-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SM8DOWhOzJzyOdrRVuHbVjf5u4XkvEHhkQoTIhw6d2H3m1A6pnKRC8TF26t7ZBO4 iVzlwk1IMWtfbYgrsz/4zg== 0000314132-03-000005.txt : 20030904 0000314132-03-000005.hdr.sgml : 20030904 20030903200045 ACCESSION NUMBER: 0000314132-03-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030727 FILED AS OF DATE: 20030904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLEETWOOD ENTERPRISES INC/DE/ CENTRAL INDEX KEY: 0000314132 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR HOMES [3716] IRS NUMBER: 951948322 STATE OF INCORPORATION: DE FISCAL YEAR END: 0425 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07699 FILM NUMBER: 03880197 BUSINESS ADDRESS: STREET 1: 3125 MYERS ST STREET 2: P O BOX 7638 CITY: RIVERSIDE STATE: CA ZIP: 92503 BUSINESS PHONE: 9093513798 MAIL ADDRESS: STREET 1: 3125 MYERS ST CITY: RIVERSIDE STATE: CA ZIP: 92503 10-Q 1 sec10q72703.txt FLEETWOOD ENTERPRISES, INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) X OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 27, 2003 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 1-7699 FLEETWOOD ENTERPRISES, INC. - --------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-1948322 _______________________ ____________________________________ (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 3125 Myers Street, Riverside, California 92503-5527 - ---------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (909) 351-3500 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 Rule12b-2 of the Exchange Act). 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. Class Outstanding at September 2, 2003 _______________________ _____________________________ Common stock, $1 par value 35,934,892 shares PART I FINANCIAL INFORMATION Item 1. Financial Statements Independent Accountants' Review Report To the Board of Directors and Shareholders Fleetwood Enterprises, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Fleetwood Enterprises, Inc. as of July 27, 2003 and the related condensed consolidated statements of operations, changes in shareholders' equity, and cash flows for the thirteen-week periods ended July 27, 2003 and July 28, 2002. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Fleetwood Enterprises, Inc. as of April 27, 2003, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated July 14, 2003, except for Note 7, as to which the date was July 22, 2003, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of April 27, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP --------------------- Ernst & Young LLP Orange County, California August 29, 2003 FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share data) (Unaudited) 13 Weeks Ended July 27, 2003 July 28, 2002 ------------- ------------- Net sales: Manufacturing $614,706 $571,739 Retail 57,604 72,516 Financial services 884 291 Less intercompany (27,063) (33,271) -------- --------- 646,131 611,275 Cost of products sold 529,055 489,256 ------- -------- Gross profit 117,076 122,019 Operating expenses 103,041 112,647 Financial services expenses 1,414 191 ------- -------- Operating income 12,621 9,181 Other income (expense): Investment income 517 752 Interest expense (2,650) (2,690) Other 724 (343) ------ ------ (1,409) (2,281) ------ ----- Income before provision for income taxes, and minority interest 11,212 6,900 Provision for income taxes (4,139) (3,374) Minority interest in Fleetwood Capital Trusts I, II and III, net of income taxes (5,157) (5,046) ------ ------ Net income (loss) $1,916 $(1,520) ======== ========
Basic Diluted Basic Diluted Net earnings (loss) per common share: $.05 $.05 $(.04) $(.04) ===== ====== ===== =====
Weighted average common shares: 35,935 36,669 35,694 35,694 ====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements. FLEETWOOD ENTERPRISES, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share data) ASSETS July 27, April 27, 2003 2003 (Unaudited) Cash $11,788 $31,515 Marketable investments available- for-sale 37,021 38,261 Receivables 183,684 143,452 Inventories 216,900 240,521 Deferred tax benefits, net 58,488 58,488 Other current assets 16,796 18,998 -------- -------- Total current assets 524,677 531,235 Finance loans receivable, net 20,976 13,293 Property, plant and equipment, net 255,699 260,318 Deferred taxes, net 31,275 31,275 Cash value of Company-owned life insurance, net 55,554 55,004 Goodwill 6,366 6,366 Other assets 30,766 27,075 -------- --------- Total assets $925,313 $924,566 ========= ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $78,209 $78,890 Employee compensation and benefits 72,888 70,006 Product warranty reserve 60,888 62,137 Retail flooring liability 15,599 15,357 Other short-term borrowings 17,927 16,054 Accrued minority interest distribution 28,591 25,249 Other current liabilities 72,242 80,631 -------- -------- Total current liabilities 346,344 348,324 -------- ------- Deferred compensation and retirement benefits 58,359 58,196 Insurance reserves 29,656 30,344 Long-term debt 2,354 2,357 ------- ------ Total liabilities 436,713 439,221 ------- ------ Commitments and contingencies Company-obligated manditorily redeemable convertible preferred securities of Fleetwood Capital Trusts I, II and III holding solely convertible subordinated debentures of the Company 374,685 374,377 ------- ------ Contingent liabilities Shareholders' equity: Preferred stock, $1 par value, authorized 10,000,000 shares, none outstanding -- -- Common stock, $1 par value, authorized 75,000,000 shares, outstanding 35,935,000 at July 27, 2003 and 35,935,000 at April 27, 2003 35,935 35,935 Additional paid-in capital 250,235 250,175 Retained deficit (171,160) (173,076) Accumulated other comprehensive loss (1,095) (2,066) ------- -------- 113,915 110,968 -------- -------- $925,313 $924,566 ======== ========
See accompanying notes to condensed consolidated financial statements. FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Amounts in thousands) 13 Weeks Ended July 27, 2003 July 28, 2002 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $1,916 $(1,520) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation expense 5,944 6,353 Amortization of financing costs 1,373 1,121 (Gain) loss on sales of property, plant and equipment (724) 343 Issuance of stock in lieu of cash for minority interest distribution -- 4,464 Changes in assets and liabilities: (Increase) decrease in receivables (40,232) 1,128 (Increase) decrease in inventories 23,621 (228) Decrease in income tax receivable 1,391 17,977 Decrease in deferred tax benefits -- 12,268 (Increase) decrease in cash value of Company-owned life insurance (550) 936 Increase in other assets (3,885) (3,785) Increase (decrease) in accounts payable and book overdraft (681) 6,057 Increase in employee compensation and benefits 3,045 4,018 Decrease in product warranty reserve (1,249) (1,257) Increase (decrease) in other liabilities (5,735) 2,601 ------- ------- Net cash provided by (used in) operating activities (15,766) 50,476 ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable investments available-for-sale (152,277) (197,592) Proceeds from sale of marketable investments available-for-sale 153,543 148,660 Purchases of property, plant and equipment, net (601) (4,400) Increase in finance loans receivable (7,683) (490) ------- ------- Net cash used in investing activities (7,018) (53,822) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Retail flooring 242 (12,763) Short-term bank borrowings 1,873 (4,263) Long-term debt (3) (6,177) Proceeds from exercise of stock options -- 192 ------- ------- Net cash provided by (used in) financing activities 2,112 (23,011) ------ ------- Foreign currency translation adjustment 945 274 ------ ------- Decrease in cash (19,727) (26,083) Cash at beginning of period 31,515 26,083 ------ ------- Cash at end of period $11,788 $ -- ======== =======
See accompanying notes to condensed consolidated financial statements. FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (Amounts in thousands) Accumulated Other Compre- Common Stock Additional hensive Total Number Paid-In Retained Income Shareholders' of Shares Amount Capital Deficit (Loss) Equity Balance April 27, 2003 35,935 $35,935 $250,175 $(173,076) $(2,066) $110,968 ------ ------- ------- --------- ------- -------- Comprehensive income: Net income -- -- -- 1,916 -- 1,916 Other comprehensive income: Foreign currency translation, net of taxes of $266 -- -- -- -- 945 945 Investment securities, net of taxes of $15 -- -- -- -- 26 26 ------ Comprehensive income 2,887 ------ Amortization of restricted stock -- -- 60 -- -- 60 ---- ---- ------ ----- ----- ------ Balance July 27, 2003 35,935 $35,935 $250,235 $(171,160) $(1,095) $113,915 ====== ======= ======== ======== ======= ========
See accompanying notes to condensed consolidated financial statements. FLEETWOOD ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 27, 2003 (Unaudited) 1) Basis of Presentation Fleetwood Enterprises, Inc. (the "Company") is the nation's leader in recreational vehicle sales, which includes motor homes, travel trailers, folding trailers and slide-in-truck campers, and one of the nation's largest producers and retailers of manufactured housing. The Company conducts manufacturing in 16 states within the U.S., and to a much lesser extent in Canada. In addition, it operates five supply companies, which provide components for the manufactured housing and recreational vehicle operations, while also generating outside sales. The accompanying condensed financial statements consolidate the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain amounts previously reported have been reclassified to conform to the fiscal 2004 presentation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Actual results could differ from those estimates. Significant estimates made in preparing these financial statements include accrued warranty costs, workers' compensation reserves, and accrued postretirement health care benefits. In the opinion of the Company's management, the accompanying condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the financial position at July 27, 2003, and results of operations for the 13-week periods ended July 27, 2003, and July 28, 2002. The condensed consolidated financial statements do not include footnotes and certain financial information normally presented annually under accounting principles generally accepted in the United States and, therefore, should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended April 27, 2003. Results of operations for the 13-week period ended July 27, 2003, are not necessarily indicative of results to be expected for the full year. 2) Industry Segment Information Information with respect to industry segments for the periods ended July 27, 2003, and July 28, 2002, is shown below (amounts in thousands): 13 Weeks Ended 13 Weeks Ended July 27, 2003 July 28, 2002 -------------- -------------- OPERATING REVENUES: Manufactured housing - Manufacturing $169,767 $191,339 Less intercompany (27,063) (33,271) -------- --------- 142,704 158,068 Retail 57,604 72,516 ------- -------- Total housing 200,308 230,584 Recreational vehicles 436,533 370,950 Supply operations 8,406 9,450 Financial services 884 291 -------- ------- $646,131 $611,275 ======== ======== OPERATING INCOME (LOSS): Manufactured housing $ 1,859 $ 761 Housing - retail* (8,469) (9,764) Recreational vehicles 14,925 17,663 Supply operations 740 1,013 Corporate and other 3,478 (2,827) Financial services (530) 92 Intercompany profit 618 2,243 ------- -------- $12,621 $9,181 ======= ====== * Before deduction of interest expense on inventory floor plan financing as follows: $485 $644 ==== ====
3) Earnings Per Share Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. In the prior fiscal year, the effect of stock options and preferred securities was anti-dilutive and was, therefore, not considered in determining diluted loss per share. Although there are a small number of dilutive stock options in the current fiscal year, there is no effect on earnings per share, and the effect of preferred securities remains anti-dilutive. The table below shows the components of the calculations for both basic and diluted earnings per share (amounts in thousands): 13 Weeks Ended 13 Weeks Ended July 27, 2003 July 28, 2002 -------------- -------------- Weighted Weighted Average Average Income Shares Loss Shares ---- ------ ---- ------ Net income (loss) $1,916 35,935 $(1,520) 35,694 Effect of dilutive securities: Stock options -- 734 -- -- ------ ------ ------- ------ Diluted net income (loss) $1,916 36,669 $(1,520) 35,694 ====== ====== ======= ====== Anti-dilutive options and warrants available 3,997 4,258 ===== ===== Anti-dilutive convertible trust preferred securities 21,631 21,631 ====== ======
4) Stock-Based Incentive Compensation The Company accounts for stock-based incentive compensation plans using the intrinsic method under which no compensation cost is recognized for stock option grants as the options are granted at fair market value at the date of grant. Had compensation costs for these plans been determined using the fair value method, under which a compensation cost is recognized over the vesting period of the stock option based on its fair value at the date of grant, the Company's net income (loss) and earnings (loss) per share would have been affected as indicated by the following table (amounts in thousands except per share data): 13 Weeks Ended 13 Weeks Ended July 27, 2003 July 28, 2002 ------------- ------------- Net income (loss), as reported $1,916 $(1,520) Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects (586) (525) ------- ------- Pro forma net income (loss) $1,330 $(2,045) ====== ======= Basic and diluted income (loss) per share, as reported $.05 $(.04) ==== ===== Basic and diluted income (loss) per share, pro forma $.04 $(.06) ==== =====
5) Inventory Valuation Inventories are valued at the lower of cost (first-in, first-out) or market. Manufacturing cost includes materials, labor and manufacturing overhead. Retail finished goods are valued at cost less intercompany manufacturing profit. Inventories consist of the following: July 27, 2003 April 27, 2003 ------------- --------------- (Amounts in thousands) Manufacturing inventory- Raw materials $97,452 $105,971 Work in process 29,579 29,176 Finished goods 11,298 25,146 ------- -------- 138,329 160,293 ------- ------- Retail inventory- Finished goods 95,682 97,957 Less manufacturing profit (17,111) (17,729) ------- ------- 78,571 80,228 ------- ------- $216,900 $240,521 ======== ========
6) Product Warranty Reserve Fleetwood provides customers of our products with a warranty covering defects in material or workmanship for periods ranging from one to two years, with longer warranties on certain structural components. We record a liability based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Factors we use in estimating the warranty liability include a history of units sold to customers, the average cost incurred to repair a unit and a profile of the distribution of warranty expenditures over the warranty period. Changes in the Company's product warranty liability during the period were as follows (amounts in thousands): Balance at April 27, 2003 $62,137 Warranties issued and changes in the estimated liability during the period 18,017 Settlements made during the period (19,266) ------- Balance at July 27, 2003 $60,888 ======= 7) Other Comprehensive Income (Loss) The difference between net income (loss) and total comprehensive income (loss) is shown below (amounts in thousands): 13 Weeks Ended July 27, 2003 July 28, 2002 ------------- ------------- Net income (loss) $1,916 $(1,520) Foreign currency translation 945 274 Unrealized gain (loss) on investments 26 (11) ------ ------- Comprehensive income (loss) $2,887 $(1,257) ====== =======
8) New Accounting Pronouncements In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires an issuer to classify a financial instrument issued in the form of shares that are mandatorily redeemable-that embodies an unconditional obligation requiring the issuer to redeem them by transferring its assets at a specified or determinable date-as a liability. We have three series of convertible trust preferred securities totaling $374 million that are now treated as quasi-equity securities that are mandatorily redeemable at specified dates. Effective with the second quarter of fiscal year 2004, these financial instruments will be classified as long-term liabilities on the balance sheet and valued at fair market value using the present value of the redemption amount, at the rate implicit in the contract at inception. Distributions to the minority interest, now classified below the tax provision net of taxes, will be reclassified on the consolidated statement of operations to a separate line item included in "Other income (expense)" as an interest expense. As these types of securities will now be treated as a liability, the number of shares related to the conversion into common stock will not be included in the calculation of diluted earnings per share. In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities," which expands upon and strengthens existing accounting guidance concerning when a company should include in its financial statements the assets, liabilities and activities of another entity. Prior to the issuance of FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 now requires a variable interest entity, as defined in FIN 46, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not believe the adoption of FIN 46 will have a material impact on the Company's financial position, results of operations or cash flows. 9) Repurchase Commitments Producers of recreational vehicles and manufactured housing customarily enter into repurchase agreements with lending institutions that provide wholesale floorplan financing to independent dealers. These agreements generally provide that, in the event of a default by a dealer in its obligation to these credit sources, we will repurchase product. With most repurchase agreements our obligation ceases when the amount for which we are contingently liable to the lending institution has been outstanding for more than 12, 18 or 24 months, depending on the terms of the agreement. The contingent liability under these agreements approximates the outstanding principal balance owed by the dealer for units subject to the repurchase agreement less any scheduled principal payments waived by the lender. Although the maximum potential contingent repurchase liability approximated $153 million for inventory at manufactured housing dealers and $505 million for inventory at RV dealers as of July 27, 2003, the risk of loss is reduced by the potential resale value of any products that are subject to repurchase, and is spread over numerous dealers and financial institutions. The gross repurchase obligation will vary depending on the season and the level of dealer inventories. Typically, the fiscal third quarter repurchase obligation will be greater than other periods due to high dealer inventories. The RV repurchase obligation is significantly more than the manufactured housing obligation due to a higher average cost per motor home and more units in dealer inventories. Past losses under these agreements have not been significant and lender repurchase demands have been funded out of working capital. Through the first three months of fiscal year 2004, we have repurchased $1.3 million of product compared to $0.6 million for the same period in the prior year, with a loss of $220,000 incurred this year compared to a repurchase loss of $358,000 in the prior year. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Preliminary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains statements which may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). Forward-looking statements regarding future events and the future performance of the Company involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, without limitation, the following items: 1. the cyclical nature of both the manufactured housing and recreational vehicle industries; 2. ongoing weakness in the manufactured housing market; 3. the potential impact on demand for our products as a result of declining consumer confidence; 4. the effect of global tensions on consumer confidence; 5. continued acceptance of the Company's products; 6. expenses and uncertainties associated with the introduction and manufacturing of new products; 7. the future availability of manufactured housing retail financing as well as housing and RV wholesale financing; 8. changes in retail inventory levels in the manufactured housing and recreational vehicle industries; 9. competitive pricing pressures; 10. the ability to attract and retain quality dealers, executive officers and other personnel; and 11. the ability to obtain the financing we need in order to execute our business strategies. Although management believes that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Fleetwood undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may arise from changing circumstances or unanticipated events. Additionally, other risks and uncertainties are described in our Annual Report on Form 10-K for the fiscal year ended April 27, 2003, filed with the Securities and Exchange Commission, under "Item 1. Business," including the section therein entitled "Risks Relating to Our Business," and "Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition," including the section therein entitled "Business Outlook." Overview We are the nation's leader in recreational vehicle sales, including motor homes, travel trailers, folding trailers and slide-in truck campers, and one of the nation's largest producers and retailers of manufactured housing. In fiscal 2002 and for fiscal 2003, we sold 53,575 and 57,069 recreational vehicles, respectively. In calendar 2002, we had an 18.2 percent share of the overall recreational vehicle retail market, consisting of a 17.7 percent share of the motor home market, a 13.4 percent share of the travel trailer market and a 42.7 percent share of the folding trailer market. In fiscal 2002 and for fiscal 2003, we shipped 30,056 and 22,176 manufactured homes, respectively, and were the second largest producer of HUD-Code homes in the United States in terms of units sold. In calendar 2002, we had a 16.9 percent share of the manufactured housing retail market. Our manufacturing activities are conducted in 16 states within the U.S., and to a much lesser extent in Canada. In addition, we operate five supply companies that provide components for our manufactured housing and recreational vehicle operations, while also generating outside sales. Our business began in 1950 producing travel trailers and quickly evolved to the exclusive production of manufactured homes. We re-entered the recreational vehicle business in 1964. We distribute our manufactured products primarily through a network of independent dealers throughout the United States and Canada. However, in fiscal 1999, we entered the manufactured housing retail business through a combination of key acquisitions and internal development of new retail sales centers. At July 27, 2003, we operated 133 retail sales locations in 21 states, and were one of the four largest retailers of manufactured homes in the United States. Critical Accounting Policies Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. This requires us to make estimates and assumptions that affect the amounts reported in the financial statements and notes. We evaluate these estimates and assumptions on an ongoing basis and use historical experience factors and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates under different assumptions or conditions. The following is a list of the accounting policies that we believe reflect our more significant judgments and estimates, and that could potentially result in materially different results under different assumptions and conditions. Revenue Recognition We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), as amended by SAB 101A and 101B. Revenue for manufacturing operations is generally recorded when all of the following conditions have been met: 1. an order for a product has been received from a dealer; 2. written or verbal approval for payment has been received from the dealer's flooring institution; 3. a common carrier signs the delivery ticket accepting responsibility for the product as agent for the dealer; and 4. product is removed from Fleetwood's property for delivery to the dealer who placed the order. Most manufacturing sales are made on cash terms, with most dealers financing their purchases under flooring arrangements with banks or finance companies. Products are not ordinarily sold on consignment; dealers do not ordinarily have the right to return products; and dealers are typically responsible for interest costs to floorplan lenders. On average, we receive payments from floorplan lenders on products sold to independent dealers within 15 days of the invoice date, i.e. the date product is shipped. For retail sales from Company-owned retail stores, sales revenue is recognized when the home has been delivered, set up and accepted by the consumer, title has been transferred and funds have been received either from the finance company or the homebuyer. Warranty Fleetwood provides customers of our products with a warranty covering defects in material or workmanship for periods ranging from one to two years, with longer warranties on certain structural components. We record a liability based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Factors we use in estimating the warranty liability include a history of units sold to customers, the average cost incurred to repair a unit and a profile of the distribution of warranty expenditures over the warranty period. A significant increase in dealer shop rates, the cost of parts or the frequency of claims could have a material adverse impact on our operating results for the period or periods in which such claims or additional costs materialize. Insurance Reserves Generally, we are self-insured for health benefit, workers' compensation, products liability and personal injury insurance. Under these plans, liabilities are recognized for claims incurred (including those incurred but not reported), changes in the reserves related to prior claims and an administration fee. At the time a claim is filed, a liability is estimated to settle the claim. The liability for workers' compensation claims is guided by state statute. Factors considered in establishing the estimated liability for products liability and personal injury claims are the nature of the claim, the geographical region in which the claim originated, loss history, severity of the claim, the professional judgment of our legal counsel, and inflation. Any material change in the aforementioned factors could have an adverse impact on our operating results. We maintain excess liability insurance with outside insurance carriers to minimize our risks related to catastrophic claims. Deferred Taxes Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. We are required to record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we previously have considered all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. The accounting guidance states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. As a result of this guidance, our recent cumulative losses and the full utilization of our loss carryback potential, we concluded that a partial valuation allowance against our net deferred tax assets was appropriate. Accordingly, as of fiscal year 2003, after considering only the effects of prudent and feasible tax strategies, we recognized a valuation allowance of $28.4 million. We continue to believe that the combination of all positive and negative factors will enable us to realize the full value of the deferred tax assets. If, after future assessments of the realizability of our deferred tax assets, we determine a lesser allowance is required, we would record a reduction to income tax expense and the valuation allowance in the period of such determination. Legal Proceedings We are regularly involved in legal proceedings in the ordinary course of our business. Because of the uncertainties related to the outcome of the litigation and range of loss on cases other than breach of warranty, we are generally unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. In other cases, including products liability (discussed above) and personal injury cases, we prepare estimates based on historical experience, the professional judgment of our legal counsel, and other assumptions that we believe are reasonable. As additional information becomes available, we reassess the potential liability related to pending litigation and revise our estimates. Such revisions and any actual liability that greatly exceeds our estimates could materially impact our results of operations and financial position. Repurchase Commitments Producers of recreational vehicles and manufactured housing customarily enter into repurchase agreements with lending institutions that provide wholesale floorplan financing to independent dealers. These agreements generally provide that, in the event of a default by a dealer in its obligation to these credit sources, we will repurchase product. With most repurchase agreements our obligation ceases when the amount for which we are contingently liable to the lending institution has been outstanding for more than 12, 18 or 24 months, depending on the terms of the agreement. The contingent liability under these agreements approximates the outstanding principal balance owed by the dealer for units subject to the repurchase agreement less any scheduled principal payments waived by the lender. Although the maximum potential contingent repurchase liability approximated $153 million for inventory at manufactured housing dealers and $505 million for inventory at RV dealers as of July 27, 2003, the risk of loss is reduced by the potential resale value of any products that are subject to repurchase, and is spread over numerous dealers and financial institutions. The gross repurchase obligation will vary depending on the season and the level of dealer inventories. Typically, the fiscal third quarter repurchase obligation will be greater than other periods due to high dealer inventories. The RV repurchase obligation is significantly more than the manufactured housing obligation due to a higher average cost per motor home and more units in dealer inventories. Past losses under these agreements have not been significant and lender repurchase demands have been funded out of working capital. Through the first three months of fiscal year 2004, we have repurchased $1.3 million of product compared to $0.6 million for the same period in the prior year, with a loss of $220,000 incurred this year compared to a repurchase loss of $358,000 in the prior year. In the past three fiscal years we have had the following repurchase activity: Fiscal Years (Amounts in millions) 2003 2002 2001 Units 182 417 641 Repurchase amount $4.4 $10.5 $15.0 Loss recognized (1) $ -- $ 2.1 $ 3.3
(1) An accrual for a potential repurchase loss was reversed in the fourth quarter of fiscal 2003 that offset losses incurred during that year. Results of Operations The following is an analysis of changes in key items included in the condensed consolidated statements of operations for the 13-week periods ended July 27, 2003, and July 28, 2002. 13 Weeks Ended July 27, 2003 -------------- (Unaudited) (Amounts in thousands) Increase % (Decrease) Change --------- ------ Net sales $34,856 5.7% Cost of products sold 39,799 8.1 ------ ---- Gross profit (4,943) (4.1) ----- ---- Selling expenses (7,169) (13.5) General and administrative expenses (1,214) (2.0) ------ ---- Operating income 3,440 37.5 Other expense (872) (38.2) ---- ---- Income before taxes and minority interest 4,312 62.5 Provision for income taxes 765 22.7 Minority interest in Fleetwood Capital Trusts, net of income taxes 111 2.2 ---- ---- Net income $3,436 -% ====== ===
Current Quarter Compared to Same Quarter Last Year Consolidated Results: We earned net income of $1.9 million or $.05 per diluted share in the July quarter compared to a net loss of $1.5 million or $.04 per diluted share a year ago. The primary reasons for the improved results were a 6 percent increase in sales and a 7 percent decline in operating expenses, resulting mostly from lower selling expenses, along with reductions in insurance related costs. Income from operations was $12.6 million compared to $9.2 million in the prior year. The manufacturing segment earned $17.5 million, excluding intercompany profit, and housing retail lost $8.5 million. The RV Group earned $14.9 million of income from operations, $2.8 million less than the $17.7 million earned in the prior year mainly due to lower gross margin in all three segments. The Motor Home Division's operating income increased 11 percent to $12.0 million compared to $10.8 million in the prior year mainly due to an 18 percent increase in sales. The Travel Trailer Division earned $3.9 million of income in the first quarter compared to $5.7 million in the prior year. The $1.8 million decline in income was mainly attributed to gross margin erosion from incremental costs associated with production inefficiencies related to 2004 model year products. Even though travel trailers continued to experience production inefficiencies, incremental production costs were significantly improved over the January and April quarters. Folding trailers incurred a loss of $976,000 from operations in the current quarter compared to earning $1.1 million in the prior year primarily due to a 30 percent decline in shipments. This was a result of soft market conditions experienced in the folding trailer industry. The Housing Group earned $1.9 million from manufacturing operations, before intercompany profit elimination, compared to $761,000 in the prior year. The improvement in profitability, despite an 11 percent decline in sales, was the result of an increase in gross margin and a 31 percent decline in product warranty expenses. Gross margin declined from 20.0 percent to 18.1 percent of sales mainly due to incremental RV manufacturing costs associated with the introduction of new products. Gross margin in the RV segment decreased from 16.4 percent to 14.1 percent of sales in the current year, mostly due to higher labor costs resulting from inefficiencies and complexities in the changeover to new products, partially offset by higher average selling prices. Gross margin for the manufactured housing segment improved from 21.5 percent to 22.8 percent as a result of selling price increases that more than offset increases to raw material costs and direct labor wage rates. Retail housing gross profit as a percentage of sales improved to 20.6 percent for the first quarter compared to 19.4 percent in the prior year due to a concerted effort to maintain margins in a very competitive market. Operating expenses, which include selling, general and administrative expenses, decreased $8.4 million or 7 percent in the first quarter, and fell as a percentage of sales from 18.5 percent to 16.2 percent. The operating expense decline from the prior year was primarily due to lower selling expenses, which decreased $7.2 million or 13 percent and fell as a percentage of sales from 8.7 percent in the prior year to 7.1 percent for the current quarter mostly due to lower warranty, sales commissions, advertising and promotional expenses. Product warranty expenses declined $3.6 million or 12 percent due to a $5.2 million reduction in Housing Group direct and indirect warranty expenses resulting from lower volume and cost- cutting actions, partially offset by a $2.1 million increase in RV warranty expense. General and administrative expenses declined $1.2 million, and decreased as a percentage of sales from 9.8 percent to 9.1 percent. The most significant decreases were mainly due to a $1.9 million decrease in the cost of the Company-owned life insurance (COLI) and split-dollar insurance expenses, along with reductions in products liability and health benefit insurance costs. The values of the securities supporting the COLI and split-dollar life insurance are affected each quarter by changes in the stock and bond markets. Last year, with a declining stock market compared to the prior quarter, the securities supporting the COLI and split-dollar life insurance policies declined in value resulting in a charge in that quarter, whereas this past quarter the value of the securities increased resulting in a credit, or a reduction, to those accounts. Also contributing to the decrease this past quarter was a $1.2 million reduction to the group insurance reserve due to the cost of benefits being lower than anticipated and a $1.2 million decrease in expenses resulting from an adjustment to the products liability loss reserves. Partially offsetting the decreases was a $1.2 million increase in HomeOne Credit Corp. expenses, which were related to the ramp up of the finance subsidiary's operations over the past year. Other expense for the first quarter was $1.4 million compared to $2.3 million in the prior year. The current quarter included a $724,000 gain from the sale of two properties contrasted with a $343,000 loss on the disposal of assets in the prior year. The effective tax rate was 36.9 percent in the first quarter compared to 48.9 percent one year ago. The current year's rate does not include a federal provision because we have a net operating loss (NOL) carryforward and a partial valuation allowance of the net deferred tax asset. The relatively high rates for the two periods (considering there is not a federal provision for the current year) were the result of the low level of pre-tax income and the fact that we don't receive a tax benefit in some states, such as Texas, where losses were the highest. Recreational Vehicles: Recreational vehicle sales rose 18 percent to $436.6 million compared to $370.9 million for last year's July quarter. Travel trailer sales led the group with a 29 percent increase to $156.8 million, compared to $121.8 million in the prior year, primarily due to customer acceptance of 2004 model year products. Motor home sales improved by 18 percent to $257.3 million versus $218.3 million in the prior year, driven by a 16 percent increase in the deliveries of Class A diesel products that have a higher average selling price. Folding trailer sales declined by 27 percent from the prior year to $22.4 million as a result of a declining market for that segment. The RV Group earned $14.9 million, which was mainly attributable to the Motor Home Division. Motor home operating income increased 11 percent to $12.0 million in the first quarter as a result of an increase in diesel product sales. The Travel Trailer Division generated operating income of $3.9 million in the current July quarter, which was $1.8 million lower than the prior year's income of $5.7 million, primarily due to incremental costs incurred in the production of new products. The Travel Trailer Division introduced new products that represented about 60 percent of its product offering at the national trade show in December. Due to the significant increase in variety, larger sizes and additional features in the new models, the manufacturing facilities incurred labor inefficiencies and overtime in their production, resulting in higher costs. Travel trailer operations also struggled in the prior two quarters with similar inefficiencies; however, by the end of the first quarter, such inefficiencies had been all but eliminated. Folding trailers incurred a loss from operations of $976,000 compared to earning $1.1 million in the prior year. The current year's loss was attributed to a 30 percent reduction in volume due to soft market conditions. Operating expenses for the RV Group rose $3.5 million but fell from 11.6 percent of sales to 10.7 percent in the current year mainly due to a 19 percent reduction in selling expenses and a rise in product warranty costs that was less than the rate of revenue growth. Manufactured Housing: Gross manufacturing revenues of $169.8 million fell 11 percent from the prior year and included $27.1 million of intercompany sales to Company- owned retail home centers. Manufacturing unit volume declined 17 percent to 5,372 homes, while the number of sections was off the same percent to 9,859. Multi-section homes represented 82 percent of factory sales versus 81 percent last year. Sales volume was below the prior year due to continued weakness in the manufactured housing market, which has been adversely affected by limited availability of retail financing and competition from repossessed units. Operating income, before the addition of intercompany profit of $618,000 this year and $2.2 million in the prior year, improved from $761,000 to $1.9 million, mainly due to improved gross margin and lower product warranty expense. Gross profit margin for the Housing Group rose from 21.5 percent to 22.8 percent of sales, mainly as a result of increased selling prices that more than offset higher raw material costs and direct labor wage rate increases. Housing Group operating costs declined by $3.4 million or 8 percent as a result of a 31 percent drop in product warranty costs. Partially offsetting the warranty reduction was an increase in general and administrative expenses due to a larger allocation of corporate expenses this year. Retail Housing Operations: Retail housing revenues from Fleetwood Retail Corp. (FRC) decreased 21 percent to $57.6 million in the first quarter on a 24 percent decline in unit sales due to difficult market conditions caused by restrictive financing. The retail division incurred an operating loss of $8.5 million for the current quarter compared to a loss of $9.8 million a year ago. The operating loss was lower despite the drop in revenues due to an improvement in gross margin from 19.4 percent to 20.6 percent of sales and a 15 percent reduction in operating expenses resulting from lower volume, store closures and reduced staffing. Interest expense on inventory financing decreased by 25 percent from $644,000 to $485,000, reflecting a 7 percent drop in inventories and lower interest rates. The retail housing segment was operating 133 stores at the end of July this year versus 136 stores last year. Fleetwood Retail Corp. Key Operational Information Quarter Ended* June 2003 June 2002 --------- --------- Number of retail stores Beginning 136 138 New 3 1 Closed (6) (3) Transferred 0 0 --- --- Ending 133 136 Average number of retail stores 135 137 Unit volume Retail - new Single-section 165 254 Multi-section 836 1,056 ----- ------ Subtotal 1,001 1,310 Retail - pre-owned 147 195 ----- ----- Total 1,148 1,505 ===== ===== Average number of homes sold per store 8 11 Average sales price New Single-section $30,388 $27,180 Multi-section $58,987 $53,262 Pre-owned $17,499 $10,541 Average unit inventory per store at quarter end New 19 19 Pre-owned 3 3
* The above statistics are as of FRC's first fiscal quarter end, which is the last day in June. Unless noted otherwise, all other statistics in this report related to FRC are as of Fleetwood Enterprises, Inc.'s first fiscal quarter ended July 27, 2003. Supply Operations: The Supply Group contributed first quarter revenues of $8.4 million compared to $9.5 million a year ago. Operating income decreased from $1.0 million in the prior year to $740,000 in the current quarter due to the lower sales. Business Outlook The combination of an improved RV market and positive acceptance of our new motor home products has been reflected in increased market share and higher production rates, resulting in significantly improved motor home earnings compared with the past two years. The Travel Trailer Division introduced new products covering 60 percent of its model line-up at the national trade show in December 2002. The impact of the new products on production efficiencies negatively affected the operating results in the second half of fiscal year 2003. However, we have now begun to experience improved operating efficiencies and expect the travel trailer business to sustain profitability in fiscal year 2004. With the current low interest rates and the introduction of new products, we expect that our RV Group will continue to achieve improved operating results in fiscal 2004 over fiscal 2003. However, the anticipated improvement could be at risk if consumer confidence, which is a key factor affecting the recreational vehicle industry, deteriorates due to concerns regarding the economy, gasoline prices or global tensions. Conditions in the manufactured housing market have been in decline since 1999, and further deteriorated in the last half of fiscal year 2003. Competition from repossessed homes, more stringent lending standards, relatively high retail interest rates for manufactured housing and the shortage of retail financing have adversely affected the industry. These conditions were aggravated by several developments during calendar 2002. As a result of the exit of several consumer lenders, there has been a reduction in the volume of loans being written, particularly in the chattel, or home only, portion of the business, related mostly to single-section homes. Further, legislation in Texas, the largest manufactured home state in the country, which was effective at the beginning of calendar year 2002, required more restrictive procedures and legal processes to be applied to sales of manufactured homes. The Texas legislature has passed a new law as of June 2003 that substantially moderates the effect of the earlier, more restrictive statute. In March 2002, Conseco Finance Servicing Corp. (Conseco), the largest floorplan lender in the country, announced its withdrawal from that business. In October, Deutsche Financial Services (Deutsche), another large housing wholesale floorplan lender, announced it would be exiting the business. Since the announcements by Conseco and Deutsche, dealer transition to other floorplan sources has been orderly and most dealers have found alternative sources of inventory financing, including our Company-owned stores. In October 2002, Conseco, also formerly the largest provider of retail financing to the manufactured housing industry, announced it would no longer provide retail financing in any form and that it would more aggressively liquidate its existing inventory of repossessed homes. Further, Oakwood Homes, the fourth largest manufacturer, as well as a major industry retailer and lender, announced in November 2002 that it was filing for Chapter 11 bankruptcy protection. Subsequently, Conseco and Oakwood have been aggressively liquidating their inventories of repossessed homes, which has depressed demand and pricing for new homes even further. We expect the industry will benefit in the longer term from these accelerated efforts to liquidate inventories of repossessed homes, thereby eventually reducing the competition for new homes. In fact, there are some indications the inventory of foreclosed homes appears to be headed towards equilibrium. However, we expect we will continue to be challenged by the overhang of repossessions in the near term. In the meantime, industry shipments in the first half of calendar 2003 were lower than in any other six months in the past 40 years. As a result of these conditions, over the past three years there have been significant industry manufacturing and retail capacity reductions and more are expected until retail finance and inventory conditions improve. We expect that the operating environment for manufactured housing will continue to be challenging, at least through fiscal year 2004. Recently, Fannie Mae, the nation's largest source of financing for home mortgages, promulgated new regulations related to purchasing mortgages on manufactured homes that will further restrict the availability of financing. However, a national lender has recently announced its intention to provide manufactured housing retail financing. Depending on the extent of the financing actually provided by this lender, in combination with retail financing that may be provided by other new entrants or that Fleetwood may make available through our own HomeOne Credit Corp. finance subsidiary, it is possible that new sources of financing could begin to moderate the effect of restrictive retail financing that has challenged the manufactured housing industry in recent years. For fiscal 2004, we expect to achieve profitability in the RV Group and the manufacturing segment of housing, although we expect we will incur an operating loss at our retail housing business. Overall, we believe that we have an excellent opportunity to have a profitable year in fiscal 2004. Toward that end, we currently expect to generate a net profit in the second quarter. Liquidity and Capital Resources We have historically relied upon internally generated cash flows to satisfy working capital needs and to fund capital expenditures. In recent periods, however, primarily due to operating losses, we have used external funding sources to supplement internal cash flows. Cash totaling $15.8 million was used in operating activities during the first quarter compared to cash generated of $50.5 million for the similar period one year ago. The use of cash from operations resulted primarily from a $40.2 million increase in receivables as a result of improved sales particularly in the month of July this year compared to the prior year. The increase in receivables was partially offset by a $23.6 million drop in inventories. Last year, the $50.5 million of cash generated from operations was mainly attributable to a $30 million refund of Federal taxes, arising from a carryback of losses to prior periods. As a result of the above-mentioned changes, cash and marketable investments decreased $21.0 million from $69.8 million as of April 27, 2003, to $48.8 million as of July 27, 2003. Additional cash outlays in the first quarter included $7.7 million in finance loans receivable at our HomeOne subsidiary and $601,000 in capital expenditures. In the same period of the prior year, the Company had capital expenditures of $4.4 million. Distributions of $3.0 million on the 6% convertible trust preferred securities were deferred, whereas $4.5 million in distributions on the 9.5% issues were paid in cash this year and in common stock in the first quarter of fiscal year 2003. At the end of the current July quarter, short-term borrowings under our secured syndicated credit facility, led by Bank of America, N.A., as administrative agent, were $17.9 million. Currently, lender commitments to the facility total $130 million. Our borrowing capacity, however, is governed by the amount of a borrowing base, consisting of inventories and accounts receivable, that fluctuates significantly from week to week. The borrowing base is revised weekly for changes in receivables and monthly for changes in inventory balances. Under the borrowing agreement, $30 million must be maintained as minimum unused availability, with the remainder available to support standby letters of credit and fund borrowings. At the end of the July quarter, the borrowing base totaled $138.2 million. After consideration of the unused minimum requirement, collateral reserves of $2.3 million, $45.0 million in standby letters of credit and the outstanding borrowings, unused borrowing capacity was approximately $33.5 million. We believe the combination of our current holdings of cash and short-term marketable investments, estimated future cash flows from operations and existing credit facilities will be sufficient to satisfy our foreseeable cash requirements for the next 12 months, including up to $30 million for capital expenditures. Contracts and Commitments Below is a table showing payment obligations for long-term debt, capital leases, operating leases and purchase obligations for the next five years and beyond: Payments Due by Period ------------------------------------------ (Amounts in thousands) More 1-3 3-5 than 5 Contractual Obligations Total years years years - ----------------------- ----- ----- ----- ----- Long-term debt $2,354 $681 $311 $1,362 Capital lease obligations 1,440 1,440 - - Operating leases (1) 38,304 26,531 6,699 5,074 Purchase obligations (2) 10,491 10,491 - - Other long-term liabilities: Deferred compensation and non-qualified retirement plans 58,359 22,895 17,839 17,625 Insurance reserves 29,656 29,656 Company-obligated mandatorily redeemable convertible preferred securities (3) 374,685 -- -- 374,685 -------- ------ ------- -------- Total $515,289 $91,694 $24,849 $398,746 ======== ======= ======= ========
* Includes payments due from July 28, 2003, through fiscal year ending April 30, 2006. ** Includes payments due from April 30, 2006, through fiscal year ending April 27, 2008. (1) Most of the Company's retail sales locations and certain of its other facilities are leased under terms that range from monthly to 15 years. Also included in the above amounts are equipment leases. Management expects that in the normal course of business, leases will be renewed or replaced by other leases for the continuing operations. (2) We have an operating agreement with a large dealer who manages 41 retail store locations for FRC. Either party may terminate the agreement by giving written notice 120 days in advance of the date of the termination. If termination notice is provided, Fleetwood Enterprises, Inc. is obligated to repurchase the outstanding inventory at that time for the amount of the dealer's obligation to its flooring institution. Similarly, an equivalent amount is included in the aggregate repurchase obligation described in footnote 9 to the Company's financial statements contained elsewhere in this Report. That repurchase obligation would become due and payable to the flooring institution only in the event the dealer defaults prior to its agreement with Fleetwood being terminated. (3) The mandatorily redeemable convertible preferred securities were issued in three separate transactions, and are reflected on the balance sheet as a quasi-equity interest. In fiscal 1998, Fleetwood, through a wholly owned Delaware business trust, issued $287.5 million aggregate liquidation amount of 6% convertible trust preferred securities due 2028. In fiscal 2002, Fleetwood, through another Delaware business trust, exchanged $86.25 million in liquidation amount of the existing 6% convertible preferred securities for $37.95 million in liquidation amount of new 9.5% convertible preferred securities due 2013. Also in fiscal 2002, Fleetwood, again through a Delaware business trust, issued $150 million in aggregate liquidation amount of new 9.5% convertible preferred securities due 2013. The obligations of the business trusts to holders of the trust preferred securities are supported by debentures issued by Fleetwood to the respective business trusts. The interest is payable quarterly. Currently, as permitted by the trust documents, payment of interest is being deferred on the outstanding 6% convertible trust preferred securities. Off-Balance Sheet In March 2002, Fleetwood entered into a sale and leaseback agreement involving 22 manufactured housing retail stores. The minimum rental payments required under this agreement are included in the Contractual Obligation schedule above, under operating leases. The agreement includes a contingent rental reset provision which provides that, in the event that the Company's credit rating falls below a certain level anytime prior to March 2005, the Company could be required, at the option of the lessor, to make an accelerated rent payment equal to the unamortized principal of the lessor's underlying debt. Since entering into the agreement, the Company's credit rating has fallen below the specified level, raising the possibility that the provision could be exercised in March 2005. The accelerated payment would be approximately $20 million. We describe our aggregate contingent repurchase obligation at footnote 9 to the Company's consolidated condensed financial statements and under Critical Accounting Policies at Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Report. Under the senior credit agreement, Fleetwood Enterprises, Inc. is a guarantor of the borrowings of Fleetwood Holdings, Inc. (FHI) and Fleetwood Retail Corp. (FRC). FHI includes most of the manufacturing wholly owned subsidiaries and FRC includes all the retail housing subsidiaries. Only the FRC parent company, however, and seven of the retail subsidiaries are borrowers under the loan and covered under the guarantee. In addition, Fleetwood Enterprises, Inc. guarantees FRC's floorplan obligation to Textron pursuant to FRC's wholesale financing agreement with Textron. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risks related to fluctuations in interest rates on marketable investments, investments underlying a Company-owned life insurance program (COLI), variable rate debt under the secured credit facility and the liability for flooring of manufactured housing retail inventories. With respect to the COLI program, the underlying investments are subject to both interest rate risk and equity market risk. We do not currently use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments. The vast majority of our marketable investments are in fixed rate securities with average original maturity dates of approximately two weeks, minimizing the effect of interest rate fluctuations on their fair value. For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. Based upon the amount of variable rate debt outstanding at the end of the first quarter, and holding the variable rate debt balance constant, each one percentage point increase in interest rates occurring on the first day of an annual period would result in an increase in interest expense of approximately $335,000. We do not believe that future market equity or interest rate risks related to our marketable investments or debt obligations will have a material impact on our results. Item 4. Controls and Procedures The Company's management evaluated, with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this Report. Based on their evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of July 27, 2003. There have been no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company's fiscal quarter ended July 27, 2003, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II OTHER INFORMATION Item 1. Legal Proceedings As previously reported, we filed a complaint in state court in Kansas, in the 18th Judicial District, District Court, Sedgewick County, Civil Department, against The Coleman Company, Inc. in connection with a dispute over the use of the "Coleman" brand name. Our Folding Trailer Division has licensed the name since 1989, when we bought Coleman Recreation Vehicles, Inc. Coleman recently notified us that it now has a different interpretation of the manner in which royalties were intended to be calculated under the license agreement. We had entered into discussions with Coleman to address these concerns in good faith, but on May 12, 2003, Coleman notified us that it had terminated the agreement and ordered us to cease using the name. Our lawsuit seeks declaratory and injunctive relief. On June 6, 2003, Coleman filed an answer and counterclaimed against us alleging various counts, including breach of contract and trademark infringement. A hearing on the matters was held on June 17, 18 and 19. On July 11, 2003, the Court issued an order stating that the rights and obligations of the parties should be resolved at a trial and not by injunctive relief. On July 16, 2003, Coleman filed a motion for reconsideration. The Court heard arguments on Coleman's motion on August 15, 2003, and on August 18, 2003, the Court issued an order granting a temporary injunction to Coleman enjoining Fleetwood from certain conduct, including using Coleman's name, trademark or logos. The Company will comply with the Court's order. Trial in this matter is currently scheduled for December 2, 2003. We intend to aggressively pursue this litigation and provide a vigorous defense to Coleman's counterclaim. It is not possible at this time to properly assess the risk of an adverse verdict or the magnitude of the possible exposure. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 15.1 Letter of Acknowledgment of Use of Report on Unaudited Interim Financial Information 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K On May 2, 2003, we filed a Current Report on Form 8-K disclosing that we had issued a news release reporting the sales results for our fourth fiscal quarter and fiscal year ended April 27, 2003. On July 23, 2003, we filed a Current Report on Form 8-K disclosing that we had issued a news release reporting our financial results for the fourth fiscal quarter and fiscal year ended April 27, 2003, and we attached a transcript of our conference call script. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLEETWOOD ENTERPRISES, INC. /s/ Boyd R. Plowman -------------------- Boyd R. Plowman Executive Vice President and Chief Financial Officer September 3, 2003 Exhibit 15.1 August 29, 2003 Board of Directors and Shareholders Fleetwood Enterprises, Inc. We are aware of the incorporation by reference in the Registration Statement (Form S-8 No. 33-55824) of Fleetwood Enterprises, Inc., Registration Statement (Form S-8 No. 333-15167) of Fleetwood Enterprises, Inc., Registration Statement (Form S-8 No. 333-37544) of Fleetwood Enterprises, Inc., Registration Statement (Form S-8 No. 333-101543) of Fleetwood Enterprises, Inc. for the registration of 3,552,698 shares of its common stock, Registration Statement (Form S-3 No. 333-73678) of Fleetwood Enterprises, Inc. for the registration of 2,359,945 shares of its common stock, and the Registration Statement (Form S-3 No. 333-102585) of Fleetwood Enterprises, Inc. of our report dated August 29, 2003 relating to the unaudited condensed consolidated interim financial statements of Fleetwood Enterprises, Inc. that are included in its Form 10-Q for the quarter ended July 27, 2003. /s/ ERNST & YOUNG LLP --------------------- Exhibit 31.1 Certification I, Edward B. Caudill, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Fleetwood Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 3, 2003 /s/ Edward B. Caudill - -------------------------- Edward B. Caudill Chief Executive Officer Exhibit 31.2 Certification I, Boyd R. Plowman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Fleetwood Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 3, 2003 /s/ Boyd R. Plowman - -------------------------- Boyd R. Plowman Chief Financial Officer Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Each of the undersigned hereby certifies, in his capacity as an officer of Fleetwood Enterprises, Inc. (the "Company"), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Quarterly Report of the Company on Form 10-Q for the period ended July 27, 2003, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: September 3, 2003 /s/ EDWARD B. CAUDILL - ---------------------- Edward B. Caudill President and Chief Executive Officer /s/ BOYD R. PLOWMAN - -------------------- Boyd R. Plowman Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----