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 October 26, 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 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 December 4, 2003
_________________________ _____________________________
Common stock, $1 par value 38,692,457 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 October 26, 2003 and the related condensed
consolidated statements of operations, changes in shareholders' equity, and
cash flows for the thirteen-week and twenty-six week periods ended October
26, 2003 and October 27, 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
November 24, 2003
FLEETWOOD ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
13 Weeks Ended 26 Weeks Ended
Oct. 26, Oct. 27, Oct. 26, Oct. 27,
2003 2002 2003 2002
Net sales:
Manufacturing $640,348 $602,303 $1,255,054 $1,174,042
Retail 69,731 69,919 127,335 142,435
Financial services 1,108 404 1,992 695
Less intercompany (36,444) (31,480) (63,507) (64,751)
------- --------- ----------- ---------
674,743 641,146 1,320,874 1,252,421
Cost of products sold 549,308 512,891 1,078,363 1,002,147
------- -------- --------- ----------
Gross profit 125,435 128,255 242,511 250,274
Operating expenses 108,681 111,969 211,722 224,616
Financial services expenses 1,479 1,179 2,893 1,370
------- ------- ------- --------
Operating income 15,275 15,107 27,896 24,288
Other income (expense):
Investment income 330 783 847 1,535
Interest expense (2,633) (2,739) (5,283) (5,429)
Other (29) 2,374 695 2,031
------ ------- ------- ------
(2,332) 418 (3,741) (1,863)
------ ------ ------ -----
Income before provision for
income taxes and
minority interest 12,943 15,525 24,155 22,425
Provision for income taxes (3,989) (5,848) (8,128) (9,222)
Minority interest in Fleetwood
Capital Trusts I, II and III,
net of income taxes (5,196) (5,076) (10,353) (10,122)
------- ------- ------- ------
Net income $3,758 $4,601 $5,674 $3,081
======= ======== ========= ========
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
Net earnings per
common share $.10 $.10 $.13 $.13 $.16 $.15 $.09 $.09
=== ==== ==== ==== ==== ==== ==== ===
Weighted average common
shares 36,124 37,116 35,911 36,005 36,030 36,868 35,802 35,863
======= ====== ====== ====== ====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
FLEETWOOD ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
October 26, April 27,
2003 2003
----------- ---------
Assets (Unaudited)
Cash $16,289 $31,515
Marketable investments available
for sale 60,350 38,261
Receivables 177,346 143,452
Inventories 241,294 240,521
Deferred tax benefits, net 58,488 58,488
Other current assets 16,513 18,998
-------- --------
Total current assets 570,280 531,235
Finance loans receivable, net 29,329 13,293
Property, plant and equipment, net 254,723 260,318
Deferred taxes, net 31,275 31,275
Cash value of Company-owned
life insurance, net 56,151 55,004
Goodwill 6,316 6,366
Other assets 30,893 27,075
-------- ---------
Total assets $978,967 $924,566
========= ==========
Liabilities and Shareholders' Equity
Accounts payable $83,721 $78,890
Employee compensation and benefits 74,272 70,006
Product warranty reserve 58,037 62,137
Retail flooring liability 16,747 15,357
Other short-term borrowings 26,949 16,054
Accrued minority interest distribution 31,983 25,249
Other current liabilities 75,243 80,631
-------- --------
Total current liabilities 366,952 348,324
Deferred compensation and
retirement benefits 58,705 58,196
Insurance reserves 31,492 30,344
Long-term debt 2,354 2,357
------- ------
Total liabilities 459,503 439,221
------- ------
Commitments and contingencies
Company-obligated optionally redeemable convertible
preferred securities of Fleetwood Capital Trusts I, II and III
holding solely convertible subordinated debentures
of the Company 374,993 374,377
------- ------
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 38,667,000
at October 26, 2003 and 35,935,000 at
April 27, 2003 38,667 35,935
Additional paid-in capital 272,865 250,175
Retained deficit (167,402) (173,076)
Accumulated other comprehensive
income (loss) 341 (2,066)
------- --------
144,471 110,968
-------- --------
$978,967 $924,566
======== ========
See accompanying notes to condensed consolidated financial statements.
FLEETWOOD ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
26 Weeks Ended
October 26, October 27,
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,674 $3,081
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation expense 11,764 12,712
Amortization of financing costs 2,811 2,313
Gain on sales of property,
plant and equipment (695) (2,031)
Issuance of stock in lieu of cash for
minority interest distribution -- 4,464
Changes in assets and liabilities:
Increase in receivables (33,894) (3,055)
Increase in inventories (773) (3,280)
Decrease in income tax receivable 290 23,666
Decrease in deferred
tax benefits -- 7,880
Increase in cash value of Company-owned
life insurance (1,147) (29)
Increase in other assets (3,680) (778)
Increase in accounts
payable 4,831 591
Increase in employee compensation
and benefits 4,775 6,525
Decrease in product warranty reserve (4,100) (2,200)
Increase in other
liabilities 2,494 5,698
------ ------
Net cash provided by (used in)
operating activities (11,650) 55,557
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investments
available for sale (363,989) (345,044)
Proceeds from sale of marketable
investments available for sale 341,931 308,268
Purchases of property, plant and
equipment, net (5,474) (3,138)
Finance loans receivable (16,036) (3,438)
------ -----
Net cash used in
investing activities (43,568) (43,352)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued 24,930 --
Increase (decrease) in retail flooring 1,390 (9,046)
Increase (decrease) in short-term
bank borrowings 10,895 (6,859)
Decrease in long-term debt (3) (6,237)
Proceeds from exercise of stock options 404 192
------- -------
Net cash provided by (used in)
financing activities 37,616 (21,950)
------ -------
Foreign currency translation adjustment 2,376 328
------ -------
Decrease in cash (15,226) (9,417)
Cash at beginning of period 31,515 26,083
------ -------
Cash at end of period $16,289 $16,666
======== =======
See accompanying notes to condensed consolidated financial statements.
FLEETWOOD ENTERPRISES, INC.
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 -- -- -- 5,674 -- 5,674
Other comprehensive income:
Foreign currency translation,
net of taxes of
$1,008 -- -- -- -- 2,376 2,376
Investment securities,
net of taxes
of $18 -- -- -- -- 31 31
------
Comprehensive income 8,081
------
Stock issued 2,674 2,674 22,256 -- -- 24,930
Stock options exercised (including related
tax benefits) 58 58 346 -- -- 404
Amortization of restricted
stock -- -- 88 -- -- 88
---- ---- ------ ----- ----- -------
Balance October 26,
2003 38,667 $38,667 $272,865 $(167,402) $341 $144,471
====== ======= ======== ======== ======= =========
See accompanying notes of condensed consolidated financial statements.
FLEETWOOD ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 26, 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 October 26, 2003, and the results of operations for the 13 and 26-
week periods ended October 26, 2003, and October 27, 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 and 26-week periods ended October 26, 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 ending
October 26, 2003 and October 27, 2002, is shown below (amounts in
thousands):
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
Oct. 26, Oct. 27, Oct. 26, Oct. 27,
2003 2002 2003 2002
------- ------- -------- -------
OPERATING REVENUES:
Manufactured housing -
Manufacturing $181,042 $195,615 $350,809 $386,954
Less intercompany (36,444) (31,480) (63,507) (64,751)
-------- -------- -------- --------
144,598 164,135 287,302 322,203
Retail 69,731 69,919 127,335 142,435
-------- ------- -------- --------
Total housing 214,329 234,054 414,637 464,638
Recreational vehicles 450,018 395,812 886,551 766,762
Supply operations 9,288 10,876 17,694 20,326
Financial services 1,108 404 1,992 695
-------- ------- -------- --------
$674,743 $641,146 $1,320,874 $1,252,421
======== ======== ========== ===========
OPERATING INCOME (LOSS):
Manufactured housing $ 6,162 $ 2,479 $ 8,021 $ 3,240
Housing - retail* (8,408) (7,805) (16,877) (17,569)
Recreational vehicles 16,468 17,026 31,393 34,689
Supply operations 401 1,016 1,141 2,029
Corporate and other 1,246 1,269 4,724 (1,558)
Financial services (371) (767) (901) (675)
Intercompany profit (223) 1,889 395 4,132
------- ----- ------- -------
$15,275 $15,107 $27,896 $24,288
======== ======== ======== =========
* Before deduction of interest expense on inventory floorplan
financing as follows:
$525 $506 $1,010 $1,150
======= ======= ======= ====
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 current and prior fiscal year, the effect of
preferred securities was anti-dilutive and was, therefore, not
considered in determining diluted earnings per share. 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
October 26, 2003 October 27, 2002
---------------- ----------------
Weighted Weighted
Average Average
Income Shares Income Shares
---- ------ ---- ------
Net income $3,758 36,124 $4,601 35,911
Effect of dilutive securities:
Stock options -- 992 -- 94
------ ------ ------ -------
Diluted net income $3,758 37,116 $4,601 36,005
====== ====== ======== ======
Anti-dilutive options and
warrants available 2,943 4,561
===== =====
Anti-dilutive convertible trust
preferred securities 21,631 21,631
====== ======
26 Weeks Ended 26 Weeks Ended
October 26, 2003 October 27, 2002
---------------- ----------------
Weighted Weighted
Average Average
Income Shares Income Shares
---- ------ ---- ------
Net income $5,674 36,030 $3,081 35,802
Effect of dilutive securities:
Stock options -- 838 -- 61
------ ------ ------ -------
Diluted net income $5,674 36,868 $3,081 35,863
====== ====== ======== ======
Anti-dilutive options and
warrants available 4,034 4,217
===== ======
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 and earnings 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
October 26, 2003 October 27, 2002
---------------- ----------------
Net income, as reported $3,758 $4,601
Deduct: Total stock-based employee compensation
expense determined under fair value-based
method for all awards, net of
related tax effects (924) (687)
------ -------
Pro forma net income $2,834 $3,914
====== ======
Basic and diluted income per share,
as reported $ .10 $ .13
====== ======
Basic and diluted income per share,
pro forma $ .08 $ .11
====== ======
26 Weeks Ended 26 Weeks Ended
October 26, 2003 October 27, 2002
---------------- ----------------
Net income, as reported $5,674 $3,081
Deduct: Total stock-based employee compensation
expense determined under fair value-based
method for all awards, net of
related tax effects (1,544) (1,212)
------ -------
Pro forma net income $4,130 $1,869
====== ======
Basic income per share,
as reported $ .16 $ .09
====== ======
Diluted income per share,
as reported $ .15 $ .09
====== ======
Basic and diluted income per
share, pro forma $ .11 $ .05
====== ======
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:
October 26, 2003 April 27, 2003
---------------- --------------
(Amounts in thousands)
Manufacturing inventory-
Raw materials $114,686 $105,971
Work in process 29,479 29,176
Finished goods 17,741 25,146
-------- --------
161,906 160,293
------- -------
Retail inventory-
Finished goods 96,722 97,957
Less manufacturing profit (17,334) (17,729
------- -------
79,388 80,228
------- -------
$241,294 $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 33,721
Settlements made during the period (37,821)
-------
Balance at October 26, 2003 $58,037
=======
7) Other Comprehensive Income
The difference between net income and total comprehensive income is
shown below (amounts in thousands):
13 Weeks Ended 26 Weeks Ended
Oct. 26, Oct. 27, Oct. 26, Oct. 27,
2003 2002 2003 2002
------- ------- -------- -------
Net income $3,758 $4,601 $5,674 $3,081
Foreign currency translation 1,431 54 2,376 328
Unrealized gain (loss) on
Investments 5 (81) 31 (92)
------ ------ ------ ------
Comprehensive income $5,194 $4,574 $8,081 $3,317
====== ====== ====== ======
8) New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 150 (FAS 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 $375
million that are now treated as quasi-equity securities. We previously
indicated that, with the adoption of FAS 150, we would be required to
reclassify these securities as long-term liabilities. However, recent
interpretive guidance relative to FAS 150 indicates that, if redemption
is not certain to occur, as in the Company's situation due to the
conversion feature, then the securities are not required to be
classified as a liability. Therefore, the adoption of the new standard
will have no impact on our financial reporting. Effective with this
report, the convertible trust preferred securities will be described as
"optionally redeemable" in place of "mandatorily redeemable."
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 $149 million for inventory
at manufactured housing dealers and $535 million for inventory at RV
dealers as of October 26, 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 higher
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 six months
of fiscal year 2004, we have repurchased $1.9 million of product
compared to $2.0 million for the same period in the prior year, with a
repurchase loss of $406,000 incurred this year compared to a repurchase
loss of $373,000 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 factory-built 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. 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 October 26, 2003, we operated 132 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 using historical experience and various other factors
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 description of our critical accounting policies, several
of which 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. the 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 from
either the homebuyer or the homebuyer's lender.
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 dealers and retail 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 an estimate for
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 considered all positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent financial performance. Current
accounting guidance indicates 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 or greater allowance is required, we would record a reduction or
increase 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
$149 million for inventory at manufactured housing dealers and $535 million
for inventory at RV dealers as of October 26, 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 higher 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 six months of fiscal year 2004, we
have repurchased $1.9 million of product compared to $2.0 million for the
same period in the prior year, with a repurchase loss of $406,000 incurred
this year compared to a repurchase loss of $373,000 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 and 26-week
periods ended October 26, 2003, and October 27, 2002.
13 Weeks Ended 26 Weeks Ended
October 26, 2003 October 26, 2003
---------------- ----------------
(Unaudited) (Unaudited)
(Amounts in thousands) Increase % Increase %
(Decrease) Change (Decrease) Change
-------- ------ -------- ------
Net sales $33,597 5.2% $68,453 5.5%
Cost of products sold 36,417 7.1 76,216 7.6
------- --- ------- ----
Gross profit (2,820) (2.2) (7,763) (3.1)
Selling expenses (5,284) (10.1) (12,453) (11.8)
General and administrative expenses 2,296 3.8 1,082 .9
------ ---- ------- ----
Operating income 168 1.1 3,608 14.9
Other expense 2,750 -- 1,878 100.8
----- ---- ------ -----
Income before provision for income
taxes and minority interest (2,582) (16.6) 1,730 7.7
Provision for income taxes (1,859) (31.8) (1,094) (11.9)
Minority interest in Fleetwood Capital
Trusts, net of income taxes 120 2.4 231 2.3
------ ---- ------ ----
Net income $(843) (18.3)% $2,593 84.2%
==== ==== ====== ====
Current Quarter Compared to Same Quarter Last Year
Consolidated Results:
We earned net income of $3.8 million or $.10 per diluted share in the October
quarter compared to earning $4.6 million or $.13 per diluted share a year ago.
Last year's net income included a $2.6 million gain from the sale of property.
The net income earned in the first and second quarters of fiscal year 2004
represents the first two quarters of consecutive profit since the third and
fourth quarters of fiscal year 2000.
Consolidated revenues rose 5 percent to $674.7 million in the second quarter
compared to $641.1 million in the prior year. A strong recreational vehicle
market and improved products drove a 14 percent sales increase in RVs, which
more than offset a 7 percent decline in manufactured housing revenues.
Income from operations was $15.3 million compared to $15.1 million in the
prior year. The manufacturing segment earned $23.0 million, excluding
intercompany profit, and housing retail lost $8.4 million. The RV Group
earned $16.5 million of income from operations compared to $17.0 million in
the prior year. The lower income was the result of gross margin deterioration
primarily in the towable products. The Motor Home Division's operating income
increased 22 percent to $14.7 million compared to $12.0 million in the prior
year mainly due to a 14 percent increase in sales. The Travel Trailer
Division earned $0.1 million of income in the second quarter compared to $3.6
million in the prior year. The $3.5 million decrease was mainly due to gross
profit erosion from increased raw material costs and incremental labor costs
associated with producing a relatively large number of new 2004 fifth-wheel
models that tend to have a higher material content and are more difficult to
manufacture. Folding trailers earned $1.6 million in the current quarter
compared to $1.4 million in the prior year despite a 19 percent decline in
shipments. The Housing Group earned $6.2 million from manufacturing
operations, before intercompany profit elimination, compared to $2.5 million
in the prior year. The improvement in profitability, despite a 7 percent
decline in sales to $181.0 million, was the result of an increase in gross
margin and a 38 percent decline in product warranty expenses.
Gross margin declined from 20.0 percent to 18.6 percent of sales mainly due
to increased raw material costs and incremental RV manufacturing costs
associated with the introduction of new products. Gross margin in the RV
segment decreased from 16.4 percent to 14.4 percent of sales in the current
year, mostly due to higher travel trailer prime costs resulting from raw
material increases and incremental costs related to the changeover to new
products. Gross margin for the manufactured housing segment improved from
22.0 percent to 23.1 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
slightly to 20.1 percent for the second quarter compared to 20.0 percent in
the prior year.
Operating expenses, which include selling, general and administrative
expenses, decreased $3.0 million or 3 percent in the second quarter, and
fell as a percentage of sales from 17.7 percent to 16.3 percent. The
decline from the prior year was primarily due to lower product warranty
expenses, which decreased $7.9 million or 24 percent and fell as a
percentage of sales from 5.0 percent to 3.6 percent in the current second
quarter. Housing Group direct and indirect warranty expenses fell by $6.0
million or 38 percent, mainly as a result of lower volume and cost-cutting
actions. Selling expenses increased $2.6 million and rose as a percentage
of sales from 3.1 percent to 3.4 percent for the current year, primarily due
to marketing expenses related to the launch of new products. General and
administrative expenses rose $2.3 million, but decreased as a percentage of
sales from 9.5 percent to 9.4 percent.
Other expense for the first quarter was $2.3 million compared to $0.4
million of income in the prior year. The prior year included a $2.6 million
gain from the sale of a travel trailer plant in California.
The effective tax rate was 30.8 percent in the second quarter compared to
37.7 percent one year ago. The current year's rate does not include a
federal provision because the Company has a net operating loss (NOL)
carryforward and has recorded a partial valuation allowance against the net
deferred tax asset. The relatively high rate for the current year
(considering there is no federal provision) was the result of the low level
of aggregate pre-tax income and the fact that the Company incurs a state tax
liability in several states but does not receive a tax benefit in other
states, such as Texas, where losses were the highest.
Recreational Vehicles:
Recreational vehicle sales rose 14 percent to $450.0 million compared to
$395.8 million for last year's October quarter. Travel trailer sales led
the group with a 24 percent increase to $144.6 million, compared to $117.0
million in the prior year, primarily due to an improving market, good
customer acceptance of 2004 model year products and a 61 percent increase in
deliveries of fifth-wheel travel trailers that have a higher average selling
price. Motor home sales improved by 14 percent to $273.6 million versus
$240.7 million in the prior year, driven by an increase in deliveries of
Class A diesel products that have a higher average selling price. Folding
trailer sales declined 17 percent from the prior year to $31.8 million as a
result of a weaker market in that segment.
The RV Group earned $16.5 million, which was mainly attributable to the
Motor Home Division. Motor home operating income increased 22 percent to
$14.7 million in the second quarter as a result of an increase in diesel
product sales and selling price increases. The Travel Trailer Division
generated operating income of $0.1 million in the current quarter, which was
$3.5 million lower than the prior year's income of $3.6 million, primarily
due to higher wood products cost and incremental manufacturing costs
incurred in the production of new products. Folding trailers earned $1.6
million income from operations compared to $1.4 million in the prior year.
Operating expenses for the RV Group were $311,000 higher than the prior
year, mainly due to an increase in products liability insurance, but fell
from 12.1 percent of sales to 10.7 percent in the current year.
Manufactured Housing:
Gross manufacturing revenues of $181.0 million were down 7 percent from the
prior year and included $36.4 million of intercompany sales to Company-owned
retail home centers. Manufacturing unit volume declined 17 percent to 5,509
homes, while the number of sections was off 15 percent from 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 adjusting for intercompany profit of $223,000 this
year and $1.9 million in the prior year, improved from $2.5 million to $6.2
million, mainly due to improved gross margin and lower product warranty
expense. Gross profit margin for the Housing Group rose from 22.0 percent
to 23.1 percent of sales, largely as a result of increased selling prices
that more than offset higher raw material costs along with reductions in
manufacturing overheads. Housing Group operating costs fell $4.8 million or
12 percent as a result of a 38 percent drop in product warranty costs.
Partially offsetting the warranty reduction was an increase in general and
administrative expenses stemming from a larger allocation of corporate
expenses this year and higher products liability insurance.
Retail Housing Operations:
Retail housing revenues from Fleetwood Retail Corp. (FRC) were down .3
percent in the second quarter at $69.7 million on a 6 percent decline in
unit sales due to difficult market conditions caused by restrictive
financing. The retail division incurred an operating loss of $8.4 million
for the current quarter compared to a loss of $7.8 million a year ago. The
operating loss was $0.6 million higher mainly due to an increase in
operating expenses, as sales and gross profit dollars were about the same as
the prior year. Interest expense on inventory financing increased 4 percent
from $506,000 to $525,000, while inventories were static at $79 million for
both periods. The retail housing segment was operating 132 stores at the
end of October this year versus 135 stores last year.
Fleetwood Retail Corp.
Key Operational Information
Quarter Ended*
Sept. 2003 Sept. 2002
---------- -----------
Number of retail stores
Beginning 133 136
New 3 --
Closed (2) (1)
Transferred -- --
---- ----
Ending 134 135
Average number of retail stores 134 135
Unit volume
Retail - new
Single-section 218 231
Multi-section 999 1,029
----- ------
Subtotal 1,217 1,260
Retail - pre-owned 172 210
----- -----
Total 1,389 1,470
===== =====
Average number of homes sold per store 10 11
Average sales price
New
Single-section $29,576 $26,406
Multi-section $59,949 $54,282
Pre-owned $16,840 $9,233
Average unit inventory per store at quarter end
New 18 18
Pre-owned 3 3
* The above statistics are as of FRC's first fiscal quarter end, which
is the last day in September. Unless noted otherwise, all other statistics
in this report related to FRC are as of Fleetwood Enterprises, Inc.'s
second fiscal quarter ended October 26, 2003.
Supply Operations:
The Supply Group contributed second quarter revenues of $9.3 million
compared to $10.9 million a year ago. Operating income decreased from $1.0
million in the prior year to $0.4 million in the current quarter due to the
lower sales.
Current Year-to-Date Compared to Same Period Last Year
Consolidated Results:
For the first six months of fiscal 2004, we earned net income of $5.7 million
or $.15 per diluted share compared to $3.1 million or $.09 per diluted share a
year ago. Last year's net income included a $2.6 million gain from the sale
of property. The improved results were mainly due to an increase in sales
and a decline in product warranty expenses.
Consolidated revenues rose 6 percent to $1.32 billion compared to $1.25
billion for last year's first half. A strong recreational vehicle market and
improved products drove a 16 percent sales increase in RVs, which more than
offset a 9 percent decline in manufactured housing revenues.
Income from operations was $27.9 million compared to $24.3 million in the
prior year. The manufacturing segment earned $40.6 million, excluding
intercompany profit, and housing retail lost $16.9 million. The RV Group
earned $31.4 million from operations in the current year compared to $34.7
million in the prior year. The 10 percent decline in income, even though
sales rose by 16 percent to $886.6 million, was the result of a deterioration
in gross margin from 16.4 percent to 14.2 percent of sales mainly due to
incremental manufacturing costs related to new product introductions. The
Motor Home Division's operating income increased 17 percent to $26.8 million
compared to $22.8 million in the prior year mainly due to a 16 percent
increase in sales. The Travel Trailer Division earned $4.0 million in the
first half of fiscal 2004 compared to $9.4 million in the prior year for the
same period. The $5.4 million decrease in income was mainly due to gross
profit erosion from increased raw material costs and incremental labor costs
associated with producing a relatively large number of new 2004 fifth-wheel
models that tend to have a higher material content and are more difficult to
manufacture. Folding trailers earned $0.7 million in the first six months
compared to $2.5 million in the prior year due to a 21 percent decline in
shipments as a result of soft market conditions. The Housing Group earned
$8.0 million from manufacturing operations, before intercompany profit
elimination, compared to $3.2 million in the prior year. The improvement in
profitability, despite a 9 percent decline in sales to $350.8 million, was the
result of an increase in gross margin and a 34 percent decline in product
warranty expenses.
Gross margin declined from 20.0 percent to 18.4 percent of sales mainly due
to rising raw material costs and incremental RV manufacturing costs
associated with the introduction of new products. Gross margin in the RV
segment decreased from 16.4 percent to 14.2 percent of sales in the current
year, mostly due to higher travel trailer prime costs resulting from wood
products raw material increases and incremental costs related to the
changeover of production to new products. Gross margin for the manufactured
housing segment improved from 21.7 percent to 23.0 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 20.3 percent for six months of the current
year compared to 19.7 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 $11.4 million or 5 percent in the first half of fiscal
2004, and fell as a percentage of sales from 18.0 percent to 16.3 percent.
The operating expense decline from the prior year was primarily due to lower
product warranty expenses, which decreased $11.4 million or 18 percent and
fell as a percentage of sales from 5.0 percent in the prior year to 3.9
percent. Housing Group direct and indirect warranty expenses fell by $11.2
million or 34 percent, mainly from lower volume and cost-cutting actions.
Selling expenses decreased $1.0 million and fell as a percentage of sales
from 3.4 percent to 3.1 percent for the current year. General and
administrative expenses rose $1.1 million, but decreased as a percentage of
sales from 9.6 percent to 9.2 percent.
Other expense for the first six months was $3.7 million compared to $1.9
million of income in the prior year. The prior year included a $2.6 million
gain from the sale of a plant in California.
The effective tax rate was 33.6 percent in the current year compared to 41.1
percent one year ago. The current year's rate does not include a federal
provision because the Company has a net operating loss (NOL) carryforward
and has recorded a partial valuation allowance against the net deferred tax
asset. The relatively high rate for the current year (considering there is
no federal provision) was the result of the low level of aggregate pre-tax
income and the fact that the Company incurs a state tax liability in several
states but does not receive a tax benefit in other states, such as Texas,
where losses were the highest.
Recreational Vehicles:
Recreational vehicle sales in the first six months of fiscal 2004 rose 16
percent to $886.6 million compared to $766.8 million for the same period in
the prior year. Travel trailer sales led the group with a 26 percent
increase to $301.4 million, compared to $238.8 million in the prior year,
primarily due to customer acceptance of 2004 model year products. Motor
home sales improved by 16 percent to $530.9 million versus $459.0 million in
the prior year, driven by an increase in deliveries of Class A diesel
products that have a higher average selling price. Folding trailer sales
declined by 21 percent from the prior year to $54.2 million as a result of a
weaker market for that segment.
The RV Group earned $31.4 million, which was mainly attributable to the
Motor Home Division. Motor home operating income increased 17 percent to
$26.8 million in the first half as a result of an increase in diesel product
sales. The Travel Trailer Division generated operating income of $4.0
million in the current year compared to $9.4 million in the prior year. The
58 percent drop in income was primarily due to gross margin erosion
resulting from higher raw material costs and incremental manufacturing costs
incurred in the production of new products. Folding trailers earned $0.7
million from operations compared to $2.5 million in the prior year.
Operating expenses for the RV Group were $3.8 million higher than the prior
year but fell from 11.9 percent of sales to 10.7 percent of sales.
Manufactured Housing:
Gross manufacturing revenues of $350.8 million fell 9 percent from the prior
year and included $63.5 million of intercompany sales to Company-owned
retail home centers. Manufacturing unit volume declined 17 percent to
10,881 homes, while the number of sections was off 16 percent from 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 adjusting for intercompany profit of $0.4 million
this year and $4.1 million in the prior year, improved 148 percent from $3.2
million to $8.0 million, mainly due to improved gross margin and lower
product warranty expense. Gross profit margin for the Housing Group rose
from 21.7 percent to 23.0 percent of sales, primarily as a result of
increased selling prices that more than offset higher raw material costs
along with reductions in manufacturing overheads. Housing Group operating
costs declined by $8.2 million or 10 percent as a result of a 34 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 and an increase in products liability
insurance rates this year.
Retail Housing Operations:
Retail housing revenues were $127.3 million in the first six months versus
$142.4 million in the prior year. The 11 percent decline in sales was due
to difficult market conditions caused by restrictive financing and
competition from the resale of repossessed homes. The retail division
incurred an operating loss of $16.9 million for the current year compared to
a loss of $17.6 million a year ago. The lower operating loss was mainly due
to an improvement in gross margin from 19.7 percent of sales to 20.3 percent
of sales for the current year. Interest expense on inventory financing
decreased by 12 percent from $1.1 million to $1.0 million, while inventories
remained static at $79 million for both periods.
Supply Operations:
The Supply Group revenues for the first half of fiscal 2004 were $17.7
million compared to $20.3 million a year ago. Operating income decreased
from $2.0 million in the prior year to $1.1 million in the current year 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 new products have been well received as
evidenced by the double-digit sales growth since introduction. However, due
to the breadth of change in terms of the number of models, amount of content
and resulting complexities, the impact of the new products on manufacturing
negatively affected the operating results in the second half of fiscal year
2003 and into the first half of fiscal 2004.
With the current low interest rates, continuing economic recovery and the
introduction of new products, we expect that our RV Group will achieve
improved operating results in fiscal 2004. 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 first half of fiscal year 2004.
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.
In October 2002, Conseco Finance Servicing Corp. (Conseco), 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 future from these accelerated
efforts to liquidate repossessed homes, thereby eventually reducing the
competition with new homes. In fact, there are indications the inventory of
foreclosed homes may be declining. 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 any other six-month period 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 the
retail finance and inventory situation improves.
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. The effects
of this action have been felt for some months; however, there has been a
recent easing of restrictions. In addition, a national lender has recently
begun providing manufactured housing retail financing. Depending on the
extent of the financing actually provided by this and other lenders, 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 manufactured housing industry
conditions could begin to moderate in future months.
For fiscal 2004, we expect to achieve profitability in the RV Group and the
manufacturing segment of housing, although we still expect to incur an
operating loss in our retail housing business. Historically, our third
fiscal quarter is seasonally slower, and accordingly, we expect to report a
loss for the quarter before returning to profitability in the fourth
quarter.
In November 2003, we announced that Charles A. Wilkinson, 62, formerly
executive vice president - chief operating officer, had departed from the
Company. There are no plans to fill this position, and the senior vice
presidents who lead the RV, Manufactured Housing and Supply Subsidiary
groups will now report directly to Edward B. Caudill, president and chief
executive officer. Over the past year we have added three senior vice
presidents to oversee RVs, manufactured housing and strategic planning and
marketing. In addition, we have recently added a Vice President of
Engineering to bolster our RV product development efforts. These additions
are an important part of our five-year business plan. We believe these
individuals' talent and leadership, when combined with that of Fleetwood's
seasoned management team, will assist our efforts to achieve the Company's
long-term strategic initiatives and to return to consistent profitability.
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 $11.7 million was
used in operating activities during the first half of fiscal 2004 compared
to cash generated of $55.6 million for the similar period one year ago. The
use of cash from operations resulted primarily from a $33.9 million increase
in receivables as a result of improved sales compared to the prior year.
Last year, the cash generated from operations was mainly attributable to a
$30.2 million refund of Federal taxes, arising from a carryback of losses to
prior periods. Late in fiscal October 2003, 2.7 million shares of common
stock were sold in a private placement resulting in cash proceeds of $24.9
million. As a result of this transaction and the above-mentioned changes,
cash and marketable investments rose $6.8 million from $69.8 million as of
April 27, 2003, to $76.6 million as of October 26, 2003.
Additional cash outlays in the first six months included $16.0 million in
finance loans receivable at our HomeOne finance subsidiary and $5.5 million
in net capital expenditures. In the same period of the prior year, the
Company had net capital expenditures of $3.1 million. Distributions of $6.0
million on the 6% convertible trust preferred securities were deferred in
the first half of this year, and $8.9 million in distributions on the 9.5%
issues were paid in cash this year, whereas $4.5 million was paid in cash
and a like amount paid in common stock for the two distributions in the
first half of fiscal year 2003.
At the end of the October 2003 quarter, short-term borrowings under our
secured syndicated credit facility, led by Bank of America, N.A., as
administrative agent, were $26.9 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 October quarter, the borrowing base totaled $153.7 million.
After consideration of the unused minimum requirement, collateral reserves
of $1.9 million, $45.6 million in standby letters of credit and the
outstanding borrowings, unused borrowing capacity was approximately $23.1
million.
We recently reached an agreement in principle, which has not yet been
executed, for a five-year capital lease of RV manufacturing equipment valued
at $8.6 million. The lease arrangement is collateralized by a secured
interest in the equipment and certain real estate.
The Company continues to negotiate a warehouse line for our HomeOne Credit
Corp. finance subsidiary, and we believe we will be able to announce a
transaction by the end of this calendar year.
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 1,367 1,329 38 -
Operating leases (1) 36,143 22,817 7,784 5,542
Purchase obligations (2) 9,441 9,441 - -
Other long-term liabilities:
Deferred compensation
and non-qualified
retirement plans 58,705 23,225 18,080 17,400
Insurance reserves 31,492 31,492
Company-obligated
optionally redeemable
convertible preferred
securities (3) 374,993 -- -- 347,993
-------- ------- ------- --------
Total $514,495 $88,985 $26,213 $399,297
======== ======= ======= ========
* Includes payments due from October 27, 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 optionally 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
2008. 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. On or after February 15, 2004,
we will have the right to redeem the 9.5% convertible trust preferred
securities at a premium of 106.333 percent, which then declines over
the next three years until it reaches 100 percent of par value.
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.
In the first quarter of fiscal year 2004, we entered into three limited
guarantees aggregating $1.6 million, to certain obligations of certain
retailers to floorplan lenders.
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 second 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 $437,000.
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 October 26, 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 October 26,
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 is
complying with the Court's order. On November 12, 2003, the Court heard
arguments on our motion to reconsider the August 18, 2003, order and
Coleman's motion for partial summary judgment. We are currently awaiting
the Court's decisions on those motions. Trial in this matter is likely to
be scheduled for January or February of 2004. 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 4. Submission of Matters to a Vote of Security Holders
At Fleetwood's Annual Meeting of Shareholders held on September 9, 2003, the
following four directors were elected to three-year terms on Fleetwood's
Board of Directors: Margaret S. Dano, Dr. James L. Doti, David S. Engelman
and Daniel D. Villanueva. The following directors continued in office after
the meeting, but were not elected at the meeting: Paul D. Borghesani, Loren
K. Carroll, Edward B. Caudill, J. Michael Hagan, Dr. Douglas M. Lawson, John
T. Montford, and Thomas B. Pitcher. Immediately following the meeting Glenn
F. Kummer retired as a director.
The shareholder votes on the elections were as follows:
For Withheld
--- --------
Margaret S. Dano 25,999,222 7,814,542
Dr. James L. Doti 25,787,332 8,026,432
David S. Engelman 26,156,683 7,657,081
Daniel D. Villanueva 26,156,228 7,657,536
In addition, the shareholders voted for a non-binding shareholder proposal
regarding the annual election of the entire Board of Directors. The
shareholder vote on the proposal was as follows:
For: 14,959,001
Against: 11,019,923
Abstain: 161,316
Non-Vote: 7,673,524
The total number of shares of Fleetwood Common stock outstanding as of July
14, 2003, the record date for the Annual Meeting, was 35,934,892.
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 July 30, 2003, we filed a Current Report on Form 8-K attaching a
transcript of the conference call from July 23, 2003 in which we had
discussed our results for the fiscal year ended April 27, 2003.
On July 31, 2003, we filed a Current Report on Form 8-K attaching a
news release reporting the sales results for our first fiscal quarter
ended July 27, 2003.
On September 4, 2003, we filed a Current Report on Form 8-K disclosing
that we had issued a news release reporting our financial results for
the first fiscal quarter July 27, 2003, and we also attached certain
supplemental information.
On September 10, 2003, we filed a Current Report on Form 8-K attaching
a transcript of the conference call from September 4, 2003, in which we
had discussed our results for the fiscal quarter ended July 27, 2003.
On October 21, 2003, we filed a Current Report on Form 8-K attaching a
press release announcing the completion of a $25 million equity
offering.
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
December 5, 2003
Exhibit 15.1
December 5, 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 November 24, 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
October 26, 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: December 5, 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: December 5, 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 October 26, 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: December 5, 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