To say that this year was “difficult” or “challenging” — as managements often do after a bad year — is such an understatement as to be absurd. Fiscal year 2001 was downright painful, and we were forced to make some agonizing decisions. Fortunately, Fleetwood has the wherewithal and the confidence after 50 years of business to continue investing in the future even as we work to recover from the current situation.

First, a quick review of history so that our financial results can be seen in context.

We are in two businesses that are cyclical, but they are driven by different factors. Affordable housing tends to be strongly influenced by the availability and cost of financing, while recreational vehicles definitely fall into the “luxury” category, which usually sees better times when the general economy is doing well and consumer confidence is high.

During the past few years, both industries expanded rapidly as dealers (wholesale) and consumers (retail) demonstrated increased demand for our products. As a market leader in both RVs and Housing, we expanded our capacity, particularly in Housing, to take advantage of the growth. Our revenues grew from $2.87 billion in fiscal 1996 to $3.77 billion in fiscal 2000.

We weren’t the only ones growing. Booming business not only caused existing competitors in both of our industries to build more plants, but enticed new competitors and new dealers to enter the market. Manufactured housing lenders also got caught up in intense competition and made loans to customers who would not have been considered creditworthy in less frantic times. Meanwhile, some of our manufacturing competitors decided to enter the retail side of the business and, as a result, several of our top dealers were purchased. In response to this challenge to our distribution channels, we established a retail arm.

All of this meant that industry production capacity and inventories were built up to a level far beyond the market’s ability to absorb them. This became evident in manufactured housing about two years ago and the surplus inventory problem is still lingering, largely due to repossessed homes competing with new homes. Lenders have responded to a high level of defaults by significantly increasing interest rates, cutting back funding budgets and, in some cases, totally withdrawing from the business. This overcorrection has left even some creditworthy potential customers unable to buy.

Just about a year after we began cutting overheads and capacity in manufactured housing in response to that slowdown, the Nasdaq stumbled and consumer confidence started spiraling downward. Concurrently, interest rates and gas prices were both on the rise. In combination, these factors postponed the buying decisions of many RV customers.

The timing couldn’t have been much worse. RV dealerships had stocked up for the late spring and summer, normally the best selling season. As retail demand started to soften, Fleetwood was particularly hard hit. With the benefit of hindsight, we would have done things differently, but at the time the slowdown was expected to be quite temporary. Production wasn’t slowed quickly enough. And, because of the long lead time and a chassis shortage at the time, we also purchased a large supply of chassis. Instead of being quickly and profitably converted into motor homes, this larger-than-normal chassis inventory remained for some time, increasing our carrying costs. It also became apparent that some of our competitors had done a better job than we had of keeping products fresh and innovative.

The bottom line: sales in fiscal 2001 were down 35 percent in Housing year-over-year and 37 percent in RVs.

Any time one-third of a company’s revenues disappears in one year it creates problems that can seem insurmountable. While we are not proud of this year’s financial results, we are extremely proud of our people and the way that they have responded and worked hard to position Fleetwood for the future.

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Obviously, we needed to cut costs quickly. We will cover some of the specifics of our “rightsizing” efforts in the Housing and RV sections of this report, but we closed 13 plants during fiscal year 2001 and laid off almost one-third of our associates. While this is never pleasant and not something we wanted to do, it was absolutely necessary. We also took a hard look at our operating costs and our operational structure in an effort to become both more efficient and more effective. And we carefully chose what investments needed to be made for our future.

We believe that the organizational structure we now have and the people that we have placed in strategic management positions put us in a much-improved position. We fully expect to weather this storm and emerge stronger for it, as we have many times before. Historically, gains in revenues and market share have inevitably followed on the heels of the toughest cycles we’ve faced.

The general state of the economy, that of our industries and our own financial performance led us to make some significant financial changes and decisions.

• In December, our Board voted to cut our quarterly dividend from 19 cents to 4 cents per share, thus saving us about $20 million on an annual basis. This was a difficult decision because we have paid dividends for 35 years and had increased it every year for the past 17. Nonetheless, it was prudent to use the money to protect and rejuvenate our business.

• Our third-quarter results included a non-cash charge of $4.86 per share for goodwill impairment and 21 cents per share for other non-recurring charges. Most of these charges related to our Housing retail business, Fleetwood Retail Corp. (FRC).

• During the first quarter of fiscal 2002, we executed a syndicated senior credit facility, led by Bank of America. At the time of closing, syndicate commitments of $195 million had been finalized. This provided us with increased liquidity, a portion of which we used to pay off approximately $70 million in notes that had been held by The Prudential Insurance Company of America.

• We announced, also during the first quarter, an exchange offer for our Convertible Trust Preferred Securities. If this is completed successfully, it will result in an enhanced balance sheet by reducing the outstanding principal amount of those securities and increasing shareholders’ equity.
  

This year also brought a number of management changes:

• We completed our own previously announced succession plan when Nelson took over from Glenn as chief executive officer on April 30, 2001.

• We were pleased to welcome Boyd Plowman back as senior vice president–chief financial officer, a position he had held for 14 years before leaving Fleetwood in 1987. His financial acumen and skills in lender relations have been invaluable during fiscal 2001.

• Chuck Wilkinson, who was promoted to senior vice president–Housing Group about 18 months ago, assumed the additional responsibility for FRC during the latter part of this fiscal year. This effectively joined the manufacturing and retail sides of our Housing business together, and we’re excited about what this means for our future.

• The entire senior management structure of the RV Group was changed last fall as a result of the disappointing results in that area. Carl Betcher, the new leader of the group, has extensive experience with Fleetwood. Carl, who was named senior vice president–RV Group last November, has been with us for 27 years and has worked in both of our core businesses. Others on the new management team are introduced in the RV section.

• Forrest Theobald was promoted to vice president, general counsel and secretary for Fleetwood in April 2001. Forrest has been an integral member of our legal staff for 26 years.

• Jack Darnall was appointed president of FRC this spring. He joined the retail company in 1998, after successful stints with two residential developers.

• A few positions were created or modified to provide more focus on some important areas. We now have a chief information officer for the first time, and Todd Inlander has already made great strides toward implementing some key strategic technology initiatives (read more). Dundee Kelbel has added the duties of strategic planning to his position as vice president–human resource development. Jim Smith was promoted to vice president–controller, a position that has not been filled for some time. And we hired Kathy Snyder to handle investor relations as well as other corporate communications initiatives.

We’re confident that these moves have already brought about positive changes in strategy and tactics, and that they help position us well for the future.

Another human resource matter we want to tell you about is our new compensation system. This is the first major change in our compensation structure in decades, and it has the potential to be a tremendous impetus for positive transformation in the Company. Although our former compensation program served Fleetwood well for a long time, we have been concerned about its extreme focus on short-term, quarterly results. We will continue to emphasize results through our bonus system, but we have refocused our associates’ incentives to better match the long-term goals of the Company. We strongly believe that the end result will be increased shareholder value.

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While we appreciated being a market and profitability leader in two growing industries — as we know all of our shareholders did — a certain complacency crept in. We've been reminded of our pride in providing the best value in affordable housing. As the new HUD secretary Mel Martinez said recently, “We believe that if you help a man or woman buy a home, you are helping to create a better citizen.” We've also rediscovered that the RV industry is fun — and it's most exciting (and profitable) when we introduce products with a lot of innovative features. When we lost sight of that, some enthusiasm was lost and we tended to develop products that were too homogeneous in look and product features.

Refocusing on our goals in both core businesses has shaped our investments in the future. We are doing a number of traditional things in new and exciting ways. Instead of telling you about these initiatives, however, we decided that it would be best to let our associates share their enthusiasm for the plans they have for Fleetwood. You'll find their stories throughout the rest of this report:

• Cheryl T. Lawson, Marketing Manager, RV Group

• Dave Russell, Director — Product Planning, Motor Homes/RV Group, and Dennis Ogawa, Vice President — Product Development, RV Group

• Judy Kiel, Quality Assurance Manager, Motor Homes/RV Group

• Wes Chancey, Vice President — Sales/Marketing/Product Design, Housing Group

• Donna Jamieson, Warranty and Customer Service Manager, Housing Group

• Ron Brewer, Vice President — Manufacturing and Engineering, Housing Group

• Todd L. Inlander, Vice President and Chief Information Officer

Overall, we have set our sights on a return to innovation, continued dedication to customer satisfaction and unwavering attention to the bottom line. We believe that this will once again align the goals of management, our customers and you, our shareholders.

We'd like to take this opportunity to thank our associates, dealers and suppliers, all of whom have been essential to our efforts to return to profitability. And special thanks to our shareholders for your patience and support. We expect that you will ultimately be rewarded for both.

Respectfully,

Chairman of the Board

President and Chief Executive Officer