-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IZ0WAZKC4517WVFHmfRCzoVSAtAn7bzH1AUii22URJyVOUGNv5OdMR6rKeanjXJs lSP+8HdjvH06rmbtYMckpQ== 0000950168-98-002717.txt : 19980817 0000950168-98-002717.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950168-98-002717 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OAKWOOD HOMES CORP CENTRAL INDEX KEY: 0000073609 STANDARD INDUSTRIAL CLASSIFICATION: MOBILE HOMES [2451] IRS NUMBER: 560985879 STATE OF INCORPORATION: NC FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07444 FILM NUMBER: 98690281 BUSINESS ADDRESS: STREET 1: 2225 S HOLDEN RD STREET 2: P O BOX 27081 CITY: GREENSBORO STATE: NC ZIP: 27425-7081 BUSINESS PHONE: 9198552400 MAIL ADDRESS: STREET 1: 2225 S HOLDEN ROAD STREET 2: P O BOX 27081 CITY: GREENSBORO STATE: NC ZIP: 27425-7081 10-Q 1 OAKWOOD HOMES CORP.--FORM 10-Q 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, 1998 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) ----------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock as of July 31, 1998. Common Stock, Par Value $.50 Per Share . . . . . . . . . 46,657,379 1 QUARTERLY REPORT ON FORM 10-Q CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the Quarter Ended June 30, 1998 OAKWOOD HOMES CORPORATION AND SUBSIDIARIES Greensboro, North Carolina 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 annual 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 INCOME (UNAUDITED) (in thousands except per share data)
Three months ended June 30, ----------------------- 1998 1997 ---------- --------- Revenues Net sales $ 440,129 $ 266,015 Financial services income Consumer finance 23,772 21,392 Insurance 8,550 843 Valuation charge (35,000) -- ---------- --------- (2,678) 22,235 Other income 3,060 4,187 ---------- --------- Total revenues 440,511 292,437 ---------- --------- Costs and expenses Cost of sales 305,470 181,516 Selling, general and administrative expenses 105,839 63,401 Financial services operating expenses Consumer finance 6,153 5,140 Insurance 7,009 270 ---------- --------- 13,162 5,410 Provision for losses on credit sales 390 -- Interest expense Non-financial services 2,336 838 Financial services 5,164 4,647 Total costs and expenses 432,361 255,812 Income before income taxes 8,150 36,625 Provision for income taxes 3,191 14,128 ---------- --------- Net income $ 4,959 $ 22,497 ---------- --------- Earnings per share Basic $ .11 $ .49 Diluted $ .10 $ .48 Dividends per share $ .01 $ .01 Weighted average number of common shares outstanding Basic 46,311 45,721 Diluted 47,525 46,696
3 OAKWOOD HOMES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (in thousands except per share data)
Nine months ended June 30, -------------------------- 1998 1997 --------- --------- Revenues Net sales $ 912,374 $ 634,449 Financial services income Consumer finance 68,157 69,920 Insurance 23,514 2,562 Valuation charge (51,300) - --------- --------- 40,371 72,482 Other income 7,322 12,985 Total revenues 960,067 719,916 --------- --------- Costs and expenses Cost of sales 627,557 434,366 Selling, general and administrative expenses 229,264 164,033 Financial services operating expenses Consumer finance 17,536 14,814 Insurance 19,080 1,344 --------- --------- 36,616 16,158 Provision for losses on credit sales 390 - Interest expense Non-financial services 3,721 2,480 Financial services 13,321 12,645 --------- --------- Total costs and expenses 910,869 629,682 --------- --------- Income before income taxes 49,198 90,234 Provision for income taxes 18,789 34,830 --------- --------- Net income $ 30,409 $ 55,404 --------- --------- Earnings per share Basic $ .66 $ 1.21 Diluted $ .64 $ 1.19 Dividends per share $ .03 $ .03 Weighted average number of common shares outstanding Basic 46,192 45,604 Diluted 47,553 46,675
4 OAKWOOD HOMES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED) (in thousands except share and per share data)
June 30, September 30, ASSETS 1998 1997 ------------ ------------ Cash and cash equivalents $ 25,494 $ 28,717 Receivables and investments 436,809 462,080 Inventories Manufactured homes 268,449 186,767 Work-in-process, materials and supplies 39,132 17,672 Land/homes under development 5,100 3,859 ------------ ------------ 312,681 208,298 Properties and facilities 230,449 139,702 Deferred income taxes 8,764 12,994 Other assets 129,376 52,715 ------------ ------------ $ 1,143,573 $ 904,506 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings $ 310,661 $ 175,800 Notes and bonds payable 67,430 78,815 Accounts payable and accrued liabilities 180,987 122,162 Insurance policy reserves 45,851 30,535 Other long-term obligations 18,767 13,312 Shareholders' equity Common stock, $.50 par value; 100,000,000 shares authorized; 46,603,000 and 46,299,000 shares issued and outstanding 23,301 23,149 Additional paid-in capital 164,941 159,281 Retained earnings 335,549 306,533 ------------ ------------ 523,791 488,963 Less: Unearned compensation (3,914) (5,081) ------------ ------------ 519,877 483,882 ------------ ------------ $ 1,143,573 $ 904,506 ============ ============
5 OAKWOOD HOMES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (in thousands)
Nine months ended June 30, ------------------------ 1998 1997 --------- -------- Operating activities Net income $ 30,409 $ 55,404 Items not requiring (providing) cash Depreciation and amortization 17,274 10,721 Deferred income taxes (2,263) 183 Provision for credit losses 390 - Gain on sale of loans (18,630) (15,016) Asset valuation charges 51,300 - Excess of cash receipts over REMIC residual income recognized (income in excess of collections) 13,121 (885) Other 4,343 2,503 Changes in net operating assets, excluding effects of business acquisition Decrease in other receivables 38 17,062 (Increase) in inventories (84,034) (74,386) (Increase) in prepaid expenses (1,171) (4,021) (Increase) decrease in deferred insurance policy acquisition costs (2,304) 236 Increase (decrease) in accounts payable and accrued liabilities 5,800 (47,857) Increase (decrease) in insurance policy reserves 15,316 (583) Increase in other long-term obligations 2,989 13,549 --------- -------- Cash provided (used) by operations 32,578 (43,090) Loans originated (793,651) (589,875) Sale of loans 765,726 676,483 Principal receipts on loans 34,913 25,214 --------- -------- Cash provided by operating activities 39,566 68,732 --------- -------- Investing activities Business acquisition (101,829) - Investment in and advances to joint venture (11,409) (4,000) Additions to properties and facilities (39,436) (22,265) Purchase of securities (5,045) - Other (3,131) (13,693) --------- -------- Cash (used) by investing activities (160,850) (39,958) --------- --------
6 Financing activities Net borrowings on short-term credit facilities 29,861 14,151 Proceeds of borrowings related to business acquisition 100,000 - Issuance of notes and bonds payable 4,472 - Payments on notes and bonds (17,105) (48,807) Cash dividends (1,393) (1,378) Proceeds from exercise of stock options 2,226 1,717 -------- -------- Cash provided (used) by financing activities 118,061 (34,317) -------- -------- Net (decrease) in cash and cash equivalents (3,223) (5,543) Cash and cash equivalents Beginning of period 28,717 28,577 -------- -------- End of period $ 25,494 $ 23,034 ======== ========
7 OAKWOOD HOMES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. The consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary to present fairly the results of operations for the periods presented. Except for asset valuation charges in the amount of $35.0 million recorded for the three months ended June 30, 1998 and $51.3 million for the nine months ended June 30, 1998, relating to the carrying value of retained interests in certain REMIC securitizations and the Company's investment in a joint venture described in Management's Discussion and Analysis of Financial Condition and Results of Operations, such adjustments included only normal recurring adjustments. Results of operations for any interim period are not necessarily indicative of results to be expected for a full year. 2. On April 1, 1998 the Company acquired Schult Homes Corporation ("Schult"), a producer of manufactured and modular housing headquartered in Middlebury, Indiana. Each outstanding common share of Schult was converted into the right to receive $22.50 in cash, or approximately $101 million in the aggregate. In addition the Company issued options to acquire common stock of the Company in exchange for certain options to acquire common shares of Schult which were outstanding as of the acquisition date. The estimated fair market value of Company stock options issued was approximately $2.9 million, which has been included as part of the cost of the acquisition, together with costs incurred in effecting the acquisition estimated to be $750,000. The Company financed the acquisition principally through a $100 million loan from a commercial bank repayable not later than March 30, 1999. The Company intends to refinance the acquisition financing using long-term debt. The acquisition has been accounted for using the purchase method of accounting. A summary of the consideration paid in the acquisition and the allocation thereof to the net assets acquired follows. The allocation of purchase price is preliminary and subject to adjustments. However, the Company currently does not expect such adjustments, if any, to be material. 8
(in thousands) Cash paid to selling shareholders $ 101,079 Acquisition costs 750 Estimated fair value of stock options issued 2,874 --------- Total consideration issued 104,703 Long-term debt assumed 1,608 Deferred income taxes 6,493 --------- $ 112,804 ========= Allocated to: Properties and facilities $ 66,794 Working capital and other assets and liabilities, excluding intangibles (15,585) Intangible assets: Assembled workforce (amortized using the straight-line method over five years) 15,961 Dealer distribution network (amortized using the straight-line method over three years) 6,000 Goodwill (amortized using the straight-line method over 40 years) 39,634 --------- $ 112,804 =========
Schult's results of operations are included with those of the Company from the April 1, 1998 acquisition date. Summarized below is unaudited pro forma financial data of the Company assuming the Schult acquisition had taken place at the beginning of the periods presented. The pro forma results are not necessarily indicative of future earnings or earnings that would have been reported had the acquisition been completed when assumed. Nine months ended June 30, ---------------------------- 1998 1997 ------------ --------- (in thousands, except per share data) Net sales $ 1,080,521 $ 889,190 Net income $ 26,658 $ 54,668 Earnings per share - diluted $ .56 $ 1.17 9 3. During the quarter ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), which establishes standards for computing and presenting earnings per share ("EPS") by replacing the presentation of primary and fully diluted EPS with a presentation of basic and diluted EPS. All current and prior year EPS amounts herein reflect adoption of FAS 128. The following table sets forth the computation of basic and diluted EPS:
Three months ended Nine months ended June 30, June 30, ---------------------- ---------------------- 1998 1997 1998 1997 ------- ------- -------- -------- (in thousands, except per share data) Numerator for basic and diluted EPS - Net income $ 4,959 $ 22,497 $ 30,409 $ 55,404 Denominator: Weighted average number of common shares outstanding 46,387 45,838 46,278 45,730 Unearned ESOP shares (76) (117) (86) (126) ------- -------- -------- --------- Denominator for basic EPS 46,311 45,721 46,192 45,604 Dilutive effect of stock options and restricted shares computed using the treasury stock method 1,214 975 1,361 1,071 ------- -------- -------- --------- Denominator for diluted EPS 47,525 46,696 47,553 46,675 ======= ======== ======== ========= Earnings per common share - basic $ .11 $ .49 $ .66 $ 1.21 ======= ======== ======== ========= Earnings per common share - diluted $ .10 $ .48 $ .64 $ 1.19 ======= ======== ======== =========
4. The Company is contingently liable as guarantor on installment sale contracts sold to third parties on a full or limited recourse basis. The amount of this contingent liability was approximately $46 million at June 30, 1998. The Company is also contingently liable as guarantor on subordinated securities issued by REMIC trusts in the aggregate principal amount of $55 million at June 30, 1998. In addition, the Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for retailers of homes produced by Destiny Industries, Inc. ("Destiny"), Golden West Homes ("Golden West") and Schult, manufacturing subsidiaries of the Company doing business with independent dealers. The Company estimates that its potential obligation under repurchase agreements approximated $160 million at June 30, 1998. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Three months ended June 30, 1998 compared to three months ended June 30, 1997 The following table summarizes certain statistics for the quarters ended June 30, 1998 and 1997 : 1998 1997 -------- --------- Retail sales (in millions) $ 327.1 $ 244.2 Other sales (in millions) $ 113.0 $ 21.8 Total sales (in millions) $ 440.1 $ 266.0 Gross profit % - integrated operations 35.0% 32.8% Gross profit % - wholesale operations 17.9% 20.5% New single-section homes sold - retail 3,444 2,902 New multi-section homes sold - retail 3,932 3,390 Used homes sold - retail 516 523 New single-section homes sold - wholesale 778 98 New multi-section homes sold - wholesale 2,545 578 Average new single-section sales price - retail $31,900 $28,700 Average new multi-section sales price - retail $54,000 $46,100 Average new single-section sales price - wholesale $21,200 $15,400 Average new multi-section sales price - wholesale $37,600 $31,100 Weighted average retail sales centers open during the period 332 271 Retail sales dollar volume increased 34%, reflecting a 17% increase in new unit volume and increases of 11% and 17% in the average new unit sales prices of single-section and multi-section homes, respectively. Single-section unit volume increased 19%, while multi-section unit volume rose 16% from the third quarter of fiscal 1997. During the third quarter of fiscal 1998, the Company opened or acquired 16 new sales centers compared to nine sales centers in the third quarter of fiscal 1997. The Company also closed one underperforming sales center during the quarter compared to two in the third quarter of fiscal 1997. Total new retail sales dollars at sales centers open more than one year increased 12% during the third quarter of fiscal 1998. The average selling prices for new single-section and new multi-section homes sold at retail increased due to price increases and a shift in product mix toward higher price points. Other sales dollar volume, which consists principally of wholesale sales to independent dealers by the Company's Destiny, Golden West and Schult units, increased 418%, due to an increase in wholesale unit volume related to the acquisition of Schult on April 1, 1998. Schult sold 2,692 units, representing $92.7 million of sales, to independent dealers during the third quarter of fiscal 1998. The increase was also a result of increases of 38% and 21% in the average sales prices of new single-section homes and new multi-section homes, respectively. Schult's average sales prices are higher than those of Golden West and Destiny. Schult focuses 11 on the middle to higher price range of the manufactured housing market. Excluding Schult, the average sales price of new single-section homes sold to independent dealers remained constant and the average sales price of new multi-section homes sold to independent dealers increased 6%. 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 to 35.0% in the current period from 32.8% in the third quarter of last year. Approximately 97% of new homes sold at retail were produced in Company-owned manufacturing plants in the third quarter of fiscal 1998 and 1997. Wholesale gross profit margins decreased as a result of the acquisition of Schult, whose gross profit margins currently are lower than those of the Company's other wholesale sales. The combined wholesale gross profit margin of Golden West and Destiny improved from last year, principally due to improved efficiencies. Financial services income for the third quarter of fiscal 1998 includes a special charge of $35.0 million (approximately $21.7 million after tax, or $.46 per share), relating to valuation adjustments of certain retained interests in REMIC securitizations and the Company's investment in a joint venture more fully described below. Interest income earned on loans held for investment and on loans held for sale prior to securitization increased from $7.0 million in the third quarter of fiscal 1997 to $8.0 million this year. This increase reflects an increase in the weighted average interest rate of loans held for sale prior to securitization due to higher interest rates charged to less creditworthy customers. This increase is partially offset by the decline in the principal balance of loans held for investment. Loan servicing fees increased from $5.5 million in the third quarter of fiscal 1997 to $6.7 million this year, reflecting the increased size of the Company's securitized loan servicing portfolio. REMIC residual income decreased from $4.5 million to $2.2 million, reflecting a decrease in the average yield on those investments, arising principally from higher credit losses more fully described below. Financial services income for the third quarter of fiscal 1998 and 1997 includes gains of approximately $7.7 million, or $.10 per share, after tax, and $3.7 million, or $.05 per share, after tax, respectively, from the sale of asset-backed securities. Financial services income for the third quarter of fiscal 1998 also includes $8.6 million in revenues from the Company's captive reinsurance business which began operations on June 1, 1997. This subsidiary enables the Company to participate more fully in what management believes to be the profitable income streams associated with the property and casualty insurance and service contract business than was possible under the commission-based insurance agency arrangement which preceded its formation. As an insurance underwriter, the Company recognizes insurance premium revenues over the life of the related policies as a component of financial services income, with the associated claims expenses reflected in financial services operating expenses. Previously, insurance commission revenue was reported upon the sale of the policies by Oakwood's retail operations, and was included in other income. Due to this fundamental change in the Company's business, earnings for insurance operations are now spread over the lives of the policies rather than being recognized in full when the policies were sold. Because reinsurance claims costs are recorded as insured events occur, underwriting reinsurance risk may increase the volatility of the Company's earnings, particularly with respect to property and casualty reinsurance. The Company has purchased catastrophe reinsurance to reduce its underwriting exposure to natural disasters. Insurance revenues in 1997 relate to the Company's 12 credit life insurance underwriting business which the Company has operated for many years and which is ongoing. The Company finances its consumer lending activities primarily by securitizing the loans it originates using Real Estate Mortgage Investment Conduits ("REMICs"), and accounts for loan securitizations under Statement of Financial Accounting Standards No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 125"). Under FAS 125, 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 estimated fair values of such interests. The Company's 50% owned consumer finance joint venture, Deutsche Financial Capital ("DFC," an equity method investee), also has securitized its separate loan orginations and also applies the provisions of FAS 125. REMIC interests retained by the Company include servicing assets and REMIC residual interests. The Company estimates the fair value of retained REMIC residual interests based, in part, upon default and prepayment assumptions which management believes market participants would use for similar instruments. The actual rate of voluntary prepayments and the amount and timing of credit losses affect the Company's yield on retained REMIC residual interests and the fair value of such interests in periods subsequent to the securitization; the actual rate of voluntary prepayments and credit losses typically varies over the life of each transaction and from transaction to transaction. If over time the Company's actual experience is more favorable than that assumed, the Company's yield on its REMIC residual interests will be enhanced. Similarly, if over time the Company's actual experience is less favorable than that assumed, such yield will be reduced or impairment of the residuals may result. For the quarter ended June 30, 1998, 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 1.58% on an annualized basis of the average principal balance of the related loans, compared to approximately 1.57% one year ago. Because losses on repossessions are reflected in the loss ratio principally in the period during which the repossessed property is disposed of, fluctuations in the number of repossessed properties disposed of from period to period may cause variations in the charge-off ratio. At June 30, 1998 the delinquency rate on Company originated loans was 4.0%, compared to 2.5% at June 30, 1997 and 3.0% at March 31, 1998. Increased delinquency rates ultimately may result in increased repossessions and foreclosures and an increase in credit losses. The Company and its DFC joint venture partner, Deutsche Financial Services Corporation ("DFS"), have agreed in principle for the Company to cease participation in the joint venture, and DFS has indicated its intention to continue the venture's business for its own account. The Company and DFS are discussing the means by which the transfer of the joint venture business to DFS may be accomplished. At June 30, 1998 the venture's assets consisted principally of approximately $167 million of loans in the warehouse, which the Company currently anticipates will be securitized. Because the Company and DFS have not reached a definitive agreement regarding the Company's exit from the DFC joint venture business, the manner of such exit and the timing thereof cannot presently be determined. At June 30, 1998 the Company's investment in and advances to the DFC joint venture totaled approximately $10.6 million, after reduction by a charge of approximately $4.3 million 13 (approximately $2.7 million after tax, or $.06 per share) to reduce the carrying value of such investment and advances to their estimated net realizable values. The amount ultimately realized from such investment and advances may be greater or less than currently estimated. DFC has securitized approximately $390 million of loans originated since its inception. Credit losses on these loans to date have been greater than those expected by the Company or DFC. Because of higher credit losses and related uncertainties associated with the Company's expected exit from the DFC joint venture, the Company has increased its credit loss assumptions with respect to these transactions, which resulted in an indicated impairment of the residual interests. Accordingly, in the third quarter the Company recorded a provision of approximately $7.5 million (approximately $4.6 million after tax, or $.10 per share) to reduce the carrying value of those investments to zero. During the third quarter of fiscal 1998, the Company experienced a rise in the rate of voluntary prepayments of loans in a number of its securitized loan pools unrelated to DFC. Such higher rate of voluntary prepayments adversely affects the Company's ability to recover the carrying value of its residual interests in such securitizations. As a result of this increase in prepayments, at June 30, 1998 the Company increased its assumed rate of voluntary prepayments on all its securitized loan pools. Such increased assumption, together with an increased credit loss assumption with respect to a loan securitization closed in late 1996, resulted in an indicated impairment of the Company's investments in certain securitization residuals. Accordingly, the Company in the third quarter recorded a charge of approximately $23.2 million (approximately $14.4 million after tax, or $.30 per share) to reduce the carrying value of such investments to their estimated fair market values. At June 30, 1998, after reduction for the valuation charges relating to the DFC and Company residual investments, such investments had an aggregate carrying value of approximately $65 million. In addition, the Company has recorded approximately $8 million, net of amortization, of servicing assets under FAS 125 and has recorded guarantee liabilities under FAS 125 of approximately $5 million relating to guarantees of certain subordinated securities issued by REMIC trusts (see Note 4). The majority of the 27% decrease in other income reflects decreased insurance commissions resulting from the formation of the reinsurance subsidiary and the Company's exit from commission-based insurance agency arrangements discussed above. Insurance commissions for the third quarter of fiscal 1997 totaled $2.1 million. Selling, general and administrative expenses increased to 24.0% of net sales in the third quarter of fiscal 1998, compared to 23.8% of net sales last year. Higher retail selling expenses were offset by lower general and administrative expenses as a percentage of sales at Schult. Excluding the effects of the Schult acquisition, non-financial selling, general and administrative expenses in the third quarter of fiscal 1998 were 27.0% of net sales compared to 23.8% of net sales last year, with higher retail selling expenses accounting for over one-half of the percentage increase. Consumer finance operating expenses rose 20% compared to the quarter ended June 30, 1997 on a 28% increase in the average number of loans serviced during the period and a 53% increase in total credit application volume. 14 Financial services interest expense includes interest expense associated with long-term debt secured by loans as well as interest expense associated with all short-term line of credit borrowings. Financial services interest expense increased 11% primarily due to a $1.4 million increase in interest expense related to higher average outstanding balances on short-term lines of credit. This increase was partially offset by lower interest expense on declining and retired long-term debt balances. Non-financial services interest expense rose from $838,000 to $2.3 million due principally to interest costs related to the financing of the Schult acquisition. The Company's effective income tax rate was 39.2% for the third quarter of fiscal 1998 compared to 38.6% last year. The increase is related to the acquisition of Schult. Nine months ended June 30, 1998 compared to nine months ended June 30, 1997 The following table summarizes certain statistics for the nine months ended June 30, 1998 and 1997: 1998 1997 -------- -------- Retail sales (in millions) $ 762.6 $ 564.3 Other sales (in millions) $ 149.8 $ 70.1 Total sales (in millions) $ 912.4 $ 634.4 Gross profit % - integrated operations 33.8% 33.2% Gross profit % - wholesale operations 18.4% 18.5% New single-section homes sold - retail 8,964 7,687 New multi-section homes sold - retail 8,890 6,951 Used homes sold - retail 1,761 1,503 New single-section homes sold - wholesale 918 447 New multi-section homes sold - wholesale 3,514 1,888 Average new single-section sales price - retail $31,000 $28,900 Average new multi-section sales price - retail $52,700 $47,400 Average new single-section sales price - wholesale $20,500 $15,200 Average new multi-section sales price - wholesale $36,700 $31,000 Weighted average retail sales centers open during the period 320 264 Retail sales dollar volume increased 35%, reflecting a 22% increase in new unit volume, and increases of 7% and 11% in the average new unit sales prices of single-section and multi-section homes, respectively. Single-section unit volume increased 17%, while multi-section unit volume rose 28% from the first nine months of fiscal 1997. The average selling prices for new single-section and new multi-section homes sold at retail increased due to price increases and a shift in product mix toward higher price points. During the first nine months of fiscal 1998, the Company opened or acquired 42 new sales centers compared to 24 sales centers in fiscal 1997. The Company also closed three underperforming sales center during the nine months ended June 30, 1998 compared to four in the nine months ended June 30, 1997. Total new retail sales 15 dollars at sales centers open more than one year increased 13% during the nine months ended June 30, 1998. Other sales dollar volume increased 114%, due to an increase in wholesale unit volume related to the acquisition of Schult on April 1, 1998. Schult sold 2,692 units, representing $92.7 million of sales, to independent dealers during the third quarter of fiscal 1998. The increase was also a result of increases of 35% and 18% in the average sales prices of new single-section homes and new multi-section homes. Excluding Schult, the average sales price of new single-section and new multi-section homes sold to independent dealers increased 6% and 9%, respectively. Gross profit margin - integrated operations increased to 33.8% during the nine months ended June 30, 1998 from 33.2% in the first nine months of fiscal 1997. The percentage of new homes sold at retail which were produced in Company-owned manufacturing plants was approximately 96% in the first nine months of fiscal 1998 and 1997. Wholesale gross profit margins decreased as a result of the acquisition of Schult whose gross profit margins currently are lower than those of the Company's other wholesale sales. The combined wholesale gross profit margin of Golden West and Destiny improved from last year, principally due to improved efficiencies. Financial services income for the first nine months of fiscal 1998 includes special charges of $51.3 million ($31.8 million after tax, or $.67 per share) relating to valuation adjustments of certain retained interests in REMIC securitizations and the Company's investment in the DFC joint venture. In addition to the $35.0 million of pretax charges described in the discussion of third quarter results of operations above, in the second quarter of fiscal 1998 the Company recorded a pretax charge of approximately $16.3 to write-down the carrying value of retained interests in certain REMIC securitizations, principally as a result of higher than anticipated credit losses. Interest income earned on loans held for investment and on loans held for sale prior to securitization decreased from $22.3 million in the first nine months of fiscal 1997 to $22.2 million this year. Loan servicing fees increased from $15.6 million in the nine months ended June 30, 1997 to $20.1 million this year, reflecting the increased size of the Company's securitized loan servicing portfolio. REMIC residual income decreased from $15.6 million to $8.5 million, reflecting a decrease in the average yield on those investments, arising principally from higher credit losses. For the nine months ended June 30, 1998, total credit losses on loans originated by the Company, including losses relating to securitized assets, loans held for investment, loans held for sale and loans sold with full or partial recourse, amounted to approximately 1.50% on an annualized basis of the average principal balance of the related loans, compared to approximately 1.33% last year. Financial services income for the first nine months of fiscal 1998 and 1997 includes gains of approximately $18.6 million, or $.24 per share, after tax and $15.0 million, or $.20 per share, after tax, respectively, from the sale of asset-backed securities. Financial services income for the first nine months of fiscal 1998 also includes $23.5 million in revenues from the Company's captive reinsurance business described in the discussion of third quarter results of operations above. Insurance revenues in 1997 relate to the Company's credit life insurance underwriting business which the Company has operated for many years and which is ongoing. 16 The majority of the 44% decrease in other income reflects decreased insurance commissions resulting from the formation of the property and casualty reinsurance subsidiary and the Company's exit from commission-based insurance agency arrangements discussed above. Insurance commissions for the first nine months of fiscal 1997 totaled $6.4 million. Selling, general and administrative expenses declined to 25.1% of net sales in the first nine months of fiscal 1998 compared to 25.9% of net sales last year. The decrease reflects, in part, lower accruals for annual management incentive compensation plans as a result of reduced profitability and the reduced significance of fixed costs on a higher revenue base. These decreases were partially offset by higher retail selling expenses. Excluding the effects of the Schult acquisition, non-financial selling, general and administrative expenses for the first nine months of fiscal 1998 were 26.5% compared to 25.9% last year. Consumer finance operating expenses rose 18% compared to the first nine months of fiscal 1997 on a 29% increase in the average number of loans serviced during the period and a 41% increase in total credit application volume. Financial services interest expense includes interest expense associated with long-term debt secured by loans as well as interest expense associated with all short-term line of credit borrowings. Financial services interest expense increased 5% primarily due to a $3.7 million increase in interest expense related to higher average outstanding balances and higher weighted average interest rates on short-term lines of credit. This increase was partially offset by lower interest expense on declining and retired long-term debt balances. Non-financial services interest expense rose from $2.5 million to $3.7 million due principally to interest costs related to the financing of the Schult acquisition. The Company's effective income tax rate was 38.2% for the first nine months of fiscal 1998 compared to 38.6% last year. YEAR 2000 ISSUES The Company has analyzed the potential effects of year 2000 issues on the computer systems that support the Company's business, including issues associated with the Company's internally developed software and software licensed from third parties. The Company is also in the process of reviewing the issues faced by certain significant suppliers to the Company. The Company has begun remediation of internally developed software to resolve year 2000 compliance issues. The costs incurred by the Company to date, which have been charged to expense, have not been material, and the Company does not anticipate that the expected remaining costs will be material. Based upon its assessment of internally developed and licensed software and the status of remediation undertaken to date, the Company believes that substantially all significant internal system issues associated with year 2000 compliance will be resolved by the end of calendar 1998, except for year 2000 issues associated with the Company's consumer finance loan origination systems which the Company plans to replace with year 2000-compliant systems by June 1999. 17 LIQUIDITY AND CAPITAL RESOURCES Receivables and investments decreased from September 30, 1997 due, in part, to a decrease in the balance of loans held for sale, as well as the continued amortization of loans held for investment. The Company originates loans and warehouses them until sufficient receivables have been accumulated for a securitization. Through its Oakwood Mortgage Investors subsidiary, the Company has securitized approximately $750 million of loans in the first nine months of fiscal 1998. The decrease also reflects aggregate write downs of certain retained interests in REMICs, offset in part by an increase in trade accounts receivable related to the acquisition of Schult. The increase in inventories from September 30, 1997 reflects the acquisition of Schult, the manufacture of inventory in preparation for the summer selling season, as well as the increase in the number of retail sales centers since September 30, 1997. Short-term borrowings reflect outstanding advances on the Company's warehousing facility used to finance originated loans prior to securitization or other permanent financing, as well as borrowings under other short-term credit facilities. Management believes that permanent financing for its loans remains readily available and anticipates securitizing installment sale contracts using REMICs approximately every three months. During the third quarter the Company also obtained a $100 million short-term loan to finance its Schult acquisition. The Company intends to replace the loan with long-term debt on or before the expiration of the loan on March 30, 1999. The Company intends to finance internal growth of its retail and manufacturing business principally using internally generated funds and short-term lines of credit. Because the Company generally sells all of the regular REMIC interests in its securitizations, additional permanent corporate financing is not expected to be required to fund internal expansion of the financial services businesses. Should the Company expand its businesses through other significant acquisitions, additional permanent capital could be required. In addition, the Company continues to monitor the debt and equity markets and evaluate the sources and cost of long-term capital in light of management's assessment of existing and future conditions in the capital markets and its assessment of the appropriate components of the Company's capital structure. While management believes that existing financing is sufficient to provide for the Company's internal growth for the foreseeable future, the Company may seek to raise additional long-term debt or equity if compelling market conditions arise. During 1997 Standard & Poor's Ratings Group, Moody's Investors Service and Fitch Investors Service, L.P. each raised its rating of the Company's senior long-term debt to BBB-. Management believes that achieving an investment grade rating from major credit rating agencies enhances the Company's flexibility in obtaining both short and long-term financing. 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits (4) Agreement to Furnish Copies of Instruments with Respect to Long-term Debt (27) Financial Data Schedule (filed in electronic format only) b) Reports on Form 8-K On April 10, 1998 the Company filed a report on Form 8-K in which the Company reported the acquisition of Schult Homes Corporation on April 1, 1998. Items 1, 2, 3, 4 and 5 are inapplicable and are omitted. 19 OAKWOOD HOMES CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 1998 OAKWOOD HOMES CORPORATION BY: s/ C. Michael Kilbourne ----------------------------- C. Michael Kilbourne Executive Vice President (Chief Financial Officer) (Duly Authorized Officer) 20 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, 1998 1-7444 OAKWOOD HOMES CORPORATION EXHIBIT INDEX Exhibit No. Exhibit Description 4 Agreement to Furnish Copies of Instruments with respect to Long-Term Debt 27 Financial Data Schedule (filed in electronic format only) 21 EX-4 2 EXHIBIT 4 EXHIBIT 4 AGREEMENT TO FURNISH COPIES OF INSTRUMENTS WITH RESPECT TO LONG-TERM DEBT The Registrant has entered into certain agreements with respect to long-term indebtedness which do not exceed ten percent of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of such agreements to the Commission upon request of the Commission. OAKWOOD HOMES CORPORATION By: s/ C. Michael Kilbourne ------------------------- C. Michael Kilbourne Executive Vice President 22 EX-27 3 FDS 27
5 This Schedule contains summary financial information extracted from (a) the Registrant's consolidated financial statements for the quarter ended June 30, 1998 filed as part of the Registrant's Form 10-Q for the quarter ended June 30, 1998 and is qualified in its entirety by reference to such (b) financial statements. 1,000 US Dollars 9-MOS Sep-30-1998 Oct-1-1997 Jun-30-1998 1 25,494 0 437,514 705 312,681 0 290,089 59,640 1,143,573 491,648 67,430 0 0 23,301 496,576 1,143,573 912,374 960,067 627,557 893,437 0 390 17,042 49,198 18,789 0 0 0 0 30,409 .66 .64 EPS-BASIC
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