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 29, 2001 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 the number of shares outstanding of each of the issuer's classes of Common stock as of the close of the period covered by this report. Class Outstanding at July 27, 2001 _________________________ _____________________________ Common stock, $1 par value 32,759,196 shares Item 1. Condensed Financial Statements The following unaudited interim condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Such financial statements have been reviewed by Arthur Andersen LLP in accordance with standards established by the American Institute of Certified Public Accountants. As indicated in their report included herein, Arthur Andersen LLP does not express an opinion on these statements. 	Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the Company's opinion, the statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations for the periods ending July 29, 2001 and July 30, 2000, and the balances as of July 29, 2001 and April 29, 2001. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the board of directors and shareholders of Fleetwood Enterprises, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of FLEETWOOD ENTERPRISES, INC. (a Delaware Corporation) and subsidiaries as of July 29, 2001, and the related condensed consolidated statements of income and cash flows for the thirteen-week periods ended July 29, 2001 and July 30, 2000, respectively, and the condensed consolidated statement of changes in shareholders' equity for the thirteen-week period ended July 29, 2001. 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 generally accepted auditing standards, the objective of which is the expression of 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 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. and subsidiaries as of April 29, 2001, and the related consolidated statements of income, cash flows and changes in shareholders' equity for the year then ended (not presented herein), and, in our report dated July 30, 2001, 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 29, 2001, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Orange County, California August 29, 2001 FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONDENSED) (Amounts in thousands except per share data) (Unaudited) 13 Weeks Ended July 29, 2001 July 30, 2000 Net sales: Manufacturing $490,347 $643,493 Retail 108,511 157,554 Less intercompany (34,726) (80,926) -------- --------- 564,132 720,121 Cost of products sold 453,840 573,023 ------- -------- Gross profit 110,292 147,098 Operating expenses 119,905 157,707 Other charges - 13,469 ------- -------- 119,905 171,176 ------- ------- Operating loss (9,613) (24,078) Other income (expense): Investment income 1,007 1,993 Interest on senior unsecured notes payable (3,922) (1,399) Interest on inventory floor plan financing (1,495) (3,036) Interest on short-term borrowing (164) (75) Other 23 28 ------ ------ (4,551) (2,489) ------ ----- Loss before benefit for income taxes, minority interest and cumulative effect of accounting change (14,164) (26,567) Benefit for income taxes 5,826 9,413 Minority interest in Fleetwood Capital Trust, net of tax (2,789) (2,787) ------ ------ Loss before cumulative effect of accounting change (11,127) (19,941) Cumulative effect of accounting change, net of tax -- (11,176) ------ ------- Net loss $(11,127) $(31,117) ======== ======== Basic Diluted Basic Diluted Loss per Common share: Loss before cumulative effect of accounting change $(.34) $(.34) $(.61) $(.61) Cumulative effect of accounting change, net of tax - - (.34) (.34) ----- ----- ---- ----- Net loss per Common share $(.34) $(.34) $(.95) $(.95) ===== ====== ===== ===== Weighted average Common shares: Basic 32,756 32,758 Diluted 32,756 32,758 ====== ====== Dividends declared per share of Common stock outstanding $.04 $.19 ==== ==== See accompanying notes to financial statements. FLEETWOOD ENTERPRISES, INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONDENSED) (Amounts in thousands except share data) ASSETS (Unaudited) July 29, April 29, 2001 2001 Cash $ 51,542 $ 36,602 Marketable investments 32,225 29,283 Receivables 128,990 122,944 Inventories 261,147 273,385 Deferred tax benefits - current 34,908 34,413 Income tax receivable 4,842 48,289 Other current assets 28,271 27,206 -------- -------- Total current assets 541,925 572,122 Property, plant and equipment, net 292,062 294,813 Marketable investments maturing after one year 3,784 7,218 Deferred tax benefits - non-current 66,598 71,945 Cash value of Company-owned life insurance 64,719 64,129 Goodwill and intangible assets 87,002 86,908 Other assets 46,801 45,326 -------- --------- $1,102,891 $1,142,461 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $85,152 $ 75,394 Employee compensation and benefits 61,325 64,379 Retail flooring liability 60,030 85,861 Motor home chassis inventory financing - 11,135 Senior unsecured notes payable 68,188 80,000 Other current liabilities 166,321 154,577 -------- -------- Total current liabilities 441,016 471,346 -------- ------- Deferred compensation and retirement benefits 70,892 68,944 Insurance reserves 28,429 28,523 ------- ------ Total liabilities 540,337 568,813 ------- ------ Contingent liabilities Company-obligated manditorily redeemable convertible preferred securities of Fleetwood Capital Trust holding solely 6% convertible subordinated debentures of the Company 287,500 287,500 ------- ------ 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 32,759,000 at July 29, 2001 and 32,740,000 at April 29, 2001 32,759 32,740 Capital surplus 194,762 194,338 Retained earnings 49,774 62,212 Accumulated other comprehensive loss (2,241) (3,142) ------- -------- 275,054 286,148 -------- -------- $1,102,891 $1,142,461 ========== ========== See accompanying notes to financial statements. FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED) (UNAUDITED) (Amounts in thousands) 13 Weeks Ended July 29, 2001 July 30, 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(11,127) $(31,117) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation expense 6,892 7,280 Amortization of intangibles and goodwill - 1,662 Other asset impairment charges - 9,400 Gain on sales of property, plant and equipment (955) (28) Changes in assets and liabilities: (Increase) decrease in receivables (6,046) 98,376 (Increase) decrease in inventories 12,238 (79,550) Decrease in income tax receivable 43,447 -- (Increase) decrease in deferred tax benefits 4,852 (4,607) Increase in cash value of Company-owned life insurance (590) (5,747) Increase in other assets (2,634) (1,734) Increase (decrease) in accounts payable 9,758 (35,286) Decrease in employee compensation and benefits (1,106) (1,769) Increase (decrease) in other liabilities 12,050 (3,278) ------- ------- Net cash provided by (used in) operating activities 66,779 (46,398) ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities available-for-sale (550,634) (737,828) Proceeds from sale of investment securities available-for-sale 551,091 770,592 Purchases of property, plant and equipment, net (3,186) (8,759) Acquisition of retail companies, net of cash acquired -- (650) ------- ------- Net cash provided by (used in) investing activities (2,729) 23,355 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends to Common shareholders (1,311) (6,219) Motor home chassis inventory financing (11,135) -- Retail flooring (25,831) 12,250 Short-term bank borrowings -- 25,000 Payment of senior unsecured notes payable (11,812) -- Proceeds from exercise of stock options 43 -- ------- ------- Net cash provided by (used in) financing activities (50,046) 31,031 ------ ------- Foreign currency translation adjustment 936 231 ------ ------- Increase in cash 14,940 8,219 Cash at beginning of period 36,602 43,649 ------ ------- Cash at end of period $51,542 $51,868 ======== ======= FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED) (UNAUDITED) PAGE 2 (Amounts in thousands) 13 Weeks Ended July 29, 2001 July 30, 2000 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for - Interest $ 3,772 $ 4,375 Income taxes 796 1,268 ======= ======= DETAILS OF ACQUISITIONS: Fair value of assets acquired -- $28,826 Liabilities assumed -- 28,176 ------- ------- Acquisitions price - 650 Less cash acquired -- -- ------- ------- Net cash paid for acquisitions -- $650 ======= ======= NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued in settlement of acquisition-related liability $400 $618 ======= ======= See accompanying notes to financial statements. FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (CONDENSED) (UNAUDITED) (Amounts in thousands) Accumulated Other Compre- Common Stock hensive Total Number Capital Retained Income Shareholders' of Shares Amount Surplus Earnings (Loss) Equity Balance April 29, 2001 32,740 $32,740 $194,338 $62,212 $(3,142) $286,148 -------- Comprehensive income (loss): Net loss -- -- -- (11,127) -- (11,127) Other comprehensive income: Foreign currency translation, net of taxes of $624 -- -- -- -- 936 936 Investment securities, net of taxes of $21 -- -- -- -- (35) (35) ------ Comprehensive income (loss) (10,226) ------ Cash dividends declared on Common stock -- -- -- (1,311) -- (1,311) Stock options exercised (including related tax benefits 4 4 39 -- -- 43 Stock issued for acquisitions 15 15 385 -- -- 400 ---- ---- ------ ----- ----- ------ Balance July 29, 2001 32,759 $32,759 $194,762 $49,774 $(2,241) $275,054 ====== ======= ======== ======== ======= ======== See accompanying notes to financial statements. FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 29, 2001 (Unaudited) 1) Reference to Annual Report Reference is made to the Notes to Consolidated Financial Statements included in the Company's Form 10-K annual report for the year ended April 29, 2001. 2) Industry Segment Information Information with respect to industry segments for the periods ending July 29, 2001 and July 30, 2000 is shown below (amounts in thousands): 13 Weeks Ended July 29, 2001 July 30, 2000 OPERATING REVENUES: Manufactured housing - Manufacturing $216,232 $317,499 Less intercompany (34,726) (80,926) --------- -------- 181,506 236,573 Retail 108,511 157,554 ------- ------- 290,017 394,127 Recreational vehicles 	 266,308 317,514 Supply operations 7,807 8,480 --------- -------- $564,132 $720,121 ======== ======== OPERATING INCOME (LOSS): Manufactured housing* $21,029 $(2,006) Housing - retail** (12,019) (5,437) Recreational vehicles (17,810) (13,281) Supply operations 2,207 2,156 Corporate and other (3,020) (5,510) --------- -------- $(9,613) $(24,078) ========= ======== * After deduction (addition) for intercompany profit in inventory as follows: $(4,838) $4,089 ===== ======= ** Before deduction of interest expense on inventory floor plan financing as follows: $1,495 $3,036 ====== ====== 3) Earnings Per Share Basic earnings per share is computed by dividing income available to Common stockholders by the weighted average number of Common shares outstanding. The effect of stock options and preferred securities were anti-dilutive and were, therefore, not added back to determine diluted earnings (loss). The table below shows the calculation components of earnings per share for both basic and diluted earnings per share (amounts in thousands): 13 Weeks Ended 13 Weeks Ended July 29, 2001 July 30, 2000 ---------------- ---------------- Weighted Weighted Average Average Loss Shares Loss Shares ------ ------- ------ ------- Basic and diluted loss before cumulative effect of accounting change $(11,127) 32,756 $(19,941) 32,758 Cumulative effect of accounting change -- -- (11,176) 32,758 --------- ------ ------ ------ Basic and diluted loss $(11,127) 32,756 $(31,117) 32,758 ======= ====== ======= ====== 4) 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 29, 2001 April 29, 2001 ---------------- -------------- (Amounts in thousands) Manufacturing inventory- Raw materials $89,955 $82,884 Work in process 21,691 21,171 Finished goods 19,133 6,124 ------- -------- 130,779 110,179 ------- -------- Retail inventory- Finished goods 159,353 197,029 Less manufacturing profit (28,985) (33,823) ------- -------- 130,368 163,206 ------- -------- $261,147 $273,385 ======== ======== 5) Other Charges The other charges incurred in the first quarter of fiscal year 2001 included $9.4 million for the writedown of impaired assets, $1.8 million for restructuring costs and $2.3 million for other non- recurring charges. In the first quarter of fiscal year 2002 there were not any restructuring or impairment charges, and all but $690,000 of previous restructuring costs have been paid. 6) Cumulative Effect of Accounting Change In the first quarter of fiscal year 2001, we changed our revenue recognition policy on credit retail housing sales to a method based on loan funding, which generally occurs with customer acceptance. Prior to fiscal year 2001, we followed the industry practice of recording credit retail sales when a written contract and down payment were secured. We recorded the cumulative effect of this accounting change on the amount of retained earnings at the beginning of fiscal year 2001 as a charge against net income in the first quarter of fiscal 2001. The after-tax amount of the cumulative effect was $11.2 million, or 34 cents per diluted share. 7) New Accounting Pronouncements During the fourth quarter of fiscal 2001, the Company adopted Emerging Issues Task Force (EITF) No. 00-10, "Accounting for Shipping and Handling Fees and Costs" and No. 00-14, "Accounting for Certain Sales Incentives." The adoption of EITF No. 00-10 affected the classification of revenues from shipments to customers and certain expenses related to shipping and handling of our product and did not affect our net loss. The adoption of EITF No. 00-14 required certain sales incentives that were previously accounted for as selling expenses to be treated as a reduction in revenue and did not affect our net loss. The net effect of these pronouncements has been an overall increase in reported sales figures of approximately 1 percent. All periods presented have been adjusted to reflect the requirements of EITF No.'s 00-10 and 00-14. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Effective with fiscal year 2002, we have adopted SFAS No. 133 and concurrently (as permitted by SFAS No. 133) have reclassified the held-to-maturity investment portfolio to the available-for-sale portfolio. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and is effective for fiscal years beginning after December 15, 2001, with early adoption permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. Effective April 30, 2001, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill not be amortized but instead be tested at least annually for impairment and expensed against earnings when the implied fair value of a reporting unit, including goodwill, is less than its carrying amount. Since the new requirements were recently published the fair values of the respective reporting units have not been determined. We are permitted six months from the adoption date to complete a preliminary review of goodwill for impairment and will record any necessary adjustments prior to the end of fiscal year 2002. The results of the fair value evaluation are expected to be completed in the second quarter. The adoption of the new standard resulted in net loss decreasing by $1.5 million or $0.05 per share for the quarter ended July 29, 2001. Comparative pro forma results for the three months ended July 30, 2000 would have reduced loss before cumulative effect of change in accounting principle and net loss by $1.7 million or $0.05 per share. We had $87.0 million and $253.7 million of goodwill on our balance sheet at July 29, 2001 and July 30, 2000, respectively. 8) Subsequent Event - New Credit Facility On July 27, 2001, we entered into an agreement for a senior secured credit facility to be funded by a syndicate of banks led by Bank of America. The loan is structured as a three-year revolving credit line for up to $230 million plus a $30 million two-year term loan. At the current time, syndicate commitments for an aggregate of $220 million, which includes the $30 million term loan, have been finalized. The revolving credit line bears interest, at our option, at variable rates based on either Bank of America's prime rate or one, two or three month LIBOR. Substantially all of our existing and future assets except certain inventories and the cash value of the Company-owned life insurance secure the facility. Advances under the revolving credit line are limited by the available borrowing base of eligible accounts receivable and inventories and were subject to a minimum excess availability of $80 million at funding, reducing thereafter to $50 million. The credit agreement contains customary affirmative and negative covenants, some of which require the maintenance of specified financial ratios and compliance with certain financial tests, including a cumulative year-to-date EBITDA requirement commencing with our second quarter - (see Management's Discussion and Analysis). A portion of the proceeds from the new credit facility was used to retire the senior unsecured notes payable held by the Prudential Insurance Company of America (Prudential). A principal payment of $68.2 million, prepayment penalties of $2.3 million, and accrued interest of $663,000 was remitted to Prudential on July 30, 2001, as part of the funding of the new facility. 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 and Exchange Act of 1934. 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, continued weakness in the manufactured housing and the recreational vehicle markets, the availability of wholesale and retail financing in the future and changes in retail inventory levels in the manufactured housing and recreational vehicle industries. Additionally, other risks and uncertainties are described in our Annual Report on Form 10-K for the fiscal year ended April 29, 2001 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." The following is an analysis of changes in key items included in the consolidated statements of income for the 13-week period ended July 29, 2001, compared to the 13-week period ended July 30, 2000. 13 Weeks Ended July 29, 2001 (Unaudited) Increase % (Amounts in thousands) (Decrease) Change Sales $(155,989) (21.7)% Cost of products sold (119,183) (20.8) --------- ---- Gross profit (36,806) (25.0) Selling expenses (17,923) (25.5) General and administrative expenses (19,879) (22.8) Other charges (13,469) -- -------- ---- Operating expenses and other charges (51,271) (30.0) Operating loss (14,465) (60.1) Other expense 2,062 82.8 ------- ---- Loss before taxes, minority interest and cumulative effect of accounting change (12,403) (46.7) Benefit for income taxes (3,587) (38.1) Minority interest in Fleetwood Capital Trust, net of tax 2 -- ------- --- Loss before cumulative effect of accounting change (8,814) (44.2) Cumulative effect of accounting change, net of tax (11,176) -- ------ ---- Net loss $(19,990) (64.2)% ======== ===== Current Quarter Compared to Same Quarter Last Year Consolidated Results: We incurred a net loss in the first quarter of fiscal 2001 of $11.1 million or 34 cents per diluted share compared to a loss of $31.1 million or 95 cents per diluted share in last year's July quarter. The loss in the current period primarily resulted from a 22 percent decrease in sales, along with an erosion in gross profit margin from 20.4 percent to 19.6 percent. Partially offsetting the lower sales and reduced margin was a 24 percent decline in operating expenses before other charges. In addition, last year's loss included restructuring and impairment charges of $13.5 million and an $11.2 million (after tax) charge for the cumulative effect of a change in accounting policy related to revenue recognition. In terms of earnings per share for the prior year, the restructuring and impairment charges and the cumulative effect of the change in accounting amounted to 27 cents and 34 cents, respectively. Consolidated revenues fell $156.0 million to $564.1 million compared to $720.1 million in last year's first quarter. All business segments experienced lower sales due to weak market conditions, with the housing business suffering additional adverse effects from restrictive financing. Manufacturing gross margin fell from 18.1 percent to 17.6 percent mainly due to lower RV margins. Gross profit for the RV segment declined from 13.4 percent to 10.8 percent of sales in the current year, due to higher freight and direct labor costs resulting from new product introductions. Gross margins for the manufactured housing segment improved from 22.5 percent to 25.3 percent due to lower material costs. Operating expenses decreased $51.3 million to $119.9 million, and fell as a percentage of sales from 23.8 percent to 21.3 percent. The dollar decrease was primarily due to lower sales, downsizing of manufacturing and retail operations and the absence of $13.5 million of other charges related to restructuring and impairment from the prior year. Selling expenses decreased $17.9 million, or 26 percent, due to lower warranty and advertising costs. General and administrative expenses declined $19.9 million and decreased as a percentage of sales from 12.1 percent to 12.0 percent due to staff reductions resulting from manufacturing plant and retail store closures. Non-operating expense rose $2.1 million to $4.6 million, mainly due to higher interest expense on the unsecured debt and lower investment income. Included in the $3.9 million of interest on senior unsecured notes payable was $2.3 million for yield maintenance charges related to the early retirement of the senior unsecured notes on July 30, 2001. Investment income was down 49 percent from the prior year as a result of lower interest rates and lower invested balances. Manufactured Housing: Gross manufacturing revenues of $216.2 million were off 32 percent from the prior year and included $34.7 million of intercompany sales to Company-owned retail home centers. Manufacturing unit volume declined 35 percent to 7,769 homes, but the number of sections was off a lesser 32 percent to 14,082 due to the continuing shift in sales mix toward multi-section homes. Multi- section homes represented 78 percent of factory sales versus 70 percent last year. Sales volume was below the prior year because of a weaker manufactured housing market, which has been adversely affected by excessive retail inventories, competition from repossessed units, and restrictive retail financing conditions. During the past 30 months, lenders have increased credit standards and down payment requirements for retail buyers. These actions, combined with an increase in interest rates, have eliminated many potential buyers of new manufactured homes. We anticipate that industry wholesale shipments will continue to be weak until the current inventory imbalance is resolved, the timing of which depends on the availability and terms of retail financing. Operating income, before elimination of intercompany profit, increased from $2.1 million to $16.2 million, and operating margin rose from less than .7 percent to 7.5 percent of sales. Excluding asset impairment charges from the prior year results, operating margin for the housing group would have been 3.6 percent of sales. Last year, asset impairment charges related to plant closings reduced operating earnings by $9.4 million. The increase to earnings, despite the decline in volume due to the aforementioned weak market conditions, was due to improved gross margin and reduced operating expenses. Gross profit margin for the housing group improved from 22.5 percent to 25.3 percent of sales, mainly as a result of lower raw material costs. More efficient material usage and improved product pricing contributed to the higher gross margin. Housing group operating costs, excluding asset impairment and restructuring charges, fell 35 percent as a result of reductions in product warranty costs and advertising expenses. Recreational Vehicles: Recreational vehicle sales declined 16 percent to $266.3 million compared to $317.5 million for last year's first quarter. Travel trailer revenues were $106.6 million, down $35.3 million or 25 percent on a 28 percent decline in unit volume, reflecting weak market conditions and a delayed introduction of new fifth-wheel floor plans. Motor home revenues for the quarter fell 9 percent to $134.1 million on a 16 percent drop in shipments. Deliveries of Class A products rose 9 percent to 1,572 units while Class C shipments fell 73 percent to 161 units, reflecting the closure of two Class C manufacturing plants toward the end of the fourth quarter and the related lag in achieving full production in the facility to which the product was transferred. Folding trailer sales fell 10 percent to $25.7 million on a 19 percent dip in unit volume. The disproportionate drop in folding trailer shipments to revenues reflects the introduction of the larger, higher- priced Caravan into the sales mix since last July. The RV group incurred an operating loss of $17.8 million in the first quarter compared to a loss of $13.3 million a year ago. The $4.5 million increase was primarily caused by the decline in sales and gross profit margin erosion, largely due to lower travel trailer margins. Operating expenses declined $9.3 million and decreased from 17.6 percent of sales to 17.5 percent in the current year. The largest decline was in employee compensation due to staff reductions resulting from downsizing actions. Supply Operations: The supply group contributed first quarter revenues of $7.8 million compared to $8.5 million a year ago. Operating income remained constant at $2.2 million despite lower sales due to improved gross margins resulting from lower material cost as a percentage of sales. Retail Housing Operations: Retail housing revenues decreased 31 percent to $108.5 million in the first quarter. Last year, sales were adjusted downward by approximately $18 million due to a change in accounting for credit retail sales. Also as a result of the accounting change, we incurred a one-time cumulative charge against earnings of $11.2 million after taxes. Unit sales from Fleetwood retail stores declined from last year by about 29 percent to 2,646 homes. The retail division incurred an operating loss of $12.0 million for the current quarter compared to a loss of $5.4 million a year ago. The increased operating loss was the result of a weak market environment and lower gross margins stemming from competitive conditions and discounting aged inventory. Operating expenses declined 23 percent due to lower volume, store closures and reduced staffing. Interest expense on inventory financing decreased by 50 percent from $3.0 million to $1.5 million, reflecting the 37 percent drop in inventories and lower interest rates. The retail housing segment was operating 156 stores at the end of July compared to 240 at the end of July a year ago. Business Outlook We currently expect fiscal 2002 second quarter results to approach breakeven. Results for the second quarter that will end on October 28, 2001, are expected to be adversely affected by continuing weakness in the manufactured housing and RV markets. For more than two years, the manufactured housing industry has been affected by excessive retail inventories and a slowing of retail sales caused by restrictive financing conditions. Encouraging progress has occurred with respect to reducing industry inventory levels and production capacity, but weak market conditions are expected to continue until the inventory imbalance is fully resolved. Within the RV sector, retail demand began to soften late in fiscal year 2000 and dealers began to reduce their inventories, which were relatively high. Today, inventory levels are more appropriately sized for current market conditions. Until the economy and consumer demand improves, we anticipate RV sales will show only modest improvement. Over the previous 15 months we have closed 14 manufacturing plants and have closed or transferred nearly 100 retail housing stores and reduced our staffing by over one third. We have downsized our operations to meet current demand. Even though we do not expect to see a significant turnaround in sales in the near future, we believe our operations are sized properly for the current conditions in order to return to profitability in fiscal year 2002. Under the terms of the bank credit agreement, we are required to generate cumulative EBITDA for the first two quarters of fiscal 2002 of $15 million. As indicated in the accompanying financial statements, EBITDA for our first quarter was a negative $2.7 million, necessitating that we generate EBITDA in the second quarter of $17.7 million to be in compliance with the bank covenant. Given our business outlook for the second quarter, which anticipates continuing weakness in the manufactured housing and RV markets, we may be unable to generate sufficient earnings to comply with the covenant. If this were to occur, the Company would be in default under the credit agreement and could be subject to the remedies available to the lenders. In the event we find ourselves at risk of default, we will make every effort to negotiate a satisfactory solution with our lenders but cannot be certain that we will be able to do so. 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 $66.8 million was generated from operating activities during the quarter compared to cash used in the comparable period in the prior year of $46.4 million. The increased cash flow from operations resulted primarily from a $50.3 million refund of Federal taxes paid in prior periods. In addition, a $12.2 million reduction in inventories in the first quarter contributed to the positive cash flow. Cash and cash equivalents increased from $73.1 million as of April 29, 2001, to $87.6 million at the end of July 2001. The increase in cash and cash equivalents occurred despite reducing retail inventory financing by $25.8 million, paying $11.8 million of principal to the holder of the senior unsecured debt and paying off the $11.1 million balance due on motor home chassis financing. Additional cash outlays in the current quarter included $1.3 million in dividends to shareholders and $3.2 million for capital expenditures. Dividends for fiscal year 2001 were $6.2 million and capital expenditures totaled $8.8 million. Distributions on the convertible trust preferred securities were $4.3 million, the same as the July quarter one year ago. Over the past year we have been negotiating with several financial institutions for additional financing in order to refinance the senior unsecured notes owed to Prudential, to replace some of the existing inventory floor plan debt and to support expected future working capital needs. On July 27, 2001, we entered into an agreement for a senior secured credit facility to be funded by a syndicate of banks led by Bank of America. The facility was funded on July 30, 2001, and we used part of the proceeds to retire our senior unsecured notes payable to Prudential and to pay down the retail flooring line. The loan is structured as a three-year revolving credit line of $230 million with an additional two-year term loan of $30 million. At the current time, syndicate commitments for an aggregate of $220 million, which includes the $30 million term loan, have been finalized. The revolving credit line and term loan are secured by substantially all of the Company's assets, excluding assets of retail subsidiaries subject to a floor plan financing agreement with another lender, those assets at our retail subsidiaries' sites managed by a third party, and the cash value of company-owned life insurance. Revolving loans will bear interest, at our option, at Bank of America's prime rate or one, two or three month LIBOR, plus a margin. Borrowings under the term loan will initially bear interest at Bank of America's prime rate plus 3 percent for the first year of the loan, with escalations and amortizations for the remainder of the term. Part of the revolving loan with Bank of America will provide funding for the purchase of retail housing inventory at Company-owned stores in seven states. The majority of the retail housing inventory is intended to be financed through one or more wholesale floor plan arrangements. Simultaneous with the signing of the new credit agreement with Bank of America, we entered into a new floor plan agreement with Conseco. We believe that the combination of the Bank of America revolving loan and the floor plan financing will provide sufficient capital to sustain and ultimately expand the retail housing business. We believe the combination of estimated future cash flows from operations and the available lines of credit will be sufficient to satisfy our foreseeable cash requirements for the next nine months, including up to $30 million for capital expenditures. 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 use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments. The vast majority of the 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. In the future, this risk should be less, as the investment in marketable securities will be less under the new borrowing arrangement. 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. With the refinancing and new credit facility, we will not have any remaining fixed rate debt. 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 $1.0 million. 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. PART II OTHER INFORMATION Item 1. Legal Proceedings In Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended April 29, 2001, we reported that in February 2000 we and two of our subsidiaries were served with a purported class action filed on behalf of nine present or former associates of our Idaho manufactured housing facility. The complaint in the matter of Bristow et al., v. Fleetwood Enterprises, Inc. et al., was filed in the U.S. District Court in Idaho and alleges violations of the federal Fair Labor Standards Act, and similar state laws, and requests compensation, punitive damages, litigation expenses, and attorneys' fees. On February 20, 2001, a Magistrate Judge conditionally certified a class of plaintiffs composed of certain production associates and supervisors of our housing and recreational vehicle groups. During July 2001, notice of the action was issued to potential class members. We continue to deny the material allegations in the complaint and are asserting a vigorous defense to that end. In Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended April 29, 2001, we reported that on August 14, 2000, another purported class action complaint was filed by Ms. Bristow along with a Jane Doe alleging sexual harassment. On January 19, 2001, an amended complaint, entitled Bogen, et al., v. Fleetwood Enterprises, Inc., was filed in the U.S. District Court in Idaho by six plaintiffs, including Ms. Bristow, alleging gender discrimination and sexual harassment as a result of a sexually hostile environment at four manufacturing centers. The plaintiffs are attempting to establish a national class action and are requesting compensatory and punitive damages, litigation expenses and attorneys' fees. We have denied the material allegations in the amended complaint and plan to assert a vigorous defense. The plaintiffs' deadline for filing a motion for class certification is September 28, 2001. We are also subject to other litigation from time to time in the ordinary course of business. Our liability under some of this litigation is covered in whole or in part by insurance. Although the amount of any liability with respect to such claims and litigation over and above our insurance coverage cannot presently be determined, in the opinion of our management such liability is not expected to have a material adverse effect on our financial condition or results of operations. 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. _______________________________ Boyd R. Plowman Senior Vice President and Chief Financial Officer August 30, 2001