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 March 31, 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 April 30, 2000.
Common Stock, Par Value $.50 Per Share . . . . . . . . .47,124,562
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures
normally included in audited financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K.
2
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
Three months ended
March 31,
---------
2000 1999
---- ----
Revenues
Net sales $ 271,349 $ 367,095
Financial services
Consumer finance, net of impairment and
valuation provisions 14,588 14,504
Insurance 14,595 11,949
----------------- -----------------
29,183 26,453
Other income 2,272 2,800
----------------- -----------------
Total revenues 302,804 396,348
----------------- -----------------
Costs and expenses
Cost of sales 215,511 260,004
Selling, general and administrative expenses 78,642 93,660
Financial services operating expenses
Consumer finance 10,361 9,117
Insurance 8,221 7,212
----------------- -----------------
18,582 16,329
Reversal of restructuring charges (4,351) -
Provision for losses on credit sales 740 1,311
Interest expense 12,995 9,186
----------------- -----------------
Total costs and expenses 322,119 380,490
----------------- -----------------
Income (loss) before income taxes (19,315) 15,858
Provision for income taxes (7,339) 6,185
----------------- -----------------
Net income (loss) $ (11,976) $ 9,673
================= =================
Earnings (loss) per share
Basic $ (0.26) $ .21
Diluted $ (0.26) $ .21
Dividends per share $ .01 $ .01
Weighted average number of
common shares outstanding
Basic 46,574 46,434
Diluted 46,574 47,172
See accompanying notes to the consolidated financial statements.
3
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(in thousands except per share data)
Six months ended
March 31,
---------
2000 1999
---- ----
Revenues
Net sales $ 568,843 $ 726,909
Financial services revenues
Consumer finance, net of impairment and
valuation provisions 21,604 30,410
Insurance 30,431 23,553
------------------- -------------------
52,035 53,963
Other income 5,378 4,860
------------------- -------------------
Total revenues 626,256 785,732
------------------- -------------------
Costs and expenses
Cost of sales 451,760 515,185
Selling, general and administrative expenses 156,203 184,353
Financial services operating expenses
Consumer finance 21,652 16,685
Insurance 16,937 15,590
------------------- -------------------
38,589 32,275
Reversal of restructuring charges (4,351) -
Provision for losses on credit sales 1,500 1,961
Interest expense 25,825 17,315
------------------- -------------------
Total costs and expenses 669,526 751,089
------------------- -------------------
Income (loss) before income taxes (43,270) 34,643
Provision for income taxes (16,442) 13,511
------------------- -------------------
Net income (loss) $ (26,828) $ 21,132
=================== ===================
Earnings (loss) per share
Basic $ (0.58) $ .46
Diluted $ (0.58) $ .45
Dividends per share $ .02 $ .02
Weighted average number of
common shares outstanding
Basic 46,565 46,423
Diluted 46,565 47,055
See accompanying notes to the consolidated financial statements.
4
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three months ended Six months ended
March 31, March 31,
---------- ---------
2000 1999 2000 1999
---- ---- ---- ----
Net income (loss) $ (11,976) $ 9,673 $(26,828) $ 21,132
Unrealized gains on securities
available for sale, net of tax 5,688 - 3,420 -
---------- -------- ---------- ----------
Comprehensive income (loss) $ (6,288) $ 9,673 $(23,408) $ 21,132
========== ======== ========== ==========
See accompanying notes to the consolidated financial statements.
5
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands except share and per share data)
March 31, September 30,
ASSETS 2000 1999
---- ----
Cash and cash equivalents $ 28,366 $ 26,939
Loans and investments 293,725 430,865
Other receivables 87,417 98,317
Inventories
Manufactured homes 315,855 382,817
Work-in-process, materials and supplies 39,744 46,463
Land/homes under development 14,964 14,318
------------------- --------------------
370,563 443,598
Properties and facilities 249,277 251,069
Deferred income taxes 31,157 30,712
Other assets 144,186 156,347
------------------- --------------------
$ 1,204,691 $ 1,437,847
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 47,000 $ 199,800
Notes and bonds payable 342,948 352,164
Accounts payable and accrued liabilities 210,956 243,525
Insurance reserves and unearned premiums 74,535 89,404
Other long-term obligations 26,934 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 299,056 326,825
------------------- --------------------
493,575 521,564
Accumulated other comprehensive income, net of
income taxes of $5,622 and $3,781 10,441 7,021
Unearned compensation (1,698) (2,593)
------------------- --------------------
502,318 525,992
------------------- --------------------
$ 1,204,691 $ 1,437,847
=================== ====================
See accompanying notes to the consolidated financial statements.
6
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
Six months ended
March 31,
---------
2000 1999
---- ----
Operating activities
Net income (loss) $ (26,828) $ 21,132
Adjustments to reconcile net income (loss) to cash provided (used)
by operating activities
Depreciation and amortization 25,434 21,068
Deferred income taxes (2,286) 1,210
Provision for losses on credit sales 1,500 1,961
Losses on loans sold or held for sale 14,136 1,565
Losses on sale of securities 4,441 -
Impairment and valuation provisions 742 3,549
Excess of cash received over REMIC residual income
recognized 7,196 12,102
Reversal of restructuring charges (4,351) -
Other 5,415 637
Changes in assets and liabilities
Other receivables 1,268 (9,335)
Inventories 73,035 (130,266)
Deferred insurance policy acquisition costs 861 (1,602)
Other assets (6,991) (11,202)
Accounts payable and accrued liabilities (28,990) (4,555)
Insurance reserves and unearned premiums (14,869) 8,733
Other long-term obligations (637) (61)
--------------- ----------------
Cash provided (used) by operations 49,076 (85,064)
Loans originated (479,061) (671,594)
Purchase of loans and securities - (108,297)
Sale of loans 582,202 641,723
Principal receipts on loans 12,423 17,652
--------------- ----------------
Cash provided (used) by operating activities 164,640 (205,580)
--------------- ----------------
Investing activities
Acquisition of properties and facilities (12,413) (26,170)
Investment in and advances to joint venture - 22,150
Other 11,952 (8,470)
--------------- ----------------
Cash (used) by investing activities (461) (12,490)
--------------- ----------------
7
Financing activities
Net (repayments) on short-term credit facilities (152,800) (88,576)
Proceeds from issuance of notes and bonds payable - 307,878
Payments on notes and bonds (9,040) (6,432)
Cash dividends (942) (937)
Proceeds from exercise of stock options 30 163
--------------- ----------------
Cash provided (used) by financing activities (162,752) 212,096
--------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,427 (5,974)
Cash and cash equivalents
Beginning of period 26,939 28,971
--------------- ----------------
End of period $ 28,366 $ 22,997
=============== ================
See accompanying notes to the consolidated financial statements.
8
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:
March 31, September 30,
2000 1999
---- ----
(in thousands)
Loans held for sale, net of valuation allowances
of $3,662 at September 30, 1999 $ 160,505 $ 279,927
Loans held for investment 40,906 48,015
Less: reserve for uncollectible receivables (3,473) (3,032)
--------------- --------------------
Total loans receivable 197,938 324,910
--------------- --------------------
Retained interests in REMIC securitizations available for sale,
exclusive of loan servicing assets and liabilities,
at fair value
Regular interests 59,704 69,325
Residual interests 36,083 36,630
--------------- --------------------
Total retained REMIC interests, at fair value
(amortized cost of $79,724 and $95,153) 95,787 105,955
--------------- --------------------
$ 293,725 $ 430,865
=============== ====================
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, temporarily idling five others and
the closing of approximately 40 sales centers, and recorded charges against
the resulting restructuring reserve of $13.0 million. During the quarters
ended March 31, 2000 and December 31, 1999 the Company recorded additional
charges against the restructuring reserve of $1.7 million and $3.6 million,
respectively. In addition, during the quarter ended March 31, 2000 the
Company reversed to income $4.4 million of the remaining reserve to reflect
resolution of certain uncertainties. The remaining reserve balance at March
31, 2000 was $3.2 million.
9
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"):
Three months ended Six months ended
March 31, March 31,
---------- ---------
2000 1999 2000 1999
---- ---- ---- ----
(in thousands, except per share data)
Numerator for basic and diluted
EPS - Net income (loss) $ (11,976) $ 9,673 $ (26,828) $ 21,132
Denominator:
Weighted average number of
common shares outstanding 46,574 46,480 46,570 46,474
Unearned shares - (46) (5) (51)
---------- ------------- ---------------- ---------------
Denominator for basic EPS 46,574 46,434 46,565 46,423
Dilutive effect of stock options and
restricted shares computed using
the treasury stock method - 738 - 632
---------- ------------- ---------------- ---------------
Denominator for diluted EPS 46,574 47,172 46,565 47,055
========== ============= ================ ===============
Earnings (loss) per common share - basic $ (0.26) $ .21 $ (0.58) $ .46
========== ============= ================ ===============
Earnings (loss) per common share - diluted $ (0.26) $ .21 $ (0.58) $ .45
========== ============= ================ ===============
Options to purchase 5,118,250 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 and second quarters
of fiscal 2000, respectively, because their inclusion would have been
antidilutive. Options to purchase 2,839,486 and 1,642,826 shares of common
stock were not included in the computation of diluted earnings per share
for the first and second 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 which has not yet been ruled upon by the court. The
Company intends to defend such lawsuit vigorously.
10
In addition, the Company is subject to legal proceedings and claims which
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 $20 million at March 31, 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 March 31, 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 estimated maximum
potential obligation under such repurchase agreements approximated $203
million at March 31, 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:
Three months ended Six months ended
March 31, March 31,
---------- ---------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
Revenues
Retail $ 178,294 $ 271,922 $ 363,828 $ 515,346
Manufacturing 165,393 247,124 410,282 514,175
Consumer finance 14,588 14,504 21,604 30,410
Insurance 14,595 11,949 30,431 23,553
Eliminations/other (70,066) (149,151) (199,889) (297,752)
------------------- -------------------- --------------- ----------------
$ 302,804 $ 396,348 $ 626,256 $ 785,732
=================== ==================== =============== ================
Income (loss) before interest expense,
investment income and income taxes
Retail $ (14,856) $ 1,585 $ (27,395) $ 5,655
Manufacturing (441) 21,907 35,376 46,158
Consumer finance 3,487 4,076 (1,548) 11,764
Insurance 6,374 4,737 13,494 7,963
Eliminations/other (1,020) (7,488) (37,684) (19,939)
------------------- -------------------- --------------- ----------------
(6,456) 24,817 (17,757) 51,601
Interest expense (12,995) (9,186) (25,825) (17,315)
Investment income 136 227 312 357
------------------- -------------------- --------------- ----------------
Income (loss) before income taxes $ (19,315) $ 15,858 $ (43,270) $ 34,643
=================== ==================== =============== ================
11
Depreciation and amortization
Retail $ 2,515 $ 2,210 $ 4,939 $ 4,170
Manufacturing 4,352 5,221 8,444 9,358
Consumer finance 2,859 2,306 7,879 3,544
Eliminations/other 2,152 2,041 4,172 3,996
------------------- -------------------- --------------- ----------------
$ 11,878 $ 11,778 $ 25,434 $ 21,068
=================== ==================== =============== ================
Capital expenditures
Retail $ 2,066 $ 4,434 $ 4,762 $ 11,468
Manufacturing 1,165 4,727 3,543 11,879
Consumer finance 1,010 - 1,973 375
Eliminations/other 923 38 2,135 2,448
------------------- -------------------- --------------- ----------------
$ 5,164 $ 9,199 $ 12,413 $ 26,170
=================== ==================== =============== ================
March 31, September 30,
2000 1999
---- ----
Identifiable assets
Retail $ 500,140 $ 560,253
Manufacturing 654,262 1,038,673
Consumer finance 485,528 491,585
Insurance 118,375 132,691
Eliminations/other (553,614) (785,355)
------------------- --------------------
$ 1,204,691 $ 1,437,847
=================== ====================
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS
Three months ended March 31, 2000 compared to three months ended March 31, 1999
The following table summarizes certain statistics for the quarters
ended March 31, 2000 and 1999:
2000 1999
---- ----
Retail sales (in millions) $ 176.2 $ 267.7
Wholesale sales (in millions) $ 95.1 $ 99.4
Total sales (in millions) $ 271.3 $ 367.1
Gross profit % - integrated operations 25.3% 34.1%
Gross profit % - wholesale operations 11.7% 15.9%
New single-section homes sold - retail 1,427 2,999
New multi-section homes sold - retail 2,289 2,986
Used homes sold - retail 465 662
New single-section homes sold - wholesale 746 688
New multi-section homes sold - wholesale 2,105 2,247
Average new single-section sales price - retail $31,900 $32,000
Average new multi-section sales price - retail $54,600 $55,500
Average new single-section sales price - wholesale $21,400 $21,900
Average new multi-section sales price - wholesale $37,500 $37,300
Weighted average retail sales centers
open during the period 374 373
NET SALES
The Company's sales volume was adversely affected by competitive industry
conditions during the quarter ended March 31, 2000. Retail sales dollar volume
decreased 34%, reflecting a 38% decrease in new unit volume and a decrease of 2%
in the average new unit sales prices of multi-section homes. These decreases
were partially offset by a shift in product mix toward multi-section homes,
which have higher average selling prices than single-section homes. 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 62% of retail new unit sales compared to 50% in the quarter ended
March 31, 1999.
During the quarter ended March 31, 2000 the Company opened four new sales
centers compared to 27 sales centers during the quarter ended March 31, 1999.
The Company also closed two underperforming sales centers during both of the
quarters ended March 31, 2000 and 1999. Total new retail sales dollars at sales
centers open more than one year decreased 41% during the quarter ended March 31,
2000.
Wholesale sales dollar volume decreased 4% due to 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 26% of wholesale
13
unit sales compared to 23% in the quarter ended March 31, 1999. The average new
unit sales prices of single-section homes decreased 2%. The decrease in average
new unit sales prices of single-section homes was primarily due to the Company's
Schult operations representing a lower percentage of single-section wholesale
sales during the quarter ended March 31, 2000 compared to the quarter ended
March 31, 1999. Schult, whose average sales prices are higher than those of the
Company's other wholesale operations, represented 80% of single-section
wholesale unit sales in the quarter ended March 31, 2000 compared to 93% in the
quarter ended March 31, 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 34.1% in the quarter ended March 31, 1999 to 25.3% in the quarter
ended March 31, 2000 primarily as a result of competitive pricing pressures and
unfavorable manufacturing variances caused by reduced production schedules
experienced during the quarter ended March 31, 2000.
Wholesale gross profit margins decreased from 15.9% in the quarter ended March
31, 1999 to 11.7% in the quarter ended March 31, 2000 as a result of competitive
pricing pressures and unfavorable manufacturing variances caused by reduced
production schedules experienced during the quarter ended March 31, 2000.
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 reduce further its inventory levels from those at March 31, 2000. However,
based on management's current expectations of retail sales, the Company believes
this reduction can be accomplished while beginning to increase production at
certain plants. These increased production rates should result in reduced
unfavorable manufacturing variances. However, competitive pricing conditions in
retail and wholesale distribution are expected to continue and are likely to
adversely affect year over year gross margin comparisons for the remainder of
fiscal 2000.
CONSUMER FINANCE REVENUES
Consumer finance revenues are summarized as follows:
Three months ended
March 31,
(in thousands) 2000 1999
---- ----
Interest income $ 10,574 $ 9,049
Servicing fees 5,160 4,979
REMIC residual income 5,911 1,887
Loss on sale of loans (2,385) (118)
Loss on sale of securities (4,441) -
Impairment and valuation
provisions (742) (1,615)
Other 511 322
--------------- --------------
$ 14,588 $ 14,504
=============== ==============
14
The increase in interest income reflects incremental interest income on retained
regular REMIC interests from certain of the Company's post-1997 securitizations.
The increase also reflects higher average outstanding balances of loans held for
sale prior to securitization. These increases were partially offset by lower
interest income on loans held for investment, the principal balance of which is
declining as these loans are liquidated.
The increase in residual income reflects significantly higher yields on retained
residual interests in REMIC securitizations.
The loss on sale of loans during the quarter ended March 31, 2000 reflects the
completion of a $328 million securitization, and is in addition to a provision
of $8,692,000 recorded at December 31, 1999 to reduce the carrying value of
loans held for sale to the lower of cost or market at that date. 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 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:
Three months ended
March 31,
-----------------------
(in thousands) 2000 1999
---- ----
Impairment writedowns of residual
REMIC interests $ - $ 1,615
Impairment writedowns of regular
REMIC interests 3,690 -
Valuation allowances on servicing
contracts 2,844 -
Reduction of previously recorded
valuation allowances on servicing
contracts (6,401) -
Additional provisions for potential
guarantee obligations on REMIC
securities sold 609 -
-------------- ---------------
$ 742 $ 1,615
============== ===============
Except for the impairment writedown 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.
15
For the quarter ended March 31, 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 2.32% on an annualized basis of the
average principal balance of the related loans, compared to approximately 2.43%
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 March 31, 2000 the Company had a total of 2,809 unsold
properties in repossession or foreclosure (approximately 2.29% of the total
number of Oakwood originated serviced assets) compared to 2,874, 1,267 and 1,776
at December 31, 1999, March 31, 1999 and December 31, 1998, respectively
(approximately 2.36%, 1.08% and 1.55%, respectively, of the total number of
Oakwood originated serviced assets). Of the total number of unsold properties in
repossession or foreclosure, 414, 410, 303 and 323 relate to loans originated on
behalf of Deutsche Financial Capital ("DFC"), the Company's former consumer
finance joint venture, at March 31, 2000, December 31, 1999, March 31, 1999 and
September 30, 1998, respectively.
At March 31, 2000 the delinquency rate on Company originated loans, excluding
loans originated on behalf of DFC, was 3.5%, compared to 3.0% at March 31, 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 increased 22%
to $14.6 million in the quarter ended March 31, 2000 from $11.9 million in the
quarter ended March 31, 1999, primarily due to the increased size of the
Company's insurance portfolio compared to the prior year quarter. A substantial
portion of insurance revenues is derived from insurance policies sold in
connection with new home sales by the Company's retail operations. Because of
the decline in year-over-year retail sales, the increase in insurance revenues
may not continue and, if the adverse sales trend continues, insurance revenues
should be expected to decline.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $15.0 million, or 16.0%,
during the quarter ended March 31, 2000 compared to the prior year. The decrease
is primarily due to cost reduction actions, particularly at retail, taken in the
fourth quarter of fiscal 1999, as well as reduced sales volumes. However, as a
percentage of net sales, selling, general and administrative expenses increased
to 29.0% in the quarter ended March 31, 2000 from 25.5% in the quarter ended
March 31, 1999 primarily as a result of a lower sales base over which to spread
the Company's fixed distribution costs and higher service costs.
CONSUMER FINANCE OPERATING EXPENSES
Consumer finance operating expenses rose $1.2 million, or 14%, during the
quarter ended March 31, 2000. The increase is primarily due to 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.
16
INSURANCE OPERATING EXPENSES
Insurance operating costs in the quarter ended March 31, 2000 as compared to the
quarter ended March 31, 1999 did not increase commensurately with the increase
in insurance revenues because a larger percentage of insurance revenues were
derived from products with lower loss ratios. Insurance operating costs did
increase 14% during the quarter ended March 31, 2000 principally due to higher
claims costs associated with the increased size of the business. 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. The Company has
purchased catastrophe reinsurance to reduce its underwriting exposure to natural
disasters.
INTEREST EXPENSE
Interest expense increased $3.8 million, or 41%, during the quarter ended March
31, 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. Interest costs on
short-term line of credit borrowings also increased due to the net effect of
higher interest rates and lower average balances outstanding. These increases
were partially offset by lower interest expense on declining and retired
long-term debt balances.
INCOME TAXES
The Company's effective income tax rate was 38.0% in the quarter ended March 31,
2000 compared to 39.0% in the quarter ended March 31, 1999. The decrease
reflects primarily limited state income tax benefits associated with certain
losses and charges.
17
Six months ended March 31, 2000 compared to six months ended March 31, 1999
The following table summarizes certain statistics for the six months
ended March 31, 2000 and 1999:
2000 1999
---- ----
Retail sales (in millions) $ 358.9 $ 509.3
Wholesale sales (in millions) $ 209.9 $ 217.6
Total sales (in millions) $ 568.8 $ 726.9
Gross profit % - integrated operations 25.3% 34.3%
Gross profit % - wholesale operations 12.6% 16.9%
New single-section homes sold - retail 2,498 4,895
New multi-section homes sold - retail 4,908 6,059
Used homes sold - retail 891 1,255
New single-section homes sold - wholesale 1,602 1,420
New multi-section homes sold - wholesale 4,603 4,855
Average new single-section sales price - retail $31,500 $32,400
Average new multi-section sales price - retail $55,100 $55,900
Average new single-section sales price - wholesale $20,700 $21,800
Average new multi-section sales price - wholesale $38,100 $38,200
Weighted average retail sales centers
open during the period 389 368
NET SALES
The Company's sales volume was adversely affected by competitive industry
conditions during the six months ended March 31, 2000. Retail sales dollar
volume decreased 30%, reflecting a 32% 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 66% of retail
new unit sales compared to 55% in the six months ended March 31, 1999.
During the six months ended March 31, 2000 the Company opened six new sales
centers compared to 31 sales centers during the six months ended March 31, 1999.
The Company also closed 43 underperforming sales centers during the six months
ended March 31, 2000 primarily resulting from its previously announced
restructuring plans compared to three during the six months ended March 31,
1999. Total new retail sales dollars at sales centers open more than one year
decreased 40% during the six months ended March 31, 2000.
Wholesale sales dollar volume decreased 4% due to 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 26% of wholesale unit sales compared to 23% in the six
months ended March 31, 1999. The average new unit sales prices of single-section
homes decreased 5%. The decrease in average new unit sales prices of
single-section homes was primarily due to the Company's Schult operations
representing a lower percentage of single-section wholesale sales during the six
months ended March 31, 2000 compared to the six months ended March 31, 1999.
Schult, whose
18
average sales prices are higher than those of the Company's other wholesale
operations, represented 69% of single-section wholesale unit sales during the
six months ended March 31, 2000 compared to 92% during the six months ended
March 31, 1999.
GROSS PROFIT
Gross profit margin - integrated operations decreased from 34.3% during the six
months ended March 31, 1999 to 25.3% during the six months ended March 31, 2000
primarily as a result of competitive pricing pressures and unfavorable
manufacturing variances caused by reduced production schedules experienced
during the first six months of fiscal 2000.
Wholesale gross profit margins decreased from 16.9% during the six months ended
March 31, 1999 to 12.6% during the six months ended March 31, 2000 as a result
of competitive pricing pressures and unfavorable manufacturing variances caused
by reduced production schedules experienced during the first six months of
fiscal 2000.
CONSUMER FINANCE REVENUES
Consumer finance revenues are summarized as follows:
Six months ended
March 31,
----------------------
(in thousands) 2000 1999
---- ----
Interest income $ 19,581 $ 19,698
Servicing fees 10,093 11,377
REMIC residual income 10,293 3,761
Losses on loans sold or held for sale:
Loss on sale of loans (5,444) (1,565)
Valuation allowance on loans
held for sale (8,692) -
--------------- --------------
(14,136) (1,565)
Loss on sale of securities (4,441) -
Impairment and valuation
provisions (742) (3,549)
Other 956 688
--------------- --------------
$ 21,604 $ 30,410
=============== ==============
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,
fell despite the growth of the Company's securitized loan portfolio primarily
due to increased amortization of loan servicing assets.
19
The increase in residual income reflects significantly higher yields on retained
residual interests in REMIC securitizations.
The loss on sale of loans for the six months ended March 31, 2000 reflects the
completion of two securitizations. In addition, during the period the Company
recorded a provision of $8,692,000 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 $14.1 million, compared to $1.6 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:
Six months ended
March 31,
-----------------------
(in thousands) 2000 1999
---- ----
Impairment writedowns of residual
REMIC interests $ - $ 3,549
Impairment writedowns of regular
REMIC interests 3,690 -
Valuation provisions on servicing
contracts 2,844 -
Reductions of previously recorded
valuation allowance on servicing
contracts (6,401) -
Additional provisions for potential
guarantee obligations on REMIC
securities sold 609 -
-------------- ---------------
$ 742 $ 3,549
============== ===============
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 six months ended March 31, 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 1.78% on an annualized basis of the
average principal balance of the related
20
loans, compared to approximately 2.02% 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 March 31, 2000 the Company had a total of
2,809 unsold properties in repossession or foreclosure (approximately 2.29% of
the total number of Oakwood originated serviced assets) compared to 2,417,
1,267, and 1,430 at September 30, 1999, March 31, 1999 and September 30, 1998,
respectively (approximately 1.97%, 1.08 and 1.28%, respectively, of the total
number of Oakwood originated serviced assets). Of the total number of unsold
properties in repossession or foreclosure, 414, 417, 303 and 295 relate to loans
originated on behalf of DFC at March 31, 2000, September 30, 1999, March 31,
1999 and September 30, 1998, respectively.
INSURANCE REVENUES
Insurance revenues from the Company's captive reinsurance business increased 29%
to $30.4 million for the six months ended March 31, 2000 from $23.6 million for
the six months ended March 31, 1999, primarily due to the increased size of the
Company's insurance portfolio compared to the prior year period. A substantial
portion of insurance revenues is derived from insurance policies sold in
connection with new home sales by the Company's retail operations. Because of
the decline in year-over-year retail sales, the increase in insurance revenues
may not continue and, if the adverse sales trend continues, insurance revenues
should be expected to decline.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $28.2 million, or 15.3%,
during the six months ended March 31, 2000 compared to the prior year. The
decrease is primarily due to cost reduction actions, particularly at retail,
taken in the fourth quarter of fiscal 1999, as well as reduced sales volumes.
However, as a percentage of net sales, selling, general and administrative
expenses increased to 27.5% for the six months ended March 31, 2000 from 25.4%
last year primarily as a result of a lower sales base over which to spread the
Company's fixed distribution costs and higher service costs.
CONSUMER FINANCE OPERATING EXPENSES
Consumer finance operating expenses rose $5.0 million, or 30%, during the six
months ended March 31, 2000. Of the total dollar increase, approximately $2.2
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 $1.1 million represents
other increases in servicing related costs. In addition, allocations of parent
company costs, principally occupancy and telecommunications, increased by
approximately $0.8 million.
INSURANCE OPERATING EXPENSES
Insurance operating costs for the six months ended March 31, 2000 as compared to
the prior year did not increase commensurately with the increase in insurance
revenues because a larger percentage of insurance revenues were derived from
products with lower loss ratios. Insurance operating costs did increase 9%
during the six months ended March 31, 2000 principally due to higher claims
costs associated with the increased size of the business.
21
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. The
Company has purchased catastrophe reinsurance to reduce its underwriting
exposure to natural disasters.
INTEREST EXPENSE
Interest expense increased $8.5 million, or 49%, during the six months ended
March 31, 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. Interest costs on
short-term line of credit borrowings also increased due to the net effect of
higher interest rates and lower average balances outstanding. These increases
were partially offset by lower interest expense on declining and retired
long-term debt balances.
INCOME TAXES
The Company's effective income tax rate was 38.0% in the six months ended March
31, 2000 compared to 39.0% in 1999. The decrease reflects primarily limited
state income tax benefits associated with certain losses and charges.
YEAR 2000
To date, there have been no significant disruptions to the Company's business
resulting from failures of the Company's or its critical suppliers' and business
partners' processes or systems as a result of the Year 2000 issue. Although the
Company believes that it successfully avoided any significant disruption from
the century rollover, it will continue to monitor all critical systems for the
appearance of delayed complications or disruptions, most particularly any
month-end, quarter-end and year-end processing that has yet to be executed in a
production environment. The costs incurred by the Company for the assessment and
conversion of systems related to Year 2000 readiness, which have been charged to
expense, have not been material.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 2000, the Company decreased inventories by
$73 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 $161 million at March 31, 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 securtization 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
22
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 18 months, demand for subordinated securities, particularly securities
rated BBB and below, has decreased dramatically. As a consequence of decreased
demand, the Company has not sold any asset-backed securities rated less than BBB
since its May 1999 loan securitization. As discussed above, during the quarter
ended March 31, 2000 the Company sold all BBB rated asset-backed securities
retained by the Company from securtizations prior to December 31, 1999, as well
as the BBB rated security created in the securitization closed in the March
quarter. 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, and was 9.25% of the aggregate principal balance of loans
securitized in the March 2000 securitization.
At March 31, 2000 the Company owned subordinated asset-backed securities having
a carrying value of approximately $50.7 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 $9.0 million
retained from securitization transactions prior to 1994. The Company considers
these securities to be available for sale, and would 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 $25 million.
The Company has several credit facilities in place to provide for its short-term
liquidity needs. The Company has a $325 million credit facility with a conduit
commercial paper issuer to provide warehouse financing for loans prior to
securitization. The Company also has a $125 million revolving credit facility
with a group of banks which is available to fund additional working capital
needs. The Company believes that these facilities should be adequate to meet the
Company's short-term liquidity needs. These facilities expire in November 2000.
The Company intends to negotiate a renewal or replacement of these facilities
prior to such expiration.
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 while increasing production at certain plants and the adequacy
of our existing credit facilities to meet our short-term liquidity needs. 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:
23
competitive industry conditions could further adversely affect our 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 our business; 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not applicable.
24
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 which has not yet been ruled upon by the court. The
Company intends to defend such lawsuit vigorously.
In addition, the Company is subject to legal proceedings and
claims which 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.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Information required by this item was provided in the Form 10-Q filed for the
quarter ended December 31, 1999.
25
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 March 31, 2000.
Items 2, 3 and 5 are inapplicable and are omitted.
26
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: May 15, 2000
OAKWOOD HOMES CORPORATION
BY: /s/ Robert A. Smith
----------------------------
Robert A. Smith
Executive Vice President
(Chief Financial Officer)
(Duly Authorized Officer)
27
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
ITEM 6(a)
FORM 10-Q
QUARTERLY REPORT
For the quarter ended Commission File Number
March 31, 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
28
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/ Robert A. Smith
-------------------
Robert A. Smith
Executive Vice President
29