10-Q 1 d10q.txt OAKWOOD HOMES CORP 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