FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

(Mark one)

For Quarterly period ended July 3, 2004

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.

     71,281,060 shares of the registrant’s $1.00 par value Common Stock were outstanding as of August 2, 2004.

Table of Contents

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 Three Months Ended July 3, 2004
(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 decrease in the allowance for tax adjustments discussed in Note 3 and the charge to retained earnings related to the induced conversion of the Series C Preferred Stock recorded in the first quarter of 2003 discussed in Note 7. 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 3, 2004 was derived from audited financial statements.
		The Company exited its consumer finance business in 2003 and as a result that segment has been reported as discontinued operations for all periods presented.
		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 3, 2004.
		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:

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2.

The following table provides information regarding activity for restructuring reserves recorded in previous periods.

		Warranty costs are expected to be paid over a three-year period after the 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. Other closing costs credited to earnings during the six months ending July 3, 2004 consisted of adjustments to accruals for employee severance and lease terminations.
3.		The provisions for income taxes (benefits) differ from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax loss from continuing operations as a result of the following differences:

		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. The Company has net operating losses incurred in 2003 totaling $80 million that are available to offset certain future taxable income. The effective tax rates for the six months ended July 3, 2004 and June 28, 2003 differ from the 35% federal statutory rate, in part, because of this 100% valuation allowance. The 2004 tax rate was also affected by the decrease in the allowance for tax adjustments as a result of the finalization of certain tax examinations. The 2003 tax rate was also affected 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. Upon 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 of 2003. These refunds exceeded, by approximately $3.0 million, the estimate made as of December 28, 2002, resulting in a $3.0 million tax benefit which was recorded in the first quarter of 2003.

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4.

A summary of inventories by component follows:

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 six months ended July 3, 2004. A portion of warranty reserves was classified as other long-term liabilities in the consolidated balance sheet.

6.

Long-term debt by component consisted of the following:

		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. During the six months ended June 28, 2003 the Company purchased and retired $35.6 million of its Senior Notes due 2009 and $15.0 million of the Senior Notes due 2007 for cash payments of $35.8 million, resulting in a pretax gain of $13.8 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. 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 and certain ratios of earnings to fixed charges, as defined. The line of credit is collateralized by accounts receivable, inventories, property, plant, and equipment, cash and other assets. As of July 3, 2004, facility availability was $61.3 million, of which $59.8 was used for letters of credit, there were no borrowings outstanding and the Company’s liquidity was $107.5 million, which was in excess of $35 million such that no financial covenants were in effect.

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		The Company has two floor plan facilities with total availability of $19.6 million of which $14.1 million was outstanding at July 3, 2004. A $15 million floor plan financing facility contains a covenant requiring the maintenance of a minimum $35 million of liquidity, as defined in the 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 July 3, 2004, the Company had approximately $10.8 million outstanding under this facility and was in compliance with the covenant.
7.		During the first quarter of 2004, the preferred shareholder exercised its right to purchase $12 million of Series B-2 preferred stock. At July 3, 2004, 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 have a 5% annual dividend that i