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 June 30, 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
--------------------------------------------------------
(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 July 31, 2001.
Common Stock, Par Value $.50 Per Share . . . . . . . . .9,530,507
EXPLANATORY NOTE:
The Registrant is filing this Form 10-Q/A in order to include the cover page
that was inadvertantly omitted from the Registrant's filing of the Form 10-Q on
August 14, 2001.
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.
1
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
Three months ended
June 30,
--------
2001 2000
---- ----
Revenues
Net sales $ 239,866 $ 310,558
Financial services
Consumer finance, net of impairment and
valuation provisions 3,203 10,391
Insurance 10,385 13,087
---------- ----------
13,588 23,478
Other income 3,010 2,353
---------- ----------
Total revenues 256,464 336,389
---------- ----------
Costs and expenses
Cost of sales 190,533 236,516
Selling, general and administrative expenses 75,698 87,449
Financial services operating expenses
Consumer finance 15,038 11,106
Insurance 4,443 7,708
---------- ----------
19,481 18,814
Reversal of restructuring charges - (1,280)
Provision for losses on credit sales 1,450 750
Interest expense 16,856 12,083
---------- ----------
Total costs and expenses 304,018 354,332
---------- ----------
Loss before income taxes and cumulative effect of
accounting change (47,554) (17,943)
Provision for income taxes - (6,818)
---------- ----------
Loss before cumulative effect of accounting change (47,554) (11,125)
---------- ----------
Cumulative effect of accounting change, net of income taxes (2,276) -
---------- ----------
Net loss $ (49,830) $ (11,125)
========== ==========
Loss per share:
Loss before cumulative effect of accounting change
Basic $ (5.05) $ (1.19)
Diluted $ (5.05) $ (1.19)
Net loss
Basic $ (5.29) $ (1.19)
Diluted $ (5.29) $ (1.19)
Dividends per share $ - $ .05
Weighted average number of
common shares outstanding
Basic 9,422 9,315
Diluted 9,422 9,315
See accompanying notes to the consolidated financial statements.
2
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
Nine months ended
June 30,
--------
2001 2000
---- ----
Revenues
Net sales $ 703,132 $ 879,401
Financial services revenues
Consumer finance, net of impairment and
valuation provisions 27,489 31,995
Insurance 29,874 43,518
---------- -----------
57,363 75,513
Other income 7,493 7,731
---------- -----------
Total revenues 767,988 962,645
---------- -----------
Costs and expenses
Cost of sales 562,720 688,276
Selling, general and administrative expenses 227,933 243,652
Financial services operating expenses
Consumer finance 34,585 32,758
Insurance 12,177 24,645
---------- -----------
46,762 57,403
Reversal of restructuring charges - (5,631)
Provision for losses on credit sales 4,450 2,250
Interest expense 44,671 37,908
---------- -----------
Total costs and expenses 886,536 1,023,858
---------- -----------
Loss before income taxes and cumulative effect of
accounting change (118,548) (61,213)
Provision for income taxes - (23,260)
---------- -----------
Loss before cumulative effect of accounting change (118,548) (37,953)
---------- -----------
Cumulative effect of accounting change, net of income taxes (2,276) -
---------- -----------
Net loss $ (120,824) $ (37,953)
========== ===========
Loss per share:
Loss before cumulative effect of accounting change
Basic $ (12.59) $ (4.08)
Diluted $ (12.59) $ (4.08)
Net loss
Basic $ (12.83) $ (4.08)
Diluted $ (12.83) $ (4.08)
Dividends per share $ - $ .15
Weighted average number of
common shares outstanding
Basic 9,415 9,314
Diluted 9,415 9,314
See accompanying notes to the consolidated financial statements.
3
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
Three months ended Nine months ended
June 30, June 30,
--------- --------
2001 2000 2001 2000
---- ---- ---- ----
Net loss $ (49,830) $ (11,125) $ (120,824) $ (37,953)
Unrealized gains (losses) on securities
available for sale, net of tax 7,779 (1,409) 10,107 2,011
------------- -------------- --------------- --------------
Comprehensive loss $ (42,051) $ (12,534) $ (110,717) $ (35,942)
============= ============== =============== ==============
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)
June 30, September 30,
ASSETS 2001 2000
---- ----
Cash and cash equivalents $ 20,664 $ 22,523
Loans and investments 256,973 322,166
Other receivables 96,710 113,460
Inventories
Manufactured homes 205,091 272,828
Work-in-process, materials and supplies 30,066 35,847
Land/homes under development 14,394 14,328
------------- --------------
249,551 323,003
Properties and facilities 225,264 241,107
Other assets 131,709 126,513
------------- --------------
$ 980,871 $ 1,148,772
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 53,000 $ 65,500
Notes and bonds payable 325,633 329,929
Accounts payable and accrued liabilities 234,523 261,888
Insurance reserves and unearned premiums 17,332 44,602
Deferred income taxes 11,611 6,169
Other long-term obligations 32,882 35,400
Commitments and contingencies
Shareholders' equity
Common stock, $.50 par value; 100,000,000
shares authorized; 9,531,000 and 9,421,000
shares issued and outstanding 4,765 4,710
Additional paid-in capital 199,898 188,584
Retained earnings 83,723 204,546
------------- --------------
288,386 397,840
Accumulated other comprehensive income, net of
income taxes of $9,223 and $3,782 17,732 7,625
Unearned compensation (228) (181)
------------- --------------
305,890 405,284
------------- --------------
$ 980,871 $ 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)
Nine months
June 30,
-------
2001 2000
---- ----
Operating activities
Net loss $ (120,824) $ (37,953)
Adjustments to reconcile net loss to cash provided
by operating activities
Cumulative effect of accounting change 2,276 -
Depreciation and amortization 46,277 36,917
Deferred income taxes - (10,605)
Provision for losses on credit sales 4,450 2,250
(Gains) losses on securities sold and loans sold or held for sale (7,041) 22,173
Impairment and valuation provisions 30,735 6,083
Excess of cash received over REMIC residual income
recognized (income recognized over cash received) (41) 6,546
Reversal of restructuring charges - (5,631)
Other (4,960) 8,962
Changes in assets and liabilities
Other receivables 17,568 2,540
Inventories 73,452 89,280
Deferred insurance policy acquisition costs 952 6,004
Other assets (13,244) (12,606)
Accounts payable and accrued liabilities (34,367) (11,932)
Insurance reserves and unearned premiums (27,270) (32,492)
Other long-term obligations (2,500) (517)
------------ -----------
Cash provided (used) by operations (34,537) 69,019
Loans originated (605,074) (741,519)
Sale of loans 656,654 825,118
Principal receipts on loans 6,618 18,283
------------ -----------
Cash provided by operating activities 23,661 170,901
------------ -----------
Investing activities
Acquisition of properties and facilities (9,420) (16,671)
Other 801 11,548
------------ -----------
Cash used by investing activities (8,619) (5,123)
------------ -----------
Financing activities
Net repayments on short-term credit facilities (12,500) (146,800)
Proceeds of borrowings related to business acquisition - -
Proceeds from issuance of notes and bonds payable 24 -
Payments on notes and bonds (4,425) (13,282)
Cash dividends - (1,413)
Proceeds from exercise of stock options - 30
------------ -----------
Cash used by financing activities (16,901) (161,465)
------------ -----------
Net increase (decrease) in cash and cash equivalents (1,859) 4,313
Cash and cash equivalents
Beginning of period 22,523 26,939
------------ -----------
End of period $ 20,664 $ 31,252
============ ===========
6
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:
June 30, September 30,
2001 2000
---- ----
(in thousands)
Loans held for sale, net of valuation allowances
of $0 and $2,563 at June 30, 2001 and
September 30, 2000, respectively $ 137,756 $ 211,296
Loans held for investment 6,256 8,512
Less: reserve for uncollectible loans receivable (2,290) (3,556)
---------------- --------------------
Total loans receivable 141,722 216,252
---------------- --------------------
Retained interests in REMIC securitizations
available for sale, exclusive of loan
servicing assets and liabilities, at fair value
Regular interests 70,090 77,229
Residual interests 45,161 28,685
---------------- --------------------
Total retained REMIC interests, at fair value
(amortized cost of $88,296 and $94,507) 115,251 105,914
---------------- --------------------
$ 256,973 $ 322,166
================ ====================
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 EITF Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets" ("EITF 99-20"). EITF 99-20 requires recognition of
impairment losses from declines in value of such interests when they result
from reductions in expected cash flows from the interests. The Company
adopted EITF 99-20 effective April 1, 2001 and accordingly recorded a
cumulative effect of an accounting change of $2.3 million.
7
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
-------------------------------------------------------------
Payments and charges (55) (33) - (88)
-------------------------------------------------------------
Balance 6/30/01 $ 71 $ 879 $ - $ 950
=============================================================
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.
8
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 determination that it was not
legally required to pay severance 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 closed sales centers.
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 substantially completed its
final negotiation of lease termination costs and had fulfilled certain
contractual obligations associated with one of its plants during this
quarter. 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 June 30, 2001, the balance remaining in the restructuring reserve was
$1.0 million.
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"):
9
Three months ended Nine months ended
June 30, June 30,
--------- --------
2001 2000 2001 2000
---- ---- ---- ----
(in thousands, except per share data)
Numerator in earnings (loss) per share calculation:
Loss before cumulative effect of accounting
change $ (47,554) $ (11,125) $ (118,548) $ (37,953)
Net loss $ (49,830) $ (11,125) $ (120,824) $ (37,953)
Denominator in earnings (loss) per share calculation:
Weighted average number of
common shares outstanding 9,422 9,315 9,415 9,315
Unearned shares - - - (1)
--------------- --------------- ---------------- ---------------
Denominator for basic EPS 9,422 9,315 9,415 9,314
Dilutive effect of stock options and
restricted shares computed using
the treasury stock method - - - -
--------------- --------------- ---------------- ---------------
Denominator for diluted EPS 9,422 9,315 9,415 9,314
=============== =============== ================ ===============
Loss per share:
Loss before cumulative effect of accounting
change
Basic $ (5.05) $ (1.19) $ (12.59) $ (4.08)
=============== =============== ================ ===============
Diluted $ (5.05) $ (1.19) $ (12.59) $ (4.08)
=============== =============== ================ ===============
Net loss
Basic $ (5.29) $ (1.19) $ (12.83) $ (4.08)
=============== =============== ================ ===============
Diluted $ (5.29) $ (1.19) $ (12.83) $ (4.08)
=============== =============== ================ ===============
Stock options to purchase 763,378 and 921,350 shares of common stock and
109,567 and 110,181 unearned restricted shares at June 30, 2001 were not
included in the computation of diluted earnings per share because their
inclusion would have been antidilutive.
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
June 30, 2001, the Company recorded non-cash expense of $0.9 million
related to the warrant.
10
The Company has complied, or obtained waivers for failing to comply, with
all covenants contained in its credit agreements.
6. 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 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 June 30, 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 June 30, 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 $111 million at
June 30, 2001. Losses under these repurchase agreements have not been
significant.
11
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:
12
Three months ended Nine months ended
June 30, June 30,
-------- --------
(in thousands) 2001 2000 2001 2000
---- ---- ---- ----
Revenues
Retail $ 151,090 $ 211,178 $ 459,308 $ 575,006
Manufacturing 167,268 209,575 470,602 619,857
Consumer finance 3,203 10,391 27,489 31,995
Insurance 12,836 13,087 37,438 43,518
Eliminations/other (77,933) (107,842) (226,849) (307,731)
----------- ------------ ----------- ------------
$ 256,464 $ 336,389 $ 767,988 $ 962,645
=========== ============ =========== ============
Income (loss) before interest expense,
investment income and income taxes
Retail $ (26,952) $ (11,291) $ (80,003) $ (38,686)
Manufacturing 10,099 3,991 14,517 39,367
Consumer finance (13,285) (1,465) (11,546) (3,013)
Insurance 5,942 5,379 17,697 18,873
Eliminations/other (6,708) (2,547) (15,156) (40,231)
----------- ------------ ----------- ------------
(30,904) (5,933) (74,491) (23,690)
Interest expense (16,856) (12,083) (44,671) (37,908)
Investment income 206 73 614 385
----------- ------------ ----------- ------------
Income (loss) before income taxes
and cumulative effect of accounting
change $ (47,554) $ (17,943) $ (118,548) $ (61,213)
=========== ============ =========== ============
Depreciation and amortization
Retail $ 4,002 $ 2,656 $ 10,034 $ 7,595
Manufacturing 4,102 4,300 12,741 12,744
Consumer finance 2,670 2,213 8,703 10,092
Eliminations/other 6,908 2,314 14,799 6,486
----------- ------------ ----------- ------------
$ 17,682 $ 11,483 $ 46,277 $ 36,917
=========== ============ =========== ============
Capital expenditures
Retail $ 849 $ 1,828 $ 2,060 $ 6,761
Manufacturing 852 935 2,589 4,565
Consumer finance 530 1,495 2,396 3,607
Eliminations/other 629 - 2,375 1,738
----------- ------------ ----------- ------------
$ 2,860 $ 4,258 $ 9,420 $ 16,671
=========== ============ =========== ============
June 30, September 30,
2001 2000
---- ----
Identifiable assets
Retail $ 390,078 $ 475,227
Manufacturing 453,766 604,946
Consumer finance 230,499 637,264
Insurance 116,986 115,959
Eliminations/other (210,458) (684,624)
----------- ------------
$ 980,871 $ 1,148,772
=========== ============
13
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 133 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. The Company plans to adopt SAB 101 in the fourth quarter of fiscal
2001, as required. 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." 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 effective October 1, 2000 to a
method based upon placement of the home at the customer's site. Although
the Company has not yet finalized its estimate of the effect of the change
on its consolidated financial position and results of operations, it
anticipates that it will record in the fourth quarter a cumulative effect
of an accounting change ranging from $13 million to $16 million.
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 June 30, 2001 and for disclosures relating to securitization
transactions and collateral for fiscal years ended after December 15, 2000.
The Company adopted FAS 140 effective July 1, 2001 and has determined that
it did 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 EITF Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets" ("EITF 99-20"). EITF 99-20 requires recognition of
impairment losses from declines in value of such interests when they result
from reductions in expected cash flows from the interests. The Company
adopted EITF 99-20
14
effective April 1, 2001 and accordingly recorded a cumulative effect of an
accounting change of $2.3 million.
On June 29, 2001, the Financial Accounting Standards Board issued Statement
No. 141,"Business Combinations", and Statement No. 142,"Goodwill and Other
Intangible Assets", which are required to be adopted by the Company at the
beginning of fiscal 2003. The Company is currently evaluating the effects
of these Statements; however, the Company recorded amortization related to
its goodwill and identifiable intangible assets of $3.8 million for the
nine months ended June 30, 2001.
9. On June 18, 2001, the Company effected a one-for-five reverse stock split.
All shares and per share amounts have been adjusted retroactively to give
effect to the reverse split.
10. Subsequent to June 30, 2001 the Company sold all subordinated securities
retained from prior securitizations for net cash proceeds of approximately
$72.9 million. These securities are included in the Company's available for
sale securities portfolio at June 30, 2001. The Company recorded impairment
charges of $20.6 million in the third quarter to reduce the carrying value
of the securities to estimated net realizable value at June 30, 2001. The
estimated loss will be adjusted to actual in the fourth quarter.
The Company also retired its $75 million revolving credit facility, which
was scheduled to mature on October 1, 2001. In connection with the
retirement, approximately $9.0 million of cash held by the lenders in a
cash collateral account was returned to the Company.
Subsequent to June 30, 2001 the Company announced its intention to close
approximately 90 underperforming retail sales centers in the fourth quarter
of fiscal 2001 in addition to the centers closed in the third quarter. A
majority of the retail sales centers are located in the South, in areas
where the Company has experienced poor operating results as well as poor
credit performance. The Company expects to sell a number of these centers
to independent retailers who will continue to sell the Company's products.
Other centers will be converted to stores which exclusively sell
repossessed homes. The centers not sold or converted will continue to
operate while liquidating the majority of their inventory in place. As of
August 14, 2001 the Company estimates that the fourth quarter charges
arising from the closure of these 90 retail sales centers will range from
$23 million to $28 million, approximately one half of which will be non-
cash asset impairments. Although the Company idled one manufacturing
facility in Texas during the third quarter, it does not expect any further
plant closings as a result of the retail store closing previously
described. During the third quarter, the Company recorded a $2.1 million
charge, most of which was non-cash in nature, related to the closing of 12
centers. The charge was included in selling, general and administrative
expenses.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
---------------------
Three months ended June 30, 2001 compared to three months ended June 30, 2000
- -----------------------------------------------------------------------------
The following table summarizes certain statistics for the quarters
ended June 30, 2001 and 2000:
2001 2000
---- ----
Retail sales (in millions) $ 150.2 $ 209.0
Wholesale sales (in millions) $ 89.7 $ 101.6
Total sales (in millions) $ 239.9 $ 310.6
Gross profit % - integrated operations 24.7% 28.2%
Gross profit % - wholesale operations 13.6% 14.8%
New single-section homes sold - retail 902 1,804
New multi-section homes sold - retail 2,102 2,664
Used homes sold - retail 307 342
New single-section homes sold - wholesale 513 662
New multi-section homes sold - wholesale 2,077 2,254
Average new single-section sales price - retail $31,000 $31,700
Average new multi-section sales price - retail $56,000 $55,400
Average new single-section sales price - wholesale $21,800 $21,700
Average new multi-section sales price - wholesale $38,500 $38,400
Weighted average retail sales centers
open during the period 348 377
Net sales
The Company's sales volume continued to be adversely affected by extremely
competitive industry conditions during the quarter ended June 30, 2001. Retail
sales dollar volume decreased 28%, reflecting a 33% decrease in new unit volume
and a decrease of 2% 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 60% in the quarter ended June 30, 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 June 30, 2001 the Company opened no new sales centers
compared to two sales centers during the quarter ended June 30, 2000. The
Company closed 14 underperforming sales centers during the quarter ended June
30, 2001 and converted one sales center to a center that exclusively markets
repossessed inventory. The Company recorded in selling, general and
administrative expenses a charge of $2.1 million related to the sales center
closings. During the quarter ended June 30, 2000 the Company closed no sales
centers. Total new retail sales dollars at sales centers open more than one year
decreased 27% during the quarter ended June 30, 2001 as a result of the
competitive market conditions described previously.
16
Wholesale sales represent sales of manufactured homes to independent retailers.
Wholesale sales dollar volume decreased 12%, reflecting a 11% decrease in unit
volume. Average new unit sales prices of single-section and multi-section homes
remained relatively constant. Multi-section sales accounted for 80% of wholesale
unit sales compared to 77% in the quarter ended June 30, 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 28.2% in the quarter ended June 30, 2000 to 24.7% in the quarter
ended June 30, 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 June 30, 2001.
Gross profit margin - wholesale operations decreased from 14.8% in the quarter
ended June 30, 2000 to 13.6% in the quarter ended June 30, 2001 as a result of
competitive pricing pressures and unfavorable manufacturing variances caused by
reduced production schedules experienced during the quarter ended June 30, 2001.
Consumer finance revenues
Consumer finance revenues are summarized as follows:
Three months ended
June 30,
--------
(in thousands) 2001 2000
---- ----
Interest income $ 5,837 $ 9,260
Loan servicing fees 8,770 6,342
REMIC residual income 2,755 3,228
Gains (losses) on securities sold and loans sold or held for sale:
Gain (loss) on sale of securities and loans 3,415 (2,900)
Valuation (provision) reversal on loans held for sale 2,739 (696)
------- --------
6,154 (3,596)
------- --------
Impairment and valuation provisions (20,647) (5,341)
Other 334 498
------- --------
$ 3,203 $ 10,391
======= ========
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
17
lower average warehouse balances resulted from a decrease in loan originations
and the timing of securitizations.
Loan servicing fees, which are reported net of amortization of servicing assets
and liabilities, increased as a result of increased overall servicing cash flows
from the Company's securitizations. 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 in certain securitizations during the quarter.
The gain on sale of securities and loans during the quarter ended June 30, 2001
reflects the securitization of $179 million of installment sale contracts and
mortgage loans. The gain resulted from an increase in the spread between the
yield on loans originated by the Company and the cost of funds obtained when the
loans were securitized, which was higher than the spread on securitizations in
the third quarter of 2000.
Impairment and valuation provisions are summarized as follows:
Three months ended
June 30,
--------
(in thousands) 2001 2000
---- ----
Impairment writedowns of residual
REMIC interests $ 102 $ -
Impairment writedowns of regular
REMIC interests 20,563 -
Valuation allowances on servicing
contracts - 1,924
Reduction of previously recorded
valuation allowances on servicing
contracts - -
Additional provisions for potential
guarantee obligations on REMIC
securities sold (18) 3,417
----------- ----------
$ 20,647 $ 5,341
=========== ==========
Subsequent to June 30, 2001, the Company sold all subordinated securities
retained from prior securitizations. These securities are included in the
Company's available for sale securities portfolio at June 30, 2001. The Company
recorded impairment charges of $20.6 million in the third quarter to reduce the
carrying value of the securities to estimated net realizable value at June 30,
2001. The estimated loss will be adjusted to actual in the fourth quarter.
18
Except for the impairment charge related to the completed sales of the regular
REMIC interests just described, impairment and valuation charges generally
result 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 June 30, 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 1.96% on an annualized basis of the
average principal balance of the related loans, compared to approximately 2.14%
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 June 30, 2001 the Company had a total of 3,817 unsold
properties in repossession or foreclosure (approximately 2.95% of the total
number of Oakwood originated serviced assets) compared to 3,899, 3,049 and 2,809
at March 31, 2001, June 30, 2000 and March 31, 2000, respectively (approximately
3.05%, 2.45% and 2.29%, respectively, of the total number of Oakwood originated
serviced assets).
The Company believes that its historical loss experience has been favorably
affected by its ability to resell repossessed units through its retail sales
centers. In an effort to reduce the cost of repossession and foreclosure, the
Company has also increasingly made use of its assumption program as an
alternative to foreclosure. Under this program, the Company obtains the
cooperation of the defaulting obligor and endeavors to find a new buyer that
meets the then-current underwriting standards for repossessed homes who is
willing to assume the defaulting obligor's loan. The costs of this program are
borne by the Company and are reflected in consumer finance operating expenses.
At June 30, 2001 the Company had 1,216 loans which were pending assumption under
this program.
At June 30, 2001 the delinquency rate on Company originated loans, excluding
loans originated on behalf of DFC, was 5.4%, compared to 4.1% at June 30, 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
20.6% to $10.4 million in the quarter ended June 30, 2001 from $13.1 million in
the quarter ended June 30, 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
19
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 a
result of the Company's favorable loss experience since the inception of the
quota share agreement, the Company received incremental commissions of $1.7
million during the quarter ended June 30, 2001.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $11.8 million, or 13%,
during the quarter ended June 30, 2001 compared to the prior year. As a
percentage of net sales, selling, general and administrative expenses increased
to 31.6% in the quarter ended June 30, 2001 from 28.2% in the quarter ended June
30, 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 increased 35% during the quarter ended June
30, 2001 principally as a result of the Company's increasing use of its
previously described assumption program.
Insurance operating expenses
Insurance operating costs declined by $3.3 million, or 42%, in the third 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 quota share agreement described previously, as well as
the Company's purchase of catastrophe reinsurance, should reduce the Company's
underwriting exposure to natural disasters.
Restructuring charges
The following table sets forth the activity by quarter in each component of the
Company's restructuring reserve (in thousands):
20
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
----------------------------------------------------------
Payments and charges (55) (33) - (88)
----------------------------------------------------------
Balance 6/30/01 $ 71 $ 879 $ - $ 950
==========================================================
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 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
21
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 June 30, 2001, the balance remaining in the restructuring reserve was $1.0
million.
During the execution of the Company's restructuring plan, 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.
Subsequent to June 30, 2001 the Company announced its intention to close
approximately 90 underperforming retail sales centers in the fourth quarter of
fiscal 2001 in addition to the centers closed in the third quarter. A majority
of the retail sales centers are located in the South, in areas where the Company
has experienced poor operating results as well as poor credit performance. The
Company expects to sell a significant number of these centers to independent
retailers who will continue to sell the Company's products. Other centers will
be converted to stores which exclusively sell repossessed homes. The centers not
sold or converted will continue to operate while liquidating the majority of
their inventory in place. The Company currently estimates that the fourth
quarter charges arising from the closure of these 90 retail sales centers will
range from $23 million to $28 million, approximately one half of which will be
non-cash asset impairments. Although the Company idled one manufacturing
facility in Texas during the third quarter, it does not expect any further plant
closings as a result of the retail store closings previously described. During
the third quarter, the Company recorded a $2.1 million charge, most of which was
non-cash in nature, related to the closing of 12 centers. The charge was
included in selling, general and administrative expenses.
Interest expense
Interest expense for the quarter ended June 30, 2001 increased 40% from the
third 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 June 30,
2001. The Company also expensed
22
approximately $3.1 million of costs associated with efforts to replace its
existing revolving credit facility which expires October 1, 2001.
Income taxes
The Company has operated at a loss in its two most recent fiscal years and in
the quarter ended June 30, 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 June 30, 2001 do not
reflect a benefit from income taxes, notwithstanding the fact that the Company
reported a loss for the period.
Cumulative effect of accounting change
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 EITF Issue
No. 99-20, "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets" ("EITF 99-20").
The Company adopted EITF 99-20 in the third quarter of 2001 and accordingly
recorded a cumulative effect of an accounting change of $2.3 million.
23
Nine months ended June 30, 2001 compared to nine months ended June 30, 2000
- ---------------------------------------------------------------------------
The following table summarizes certain statistics for the nine months ended
June 30, 2001 and 2000:
2001 2000
---- ----
Retail sales (in millions) $ 453.9 $ 567.9
Wholesale sales (in millions) $ 249.2 $ 311.5
Total sales (in millions) $ 703.1 $ 879.4
Gross profit % - integrated operations 24.2% 26.4%
Gross profit % - wholesale operations 12.3% 13.3%
New single-section homes sold - retail 2,757 4,302
New multi-section homes sold - retail 6,464 7,572
Used homes sold - retail 924 1,233
New single-section homes sold - wholesale 1,411 2,264
New multi-section homes sold - wholesale 5,681 6,857
Average new single-section sales price - retail $30,400 $31,600
Average new multi-section sales price - retail $55,400 $55,200
Average new single-section sales price - wholesale $21,400 $21,000
Average new multi-section sales price - wholesale $38,700 $38,200
Weighted average retail sales centers
open during the period 363 385
Net sales
The Company's sales volume continued to be adversely affected by extremely
competitive industry conditions during the nine months ended June 30, 2001.
Retail sales dollar volume decreased 20%, reflecting a 22% 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 64% in the nine months ended June 30, 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 nine months ended June 30, 2001 the Company opened one new sales
center compared to eight sales centers during the nine months ended June 30,
2000. The Company closed 26 underperforming sales centers during the nine months
ended June 30, 2001 and converted 13 sales centers to centers that exclusively
market repossessed inventory. During the nine months ended June 30, 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 19%
during the nine months ended June 30, 2001.
Wholesale sales represent sales of manufactured homes to independent retailers.
Wholesale sales dollar volume decreased 20%, reflecting a 22% decrease in unit
volume. This decrease was partially offset by a 2% increase in the average new
unit sales prices of single-section homes. Multi-section sales accounted for 80%
of wholesale unit sales compared to 75% in the nine months ended June 30, 2000.
Gross profit
24
Gross profit margin - integrated operations decreased from 26.4% in the nine
months ended June 30, 2000 to 24.2% in the nine months ended June 30, 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 nine months ended June 30, 2001.
Gross profit margin - wholesale operations decreased from 13.3% in the nine
months ended June 30, 2000 to 12.3% in the nine months ended June 30, 2001 as a
result of competitive pricing pressures and unfavorable manufacturing variances
caused by reduced production schedules experienced during the nine months ended
June 30, 2001.
Consumer finance revenues
Consumer finance revenues are summarized as follows:
Nine months ended
June 30,
--------
(in thousands) 2001 2000
---- ----
Interest income $ 25,646 $ 28,841
Loan servicing fees 18,331 16,435
REMIC residual income 6,025 13,521
Gains (losses) on securities sold and
loans sold or held for sale:
Gain (loss) on sale of securities and loans 7,041 (12,785)
Valuation provision on loans
held for sale - (9,388)
----------- ----------
7,041 (22,173)
----------- ----------
Impairment and valuation
provisions (30,735) (6,083)
Other 1,181 1,454
----------- ----------
$ 27,489 $ 31,995
=========== ==========
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 and the timing of securitizations.
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. 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.
25
The decrease in residual income primarily reflects reduced cash flow from
certain retained residual interests due to increased liquidations of
repossessions in certain securitizations during the nine months ended June 30,
2001.
The gain on sale of securities and loans during the nine months ended June 30,
2001 resulted from the completion of three securitizations and the increased
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:
Nine months ended
June 30,
--------
(in thousands) 2001 2000
---- ----
Impairment writedowns of residual
REMIC interests $ 245 $ -
Impairment writedowns of regular
REMIC interests 20,563 3,690
Valuation provisions on servicing
contracts 9,945 4,768
Reductions of previously recorded
valuation allowance on servicing
contracts - (6,401)
Additional provisions for potential
guarantee obligations on REMIC
securities sold (18) 4,026
-------------- --------------
$ 30,735 $ 6,083
============== ==============
Subsequent to June 30, 2001, the Company sold all subordinated securities
retained from prior securitizations. These securities are included in the
Company's available for sale securities portfolio at June 30, 2001. The Company
recorded impairment charges of $20.6 million in the third quarter to reduce the
carrying value of the securities to estimated net realizable value at June 30,
2001. The estimated loss will be adjusted to actual in the fourth quarter.
Except for the impairment charge related to the completed sales of the regular
REMIC interests just described, impairment and valuation charges generally
result 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
26
inventory levels of repossessed homes, may affect recovery rates and default
rates and result in future impairment and valuation provisions.
For the nine months ended June 30, 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 1.92% on an annualized basis of the
average principal balance of the related loans, compared to approximately 1.90%
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 June 30, 2001 the Company had a total of 3,817 unsold properties
in repossession or foreclosure (approximately 2.95% of the total number of
Oakwood originated serviced assets) compared to 3,899, 3,049 and 2,809 at March
31, 2001, June 30, 2000 and March 31, 2000, respectively (approximately 3.05%,
2.45% and 2.29%, respectively, of the total number of Oakwood originated
serviced assets).
The Company believes that its historical loss experience has been favorably
affected by its ability to resell repossessed units through its retail sales
centers. In an effort to reduce the cost of repossession and foreclosure, the
Company has also increasingly made use of its assumption program as an
alternative to foreclosure. Under this program, the Company obtains the
cooperation of the defaulting obligor and endeavors to find a new buyer that
meets the then-current underwriting standards for repossessed homes who is
willing to assume the defaulting obligor's loan. The costs of this program are
borne by the Company and are reflected in consumer finance operating expenses.
At June 30, 2001 the Company had 1,216 loans which were pending assumption under
this program.
Insurance revenues
Insurance revenues from the Company's captive reinsurance business decreased 31%
to $29.9 million in the nine months ended June 30, 2001 from $43.5 million in
the nine months ended June 30, 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 a result of the Company's favorable loss
experience since the inception of the quota share agreement, the Company
received incremental commissions of $1.7 million during the quarter ended June
30, 2001.
Selling, general and administrative expenses
27
Selling, general and administrative expenses decreased $15.7 million, or 6%,
during the nine months ended June 30, 2001 compared to the prior year. As a
percentage of net sales, selling, general and administrative expenses increased
to 32.4% in the nine months ended June 30, 2001 from 27.7% in the nine months
ended June 30, 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 increased $1.8 million, or 6%, during the
nine months ended June 30, 2001 principally as a result of the Company's
increasing use of its previously described assumption program. These increased
costs were partially offset by the effect of cost reduction initiatives
undertaken during the fourth quarter of fiscal 2000.
Insurance operating expenses
Insurance operating costs declined by $12.5 million, or 51%, in the nine 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 quota share agreement described previously, as well as
the Company's purchase of catastrophe reinsurance, should reduce the Company's
underwriting exposure to natural disasters.
Restructuring charges
Refer to the information provided under the "Restructuring charges" caption
included in the "Three months ended June 30, 2001 compared to three months ended
June 30, 2000" section.
Interest expense
Interest expense for the nine months ended June 30, 2001 increased $6.8 million
from the first nine 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 nine months
ended June 30, 2001. The Company also expensed approximately $3.1 million of
costs associated with efforts to replace its existing revolving credit facility
which expires October 1, 2001.
Income taxes
The Company has operated at a loss in its two most recent fiscal years and in
the nine months ended June 30, 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
28
previously paid. Consequently, the Company's results for the nine months ended
June 30, 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 nine months ended June 30, 2001 the Company reported a net loss of
$120.8 million. The net loss included non-cash charges of $30.7 million related
to the financial services business, a $7.0 million gain on securitizations and a
$5.1 million charge in connection with closing a manufacturing facility, closing
20 sales centers, and further streamlining the organization. For the nine months
ended June 30, 2000 the Company reported a net loss of $38.0 million. The net
loss included non-cash charges of $28.3 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 35% during the first
six months 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 nine 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 by the Company recently, most
notably plant and sales center closings, curtailed production schedules and
competitive pricing to effect a $194.0 million reduction in inventories since
September 30, 1999, negatively affected the Company's reported earnings for 2000
and during the first nine 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.
Subsequent to June 30, 2001 the Company sold all the subordinated securities
retained from prior securitizations for net cash proceeds of approximately $72.9
million. These securities are included in the Company's available for sale
securities portfolio at June 30, 2001. The Company recorded impairment charges
of $20.6 million in the third quarter to reduce the carrying value of the
securities to estimated net realizable value at June 30, 2001. The estimated
loss will be adjusted to actual in the fourth quarter.
The Company also retired its $75 million revolving credit facility, which was
scheduled to mature on October 1, 2001. In connection with the retirement
approximately $9.0 million of the cash held by the lenders in a cash collateral
account was returned to the Company.
The net cash proceeds from the sale of securities and the release of the cash
collateral associated with the revolving credit facility more than offsets the
$75 million previously available under the revolving credit facility. The
company expects to complete a new $50 million liquidity facility to provide
funding for servicer advances, which was the primary use of the revolving credit
facility. Additionally, the Company will negotiate a new credit facility, a
major use of which will be to support outstanding letters of credit that
continue to be provided by two banks which participated in the retired revolving
credit facility. However, there can be no assurance that such facilities will be
finalized.
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
29
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 has complied, or obtained waivers for failing to comply, with all
covenants contained in its credit agreements.
In the event of further deterioration in market conditions, the Company intends
to take additional steps to protect liquidity and manage cash flow as
demonstrated by its announcement subsequent to June 30, 2001 to close
approximately 90 underperforming retail sales centers in the fourth quarter.
Should market conditions fail to improve, the Company could further curtail
production, close additional retail sales centers or sell selected operational
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 June 30, 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
30
securities, particularly securities rated below BBB, has decreased. As a result,
the Company 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.
At June 30, 2001 the Company owned subordinated asset-backed securities rated
below BBB having a carrying value of approximately $68.3 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
$1.8 million retained from securitization transactions prior to 1994. Subsequent
to June 30, 2001, the Company sold all subordinated securities retained from
prior loan securitizations; these securities are included in the Company's
available for sale securities portfolio at June 30, 2001.
The decrease in loans and investments from September 30, 2000 principally
reflects a decrease in loans held for sale from $211 million at September 30,
2000 to $138 million at June 30, 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. This decrease was
partially offset by an increase in retained interests in securitizations.
The Company estimates that in 2001 capital expenditures will approximate $15
million, comprised principally of improvements at existing facilities, computer
equipment and the replacement of certain computer information systems.
During the nine months ended June 30, 2001 the Company decreased inventories by
$73.5 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, statements relating to our plans to close
approximately 90 underperforming retail sales centers, our estimate of the
charge we will incur in the fourth quarter as a result of closing these sales
centers, our expectation that we will not close any additional manufacturing
plants as a result of our closing these sales centers, our expectation that
these restructuring actions will strengthen our business and improve our
financial condition, our belief that our operating results will improve after
the transitional period in which these retail sales centers are closed and their
inventory liquidated, statements relating to our belief that any legal
proceedings or claims that arise in the ordinary course of business will not
have a material adverse effect on the Company's results of operations, financial
condition or cash flows, our estimate of the effect of SAB 101 on our
consolidated financial position in the fourth quarter, our intention to close a
new $50 million liquidity facility for funding for servicer advances, the
sufficiency of our current facilities to meet our cash needs given our current
level of operations, the
31
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 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; the Company may not be able to close its
anticipated sale of subordinated securities for $58 million; the Company may not
realize anticipated benefits associated with its restructuring activities
(including the closing of sales centers); 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 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not applicable.
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
------------------
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. 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 ordinary course of its business and have not been
finally adjudicated. In management's opinion, the ultimate resolution of
these matters is not expected to have a material adverse effect on the
Company's results of operations or financial condition.
Item 2. Change in Securities and Use of Proceeds
----------------------------------------
The Company effected a one-for-five reverse stock split effective after the
close of business on June 18, 2001.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At a special meeting of the shareholders held on Friday, June 8, 2001, the
shareholders of the Company approved a one-for-five reverse stock split of
the Company's common stock. There were 40,952,244 votes cast for the
reverse stock split, 3,667,859 cast against the reverse stock split,
187,510 abstentions and no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
(2) Articles of Amendment to Articles of Incorporation of
the Company, dated June 13, 2001.
(4) Agreement to Furnish Copies of Instruments with Respect
to Long-term Debt
b) Reports on Form 8-K
Items 3 and 5 are not applicable and are omitted.
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: August 14, 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
June 30, 2001 1-7444
OAKWOOD HOMES CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit Description
- ----------- -------------------
2 Articles of Amendment to Articles of
Incorporation of the Company, dated June 13,
2001
4 Agreement to Furnish Copies of Instruments
with Respect to Long-term Debt
35