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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

For Quarterly period ended March 29, 2003

OR

For the transition period from      to       

Commission file number 1-9751

CHAMPION ENTERPRISES, INC.

2701 Cambridge Court, Suite 300
Auburn Hills, MI 48326

Registrant’s telephone number, including area code: (248) 340-9090

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]  No [  ]

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [  ]

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

56,777,241 shares of the registrant’s $1.00 par value Common Stock were outstanding as of May 3, 2003.

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PART I. FINANCIAL INFORMATION

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

See accompanying Notes to Consolidated Financial Statements.

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

See accompanying Notes to Consolidated Financial Statements.

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

See accompanying Notes to Consolidated Financial Statements.

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CHAMPION ENTERPRISES, INC.
Consolidated Statement of Shareholders’ Equity
Unaudited Three Months Ended March 29, 2003
(In thousands)

See accompanying Notes to Consolidated Financial Statements.

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CHAMPION ENTERPRISES, INC.

Notes to Consolidated Financial Statements
(Unaudited)

1.		The Consolidated Financial Statements are unaudited, but in the opinion of management include all adjustments necessary for a fair presentation of the results of the interim period. All such adjustments are of a normal recurring nature except for the lower of cost or market provision for finance loans held for sale as discussed in Note 11 and the charge to retained earnings related to the induced conversion of the Series C Preferred Stock as discussed in Note 8. 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 28, 2002 was derived from audited financial statements.
		For a description of significant accounting policies used by the Company in the preparation of its consolidated financial statements, please refer to Note 1 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 28, 2002.
		The Company accounts for its stock-based employee compensation programs under Accounting Principles Board (“APB”) Opinion No. 25. The additional disclosures and pro forma information required by Statement of Financial Accounting Standards (“SFAS”) No. 123 as amended by SFAS No. 148 follow. If compensation costs for the Company’s stock-based compensation plans had been determined based on the fair value at the grant dates consistent with the requirements of SFAS No. 123, pro forma net loss, loss per share and stock-based compensation expense would have been the amounts indicated below:

2.

The provisions for income taxes (benefits) differ from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax loss as a result of the following differences:

Beginning with the quarter ended June 29, 2002, the Company has provided a 100% valuation allowance for its deferred tax assets. Deferred tax assets will continue to require a 100% valuation allowance until the Company can demonstrate their realizability through sustained profitability and/or from other factors. Current federal income tax regulations provide for a two-year carryback period for net operating losses. The Company has no taxable income available in this carryback period. Therefore, any net operating losses incurred in 2003 will become tax loss carryforwards that will be available to offset future taxable income. The effective tax rate for the three months ended March 29, 2003 differs from the 35% federal statutory rate primarily because of the 100% valuation allowance for deferred taxes resulting from tax loss carryforwards in the period, partially offset by a $3.0 million tax benefit for a reduction in the valuation

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		allowance, as discussed below.
		The amount of net deferred tax assets, the 100% valuation allowance and the expected tax refund related to the 2002 federal income tax return were estimated at December 28, 2002, based on year-end estimates of the tax deductibility of certain costs and charges. As a result of the completion and filing of the 2002 federal income tax return in April 2003, the Company received tax refunds totaling $62.8 million in fiscal April 2003 and expects to receive additional refunds totaling $0.7 million in May 2003. These refunds exceeded by approximately $3.0 million the estimate made as of December 28, 2002, resulting in a $3.0 million reduction of deferred tax assets during the quarter ended March 29, 2003. As a result, during the quarter ended March 29, 2003, a tax benefit of $3.0 million was recorded for the related reduction in the 100% valuation allowance.
3.		A summary of inventories by component follows:

		Other inventory consists of pre-owned manufactured homes, land and park spaces and improvements.
4.		A summary of other current assets and other long-term liabilities by component follows:

		Deposits consist of cash collateral deposited for surety bonds and insurance purposes.
5.		The change in the carrying amount of goodwill follows:

		The decrease in other goodwill during the quarter was due to the sale of land, land improvements and certain other assets of a development company.
6.		The Company’s manufacturing operations provide the retail homebuyer with a twelve-month warranty from the date of consumer purchase. Estimated warranty costs are accrued as cost of sales at the time of sale. The warranty provision and reserves are based on estimates of the amounts necessary to settle existing and future claims on homes sold by the manufacturing operations as of the balance sheet date. The following table summarizes the changes in accrued product warranty obligations during the first quarter of

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2003.

A portion of warranty reserves is classified as other long-term liabilities in the consolidated balance sheet.

7.

Long-term debt by component consisted of the following:

		During the quarter ended March 29, 2003 the Company purchased and retired $12.9 million of the Senior Notes due 2009 and $15.0 million of the Senior Notes due 2007 for a total of $20.6 million, resulting in pretax gains totaling $6.7 million.
		In January 2003, Champion Home Builders Co. (“CHB”), a wholly-owned subsidiary of the Company, entered into a three-year, $75 million revolving credit facility to be used in support of letters of credit and for general corporate purposes. Under this facility, letter of credit fees range from 2.5% to 3.5% annually on letters of credit issued and borrowings bear interest at either the prime interest rate plus up to 0.5% or the Eurodollar rate plus 2.5% to 3.5%. In addition, there is an annual fee of $0.1 million plus 0.375% of the unused portion of the facility. Availability under the credit facility is subject to a borrowing base calculated as percentages of eligible accounts receivable, inventory and fixed assets. The facility agreement contains certain financial covenants that require the Company, only in the event that its liquidity, as defined, falls below $35 million, to maintain certain levels of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) and certain ratios of EBITDA to fixed charges, as defined. Liquidity, as defined, consists of the majority of the Company’s unrestricted cash and cash equivalents plus unused availability under the facility. Fixed charges, as defined, consist primarily of interest expense, capital expenditures, dividends paid in cash, required principal payments of debt and lease payments paid or accrued during the calculation period and cash losses under wholesale repurchase obligations. In addition the facility contains covenants that limit the Company’s ability to incur additional indebtedness and liens, sell assets and, if liquidity falls below $35 million, make certain investments, pay dividends and purchase or redeem its common stock. The line of credit is collateralized by accounts receivable, inventories, property, plant, and equipment, cash and other assets. As of March 29, 2003, availability under the facility was $67.2 million, letters of credit issued under the facility totaled $60.4 million and the Company’s liquidity was in excess of $35 million such that no other financial covenants were in effect.
		Upon completion of the $75 million credit facility, during the quarter ended March 29, 2003 substantially all of the former fully cash collateralized letters of credit were terminated, resulting in the release to the Company of restricted cash totaling $49.8 million. Additionally, $9.6 million of cash deposits were released to the Company upon replacing cash collateral for surety bonds with letters of credit under the new credit facility.
		The Company’s $150 million warehouse facility had a one-year term which expired in April 2003. In April 2003, the Company completed an amendment and renewal of the warehouse facility at a reduced size of $75 million. The warehouse facility is maintained for a consolidated third party special purpose entity to support the Company’s consumer finance operations. Under the renewed warehouse facility, the advance rate is currently 76% of the unpaid principal amount of the finance loans placed in the warehouse line. Under the terms of the renewed facility, there are a number of events that could result in the agent bank activating alternate “waterfall” provisions that would reduce or eliminate current payments to the

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		consolidated third party special purpose entity from collections on the underlying consumer loans until such time as the effective advance rate has been reduced to the equivalent of a AAA-rated level.
		The renewed warehouse facility has a term of one year and contains covenants which require the Company to maintain certain levels of quarterly consolidated net income or loss. Under the facility, the Company must also maintain minimum unsecured senior debt ratings of B- by Standard & Poor’s (“S&P”) and B3 by Moody’s Investors Services (“Moody’s”). Failure to attain the required quarterly levels of net income or loss or negative ratings actions by either Moody’s or S&P, among other things, would cause a termination event under the warehouse facility. Upon a termination event, the agent bank could discontinue making further advances under the facility and activate alternate “waterfall” provisions that would reduce or eliminate current payments to the consolidated third party special purpose entity on the underlying consumer loans. A termination event could result in the ability of the agent bank to liquidate the loans held under the warehouse facility in a commercially reasonable manner and on commercially reasonable terms. If the agent bank were to discontinue further advances or liquidate the loans, Champion would seek other sources of capital for its consumer finance operations, though there is no assurance that alternate sources of capital could be found. A default under the $75 million warehouse facility would not trigger a default under the indentures related to the Senior Notes due 2007 or 2009.
		The Company structures sales of originated consumer loans to the warehouse facility as collateralized financing transactions under generally accepted accounting principles. The interest rate on such borrowings under the warehouse facility is LIBOR plus 80 basis points. There is also a facility fee that is payable monthly based on an annual rate of 40 basis points of the facility. This facility fee is subject to an increase to 80 basis points per annum under certain conditions.
		The Company has two floor plan facilities with total availability of $21 million of which $16.7 million was outstanding at March 29, 2003. A $15 million floor plan financing facility contains a covenant requiring the maintenance of a minimum of $35 million of liquidity, as defined in the revolving credit facility, at each fiscal month end. In the event of non-compliance with this covenant, the lender could terminate the credit line and cause the debt to become immediately due and payable. As of March 29, 2003, the Company had approximately $13.7 million outstanding under this facility and was in compliance with the covenant.
8.		At March 29, 2003 redeemable convertible preferred stock consisted of Series B-1 with a carrying value and a redemption value of $5.0 million and Series C with a carrying value of $8.5 million and a redemption value of $8.75 million. Both Series have a 5% annual dividend that is payable quarterly, at the Company’s option, in cash or common stock. The Series C is carried net of issuance costs, which are being amortized by charges to paid-in-capital over a period of two years through April 2004.
		The rights and preferences of the Series B-1 preferred stock provide for, among other things, mandatory redemption on March 29, 2004. Such redemption may be made for either common stock or cash, at the Company’s option. Optional redemptions may be made by the holder only for common stock and are subject to a common stock floor price of $5.66 per share. The holder has the right to purchase an additional $12 million of Series B-1 preferred stock until December 31, 2004.
		The Series C preferred stock has a seven-year term expiring April 2, 2009. The original terms provided the holder the right to convert all or any part of the preferred stock into Champion common stock at a price of $9.6295 per share until June 29, 2003, at which time the conversion price would have been reset to equal 115% of the average market price of Champion common stock as of June 29, 2003, provided that the conversion price could not be less than $5.66 nor greater than $10.83. During the quarter ended March 29, 2003, the terms of the Series C preferred stock were amended to accelerate the modification of the conversion price to $5.66 and the preferred shareholder agreed to convert $16.25 million of the Series C cumulative convertible preferred stock by March 12, 2003. Upon conversion, 2.9 million shares of common stock were issued. This amendment to the preferred stock terms was accounted for as an induced conversion, resulting in a charge to retained earnings of $3.5 million during the quarter ended March 29, 2003.
		In connection with the issuance of the Series C preferred stock in 2002, the Company issued the preferred shareholder a warrant which currently is exercisable based on approximately 2.2 million shares at a strike price of $10.77 per share. Annually, on April 2 of each year, the warrant strike price increases by $0.75 per share. The warrant expires on April 2, 2009 and is exercisable only on a non-cash, net basis, whereby the warrant holder would receive shares of common stock as payment for the net gain upon exercise.

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9.		As is customary in the manufactured housing industry, the majority of the Company’s manufacturing sales to independent retailers are made pursuant to repurchase agreements with lending institutions that provide wholesale floor plan financing to the retailers. Pursuant to these agreements, for a period of up to 24 months from invoice date of the sale of the homes and upon default by the retailers and repossession by the financial institution, the Company is obligated to purchase the related floor plan loans or repurchase the homes from the lender. The contingent repurchase obligation at March 29, 2003 was estimated to be approximately $260 million, without reduction for the resale value of the homes. This amount compares to $240 million at the beginning of the year and $310 million a year earlier. Losses under repurchase obligations are determined by the difference between the repurchase price and the estimated net proceeds from the resale of the homes. Repurchase losses incurred on homes repurchased totaled $0.3 million for the quarter ended March 29, 2003 and $0.3 million for the quarter ended March 30, 2002. During the quarter ended March 29, 2003, wholesale repurchase reserves were increased $3.2 million in connection with the extension of repurchase terms to 24 months for certain national lenders and for the negative effects of market conditions on the Company’s largest independent retailer.
		At March 29, 2003 the Company was contingently obligated for approximately $60.7 million under letters of credit, primarily comprised of $14.1 million to support insurance reserves, $18.4 million to support long-term debt and $27.4 million to secure surety bonds. Champion was also contingently obligated for $35.6 million under surety bonds, generally to support insurance, and license and service bonding requirements. The letters of credit and $20.8 million of the surety bonds support insurance reserves and long-term debt that are reflected as liabilities in the consolidated balance sheet.
		At March 29, 2003 Champion was contingently liable for up to $15.0 million under an unconditional guaranty of a $150 million warehouse facility of a consolidated third party special purpose entity. The warehouse facility supports Champion’s finance company’s operations. In April 2003, upon renewal of the warehouse facility at $75 million, the maximum amount of the related unconditional guaranty was reduced to $7.5 million.
		At March 29, 2003 certain of the Company’s subsidiaries were guarantors of $6.1 million of debt of unconsolidated subsidiaries, none of which was reflected in the consolidated balance sheet. These guarantees are several or joint and several and are related to indebtedness of certain manufactured housing community developments which are collateralized by the properties being developed.
		The Company has provided various representations, warranties and other standard indemnifications in the ordinary course of its business, in agreements to acquire and sell business assets and in financing arrangements. The Company is subject to various legal proceedings and claims which arise in the ordinary course of its business.
		Management believes the ultimate liability with respect to these contingent liabilities will not have a material effect on the Company’s financial position, results of operations or cash flows.
10.		The numerators used in the Company’s basic and diluted earnings per share (“EPS”) calculations were net loss as reported in the financial statements together with the effect of preferred stock dividends and the charge related to the induced conversion of preferred stock. Because the Company was in a loss position, the dividend on preferred stock and the charge related to the preferred stock induced conversion were not added back for the calculation of diluted EPS because the effect would have been antidilutive. The denominators used in the Company’s basic and diluted EPS calculations were weighted average shares outstanding. The Company’s potential dilutive securities consist of outstanding stock options, deferred purchase price obligations, convertible preferred stock and warrants. Dilutive securities were not considered in determining the denominator for diluted EPS in the periods presented because the effect on the net loss would have been antidilutive.
11.		The Company’s financial services segment operates as HomePride Finance Corp. (“HPFC”). HPFC structures sales of originated consumer loans to the warehouse facility as collateralized financing transactions under generally accepted accounting principles. As a result, the Company’s consolidated balance sheet reflects the related consumer loans as finance loans receivable, and reflects proceeds from the sales of consumer loans into the warehouse facility as collateralized borrowings.
		Finance loans receivable were held for investment at December 28, 2002, and were stated at the aggregate remaining unpaid principal balances, plus deferred loan origination costs, less deferred loan origination fees and allowance for loan losses. The finance loans receivable balance was reclassified to held for sale as of March 29, 2003 upon the Company’s decision to sell the majority of these finance loans. As a result,

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		during the quarter ended March 2003, the Company recorded a $5.4 million charge to value its finance loans receivable at the lower of cost or market. In April 2003, the Company sold loans with a face value of $59.7 million for approximately $54.1 million, which was comparable to the carrying value of the loans, net of the lower of cost or market reserve. The sale of the loans provided net cash of $12.8 million after paying down $41.7 million of warehouse line borrowings.
12.		Reconciliations of segment revenues to consolidated net revenues and segment earnings (loss) to loss before income taxes follow. The Company evaluates the performance of its manufacturing and retail segments based on earnings (loss) before interest, income taxes and general corporate expenses (“EBIT”). Financial services revenues consist of interest income and other income earned on the consumer loans. Financial services loss consists of financial services revenues less operating costs, interest expense for the warehouse facility and the lower of cost or market provision for finance loans held for sale.

		Retail floor plan interest expense not charged to retail EBIT totaled $0.4 million and $1.4 million for the three months ended March 29, 2003 and March 30, 2002, respectively. Financial services interest expense on warehouse borrowings charged to financial services loss totaled $0.2 million for the three months ended March 29, 2003. Financial services loss for the quarter ended March 29, 2003, included a lower of cost or market provision of $5.4 million for finance loans held for sale.
13.		In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal 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 previously 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).” SFAS No. 146 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 at the beginning of fiscal 2003 had no significant impact on the Company’s financial statements for the quarter ended March 29, 2003. In future periods, SFAS No. 146 may impact the manner in which the Company reports certain restructuring activities, including lease termination costs, employee severance and other exit activities. These charges will generally be recognized when the liability is incurred.
		In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123,” which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption by the Company of SFAS No. 148 in the first quarter of 2003 impacted interim disclosure

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		requirements and requires the Company to choose among alternative implementation methods if the Company were to adopt SFAS No. 123 and change to the fair value method of accounting for stock-based compensation.
		In December 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation clarifies the requirement for recognition of a liability by a guarantor at the inception of the guarantee, based on the fair value of the non-contingent obligation to perform. This interpretation must be applied prospectively to guarantees entered into or modified after December 31, 2002. Accordingly, the Company will recognize the fair value of guarantees issued beginning in 2003. There was no significant impact on the Company’s financial statements for the quarter ended March 29, 2003 upon adoption of Interpretation No. 45 at the beginning of the quarter.
		In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” Under previous practice, entities were included in consolidated financial statements generally based on controlling voting interests or in other special situations. Under this interpretation, certain previously unconsolidated entities (often referred to as “special purpose entities”) are included in the consolidated financial statements of the “primary beneficiary” as a result of non-voting financial interests which are established through contractual or other means. For variable interest entities created after January 31, 2003, this interpretation is effective immediately. For any pre-existing variable interest entities, this interpretation is effective beginning with the Company’s fiscal 2003 third quarter. The Company continues to examine this new literature but believes the accounting for its special purpose entity is already in compliance with this interpretation.
14.		Substantially all subsidiaries of CHB are guarantors and the Company is a subordinated guarantor of the Senior Notes due 2007. In addition, CHB is a guarantor and substantially all of its subsidiaries are guarantors of the Senior Notes due 2009 on a basis subordinated to their guarantees of the Senior Notes due 2007. The non-guarantor subsidiaries include the Company’s foreign operations, its development companies and certain finance subsidiaries.
		Separate financial statements for each guarantor subsidiary are not included in this filing because each guarantor subsidiary is wholly-owned and the guarantees are full and unconditional, as well as joint and several, for the Senior Notes due 2009 and for the Senior Notes due 2007. There were no significant restrictions on the ability of the parent company or any guarantor subsidiary to obtain funds from its subsidiaries by dividend or loan.
		The following condensed consolidating financial information presents the financial position, results of operations and cash flows of (i) the Company (“Parent”) and CHB, as parents, as if they accounted for their subsidiaries on the equity method; (ii) the guarantor subsidiaries, and (iii) the non-guarantor subsidiaries.

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CHAMPION ENTERPRISES, INC.
Condensed Consolidating Statement of Operations
For the Three Months Ended March 29, 2003