13,787)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in floor plan payable, net (60,174) (29,124)
Repayment of long-term debt (440) (333)
Proceeds from Senior Notes 145,821 --
Purchase of Senior Notes (23,750) --
Proceeds from warehouse borrowings 2,103 --
Increase in deferred financing costs (3,266) --
Increase in restricted cash (35,572) --
Preferred stock issued, net 23,810 --
Common stock issued, net 1,000 590
--------- ---------
Net cash provided by (used for) financing activities 49,532 (28,867)
--------- ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16,180 (14,251)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 69,456 50,143
--------- ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 85,636 $ 35,892
========= =========

See accompanying Notes to Consolidated Financial Statements.

Page 4 of 40

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 goodwill impairment charge discussed in Note
2 and the deferred tax asset valuation allowance discussed in Note 3.
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 December 29, 2001 was derived from audited
financial statements. Certain prior period amounts have been reclassified to
conform to the current period presentation. Accumulated other comprehensive
income (loss) consists of foreign currency translation adjustments. The
Company's total comprehensive loss for the three and six months ended June
29, 2002 was $198.7 million and $210.6 million, respectively compared to its
total comprehensive income of $0.6 million for the three months ended June
30, 2001 and total comprehensive loss of $25.6 million for the six months
then ended.

2. During the quarter ending June 29, 2002 the Company's operating results were
affected by continuing challenging industry conditions including reductions
in chattel lending availability, the effects of Conseco Finance Corp.
exiting the floor plan lending business, high industry repossession levels
and the Texas legislation that limits the use of chattel financing to
purchase a manufactured home. As a result of these conditions and their
effects on our sales volume and operating results, in June 2002 the Company
announced the closure or consolidation of 33 under-performing retail sales
centers and one manufacturing facility. The continuation of these industry
conditions through the month of July 2002, together with unfavorable changes
in the economy, caused the Company to re-evaluate our manufacturing and
retail capacity and overall cost structure. On August 8, 2002, the Company
announced the closure or consolidation of 64 retail sales centers and seven
manufacturing facilities. These additional closures bring the total retail
closures in 2002 to 101 or

46% of the sales centers we were operating at the beginning of 2002.

As a result of the significant downsizing of our retail operations in
reaction to continuing challenging industry conditions and in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," we performed a test for goodwill impairment
using the present value of future cash flows method. The results of this
test indicated that the fair value of the retail goodwill was less than its
carrying value. Therefore, in the quarter ended June 29, 2002, we recorded
non-cash goodwill impairment charges of $97 million.

The change in the carrying amount of goodwill follows:

Six Months Ended June 29, 2002
---------------------------------------------------------
Manufacturing Retail Other Total
------------- ------ ----- -----
(In thousands)

Balance at December 29, 2001 $ 126,482 $ 131,571 $ 914 $ 258,967
Impairment charges -- (97,000) -- (97,000)
Goodwill acquired -- -- 4,099 4,099
Other changes 31 (133) -- (102)
--------- --------- --------- ---------
Balance at June 29, 2002 $ 126,513 $ 34,438 $ 5,013 $ 165,964
========= ========= ========= =========

3. SFAS No. 109, "Accounting for Income Taxes," 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." It further states,
"forming a conclusion that a valuation allowance is not needed is difficult
when there is negative evidence such as cumulative losses in recent years"
and places considerably more weight on historical results and less weight on
future projections. The Company incurred pretax losses in 2000 and 2001 and
through the first half of 2002 totaling $391 million, including goodwill
impairment charges of $97 million in 2002 and $190 million in 2000. The
industry continues to be challenged by limited availability of consumer
chattel financing, high industry repossession levels and reductions in
wholesale floor plan lending availability and a negative economic outlook
resulting in a continued decline in wholesale shipments and retail sales. In
the absence of specific favorable factors, application of SFAS No. 109
requires a 100% valuation allowance for any net deferred tax asset when a
company has cumulative financial accounting losses, excluding unusual items,
over several years. Accordingly, after consideration of these factors, in
the quarter ended June 29, 2002, the Company provided a 100% valuation
allowance against deferred tax assets, which totaled $120 million. 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.

Because of provisions in the tax law which allow us to receive a carryback
refund for taxable losses incurred in 2002, in determining the amount of the
deferred tax asset valuation allowance we had to estimate the current tax
deductibility of certain costs and charges. These estimates are subject to
change. Any differences between these current estimates and actual values
determined at the end of this fiscal year will result in a change to the
valuation allowance which will be reflected in results of operations in the
third or fourth quarter of the year.

The income tax provision or benefit differs from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax rate
to pretax loss as a result of the following differences:

Six Months Ended
--------------------------
June 29, June 30,
2002 2001
-------- ----------
(In thousands)

Statutory U.S. tax rate $ (45,200) $ (13,800)
Change in rate resulting from
Deferred tax valuation allowance 120,000 --
State taxes, net of federal benefit (3,700) (1,000)
Nondeductible goodwill amortization and impairment charges 10,300 800
Other 600 200
--------- ---------
Total income tax provision (benefit) $ 82,000 $ (13,800)
========= =========

Page 5 of 40

4. A summary of inventories by component follows:

June 29, December 29,
2002 2001
----------- ------------
(In thousands)

New manufactured homes $ 102,187 $ 102,090
Raw materials 33,175 32,207
Work-in-process 7,810 8,130
Other inventory 28,285 29,849
----------- -----------
$ 171,457 $ 172,276
=========== ===========

Other inventory consists of pre-owned manufactured homes, land and park
spaces and improvements.

5. A summary of other current and non-current assets by component follows:

June 29, December 29,
2002 2001
----------- -----------
(In thousands)

Other Current Assets
Refundable income taxes $ 18,840 $ 21,700
Deposits 15,558 2,708
Other current assets 12,025 12,229
----------- -----------
$ 46,423 $ 36,637
=========== ===========

Other Non-Current Assets
Investment in unconsolidated subsidiaries $ 9,057 $ 8,955
Other non-current assets 17,133 11,476
----------- -----------
$ 26,190 $ 20,431
=========== ===========

Deposits consist primarily of cash collateral deposited for surety
bonds and insurance purposes.

Page 6 of 40

6. Reconciliations of segment sales to consolidated sales and segment
EBITA (earnings (loss) before interest, taxes, goodwill amortization
and impairment charges, general corporate expenses and certain gains)
to consolidated operating income (loss) follow. Finance EBITA (loss)
includes operating costs and net interest income earned on loans
receivable.

Three Months Ended
--------------------------
June 29, June 30,
2002 2001
----------- ---------
(In thousands)

Net sales
Manufacturing $ 313,699 $ 351,199
Retail 96,607 129,403
Less: intercompany (48,800) (52,400)
----------- ---------
Consolidated net sales $ 361,506 $ 428,202
=========== =========

Operating income (loss)
Manufacturing EBITA $ 10,426 $ 19,372
Retail EBITA (loss) (13,802) (1,817)
Finance EBITA (loss) (1,927) -
Gain on debt retirement 5,870 -
General corporate expenses (7,111) (7,101)
Goodwill impairment charges (97,000) -
Goodwill amortization - (2,882)
----------- ---------
Consolidated operating income (loss) $ (103,544) $ 7,572
=========== =========

Six Months Ended
-------------------------
June 29, June 30,
2002 2001
----------- ---------
(In thousands)

Net sales
Manufacturing $ 580,351 $ 611,709
Retail 176,732 237,805
Less: intercompany (89,200) (95,000)
----------- ---------
Consolidated net sales $ 667,883 $ 754,514
=========== =========

Operating loss
Manufacturing EBITA $ 11,729 $ 8,916
Retail EBITA (loss) (21,880) (16,655)
Finance EBITA (loss) (1,927) -
Gain on debt retirement 5,870 -
General corporate expenses (14,065) (13,683)
Goodwill impairment charges (97,000) -
Goodwill amortization - (5,761)
----------- ---------
Consolidated operating loss $ (117,273) $ (27,183)
=========== =========

For the three and six months ended June 29, 2002, retail EBITA (loss)
includes $1.9 million of non-cash fixed asset impairment charges and $3.0
million of lease termination and other costs associated with closures of
retail sales centers. For the quarter ended June 30, 2001, manufacturing
EBITA includes $1.0 million of non-cash fixed asset impairment charges
related to closed plants. For the six month period ended June 30, 2001,
manufacturing EBITA includes $3.3 million of non-cash fixed asset impairment
charges related to closed plants, and retail EBITA (loss) includes $3.2
million of non-cash fixed asset impairment charges and $2.2 million of lease
termination and other costs associated with closures of retail sales
centers. Retail floor plan interest expense not charged to retail EBITA
(loss) totaled $0.9 million and $2.3 million for the three and six months
ended June 29, 2002 and $2.2 million and $4.9 million for the three and six
months ended June 30, 2001, respectively.

Page 7 of 40

7. As is customary in the manufactured housing industry, the majority of
Champion's manufacturing sales to independent retailers are made in
connection with repurchase agreements with lending institutions that provide
wholesale floor plan financing to the retailers. Pursuant to these
agreements, for a period of either 12 or 15 months from invoice date of the
sale of the homes and upon default by the retailer 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 maximum
potential contingent repurchase obligation at June 29, 2002 was estimated to
be $270 million, without reduction for the resale value of the homes. This
amount compares to $300 million at the beginning of the year and $320
million a year ago. Repurchase losses incurred totaled $0.2 million and $0.5
million for the three and six months ended June 29, 2002, respectively, and
$1.3 million and $3.3 million for the three and six months ended June 30,
2001, respectively.

At June 29, 2002 the Company was contingently obligated for additional
purchase price of up to $42 million related to its 1999 acquisitions.
Management currently believes that none of this contingent purchase price
will require payment.

At June 29, 2002 Champion was contingently obligated for approximately $35
million under letters of credit and $43 million under surety bonds,
generally to support insurance, industrial revenue bond financing, and
license and service bonding requirements. The $35 million of letters of
credit and $21 million of the surety bonds support insurance reserves and
long-term debt that are reflected as liabilities in the Company's
consolidated balance sheet. As of June 29, 2002, the Company had fully
collateralized its letters of credit with restricted cash including $17.8
million to support insurance reserves and $18.4 million to support long-term
debt. In addition, the Company has deposited $9.6 million to secure surety
bonds.

At June 29, 2002, the Company is contingently liable for up to $15 million
under an unconditional guaranty of a $150 million warehouse facility of a
third party special purpose entity (which is included in our consolidated
financial statements). The warehouse facility, which has an outstanding
balance of $2.1 million at June 29, 2002, supports the Company's finance
company's operations and is included in the Company's consolidated balance
sheet.

At June 29, 2002 certain of the Company's subsidiaries were guarantors of
$6.6 million of debt of unconsolidated subsidiaries.

8. On April 2, 2002 the Company issued $25 million of Series C cumulative
convertible preferred stock and a warrant which was initially exercisable
based on approximately 1.1 million shares of common stock at a strike price
of $12.04 per share. In accordance with the terms of the warrant, on August
6, 2002 the number of shares under warrant and the strike price per share
were reset at 2.2 million shares and $10.02 per share, respectively.
Beginning on March 29, 2003, the warrant strike price will increase annually
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.
The Series C preferred stock has a seven-year term and a 5% annual dividend
that is payable quarterly, at the Company's option, in cash or common stock.
The initial conversion price is $9.63 per share. On June 29, 2003, the
conversion price will be adjusted to 115% of the common stock's then market
value (subject to certain limitations), provided that such conversion price
shall not be greater than $10.83 per share or less than $5.66 per share.
Commencing March 29, 2004, this preferred stock is redeemable by the holder
for common stock, and, at the Company's option, partially for cash. The net
proceeds of this issuance of $23.8 million were used to fund a portion of
the cash collateral for the letters of credit discussed above. The preferred
stock is presented net of issuance costs which are amortized over a period
of two years from the date of issuance by charges to paid-in-capital.

The rights and preferences of the Company's Series B-1 cumulative
convertible preferred stock, which was issued in July 2001 and of which $20
million is outstanding, were amended on March 29, 2002 to provide, among
other things, for mandatory redemption on March 29, 2004. Such redemption
may be made for either common stock or cash, at the Company's option.
Additionally, the commencement date of the holder's optional redemption
period for the Series B-1 preferred stock was changed to April 2, 2002, from
July 2003, and the expiration date of the holder's rights to purchase an
additional $12 million of Series B-1 preferred stock was extended to
December 31, 2004 from March 2003. Optional redemptions may be made only for
common stock.

Page 8 of 40

On June 30, 2002 Champion paid quarterly dividends on the preferred stock by
issuing 77,000 shares of the company's common stock. These shares are
included in issued and outstanding shares at June 29, 2002.

9. The numerators used in the Company's basic earnings per share (EPS)
calculations consist of net income (loss) as reported in the financial
statements less the effect of preferred stock dividends. The numerator for
diluted EPS calculations is the numerator of basic EPS adjusted by adding
back the preferred stock dividend. In loss periods the dividend is not added
back because the effect would be antidilutive. The denominators used in the
Company's EPS calculations are as follows: weighted average shares
outstanding are used in calculating basic EPS. Weighted average shares
outstanding plus the effect of dilutive securities are used in calculating
diluted EPS. The Company's potential dilutive securities consist of
outstanding stock options, convertible preferred stock, warrants and $22
million of deferred purchase price which is payable, at the Company's
option, in cash or common stock. Dilutive securities were not considered in
determining the denominator for diluted EPS in either six-month period
presented and for the three months ended June 29, 2002 because the effect on
the net loss would be antidilutive. Calculations of basic and diluted EPS
follow:

Three Months Ended
------------------------------------
June 29, June 30,
2002 2001
----------- ----------
(In thousands, except per share amounts)

Numerator:
Net income (loss) $ (199,291) $ 490
Less: preferred stock dividend 563 -
----------- ---------
Income (loss) available to common shareholders $ (199,854) $ 490
=========== =========

Denominator:
Weighted average shares outstanding 48,729 47,847
Effect of dilutive securities - options - 1,661
----------- ---------
Shares for diluted EPS 48,729 49,508
=========== =========

Basic earnings (loss) per share $ (4.10) $ 0.01
=========== =========
Diluted earnings (loss) per share $ (4.10) $ 0.01
=========== =========

Six Months Ended
----------------------------------
June 29, June 30,
2002 2001
----------- ----------
(In thousands, except per share amounts)

Numerator:
Net loss $ (211,137) $ (25,593)
Less: preferred stock dividend 813 -
----------- ---------
Loss available to common shareholders $ (211,950) $ (25,593)
=========== =========
Denominator:
Weighted average shares outstanding 48,617 47,672
=========== ==========

Basic and diluted loss per share $ (4.36) $ (0.54)
=========== =========

10. During the quarter ended June 29, 2002, the Company terminated its revolving
credit agreement for a $75 million secured line of credit. As a result of
the termination of this credit facility, the guarantees by the Company's
subsidiaries of the Senior Notes due 2009 terminated. However, Champion Home
Builders Co. ("CHB"), a wholly-owned subsidiary of the Company, has agreed
to be a guarantor and substantially all of CHB's subsidiaries have agreed to
be guarantors, on a basis subordinated to their guarantees of the Senior
Notes due 2007, of the $170 million Senior Notes due 2009. Additionally, the
Company arranged to have a bank provide $35 million of letters of credit on
a fully cash collateralized basis.

In April 2002, CHB issued $150 million of Senior Notes due 2007 with
interest payable semi-annually at an

Page 9 of 40

annual rate of 11.25%. The net proceeds, net of deferred financing costs, of
approximately $145 million from the offering were used to acquire the
manufactured housing loan origination business of CIT Group/Sales Financing,
Inc. ("CIT"), to repay a portion of the Company's debt, including a
significant portion of the Company's floor plan payable, to provide working
capital for the Company's existing business segments and the Company's new
consumer financing business, and for general corporate purposes. The Notes
contain covenants, which among other things limit the Company's ability to
incur additional indebtedness, issue additional redeemable preferred stock,
pay dividends on or repurchase common stock, make certain investments and
incur liens on assets. Substantially all of CHB's wholly owned subsidiaries
are guarantors and the Company is a subordinated guarantor of the Senior
Notes due 2007. The Senior Notes due 2007 are effectively senior to the
Senior Notes due 2009.

A covenant in the Senior Notes due 2007 currently limits additional debt to
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; warehouse financing meeting certain parameters up to
$200 million; other debt up to $30 million; and ordinary course indebtedness
that includes non-speculative hedging obligations, floor plan financing,
letters of credit, surety bonds, bankers' acceptances, repurchase agreements
related to retailer floor plan financing and guaranties of additional debt
otherwise permitted to be incurred.

In April 2002, the Company arranged a $150 million warehouse facility for a
consolidated third party special purpose entity to support the finance
company's operations. Interest on borrowings under the warehouse facility is
at LIBOR plus 80 basis points and there is a facility fee that is payable
monthly based on an annual rate of 40 basis points of the entire facility.
The warehouse facility has a term of one year and contains covenants that
require the Company's maintenance of minimum interest coverage ratios and
tangible net worth, as defined therein; certain minimum unsecured debt
ratings from two of the national ratings agencies; and that the Company
perform certain other duties thereunder. Subsequent to quarter-end, the
consolidated third party special purpose entity entered into waiver
agreements to cure noncompliance with the minimum interest coverage ratio
covenant for the quarter ended June 29, 2002 and to cure noncompliance with
the minimum tangible net worth covenant as of June 29, 2002 and provide for
a lower minimum tangible net worth requirement through August 30, 2002.

During the third quarter of 2002, the Company will seek and will need to
obtain amendments to the performance covenants of the $150 million warehouse
facility in order to ensure our continuing compliance therewith. If the
Company cannot obtain such amendments, it would be in default under the
facility. Also, if the Company's operating results do not improve it may
again become noncompliant with one or more of the covenants, which, if not
cured or amended, would result in default under the facility. In an event of
default, the agent bank could discontinue making further advances under the
facility and enact alternate "waterfall" provisions thereunder that would
reduce or eliminate current payments to the consolidated third party special
purpose entity from the underlying consumer loans. If the agent were to
discontinue further advances, the Company would seek other sources of
capital for its consumer finance operations.

The Company has a $15 million floor plan financing facility that contains a
covenant requiring it to maintain minimum earnings before interest, taxes,
depreciation and amortization (EBITDA), as defined. If the Company's
operating results do not improve, it may not be in compliance with this
covenant, which could result in the lender terminating the credit line and
causing such debt to become immediately due and payable. As of June 29,
2002, the Company had approximately $2 million outstanding under this
facility.

In August 2002, Moody's Investors Service ("Moody's") and Standard & Poor's
announced that they have placed under review, for possible downgrade, the
Company's senior implied credit ratings and the ratings on the Company's
Senior Notes due 2007 and Senior Notes due 2009. Because the $150 million
warehouse facility arranged by the Company in April 2002 requires that we
maintain certain minimum unsecured debt ratings, a negative ratings action
by Moody's or Standard & Poor's could cause a default under that facility. A
negative ratings action also could affect the Company's ability to obtain or
maintain various forms of business credit, including but not limited to
letters of credit, surety bonds, trade payables and floor plan financing, or
could result in the Company having to place additional collateral related
thereto.

During the quarter ended June 29, 2002, the Company purchased and retired
$30 million of its Senior Notes due

Page 10 of 40

2009 for $23.8 million, resulting in a gain of $5.9 million before tax
or $3.6 million after tax. At June 29, 2002, the Company's outstanding
notes payable balance due 2009 totaled $170 million.

During the quarter and year-to-date periods ended June 29, 2002, the
Company repaid approximately $53 million and $60 million of its floor
plan borrowings, respectively.

11. In April 2002 the Company acquired CIT's manufactured housing consumer
loan origination business and entered into certain related agreements
for approximately $5 million. Through June 29, 2002 the Company's newly
acquired financing segment had originated $6.1 million of loans and had
applied $2.4 million of these loans to the warehouse facility,
resulting in $2.1 million of proceeds. The Company structures sales of
originated consumer loans to the warehouse facility, and intends to
structure asset-backed securitizations in the capital markets, as
collateralized financing transactions under generally accepted
accounting principles. The consolidated balance sheet reflects the
related consumer loans as receivables, and reflects proceeds from the
sales of consumer loans through the warehouse facility, and will
reflect securitization proceeds, as indebtedness. Finance segment EBITA
(loss) for the three months ended June 29, 2002 primarily represent
operating costs and are included in selling, general and administrative
expenses.

12. During the three and six months ended June 29, 2002, the Company
recorded charges totaling $4.9 million for fixed asset impairments and
lease termination and other costs related to closed retail sales
centers. During the quarter ended June 30, 2001, the Company closed two
homebuilding facilities, resulting in non-cash fixed asset impairment
charges of $1.0 million. For the year-to-date period ended June 30,
2001, non-cash fixed asset impairment charges and lease termination and
other costs related to closed operations totaled $8.7 million.

13. In June 2001 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets," which requires
that goodwill and other intangible assets with indefinite lives not be
amortized but instead be tested annually for impairment based on a
reporting unit's fair value versus its carrying value. The Company
adopted SFAS No. 142 in January 2002, which resulted in the cessation
of the amortization of goodwill commencing on the first day of our
fiscal year 2002. Following is a reconciliation, for the 2001 periods
presented, of the Company's net income (loss) and earnings (loss) per
share adjusted to exclude goodwill amortization expense, net of tax:

Three Months Ended Six Months Ended
June 30, June 30,
2001 2001
------------------ ----------------
(In thousands except per share amounts)

Reported net income (loss) $ 490 $ (25,593)
Add back: Goodwill amortization
(net of taxes of $720 and $1,400, respectively) 2,165 4,361
--------- ----------

Adjusted net income (loss) $ 2,655 $ (21,232)
========= ==========

Basic earnings (loss) per share as reported $ 0.01 $ (0.54)
Goodwill amortization 0.05 0.09
--------- ----------
Adjusted basic earnings (loss) per share $ 0.06 $ (0.45)
========= ==========

Diluted earnings (loss) per share as reported $ 0.01 $ (0.54)
Goodwill amortization 0.04 0.09
--------- ----------
Adjusted diluted earnings (loss) per share $ 0.05 $ (0.45)
========= ==========

In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections," which no longer requires extinguishment of debt
to be characterized as an extraordinary gain. As a result of the
issuance of SFAS 145, the gain on debt retirement totaling $5.9 million
is included in the Company's operating loss for the three and six
months ended June 29, 2002 rather than as an extraordinary gain as
previously required under SFAS No.4.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal

Page 11 of 40

Activities," which requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is
incurred rather than recognized at the date of an entity's commitment
to an exit plan as currently required in accordance with Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The
Statement also establishes that fair value is the objective for initial
measurement of the liability. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption by the Company of SFAS No. 146 at the
beginning of fiscal 2003 will impact the manner in which the Company
reports certain restructuring activities, including facility closures,
employee severance and other exit activities. These charges will
generally be recognized when the liability is incurred.

14. In response to continued negative information about the economy,
consumer and floor plan financing availability for the industry, high
industry repossession levels, recent reductions in industry shipments
and incoming order rates at the Company's manufacturing facilities, the
Company, on August 8, 2002, announced the closing or consolidation of
64 retail sales centers and seven homebuilding facilities across the
country. These closures represent 35% of its current retail operations
and 15% of its manufacturing facilities. The closure of 64 additional
retail locations reduces the total number of retail locations it is
operating to 117. Third quarter pre-tax charges for the retail and
manufacturing closures will total approximately $44.1 million,
consisting primarily of non-cash fixed asset impairment charges of
$24.5 million, inventory write downs of $6.8 million, severance costs
of $4.3 million, additional warranty costs of $3.5 million, and retail
lease termination and other costs of $5.0 million. As a result of these
closures, employee reductions are estimated at 1,500, or 15% of the
total workforce.

15. Prior to April 2002, most of the subsidiaries included in the Company's
consolidated financial statements were directly wholly owned by
Champion Enterprises, Inc. In April 2002, CHB became the sole wholly
owned subsidiary of the Company and CHB became the sole shareholder of
almost all the other subsidiaries. At June 29, 2002, substantially all
of CHB's subsidiaries were guarantors of the $150 million Senior Notes
due 2007. Additionally, CHB has agreed to be a guarantor and
substantially all of CHB's subsidiaries have agreed to be guarantors,
on a basis subordinated to their guarantees of the Senior Notes due
2007, of the $170 million Senior Notes due 2009. The non-guarantor
subsidiaries include the Company's foreign operations and its
development companies.

Separate financial statements for each guarantor subsidiary are not
included in this filing because each guarantor subsidiary is
wholly-owned and was fully, unconditionally, jointly and severally
liable 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 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 12 of 40

CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Three Months Ended June 29, 2002

Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ ------------- ------------
(In thousands)

Net sales $ - $ 74,508 $ 326,463 $ 9,335 $ (48,800) $ 361,506
Cost of sales - 63,994 278,544 7,562 (48,800) 301,300
--------- --------- --------- --------- --------- ---------
Gross margin - 10,514 47,919 1,773 - 60,206
Selling, general and
administrative expenses - 13,421 52,242 2,057 - 67,720
Goodwill impairment charges - - 97,000 - - 97,000
Closing-related expenses - - 4,900 - - 4,900
Gain on debt retirement (5,870) - - - - (5,870)
--------- --------- --------- --------- --------- ---------
Operating income (loss) 5,870 (2,907) (106,223) (284) - (103,544)
Interest income 3,329 - 299 33 (3,060) 601
Interest expense (3,329) (3,179) (4,151) (49) 3,060 (7,648)
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes 5,870 (6,086) (110,075) (300) - (110,591)
Income taxes 2,230 10,537 72,524 3,409 - 88,700
--------- --------- --------- --------- --------- ---------

Income (loss) before equity
in income (loss) of
consolidated subsidiaries 3,640 (16,623) (182,599) (3,709) - (199,291)

Equity in income (loss) of
consolidated subsidiaries (202,931) (186,308) - - 389,239 -
--------- --------- --------- --------- --------- ---------
Net loss $(199,291) $(202,931) $(182,599) $ (3,709) $ 389,239 $(199,291)
========= ========= ========= ========= ========= =========

Page 13 of 40

CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Six Months Ended June 29, 2002

Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------ -------------- ------------
(In thousands)

Net sales $ - $ 139,845 $ 600,614 $ 16,624 $ (89,200) $ 667,883
Cost of sales - 121,975 516,776 13,617 (89,200) 563,168
--------- --------- --------- --------- --------- ---------

Gross margin - 17,870 83,838 3,007 - 104,715

Selling, general and
administrative expenses - 29,024 92,730 4,204 - 125,958
Goodwill impairment charges - - 97,000 - - 97,000
Closing-related expenses - - 4,900 - - 4,900
Gain on debt retirement (5,870) - - - - (5,870)
--------- --------- --------- --------- --------- ---------

Operating income (loss) 5,870 (11,154) (110,792) (1,197) - (117,273)

Interest income 7,193 - 832 205 (7,011) 1,219
Interest expense (7,193) (3,201) (9,585) (115) 7,011 (13,083)
--------- --------- --------- --------- --------- ---------

Income (loss) before income taxes 5,870 (14,355) (119,545) (1,107) - (129,137)

Income taxes 2,230 7,467 69,203 3,100 - 82,000
--------- --------- --------- --------- --------- ---------
Income (loss) before equity
in income (loss) of
consolidated subsidiaries 3,640 (21,822) (188,748) (4,207) - (211,137)
Equity in income (loss) of
consolidated subsidiaries (214,777) (192,955) - - 407,732 -
--------- --------- --------- --------- --------- ---------
Net loss $(211,137) $(214,777) $(188,748) $ (4,207) $ 407,732 $(211,137)
========= ========= ========= ========= ========= =========

Page 14 of 40

CHAMPION ENTERPRISES, INC.
Condensed Consolidating Balance Sheet
As of June 29, 2002

Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------- -------------- ------------
Assets (In thousands)

Current assets
Cash and cash equivalents $ - $ 72,908 $ 2,882 $ 9,846 $ - $ 85,636
Restricted cash - 16,500 624 653 - 17,777
Accounts receivable, trade - 12,044 47,246 2,346 (12,200) 49,436
Inventories - 13,151 159,705 2,020 (3,419) 171,457
Other current assets 9,600 11,719 94,767 1,540 (71,203) 46,423
--------- --------- --------- --------- --------- ---------
Total current assets 9,600 126,322 305,224 16,405 (86,822) 370,729
--------- --------- --------- --------- --------- ---------

Loans receivable - - 6,145 - - 6,145
Property and equipment, net - 41,717 119,881 2,969 - 164,567
Goodwill, net - - 164,410 1,554 - 165,964
Investment in consolidated
subsidiaries 278,957 388,811 91,768 4,828 (764,364) -
Restricted cash - 18,443 - - - 18,443
Other non-current assets 2,094 9,472 4,956 9,668 - 26,190
--------- --------- --------- --------- --------- ---------
$ 290,651 $ 584,765 $ 692,384 $ 35,424 $(851,186) $ 752,038
========= ========= ========= ========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities
Floor plan payable $ - $ - $ 10,345 $ 400 $ - $ 10,745
Accounts payable - 14,033 52,343 1,736 (800) 67,312
Warehouse borrowings - - 2,103 - - 2,103
Accrued warranty obligations - 5,523 34,975 750 - 41,248
Accrued volume rebates - 9,150 23,170 925 (100) 33,145
Other current liabilities 1,576 104,467 63,212 1,542 (71,503) 99,294
--------- --------- --------- --------- --------- ---------
Total current liabilities 1,576 133,173 186,148 5,353 (72,403) 253,847
--------- --------- --------- --------- --------- ---------

Long-term liabilities
Long-term debt 170,000 157,572 14,330 2,965 - 344,867
Deferred portion of purchase price - - 14,000 - - 14,000
Other long-term liabilities - 17,027 14,114 150 - 31,291
--------- --------- --------- --------- --------- ---------
170,000 174,599 42,444 3,115 - 390,158
--------- --------- --------- --------- --------- ---------
Intercompany balances 9,620 (122,727) 445,585 3,268 (335,746) -
Redeemable convertible
preferred stock 43,959 - - - - 43,959
Shareholders' equity
Common stock 48,822 1 60 3 (64) 48,822
Capital in excess of par value 39,362 613,336 225,646 30,022 (869,004) 39,362
Retained earnings (deficit) (22,688) (213,617) (207,499) (4,915) 426,031 (22,688)
Accumulated other
comprehensive income (loss) - - - (1,422) - (1,422)
--------- --------- --------- --------- --------- ---------
Total shareholders' equity 65,496 399,720 18,207 23,688 (443,037) 64,074
--------- --------- --------- --------- --------- ---------
$ 290,651 $ 584,765 $ 692,384 $ 35,424 $(851,186) $ 752,038
========= ========= ========= ========= ========= =========

Page 15 of 40

CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 29, 2002

Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------- ------------- ------------

(In thousands)
Net cash provided by (used
for) operating activities: $ (9,609) $ (2,734) $ (7,389) $ 1,502 $ -- $ (18,230)
--------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisitions -- -- (8,050) -- -- (8,050)
Increase in loans receivable -- -- (6,145) -- -- (6,145)
Additions to property and equipment -- (362) (2,359) (136) -- (2,857)
Investments in and advances to
unconsolidated subsidiaries -- -- -- (1,139) -- (1,139)
Investments in and advances
to consolidated subsidiaries (51,762) (33,134) 81,711 3,185 -- --
Proceeds on disposal of fixed assets -- -- 3,069 -- -- 3,069
--------- --------- --------- --------- --------- ---------
Net cash provided by (used
for) investing activities (51,762) (33,496) 68,226 1,910 -- (15,122)
--------- --------- --------- --------- --------- ---------

Cash flows from financing activities:
Increase (decrease) in floor
plan payable, net -- -- (60,251) 77 -- (60,174)
Payment of other long-term debt -- (25) (389) (26) -- (440)
Proceeds from Senior Notes -- 145,821 -- -- -- 145,821
Purchase of Senior Notes (23,750) -- -- -- -- (23,750)
Proceeds from warehouse borrowings -- -- 2,103 -- -- 2,103
Increase in deferred financing costs -- (1,466) (1,800) -- -- (3,266)
Increase in restricted cash (34,943) (624) (5) -- (35,572)
Preferred stock issued, net 23,810 -- -- -- -- 23,810
Common stock issued, net 1,000 -- -- -- -- 1,000
--------- --------- --------- --------- --------- ---------
Net cash provided by (used
for) financing activities 1,060 109,387 (60,961) 46 -- 49,532
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in
cash and cash equivalents (60,311) 73,157 (124) 3,458 -- 16,180
Cash and cash equivalents at
beginning of period 60,311 (249) 3,006 6,388 -- 69,456
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at
End of period $ -- $ 72,908 $ 2,882 $ 9,846 $ -- $ 85,636
========= ========= ========= ========= ========= =========

Page 16 of 40

CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2001

Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------- ------------- ------------
(In thousands)

Net sales $ -- $ 74,712 $ 396,948 $ 8,942 $ (52,400) $ 428,202
Cost of sales -- 64,628 332,137 7,426 (52,400) 351,791
--------- --------- --------- --------- --------- ---------
Gross margin -- 10,084 64,811 1,516 -- 76,411
Selling, general and
administrative expenses -- 13,324 52,379 2,136 -- 67,839
Closing-related expenses -- -- 1,000 -- 1,000
--------- --------- --------- --------- --------- ---------
Operating income (loss) -- (3,240) 11,432 (620) -- 7,572

Interest income 3,965 -- 869 50 (4,118) 766
Interest expense (3,965) (61) (6,554) (86) 4,118 (6,548)
--------- --------- --------- --------- --------- ---------

Income (loss) before income taxes -- (3,301) 5,747 (656) -- 1,790

Income taxes (benefits) -- (1,210) 2,776 (266) -- 1,300
--------- --------- --------- --------- --------- ---------
Income (loss) before equity in
income (loss) of
consolidated subsidiaries -- (2,091) 2,971 (390) -- 490
Equity in income (loss) of
consolidated subsidiaries 490 -- -- -- (490) --
--------- --------- --------- --------- --------- ---------

Net income (loss) $ 490 $ (2,091) $ 2,971 $ (390) $ (490) $ 490
========= ========= ========= ========= ========= =========

Page 17 of 40

CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2001

Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------- ------------- ------------
(In thousands)

Net sales $ -- $ 135,102 $ 699,077 $ 15,335 $ (95,000) $ 754,514
Cost of sales -- 122,077 593,194 13,024 (95,000) 633,295
--------- --------- --------- --------- --------- ---------

Gross margin -- 13,025 105,883 2,311 -- 121,219

Selling, general and
administrative expenses -- 24,685 110,669 4,348 -- 139,702
Closing-related expenses -- 1,000 7,700 -- 8,700
--------- --------- --------- --------- --------- ---------

Operating loss -- (12,660) (12,486) (2,037) -- (27,183)

Interest income 7,693 -- 1,449 110 (7,909) 1,343
Interest expense (7,693) (148) (13,445) (176) 7,909 (13,553)
--------- --------- --------- --------- --------- ---------

Loss before income taxes -- (12,808) (24,482) (2,103) -- (39,393)

Income tax benefit -- (4,730) (8,270) (800) -- (13,800)
--------- --------- --------- --------- --------- ---------
Loss before equity in
income (loss) of
consolidated subsidiaries -- (8,078) (16,212) (1,303) -- (25,593)
Equity in income (loss) of
consolidated subsidiaries (25,593) -- -- -- 25,593 --
--------- --------- --------- --------- --------- ---------
Net loss $ (25,593) $ (8,078) $ (16,212) $ (1,303) $ 25,593 $ (25,593)
========= ========= ========= ========= ========= =========

Page 18 of 40

CHAMPION ENTERPRISES, INC.
Condensed Consolidating Balance Sheet
As of December 29, 2001

Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
--------- --------- ------------ ------------- ------------- ------------

Assets (In thousands)
Current assets
Cash and cash equivalents $ 60,311 $ (249) $ 3,006 $ 6,388 $ -- $ 69,456
Restricted cash -- -- -- 648 -- 648
Accounts receivable, trade -- 8,446 30,457 1,204 (12,600) 27,507
Inventories -- 13,694 158,138 2,263 (1,819) 172,276
Deferred taxes and other current assets 479 12,091 127,102 1,857 (65,792) 75,737
--------- --------- --------- --------- --------- ---------
Total current assets 60,790 33,982 318,703 12,360 (80,211) 345,624
--------- --------- --------- --------- --------- ---------

Property and equipment, net -- 44,793 129,633 3,004 -- 177,430
Goodwill, net -- -- 257,444 1,523 -- 258,967
Investment in consolidated
subsidiaries 440,786 1 130,900 4,438 (576,125) --
Deferred taxes and other assets 3,143 6,834 53,581 12,573 -- 76,131
--------- --------- --------- --------- --------- ---------
$ 504,719 $ 85,610 $ 890,261 $ 33,898 $(656,336) $ 858,152
========= ========= ========= ========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities
Floor plan payable $ -- $ -- $ 70,596 $ 323 $ -- $ 70,919
Accounts payable -- 10,839 35,929 791 -- 47,559
Accrued warranty obligations -- 5,888 35,955 697 -- 42,540
Accrued volume rebates -- 12,082 26,801 1,043 (500) 39,426
Other current liabilities 2,280 90,053 64,112 917 (65,292) 92,070
--------- --------- --------- --------- --------- ---------
Total current liabilities 2,280 118,862 233,393 3,771 (65,792) 292,514
--------- --------- --------- --------- --------- ---------

Long-term liabilities
Long-term debt 200,000 7,597 14,338 2,991 -- 224,926
Deferred portion of purchase price -- -- 18,000 -- -- 18,000
Other long-term liabilities -- 16,012 14,569 97 -- 30,678
--------- --------- --------- --------- --------- ---------
200,000 23,609 46,907 3,088 -- 273,604
--------- --------- --------- --------- --------- ---------

Intercompany balances 8,434 (87,936) 414,301 949 (335,748) --

Redeemable convertible
preferred stock 20,000 -- -- -- -- 20,000

Shareholders' equity
Common stock 48,320 1 259 13 (273) 48,320
Capital in excess of par value 36,423 29,914 214,152 28,756 (272,822) 36,423
Retained earnings 189,262 1,160 (18,751) (708) 18,299 189,262
Accumulated other
comprehensive income (loss) -- -- -- (1,971) -- (1,971)
--------- --------- --------- --------- --------- ---------
Total shareholders' equity 274,005 31,075 195,660 26,090 (254,796) 272,034
--------- --------- --------- --------- --------- ---------
$ 504,719 $ 85,610 $ 890,261 $ 33,898 $(656,336) $ 858,152
========= ========= ========= ========= ========= =========

Page 19 of 40

CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2001

Guarantor Non-guarantor Consolidating
Parent CHB Subsidiaries Subsidiaries Eliminations Consolidated
-------- -------- ------------ ------------- ------------- ------------

(In thousands)
Net cash provided by (used
for) operating activities: $ 1,894 $ 1,327 $ 26,723 $ (1,541) $ -- $ 28,403
-------- -------- -------- -------- ------------ --------
Cash flows from investing activities:
Acquisitions -- -- (10,233) -- -- (10,233)
Additions to property and equipment -- (386) (2,614) (229) -- (3,229)
Investments in and advances to
unconsolidated subsidiaries -- -- -- (1,819) -- (1,819)
Investments in and advances
to consolidated subsidiaries (13,467) 441 11,985 1,041 -- --
Proceeds on disposal of fixed assets -- -- 1,494 -- -- 1,494
-------- -------- -------- -------- ------------ --------
Net cash provided by (used
for) investing activities (13,467) 55 632 (1,007) -- (13,787)
-------- -------- -------- -------- ------------ --------

Cash flows from financing activities:
Decrease in floor plan payable, net -- -- (29,101) (23) -- (29,124)
Increase (decrease) in other
long-term debt -- (22) (348) 37 -- (333)
Common stock issued, net 590 -- -- -- -- 590
-------- -------- -------- -------- ------------ --------
Net cash provided by (used
for) financing activities 590 (22) (29,449) 14 -- (28,867)
-------- -------- -------- -------- ------------ --------

Net increase (decrease) in
cash and cash equivalents (10,983) 1,360 (2,094) (2,534) -- (14,251)
Cash and cash equivalents at
beginning of period 41,152 (1,413) 3,124 7,280 -- 50,143
-------- -------- -------- -------- ------------ --------
Cash and cash equivalents at
End of period $ 30,169 $ (53) $ 1,030 $ 4,746 $ -- $ 35,892
======== ======== ======== ======== ============ ========

Page 20 of 40

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 JUNE 29, 2002
VERSUS THE THREE AND SIX MONTHS ENDED JUNE 30, 2001

CONSOLIDATED

Three Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------

Net sales (Dollars in millions)
Manufacturing $ 313.7 $ 351.2 (11%)
Retail 96.6 129.4 (25%)
Less: intercompany (48.8) (52.4)
--------- ----------
Total net sales $ 361.5 $ 428.2 (16%)
========= ==========

Gross margin $ 60.2 $ 76.4 (21%)
SG&A 67.7 67.8
Goodwill impairment charges 97.0 -
Closing-related expenses 4.9 1.0
Gain on debt retirement (5.9) -
--------- ----------
Operating income (loss) $ (103.5) $ 7.6
========= ==========

As a percent of sales
Gross margin 16.7% 17.8%
SG&A 18.7% 15.8%
Operating income (loss) (28.6%) 1.8%

Six Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------

Net sales
Manufacturing $ 580.4 $ 611.7 (5%)
Retail 176.7 237.8 (26%)
Less: intercompany (89.2) (95.0)
--------- ----------
Total net sales $ 667.9 $ 754.5 (11%)
========= ==========

Gross margin $ 104.7 $ 121.2 (14%)
SG&A 126.0 139.7 (10%)
Goodwill impairment charges 97.0 -
Closing-related expenses 4.9 8.7
Gain on debt retirement (5.9) -
--------- ----------
Operating loss $ (117.3) $ (27.2)
========= ==========

As a percent of sales
Gross margin 15.7% 16.1%
SG&A 18.9% 18.5%
Operating loss (17.6%) (3.6%)

Net sales for the quarter and year-to-date periods ended June 29, 2002 decreased
from the same periods in 2001 due primarily to our operating fewer retail sales
centers and decreasing manufacturing and retail sales volumes due to industry
conditions, partially offset by sales price increases in both the manufacturing
and retail segments. Sales in the first half of 2002 were affected by the
continuing reduction in chattel lending availability, the effects of Conseco
Finance Corp.

Page 21 of 40

("Conseco") withdrawing from the wholesale floor plan lending business,
continuing high industry repossession levels and Texas legislation, effective in
2002, which limits consumer use of chattel financing to purchase a manufactured
home. During the quarter we closed 33 retail sales centers and consolidated one
manufacturing facility. At June 29, 2002 we were operating 46 manufacturing
facilities and 181 sales centers compared to 49 manufacturing facilities and 230
sales centers at June 30, 2001.

Gross margin dollars for the three months ended June 29, 2002 declined $16.2
million from the comparable quarter of 2001, primarily due to lower sales volume
in the second quarter of 2002 versus the prior year. Gross margin declined as a
percent of sales due to a higher manufacturing overhead rate related to fixed
costs and inefficiencies from lower production volumes and lower backlogs, and
increased manufacturing material costs, partially offset by increased wholesale
and retail average sales prices. Gross margin dollars for the six months ended
June 29, 2002 declined $16.5 million from the comparable period of 2001
primarily due to the $87 million decline in consolidated net sales. Gross margin
for the six month period declined as a percent of sales due to the same factors
that affected the second quarter, as discussed above.

Second quarter 2002 selling, general and administrative expenses ("SG&A")
remained constant despite the decrease in sales volume, causing SG&A as a
percentage of sales to increase from 15.8% in 2001 to 18.7% in 2002. Expenses
from our newly acquired finance operation added $1.9 million to SG&A expense.
SG&A as a percentage of sales increased due to stable fixed costs versus lower
sales volumes. SG&A in 2001 included $2.9 million of goodwill amortization which
was not incurred in 2002 as a result of implementing SFAS No. 142 in January
2002. SG&A for the six-month period ended June 29, 2002 decreased 10% versus the
prior year. Lower SG&A is primarily due to the reduction in sales and operating
fewer manufacturing facilities and sales centers and the $5.8 million reduction
of goodwill amortization, which was eliminated in 2002 due to the implementation
of SFAS No. 142.

For the three and six months ended June 29, 2002, our operating loss includes
$1.9 million for fixed asset impairment charges and $3.0 million for lease
termination and other costs related to the closing of 33 retail sales centers in
the second quarter 2002. In the comparable quarter last year, our operating loss
included $1.0 million for fixed asset impairment charges. For the six months
ended June 30, 2001, operating loss included $6.5 million of fixed asset
impairment charges and $2.2 million of lease termination and other costs related
to the closing of four homebuilding facilities and 30 retail sales centers. In
the second quarter 2002, the Company purchased and retired $30 million of our
Senior Notes due 2009 for approximately $23.8 million plus accrued interest of
$1.0 million and recognized a gain on extinguishment of debt totaling $5.9
million.

During the quarter ended June 29, 2002, we re-evaluated our goodwill and
deferred tax assets and as a result recorded non-cash charges of $97 million
pre-tax for retail goodwill impairments and $120 million for a deferred tax
asset valuation allowance. See additional discussion under "Accounting Estimates
and Assumptions."

MANUFACTURING OPERATIONS

Three Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------

Net sales (in millions) $ 313.7 $ 351.2 (11%)
EBITA (in millions) $ 10.4 $ 19.4 (46%)
EBITA margin % 3.3% 5.5%
Homes sold 9,124 10,918 (16%)
Floors sold 16,778 19,516 (14%)
Multi-section mix 80% 76%
Average home price $ 33,000 $ 30,800 7%

Six Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------

Net sales (in millions) $ 580.4 $ 611.7 (5%)
EBITA (in millions) $ 11.7 $ 8.9 32%
EBITA margin % 2.0% 1.5%
Homes sold 16,869 19,128 (12%)
Floors sold 31,213 34,212 (9%)
Multi-section mix 81% 76%
Average home price $ 33,100 $ 30,700 8%
Manufacturing facilities at period end 46 49 (6%)

Page 22 of 40

Manufacturing net sales for the quarter ended June 29, 2002 decreased 11%
compared to the second quarter of 2001 as a result of selling 16% fewer homes
partially offset by a 7% increase in average selling prices. For the quarter,
shipments of HUD code homes declined 18% and shipments of non-HUD code homes
increased 8% from shipments in the second quarter of 2001. Wholesale shipments
of homes to our company-owned retailers and independent retailers were off 6%
and 18%, respectively, from shipment levels in the second quarter of 2001.
Manufacturing sales for the six months ended June 29, 2002 decreased 5% compared
to the same period last year due to a 12% decrease in the number of homes sold
partially offset by an 8% increase in average home selling price. Sales from our
four manufacturing facilities in Texas declined approximately $15 million and
$24 million, respectively, in the quarter and six month period ended June 29,
2002, as compared to the comparable periods of 2001. Manufacturing sales volume
was affected by the continuing reduction of chattel lending available to
consumers, the Texas legislation which limits consumer use of chattel financing
to purchase a manufactured home, a reduced number of company-owned retail sales
centers and the effects of Conseco withdrawing from the floor plan lending
business. Conseco had been the manufactured housing industry's largest floor
plan lender. In April 2002, Conseco stopped approving and funding new floor plan
requests. In May 2002, Conseco announced its intention to withdraw from the
floor plan lending business by December 31, 2002, and asked its retail customers
to pay off their floor plan balances by mid-July 2002, or enter into
arrangements to pay off their balances by December 31, 2002. We believe our
wholesale shipments in the quarter were impacted as independent retailers
transitioned to alternative floor plan lenders.

According to data reported by the National Conference of States on Building
Codes and Standards, U.S. industry wholesale shipments of HUD code homes for the
first and second quarters of 2002 were comparable to and declined 9.6% from,
respectively, shipments in the comparable 2001 periods. Of our total wholesale
shipments for the quarter, 85% were to independent retailers and
builders/developers and 15% were to our company-owned sales centers. Due to
market conditions, during the second quarter of 2002 we closed one manufacturing
facility.

Manufacturing EBITA in the second quarter of 2002 decreased $9 million from the
prior year, primarily due to reduced gross margin dollars, as a result of
reduced sales and increased material costs that were only partially offset by
increased selling prices. For the quarter ending June 29, 2002, manufacturing
EBITA as a percent of sales declined 2.2% from the comparable quarter of 2001
due to a higher overhead rate related to fixed costs and inefficiencies from
lower production volumes and lower backlogs, and SG&A which only declined
slightly from prior year levels.

Although retailer orders can be cancelled at any time without penalty, and
unfilled orders are not necessarily an indication of future business, our
unfilled wholesale orders for housing at June 29, 2002 totaled approximately $26
million at the 46 plants operated, compared to $43 million at 49 plants at June
30, 2001.

RETAIL OPERATIONS

Three Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------

Net sales (in millions) $ 96.6 $ 129.4 (25%)
EBITA (loss) (in millions) $ (13.8) $ (1.8) (660%)
EBITA (loss) margin % (14.3%) (1.4%)
New homes sold 1,430 2,183 (34%)
Pre-owned homes sold 376 529 (29%)
Total homes sold 1,806 2,712 (33%)
% Champion-produced new homes sold 96% 86%
New home multi-section mix 78% 72%
Average new home price $ 62,600 $ 55,900 12%
Average number of new homes sold per
sales center per month 2.4 3.2 (25%)

Page 23 of 40

Six Months Ended
--------------------------------
June 29, June 30, %
2002 2001 Change
--------- ---------- ----------

Net sales (in millions) $ 176.7 $ 237.8 (26%)
EBITA (loss) (in millions) $ (21.9) $ (16.7) (31%)
EBITA (loss) margin % (12.4%) (7.0%)
New homes sold 2,624 4,007 (35%)
Pre-owned homes sold 723 1,042 (31%)
Total homes sold 3,347 5,049 (34%)
% Champion-produced new homes sold 95% 85%
New home multi-section mix 78% 71%
Average new home price $ 62,100 $ 55,700 11%
Average number of new homes sold per
sales center per month 2.1 2.8 (25%)
Average number of new homes in inventory
per sales center at period end 16 15 7%
Sales centers at period end 181 230 (21%)

Retail sales for the three and six months ended June 29, 2002 decreased 25% and
26%, respectively versus the same periods last year due to our operating fewer
retail sales centers and selling fewer homes per sales center, partially offset
by higher average selling prices. In the second quarter of 2002 we operated an
average of 198 sales centers, 14% lower than the average of 230 sales centers
operated in the second quarter of 2001. Sales per sales center through the first
six months of 2002 were affected by the continuing reduction of chattel lending
availability, the high level of competing repossession sales, the lengthening of
the sales cycle because of the industry shift to more real estate mortgages, and
the Texas legislation, effective in 2002, that limits consumer use of chattel
financing to purchase a manufactured home. Approximately 25% of our
company-owned retail sales centers are located in Texas. Our retail sales in
Texas declined approximately $15 million and $29 million, respectively, in the
quarter and six month periods ended June 29, 2002, versus the comparable periods
of 2001. Average selling prices increased due in part to selling a greater
proportion of higher priced, multi-section homes. Based on data reported by
Statistical Surveys, Inc., and our estimates, we believe that industry retail
sales of new homes in the first five months of 2002 dropped approximately 7%
from prior year levels.

Retail EBITA (loss) for the quarter ended June 29, 2002 worsened by $12.0
million compared to the second quarter of 2001. Approximately $4.9 million of
this change was comprised of $1.9 million for fixed asset impairment charges and
$3.0 million for lease termination and other costs related to the closing of 33
retail sales centers. Gross margin dollars declined by $6 million due to the
reduction in retail sales volume.

The 97 retail sales centers that we closed or consolidated in the quarter ended
June 29, 2002, or whose closure or consolidation was announced on August 8,
2002, incurred operating losses, excluding floor plan interest charges,
totaling $8.5 million in the six months ended June 29, 2002.

CONTINGENT REPURCHASE OBLIGATIONS

We are contingently obligated under repurchase agreements with certain lending
institutions that provide wholesale floor plan financing to independent
retailers. At June 29, 2002 the maximum contingent repurchase obligation was
approximately $270 million, without reduction for the resale value of the homes.
For the six months ended June 29, 2002, Champion paid $2.9 million and incurred
losses of $0.5 million for the repurchase of 100 homes. In the same period last
year, the Company paid $17.0 million and incurred losses of $3.3 million for the
repurchase of 562 homes. Our maximum contingent repurchase obligation has
declined $30 million since year end and $50 million from a year ago due to
reduced inventory at our independent retailers and due to an estimated 34% of
independent retailer inventory being financed at local banks, from whom we have
historically suffered only negligible repurchase losses.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $85.6 million at June 29, 2002. For the six
months ended June 29, 2002, $145 million was provided by the net proceeds from
the issuance of the Senior Notes due 2007, $23.8 million from the net proceeds
of the preferred stock issuance and $2 million from proceeds on the Company's
warehouse facility placements. Expenditures during the first six months of 2002
included $18 million of net cash used for operations, $60 million to reduce
floor plan borrowings, $35 million to cash collateralize our letters of credit,
$24 million for the repurchase of Senior Notes due 2009, $8 million for
acquisition related payments, $6 million in finance loans receivable, $3 million
for

Page 24 of 40

capital improvements and $1 million for investments in and advances to
unconsolidated subsidiaries.

During 2002, accounts receivable and accounts payable increased due to year-end
levels generally being low due to seasonality, holidays and vacations. Other
current assets increased due to cash collateral deposits totaling $12.9 million
made for insurance and surety bond requirements. Refundable income taxes related
to the tax benefit of our current year to date operating loss were offset by the
$17.5 million income tax refund received during the second quarter of 2002.
Other non-current assets increased due to the increase in deferred financing
costs associated with the Senior Notes due 2007 and the warehouse credit
facility.

During the quarter ended June 29, 2002, the following transactions were
completed:

- We received net proceeds of $23.8 million from the issuance of
$25 million of redeemable convertible preferred stock. The net
proceeds were used to cash collateralize a portion of our $35
million of letters of credit in connection with the
termination of our revolving credit agreement, as discussed
below.

- On April 22, 2002 we terminated our revolving credit agreement
for a $75 million secured line of credit.

- We arranged to have a bank provide $35 million of letters of
credit on a fully cash collateralized basis.

- One of our subsidiaries issued $150 million of Senior Notes
due 2007 with interest payable semi-annually at an annual rate
of 11.25%. The net proceeds from the offering of approximately
$145 million were used to finance the acquisition of the
manufactured housing loan origination business of CIT
Group/Sales Financing, Inc. ("CIT"), to repay a portion of our
debt, including a significant portion of our floor plan
payable, to provide working capital for our existing business
segments and our new consumer financing business, and for
general corporate purposes. The Senior Notes due 2007 contain
covenants, which among other things limit the Company's
ability to incur additional indebtedness, issue additional
redeemable preferred stock, pay dividends on or repurchase
common stock, make certain investments and incur liens on
assets. The debt incurrence covenant in the Notes currently
limits additional debt to 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; warehouse financing meeting certain parameters up
to $200 million; other debt up to $30 million; and ordinary
course indebtedness that includes non-speculative hedging
obligations, floor plan financing, letters of credit, surety
bonds, bankers' acceptances, repurchase agreements related to
retailer floor plan financing and guaranties of additional
debt otherwise permitted to be incurred.

- We completed the acquisition of the manufactured housing loan
origination business of CIT for approximately $5 million.

- We arranged a $150 million warehouse facility to support our
finance company's future operations. Consumer loans originated
by our finance company will be sold in exchange for cash
proceeds under the warehouse line.

- We purchased and retired $30 million of our Senior Notes due
2009 for approximately $23.8 million plus accrued interest of
$1.0 million.

- We repaid approximately $53 million of our floor plan
borrowings, including substantially all amounts with Conseco.

We have used demand borrowings from floor plan lenders to finance a significant
portion of our retail inventory of new homes. We intend to maintain floor plan
lines of credit totaling approximately $30 million with three floor plan
lenders. Our outstanding balance of floor plan borrowings at June 29, 2002
totaled approximately $11 million.

We plan to spend less than $10 million in 2002 on capital expenditures.

The warehouse facility has been extended to a consolidated third party special
purpose entity, has a one year term and will provide for up to $150 million of
revolving credit availability based on, and secured by, manufactured home loans
and contracts acquired from us by the consolidated third party special purpose
entity. The consolidated third party entity functions to ensure that the
warehouse facility provider takes clear title to the loans it acquires. Proceeds
from the

Page 25 of 40

warehouse facility will be used to fund a portion of the purchase price of these
loans and contracts by the consolidated third party entity from a consolidated
special purpose subsidiary owned by the Company. The remainder of the purchase
price will be financed by a subordinated note from the consolidated third party
entity to our consolidated special purpose subsidiary. Our special purpose
subsidiary will, in turn, use the cash proceeds received from the consolidated
third party entity to pay a portion of the purchase price of the loans and
contracts from our finance company. Our finance company will use these proceeds
and other cash from operations as well as a portion of the proceeds from the
issuance of the Senior Notes due 2007 to purchase manufactured home loans and
contracts from company-owned and independent retailers.

The warehouse facility contains covenants requiring the Company to maintain
minimum interest coverage ratios and tangible net worth, as defined therein;
maintain certain minimum unsecured debt ratings from two of the national ratings
agencies; and perform certain other duties thereunder. Subsequent to quarter
end, the consolidated third party special purpose entity entered into waiver
agreements to cure its noncompliance with the minimum interest coverage ratio
covenant for the quarter ended June 29, 2002 and to cure noncompliance with the
minimum tangible net worth covenant as of June 29, 2002 and provide for a lower
minimum tangible net worth requirement through August 30, 2002.

During the third quarter of 2002, we are seeking and will need to obtain
amendments to the performance covenants of the $150 million warehouse facility
in order to ensure our continuing compliance therewith. Also, if our operating
results do not improve we may again become noncompliant with one or more of the
covenants, which, if not cured or amended, would result in default under the
facility. In an event of default, the agent bank could discontinue making
further advances under the facility and enact alternate "waterfall" provisions
thereunder that would reduce or eliminate current payments to the consolidated
third party special purpose entity from the underlying consumer loans. If the
agent were to discontinue further advances, we would seek other sources of
capital for our consumer finance operations.

We also have a $15 million floor plan financing facility that contains a
covenant requiring us to maintain minimum earnings before interest, taxes,
depreciation and amortization (EBITDA), as defined. If our operating results do
not improve, we may not be in compliance with this covenant, which could result
in the lender terminating the credit line and causing such debt to become
immediately due and payable. As of June 29, 2002, the Company had approximately
$2 million outstanding under this facility.

In August 2002, Moody's Investors Service and Standard & Poor's announced that
they have placed under review, for possible downgrade, the Company's senior
implied credit ratings and the ratings on the Company's Senior Notes due 2007
and Senior Notes due 2009. Because the $150 million warehouse facility arranged
by the Company in April 2002 requires that we maintain certain minimum unsecured
debt ratings, a negative ratings action by Moody's or Standard & Poor's could
cause a default under that facility. A negative ratings action also could affect
the Company's ability to obtain or maintain various forms of business credit,
including but not limited to letters of credit, surety bonds, trade payables and
floor plan financing, or could result in the Company having to place additional
collateral related thereto.

From time to time, as a sufficient amount of manufactured home loans and
contracts that satisfy established underwriting guidelines are accumulated, we
expect the warehouse facility will be repaid, in whole or in part, with proceeds
from the sale of debt obligations or other securities in the asset-backed
securities markets. We expect these debt obligations or other securities will be
secured by the underlying manufactured home loans and contracts purchased by the
consolidated special purpose entities from our new consumer finance business.

We believe that our cash balances, cash flows from operations, availability
under our floor plan arrangements, proceeds under our warehouse facility from
sales of consumer loans originated by our new finance business, and proceeds
from expected asset-backed securitizations in the capital markets of loans
originated, will be adequate to meet our anticipated financing needs, operating
requirements and capital expenditures for the next twelve months. In the event
one or more of our capital resources were to become unavailable, we would revise
our operating strategies accordingly.

The restructuring actions announced in August 2002 result in estimated cash
charges totaling approximately $13 million pretax. These closures and the
expected operating losses should result in a tax refund of greater than $40
million in 2003.

We had significant contingent obligations at June 29, 2002, including a maximum
potential wholesale repurchase obligation of approximately $270 million, surety
bonds and letters of credit totaling $33 million (net of $45 million of cash
collateral) and guarantees by certain of our consolidated subsidiaries of $6.6
million of debt of unconsolidated

Page 26 of 40

subsidiaries. In addition, the Company is contingently liable under an
unconditional guaranty of a consolidated third party special purpose entity's
$150 million warehouse facility to support our finance company's operations in
an amount limited to $15 million. At June 29, 2002, $2.1 million was outstanding
under the warehouse facility and is reflected in our consolidated balance sheet.
If we were required to fund a material amount of these contingent obligations,
our liquidity would be adversely affected.

SUBSEQUENT EVENTS

In response to continued negative information about the economy, consumer and
floor plan financing availability for the industry, high industry repossession
levels, recent reductions in industry shipments and incoming order rates at the
Company's manufacturing facilities, the Company, on August 8, 2002, announced
the closing or consolidation of 64 retail sales centers and seven homebuilding
facilities across the country. These closures represent 35% of our current
retail operations and 15% of our manufacturing facilities. The closure of 64
additional retail locations reduces the total number of retail locations we
operate to 117. Third quarter pre-tax charges for the retail and manufacturing
closures will total approximately $44.1 million, consisting primarily of
non-cash fixed asset impairment charges of $24.5 million, inventory write downs
of $6.8 million, severance costs of $4.3 million, additional warranty costs of
$3.5 million, and retail lease termination and other costs of $5.0 million. As a
result of these closures, employee reductions are estimated at 1,500, or 15% of
the total workforce.

ENTRY INTO CONSUMER FINANCE BUSINESS

In April 2002, we acquired CIT's manufactured housing consumer loan origination
business and certain related agreements for approximately $5 million. This
business operates as HomePride Finance Corp. ("HPFC"), an indirect wholly owned
subsidiary of the Company. With this transaction we acquired $0.5 million of
fixed assets, we were assigned two office leases and we obtained the operating
procedures and policies and the customer lists for the business. We did not
purchase any of the loan portfolios or related obligations of CIT's loan
origination business. The CIT loan origination platform has technologically
advanced systems, with nearly 100% of loan applications received through the
Internet. We have entered into agreements whereby, for a period of three years,
CIT is providing its loan origination and servicing systems to us and is
servicing the loans we originate. We have agreed to pay CIT $249,000 annually
plus a monthly servicing fee based on 8.33 basis points of loans receivable up
to $200 million and 6.25 basis points on loans receivable in excess of $200
million and a monthly loan origination fee based on 25 to 50 basis points of the
amount of loans originated, subject to a minimum fee of $100,000 per month.

Entry into consumer finance complements both our manufacturing and retail
operations. We have been assessing our entry into consumer finance since
expanding our manufactured housing retail operations in 1998. We believe that
the departure of several industry consumer chattel lenders during the past three
years and other conditions resulting from the recent industry downturn present
us the opportunity to capitalize on reduced competition, enhanced underwriting
practices and other favorable trends in the manufactured home consumer lending
industry. We are building upon CIT's manufactured housing loan origination
platform by integrating CIT's disciplined underwriting practices with our retail
resources and industry knowledge under the direction of a senior management team
with over 16 years of manufactured home consumer lending experience.

HPFC is headquartered in Overland Park, Kansas, has an office in Sacramento,
California, and employs approximately 50 people. We are funding loans to
consumers who purchase manufactured homes from both company-owned and
independent retailers. We also plan to originate some loans for purchases of
high quality pre-owned manufactured homes. We have implemented a finance
participation model under which our company-owned retailers will participate in
the management of delinquent loans they originate and the remarketing of
repossessed homes to improve loan performance and mitigate loan losses. This
finance participation model is also intended to produce higher quality loans and
stronger retail location manager retention.

The loan origination team performs monthly quality and audit loan reviews. We
subject independent retailers to a thorough approval process before accepting
loan applications from them. We use the credit bureau score provided by at least
one of the three major credit reporting agencies to determine pricing and help
assess credit risk. Additionally, each application is evaluated for borrower
stability, collateral value, willingness to repay, and ability to pay.

Page 27 of 40

We require a down payment in the form of cash, the trade-in value of a
previously-owned manufactured home, and/or the fair market value of equity in
real property pledged as additional collateral. The balance of the purchase
price is financed using installment sales contracts or mortgage instruments
providing for a purchase money security interest in the manufactured home and a
mortgage on any real property pledged as additional collateral. Generally, the
contracts provide for equal monthly payments over a period of seven to 30 years
at fixed rates of interest. We believe that disciplined loan origination
policies, plus the alignment of the interests of our company-owned retailers and
our retail finance company will result in higher quality loans, reduced loan
delinquencies from higher consumer satisfaction, improved collections and
greater recovery on repossessed homes.

We have used a portion of the proceeds of the April 2002 issuance of $150
million Senior Notes due 2007, together with cash from operations and proceeds
from the sale of manufactured home loans and contracts in connection with the
warehouse facility, to provide working capital for our consumer finance
business. We expect long-term financing to be provided by asset-backed
securitization transactions in the capital markets.

We intend to structure sales of originated consumer loans under our warehouse
facility and asset-backed securitizations in the capital markets as
collateralized financing transactions under generally accepted accounting
principles ("GAAP"). Under GAAP, our consolidated balance sheet reflects the
related consumer loans as receivables, and proceeds from the sales of consumer
loans through the warehouse facility and securitizations as indebtedness. Our
consolidated income statement will reflect interest income and other income
earned from holding the consumer loans as finance revenues. Finance costs and
expenses include interest expense from indebtedness under the warehouse facility
and securitizations, credit losses and operating costs.

ACCOUNTING ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with 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. With the recently announced restructuring, each of
these reserves are being evaluated. Following is a description of each
accounting policy requiring significant judgments and estimates:

Goodwill

The Company tests for goodwill impairment in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets". The Company evaluates each reporting unit's fair value versus its
carrying value annually 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, the Company calculates 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. As a result of the
continued downturn in the manufactured housing industry in June 2002 we
announced the closure of 33 retail sales centers and one manufacturing facility
and in August 2002 we announced the closure or consolidation of 64 retail sales
centers and seven manufacturing facilities. In connection with the significant
reduction in our retail operations, the Company re-evaluated the fair value of
its retail goodwill in accordance with SFAS No. 142. As a result, we recorded a
non-cash impairment charge of $97 million for retail goodwill in the quarter
ended June 29, 2002. Significant changes in the estimates and assumptions used
in calculating the fair value of goodwill or differences between estimates and
actual results could continue to have a material adverse impact on future
operating results.

Deferred Tax Assets

Deferred tax assets and liabilities are determined based on the 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. The Company periodically evaluates the
realizability of its 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." It further states, "forming a
conclusion that a valuation allowance is not needed is difficult when there is
negative evidence such as cumulative losses in recent years."

Page 28 of 40

We incurred pretax losses in 2000 and 2001 and through the first half of 2002
totaling $391 million, including goodwill impairment charges of $97 million in
2002 and $190 million in 2000. Our industry continues to be challenged by
limited availability of consumer chattel financing, high industry repossession
levels, and reductions in wholesale floor plan lending availability and a
negative economic outlook resulting in a continued decline in wholesale
shipments and retail sales. In the absence of specific favorable factors,
application of SFAS No. 109 require a 100% valuation allowance for any net
deferred tax asset when a company has cumulative financial accounting losses,
excluding unusual items, over several years. Accordingly, after consideration of
these factors in the quarter ended June 29, 2002, we provided a 100% valuation
allowance against our deferred tax assets, which totaled $120 million. 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.

Because of provisions in the tax law which will allow us to receive a carryback
refund for taxable losses incurred in 2002, in determining the amount of
the deferred tax asset valuation allowance we had to estimate the current tax
deductibility of certain costs and charges. These estimates are subject to
change. Any differences between these current estimates and actual values
determined at the end of this fiscal year will result in a change to the
valuation allowance which will be reflected in results of operations in the
third or fourth quarter of the year.

Property, Plant and Equipment

The recoverability of long-lived assets is evaluated whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable, primarily based on estimated selling price, appraised value or
projected undiscounted cash flows. Our cash flow estimates are based on
historical results adjusted for estimated current industry trends, the economy
and operating conditions. A significant change in these estimates and
assumptions could have a material adverse impact on future operating results.

Reserves for Self-Insured Risks

The Company is self-insured for a significant portion of its workers'
compensation, general and products, auto liability, health and property
insurance. 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 the Company's outside insurance carriers, which
historically have been greater than the Company's own estimates. Although the
Company believes that its estimates are reasonable based on its evaluation of
the factors listed above, the Company plans to obtain, by year end, a review of
such estimates by an independent third party. A revision of the Company's
estimated insurance costs based on such a review or a significant change in the
factors described above could have a material adverse impact on future operating
results. We maintain excess liability insurance with outside insurance carriers
to minimize our risks related to catastrophic claims.

Warranty Reserves

Champion's manufacturing operations provide the retail homebuyer with a
twelve-month warranty from the date of retail purchase. Estimated warranty costs
are accrued as cost of sales at the time the manufacturing segment records the
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 12 month
warranty period, and the historical average costs incurred to service a home. A
significant change in these factors could have a material adverse impact on
future operating results.

Wholesale Repurchase Reserves

The majority of the Company's manufacturing sales to independent retailers are
made pursuant to repurchase agreements. 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 and the cost of such repurchases and the historical losses incurred
as well as the current inventory levels held at Champion's independent
retailers. In addition, the Company monitors the risks associated with its
independent retailers and considers these risks in its evaluation of the
wholesale repurchase reserve. A significant change in any of these factors could
have a material adverse impact on future operating results.

FORWARD LOOKING STATEMENTS AND RISK FACTORS

Certain statements contained in this Report, including our plans and beliefs
regarding goals, ability to implement retail, manufacturing and finance
strategies and the effect of those strategies, availability of liquidity and
financing, new market initiatives and strategies, anticipated capital
expenditures, outlook for the manufactured housing industry in particular and

Page 29 of 40

the economy in general, availability of wholesale and consumer financing,
characterization of and our ability to control our contingent liabilities,
demographic trends, and our ability to maintain supply and distribution networks
could be construed to be forward looking statements within the meaning of the
Securities Exchange Act of 1934. In addition, we may or persons acting on our
behalf may from time to time publish or communicate other items that could also
be construed to be forward looking statements. Statements of this sort are or
will be based on our estimates, assumptions and projections, and are subject to
risks and uncertainties, including those specifically listed below that could
cause actual results to differ materially from those included in the forward
looking statements. We do not undertake to update our forward looking statements
or risk factors to reflect future events or circumstances. The following risk
factors could affect our operating results or financial condition.

SIGNIFICANT LEVERAGE - OUR SIGNIFICANT DEBT COULD ADVERSELY AFFECT OUR FINANCIAL
HEALTH AND PREVENT US FROM FULFILLING OUR DEBT OBLIGATIONS. IF WE ARE UNABLE TO
PAY OUR DEBT OBLIGATIONS WHEN DUE, WE COULD BE IN DEFAULT UNDER OUR DEBT
AGREEMENTS AND OUR LENDERS COULD ACCELERATE OUR DEBT OR TAKE OTHER ACTIONS WHICH
COULD RESTRICT OUR OPERATIONS.

As of June 29, 2002, we had long-term debt of approximately $345
million, floor plan payables of approximately $11 million and warehouse
borrowings of approximately $2 million. 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 some of our
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 sufficient cash
flows from operations and proceeds may not be available to us from sales of
manufactured home loans and contracts in connection with the warehouse facility
and asset-backed securitization transactions in an amount 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 - THE CURRENT DOWNTURN IN THE MANUFACTURED HOUSING
INDUSTRY HAS ADVERSELY AFFECTED OUR OPERATING RESULTS. IF THE CURRENT DOWNTURN
DOES NOT REVERSE, OUR SALES COULD DECLINE AND WE MAY SUFFER FURTHER LOSSES.

Since mid-1999 the manufactured housing industry has experienced
declining wholesale shipments, tightened consumer credit standards, excess
retail locations and inventory, reduced consumer financing availability, high
consumer repossession levels and higher interest rates on manufactured housing
loans. Based on reports published by the National Conference of States on
Building Codes and Standards, or NCSBCS, industry wholesale shipments of
manufactured housing decreased 5.3% for the first six months of 2002 versus
2001, 23% from 2000 to 2001 and 28% from 1999 to 2000. Based on data reported by
Statistical Surveys, Inc. and other sources, we estimate that industry retail
sales of new homes declined 7% for the first five months of 2002 versus 2001,
25% from 2000 to 2001 and 17% from 1999 to 2000. In addition, we estimate
approximately 3,500 retail locations, or approximately 37% of industry
locations, and 100 manufacturing facilities, or approximately 30% of industry
manufacturing facilities, have closed since mid-1999. Largely

Page 30 of 40

as a result of these industry conditions, since mid-1999 and including the
restructuring actions announced in August 2002, we have closed 29 homebuilding
facilities in an attempt to return to profitability. Since June 2000, we have
closed 196 retail sales centers. These downsizing efforts have resulted in
closing-related expenses and fixed asset impairment charges. Additionally, in
2000 and 2002 we recorded goodwill impairment charges totaling $287 million and
in 2002 recorded a valuation allowance for 100% of our deferred tax assets, or
$120 million. For the first six months of 2002, we have reported pretax losses
of $32.1 million excluding goodwill impairment charges. In 2001 and 2000, we
reported pretax losses of $41.3 million and $30.6 million, respectively,
excluding goodwill impairment charges. If the current downturn in the industry
continues, our sales could continue to decline and we may incur further losses
including additional closures or consolidations of existing operations, fixed
asset impairment charges and goodwill impairment charges.

OUR COMMON STOCK MARKET PRICE IS DEPRESSED AND MAY CONTINUE TO DECLINE OR BE
HIGHLY VOLATILE GIVEN CURRENT INDUSTRY AND ECONOMIC CONDITIONS.

Our Company's closing common stock price was $27.38 on January 2, 1999,
before the industry downturn in mid-1999. The trading value of our stock has
declined to $2.88 as of August 14, 2002. The market price of our common stock is
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 our
common stock market price in the future.

FLUCTUATIONS IN OPERATING RESULTS - THE CYCLICAL AND SEASONAL NATURE OF THE
MANUFACTURED HOUSING MARKET CAUSES OUR REVENUES AND OPERATING RESULTS TO
FLUCTUATE. WE EXPECT THIS FLUCTUATION TO CONTINUE IN THE FUTURE, WHICH COULD
RESULT IN OPERATING LOSSES DURING DOWNTURNS.

The manufactured housing industry is highly cyclical and is influenced
by many national and regional economic and demographic factors, including:

- 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 economic, demographic
and seasonal factors, our revenues and operating results fluctuate, and we
expect them to 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, CURTAILED LENDING
ACTIVITY AND INCREASED INTEREST RATES AMONG CHATTEL, OR HOME-ONLY, RETAIL
LENDERS HAVE REDUCED OUR SALES. IF CHATTEL FINANCING WERE TO BECOME FURTHER
CURTAILED OR UNAVAILABLE, WE MAY EXPERIENCE FURTHER SALES DECLINES.

The consumers who buy our homes have historically secured retail
financing from third party lenders. The availability, terms and costs of retail
financing depend on the lending practices of financial institutions,
governmental policies and economic and other conditions, all of which are beyond
our control. A consumer seeking to finance the purchase of a manufactured home
without land will generally pay a higher interest rate and have a shorter loan
maturity than a consumer seeking to finance the purchase of land and the home.
Manufactured home chattel financing is at times more difficult to obtain than
financing for site-built homes. Since 1999, home-only lenders have tightened the
credit underwriting standards and increased interest rates for loans to purchase
manufactured homes, which has reduced lending volumes and caused our sales to
decline. On August 9, 2002, Conseco, the parent company of Conseco Finance,
announced that a "radical change" in its capital structure is required. Conseco
Finance has historically been one of the

Page 31 of 40

largest chattel finance companies in the manufactured housing industry. While
Conseco stated that Conseco Finance will not be directly involved in the planned
restructuring, we do not know what impact the restructuring may have on Conseco
Finance's manufactured home chattel lending business, or the related impact on
our retail and manufacturing operations. If chattel financing were to become
further curtailed or unavailable, we may experience further retail and
manufacturing sales declines.

WHOLESALE FINANCING AVAILABILITY - REDUCED NUMBER OF FLOOR PLAN LENDERS AND
REDUCED AMOUNT OF CREDIT ALLOWED TO INDUSTRY RETAILERS MAY RESULT IN LOWER
INVENTORY LEVELS AND LOWER SALES AT OUR INDEPENDENT RETAILERS AND FEWER SALES
CENTERS, WHICH COULD ALSO AFFECT OUR LEVEL OF WHOLESALE SHIPMENTS TO THESE
RETAILERS.

Independent retailers of our manufactured homes generally finance their
inventory purchases with wholesale floor plan financing provided by lending
institutions. Primarily the number of floor plan lenders and their lending
limits affects the availability of wholesale financing. During the past five
years some wholesale lenders have exited the industry or curtailed their floor
plan operations while a smaller number have entered or expanded their floor plan
operations. Conseco Finance has historically been the largest floor plan lender,
previously providing about 25% of the industry's wholesale financing. Conseco
Finance discontinued approving and funding new floor plan loan requests
commencing April 2002. In May 2002, Conseco Finance announced its intention to
withdraw from the floor plan lending business by December 31, 2002, and asked
its retail customers to pay off their floor plan balances by mid-July 2002, or
enter into an arrangement to pay off their balances by December 31, 2002.
Reduced availability of floor plan lending may affect our independent retailers'
inventory levels of new homes, their 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 reduced number of sales
centers.

CONTINGENT LIABILITIES - WE HAVE, AND WILL CONTINUE TO HAVE, SIGNIFICANT
CONTINGENT REPURCHASE AND OTHER OBLIGATIONS, SOME OF WHICH MAY BECOME ACTUAL
OBLIGATIONS THAT WE MUST REPAY.

In connection with a floor plan arrangement for our wholesale 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, for a period of
12 to 15 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 amount of any
damage to the home and any missing appliances. Our maximum aggregate potential
contingent repurchase obligation at June 29, 2002 was approximately $270
million, before any resale value of the homes. This amount compares to $300
million at the beginning of the year and $320 million a year earlier. During the
first six months of 2002, we paid $2.9 million and incurred losses of $0.5
million under repurchase agreements related to 100 homes. We may be required to
honor some or all of our contingent repurchase obligations in the future and we
may suffer additional losses with respect to, and as a consequence of, these
repurchase agreements.

At June 29, 2002, we also had contingent debt obligations, surety bonds
and letters of credit totaling $33 million (net of $45 million of cash
collateral) and guarantees by certain of our consolidated subsidiaries of $6.6
million of debt of unconsolidated subsidiaries. In addition, the Company is
contingently liable under an unconditional guaranty of a consolidated third
party special purpose entity's $150 million warehouse facility to support our
finance company's operations in an amount limited to $15 million. If we were
required to fund a material amount of these contingent obligations, our
liquidity would be adversely affected.

DEPENDENCE UPON INDEPENDENT RETAILERS - IF WE ARE UNABLE TO ESTABLISH OR
MAINTAIN RELATIONSHIPS WITH INDEPENDENT RETAILERS WHO SELL OUR HOMES, OUR SALES
COULD DECLINE.

During 2001, approximately 79% of our wholesale shipments of homes were
made to independent retail locations throughout the United States and western
Canada. As is common in the industry, independent retailers may sell
manufactured homes produced by competing manufacturers. We may not be able to
establish relationships with new independent retailers or maintain good
relationships with independent retailers that sell our homes. Even if we do
establish and maintain relationships with independent retailers, these retailers
are not obligated to sell our manufactured homes exclusively, and may choose to
sell our competitors' homes instead. The independent retailers with whom we have
relationships can cancel these relationships on short notice. In addition, these
retailers may not remain financially

Page 32 of 40

solvent as they are subject to the same industry, economic, demographic and
seasonal trends that we face. If we do not establish and maintain relationships
with solvent independent retailers in one or more of our markets, sales in those
markets could decline.

EFFECT ON LIQUIDITY - CURRENT INDUSTRY CONDITIONS AND OUR RECENT OPERATING
RESULTS HAVE LIMITED OUR SOURCES OF CAPITAL. IF THIS SITUATION DOES NOT IMPROVE
AND IF WE ARE UNABLE TO LOCATE ALTERNATIVE SOURCES OF CAPITAL, WE MAY BE UNABLE
TO EXPAND OR MAINTAIN OUR BUSINESS.

We depend on our cash balances, cash flows from operations, floor plan
facilities, surety bond and insurance programs, and proceeds from sales of
manufactured home loans and contracts in connection with the warehouse facility,
and will depend on anticipated proceeds of asset-backed securitization
transactions, 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 have decreased sources of floor plan
financing and required us to cash collateralize a portion of our surety bond and
insurance program needs and our letters of credit.

If the availability under our floor plan facilities, anticipated
proceeds from sales of manufactured home loans and contracts in connection with
the warehouse facility and asset-backed securitization transactions or cash flow
from operations is insufficient to finance our operations and alternative
capital is not available or surety bonds become unavailable to us, we may be
unable to expand or maintain our operations, and our business, results of
operations and financial position could suffer.

ENTRY INTO CONSUMER FINANCE BUSINESS - WE FACE RISKS AS A NEW ENTRANT TO THE
CONSUMER FINANCE BUSINESS.

Although CIT has operated a consumer finance business in the
manufactured home sector for over 50 years, and we have obtained the services of
substantially all of CIT's former loan origination personnel in this business,
we have limited experience operating a consumer finance business and are largely
depending on these former CIT personnel. Our previous loan origination business,
which we operated through our subsidiary, HomePride Finance Corp., experienced
operational control inadequacies, which resulted in the origination of some
loans that did not qualify for sale to intended third party institutions. Our
ability to increase our loan portfolio in connection with our new consumer
finance business depends in part upon our ability to effectively market our
consumer finance services to buyers of our manufactured homes and in the same
general economic conditions affecting the consumer finance and manufactured
housing industries. We may incur losses as we develop our loan portfolio and
integrate our consumer finance business into our existing operations. Moreover,
due to our limited operating history and non-participation in the securitization
market to date, the manufactured home loans and contracts that we seek to
securitize may receive lower ratings and may be subject to stricter underwriting
standards than those of our competitors that have an established consumer
finance record. As a result, we may be required to bear a larger portion of the
risk of loss on the financing agreements and may pay higher interest rates than
our competitors. If we are unable to operate our consumer finance business
profitably, we may be unable to recover accumulated operating losses, which
could have a material adverse effect on our results and financial position.

FUNDING FOR OUR NEW CONSUMER FINANCE BUSINESS - WE FACE NUMEROUS RISKS
ASSOCIATED WITH THE SECURITIZATION PROGRAMS THROUGH WHICH WE INTEND PRIMARILY TO
FUND OUR NEW FINANCE OPERATIONS.

In connection with our new business as an originator of consumer
financing for factory-built homes, we require continual access to significant,
long- and short-term sources of cash to fund our originations of these
manufactured home loans and contracts, interest payments, over-collateralization
requirements for loan securitizations and other expenses.

We are funding our consumer finance business with a portion of the
proceeds from the April 2002 issuance of $150 million of Senior Notes due 2007,
cash from operations, proceeds from sales of manufactured home loans and
contracts in connection with the warehouse facility and, ultimately, from
asset-backed securitization transactions in the capital markets. Adverse changes
in the securitization market, interest rates, the market for factory-built homes
or general economic conditions could impair our ability to originate, borrow
against, purchase and sell manufactured home loans and contracts on a favorable
or timely basis. This could prevent the accumulation of a sufficient number of
manufactured home loans and contracts on terms required to securitize the
manufactured home loans and contracts in asset-backed securitization
transactions, in which case we could be forced to sell at a significant discount
or hold manufactured home loans and contracts. Our inability to sell the
manufactured home loans and contracts would increase our exposure to the risk of
default and delinquency by the borrowers thereunder. The occurrence of any of
the foregoing

Page 33 of 40

could require us to make cash payments in excess of the funds generated by our
loan originations and under loans otherwise acquired by our consumer finance
business, which could have a material adverse effect on our results and
financial position. If we were unable to make such payments, our business and
operations could be severely disrupted.

If our cash requirements increase beyond those generated by our
business and we are unable to increase proceeds available from sales of
manufactured home loans and contracts in connection with the warehouse facility
or access the securitization markets, we may be unable to maintain or increase
the volume of our consumer finance business. Our warehouse facility has a
one-year term. Although we expect to be able to obtain a replacement facility or
renew the facility when it expires, such facility may not be available on
favorable terms, if at all. To the extent that we are unable to arrange any
facility or other financing, our loan origination activities would be curtailed,
which could have a material adverse effect on our results and financial
position.

OPERATION OF OUR CONSUMER FINANCE BUSINESS - WE FACE RISKS OF LOSS RELATED TO
MANUFACTURED HOME LOANS AND CONTRACTS, INCLUDING RISKS ASSOCIATED WITH DEFAULTS,
DELINQUENCIES AND PREPAYMENTS, MANY OF WHICH WILL BE OUTSIDE OUR CONTROL.

We expect to face numerous additional risks in connection with our
finance operations, many of which will be outside our control. Many purchasers
of manufactured homes may be deemed to be relatively high credit risks due to
various factors, including the lack of or impaired credit histories and limited
financial resources. Accordingly, the loans we originate may bear relatively
high interest rates and may involve higher default and delinquency rates and
servicing costs. In the event that we foreclose on delinquent loans, our ability
to sell the underlying collateral to recover or mitigate our loan losses will be
subject to market valuations of the collateral. These values may be affected by
factors such as the amount of available inventory of manufactured homes on the
market and general economic conditions.

Prepayments of our managed receivables, whether due to refinancing,
repayments or foreclosures, in excess of management's estimates could adversely
affect our future cash flow as a result of the resulting loss of any servicing
fee revenue and net interest income on such prepaid receivables. Prepayments can
result from a variety of factors, many of which are beyond our control,
including changes in interest rates and general economic conditions.

The foregoing risks become more acute in any economic slowdown or
recession. Periods of economic slowdown or recession may be accompanied by
decreased demand for consumer credit and declining asset values. In the home
equity mortgage and factory-built housing businesses, any material decline in
real estate values reduces the ability of borrowers to use home equity to
support borrowing and increases the loan-to-value ratios of loans previously
made, thereby weakening collateral coverage and increasing the possibility of a
loss in the event of a default. Delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. Loss of employment, increases
in cost-of-living or other adverse economic conditions would likely impair the
ability of our consumer borrowers to meet their payment obligations, which could
impair our ability to continue to fund our finance operations.

COMPETITION - THE MANUFACTURED HOUSING INDUSTRY IS VERY COMPETITIVE. IF WE ARE
UNABLE TO EFFECTIVELY COMPETE, OUR GROWTH COULD BE LIMITED AND OUR SALES COULD
DECLINE.

The manufactured housing industry is highly competitive at both the
manufacturing and retail levels, with competition based upon several factors,
including price, product features, reputation for service and quality,
merchandising, terms of retailer promotional programs and the terms of retail
customer financing. Numerous companies produce manufactured homes in our
markets. A number of our manufacturing competitors also have their own 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 easy for new retailers to enter into
our markets as competitors. In addition, our products compete with other forms
of low to moderate-cost housing, including site-built homes, panelized homes,
apartments, townhouses and condominiums. If we are unable to effectively compete
in this environment, our retail sales and wholesale shipments could be reduced.
As a result, our growth could be limited and our sales could decline.

ZONING - IF THE MANUFACTURED HOUSING INDUSTRY IS NOT ABLE TO SECURE FAVORABLE
LOCAL ZONING ORDINANCES, OUR SALES COULD DECLINE AND OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED.

Page 34 of 40

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 business, results of
operations and financial condition could be materially adversely affected.

DEPENDENCE UPON WALTER R. YOUNG AND OTHER KEY PERSONNEL - THE LOSS OF ANY OF OUR
EXECUTIVE OFFICERS COULD REDUCE OUR ABILITY TO ACHIEVE OUR BUSINESS PLAN AND
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS.

We depend on the continued services and performance of our executive
officers, including our Chairman, President and Chief Executive Officer, Walter
R. Young. If we lose the service of Mr. Young or any of our executive officers,
it could limit our ability to achieve our business plan and could have a
material adverse effect on our business and operating results.

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.

Since mid-1999, retail sales and wholesale 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 traditional chattel
lending portion of the industry, higher interest rates on chattel loans and a
reduced number of wholesale lenders in the industry. As a result, our operating
results have been adversely affected and we have closed a significant number of
manufacturing facilities and retail sales centers. We are implementing
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.

RESTRICTIVE COVENANTS - THE TERMS OF OUR DEBT PLACE RESTRICTIONS ON US AND OUR
SUBSIDIARIES, REDUCING OPERATIONAL FLEXIBILITY.

The documents governing the terms of substantially all of our
indebtedness 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;
- 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.

If we fail to comply with any of these covenants, the trustees could
cause our debt to become due and payable prior to maturity. If this debt were to
be accelerated, our assets might not be sufficient to repay our debt in full.

Page 35 of 40

The $150 million of Senior Notes due 2007 contain covenants, which
among other things limit the Company's ability to incur additional indebtedness,
issue additional redeemable preferred stock, pay dividends on or repurchase
common stock, make certain investments and incur liens on assets. The debt
incurrence covenant in the Notes currently limits additional debt to 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;
warehouse financing meeting certain parameters up to $200 million; other debt up
to $30 million; and ordinary course indebtedness that includes non-speculative
hedging obligations, floor plan financing, letters of credit, surety bonds,
bankers' acceptances, repurchase agreements related to retailer floor plan
financing and guaranties of additional debt otherwise permitted to be incurred.

The $150 million warehouse facility we arranged in April 2002 contains
covenants requiring the Company to maintain minimum interest coverage ratios and
tangible net worth, as defined therein; maintain certain minimum unsecured debt
ratings from two of the national ratings agencies; and perform certain other
duties thereunder. Subsequent to quarter end, the consolidated special purpose
third party entity entered into waiver agreements to cure noncompliance with the
minimum interest coverage ratio covenant for the quarter ended June 29, 2002 and
to cure noncompliance with the minimum tangible net worth covenant as of June
29, 2002 and provide for a lower minimum tangible net worth requirement through
August 30, 2002.

We also have a $15 million floor plan financing facility that contains
a covenant requiring us to maintain minimum earnings before interest, taxes,
depreciation and amortization (EBITDA), as defined. If our operating results do
not improve, we may not be in compliance with this covenant, which could result
in the lender terminating the credit line and causing such debt to become
immediately due and payable. As of June 29, 2002, the Company had approximately
$2 million outstanding under this facility.

In August 2002, Moody's Investors Service and Standard & Poor's
announced that they have placed under review, for possible downgrade, our senior
implied credit ratings and the ratings on our Senior Notes due 2007 and Senior
Notes due 2009. Because the $150 million warehouse facility we arranged in April
2002 requires that we maintain certain minimum unsecured debt ratings, a
negative ratings action by Moody's or Standard & Poor's could cause a default
under that facility. A negative ratings action also could affect our ability to
obtain or maintain various forms of business credit, including but not limited
to letters of credit, surety bonds, trade payables and floor plan financing, or
could result in us having to place additional collateral related thereto.

During the third quarter of 2002, we are seeking and will need to
obtain amendments to the performance covenants of the $150 million warehouse
facility in order to ensure our continuing compliance therewith. Also, if our
operating results do not improve we may again become noncompliant with one or
several of the covenants, which, if not cured or amended, would result in
default under the facility. In an event of default, the agent bank could
discontinue making further advances under the facility and enact alternate
"waterfall" provisions thereunder that would reduce or eliminate current
payments to the consolidated third party special purpose entity from the
underlying consumer loans. If the agent were to discontinue further advances, we
may not have sufficient capital resources to fund our consumer finance
operations.

POTENTIAL DILUTION - OUTSTANDING PREFERRED STOCK THAT IS CONVERTIBLE INTO COMMON
STOCK AND REDEEMABLE FOR COMMON STOCK (AND AT THE COMPANY'S OPTION FOR CASH),
AND A DEFERRED PURCHASE PRICE OBLIGATION THAT IS PAYABLE, AT THE COMPANY'S
OPTION, IN CASH OR COMMON STOCK, COULD RESULT IN POTENTIAL DILUTION AND IMPAIR
THE PRICE OF OUR COMMON STOCK.

We currently have outstanding $20 million of Series B-1 cumulative
convertible preferred stock which is convertible into common stock at a rate of
$13.85 per share. The preferred shareholder has the right, through March 29,
2004, to redeem this preferred stock for common stock. We have the mandatory
obligation to redeem any remaining outstanding Series B-1 preferred stock on
March 29, 2004, for cash or common stock, at our option. The preferred
shareholder has the right until December 31, 2004 to purchase an additional $12
million of Series B preferred stock. From July 3, 2003 until its maturity on
July 3, 2008 the holder will have the right to redeem the additional $12 million
of Series B preferred stock in common stock at the then market price or in cash
at our option. The conversion rate for any future issuance of this preferred
stock would be 120% of the market value of the common stock at the time of
purchase

Page 36 of 40

(subject to certain limitations) but could not be less than $7.50 per share.

We currently have outstanding $25 million of Series C cumulative
convertible preferred stock with a seven year term, which is currently
convertible into common stock at a rate of $9.63 per share. On June 29, 2003,
the conversion price will be adjusted to 115% of the common stock's then market
value (subject to certain limitations), provided that such conversion price
shall not be greater than $10.83 per share or less than $5.66 per share.
Commencing March 29, 2004, the preferred shareholder has the right to redeem
this preferred stock for common stock, and, at our option, partially for cash.

We also pay a quarterly dividend on the preferred stock at a rate of 5%
per annum. The dividend is payable in cash or shares of our common stock, at our
option. The number of shares issuable in payment of these dividends depends on
the market value of the common stock at the time of issuance (subject to certain
limitations). As a result, assuming we elected to pay any dividend in shares of
common stock, the preferred shareholder would receive a greater number of shares
of common stock in payment of those dividends if our common stock price
decreases.

We currently have outstanding a warrant which was initially exercisable
based on approximately 1.1 million shares of common stock at a strike price of
$12.04 per share. In accordance with the terms of the warrant, on August 6, 2002
the number of shares under warrant and the strike price per share were reset at
2.2 million shares and $10.02 per share, respectively. Beginning on March 29,
2003, the warrant strike price will increase annually 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 June 29, 2002, we had outstanding $22 million of a deferred
purchase price obligation which is payable in quarterly payments of $2 million
through January 3, 2005. Quarterly payments 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 at the time of issuance.
As a result, assuming we elected to pay any quarterly installment in shares of
common stock, the recipients would receive a greater number of shares of common
stock in payment of those installments if our common stock price decreases.

To the extent that the preferred shareholder elects to convert the
preferred stock into common stock or we elect to make preferred dividend
payments or the deferred purchase price obligation payments in common stock, our
then existing common shareholders would experience dilution in their percentage
ownership interests. If the $25 million of outstanding Series C preferred stock
were converted at its conversion price of $9.63 per share, the $20 million of
Series B-1 outstanding preferred stock were redeemed at its current redemption
floor of $5.66 per share, the $12 million of additional Series B preferred stock
were assumed to be issued and converted at 120% of the June 29, 2002 market
price, at a minimum of $7.50 per share, and the $22 million deferred purchase
price obligation were assumed to be paid in common stock using the June 29, 2002
market price, dilution of approximately 19.3% would occur based on the number of
shares of common stock outstanding at June 29, 2002. If all of these securities
were assumed to be converted at the June 29, 2002 market price rather than at
the current respective conversion or redemption prices, additional dilution of
approximately 3.1% would occur.

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 or in payment of the deferred purchase price obligation 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 or the recipients of the deferred purchase price payments, 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 all
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,
the terms of which may result in additional potential dilution.

Page 37 of 40

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company's floor plan borrowings are subject to interest primarily
based on the U.S. prime interest rate. A 100 basis point increase in the prime
rate would result in additional annual interest cost of $0.1 million, assuming
average floor plan borrowings of $11 million, the amount of outstanding
borrowings at June 29, 2002.

Page 38 of 40

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On April 30, 2002 the registrant held its 2002 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 Withheld
--------------------------------------------- -------------------------- ---------------------------

Robert W. Anestis 43,829,727 283,805

Eric S. Belsky 43,802,539 310,993

Selwyn Isakow 43,819,643 293,889

Brian D. Jellison 43,822,763 290,769

Ellen R. Levine 43,812,187 301,345

George R. Mrkonic 43,793,902 319,630

Walter R. Young 37,878,521 6,235,011

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) The following exhibits are filed as part of this report:

Exhibit No Description

10.1 Receivables Purchase Agreement dated as of April 18, 2002
among GSS HomePride Corp., HomePride Finance Corp., The CIT
Group/Sales Financing, Inc., Greenwich Funding Corp., the
financial institutions named therein and Credit Suisse First
Boston, New York Branch.

10.2 Amendment Agreement No. 1, dated as of May 23, 2002 to the
Receivables Purchase Agreement, dated as of April 18, 2002,
among HomePride Finance Corp., GSS HomePride Corp., The CIT
Group/Sales Financing, Inc., Greenwich Funding Corp., the
financial institutions named therein as Banks and Credit
Suisse First Boston, New York Branch.

10.3 Amendment and Waiver Agreement No. 2, dated as of June 17,
2002, to the (i) Fee Letter Agreement, dated as of April 18,
2002, among GSS HomePride Corp., a Delaware corporation,
HomePride Finance Corp., a Michigan corporation and Credit
Suisse First Boston, New York Branch, and (ii) Receivables
Purchase Agreement, dated as of April 18, 2002, among GSS
HomePride Corp., HomePride Finance Corp., The CIT/Group Sales
Financing, Inc., a Delaware corporation, Greenwich Funding
Corp., the financial institutions set forth on the signature
page thereto and Credit Suisse First Boston, New York Branch.

10.4 Amendment Agreement No. 3, dated as of June 21, 2002, to the
Receivables Purchase Agreement, dated as of April 18, 2002,
among HomePride Finance Corp., GSS HomePride Corp., The CIT
Group/Sales Financing, Inc., Greenwich Funding Corp., the
financial institutions named therein as Banks and Credit
Suisse First Boston, New York Branch.

11 Statement Regarding Computation of Earnings (Loss) Per Share.

(b) On April 5, 2002 (three filings), April 17, 2002 (two
filings), April 25, 2002, May 16, 2002, May 23, 2002, June 18
2002, June 27, 2002, July 17, 2002, August 8, 2002 and August
14, 2002, Champion filed current reports on Form 8-K. On
August 19, 2002 Champion filed a Form 8-K/A to amend its Form
8-K dated August 8, 2002 and a Form 8-K/A to amend its Form
8-K dated July 17, 2002.

Page 39 of 40

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/ ANTHONY S. CLEBERG
------------------------------------
Anthony S. Cleberg
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

And: /s/ RICHARD HEVELHORST
------------------------------------
Richard Hevelhorst
Vice President and Controller
(Principal Accounting Officer)

Dated: August 19, 2002

Page 40 of 40

Exhibit Index

Exhibit No Description

10.1 Receivables Purchase Agreement dated as of April 18, 2002
among GSS HomePride Corp., HomePride Finance Corp., The CIT
Group/Sales Financing, Inc., Greenwich Funding Corp., the
financial institutions named therein and Credit Suisse First
Boston, New York Branch.

10.2 Amendment Agreement No. 1, dated as of May 23, 2002 to the
Receivables Purchase Agreement, dated as of April 18, 2002,
among HomePride Finance Corp., GSS HomePride Corp., The CIT
Group/Sales Financing, Inc., Greenwich Funding Corp., the
financial institutions named therein as Banks and Credit
Suisse First Boston, New York Branch.

10.3 Amendment and Waiver Agreement No. 2, dated as of June 17,
2002, to the (i) Fee Letter Agreement, dated as of April 18,
2002, among GSS HomePride Corp., a Delaware corporation,
HomePride Finance Corp., a Michigan corporation and Credit
Suisse First Boston, New York Branch, and (ii) Receivables
Purchase Agreement, dated as of April 18, 2002, among GSS
HomePride Corp., HomePride Finance Corp., The CIT/Group Sales
Financing, Inc., a Delaware corporation, Greenwich Funding
Corp., the financial institutions set forth on the signature
page thereto and Credit Suisse First Boston, New York Branch.

10.4 Amendment Agreement No. 3, dated as of June 21, 2002, to the
Receivables Purchase Agreement, dated as of April 18, 2002,
among HomePride Finance Corp., GSS HomePride Corp., The CIT
Group/Sales Financing, Inc., Greenwich Funding Corp., the
financial institutions named therein as Banks and Credit
Suisse First Boston, New York Branch.

11 Statement Regarding Computation of Earnings (Loss) Per Share.