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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark one)

For Quarterly period ended June 28, 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.

     57,323,990 shares of the registrant’s $1.00 par value Common Stock were outstanding as of August 1, 2003.

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

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 Six Months Ended June 28, 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 following two adjustments which were recorded in the first quarter of 2003: the lower of cost or market provision recorded upon the reclassification of finance loans to held for sale as discussed in Note 13 and the charge to retained earnings related to the induced conversion of the Series C Preferred Stock as discussed in Note 10. 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 Champion Enterprises, Inc. (“the Company”) in the preparation of its consolidated financial statements, please refer to Note 1 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended 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 income (loss), income (loss) per share and stock-based compensation expense would have been the amounts indicated below:

2.		In July 2003, the Company engaged the performance improvement group of AlixPartners LLC to perform a review for potential improvements to the Company’s operating performance. The study includes looking at all aspects of the Company’s operations and may result in the closing of additional manufacturing facilities and retail sales centers during the third and fourth quarters of 2003. Any such closures would likely result in fixed asset impairment charges, severance costs and other charges and would trigger an evaluation of goodwill that could result in goodwill impairment charges.
		In July 2003, the Company decided to discontinue its consumer finance operation and various exit strategies are being evaluated. The Company currently estimates that it will record charges not to exceed $12 million in the third quarter of 2003, including a non-cash charge of approximately $5 million primarily reflecting the impairment of goodwill.

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		In July 2003, certain of the Company’s executive officers terminated employment with the Company. These terminations will result in certain charges which will be recorded in the third quarter of 2003, although the amounts have not yet been determined.
3.		The provisions for income taxes (benefit) 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 six months ended June 28, 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 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 $63.5 million in the second quarter 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 2003. As a result, during the first quarter of 2003, a tax benefit of $3.0 million was recorded for the related reduction in the 100% valuation allowance.
4.		A summary of inventories by component follows:

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

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5.

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.
6.		The change in the carrying amount of goodwill follows:

		The decrease in other goodwill during the six months ended June 28, 2003 was due to the sale of land, land improvements and certain other assets of a development company during the first quarter of 2003. At June 28, 2003, other goodwill of $4.1 million was related to the Company’s consumer finance operation. As discussed in Note 2, in July 2003 the Company decided to discontinue its consumer finance operation which will result in the recording of a 100% impairment charge in the third quarter of 2003.
		In the second quarter 2002, as a result of the significant downsizing of the Company’s retail operations in reaction to continuing challenging industry conditions and in accordance with SFAS No. 142, the Company performed a test for goodwill impairment. The results of this impairment test indicated that the implied fair value of the retail goodwill was less than its carrying value, resulting in a non-cash, pretax impairment charge of $97 million.
7.		During the quarter ended June 29, 2002 the Company recorded restructuring charges totaling $4.9 million for fixed asset impairments and lease termination and other costs related to the closure of 34 retail sales centers.
8.		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 for homes sold by the manufacturing operations as of the balance sheet date. The following table summarizes the changes in accrued product warranty obligations during the six months ended June 28, 2003. A portion of warranty reserves was classified as other long-term liabilities in the consolidated balance sheet.

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9.

Long-term debt by component consisted of the following:

		During the quarter ended June 28, 2003 the Company purchased and retired $22.7 million of the Senior Notes due 2009 for cash payments of $15.3 million, resulting in pretax gains totaling $7.1 million. During the six months ended June 28, 2003 the Company purchased and retired $35.6 million of the Senior Notes due 2009 and $15 million of the Senior Notes due 2007 for cash payments of $35.8 million, resulting in pretax gains totaling $13.8 million. During the quarter ended June 29, 2002, the Company purchased and retired $30 million of its Senior Notes due 2009 for cash payments of $23.8 million, resulting in a pretax gain of $5.9 million.
		In January 2003, Champion Home Builders Co. (“CHB”), a wholly-owned subsidiary of the Company, entered into a three-year, $75 million revolving credit facility to be used in support of letters of credit and for general corporate purposes. Under this facility, letter of credit fees range from 2.5% to 3.5% annually on letters of credit issued and borrowings bear interest at either the prime interest rate plus up to 0.5% or the Eurodollar rate plus 2.5% to 3.5%. In addition, there is an annual fee of $0.1 million plus 0.375% of the unused portion of the facility. Availability under the credit facility is subject to a borrowing base calculated as percentages of eligible accounts receivable, inventory and fixed assets. The facility agreement contains certain financial covenants that require the Company, only in the event that its liquidity, as defined, falls below $35 million, to maintain certain levels of consolidated earnings before interest, taxes, depreciation, amortization, non-cash restructuring costs and gains from extinguishment of Senior Notes (“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 June 28, 2003, availability under the facility was $72 million, letters of credit totaling $61.9 million and borrowings of $7.0 million were outstanding under the facility and the Company’s liquidity was in excess of $35 million such that no financial covenants were in effect.
		During the first quarter of 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.
		In April 2003, the Company completed an amendment and renewal of the $150 million warehouse facility that expired in April 2003 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. In July 2003, borrowings under the warehouse facility were substantially repaid through the proceeds from the sale of loans with a face value totaling $16.4 million. As discussed in Note 2, in July the Company decided to discontinue its consumer finance operation. As a result the warehouse facility is expected to be terminated during the third quarter of 2003.

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		The Company has two floor plan facilities with total availability of $21 million of which $17.8 million was outstanding at June 28, 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 $75 million 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 June 28, 2003, the Company had approximately $13.7 million outstanding under this facility and was in compliance with the covenant.
10.		At June 28, 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 $8.6 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. During the first quarter of 2003, the terms of the Series C preferred stock were amended to accelerate the modification of the conversion price to $5.66 and the preferred shareholder agreed to convert $16.25 million of the Series C cumulative convertible preferred stock by March 12, 2003. Upon conversion, 2.9 million shares of common stock were issued. This amendment to the preferred stock terms was accounted for as an induced conversion, resulting in a charge to retained earnings of $3.5 million during the first quarter of 2003.
		In connection with the issuance of the Series C preferred stock in 2002, the Company issued 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.
11.		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 June 28, 2003 was estimated to be approximately $265 million, without reduction for the resale value of the homes. This amount compares to approximately $240 million at the beginning of the year and approximately $270 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 and $0.6 million for the three and six months ended June 28, 2003, respectively, and $0.2 million and $0.5 million for the three and six months ended June 29, 2002, respectively. During the first quarter 2003, wholesale repurchase reserves were increased $3.2 million in connection with the extension of repurchase terms to 24 months for certain national lenders and for the negative effects of market conditions on the Company’s largest independent retailer. During the second quarter of 2003, the Company agreed to extend both repurchase terms and the timing of required principal curtailment payments by this independent retailer to respective floor plan lenders resulting in a slightly higher repurchase exposure to the Company for a longer period of time.
		At June 28, 2003 the Company was contingently obligated for approximately $62.2 million under letters of credit, primarily comprised of $14.1 million to support insurance reserves, $18.4 million to support long-term debt and $27.7 million to secure surety bonds. Champion was also contingently obligated for $35.8 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 June 28, 2003 Champion was contingently liable for up to $7.5 million under an unconditional guaranty of a $75 million warehouse facility of a consolidated third party special purpose entity. The warehouse

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		facility supported Champion’s finance company’s operation. This facility is expected to be terminated in the third quarter of 2003 as a result of the Company’s decision to discontinue its consumer finance operation as discussed in Note 2.
		At June 28, 2003 certain of the Company’s subsidiaries were guarantors of $5.7 million of debt of unconsolidated subsidiaries, none of which was reflected in the consolidated balance sheet. These guarantees are several or joint and several and are related to indebtedness of certain manufactured housing community developments which are collateralized by the properties being developed.
		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.
12.		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 earnings per share (“EPS”) in either six-month period presented and for the three months ended June 29, 2002 because the effect on the net loss would have been antidilutive. Convertible preferred stock was not included as dilutive securities in the quarter ended June 28, 2003 because preferred stock dividends were more dilutive. A reconciliation of the numerators and denominators used in the Company’s basic and diluted EPS calculations follows:

13.		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 during the quarter ended March 29, 2003 upon the Company’s decision to sell the majority of its finance loans through whole loan sales. As a result, for the three and six months ended June 28, 2003, the Company recorded $0.3 million and $5.7 million, respectively, of charges to value its finance loans receivable at the lower of cost or market. During the quarter ended June 28, 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 $11.9 million after paying down $42.2 million of warehouse line borrowings. Subsequent to quarter end, in July 2003, the Company sold loans with a face value of $16.4 million for approximately $15.6 million. The sale of these loans provided net cash of $5.6 million after paying down $10.0 million of warehouse line borrowings.

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		As discussed in Note 2, in July 2003 the Company decided to discontinue its consumer finance operation.
14.		The Company evaluates the performance of its manufacturing and retail segments based on earnings (loss) before interest, income taxes and general corporate expenses (“EBIT”), excluding goodwill impairment charges. 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 losses on finance loans sold or held for sale. Reconciliations of segment revenues to consolidated net revenues and segment earnings (loss) to income (loss) before income taxes follow: