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 December 31, 2000 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
-------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-0985879
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(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
---
(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, 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 January 31, 2001.
Common Stock, Par Value $.50 Per Share . . . . . . . . .47,694,204
1
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
December 31,
------------
2000 1999
---- ----
Revenues
Net sales $ 255,205 $ 297,494
Financial services
Consumer finance, net of impairment and
valuation provisions 584 7,016
Insurance 10,079 15,836
---------- ----------
10,663 22,852
Other income 2,347 3,106
---------- ----------
Total revenues 268,215 323,452
---------- ----------
Costs and expenses
Cost of sales 203,838 236,249
Selling, general and administrative expenses 79,650 77,561
Financial services operating expenses
Consumer finance 9,271 11,291
Insurance 3,060 8,716
---------- ----------
12,331 20,007
Provision for losses on credit sales 750 760
Interest expense 14,596 12,830
---------- ----------
Total costs and expenses 311,165 347,407
---------- ----------
Income (loss) before income taxes (42,950) (23,955)
Provision for income taxes - (9,103)
---------- ----------
Net income (loss) $ (42,950) $ (14,852)
========== ==========
Earnings (loss) per share
Basic $ (0.91) $ (0.32)
Diluted $ (0.91) $ (0.32)
Dividends per share $ - $ .01
Weighted average number of
common shares outstanding
Basic 47,005 46,555
Diluted 47,005 46,555
See accompanying notes to the consolidated financial statements.
3
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three months ended
December 31,
------------
2000 1999
---- ----
Net income (loss) $ (42,950) $ (14,852)
Unrealized gains (losses) on securities
available for sale, net of tax (713) (2,268)
---------- ----------
Comprehensive income (loss) $ (43,663) $ (17,120)
========== ==========
See accompanying notes to the consolidated financial statements.
4
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands except share and per share data)
December 31 September 30
2000 1999
---- ----
ASSETS
Cash and cash equivalents $ 32,318 $ 22,523
Loans and investments 342,352 322,166
Other receivables 92,903 113,460
Inventories:
Manufactured homes 237,084 272,828
Work-in-process, materials and supplies 32,900 35,847
Land/homes under development 13,703 14,328
----------- -----------
283,687 323,003
Properties and facilities 234,574 241,107
Other assets 125,495 126,513
----------- -----------
$ 1,111,329 $ 1,148,772
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 124,991 $ 65,500
Notes and bonds payable 327,377 329,929
Accounts payable and accrued liabilites 216,875 261,888
Insurance reserves and unearned premiums 39,555 44,602
Deferred income taxes 5,785 6,169
Other long-term obligations 34,942 35,400
Shareholders' equity
Common stock, $.50 par value; 100,000,000
shares authorized; 47,694,000 and 47,105,000
shares issued and outstanding 23,847 23,552
Additional paid-in capital 169,816 169,742
Retained earnings 161,597 204,546
----------- -----------
355,260 397,840
Accumulated other comprehensive income, net of
income taxes of $3,397 and $3,782 6,912 7,625
Unearned compensation (368) (181)
----------- -----------
361,804 405,284
----------- -----------
$ 1,111,329 $ 1,148,772
=========== ===========
See accompanying notes to the consolidated financial statements.
5
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
Three months
December 31,
----------------------
2000 1999
---- ----
Operating activities
Net income (loss) $ (42,950) $ (14,852)
Adjustments to reconcile net income (loss) to cash provided (used)
by operating activities
Depreciation and amortization 15,414 13,556
Deferred income taxes - 6,555
Provision for losses on credit sales 750 760
Losses on loans sold or held for sale 3,679 11,751
Impairment and valuation provisions 9,656 -
Excess of cash received over REMIC residual Income
recognized (income recognized over cash received) (568) 6,510
Other (689) (1,996)
Changes in assets and liabilities
Other receivables 22,673 22,851
Inventories 39,316 43,868
Deferred insurance policy acquisition costs (4,011) 367
Other assets (738) (6,192)
Accounts payable and accrued liabilities (51,623) (35,516)
Insurance reserves and unearned premiums (5,047) (13,444)
Other long-term obligations (458) (116)
----------- ----------
Cash provided (used) by operations (14,596) 34,102
Loans originated (238,667) (237,673)
Sale of loans 205,972 253,882
Principal receipts on loans 3,566 5,026
----------- ----------
Cash provided (used) by operating activities (43,725) 55,337
----------- ----------
Investing activities
Acquisition of properties and facilities (3,222) (7,249)
Other (162) 2,531
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Cash (used) by investing activities (3,384) (4,718)
----------- ----------
Financing activities
Net borrowings (repayments) on short-term credit facilities 59,491 (43,711)
Proceeds from issuance of notes and bonds payable 24 -
Payments on notes and bonds (2,611) (3,976)
Cash dividends - (471)
Proceeds from exercise of stock options - 30
----------- ----------
Cash provided (used) by financing activities 56,904 (48,128)
----------- ----------
Net increase in cash and cash equivalents 9,795 2,491
Cash and cash equivalents
Beginning of period 22,523 26,939
----------- ----------
End of period $ 32,318 $ 29,430
=========== ==========
See accompanying notes to the consolidated financial statements.
6
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. The consolidated financial statements reflect all adjustments, which
include only normal recurring adjustments, which are, in the opinion of
management, necessary to present fairly 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.
2. The components of loans and investments are as follows:
December 31, September 30,
2000 2000
---- ----
(in thousands)
Loans held for sale, net of valuation allowances
of $2,739 and $2,563 $221,537 $211,296
Loans held for investment 7,579 8,512
Less: reserve for uncollectible receivables (2,855) (3,556)
-------- --------
Total loans receivable 226,261 216,252
-------- --------
Retained interests in REMIC securitizations
available for sale, exclusive of loan
servicing assets and liabilities, at fair value
Regular interests 87,966 77,229
Residual interests 28,125 28,685
-------- --------
Total retained REMIC interests, at fair value
(amortized cost of $105,782 and $94,507) 116,091 105,914
-------- --------
$342,352 $322,166
======== ========
3. During the quarter ended December 31, 2000 the Company recorded charges of
approximately $3.0 million, related primarily to the closing of a
manufacturing facility, the closing of eight sales centers and the further
streamlining of the organization.
7
4. 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
December 31,
------------
2000 1999
---- ----
(in thousands, except per share data)
Numerator for basic and diluted
EPS - Net income (loss) $ (42,950) $ (14,852)
Denominator:
Weighted average number of
common shares outstanding 47,005 46,565
Unearned shares - (10)
-------- --------
Denominator for basic EPS 47,005 46,555
Dilutive effect of stock options and
restricted shares computed using
the treasury stock method - -
-------- --------
Denominator for diluted EPS 47,005 46,555
======== ========
Earnings (loss) per common share - basic $ (0.91) $ (0.32)
======== ========
Earnings (loss) per common share - diluted $ (0.91) $ (0.32)
======== ========
Stock options to purchase 4,258,705 and 5,118,250 shares of common stock
and 589,500 and 550,903 unearned restricted shares were not included in the
computation of diluted earnings per share for the first quarter of fiscal
2000 and 1999, respectively, because their inclusion would have been
antidilutive.
5. In November 1998 the Company and certain of its present and former officers
and directors were named as defendants in lawsuits filed on behalf of
purchasers of the Company's common stock for various periods between April
11, 1997 and July 21, 1998 (the "Class Period"). In June 1999 a
consolidated amended complaint was filed in the United States Middle
District Court in Guilford County, North Carolina. The amended complaint,
which sought class action certification, alleged violations of federal
securities law based on alleged fraudulent acts, false and misleading
financial statements, reports filed by the Company and other
representations during the Class Period and sought the loss of value in
class members' stockholdings. In January 2001 the Federal District Court of
the Middle District of North Carolina dismissed with prejudice the
consolidated amended shareholder lawsuit. The time for filing any appeal
from the court's ruling has expired, and all shareholder action against the
Company and its officers and directors has been resolved.
During 2000 two lawsuits were filed against the Company's subsidiaries,
Oakwood Mobile Homes, Inc. and Oakwood Acceptance Corporation, and certain
of their employees in the Circuit Court of Jefferson County, Mississippi.
These lawsuits generally allege that the Company's subsidiaries and their
employees engaged in various improper business practices
8
including false advertising and misrepresentation of material facts
relating to financing and insurance matters. In October 2000 the plaintiffs
filed a motion to consolidate the two cases, add a large number of
additional plaintiffs residing in various parts of the United States to the
action and add the Company as a defendant. As the lawsuits are in the early
stages of discovery, the Company is unable to determine the effect, if any,
on its results of operations, financial position or cash flows. The Company
intends to defend these lawsuits vigorously.
In addition, 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 $17 million at December 31, 2000. The Company is also
contingently liable as guarantor on subordinated securities issued by REMIC
trusts in the aggregate principal amount of $121 million at December 31,
2000. 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 the numerous retailers and is further reduced by
the resale value of repurchased homes. The Company's estimated potential
obligations under such repurchase agreements approximated $122 million at
December 31, 2000. Losses under these repurchase agreements have not been
significant.
6. 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:
9
Three months ended
December 31,
------------
(in thousands) 2000 1999
---- ----
Revenues
Retail $ 174,775 $ 185,534
Manufacturing 156,348 244,889
Consumer finance 584 7,016
Insurance 12,767 15,836
Eliminations/other (76,259) (129,823)
--------- ---------
$ 268,215 $ 323,452
========= =========
Income (loss) before interest expense,
investment income and Income taxes
Retail $ (24,986) $ (12,539)
Manufacturing 1,834 35,817
Consumer finance (9,437) (5,035)
Insurance 7,019 7,120
Eliminations/other (2,920) (36,664)
--------- ---------
(28,490) (11,301)
Interest expense (14,596) (12,830)
Investment income 136 176
--------- ---------
Income (loss) before income taxes $ (42,950) $ (23,955)
========= =========
Depreciation and amortization
Retail $ 3,300 $ 2,424
Manufacturing 4,322 4,092
Consumer finance 3,411 5,020
Eliminations/other 4,381 2,020
--------- ---------
$ 15,414 $ 13,556
========= =========
Capital expenditures
Retail $ 820 $ 2,696
Manufacturing 865 2,378
Consumer finance 944 963
Eliminations/other 593 1,212
--------- ---------
$ 3,222 $ 7,249
========= =========
December 31, September 30,
2000 2000
---- ----
Identifiable assets
Retail $ 430,177 $ 475,227
Manufacturing 599,328 604,946
Consumer finance 678,759 637,264
Insurance 123,672 115,959
Eliminations/other (720,607) (684,624)
---------- ----------
$1,111,329 $1,148,772
========== ==========
10
7. In June 1998 the Financial Accounting Standards Board (the "Board")
issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("FAS 133"), which
establishes accounting and reporting standards for derivative instruments
and hedging activities. In June 2000 the Board issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities"("FAS 138"), which
amends FAS 133 and addresses a limited number of implementation issues
related to FAS 133. FAS 133, as amended by FAS 138, was effective for the
Company as of October 1, 2000. The Company has evaluated its significant
contracts and has determined that FAS 133 does not have a material impact
on its financial condition or results of operations.
In December 1999 the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"), which summarizes the SEC's views in
applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101, as amended, will be effective for the
Company no later than the fourth quarter of fiscal 2001. The Company
plans to adopt SAB 101 in the fourth quarter of fiscal 2001. SAB 101
allows companies to report any changes in revenue recognition related to
adopting its provisions as an accounting change at the time of
implementation in accordance with APB Opinion No. 20, "Accounting
Changes." Upon adoption, the Company will record a cumulative effect of
change in accounting principle, effective October 1, 2000. Under its
current policy, the Company recognizes revenue for the majority of retail
sales upon closing, which includes, for the great majority of retail
sales, execution of loan documents and related paperwork and receipt of
the customer's down payment. To adopt the provisions of SAB 101, the
Company currently plans to change its revenue recognition policy on these
retail sales to a method based upon placement of the home at the
customer's site. The Company has not yet determined the effect of this
change on its consolidated financial position and results of operations.
In September 2000 the Board issued 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"), which revises the standards of accounting
for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. FAS 140 is effective for
transfers occurring after March 31, 2001 and for disclosures relating to
securitization transactions and collateral for fiscal years ended after
December 15, 2000. The Company has determined that FAS 140 does not have
a material impact on its financial condition or results of operations.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
---------------------
Three months ended December 31, 2000 compared to three months ended December 31,
- --------------------------------------------------------------------------------
1999
- ----
The following table summarizes certain statistics for the quarters
ended December 31, 2000 and 1999:
2000 1999
---- ----
Retail sales (in millions) $ 172.9 $ 182.6
Wholesale sales (in millions) $ 82.3 $ 114.9
Total sales (in millions) $ 255.2 $ 297.5
Gross profit % - integrated operations 24.0% 25.2%
Gross profit % - wholesale operations 12.0% 13.2%
New single-section homes sold - retail 956 1,071
New multi-section homes sold - retail 2,523 2,619
Used homes sold - retail 284 426
New single-section homes sold - wholesale 428 856
New multi-section homes sold - wholesale 1,852 2,498
Average new single-section sales price - retail $30,100 $31,100
Average new multi-section sales price - retail $55,700 $55,600
Average new single-section sales price - wholesale $22,300 $20,100
Average new multi-section sales price - wholesale $39,000 $38,500
Weighted average retail sales centers
open during the period 377 400
Net sales
The Company's sales volume continued to be adversely affected by extremely
competitive industry conditions during the quarter ended December 31, 2000.
Retail sales dollar volume decreased 5%, reflecting a 6% decrease in new unit
volume and a decrease of 3% in the average new unit sales prices of
single-section homes. These decreases were partially offset by a shift in
product mix toward multi-section homes, which have higher average selling prices
than single-section homes. Multi-section homes accounted for 73% of retail new
unit sales compared to 71% in the quarter ended December 31, 1999. Average
retail sales prices on single-section homes declined as a result of competitive
pricing pressure and various promotional programs targeted at selling older
inventory models.
During the quarter ended December 31, 2000 the Company opened one new sales
center compared to two sales centers during the quarter ended December 31, 1999.
The Company also closed three and announced the closing of eight underperforming
sales centers during the quarter ended December 31, 2000. During the quarter
ended December 31, 1999 the Company closed 41 underperforming sales centers
primarily as part of its restructuring plans announced during the fourth quarter
of fiscal 1999. Total new retail sales dollars at sales centers open more than
one year decreased 4% during the quarter ended December 31, 2000.
Wholesale sales dollar volume decreased 28%, reflecting a 32% decrease in unit
volume. This decrease was partially offset by an 11% and 1% increase in the
average new unit sales price of
12
single-section and multi-section homes, respectively. The unit volume decrease
was also offset by a shift in product mix toward multi-section homes, which have
higher average selling prices than single-section homes. Multi-section sales
accounted for 81% of wholesale unit sales compared to 74% in the quarter ended
December 31, 1999.
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
decreased from 25.2% in the quarter ended December 31, 1999 to 24.0% in the
quarter ended December 31, 2000 primarily as a result of competitive pricing
pressures, various promotional programs targeted at selling older inventory
models and unfavorable manufacturing variances caused by reduced production
schedules experienced during the quarter ended December 31, 2000.
Gross profit margin - wholesale operations decreased from 13.2% in the quarter
ended December 31, 1999 to 12.0% in the quarter ended December 31, 2000 as a
result of competitive pricing pressures and unfavorable manufacturing variances
caused by reduced production schedules experienced during the quarter ended
December 31, 2000.
Consumer finance revenues
Consumer finance revenues are summarized as follows:
Three months ended
December 31,
------------
(in thousands) 2000 1999
---- ----
Interest income $ 10,176 $ 9,007
Servicing fees 2,306 4,933
REMIC residual income 1,086 4,382
Losses on loans sold or held for sale:
Loss on sale of loans (940) (3,059)
Valuation provision on loans
held for sale (2,739) (8,692)
-------- --------
(3,679) (11,751)
-------- --------
Impairment and valuation
provisions (9,656) -
Other 351 445
-------- --------
$ 584 $ 7,016
======== ========
The increase in interest income reflects higher average interest rates on loans
held for sale in the warehouse prior to securitization. This increase was
partially offset by lower average outstanding balances of loans held for sale in
the warehouse prior to securitization. The lower average warehouse balances
resulted from the timing of securitizations.
13
Loan servicing fees, which are reported net of amortization of servicing assets
and liabilities, declined as a result of increased servicing asset amortization
and lower servicing cash flows from the Company's securitizations. Servicing
fees did not increase commensurately with the growth of the Company's
securitized loan portfolio because 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 residual income primarily reflects reduced cash flow from
certain retained residual interests due to increased liquidations of
repossessions during the quarter.
The loss on sale of loans during the quarter ended December 31, 2000 reflects
the completion of a $214 million securitization. The decrease in securitization
losses reflects 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:
Three months ended
December 31,
------------
(in thousands) 2000 1999
---- ----
Impairment writedowns of residual
REMIC Interests $ 144 $ -
Valuation allowances on servicing
contracts 9,512 -
-------- --------
$ 9,656 $ -
======== ========
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 December 31, 2000 total credit losses on loans originated
by the Company, 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 1.88% on an annualized basis of the
average principal balance of the related loans, compared to approximately 1.26%
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. At December 31, 2000 the Company had a total of 3,287 unsold
properties in repossession or foreclosure (approximately 2.57% of the total
number of Oakwood originated serviced assets) compared to 2,603, 2,874 and 2,417
at September 30, 2000, December 31, 1999 and September 30, 1999, respectively
(approximately 2.06%, 2.36% and 1.97%, respectively, of the total number of
Oakwood originated serviced assets). Of the total number of unsold properties in
repossession or foreclosure, 298, 301, 410 and 417 relate to loans originated on
behalf of Deutsche Financial
14
Capital ("DFC"), the Company's former consumer finance joint venture, at
December 31, 2000, September 30, 2000, December 31, 1999 and September 30, 1999,
respectively.
At December 31, 2000 the delinquency rate on Company originated loans, excluding
loans originated on behalf of DFC, was 5.8%, compared to 5.1% at December 31,
1999. Increased delinquency rates ultimately may result in increased
repossessions and foreclosures and an increase in credit losses.
Insurance revenues
Insurance revenues from the Company's captive reinsurance business decreased 36%
to $10.1 million in the quarter ended December 31, 2000 from $15.8 million in
the quarter ended December 31, 1999. 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 trend experienced in
the first quarter of fiscal 2001 continues, insurance revenues should be
expected to continue to decline.
Effective June 1, 2000, the Company entered into a quota share agreement which
management believes will reduce the volatility of the Company's earnings by
lowering its underwriting exposure to natural disasters such as hurricanes and
floods. The agreement will reduce the levels of credit support, which currently
take the form of letters of credit and cash, to secure the reinsurance
subsidiary's obligations to pay claims and to meet regulatory capital
requirements. Under the new arrangement, which covers physical damage policies,
the Company will retro-cede 50% of the Company's physical damage premiums and
losses on an on-going basis. In return, the Company will receive a nonrefundable
commission with the potential to receive an incremental commission based on
favorable loss experience.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $2.1 million, or 3%,
during the quarter ended December 31, 2000 compared to the prior year. As a
percentage of net sales, selling, general and administrative expenses increased
to 31.2% in the quarter ended December 31, 2000 from 26.1% in the quarter ended
December 31, 1999. The increase is primarily due to higher selling expenses
principally as a result of certain salesperson compensation incentives
associated with the reduction of inventory levels and also as a result of a
lower sales base over which to spread the Company's fixed portion of
distribution and overhead costs and higher service costs.
Consumer finance operating expenses
Consumer finance operating expenses decreased $2.0 million, or 18%, during the
quarter ended December 31, 2000 principally as a result of cost reduction
initiatives undertaken during the fourth quarter of fiscal 2000.
Insurance operating expenses
Insurance operating costs declined by $5.7 million, or 65%, in the first quarter
of fiscal 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 reinsurance agreement described previously, as well as
the
15
Company's purchase of catastrophe reinsurance, should reduce the Company's
underwriting exposure to natural disasters.
Interest expense
Interest expense for the quarter ended December 31, 2000 increased $1.8 million
from the first quarter of fiscal 2000 due to higher fees and interest rates
associated with the Company's short-term credit facilities. These increases were
partially offset by lower average balances outstanding during the quarter ended
December 31, 2000.
Income taxes
The Company has operated at a loss in its two most recent fiscal years and in
the quarter ended December 31, 2000. Because management believes difficult
competitive conditions will continue for the foreseeable future, management
believes that under the provisions of Statement of Financial Accounting
Standards No. 109, it is not appropriate to record income tax benefits on
current losses in excess of anticipated refunds of taxes previously paid.
Consequently, the Company's results for the quarter ended December 31, 2000 do
not reflect a benefit from income taxes, notwithstanding the fact that the
Company reported a loss for the period. Had the Company recorded a tax benefit
in the quarter, the net loss would have been reduced by approximately $15.5
million.
Liquidity and Capital Resources
For the quarter ended December 31, 2000 the Company reported a net loss of $43.0
million. The net loss included non-cash charges of $13.3 million related to the
financial services business and a $3.0 million charge in connection with closing
a manufacturing facility, closing eight sales centers, and further streamlining
the organization. For the quarter ended December 31, 1999 the Company reported a
net loss of $14.9 million. The net loss included non-cash charges of $11.8
million related to the financial services business.
The financial results reported by the Company beginning in fiscal 1999 reflect
business conditions within the manufactured housing industry. The Company is
currently operating 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. The industry estimates that
shipments of manufactured homes from production facilities declined by
approximately 28% during calendar 2000.
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 continued during
the first quarter of fiscal 2001 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 during the past fiscal year,
most notably plant and sales center closings, curtailed production schedules and
competitive pricing to effect a $159.9 million reduction in inventories since
September 30, 1999, negatively affected the Company's reported earnings for 2000
and in the quarter ended December 31, 2000. Because the Company expects
competitive market conditions to continue during 2001, it does not expect to
generate income from operations; however, it plans to manage operations to
generate positive cash flow. The Company believes that operating cash flow,
coupled with borrowings under its
16
credit facilities will provide sufficient liquidity to meet obligations and
execute its business plan during 2001.
The Company also is currently negotiating new multi-year credit facilities to
replace its existing credit facilities which mature in October 2001. However,
there can be no assurance that the Company will be able to finalize such
facilities.
In the event of further deterioration in market conditions, the Company intends
to 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 operating or financial
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 December 31, 2000 the Company was operating
approximately 20 plants, though many were operating at reduced production
schedules. Should market conditions worsen from that anticipated, the Company
intends to continue to curtail production by lowering production speed or idling
additional production facilities.
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. However, there can be no assurances that such sources would be
adequate to fund its finance business.
Beginning in 1994, the Company generally sold to investors securities having a
principal balance approximately equal to the principal balance of the loans
securitized, and accordingly was not required to seek the permanent capital
required to fund its finance business outside of the asset-backed securities
market. Over the last two years, demand for subordinated securities,
particularly securities rated below BBB, has decreased. As a result, the Company
has retained certain subordinated asset-backed securities rated below BBB. The
aggregate principal balance of the retained securities rated below BBB
(including any initial overcollateralization) represented approximately 9% of
the aggregate principal balance of the loans securitized in transactions during
fiscal 2000.
At December 31, 2000 the Company owned subordinated asset-backed securities
rated below BBB having a carrying value of approximately $85.1 million
associated with certain of the Company's 1998, 1999, 2000 and 2001
securitizations, as well as subordinated asset-backed securities having a
carrying value of approximately $2.8 million retained from securitization
transactions prior to 1994. The Company considers these securities to be
available for sale, and
17
would consider opportunities to liquidate these securities based upon market
conditions. Continued decreased demand for subordinated asset-backed securities
at prices acceptable to the Company would be likely to 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 subordinated asset-backed securities. There can be no assurance that such
alternative financing can be obtained.
The Company estimates that in 2001 capital expenditures will approximate $24
million, comprised principally of improvements at existing facilities, computer
equipment and the replacement of certain computer information systems.
During the quarter ended December 31, 2000 the Company decreased inventories by
$39 million as a result of inventory reduction measures described previously.
The increase in loans and investments from September 30, 2000 principally
reflects an increase in loans held for sale from $211 million at September 30,
2000 to $222 million at December 31, 2000. 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.
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, statements relating to its belief that operating cash
flow, coupled with borrowings under its credit facilities, will provide
sufficient liquidity to meet its obligations and execute its business plan
during 2001 and the ability of the quota share agreement to reduce the Company's
underwriting exposure to natural disasters. Words like "believe," "expect,"
"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: competitive industry conditions could further adversely
affect sales and profitability; the Company may be unable to access sufficient
capital to fund its retail finance activities; 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; adverse
changes in governmental regulations applicable to its business could negatively
impact its business; the Company could suffer losses resulting from litigation;
the captive Bermuda reinsurance subsidiary could experience significant losses;
the Company could experience increased credit losses or higher delinquency rates
on loans that it originates; negative changes in general economic conditions in
its markets could adversely impact the Company; the Company could lose the
services of its key management personnel; and any other factors that generally
affect companies in its 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 2. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not applicable.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In November 1998 the Company and certain of its present and former officers
and directors were named as defendants in lawsuits filed on behalf of
purchasers of the Company's common stock for various periods between April
11, 1997 and July 21, 1998 (the "Class Period"). In June 1999 a
consolidated amended complaint was filed in the United States Middle
District Court in Guilford County, North Carolina. The amended complaint,
which sought class action certification, alleged violations of federal
securities law based on alleged fraudulent acts, false and misleading
financial statements, reports filed by the Company and other
representations during the Class Period and sought the loss of value in
class members' stockholdings. In January 2001 the Federal District Court of
the Middle District of North Carolina dismissed with prejudice the
consolidated amended shareholder lawsuit. The time for filing any appeal
from the court's ruling has expired, and all shareholder action against the
Company and its officers and directors has been resolved.
During 2000 two lawsuits were filed against the Company's subsidiaries,
Oakwood Mobile Homes, Inc. and Oakwood Acceptance Corporation, and certain
of their employees in the Circuit Court of Jefferson County, Mississippi.
These lawsuits generally allege that the Company's subsidiaries and their
employees engaged in various improper business practices including false
advertising and misrepresentation of material facts relating to financing
and insurance matters. In October 2000 the plaintiffs filed a motion to
consolidate the two cases, add a large number of additional plaintiffs
residing in various parts of the United States to the action and add the
Company as a defendant. As the lawsuits are in the early stages of
discovery, the Company is unable to determine the effect, if any, on its
financial position or results of operations. The Company intends to defend
these lawsuits vigorously.
In addition, 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.
19
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Annual Meeting of Shareholders of the Registrant held on
January 31, 2001, the shareholders elected Clarence W. Walker, Dennis I. Meyer,
Robert A. Smith, Duane D. Daggett, and Myles E. Standish as directors and
approved the selection of PricewaterhouseCoopers LLP as independent accountants.
The following table sets forth the votes on each such matter:
FOR AGAINST ABSTAIN NOT VOTED
---- ------- ------- ---------
Election of Directors
(by nominee)
Clarence W. Walker 43,276,019 -- 866,163 2,962,522
Dennis I. Meyer 42,920,059 -- 1,222,123 2,962,522
Robert A. Smith 43,633,650 -- 508,532 2,962,522
Duane D. Daggett 43,637,354 -- 504,828 2,962,522
Myles E. Standish 43,643,680 -- 498,502 2,962,522
Approval of selection of
PricewaterhouseCoopers
LLP as Independent
Accountants 43,077,897 902,561 161,724 2,962,522
20
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
(4) Agreement to Furnish Copies of Instruments with
Respect to Long-term Debt
b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ended
December 31, 2000.
Items 2, 3 and 5 are not applicable and are omitted.
21
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
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: February 14, 2001
OAKWOOD HOMES CORPORATION
BY: /s/ Suzanne H. Wood
--------------------
Suzanne H. Wood
Executive Vice President
(Chief Financial Officer)
(Duly Authorized Officer)
22
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
ITEM 6(a)
FORM 10-Q
QUARTERLY REPORT
For the quarter ended Commission File Number
December 31, 2000 1-7444
OAKWOOD HOMES CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit Description
----------- -------------------
4 Agreement to Furnish Copies of Instruments with Respect
to Long-term Debt
23