SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
( X ) Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1998 or
( ) Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _______ to _______
Commission File Number 1-7444
OAKWOOD HOMES CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-0985879
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7800 McCloud Road, Greensboro, North Carolina 27409-9634
(Address of principal executive offices)
Post Office Box 27081, Greensboro, North Carolina 27425-7081
(Mailing address of principal executive offices)
(336) 664-2400
(Registrant's telephone number, including area code)
-----------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No _____
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of July 31, 1998.
Common Stock, Par Value $.50 Per Share . . . . . . . . . 46,657,379
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<PAGE>
QUARTERLY REPORT ON FORM 10-Q
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Quarter Ended June 30, 1998
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
Greensboro, North Carolina
The consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures
contained herein are adequate to make the information presented not misleading.
These consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's latest
annual report on Form 10-K.
2
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands except per share data)
<TABLE>
<CAPTION>
Three months ended
June 30,
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
Revenues
Net sales $ 440,129 $ 266,015
Financial services income
Consumer finance 23,772 21,392
Insurance 8,550 843
Valuation charge (35,000) --
---------- ---------
(2,678) 22,235
Other income 3,060 4,187
---------- ---------
Total revenues 440,511 292,437
---------- ---------
Costs and expenses
Cost of sales 305,470 181,516
Selling, general and administrative expenses 105,839 63,401
Financial services operating expenses
Consumer finance 6,153 5,140
Insurance 7,009 270
---------- ---------
13,162 5,410
Provision for losses on credit sales 390 --
Interest expense
Non-financial services 2,336 838
Financial services 5,164 4,647
Total costs and expenses 432,361 255,812
Income before income taxes 8,150 36,625
Provision for income taxes 3,191 14,128
---------- ---------
Net income $ 4,959 $ 22,497
---------- ---------
Earnings per share
Basic $ .11 $ .49
Diluted $ .10 $ .48
Dividends per share $ .01 $ .01
Weighted average number of
common shares outstanding
Basic 46,311 45,721
Diluted 47,525 46,696
</TABLE>
3
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(in thousands except per share data)
<TABLE>
<CAPTION>
Nine months ended
June 30,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues
Net sales $ 912,374 $ 634,449
Financial services income
Consumer finance 68,157 69,920
Insurance 23,514 2,562
Valuation charge (51,300) -
--------- ---------
40,371 72,482
Other income 7,322 12,985
Total revenues 960,067 719,916
--------- ---------
Costs and expenses
Cost of sales 627,557 434,366
Selling, general and administrative expenses 229,264 164,033
Financial services operating expenses
Consumer finance 17,536 14,814
Insurance 19,080 1,344
--------- ---------
36,616 16,158
Provision for losses on credit sales 390 -
Interest expense
Non-financial services 3,721 2,480
Financial services 13,321 12,645
--------- ---------
Total costs and expenses 910,869 629,682
--------- ---------
Income before income taxes 49,198 90,234
Provision for income taxes 18,789 34,830
--------- ---------
Net income $ 30,409 $ 55,404
--------- ---------
Earnings per share
Basic $ .66 $ 1.21
Diluted $ .64 $ 1.19
Dividends per share $ .03 $ .03
Weighted average number of
common shares outstanding
Basic 46,192 45,604
Diluted 47,553 46,675
</TABLE>
4
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(in thousands except share and per share data)
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 25,494 $ 28,717
Receivables and investments 436,809 462,080
Inventories
Manufactured homes 268,449 186,767
Work-in-process, materials and supplies 39,132 17,672
Land/homes under development 5,100 3,859
------------ ------------
312,681 208,298
Properties and facilities 230,449 139,702
Deferred income taxes 8,764 12,994
Other assets 129,376 52,715
------------ ------------
$ 1,143,573 $ 904,506
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 310,661 $ 175,800
Notes and bonds payable 67,430 78,815
Accounts payable and accrued liabilities 180,987 122,162
Insurance policy reserves 45,851 30,535
Other long-term obligations 18,767 13,312
Shareholders' equity
Common stock, $.50 par value; 100,000,000
shares authorized; 46,603,000 and 46,299,000
shares issued and outstanding 23,301 23,149
Additional paid-in capital 164,941 159,281
Retained earnings 335,549 306,533
------------ ------------
523,791 488,963
Less: Unearned compensation (3,914) (5,081)
------------ ------------
519,877 483,882
------------ ------------
$ 1,143,573 $ 904,506
============ ============
</TABLE>
5
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30,
------------------------
1998 1997
--------- --------
<S> <C> <C>
Operating activities
Net income $ 30,409 $ 55,404
Items not requiring (providing) cash
Depreciation and amortization 17,274 10,721
Deferred income taxes (2,263) 183
Provision for credit losses 390 -
Gain on sale of loans (18,630) (15,016)
Asset valuation charges 51,300 -
Excess of cash receipts over REMIC residual income
recognized (income in excess of collections) 13,121 (885)
Other 4,343 2,503
Changes in net operating assets, excluding effects of business acquisition
Decrease in other receivables 38 17,062
(Increase) in inventories (84,034) (74,386)
(Increase) in prepaid expenses (1,171) (4,021)
(Increase) decrease in deferred insurance policy
acquisition costs (2,304) 236
Increase (decrease) in accounts payable and accrued liabilities 5,800 (47,857)
Increase (decrease) in insurance policy reserves 15,316 (583)
Increase in other long-term obligations 2,989 13,549
--------- --------
Cash provided (used) by operations 32,578 (43,090)
Loans originated (793,651) (589,875)
Sale of loans 765,726 676,483
Principal receipts on loans 34,913 25,214
--------- --------
Cash provided by operating activities 39,566 68,732
--------- --------
Investing activities
Business acquisition (101,829) -
Investment in and advances to joint venture (11,409) (4,000)
Additions to properties and facilities (39,436) (22,265)
Purchase of securities (5,045) -
Other (3,131) (13,693)
--------- --------
Cash (used) by investing activities (160,850) (39,958)
--------- --------
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C>
Financing activities
Net borrowings on short-term credit facilities 29,861 14,151
Proceeds of borrowings related to business acquisition 100,000 -
Issuance of notes and bonds payable 4,472 -
Payments on notes and bonds (17,105) (48,807)
Cash dividends (1,393) (1,378)
Proceeds from exercise of stock options 2,226 1,717
-------- --------
Cash provided (used) by financing activities 118,061 (34,317)
-------- --------
Net (decrease) in cash and cash equivalents (3,223) (5,543)
Cash and cash equivalents
Beginning of period 28,717 28,577
-------- --------
End of period $ 25,494 $ 23,034
======== ========
</TABLE>
7
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. The consolidated financial statements reflect all adjustments, which are, in
the opinion of management, necessary to present fairly the results of
operations for the periods presented. Except for asset valuation charges in
the amount of $35.0 million recorded for the three months ended June 30, 1998
and $51.3 million for the nine months ended June 30, 1998, relating to the
carrying value of retained interests in certain REMIC securitizations and the
Company's investment in a joint venture described in Management's Discussion
and Analysis of Financial Condition and Results of Operations, such
adjustments included only normal recurring adjustments. Results of operations
for any interim period are not necessarily indicative of results to be
expected for a full year.
2. On April 1, 1998 the Company acquired Schult Homes Corporation ("Schult"), a
producer of manufactured and modular housing headquartered in Middlebury,
Indiana. Each outstanding common share of Schult was converted into the right
to receive $22.50 in cash, or approximately $101 million in the aggregate. In
addition the Company issued options to acquire common stock of the Company in
exchange for certain options to acquire common shares of Schult which were
outstanding as of the acquisition date. The estimated fair market value of
Company stock options issued was approximately $2.9 million, which has been
included as part of the cost of the acquisition, together with costs incurred
in effecting the acquisition estimated to be $750,000.
The Company financed the acquisition principally through a $100 million loan
from a commercial bank repayable not later than March 30, 1999. The Company
intends to refinance the acquisition financing using long-term debt. The
acquisition has been accounted for using the purchase method of accounting. A
summary of the consideration paid in the acquisition and the allocation
thereof to the net assets acquired follows. The allocation of purchase price
is preliminary and subject to adjustments. However, the Company currently
does not expect such adjustments, if any, to be material.
8
<PAGE>
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash paid to selling shareholders $ 101,079
Acquisition costs 750
Estimated fair value of stock options issued 2,874
---------
Total consideration issued 104,703
Long-term debt assumed 1,608
Deferred income taxes 6,493
---------
$ 112,804
=========
Allocated to:
Properties and facilities $ 66,794
Working capital and other assets and
liabilities, excluding intangibles (15,585)
Intangible assets:
Assembled workforce (amortized using the straight-line method over
five years) 15,961
Dealer distribution network (amortized using the straight-line method
over three years) 6,000
Goodwill (amortized using the straight-line method over 40 years) 39,634
---------
$ 112,804
=========
</TABLE>
Schult's results of operations are included with those of the Company from
the April 1, 1998 acquisition date.
Summarized below is unaudited pro forma financial data of the Company
assuming the Schult acquisition had taken place at the beginning of the
periods presented. The pro forma results are not necessarily indicative of
future earnings or earnings that would have been reported had the acquisition
been completed when assumed.
Nine months ended
June 30,
----------------------------
1998 1997
------------ ---------
(in thousands, except per share data)
Net sales $ 1,080,521 $ 889,190
Net income $ 26,658 $ 54,668
Earnings per share - diluted $ .56 $ 1.17
9
<PAGE>
3. During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"),
which establishes standards for computing and presenting earnings per share
("EPS") by replacing the presentation of primary and fully diluted EPS with a
presentation of basic and diluted EPS. All current and prior year EPS amounts
herein reflect adoption of FAS 128. The following table sets forth the
computation of basic and diluted EPS:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Numerator for basic and diluted
EPS - Net income $ 4,959 $ 22,497 $ 30,409 $ 55,404
Denominator:
Weighted average number of
common shares outstanding 46,387 45,838 46,278 45,730
Unearned ESOP shares (76) (117) (86) (126)
------- -------- -------- ---------
Denominator for basic EPS 46,311 45,721 46,192 45,604
Dilutive effect of stock options and
restricted shares computed using
the treasury stock method 1,214 975 1,361 1,071
------- -------- -------- ---------
Denominator for diluted EPS 47,525 46,696 47,553 46,675
======= ======== ======== =========
Earnings per common share - basic $ .11 $ .49 $ .66 $ 1.21
======= ======== ======== =========
Earnings per common share - diluted $ .10 $ .48 $ .64 $ 1.19
======= ======== ======== =========
</TABLE>
4. The Company is contingently liable as guarantor on installment sale contracts
sold to third parties on a full or limited recourse basis. The amount of this
contingent liability was approximately $46 million at June 30, 1998. The
Company is also contingently liable as guarantor on subordinated securities
issued by REMIC trusts in the aggregate principal amount of $55 million at
June 30, 1998. In addition, the Company is contingently liable under terms of
repurchase agreements with financial institutions providing inventory
financing for retailers of homes produced by Destiny Industries, Inc.
("Destiny"), Golden West Homes ("Golden West") and Schult, manufacturing
subsidiaries of the Company doing business with independent dealers. The
Company estimates that its potential obligation under repurchase agreements
approximated $160 million at June 30, 1998.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended June 30, 1998 compared to three months ended June 30, 1997
The following table summarizes certain statistics for the quarters ended
June 30, 1998 and 1997 :
1998 1997
-------- ---------
Retail sales (in millions) $ 327.1 $ 244.2
Other sales (in millions) $ 113.0 $ 21.8
Total sales (in millions) $ 440.1 $ 266.0
Gross profit % - integrated operations 35.0% 32.8%
Gross profit % - wholesale operations 17.9% 20.5%
New single-section homes sold - retail 3,444 2,902
New multi-section homes sold - retail 3,932 3,390
Used homes sold - retail 516 523
New single-section homes sold - wholesale 778 98
New multi-section homes sold - wholesale 2,545 578
Average new single-section sales price - retail $31,900 $28,700
Average new multi-section sales price - retail $54,000 $46,100
Average new single-section sales price - wholesale $21,200 $15,400
Average new multi-section sales price - wholesale $37,600 $31,100
Weighted average retail sales centers
open during the period 332 271
Retail sales dollar volume increased 34%, reflecting a 17% increase in new
unit volume and increases of 11% and 17% in the average new unit sales prices of
single-section and multi-section homes, respectively. Single-section unit volume
increased 19%, while multi-section unit volume rose 16% from the third quarter
of fiscal 1997. During the third quarter of fiscal 1998, the Company opened or
acquired 16 new sales centers compared to nine sales centers in the third
quarter of fiscal 1997. The Company also closed one underperforming sales center
during the quarter compared to two in the third quarter of fiscal 1997. Total
new retail sales dollars at sales centers open more than one year increased 12%
during the third quarter of fiscal 1998. The average selling prices for new
single-section and new multi-section homes sold at retail increased due to price
increases and a shift in product mix toward higher price points.
Other sales dollar volume, which consists principally of wholesale sales
to independent dealers by the Company's Destiny, Golden West and Schult units,
increased 418%, due to an increase in wholesale unit volume related to the
acquisition of Schult on April 1, 1998. Schult sold 2,692 units, representing
$92.7 million of sales, to independent dealers during the third quarter of
fiscal 1998. The increase was also a result of increases of 38% and 21% in the
average sales prices of new single-section homes and new multi-section homes,
respectively. Schult's average sales prices are higher than those of Golden West
and Destiny. Schult focuses
11
<PAGE>
on the middle to higher price range of the manufactured housing market.
Excluding Schult, the average sales price of new single-section homes sold to
independent dealers remained constant and the average sales price of new
multi-section homes sold to independent dealers increased 6%.
Gross profit margin - integrated operations reflects gross profit earned
on all sales at retail as well as the manufacturing gross profit on retail sales
of units manufactured by the Company. Gross profit margin - integrated
operations increased to 35.0% in the current period from 32.8% in the third
quarter of last year. Approximately 97% of new homes sold at retail were
produced in Company-owned manufacturing plants in the third quarter of fiscal
1998 and 1997.
Wholesale gross profit margins decreased as a result of the acquisition of
Schult, whose gross profit margins currently are lower than those of the
Company's other wholesale sales. The combined wholesale gross profit margin of
Golden West and Destiny improved from last year, principally due to improved
efficiencies.
Financial services income for the third quarter of fiscal 1998 includes a
special charge of $35.0 million (approximately $21.7 million after tax, or $.46
per share), relating to valuation adjustments of certain retained interests in
REMIC securitizations and the Company's investment in a joint venture more fully
described below. Interest income earned on loans held for investment and on
loans held for sale prior to securitization increased from $7.0 million in the
third quarter of fiscal 1997 to $8.0 million this year. This increase reflects
an increase in the weighted average interest rate of loans held for sale prior
to securitization due to higher interest rates charged to less creditworthy
customers. This increase is partially offset by the decline in the principal
balance of loans held for investment. Loan servicing fees increased from $5.5
million in the third quarter of fiscal 1997 to $6.7 million this year,
reflecting the increased size of the Company's securitized loan servicing
portfolio. REMIC residual income decreased from $4.5 million to $2.2 million,
reflecting a decrease in the average yield on those investments, arising
principally from higher credit losses more fully described below.
Financial services income for the third quarter of fiscal 1998 and 1997
includes gains of approximately $7.7 million, or $.10 per share, after tax, and
$3.7 million, or $.05 per share, after tax, respectively, from the sale of
asset-backed securities.
Financial services income for the third quarter of fiscal 1998 also
includes $8.6 million in revenues from the Company's captive reinsurance
business which began operations on June 1, 1997. This subsidiary enables the
Company to participate more fully in what management believes to be the
profitable income streams associated with the property and casualty insurance
and service contract business than was possible under the commission-based
insurance agency arrangement which preceded its formation. As an insurance
underwriter, the Company recognizes insurance premium revenues over the life of
the related policies as a component of financial services income, with the
associated claims expenses reflected in financial services operating expenses.
Previously, insurance commission revenue was reported upon the sale of the
policies by Oakwood's retail operations, and was included in other income. Due
to this fundamental change in the Company's business, earnings for insurance
operations are now spread over the lives of the policies rather than being
recognized in full when the policies were sold. Because reinsurance claims costs
are recorded as insured events occur, underwriting reinsurance risk may increase
the volatility of the Company's earnings, particularly with respect to property
and casualty reinsurance. The Company has purchased catastrophe reinsurance to
reduce its underwriting exposure to natural disasters. Insurance revenues in
1997 relate to the Company's
12
<PAGE>
credit life insurance underwriting business which the Company has operated for
many years and which is ongoing.
The Company finances its consumer lending activities primarily by
securitizing the loans it originates using Real Estate Mortgage Investment
Conduits ("REMICs"), and accounts for loan securitizations under Statement of
Financial Accounting Standards No. 125, "Accounting for Transfer and Servicing
of Financial Assets and Extinguishments of Liabilities" ("FAS 125"). Under FAS
125, the Company allocates the sum of its basis in the loans conveyed to each
REMIC and the costs of forming the REMIC among the REMIC interests retained and
the REMIC interests sold to investors based upon the estimated fair values of
such interests. The Company's 50% owned consumer finance joint venture, Deutsche
Financial Capital ("DFC," an equity method investee), also has securitized its
separate loan orginations and also applies the provisions of FAS 125.
REMIC interests retained by the Company include servicing assets and REMIC
residual interests. The Company estimates the fair value of retained REMIC
residual interests based, in part, upon default and prepayment assumptions which
management believes market participants would use for similar instruments. The
actual rate of voluntary prepayments and the amount and timing of credit losses
affect the Company's yield on retained REMIC residual interests and the fair
value of such interests in periods subsequent to the securitization; the actual
rate of voluntary prepayments and credit losses typically varies over the life
of each transaction and from transaction to transaction. If over time the
Company's actual experience is more favorable than that assumed, the Company's
yield on its REMIC residual interests will be enhanced. Similarly, if over time
the Company's actual experience is less favorable than that assumed, such yield
will be reduced or impairment of the residuals may result.
For the quarter ended June 30, 1998, total credit losses on loans
originated by the Company, including losses relating to assets securitized by
the Company, loans held for investment, loans held for sale and loans sold with
full or partial recourse, amounted to approximately 1.58% on an annualized basis
of the average principal balance of the related loans, compared to approximately
1.57% one year ago. Because losses on repossessions are reflected in the loss
ratio principally in the period during which the repossessed property is
disposed of, fluctuations in the number of repossessed properties disposed of
from period to period may cause variations in the charge-off ratio. At June 30,
1998 the delinquency rate on Company originated loans was 4.0%, compared to 2.5%
at June 30, 1997 and 3.0% at March 31, 1998. Increased delinquency rates
ultimately may result in increased repossessions and foreclosures and an
increase in credit losses.
The Company and its DFC joint venture partner, Deutsche Financial Services
Corporation ("DFS"), have agreed in principle for the Company to cease
participation in the joint venture, and DFS has indicated its intention to
continue the venture's business for its own account. The Company and DFS are
discussing the means by which the transfer of the joint venture business to DFS
may be accomplished. At June 30, 1998 the venture's assets consisted principally
of approximately $167 million of loans in the warehouse, which the Company
currently anticipates will be securitized. Because the Company and DFS have not
reached a definitive agreement regarding the Company's exit from the DFC joint
venture business, the manner of such exit and the timing thereof cannot
presently be determined.
At June 30, 1998 the Company's investment in and advances to the DFC joint
venture totaled approximately $10.6 million, after reduction by a charge of
approximately $4.3 million
13
<PAGE>
(approximately $2.7 million after tax, or $.06 per share) to reduce the carrying
value of such investment and advances to their estimated net realizable values.
The amount ultimately realized from such investment and advances may be greater
or less than currently estimated.
DFC has securitized approximately $390 million of loans originated since
its inception. Credit losses on these loans to date have been greater than those
expected by the Company or DFC. Because of higher credit losses and related
uncertainties associated with the Company's expected exit from the DFC joint
venture, the Company has increased its credit loss assumptions with respect to
these transactions, which resulted in an indicated impairment of the residual
interests. Accordingly, in the third quarter the Company recorded a provision of
approximately $7.5 million (approximately $4.6 million after tax, or $.10 per
share) to reduce the carrying value of those investments to zero.
During the third quarter of fiscal 1998, the Company experienced a rise in
the rate of voluntary prepayments of loans in a number of its securitized loan
pools unrelated to DFC. Such higher rate of voluntary prepayments adversely
affects the Company's ability to recover the carrying value of its residual
interests in such securitizations. As a result of this increase in prepayments,
at June 30, 1998 the Company increased its assumed rate of voluntary prepayments
on all its securitized loan pools. Such increased assumption, together with an
increased credit loss assumption with respect to a loan securitization closed in
late 1996, resulted in an indicated impairment of the Company's investments in
certain securitization residuals. Accordingly, the Company in the third quarter
recorded a charge of approximately $23.2 million (approximately $14.4 million
after tax, or $.30 per share) to reduce the carrying value of such investments
to their estimated fair market values.
At June 30, 1998, after reduction for the valuation charges relating to
the DFC and Company residual investments, such investments had an aggregate
carrying value of approximately $65 million. In addition, the Company has
recorded approximately $8 million, net of amortization, of servicing assets
under FAS 125 and has recorded guarantee liabilities under FAS 125 of
approximately $5 million relating to guarantees of certain subordinated
securities issued by REMIC trusts (see Note 4).
The majority of the 27% decrease in other income reflects decreased
insurance commissions resulting from the formation of the reinsurance subsidiary
and the Company's exit from commission-based insurance agency arrangements
discussed above. Insurance commissions for the third quarter of fiscal 1997
totaled $2.1 million.
Selling, general and administrative expenses increased to 24.0% of net
sales in the third quarter of fiscal 1998, compared to 23.8% of net sales last
year. Higher retail selling expenses were offset by lower general and
administrative expenses as a percentage of sales at Schult. Excluding the
effects of the Schult acquisition, non-financial selling, general and
administrative expenses in the third quarter of fiscal 1998 were 27.0% of net
sales compared to 23.8% of net sales last year, with higher retail selling
expenses accounting for over one-half of the percentage increase.
Consumer finance operating expenses rose 20% compared to the quarter ended
June 30, 1997 on a 28% increase in the average number of loans serviced during
the period and a 53% increase in total credit application volume.
14
<PAGE>
Financial services interest expense includes interest expense associated
with long-term debt secured by loans as well as interest expense associated with
all short-term line of credit borrowings. Financial services interest expense
increased 11% primarily due to a $1.4 million increase in interest expense
related to higher average outstanding balances on short-term lines of credit.
This increase was partially offset by lower interest expense on declining and
retired long-term debt balances.
Non-financial services interest expense rose from $838,000 to $2.3 million
due principally to interest costs related to the financing of the Schult
acquisition.
The Company's effective income tax rate was 39.2% for the third quarter of
fiscal 1998 compared to 38.6% last year. The increase is related to the
acquisition of Schult.
Nine months ended June 30, 1998 compared to nine months ended June 30, 1997
The following table summarizes certain statistics for the nine months
ended June 30, 1998 and 1997:
1998 1997
-------- --------
Retail sales (in millions) $ 762.6 $ 564.3
Other sales (in millions) $ 149.8 $ 70.1
Total sales (in millions) $ 912.4 $ 634.4
Gross profit % - integrated operations 33.8% 33.2%
Gross profit % - wholesale operations 18.4% 18.5%
New single-section homes sold - retail 8,964 7,687
New multi-section homes sold - retail 8,890 6,951
Used homes sold - retail 1,761 1,503
New single-section homes sold - wholesale 918 447
New multi-section homes sold - wholesale 3,514 1,888
Average new single-section sales price - retail $31,000 $28,900
Average new multi-section sales price - retail $52,700 $47,400
Average new single-section sales price - wholesale $20,500 $15,200
Average new multi-section sales price - wholesale $36,700 $31,000
Weighted average retail sales centers
open during the period 320 264
Retail sales dollar volume increased 35%, reflecting a 22% increase in new
unit volume, and increases of 7% and 11% in the average new unit sales prices of
single-section and multi-section homes, respectively. Single-section unit volume
increased 17%, while multi-section unit volume rose 28% from the first nine
months of fiscal 1997. The average selling prices for new single-section and new
multi-section homes sold at retail increased due to price increases and a shift
in product mix toward higher price points. During the first nine months of
fiscal 1998, the Company opened or acquired 42 new sales centers compared to 24
sales centers in fiscal 1997. The Company also closed three underperforming
sales center during the nine months ended June 30, 1998 compared to four in the
nine months ended June 30, 1997. Total new retail sales
15
<PAGE>
dollars at sales centers open more than one year increased 13% during the nine
months ended June 30, 1998.
Other sales dollar volume increased 114%, due to an increase in wholesale
unit volume related to the acquisition of Schult on April 1, 1998. Schult sold
2,692 units, representing $92.7 million of sales, to independent dealers during
the third quarter of fiscal 1998. The increase was also a result of increases of
35% and 18% in the average sales prices of new single-section homes and new
multi-section homes. Excluding Schult, the average sales price of new
single-section and new multi-section homes sold to independent dealers increased
6% and 9%, respectively.
Gross profit margin - integrated operations increased to 33.8% during the
nine months ended June 30, 1998 from 33.2% in the first nine months of fiscal
1997. The percentage of new homes sold at retail which were produced in
Company-owned manufacturing plants was approximately 96% in the first nine
months of fiscal 1998 and 1997.
Wholesale gross profit margins decreased as a result of the acquisition of
Schult whose gross profit margins currently are lower than those of the
Company's other wholesale sales. The combined wholesale gross profit margin of
Golden West and Destiny improved from last year, principally due to improved
efficiencies.
Financial services income for the first nine months of fiscal 1998
includes special charges of $51.3 million ($31.8 million after tax, or $.67 per
share) relating to valuation adjustments of certain retained interests in REMIC
securitizations and the Company's investment in the DFC joint venture. In
addition to the $35.0 million of pretax charges described in the discussion of
third quarter results of operations above, in the second quarter of fiscal 1998
the Company recorded a pretax charge of approximately $16.3 to write-down the
carrying value of retained interests in certain REMIC securitizations,
principally as a result of higher than anticipated credit losses. Interest
income earned on loans held for investment and on loans held for sale prior to
securitization decreased from $22.3 million in the first nine months of fiscal
1997 to $22.2 million this year. Loan servicing fees increased from $15.6
million in the nine months ended June 30, 1997 to $20.1 million this year,
reflecting the increased size of the Company's securitized loan servicing
portfolio. REMIC residual income decreased from $15.6 million to $8.5 million,
reflecting a decrease in the average yield on those investments, arising
principally from higher credit losses. For the nine months ended June 30, 1998,
total credit losses on loans originated by the Company, including losses
relating to securitized assets, loans held for investment, loans held for sale
and loans sold with full or partial recourse, amounted to approximately 1.50% on
an annualized basis of the average principal balance of the related loans,
compared to approximately 1.33% last year.
Financial services income for the first nine months of fiscal 1998 and
1997 includes gains of approximately $18.6 million, or $.24 per share, after tax
and $15.0 million, or $.20 per share, after tax, respectively, from the sale of
asset-backed securities.
Financial services income for the first nine months of fiscal 1998 also
includes $23.5 million in revenues from the Company's captive reinsurance
business described in the discussion of third quarter results of operations
above. Insurance revenues in 1997 relate to the Company's credit life insurance
underwriting business which the Company has operated for many years and which is
ongoing.
16
<PAGE>
The majority of the 44% decrease in other income reflects decreased
insurance commissions resulting from the formation of the property and casualty
reinsurance subsidiary and the Company's exit from commission-based insurance
agency arrangements discussed above. Insurance commissions for the first nine
months of fiscal 1997 totaled $6.4 million.
Selling, general and administrative expenses declined to 25.1% of net
sales in the first nine months of fiscal 1998 compared to 25.9% of net sales
last year. The decrease reflects, in part, lower accruals for annual management
incentive compensation plans as a result of reduced profitability and the
reduced significance of fixed costs on a higher revenue base. These decreases
were partially offset by higher retail selling expenses. Excluding the effects
of the Schult acquisition, non-financial selling, general and administrative
expenses for the first nine months of fiscal 1998 were 26.5% compared to 25.9%
last year.
Consumer finance operating expenses rose 18% compared to the first nine
months of fiscal 1997 on a 29% increase in the average number of loans serviced
during the period and a 41% increase in total credit application volume.
Financial services interest expense includes interest expense associated
with long-term debt secured by loans as well as interest expense associated with
all short-term line of credit borrowings. Financial services interest expense
increased 5% primarily due to a $3.7 million increase in interest expense
related to higher average outstanding balances and higher weighted average
interest rates on short-term lines of credit. This increase was partially offset
by lower interest expense on declining and retired long-term debt balances.
Non-financial services interest expense rose from $2.5 million to $3.7
million due principally to interest costs related to the financing of the Schult
acquisition.
The Company's effective income tax rate was 38.2% for the first nine months
of fiscal 1998 compared to 38.6% last year.
YEAR 2000 ISSUES
The Company has analyzed the potential effects of year 2000 issues on the
computer systems that support the Company's business, including issues
associated with the Company's internally developed software and software
licensed from third parties. The Company is also in the process of reviewing the
issues faced by certain significant suppliers to the Company.
The Company has begun remediation of internally developed software to
resolve year 2000 compliance issues. The costs incurred by the Company to date,
which have been charged to expense, have not been material, and the Company does
not anticipate that the expected remaining costs will be material. Based upon
its assessment of internally developed and licensed software and the status of
remediation undertaken to date, the Company believes that substantially all
significant internal system issues associated with year 2000 compliance will be
resolved by the end of calendar 1998, except for year 2000 issues associated
with the Company's consumer finance loan origination systems which the Company
plans to replace with year 2000-compliant systems by June 1999.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Receivables and investments decreased from September 30, 1997 due, in
part, to a decrease in the balance of loans held for sale, as well as the
continued amortization of loans held for investment. The Company originates
loans and warehouses them until sufficient receivables have been accumulated for
a securitization. Through its Oakwood Mortgage Investors subsidiary, the Company
has securitized approximately $750 million of loans in the first nine months of
fiscal 1998. The decrease also reflects aggregate write downs of certain
retained interests in REMICs, offset in part by an increase in trade accounts
receivable related to the acquisition of Schult.
The increase in inventories from September 30, 1997 reflects the
acquisition of Schult, the manufacture of inventory in preparation for the
summer selling season, as well as the increase in the number of retail sales
centers since September 30, 1997.
Short-term borrowings reflect outstanding advances on the Company's
warehousing facility used to finance originated loans prior to securitization or
other permanent financing, as well as borrowings under other short-term credit
facilities. Management believes that permanent financing for its loans remains
readily available and anticipates securitizing installment sale contracts using
REMICs approximately every three months. During the third quarter the Company
also obtained a $100 million short-term loan to finance its Schult acquisition.
The Company intends to replace the loan with long-term debt on or before the
expiration of the loan on March 30, 1999.
The Company intends to finance internal growth of its retail and
manufacturing business principally using internally generated funds and
short-term lines of credit. Because the Company generally sells all of the
regular REMIC interests in its securitizations, additional permanent corporate
financing is not expected to be required to fund internal expansion of the
financial services businesses. Should the Company expand its businesses through
other significant acquisitions, additional permanent capital could be required.
In addition, the Company continues to monitor the debt and equity markets and
evaluate the sources and cost of long-term capital in light of management's
assessment of existing and future conditions in the capital markets and its
assessment of the appropriate components of the Company's capital structure.
While management believes that existing financing is sufficient to provide for
the Company's internal growth for the foreseeable future, the Company may seek
to raise additional long-term debt or equity if compelling market conditions
arise. During 1997 Standard & Poor's Ratings Group, Moody's Investors Service
and Fitch Investors Service, L.P. each raised its rating of the Company's senior
long-term debt to BBB-. Management believes that achieving an investment grade
rating from major credit rating agencies enhances the Company's flexibility in
obtaining both short and long-term financing.
18
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(4) Agreement to Furnish Copies of Instruments
with Respect to Long-term Debt
(27) Financial Data Schedule (filed in electronic format only)
b) Reports on Form 8-K
On April 10, 1998 the Company filed a report on Form 8-K in
which the Company reported the acquisition of Schult Homes
Corporation on April 1, 1998.
Items 1, 2, 3, 4 and 5 are inapplicable and are omitted.
19
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1998
OAKWOOD HOMES CORPORATION
BY: s/ C. Michael Kilbourne
-----------------------------
C. Michael Kilbourne
Executive Vice President
(Chief Financial Officer)
(Duly Authorized Officer)
20
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
ITEM 6(a)
FORM 10-Q
QUARTERLY REPORT
For the quarter ended Commission File Number
June 30, 1998 1-7444
OAKWOOD HOMES CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit Description
4 Agreement to Furnish Copies of Instruments with
respect to Long-Term Debt
27 Financial Data Schedule (filed in electronic format only)
21
<PAGE>
EXHIBIT 4
AGREEMENT TO FURNISH COPIES OF INSTRUMENTS
WITH RESPECT TO LONG-TERM DEBT
The Registrant has entered into certain agreements with respect to
long-term indebtedness which do not exceed ten percent of the total assets of
the Registrant and its subsidiaries on a consolidated basis. The Registrant
hereby agrees to furnish a copy of such agreements to the Commission upon
request of the Commission.
OAKWOOD HOMES CORPORATION
By: s/ C. Michael Kilbourne
-------------------------
C. Michael Kilbourne
Executive Vice President
22
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from (a)
the Registrant's consolidated financial statements for the quarter ended
June 30, 1998 filed as part of the Registrant's Form 10-Q for the quarter
ended June 30, 1998 and is qualified in its entirety by reference to such
(b) financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Sep-30-1998
<PERIOD-START> Oct-1-1997
<PERIOD-END> Jun-30-1998
<EXCHANGE-RATE> 1
<CASH> 25,494
<SECURITIES> 0
<RECEIVABLES> 437,514
<ALLOWANCES> 705
<INVENTORY> 312,681
<CURRENT-ASSETS> 0
<PP&E> 290,089
<DEPRECIATION> 59,640
<TOTAL-ASSETS> 1,143,573
<CURRENT-LIABILITIES> 491,648
<BONDS> 67,430
0
0
<COMMON> 23,301
<OTHER-SE> 496,576
<TOTAL-LIABILITY-AND-EQUITY> 1,143,573
<SALES> 912,374
<TOTAL-REVENUES> 960,067
<CGS> 627,557
<TOTAL-COSTS> 893,437
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 390
<INTEREST-EXPENSE> 17,042
<INCOME-PRETAX> 49,198
<INCOME-TAX> 18,789
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,409<F1>
<EPS-PRIMARY> .66
<EPS-DILUTED> .64
<FN>
<F1> EPS-BASIC
</FN>
</TABLE>