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, 1999 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, 1999.
Common Stock, Par Value $.50 Per Share . . . . . . . . . 47,126,140
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUARTERLY REPORT ON FORM 10-Q
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 1999
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
Greensboro, North Carolina
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures contained herein are adequate to make the information presented not
misleading. These consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K.
2
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands except per share data)
Three months ended
June 30,
1999 1998
---- ----
Revenues
Net sales $ 404,346 $ 440,129
Financial services revenues
Consumer finance 17,746 23,772
Special charges - (35,000)
Insurance 13,676 8,550
-------------- -------------
31,422 (2,678)
Other income 5,505 3,060
-------------- -------------
Total revenues 441,273 440,511
-------------- -------------
Costs and expenses
Cost of sales 287,806 305,470
Selling, general and administrative expenses 110,601 105,839
Financial services operating expenses
Consumer finance 8,829 6,153
Insurance 8,495 7,009
-------------- -------------
17,324 13,162
Provision for losses on credit sales 400 390
Interest expense
Non-financial services 2,859 2,336
Financial services 9,407 5,164
-------------- -------------
Total costs and expenses 428,397 432,361
-------------- -------------
Income before income taxes 12,876 8,150
Provision for income taxes 5,022 3,191
-------------- -------------
Net income $ 7,854 $ 4,959
============== =============
Earnings per share
Basic $ .17 $ .11
Diluted $ .17 $ .10
Dividends per share $ .01 $ .01
Weighted average number of
common shares outstanding
Basic 46,473 46,311
Diluted 47,168 47,525
See accompanying notes to the consolidated financial statements.
3
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands except per share data)
Nine months ended
June 30,
1999 1998
---- ----
Revenues
Net sales $ 1,131,255 $ 912,374
Financial services revenues
Consumer finance 48,156 68,157
Special charges - (51,300)
Insurance 37,229 23,514
------------- ------------
85,385 40,371
Other income 10,365 7,322
------------- ------------
Total revenues 1,227,005 960,067
------------- ------------
Costs and expenses
Cost of sales 802,991 627,557
Selling, general and administrative expenses 294,954 229,264
Financial services operating expenses
Consumer finance 25,514 17,536
Insurance 24,085 19,080
------------- ------------
49,599 36,616
Provision for losses on credit sales 2,361 390
Interest expense
Non-financial services 7,688 3,721
Financial services 21,893 13,321
------------- ------------
Total costs and expenses 1,179,486 910,869
------------- ------------
Income before income taxes 47,519 49,198
Provision for income taxes 18,533 18,789
------------- ------------
Net income $ 28,986 $ 30,409
============= ============
Earnings per share
Basic $ .62 $ .66
Diluted $ .62 $ .64
Dividends per share $ .03 $ .03
Weighted average number of
common shares outstanding
Basic 46,439 46,192
Diluted 47,093 47,553
See accompanying notes to the consolidated financial statements.
4
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands except share and per share data)
June 30, September 30,
ASSETS 1999 1998
---- ----
Cash and cash equivalents $ 34,093 $ 28,971
Loans and investments 395,658 502,583
Other receivables 75,613 58,774
Inventories
Manufactured homes 401,384 242,867
Work-in-process, materials and supplies 49,560 42,068
Land/homes under development 13,645 6,417
-------------- --------------
464,589 291,352
Properties and facilities 251,443 237,726
Deferred income taxes 17,155 14,850
Other assets 154,268 149,120
-------------- --------------
$ 1,392,819 $ 1,283,376
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 128,601 $ 375,023
Notes and bonds payable 355,799 61,875
Accounts payable and accrued liabilities 233,806 226,867
Insurance reserves and unearned premiums 72,818 57,419
Other long-term obligations 21,567 14,517
Shareholders' equity
Common stock, $.50 par value; 100,000,000
shares authorized; 47,126,000 and 46,660,000
shares issued and outstanding 23,563 23,330
Additional paid-in capital 172,702 167,592
Retained earnings 387,603 360,025
-------------- --------------
583,868 550,947
Less: Unearned compensation (3,640) (3,272)
-------------- --------------
580,228 547,675
-------------- --------------
$ 1,392,819 $ 1,283,376
============== ==============
See accompanying notes to the consolidated financial statements.
5
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine months ended
June 30,
1999 1998
Operating activities
Net income $ 28,986 $ 30,409
Adjustments to reconcile net income to cash provided (used)
by operating activities
Depreciation and amortization 33,474 17,274
Deferred income taxes (2,305) (2,263)
Provision for losses on credit sales 2,361 390
(Gain) loss on sale of loans 3,153 (18,630)
Special charges - 51,300
Excess of cash receipts over REMIC residual income
recognized 19,992 13,121
Other 8,100 4,343
Changes in assets and liabilities, net of effect of
business acquisition
Other receivables (31,091) 38
Inventories (173,237) (84,034)
Deferred insurance policy acquisition costs (2,763) (2,304)
Other assets (18,346) (1,171)
Accounts payable and accrued liabilities 6,550 5,800
Insurance reserves and unearned premiums 15,399 15,316
Other long-term obligations 24 2,989
------------- -----------
Cash provided (used) by operations (109,703) 32,578
Loans originated (1,036,455) (793,651)
Purchase of loans and securities (108,297) -
Sale of loans 1,205,435 765,726
Principal receipts on loans 27,577 34,913
------------- -----------
Cash provided (used) by operating activities (21,443) 39,566
------------- -----------
Investing activities
Business acquisition - (101,829)
Acquisition of properties and facilities (34,491) (39,436)
Investment in and advances to joint venture 22,150 (11,409)
Purchase of securities - (5,045)
Other (7,885) (3,131)
------------- -----------
Cash (used) by investing activities (20,226) (160,850)
------------- -----------
6
Financing activities
Net borrowings (repayments) on short-term credit facilities (246,422) 29,861
Proceeds from borrowings related to business acquisition - 100,000
Issuance of notes and bonds payable 307,878 4,472
Payments on notes and bonds (13,635) (17,105)
Cash dividends (1,408) (1,393)
Proceeds from exercise of stock options 378 2,226
---------- -----------
Cash provided by financing activities 46,791 118,061
---------- -----------
Net increase (decrease) in cash and cash equivalents 5,122 (3,223)
Cash and cash equivalents
Beginning of period 28,971 28,717
========== ===========
End of period $ 34,093 $ 25,494
========== ===========
See accompanying notes to the consolidated financial statements.
7
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. The consolidated financial statements reflect all adjustments, which are,
in the opinion of management, necessary to present fairly the results of
operations for the periods presented. Except for special charges in the
amount of $35.0 million recorded for the three months ended June 30, 1998
and $51.3 million for the nine months ended June 30, 1998, relating to the
carrying value of retained interests in certain REMIC securitizations and
the Company's exit from Deutsche Financial Capital, the Company's former
consumer finance joint venture, such adjustments include only normal
recurring adjustments. Results of operations for any interim period are not
necessarily indicative of results to be expected for a full year.
2. On April 1, 1998 the Company acquired Schult Homes Corporation ("Schult"),
a producer of manufactured and modular housing headquartered in Middlebury,
Indiana. The acquisition was accounted for using the purchase method of
accounting. Schult's results of operations are included with those of the
Company from the April 1, 1998 acquisition date.
3. Certain of the Company's significant accounting policies are outlined below.
REVENUE RECOGNITION - MANUFACTURED HOUSING
Passage of title and risk of loss in a retail sale occurs upon the closing
of the sale, which includes, for the great majority of retail sales,
execution of loan documents and related paperwork and receipt of the
customer's down payment.
For those sales in which the home remains personal property, rather than
being converted to real property (i.e., sales under retail installment
contracts), the closing generally takes place before the home is delivered
to and installed on the customer's site. For such sales, delivery and
installation typically are straightforward and involve minimal preparation
of the customer's site, and typically occur shortly after closing.
Sales transactions in which the home is converted from personal property to
real property are financed as traditional mortgages rather than under
retail installment contracts. Such sales typically involve significant
preparation of the customer's site, which may include installation of
utilities, wells, extensive foundations, etc., and also require completion
of mortgage financing documentation, including title searches and
appraisals. As a consequence, the closing of these transactions occurs
after the home has been delivered and installed.
WARRANTY OBLIGATIONS
The Company provides a warranty against manufacturing defects from the date
of the retail sale. Estimated future warranty obligations are accrued at
the time of sale.
8
4. The components of loans and investments are as follows:
June 30, September 30,
1999 1998
(in thousands)
Loans held for sale $ 253,231 $ 365,126
Loans held for investment 53,661 62,669
Less: reserve for uncollectible receivables (4,132) (1,653)
------------ -------------
Total loans 302,760 426,142
------------ -------------
Retained interests in REMIC securitizations
(exclusive of loan servicing assets
included in other assets)
Regular interests, at amortized cost which
approximates fair value 48,282 22,822
Residual interests, at amortized cost which
approximates fair value 44,616 53,619
------------ -------------
Total retained REMIC interests 92,898 76,441
------------ -------------
$ 395,658 $ 502,583
============ =============
5. The following table sets forth the computation of basic and diluted earnings
per share ("EPS"):
Three months ended Nine months ended
June 30, June 30,
--------- --------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands, except per share data)
Numerator for basic and diluted
EPS - Net income $ 7,854 $ 4,959 $ 28,986 $ 30,409
Denominator:
Weighted average number of
common shares outstanding 46,509 46,387 46,485 46,278
Unearned shares (36) (76) (46) (86)
------------ ------------ ----------- ----------
Denominator for basic EPS 46,473 46,311 46,439 46,192
Dilutive effect of stock options and
restricted shares computed using
the treasury stock method 695 1,214 654 1,361
------------ ------------ ----------- ----------
Denominator for diluted EPS 47,168 47,525 47,093 47,553
============ ============ =========== ==========
Earnings per common share - basic $ .17 $ .11 $ .62 $ .66
============ ============ =========== ==========
Earnings per common share - diluted $ .17 $ .10 $ .62 $ .64
============ ============ =========== ==========
9
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 EPS for the first,
second and third quarters of fiscal 1999, respectively, because the
options' exercise prices were greater than the average market price of the
Company's common stock for that period and their inclusion would have been
antidilutive.
6. 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. 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. The Company intends to defend such lawsuit vigorously.
The Company is also subject to legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. Management believes that these actions, when ultimately
concluded and determined, should not have a material effect on the results
of operations or financial condition of the Company.
The Company is contingently liable as guarantor on installment sale
contracts sold to third parties on a full or limited recourse basis. The
amount of this contingent liability was approximately $26 million at June
30, 1999. 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, 1999. The Company is also contingently
liable under terms of repurchase agreements with financial institutions
providing inventory financing for retailers of homes produced by Destiny
Industries, Inc. ("Destiny"), Golden West Homes ("Golden West") and Schult,
manufacturing subsidiaries of the Company doing business with independent
dealers. The Company estimates that its potential obligation under
repurchase agreements approximated $204 million at June 30, 1999.
7. Subsequent to June 30, 1999 the Company announced plans to reduce
production schedules and operating costs. Certain manufacturing facilities
have been closed, production levels at other plants have been lowered and
other staff costs reduced. The Company has also reduced employee staff
levels in areas outside manufacturing. These cost reductions are ongoing.
The Company currently is analyzing the effect of these actions and will
record a related charge to earnings in the fourth quarter of fiscal 1999.
The amount of the charge cannot be reasonably estimated at this time.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Three months ended June 30, 1999 compared to three months ended June 30, 1998
The following table summarizes certain statistics for the quarters ended June 30, 1999 and 1998 :
1999 1998
Retail sales (in millions) $ 289.4 $ 327.1
Wholesale sales (in millions) $ 114.9 $ 113.0
Total sales (in millions) $ 404.3 $ 440.1
Gross profit % 28.8% 30.6%
New single-section homes sold - retail 2,526 3,444
New multi-section homes sold - retail 3,658 3,932
Used homes sold - retail 486 516
New single-section homes sold - wholesale 858 778
New multi-section homes sold - wholesale 2,549 2,545
Average new single-section sales price - retail $32,600 $31,900
Average new multi-section sales price - retail $56,000 $54,000
Average new single-section sales price - wholesale $21,700 $21,200
Average new multi-section sales price - wholesale $37,300 $37,600
Weighted average retail sales centers
open during the period 392 332
NET SALES
The Company's sales volume was adversely affected by competitive industry
conditions. Retail sales dollar volume decreased 12%, reflecting a 16% decrease
in new unit volume partially offset by increases of 2% and 4% in the average new
unit sales prices of single-section and multi-section homes, respectively, and a
shift in product mix toward multi-section homes, which have higher average
selling prices than single-section homes. Average retail sales prices rose due
to price increases and a shift in product mix toward higher price points.
Multi-section homes accounted for 59% of retail new unit sales, compared to 53%
in the third quarter of fiscal 1998.
During the third quarter of fiscal 1999, the Company opened or acquired 15 new
sales centers, compared to 16 sales centers during the third quarter of fiscal
1998. The Company also closed two underperforming sales centers during the
quarter ended June 30, 1999, compared to one during the third quarter of fiscal
1998. Total new retail sales dollars at sales centers open more than one year
decreased 22% during the third quarter of fiscal 1999.
Wholesale sales dollar volume, which consists of sales to independent dealers,
was $115 million compared to $113 million in the third quarter of fiscal 1998.
11
GROSS PROFIT
Gross profit margin decreased to 28.8% in the third quarter of fiscal 1999 from
30.6% in fiscal 1998, as a result of wholesale sales, which have lower margins
than retail sales, representing a higher percentage of total sales during the
current quarter than fiscal 1998, as well as more aggressive pricing of the
Company's homes during the last month of the quarter. Approximately 97% of new
homes sold at retail were produced in Company-owned manufacturing plants in the
third quarter of fiscal 1999 and 1998.
FINANCIAL SERVICES REVENUES
The third quarter of fiscal 1998 includes special charges of $35 million
(approximately $21.7 million after tax, or $.46 per share), relating to
valuation adjustments of certain retained interests in REMIC securitizations and
the Company's exit from Deutsche Financial Capital ("DFC"), the Company's former
consumer finance joint venture. The Company recorded a valuation adjustment of
$3.1 million relating to the carrying value of residual interests in the third
quarter of fiscal 1999. Excluding the effects of these charges, consumer finance
revenues for the three months ended June 30, 1999 declined $2.9 million compared
to the three months ended June 30, 1998.
REMIC interests retained by the Company include servicing assets and REMIC
residual and regular interests. The Company estimates the fair value of retained
REMIC residual interests based, in part, upon default and prepayment assumptions
which management believes market participants would use for similar instruments.
The actual rate of voluntary prepayments and the amount and timing of credit
losses affect the Company's yield on retained REMIC residual interests and the
fair value of such interests in periods subsequent to the securitization; the
actual rate of voluntary prepayments and credit losses typically varies over the
life of each transaction and from transaction to transaction. If over time the
Company's actual experience is more favorable than that assumed, the Company's
yield on its REMIC residual interests will be enhanced. Similarly, if over time
the Company's actual experience is less favorable than that assumed, such yield
will be reduced or, if the indicated yield falls below the risk free rate,
impairment of the residuals will occur which will cause an immediate charge to
earnings.
For the quarter ended June 30, 1999, 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 1.40% on an annualized basis of the
average principal balance of the related loans, compared to approximately 1.58%
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. During the third quarter of
fiscal 1999 the Company sold 1,242 repossessed homes compared to 1,081 in the
third quarter of fiscal 1998. The Company's inventory of repossessed homes
increased from 964 units at March 31, 1999 to 1,474 at June 30, 1999.
At June 30, 1999 the delinquency rate on Company originated loans, excluding
loans originated on behalf of DFC, the Company's former consumer finance joint
venture, was 3.6%, compared to 3.9% at September 30, 1998 and 4.1% at June 30,
1998.
12
Financial services revenues include a loss on the sale of asset-backed
securities of $1.6 million (approximately $1.0 million after tax, or $.02 per
share) in the 1999 quarter, compared to a gain in the 1998 quarter of $7.7
million (approximately $4.7 million after tax, or $.10 per share). The
substantial decline in securitization gains 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 lower loan yields resulting from both a shift in product mix
toward multi-section loans which generally carry lower coupons than
single-section loans and from generally lower interest rates prevailing in the
marketplace when the loans were originated. The decline in spread also reflects
higher securitization funding costs resulting from an increase in the spread
over treasurys required by institutional purchasers of the Company's
asset-backed securities, and a rise in treasury yields during the June 1999
quarter. Rising treasury yields and widening spreads over treasurys have
continued subsequent to June 30 and are expected to adversely affect the
Company's financial services revenues in the fourth quarter.
REMIC residual income decreased from $2.2 million in the quarter ended June 30,
1998 to $1.8 million in third quarter of fiscal 1999, primarily reflecting a
decline in the average balance of residual interests.
Interest income earned on loans held for investment and on loans held for sale
prior to securitization increased from $8.0 million during the third quarter of
fiscal 1998 to $12.8 million in fiscal 1999. The increase reflects higher
average outstanding balances of loans held for sale prior to securitization due
to increased origination volume as well as the timing of securitizations, offset
slightly by lower average interest rates on the loans. The increase also
reflects incremental interest income on retained regular REMIC interests from
the Company's August and November 1998 securitizations. During April 1999 the
Company sold its interest from the November 1998 securitization. This increase
was partially offset by lower interest income on loans held for investment, the
principal balance of which is declining as these loans are liquidated.
Loan servicing fees increased from $6.7 million during the third quarter of
fiscal 1998 to $7.3 million this year. Servicing fees did not increase
commensurately with the growth of the Company's securitized loan portfolio
because certain securitizations did not generate sufficient cash flows to enable
the Company to receive its full servicing fee. The Company has not recorded
revenues or receivables for these shortfalls, because the Company's right to
receive servicing fees generally is subordinate to the holders of regular REMIC
interests, and projected future shortfalls are reflected in amortization of
servicing assets.
Insurance revenues from the Company's captive reinsurance business increased 60%
to $13.7 million for the three months ended June 30, 1999 from $8.6 million for
the three months ended June 30, 1998. This increase is primarily due to the
increased size of the Company's portfolio.
OTHER INCOME
Other income for the third quarter of fiscal 1999 increased to $5.5 million from
$3.1 million in fiscal 1998. During the third quarter of fiscal 1999 the Company
settled an insurance claim relating to homes at a manufacturing facility which
were damaged by a hail storm. The net gain of $1.1 million resulting from this
settlement is included in other income. During the third quarter of fiscal 1999
the Company also sold two airplanes at a gain of $1.4 million.
13
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 27.4% of net sales for
the three months ended June 30, 1999 from 24.0% of net sales last year primarily
as a result of a lower sales base over which to spread the Company's fixed
distribution costs.
FINANCIAL SERVICES OPERATING EXPENSES
Consumer finance operating expenses rose $2.7 million during the third quarter
of fiscal 1999 due principally to increased headcount and other compensation
cost increases as well as other expenses associated with the growth in the
servicing portfolio. In the third quarter, the average number of loans serviced
increased 14% over the same period last year. Insurance operating costs
increased 21% during the third quarter of fiscal 1999 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
Non-financial services interest expense rose from $2.3 million for the third
quarter of fiscal 1998 to $2.9 million in 1999, due principally to higher
interest expense associated with the $100 million of debt incurred in connection
with the Schult acquisition, which was refinanced in March 1999 using a portion
of the proceeds of the Company's $300 million senior note offering.
Financial services interest expense includes interest expense associated with
long-term debt secured by loans, interest expense associated with all short-term
line of credit borrowings, and interest expense on $200 million of the $300
million senior notes issued in March 1999. Financial services interest expense
increased 82% for the third quarter of fiscal 1999 which primarily reflects the
interests costs related to the $200 million of senior notes. Interest costs on
short-term line of credit borrowings also increased due to an increase in the
average balances outstanding offset by slightly lower interest rates. 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 39.0% for the third quarter of
fiscal 1999 compared to 39.2% in fiscal 1998.
14
Nine months ended June 30, 1999 compared to nine months ended June 30, 1998
The following table summarizes certain statistics for the nine months
ended June 30, 1999 and 1998 :
1999 1998
---- ----
Retail sales (in millions) $ 798.7 $ 762.6
Wholesale sales (in millions) $ 332.6 $ 149.8
Total sales (in millions) $ 1,131.3 $ 912.4
Gross profit % - integrated operations 29.0% 31.2%
New single-section homes sold - retail 7,421 8,964
New multi-section homes sold - retail 9,717 8,890
Used homes sold - retail 1,741 1,761
New single-section homes sold - wholesale 2,278 918
New multi-section homes sold - wholesale 7,403 3,514
Average new single-section sales price - retail $32,500 $31,000
Average new multi-section sales price - retail $55,900 $52,700
Average new single-section sales price - wholesale $21,700 $20,500
Average new multi-section sales price - wholesale $37,900 $36,700
Weighted average retail sales centers
open during the period 376 320
NET SALES
Retail sales dollar volume increased 5%, reflecting increases of 5% and 6% in
the average new unit sales prices of single-section and multi-section homes,
respectively, and a shift in product mix toward multi-section homes, which have
higher average selling prices than single-section homes, offset by a 4% decrease
in new unit volume. Average retail sales prices rose due to price increases and
a shift in product mix toward higher price points. Multi-section homes accounted
for 57% of retail new unit sales, compared to 50% in the nine months ended June
30, 1998. The Company believes the multi-section performance reflects the
addition of new homes to the Company's product line in response to continuing
consumer preference for multi-section homes.
During the first nine months of fiscal 1999, the Company opened or acquired 46
new sales centers, compared to 42 sales centers during the nine months ended
June 30, 1998. The Company also closed five underperforming sales centers during
the nine months ended June 30, 1999, compared to three during the nine months
ended June 30, 1998. Total new retail sales dollars at sales centers open more
than one year decreased 7.6% during the nine months ended June 30, 1999.
Wholesale sales dollar volume increased due to wholesale unit volume related to
the acquisition of Schult on April 1, 1998. Schult sold 7,690 units,
representing $267.7 million of sales, to independent dealers during the nine
months ended June 30, 1999 compared to 2,692 units, representing $92.7 million
of sales, during the third quarter of fiscal 1998. Excluding the effects of the
Schult acquisition, wholesale sales dollars increased 14% from the nine months
ended June 30, 1998, due to a 14% increase in units sold to independent dealers.
Schult's higher
15
average price points primarily caused the overall average
wholesale selling prices of single-section and multi-section homes to rise 6%
and 3%, respectively.
GROSS PROFIT
Gross profit margin decreased to 29.0% in the nine months ended June 30, 1999
from 31.2% in fiscal 1998, reflecting the increased significance of relatively
lower margin wholesale sales as a result of the acquisition of Schult. Excluding
the effect of the Schult acquisition, gross profit margin was 32.8% for the nine
months ended June 30, 1999 and 1998. Approximately 97% of new homes sold at
retail were produced in Company-owned manufacturing plants in the nine months
ended June 30, 1999 compared to 96% in the nine months ended June 30, 1998.
FINANCIAL SERVICES REVENUES
The nine months ended June 30, 1998 include special charges of $51.3 million
(approximately $31.8 million after tax, or $.67 per share), relating to
valuation adjustments of certain retained interests in REMIC securitizations and
the Company's exit from DFC, the Company's former consumer finance joint
venture. The Company recorded valuation adjustments of $6.6 million relating to
the carrying value of residual interests during the nine months ended June 30,
1999. Excluding the effects of these charges, consumer finance revenues for the
nine months ended June 30, 1999 declined $13.4 million.
For the nine months ended June 30, 1999, 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 1.80% on an annualized basis of the
average principal balance of the related loans, compared to approximately 1.50%
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. For the nine months ended
June 30, 1999 the Company sold 4,853 repossessed homes compared to 3,401 for the
nine months ended June 30, 1998. The Company's inventory of repossessed homes
increased from 1,135 units at September 30, 1998 to 1,474 at June 30, 1999.
Financial services revenues for the nine months ended June 30, 1999 include
losses on the sale of asset-backed securities of $3.2 million (approximately
$1.9 million after tax, or $.04 per share), compared to gains in the prior year
of $18.6 million (approximately $11.5 million after tax, or $.24 per share). The
substantial decline in securitization gains 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 lower loan yields resulting from both a shift in product mix
toward multi-section loans which generally carry lower coupons than
single-section loans and from generally lower interest rates prevailing in the
marketplace when the loans were originated. The decline in spread also reflects
higher securitization funding costs resulting from an increase in the spread
over treasurys required by institutional purchasers of the Company's
asset-backed securities, partially offset early in fiscal 1999 by lower treasury
yields.
16
REMIC residual income decreased from $8.5 million in the nine months ended June
30, 1998 to $5.6 million in first nine months of fiscal 1999, primarily
reflecting a decline in the average balance of residual interests.
Interest income earned on loans held for investment and on loans held for sale
prior to securitization increased from $22.2 million during the first nine
months of fiscal 1998 to $32.5 million in fiscal 1999. The increase reflects
higher average outstanding balances of loans held for sale prior to
securitization due to increased origination volume offset slightly by lower
average interest rates on the loans. The increase also reflects incremental
interest income on retained regular REMIC interests from the Company's August
and November 1998 securitizations. During April 1999 the Company sold its
interest from the November 1998 securitization. This increase was partially
offset by lower interest income on loans held for investment, the principal
balance of which is declining as these loans are liquidated.
Loan servicing fees, which are reported net of amortization of servicing assets,
decreased from $20.1 million during the nine months ended June 30, 1998 to $18.7
million this year. Servicing fees did not increase commensurately with the
growth of the Company's securitized loan portfolio because certain
securitizations did not generate sufficient cash flows to enable the Company to
receive its full servicing fee. The Company has not recorded revenues or
receivables for these shortfalls, because the Company's right to receive
servicing fees generally is subordinate to the holders of regular REMIC
interests, and projected future shortfalls are reflected in amortization of
servicing assets.
Insurance revenues from the Company's captive reinsurance business increased 58%
to $37.2 million for the nine months ended June 30, 1999 from $23.5 million for
the nine months ended June 30, 1998. This increase is primarily due to the
increased size of the portfolio, relating to an increase in premiums written
resulting from retail sales growth and improved penetration, renewal and
cancellation rates.
OTHER INCOME
Other income for the nine months ended June 30, 1999 increased to $10.4 million
from $7.3 million for the nine months ended June 30, 1998. This increase is
primarily due to a $1.1 million gain resulting from an insurance settlement
relating to homes at a manufacturing facility which were damaged by a hail
storm. The Company also sold two airplanes at a gain of $1.4 million during
fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 26.1% of net sales for
the nine months ended June 30, 1999 from 25.1% of net sales last year. Higher
retail selling expenses were offset by lower selling, general and administrative
expenses as a percentage of sales at Schult. Excluding the effects of the Schult
acquisition, selling, general and administrative expenses for the first nine
months of fiscal 1999 were 30.0% of net sales compared to 26.5% of net sales
last year, primarily reflecting higher retail selling expenses caused by
compensation plan changes implemented in the second quarter of fiscal 1998 and
an increase in commissions paid for sales of repossessed homes.
17
FINANCIAL SERVICES OPERATING EXPENSES
Consumer finance operating expenses rose 45% during the nine months ended June
30, 1999 due principally to increased headcount and other compensation cost
increases as well as other expenses associated with the growth in the servicing
portfolio and an increase in the number of applications processed. In the first
nine months of fiscal 1999, the average number of loans serviced increased 17%.
Insurance operating costs increased 26% during the nine months ended June 30,
1999 principally due to higher claims costs associated with the increased size
of the business.
PROVISION FOR LOSSES
The provision for losses increased $2.0 million largely related to the increase
in repossession activity during the first nine months of fiscal 1999 and the
high balance of loans carried on the Company's balance sheet prior to
securitization.
INTEREST EXPENSE
Non-financial services interest expense rose from $3.7 million for the nine
months ended June 30, 1998 to $7.7 million in 1999, due principally to interest
costs related to the financing of the Schult acquisition.
Financial services interest expense includes interest expense associated with
long-term debt secured by loans, interest expense associated with all short-term
line of credit borrowings, and interest expense on $200 million of the $300
million senior notes issued in March 1999. Financial services interest expense
increased 64% for the first nine months of fiscal 1999 due to the interests
costs related to the $200 million of senior notes. Interest costs on short-term
line of credit borrowings also increased due to an increase in the average
balances outstanding offset by slightly lower interest rates. 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 39.0% for the nine months ended June
30, 1999 compared to 38.2% in fiscal 1998 due to higher state income taxes
arising from the Schult acquisition.
YEAR 2000 ISSUES
During 1997 the Company formed an ongoing project team to address the Year 2000
issue. The Year 2000 issue relates to the way computer hardware and software
process calendar dates. With the turn of the century at midnight, January 1,
2000, it is possible that some systems may
18
interpret a year stored as '00 as 1900 instead of 2000. Calculations involving
these dates would then be adversely affected.
The Company's Year 2000 conversion project has several phases, including
assessment of the hardware and software affected by the Year 2000 issue;
identification of critical suppliers and assessment of their state of readiness;
conversion of existing processes, hardware and software as required; testing of
modified, existing and new processes; implementation of Year 2000 compliant
systems; and development and implementation of contingency and business
continuation plans as considered necessary. The Company is also conducting
ongoing awareness campaigns with employees and key vendors.
Assessment of hardware and software has been conducted with internal resources
that researched all of the Company's internal systems and hardware platforms. As
a result of the assessment effort, a plan was developed to convert and test all
hardware and software deemed to be non-compliant. Based upon the status of
remediation undertaken to date, the Company believes that substantially all
significant internal system issues associated with Year 2000 compliance have
been resolved. The Company intends to continue testing throughout the year as
well as resolving any remaining system issues.
Separately all of the Company's significant external suppliers and business
partners were included in the project to determine their state of readiness for
the Year 2000 issue. General surveys were sent to all significant external
suppliers and business partners upon which the Company relies for services. The
intention of these surveys was to assess the organization's overall readiness.
Additionally, specific inquiry letters were sent to external suppliers and
business partners upon which the Company relies for a specific product.
Recently the Company has begun to focus attention to mission critical suppliers.
The Company believes that its most likely worst case scenario would result from
an external supplier's inability to provide raw materials for use in the
Company's manufacturing processes. In order to alleviate the worst case
scenario, the Company is exploring plans to stockpile raw materials inventory.
In addition, the Company is planning on stockpiling finished goods inventory and
evaluating a modified holiday vacation schedule around the first of the year.
The other mission critical suppliers upon which the Company is dependent supply
services including insurance and loan servicing. No contingency plans have been
developed at this point in time should these suppliers prove to be
non-compliant. However, the Company is working with these organizations in order
to obtain further assurances regarding their compliance.
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. Recently the Company has begun to incur additional costs for
independent review and testing of compliance. The Company has acquired computing
platforms specifically for allowing a qualified third party review of all
internal systems. While the costs associated with this effort are not expected
to be material, they do represent a commitment on the part of the executive
management team to ensure the Company's position related to the Year 2000 issue.
While the Company believes its efforts will provide reasonable assurance that
material disruptions will not occur, there can be no assurance that interruption
will not occur.
19
LIQUIDITY AND CAPITAL RESOURCES
The increase in inventories since September 30, 1998 reflects primarily an
increase in finished goods inventory due to the softness in retail sales, the
increase in the number of retail sales centers and an increase in the percentage
of inventories represented by multi-section homes, which have higher average
unit costs than single-section homes. The Company's business has been adversely
impacted by competitive market conditions at retail and unexpected softness in
retail sales. The Company is in the process of responding to these conditions by
closing certain manufacturing plants, lowering production levels at other plants
and reducing staff costs at manufacturing and areas outside manufacturing. These
cost reductions are ongoing.
The decrease in loans and investments since September 30, 1998 principally
reflects a decrease in loans held for sale from $365 million at September 30,
1998 to $253 million at June 30, 1999. The Company originates loans and
warehouses them until sufficient receivables have been accumulated for a
securitization.
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. Since 1994, the Company generally has sold
to investors securities having a principal balance approximately equal to the
principal balance of the loans securitized, and accordingly has not been
required to seek the permanent capital required to fund its finance business
outside of the asset-backed securities market.
Late in 1998, global economic conditions significantly reduced the liquidity in
the asset-backed securities market, and credit spreads over treasurys demanded
by purchasers of the Company's asset-backed securities rose significantly. In
addition, demand for the relatively more subordinated asset-backed securities
offered for sale by the Company has decreased significantly. While market
conditions improved somewhat in early to mid 1999, late in the June quarter
credit spreads again widened and treasury yields rose. Such trends have
continued in July and early August. Widening credit spreads and higher treasury
yields adversely affect the Company's permanent funding costs, and adversely
affect the Company's profitability if the Company is unable to increase rates
charged to customers to compensate for these higher costs. Moreover, decreased
demand for asset-backed securities could require the Company to seek alternative
sources of financing for the loans originated by the consumer finance business.
At June 30, 1999 the Company owned subordinated asset-backed securities having a
principal balance of approximately $50 million associated with the Company's
August 1998 and June 1999 securitizations. Such securities are regular REMIC
interests and are included at their carrying value of $39 million in the
related caption in the table appearing in Note 4. The Company would consider
opportunities to liquidate these securities based upon market conditions.
In recent years, the Company has financed internal growth of its retail and
manufacturing business principally using internally generated funds and
short-term lines of credit. On March 2, 1999, the Company closed a $300 million
debt offering comprised of $175 million of senior notes at 8.125% due on March
1, 2009 and $125 million of senior notes at 7.875% due on March 1,
20
2004. The proceeds of this offering were used to pay outstanding indebtedness,
including $100 million borrowed from a commercial bank to finance the Schult
acquisition.
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 $175 million revolving credit facility
with a group of banks which is available to fund additional working capital
needs, a $20 million cash management line of credit and $10 million of
uncommitted lines of credit.
21
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. 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. The Company intends
to defend such lawsuit vigorously.
The Company is a defendant in a number of lawsuits that are
incidental to the conduct of its business.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(4) Agreement to Furnish Copies of Instruments
with Respect to Long-term Debt
(10) CIC Employment Agreement Between the Company
and Nicholas J. St. George
(27) Financial Data Schedule
b) Reports on Form 8-K
On April 9, 1999 the Company filed a report on Form
8-K in which the Company announced the issuance of a
press release concerning its anticipated results of
operations for the quarter ended March 31, 1999.
On June 18, 1999 the Company filed a report on Form
8-K in which the Company announced the issuance of a
press release concerning its anticipated results of
operations for the quarter ended June 30, 1999 and
the Board of Directors review of strategic
alternatives to enhance shareholder value.
Items 2, 3, 4 and 5 are inapplicable and are omitted.
22
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 16, 1999
OAKWOOD HOMES CORPORATION
BY: /s/ Robert A. Smith
--------------------------
Robert A. Smith
Executive Vice President
(Chief Financial Officer)
(Duly Authorized Officer)
23
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, 1999 1-7444
OAKWOOD HOMES CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit Description
4 Agreement to Furnish Copies of Instruments with Respect to
Long-term Debt
10 CIC Employment Agreement Between the Company and Nicholas J. St.
George
27 Financial Data Schedule
24