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 July 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.

75,730,293 shares of the registrant’s $1.00 par value Common Stock were outstanding as of July 25, 2005.

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
	July 2, 2005		July 3, 2004		July 2, 2005		July 3, 2004
Net sales	$317,100		$270,484		$561,375		$477,218

Cost of sales	261,527		224,890		468,538		404,167

Gross margin	55,573		45,594		92,837		73,051

Selling, general and administrative expenses	36,642		33,927		68,311		62,170
Mark-to-market (credit) charge for common stock warrant	(500	)	(3,900	)	(4,300	)	1,200
Loss (gain) on debt retirement	901		(450	)	901		2,776

Operating income	18,530		16,017		27,925		6,905

Interest income	929		245		1,702		484
Interest expense	(4,628	)	(4,586	)	(9,209	)	(9,648	)

Income (loss) from continuing operations before income taxes	14,831		11,676		20,418		(2,259	)

Income tax expense (benefit)	600		(11,400	)	900		(11,100	)

Income from continuing operations	14,231		23,076		19,518		8,841

(Loss) income from discontinued operations, net of taxes	(751	)	356		(3,309	)	268

Net income	$ 13,480		$ 23,432		$ 16,209		$ 9,109

Basic income (loss) per share:
Income from continuing operations	$ 0.19		$ 0.30		$ 0.25		$ 0.11
(Loss) income from discontinued operations	(0.01	)	0.01		(0.05	)	0.01
Basic income per share	$ 0.18		$ 0.31		$ 0.20		$ 0.12

Weighted shares for basic EPS	75,176		70,657		73,861		69,380

Diluted income (loss) per share:
Income from continuing operations	$ 0.18		$ 0.29		$ 0.25		$ 0.11
(Loss) income from discontinued operations	(0.01	)	0.01		(0.05	)	0.00
Diluted income per share	$ 0.17		$ 0.30		$ 0.20		$ 0.11

Weighted shares for diluted EPS	76,042		72,253		74,756		71,152

See accompanying Notes to Consolidated Financial Statements.

CHAMPION ENTERPRISES, INC.

Consolidated Balance Sheets

(In thousands, except par value)

	Unaudited July 2, 2005			January 1, 2005
ASSETS
Current assets
Cash and cash equivalents	$	149,899		$	142,266
Restricted cash		528			529
Accounts receivable, trade		41,694			22,119
Inventories		80,886			71,616
Current assets of discontinued operations		9,780			35,463
Other current assets		13,736			13,535
Total current assets		296,523			285,528

Property, plant and equipment		198,397			207,216
Less-accumulated depreciation		120,190			126,259
		78,207			80,957

Goodwill		126,564			126,591
Non-current assets of discontinued operations		4,701			7,747
Other non-current assets		13,371			16,219
	$	519,366		$	517,042

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY

Current liabilities
Accounts payable		33,673			13,819
Accrued warranty obligations		32,011			33,551
Accrued volume rebates		27,564			30,234
Accrued compensation and payroll taxes		20,264			19,659
Accrued self-insurance		26,797			25,988
Current liabilities of discontinued operations		5,422			21,411
Other current liabilities		29,984			31,696
Total current liabilities		175,715			176,358

Long-term liabilities
Long-term debt		191,543			200,758
Long-term liabilities of discontinued operations		342			432
Other long-term liabilities		34,660			41,444
		226,545			242,634
Contingent liabilities (Note 8)

Redeemable convertible preferred stock, no par value, 5,000 shares authorized, 0 shares and 21 shares issued and outstanding, respectively		—			20,750

Shareholders’ equity
Common stock, $1 par value, 120,000 shares authorized, 75,730 and 72,358 shares issued and outstanding, respectively		75,730			72,358
Capital in excess of par value		185,287			164,377
Accumulated deficit		(143,459	)		(159,375	)
Accumulated other comprehensive loss		(452	)		(60	)
Total shareholders’ equity		117,106			77,300
	$	519,366		$	517,042

See accompanying Notes to Consolidated Financial Statements.

CHAMPION ENTERPRISES, INC.

Consolidated Statements of Cash Flows

(In thousands)

	Unaudited Six Months Ended
	July 2, 2005			July 3, 2004
Cash flows from operating activities
Income from continuing operations	$	19,518		$	8,841

Adjustments to reconcile income from continuing operations to net cash provided by (used for) operating activities:
Depreciation and amortization		5,063			5,342
Loss on debt retirement		901			2,776
Mark-to-market (credit) charge for common stock warrant		(4,300	)		1,200
Gain on disposal of fixed assets		(1,599	)		(74	)
Decrease in allowance for tax adjustments		—			(12,000	)
Increase/decrease
Accounts receivable		(19,575	)		(16,150	)
Refundable income taxes		—			376
Inventories		(9,269	)		(17,776	)
Accounts payable		19,701			7,061
Accrued liabilities		(2,222	)		(6,025	)
Other, net		5,141			(1,343	)
Net cash provided by (used for) continuing operating activities		13,359			(27,772	)

Cash flows from discontinued operations
(Loss) income from discontinued operations		(3,309	)		268
Proceeds from sales of retail businesses		24,312			—
Change in net assets of discontinued operations		(12,232	)		(6,273	)
Net cash provided by (used for) discontinued operations		8,771			(6,005	)

Cash flows from investing activities
Additions to property, plant and equipment		(5,290	)		(4,016	)
Investments in and advances to unconsolidated subsidiaries		(55	)		(109	)
Proceeds on disposal of fixed assets		5,056			203
Net cash used for investing activities		(289	)		(3,922	)

Cash flows from financing activities
Decrease in floor plan payable, net		—			(29	)
Decrease in other long-term debt		(128	)		(5,939	)
Purchase of Senior Notes		(9,885	)		(10,395	)
Purchase of common stock warrant		(4,500	)		—
Decrease in restricted cash		1			7,710
Preferred stock issued, net		—			12,000
Common stock issued, net		597			4,512
Dividends paid on preferred stock		(293	)		(160	)
Net cash (used for) provided by financing activities		(14,208	)		7,699

Net increase (decrease) in cash and cash equivalents		7,633			(30,000	)
Cash and cash equivalents at beginning of period		142,266			145,868

Cash and cash equivalents at end of period	$	149,899		$	115,868

See accompanying Notes to Consolidated Financial Statements.

CHAMPION ENTERPRISES, INC.

Consolidated Statement of Shareholders’ Equity

Unaudited Six Months Ended July 2, 2005

(In thousands)

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

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

Net income	—		—		—		16,209			—			16,209		$	16,209
Preferred stock dividends	—		—		—		(293	)		—			(293	)		—
Stock options and benefit plans	141		141		1,391		—			—			1,532			—
Issuance for acquisition deferred purchase price payments	171		171		1,829		—			—			2,000			—
Preferred stock conversion	3,060		3,060		17,690		—			—			20,750
Foreign currency translation adjustments	—		—		—		—			(392	)		(392	)		(392)

Balance at July 2, 2005	75,730	$	75,730	$	185,287	$	(143,459	)	$	(452	)	$	117,106		$	15,817

See accompanying Notes to Consolidated Financial Statements.

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.

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.

During the six months ended July 2, 2005, the Company sold 30 of its retail sales centers pursuant to a plan to dispose of the remainder of its retail operations except for its non-traditional retail operation in California. As a result retail operations, excluding this California operation, were classified as held for sale and, for the periods reported, 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.

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
	July 2, 2005		July 3, 2004
	(In thousands, except per share amounts)
Net income – as reported	$	13,480	$	23,432
Net income – pro forma		13,263		23,404
Basic income per share – as reported		0.18		0.31
Diluted income per share – as reported		0.17		0.30
Basic income per share – pro forma		0.18		0.30
Diluted income per share – pro forma		0.17		0.30
Stock-based employee compensation expense, net of related tax effects – as reported		1,407		185
Stock-based employee compensation expense, net of related tax effects – pro forma	$	1,624	$	213

	Six Months Ended
	July 2, 2005		July 3, 2004
	(In thousands, except per share amounts)
Net income – as reported	$	16,209	$	9,109
Net income – pro forma		15,881		8,944
Basic income per share – as reported		0.20		0.12
Diluted income per share – as reported		0.20		0.11
Basic income per share – pro forma		0.20		0.11
Diluted income per share – pro forma		0.20		0.11
Stock-based employee compensation expense, net of related tax effects – as reported		2,514		330
Stock-based employee compensation expense, net of related tax effects – pro forma	$	$ 2,841	$	$ 495

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 fiscal years beginning after June 15, 2005. The Company 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 July 2, 2005. The effect of adopting the standard for the Company’s other stock-based compensation plans is not determinable. 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 relating to closures of manufacturing plants and retail sales centers.

	Six Months Ended July 2, 2005
	2004 Closures			Prior Closures			Total
	(In thousands)
Balance at beginning of year	$	810		$	3,611		$	4,421
Cash payments:
Warranty costs		—			(443	)		(443	)
Other closing costs		(528	)		(122	)		(650	)
Reversals credited to earnings:
Other closing costs		(190	)		(16	)		(206	)
Balance at July 2, 2005	$	92		$	3,030		$	3,122

Period end balance comprised of:
Warranty costs	$	—		$	2,149		$	2,149
Other closing costs		92			881			973
	$	92		$	3,030		$	3,122

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 closing costs during the six months ended July 2, 2005 consisted of an adjustment to accruals for employee severance.

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

	Six Months Ended
	July 2, 2005			July 3, 2004
Continuing operations	(In thousands)
Statutory U.S. tax rate	$	7,200		$	(800	)
(Decrease) increase in rate resulting from:
Warrant mark-to-market and other permanent differences		(1,300	)		600
Deferred tax valuation allowance		(5,100	)		700
Decrease in allowance for tax adjustments		—			(12,000	)
Foreign and state taxes		100			400
Total income tax expense (benefit)	$	900		$	(11,100	)

	Six Months Ended
	July 2, 2005			July 3, 2004
Discontinued operations	(In thousands)
Statutory U.S. tax rate	$	(1,200	)	$	100
(Decrease) increase in rate resulting from:
Deferred tax valuation allowance		1,200			(100	)
Total income tax	$	—		$	—

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 certain future federal taxable income. These loss carryforwards expire in 2023 and 2024.

4.	A summary of inventories by component follows:

	July 2,		January 1,
	2005		2005
	(In thousands)
New manufactured homes	$	22,547	$	18,749
Raw materials		29,107		30,908
Work-in-process		11,632		7,166
Other inventory		17,600		14,793
	$	80,886	$	71,616

Other inventory consists of 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 primarily at the time of the manufacturing sale. Warranty provisions and reserves are based on estimates of the amounts necessary to settle existing and future claims for homes sold by the manufacturing operations as of the balance sheet date. The following table summarizes the changes in accrued product warranty obligations during the six months ended July 2, 2005 and July 3, 2004. 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 year	$	40,051		$	47,058
Warranty expense provided		24,365			24,302
Cash warranty payments		(25,905	)		(27,721	)
Reserves at end of quarter	$	38,511		$	43,639

6.	Long-term debt consisted of the following:

	July 2, 2005		January 1, 2005
	(In thousands)
7.625% Senior Notes due 2009	$	89,273	$	89,273
11.25% Senior Notes due 2007		88,430		97,510
Obligations under industrial revenue bonds		12,430		12,430
Other debt		1,410		1,545
	$	191,543	$	200,758

During the quarter ended July 2, 2005, the Company purchased and retired $9.1 million of its Senior Notes due 2007 for cash payments of $9.9 million, resulting in a pretax loss of $0.9 million. During the quarter ended July 3, 2004, the Company purchased and retired $10.9 million of its Senior Notes due 2009 for cash payments of $10.4 million, resulting in a pretax gain of $0.5 million. During the first quarter of 2004, the Company purchased and retired $13.5 million of the Senior Notes due 2009 and $13.5 million of the Senior Notes due 2007 in exchange for Company common stock totaling 3.9 million shares, resulting in a pretax loss of $3.2 million. Also during the first quarter of 2004, the Company repaid a $5.7 million obligation under an industrial revenue bond.

Champion Home Builders Co., a wholly-owned subsidiary of the Company, 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 July 2, 2005, availability under the facility was $61.6 million, there were $61.0 million of letters of credit issued and no borrowings outstanding, and the Company’s liquidity, as defined, was $138.5 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 January 1, 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. Also at January 1, 2005, the preferred shareholder held a warrant that was issued by the Company, which was exercisable based on approximately 2.2 million shares at the strike price at April 2, 2005 of $12.27 per share. 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.

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 all of 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.

During the quarter and six months ended July 2, 2005, the Company recorded mark-to-market credits of $0.5 million and $4.3 million, respectively, for the change in estimated fair value of the warrant. During the quarter and six months ended July 3, 2004, the Company recorded mark-to-market adjustments of a $3.9 million credit and a $1.2 million charge, respectively.

8. The majority of the Company’s manufacturing sales to independent retailers are made pursuant to repurchase agreements with lending institutions that provide wholesale floor plan financing to the retailers. Pursuant to these agreements, generally for a period of up to 24 months from invoice date of the sale of the homes and upon default by the retailers and repossession by the financial institution, the Company is obligated to purchase the related floor plan loans or repurchase the homes from the lender. The contingent repurchase obligation at July 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 $0.3 million and $0.2 million for the six months ended July 2, 2005 and July 3, 2004, respectively.

At July 2, 2005 the Company was contingently obligated for approximately $61.3 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 $29.9 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 July 2, 2005 certain of the Company’s subsidiaries were guarantors of $4.6 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.

9. During the three and six months ended July 2, 2005 and July 3, 2004, the Company’s potentially dilutive securities consisted of outstanding stock options and awards, convertible preferred stock, a common stock warrant, and, in the 2004 periods, 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. A reconciliation of the numerators and denominators used in the Company’s basic and diluted EPS calculations follows:

	Three Months Ended						Six Months Ended
	July 2, 2005			July 3, 2004			July 2, 2005			July 3, 2004
Numerator	(In thousands)
Net income	$	13,480		$	23,432		$	16,209		$	9,109
Plus loss (less income) from discontinued operations		751			(356	)		3,309			(268	)
Less preferred stock dividend		(34	)		(259	)		(293	)		(419	)
Less amount allocated to participating securities holders		(195	)		(1,594	)		(793	)		(545	)
Income from continuing operations available to common shareholders for basic and diluted EPS		14,002			21,223			18,432			7,877

(Loss) income from discontinued operations		(751	)		356			(3,309	)		268
Less amount allocated to participating securities		—			(25	)		—			(17	)
(Loss) income from discontinued operations available to common shareholders for basic and diluted EPS		(751	)		331			(3,309	)		251

Income available to common shareholders for basic and diluted EPS		$13,251			$21,554			$15,123			$8,128

Denominator
Shares for basic EPS--weighted average shares outstanding		75,176			70,657			73,861			69,380
Plus effect of dilutive securities
Deferred purchase price obligations		—			610			—			758
Stock options and awards		866			986			895			1,014
Shares for diluted EPS		76,042			72,253			74,756			71,152

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
	July 2, 2005			July 3, 2004
Net sales	(In thousands)
Manufacturing	$	291,595		$	269,084
Retail		38,805			28,300
Less: intercompany		(13,300	)		(26,900	)
Consolidated net sales	$	317,100		$	270,484

Income from continuing operations before income taxes: Manufacturing segment income		$24,6	67		$17,5	67
Retail segment income		2,602			1,445
General corporate expenses		(8,738	)		(6,845	)
Mark-to-market credit for common stock warrant		500			3,900
(Loss) gain on debt retirement		(901	)		450
Interest expense, net		(3,699	)		(4,341	)
Intercompany eliminations		400			(500	)
Income from continuing operations before income taxes	$	14,831		$	11,676

	Six Months Ended
	July 2, 2005			July 3, 2004
Net sales	(In thousands)
Manufacturing	$	530,333		$	478,940
Retail		63,942			47,778
Less: intercompany		(32,900	)		(49,500	)
Consolidated net sales	$	561,375		$	477,218

Income from continuing operations before income taxes: Manufacturing segment income		$35,857			$22,221
Retail segment income		3,869			2,228
General corporate expenses		(16,800	)		(12,868	)
Mark-to-market credit (charge) for common stock warrant		4,300			(1,200	)
Loss on debt retirement		(901	)		(2,776	)
Interest expense, net		(7,507	)		(9,164	)
Intercompany eliminations		1,600			(700	)
Income (loss) from continuing operations before income taxes	$	20,418		$	(2,259	)

11. Discontinued operations include the Company’s traditional retail operations, excluding its California retail operations, and its former consumer finance business that was exited in 2003. For the three and six months ended July 2, 2005, revenues from discontinued retail operations were $6.2 million and $25.1 million, respectively. For the three and six months ended July 3, 2004, revenues from discontinued retail operations were $35.6 million and $66.0 million, respectively. (Loss) income from discontinued operations for the three and six months ended July 2, 2005 and July 3, 2004 consist of the following:

	Three Months Ended						Six Months Ended
	July 2, 2005			July 3, 2004			July 2, 2005			July 3, 2004
	(In thousands)
(Loss) income from retail operations	$	(739	)	$	388		$	(3,287	)	$	(849	)
(Loss) income from consumer finance business		(12	)		(32	)		(22	)		1,117
Total (loss) income from discontinued operations	$	(751	)	$	356		$	(3,309	)	$	268

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

	July 2, 2005		January 1, 2005
	(In thousands)
Assets:
Accounts receivable, trade	$	141	$	598
Inventories		9,167		33,964
Other current assets		472		901
Current assets of discontinued operations	$	9,780	$	35,463
Property, plant, and equipment, net	$	2,507	$	5,064
Other non-current assets		2,194		2,683
Non-current assets of discontinued Operations	$	4,701	$	7,747

Liabilities:
Floor plan payable	$	29	$	11,835
Accounts payable		710		2,043
Other current liabilities		4,683		7,533
Current liabilities of discontinued operations	$	5,422	$	21,411
Long-term debt	$	342	$	432

Loss from discontinued retail operations for the six months ended July 2, 2005 included an operating loss of $2.1 million and a net loss of $1.2 million related to sales of 30 retail locations. In connection with the sales of retail businesses during 2005, intercompany profit of $1.4 million, which had been previously eliminated in consolidation, was recognized in the consolidated statement of operations and was not classified as discontinued operations. Retail assets sold consisted primarily of new homes and other inventory. The total sale price was cash of approximately $24.3 million and the buyers’ assumption of certain liabilities totaling approximately $1.2 million. In connection with these sales, the Company paid down $10.9 million of floor plan borrowings. On July 19, 2005, the Company’s remaining ten traditional retail locations were sold.

12. During the quarter ended April 2, 2005, the Company issued 171,000 shares of common stock in payment of the final $2.0 million installment of deferred purchase price obligations. During the three and six months ended July 3, 2004, the Company issued 193,000 shares and 469,000 shares, respectively, of common stock in payment of deferred purchase price obligations of $2.0 million and $4.0 million, respectively. In addition, during the second quarter of 2004, the Company issued 29,000 shares of common stock in payment of preferred stock dividends totaling $0.3 million. During the first quarter of 2004, the Company purchased and retired $13.5 million of its Senior Notes due 2009 and $13.5 million of its Senior Notes due 2007 in exchange for 3.9 million shares of Company common stock.

13. On July 18, 2005 the Company entered into an agreement to acquire New Era Building Systems, a leading modular homebuilder, and its affiliates, Castle Housing of Pennsylvania and Carolina Building Solutions, for cash consideration of $41 million and the assumption of certain liabilities, pending regulatory and the sellers’ shareholder approvals.

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 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.

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Statement of Operations

For the Three Months Ended July 2, 2005

							Guarantor			Non-guarantor			Consolidating
	Parent			CHB			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	94,431		$	221,393		$	14,276		$	(13,000	)	$	317,100

Cost of sales		—			78,780			184,910			11,237			(13,400	)		261,527

Gross margin		—			15,651			36,483			3,039			400			55,573

Selling, general, and administrative expenses		(111)			10,96	9		24,40	5		1,37	9		—			36,64	2
Mark-to-market credit for common stock warrant		(500)			—			—			—			—			(500)
Loss on debt retirement		—			901			—			—			—			901

Operating income		611			3,781			12,078			1,660			400			18,530

Interest income		1,743			1,766			4,261			97			(6,938	)		929
Interest expense		(1,743	)		(2,776	)		(7,025	)		—			6,916			(4,628	)

Income from continuing operations before income taxes		611			2,771			9,314			1,757			378			14,831

Income tax expense		—			—			50			550			—			600

Income from continuing operations		611			2,771			9,264			1,207			378			14,231

(Loss) income from discontinued operations		—			—			(989	)		216			22			(751	)

Income before equity in income of consolidated subsidiaries		611			2,771			8,275			1,423			400			13,480
Equity in income of consolidated subsidiaries		12,469			9,698			—			—			(22,167	)		—
Net income	$	13,080		$	12,469		$	8,275		$	1,423		$	(21,767	)	$	13,480

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Statement of Operations

For the Six Months Ended July 2, 2005

							Guarantor			Non-guarantor			Consolidating
	Parent			CHB			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(In thousands)
Net sales	$	—		$	169,239		$	399,906		$	24,230		$	(32,000	)	$	561,375

Cost of sales		—			143,176			339,348			19,614			(33,600	)		468,538

Gross margin		—			26,063			60,558			4,616			1,600			92,837

Selling, general, and administrative expenses		(1)			20,99	5		44,61	0		2,70	7		—			68,31	1
Mark-to-market credit for common stock warrant		(4,300)			—			—			—			—			(4,300)
Loss on debt retirement		—			901			—			—			—			901

Operating income		4,301			4,167			15,948			1,909			1,600			27,925

Interest income		3,458			3,458			1,514			188			(6,916	)		1,702
Interest expense		(3,458	)		(5,559	)		(7,108	)		—			6,916			(9,209	)

Income from continuing operations before income taxes		4,301			2,066			10,354			2,097			1,600			20,418

Income tax expense		—			—			100			800			—			900

Income from continuing operations		4,301			2,066			10,254			1,297			1,600			19,518

Loss from discontinued operations		—			—			(3,251)			(58)			—			(3,309)

Income before equity in income of consolidated subsidiaries		4,301			2,066			7,003			1,239			1,600			16,209
Equity in income of consolidated subsidiaries		10,308			8,242			—			—			(18,550	)		—
Net income	$	14,609		$	10,308		$	7,003		$	1,239		$	(16,950	)	$	16,209

CHAMPION ENTERPRISES, INC.

Condensed Consolidating Balance Sheet

As of July 2, 2005

	Parent		CHB		Guarantor Subsidiaries		Non-guarantor Subsidiaries		Consolidating Eliminations			Consolidated
Assets	(In thousands)
Current assets
Cash and cash equivalents	$	—	$	124,799	$	6,387	$	18,712	$	1		$	149,899
Restricted cash		—		294		234		—		—			528
Accounts receivable, trade		—		13,953		27,907		1,589		(1,755	)		41,694
Inventories		—		17,001		63,612		3,073		(2,800	)		80,886
Current assets of discontinued operations				—		9,780		—		—			9,780
Other current assets		—		9,791		3,627		418		(100	)		13,736
Total current assets		—		165,838		111,547		23,792		(4,654	)		296,523

Property, plant and equipment, net		—		26,528		49,320		2,359		—			78,207
Goodwill		—		—		125,783		781		—			126,564
Investment in consolidated subsidiaries		20,100		310,393		162,379		6,788		(499,660	)		—
Non-current assets of discontinued operations		—		—		4,701		—		—			4,701
Other non-current assets		535		1,748		3,360		7,728		—			13,371
	$	20,635	$	504,507	$	457,090	$	41,448	$	(504,314	)	$	519,366
Liabilities, Redeemable Convertible Preferred Stock and Shareholders’ Equity
Current liabilities
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