SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2001 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
-------------- ----------
(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
------------------------------------------------------------
(Mailing address of principal executive offices)
(336) 664-2400
--------------
(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 April 30, 2001.
Common Stock, Par Value $.50 Per Share . . . . . . . . .9,528,841
1
EXPLANATORY NOTE:
The Registrant is filing this Form 10-Q/A in order to provide additional
disclosure in Part 1, Item 1 - Financial Information and Part 1, Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations relating to restructuring charges recorded during the fiscal years
ended September 30, 2000 and 1999, respectively.
Additionally, the Company effected a one-for-five reverse stock split effective
after the close of business on June 18, 2001. All share and per share amounts in
this Form 10-Q/A have been adjusted retroactively to give effect to the reverse
stock split.
2
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.
3
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
Three months ended
March 31,
----------
2001 2000
---- ----
Revenues
Net sales $ 208,061 $ 271,349
Financial services
Consumer finance, net of impairment and
valuation provisions 23,702 14,588
Insurance 9,410 14,595
----------- -----------
33,112 29,183
Other income 2,136 2,272
----------- -----------
Total revenues 243,309 302,804
----------- -----------
Costs and expenses
Cost of sales 168,349 215,511
Selling, general and administrative expenses 72,585 78,642
Financial services operating expenses
Consumer finance 10,276 10,361
Insurance 4,674 8,221
----------- -----------
14,950 18,582
Reversal of restructuring charges - (4,351)
Provision for losses on credit sales 2,250 740
Interest expense 13,219 12,995
----------- -----------
Total costs and expenses 271,353 322,119
----------- -----------
Loss before income taxes (28,044) (19,315)
Provision for income taxes - (7,339)
----------- -----------
Net loss $ (28,044) $ (11,976)
=========== ===========
Loss per share
Basic $ (2.98) $ (1.29)
Diluted $ (2.98) $ (1.29)
Dividends per share $ - $ .05
Weighted average number of
common shares outstanding
Basic 9,421 9,315
Diluted 9,421 9,315
See accompanying notes to the consolidated financial statements.
4
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
Six months ended
March 31,
---------
2001 2000
---- ----
Revenues
Net sales $ 463,266 $ 568,843
Financial services revenues
Consumer finance, net of impairment and
valuation provisions 24,286 21,604
Insurance 19,489 30,431
------------ ------------
43,775 52,035
Other income 4,483 5,378
------------ ------------
Total revenues 511,524 626,256
------------ ------------
Costs and expenses
Cost of sales 372,187 451,760
Selling, general and administrative expenses 152,235 156,203
Financial services operating expenses
Consumer finance 19,547 21,652
Insurance 7,734 16,937
------------ ------------
27,281 38,589
Reversal of restructuring charges - (4,351)
Provision for losses on credit sales 3,000 1,500
Interest expense 27,815 25,825
------------ ------------
Total costs and expenses 582,518 669,526
------------ ------------
Loss before income taxes (70,994) (43,270)
Provision for income taxes - (16,442)
------------ ------------
Net loss $ (70,994) $ (26,828)
============ ============
Loss per share
Basic $ (7.54) $ (2.88)
Diluted $ (7.54) $ (2.88)
Dividends per share $ - $ .10
Weighted average number of
common shares outstanding
Basic 9,411 9,313
Diluted 9,411 9,313
See accompanying notes to the consolidated financial statements.
5
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
Three months ended Six months ended
March 31, March 31,
---------- ----------
2001 2000 2001 2000
---- ---- ---- ----
Net loss $ (28,044) $ (11,976) $(70,994) $(26,828)
Unrealized gains on securities
available for sale, net of tax 3,041 5,688 2,328 3,420
--------- --------- -------- --------
Comprehensive loss $ (25,003) $ (6,288) $(68,666) $(23,408)
========= ========= ======== ========
See accompanying notes to the consolidated financial statements.
6
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands except share and per share data)
March 31, September 30,
ASSETS 2001 2000
---- ----
Cash and cash equivalents $ 18,530 $ 22,523
Loans and investments 239,388 322,166
Other receivables 102,086 113,460
Inventories
Manufactured homes 227,515 272,828
Work-in-process, materials and supplies 28,354 35,847
Land/homes under development 13,158 14,328
---------- ------------
269,027 323,003
Properties and facilities 230,695 241,107
Other assets 130,845 126,513
---------- ------------
$ 990,571 $ 1,148,772
========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 30,000 $ 65,500
Notes and bonds payable 326,637 329,929
Accounts payable and accrued liabilities 227,158 261,888
Insurance reserves and unearned premiums 18,221 44,602
Deferred income taxes 7,423 6,169
Other long-term obligations 33,247 35,400
Commitments and contingencies
Shareholders' equity
Common stock, $.50 par value; 100,000,000
shares authorized; 9,532,000 and 9,421,000
shares issued and outstanding 23,829 23,552
Additional paid-in capital 180,838 169,742
Retained earnings 133,553 204,546
---------- ------------
338,220 397,840
Accumulated other comprehensive income, net of
income taxes of $5,034 and $3,782 9,953 7,625
Unearned compensation (288) (181)
---------- ------------
347,885 405,284
---------- ------------
$ 990,571 $ 1,148,772
========== ============
7
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
Six months
March 31,
----------
2001 2000
---- ----
Operating activities
Net loss $ (70,994) $ (26,828)
Adjustments to reconcile net loss to cash provided
by operating activities
Depreciation and amortization 28,595 25,434
Deferred income taxes - (2,286)
Provision for losses on credit sales 3,000 1,500
(Gains) losses on securities sold and loans sold or held for sale (887) 18,577
Impairment and valuation provisions 10,088 742
Excess of cash received over REMIC residual income
recognized (income recognized over cash received) (1,163) 7,196
Reversal of restructuring charges - (4,351)
Other (3,600) 5,415
Changes in assets and liabilities
Other receivables 13,573 1,268
Inventories 53,976 73,035
Deferred insurance policy acquisition costs 603 861
Other assets (3,420) (6,991)
Accounts payable and accrued liabilities (40,252) (28,990)
Insurance reserves and unearned premiums (26,381) (14,869)
Other long-term obligations (2,153) (637)
----------- -----------
Cash provided (used) by operations (39,015) 49,076
Loans originated (405,850) (479,061)
Sale of loans 483,965 582,202
Principal receipts on loans 3,440 12,423
----------- -----------
Cash provided by operating activities 42,540 164,640
----------- -----------
Investing activities
Acquisition of properties and facilities (6,560) (12,413)
Other (1,112) 11,952
----------- -----------
Cash used by investing activities (7,672) (461)
----------- -----------
8
Financing activities
Net repayments on short-term credit facilities (35,500) (152,800)
Proceeds from issuance of notes and bonds payable 24 -
Payments on notes and bonds (3,385) (9,040)
Cash dividends - (942)
Proceeds from exercise of stock options - 30
----------- ------------
Cash used by financing activities (38,861) (162,752)
----------- ------------
Net increase (decrease) in cash and cash equivalents (3,993) 1,427
Cash and cash equivalents
Beginning of period 22,523 26,939
----------- ------------
End of period $ 18,530 $ 28,366
=========== ============
See accompanying notes to the consolidated financial statements.
9
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 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:
March 31, September 30,
2001 2000
---- ----
(in thousands)
Loans held for sale, net of valuation allowances
of $2,739 and $2,563 $ 113,530 $ 211,296
Loans held for investment 7,268 8,512
Less: reserve for uncollectible loans receivable (1,559) (3,556)
---------- ----------
Total loans receivable 119,239 216,252
---------- ----------
Retained interests in REMIC securitizations
available for sale, exclusive of loan
servicing assets and liabilities, at fair value
Regular interests 85,978 77,229
Residual interests 34,171 28,685
---------- ----------
Total retained REMIC interests, at fair value
(amortized cost of $105,160 and $94,507) 120,149 105,914
---------- ----------
$ 239,388 $ 322,166
========== ==========
10
3. 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 recorded 9/28/99 $ 7,350 $ 7,384 $ 11,192 $ 25,926
Payments and charges (1,707) (141) (11,192) (13,040)
----------------------------------------------------------
Balance 9/30/99 5,643 7,243 - 12,886
----------------------------------------------------------
Payments and charges (810) (2,750) - (3,560)
----------------------------------------------------------
Balance 12/31/99 4,833 4,493 - 9,326
----------------------------------------------------------
Payments and charges (550) (1,183) - (1,733)
Reversals (2,912) (1,439) - (4,351)
----------------------------------------------------------
Balance 3/31/00 1,371 1,871 - 3,242
----------------------------------------------------------
Payments and charges (81) (685) 378 (388)
Reversals (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 charges (1,505) (1,277) (15) (2,797)
Reversals (100) (635) - (735)
----------------------------------------------------------
Balance 9/30/00 759 1,052 - 1,811
----------------------------------------------------------
Payments and charges (519) (109) - (628)
----------------------------------------------------------
Balance 12/31/00 240 943 - 1,183
----------------------------------------------------------
Payments and charges (114) (31) - (145)
----------------------------------------------------------
Balance 3/31/01 $ 126 $ 912 $ - $ 1,038
----------------------------------------------------------
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 manufacturing, retail and finance operations, costs
associated with closing plants and sales centers, and asset writedowns.
During the second quarter of 2000 the Company reversed into income $4.4
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
11
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. In
the second quarter, the Company also reversed approximately $1.4 million of
charges related to plant, sales center and office closings when it revised
its estimate of costs to restore sales center lots to their original
condition. The revision of the Company's original cost estimate was made
concurrent with the ultimate disposition of certain sales center closings.
During the third quarter of 2000 the Company reversed into income
approximately $0.9 million and $0.4 million of charges related to estimated
legal costs associated with the restructuring plan, principally severance
and other termination payments, and the disposition of certain assets,
principally vehicles, respectively. Because the substantial portion of the
activities to which these accrued costs related had been completed in the
quarter, the Company revised its original cost estimate and thus reversed
the charges.
During the fourth quarter of 2000, the Company reversed into income
approximately $0.7 million of charges primarily related to plant, remaining
sales center and office closings. The Company had substantially completed
its final negotiation of lease termination costs and had fulfilled certain
contractual obligations associated with one of its plants. As a result, the
Company revised it original estimate of the costs associated with these
activities and thus reversed the charges.
The Company also recorded an additional $3.8 million charge during the
fourth quarter of 2000, primarily related to severance costs associated
with a reduction in headcount of an additional 250 people primarily in the
corporate, finance and manufacturing operations area, and the closure of
offices.
At March 31, 2001 approximately $1.0 million remained in the restructuring
reserve relating to costs the Company expects to pay by the end of fiscal
2001.
During the execution of the Company's restructuring plans, 2,400 employees
were terminated. With the exception of the 250 employees who were
terminated in the fourth quarter of 2000, all employees were terminated
during the fourth quarter of 1999.
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"):
12
Three months ended Six months ended
March 31, March 31,
---------- ---------
2001 2000 2001 2000
---- ---- ---- ----
(in thousands, except per share data)
Numerator for basic and diluted
EPS - Net loss $ (28,044) $ (11,976) $ (70,994) $ (26,828)
Denominator:
Weighted average number of
common shares outstanding 9,421 9,315 9,411 9,314
Unearned shares - - - (1)
------------ ------------- ------------ ------------
Denominator for basic EPS 9,421 9,315 9,411 9,313
Dilutive effect of stock options and
restricted shares computed using
the treasury stock method - - - -
------------ ------------- ------------ ------------
Denominator for diluted EPS 9,421 9,315 9,411 9,313
============ ============= ============ ============
Earnings (loss) per common share - basic $ (2.98) $ (1.29) $ (7.54) $ (2.88)
============ ============= ============ ============
Earnings (loss) per common share - diluted $ (2.98) $ (1.29) $ (7.54) $ (2.88)
============ ============= ============ ============
Stock options to purchase 769,819 and 921,350 shares of common stock and
107,900 and 110,181 unearned restricted shares at March 31, 2001 were not
included in the computation of diluted earnings per share because their
inclusion would have been antidilutive.
13
5. During the second quarter of fiscal 2001, the Company entered into a
three-year, $200 million loan purchase facility with a financial
institution. 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, loans are purchased from the Company and held
for later securitization. In connection with the facility, the Company
issued to a sister company of the financial institution a warrant to
acquire approximately 1.9 million shares of the Company's common stock with
an exercise price of approximately $9.84 per share. The warrant, which is
immediately exercisable, expires in February 2009. During the quarter ended
March 31, 2001, the Company recorded non-cash expense of $0.3 million
related to the warrant.
The Company has complied, or obtained waivers for failing to comply, with
all covenants contained in its credit agreements. However, certain
financial covenants contained in the Company's revolving credit agreement,
particularly earnings before interest, taxes and depreciation (as defined
in the agreement) become more stringent in the second half of the fiscal
year, consistent with the seasonal nature of the Company's business. Should
the Company's results of operations fail to improve in the second six
months of the fiscal year, it is likely that the Company will violate
financial covenants contained in the agreement. While the Company's lenders
have in the past amended certain financial covenants or waived compliance
therewith, there can be no assurance that the Company's lenders will do so
in the future should such violations occur.
6. 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 dismissed and resolved.
During fiscal 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. These motions have
not been ruled on by the trial judge. Oakwood Mobile Homes, Inc. and
Oakwood Acceptance Corporation have filed six separate suits in the United
States District Court for the Southern District of Mississippi requesting
the Court to enforce arbitration agreements signed by all but one of the
original Jefferson County plaintiffs. The defendants in these actions have
filed a series of procedural motions. As a result, no hearing date has been
set on any of these actions. As the lawsuits are in the early stages, 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
14
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, 2001. The Company is also
contingently liable as guarantor on subordinated securities issued by REMIC
trusts in the aggregate principal amount of $123 million at March 31, 2001.
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 $109 million at
March 31, 2001. Losses under these repurchase agreements have not been
significant.
7. 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:
Three months ended Six months ended
March 31, March 31,
---------- ---------
(in thousands) 2001 2000 2001 2000
---- ---- ---- ----
Revenues
Retail $ 133,443 $ 178,294 $ 308,218 $ 363,828
Manufacturing 146,986 165,393 303,334 410,282
Consumer finance 23,702 14,588 24,286 21,604
Insurance 11,835 14,595 24,602 30,431
Eliminations/other (72,657) (70,066) (148,916) (199,889)
----------- ----------- ----------- ------------
$ 243,309 $ 302,804 $ 511,524 $ 626,256
=========== =========== =========== ============
Income (loss) before interest expense,
investment income and income taxes
Retail $ (28,065) $ (14,856) $ (53,051) $ (27,395)
Manufacturing 2,584 (441) 4,418 35,376
Consumer finance 11,176 3,487 1,739 (1,548)
Insurance 4,736 6,374 11,755 13,494
Eliminations/other (5,528) (1,020) (8,448) (37,684)
----------- ----------- ----------- ------------
(15,097) (6,456) (43,587) (17,757)
Interest expense (13,219) (12,995) (27,815) (25,825)
Investment income 272 136 408 312
----------- ----------- ----------- ------------
Income (loss) before income taxes $ (28,044) $ (19,315) $ (70,994) $ (43,270)
=========== =========== =========== ============
15
Depreciation and amortization
Retail $ 2,732 $ 2,515 $ 6,032 $ 4,939
Manufacturing 4,317 4,352 8,639 8,444
Consumer finance 2,622 2,859 6,033 7,879
Eliminations/other 3,510 2,152 7,891 4,172
----------- ------------- ------------ ------------
$ 13,181 $ 11,878 $ 28,595 $ 25,434
=========== ============= ============ ============
Capital expenditures
Retail $ 391 $ 2,066 $ 1,211 $ 4,762
Manufacturing 872 1,165 1,737 3,543
Consumer finance 922 1,010 1,866 1,973
Eliminations/other 1,153 923 1,746 2,135
----------- ------------- ------------ ------------
$ 3,338 $ 5,164 $ 6,560 $ 12,413
=========== ============= ============ ============
March 31, September 30,
2001 2000
---- ----
Identifiable assets
Retail $ 412,290 $ 475,227
Manufacturing 467,432 604,946
Consumer finance 425,372 637,264
Insurance 111,924 115,959
Eliminations/other (426,447) (684,624)
----------- -------------
$ 990,571 $ 1,148,772
=========== =============
16
8. 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 adoption of FAS 123 did not have any
material impact on the Company's financial condition or results of
operation as the Company has no derivative instruments.
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.
In October 2000 the Emerging Issues Task Force of the Board (the "EITF")
reached a consensus on a new accounting requirement for the recognition
of other than temporary impairments on purchased and retained beneficial
interests resulting from securitization transactions. This requirement is
summarized in EIFF Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets" ("EITF 99-20"). Initial adoption of this new accounting
guidance will be required for the Company's third quarter of 2001 and is
to be reflected as a cumulative effect of an accounting change at the
time of adoption. The Company is currently addressing the potential
impact on the accounting for the Company's REMIC interests retained at
the time of its securitization transactions.
9. On June 8, 2001, the Company's Board of Directors authorized a
one-for-five reverse stock split effective after the close of business on
June 18, 2001. All shares and per share amounts have been adjusted to
give effect to the reverse split.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Three months ended March 31, 2001 compared to three months ended March 31, 2000
- -------------------------------------------------------------------------------
The following table summarizes certain statistics for the quarters ended
March 31, 2001 and 2000:
2001 2000
---- ----
Retail sales (in millions) $ 130.9 $ 176.2
Wholesale sales (in millions) $ 77.2 $ 95.1
Total sales (in millions) $ 208.1 $ 271.3
Gross profit % - integrated operations 23.9% 25.3%
Gross profit % - wholesale operations 11.0% 11.7%
New single-section homes sold - retail 899 1,427
New multi-section homes sold - retail 1,839 2,289
Used homes sold - retail 333 465
New single-section homes sold - wholesale 470 746
New multi-section homes sold - wholesale 1,752 2,105
Average new single-section sales price - retail $30,100 $31,900
Average new multi-section sales price - retail $54,500 $54,600
Average new single-section sales price - wholesale $20,400 $21,400
Average new multi-section sales price - wholesale $38,400 $37,500
Weighted average retail sales centers
open during the period 365 374
Net sales
The Company's sales volume continued to be adversely affected by extremely
competitive industry conditions during the quarter ended March 31, 2001. Retail
sales dollar volume decreased 26%, reflecting a 26% decrease in new unit volume
and a decrease of 6% 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 67% of retail new unit
sales compared to 62% in the quarter ended March 31, 2000. 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 March 31, 2001 the Company opened no new sales centers
compared to four sales centers during the quarter ended March 31, 2000. The
Company also closed nine underperforming sales centers during the quarter ended
March 31, 2001 and converted 12 sales centers to centers that exclusively market
repossessed inventory. No restructuring charges were recorded as a result of
these closings and conversions. During the quarter ended March 31, 2000 the
Company closed two underperforming sales centers. Total new retail sales dollars
at sales centers open more than one year decreased 25% during the quarter ended
March 31, 2001.
Wholesale sales represent sales of manufactured homes to independent retailers.
Wholesale sales dollar volume decreased 19%, reflecting a 22% decrease in unit
volume and a 5% decrease in the average new unit sales prices of single-section
homes. This decrease was partially offset by
18
a 2% increase in the average new unit sales price of multi-section homes. 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 79% of wholesale unit
sales compared to 74% in the quarter ended March 31, 2000.
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 25.3% in the quarter ended March 31, 2000 to 23.9% in the quarter
ended March 31, 2001 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 March 31, 2001.
Gross profit margin - wholesale operations decreased from 11.7% in the quarter
ended March 31, 2000 to 11.0% in the quarter ended March 31, 2001 as a result of
competitive pricing pressures and unfavorable manufacturing variances caused by
reduced production schedules experienced during the quarter ended March 31,
2001.
Consumer finance revenues
Consumer finance revenues are summarized as follows:
Three months ended
March 31,
---------
(in thousands) 2001 2000
---- ----
Interest income $ 9,632 $ 10,574
Servicing fees 7,255 5,160
REMIC residual income 2,184 5,911
Gains (losses) on securities sold and
loans sold or held for sale:
Gain (loss) on sale of securities and loans 4,566 (6,826)
Valuation provision on loans
held for sale - -
--------- ---------
4,566 (6,826)
--------- ---------
Impairment and valuation
provisions (432) (742)
Other 497 511
--------- ---------
$ 23,702 $ 14,588
--------- ---------
The decrease in interest income reflects lower average outstanding balances of
loans held for sale in the warehouse prior to securitization. This decrease was
partially offset by higher 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.
Loan servicing fees, which are reported net of amortization of servicing assets
and liabilities, increased as a result of increased overall servicing cash flows
from the Company's securitizations.
19
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 residual income primarily reflects reduced cash flow from
certain retained residual interests as a result of increased liquidations of
repossessions during the quarter.
The gain on sale of securities and loans during the quarter ended March 31, 2001
reflects the securitization of $250 million of consumer finance assets,
consisting of approximately $224 million of installment sale contracts and
mortgage loans and approximately $26 million principal balance of securities
which the Company had retained from asset-backed transactions closed in 1999 and
2000. The gain 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
March 31,
---------
(in thousands) 2001 2000
---- ----
Impairment writedowns of residual
REMIC interests $ - $ -
Impairment writedowns of regular
REMIC interests - 3,690
Valuation allowances on servicing
contracts 432 2,844
Reduction of previously recorded
valuation allowances on servicing
contracts - (6,401)
Additional provisions for potential
guarantee obligations on REMIC
securities sold - 609
------- -------
$ 432 $ 742
======= =======
These charges 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, 2001 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 1.93% on an annualized basis of the
average principal balance of the related loans, compared to approximately 2.32%
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
20
variations in the charge-off ratio. At March 31, 2001 the Company had a total of
3,899 unsold properties in repossession or foreclosure (approximately 3.05% of
the total number of Oakwood originated serviced assets) compared to 3,287, 2,809
and 2,874 at December 31, 2000, March 31, 2000 and December 31, 1999,
respectively (approximately 2.57%, 2.29% and 2.36%, respectively, of the total
number of Oakwood originated serviced assets). Of the total number of unsold
properties in repossession or foreclosure, 353, 298, 414 and 410 relate to loans
originated on behalf of Deutsche Financial Capital ("DFC"), the Company's former
consumer finance joint venture, at March 31, 2001, December 31, 2000, March 31,
2000 and December 31, 1999, respectively.
At March 31, 2001 the delinquency rate on Company originated loans, excluding
loans originated on behalf of DFC, was 3.8%, compared to 3.5% at March 31, 2000.
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 $9.4 million in the quarter ended March 31, 2001 from $14.6 million in the
quarter ended March 31, 2000. A substantial portion of insurance revenues is
derived from insurance policies sold in connection with new home sales by the
Company's retail operations.
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. As of March 31, 2001, the Company has not recognized
any incremental commission from the arrangement.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $6.1 million, or 8%,
during the quarter ended March 31, 2001 compared to the prior year. As a
percentage of net sales, selling, general and administrative expenses increased
to 34.9% in the quarter ended March 31, 2001 from 29.0% in the quarter ended
March 31, 2000. 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 combined with 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 1%, during the quarter ended March
31, 2001 principally as a result of cost reduction initiatives undertaken during
the fourth quarter of fiscal 2000.
Insurance operating expenses
Insurance operating costs declined by $3.5 million, or 43%, in the second
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
21
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 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):
Severance Plant, sales
and other center and
termination office Asset
charges closings write-downs Total
----------------------------------------------------------
Original provision recorded 9/28/99 $ 7,350 $ 7,384 $ 11,192 $ 25,926
Payments and charges (1,707) (141) (11,192) (13,040)
----------------------------------------------------------
Balance 9/30/99 5,643 7,243 - 12,886
----------------------------------------------------------
Payments and charges (810) (2,750) - (3,560)
----------------------------------------------------------
Balance 12/31/99 4,833 4,493 - 9,326
----------------------------------------------------------
Payments and charges (550) (1,183) - (1,733)
Reversals (2,912) (1,439) - (4,351)
----------------------------------------------------------
Balance 3/31/00 1,371 1,871 - 3,242
----------------------------------------------------------
Payments and charges (81) (685) 378 (388)
Reversals (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 charges (1,505) (1,277) (15) (2,797)
Reversals (100) (635) - (735)
----------------------------------------------------------
Balance 9/30/00 759 1,052 - 1,811
----------------------------------------------------------
Payments and charges (519) (109) - (628)
----------------------------------------------------------
Balance 12/31/00 240 943 - 1,183
----------------------------------------------------------
Payments and charges (114) (31) - (145)
----------------------------------------------------------
Balance 3/31/01 $ 126 $ 912 $ - $ 1,038
----------------------------------------------------------
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
manufacturing, retail and finance operations, costs associated with closing
plants and sales centers, and asset writedowns.
22
During the second quarter of 2000 the Company reversed into income $4.4 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. In the second quarter, the Company also
reversed approximately $1.4 million of charges related to plant, sales center
and office closings when it revised its estimate of costs to restore sales
center lots to their original condition. The revision of the Company's original
cost estimate was made concurrent with the ultimate disposition of certain sales
center closings.
During the third quarter of 2000 the Company reversed into income approximately
$0.9 million and $0.4 million of charges related to estimated legal costs
associated with the restructuring plan, principally severance and other
termination payments, and the disposition of certain assets, principally
vehicles, respectively. Because the substantial portion of the activities to
which these accrued costs related had been completed in the quarter, the Company
revised its original cost estimate and thus reversed the charges.
During the fourth quarter of 2000, the Company reversed into income
approximately $0.7 million of charges primarily related to plant, remaining
sales center and office closings. The Company had substantially completed its
final negotiation of lease termination costs and had fulfilled certain
contractual obligations associated with one of its plants. As a result, the
Company revised it original estimate of the costs associated with these
activities and thus reversed the charges.
The Company also recorded an additional $3.8 million charge during the fourth
quarter of 2000, primarily related to severance costs associated with a
reduction in headcount of an additional 250 people primarily in the corporate,
finance and manufacturing operations area, and the closure of offices.
At March 31, 2001 approximately $1.0 million remained in the restructuring
reserve relating to costs the Company expects to pay by the end of fiscal 2001.
During the execution of the Company's restructuring plans, 2,400 employees were
terminated. With the exception of the 250 employees who were terminated in the
fourth quarter of 2000, all employees were terminated during the fourth quarter
of 1999.
Interest expense
Interest expense for the quarter ended March 31, 2001 increased 2% from the
second 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 March 31,
2001.
Income taxes
The Company has operated at a loss in its two most recent fiscal years and in
the quarter ended March 31, 2001. 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
23
the quarter ended March 31, 2001 do not reflect a benefit from income taxes,
notwithstanding the fact that the Company reported a loss for the period.
Six months ended March 31, 2001 compared to six months ended March 31, 2000
- ---------------------------------------------------------------------------
The following table summarizes certain statistics for the six months ended
March 31, 2001 and 2000:
2001 2000
---- ----
Retail sales (in millions) $ 303.8 $ 358.9
Wholesale sales (in millions) $ 159.5 $ 209.9
Total sales (in millions) $ 463.3 $ 568.8
Gross profit % - integrated operations 23.9% 25.3%
Gross profit % - wholesale operations 11.6% 12.6%
New single-section homes sold - retail 1,855 2,498
New multi-section homes sold - retail 4,362 4,908
Used homes sold - retail 617 891
New single-section homes sold - wholesale 898 1,602
New multi-section homes sold - wholesale 3,604 4,603
Average new single-section sales price - retail $30,100 $31,500
Average new multi-section sales price - retail $55,200 $55,100
Average new single-section sales price - wholesale $21,200 $20,700
Average new multi-section sales price - wholesale $38,700 $38,100
Weighted average retail sales centers
open during the period 370 389
Net sales
The Company's sales volume continued to be adversely affected by extremely
competitive industry conditions during the six months ended March 31, 2001.
Retail sales dollar volume decreased 15%, reflecting a 16% decrease in new unit
volume and a decrease of 4% 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 70% of retail new
unit sales compared to 66% in the six months ended March 31, 2000. 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 six months ended March 31, 2001 the Company opened one new sales
center compared to six sales centers during the six months ended March 31, 2000.
The Company also closed 12 underperforming sales centers during the six months
ended March 31, 2001 and converted 12 sales centers to centers that exclusively
market repossessed inventory. During the six months ended March 31, 2000 the
Company closed 43 underperforming sales centers primarily as part of its
restructuring plan announced during the fourth quarter of fiscal 1999. Total new
retail sales dollars at sales centers open more than one year decreased 14%
during the six months ended March 31, 2001.
Wholesale sales represent sales of manufactured homes to independent retailers.
Wholesale sales dollar volume decreased 24%, reflecting a 27% decrease in unit
volume. This decrease was partially offset by a 2% increase in the average new
unit sales prices of single-section homes and a 2% increase in the average new
unit sales price of multi-section homes. The unit volume decrease was also
offset by a shift in product mix toward multi-section homes, which have higher
24
average selling prices than single-section homes. Multi-section sales accounted
for 80% of wholesale unit sales compared to 74% in the six months ended March
31, 2000.
Gross profit
Gross profit margin - integrated operations decreased from 25.3% in the quarter
ended March 31, 2000 to 23.9% in the six months ended March 31, 2001 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 six
months ended March 31, 2001.
Gross profit margin - wholesale operations decreased from 12.6% in the six
months ended March 31, 2000 to 11.6% in the six months ended March 31, 2001 as a
result of competitive pricing pressures and unfavorable manufacturing variances
caused by reduced production schedules experienced during the six months ended
March 31, 2001.
Consumer finance revenues
Consumer finance revenues are summarized as follows:
Six months ended
March 31,
---------
(in thousands) 2001 2000
---- ----
Interest income $ 19,808 $ 19,581
Servicing fees 9,561 10,093
REMIC residual income 3,270 10,293
Gains (losses) on securities sold and loans sold or held for sale:
Gain (loss) on sale of securities and loans 3,626 (9,885)
Valuation provision on loans
held for sale (2,739) (8,692)
-------- --------
887 (18,577)
-------- --------
Impairment and valuation
provisions (10,088) (742)
Other 848 956
-------- --------
$ 24,286 $ 21,604
-------- --------
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 a decrease in loan originations.
Loan servicing fees, which are reported net of amortization of servicing assets
and liabilities, increased 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
25
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 six months ended March 31, 2001.
The gain on sale of securities and loans during the six months ended March 31,
2001 reflects the completion of two securitizations. The gain 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 as well as the sale
of securities retained from securitizations completed in 1999 and 2000.
Impairment and valuation provisions are summarized as follows:
Six months ended
March 31,
---------
(in thousands) 2001 2000
---- ----
Impairment writedowns of residual
REMIC interests $ 143 $ -
Impairment writedowns of regular
REMIC interests - 3,690
Valuation provisions on servicing
contracts 9,945 2,844
Reductions of previously recorded
valuation allowance on servicing
contracts - (6,401)
Additional provisions for potential
guarantee obligations on REMIC
securities sold - 609
-------- --------
$ 10,088 $ 742
======== ========
These charges 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, 2001 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 1.90% on an annualized basis of the
average principal balance of the related loans, compared to approximately 1.78%
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 March 31, 2001 the Company had a total of 3,899 unsold
properties in repossession or foreclosure (approximately 3.05% of the total
number of Oakwood originated serviced assets) compared to 3,287, 2,809 and 2,874
at December 31, 2000, March 31, 2000 and December 31, 1999, respectively
(approximately 2.57%, 2.29% and 2.36%, respectively,
26
of the total number of Oakwood originated serviced assets). Of the total number
of unsold properties in repossession or foreclosure, 353, 298, 414 and 410
relate to loans originated on behalf of Deutsche Financial Capital ("DFC"), the
Company's former consumer finance joint venture, at March 31, 2001, December 31,
2000, March 31, 2000 and December 31, 1999, respectively.
Insurance revenues
Insurance revenues from the Company's captive reinsurance business decreased 36%
to $19.5 million in the six months ended March 31, 2001 from $30.4 million in
the six months ended March 31, 2000. A substantial portion of insurance revenues
is derived from insurance policies sold in connection with new home sales by the
Company's retail operations.
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. As of March 31, 2001, the Company has not recognized
any incremental commission from the arrangement.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $4.0 million, or 3%,
during the six months ended March 31, 2001 compared to the prior year. As a
percentage of net sales, selling, general and administrative expenses increased
to 32.9% in the six months ended March 31, 2001 from 27.5% in the six months
ended March 31, 2000. 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 combined with 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 $2.1 million, or 10%, during the
six months ended March 31, 2001 principally as a result of cost reduction
initiatives undertaken during the fourth quarter of fiscal 2000.
Insurance operating expenses
Insurance operating costs declined by $9.2 million, or 54%, in the first six
months 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 Company's purchase of catastrophe reinsurance, should reduce the Company's
underwriting exposure to natural disasters.
Restructuring charges
27
Refer to the information provided under the "Restructuring charges" caption
included in the "Three months ended March 31, 2001 compared to three months
ended March 31, 2001" section.
Interest expense
Interest expense for the six months ended March 31, 2001 increased $2.0 million
from the first six months 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 six months
ended March 31, 2001.
Income taxes
The Company has operated at a loss in its two most recent fiscal years and in
the six months ended March 31, 2001. 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 March 31, 2001 do not
reflect a benefit from income taxes, notwithstanding the fact that the Company
reported a loss for the period.
Liquidity and Capital Resources
For the six months ended March 31, 2001 the Company reported a net loss of $71.0
million. The net loss included non-cash charges of $12.8 million related to the
financial services business, a $3.6 million gain on securitizations and a $3.0
million charge in connection with closing a manufacturing facility, closing
eight sales centers, and further streamlining the organization. For the six
months ended March 31, 2000 the Company reported a net loss of $26.8 million.
The net loss included non-cash charges of $18.6 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 and by approximately 41% during the first
quarter of calendar 2001.
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 six months 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 $174.6 million reduction in inventories since
September 30, 1999, negatively affected the Company's reported earnings for 2000
and during the first six months of fiscal 2001. 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 credit facilities, will provide sufficient
liquidity to meet obligations and execute its business plan during 2001.
28
During the second quarter of fiscal 2001, the Company entered into a three-year,
$200 million loan purchase facility with a financial institution. 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,
loans are purchased from the Company and held for later securitization. In
connection with the facility, the Company issued to a sister company of the
financial institution a warrant to acquire approximately 1.9 million shares of
the Company's common stock with an exercise price of approximately $9.84 per
share. The warrant, which is immediately exercisable, expires in February 2009.
The Company also is currently negotiating a new multi-year credit facility to
replace its existing revolving credit line which matures in October 2001.
However, there can be no assurance that the Company will be able to finalize
such facility.
The Company has complied, or obtained waivers for failing to comply, with all
covenants contained in its credit agreements. However, certain financial
covenants contained in the Company's revolving credit agreement, particularly
earnings before interest, taxes and depreciation (as defined in the agreement)
become more stringent in the second half of the fiscal year, consistent with the
seasonal nature of the Company's business. Should the Company's results of
operations fail to improve in the second six months of the fiscal year, it is
likely that the Company will violate financial covenants contained in the
agreement. While the Company's lenders have in the past amended certain
financial covenants or waived compliance therewith, there can be no assurance
that the Company's lenders will do so in the future should such violations
occur.
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 March 31, 2001 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 2001 and 2000.
29
The increase in loans and investments from September 30, 2000 principally
reflects an increase in retained interests in securitizations. This increase was
partially offset by a decrease in loans held for sale from $211 million at
September 30, 2000 to $114 million at March 31, 2001. 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.
At March 31, 2001 the Company owned subordinated asset-backed securities rated
below BBB having a carrying value of approximately $86.0 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 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. However, there can be no assurance
that such alternative financing can be obtained. During the quarter ended March
31, 2001 the Company sold certain of these subordinated securities.
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 six months ended March 31, 2001 the Company decreased inventories by
$54 million as a result of inventory reduction measures described previously.
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 ability to negotiate a new
revolving credit facility, the sufficiency of our current facilities to meet our
cash needs given our current level of operations, the 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 be unable to
negotiate a replacement revolving credit facility for its existing facility
which expires on October 1, 2001; 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
30
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.
31
PART II. OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
On February 26, 2001, in connection with the establishment of the Company's
$200 million loan purchase facility with a financial institution, the
Company issued a warrant to purchase approximately 1.9 million shares of
common stock with an initial exercise price of $9.84 per share to an
affiliate of the financial institution in a transaction exempt from the
registration requirements of the Securities Act of 1933 pursuant to Section
4 (2) thereof.
32
33
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: July 18, 2001
OAKWOOD HOMES CORPORATION
BY: /s/ Suzanne H. Wood
Suzanne H. Wood
Executive Vice President
(Chief Financial Officer)
(Duly Authorized Officer)
34
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, 2001 1-7444
OAKWOOD HOMES CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit Description
----------- -------------------
4 Agreement to Furnish Copies of Instruments with
Respect to Long-term Debt
35