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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2002 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 (or such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of July 31, 2002.
Common Stock, Par Value $.50 Per Share . . . . . . . 9,537,485
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures
normally included in audited financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K.
2
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
Three months ended
June 30,
--------
2002 2001
---- ----
Revenues
Net sales $ 250,869 $ 240,629
Financial services
Consumer finance, net of impairment and
valuation provisions (70,010) 3,203
Insurance 7,709 10,385
--------- ---------
(62,301) 13,588
Other income 1,912 3,010
--------- ---------
Total revenues 190,480 257,227
--------- ---------
Costs and expenses
Cost of sales 194,854 191,665
Selling, general and administrative expenses 66,489 75,733
Financial services operating expenses
Consumer finance 12,289 15,038
Insurance 3,801 4,443
--------- ---------
16,090 19,481
Asset impairment charges 14,255 --
Provision for losses on credit sales 8,544 1,450
Interest expense 10,065 16,856
--------- ---------
Total costs and expenses 310,297 305,185
--------- ---------
Loss before income taxes and cumulative effect of
accounting change (119,817) (47,958)
Provision for income taxes -- --
--------- ---------
Loss before cumulative effect of accounting change (119,817) (47,958)
--------- ---------
Cumulative effect of accounting change, net of
income taxes -- (2,276)
--------- ---------
Net loss $(119,817) $ (50,234)
========= =========
Loss per share:
Loss before cumulative effect of accounting change
Basic $ (12.61) $ (5.09)
Diluted $ (12.61) $ (5.09)
Net loss
Basic $ (12.61) $ (5.33)
Diluted $ (12.61) $ (5.33)
Weighted average number of
common shares outstanding
Basic 9,498 9,422
Diluted 9,498 9,422
See accompanying notes to the consolidated financial statements.
3
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
Nine months ended
June 30,
--------
2002 2001
---- ----
Revenues
Net sales $ 684,929 $ 740,180
Financial services revenues
Consumer finance, net of impairment and
valuation provisions (35,340) 27,489
Insurance 22,683 29,874
--------- ---------
(12,657) 57,363
Other income 5,702 7,493
--------- ---------
Total revenues 677,974 805,036
--------- ---------
Costs and expenses
Cost of sales 526,418 589,964
Selling, general and administrative expenses 194,261 228,831
Financial services operating expenses
Consumer finance 39,022 34,585
Insurance 9,973 12,177
--------- ---------
48,995 46,762
Reversal of restructuring charges (2,071) --
Asset impairment charges 14,255 --
Provision for losses on credit sales 44,956 4,450
Interest expense 29,395 44,671
--------- ---------
Total costs and expenses 856,209 914,678
--------- ---------
Loss before income taxes and cumulative effect of
accounting changes (178,235) (109,642)
Provision for income taxes (Note 15) (78,729) --
--------- ---------
Loss before cumulative effect of accounting changes (99,506) (109,642)
--------- ---------
Cumulative effect of accounting changes, net of
income taxes -- (16,866)
--------- ---------
Net loss $ (99,506) $(126,508)
========= =========
Loss per share:
Loss before cumulative effect of accounting changes
Basic $ (10.49) $ (11.65)
Diluted $ (10.49) $ (11.65)
Net loss
Basic $ (10.49) $ (13.44)
Diluted $ (10.49) $ (13.44)
Weighted average number of
common shares outstanding
Basic 9,485 9,415
Diluted 9,485 9,415
See accompanying notes to the consolidated financial statements.
4
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
Three months ended Nine months ended
June 30, June 30,
--------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net loss $(119,817) $(50,234) $ (99,506) $(126,508)
Unrealized gains (losses) on
securities available for
sale, net of tax (6,931) 7,779 (2,815) 10,107
--------- -------- --------- ---------
Comprehensive loss $(126,748) $(42,455) $(102,321) $(116,401)
========= ======== ========= =========
See accompanying notes to the consolidated financial statements.
5
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands except share and per share data)
June 30, September 30,
ASSETS 2002 2001
---- ----
Cash and cash equivalents $ 45,248 $ 44,246
Loans and investments 152,860 199,403
Other receivables 166,526 124,807
Inventories
Manufactured homes 156,688 184,989
Work-in-process, materials and supplies 30,784 30,813
Land/homes under development 12,281 12,770
--------- ---------
199,753 228,572
Properties and facilities 184,939 208,798
Other assets 92,759 116,464
--------- ---------
$ 842,085 $ 922,290
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 30,000 $ 47,500
Notes and bonds payable 309,214 323,120
Accounts payable and accrued liabilities 270,899 250,658
Insurance reserves and unearned premiums 15,027 17,322
Deferred income taxes 6,169 6,169
Other long-term obligations 74,132 38,750
Commitments and contingencies (Note 11)
Shareholders' equity
Common stock, $.50 par value; 100,000,000
shares authorized; 9,537,000 and 9,528,000
shares issued and outstanding 4,769 4,764
Additional paid-in capital 199,857 199,761
Retained earnings (accumulated deficit) (71,010) 28,497
--------- ---------
133,616 233,022
Accumulated other comprehensive income 3,097 5,912
Unearned compensation (69) (163)
--------- ---------
136,644 238,771
--------- ---------
$ 842,085 $ 922,290
========= =========
See accompanying notes to the consolidated financial statements.
6
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine months ended
June 30,
--------
2002 2001
---- ----
Operating activities
Net loss $ (99,506) $(126,508)
Adjustments to reconcile net loss to cash provided
by operating activities
Cumulative effect of accounting changes -- 16,866
Depreciation and amortization 24,321 46,277
Provision for losses on credit sales, net of
charge-offs 500 (1,496)
Gains on securities sold and loans sold or held
for sale (1,155) (7,041)
Impairment and valuation provisions 85,170 30,735
Excess of cash received over REMIC residual income
recognized (income recognized over cash received) 1,787 (41)
Reversal of restructuring charges (2,071) --
Asset impairment charges 14,255 --
Other (6,070) (4,960)
Changes in assets and liabilities
Other receivables (40,963) 17,568
Inventories 28,819 94,682
Deferred insurance policy acquisition costs 913 952
Other assets 2,806 (13,244)
Accounts payable and accrued liabilities (7,282) (35,707)
Insurance reserves and unearned premiums (2,295) (27,270)
Other long-term obligations (1,931) (2,500)
--------- ---------
Cash used by operations (2,702) (11,687)
Loans originated (579,512) (633,870)
Purchase of loans and securities (9,405) --
Sale of loans 622,427 656,654
Principal receipts on loans 9,249 12,564
--------- ---------
Cash provided by operating activities 40,057 23,661
--------- ---------
Investing activities
Acquisition of properties and facilities (7,094) (9,420)
Other -- 801
--------- ---------
Cash used by investing activities (7,094) (8,619)
--------- ---------
Financing activities
Net repayments on short-term credit facilities (17,500) (12,500)
Payments on notes and bonds (14,471) (4,401)
Proceeds from exercise of stock options 10 --
--------- ---------
Cash used by financing activities (31,961) (16,901)
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,002 (1,859)
Cash and cash equivalents
Beginning of period 44,246 22,523
--------- ---------
End of period $ 45,248 $ 20,664
========= =========
See accompanying notes to the consolidated financial statements.
7
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 for a fair statement of 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.
Unless otherwise indicated, all references to annual periods refer to
fiscal years ended September 30.
2. Effective October 1, 2000 the Company adopted Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101") and recorded
a charge of $14.6 million, or $1.55 per share, as a cumulative effect of an
accounting change as of that date. The Company has restated quarterly
amounts previously reported for 2001.
3. The components of loans and investments are as follows:
June 30, September 30,
2002 2001
---- ----
(in thousands)
Loans held for sale $ 136,943 $ 163,085
Loans held for investment 3,250 2,974
Less: reserve for uncollectible loans receivable (4,939) (3,231)
--------- ---------
Total loans receivable 135,254 162,828
--------- ---------
Retained interests in REMIC securitizations
available for sale, exclusive of loan
servicing assets and liabilities, at fair value
Regular interests 968 7,619
Residual interests 16,638 28,956
--------- ---------
Total retained REMIC interests, at fair value
(amortized cost of $10,728 and $26,883) 17,606 36,575
--------- ---------
$ 152,860 $ 199,403
========= =========
8
4. The following table summarizes the transactions reflected in the reserve
for credit losses:
Three months ended Nine months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Balance at beginning of period $ 4,499 $ 1,752 $ 3,399 $ 3,983
Provision for losses on credit sales 8,544 1,450 44,956 4,450
Losses charged to the reserve (7,982) (715) (43,294) (5,946)
------- ------- -------- -------
Balance at end of period $ 5,061 $ 2,487 $ 5,061 $ 2,487
======= ======= ======== =======
The provision for losses on credit sales and losses charged to the reserve
principally reflect costs associated with the Company's loan assumption
program, which is more fully described in the "Consumer Finance Revenues"
and "Liquidity and Capital Resources" sections of Management's Discussion
and Analysis. The Company increasingly made use of this program from its
inception in the second quarter of 2001 through the third quarter of 2002
when the Company decided to substantially curtail its use of the program.
The reserve for credit losses is reflected in the consolidated balance
sheet as follows:
June 30, September 30,
2002 2001
---- ----
(in thousands)
Reserve for uncollectible receivables
(included in loans and investments) $4,939 $3,231
Reserve for contingent liabilities
(included in accounts payable and accrued
liabilities) 122 168
------ ------
$5,061 $3,399
====== ======
5. The Company's retained interests in securitizations are set forth below.
June 30, September 30,
2002 2001
---- ----
(in thousands)
Regular interests $ 968 $ 7,619
Residual interests 16,638 28,956
Net servicing liabilities 55,998 19,643
Guarantee liabilities 71,833 36,180
9
In October 2000 the Emerging Issues Task Force of the Financial Accounting
Standards Board (the "EITF") issued EITF 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets," which sets forth new accounting requirements
for the recognition of impairment on REMIC interests arising from
securitizations. Under the prior accounting rule, declines in the value of
retained REMIC interests were recognized in earnings when the present value
of estimated cash flows discounted at a risk-free rate using current
assumptions was less than the carrying value of the retained interest.
Under the new accounting rule, declines in value are recognized when both
of the following occur: the fair value of the retained interest is less
than its carrying value and the timing and/or amount of cash expected to be
received from the retained interest has changed adversely from the previous
valuation which determined the carrying value of the retained interest.
When both of these circumstances occur, the carrying value of the retained
interest is reduced to its estimated fair value.
The Company adopted EITF 99-20 as required on April 1, 2001 and accordingly
recorded a cumulative effect of an accounting change of $2.3 million as of
that date.
The Company estimates the fair value of its retained interests in
securitizations by determining the present value of the associated expected
future cash flows over the entire expected life of the loans using modeling
techniques that incorporate estimates of key assumptions, which management
believes market participants would use for similar interests. Such
assumptions include prepayment speeds, net credit losses and interest rates
used to discount cash flows.
The valuation of retained interests is affected not only by the projected
level of prepayments of principal and net credit losses, but also by the
projected timing of such prepayments and net credit losses. Should such
timing differ materially from the Company's projections, it could have a
material effect on the valuation of the Company's retained interests and
may result in impairment charges being recorded.
The key economic assumptions used in measuring the initial retained
interests resulting from securitizations completed in the nine months ended
June 30, 2002 were as follows:
June 30,
2002
--------
Approximate weighted average life (in years) 4.8
Estimated projected credit losses as a percentage
of original principal balance of loans 15.9%
Approximate weighted average interest rate used
to discount assumed residual cash flows 30.0%
Approximate assumed weighted average constant
prepayment rate as a percentage of unpaid
principal balance 16.3%
10
The following table sets forth certain data with respect to securitized
loans in which the Company retains an interest, and with respect to the key
economic assumptions used by the Company in estimating the fair value of
such retained interests:
June 30, September 30,
2002 2001
---------- ----------
(in thousands)
Aggregate unpaid principal balance of loans $4,993,615 $4,854,849
Weighted average interest rate of loans at
period end 11.2% 11.0%
Approximate assumed weighted average constant
prepayment rate as a percentage of unpaid
principal balance of loans 12.4% 16.8%
Approximate remaining assumed nondiscounted
credit losses as a percentage of unpaid
principal balance of loans 18.6% 12.4%
Approximate weighted average interest rate used
to discount assumed residual cash flows 16.7% 19.2%
Interest rate used to discount assumed servicing
asset cash flows 15.0% 15.0%
Interest rate used to discount assumed servicing
and guarantee liability cash flows 4.8% 4.6%
The foregoing data and assumptions may not be comparable because of changes
in pool demographics, such as average age of loans and the interaction of
assumptions. All data is based on weighted averages using unpaid or
original principal balances of loans. See further discussion of assumptions
in the "Consumer Finance Revenues" section of "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The following table summarizes certain cash flows received from and paid to
the securitization trusts during the nine months ended June 30, 2002:
June 30,
2002
--------------
(in thousands)
Proceeds from new securitizations $ 622,427
Servicing fees received 29,157
Net advances of principal and interest to trusts 8,178
Guarantee payments 1,660
Cash flow received on retained regular interests 1,173
Cash flow received on retained residual interests 5,801
11
Loans serviced by the Company and related loans past due 90 days or more at
June 30, 2002, are set forth below:
Total Amount
Principal 90 days or more
Amount Past Due
--------- ---------------
(in thousands)
Loans held for sale $132,979 $ 5,022
Securitized loans 4,993,615 400,163
6. The following table sets forth the activity by quarter in each component of
the Company's restructuring reserve (in thousands):
12
Severance Plant, sales
and other center and
termination office Asset
charges closings write-downs Total
-------------------------------------------------------------
Original provision $ 7,350 $ 7,384 $ 11,192 $ 25,926
Payments and balance sheet charges (1,707) (141) (11,192) (13,040)
-------------------------------------------------------------
Balance 9/30/99 5,643 7,243 -- 12,886
-------------------------------------------------------------
Payments and balance sheet charges (810) (2,750) -- (3,560)
-------------------------------------------------------------
Balance 12/31/99 4,833 4,493 -- 9,326
-------------------------------------------------------------
Payments and balance sheet charges (550) (1,183) -- (1,733)
Reversal of restructuring charges (2,912) (1,439) -- (4,351)
-------------------------------------------------------------
Balance 3/31/00 1,371 1,871 -- 3,242
-------------------------------------------------------------
Payments and balance sheet charges (81) (685) 378 (388)
Reversal of restructuring charges (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 balance sheet charges (1,505) (1,277) (15) (2,797)
Reversal of restructuring charges (100) (635) -- (735)
-------------------------------------------------------------
Balance 9/30/00 759 1,052 -- 1,811
-------------------------------------------------------------
Payments and balance sheet charges (519) (109) -- (628)
-------------------------------------------------------------
Balance 12/31/00 240 943 -- 1,183
-------------------------------------------------------------
Payments and balance sheet charges (114) (31) -- (145)
-------------------------------------------------------------
Balance 3/31/01 126 912 -- 1,038
-------------------------------------------------------------
Payments and balance sheet charges (55) (33) -- (88)
-------------------------------------------------------------
Balance 6/30/01 71 879 -- 950
-------------------------------------------------------------
Additional provision 681 4,702 12,460 17,843
Payments and balance sheet charges (41) (1,339) (12,460) (13,840)
Reversal of 1999 restructuring charges (30) (45) -- (75)
-------------------------------------------------------------
Balance 9/30/01 681 4,197 -- 4,878
-------------------------------------------------------------
Payments and balance sheet charges (145) (743) -- (888)
-------------------------------------------------------------
Balance 12/31/01 536 3,454 -- 3,990
-------------------------------------------------------------
Payments and balance sheet charges (50) (593) 412 (231)
Reversal of 2001 restructuring charges (486) (1,173) (412) (2,071)
-------------------------------------------------------------
Balance 3/31/02 $ -- $ 1,688 $ -- $ 1,688
-------------------------------------------------------------
Payments and balance sheet charges -- (505) -- (505)
-------------------------------------------------------------
Balance 6/30/02 $ -- $ 1,183 $ -- $ 1,183
-------------------------------------------------------------
13
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 included
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 2000 the Company reversed into income $6.4 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.
During 2000 the Company also reevaluated its restructuring plans and
determined that the losses associated with the closing of retail sales
centers, the idling or closing of manufacturing plants, the disposition of
certain assets and legal costs were less than anticipated and $3.5 million
of the charges were reversed. During 2000 the Company recorded an
additional $3.8 million charge, primarily related to severance costs
associated with a reduction in headcount of 250 people primarily in the
corporate, finance and manufacturing operations area, and the closure of
offices.
During the fourth quarter of 2001 the Company recorded restructuring
charges of approximately $17.8 million, primarily related to the closing of
approximately 90 underperforming retail sales centers, a majority of which
were located in the South, in areas where the Company has experienced poor
operating results as well as poor credit performance. At March 31, 2002
these restructuring activities were substantially complete.
Market conditions, particularly in the South where the majority of store
closings occurred, remained fluid during the six months ended March 31,
2002. While the Company did close the originally identified approximately
90 stores, these changing market conditions caused the Company to revise
its initial determination of the number of stores to be either sold to
independent dealers, converted to centers that exclusively market
repossessed inventory or closed. The Company originally estimated that the
disposition of the stores would be approximately evenly divided between
those sold to independent dealers, converted to centers exclusively
marketing repossessed inventory or closed. Ultimately, approximately 27
stores were sold, 23 were converted and 40 were closed. As a result of the
change in the ultimate disposition of certain of the stores, as well as
changes in the original estimate of costs to exit the stores, the Company
reversed into income in the quarter ended March 31, 2002 $2.1 million of
restructuring charges originally recorded in the fourth quarter of fiscal
2001.
The balance in the restructuring reserve at June 30, 2002 relates to
provisions established during the fourth quarter of 2001. The Company is
contractually obligated to pay the amounts remaining in the reserve at June
30, 2002.
14
During the execution of the Company's restructuring plans, approximately
2,800 employees were affected, of which 2,150 and 250 were terminated
during the fourth quarters of 1999 and 2000, respectively. The Company
terminated approximately 400 employees as part of its fourth quarter 2001
plan.
7. During the quarter ended June 30, 2002 the Company recorded an $18.9
million charge related principally to the closure of a manufacturing
facility in Texas and the reduction in the net book value of certain retail
division assets. The plant was closed in order to support the Company's
overall business strategy to align production rates with anticipated sales
and to consolidate the Company's Texas manufacturing operations in more
modern and efficient facilities. For the quarter and nine months ended June
30, 2002 the Texas plant generated operating losses of $0.1 million and
$0.3 million, respectively. The retail division charge principally relates
to the Company's plans to close nine unprofitable retail sales centers. For
the quarter and nine months ended June 30, 2002 these retail sales centers
collectively generated operating losses of $0.7 million and $2.2 million,
respectively. Approximately $14.3 million of the $18.9 million charge was
non-cash in nature and has been separately disclosed in the accompanying
Consolidated Statement of Operations. The non-cash charges relate to the
write down of assets, including land improvements, leasehold improvements,
machinery and equipment and intangible assets. The remaining $4.6 million
has been included in cost of sales and relates principally to costs to exit
the Texas plant.
8. 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"):
15
Three months ended Nine months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except per share data)
Numerator in loss per share calculation:
Loss before cumulative effect of accounting
changes $(119,817) $(47,958) $(99,506) $(109,642)
Net loss $(119,817) $(50,234) $(99,506) $(126,508)
Denominator in loss per share calculation:
Weighted average number of
common shares outstanding 9,498 9,422 9,485 9,415
Unearned shares -- -- -- --
--------- -------- -------- ---------
Denominator for basic EPS 9,498 9,422 9,485 9,415
Dilutive effect of stock options and
restricted shares computed using
the treasury stock method -- -- -- --
--------- -------- -------- ---------
Denominator for diluted EPS 9,498 9,422 9,485 9,415
========= ======== ======== =========
Loss per share:
Loss before cumulative effect of accounting
changes
Basic $ (12.61) $ (5.09) $ (10.49) $ (11.65)
========= ======== ======== =========
Diluted $ (12.61) $ (5.09) $ (10.49) $ (11.65)
========= ======== ======== =========
Net loss
Basic $ (12.61) $ (5.33) $ (10.49) $ (13.44)
========= ======== ======== =========
Diluted $ (12.61) $ (5.33) $ (10.49) $ (13.44)
========= ======== ======== =========
Stock options to purchase 521,985 and 763,378 shares of common stock,
1,924,779 and 1,906,888 shares which may be acquired pursuant to a stock
warrant, and 10,604 and 109,567 unearned restricted shares at June 30, 2002
and 2001, respectively, were not included in the computation of diluted
earnings per share because their inclusion would have been antidilutive.
9. During the first quarter of fiscal 2002 the Company formed a wholly-owned
qualifying special purpose subsidiary, Oakwood Advance Receivables Company,
LLC ("OAR"), to provide up to $50 million of revolving funding for
qualifying servicing advance receivables. The Company sells qualifying
servicing advance receivables to OAR, which funds its purchases of
receivables using the proceeds of debt obligations issued by OAR to third
party investors. OAR collects the receivables it purchases from the
Company, and such proceeds are available to purchase additional receivables
from the Company through August 2003. At June 30, 2002 OAR had
approximately $32.1 million of cash available to purchase additional
qualifying servicing advance receivables from the Company. Conveyances of
receivables to OAR are accounted for as sales under 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").
16
10. The estimated principal payments under notes and bonds payable are $0.8
million, $0.9 million, $125.4 million, $0.8 million, and $0.8 million for
the 12 months ended June 30, 2003, 2004, 2005, 2006, and 2007,
respectively, and the balance is payable thereafter.
11. 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 $15.4 million at June 30, 2002. The Company is also
contingently liable as guarantor on subordinated securities issued by REMIC
trusts in the aggregate principal amount of $274.8 million at June 30,
2002. Such guarantees obligate the Company to make payments in amounts
equal to the excess, if any, of principal and interest distributions
payable on the guaranteed securities over the cash available for such
purpose in the underlying securitization trusts. Such payments may arise as
a result of credit losses on the underlying trusts or because of structural
provisions of the guaranteed securities which give rise to guarantee
payments unrelated to loan pool performance. 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 numerous retailers and is further reduced by the resale value of
repurchased homes. The Company's estimated potential obligations under such
repurchase agreements approximated $101.8 million at June 30, 2002. Losses
under these repurchase agreements have not been significant as of June 30,
2002.
12. 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:
17
Three months ended Nine months ended
June 30, June 30,
-------- --------
(in thousands) 2002 2001 2002 2001
---- ---- ---- ----
Revenues
Retail $ 138,709 $ 151,853 $ 388,670 $ 496,356
Manufacturing 182,245 167,268 488,948 470,602
Consumer finance (70,010) 3,203 (35,340) 27,489
Insurance 10,861 12,836 32,142 37,438
Eliminations/other (71,325) (77,933) (196,446) (226,849)
--------- --------- --------- ---------
$ 190,480 $ 257,227 $ 677,974 $ 805,036
========= ========= ========= =========
Loss before interest expense,
investment income and income
taxes
Retail $ (17,078) $ (27,356) $ (41,128) $ (71,097)
Manufacturing (1,065) 10,099 13,122 14,517
Consumer finance (90,843) (13,285) (119,318) (11,546)
Insurance 3,908 5,942 12,709 17,697
Eliminations/other (4,717) (6,708) (14,377) (15,156)
--------- --------- --------- ---------
(109,795) (31,308) (148,992) (65,585)
Interest expense (10,065) (16,856) (29,395) (44,671)
Investment income 43 206 152 614
--------- --------- --------- ---------
Loss before income taxes and
cumulative effect of
accounting changes $(119,817) $ (47,958) $(178,235) $(109,642)
========= ========= ========= =========
Depreciation and amortization
Retail $ 2,011 $ 4,002 $ 6,737 $ 10,034
Manufacturing 3,794 4,102 11,475 12,741
Consumer finance 545 2,670 1,584 8,703
Eliminations/other 1,487 6,908 4,525 14,799
--------- --------- --------- ---------
$ 7,837 $ 17,682 $ 24,321 $ 46,277
========= ========= ========= =========
Capital expenditures
Retail $ 96 $ 849 $ 1,385 $ 2,060
Manufacturing 880 852 3,333 2,589
Consumer finance 740 530 1,215 2,396
Eliminations/other 439 629 1,161 2,375
--------- --------- --------- ---------
$ 2,155 $ 2,860 $ 7,094 $ 9,420
========= ========= ========= =========
June 30, September 30,
2002 2001
---- ----
Identifiable assets
Retail $ 402,025 $ 478,976
Manufacturing 242,066 258,498
Consumer finance 243,651 384,244
Insurance 109,662 123,405
Eliminations/other (155,319) (322,833)
--------- ---------
$ 842,085 $ 922,290
========= =========
18
13. In June 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("FAS 141")
and Statement No. 142, "Goodwill and Other Intangible Assets" ("FAS 142").
FAS 141 mandates the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and establishes specific
criteria for the recognition of intangible assets separately from goodwill.
FAS 142 addresses the accounting for goodwill and intangible assets
subsequent to their acquisition. The most significant changes made by FAS
142 are that goodwill and indefinite-lived intangible assets will no longer
be amortized and will be tested for impairment at least annually. The
Company is required to adopt FAS 142 at the beginning of 2003. The Company
has not yet determined the impact that this statement could have on its
financial position or results of operations. However, the application of
the non-amortization provisions of FAS 142 would be expected to result in a
decrease of pre-tax loss in 2002. For the nine months ended June 30, 2002
amortization of intangible assets was approximately $3.6 million, all of
which would be subject to the non-amortization provisions of FAS 142. At
June 30, 2002 goodwill and other intangible assets were $45.2 million net
of accumulated amortization.
14. 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.
15. For the nine months ending June 30, 2002 and 2001 the Company reported net
losses of $99.5 million and $126.5 million, respectively. Included in the
net loss for the nine months ended June 30, 2002 and 2001 were impairment
and valuation provisions of $85.2 million and $30.7 million, respectively.
These charges are more fully described in the "Consumer Finance Revenues"
section of "Management's Discussion and Analysis of Financial Condition and
Results of Operations'.
The net loss for the nine months ended June 30, 2002 reflects an income tax
benefit of $78.7 million. Approximately $6.5 million of the benefit
resulted from the completion of an examination of the Company's federal
income tax returns for the fiscal years 1997 through 2000 and the favorable
resolution of certain income tax contingencies for which the Company had
previously recorded a provision. The remaining $72.2 million income tax
benefit resulted from the enactment of the Job Creation and Worker
Assistance Act of 2002 ("the Act") on March 8, 2002. The Act extended the
period to which certain net operating losses could be carried back from two
years to five years, giving the Company the opportunity to file for refunds
of income taxes paid relating to the 1996 and 1997 tax years. After filing
its 2001 income tax return, the Company received in April 2002 a cash
refund of $46.6 million. The remaining refund of approximately $26 million
is expected to be realized after the Company files its income tax return
for the year ending September 30, 2002.
The Company's operating results reflect difficult business conditions
within the manufactured housing industry. The Company continues to operate
in a highly competitive environment caused principally by the industry's
aggressive expansion in the retail channel, excessive amounts of finished
goods and repossession inventory and a general reduction in the
availability of financing at both the wholesale and retail levels. These
problems have been magnified by a decline in overall economic conditions
which has resulted in higher loan delinquencies, increased repossessions
and reduced recovery rates associated with the sale of repossessed homes.
The industry estimates that shipments of manufactured homes from production
facilities declined by approximately 28% and 22% during calendar years 2000
and 2001, respectively. For the nine month period ended June 30, 2002, the
19
industry estimates that shipments have further declined by approximately 9%
compared to the same period last year.
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
have continued through the first nine months of fiscal 2002 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, most notably plant and sales center closings, curtailed production
schedules and competitive pricing to effect a $243.8 million reduction in
inventories since September 1999, have negatively affected the Company's
reported earnings. Although the Company anticipates a loss for the fiscal
year, it believes that its operating cash flow, coupled with its continued
access to the asset-backed securities market and borrowings under its
credit facilities, which are described below, will provide sufficient
liquidity to meet obligations and execute its business plan during the
remainder of fiscal 2002. However, there can be no assurances that the
Company will be able to continue to access the asset-backed securities
market. There can also be no assurances that the Company will be able to
meet the covenants contained in its loan agreements.
In the event of further deterioration in market conditions, the Company
would 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 operational 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, 2002 the
Company was operating 19 plants. Should market conditions worsen from those
anticipated, the Company will continue to curtail production by lowering
production speed or idling additional production facilities.
The Company's primary sources of liquidity include cash generated by
operations, borrowing availability under its three credit facilities and
its securitization program through which loans are sold into the
asset-backed securities market. During 2002 the Company also received an
income tax refund and expects to receive an additional refund in 2003 as
described above.
During 2001 the Company generated $47.5 million of cash from operating
activities, principally as a result of a $94.4 million reduction in its
inventories and the sale of substantially all subordinated asset-backed
securities rated below BBB previously retained by the Company from prior
securitizations. The sale of these subordinated securities was finalized
during the fourth quarter of 2001 and generated $72.9 million of cash.
Subsequent to the sale of the retained subordinated securities, the Company
retired its $75 million revolving credit facility, which was scheduled to
mature in October 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. The net cash proceeds from the sale of the
retained subordinated securities and the release of the cash collateral
more than offset the $75 million previously available under the revolving
credit facility.
20
During the first nine months of fiscal 2002 the Company's operating
activities provided $40.1 million of cash principally as a result of a
$28.8 million reduction in inventory and the timing of its asset-backed
securitizations offset by the increased costs associated with its loan
assumption program, which is an alternative means to repossession in
dealing with troubled loans as more fully described in the "Consumer
Finance Revenues" section of "Management's Discussion and Analysis of
Financial Condition and Results of Operations". For the nine months ended
June 30, 2002, the Company expended cash approximating $47.6 million in
connection with the loan assumption program. As previously described, the
Company substantially curtailed its use of this program in June 2002.
The Company's liquidity position continues to be adversely affected by
defaulted loans in the Company's servicing portfolio, which have negatively
affected cash flow, through both reduced residual cash flow from retained
securitization interests and as a result of the costs borne by the Company
on the loan assumption program. In addition, delinquency on loans,
including those in repossession, adversely affect liquidity because the
Company is obligated, in most cases, to make servicing advances of
delinquent mortgage payments. While the curtailment of the loan assumption
program will improve liquidity, the Company's increased disposition of
repossessions through the wholesale channel of distribution will partially
offset this improvement as servicing fees and cash received from retained
residual interests will be reduced.
Liquidity also has been and may continue to be negatively affected by
increasing insurance costs and credit support requirements associated with
its general corporate insurance program. These expected higher rates and
deductibles reflect what management believes is an increasingly competitive
insurance market. Management also expects that the Company's liquidity
position will continue to be negatively affected by its insurers' increased
requirements for letters of credit, surety bonds or other similar forms of
collateral.
The Company currently has in place three credit facilities that it believes
are adequate to meet liquidity needs during fiscal 2002. During the second
quarter of 2001 a newly formed, special purpose subsidiary of the Company
entered into a three-year, $200 million loan purchase facility with a
financial institution that provides for funding of up to 81% of qualifying
loan principal balances held for sale. Under the facility, the Company
issued to a sister company of the financial institution a warrant valued at
$11.0 million to acquire approximately 1.9 million shares of the Company's
common stock with an exercise price of approximately $9.75 per share. The
warrant, which is immediately exercisable, expires in February 2009.
During the first quarter of fiscal 2002 the Company formed a wholly-owned
qualifying special purpose subsidiary, Oakwood Advance Receivables Company,
LLC ("OAR"), to provide up to $50 million of revolving funding for
qualifying servicing advance receivables. The Company sells qualifying
servicing advance receivables to OAR, which funds its purchases of
receivables using the proceeds of debt obligations issued by OAR to third
party investors. OAR collects the receivables it purchases from the
Company, and such proceeds are available to purchase additional receivables
from the Company through August 2003. At June 30, 2002 OAR had
approximately $32.1 million of cash available to purchase additional
qualifying servicing advance receivables from the Company. Conveyances of
receivables to OAR are accounted for as sales under FAS 140.
21
During the second quarter of fiscal 2002 the Company closed a new $65
million revolving credit facility. The facility matures in January 2007 and
is collateralized by substantially all assets of the Company excluding raw
materials inventory and loans held for sale. The primary purposes of the
facility are to support outstanding letters of credit of approximately
$47.3 million and to provide additional cash borrowing capacity. The
agreement contains financial covenants which, among other things, specify
minimum levels of tangible net worth and earnings before interest, taxes
and depreciation and amortization, and limit capital expenditures.
Borrowings outstanding under the facility bear interest at the greater of
LIBOR plus 3.50% or 9%.
At June 30, 2002 the Company was in compliance with all covenants contained
in its debt agreements or had obtained waivers and amendments for any
violations.
The Company continues to generate liquidity through its securitization
program. The retail financing of sales of the Company's products is an
integral part of the Company's business strategy, particularly because
there has been a significant reduction in the number of lenders offering
financing to purchasers of manufactured housing. If the Company were unable
to offer consumer financing to its customers through its Oakwood Acceptance
finance subsidiary, sales could be adversely affected because of the
scarcity of alternative financing sources. Such financing consumes
substantial amounts of capital, which the Company has obtained principally
by regularly securitizing such loans through the asset-backed securities
market. While the Company has for many years successfully accessed this
market, an interruption of such access, either completely or with respect
to relatively lower credit-rated portions of securitizations, would
adversely affect the Company's liquidity. 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. There can be no assurance that such alternative financing
can be obtained, and the inability of the Company to obtain such
alternative financing would adversely affect the Company's liquidity and
operations.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
CRITICAL ACCOUNTING POLICIES
----------------------------
The Company has chosen accounting policies that it believes are appropriate to
accurately and fairly report its results of operations and financial position,
and it applies those accounting policies in a consistent manner. The Company's
significant accounting policies are summarized in Note 1 to the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended September 30, 2001.
The preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires that the Company's
management make estimates and assumptions that may affect the reported amounts
of assets, liabilities, revenues and expenses. These estimates and assumptions
are based on historical and other factors believed to be reasonable under the
circumstances. The Company evaluates these estimates and assumptions on an
ongoing basis.
The Company believes that the following accounting policies are the most
critical because they involve the most significant judgments and estimates used
in preparation of the consolidated financial statements.
Loan securitization
The Company finances its lending activities primarily by securitizing the loans
it originates using Real Estate Mortgage Investment Conduits ("REMICs") or, for
certain FHA-insured loans, using collateralized mortgage obligations issued
under authority granted to the Company by the Government National Mortgage
Association ("GNMA").
The Company allocates the sum of its basis in the loans conveyed to each REMIC
and the costs of forming the REMIC among the REMIC interests retained and the
REMIC interests sold to investors based upon the relative estimated fair values
of such interests.
The Company estimates the fair value of retained REMIC interests, including
regular and residual interests, servicing contracts, and guarantee liabilities
based, in part, upon net credit loss, discount rate and prepayment speed
assumptions which management believes market participants would use for similar
instruments.
In accordance with EITF 99-20, income on retained REMIC regular and residual
interests is recorded using the level yield method over the period such
interests are outstanding. The rate of voluntary prepayments and the amount and
timing of net credit losses affect the Company's yield on retained regular and
residual REMIC interests and the fair value of such interests and of servicing
contracts and guarantee liabilities in periods subsequent to the securitization;
the actual rate of voluntary prepayments and net credit losses typically varies
over the life of each transaction and from transaction to transaction. If over
time the Company's prepayment and credit loss experience is more favorable than
that assumed, the Company's yield on its REMIC residual interests will be
enhanced. If experience is worse than assumed, then impairment charges could
result. The yield to maturity of regular REMIC
23
interests may be influenced by prepayment rates and net credit losses, but is
less likely to be influenced by such factors because cash distributions on
regular REMIC interests are senior to distributions on residual REMIC interests.
Residual and regular REMIC interests retained by the Company following
securitization are considered available for sale and are carried at their
estimated fair value. The Company has no securities held for trading or
investment purposes.
Declines in the value of retained REMIC interests are recognized when the fair
value of the retained interest is less than its carrying value and/or the amount
of cash expected to be received from the retained interest has changed adversely
from the previous valuation which determined the carrying value of the retained
interest. When both these circumstances occur, the carrying value of the
retained interest is reduced to its estimated fair value.
Servicing contracts and fees
Servicing fee income is recognized as earned, net of amortization of servicing
assets and liabilities, which are amortized in proportion to and over the period
of estimated net servicing income. If the estimated fair value of a servicing
contract is less than its carrying value, the Company records a valuation
allowance by a charge to earnings to reduce the carrying value of the contract
to its estimated fair value. Valuation allowances may be reversed to earnings
upon the recovery of a contract's fair value. Such recoveries are only
recognized after sustained performance of the pool has been demonstrated.
Guarantee liabilities
The Company estimates the fair value of guarantee liabilities as the greater of
the estimated price differential between guaranteed and substantially similar
unguaranteed securities offered for sale by the Company and the present value of
payments, if any, estimated to be made as a result of such guarantees. Guarantee
liabilities are amortized to income over the period during which the guarantee
is outstanding. Amortization is commenced only after a demonstrated history of
pool performance.
If the present value of any estimated guarantee payments exceeds the amount
recorded with respect to such guarantee, the Company records an impairment
charge to increase the guarantee liability to such present value.
Loans held for sale or investment
Loans held for sale are carried at the lower of cost or market. Loans held for
investment are carried at their outstanding principal amounts, less unamortized
discounts and plus unamortized premiums.
Reserve for credit losses
The Company maintains reserves for estimated credit losses on loans held for
investment, on loans warehoused prior to securitization and on loans sold to
third parties with full or limited recourse. The Company provides for losses in
amounts necessary to maintain the reserves at amounts the Company believes are
sufficient to provide for probable losses based upon the Company's historical
loss experience, current economic conditions and an assessment of current
portfolio performance measures.
24
Insurance underwriting
The Company has a captive reinsurance underwriting subsidiary, domiciled in
Bermuda, for property and casualty and credit life insurance and service
contract business. Premiums from reinsured insurance policies are deferred and
recognized as revenue over the term of the contracts, generally ranging from one
to five years. Claims expenses are recorded as insured events occur. Policy
acquisition costs, which consist principally of sales commissions and ceding
fees, are deferred and amortized over the terms of the contracts.
The Company estimates liabilities for reported unpaid insurance claims, which
are reflected at undiscounted amounts, based upon reports from adjusters with
respect to adjusted claims and based on historical average costs per claim for
similar claims with respect to unadjusted claims. Adjustment expenses are
accrued based on contractual rates with the ceding company. The ceding company,
using a development factor that reflects historical average costs per claim and
historical reporting lag trends, estimates liabilities for claims incurred but
not reported. The Company does not consider anticipated investment income in
determining whether premium deficiencies exist. The Company accounts for
catastrophe reinsurance ceded in accordance with Emerging Issues Task Force
Issue No. 93-6, "Accounting for Multi-Year Retrospectively Rated Contracts by
Ceding and Assuming Enterprises."
Income taxes
The Company accounts for deferred income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are based on the
temporary differences between the financial reporting basis and tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled. Valuation allowances are provided
against assets if it is anticipated that it is more likely than not that some or
all of a deferred tax asset may not be realized.
RESULTS OF OPERATIONS
---------------------
Three months ended June 30, 2002 compared to three months ended June 30, 2001
- -----------------------------------------------------------------------------
The following table summarizes certain statistics for the quarters ended
June 30, 2002 and 2001:
2002 2001
---- ----
Retail sales (in millions) $ 137.0 $ 150.9
Wholesale sales (in millions) $ 113.9 $ 89.7
Total sales (in millions) $ 250.9 $ 240.6
Gross profit % - consolidated 22.3% 20.3%
New single-section homes sold - retail 624 884
New multi-section homes sold - retail 1,908 2,140
Used homes sold - retail 245 295
New single-section homes sold - wholesale 852 513
New multi-section homes sold - wholesale 2,533 2,077
Average new single-section sales price - retail $32,100 $30,900
Average new multi-section sales price - retail $59,600 $55,800
Average new single-section sales price - wholesale $19,200 $21,800
Average new multi-section sales price - wholesale $38,400 $38,500
Weighted average retail sales centers
open during the period 236 348
25
Net sales
The Company's retail sales volume continued to be adversely affected by
extremely competitive industry conditions and generally weaker economic
conditions, fewer promotional programs and a reduction in the number of open
sales centers during the quarter ended June 30, 2002. Retail sales dollar volume
decreased 9%, reflecting a 16% decrease in new unit volume principally as a
result of the Company operating fewer sales centers at June 30, 2002 as compared
to the same quarter last year. This decrease was partially offset by increases
of 4% and 7% in the average new unit sales prices of single-section and
multi-section homes, respectively, and a shift in product mix toward
multi-section homes, which have higher average selling prices than
single-section homes. Multi-section homes accounted for 75% of retail new unit
sales compared to 71% in the quarter ended June 30, 2001. Average retail sales
prices on single-section and multi-section homes increased as a result of fewer
promotional programs targeted at selling older inventory models in the quarter
ended June 30, 2002 compared to the quarter ended June 30, 2001.
During the quarters ended June 30, 2002 and 2001 the Company opened no new sales
centers. The Company closed two underperforming sales centers during the quarter
ended June 30, 2002. During the quarter ended June 30, 2001 the Company closed
14 sales centers and converted one sales center to a center that exclusively
markets repossessed homes. At June 30, 2002 the Company had 236 retail sales
centers open compared to 340 open at June 30, 2001. Total new retail sales
dollars at sales centers open more than one year increased 16% during the
quarter ended June 30, 2002. At June 30, 2002 the Company operated 37 sales
centers that exclusively market repossessed homes compared to 15 at June 30,
2001.
Wholesale sales represent sales of manufactured homes to independent retailers.
Wholesale sales dollar volume increased 27%, reflecting a 31% increase in unit
volume. This increase was partially offset by a decrease in the average new unit
sales price of single-section homes of 12%.
Gross profit
Consolidated gross profit margin increased from 20.3% in the quarter ended June
30, 2001 to 22.3% in the quarter ended June 30, 2002. Excluding the $4.6 million
charge included in cost of sales for the quarter ended June 30, 2002 related to
the closure of a Texas plant as discussed below, the gross profit margin would
have been 24.2%. The increase resulted principally from improved manufacturing
efficiencies and reduced promotional pricing associated with the Company's
planned inventory reduction during the quarter ended June 30, 2002. These
increases were partially offset by a higher percentage of wholesale sales to
independent retailers in the quarter ended June 30, 2002. Wholesale sales
typically carry lower margins than the Company's integrated retail sales.
The Company believes that consolidated gross profit margin better reflects the
Company's results of operations than the integrated gross profit margin ratio
previously shown.
26
Consumer finance revenues
Consumer finance revenues are summarized as follows:
Three months ended
June 30,
(in thousands) 2002 2001
---- ----
Interest income $ 4,245 $ 5,837
Servicing fees 9,437 8,770
REMIC residual income 960 2,755
Gains (losses) on securities sold and
loans sold or held for sale:
Gain on sale of securities and loans 1,089 3,415
Valuation (provision) reversal on loans
held for sale (2,407) 2,739
-------- --------
(1,318) 6,154
-------- --------
Impairment and valuation
provisions (84,056) (20,647)
Other 722 334
-------- --------
$(70,010) $ 3,203
======== ========
The decrease in interest income reflects decreased income on retained regular
REMIC interests as a result of the sale of the majority of these assets during
the fourth quarter of fiscal 2001 and lower average interest rates on loans held
for sale in the warehouse prior to securitization. This decrease was partially
offset by higher average outstanding balances of loans held for sale in the
warehouse prior to securitization. The higher average warehouse balances
resulted principally from the timing of securitizations.
Loan servicing fees, which are reported net of amortization of servicing assets
and liabilities, increased as a result of a net decrease in servicing asset and
liability amortization. The increase was partially offset by lower overall
servicing cash flows from the Company's securitizations. The timing and amount
of servicing cash flows may vary based on the overall performance of loans in
the securitizations and the number of repossessions liquidated.
In some instances certain securitizations did not generate sufficient cash flows
to enable the Company to receive its full servicing fee for a given period. 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 REMIC residual income primarily reflects decreased residual cash
flows from certain retained residual interests as a result of increased
liquidations of repossessions.
27
For the quarter ended June 30, 2002 the Company recorded a loss of $0.6 million
on the securitization of $249.0 million of installment sale contracts and
mortgage loans. The loss resulted principally from a decrease from the prior
year 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 increased
overcollateralization requirements. Offsetting this loss were gains principally
resulting from the Company's termination of its 1991-1 and 1993-2 REMIC
securitization trusts and the sale of a retained regular interest. Such gains
aggregated $1.7 million.
During the quarter, the Company also recorded a charge of $2.4 million to reduce
the carrying value of loans held for sale to a lower of cost or market basis
at June 30, 2002.
Impairment and valuation provisions are summarized as follows:
Three months ended
June 30,
(in thousands) 2002 2001
---- ----
Impairment writedowns of residual
REMIC interests $ 1,914 $ 102
Impairment writedowns of regular
REMIC interests -- 20,563
Valuation allowances on servicing
contracts 45,390 --
Additional provision for (amortization of)
potential guarantee obligations on
REMIC securities sold 36,752 (18)
------- --------
$84,056 $ 20,647
======= ========
These charges generally resulted from changes in the assumptions of net credit
losses and voluntary prepayment rates on securitized loans. During June 2002,
the Company decided to substantially curtail its loan assumption program, which
was implemented during 2001. The elimination of the loan assumption program, and
the Company's need to reduce the number of repossessed homes on hand, will
require the Company to increase the number of repossessed homes sold through the
wholesale distribution channel, which typically carries much lower recovery
rates than those sold through the retail distribution channel. As a result of
this decision, the Company expects future net credit losses to increase,
particularly in the near-term. Accordingly, the Company has recorded impairment
charges to reflect updated valuations of its estimated REMIC residual asset cash
flows, projected shortfalls in future servicing fee revenues and estimated
payments under guarantee obligations on certain subordinated securities sold.
This decrease in recovery rates was projected to be most significant over the
next 24 months, reflecting the Company's current disposition plan, the weakened
economy and the industry's current oversupply of repossessed homes. Downward
adjustments to assumed recovery rates were less substantial for periods after
the next 24 months. In addition to these changes to estimated net credit losses,
the Company also reduced its voluntary prepayment speed assumptions over the
estimated lives of the securitization transactions to reflect the industry's
current retail lending interest rate environment, reduced retail consumer
lending capacity as well as the Company's recent actual voluntary prepayment
experience.
28
As further described in the Company's Annual Report on Form 10-K, the Company's
retained interests in securitizations are sensitive to changes in certain key
economic assumptions, particularly the net credit losses assumption which
includes estimations of the timing, frequency and severity of loan defaults. At
June 30, 2002, the aggregate valuation of retained interests was a net liability
of $110.2 million. The effect of a 10% adverse change in the net credit losses
assumption at June 30, 2002 would increase the net liability by approximately
$53.7 million. 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.
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 made use of its loan assumption program beginning in 2001 as an
alternative to foreclosure. Under this program, the Company endeavored to find a
new buyer that met the then-current underwriting standards for repossessed homes
who was willing to assume the defaulting obligor's loan. The expenses associated
with this program, which have been recorded in the Company's consolidated
statement of operations, amounted to $7.4 million and $3.7 million for the
quarters ended June 30, 2002 and 2001, respectively. During June 2002 the
Company decided to substantially curtail the loan assumption program and
converted the majority of assumption units to repossession status. The reduction
in use of this program should reduce the cash costs associated with the program.
See further discussion in the "Liquidity and Capital Resources" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
For the quarter ended June 30, 2002 total credit losses on the Company's loan
portfolio, 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 2.91% on an annualized basis of the average
principal balance of the related loans, compared to approximately 2.20% 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. Expenses
associated with the loan assumption program, as described above, are also
included in total credit losses as a percentage of average principal balance and
are the principal reason for the increase during the quarter ended June 30,
2002. At June 30, 2002 the Company had a total of 6,772 unsold properties in
repossession or foreclosure, including former pending assumption or equity
transfer units that were converted to repossession status at June 30, 2002,
(approximately 5.03% of the total number of serviced assets) compared to 6,461,
5,033 and 4,807 at March 31, 2002, June 30, 2001 and March 31, 2001,
respectively (approximately 4.82%, 3.77% and 3.72%, respectively, of the total
number of serviced assets).
At June 30, 2002 and 2001 the delinquency rate on the Company's serviced assets
was 5.5%. Higher delinquency levels may result in increased repossessions and
loan assumptions and related future impairment charges and valuation provisions.
29
Insurance revenues
Insurance revenues from the Company's captive reinsurance business decreased 26%
to $7.7 million in the quarter ended June 30, 2002 from $10.4 million in the
quarter ended June 30, 2001. A substantial portion of insurance revenues is
derived from insurance policies sold in connection with new home sales by the
Company's retail operations. If the adverse retail sales trends experienced in
2001 and the first nine months of fiscal 2002 continue, insurance revenues will
continue to decline in future periods.
The Company has entered into a quota share agreement that management believes
reduces the volatility of the Company's earnings by lowering its underwriting
exposure to natural disasters such as hurricanes and floods. The agreement
reduces the levels of credit support, which take the form of letters of credit
and/or cash, to secure the reinsurance subsidiary's obligations to pay claims
and to meet regulatory capital requirements. Under this arrangement, which
covers physical damage policies, the Company retro-cedes 50% of the Company's
physical damage premiums and losses on an ongoing basis. In return, the Company
receives 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, the Company recognized incremental commissions of
$0.6 million during the quarter ended June 30, 2002 compared to $1.7 million in
the third quarter of 2001.
Effective March 1, 2001 the Company entered into an agreement which amended the
basis upon which credit life premiums are ceded. Under the terms of the
agreement, all unearned credit life premiums and loss reserves were transferred
back to the ceding company. Remaining premiums for policies in force at that
date and premiums for new policies thereafter are ceded on an earned basis,
rather than on a written basis. This agreement reduced the level of credit
support required to maintain regulatory compliance.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $9.2 million, or 12%,
during the quarter ended June 30, 2002 compared to the prior year. As a
percentage of net sales, selling, general and administrative expenses decreased
to 26.5% in the quarter ended June 30, 2002 from 31.5% in the quarter ended June
30, 2001. The decrease is primarily due to ongoing cost containment measures and
the closure of underperforming sales centers having a high ratio of fixed costs
to sales. Selling, general and administrative expenses for the quarter ended
June 30, 2001 included a $2.1 million charge associated with the closure of 12
retail sales centers.
Consumer finance operating expenses
Consumer finance operating expenses decreased 18% during the quarter ended June
30, 2002 principally as a result of the inclusion of loan assumption costs of
$3.7 million in consumer finance operating expenses for the quarter ended June
30, 2001. The costs of the assumption program are reflected in the provision for
credit losses for the quarter ended June 30, 2002.
Insurance operating expenses
Insurance operating costs decreased 14% during the quarter ended June 30, 2002
compared to the quarter ended June 30, 2001 principally as a result of favorable
claims experience. Because reinsurance claims costs are recorded as insured
events occur, reinsurance
30
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):
31
Severance Plant, sales
and other center and
termination office Asset
charges closings write-downs Total
-------------------------------------------------------------
Original provision $ 7,350 $ 7,384 $ 11,192 $ 25,926
Payments and balance sheet charges (1,707) (141) (11,192) (13,040)
-------------------------------------------------------------
Balance 9/30/99 5,643 7,243 -- 12,886
-------------------------------------------------------------
Payments and balance sheet charges (810) (2,750) -- (3,560)
-------------------------------------------------------------
Balance 12/31/99 4,833 4,493 -- 9,326
-------------------------------------------------------------
Payments and balance sheet charges (550) (1,183) -- (1,733)
Reversal of restructuring charges (2,912) (1,439) -- (4,351)
-------------------------------------------------------------
Balance 3/31/00 1,371 1,871 -- 3,242
-------------------------------------------------------------
Payments and balance sheet charges (81) (685) 378 (388)
Reversal of restructuring charges (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 balance sheet charges (1,505) (1,277) (15) (2,797)
Reversal of restructuring charges (100) (635) -- (735)
-------------------------------------------------------------
Balance 9/30/00 759 1,052 -- 1,811
-------------------------------------------------------------
Payments and balance sheet charges (519) (109) -- (628)
-------------------------------------------------------------
Balance 12/31/00 240 943 -- 1,183
-------------------------------------------------------------
Payments and balance sheet charges (114) (31) -- (145)
-------------------------------------------------------------
Balance 3/31/01 126 912 -- 1,038
-------------------------------------------------------------
Payments and balance sheet charges (55) (33) -- (88)
-------------------------------------------------------------
Balance 6/30/01 71 879 -- 950
-------------------------------------------------------------
Additional provision 681 4,702 12,460 17,843
Payments and balance sheet charges (41) (1,339) (12,460) (13,840)
Reversal of 1999 restructuring charges (30) (45) -- (75)
-------------------------------------------------------------
Balance 9/30/01 681 4,197 -- 4,878
-------------------------------------------------------------
Payments and balance sheet charges (145) (743) -- (888)
-------------------------------------------------------------
Balance 12/31/01 536 3,454 -- 3,990
-------------------------------------------------------------
Payments and balance sheet charges (50) (593) 412 (231)
Reversal of 2001 restructuring charges (486) (1,173) (412) (2,071)
-------------------------------------------------------------
Balance 3/31/02 $ -- $ 1,688 $ -- $ 1,688
-------------------------------------------------------------
Payments and balance sheet charges -- (505) -- (505)
-------------------------------------------------------------
Balance 6/30/02 $ -- $ 1,183 $ -- $ 1,183
-------------------------------------------------------------
32
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 included 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 2000 the Company reversed into income $6.4 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. During 2000 the Company also reevaluated its restructuring
plans and determined that the losses associated with the closing of retail sales
centers, the idling or closing of manufacturing plants, the disposition of
certain assets and legal costs were less than anticipated and $3.5 million of
the charges were reversed. During 2000 the Company recorded an additional $3.8
million charge, primarily related to severance costs associated with a reduction
in headcount of 250 people primarily in the corporate, finance and manufacturing
operations area, and the closure of offices.
During the fourth quarter of 2001 the Company recorded restructuring charges of
approximately $17.8 million, primarily related to the closing of approximately
90 underperforming retail sales centers, a majority of which were located in the
South, in areas where the Company has experienced poor operating results as well
as poor credit performance. At March 31, 2002 these restructuring activities
were substantially complete.
Market conditions, particularly in the South where the majority of store
closings occurred, remained fluid during the six months ended March 31, 2002.
While the Company did close the originally identified approximately 90 stores,
these changing market conditions caused the Company to revise its initial
determination of the number of stores to be either sold to independent dealers,
converted to centers that exclusively market repossessed inventory or closed.
The Company originally estimated that the disposition of the stores would be
approximately evenly divided between those sold to independent dealers,
converted to centers exclusively marketing repossessed inventory or closed.
Ultimately, approximately 27 stores were sold, 23 were converted and 40 were
closed. As a result of the change in the ultimate disposition of certain of the
stores, as well as changes in the original estimate of costs to exit the stores,
the Company reversed into income in the quarter ended March 31, 2002 $2.1
million of restructuring charges originally recorded in the fourth quarter of
fiscal 2001.
The balance in the restructuring reserve at June 30, 2002 relates to provisions
established during the fourth quarter of 2001. The Company is contractually
obligated to pay the amounts remaining in the reserve at June 30, 2002.
During the execution of the Company's restructuring plans, approximately 2,800
employees were affected, of which 2,150 and 250 were terminated during the
fourth quarters of 1999 and 2000, respectively. The Company terminated
approximately 400 employees as part of its fourth quarter 2001 plan.
33
Asset impairment charges
During the quarter ended June 30, 2002 the Company recorded asset impairment
charges of $14.3 million principally related to the closure of a manufacturing
facility and the reduction in net book value of certain retail division assets.
Interest expense
Interest expense for the quarter ended June 30, 2002 decreased $6.8 million, or
40%, from the third quarter of fiscal 2001 due principally to lower average
balances outstanding on short-term credit facilities during the quarter ended
June 30, 2002 and a prior year charge of $3.1 million to expense costs
associated with efforts to replace its revolving credit facility.
Cumulative effect of accounting change
In October 2000 the Emerging Issues Task Force of the Financial Accounting
Standards Board (the "EITF") issued EITF 99-20, "Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets," which sets forth new accounting requirements for the
recognition of impairment on REMIC interests arising from securitizations. Under
the prior accounting rule, declines in the value of retained REMIC interests
were recognized in earnings when the present value of estimated cash flows
discounted at a risk-free rate using current assumptions was less than the
carrying value of the retained interest. Under the new accounting rule, declines
in value are recognized when both of the following occur: the fair value of the
retained interest is less than its carrying value and the timing and/or amount
of cash expected to be received from the retained interest has changed adversely
from the previous valuation which determined the carrying value of the retained
interest. When both of these circumstances occur, the carrying value of the
retained interest is reduced to its estimated fair value. The Company adopted
EITF 99-20 as required on April 1, 2001 and accordingly recorded a cumulative
effect of an accounting change of $2.3 million as of that date.
Nine months ended June 30, 2002 compared to nine months ended June 30, 2001
- ---------------------------------------------------------------------------
The following table summarizes certain statistics for the nine months ended
June 30, 2002 and 2001:
2002 2001
---- ----
Retail sales (in millions) $ 383.6 $ 491.0
Wholesale sales (in millions) $ 301.3 $ 249.2
Total sales (in millions) $ 684.9 $ 740.2
Gross profit % - consolidated 23.1% 20.3%
New single-section homes sold - retail 1,791 3,172
New multi-section homes sold - retail 5,369 6,902
Used homes sold - retail 742 1,065
New single-section homes sold - wholesale 2,151 1,411
New multi-section homes sold - wholesale 6,685 5,681
Average new single-section sales price - retail $31,900 $30,300
Average new multi-section sales price - retail $59,000 $55,300
Average new single-section sales price - wholesale $19,200 $21,400
Average new multi-section sales price - wholesale $38,800 $38,700
Weighted average retail sales centers
open during the period 245 363
34
Net sales
The Company's retail sales volume continued to be adversely affected by
extremely competitive industry conditions and generally weaker economic
conditions, fewer promotional programs and a reduction in the number of open
sales centers during the nine months ended June 30, 2002. Retail sales dollar
volume decreased 22%, reflecting a 29% decrease in new unit volume principally
as a result of the Company operating fewer sales centers at June 30, 2002 as
compared to the same quarter last year. This decrease was partially offset by
increases of 5% and 7% in the average new unit sales prices of single-section
and multi-section homes, respectively, and a shift in product mix toward
multi-section homes, which have higher average selling prices than
single-section homes. Multi-section homes accounted for 75% of retail new unit
sales compared to 69% in the nine months ended June 30, 2001. Average retail
sales prices on single-section and multi-section homes increased as a result of
fewer promotional programs targeted at selling older inventory models in the
nine months ended June 30, 2002 compared to the nine months ended June 30, 2001.
During the nine months ended June 30, 2002 the Company opened no new sales
centers compared to one new sales center during the nine months ended June 30,
2001. The Company closed 60 underperforming sales centers during the nine months
ended June 30, 2002 and converted three sales centers to centers that
exclusively market repossessed homes. The closure or conversion of sales centers
resulted principally from the Company's restructuring plan, which was announced
during the fourth quarter of 2001 and is described below. During the nine months
ended June 30, 2001 the Company closed 26 underperforming sales centers and
converted 13 sales centers to centers that exclusively market repossessed
inventory. At June 30, 2002 the Company had 236 retail sales centers open
compared to 340 open at June 30, 2001. Total new retail sales dollars at sales
centers open more than one year decreased 2% during the nine months ended June
30, 2002. At June 30, 2002 the Company operated 37 sales centers that
exclusively market repossessed homes compared to 15 at June 30, 2001.
Wholesale sales represent sales of manufactured homes to independent retailers.
Wholesale sales dollar volume increased 21%, reflecting a 25% increase in unit
volume. This increase was partially offset by a decrease in the average new unit
sales price of single-section homes of 10%.
Gross profit
Consolidated gross profit margin increased from 20.3% in the nine months ended
June 30, 2001 to 23.1% in the quarter ended June 30, 2002. The increase resulted
principally from improved manufacturing efficiencies and reduced promotional
pricing associated with the Company's planned inventory reduction during the
nine months ended June 30, 2002. These increases were partially offset by a
higher percentage of wholesale sales in the nine months ended June 30, 2002.
Wholesale sales typically carry lower margins than the Company's integrated
retail sales.
The Company believes that consolidated gross profit margin better reflects the
Company's results of operations than the integrated gross profit margin ratio
previously shown.
35
Consumer finance revenues
Consumer finance revenues are summarized as follows:
Nine months ended
June 30,
(in thousands) 2002 2001
---- ----
Interest income $ 10,568 $ 25,646
Servicing fees 31,126 18,331
REMIC residual income 4,014 6,025
Gains (losses) on securities sold and
loans sold or held for sale:
Gain on sale of securities and loans 4,407 7,041
Valuation provision on loans
held for sale (2,407) --
-------- --------
2,000 7,041
-------- --------
Impairment and valuation
provisions (85,170) (30,735)
Other 2,122 1,181
--------
$(35,340) $ 27,489
======== ========
The decrease in interest income reflects decreased income on retained regular
REMIC interests as a result of the sale of the majority of these assets during
the fourth quarter of fiscal 2001, lower average outstanding balances of loans
held for sale in the warehouse prior to securitization and lower 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 higher overall servicing cash flows
from the Company's securitizations. The timing and amount of servicing cash
flows may vary based on the performance of loans in the securitizations and the
number of repossessions liquidated.
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 REMIC residual income primarily reflects decreased residual cash
flows from certain retained residual interests as a result of increased
liquidations of repossessions in certain securitizations during the nine months
ended June 30, 2002.
36
The gain on sale of securities and loans during the nine months ended June 30,
2002 reflects the completion of three securitizations. The gain resulted
principally 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.
The Company recorded a charge of $2.4 million to reduce the carrying value of
loans held for sale to a lower of cost or market basis at June 30, 2002.
Impairment and valuation provisions are summarized as follows:
Nine months ended
June 30,
(in thousands) 2002 2001
---- ----
Impairment writedowns of residual
REMIC interests $ 1,914 $ 245
Impairment writedowns of regular
REMIC interests -- 20,563
Valuation provisions on servicing
contracts 46,614 9,945
Additional provision for (amortization of)
potential guarantee obligations on
REMIC securities sold 36,642 (18)
-------- --------
$ 85,170 $ 30,735
======== ========
These charges generally resulted from changes in the assumptions of net credit
losses and voluntary prepayment rates on securitized loans. During June 2002,
the Company decided to substantially curtail its loan assumption program, which
was implemented during 2001. The elimination of the loan assumption program, and
the Company's need to reduce the number of repossessed homes on hand, will
require the Company to increase the number of repossessed homes sold through the
wholesale distribution channel, which typically carries much lower recovery
rates than those sold through the retail distribution channel. As a result of
this decision, the Company expects future net credit losses to increase,
particularly in the near-term. Accordingly, the Company has recorded impairment
charges to reflect updated valuations of its estimated REMIC residual asset cash
flows, projected shortfalls in future servicing fee revenues and estimated
payments under guarantee obligations on certain subordinated securities sold.
This decrease in recovery rates was projected to be most significant over the
next 24 months, reflecting the Company's current disposition plan, the weakened
economy and the industry's current oversupply of repossessed homes. Downward
adjustments to assumed recovery rates were less substantial for periods after
the next 24 months. In addition to these changes to estimated net credit losses,
the Company also reduced its voluntary prepayment speed assumptions over the
estimated lives of the securitization transactions to reflect the industry's
current retail lending interest rate environment, reduced retail consumer
lending capacity as well as the Company's recent actual voluntary prepayment
experience.
As further described in the Company's Annual Report on Form 10-K, the Company's
retained interests in securitizations are sensitive to changes in certain key
economic assumptions, particularly the net credit losses assumption which
includes estimations of the timing, frequency and severity of loan defaults. At
June 30, 2002, the aggregate valuation of
37
retained interests was a net liability of $110.2 million. The effect of a 10%
adverse change in the net credit losses assumption at June 30, 2002 would
increase the net liability by approximately $53.7 million. 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.
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 made use of its loan assumption program beginning in 2001 as an
alternative to foreclosure. Under this program, the Company endeavored to find a
new buyer that met the then-current underwriting standards for repossessed homes
who was willing to assume the defaulting obligor's loan. The expenses associated
with this program, which have been recorded in the Company's consolidated
statement of operations amounted to $38.0 million and $3.9 million for the nine
months ended June 30, 2002 and 2001, respectively. During June 2002 the Company
decided to substantially curtail the loan assumption program and converted the
majority of assumption units to repossession status. The reduction in use of
this program should reduce the cash costs associated with the program. See
further discussion in the "Liquidity and Capital Resources" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
For the nine months ended June 30, 2002 total credit losses on the Company's
loan portfolio, 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 3.31% on an annualized basis of the
average principal balance of the related loans, compared to approximately 1.95%
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. Expenses associated with the loan assumption program, as
described above, are also included in total credit losses as a percentage of
average principal balance and are the principal reason for the increase during
the quarter ended June 30, 2002. At June 30, 2002 the Company had a total of
6,772 unsold properties in repossession or foreclosure, including former pending
assumption or equity transfer units that were converted to repossession status
at June 30, 2002, (approximately 5.03% of the total number of serviced assets)
compared to 6,461, 5,033 and 4,807 at March 31, 2002, June 30, 2001 and March
31, 2001, respectively (approximately 4.82%, 3.77% and 3.72%, respectively, of
the total number of serviced assets).
At June 30, 2002 and 2001 the delinquency rate on the Company's serviced assets
was 5.5%. Higher delinquency levels may result in increased repossessions and
loan assumptions and related future impairment charges and valuation provisions.
Insurance revenues
Insurance revenues from the Company's captive reinsurance business decreased 24%
to $22.7 million in the nine months ended June 30, 2002 from $29.9 million in
the nine months ended June 30, 2001. A substantial portion of insurance revenues
is derived from insurance
38
policies sold in connection with new home sales by the Company's retail
operations. If the adverse retail sales trends experienced in 2001 and the first
nine months of fiscal 2002 continue, insurance revenues will continue to decline
in future periods.
The Company has entered into a quota share agreement that management believes
reduces the volatility of the Company's earnings by lowering its underwriting
exposure to natural disasters such as hurricanes and floods. The agreement
reduces the levels of credit support, which take the form of letters of credit
and/or cash, to secure the reinsurance subsidiary's obligations to pay claims
and to meet regulatory capital requirements. Under this arrangement, which
covers physical damage policies, the Company retro-cedes 50% of the Company's
physical damage premiums and losses on an ongoing basis. In return, the Company
receives 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, the Company recognized incremental commissions of
$0.6 million during the nine months ended June 30, 2002 compared to $1.7
million in the same period last year.
Effective March 1, 2001 the Company entered into an agreement which amended the
basis upon which credit life premiums are ceded. Under the terms of the
agreement, all unearned credit life premiums and loss reserves were transferred
back to the ceding company. Remaining premiums for policies in force at that
date and premiums for new policies thereafter are ceded on an earned basis,
rather than on a written basis. This agreement reduced the level of credit
support required to maintain regulatory compliance.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $34.6 million, or 15%,
during the nine months ended June 30, 2002 compared to the prior year. As a
percentage of net sales, selling, general and administrative expenses decreased
to 28.4% in the nine months ended June 30, 2002 from 30.9% in the nine months
ended June 30, 2001. The decrease is primarily due to ongoing cost containment
measures and the closure of underperforming sales centers having a high ratio of
fixed costs to sales. Selling, general and administrative expenses for the nine
months ended June 30, 2001 included a $2.1 million charge associated with the
closure of 12 retail sales centers.
Consumer finance operating expenses
Consumer finance operating expenses increased 13% during the nine months ended
June 30, 2002 principally as a result of increased headcount in the collections
and loan assumption areas and higher expenses associated with discounting
increased customer advance and extension balances. Consumer finance operating
expenses included $3.9 million of costs related to the assumption program for
the nine months ended June 30, 2001. The costs of the assumption program are
reflected in the provision for credit losses for the nine months ended June 30,
2002.
Insurance operating expenses
Insurance operating costs decreased 18% during the nine months ended June 30,
2002 compared to the nine months ended June 30, 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,
39
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):
40
Severance Plant, sales
and other center and
termination office Asset
charges closings write-downs Total
-------------------------------------------------------------
Original provision $ 7,350 $ 7,384 $ 11,192 $ 25,926
Payments and balance sheet charges (1,707) (141) (11,192) (13,040)
-------------------------------------------------------------
Balance 9/30/99 5,643 7,243 -- 12,886
-------------------------------------------------------------
Payments and balance sheet charges (810) (2,750) -- (3,560)
-------------------------------------------------------------
Balance 12/31/99 4,833 4,493 -- 9,326
-------------------------------------------------------------
Payments and balance sheet charges (550) (1,183) -- (1,733)
Reversal of restructuring charges (2,912) (1,439) -- (4,351)
-------------------------------------------------------------
Balance 3/31/00 1,371 1,871 -- 3,242
-------------------------------------------------------------
Payments and balance sheet charges (81) (685) 378 (388)
Reversal of restructuring charges (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 balance sheet charges (1,505) (1,277) (15) (2,797)
Reversal of restructuring charges (100) (635) -- (735)
-------------------------------------------------------------
Balance 9/30/00 759 1,052 -- 1,811
-------------------------------------------------------------
Payments and balance sheet charges (519) (109) -- (628)
-------------------------------------------------------------
Balance 12/31/00 240 943 -- 1,183
-------------------------------------------------------------
Payments and balance sheet charges (114) (31) -- (145)
-------------------------------------------------------------
Balance 3/31/01 126 912 -- 1,038
-------------------------------------------------------------
Payments and balance sheet charges (55) (33) -- (88)
-------------------------------------------------------------
Balance 6/30/01 71 879 -- 950
-------------------------------------------------------------
Additional provision 681 4,702 12,460 17,843
Payments and balance sheet charges (41) (1,339) (12,460) (13,840)
Reversal of 1999 restructuring charges (30) (45) -- (75)
-------------------------------------------------------------
Balance 9/30/01 681 4,197 -- 4,878
-------------------------------------------------------------
Payments and balance sheet charges (145) (743) -- (888)
-------------------------------------------------------------
Balance 12/31/01 536 3,454 -- 3,990
-------------------------------------------------------------
Payments and balance sheet charges (50) (593) 412 (231)
Reversal of 2001 restructuring charges (486) (1,173) (412) (2,071)
-------------------------------------------------------------
Balance 3/31/02 $ -- $ 1,688 $ -- $ 1,688
-------------------------------------------------------------
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
41
employees primarily in manufacturing, retail and finance operations, costs
associated with closing plants and sales centers, and asset writedowns.
During 2000 the Company reversed into income $6.4 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. During 2000 the Company also reevaluated its restructuring
plans and determined that the losses associated with the closing of retail sales
centers, the idling or closing of manufacturing plants, the disposition of
certain assets and legal costs were less than anticipated and $3.5 million of
the charges was reversed. During 2000 the Company recorded an additional $3.8
million charge, primarily related to severance costs associated with a reduction
in headcount of 250 people primarily in the corporate, finance and manufacturing
operations area, and the closure of offices.
During the fourth quarter of 2001 the Company recorded restructuring charges of
approximately $17.8 million, primarily related to the closing of approximately
90 underperforming retail sales centers, a majority of which were located in the
South, in areas where the Company has experienced poor operating results as well
as poor credit performance. At March 31, 2002 these restructuring activities
were substantially complete.
Market conditions, particularly in the South where the majority of store
closings occurred, remained fluid during the six months ended March 31, 2002.
While the Company did close the originally identified approximately 90 stores,
these changing market conditions caused the Company to revise its initial
determination of the number of stores to be either sold to independent dealers,
converted to centers that exclusively market repossessed inventory or closed.
The Company originally estimated that the disposition of the stores would be
approximately evenly divided between those sold to independent dealers,
converted to centers exclusively marketing repossessed inventory or closed.
Ultimately, approximately 27 stores were sold, 23 were converted and 40 were
closed. As a result of the change in the ultimate disposition of certain of the
stores, as well as changes in the original estimate of costs to exit the stores,
the Company reversed into income in the quarter ended March 31, 2002 $2.1
million of restructuring charges originally recorded in the fourth quarter of
fiscal 2001.
The balance in the restructuring reserve at June 30, 2002 relates to provisions
established during the fourth quarter of 2001. The Company is contractually
obligated to pay the amounts remaining in the reserve at June 30, 2002.
Interest expense
Interest expense for the nine months ended June 30, 2002 decreased $15.3
million, or 34%, from the first nine months of fiscal 2001 due principally to
lower average balances outstanding on short-term credit facilities during the
nine months ended June 30, 2002 and a prior year charge of $3.1 million to
expense costs associated with efforts to replace its revolving credit facility.
42
Income taxes
For the nine months ended June 30, 2002 the Company recorded an income tax
benefit of $6.5 million resulting from the completion of an examination of the
Company's federal income tax returns for the fiscal years 1997 through 2000 and
the favorable resolution of certain income tax contingencies for which the
Company had previously recorded a provision.
The Company also recorded an income tax benefit of $72.2 million resulting from
the enactment of the Job Creation and Worker Assistance Act of 2002 ("the Act")
on March 8, 2002. The Act extended the period to which net operating losses
could be carried back from two years to five years, giving the Company the
opportunity to file for refunds of income taxes paid relating to the 1996 and
1997 tax years. After filing its 2001 income tax return, the Company received in
April 2002 a cash refund of $46.6 million. The remaining tax benefit from the
extended carryback period in the form of a cash refund of approximately $26
million is expected to be realized after the Company files its income tax return
for the year ending September 30, 2002.
Cumulative effect of accounting changes
Effective October 1, 2000 the Company adopted Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" ("SAB 101") and recorded a charge
of $14.6 million as a cumulative effect of an accounting change as of that date.
Under its previous accounting policy, the Company recognized revenue for the
majority of retail sales upon closing, which included execution of loan
documents and related paperwork and receipt of the customer's down payment. In
adopting the provisions of SAB 101, the Company changed its revenue recognition
policy on these retail sales to a method based on placement of the home at the
customer's site and completion of all contractual obligations. As required by
SAB 101 the Company has restated its previously reported financial statements
for the first quarter of 2001 to include the cumulative effect of the accounting
change and to apply the provisions of SAB 101 to the quarter.
In October 2000 the Emerging Issues Task Force of the Financial Accounting
Standards Board (the "EITF") issued EITF 99-20, "Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets," which sets forth new accounting requirements for the
recognition of impairment on REMIC interests arising from securitizations. Under
the prior accounting rule, declines in the value of retained REMIC interests
were recognized in earnings when the present value of estimated cash flows
discounted at a risk-free rate using current assumptions was less than the
carrying value of the retained interest. Under the new accounting rule, declines
in value are recognized when both of the following occur: the fair value of the
retained interest is less than its carrying value and the timing and/or amount
of cash expected to be received from the retained interest has changed adversely
from the previous valuation which determined the carrying value of the retained
interest. When both of these circumstances occur, the carrying value of the
retained interest is reduced to its estimated fair value. The Company adopted
EITF 99-20 as required on April 1, 2001 and accordingly recorded a cumulative
effect of an accounting change of $2.3 million as of that date.
43
Liquidity and Capital Resources
For the nine months ending June 30, 2002 and 2001 the Company reported net
losses of $99.5 million and $126.5 million, respectively. Included in the net
loss for the nine months ended June 30, 2002 and 2001 were impairment and
valuation provisions of $85.2 million and $30.7 million, respectively. These
charges are more fully described in the "Consumer Finance Revenues" section.
The net loss for the nine months ended June 30, 2002 reflects an income tax
benefit of $78.7 million. Approximately $6.5 million of the benefit resulted
from the completion of an examination of the Company's federal income tax
returns for the fiscal years 1997 through 2000 and the favorable resolution of
certain income tax contingencies for which the Company had previously recorded a
provision. The remaining $72.2 million income tax benefit resulted from the
enactment of the Job Creation and Worker Assistance Act of 2002 ("the Act") on
March 8, 2002. The Act extended the period to which certain net operating losses
could be carried back from two years to five years, giving the Company the
opportunity to file for refunds of income taxes paid relating to the 1996 and
1997 tax years. After filing its 2001 income tax return, the Company received in
April 2002 a cash refund of $46.6 million. The remaining refund of approximately
$26 million is expected to be realized after the Company files its income tax
return for the year ending September 30, 2002.
The Company's operating results reflect business conditions within the
manufactured housing industry. The Company continues to operate in a highly
competitive environment caused principally by the industry's aggressive
expansion in the retail channel, excessive amounts of finished goods and
repossession inventory and a general reduction in the availability of financing
at both the wholesale and retail levels. These problems have been magnified by a
decline in overall economic conditions which has resulted in higher loan
delinquencies, increased repossessions and reduced recovery rates associated
with the sale of repossessed homes. The industry estimates that shipments of
manufactured homes from production facilities declined by approximately 28% and
22% during calendar years 2000 and 2001, respectively. For the nine month period
ended June 30, 2002, the industry estimates that shipments have further declined
by approximately 9% compared to the same period last year.
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 have continued
through the first nine months of fiscal 2002 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, most notably plant and
sales center closings, curtailed production schedules and competitive pricing to
effect a $243.8 million reduction in inventories since September 1999, have
negatively affected the Company's reported earnings. Although the Company
anticipates a loss for the fiscal year, it believes that operating cash flow,
coupled with its continued access to the asset-backed securities market and
borrowings under its credit facilities, which are described below, will provide
sufficient liquidity to meet obligations and execute its business plan during
the remainder of fiscal 2002. However, there can be no assurances that the
Company will be able to continue to access the asset-backed securities market.
There can also be no assurances that the Company will be able to meet the
covenants contained in its loan agreements.
In the event of further deterioration in market conditions, the Company would
take additional steps to protect liquidity and manage cash flow. Among other
things, these actions might
44
include further production curtailments, closing of additional retail sales
centers or the selective sale of operational 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, 2002 the Company was operating 19
plants. Should market conditions worsen from those anticipated, the Company will
continue to curtail production by lowering production speed or idling additional
production facilities.
The Company's primary sources of liquidity include cash generated by operations,
borrowing availability under its three credit facilities and its securitization
program through which loans are sold into the asset-backed securities market.
During 2002 the Company also received an income tax refund and expects to
receive an additional refund in 2003 as described above.
During 2001 the Company generated $47.5 million of cash from operating
activities, principally as a result of a $94.4 million reduction in its
inventories and the sale of substantially all subordinated asset-backed
securities rated below BBB previously retained by the Company from prior
securitizations. The sale of these subordinated securities was finalized during
the fourth quarter of 2001 and generated $72.9 million of cash.
Subsequent to the sale of the retained subordinated securities, the Company
retired its $75 million revolving credit facility, which was scheduled to mature
in October 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. The net cash proceeds from the sale of the retained subordinated
securities and the release of the cash collateral more than offset the $75
million previously available under the revolving credit facility.
During the first nine months of fiscal 2002 the Company's operating activities
provided $40.1 million of cash principally as a result of a $28.8 million
reduction in inventory and the timing of its asset-backed securitizations offset
by the increased costs associated with its loan assumption program, which is an
alternative means to repossession in dealing with troubled loans as more fully
described in the "Consumer Finance Revenues" section. For the nine months ended
June 30, 2002, the Company expended cash approximating $47.6 million in
connection with the loan assumption program. As previously described, the
Company substantially curtailed its use of this program in June 2002.
The Company's liquidity position continues to be adversely affected by defaulted
loans in the Company's servicing portfolio, which have negatively affected cash
flow, through both reduced residual cash flow from retained securitization
interests and as a result of the costs borne by the Company on the loan
assumption program. In addition, delinquency on loans, including those in
repossession, adversely affect liquidity because the Company is obligated, in
most cases, to make servicing advances of delinquent mortgage payments. While
the curtailment of the loan assumption program will improve liquidity, the
Company's increased disposition of repossessions through the wholesale channel
of distribution will partially offset this improvement as servicing fees and
cash received from retained residuals interests will be reduced.
Liquidity also has been and may continue to be negatively affected by increasing
insurance costs and credit support requirements associated with its general
corporate insurance program. These expected higher rates and deductibles reflect
what management believes
45
is an increasingly competitive insurance market. Management also expects that
the Company's liquidity position will continue to be negatively affected by its
insurers' increased requirements for letters of credit, surety bonds or other
similar forms of collateral.
The Company currently has in place three credit facilities that it believes are
adequate to meet liquidity needs during fiscal 2002. During the second quarter
of 2001 a newly formed, special purpose subsidiary of the Company entered into a
three-year, $200 million loan purchase facility with a financial institution
that provides for funding of up to 81% of qualifying loan principal balances
held for sale. Under the facility, the Company issued to a sister company of the
financial institution a warrant valued at $11.0 million to acquire approximately
1.9 million shares of the Company's common stock with an exercise price of
approximately $9.75 per share. The warrant, which is immediately exercisable,
expires in February 2009.
During the first quarter of fiscal 2002 the Company formed a wholly-owned
qualifying special purpose subsidiary, Oakwood Advance Receivables Company, LLC
("OAR"), to provide up to $50 million of revolving funding for qualifying
servicing advance receivables. The Company sells qualifying servicing advance
receivables to OAR, which funds its purchases of receivables using the proceeds
of debt obligations issued by OAR to third party investors. OAR collects the
receivables it purchases from the Company, and such proceeds are available to
purchase additional receivables from the Company through August 2003. At June
30, 2002 OAR had approximately $32.1 million of cash available to purchase
additional qualifying servicing advance receivables from the Company.
Conveyances of receivables to OAR are accounted for as sales under FAS 140.
During the second quarter of fiscal 2002 the Company closed a new $65 million
revolving credit facility. The facility matures in January 2007 and is
collateralized by substantially all assets of the Company excluding raw
materials inventory and loans held for sale. The primary purposes of the
facility are to support outstanding letters of credit of approximately $47.3
million and to provide additional cash borrowing capacity. The agreement
contains financial covenants which, among other things, specify minimum levels
of tangible net worth and earnings before interest, taxes and depreciation and
amortization, and limit capital expenditures. Borrowings outstanding under the
facility bear interest at the greater of LIBOR plus 3.50% or 9%.
The Company continues to generate liquidity through its securitization program.
The retail financing of sales of the Company's products is an integral part of
the Company's business strategy, particularly because there has been a
significant reduction in the number of lenders offering financing to purchasers
of manufactured housing. If the Company were unable to offer consumer financing
to its customers through its Oakwood Acceptance finance unit, sales could be
adversely affected because of the scarcity of alternative financing sources.
Such financing consumes substantial amounts of capital, which the Company has
obtained principally by regularly securitizing such loans through the
asset-backed securities market. While the Company has for many years
successfully accessed this market, an interruption of such access, either
completely or with respect to relatively lower credit-rated portions of
securitizations, would adversely affect the Company's liquidity. 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. There can be no assurance that such alternative financing can be
obtained, and the inability of the Company to obtain such alternative financing
would adversely affect the Company's liquidity and operations.
46
The Company, from time to time, has retained certain subordinated securities
from its securitizations. At June 30, 2002 the Company owned such subordinated
asset-backed securities having a carrying value of $1.0 million from
securitization transactions prior to 1994. The Company considers any
asset-backed securities retained to be available for sale and would consider
opportunities to liquidate these securities based upon market conditions. A
significant decrease in the demand for subordinated asset-backed securities at
prices acceptable to the Company would likely 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 the subordinated asset-backed securities. As described above, there can be
no assurance that such alternative financing can be obtained.
At June 30, 2002 the Company was in compliance with all covenants contained in
its debt agreements or had obtained waivers and amendments for any violations.
The Company estimates that in 2002 capital expenditures will approximate $14
million comprised principally of improvements at existing facilities, computer
equipment and the replacement of certain computer information systems.
The decrease in loans and investments from September 30, 2001 principally
reflects a decrease in loans held for sale from $163 million at September 30,
2001 to $137 million at June 30, 2002. 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.
On June 1, 2002 the Company redeemed $12.9 million of its reset debentures due
2007 pursuant to redemption provisions in the related trust indenture. The
interest rate was also reset on the debentures from 8% to 12.5%.
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, the belief that its operating cash flow, coupled with its
continued access to the asset-backed securities market and borrowings under its
existing credit facilities, will provide sufficient liquidity to meet
obligations and execute its business plan during the remainder of fiscal 2002;
the expectation that the Company's liquidity position will continue to be
negatively affected by its insurers' increased requirements for letters of
credit, surety bonds or other similar forms of collateral; the belief that the
Company will incur a loss in 2002; the belief that the curtailment of the loan
assumption program will improve liquidity by substantially reducing the cash
costs associated with the program; the belief that servicing fees and cash
received from retained residual interests will be reduced; the expectation that
the timing of the receipts of cash received from retained residual interests may
be delayed due to increased overcollateralization requirements; the intention to
sell an increased number of repossessed homes through the wholesale channel of
distribution; the belief that the increased use of the wholesale channel of
distribution to sell repossessed homes will increase future net credit losses
and will reduce the Company's servicing fees and cash received from retained
residual
47
interests; the intention to take additional steps to protect liquidity and
manage cash flow in the event of further deterioration in market conditions; the
intention to continue to adjust production capacity in line with demand thereby
enabling it to produce homes at a rate that will allow the Company to lower its
inventories; the intention to continue to curtail production by lowering
production speed or idling additional production facilities if market conditions
worsen from those anticipated; the expectation that $26 million will be realized
after the Company files its income tax return for 2002; and the reduction in the
Company's insurance underwriting exposure as a result of the quota share
agreement and its purchase of catastrophe reinsurance. Words like "believe,"
"expect," "could," "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: the Company may not receive the $26 million income tax
refund after September 30, 2002; competitive industry conditions could further
adversely affect sales and profitability; the Company may be unable to access
the asset-backed securities market, in whole or in part, or borrowings under its
credit facilities or otherwise access sufficient capital and liquidity to fund
its operations; the Company may recognize special charges or experience
increased costs in connection with securitizations or other financing
activities; the estimates underlying the Company's critical accounting policies
(including those related to retained interests in securitizations) could be
inaccurate or require adjustment with the result being that the Company would be
required to recognize special charges; the Company may recognize special charges
or experience increased costs in connection with restructuring activities; the
Company may not realize anticipated benefits associated with its restructuring
activities (including the closing of underperforming sales centers); the
Company's loan assumption program could result in increased costs or otherwise
fail to reduce the overall costs of defaulted loans; the Company's recovery
rates on repossessed homes sold through its wholesale distribution channel could
be worse than anticipated; adverse changes in governmental regulations
applicable to its business could negatively impact the Company; it could suffer
losses resulting from litigation (including shareholder class actions or other
class action suits); the captive Bermuda reinsurance subsidiary could experience
significant losses; the Company could experience increased net credit losses or
higher delinquency rates on loans originated (including as a result of the
discontinuation of its loan assumption program); the Company could increase
above current expectations the percentage of repossessed homes sold through the
wholesale channel of distribution; negative changes in general economic
conditions in its markets could adversely impact the Company; it could lose the
services of its key management personnel; the Company could be required to make
payment on its guarantees of certain loans sold to third parties, on its
guarantee of subordinated securities issued by certain REMIC trusts or on its
guarantees related to retail inventory; and any other factors that generally
affect companies in these 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.
48
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
------------------
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 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
(4) Agreement to Furnish Copies of Instruments with Respect to
Long-term Debt
10.1 First Amendment to Loan Agreement, dated as of July 8,
2002, by and among the Company and each of its subsidiaries
identified on the signature pages thereof, the Lenders
identified on the signature pages thereto, and Foothill
Capital Corporation, in its capacity as agent for the Lenders
10.2 Second Amendment to Loan Agreement, dated as of July 31,
2002, by and among the Company and each of its subsidiaries
identified on the signature pages thereof, the Lenders
identified on the signature pages thereto, and Foothill
Capital Corporation, in its capacity as agent for the Lenders
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by our Chief Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by our Chief Financial Officer
b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ended
June 30, 2002.
Items 2, 3, 4 and 5 are not applicable and are omitted.
49
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, 2002
OAKWOOD HOMES CORPORATION
BY: /s/ Suzanne H. Wood
-----------------------------
Suzanne H. Wood
Executive Vice President and
Chief Financial Officer
50
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, 2002 1-7444
OAKWOOD HOMES CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit Description
----------- -------------------
4 Agreement to Furnish Copies of Instruments with Respect to
Long-term Debt
10.1 First Amendment to Loan Agreement, dated as of July 8, 2002,
by and among the Company and each of its subsidiaries
identified on the signature pages thereof, the Lenders
identified on the signature pages thereto, and Foothill
Capital Corporation, in its capacity as agent for the Lenders
10.2 Second Amendment to Loan Agreement, dated as of July 31, 2002,
by and among the Company and each of its subsidiaries
identified on the signature pages thereof, the Lenders
identified on the signature pages thereto, Foothill Capital
Corporation, in its capacity as agent for the Lenders
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
our Chief Executive Officer
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by
our Chief Financial Officer
51