Edgar Filing: CHAMPION ENTERPRISES INC

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark one)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934.

For Quarterly period ended April 2, 2005

o	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 of incorporation or organization)

(I.R.S. Employer

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

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.

75,685,743 shares of the registrant’s $1.00 par value Common Stock were outstanding as of April 22, 2005.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

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

	Unaudited
	Three Months Ended
	April 2, 2005			April 3, 2004

Net sales	$	244,275		$	206,734
Cost of sales		207,011			179,277
Gross margin		37,264			27,457

Selling, general, and administrative expenses		31,669			28,243
Mark-to-market (credit) charge for common stock warrant		(3,800	)		5,100
Loss on debt retirement		—			3,226

Operating income (loss)		9,395			(9,112	)

Interest income		773			232
Interest expense		(4,581	)		(5,062	)

Income (loss) from continuing operations before income taxes		5,587			(13,942	)

Income tax expense		300			300

Income (loss) from continuing operations		5,287			(14,242	)

Loss from discontinued operations, net of taxes		(2,558	)		(81	)

Net income (loss)	$	2,729		$	(14,323	)


Basic income (loss) per share (Note 9):
Income (loss) from continuing operations	$	0.06		$	(0.21	)
Loss from discontinued operations		(0.03	)		—
Basic income (loss) per share	$	0.03		$	(0.21	)

Weighted shares for basic EPS		72,547			68,103

Diluted income (loss) per share (Note 9):
Income (loss) from continuing operations	$	0.06		$	(0.21	)
Loss from discontinued operations		(0.03	)		—
Diluted income (loss) per share	$	0.03		$	(0.21	)

Weighted shares for diluted EPS		73,345			68,103

See accompanying Notes to Consolidated Financial Statements.

Page 1 of 33

CHAMPION ENTERPRISES, INC.

Consolidated Balance Sheets

(In thousands, except par value)

	Unaudited
		April 2, 2005			January 1, 2005
ASSETS
Current assets
Cash and cash equivalents	$	142,119		$	142,266
Restricted cash		4,694			529
Accounts receivable, trade		34,245			22,119
Inventories		83,869			71,616
Current assets of discontinued operations		14,751			35,463
Other current assets		13,003			13,535
Total current assets		292,681			285,528

Property, plant and equipment		196,344			207,216
Less-accumulated depreciation		118,345			126,259
		77,999			80,957

Goodwill		126,583			126,591
Non-current assets of discontinued operations		6,478			7,747
Other non-current assets		15,726			16,219
	$	519,467		$	517,042

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	28,664		$	13,819
Accrued warranty obligations		32,691			33,551
Accrued volume rebates		27,345			30,234
Accrued compensation and payroll taxes		14,238			19,659
Accrued self-insurance		26,684			25,988
Current liabilities of discontinued operations		9,051			21,411
Other current liabilities		36,094			31,696
Total current liabilities		174,767			176,358
Long-term liabilities
Long-term debt		200,710			200,758
Long-term liabilities of discontinued operations		417			432
Other long-term liabilities		40,492			41,444
		241,619			242,634
Contingent liabilities (Note 8)
Redeemable convertible preferred stock, no par value, 5,000 shares authorized, 21 shares and 21 shares issued and outstanding, respectively		20,750			20,750

Shareholders’ equity
Common stock, $1 par value, 120,000 shares authorized, 72,583 and 72,358 shares issued and outstanding, respectively		72,583			72,358
Capital in excess of par value		166,821			164,377
Accumulated deficit		(156,905	)		(159,375	)
Accumulated other comprehensive loss		(168	)		(60	)
Total shareholders’ equity		82,331			77,300
	$	519,467		$	517,042
See accompanying Notes to Consolidated Financial Statements.

Page 2 of 33

CHAMPION ENTERPRISES, INC.

Consolidated Statements of Cash Flows

(In thousands)

	Unaudited
	Three Months Ended
	April 2, 2005			April 3, 2004
Cash flows from operating activities
Income (loss) from continuing operations	$	5,287		$	(14,242	)
Adjustments to reconcile income (loss) from continuing operations to net cash used for continuing operating activities:
Depreciation		2,539			2,670
Loss on debt retirement		—			3,226
Mark-to-market (credit) charge for common stock warrant		(3,800	)		5,100
(Gain) loss on disposal of fixed assets, net		(1,595	)		37
Increase/decrease
Accounts receivable		(12,126	)		(17,944	)
Refundable income taxes		—			277
Inventories		(12,253	)		(13,631	)
Accounts payable		14,845			6,520
Accrued liabilities		(1,814	)		(5,018	)
Other, net		3,825			501
Net cash used for continuing operating activities		(5,092	)		(32,504	)

Cash flows from discontinued operations
Loss from discontinued operations		(2,558	)		(81	)
Proceeds from sales of retail businesses		19,568			—
Decrease (increase) in net assets of discontinued operations		(9,995	)		(3,355	)
Net cash provided by (used for) discontinued operations		7,015			(3,436	)

Cash flows from investing activities
Additions to property, plant and equipment		(2,468	)		(1,880	)
Proceeds on disposal of fixed assets		4,746			223
Investments in and advances to unconsolidated subsidiaries		(55	)		(58	)
Net cash provided by (used for) investing activities		2,223			(1,715	)

Cash flows from financing activities
Decrease in floor plan payable, net		—			(29	)
Decrease in long-term debt		(51	)		(5,813	)
(Increase) decrease in restricted cash		(4,165	)		1,710
Preferred stock issued, net		—			12,000
Common stock issued, net		182			1,611
Dividends paid on preferred stock		(259	)		(112	)
Net cash (used for) provided by financing activities		(4,293	)		9,367

Net decrease in cash and cash equivalents		(147	)		(28,288	)
Cash and cash equivalents at beginning of period		142,266			145,868
Cash and cash equivalents at end of period	$	142,119		$	117,580

See accompanying Notes to Consolidated Financial Statements.

Page 3 of 33

CHAMPION ENTERPRISES, INC.

Consolidated Statement of Shareholders’ Equity

Unaudited Three Months Ended April 2, 2005

(In thousands)

	Common stock			Capital in excess of		Accumulated			Accumulated other comprehensive
	Shares	Amount		par value		deficit			income (loss)			Total

Balance at January 1, 2005	72,358	$	72,358	$	164,377	$	(159,375	)	$	(60	)	$	77,300

Net income	—		—		—		2,729			—			2,729
Preferred stock dividends	—		—		—		(259	)		—			(259	)
Stock options and benefit plans	54		54		615		—			—			669
Issuance for acquisition deferred purchase price payments	171		171		1,829		—			—			2,000
Foreign currency translation adjustments	—		—		—		—			(108	)		(108	)
Balance at April 2, 2005	72,583	$	72,583	$	166,821	$	(156,905	)	$	(168	)	$	82,331

See accompanying Notes to Consolidated Financial Statements.

Page 4 of 33

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 statement of the results of the interim period. All such adjustments are of a normal recurring nature. Financial results of the interim period are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year. The balance sheet as of January 1, 2005 was derived from audited financial statements.

During the quarter ended April 2, 2005, the Company sold 22 of its retail sales centers and committed to a plan to dispose of the remainder of its retail operations except for its Advantage Homes operation in California. As a result the remaining non-Advantage operations were classified as held for sale. For the periods reported, retail operations, excluding Advantage Homes, are classified as discontinued operations. Also included in discontinued operations is the Company’s former consumer finance business that was exited in the third quarter of 2003.

For a description of significant accounting policies used by Champion Enterprises, Inc. (“the Company”) in the preparation of its consolidated financial statements, please refer to Note 1 of Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended January 1, 2005.

Certain amounts reported in previous periods have been reclassified to conform to the 2005 presentation.

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 as indicated below:

	Three Months Ended
	April 2, 2005		April 3, 2004
	(In thousands, except per share amounts)
Net income (loss) – as reported	$	2,729	$	(14,323	)
Net income (loss) – pro forma		2,618		(14,460	)
Basic income (loss) per share – as reported		0.03		(0.21	)
Diluted income (loss) per share – as reported		0.03		(0.21	)
Basic income (loss) per share – pro forma		0.03		(0.21	)
Diluted income (loss) per share – pro forma		0.03		(0.21	)
Stock-based employee compensation expense,
net of related tax effects – as reported		1,107		145
Stock-based employee compensation expense, net of related tax effects – pro forma	$	1,218	$	282

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment.” Under previous practice, the reporting entity could account for share-based payment under the provisions of APB Opinion No. 25 and disclose share-based compensation as accounted for under the provisions of SFAS No. 123. Under the provisions of SFAS No. 123R, a public entity is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. In April 2005, the Securities and Exchange Commission (“SEC”) postponed the effective date of SFAS No. 123R until the fiscal year beginning after June 15, 2005. The Company

Page 5 of 33

expects to adopt SFAS No. 123R in January 2006. Once the standard is adopted, the Company currently expects full-year 2006 diluted net earnings per share to be reduced by less than $.01 for stock options outstanding at April 2, 2005. Application of this pronouncement requires significant judgment regarding the inputs to an option-pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking over the expected term of the award. As a result, the actual impact of adoption on earnings for 2006 could differ significantly from the Company’s current estimate. The Company is currently considering the modified prospective method of transition, which would be first effective for the Company’s 2006 fiscal first quarter.

2. The following table provides information regarding current year activity for restructuring reserves recorded in previous periods for closures of manufacturing plants and retail sales centers.

	Three Months Ended April 2, 2005
	2004 Closures			Prior Closures			Total
	(In thousands)
Balance at beginning of year	$	810		$	3,611		$	4,421
Cash payments:
Warranty costs		—			(211	)		(211	)
Other closing costs		(421	)		(51	)		(472	)
Reversals credited to earnings:
Warranty costs		—			—			—
Other closing costs		(190	)		—			(190	)
Balance at April 2, 2005	$	199		$	3,349		$	3,548

Period end balance comprised of:
Warranty costs	$	—		$	2,381		$	2,381
Other closing costs		199			968			1,167
	$	199		$	3,349		$	3,548

Warranty costs are expected to be paid over a three-year period after the related closures. Other closing costs are generally paid within one year of the related closures, though certain lease payments at abandoned retail locations are paid up to three years after the closures. The reversal of other closing costs during the three months ended April 2, 2005 consisted of an adjustment to accruals for employee severance.

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

	Three Months Ended
	April 2, 2005			April 3, 2004
	(In thousands)
Statutory U.S. tax rate	$	2,000		$	(4,900	)
(Decrease) increase in rate resulting from:
Warrant mark-to-market and other permanent		(1,200	)		1,900
Deferred tax valuation allowance		(800	)		3,000
Foreign and state taxes		300			300
Total income tax expense	$	300		$	300

The Company currently provides a 100% valuation allowance for its deferred tax assets. Deferred tax assets will continue to require a 100% valuation allowance until the Company has demonstrated their realizability through sustained profitability and/or from other factors. As of January 1, 2005, the Company had available federal net operating loss carryforwards of approximately $120 million for tax purposes to offset future federal taxable income. These loss carryforwards expire in 2023 and 2024.

4.	A summary of inventories by component follows:

	April 2, 2005		January 1, 2005
	(In thousands)
New manufactured homes	$	26,190	$	18,749
Raw materials		31,297		30,908
Work-in-process		9,443		7,166
Other inventory		16,939		14,793
	$	83,869	$	71,616

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

5. The Company’s manufacturing operations generally provide retail homebuyers with a twelve-month warranty from the date of purchase. Estimated warranty costs are accrued as cost of sales at the time of sale. The warranty provision and reserves are based on estimates of the amounts necessary to settle existing and future claims for homes sold by the manufacturing operations as of the balance sheet date. The following table summarizes the changes in accrued product warranty obligations during the three months ended April 2, 2005. A portion of warranty reserves was classified as other long-term liabilities in the consolidated balance sheet.

	Accrued Warranty Obligations
	2005			2004
	(In thousands)
Reserves at beginning of quarter	$	40,051		$	47,058
Warranty expense provided		12,579			12,564
Cash warranty payments		(13,439	)		(14,271	)
Reserve at end of quarter	$	39,191		$	45,351

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6.	Long-term debt by component consisted of the following:

	April 2, 2005		January 1, 2005
	(In thousands)
7.625% Senior Notes due 2009	$	89,273	$	89,273
11.25% Senior Notes due 2007		97,510		97,510
Obligations under industrial revenue bonds		12,430		12,430
Other debt		1,497		1,545
	$	200,710	$	200,758

During the three months ended April 3, 2004, the Company purchased and retired $13.5 million of the Senior Notes due 2009 and $13.5 million of the Senior Notes due 2007 in exchange for Company common stock totaling 3.9 million shares, resulting in a pretax loss of $3.2 million. Also during the first quarter of 2004, the Company repaid a $5.7 million obligation under an industrial revenue bond.

CHB has a three-year, $75 million revolving credit facility currently used for the issuance of letters of credit. Under this facility, as amended January 24, 2005, letter of credit fees range from 1.75% to 2.25% annually and borrowings bear interest at either the prime interest rate plus up to 0.5% or the Eurodollar rate plus 2.0% to 2.5%. In addition, there is an annual fee of $0.1 million plus 0.375% of the unused portion of the facility. Availability under the facility is determined by a monthly borrowing base calculation based on percentages of eligible accounts receivable, inventory, fixed assets, and, if necessary, cash on deposit. The facility agreement contains certain financial covenants that require the Company, only in the event that its liquidity, as defined, falls below $35 million, to maintain certain levels of consolidated earnings before interest, taxes, depreciation, amortization, non-cash restructuring costs and gains from extinguishment of Senior Notes and certain ratios of earnings to fixed charges, as defined. Liquidity, as defined, consists of the majority of the Company’s unrestricted cash and cash equivalents plus unused availability under the facility. Fixed charges, as defined, consist primarily of interest expense, capital expenditures, dividends paid in cash, required principal payments of debt and lease payments paid or accrued during the calculation period as well as cash losses under wholesale repurchase obligations. In addition the facility contains covenants that limit the Company’s ability to incur additional indebtedness and liens, sell assets and, if liquidity falls below $35 million, make certain investments, pay dividends and purchase or redeem its common stock. The line of credit is collateralized by accounts receivable, inventories, fixed assets, cash, and other assets. As of April 2, 2005, there were $60.3 million of letters of credit issued under the facility, there were no borrowings outstanding and the Company’s liquidity, as defined, was $132.5 million, which was in excess of $35 million such that no other financial covenants were in effect.

7. During the first quarter of 2004, the preferred shareholder exercised its right to purchase $12 million of Series B-2 preferred stock. At April 2, 2005 redeemable convertible preferred stock consisted of $8.75 million of Series C and $12 million of Series B-2 with mandatory redemption dates of April 2, 2009 and July 3, 2008, respectively. Both Series had a 5% annual dividend that was payable quarterly, at the Company’s option, in cash or common stock.

In connection with the issuance of the Series C preferred stock in 2002, the Company issued to the preferred shareholder a warrant, which was exercisable based on approximately 2.2 million shares at a strike price of $12.27 per share at April 2, 2005. The warrant would have expired on April 2, 2009 and was exercisable only on a non-cash, net basis, whereby the warrant holder would have received shares of common stock as payment for any net gain upon exercise. During the three months ended April 2, 2005 and April 3, 2004, as a result of changes in the Company’s common stock price, the Company recorded a mark-to-market credit of $3.8 million and a charge of $5.1 million, respectively, for the change in estimated fair value of the warrant.

On April 18, 2005, the Company repurchased and subsequently cancelled the common stock warrant in exchange for a cash payment of $4.5 million and the preferred shareholder elected to immediately convert the outstanding Series B-2 and Series C preferred stock into 3.1 million shares of common stock under the terms of the respective preferred stock agreements.

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8. The majority of the Company’s manufacturing sales to independent retailers are made pursuant to repurchase agreements with lending institutions that provide wholesale floor plan financing to the retailers. Pursuant to these agreements, generally for a period of up to 24 months from invoice date of the sale of the homes and upon default by the retailers and repossession by the financial institution, the Company is obligated to purchase the related floor plan loans or repurchase the homes from the lender. The contingent repurchase obligation at April 2, 2005 was estimated to be approximately $250 million, without reduction for the resale value of the homes. Losses under repurchase obligations are determined by the difference between the repurchase price and the estimated net proceeds from the resale of the homes. Losses incurred on homes repurchased totaled $0.1 million for both the three months ended April 2, 2005 and April 3, 2004.

At April 2, 2005 the Company was contingently obligated for approximately $60.6 million under letters of credit, primarily comprised of $14.5 million to support insurance reserves, $12.6 million to support long-term debt, $27.7 million to secure surety bonds, and $5.0 million to support floor plan facilities of independent retailers. Champion was also contingently obligated for $31.8 million under surety bonds, generally to support insurance and license and service bonding requirements. Approximately $27.2 million of the letters of credit and $20.8 million of the surety bonds support insurance reserves and long-term debt that are reflected as liabilities in the consolidated balance sheet.

At April 2, 2005 certain of the Company’s subsidiaries were guarantors of $5.5 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 that arise in the ordinary course of its business.

Management believes the ultimate liability with respect to these contingent obligations will not have a material effect on the Company’s financial position, results of operations or cash flows.

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9.At the end of the quarter, the Company’s potentially dilutive securities in 2005 and 2004 consisted of outstanding stock options and awards, convertible preferred stock, a common stock warrant, and, in 2004, deferred purchase price obligations. Convertible preferred stock and common stock warrants were not considered in determining the denominator for diluted earnings per share (“EPS”) in any period presented because the effect would have been antidilutive. Additionally, outstanding stock options and awards and deferred purchase price obligations were not considered in determining the denominator for diluted EPS for the three months ended April 3, 2004 because the effect would have been antidilutive. A reconciliation of the numerators and denominators used in the Company’s basic and diluted EPS calculations follows:

	Three Months Ended
	April 2, 2005			April 3, 2004
	(In thousands)
Numerator:
Net income (loss)	$	2,729		$	(14,323	)
Plus loss from discontinued operations		2,558			81
Less preferred stock dividends		(259	)		(160	)
Less amount allocated to participating securities holders		(343	)		—
Income (loss) from continuing operations available to common shareholders for basic and diluted EPS		4,685			(14,402	)

Loss from discontinued operations		(2,558	)		(81	)
Less amount allocated to participating securities.		-			-
Loss from discontinued operations available to common shareholders for basic and diluted EPS		(2,558	)		(81	)

Income (loss) available to common shareholders for basic and diluted EPS	$	2,127		$	(14,483	)

Denominator:
Shares for basic EPS - weighted average shares outstanding		72,547			68,103
Plus effect of dilutive securities
Stock options and awards		798			—
Shares for diluted EPS		73,345			68,103

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10.The Company evaluates the performance of its manufacturing and retail segments based on income before interest, income taxes, and general corporate expenses. Reconciliations of segment sales to consolidated net sales and segment income to consolidated income (loss) from continuing operations before income taxes follow:

	Three Months Ended
	April 2, 2005			April 3, 2004
Net sales	(In thousands)
Manufacturing	$	238,738		$	209,856
Retail		25,137			19,478
Less: intercompany		(19,600	)		(22,600	)
Consolidated net sales	$	244,275		$	206,734

Income (loss) from continuing operations before income taxes:
Manufacturing segment income	$	11,190		$	4,654
Retail segment income		1,267			783
General corporate expenses		(8,062	)		(6,023	)
Mark-to-market credit (charge) for common stock warrant		3,800			(5,100	)
Loss on debt retirement		—			(3,226	)
Interest expense, net		(3,808	)		(4,830	)
Intercompany eliminations		1,200			(200	)
Income (loss) from continuing operations before income taxes	$	5,587		$	(13,942	)

11. Discontinued operations include the Company’s retail operations, excluding Advantage Homes, and its former consumer finance business that was exited in 2003. For the three months ended April 2, 2005 and April 3, 2004, revenues from discontinued retail operations were $18.9 million and $30.4 million, respectively. (Loss) income from discontinued operations for the quarters ended April 2, 2005 and April 3, 2004 consist of the following:

	Three Months Ended
	April 2, 2005			April 3, 2004
	(In thousands)
Loss from retail operations	$	(2,548	)	$	(1,237	)
(Loss) income from consumer finance business		(10	)		1,156
Total loss from discontinued operations	$	(2,558	)	$	(81	)

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The assets and liabilities of discontinued operations consisted of the following:

	April 2, 2005		January 1, 2005
	(In thousands)
Assets:
Accounts receivable, trade	$	167	$	598
Inventories		13,507		33,964
Other current assets		1,077		901
Current assets of discontinued operations	$	14,751	$	35,463
Property, plant, and equipment, net	$	3,851	$	5,064
Other non-current assets		2,627		2,683
Non-current assets of discontinued operations	$	6,478	$	7,747

Liabilities:
Floor plan payable	$	1,568	$	11,835
Accounts payable		1,134		2,043
Other current liabilities		6,349		7,533
Current liabilities of discontinued operations	$	9,051	$	21,411
Long-term debt	$	417	$	432

Loss from discontinued retail operations for the quarter ended April 2, 2005 included an operating loss of $1.6 million and a net loss of $1.0 million related to sales of retail businesses during the quarter and asset impairment charges related to a sale that was completed in April 2005. During the quarter ended April 2, 2005, the Company completed six transactions in which the assets and businesses of 22 of its retail sales centers were sold. The 22 retail sales centers had sales of $10.4 million for the three months ended April 2, 2005. The assets sold consisted primarily of new homes and other inventory. The total sale price was cash of approximately $19.6 million and the buyers’ assumption of certain liabilities totaling approximately $1.0 million. The Company recorded a loss of approximately $0.2 million from these transactions. In connection with one of these sales, the Company paid down $10.3 million of floor plan borrowings.

On April 15 2005, the Company sold the assets and business of eight retail sales centers for cash of $1.6 million, the buyer’s assumption of certain liabilities totaling $0.3 million and the buyer’s pay down of floor plan borrowings of $1.6 million. The assets sold consisted primarily of inventory of new and pre-owned homes. During the quarter ended April 2, 2005 the Company recorded impairment charges of approximately $0.8 million related to the assets sold.

In connection with the sales of retail businesses during 2005, intercompany profit of $1.6 million was recognized in the consolidated statement of operations that is not classified as discontinued operations.

Income from discontinued consumer finance business for the three months ended April 3, 2004 consisted primarily of a favorable adjustment from the settlement of remaining contractual obligations.

12. During the first quarter of 2004, the Company purchased and retired $27.0 million of its Senior Notes in exchange for 3.9 million shares of Company common stock. In addition, during the three months ended April 2, 2005 and April 3, 2004, the Company issued 171,000 shares and 276,000 shares of common stock, respectively, in payment of deferred purchase price obligations of $2.0 million each.

13. 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

Page 12 of 33

Notes due 2009 on a basis subordinated to their guarantees of the Senior Notes due 2007. The non-guarantor subsidiaries include the Company’s foreign operations, its development companies and certain finance subsidiaries.

Separate financial statements for each guarantor subsidiary are not included in this filing because each guarantor subsidiary is 100%-owned and the guarantees are full and unconditional, as well as joint and several, for the Senior Notes due 2009 and for the Senior Notes due 2007. There were no significant restrictions on the ability of the parent company or any guarantor subsidiary to obtain funds from its subsidiaries by dividend or loan.

The following condensed consolidating financial information presents the financial position, results of operations and cash flows of (i) the Company (“Parent”) and CHB, as parents, as if they accounted for their subsidiaries on the equity method; (ii) the guarantor subsidiaries, and (iii) the non-guarantor subsidiaries.

Page 13 of 33

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Statement of Operations

For the Three Months Ended April 2, 2005

	Parent			CHB			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Eliminations			Consolidated
				(In thousands)
Net sales	$	—		$	74,808		$	178,513		$	9,954		$	(19,000	)	$	244,275

Cost of sales		—			64,396			154,438			8,377			(20,200	)		207,011

Gross margin		—			10,412			24,075			1,577			1,200			37,264

Selling, general and Administrative expenses		110			10,026			20,205			1,328			—			31,669
Mark-to-market credit for common stock warrant		(3,800	)		—			—			—			—			(3,800	)

Operating income		3,690			386			3,870			249			1,200			9,395

Interest income		1,715			1,692			(2,747	)		91			22			773
Interest expense		(1,715	)		(2,783	)		(83	)		—			—			(4,581	)

Income (loss) from continuing operations before income taxes		3,690			(705	)		1,040			340			1,222			5,587

Income tax expense		—			—			50			250			—			300

Income (loss) from continuing operations		3,690			(705	)		990			90			1,222			5,287

Loss from discontinued operations, net of taxes		—			—			(2,262	)		(274	)		(22	)		(2,558	)

Income (loss) before equity in income of consolidated subsidiaries		3,690			(705	)		(1,272	)		(184	)		1,200			2,729
Equity in (loss) income of consolidated subsidiaries		(2,161	)		(1,456	)		—			—			3,617			—
Net income (loss)	$	1,529		$	(2,161	)	$	(1,272	)	$	(184	)	$	4,817		$	2,729

Page 14 of 33

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Balance Sheet

As of April 2, 2005

	Parent -			CHB			Guarantor Subsidiaries			Non-guarantor Subsidiaries			Consolidating Eliminations			Consolidated
Assets	(In thousands)
Current assets
Cash and cash equivalents	$	—		$	120,731		$	4,155		$	17,231		$	2		$	142,119
Restricted cash		—			4,460			234			—			—			4,694
Accounts receivable, trade		—			11,948			22,631			1,586			(1,920	)		34,245
Inventories		—			17,536			66,279			2,854			(2,800	)		83,869
Current assets of discontinued operations								14,751			—			—			14,751
Other current assets		—			8,554			4,302			447			(300	)		13,003
Total current assets		—			163,229			112,352			22,118			(5,018	)		292,681

Property, plant, and equipment, net		—			26,373			49,290			2,336			—			77,999
Goodwill		—			—			125,783			800			—			126,583
Investment in consolidated subsidiaries		5,787			309,960			163,724			6,791			(486,262	)		—
Non-current assets of discontinued operations		—			—			5,687			791			—			6,478
Other non-current assets		650			2,653			4,604			7,819			—			15,726
	$	6,437		$	502,215		$	461,440		$	40,655		$	(491,280	)	$	519,467
Liabilities, Redeemable Convertible Preferred Stock, and Shareholders’ Equity
Current liabilities
Accounts payable	$	—		$	9,342		$	18,035		$	1,287		$	—		$	28,664
Accrued warranty obligations		—			7,660			24,277			754			—			32,691
Accrued volume rebates		—			8,983			17,666			1,993			(1,297	)		27,345
Current liabilities of discontinued operations		—			—			9,051			—			—			9,051
Other current liabilities		2,656			24,981			48,466			1,113			(200	)		77,016
Total current liabilities		2,656			50,966			117,495			5,147			(1,497	)		174,767

Long-term liabilities
Long-term debt		89,273			104,879			6,558			—			—			200,710
Long-term liabilities of discontinued operations		—			—			417			—			—			417
Other long-term liabilities		5,000			8,125			27,249			118			—			40,492
		94,273			113,004			34,224			118			—			241,619
Intercompany balances		(182,962	)		59,508			457,553			4,658			(338,757	)		—

Redeemable convertible preferred stock		20,750			—			—			—			—			20,750
Shareholders’ equity
Common stock		72,583			1			62			3			(66	)		72,583
Capital in excess of par value		166,821			613,336			323,527			32,526			(969,389	)		166,821
Accumulated deficit		(167,684	)		(334,600	)		(471,367	)		(1,683	)		818,429			(156,905	)
Accumulated other comprehensive loss		—			—			(54	)		(114	)		—			(168	)
Total shareholders’ equity		71,720			278,737			(147,832	)		30,732			(151,026	)		82,331
	$	6,437		$	502,215		$	461,440		$	40,655		$	(491,280	)	$	519,467

Page 15 of 33

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Statement of Cash Flows

For the Three Months Ended April 2, 2005

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

Net cash (used for) provided by continuing operating activities	$	(2,187	)	$	8,978		$	(16,359	)	$	5,141			$	(665	)		$	(5,092	)

Net cash provided by (used for) discontinued operations		—			—			7,289			(274	)			—				7,015

Cash flows from investing activities
Additions to property, plant, and equipment		—			(382	)		(1,874	)		(212	)			—				(2,468	)
Investments in and advances to unconsolidated subsidiaries		—			—			—			(55	)			—				(55	)
Investments in and advances to consolidated subsidiaries		2,264			(4,235	)		7,131			(5,346	)			186				—
Proceeds on disposal of fixed assets		—			144			4,206			396								4,746
Net cash provided by (used for) investing activities		2,264			(4,473	)		9,463			(5,217	)			186				2,223

Cash flows from financing Activities
Decrease in long-term debt		—			—			(51	)		—				—				(51	)
Increase in restricted cash		—			(4,151	)		(14	)		—				—				(4,165	)
Common stock issued, net		182			—			—			—				—				182
Dividends paid on preferred stock		(259	)		—			—			—				—				(259	)
Net cash used for financing activities		(77	)		(4,151	)		(65	)		—				—				(4,293	)