-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DIcvJRVbkXdjRz0mW1q15WJ17/CrtUYiHRp2/D1g2J8Lu6L5RE+7H40ZPU2I/NMf ZP65PZEQoz/ROP6hRY3f2Q== 0000950168-01-500792.txt : 20010719 0000950168-01-500792.hdr.sgml : 20010719 ACCESSION NUMBER: 0000950168-01-500792 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010718 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OAKWOOD HOMES CORP CENTRAL INDEX KEY: 0000073609 STANDARD INDUSTRIAL CLASSIFICATION: MOBILE HOMES [2451] IRS NUMBER: 560985879 STATE OF INCORPORATION: NC FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-07444 FILM NUMBER: 1683755 BUSINESS ADDRESS: STREET 1: 7800 MCCLOUD RD CITY: GREENSBORO STATE: NC ZIP: 27409-9634 BUSINESS PHONE: 9198552400 MAIL ADDRESS: STREET 1: 7800 MCCLOUD RD CITY: GREENSBORO STATE: NC ZIP: 27409-9634 10-Q/A 1 form10-qa_78371.txt OAKWOOD HOMES CORP. 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 -------------------------------------------------------- (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 EX-4 2 ex4_78371.txt AGREEMENT TO FURNISH COPIES OF INSTRUMENTS EXHIBIT 4 --------- AGREEMENT TO FURNISH COPIES OF INSTRUMENTS WITH RESPECT TO LONG-TERM DEBT ------------------------------ The Registrant has entered into certain agreements with respect to long-term indebtedness, which do not exceed ten percent of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of such agreements to the Commission upon request of the Commission. OAKWOOD HOMES CORPORATION By: s/ Suzanne H. Wood ------------------ Suzanne H. Wood Executive Vice President 36 -----END PRIVACY-ENHANCED MESSAGE-----