10-Q 1 g74241e10-q.txt OAKWOOD HOMES CORPORATION 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 December 31, 2001 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ------- ------- Commission File Number: 1-7444 OAKWOOD HOMES CORPORATION ------------------------- (Exact Name of Registrant as Specified in Its Charter) North Carolina 56-0985879 -------------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 7800 McCloud Road, Greensboro, North Carolina 27409-9634 -------------------------------------------------------- (Address of Principal Executive Offices) Post Office Box 27081, Greensboro, North Carolina 27425-7081 ------------------------------------------------------------ (Mailing Address of Principal Executive Offices) (336) 664-2400 -------------- (Registrant's Telephone Number, Including Area Code) N/A --- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 January 31, 2002. Common Stock, Par Value $.50 Per Share . . . . . . . 9,530,095 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. OAKWOOD HOMES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (in thousands except per share data)
Three months ended December 31, ------------------------- 2001 2000 --------- --------- Revenues Net sales $ 228,979 $ 278,344 Financial services Consumer finance, net of impairment and valuation provisions 23,250 584 Insurance 7,626 10,079 --------- --------- 30,876 10,663 Other income 2,149 2,347 --------- --------- Total revenues 262,004 291,354 --------- --------- Costs and expenses Cost of sales 176,616 219,271 Selling, general and administrative expenses 64,604 80,183 Financial services operating expenses Consumer finance 13,341 9,271 Insurance 3,049 3,060 --------- --------- 16,390 12,331 Reversal of restructuring charges -- -- Provision for losses on credit sales 11,405 750 Interest expense 9,467 14,596 --------- --------- Total costs and expenses 278,482 327,131 --------- --------- Loss before income taxes and cumulative effect of accounting change (16,478) (35,777) Provision for income taxes (6,500) -- --------- --------- Loss before cumulative effect of accounting change (9,978) (35,777) --------- --------- Cumulative effect of accounting change, net of income taxes -- (14,590) --------- --------- Net loss $ (9,978) $ (50,367) ========= ========= Loss per share: Loss before cumulative effect of accounting change Basic $ (1.05) $ (3.81) Diluted $ (1.05) $ (3.81) Net loss Basic $ (1.05) $ (5.36) Diluted $ (1.05) $ (5.36) Dividends per share $ -- $ -- Weighted average number of common shares outstanding Basic 9,463 9,401 Diluted 9,463 9,401
See accompanying notes to the consolidated financial statements. OAKWOOD HOMES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (in thousands)
Three months ended December 31, ---------------------- 2001 2000 ------- -------- Net loss $(9,978) $(50,367) Unrealized gains (losses) on securities available for sale, net of tax 5,044 (713) ------- -------- Comprehensive loss $(4,934) $(51,080) ======= ========
See accompanying notes to the consolidated financial statements. OAKWOOD HOMES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) (in thousands except share and per share data)
December 31, September 30, ASSETS 2001 2001 --------- --------- Cash and cash equivalents $ 20,027 $ 44,246 Loans and investments 150,068 199,403 Other receivables 127,845 124,807 Inventories Manufactured homes 166,043 184,989 Work-in-process, materials and supplies 27,962 30,813 Land/homes under development 12,377 12,770 --------- --------- 206,382 228,572 Properties and facilities 202,907 208,798 Other assets 120,991 116,464 --------- --------- $ 828,220 $ 922,290 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings $ -- $ 47,500 Notes and bonds payable 323,107 323,120 Accounts payable and accrued liabilities 208,037 250,658 Insurance reserves and unearned premiums 15,996 17,322 Deferred income taxes 8,885 6,169 Other long-term obligations 38,293 38,750 Commitments and contingencies (Note 8) Shareholders' equity Common stock, $.50 par value; 100,000,000 shares authorized; 9,530,000 and 9,528,000 shares issued and outstanding 4,765 4,764 Additional paid-in capital 199,802 199,761 Retained earnings 18,518 28,497 --------- --------- 223,085 233,022 Accumulated other comprehensive income, net of income taxes of $6,497 and $3,780 10,956 5,912 Unearned compensation (139) (163) --------- --------- 233,902 238,771 --------- --------- $ 828,220 $ 922,290 ========= =========
See accompanying notes to the consolidated financial statements. OAKWOOD HOMES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (in thousands)
Three months December 31, ------------------------ 2001 2000 --------- --------- Operating activities Net loss $ (9,978) $ (50,367) Adjustments to reconcile net loss to cash provided (used) by operating activities Cumulative effect of accounting change -- 14,590 Depreciation and amortization 8,346 15,414 Deferred income taxes -- -- Provision for losses on credit sales, net of charge-offs 2,906 (786) (Gains) losses on securities sold and loans sold or held for sale (5,258) 3,679 Impairment and valuation provisions (55) 9,656 Excess of cash received over REMIC residual income recognized (income recognized over cash received) 826 (568) Reversal of restructuring charges -- -- Other (2,276) (689) Changes in assets and liabilities Other receivables (2,546) 22,673 Inventories 22,190 51,522 Deferred insurance policy acquisition costs 409 (4,011) Other assets (8,658) (738) Accounts payable and accrued liabilities (39,553) (52,221) Insurance reserves and unearned premiums (1,326) (5,047) Other long-term obligations (402) (458) --------- --------- Cash provided (used) by operations (35,375) 2,649 Loans originated (167,803) (257,448) Sale of loans 223,880 205,972 Principal receipts on loans 3,760 5,102 --------- --------- Cash provided (used) by operating activities 24,462 (43,725) --------- --------- Investing activities Acquisition of properties and facilities (670) (3,222) Other -- (162) --------- --------- Cash used by investing activities (670) (3,384) --------- --------- Financing activities Net borrowings (repayments) on short-term credit facilities (47,500) 59,491 Payments on notes and bonds (511) (2,587) --------- --------- Cash provided (used) by financing activities (48,011) 56,904 --------- --------- Net increase (decrease) in cash and cash equivalents (24,219) 9,795 Cash and cash equivalents Beginning of period 44,246 22,523 --------- --------- End of period $ 20,027 $ 32,318 ========= =========
See accompanying notes to the consolidated financial statements. 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. The components of loans and investments are as follows:
December 31, September 30, 2001 2001 --------- --------- (in thousands) Loans held for sale $ 106,995 $ 163,085 Loans held for investment 3,154 2,974 Less: reserve for uncollectible loans receivable (6,126) (3,231) --------- --------- Total loans receivable 104,023 162,828 --------- --------- Retained interests in REMIC securitizations available for sale, exclusive of loan servicing assets and liabilities, at fair value Regular interests 10,193 7,619 Residual interests 35,852 28,956 --------- --------- Total retained REMIC interests, at fair value (amortized cost of $29,071 and $26,883) 46,045 36,575 --------- --------- $ 150,068 $ 199,403 ========= =========
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. 3. The Company's retained interests in securitizations are set forth below.
December 31, September 30, 2001 2001 ------- ------- (in thousands) Regular interests $10,193 $ 7,619 Residual interests 35,852 28,956 Net servicing liabilities 17,341 19,643 Guarantee liabilities 36,050 36,180
The Company estimates the fair value of the retained interests by determining the present value of the associated expected future cash flows using modeling techniques that incorporate estimates of key assumptions which include, but may not be limited to, 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. Additionally, such valuation is determined by discounting cash flows over the entire expected life of the loans sold. The key economic assumptions used in measuring the initial retained interests resulting from securitizations completed in the quarter ended December 31, 2001 were as follows:
December 31, 2001 ------------ Approximate weighted average life of loans (in years) 5.1 Approximate remaining assumed nondiscounted credit losses as a percentage of unpaid principal balance of loans 11.2% Estimated actual plus projected credit losses as a percentage of original principal balance of loans 11.2% 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 15.7%
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:
December 31, September 30, 2001 2001 ------------ ------------- (in thousands) Aggregate unpaid principal balance of loans $ 4,892,417 $ 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 16.6% 16.8% Approximate remaining assumed nondiscounted credit losses as a percentage of unpaid principal balance of loans 11.9% 12.4% Approximate weighted average interest rate used to discount assumed residual cash flows 18.2% 19.2% Interest rate used to discount assumed servicing asset cash flows 15.0% 15.0% Interest rate used to discount assumed servicing liability cash flows 5.0% 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. The following table summarizes certain cash flows received from and paid to the securitization trusts during the quarter ended December 31, 2001:
December 31, 2001 ------------- (in thousands) Proceeds from new securitizations $223,880 Servicing fees received 12,044 Net advances of principal and interest of trusts 11,923 Guarantee payments 554 Cash flow received on retained regular interests 360 Cash flow received on retained residual interests 2,374
Loans serviced by the Company and related loans past due 90 days or more at December 31, 2001, are set forth below:
Total Amount Principal 90 days or more Amount Past Due ---------- --------------- (in thousands) Loans held for sale $ 103,113 $ 6,513 Securitized loans 4,892,417 371,024
4. The following table sets forth the activity by quarter in each component of the Company's restructuring reserve (in thousands):
Severance Plant, sales and other center and termination office Asset charges closings write-downs Total --------------------------------------------------------------- Original provision $ 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 ---------------------------------------------------------------
During the fourth quarter of 1999 the Company recorded restructuring charges of approximately $25.9 million, related primarily to the closing of four manufacturing lines, the temporary idling of five others and the closing of approximately 40 sales centers. The charges in 1999 include severance and other termination costs related to approximately 2,150 employees primarily in manufacturing, retail and finance operations, costs associated with closing plants and sales centers, and asset writedowns. During 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 December 31, 2001 only seven of these underperforming sales centers remained open while 23 were converted to centers that exclusively market repossessed inventory. The remainder were either sold or closed during the quarter ended December 31, 2001. The Company expects to complete these restructuring activities during the second quarter of 2002. Approximately $50,000 of the $4.0 million remaining in the restructuring reserve at December 31, 2001 related to provisions established prior to the fourth quarter of 2001. 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. 5. 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"):
Three months ended December 31, ------------------------ 2001 2000 ------- -------- (in thousands, except per share data) Numerator in earnings (loss) per share calculation: Loss before cumulative effect of accounting change $(9,978) $(35,777) Net loss $(9,978) $(50,367) Denominator in earnings (loss) per share calculation: Weighted average number of common shares outstanding 9,463 9,401 Unearned shares -- -- ------- -------- Denominator for basic EPS 9,463 9,401 Dilutive effect of stock options and restricted shares computed using the treasury stock method -- -- ------- -------- Denominator for diluted EPS 9,463 9,401 ======= ======== Loss per share: Loss before cumulative effect of accounting change Basic $ (1.05) $ (3.81) ======= ======== Diluted $ (1.05) $ (3.81) ======= ======== Net loss Basic $ (1.05) $ (5.36) ======= ======== Diluted $ (1.05) $ (5.36) ======= ========
Stock options to purchase 641,291 and 851,741 shares of common stock and 36,534 and 117,900 unearned restricted shares at December 31, 2001 and 2000, respectively, were not included in the computation of diluted earnings per share because their inclusion would have been antidilutive. 6. 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 December 31, 2001, OAR had approximately $38.6 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"). 7. The estimated principal payments under notes and bonds payable, assuming the reset debentures are fully redeemed by the holders on the June 1, 2002 redemption date, are $16.7 million, $0.9 million, $125.4 million, $0.8 million, $0.9 million for the 12 months ended December 31, 2002, 2003, 2004, 2005, and 2006, respectively and the balance is payable thereafter. 8. 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 $16 million at December 31, 2001. The Company is also contingently liable as guarantor on subordinated securities issued by REMIC trusts in the aggregate principal amount of $240 million at December 31, 2001. The Company is also contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for retailers of their products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default on payments by the retailer. The risk of loss under these agreements is spread over the numerous retailers and is further reduced by the resale value of repurchased homes. The Company's estimated potential obligations under such repurchase agreements approximated $105 million at December 31, 2001. Losses under these repurchase agreements have not been significant. 9. The Company operates in four major business segments: retail, manufacturing, consumer finance and insurance. The following table summarizes information with respect to the Company's business segments:
Three months ended December 31, --------------------------- (in thousands) 2001 2000 --------- --------- Revenues Retail $ 133,475 $ 197,914 Manufacturing 154,649 156,348 Consumer finance 23,250 584 Insurance 10,890 12,767 Eliminations/other (60,260) (76,259) --------- --------- $ 262,004 $ 291,354 ========= ========= Income (loss) before interest expense, investment income and income taxes Retail $ (11,050) $ (17,813) Manufacturing 4,829 1,834 Consumer finance (1,496) (9,437) Insurance 4,577 7,019 Eliminations/other (3,955) (2,920) --------- --------- (7,095) (21,317) Interest expense (9,467) (14,596) Investment income 84 136 --------- --------- Income (loss) before income taxes and cumulative effect of accounting change $ (16,478) $ (35,777) ========= ========= Depreciation and amortization Retail $ 2,297 $ 3,300 Manufacturing 3,832 4,322 Consumer finance 702 3,411 Eliminations/other 1,515 4,381 --------- --------- $ 8,346 $ 15,414 ========= ========= Capital expenditures Retail $ 20 $ 820 Manufacturing 405 865 Consumer finance 82 944 Eliminations/other 163 593 --------- --------- $ 670 $ 3,222 ========= =========
December 31, September 30, 2001 2001 --------- --------- Identifiable assets Retail $ 457,615 $ 478,976 Manufacturing 247,197 258,498 Consumer finance 304,198 384,244 Insurance 123,452 123,405 Eliminations/other (304,242) (322,833) --------- --------- $ 828,220 $ 922,290 ========= =========
10. 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 quarter ended December 31, 2001 amortization of intangible assets was approximately $1.2 million. 11. 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. 12. For the quarters ended December 31, 2001 and 2000 the Company reported net losses of $10.0 million and $50.4 million, respectively. These financial results reflect business conditions within the manufactured housing industry. The Company is currently operating in a highly competitive environment caused principally by the industry's aggressive expansion in the retail channel, excessive amounts of finished goods inventory and a general reduction in the availability of financing at both the wholesale and retail levels. A decline in overall economic conditions has also contributed to a difficult environment. The industry estimates that shipments of manufactured homes from production facilities declined by approximately 28% and 22% during calendar years 2000 and 2001, respectively. 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 quarter 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 $237.2 million reduction in inventories since September 1999, negatively affected the Company's reported earnings for fiscal years 2000 and 2001 and the first quarter of fiscal 2002. Management believes that, unless business conditions improve, the Company is likely to incur a loss in fiscal 2002; however, it plans to continue to manage operations to generate positive cash flow. The Company 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, including potential repayment of the 8% reset debentures, and execute its business plan during the remainder of fiscal 2002. 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 December 31, 2001, the Company was operating approximately 20 plants, though many were operating at reduced production schedules. 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 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. 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 entity of the Company entered into a three-year, $200 million loan purchase facility with a financial institution. It provides for funding of up to 81% of qualifying loan principal balances held for sale. The new facility replaced the Company's $250 million facility with a commercial paper issuer, which was scheduled to expire in October 2001. Under the new facility, 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 $9.84 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 December 31, 2001, OAR had approximately $38.6 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. Subsequent to December 31, 2001, the Company closed a new $55 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 $39 million and to provide additional cash borrowing capacity. The completion of this facility also freed up approximately $12 million of cash which was used to secure letters of credit. 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 will bear interest at the greater of prime plus 1.50% or 7%. 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 integration strategy. Such financing consumes substantial amounts of capital, which the Company has obtained principally by regularly securitizing such loans through the asset-backed securities market. Should the Company's ability to access the asset-backed securities market become impaired, the Company would be required to seek additional sources of funding for its finance business. Such sources might include, but would not be limited to, the sale of whole loans to unrelated third parties and the increased utilization of FHA financing. The Company's inability to find alternative sources of funding could have an adverse impact on the Company's liquidity and operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Three months ended December 31, 2001 compared to three months ended December 31, 2000 The following table summarizes certain statistics for the quarters ended December 31, 2001 and 2000:
2001 2000 ------- ------- Retail sales (in millions) $ 131.7 $ 196.0 Wholesale sales (in millions) $ 97.3 $ 82.3 Total sales (in millions) $ 229.0 $ 278.3 Gross profit % - integrated operations 28.9% 25.0% Gross profit % - wholesale operations 14.7% 12.0% New single-section homes sold - retail 590 1,257 New multi-section homes sold - retail 1,856 2,778 Used homes sold - retail 235 310 New single-section homes sold - wholesale 689 428 New multi-section homes sold - wholesale 2,166 1,852 Average new single-section sales price - retail $31,600 $30,300 Average new multi-section sales price - retail $59,000 $55,400 Average new single-section sales price - wholesale $19,100 $22,300 Average new multi-section sales price - wholesale $38,800 $39,000 Weighted average retail sales centers open during the period 258 377
Net sales The Company's sales volume continued to be adversely affected by extremely competitive industry conditions, fewer promotional programs and a reduction in the number of open sales centers during the quarter ended December 31, 2001. Retail sales dollar volume decreased 33%, reflecting a 39% decrease in new unit volume. This decrease was partially offset by increases of 4% and 6% 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 76% of retail new unit sales compared to 69% in the quarter ended December 31, 2000. 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 December 31, 2001 compared to the quarter ended December 31, 2000. During the quarter ended December 31, 2001 the Company opened no new sales centers compared to one sales center during the quarter ended December 31, 2000. The Company closed 45 underperforming sales centers during the quarter ended December 31, 2001 and converted three sales centers to centers that exclusively market repossessed inventory. 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 quarter ended December 31, 2000 the Company closed three sales centers. At December 31, 2001 the Company had 251 retail sales centers open compared to 376 open at December 31, 2000. Total new retail sales dollars at sales centers open more than one year decreased 23% during the quarter ended December 31, 2001. Wholesale sales represent sales of manufactured homes to independent retailers. Wholesale sales dollar volume increased 18%, reflecting a 25% increase in unit volume. This increase was partially offset by a decrease in the average new unit sales prices of single-section and multi-section homes of 14% and 1%, respectively. Gross profit Gross profit margin - integrated operations reflects gross profit earned on all sales at retail as well as the manufacturing gross profit on retail sales of units manufactured by the Company. Gross profit margin - integrated operations increased from 25.0% in the quarter ended December 31, 2000 to 28.9% in the quarter ended December 31, 2001 primarily as a result of improved manufacturing efficiencies and reduced promotional pricing associated with the Company's planned inventory reduction during the quarter ended December 31, 2001. Gross profit margin - wholesale operations increased from 12.0% in the quarter ended December 31, 2000 to 14.7% in the quarter ended December 31, 2001 as a result of improved manufacturing efficiencies experienced during the quarter ended December 31, 2001. Consumer finance revenues Consumer finance revenues are summarized as follows:
Three months ended December 31, ------------------------- (in thousands) 2001 2000 -------- -------- Interest income $ 3,381 $ 10,176 Servicing fees 12,440 2,306 REMIC residual income 1,547 1,086 Gains (losses) on securities sold and loans sold or held for sale: Gain (loss) on sale of securities and loans 5,258 (940) Valuation (provision) reversal on loans held for sale -- (2,739) -------- -------- 5,258 (3,679) -------- -------- Impairment and valuation (provisions) reversal 55 (9,656) Other 569 351 -------- -------- $ 23,250 $ 584 ======== ========
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 increase in REMIC residual income primarily reflects increased cash flows from certain retained residual interests as a result of decreased liquidations of repossessions in certain securitizations during the quarter. The gain on sale of securities and loans during the quarter ended December 31, 2001 reflects the securitization of $172 million of installment sale contracts and mortgage loans. 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. Impairment and valuation provisions are summarized as follows:
Three months ended December 31, ----------------------- (in thousands) 2001 2000 ------- ------ Impairment writedowns of residual REMIC interests $ -- $ 144 Valuation allowances on servicing contracts -- 9,512 Additional provision for (amortization of) potential guarantee obligations on REMIC securities sold (55) -- ------- ------ $ (55) $9,656 ======= ======
The prior year charges generally resulted from changes in assumptions of credit losses on securitized loans. Management continues to monitor performance of the loan pools and underlying collateral and adjust the carrying value of assets and liabilities arising from loan securitizations as appropriate. Changes in loan pool performance and market conditions, such as general economic conditions and higher industry inventory levels of repossessed homes, may affect recovery rates and default rates and result in future impairment and valuation provisions. For the quarter ended December 31, 2001 total credit losses on loans originated by the Company, including losses relating to assets securitized by the Company, loans held for investment, loans held for sale and loans sold with full or partial recourse, amounted to approximately 1.63% on an annualized basis of the average principal balance of the related loans, compared to approximately 1.88% on an annualized basis one year ago. Because losses on repossessions are reflected in the loss ratio principally in the period during which the repossessed property is disposed of, fluctuations in the number of repossessed properties disposed of from period to period may cause variations in the charge-off ratio. At December 31, 2001 the Company had a total of 4,108 unsold properties in repossession or foreclosure (approximately 3.24% of the total number of Oakwood originated serviced assets) compared to 3,687, 3,287 and 2,603 at September 30, 2001, December 31, 2000 and September 30, 2000, respectively (approximately 2.83%, 2.57% and 2.06%, respectively, of the total number of Oakwood originated serviced assets). The Company believes that its historical loss experience has been favorably affected by its ability to resell repossessed units through its retail sales centers. In an effort to reduce the cost of repossession and foreclosure, the Company has also increasingly made use of its loan assumption program as an alternative to foreclosure. Under this program, the Company obtains the cooperation of the defaulting obligor and endeavors to find a new buyer that meets the then-current underwriting standards for repossessed homes who is willing to assume the defaulting obligor's loan. The costs of this program for the quarter ended December 31, 2001 were $10.2 million and are reflected in provision for losses on credit sales. For the quarter ended December 31, 2000, the costs associated with the loan assumption program were insignificant. At December 31, 2001 and 2000 the Company had 2,626 and 143 loans, respectively, which were pending assumption under this program. At December 31, 2001 the delinquency rate on Company originated loans was 6.7%, compared to 5.8% at December 31, 2000. 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 24.3% to $7.6 million in the quarter ended December 31, 2001 from $10.1 million in the quarter ended December 31, 2000. A substantial portion of insurance revenues is derived from insurance policies sold in connection with new home sales by the Company's retail operations. If the adverse retail sales trends experienced in 2001 and the first quarter of fiscal 2002 continue, insurance revenues may continue to decline in future periods. Effective June 1, 2000 the Company 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 reduced 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 since the inception of the quota share agreement, the Company recognized incremental commissions of $1.7 million during the year ended September 30, 2001. In order to further reduce volatility and the required levels of credit support, effective August 1, 2000 the Company entered into a commission-based arrangement for its extended service contract line of business. Policies in force on August 1, 2000 will continue to earn out over the policy term, while the Company earns a commission on all business written after that date. 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 $15.6 million, or 19%, during the quarter ended December 31, 2001 compared to the prior year. As a percentage of net sales, selling, general and administrative expenses decreased to 28.2% in the quarter ended December 31, 2001 from 28.8% in the quarter ended December 31, 2000. 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. Consumer finance operating expenses Consumer finance operating expenses increased 44% during the quarter ended December 31, 2001 principally as a result of increased headcount. Insurance operating expenses Insurance operating costs remained relatively constant for the quarter ended December 31, 2001 compared to the quarter ended December 31, 2000. Because reinsurance claims costs are recorded as insured events occur, reinsurance underwriting risk may increase the volatility of the Company's earnings, particularly with respect to property and casualty reinsurance. However, the quota share agreement described previously, as well as the Company's purchase of catastrophe reinsurance, should reduce the Company's underwriting exposure to natural disasters. Restructuring charges The following table sets forth the activity by quarter in each component of the Company's restructuring reserve (in thousands):
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 ---------------------------------------------------------------
During the fourth quarter of 1999 the Company recorded restructuring charges of approximately $25.9 million, related primarily to the closing of four manufacturing lines, the temporary idling of five others and the closing of approximately 40 sales centers. The charges in 1999 include severance and other termination costs related to approximately 2,150 employees primarily in manufacturing, retail and finance operations, costs associated with closing plants and sales centers, and asset writedowns. During 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 December 31, 2001 only seven of these underperforming sales centers remained open while 23 were converted to centers that exclusively market repossessed inventory. The remainder were either sold or closed during the quarter ended December 31, 2001. The Company expects to complete these restructuring activities during the second quarter of 2002. Approximately $50,000 of the $4.0 million remaining in the restructuring reserve at December 31, 2001 related to provisions established prior to the fourth quarter of 2001. 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. Interest expense Interest expense for the quarter ended December 31, 2001 decreased $5.1 million, or 35%, from the first quarter of fiscal 2001 due to lower average balances outstanding on short-term credit facilities during the quarter ended December 31, 2001. Income taxes For the quarter ended December 31, 2001, 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 has operated at a loss in its three most recent fiscal years and in the quarter ended December 31, 2001. Because management believes difficult competitive conditions may continue for the foreseeable future, management believes that under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), it is not appropriate to record income tax benefits on current losses in excess of anticipated refunds of taxes previously paid. Consequently, the Company's results for the quarter ended December 31, 2001 do not reflect a benefit from income taxes other than described above, notwithstanding the fact that the Company reported a loss for the period. Cumulative effect of accounting change 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 cumulated effect of the accounting change and to apply the provisions of SAB 101 to the quarter. LIQUIDITY AND CAPITAL RESOURCES For the quarters ended December 31, 2001 and 2000 the Company reported net losses of $10.0 million and $50.4 million, respectively. These financial results reflect business conditions within the manufactured housing industry. The Company is currently operating in a highly competitive environment caused principally by the industry's aggressive expansion in the retail channel, excessive amounts of finished goods inventory and a general reduction in the availability of financing at both the wholesale and retail levels. A decline in overall economic conditions has also contributed to a difficult environment. The industry estimates that shipments of manufactured homes from production facilities declined by approximately 28% and 22% during calendar years 2000 and 2001, respectively. 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 quarter 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 $237.2 million reduction in inventories since September 1999, negatively affected the Company's reported earnings for fiscal years 2000 and 2001 and the first quarter of fiscal 2002. Management believes that, unless business conditions improve, the Company is likely to incur a loss in fiscal 2002; however, it plans to continue to manage operations to generate positive cash flow. The Company 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, including potential repayment of the 8% reset debentures, and execute its business plan during the remainder of fiscal 2002. 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 December 31, 2001, the Company was operating approximately 20 plants, though many were operating at reduced production schedules. 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 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. 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 entity of the Company entered into a three-year, $200 million loan purchase facility with a financial institution. It provides for funding of up to 81% of qualifying loan principal balances held for sale. The new facility replaced the Company's $250 million facility with a commercial paper issuer, which was scheduled to expire in October 2001. Under the new facility, 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 $9.84 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 December 31, 2001, OAR had approximately $38.6 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. Subsequent to December 31, 2001, the Company closed a new $55 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 $39 million and to provide additional cash borrowing capacity. The completion of this facility also freed up approximately $12 million of cash used to secure letters of credit. 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 will bear interest at the greater of prime plus 1.50% or 7%. 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 integration strategy. Such financing consumes substantial amounts of capital, which the Company has obtained principally by regularly securitizing such loans through the asset-backed securities market. Should the Company's ability to access the asset-backed securities market become impaired, the Company would be required to seek additional sources of funding for its finance business. Such sources might include, but would not be limited to, the sale of whole loans to unrelated third parties and the increased utilization of FHA financing. The Company's inability to find alternative sources of funding could have an adverse impact on the Company's liquidity and operations. The Company, from time to time, has retained certain subordinated securities from its securitizations. At December 31, 2001 the Company owned such subordinated asset-backed securities having a carrying value of $8.4 million associated with the August and December 2001 securitizations, as well as securities having a carrying value of $1.8 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. There can be no assurance that such alternative financing can be obtained, and the inability of the Company to obtain such alternative financing could adversely impact the Company's liquidity and operations. At December 31, 2001 the Company was in compliance with all covenants contained in its debt agreements. 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 $107 million at December 31, 2001. The Company originates loans and warehouses them until sufficient receivables have been accumulated for a securitization. Changes in loan origination volume, which is significantly affected by retail sales, and the timing of loan securitization transactions affect the amount of loans held for sale at any point in time. FORWARD LOOKING STATEMENTS This Form 10-Q contains certain forward-looking statements and information based on the beliefs of the Company's management as well as assumptions made by, and information currently available to, the Company's management. These statements include, among others, statements relating to the Company's expectation that it will sell a number of the underperforming retail centers that it is closing to independent retailers who will continue to sell the Company's products; the expectation that it will convert other underperforming sales centers to stores that exclusively sell repossessed homes; the expectation that the Company will complete its restructuring activities during the second quarter of 2002; the belief that it will continue to operate other underperforming sales centers that are not sold or converted to liquidate their inventory; 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 its obligations, including potential repayment of the 8% reset debentures, and to execute its business plan during 2002; the plan to negotiate an additional credit facility in 2002; the intention to continue to manage operations to generate positive cash flow even though it expects to incur a loss during 2002; 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; 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," "should" and similar expressions used in this Form 10-Q are intended to identify other such forward-looking statements. These forward-looking statements reflect the current views of the Company with respect to future events and are subject to a number of risks, including, among others, the following: competitive industry conditions could further adversely affect sales and profitability; the Company may be unable to access sufficient capital to fund its operations; the Company may recognize special charges or experience increased costs in connection with securitizations or other financing activities; the Company may recognize special charges or experience increased costs in connection with restructuring activities; the Company may not realize anticipated benefits associated with its restructuring activities (including the closing of underperforming sales centers); 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 credit losses or higher delinquency rates on loans originated; negative changes in general economic conditions in its markets could adversely impact the Company; it could lose the services of its key management personnel; 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. 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 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Shareholders of the Registrant held on January 30, 2002, the shareholders elected Sabin C. Streeter as a director for a term expiring in 2005 and ratified the selection of PricewaterhouseCoopers LLP as independent accountants. The following table sets forth the votes on each such matter:
BROKER FOR AGAINST ABSTAIN NON-VOTES --- ------- ------- --------- Election of Director (by nominee) Sabin C. Streeter 8,482,170 -- 153,217 897,493 Approval of selection of PricewaterhouseCoopers LLP as Independent Accountants 8,498,356 121,257 15,774 897,493
Item 6. Exhibits and Reports on Form 8-K a) Exhibits (3) Amended and Restated Bylaws of Oakwood Homes Corporation (4) Agreement to Furnish Copies of Instruments with Respect to Long-term Debt (10.1) Note Purchase Agreement dated as of September 28, 2001 by and among Oakwood Advance Receivables Company, L.L.C. and the Purchasers listed on Schedule I attached thereto (10.2) Indenture by and among Oakwood Advance Receivables Company, L.L.C. as Issuer and The Chase Manhattan Bank as Trustee, Verification Agent and Paying Agent and Oakwood Acceptance Corporation, individually and as REMIC Servicer, dated as of September 28, 2001 (10.3) Receivables Contribution Agreement by and between Oakwood Acceptance Corporation as Seller and Oakwood Advance Receivables Company, L.L.C. as Issuer, dated September 28, 2001 b) Reports on Form 8-K None Items 2, 3 and 5 are not applicable and are omitted. 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: February 14, 2002 OAKWOOD HOMES CORPORATION BY: /s/ Suzanne H. Wood --------------------- Suzanne H. Wood Executive Vice President and Chief Financial Officer SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS ITEM 6(a) FORM 10-Q QUARTERLY REPORT For the quarter ended Commission File Number December 31, 2001 1-7444 OAKWOOD HOMES CORPORATION EXHIBIT INDEX
Exhibit No. Exhibit Description ----------- ------------------- 3 Amended and Restated Bylaws of Oakwood Homes Corporation 4 Agreement to Furnish Copies of Instruments with Respect to Long-term Debt 10.1 Note Purchase Agreement dated as of September 28, 2001 by and among Oakwood Advance Receivables Company, L.L.C. and the Purchasers listed on Schedule I attached thereto 10.2 Indenture by and among Oakwood Advance Receivables Company, L.L.C. as Issuer and The Chase Manhattan Bank as Trustee, Verification Agent and Paying Agent and Oakwood Acceptance Corporation, individually and as REMIC Servicer, dated as of September 28, 2001 10.3 Receivables Contribution Agreement by and between Oakwood Acceptance Corporation as Seller and Oakwood Advance Receivables Company, L.L.C. as Issuer, dated September 28, 2001