SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2002 or
[ ] 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: 1-7444
OAKWOOD HOMES CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
North Carolina 56-0985879
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7800 McCloud Road, Greensboro, North Carolina 27409-9634
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(Address of Principal Executive Offices)
Post Office Box 27081, Greensboro, North Carolina 27425-7081
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(Mailing Address of Principal Executive Offices)
(336) 664-2400
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former
Fiscal Year, if Changed Since Last Report)
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 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 April 30, 2002.
Common Stock, Par Value $.50 Per Share ............. 9,529,691
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and disclosures
normally included in audited financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K.
2
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
Three months ended
March 31,
---------------------------
2002 2001
--------- ---------
Revenues
Net sales $ 205,081 $ 221,207
Financial services
Consumer finance, net of impairment and
valuation provisions 11,420 23,702
Insurance 7,348 9,410
--------- ---------
18,768 33,112
Other income 1,641 2,136
--------- ---------
Total revenues 225,490 256,455
--------- ---------
Costs and expenses
Cost of sales 154,948 179,027
Selling, general and administrative expenses 63,168 72,916
Financial services operating expenses
Consumer finance 13,392 10,276
Insurance 3,123 4,674
--------- ---------
16,515 14,950
Reversal of restructuring charges (2,071) --
Provision for losses on credit sales 25,007 2,250
Interest expense 9,863 13,219
--------- ---------
Total costs and expenses 267,430 282,362
--------- ---------
Loss before income taxes (41,940) (25,907)
Provision for income taxes (Note 14) (72,229) --
--------- ---------
Net income (loss) $ 30,289 $ (25,907)
========= =========
Net income (loss) per share
Basic $ 3.19 $ (2.75)
Diluted $ 3.16 $ (2.75)
Weighted average number of
common shares outstanding
Basic 9,493 9,421
Diluted 9,578 9,421
See accompanying notes to the consolidated financial statements.
3
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
Six months ended
March 31,
---------------------------
2002 2001
--------- ---------
Revenues
Net sales $ 434,060 $ 499,551
Financial services revenues
Consumer finance, net of impairment and
valuation provisions 34,670 24,286
Insurance 14,974 19,489
--------- ---------
49,644 43,775
Other income 3,790 4,483
--------- ---------
Total revenues 487,494 547,809
--------- ---------
Costs and expenses
Cost of sales 331,564 398,298
Selling, general and administrative expenses 127,772 153,099
Financial services operating expenses
Consumer finance 26,733 19,547
Insurance 6,172 7,734
--------- ---------
32,905 27,281
Reversal of restructuring charges (2,071) --
Provision for losses on credit sales 36,412 3,000
Interest expense 19,330 27,815
--------- ---------
Total costs and expenses 545,912 609,493
--------- ---------
Loss before income taxes and cumulative effect of
accounting change (58,418) (61,684)
Provision for income taxes (Note 14) (78,729) --
--------- ---------
Income (loss) before cumulative effect of accounting change 20,311 (61,684)
--------- ---------
Cumulative effect of accounting change, net of income taxes -- (14,590)
--------- ---------
Net income (loss) $ 20,311 $ (76,274)
========= =========
Income (loss) per share:
Income (loss) before cumulative effect of accounting change
Basic $ 2.14 $ (6.55)
Diluted $ 2.13 $ (6.55)
Net income (loss)
Basic $ 2.14 $ (8.10)
Diluted $ 2.13 $ (8.10)
Weighted average number of
common shares outstanding
Basic 9,478 9,411
Diluted 9,520 9,411
See accompanying notes to the consolidated financial statements.
4
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
Three months ended Six months ended
March 31, March 31,
------------------------- -----------------------
2002 2001 2002 2001
-------- -------- ------- --------
Net income (loss) $ 30,289 $(25,907) $20,311 $(76,274)
Unrealized gains (losses) on securities
available for sale, net of tax (928) 3,041 4,116 2,328
-------- -------- ------- --------
Comprehensive income (loss) $ 29,361 $(22,866) $24,427 $(73,946)
======== ======== ======= ========
See accompanying notes to the consolidated financial statements.
5
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands except share and per share data)
March 31, September 30,
2002 2001
--------- -------------
ASSETS
Cash and cash equivalents $ 25,892 $ 44,246
Loans and investments 169,366 199,403
Other receivables 188,063 124,807
Inventories
Manufactured homes 163,503 184,989
Work-in-process, materials and supplies 31,144 30,813
Land/homes under development 12,185 12,770
--------- ---------
206,832 228,572
Properties and facilities 200,135 208,798
Other assets 107,360 116,464
--------- ---------
$ 897,648 $ 922,290
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 41,000 $ 47,500
Notes and bonds payable 322,912 323,120
Accounts payable and accrued liabilities 209,863 250,658
Insurance reserves and unearned premiums 15,253 17,322
Deferred income taxes 6,169 6,169
Other long-term obligations 39,122 38,750
Commitments and contingencies (Note 10)
Shareholders' equity
Common stock, $.50 par value; 100,000,000
shares authorized; 9,529,000 and 9,528,000
shares issued and outstanding 4,765 4,764
Additional paid-in capital 199,804 199,761
Retained earnings 48,808 28,497
--------- ---------
253,377 233,022
Accumulated other comprehensive income 10,028 5,912
Unearned compensation (76) (163)
--------- ---------
263,329 238,771
--------- ---------
$ 897,648 $ 922,290
========= =========
See accompanying notes to the consolidated financial statements.
6
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
Six months
March 31,
---------------------------
2002 2001
--------- ---------
Operating activities
Net income (loss) $ 20,311 $ (76,274)
Adjustments to reconcile net income (loss) to cash provided (used)
by operating activities
Cumulative effect of accounting change -- 14,590
Depreciation and amortization 16,484 28,595
Deferred income taxes -- --
Provision for losses on credit sales, net of charge-offs 1,100 (2,231)
Gains on securities sold and loans sold or held for sale (3,318) (887)
Impairment and valuation provisions 1,114 10,088
Excess of cash received over REMIC residual income
recognized (income recognized over cash received) 2,148 (1,163)
Reversal of restructuring charges (2,071) --
Other (3,550) (3,600)
Changes in assets and liabilities
Other receivables (61,219) 13,573
Inventories 21,740 74,277
Deferred insurance policy acquisition costs 694 603
Other assets 516 (3,420)
Accounts payable and accrued liabilities (32,297) (41,617)
Insurance reserves and unearned premiums (2,069) (26,381)
Other long-term obligations (189) (2,153)
--------- ---------
Cash used by operations (40,606) (16,000)
Loans originated (354,372) (434,096)
Sale of loans 381,427 483,965
Principal receipts on loans 7,363 8,671
--------- ---------
Cash provided (used) by operating activities (6,188) 42,540
--------- ---------
Investing activities
Acquisition of properties and facilities (4,939) (6,560)
Other -- (1,112)
--------- ---------
Cash used by investing activities (4,939) (7,672)
--------- ---------
Financing activities
Net repayments on short-term credit facilities (6,500) (35,476)
Payments on notes and bonds (735) (3,385)
Proceeds from exercise of stock options 8 --
--------- ---------
Cash used by financing activities (7,227) (38,861)
--------- ---------
Net decrease in cash and cash equivalents (18,354) (3,993)
Cash and cash equivalents
Beginning of period 44,246 22,523
--------- ---------
End of period $ 25,892 $ 18,530
========= =========
See accompanying notes to the consolidated financial statements.
7
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. The unaudited consolidated financial statements reflect all
adjustments, which include only normal recurring adjustments, which
are, in the opinion of management, necessary for a fair statement of
the results of operations for the periods presented. These interim
statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's
latest Annual Report on Form 10-K. Results of operations for any
interim period are not necessarily indicative of results to be
expected for a full year.
Unless otherwise indicated, all references to annual periods refer to
fiscal years ended September 30.
2. Effective October 1, 2000 the Company adopted Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") and recorded a charge of $14.6 million, or $1.55 per share, as a
cumulative effect of an accounting change as of that date. The Company
has restated quarterly amounts previously reported for 2001.
3. The components of loans and investments are as follows:
March 31, September 30,
2002 2001
--------- -------------
(in thousands)
Loans held for sale $ 136,930 $ 163,085
Loans held for investment 3,174 2,974
Less: reserve for uncollectible loans receivable (4,395) (3,231)
--------- ---------
Total loans receivable 135,709 162,828
--------- ---------
Retained interests in REMIC securitizations
available for sale, exclusive of loan
servicing assets and liabilities, at fair value
Regular interests 1,769 7,619
Residual interests 31,888 28,956
--------- ---------
Total retained REMIC interests, at fair value
(amortized cost of $19,847 and $26,883) 33,657 36,575
--------- ---------
$ 169,366 $ 199,403
========= =========
4. The following table summarizes the transactions reflected in the
reserve for credit losses:
8
Three months ended Six months ended
March 31, March 31,
------------------------ ------------------------
2002 2001 2002 2001
-------- ------- -------- -------
(in thousands)
Balance at beginning of period $ 6,305 $ 3,197 $ 3,399 $ 3,983
Provision for losses on credit sales 25,007 2,250 36,412 3,000
Losses charged to the reserve (26,813) (3,695) (35,312) (5,231)
-------- ------- -------- -------
Balance at end of period $ 4,499 $ 1,752 $ 4,499 $ 1,752
======== ======= ======== =======
The provision for losses and losses charged to the reserve reflect
costs associated with the Company's loan assumption program, which is
more fully described in the "Consumer Finance Revenues" and "Liquidity
and Capital Resources" sections of Management's Discussion and
Analysis. The Company increasingly has made use of this program since
its inception in the second quarter of 2001.
The reserve for credit losses is reflected in the consolidated balance
sheet as follows:
March 31, September 30,
2002 2001
--------- -------------
(in thousands)
Reserve for uncollectible receivables
(included in loans and investments) $4,395 $3,231
Reserve for contingent liabilities
(included in accounts payable and accrued
liabilities) 104 168
------ ------
$4,499 $3,399
====== ======
5. The Company's retained interests in securitizations are set forth
below.
March 31, September 30,
2002 2001
--------- -------------
(in thousands)
Regular interests $ 1,769 $ 7,619
Residual interests 31,888 28,956
Net servicing liabilities 14,693 19,643
Guarantee liabilities 36,164 36,180
In October 2000 the Emerging Issues Task Force of the Financial
Accounting Standards Board (the "EITF") issued EITF 99-20,
"Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets," which
sets forth new accounting requirements for the recognition of
impairment on REMIC interests arising from securitizations. Under the
prior accounting rule, declines in the value of retained REMIC
interests were recognized in earnings when the present value of
estimated cash flows discounted at a risk-free rate using current
assumptions was less than the carrying value of the retained interest.
Under the new accounting rule, declines in value are recognized when
both of the following occur: the fair value of the retained interest
is less than its carrying value and
9
the timing and/or amount of cash expected to be received from the
retained interest has changed adversely from the previous valuation
which determined the carrying value of the retained interest. When
both of these circumstances occur, the carrying value of the retained
interest is reduced to its estimated fair value.
The Company adopted EITF 99-20 as required on April 1, 2001 and
accordingly recorded a cumulative effect of an accounting change of
$2.3 million as of that date.
The Company estimates the fair value of the retained interests by
determining the present value of the associated expected future cash
flows over the entire expected life of the loans using modeling
techniques that incorporate estimates of key assumptions, which
management believes market participants would use for similar
interests. Such assumptions include prepayment speeds, net credit
losses and interest rates used to discount cash flows.
The valuation of retained interests is affected not only by the
projected level of prepayments of principal and net credit losses, but
also by the projected timing of such prepayments and net credit
losses. Should such timing differ materially from the Company's
projections, it could have a material effect on the valuation of the
Company's retained interests and may result in impairment charges
being recorded.
The key economic assumptions used in measuring the initial retained
interests resulting from securitizations completed in the six months
ended March 31, 2002 were as follows:
March 31,
2002
---------
Approximate weighted average life (in years) 5.0
Estimated projected credit losses as a percentage
of original principal balance of loans 11.1%
Approximate weighted average interest rate used
to discount assumed residual cash flows 30.0%
Approximate assumed weighted average constant
prepayment rate as a percentage of unpaid
principal balance 15.8%
The following table sets forth certain data with respect to
securitized loans in which the Company retains an interest, and with
respect to the key economic assumptions used by the Company in
estimating the fair value of such retained interests:
March 31, September 30,
2002 2001
---------- -------------
(in thousands)
Aggregate unpaid principal balance of loans $4,909,490 $4,854,849
Weighted average interest rate of loans at period end 11.2% 11.0%
10
Approximate assumed weighted average constant
prepayment rate as a percentage of unpaid
principal balance of loans 16.7% 16.8%
Approximate remaining assumed nondiscounted
credit losses as a percentage of unpaid
principal balance of loans 12.1% 12.4%
Approximate weighted average interest rate used
to discount assumed residual cash flows 17.2% 19.2%
Interest rate used to discount assumed servicing asset
cash flows 15.0% 15.0%
Interest rate used to discount assumed servicing liability
cash flows 5.4% 4.6%
The foregoing data and assumptions may not be comparable because of
changes in pool demographics, such as average age of loans and the
interaction of assumptions. All data is based on weighted averages
using unpaid or original principal balances of loans.
The following table summarizes certain cash flows received from and
paid to the securitization trusts during the six months ended March
31, 2002:
March 31,
2002
--------------
(in thousands)
Proceeds from new securitizations $381,427
Servicing fees received 20,356
Net advances of principal and interest of trusts 6,155
Guarantee payments 578
Cash flow received on retained regular interests 736
Cash flow received on retained residual interests 5,202
Loans serviced by the Company and related loans past due 90 days or
more at March 31, 2002, are set forth below:
Total Amount
Principal 90 days or more
Amount Past Due
---------- ---------------
(in thousands)
Loans held for sale $ 134,590 $ 5,637
Securitized loans 4,909,490 410,689
11
6. The following table sets forth the activity by quarter in each
component of the Company's restructuring reserve (in thousands):
Severance Plant, sales
and other center and
termination office Asset
charges closings write-downs Total
-----------------------------------------------------------
Original provision $ 7,350 $ 7,384 $ 11,192 $ 25,926
Payments and balance sheet charges (1,707) (141) (11,192) (13,040)
-----------------------------------------------------------
Balance 9/30/99 5,643 7,243 -- 12,886
-----------------------------------------------------------
Payments and balance sheet charges (810) (2,750) -- (3,560)
-----------------------------------------------------------
Balance 12/31/99 4,833 4,493 -- 9,326
-----------------------------------------------------------
Payments and balance sheet charges (550) (1,183) -- (1,733)
Reversal of restructuring charges (2,912) (1,439) -- (4,351)
-----------------------------------------------------------
Balance 3/31/00 1,371 1,871 -- 3,242
-----------------------------------------------------------
Payments and balance sheet charges (81) (685) 378 (388)
Reversal of restructuring charges (900) (2) (378) (1,280)
-----------------------------------------------------------
Balance 6/30/00 390 1,184 -- 1,574
-----------------------------------------------------------
Additional provision 1,974 1,780 15 3,769
Payments and balance sheet charges (1,505) (1,277) (15) (2,797)
Reversal of restructuring charges (100) (635) -- (735)
-----------------------------------------------------------
Balance 9/30/00 759 1,052 -- 1,811
-----------------------------------------------------------
Payments and balance sheet charges (519) (109) -- (628)
-----------------------------------------------------------
Balance 12/31/00 240 943 -- 1,183
-----------------------------------------------------------
Payments and balance sheet charges (114) (31) -- (145)
-----------------------------------------------------------
Balance 3/31/01 126 912 -- 1,038
-----------------------------------------------------------
Payments and balance sheet charges (55) (33) -- (88)
-----------------------------------------------------------
Balance 6/30/01 71 879 -- 950
-----------------------------------------------------------
Additional provision 681 4,702 12,460 17,843
Payments and balance sheet charges (41) (1,339) (12,460) (13,840)
Reversal of 1999 restructuring charges (30) (45) -- (75)
-----------------------------------------------------------
Balance 9/30/01 681 4,197 -- 4,878
-----------------------------------------------------------
Payments and balance sheet charges (145) (743) -- (888)
-----------------------------------------------------------
Balance 12/31/01 536 3,454 -- 3,990
-----------------------------------------------------------
Payments and balance sheet charges (50) (593) 412 (231)
Reversal of 2001 restructuring charges (486) (1,173) (412) (2,071)
-----------------------------------------------------------
Balance 3/31/02 $ -- $ 1,688 $ -- $ 1,688
-----------------------------------------------------------
12
During the fourth quarter of 1999 the Company recorded restructuring
charges of approximately $25.9 million, related primarily to the
closing of four manufacturing lines, the temporary idling of five
others and the closing of approximately 40 sales centers. The charges
in 1999 included severance and other termination costs related to
approximately 2,150 employees primarily in manufacturing, retail and
finance operations, costs associated with closing plants and sales
centers, and asset writedowns.
During 2000 the Company reversed into income $6.4 million of charges
initially recorded in 1999. Approximately $2.9 million of the reversal
related to the Company's legal determination that it was not required
to pay severance amounts to certain terminated employees under the
Worker Adjustment and Retraining Notification Act ("WARN"). Upon the
expiration of a six-month waiting period specified by WARN and the
Company's final calculation of the number of affected employees in
relation to its workforce at the time of the restructuring
announcement, the Company determined that it was not required to pay
amounts previously accrued. During 2000 the Company also reevaluated
its restructuring plans and determined that the losses associated with
the closing of retail sales centers, the idling or closing of
manufacturing plants, the disposition of certain assets and legal
costs were less than anticipated and $3.5 million of the charges were
reversed. During 2000 the Company recorded an additional $3.8 million
charge, primarily related to severance costs associated with a
reduction in headcount of 250 people primarily in the corporate,
finance and manufacturing operations area, and the closure of offices.
During the fourth quarter of 2001 the Company recorded restructuring
charges of approximately $17.8 million, primarily related to the
closing of approximately 90 underperforming retail sales centers, a
majority of which were located in the South, in areas where the
Company has experienced poor operating results as well as poor credit
performance. At March 31, 2002 these restructuring activities were
substantially complete.
Market conditions, particularly in the South where the majority of
store closings occurred, remained fluid during the six months ended
March 31, 2002. While the Company did close the originally identified
approximately 90 stores, these changing market conditions caused the
Company to revise its initial determination of the number of stores to
be either sold to independent dealers, converted to centers that
exclusively market repossessed inventory or closed. The Company
originally estimated that the disposition of the stores would be
approximately evenly divided between those sold to independent dealers,
converted to centers exclusively marketing repossessed inventory or
closed. Ultimately, approximately 27 stores were sold, 23 were
converted and 40 were closed. As a result of the change in the ultimate
disposition of certain of the stores, as well as changes in the
original estimate of costs to exit the stores, the Company reversed
into income in the quarter ended March 31, 2002 $2.1 million of
restructuring charges originally recorded in the fourth quarter of
fiscal 2001.
Approximately $20,000 of the $1.7 million remaining in the
restructuring reserve at March 31, 2002 related to provisions
established prior to the fourth quarter of 2001. The Company is
contractually obligated to pay the amounts remaining in the reserve at
March 31, 2002.
During the execution of the Company's restructuring plans,
approximately 2,800 employees were affected, of which 2,150 and 250
were terminated during the fourth quarters of 1999 and
13
2000, respectively. The Company terminated approximately 400 employees
as part of its fourth quarter 2001 plan.
7. The following table displays the derivation of the weighted average
number of shares outstanding used in the computation of basic and
diluted earnings per share ("EPS"):
Three months ended Six months ended
March 31, March 31,
----------------------- -----------------------
2002 2001 2002 2001
------- -------- ------- --------
(in thousands, except per share data)
Numerator in earnings (loss) per share calculation:
Income (loss) before cumulative effect of accounting
change $30,289 $(25,907) $20,311 $(61,684)
Net income (loss) $30,289 $(25,907) $20,311 $(76,274)
Denominator in earnings (loss) per share calculation:
Weighted average number of
common shares outstanding 9,493 9,421 9,478 9,411
Unearned shares -- -- -- --
------- -------- ------- --------
Denominator for basic EPS 9,493 9,421 9,478 9,411
Dilutive effect of stock options and
restricted shares computed using
the treasury stock method 85 -- 42 --
------- -------- ------- --------
Denominator for diluted EPS 9,578 9,421 9,520 9,411
======= ======== ======= ========
Income (loss) per share:
Income (loss) before cumulative effect of accounting
change
Basic $ 3.19 $ (2.75) $ 2.14 $ (6.55)
======= ======== ======= ========
Diluted $ 3.16 $ (2.75) $ 2.13 $ (6.55)
======= ======== ======= ========
Net income (loss)
Basic $ 3.19 $ (2.75) $ 2.14 $ (8.10)
======= ======== ======= ========
Diluted $ 3.16 $ (2.75) $ 2.13 $ (8.10)
======= ======== ======= ========
Stock options to purchase 563,572 and 769,819 shares of common stock,
1,922,963 and 1,906,888 shares which may be acquired pursuant to a
stock warrant, and 3,202 and 107,900 unearned restricted shares at
March 31, 2002 and 2001, respectively, were not included in the
computation of diluted earnings per share because their inclusion
would have been antidilutive.
8. During the first quarter of fiscal 2002, the Company formed a
wholly-owned qualifying special purpose subsidiary, Oakwood Advance
Receivables Company, LLC ("OAR"), to provide up to $50 million of
revolving funding for qualifying servicing advance receivables. The
Company sells qualifying servicing advance receivables to OAR, which
funds its purchases of receivables using the proceeds of debt
obligations issued by OAR to third party investors.
14
OAR collects the receivables it purchases from the Company, and such
proceeds are available to purchase additional receivables from the
Company through August 2003. At March 31, 2002, OAR had approximately
$38.8 million of cash available to purchase additional qualifying
servicing advance receivables from the Company. Conveyances of
receivables to OAR are accounted for as sales under Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities - A
Replacement of FASB Statement No. 125" ("FAS 140").
9. The estimated principal payments under notes and bonds payable,
assuming the reset debentures are fully redeemed by the holders on the
June 1, 2002 redemption date, are $16.5 million, $0.9 million, $125.4
million, $0.8 million, $0.9 million for the 12 months ended March 31,
2003, 2004, 2005, 2006, and 2007, respectively, and the balance is
payable thereafter.
10. The Company is subject to legal proceedings and claims that have
arisen in the ordinary course of its business and have not been
finally adjudicated. In management's opinion, the ultimate resolution
of these matters is not expected to have a material adverse effect on
the Company's results of operations, financial condition or cash
flows.
The Company is contingently liable as guarantor of loans sold to third
parties on a recourse basis. The amount of this contingent liability
was approximately $16 million at March 31, 2002. The Company is also
contingently liable as guarantor on subordinated securities issued by
REMIC trusts in the aggregate principal amount of $260 million at March
31, 2002. Such guarantees obligate the Company to make payments in
amounts equal to the excess, if any, of principal and interest
distributions payable on the guaranteed securities over the cash
available for such purpose in the underlying securitization trusts.
Such payments may arise as a result of credit losses on the underlying
trusts or because of structural provisions of the guaranteed securities
which give rise to guarantee payments unrelated to loan pool
performance. The Company is also contingently liable under terms of
repurchase agreements with financial institutions providing inventory
financing for retailers of their products. These arrangements, which
are customary in the industry, provide for the repurchase of products
sold to retailers in the event of default on payments by the retailer.
The risk of loss under these agreements is spread over numerous
retailers and is further reduced by the resale value of repurchased
homes. The Company's estimated potential obligations under such
repurchase agreements approximated $108 million at March 31, 2002.
Losses under these repurchase agreements have not been significant.
11. The Company operates in four major business segments: retail,
manufacturing, consumer finance and insurance. The following table
summarizes information with respect to the Company's business
segments:
15
Three months ended Six months ended
March 31, March 31,
--------------------------- ---------------------------
(in thousands) 2002 2001 2002 2001
--------- --------- --------- ---------
Revenues
Retail $ 116,486 $ 146,589 $ 249,961 $ 344,503
Manufacturing 152,054 146,986 306,703 303,334
Consumer finance 11,420 23,702 34,670 24,286
Insurance 10,391 11,835 21,281 24,602
Eliminations/other (64,861) (72,657) (125,121) (148,916)
--------- --------- --------- ---------
$ 225,490 $ 256,455 $ 487,494 $ 547,809
========= ========= ========= =========
Income (loss) before interest expense,
investment income and income taxes
Retail $ (13,000) $ (25,928) $ (24,050) $ (43,741)
Manufacturing 9,358 2,584 14,187 4,418
Consumer finance (26,979) 11,176 (28,475) 1,739
Insurance 4,224 4,736 8,801 11,755
Eliminations/other (5,705) (5,528) (9,660) (8,448)
--------- --------- --------- ---------
(32,102) (12,960) (39,197) (34,277)
Interest expense (9,863) (13,219) (19,330) (27,815)
Investment income 25 272 109 408
--------- --------- --------- ---------
Income (loss) before income taxes
and cumulative effect of accounting
change $ (41,940) $ (25,907) $ (58,418) $ (61,684)
========= ========= ========= =========
Depreciation and amortization
Retail $ 2,429 $ 2,732 $ 4,726 $ 6,032
Manufacturing 3,849 4,317 7,681 8,639
Consumer finance 337 2,622 1,039 6,033
Eliminations/other 1,523 3,510 3,038 7,891
--------- --------- --------- ---------
$ 8,138 $ 13,181 $ 16,484 $ 28,595
========= ========= ========= =========
Capital expenditures
Retail $ 1,269 $ 391 $ 1,289 $ 1,211
Manufacturing 2,048 872 2,453 1,737
Consumer finance 393 922 475 1,866
Eliminations/other 559 1,153 722 1,746
--------- --------- --------- ---------
$ 4,269 $ 3,338 $ 4,939 $ 6,560
========= ========= ========= =========
March 31, September 30,
2002 2001
--------- -------------
Identifiable assets
Retail $ 413,949 $ 478,976
Manufacturing 247,372 258,498
Consumer finance 303,438 384,244
Insurance 109,152 123,405
Eliminations/other (176,263) (322,833)
--------- ---------
$ 897,648 $ 922,290
========= =========
12. In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("FAS 141") and Statement No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 141 mandates the purchase method
of accounting be used for all business combinations initiated after
June 30, 2001 and
16
establishes specific criteria for the recognition of intangible assets
separately from goodwill. FAS 142 addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. The
most significant changes made by FAS 142 are that goodwill and
indefinite-lived intangible assets will no longer be amortized and
will be tested for impairment at least annually. The Company is
required to adopt FAS 142 at the beginning of 2003. The Company has
not yet determined the impact that this statement could have on its
financial position or results of operations. However, the application
of the non-amortization provisions of FAS 142 would be expected to
result in a decrease of pre-tax loss in 2002. For the six months ended
March 31, 2002 amortization of intangible assets was approximately
$2.4 million. At March 31, 2002 goodwill and other intangible assets
were $50.1 million net of accumulated amortization.
13. On June 18, 2001, the Company effected a one-for-five reverse stock
split. All shares and per share amounts have been adjusted
retroactively to give effect to the reverse split.
14. For the six months ending March 31, 2002 and 2001 the Company reported
net income of $20.3 million and net losses of $76.3 million,
respectively.
Net income for the six months ended March 31, 2002 reflects an income
tax benefit of $78.7 million. Approximately $6.5 million resulted from
the completion of an examination of the Company's federal income tax
returns for the fiscal years 1997 through 2000 and the favorable
resolution of certain income tax contingencies for which the Company
had previously recorded a provision. The remaining $72.2 million income
tax benefit resulted from the enactment of the Job Creation and Worker
Assistance Act of 2002 ("the Act") on March 8, 2002. The Act extended
the period to which net operating losses could be carried back from two
years to five years, giving the Company the opportunity to file for
refunds of income taxes paid relating to the 1996 and 1997 tax years.
After filing its 2001 income tax return, the Company received in April
2002 a cash refund of $46.6 million. The remaining tax benefit from the
extended carryback period in the form of a cash refund of approximately
$26 million is expected to be realized after the Company files its
income tax return for the year ending September 30, 2002.
The operating results reflect business conditions within the
manufactured housing industry. The Company continues to operate in a
highly competitive environment caused principally by the industry's
aggressive expansion in the retail channel, excessive amounts of
finished goods inventory and a general reduction in the availability
of financing at both the wholesale and retail levels. A decline in
overall economic conditions has also contributed to a difficult
environment and resulted in higher loan delinquencies, repossessions,
and loan assumptions. The industry estimates that shipments of
manufactured homes from production facilities declined by
approximately 28% and 22% during calendar years 2000 and 2001,
respectively.
The Company began to experience the effect of these cyclical industry
factors during late fiscal 1999 and took steps to begin to lower
inventory levels, reduce operating expenses and maximize cash flow.
These efforts have continued through the first six months of fiscal
2002 as the Company maintained its focus on areas considered to be
within its span of control, principally cost control and inventory
management. Many of the actions taken, most notably plant and sales
center closings, curtailed production schedules and competitive
pricing to effect a $236.8 million reduction in inventories since
September 1999, negatively affected the Company's reported earnings
for fiscal years 2000 and 2001 and the first six months of fiscal
2002. Management believes that, unless business conditions improve,
the Company is likely to incur a loss in fiscal 2002; however, it
plans to continue to manage operations to generate positive cash flow.
The Company believes that its operating cash flow, coupled with its
continued access to the asset-backed securities market and borrowings
under its credit facilities, which are described below, will provide
sufficient liquidity to meet obligations,
17
including potential repayment of the 8% reset debentures, and execute
its business plan during the remainder of fiscal 2002.
In the event of further deterioration in market conditions, the
Company would take additional steps to protect liquidity and manage
cash flow. Among other things, these actions might include further
production curtailments, closing of additional retail sales centers or
the selective sale of operational assets.
The Company operates its plants to support its captive retail sales
centers and its independent retailer base. The Company has, and will
continue to adjust production capacity in line with demand, producing
at a rate that will allow the Company to lower its inventories. At
March 31, 2002, the Company was operating approximately 20 plants,
though many were operating at reduced production schedules. Should
market conditions worsen from those anticipated, the Company will
continue to curtail production by lowering production speed or idling
additional production facilities.
The Company's primary sources of liquidity include cash generated by
operations, borrowing availability under its three credit facilities
and its securitization program through which loans are sold into the
asset-backed securities market. During 2002, the Company also received
an income tax refund and expects to receive an additional refund in
2003 as described earlier.
During 2001 the Company generated $47.5 million of cash from operating
activities, principally as a result of a $94.4 million reduction in
its inventories and the sale of substantially all subordinated
asset-backed securities rated below BBB previously retained by the
Company from prior securitizations. The sale of these subordinated
securities was finalized during the fourth quarter of 2001 and
generated $72.9 million of cash.
Subsequent to the sale of the retained subordinated securities, the
Company retired its $75 million revolving credit facility, which was
scheduled to mature in October 2001. In connection with the
retirement, approximately $9.0 million of cash held by the lenders in
a cash collateral account was returned to the Company. The net cash
proceeds from the sale of the retained subordinated securities and the
release of the cash collateral more than offset the $75 million
previously available under the revolving credit facility.
During the first six months of fiscal 2002, the Company's operating
activities used $6.2 million of cash principally as a result of the
timing of its asset-backed securitizations and the increased expenses
associated with its loan assumption program which are reflected in the
provision for credit losses.
The Company's liquidity position continues to be adversely affected by
defaulted loans in the Company's servicing portfolio, which have
negatively affected cash flow, through both reduced residual cash flow
from retained securitization interests and as a result of the costs
borne by the Company on the loan assumption program. The loan
assumption program is an alternative means to repossession in dealing
with troubled loans as more fully described in the "Consumer Finance
Revenues" section. In addition, delinquency on loans, including those
in repossession and those pending loan assumption, adversely affect
liquidity because the Company is obligated, in most cases, to make
servicing advances of delinquent mortgage payments.
The Company anticipates that its liquidity will also be negatively
affected by increasing insurance costs and credit support requirements
associated with its general corporate insurance program. These expected
higher rates and deductibles reflect what management believes is an
increasingly competitive insurance market. Management also expects that
the Company's liquidity position
18
will continue to be negatively affected by its insurers' increased
requirements for letters of credit, surety bonds or other similar forms
of collateral.
The Company currently has in place three credit facilities that it
believes are adequate to meet liquidity needs during fiscal 2002.
During the second quarter of 2001, a newly formed, special purpose
entity of the Company entered into a three-year, $200 million loan
purchase facility with a financial institution that provides for
funding of up to 81% of qualifying loan principal balances held for
sale. The new facility replaced the Company's $250 million facility
with a commercial paper issuer, which was scheduled to expire in
October 2001. Under the new facility, the Company issued to a sister
company of the financial institution a warrant valued at $11.0 million
to acquire approximately 1.9 million shares of the Company's common
stock with an exercise price of approximately $9.76 per share. The
warrant, which is immediately exercisable, expires in February 2009.
During the first quarter of fiscal 2002, the Company formed a
wholly-owned qualifying special purpose subsidiary, Oakwood Advance
Receivables Company, LLC ("OAR"), to provide up to $50 million of
revolving funding for qualifying servicing advance receivables. The
Company sells qualifying servicing advance receivables to OAR, which
funds its purchases of receivables using the proceeds of debt
obligations issued by OAR to third party investors. OAR collects the
receivables it purchases from the Company, and such proceeds are
available to purchase additional receivables from the Company through
August 2003. At March 31, 2002, OAR had approximately $38.8 million of
cash available to purchase additional qualifying servicing advance
receivables from the Company. Conveyances of receivables to OAR are
accounted for as sales under FAS 140.
During the second quarter of fiscal 2002, the Company closed a new $65
million revolving credit facility. The facility matures in January
2007 and is collateralized by substantially all assets of the Company
excluding raw materials inventory and loans held for sale. The primary
purposes of the facility are to support outstanding letters of credit
of approximately $44 million and to provide additional cash borrowing
capacity. The completion of this facility also freed up approximately
$12 million of cash which was used to secure letters of credit. The
agreement contains financial covenants which, among other things,
specify minimum levels of tangible net worth and earnings before
interest, taxes and depreciation and amortization, and limit capital
expenditures. The Company is in compliance with all such covenants.
Borrowings outstanding under the facility will bear interest at the
greater of prime plus 1.50% or 7%.
The Company continues to generate liquidity through its securitization
program. The retail financing of sales of the Company's products is an
integral part of the Company's integration strategy. Such financing
consumes substantial amounts of capital, which the Company has
obtained principally by regularly securitizing such loans through the
asset-backed securities market. Should the Company's ability to access
the asset-backed securities market become impaired, the Company would
be required to seek additional sources of funding for its finance
business. Such sources might include, but would not be limited to, the
sale of whole loans to unrelated third parties and the increased
utilization of FHA financing. The Company's inability to find
alternative sources of funding could have an adverse impact on the
Company's liquidity and operations.
19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CRITICAL ACCOUNTING POLICIES
The Company has chosen accounting policies that it believes are appropriate to
accurately and fairly report its results of operations and financial position,
and it applies those accounting policies in a consistent manner. The Company's
significant accounting policies are summarized in Note 1 to the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended September 30, 2001.
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires that the
Company's management make estimates and assumptions that may affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates
and assumptions are based on historical and other factors believed to be
reasonable under the circumstances. The Company evaluates these estimates and
assumptions on an ongoing basis.
The Company believes that the following accounting policies are the most
critical because they involve the most significant judgments and estimates used
in preparation of the consolidated financial statements.
Loan securitization
The Company finances its lending activities primarily by securitizing the loans
it originates using Real Estate Mortgage Investment Conduits ("REMICs") or, for
certain FHA-insured loans, using collateralized mortgage obligations issued
under authority granted to the Company by the Government National Mortgage
Association ("GNMA").
The Company allocates the sum of its basis in the loans conveyed to each REMIC
and the costs of forming the REMIC among the REMIC interests retained and the
REMIC interests sold to investors based upon the relative estimated fair values
of such interests.
The Company estimates the fair value of retained REMIC interests, including
regular and residual interests and servicing contracts, as well as guarantee
liabilities, based, in part, upon net credit loss, discount rate and prepayment
assumptions which management believes market participants would use for similar
instruments.
In accordance with EITF 99-20, income on retained REMIC regular and residual
interests is recorded using the level yield method over the period such
interests are outstanding. The rate of voluntary prepayments and the amount and
timing of credit losses affect the Company's yield on retained REMIC regular and
residual interests and the fair value of such interests and of servicing
contracts and guarantee liabilities in periods subsequent to the securitization;
the actual rate of voluntary prepayments and credit losses typically varies over
the life of each transaction and from transaction to transaction. If over time
the Company's prepayment and credit loss experience is more favorable than that
assumed, the Company's yield on its REMIC residual interests will be enhanced.
If experience is worse than assumed, then impairment charges could result. The
yield to maturity of regular REMIC interests may be influenced by prepayment
rates and credit losses, but is less likely to be influenced by such factors
because cash distributions on regular REMIC interests are senior to
distributions on residual REMIC interests.
20
REMIC residual and regular interests retained by the Company following
securitization are considered available for sale and are carried at their
estimated fair value. The Company has no securities held for trading or
investment purposes.
Declines in the value of retained interests are recognized when the fair value
of the retained interest is less than its carrying value and/or the amount of
cash expected to be received from the retained interest has changed adversely
from the previous valuation which determined the carrying value of the retained
interest. When both these circumstances occur, the carrying value of the
retained interest is reduced to its estimated fair value.
Servicing contracts and fees
Servicing fee income is recognized as earned, net of amortization of servicing
assets and liabilities, which are amortized in proportion to and over the
period of estimated net servicing income. If the estimated fair value of a
servicing contract is less than its carrying value, the Company records a
valuation allowance by a charge to earnings to reduce the carrying value of the
contract to its estimated fair value. Valuation allowances may be reversed to
earnings upon the recovery of a contract's fair value. Such recoveries are only
recognized after sustained performance of the pool has been demonstrated.
Guarantee liabilities
The Company estimates the fair value of guarantee liabilities as the greater of
the estimated price differential between guaranteed and substantially similar
unguaranteed securities offered for sale by the Company and the present value
of payments, if any, estimated to be made as a result of such guarantees.
Guarantee liabilities are amortized to income over the period during which the
guarantee is outstanding. Amortization is commenced only upon a demonstrated
history of pool performance (generally after two years).
If the present value of any estimated guarantee payments exceeds the amount
recorded with respect to such guarantee, the Company records an impairment
charge to increase the guarantee liability to such present value.
Loans held for sale or investment
Loans held for sale are carried at the lower of cost or market. Loans held for
investment are carried at their outstanding principal amounts, less unamortized
discounts and plus unamortized premiums.
Reserve for credit losses
The Company maintains reserves for estimated credit losses on loans held for
investment, on loans warehoused prior to securitization and on loans sold to
third parties with full or limited recourse. The Company provides for losses in
amounts necessary to maintain the reserves at amounts the Company believes are
sufficient to provide for probable losses based upon the Company's historical
loss experience, current economic conditions and an assessment of current
portfolio performance measures.
Insurance underwriting
The Company has a captive reinsurance underwriting subsidiary, domiciled in
Bermuda, for property and casualty and credit life insurance and service
contract business. Premiums from
21
reinsured insurance policies are deferred and recognized as revenue over the
term of the contracts, generally ranging from one to five years. Claims
expenses are recorded as insured events occur. Policy acquisition costs, which
consist principally of sales commissions and ceding fees, are deferred and
amortized over the terms of the contracts.
The Company estimates liabilities for reported unpaid insurance claims, which
are reflected at undiscounted amounts, based upon reports from adjusters with
respect to adjusted claims and based on historical average costs per claim for
similar claims with respect to unadjusted claims. Adjustment expenses are
accrued based on contractual rates with the ceding company. The ceding company,
using a development factor that reflects historical average costs per claim and
historical reporting lag trends, estimates liabilities for claims incurred but
not reported. The Company does not consider anticipated investment income in
determining whether premium deficiencies exist. The Company accounts for
catastrophe reinsurance ceded in accordance with Emerging Issues Task Force
Issue No. 93-6, "Accounting for Multi-Year Retrospectively Rated Contracts by
Ceding and Assuming Enterprises."
Income taxes
The Company accounts for deferred income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are based on the
temporary differences between the financial reporting basis and tax basis of
the Company's assets and liabilities at enacted tax rates expected to be in
effect when such amounts are realized or settled.
Valuation allowances are provided against assets if it is anticipated that it
is more likely than not that some or all of a deferred tax asset may not be
realized.
RESULTS OF OPERATIONS
Three months ended March 31, 2002 compared to three months ended March 31, 2001
The following table summarizes certain statistics for the quarters
ended March 31, 2002 and 2001:
2002 2001
------- -------
Retail sales (in millions) $ 114.9 $ 144.0
Wholesale sales (in millions) $ 90.2 $ 77.2
Total sales (in millions) $ 205.1 $ 221.2
Gross profit % - integrated operations 29.9% 23.4%
Gross profit % - wholesale operations 17.4% 11.0%
New single-section homes sold - retail 577 1,031
New multi-section homes sold - retail 1,605 1,984
Used homes sold - retail 262 460
New single-section homes sold - wholesale 610 470
New multi-section homes sold - wholesale 1,986 1,752
Average new single-section sales price - retail $31,900 $29,900
Average new multi-section sales price - retail $58,300 $54,600
Average new single-section sales price - wholesale $19,300 $20,400
Average new multi-section sales price - wholesale $39,400 $38,400
Weighted average retail sales centers
open during the period 241 365
Net sales
22
The Company's retail sales volume continued to be adversely affected by
extremely competitive industry conditions and generally weaker economic
conditions, fewer promotional programs and a reduction in the number of open
sales centers during the quarter ended March 31, 2002. Retail sales dollar
volume decreased 20%, reflecting a 28% decrease in new unit volume. This
decrease was partially offset by increases of 7% in the average new unit sales
prices of single-section and multi-section homes, and a shift in product mix
toward multi-section homes, which have higher average selling prices than
single-section homes. Multi-section homes accounted for 74% of retail new unit
sales compared to 66% in the quarter ended March 31, 2001. Average retail sales
prices on single-section and multi-section homes increased as a result of fewer
promotional programs targeted at selling older inventory models in the quarter
ended March 31, 2002 compared to the quarter ended March 31, 2001.
During the quarters ended March 31, 2002 and 2001, the Company opened no new
sales centers. The Company closed 13 underperforming sales centers during the
quarter ended March 31, 2002. The closure of sales centers resulted principally
from the Company's restructuring plan, which was announced during the fourth
quarter of 2001 and is described below. During the quarter ended March 31, 2001
the Company closed nine sales centers and converted 12 sales centers to centers
that exclusively market repossessed inventory. At March 31, 2002 the Company had
238 retail sales centers open compared to 355 open at March 31, 2001. Total new
retail sales dollars at sales centers open more than one year decreased 1%
during the quarter ended March 31, 2002. At March 31, 2002 the Company operated
39 sales centers that exclusively market repossessed inventory compared to 14 at
March 31, 2001.
Wholesale sales represent sales of manufactured homes to independent retailers.
Wholesale sales dollar volume increased 17%, reflecting a 17% increase in unit
volume and an increase in the average new unit sales price of multi-section
homes of 3%. This increase was partially offset by a decrease in the average
new unit sales price of single-section homes of 5%.
Gross profit
Gross profit margin - integrated operations reflects gross profit earned on all
sales at retail as well as the manufacturing gross profit on retail sales of
units manufactured by the Company. Gross profit margin - integrated operations
increased from 23.4% in the quarter ended March 31, 2001 to 29.9% in the
quarter ended March 31, 2002 primarily as a result of improved manufacturing
efficiencies and reduced promotional pricing associated with the Company's
planned inventory reduction during the quarter ended March 31, 2002.
Gross profit margin - wholesale operations increased from 11.0% in the quarter
ended March 31, 2001 to 17.4% in the quarter ended March 31, 2002 as a result
of improved manufacturing efficiencies experienced during the quarter ended
March 31, 2002.
Consumer finance revenues
Consumer finance revenues are summarized as follows:
23
Three months ended
March 31,
-------------------------
(in thousands) 2002 2001
-------- --------
Interest income $ 2,942 $ 9,632
Servicing fees 9,249 7,255
REMIC residual income 1,507 2,184
Gain (loss) on sale of securities and loans (1,940) 4,566
Impairment and valuation
provisions (1,169) (432)
Other 831 497
-------- --------
$ 11,420 $ 23,702
======== ========
The decrease in interest income reflects decreased income on retained regular
REMIC interests as a result of the sale of the majority of these assets during
the fourth quarter of fiscal 2001, lower average outstanding balances of loans
held for sale in the warehouse prior to securitization and lower average
interest rates on loans held for sale in the warehouse prior to securitization.
The lower average warehouse balances resulted from a decrease in loan
originations and the timing of securitizations.
Loan servicing fees, which are reported net of amortization of servicing assets
and liabilities, increased as a result of a net decrease in servicing asset and
liability amortization. The increase was partially offset by lower overall
servicing cash flows from the Company's securitizations. The timing and amount
of servicing cash flows may vary based on the performance of loans in the
securitizations and the number of repossessions liquidated.
In some instances certain securitizations did not generate sufficient cash
flows to enable the Company to receive its full servicing fee. The Company has
not recorded revenues or receivables for these shortfalls because the Company's
right to receive servicing fees generally is subordinate to the holders of
regular REMIC interests.
The decrease in REMIC residual income primarily reflects decreased cash flows
from certain retained residual interests as a result of increased liquidations
of repossessions.
The loss on sale of securities and loans during the quarter ended March 31,
2002 reflects the securitization of $156 million of installment sale contracts
and mortgage loans. The loss resulted principally from a decrease in the spread
between the yield on loans originated by the Company and the cost of funds
obtained when the loans were securitized and increased overcollateralization
requirements.
Impairment and valuation provisions are summarized as follows:
24
(in thousands) 2002 2001
------ ----
Valuation allowances on servicing
contracts 1,224 432
Additional provision for (amortization of)
potential guarantee obligations on
REMIC securities sold (55) --
------ ----
$1,169 $432
====== ====
These charges generally resulted from changes in assumptions of credit losses
on securitized loans. Management continues to monitor performance of the loan
pools and underlying collateral and adjust the carrying value of assets and
liabilities arising from loan securitizations as appropriate. Changes in loan
pool performance and market conditions, such as general economic conditions and
higher industry inventory levels of repossessed homes, may affect recovery
rates and default rates and result in future impairment and valuation
provisions.
For the quarter ended March 31, 2002 total credit losses on the Company's loan
portfolio, including losses relating to assets securitized by the Company,
loans held for investment, loans held for sale and loans sold with full or
partial recourse, amounted to approximately 4.77% on an annualized basis of the
average principal balance of the related loans, compared to approximately 1.84%
on an annualized basis one year ago. Because losses on repossessions are
reflected in the loss ratio principally in the period during which the
repossessed property is disposed of, fluctuations in the number of repossessed
properties disposed of from period to period may cause variations in the
charge-off ratio. Expenses associated with the loan assumption program, as
described below, are also included in total credit losses as a percentage of
average principal balance and are the principal reason for the increase during
the quarter ended March 31, 2002. At March 31, 2002 the Company had a total of
3,920 unsold properties in repossession or foreclosure (approximately 2.92% of
the total number of serviced assets) compared to 4,108, 3,899 and 3,287 at
December 31, 2001, March 31, 2001 and December 31, 2000, respectively
(approximately 3.06%, 2.95% and 2.49%, respectively, of the total number of
serviced assets).
The Company believes that its historical loss experience has been favorably
affected by its ability to resell repossessed units through its retail sales
centers. In an effort to reduce the cost of repossession and foreclosure, the
Company has also increasingly made use of its loan assumption program as an
alternative to foreclosure. Under this program, the Company obtains the
cooperation of the defaulting obligor and endeavors to find a new buyer that
meets the then-current underwriting standards for repossessed homes who is
willing to assume the defaulting obligor's loan. The costs of this program for
the quarter ended March 31, 2002 were $20.4 million and are reflected in
provision for losses on credit sales. These higher costs resulted from both the
increased number of pending assumptions and the Company's efforts to reduce the
number of pending assumptions by accelerating the refurbishment process. For the
quarter ended March 31, 2001, the costs associated with the loan assumption
program were insignificant as the program was initiated toward the end of the
quarter. At March 31, 2002 and 2001 the Company had 2,541 and 908 loans,
respectively, which were pending assumption under this program.
At March 31, 2002 the delinquency rate on the Company's serviced assets was
5.1%, compared to 4.0% at March 31, 2001 reflecting generally weakened economic
conditions in the Company's
25
markets, particularly the South. Higher delinquency levels may result in
increased repossessions and loan assumptions and related future impairment
charges and valuation provisions.
Insurance revenues
Insurance revenues from the Company's captive reinsurance business decreased
22% to $7.3 million in the quarter ended March 31, 2002 from $9.4 million in
the quarter ended March 31, 2001. A substantial portion of insurance revenues
is derived from insurance policies sold in connection with new home sales by
the Company's retail operations. If the adverse retail sales trends experienced
in 2001 and the first six months of fiscal 2002 continue, insurance revenues
may continue to decline in future periods.
The Company has entered into a quota share agreement that management believes
reduces the volatility of the Company's earnings by lowering its underwriting
exposure to natural disasters such as hurricanes and floods. The agreement
reduces the levels of credit support, which take the form of letters of credit
and/or cash, to secure the reinsurance subsidiary's obligations to pay claims
and to meet regulatory capital requirements. Under this arrangement, which
covers physical damage policies, the Company retro-cedes 50% of the Company's
physical damage premiums and losses on an ongoing basis. In return, the Company
receives a nonrefundable commission with the potential to receive an
incremental commission based on favorable loss experience.
Effective March 1, 2001 the Company entered into an agreement which amended the
basis upon which credit life premiums are ceded. Under the terms of the
agreement, all unearned credit life premiums and loss reserves were transferred
back to the ceding company. Remaining premiums for policies in force at that
date and premiums for new policies thereafter are ceded on an earned basis,
rather than on a written basis. This agreement reduced the level of credit
support required to maintain regulatory compliance.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $9.7 million, or 13%,
during the quarter ended March 31, 2002 compared to the prior year. As a
percentage of net sales, selling, general and administrative expenses decreased
to 30.8% in the quarter ended March 31, 2002 from 33.0% in the quarter ended
March 31, 2001. The decrease is primarily due to ongoing cost containment
measures and the closure of underperforming sales centers having a high ratio
of fixed costs to sales.
Consumer finance operating expenses
Consumer finance operating expenses increased 30% during the quarter ended
March 31, 2002 principally as a result of increased headcount in the
collections and loan assumption areas and higher expenses associated with
discounting increased customer advance and extension balances.
Insurance operating expenses
Insurance operating costs decreased 33% during the quarter ended March 31, 2002
compared to the quarter ended March 31, 2001 principally as a result of
favorable claims experience. Because reinsurance claims costs are recorded as
insured events occur, reinsurance underwriting risk may increase the volatility
of the Company's earnings, particularly with respect to property and casualty
reinsurance. However, the quota share agreement described previously, as well
as the Company's purchase of catastrophe reinsurance, should reduce the
Company's underwriting exposure to natural disasters.
26
Restructuring charges
The following table sets forth the activity by quarter in each component of the
Company's restructuring reserve (in thousands):
27
Severance Plant, sales
and other center and
termination office Asset
charges closings write-downs Total
-----------------------------------------------------------
Original provision $ 7,350 $ 7,384 $ 11,192 $ 25,926
Payments and balance sheet charges (1,707) (141) (11,192) (13,040)
-----------------------------------------------------------
Balance 9/30/99 5,643 7,243 -- 12,886
-----------------------------------------------------------
Payments and balance sheet charges (810) (2,750) -- (3,560)
-----------------------------------------------------------
Balance 12/31/99 4,833 4,493 -- 9,326
-----------------------------------------------------------
Payments and balance sheet charges (550) (1,183) -- (1,733)
Reversal of restructuring charges (2,912) (1,439) -- (4,351)
-----------------------------------------------------------
Balance 3/31/00 1,371 1,871 -- 3,242
-----------------------------------------------------------
Payments and balance sheet charges (81) (685) 378 (388)
Reversal of restructuring charges (900) (2) (378) (1,280)
-----------------------------------------------------------
Balance 6/30/00 390 1,184 -- 1,574
-----------------------------------------------------------
Additional provision 1,974 1,780 15 3,769
Payments and balance sheet charges (1,505) (1,277) (15) (2,797)
Reversal of restructuring charges (100) (635) -- (735)
-----------------------------------------------------------
Balance 9/30/00 759 1,052 -- 1,811
-----------------------------------------------------------
Payments and balance sheet charges (519) (109) -- (628)
-----------------------------------------------------------
Balance 12/31/00 240 943 -- 1,183
-----------------------------------------------------------
Payments and balance sheet charges (114) (31) -- (145)
-----------------------------------------------------------
Balance 3/31/01 126 912 -- 1,038
-----------------------------------------------------------
Payments and balance sheet charges (55) (33) -- (88)
-----------------------------------------------------------
Balance 6/30/01 71 879 -- 950
-----------------------------------------------------------
Additional provision 681 4,702 12,460 17,843
Payments and balance sheet charges (41) (1,339) (12,460) (13,840)
Reversal of 1999 restructuring charges (30) (45) -- (75)
-----------------------------------------------------------
Balance 9/30/01 681 4,197 -- 4,878
-----------------------------------------------------------
Payments and balance sheet charges (145) (743) -- (888)
-----------------------------------------------------------
Balance 12/31/01 536 3,454 -- 3,990
-----------------------------------------------------------
Payments and balance sheet charges (50) (593) 412 (231)
Reversal of 2001 restructuring charges (486) (1,173) (412) (2,071)
-----------------------------------------------------------
Balance 3/31/02 $ -- $ 1,688 $ -- $ 1,688
-----------------------------------------------------------
During the fourth quarter of 1999 the Company recorded restructuring charges of
approximately $25.9 million, related primarily to the closing of four
manufacturing lines, the temporary idling of five others and the closing of
approximately 40 sales centers. The charges in 1999 included
28
severance and other termination costs related to approximately 2,150 employees
primarily in manufacturing, retail and finance operations, costs associated
with closing plants and sales centers, and asset writedowns.
During 2000 the Company reversed into income $6.4 million of charges initially
recorded in 1999. Approximately $2.9 million of the reversal related to the
Company's legal determination that it was not required to pay severance amounts
to certain terminated employees under the Worker Adjustment and Retraining
Notification Act ("WARN"). Upon the expiration of a six-month waiting period
specified by WARN and the Company's final calculation of the number of affected
employees in relation to its workforce at the time of the restructuring
announcement, the Company determined that it was not required to pay amounts
previously accrued. During 2000 the Company also reevaluated its restructuring
plans and determined that the losses associated with the closing of retail
sales centers, the idling or closing of manufacturing plants, the disposition
of certain assets and legal costs were less than anticipated and $3.5 million
of the charges were reversed. During 2000 the Company recorded an additional
$3.8 million charge, primarily related to severance costs associated with a
reduction in headcount of 250 people primarily in the corporate, finance and
manufacturing operations area, and the closure of offices.
During the fourth quarter of 2001 the Company recorded restructuring charges of
approximately $17.8 million, primarily related to the closing of approximately
90 underperforming retail sales centers, a majority of which were located in the
South, in areas where the Company has experienced poor operating results as well
as poor credit performance. At March 31, 2002 these restructuring activities
were substantially complete.
Market conditions, particularly in the South where the majority of store
closings occurred, remained fluid during the six months ended March 31, 2002.
While the Company did close the originally identified approximately 90 stores,
these changing market conditions caused the Company to revise its initial
determination of the number of stores to be either sold to independent dealers,
converted to centers that exclusively market repossessed inventory or closed.
The Company originally estimated that the disposition of the stores would be
approximately evenly divided between those sold to independent dealers,
converted to centers exclusively marketing repossessed inventory or closed.
Ultimately, approximately 27 stores were sold, 23 were converted and 40 were
closed. As a result of the change in the ultimate disposition of certain of the
stores, as well as changes in the original estimate of costs to exit the stores,
the Company reversed into income in the quarter ended March 31, 2002 $2.1
million of restructuring charges originally recorded in the fourth quarter of
fiscal 2001.
Approximately $20,000 of the $1.7 million remaining in the restructuring
reserve at March 31, 2002 related to provisions established prior to the fourth
quarter of 2001. The Company is contractually obligated to pay the amounts
remaining in the reserve at March 31, 2002.
During the execution of the Company's restructuring plans, approximately 2,800
employees were affected, of which 2,150 and 250 were terminated during the
fourth quarters of 1999 and 2000, respectively. The Company terminated
approximately 400 employees as part of its fourth quarter 2001 plan.
Interest expense
Interest expense for the quarter ended March 31, 2002 decreased $3.4 million,
or 25%, from the second quarter of fiscal 2001 due principally to lower average
balances outstanding on short-term credit facilities during the quarter ended
March 31, 2002.
29
Income taxes
For the quarter ended March 31, 2002, the Company recorded an income tax benefit
of $72.2 million resulting from the enactment of the Job Creation and Worker
Assistance Act of 2002 ("the Act") on March 8, 2002. The Act extended the period
to which net operating losses could be carried back from two years to five
years, giving the Company the opportunity to file for refunds of income taxes
paid relating to the 1996 and 1997 tax years. After filing its 2001 income tax
return, the Company received in April 2002 a cash refund of $46.6 million. The
remaining tax benefit from the extended carryback period in the form of a cash
refund of approximately $26 million is expected to be realized after the Company
files its income tax return for the year ending September 30, 2002.
Six months ended March 31, 2002 compared to six months ended March 31, 2001
The following table summarizes certain statistics for the six months
ended March 31, 2002 and 2001:
2002 2001
------- -------
Retail sales (in millions) $ 246.7 $ 340.1
Wholesale sales (in millions) $ 187.4 $ 159.5
Total sales (in millions) $ 434.1 $ 499.6
Gross profit % - integrated operations 29.4% 24.3%
Gross profit % - wholesale operations 16.0% 11.6%
New single-section homes sold - retail 1,167 2,288
New multi-section homes sold - retail 3,461 4,762
Used homes sold - retail 497 770
New single-section homes sold - wholesale 1,299 898
New multi-section homes sold - wholesale 4,152 3,604
Average new single-section sales price - retail $31,800 $30,100
Average new multi-section sales price - retail $58,700 $55,100
Average new single-section sales price - wholesale $19,200 $21,200
Average new multi-section sales price - wholesale $39,100 $38,700
Weighted average retail sales centers
open during the period 249 370
Net sales
The Company's retail sales volume continued to be adversely affected by
extremely competitive industry conditions and generally weaker economic
conditions, fewer promotional programs and a reduction in the number of open
sales centers during the six months ended March 31, 2002. Retail sales dollar
volume decreased 27%, reflecting a 34% decrease in new unit volume. This
decrease was partially offset by increases of 6% and 7% in the average new unit
sales prices of single-section and multi-section homes, respectively, and a
shift in product mix toward multi-section homes, which have higher average
selling prices than single-section homes. Multi-section homes accounted for 75%
of retail new unit sales compared to 68% in the six months ended March 31,
2001. Average retail sales prices on single-section and multi-section homes
increased as a result of fewer promotional programs targeted at selling older
inventory models in the six months ended March 31, 2002 compared to the six
months ended March 31, 2001.
During the six months ended March 31, 2002 the Company opened no new sales
centers compared to one new sales center during the six months ended March 31,
2001. The Company closed 58 underperforming sales centers during the six months
ended March 31, 2002 and
30
converted three sales centers to centers that exclusively market repossessed
inventory. The closure or conversion of sales centers resulted principally from
the Company's restructuring plan, which was announced during the fourth quarter
of 2001 and is described below. During the six months ended March 31, 2001 the
Company closed 12 underperforming sales centers and converted 12 sales centers
to centers that exclusively market repossessed inventory. At March 31, 2002 the
Company had 238 retail sales centers open compared to 355 open at March 31,
2001. Total new retail sales dollars at sales centers open more than one year
decreased 11% during the six months ended March 31, 2002. At March 31, 2002 the
Company operated 39 sales centers that exclusively market repossessed inventory
compared to 14 at March 31, 2001.
Wholesale sales represent sales of manufactured homes to independent retailers.
Wholesale sales dollar volume increased 17%, reflecting a 21% increase in unit
volume and an increase in the average new unit sales price of multi-section
homes of 1%. This increase was partially offset by a decrease in the average
new unit sales price of single-section homes of 9%.
Gross profit
Gross profit margin - integrated operations increased from 24.3% in the six
months ended March 31, 2001 to 29.4% in the six months ended March 31, 2002
primarily as a result of improved manufacturing efficiencies and reduced
promotional pricing associated with the Company's planned inventory reduction
during the six months ended March 31, 2002.
Gross profit margin - wholesale operations increased from 11.6% in the six
months ended March 31, 2001 to 16.0% in the six months ended March 31, 2002 as
a result of improved manufacturing efficiencies experienced during the six
months March 31, 2002.
Consumer finance revenues
Consumer finance revenues are summarized as follows:
Six months ended
March 31,
-------------------------
(in thousands) 2002 2001
-------- --------
Interest income $ 6,323 $ 19,808
Servicing fees 21,689 9,561
REMIC residual income 3,054 3,270
Gains on securities sold and
loans sold or held for sale:
Gain on sale of securities and loans 3,318 3,626
Valuation provision on loans
held for sale -- (2,739)
-------- --------
3,318 887
-------- --------
Impairment and valuation
provisions (1,114) (10,088)
Other 1,400 848
-------- --------
$ 34,670 $ 24,286
======== ========
31
The decrease in interest income reflects decreased income on retained regular
REMIC interests as a result of the sale of the majority of these assets during
the fourth quarter of fiscal 2001, lower average outstanding balances of loans
held for sale in the warehouse prior to securitization and lower average
interest rates on loans held for sale in the warehouse prior to securitization.
The lower average warehouse balances resulted from a decrease in loan
originations and the timing of securitizations.
Loan servicing fees, which are reported net of amortization of servicing assets
and liabilities, increased as a result of higher overall servicing cash flows
from the Company's securitizations. The timing and amount of servicing cash
flows may vary based on the performance of loans in the securitizations and the
number of repossessions liquidated.
In some instances, however, certain securitizations did not generate sufficient
cash flows to enable the Company to receive its full servicing fee. The Company
has not recorded revenues or receivables for these shortfalls because the
Company's right to receive servicing fees generally is subordinate to the
holders of regular REMIC interests.
The decrease in REMIC residual income primarily reflects decreased cash flows
from certain retained residual interests as a result of increased liquidations
of repossessions in certain securitizations during the six months ended March
31, 2002.
The gain on sale of securities and loans during the six months ended March 31,
2002 reflects the completion of two securitizations. The gain resulted
principally from an increase in the spread between the yield on loans
originated by the Company and the cost of funds obtained when the loans were
securitized.
Impairment and valuation provisions are summarized as follows:
Six months ended
March 31,
------------------------
(in thousands) 2002 2001
-------- -------
Impairment writedowns of residual
REMIC interests $ -- $ 143
Valuation provisions on servicing
contracts 1,224 9,945
Additional provisions for potential
guarantee obligations on REMIC
securities sold (110) --
-------- -------
$ 1,114 $10,088
======== =======
These charges generally resulted from changes in assumptions of credit losses
on securitized loans. Management continues to monitor performance of the loan
pools and underlying collateral and adjust the carrying value of assets and
liabilities arising from loan securitizations as appropriate. Changes in loan
pool performance and market conditions, such as general economic conditions and
higher industry inventory levels of repossessed homes, may affect recovery
rates and default rates and result in future impairment and valuation
provisions.
For the six months ended March 31, 2002 total credit losses on the Company's
loan portfolio, including losses relating to assets securitized by the Company,
loans
32
held for investment, loans held for sale and loans sold with full or partial
recourse, amounted to approximately 3.54% on an annualized basis of the average
principal balance of the related loans, compared to approximately 1.82% on an
annualized basis one year ago. Because losses on repossessions are reflected in
the loss ratio principally in the period during which the repossessed property
is disposed of, fluctuations in the number of repossessed properties disposed
of from period to period may cause variations in the charge-off ratio. Expenses
associated with the loan assumption program, as described below, are also
included in the total credit losses as a percentage of average principal
balance and are the principal reason for the increase during the six months
ended March 31, 2002. At March 31, 2002 the Company had a total of 3,920 unsold
properties in repossession or foreclosure (approximately 2.92% of the total
number of serviced assets) compared to 4,108, 3,899 and 3,287 at December 31,
2001, March 31, 2001 and December 31, 2000, respectively (approximately 3.06%,
2.95% and 2.49%, respectively, of the total number of serviced assets).
The Company believes that its historical loss experience has been favorably
affected by its ability to resell repossessed units through its retail sales
centers. In an effort to reduce the cost of repossession and foreclosure, the
Company has also increasingly made use of its loan assumption program as an
alternative to foreclosure. Under this program, the Company obtains the
cooperation of the defaulting obligor and endeavors to find a new buyer that
meets the then-current underwriting standards for repossessed homes who is
willing to assume the defaulting obligor's loan. The costs of this program for
the six months ended March 31, 2002 were $30.6 million and are reflected in
provision for losses on credit sales. These higher costs resulted from both the
increased number of pending assumptions and the Company's efforts to reduce the
number of pending assumptions by accelerating the refurbishment process. For
the six months ended March 31, 2001, the costs associated with the loan
assumption program were insignificant as the program was initiated toward the
end of the second quarter and costs to refurbish units had not yet been
incurred. At March 31, 2002 and 2001 the Company had 2,541 and 908 loans,
respectively, which were pending assumption under this program.
At March 31, 2002 the delinquency rate on the Company's serviced assets was
5.1%, compared to 4.0% at March 31, 2001 reflecting generally weakened economic
conditions in the Company's markets, particularly the South. Higher delinquency
levels may result in increased repossessions and loan assumptions and related
future impairment charges and valuation provisions.
Insurance revenues
Insurance revenues from the Company's captive reinsurance business decreased
23% to $15.0 million in the six months ended March 31, 2002 from $19.5 million
in the six months ended March 31, 2001. A substantial portion of insurance
revenues is derived from insurance policies sold in connection with new home
sales by the Company's retail operations. If the adverse retail sales trends
experienced in 2001 and the first six months of fiscal 2002 continue, insurance
revenues may continue to decline in future periods.
The Company has entered into a quota share agreement that management believes
reduces the volatility of the Company's earnings by lowering its underwriting
exposure to natural disasters such as hurricanes and floods. The agreement
reduces the levels of credit support, which take the form of letters of credit
and/or cash, to secure the reinsurance subsidiary's obligations to pay claims
and to meet regulatory capital requirements. Under this arrangement, which
covers physical damage policies, the Company retro-cedes 50% of the Company's
physical damage premiums and losses on an ongoing basis. In return, the Company
receives a nonrefundable commission with the potential to receive an
incremental commission based on favorable loss experience.
Effective March 1, 2001 the Company entered into an agreement which amended the
basis upon which credit life premiums are ceded. Under the terms of the
agreement, all unearned credit life
33
premiums and loss reserves were transferred back to the ceding company.
Remaining premiums for policies in force at that date and premiums for new
policies thereafter are ceded on an earned basis, rather than on a written
basis. This agreement reduced the level of credit support required to maintain
regulatory compliance.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $25.3 million, or 17%,
during the six months ended March 31, 2002 compared to the prior year. As a
percentage of net sales, selling, general and administrative expenses decreased
to 29.4% in the six months ended March 31, 2002 from 30.6% in the six months
ended March 31, 2001. The decrease is primarily due to ongoing cost containment
measures and the closure of underperforming sales centers having a high ratio
of fixed costs to sales.
Consumer finance operating expenses
Consumer finance operating expenses increased 37% during the six months ended
March 31, 2002 principally as a result of increased headcount in the
collections and loan assumption areas and higher expenses associated with
discounting increased customer advance and extension balances.
Insurance operating expenses
Insurance operating costs decreased 20% during the six months ended March 31,
2002 compared to the six months ended March 31, 2001 primarily as a result of
favorable loss ratios and because a larger percentage of insurance revenues
were derived from products with lower expense ratios. Because reinsurance
claims costs are recorded as insured events occur, reinsurance underwriting
risk may increase the volatility of the Company's earnings, particularly with
respect to property and casualty reinsurance. However, the quota share
agreement described previously, as well as the Company's purchase of
catastrophe reinsurance, should reduce the Company's underwriting exposure to
natural disasters.
Restructuring charges
The following table sets forth the activity by quarter in each component of the
Company's restructuring reserve (in thousands):
34
Severance Plant, sales
and other center and
termination office Asset
charges closings write-downs Total
-----------------------------------------------------------
Original provision $ 7,350 $ 7,384 $ 11,192 $ 25,926
Payments and balance sheet charges (1,707) (141) (11,192) (13,040)
-----------------------------------------------------------
Balance 9/30/99 5,643 7,243 -- 12,886
-----------------------------------------------------------
Payments and balance sheet charges (810) (2,750) -- (3,560)
-----------------------------------------------------------
Balance 12/31/99 4,833 4,493 -- 9,326
-----------------------------------------------------------
Payments and balance sheet charges (550) (1,183) -- (1,733)
Reversal of restructuring charges (2,912) (1,439) -- (4,351)
-----------------------------------------------------------
Balance 3/31/00 1,371 1,871 -- 3,242
-----------------------------------------------------------
Payments and balance sheet charges (81) (685) 378 (388)
Reversal of restructuring charges (900) (2) (378) (1,280)
-----------------------------------------------------------
Balance 6/30/00 390 1,184 -- 1,574
-----------------------------------------------------------
Additional provision 1,974 1,780 15 3,769
Payments and balance sheet charges (1,505) (1,277) (15) (2,797)
Reversal of restructuring charges (100) (635) -- (735)
-----------------------------------------------------------
Balance 9/30/00 759 1,052 -- 1,811
-----------------------------------------------------------
Payments and balance sheet charges (519) (109) -- (628)
-----------------------------------------------------------
Balance 12/31/00 240 943 -- 1,183
-----------------------------------------------------------
Payments and balance sheet charges (114) (31) -- (145)
-----------------------------------------------------------
Balance 3/31/01 126 912 -- 1,038
-----------------------------------------------------------
Payments and balance sheet charges (55) (33) -- (88)
-----------------------------------------------------------
Balance 6/30/01 71 879 -- 950
-----------------------------------------------------------
Additional provision 681 4,702 12,460 17,843
Payments and balance sheet charges (41) (1,339) (12,460) (13,840)
Reversal of 1999 restructuring charges (30) (45) -- (75)
-----------------------------------------------------------
Balance 9/30/01 681 4,197 -- 4,878
-----------------------------------------------------------
Payments and balance sheet charges (145) (743) -- (888)
-----------------------------------------------------------
Balance 12/31/01 536 3,454 -- 3,990
-----------------------------------------------------------
Payments and balance sheet charges (50) (593) 412 (231)
Reversal of 2001 restructuring charges (486) (1,173) (412) (2,071)
-----------------------------------------------------------
Balance 3/31/02 $ -- $ 1,688 $ -- $ 1,688
-----------------------------------------------------------
During the fourth quarter of 1999 the Company recorded restructuring charges of
approximately $25.9 million, related primarily to the closing of four
manufacturing lines, the temporary idling of five others and the closing of
approximately 40 sales centers. The charges in 1999 include severance and other
termination costs related to approximately 2,150 employees primarily in
35
manufacturing, retail and finance operations, costs associated with closing
plants and sales centers, and asset writedowns.
During 2000 the Company reversed into income $6.4 million of charges initially
recorded in 1999. Approximately $2.9 million of the reversal related to the
Company's legal determination that it was not required to pay severance amounts
to certain terminated employees under the Worker Adjustment and Retraining
Notification Act ("WARN"). Upon the expiration of a six-month waiting period
specified by WARN and the Company's final calculation of the number of affected
employees in relation to its workforce at the time of the restructuring
announcement, the Company determined that it was not required to pay amounts
previously accrued. During 2000 the Company also reevaluated its restructuring
plans and determined that the losses associated with the closing of retail
sales centers, the idling or closing of manufacturing plants, the disposition
of certain assets and legal costs were less than anticipated and $3.5 million
of the charges was reversed. During 2000 the Company recorded an additional
$3.8 million charge, primarily related to severance costs associated with a
reduction in headcount of 250 people primarily in the corporate, finance and
manufacturing operations area, and the closure of offices.
During the fourth quarter of 2001 the Company recorded restructuring charges of
approximately $17.8 million, primarily related to the closing of approximately
90 underperforming retail sales centers, a majority of which were located in
the South, in areas where the Company has experienced poor operating results as
well as poor credit performance. Twenty-three of the underperforming sales
centers were converted to centers that exclusively market repossessed inventory
and the remainder were either sold or closed during the six months ended March
31, 2002. At March 31, 2002 these restructuring activities were substantially
complete.
Market conditions, particularly in the South where the majority of store
closings occurred, remained fluid during the six months ended March 31, 2002.
While the Company did close the originally identified approximately 90 stores,
these changing market conditions caused the Company to revise its initial
determination of the number of stores to be either sold to independent dealers,
converted to centers that exclusively market repossessed inventory or closed.
The Company originally estimated that the disposition of the stores would be
approximately evenly divided between being sold to independent dealers,
converted to centers exclusively marketing repossessed inventory or closed.
Ultimately, approximately 27 stores were sold, 23 were converted and 40 were
closed. As a result of the change in the ultimate disposition of certain of the
stores, as well as changes in the original estimate of costs to exit the
stores, the Company reversed $2.1 million of restructuring charges originally
recorded in the fourth quarter of fiscal 2001.
Approximately $20,000 of the $1.7 million remaining in the restructuring
reserve at March 31, 2002 related to provisions established prior to the fourth
quarter of 2001. The Company is contractually obligated to pay the amounts
remaining in the reserve subsequent to March 31, 2002.
During the execution of the Company's restructuring plans, approximately 2,800
employees were affected, of which 2,150 and 250 were terminated during the
fourth quarters of 1999 and 2000, respectively. The Company terminated
approximately 400 employees as part of its fourth quarter 2001 plan.
Interest expense
Interest expense for the six months ended March 31, 2002 decreased $8.5
million, or 31%, from the first six months of fiscal 2001 due principally to
lower average balances outstanding on short-term credit facilities during the
six months ended March 31, 2002.
36
Income taxes
For the six months ended March 31, 2002, the Company recorded an income tax
benefit of $6.5 million resulting from the completion of an examination of the
Company's federal income tax returns for the fiscal years 1997 through 2000 and
the favorable resolution of certain income tax contingencies for which the
Company had previously recorded a provision.
The Company also recorded an income tax benefit of $72.2 million resulting from
the enactment of the Job Creation and Worker Assistance Act of 2002 ("the Act")
on March 8, 2002. The Act extended the period to which net operating losses
could be carried back from two years to five years, giving the Company the
opportunity to file for refunds of income taxes paid relating to the 1996 and
1997 tax years. After filing its 2001 income tax return, the Company received in
April 2002 a cash refund of $46.6 million. The remaining tax benefit from the
extended carryback period in the form of a cash refund of approximately $26
million is expected to be realized after the Company files its income tax return
for the year ending September 30, 2002.
Cumulative effect of accounting change
Effective October 1, 2000 the Company adopted Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB 101") and recorded a charge
of $14.6 million as a cumulative effect of an accounting change as of that
date. Under its previous accounting policy, the Company recognized revenue for
the majority of retail sales upon closing, which included execution of loan
documents and related paperwork and receipt of the customer's down payment. In
adopting the provisions of SAB 101, the Company changed its revenue recognition
policy on these retail sales to a method based on placement of the home at the
customer's site and completion of all contractual obligations. As required by
SAB 101 the Company has restated its previously reported financial statements
for the first quarter of 2001 to include the cumulative effect of the accounting
change and to apply the provisions of SAB 101 to the quarter.
37
LIQUIDITY AND CAPITAL RESOURCES
For the six months ending March 31, 2002 and 2001 the Company reported net
income of $20.3 million and net losses of $76.3 million, respectively.
Net income for the six months ended March 31, 2002 reflects an income tax
benefit of $78.7 million. Approximately $6.5 million resulted from the
completion of an examination of the Company's federal income tax returns for the
fiscal years 1997 through 2000 and the favorable resolution of certain income
tax contingencies for which the Company had previously recorded a provision. The
remaining $72.2 million income tax benefit resulted from the enactment of the
Job Creation and Worker Assistance Act of 2002 ("the Act") on March 8, 2002. The
Act extended the period to which net operating losses could be carried back from
two years to five years, giving the Company the opportunity to file for refunds
of income taxes paid relating to the 1996 and 1997 tax years. After filing its
2001 income tax return, the Company received in April 2002 a cash refund of
$46.6 million. The remaining tax benefit from the extended carryback period in
the form of a cash refund of approximately $26 million is expected to be
realized after the Company files its income tax return for the year ending
September 30, 2002.
The operating results reflect business conditions within the manufactured
housing industry. The Company continues to operate in a highly competitive
environment caused principally by the industry's aggressive expansion in the
retail channel, excessive amounts of finished goods inventory and a general
reduction in the availability of financing at both the wholesale and retail
levels. A decline in overall economic conditions has also contributed to a
difficult environment and resulted in higher loan delinquencies, repossessions,
and loan assumptions. The industry estimates that shipments of manufactured
homes from production facilities declined by approximately 28% and 22% during
calendar years 2000 and 2001, respectively.
The Company began to experience the effect of these cyclical industry factors
during late fiscal 1999 and took steps to begin to lower inventory levels,
reduce operating expenses and maximize cash flow. These efforts have continued
through the first six months of fiscal 2002 as the Company maintained its focus
on areas considered to be within its span of control, principally cost control
and inventory management. Many of the actions taken, most notably plant and
sales center closings, curtailed production schedules and competitive pricing
to effect a $236.8 million reduction in inventories since September 1999,
negatively affected the Company's reported earnings for fiscal years 2000 and
2001 and the first six months of fiscal 2002. Management believes that, unless
business conditions improve, the Company is likely to incur a loss in fiscal
2002; however, it plans to continue to manage operations to generate positive
cash flow. The Company believes that its operating cash flow, coupled with its
continued access to the asset-backed securities market and borrowings under its
credit facilities, which are described below, will provide sufficient liquidity
to meet obligations, including potential repayment of the 8% reset debentures,
and execute its business plan during the remainder of fiscal 2002.
In the event of further deterioration in market conditions, the Company would
take additional steps to protect liquidity and manage cash flow. Among other
things, these actions might include further production curtailments, closing of
additional retail sales centers or the selective sale of operational assets.
The Company operates its plants to support its captive retail sales centers and
its independent retailer base. The Company has, and will continue to adjust
production capacity in line with demand, producing at a rate that will allow
the Company to lower its inventories. At March 31, 2002, the Company was
operating approximately 20 plants, though many were operating at reduced
production schedules. Should market conditions worsen from those anticipated,
the
38
Company will continue to curtail production by lowering production speed or
idling additional production facilities.
The Company's primary sources of liquidity include cash generated by
operations, borrowing availability under its three credit facilities and its
securitization program through which loans are sold into the asset-backed
securities market. During 2002, the Company also received an income tax refund
and expects to receive an additional refund in 2003 as described earlier.
During 2001 the Company generated $47.5 million of cash from operating
activities, principally as a result of a $94.4 million reduction in its
inventories and the sale of substantially all subordinated asset-backed
securities rated below BBB previously retained by the Company from prior
securitizations. The sale of these subordinated securities was finalized during
the fourth quarter of 2001 and generated $72.9 million of cash.
Subsequent to the sale of the retained subordinated securities, the Company
retired its $75 million revolving credit facility, which was scheduled to
mature in October 2001. In connection with the retirement, approximately $9.0
million of cash held by the lenders in a cash collateral account was returned
to the Company. The net cash proceeds from the sale of the retained
subordinated securities and the release of the cash collateral more than offset
the $75 million previously available under the revolving credit facility.
During the first six months of fiscal 2002, the Company's operating activities
used $6.2 million of cash principally as a result of the timing of its
asset-backed securitizations and the increased expenses associated with its
loan assumption program which are reflected in the provision for credit losses.
The Company's liquidity position continues to be adversely affected by defaulted
loans in the Company's servicing portfolio, which have negatively affected cash
flow, through both reduced residual cash flow from retained securitization
interests and as a result of the costs borne by the Company on the loan
assumption program. The loan assumption program is an alternative means to
repossession in dealing with troubled loans as more fully described in the
"Consumer Finance Revenues" section. In addition, delinquency on loans,
including those in repossession and those pending loan assumption, adversely
affect liquidity because the Company is obligated, in most cases, to make
servicing advances of delinquent mortgage payments.
The Company anticipates that its liquidity also will be negatively affected by
increasing insurance costs and credit support requirements associated with its
general corporate insurance program. These expected higher rates and deductibles
reflect what management believes is an increasingly competitive insurance
market. Management also expects that the Company's liquidity position may be
negatively affected by its insurers' increased requirements for letters of
credit, surety bonds or other similar forms of collateral.
The Company currently has in place three credit facilities that it believes are
adequate to meet liquidity needs during fiscal 2002. During the second quarter
of 2001, a newly formed, special purpose entity of the Company entered into a
three-year, $200 million loan purchase facility with a financial institution
that provides for funding of up to 81% of qualifying loan principal balances
held for sale. The new facility replaced the Company's $250 million facility
with a commercial paper issuer, which was scheduled to expire in October 2001.
Under the new facility, the Company issued to a sister company of the financial
institution a warrant valued at $11.0 million to acquire approximately 1.9
million shares of the Company's common stock with an exercise price of
approximately $9.76 per share. The warrant, which is immediately exercisable,
expires in February 2009.
39
During the first quarter of fiscal 2002, the Company formed a wholly-owned
qualifying special purpose subsidiary, Oakwood Advance Receivables Company, LLC
("OAR"), to provide up to $50 million of revolving funding for qualifying
servicing advance receivables. The Company sells qualifying servicing advance
receivables to OAR, which funds its purchases of receivables using the proceeds
of debt obligations issued by OAR to third party investors. OAR collects the
receivables it purchases from the Company, and such proceeds are available to
purchase additional receivables from the Company through August 2003. At March
31, 2002, OAR had approximately $38.8 million of cash available to purchase
additional qualifying servicing advance receivables from the Company.
Conveyances of receivables to OAR are accounted for as sales under FAS 140.
During the second quarter of fiscal 2002, the Company closed a new $65 million
revolving credit facility. The facility matures in January 2007 and is
collateralized by substantially all assets of the Company excluding raw
materials inventory and loans held for sale. The primary purposes of the
facility are to support outstanding letters of credit of approximately $44
million and to provide additional cash borrowing capacity. The completion of
this facility also freed up approximately $12 million of cash which was used to
secure letters of credit. The agreement contains financial covenants which,
among other things, specify minimum levels of tangible net worth and earnings
before interest, taxes and depreciation and amortization, and limit capital
expenditures. Borrowings outstanding under the facility will bear interest at
the greater of prime plus 1.50% or 7%.
The Company continues to generate liquidity through its securitization program.
The retail financing of sales of the Company's products is an integral part of
the Company's integration strategy. Such financing consumes substantial amounts
of capital, which the Company has obtained principally by regularly
securitizing such loans through the asset-backed securities market. Should the
Company's ability to access the asset-backed securities market become impaired,
the Company would be required to seek additional sources of funding for its
finance business. Such sources might include, but would not be limited to, the
sale of whole loans to unrelated third parties and the increased utilization of
FHA financing. The Company's inability to find alternative sources of funding
could have an adverse impact on the Company's liquidity and operations.
The Company, from time to time, has retained certain subordinated securities
from its securitizations. At March 31, 2002 the Company owned such subordinated
asset-backed securities having a carrying value of $1.8 million from
securitization transactions prior to 1994. The Company considers any
asset-backed securities retained to be available for sale and would consider
opportunities to liquidate these securities based upon market conditions. A
significant decrease in the demand for subordinated asset-backed securities at
prices acceptable to the Company would likely require the Company to seek
alternative sources of financing for the loans originated by the consumer
finance business, or require the Company to seek alternative long-term
financing for the subordinated asset-backed securities. There can be no
assurance that such alternative financing can be obtained, and the inability of
the Company to obtain such alternative financing could adversely impact the
Company's liquidity and operations.
At March 31, 2002 the Company was in compliance with all covenants contained in
its debt agreements.
The Company estimates that in 2002 capital expenditures will approximate $14
million comprised principally of improvements at existing facilities, computer
equipment and the replacement of certain computer information systems.
40
The decrease in loans and investments from September 30, 2001 principally
reflects a decrease in loans held for sale from $163 million at September 30,
2001 to $137 million at March 31, 2002. The Company originates loans and
warehouses them until sufficient receivables have been accumulated for a
securitization. Changes in loan origination volume, which is significantly
affected by retail sales, and the timing of loan securitization transactions
affect the amount of loans held for sale at any point in time.
On May 6, 2002 the Company terminated its 1998 Director Deferral Plan, pursuant
to which non-employee directors could elect to defer payment of all or any
portion of their annual retainer or meeting fees in exchange for phantom stock
units. As a result of the termination of this plan, the Company will be required
to make a cash payment of approximately $0.7 million in the aggregate to the
directors who participated in the plan.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements and information based
on the beliefs of the Company's management as well as assumptions made by, and
information currently available to, the Company's management. These statements
include, among others, the belief that its operating cash flow, coupled with its
continued access to the asset-backed securities market and borrowings under its
existing credit facilities, will provide sufficient liquidity to meet its
obligations, including potential repayment of the 8% reset debentures, and to
execute its business plan during 2002; the intention to continue to manage
operations to generate positive cash flow even though it expects to incur a loss
during 2002; the intention to take additional steps to protect liquidity and
manage cash flow in the event of further deterioration in market conditions; the
intention to continue to adjust production capacity in line with demand thereby
enabling it to produce homes at a rate that will allow the Company to lower its
inventories; the intention to continue to curtail production by lowering
production speed or idling additional production facilities if market conditions
worsen from those anticipated; the expectation that $26 million will be realized
after the Company files its income tax return for 2002; and the reduction in the
Company's insurance underwriting exposure as a result of the quota share
agreement and its purchase of catastrophe reinsurance. Words like "believe,"
"expect," "could," "should" and similar expressions used in this Form 10-Q are
intended to identify other such forward-looking statements.
These forward-looking statements reflect the current views of the Company with
respect to future events and are subject to a number of risks, including, among
others, the following: the Company may not receive the $26 million income tax
refund after September 30, 2002; competitive industry conditions could further
adversely affect sales and profitability; the Company may be unable to access
the asset-backed securities market or otherwise access sufficient capital to
fund its operations; the Company may recognize special charges or experience
increased costs in connection with securitizations or other financing
activities; the Company may recognize special charges or experience increased
costs in connection with restructuring activities; the Company may not realize
anticipated benefits associated with its restructuring activities (including the
closing of underperforming sales centers); the Company's loan assumption program
could be ineffective or result in increased costs; adverse changes in
governmental regulations applicable to its business could negatively impact the
Company; it could suffer losses resulting from litigation (including shareholder
class actions or other class action suits); the captive Bermuda reinsurance
subsidiary could experience significant losses; the Company could experience
increased credit losses or higher delinquency rates on loans originated;
negative changes in general economic conditions in its markets could adversely
impact the Company; it could lose the services of its key management personnel;
the Company could be required to make payment on its guarantees of certain loans
sold to third parties, on its guarantee of subordinated securities issued by
certain REMIC trusts or on its guarantees related to retail
41
inventory; and any other factors that generally affect companies in these lines
of business could also adversely impact the Company. Should the Company's
underlying assumptions prove incorrect or should one or more of the risks and
uncertainties materialize, actual events or results may vary materially and
adversely from those described herein as anticipated, expected, believed or
estimated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings and claims that have
arisen in the ordinary course of its business and have not been
finally adjudicated. In management's opinion, the ultimate resolution
of these matters is not expected to have a material adverse effect on
the Company's results of operations or financial condition.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(4) Agreement to Furnish Copies of Instruments with Respect to Long-term
Debt
(10.1) Lender Assumption Agreement, dated February 21, 2002 by The CIT
Group/Business Credit, Inc.
(10.2) Loan and Security Agreement, dated January 22, 2002, by and among
Oakwood Homes Corporation and each of its subsidiaries that are
signatories thereto, the lenders that are signatories thereto and
Foothill Capital Corporation
b) Reports on Form 8-K
On January 25, 2002, the Company filed a Current
Report on Form 8-K reporting pursuant to Item 5
thereof that it had entered into a revolving credit
facility with Foothill Capital Corporation. No
financial statements were filed as a part of such
Form 8-K.
Items 2, 3, 4 and 5 are not applicable and are omitted.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2002
OAKWOOD HOMES CORPORATION
BY: /s/ Suzanne H. Wood
-----------------------------
Suzanne H. Wood
Executive Vice President and
Chief Financial Officer
44
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
ITEM 6(a)
FORM 10-Q
QUARTERLY REPORT
For the quarter ended Commission File Number
March 31, 2002 1-7444
OAKWOOD HOMES CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit Description
----------- -------------------
4 Agreement to Furnish Copies of Instruments with Respect to
Long-term Debt
10.1 Lender Assumption Agreement, dated February 21, 2002 by The
CIT Group/Business Credit, Inc.
10.2 Loan and Security Agreement, dated January 22, 2002, and by
and among Oakwood Homes Corporation and each of its
subsidiaries that are signatories thereto, the lenders that
are signatories thereto and Foothill Capital Corporation
45