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, 2000 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number: 1-7444
OAKWOOD HOMES CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-0985879
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7800 McCloud Road, Greensboro, North Carolina 27409-9634
--------------------------------------------------------
(Address of principal executive offices)
Post Office Box 27081, Greensboro, North Carolina 27425-7081
(Mailing address of principal executive offices)
(336) 664-2400
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of July 31, 2000.
Common Stock, Par Value $.50 Per Share . . . . . . . . .47,124,562
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures
normally included in audited financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K.
2
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
Three months ended
June 30,
-------------------------
2000 1999
---- ----
Revenues
Net sales $ 310,558 $ 404,346
Financial services
Consumer finance, net of impairment and
valuation provisions 10,391 17,746
Insurance 13,087 13,676
---------- ----------
23,478 31,422
Other income 2,353 5,505
---------- ----------
Total revenues 336,389 441,273
---------- ----------
Costs and expenses
Cost of sales 236,516 287,806
Selling, general and administrative expenses 87,449 110,601
Financial services operating expenses
Consumer finance 11,106 8,829
Insurance 7,708 8,495
---------- ----------
18,814 17,324
Reversal of restructuring charges (1,280) -
Provision for losses on credit sales 750 400
Interest expense 12,083 12,266
---------- ----------
Total costs and expenses 354,332 428,397
---------- ----------
Income (loss) before income taxes (17,943) 12,876
Provision for income taxes (6,818) 5,022
---------- ----------
Net income (loss) $ (11,125) $ 7,854
========== ==========
Earnings (loss) per share
Basic $ (0.24) $ .17
Diluted $ (0.24) $ .17
Dividends per share $ .01 $ .01
Weighted average number of
common shares outstanding
Basic 46,574 46,473
Diluted 46,574 47,168
See accompanying notes to the consolidated financial statements.
3
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
<TABLE>
<CAPTION>
Nine months ended
June 30,
--------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues
Net sales $ 879,401 $ 1,131,255
Financial services revenues
Consumer finance, net of impairment and
valuation provisions 31,995 48,156
Insurance 43,518 37,229
---------- ------------
75,513 85,385
Other income 7,731 10,365
---------- ------------
Total revenues 962,645 1,227,005
---------- ------------
Costs and expenses
Cost of sales 688,276 802,991
Selling, general and administrative expenses 243,652 294,954
Financial services operating expenses
Consumer finance 32,758 25,514
Insurance 24,645 24,085
---------- ------------
57,403 49,599
Reversal of restructuring charges (5,631) -
Provision for losses on credit sales 2,250 2,361
Interest expense 37,908 29,581
---------- ------------
Total costs and expenses 1,023,858 1,179,486
---------- ------------
Income (loss) before income taxes (61,213) 47,519
Provision for income taxes (23,260) 18,533
---------- ------------
Net income (loss) $ (37,953) $ 28,986
========== ============
Earnings (loss) per share
Basic $ (0.82) $ .62
Diluted $ (0.82) $ .62
Dividends per share $ .03 $ .03
Weighted average number of
common shares outstanding
Basic 46,568 46,439
Diluted 46,568 47,093
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
--------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (11,125) $ 7,854 $(37,953) $ 28,986
Unrealized gains (losses) on securities
available for sale, net of tax (1,409) - 2,011 -
--------- ------- -------- --------
Comprehensive income (loss) $ (12,534) $ 7,854 $(35,942) $ 28,986
========== ======== ========= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands except share and per share data)
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 2000 1999
---- ----
<S> <C> <C>
Cash and cash equivalents $ 31,252 $ 26,939
Loans and investments 300,191 430,865
Other receivables 80,473 98,317
Inventories
Manufactured homes 300,842 382,817
Work-in-process, materials and supplies 39,404 46,463
Land/homes under development 14,072 14,318
------------ ------------
354,318 443,598
Properties and facilities 246,154 251,069
Deferred income taxes 40,236 30,712
Other assets 145,193 156,347
------------ ------------
$ 1,197,817 $ 1,437,847
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 53,000 $ 199,800
Notes and bonds payable 338,739 352,164
Accounts payable and accrued liabilities 228,625 243,525
Insurance reserves and unearned premiums 56,912 89,404
Other long-term obligations 30,471 26,962
Shareholders' equity
Common stock, $.50 par value; 100,000,000
shares authorized; 47,125,000 and 47,107,000
shares issued and outstanding 23,562 23,554
Additional paid-in capital 170,957 171,185
Retained earnings 287,460 326,825
------------ ------------
481,979 521,564
Accumulated other comprehensive income, net of
income taxes of $4,863 and $3,781 9,032 7,021
Unearned compensation (941) (2,593)
------------ ------------
490,070 525,992
------------ ------------
$ 1,197,817 $ 1,437,847
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Operating activities
Net income (loss) $ (37,953) $ 28,986
Adjustments to reconcile net income (loss) to cash provided (used)
by operating activities
Depreciation and amortization 36,917 33,474
Deferred income taxes (10,605) (2,305)
Provision for losses on credit sales 2,250 2,361
Losses on loans sold or held for sale 17,712 3,153
Losses on sale of securities 4,461 -
Impairment and valuation provisions 6,083 6,618
Excess of cash received over REMIC residual income
recognized 6,546 19,992
Reversal of restructuring charges (5,631) -
Other 8,962 1,482
Changes in assets and liabilities
Other receivables 2,540 (31,091)
Inventories 89,280 (173,237)
Deferred insurance policy acquisition costs 6,004 (2,763)
Other assets (12,606) (18,346)
Accounts payable and accrued liabilities (11,932) 6,550
Insurance reserves and unearned premiums (32,492) 15,399
Other long-term obligations (517) 24
--------- --------
Cash provided (used) by operations 69,019 (109,703)
Loans originated (741,519) (1,036,455)
Purchase of loans and securities - (108,297)
Sale of loans 825,118 1,205,435
Principal receipts on loans 18,283 27,577
--------- --------
Cash provided (used) by operating activities 170,901 (21,443)
--------- --------
Investing activities
Acquisition of properties and facilities (16,671) (34,491)
Investment in and advances to joint venture - 22,150
Other 11,548 (7,885)
--------- --------
Cash (used) by investing activities (5,123) (20,226)
--------- --------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Financing activities
Net (repayments) on short-term credit facilities (146,800) (246,422)
Proceeds from issuance of notes and bonds payable - 307,878
Payments on notes and bonds (13,282) (13,635)
Cash dividends (1,413) (1,408)
Proceeds from exercise of stock options 30 378
--------- ---------
Cash provided (used) by financing activities (161,465) 46,791
--------- ---------
Net increase in cash and cash equivalents 4,313 5,122
Cash and cash equivalents
Beginning of period 26,939 28,971
--------- ---------
End of period $ 31,252 $ 34,093
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
8
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. The consolidated financial statements reflect all adjustments, which
include only normal recurring adjustments, which are, in the opinion of
management, necessary to present fairly the results of operations for the
periods presented. Results of operations for any interim period are not
necessarily indicative of results to be expected for a full year.
2. The components of loans and investments are as follows:
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---- ----
<S> <C> <C>
(in thousands)
Loans held for sale, net of valuation allowances
of $696 and $3,662 $ 167,076 $ 279,927
Loans held for investment 30,452 48,015
Less: reserve for uncollectible receivables (3,748) (3,032)
-------------- ------------
Total loans receivable 193,780 324,910
-------------- ------------
Retained interests in REMIC securitizations
available for sale, exclusive of
loan servicing assets and liabilities,
at fair value
Regular interests 71,423 69,325
Residual interests 34,988 36,630
-------------- ------------
Total retained REMIC interests, at fair value
(amortized cost of $92,516 and $95,153) 106,411 105,955
-------------- ------------
$ 300,191 $ 430,865
============== ============
</TABLE>
3. During the fourth quarter of fiscal 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, and recorded charges against the
resulting restructuring reserve of $13.0 million. During the quarter ended
June 30, 2000 and the nine months ended June 30, 2000 the Company recorded
additional charges against the restructuring reserve of $0.4 million and
$5.7 million, respectively. In addition, during the quarter ended June 30,
2000 and the nine months ended June 30, 2000 the Company reversed to income
$1.3 million and $5.6 million, respectively, of the remaining reserve to
reflect resolution of certain uncertainties. The remaining reserve balance
at June 30, 2000 was $1.6 million.
9
<PAGE>
4. The following table displays the derivation of the weighted average number
of shares outstanding used in the computation of basic and diluted earnings
per share ("EPS"):
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
--------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Numerator for basic and diluted
EPS - Net income (loss) $ (11,125) $ 7,854 $ (37,953) $ 28,986
Denominator:
Weighted average number of
common shares outstanding 46,574 46,509 46,571 46,485
Unearned shares - (36) (3) (46)
------------- ------------- ---------------- ---------------
Denominator for basic EPS 46,574 46,473 46,568 46,439
Dilutive effect of stock options and
restricted shares computed using
the treasury stock method - 695 - 654
------------- ------------- ---------------- ---------------
Denominator for diluted EPS 46,574 47,168 46,568 47,093
============= ============= ================ ===============
Earnings (loss) per common share - basic $ (0.24) $ .17 $ (0.82) $ .62
============= ============= ================ ===============
Earnings (loss) per common share - diluted $ (0.24) $ .17 $ (0.82) $ .62
============= ============= ================ ===============
</TABLE>
Options to purchase 5,118,250, 4,606,750 and 4,606,750 shares of common
stock and 550,903 shares of unearned restricted stock were not included in
the computation of diluted earnings per share for the first, second and
third quarters of fiscal 2000, respectively, because their inclusion would
have been antidilutive. Options to purchase 2,839,486, 1,642,826 and
2,812,412 shares of common stock were not included in the computation of
diluted earnings per share for the first, second and third quarters of
fiscal 1999, respectively, because their inclusion would have been
antidilutive.
5. In November 1998 the Company and certain of its present and former officers
and directors were named as defendants in lawsuits filed on behalf of
purchasers of the Company's common stock for various periods between April
11, 1997 and July 21, 1998 (the "Class Period"). In June 1999 a
consolidated amended complaint was filed in the United States Middle
District Court in Guilford County, North Carolina. The amended complaint,
which seeks class action certification, alleges violations of federal
securities law based on alleged fraudulent acts, false and misleading
financial statements, reports filed by the Company and other
representations during the Class Period and seeks the loss of value in
class members' stockholdings. The Company has filed a motion to dismiss the
amended complaint. In July 2000, the magistrate submitted a recommended
order dismissing the complaint with prejudice. The plaintiffs have objected
to the
10
<PAGE>
recommended order and the matter is before the District Court judge. The
Company intends to defend such lawsuit vigorously.
In addition, the Company is subject to legal proceedings and claims that
have arisen in the ordinary course of its business and have not been
finally adjudicated. In management's opinion, the ultimate resolution of
these matters should have no material effect on the Company's results of
operations or financial condition.
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 $18 million at June 30, 2000. The Company is also
contingently liable as guarantor on subordinated securities issued by REMIC
trusts in the aggregate principal amount of $123 million at June 30, 2000.
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 maximum
potential obligation under such repurchase agreements approximated $195
million at June 30, 2000. Losses under these repurchase agreements have not
been significant in the past.
6. 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:
11
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
--------- --------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Retail $ 211,178 $ 294,793 $ 575,006 $ 810,139
Manufacturing 209,575 291,383 619,857 805,558
Consumer finance 10,391 17,746 31,995 48,156
Insurance 13,087 13,676 43,518 37,229
Eliminations/other (107,842) (176,325) (307,731) (474,077)
----------- ----------- ----------- -------------
$ 336,389 $ 441,273 $ 962,645 $ 1,227,005
=========== =========== =========== =============
Income (loss) before interest expense,
investment income and income taxes
Retail $ (11,291) $ (3,878) $ (38,686) $ 1,777
Manufacturing 3,991 28,759 39,367 74,917
Consumer finance (1,465) 8,517 (3,013) 20,281
Insurance 5,379 5,181 18,873 13,144
Eliminations/other (2,547) (13,525) (40,231) (33,464)
----------- ----------- ----------- -------------
(5,933) 25,054 (23,690) 76,655
Interest expense (12,083) (12,266) (37,908) (29,581)
Investment income 73 88 385 445
----------- ----------- ----------- -------------
Income (loss) before income taxes $ (17,943) $ 12,876 $ (61,213) $ 47,519
=========== =========== =========== =============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Depreciation and amortization
Retail $ 2,656 $ 2,371 $ 7,595 $ 6,541
Manufacturing 4,300 5,618 12,744 14,976
Consumer finance 2,213 2,413 10,092 5,957
Eliminations/other 2,314 2,004 6,486 6,000
--------- --------- --------- ---------
$ 11,483 $ 12,406 $ 36,917 $ 33,474
========= ========= ========= =========
Capital expenditures
Retail $ 1,828 $ 5,003 $ 6,761 $ 16,775
Manufacturing 935 3,318 4,565 15,399
Consumer finance 1,495 - 3,607 375
Eliminations/other - - 1,738 1,942
--------- --------- --------- ---------
$ 4,258 $ 8,321 $ 16,671 $ 34,491
========= ========= ========= =========
June 30, September 30,
2000 1999
---- ----
Identifiable assets
Retail $ 489,882 $ 560,253
Manufacturing 654,482 1,038,673
Consumer finance 431,539 491,585
Insurance 105,785 132,691
Eliminations/other (483,871) (785,355)
------------ ------------
$ 1,197,817 $ 1,437,847
============ ============
</TABLE>
7. In July 2000, the Company idled a manufacturing line at its Arizona plant,
closed two of its regional finance offices and eliminated certain positions
at its corporate office. These actions reduced headcount by approximately
200 people. The costs of implementing these actions, which are estimated to
be less than $2 million, will be charged to operations in the quarter
ending September 30, 2000.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
---------------------
Three months ended June 30, 2000 compared to three months ended June 30, 1999
The following table summarizes certain statistics for the quarters ended
June 30, 2000 and 1999:
2000 1999
---- ----
Retail sales (in millions) $ 209.0 $ 289.4
Wholesale sales (in millions) $ 101.6 $ 114.9
Total sales (in millions) $ 310.6 $ 404.3
Gross profit % - integrated operations 28.2% 33.9%
Gross profit % - wholesale operations 14.8% 16.1%
New single-section homes sold - retail 1,804 2,526
New multi-section homes sold - retail 2,664 3,658
Used homes sold - retail 342 486
New single-section homes sold - wholesale 662 858
New multi-section homes sold - wholesale 2,254 2,549
Average new single-section sales price - retail $31,700 $32,600
Average new multi-section sales price - retail $55,400 $56,000
Average new single-section sales price - wholesale $21,700 $21,700
Average new multi-section sales price - wholesale $38,400 $37,300
Weighted average retail sales centers
open during the period 377 392
Net sales
The Company's sales volume was adversely affected by competitive industry
conditions during the quarter ended June 30, 2000. Retail sales dollar volume
decreased 28%, reflecting a 28% decrease in new unit volume and decreases of 3%
and 1% in the average new unit sales prices of single-section and multi-section
homes, respectively. These decreases were partially offset by a shift in product
mix toward multi-section homes, which have higher average selling prices than
single-section homes. Average retail sales prices declined as a result of
competitive pricing pressure and various promotional programs targeted at moving
older inventory models. Multi-section homes accounted for 60% of retail new unit
sales compared to 59% in the quarter ended June 30, 1999.
During the quarter ended June 30, 2000 the Company opened two new sales centers
compared to 15 sales centers during the quarter ended June 30, 1999. The Company
also closed two underperforming sales centers during quarter ended June 30,
1999. Total new retail sales dollars at sales centers open more than one year
decreased 32% during the quarter ended June 30, 2000.
Wholesale sales dollar volume decreased 12%, reflecting a 14% decrease in unit
volume. This decrease was partially offset by a shift in product mix toward
multi-section homes, which have higher average selling prices than
single-section homes and a 3% increase in the
14
<PAGE>
average unit sales price of multi-section homes. Multi-section sales accounted
for 77% of wholesale unit sales compared to 75% in the quarter ended June 30,
1999.
Gross profit
Gross profit margin - integrated operations reflects gross profit earned on all
sales at retail as well as the manufacturing gross profit on retail sales of
units manufactured by the Company. Gross profit margin - integrated operations
decreased from 33.9% in the quarter ended June 30, 1999 to 28.2% in the quarter
ended June 30, 2000 primarily as a result of competitive pricing pressures and
unfavorable manufacturing variances caused by reduced production schedules
experienced during the quarter ended June 30, 2000.
Wholesale gross profit margins decreased from 16.1% in the quarter ended June
30, 1999 to 14.8% in the quarter ended June 30, 2000 as a result of competitive
pricing pressures and unfavorable manufacturing variances caused by reduced
production schedules experienced during the quarter ended June 30, 2000.
Compared to prior year levels, the Company has significantly reduced its
manufacturing production rates in order to reduce the level of inventories held
for retail sale. The Company plans to further reduce inventory from the June 30,
2000 levels and will continue to vary production levels to ensure that inventory
reduction targets are met. Competitive pricing pressures in both retail and
wholesale distribution channels coupled with reduced plant operating schedules
are likely to adversely affect gross margin comparisons for the remainder of
fiscal 2000.
Consumer finance revenues
Consumer finance revenues are summarized as follows:
Three months ended
June 30,
--------
(in thousands) 2000 1999
---- ----
Interest income $ 9,260 $ 12,834
Servicing fees 6,342 7,329
REMIC residual income 3,228 1,835
Losses on loans sold or held for sale:
Loss on sale of loans (2,880) (1,587)
Valuation provision on loans
held for sale (696) -
--------------- --------------
(3,576) (1,587)
Loss on sale of securities (20) -
Impairment and valuation
provisions (5,341) (3,069)
Other 498 404
--------------- --------------
$ 10,391 $ 17,746
=============== ==============
15
<PAGE>
The decrease in interest income reflects lower average outstanding balances of
loans held for sale in the warehouse prior to securitization and lower interest
income on loans held for investment, the principal balance of which is declining
as these loans are liquidated. Lower average warehouse balances resulted from
reduced originations during the current year as compared to the prior year and
the timing of securitizations. These decreases were partially offset by
incremental interest income on retained regular REMIC interests from certain of
the Company's post-1997 securitizations and higher average interest rates on
loans held for sale.
Loan servicing fees, which are reported net of amortization of servicing assets,
declined as a result of lower servicing cash flows from the Company's
securitizations.
The increase in residual income reflects higher yields on retained residual
interests in REMIC securitizations.
The loss on sale of loans during the quarter ended June 30, 2000 reflects the
completion of a $360 million securitization. The increase in securitization
losses reflects a decline in the spread between the yield on loans originated by
the Company and the cost of funds obtained when the loans were securitized. The
decline in spread reflects, in part, generally lower interest rates prevailing
in the marketplace when the loans were originated as compared to when they were
securitized.
Impairment and valuation provisions are summarized as follows:
Three months ended
June 30,
--------
(in thousands) 2000 1999
---- ----
Impairment writedowns of residual
REMIC interests $ - $ 3,069
Impairment writedowns of regular
REMIC interests - -
Valuation allowances on servicing
contracts 1,924 -
Reduction of previously recorded
valuation allowances on servicing
contracts - -
Additional provisions for potential
guarantee obligations on REMIC
securities sold 3,417 -
-------- --------
$ 5,341 $ 3,069
======== ========
The 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 higher industry inventory levels
of repossessed homes, which have affected recovery rates and may continue to
affect future recovery rates, may result in future impairment charges.
16
<PAGE>
For the quarter ended June 30, 2000 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 2.14% on an annualized basis of the
average principal balance of the related loans, compared to approximately 1.40%
on an annualized basis one year ago. Because losses on repossessions are
reflected in the loss ratio principally in the period during which the
repossessed property is disposed of, fluctuations in the number of repossessed
properties disposed of from period to period may cause variations in the
charge-off ratio. At June 30, 2000 the Company had a total of 3,049 unsold
properties in repossession or foreclosure (approximately 2.45% of the total
number of Oakwood originated serviced assets) compared to 2,809, 1,835 and 1,267
at March 31, 2000, June 30, 1999 and March 31, 1999, respectively (approximately
2.29%, 1.53% and 1.08%, respectively, of the total number of Oakwood originated
serviced assets). Of the total number of unsold properties in repossession or
foreclosure, 433, 414, 361 and 303 relate to loans originated on behalf of
Deutsche Financial Capital ("DFC"), the Company's former consumer finance joint
venture, at June 30, 2000, March 31, 2000, June 30, 1999 and March 31, 1999,
respectively.
At June 30, 2000 the delinquency rate on Company originated loans, excluding
loans originated on behalf of DFC, was 4.1%, compared to 3.6% at June 30, 1999.
Increased delinquency rates ultimately may result in increased repossessions and
foreclosures and an increase in credit losses.
Insurance revenues
Insurance revenues from the Company's captive reinsurance business decreased 4%
to $13.1 million in the quarter ended June 30, 2000 from $13.7 million in the
quarter ended June 30, 1999. 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 trend experienced in
the third quarter of fiscal 2000 continues, insurance revenues should be
expected to continue to decline.
Effective June 1, 2000, the Company entered into a quota share agreement which
management believes will reduce the volatility of the Company's earnings by
lowering its underwriting exposure to natural disasters such as hurricanes and
floods. The agreement will substantially reduce the levels of credit support,
which currently take the form of letters of credit and cash, to secure the
reinsurance subsidiary's obligations to pay claims and to meet regulatory
capital requirements. Under the new arrangement, which covers physical damage
policies, the Company will retro-cede 50% of the Company's physical damage
premiums. In return, the Company will receive a nonrefundable commission with
the potential to receive an incremental commission based on favorable loss
experience. In addition, the Company will cede 50% of all losses incurred. The
Company estimates that this quota share arrangement reduced insurance revenues
and expenses by $1.0 million and $1.1 million, respectively, in the quarter
ended June 30, 2000. On an annualized basis, the Company expects that this
arrangement will reduce pre-tax income slightly in a normal loss year.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $23.2 million, or 21%,
during the quarter ended June 30, 2000 compared to the prior year. The decrease
is primarily due to cost reduction actions, particularly relating to the
Company's retail operations, taken in the fourth quarter of fiscal 1999, as well
as reduced sales volumes. However, as a percentage
17
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of net sales, selling, general and administrative expenses increased to 28.2% in
the quarter ended June 30, 2000 from 27.4% in the quarter ended June 30, 1999
primarily as a result of a lower sales base over which to spread the Company's
fixed portion of distribution and overhead costs and higher service costs.
Consumer finance operating expenses
Consumer finance operating expenses rose $2.3 million, or 26%, during the
quarter ended June 30, 2000. Of the total dollar increase, approximately $0.9
million represents higher compensation costs, including headcount additions in
the loan servicing functions in order to improve the performance of the loan
servicing portfolio over the long term and approximately $0.8 million represents
other increases in servicing related costs.
Insurance operating expenses
Insurance operating costs declined by $0.8 million, or 9%, in the fiscal 2000
quarter primarily as a result of the reinsurance arrangement entered into in
June. Because reinsurance claims costs are recorded as insured events occur,
reinsurance underwriting risk may increase the volatility of the Company's
earnings, particularly with respect to property and casualty reinsurance.
However, the reinsurance agreement described previously, as well as the
Company's purchase of catastrophe reinsurance, should reduce the Company's
underwriting exposure to natural disasters.
Interest expense
Interest expense for the quarter ended June 30, 2000 remained relatively
unchanged from the third quarter of fiscal 1999. Lower average outstanding
borrowings on short-term lines of credit in fiscal 2000 were substantially
offset by higher average interest rates and fees compared to fiscal 1999. The
Company expects these higher rates and fees to continue to increase until such
time as the Company replaces its credit facilities. See "Liquidity and Capital
Resources."
Income taxes
The Company's effective income tax rate was 38.0% in the quarter ended June 30,
2000 compared to 39.0% in the quarter ended June 30, 1999. The decrease reflects
primarily limited state income tax benefits associated with certain losses and
charges.
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Nine months ended June 30, 2000 compared to nine months ended June 30, 1999
The following table summarizes certain statistics for the nine months ended
June 30, 2000 and 1999:
2000 1999
---- ----
Retail sales (in millions) $ 567.9 $ 798.7
Wholesale sales (in millions) $ 311.5 $ 332.6
Total sales (in millions) $ 879.4 $1,131.3
Gross profit % - integrated operations 26.4% 34.2%
Gross profit % - wholesale operations 13.3% 16.6%
New single-section homes sold - retail 4,302 7,421
New multi-section homes sold - retail 7,572 9,717
Used homes sold - retail 1,233 1,741
New single-section homes sold - wholesale 2,264 2,278
New multi-section homes sold - wholesale 6,857 7,403
Average new single-section sales price - retail $31,600 $32,500
Average new multi-section sales price - retail $55,200 $55,900
Average new single-section sales price - wholesale $21,000 $21,700
Average new multi-section sales price - wholesale $38,200 $37,900
Weighted average retail sales centers
open during the period 385 376
Net sales
The Company's sales volume was adversely affected by competitive industry
conditions during the nine months ended June 30, 2000. Retail sales dollar
volume decreased 29%, reflecting a 31% decrease in new unit volume and decreases
of 3% and 1% in the average new unit sales prices of single-section and
multi-section homes, respectively. These decreases were partially offset by a
shift in product mix toward multi-section homes, which have higher average
selling prices than single-section homes. Average retail sales prices declined
as a result of various programs targeted at moving older inventory models and
competitive pricing pressure. Multi-section homes accounted for 64% of retail
new unit sales compared to 57% in the nine months ended June 30, 1999.
During the nine months ended June 30, 2000 the Company opened eight new sales
centers compared to 46 sales centers during the nine months ended June 30, 1999.
The Company also closed 43 underperforming sales centers during the nine months
ended June 30, 2000 as part of its previously announced restructuring plans.
During the nine months ended June 30, 1999, five sales centers were closed.
Total new retail sales dollars at sales centers open more than one year
decreased 37% during the nine months ended June 30, 2000.
Wholesale sales dollar volume decreased 6% due to a 6% decrease in unit volume,
a higher percentage of single-section sales, which have lower average selling
prices than multi-section homes, and lower average sales prices on
single-section homes. Single-section sales accounted for 25% of wholesale unit
sales compared to 24% in the nine months ended June 30, 1999. The average new
unit sales prices of single-section homes decreased 3%.
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Gross profit
Gross profit margin - integrated operations decreased from 34.2% during the nine
months ended June 30, 1999 to 26.4% during the nine months ended June 30, 2000
primarily as a result of competitive pricing pressures and unfavorable
manufacturing variances caused by reduced production schedules experienced
during the first nine months of fiscal 2000.
Wholesale gross profit margins decreased from 16.6% during the nine months ended
June 30, 1999 to 13.3% during the nine months ended June 30, 2000 as a result of
competitive pricing pressures and unfavorable manufacturing variances caused by
reduced production schedules experienced during the first nine months of fiscal
2000.
Consumer finance revenues
Consumer finance revenues are summarized as follows:
Nine months ended
June 30,
--------
(in thousands) 2000 1999
---- ----
Interest income $ 28,841 $ 32,532
Servicing fees 16,435 18,706
REMIC residual income 13,521 5,596
Losses on loans sold or held for sale:
Loss on sale of loans (8,324) (3,152)
Valuation provision on loans
held for sale (9,388) -
---------- ----------
(17,712) (3,152)
Loss on sale of securities (4,461) -
Impairment and valuation
provisions (6,083) (6,618)
Other 1,454 1,092
---------- ----------
$ 31,995 $ 48,156
========== ==========
The decrease in interest income primarily reflects lower average outstanding
balances of loans held for sale prior to securitization. The decrease also
reflects lower interest income on loans held for investment, the principal
balance of which is declining as these loans are liquidated. These decreases
were partially offset by incremental interest income on retained regular REMIC
interests from certain of the Company's post-1997 securitizations.
Loan servicing fees, which are reported net of amortization of servicing assets,
declined as a result of increased servicing asset amortization and lower
servicing cash flows from the Company's securitizations.
The increase in residual income reflects significantly higher yields on retained
residual interests in REMIC securitizations.
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<PAGE>
The loss on sale of loans for the nine months ended June 30, 2000 reflects the
completion of three securitizations. In addition, during the period the Company
recorded provisions of $9.4 million to reduce the carrying value of loans held
for sale to the lower of cost or market, resulting in aggregate losses on loans
sold or held for sale of $17.7 million, compared to $3.2 million in the prior
year period. The increase in securitization losses reflects principally a
significant decline in the spread between the yield on loans originated by the
Company and the cost of funds obtained when the loans were securitized. The
decline in spread reflects, in part, generally lower loan yields resulting from
a shift in product mix toward loans involving land, which generally carry lower
coupons than non-land loans, and from generally lower interest rates prevailing
in the marketplace when the loans were originated as compared to when they were
securitized.
The loss on sale of securities reflects the sale of all BBB rated asset-backed
securities retained by the Company from securitizations prior to December 31,
1999.
Impairment and valuation provisions are summarized as follows:
Nine months ended
June 30,
--------
(in thousands) 2000 1999
---- ----
Impairment writedowns of residual
REMIC interests $ - $ 6,618
Impairment writedowns of regular
REMIC interests 3,690 -
Valuation provisions on servicing
contracts 4,768 -
Reductions of previously recorded
valuation allowance on servicing
contracts (6,401) -
Additional provisions for potential
guarantee obligations on REMIC
securities sold 4,026 -
--------- ---------
$ 6,083 $ 6,618
========= =========
Except for the impairment charge relating to regular REMIC interests, these
charges and credits generally resulted from changes in assumptions of credit
losses on securitized loans. The impairment writedown of regular REMIC interests
reflects the Company's determination that the decline in fair value of a
retained REMIC regular interest below its amortized cost was other than
temporary.
For the nine months ended June 30, 2000 total credit losses on loans originated
by the Company, including losses relating to assets securitized by the Company,
loans held for investment, loans held for sale and loans sold with full or
partial recourse, amounted to approximately 1.90% on an annualized basis of the
average principal balance of the related loans, compared to approximately 1.80%
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
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<PAGE>
disposed of from period to period may cause variations in the charge-off ratio.
At June 30, 2000 the Company had a total of 3,049 unsold properties in
repossession or foreclosure (approximately 2.45% of the total number of Oakwood
originated serviced assets) compared to 2,417, 1,835, and 1,430 at September 30,
1999, June 30, 1999 and September 30, 1998, respectively (approximately 1.97%,
1.53% and 1.28%, respectively, of the total number of Oakwood originated
serviced assets). Of the total number of unsold properties in repossession or
foreclosure, 433, 417, 361 and 295 relate to loans originated on behalf of DFC
at June 30, 2000, September 30, 1999, June 30, 1999 and September 30, 1998,
respectively.
Insurance revenues
Insurance revenues increased 17% to $43.5 million for the nine months ended June
30, 2000 compared with the same period last year primarily as a result of the
increased size of the Company's insurance portfolio. 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 the first nine months of fiscal 2000 continue, insurance
revenues should decline in future periods.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $51.3 million, or 17%,
during the nine months ended June 30, 2000 compared to the prior year. The
decrease resulted from cost reduction actions, particularly at retail, taken in
the fourth quarter of fiscal 1999, as well as lower sales volumes. However, as a
percentage of net sales, selling, general and administrative expenses increased
to 27.7% for the nine months ended June 30, 2000 from 26.1% last year as a
result of a lower sales base over which to spread the Company's fixed portion of
distribution and overhead costs and higher service costs.
Consumer finance operating expenses
Consumer finance operating expenses rose $7.2 million, or 28%, during the nine
months ended June 30, 2000. Of the total dollar increase, approximately $3.1
million represents higher compensation costs, including headcount additions to
the loan servicing functions in order to improve the performance of the loan
servicing portfolio over the long term. Approximately $1.9 million represents
other increases in servicing related costs. In addition, allocations of parent
company costs, principally occupancy and telecommunications, increased by
approximately $1.2 million.
Insurance operating expenses
Insurance operating costs for the nine months ended June 30, 2000 rose 2% to
$24.6 million. Expenses did not increase commensurately with the increase in
insurance revenues because a larger percentage of insurance revenues were
derived from products with lower expense ratios. Because reinsurance claims
costs are recorded as insured events occur, reinsurance underwriting risk may
increase the volatility of the Company's earnings, particularly with respect to
property and casualty reinsurance. However, the reinsurance agreement described
previously, as well as the Company's purchase of catastrophe reinsurance, should
reduce the Company's underwriting exposure to natural disasters.
22
<PAGE>
Interest expense
Interest expense increased $8.3 million, or 28%, during the nine months ended
June 30, 2000 due principally to interest expense associated with the Company's
March 1999 $300 million senior note offering. A portion of the proceeds from the
senior note offering was used to retire $100 million of debt incurred in
connection with the April 1, 1998 Schult acquisition. This increase was
partially offset by lower interest expense on declining and retired long-term
debt balances. Interest expense on short-term lines of credit was relatively
constant, reflecting an approximate $100 million reduction in average balances
outstanding offset by higher interest rates and fees.
Income taxes
The Company's effective income tax rate was 38.0% in the nine months ended June
30, 2000 compared to 39.0% in 1999. The decrease reflects primarily limited
state income tax benefits associated with certain losses and charges.
Liquidity and Capital Resources
During the nine months ended June 30, 2000, the Company decreased inventories by
$89 million as a result of inventory reduction measures initiated during the
quarter ended September 30, 1999.
The decrease in loans and investments from September 30, 1999 principally
reflects a decrease in loans held for sale from $280 million at September 30,
1999 to $167 million at June 30, 2000. 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.
Retail financing of sales of the Company's products is an integral part of the
Company's vertical integration strategy. Such financing consumes substantial
amounts of capital, which the Company has obtained principally by securitizing
such loans, primarily using REMICs. Beginning in 1994, the Company generally
sold to investors securities having a principal balance approximately equal to
the principal balance of the loans securitized, and accordingly was not required
to seek the permanent capital required to fund its finance business outside of
the asset-backed securities market. During the last 21 months, demand for
subordinated securities, particularly securities rated BBB and below, has
decreased dramatically. During the current fiscal year, the Company sold all BBB
rated asset-backed securities retained by the Company from securitizations prior
to December 31, 1999. Additionally, the Company sold the BBB rated securities
created in the securitizations closed in the most recent March and June
quarters. The aggregate principal balance of the securities rated below BBB
(including any initial overcollateralization) represents approximately 8% of the
aggregate principal balance of the loans securitized in transactions subsequent
to May 1999.
At June 30, 2000 the Company owned subordinated asset-backed securities having a
carrying value of approximately $62.3 million associated with certain of the
Company's 1998, 1999 and 2000 securitizations, as well as subordinated
asset-backed securities having a carrying value of approximately $9.1 million
retained from securitization transactions prior to 1994. The Company considers
these securities to be available for sale, and would
23
<PAGE>
consider opportunities to liquidate these securities based upon market
conditions. Continued decreased demand for subordinated asset-backed securities
at prices acceptable to the Company would require the Company to seek
alternative sources of financing for the loans originated by the consumer
finance business, or require the Company to seek alternative long-term financing
for subordinated asset-backed securities. There can be no assurance that such
alternative financing can be obtained.
The Company estimates that during the remainder of fiscal 2000 capital
expenditures will approximate $8 million.
The Company has several credit facilities in place to provide for its short-term
liquidity needs. The Company has a $250 million credit facility with a conduit
commercial paper issuer to provide warehouse financing for loans prior to
securitization. The Company also has a revolving credit facility with a group of
banks, which is available to fund up to $75 million of additional working
capital needs. These facilities expire in November 2000. The Company has
obtained waivers for covenant violations of these facilities through August 22,
2000. The Company is completing negotiations of amendments of these facilities
to August 2001 and, while there can be no assurance that such negotiations will
be successful, the Company believes it will be able to extend the facilities
through 2001 at levels sufficient to provide the Company with liquidity needed
to finance its business. Any such amendments would, however, increase the
Company's borrowing costs and such increases would become more significant over
time. The Company is exploring replacing these facilities with other lenders in
order to mitigate these cost increases.
Forward Looking Statements
This Form 10-Q contains certain forward-looking statements and information based
on 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 our ability to reduce our
inventory levels, the adequacy of our existing credit facilities to meet
short-term liquidity needs, the ability of the quota share agreement to
reduce the Company's underwriting exposure to natural disasters and the ability
to successfully negotiate amendments to the Company's credit facilities. 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; we may be unable to access sufficient capital to
fund our retail finance activities; we may recognize special charges or
experience increased costs in connection with our securitization or other
financing activities; adverse changes in governmental regulations applicable to
our business could negatively impact us; we could suffer losses resulting from
litigation (including shareholder class actions or other class action suits);
our captive Bermuda reinsurance subsidiary could experience significant losses;
we could experience increased credit losses or higher delinquency rates on loans
that we originate; negative changes in general economic conditions in our
markets could adversely impact us; we could lose the services of our key
management personnel; and any other factors that generally affect companies in
our lines of business could also adversely impact us. Should our 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.
24
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
25
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In November 1998 the Company and certain of its present and
former officers and directors were named as defendants in lawsuits filed on
behalf of purchasers of the Company's common stock for various periods between
April 11, 1997 and July 21, 1998 (the "Class Period"). In June 1999 a
consolidated amended complaint was filed in the United States Middle District
Court in Guilford County, North Carolina. The amended complaint, which seeks
class action certification, alleges violations of federal securities law based
on alleged fraudulent acts, false and misleading financial statements, reports
filed by the Company and other representations during the Class Period and seeks
the loss of value in class members' stockholdings. The Company has filed a
motion to dismiss the amended complaint. In July 2000, the magistrate submitted
a recommended order dismissing the complaint with prejudice. The plaintiffs have
objected to the recommended order and the matter is before the district court
judge. The Company intends to defend such lawsuit vigorously.
In addition, the Company is subject to legal proceedings and
claims that have arisen in the ordinary course of its business and have not been
finally adjudicated. In management's opinion, the ultimate resolution of these
matters should have no material effect on the Company's results of operations or
financial condition.
26
<PAGE>
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
b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ended
June 30, 2000.
Items 2, 3, 4 and 5 are inapplicable and are omitted.
27
<PAGE>
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, 2000
OAKWOOD HOMES CORPORATION
BY: /s/ Robert A. Smith
-------------------------
Robert A. Smith
Executive Vice President
(Chief Financial Officer)
(Duly Authorized Officer)
28
<PAGE>
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, 2000 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
29
