Over the past year, we witnessed a remarkable shift in investor sentiment as the stocks of traditional companies fell out of favor on Wall Street. Although these companies generate millions in profits making brand-name products and essentials like food, shelter and medicine, they struggled to capture the attention of investors more enamored with hot technology stocks that haven't earned a penny. At a time like this, we think it's worthwhile to remind our shareholders what you own when you own stock in Fleetwood Enterprises.

    You have a stake in a company with a fifty-year track record as a leading manufacturer in two substantial industries — manufactured housing and recreational vehicles — that provide tangible benefits to thousands of Americans. One provides affordable homes for families in many different types of economic circumstances, especially those who might not otherwise enjoy the benefits of home ownership. The other is dedicated to enhancing the cherished leisure activities and travels of hard-working baby-boomers and retirees. We're a company with excellent long-term growth opportunities, backed by a half century of experience.
    Granted, it's been a tough year in manufactured housing — not just for Fleetwood, but for our entire industry. But we believe shareholders with a longer-term perspective will be amply rewarded because of our unwavering commitment to business strategies that will create long-term value. It's not the first time we've seen a downturn since our stock went public in 1965, and experience has taught us that our quality products, responsiveness to customer needs, and our solid financial foundation give us the strength to weather the inevitable down cycles and emerge a more competitive company. What's more, we've had the wherewithal to pay a dividend for 35 years, and to increase it every year for the past 17 years.
    Our golden anniversary was both a dynamic and disappointing year for Fleetwood. Our two businesses were moving in different directions and we fell short of our profit objectives. Nevertheless, we're optimistic that we made significant progress in fiscal 2000 to improve our performance and position us for long-term growth. We achieved record revenues of $3.71 billion, six percent ahead of the prior year, thanks to healthy recreational vehicle sales and the continuing expansion of our retail housing business. However, we didn't reach our internal revenue target, mostly because of significant weakness in the manufactured housing market. Fiscal 2000 net income was $83.5 million or $2.41 per share, down from $107.1 million and $2.94 per share in the prior year. Besides the shortfall in manufactured housing revenues, lower profit margins on RV products were the other primary cause of the earnings decline. This partially reflects our strategy to improve market share by broadening our RV product lines with more competitively-priced models.

Positive Trends Bode Well for the Future
We firmly believe that both of our businesses have promising futures, and this belief is supported by favorable economic factors and long-term demographic trends. Consider these positive trends in manufactured housing:

And the RV industry stands to benefit from the following trends, many of which are irreversible:


Our Most Important Job:
Building Shareholder Value
Our enthusiasm for the future doesn't lessen our concern about Fleetwood's stock performance. Like you, we've been deeply concerned about it over the past year, and realize you ultimately will judge management's effectiveness on the basis of how our stock performs. As a result, we've developed corporate strategies geared to building long-term shareholder value by pursuing the following goals:

    We believe that the key strategies and business improvement initiatives we addressed during fiscal 2000 are consistent with these goals. For example, our continuing effort to expand our retail housing operations, while penalizing short-term earnings, is designed to increase revenues, market share and profits in the long run. Also, the investment we're making in systems and staffing to establish a world-class customer service capability in both housing and RVs is intended to build customer satisfaction and loyalty and, ultimately, improve financial performance.
    Certainly, our recent earnings trends and the difficulties in the manufactured housing industry have hurt investor perception of Fleetwood's stock. However, it's worth noting that powerful external factors, although presumably temporary, have also depressed the stock price:

    While they naturally concern us, these factors are beyond our control. What is in our control is to stay focused on carrying out the strategies we believe will most benefit Fleetwood's performance over time.
    Aside from the above factors, the biggest issue our industry faced in fiscal 2000 continues to challenge us today. The manufactured housing industry has been burdened by too much capacity at both the manufacturing and retail levels, resulting in inflated retail inventories that exceed retail demand. Regrettably, no one in the industry is able to accurately predict when the problem will subside. The greatest unknown is how soon lenders will loosen their credit requirements to enable more prospective buyers to qualify for housing loans. On a more positive note, it has always been our policy not to build inventories, unlike many of our peers, which positions us to recover from this situation more quickly than others.

RV Group Achieves Record Sales,
Maintains Industry Lead
We also believe our stock is undervalued because investors don't fully appreciate the contribution of our strongest business. The difficulties in manufactured housing have overshadowed favorable developments in the RV industry, and detract from Fleetwood's leadership position in the industry. The combination of healthy economic conditions and favorable long-term demographic trends in fiscal 2000 created the best market environment for the recreational vehicle industry in more than 20 years. Fleetwood participated in this prosperity by achieving all-time record sales of $1.91 billion, 11 percent ahead of prior year revenues. All three of our RV divisions posted record sales for the year.
    The motor home division generated nearly three-fourths of the $185 million RV revenue gain, recording a 13 percent increase to $1.20 billion. Our travel trailer and folding trailer divisions reached sales of $590 million and $124 million, respectively, seven percent ahead of the prior year. As a result of our strong sales performance, we maintained our position as the leading company in the RV industry. We're extremely proud of the fact that one out of every four recreational vehicles sold in this country is a Fleetwood product.
    Despite the growth in revenues, RV operating profit for 2000 fell slightly below the record earnings we achieved in the prior year for three reasons. As we noted previously, we changed our sales mix to encompass lower-priced products yielding smaller margins, which we are convinced was a critical step to increase market share. We also incurred higher product warranty costs and increases in sales promotion expenses.

Housing Group Excels in a
Challenging Market Environment

We make the dream of home ownership a reality for many families.

 


As we mentioned, our housing group operated in a difficult market environment throughout the fiscal year due to the industry's excess capacity and inventory issues. Although retail traffic and homebuyer interest remained high, many potential customers were prevented from buying manufactured homes as lenders tightened credit standards and raised interest rates and down payment requirements. This led to a 6.5 percent decline in industry factory shipments in calendar 1999, but the rate of decline accelerated late in the calendar year and continued into the early months of calendar 2000. With this as a backdrop, our housing group's revenues dropped seven percent in fiscal 2000 to $1.45 billion, before the elimination of intercompany sales to our Company-owned retail stores. Operating income fell 17 percent on the lower volume, even though gross profit margins remained fairly stable. We kept operating costs under control, but certain fixed overhead costs couldn't be cut to offset the lower sales volume.
    Once again, we led the manufactured housing industry in capturing retail market share. About one out of every five manufactured homes sold in the U.S. at retail in calendar 1999 was a Fleetwood home. During fiscal 2000, our housing group kept its focus on fundamental business strategies, including programs and systems that give our customers added value. For example, we have added new systems to streamline customer service efforts that will lower future costs while improving customer service response time. We also introduced the industry's first comprehensive two-year warranty, coupled with an extended warranty service contract that provides optional three-year coverage beyond the original warranty. As these and many other strategic initiatives gain traction, we'll be able to improve our products and services and reduce operating costs, resulting in leaner, more efficient housing operations that we expect will contribute significantly to improved shareholder value.

Manufactured Housing Retail
Operations Continue Expansion
Consistent with our long-term strategy, we continued to expand Fleetwood Retail Corp. (FRC) during fiscal 2000, growing from 167 sales locations to 243 by year-end. Sales grew 78 percent from $332 million in fiscal 1999 to $592 million in fiscal 2000, as we increased the number of homes sold from 8,255 in fiscal 1999 to 14,528 homes in fiscal 2000. However, as the year progressed we adjusted to the adverse market conditions by slowing the rate of new retail store growth. Revenues were lower than expected, and start-up losses at new locations higher than anticipated. Consequently, FRC was only marginally profitable in 2000, well below our operating plan.
    Besides the steep cost to start up new sales centers, the cost to develop and train staff and build our infrastructure and systems was also heavy. The good news is that we have reached the critical mass necessary to facilitate our growth strategy, and the rapid retail expansion phase is now behind us. Though expensive, we believe all of this was necessary to protect the distribution channel that links us to our retail customers. You may recall from our report last year that there were compelling reasons for entering the retail business as a defensive measure. During 1997 and 1998, competitors acquired six of our top ten independent retailers. Collectively, these retailers represented approximately $250 million or 17 percent of Fleetwood's housing revenues. In total, Fleetwood retailers purchased by competitors represented about 25 percent of our factory sales volume. The move into retail was also a sound offensive strategy, providing us with a new avenue for top-line growth, while increasing our ability to be a more effective and responsive marketer of homes.

Long-term Outlook Remains Favorable
As we entered the new fiscal year, we continued to see the weak housing industry conditions and softening RV industry trends that we faced in the fourth quarter. The stock market is still volatile, investors remain wary, and many old economy stocks like Fleetwood continue to trade below their intrinsic values. Yet the bloom has come off the rose for many Internet stocks and some household names are coming back into favor — a sign, we hope, of rekindled interest in traditional stocks.
     From the vantage point of 50 years in business, we know that we can't let short-term market conditions sidetrack us from pursuing the strategies we believe will strengthen our competitive position over the long-term. We're very optimistic about our future growth opportunities, and have confidence in the operational and marketing initiatives we put in place to ensure the growth and earnings consistency so crucial to maintaining investor attention and trust. We especially appreciate the support of our stakeholders over the past year — we know you've been waiting patiently. Rest assured that we're dedicated to creating long-term value that will reward all of those who contribute to our success.

Respectfully,

Glenn F. Kummer
Chairman and Chief Executive Officer

Nelson W. Potter
President and Chief Operating Officer