SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ________________
Commission file number 1-7444
OAKWOOD HOMES CORPORATION
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(Exact name of Registrant as specified in its charter)
NORTH CAROLINA 56-0985879
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(State of incorporation) (I.R.S. Employer Identification No.)
7800 McCloud Road, Greensboro, NC 27409-9634
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (336)664-2400
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
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Common Stock, Par Value New York Stock Exchange, Inc.
$.50 Per Share
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Company: (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 (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of shares of the Company's $.50 par value
Common Stock, its only outstanding class of common equity, held by
non-affiliates as of December 10, 1999 was $126,052,754.
The number of issued and outstanding shares of the Company's $.50 par
value Common Stock, its only outstanding class of common stock, as of December
10, 1999 was 47,124,562 shares.
The indicated portions of the following documents are incorporated by
reference into the indicated parts of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Parts Into Which
Incorporated Documents Incorporated
---------------------- ------------
<S> <C>
Annual Report to Shareholders for the Parts I and II
Fiscal Year Ended September 30, 1999
Proxy Statement for the Substitute Annual Meeting Part III
of Shareholders to be held February 9, 2000
</TABLE>
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PART I
ITEM 1. BUSINESS.
Oakwood Homes Corporation, a North Carolina corporation (the
"Company"), which was founded in 1946, designs, manufactures and markets
manufactured and modular homes and finances the majority of its retail sales.
The Company operates five manufacturing lines in Texas, four in each of North
Carolina, Georgia, Oregon and Indiana, two in each of Arizona and Pennsylvania,
and one in each of California, Colorado, Kansas, Minnesota and Tennessee,
including five idled lines. The Company's manufactured homes are currently sold
at retail through 371 Company owned and operated sales centers located primarily
in the southeastern and southwestern United States and to approximately 575
independent retailers located throughout the United States. The Company sells
insurance for customers choosing to purchase insurance and assumes the related
underwriting risk through its captive reinsurance business.
Manufactured Homes
The Company designs and manufactures a number of models of homes. Each
home contains a living room, dining area, kitchen, two, three or four bedrooms
and one or two bathrooms, and is equipped with a hot water heater and central
heating. Some homes are furnished with a sofa and matching chairs, dinette set,
coffee and end tables, carpeting, lamps, draperies, curtains and screens.
Optional furnishings and equipment include a range and oven, refrigerator, beds,
a fireplace, washing machine, dryer, microwave oven, dishwasher, air
conditioning, intercom, stereo systems, wet bar, vaulted ceilings, skylights,
hardwood cabinetry and energy conservation items. The homes manufactured by the
Company are primarily sold under the registered trademarks "Oakwood," "Freedom,"
"House Smart," "Golden West," "Schult," "Marlette" and the trade name "Victory."
The Company's manufactured homes are constructed and furnished at the
Company's manufacturing facilities and transported on wheels to the homesite.
The Company's manufactured homes are normally occupied as permanent residences
but can be transported on wheels to new homesites. The Company's homes are
defined as "manufactured homes" under the United States Code, and formerly were
defined as "mobile homes."
The Company manufactures 14-foot and 16-foot wide single-section homes
and multi-section homes consisting of two floors that are joined at the homesite
and are 24, 28 or 32 feet wide. The Company also manufactures a limited number
of multi-section homes consisting of three or four floors. The Company's homes
range from 40 feet to 80 feet in length. The Company's homes are sometimes
placed on rental lots in communities of similarly constructed homes.
The Company manufactures homes at thirty lines located in Hillsboro
(2), Kileen and Navasota (2), Texas; Richfield, Rockwell (2) and Pine Bluff,
North Carolina; Moultrie, Georgia (4); Etna Green (2) and Middlebury (2),
Indiana; Buckeye, Arizona (2); Albany (2) and Hermiston (2), Oregon; Lewistown
and Milton, Pennsylvania; Perris, California; Fort Morgan, Colorado; Plainville,
Kansas; Redwood Falls, Minnesota; and Pulaksi, Tennessee, including five idled
lines. During fiscal 1999, the Company took steps to permanently close four
manufacturing lines and temporarily idle five others.
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The Company purchases components and materials used in the manufacture
of its homes on the open market and is not dependent upon any particular
supplier. The principal raw materials purchased by the Company for use in the
construction of its homes are lumber, steel, aluminum, galvanized pipe,
insulating materials, drywall and plastics. Steel I-beams, axles, wheels and
tires, roof and ceiling materials, home appliances, plumbing fixtures,
furniture, floor coverings, windows, doors and decorator items are purchased or
fabricated by the Company and are assembled and installed at various stages on
the assembly line. Construction of the manufactured homes and the plumbing,
heating and electrical systems installed in them must comply with the standards
set by the Department of Housing and Urban Development ("HUD") under the
National Manufactured Home Construction and Safety Standards Act of 1974. See
"Regulation."
The Company furnishes to each purchaser of a new home manufactured by
the Company a one or five year limited warranty against defects in materials and
workmanship, except for equipment and furnishings supplied by other
manufacturers which are frequently covered by the manufacturers' warranties.
Modular Homes
In addition to traditional manufactured homes, the Company also
manufactures modular homes which are built in accordance with state or local
building codes and therefore are similar in specifications and design to
site-built homes. The Company's modular homes range in size from 960 square feet
to 3,355 square feet and include a variety of single story ranch homes, one and
a half story homes, two story homes, townhouses and duplex units, all of which
can include attached garages built at the site by others.
Sales
At September 30, 1999, the Company sold manufactured homes through 412
Company owned and operated sales centers located in 30 states primarily in the
southeastern and southwestern United States. See "Properties Manufactured Home
Sales Centers." The Company opened 60 new sales centers and closed seven sales
centers in fiscal 1999. Subsequent to September 30, 1999 the Company closed 41
underperforming sales centers. Each of the Company's sales centers hires and
trains sales personnel. Generally, each salesperson is paid a commission based
on the gross margin of his or her sales and certain volume targets, and each
general manager is paid a commission based on the profits of the sales center.
The Company operates its sales centers under the names Oakwood(R)
Mobile Homes, Freedom Homes(R), House Smart(R), Victory Homes, Schult(R) Homes
and Golden West Homes(R). At its sales centers, the Company sells homes
manufactured by it as well as by other manufacturers. During fiscal 1999,
approximately 97% of the Company's retail dollar sales of new homes were homes
manufactured by the Company and 3% represented sales of new homes manufactured
by others.
The Company also sells used homes acquired in trade-ins. At September
30, 1999, the Company's inventory of used homes was 1,384 homes as compared to
1,385 homes at September 30, 1998. Used homes in inventory do not include
repossessed units.
The Company also sells its homes to approximately 575 independent
retailers located throughout the United States. Sales to independent retail
dealers accounted for approximately 31% of the Company's total dollar volume of
sales in fiscal 1999 as compared to 19% in fiscal 1998. This increase resulted
from the Company's April 1, 1998 acquisition of Schult, which traditionally sold
all of its manufactured homes through independent dealers. The Company currently
sells modular homes to independent dealers.
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During recent years, the Company has placed increased emphasis on the
sale of multi-section homes. In fiscal 1999, the Company's retail sales of new
multi-section homes represented 58% of the total number of new homes sold at
retail, as compared to 52% in fiscal 1998.
The retail sales price for new single-section homes sold by the Company
in fiscal 1999 generally ranged from $16,000 to $68,000 with a mean sales price
of approximately $32,400. The retail sales price of multi-section homes sold by
the Company in fiscal 1999 generally ranged from $27,000 to $145,000, with a
mean sales price of approximately $56,100.
The Company's sales have traditionally been higher in the period from
late spring through early fall than in the winter months. Because a majority of
the homes manufactured by the Company are sold directly to retail customers, the
Company does not believe its backlog of orders is material.
Company Retail Sales Financing
A significant factor affecting sales of manufactured homes is the
availability and terms of financing. Approximately 87% of the Company's retail
unit sales in fiscal 1999 were financed by installment sale contracts or loans
arranged by the Company, each of which provided for monthly payments generally
over a period of 5 to 30 years. The remaining 13% of retail unit sales were paid
for with cash.
In fiscal 1999, 96% of the aggregate loan originations relating to
retail unit sales and dispositions of repossessed homes were installment sales
or loans financed and warehoused by the Company for investment or later sale and
4% were installment sales or loans financed by others without recourse to the
Company. At September 30, 1999, the Company held installment sale contracts or
loans with a principal balance of approximately $289 million and serviced an
additional $3.961 billion principal balance of installment sale contracts or
loans, the substantial majority of which it originated and securitized. A
substantial majority of the installment sale contracts owned by the Company are
pledged to financial institutions as collateral for loans to the Company.
The Company processes credit applications with respect to customers
seeking financing. The Company uses a credit scoring system, updated in fiscal
1998, to improve its credit decision-making process. The most significant
criteria in the system are the stability, income and credit history of the
borrower. This system requires a minimum credit score before the Company will
consider underwriting a contract. This system allows the Company a greater
ability to standardize the process by which it decides whether to extend credit
to a customer.
The Company retains a security interest in all homes it finances. In
certain circumstances, the Company also obtains a security interest in the real
property on which a home is located.
The Company is responsible for all collection and servicing activities
with respect to installment sale contracts it owns, as well as with respect to
certain contracts that the Company originated and sold. The Company receives
servicing fees with respect to installment sale contracts that it has sold but
continues to service.
The Company's ability to finance installment sale contracts is
dependent on the availability of funds to the Company. The Company obtains funds
to finance installment sale contracts primarily through sales of real estate
mortgage investment conduit ("REMIC") trust certificates to institutional
investors. During fiscal 1999, the Company sold $1.49 billion of REMIC
securities. The Company generally has no
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credit exposure with respect to securitized contracts except (i) with respect to
breaches of representations and warranties, (ii) to the extent of any retained
interests in a REMIC, (iii) with respect to required servicer advances, (iv)
with respect to the servicing fee (which is subordinated) and (v) with respect
to any REMIC security the Company has guaranteed.
The Company also obtains financing from time to time from loans insured
by the Federal Housing Administration ("FHA"). These installment sale contracts
are permanently funded primarily through the Government National Mortgage
Association ("GNMA") pass-through program, under which the Company issues
obligations guaranteed by GNMA. During fiscal 1999, the Company issued no
obligations guaranteed by GNMA. FHA insurance minimizes the Company's exposure
to losses on these credit sales.
The Company uses short-term credit facilities and internally generated
funds to support installment sale contracts until a pool of installment sale
contracts is accumulated to provide for permanent financing generally at fixed
rates.
In the past, the Company sold a significant number of installment sale
contracts to unrelated financial institutions with full recourse to the Company
in the event of default by the buyer. The Company receives endorsement fees from
financial institutions for installment sale contracts it has placed with them on
such a basis. Such fees totaled $98,000 in fiscal 1999. The Company's contingent
liability on installment sale contracts sold with full and limited recourse was
approximately $24 million at September 30, 1999.
Independent Dealer Retail Sales Financing
The Company provides permanent financing for homes sold by certain
independent dealers that sell Company manufactured homes. During fiscal 1999,
the Company financed approximately $99 million of the retail sales of these
independent dealers.
The Company from time to time considers the purchase of manufactured
home installment sale portfolios originated by others as well as servicing
rights to such portfolios. In fiscal 1999, the Company purchased a portfolio of
approximately $97 million associated with the wind down of its Deutsche
Financial Capital ("DFC") joint venture with Deutsche Financial Services
Corporation.
Delinquency and Repossession
In the event an installment sale contract or loan becomes delinquent,
the Company, either as owner or as servicer, normally contacts the customer
within 8 to 25 days thereafter in an effort to have the default cured. The
Company, as owner or servicer, generally repossesses the home after payments
have become 60 to 90 days delinquent if the Company is not able to work out a
satisfactory arrangement with the customer. After repossession, the Company
generally transports the home to a Company owned and operated sales center where
the Company attempts to resell the home or contracts with an independent party
to remarket the home. The Company also sells repossessed homes at wholesale.
The Company maintains a reserve for estimated credit losses on
installment sale contracts and loans owned by the Company or sold to third
parties with full or limited recourse. The Company provides for losses on credit
sales in amounts necessary to maintain the reserves at levels the Company
believes are sufficient to provide for future losses based on the Company's
historical loss experience, current economic conditions and portfolio
performance measures. For fiscal 1999, 1998 and 1997, as a result of expenses
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incurred due to defaults and repossessions, $3,678,000, $3,491,000 and
$3,984,000, respectively, was charged to the reserve for losses on credit sales.
The Company's reserve for losses on credit sales at September 30, 1999 was
$3,546,000, as compared to $2,067,000 at September 30, 1998 and $4,277,000 at
September 30, 1997.
In fiscal 1999, 1998 and 1997, the Company repossessed 7,830, 5,475 and
3,955 homes, respectively, including 854, 534 and 76, respectively, originated
on behalf of DFC. At September 30, 1999 the Company had a total of 2,417 unsold
properties in repossession or foreclosure compared to 1,430 and 1,016 at
September 30, 1998 and 1997, respectively. Of the total number of unsold
properties in repossession or foreclosure, 417, 295 and 54 relate to loans
originated on behalf of DFC at September 30, 1999, 1998 and 1997, respectively.
The estimated net realizable value of unsold properties in repossession or
foreclosure at September 30, 1999 was approximately $51 million.
The net losses resulting from repossessions on Company originated loans
as a percentage of the average principal amount of such loans outstanding for
fiscal 1999, 1998 and 1997 was 1.72%, 1.52% and 1.30%, respectively.
At September 30, 1999 and September 30, 1998, delinquent installment
sale contracts and loans expressed as a percentage of the total number of
installment sale contracts and loans that the Company (a) services or (b) has
sold with full recourse and that are serviced by others were as follows:
<TABLE>
<CAPTION>
Total Number Of Contracts Delinquency Percentage
And Loans September 30, 1999
---------------------------- ---------------------------------------------------------
30 days 60 days 90 days Total
------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Company-serviced contracts
and loans 125,115 (1) 2.8% 0.8% 1.5% 5.1%
Contracts and loans sold
with full recourse and
serviced by others
1,236 3.0% 1.2% 1.6% 5.8%
Total Number Of Contracts Delinquency Percentage
And Loans September 30, 1998
---------------------------- ---------------------------------------------------------
30 days 60 days 90 days Total
------- ------- ------- -----
Company-serviced contracts
and loans 114,169 (1) 2.1% 0.8% 1.2% 4.1%
Contracts and loans sold
with full recourse and
serviced by others
2,982 2.0% 0.7% 0.7% 3.4%
</TABLE>
(1) Excludes certain contracts and loans originated in September of each
year that were being processed at year end and not entered into the
loan servicing system until October of such year.
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At September 30, 1999 and September 30, 1998, delinquent installment
sale contracts and loans expressed as a percentage of the total outstanding
principal balance of installment sale contracts and loans that the Company (a)
services or (b) has sold with full recourse and that are serviced by others were
as follows:
<TABLE>
<CAPTION>
Total Value Delinquency Percentage
of Contracts September 30, 1999
---------------------------- ------------------------------------------------------------
30 days 60 days 90 days Total
------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Company-serviced contracts
and loans $4,210,908,000 (1) 2.4% 0.9% 1.5% 4.8%
Contracts and loans sold
with full recourse and
serviced by others
$7,927,000 2.8% 1.2% 1.7% 5.7%
Total Value Delinquency Percentage
of Contracts September 30, 1998
---------------------------- ------------------------------------------------------------
30 days 60 days 90 days Total
------- ------- ------- -----
Company-serviced contracts
and loans $3,531,522,000 (1) 1.9% 0.7% 1.1% 3.7%
Contracts and loans sold
with full recourse and
serviced by others
$22,000,000 2.3% 0.9% 0.8% 4.0%
</TABLE>
(1) Excludes certain contracts and loans originated in September of each
year that were being processed at year end and not entered into the
loan servicing system until October of such year.
Independent Retailer Repurchase Obligations
Substantially all of the independent retailers who purchase homes from
the Company finance new home inventories through wholesale credit lines provided
by third parties under which a financial institution provides the retailer with
a credit line for the purchase price of the home and maintains a security
interest in the home as collateral. A wholesale credit line is used by the
retailer to finance the acquisition of its display models, as well as to finance
the initial purchase of a home from a manufacturer until the home buyers obtain
permanent financing or otherwise pay the dealer for the installed home. In
connection with the wholesale financing arrangement, the financial institution
generally requires the Company to enter into a repurchase agreement with the
financial institution under which the Company is obligated, upon default by the
retailer, to repurchase its homes. Under the terms of such repurchase
agreements, the Company agrees to repurchase homes at declining prices depending
upon the age of the units. At September 30, 1999, the Company estimates that its
contingent liability under these repurchase agreements was approximately $208
million. The Company's losses under these arrangements have not been
significant.
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Insurance
On June 1, 1997, the Company ceased receiving commission income for
acting as an agent for certain insurance companies with respect to homeowners
insurance, credit life insurance and service contracts written for its
customers, and entered the reinsurance business directly through its own captive
reinsurer. This shift in activities 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 revenue, 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 insurance business,
earnings from 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.
Manufactured Housing Communities
The Company has under development a manufactured housing subdivision in
Hendersonville, North Carolina. The Company also owns land on which it intended
to develop a manufactured housing subdivision in Pinehurst, North Carolina. The
Pinehurst subdivision surrounds an existing golf course which the Company sold
in fiscal 1998. The Company intends to attempt to sell its remaining interests
in the Pinehurst subdivision. The Company does not intend to commit any material
resources to the land development business in the future, but may become
involved in land development or lot purchases from time to time to facilitate
retail sales.
The Company also owned a 50% interest in a recreational vehicle
campground and adjoining undeveloped land located in Deltaville, Virginia.
Subsequent to September 30, 1999, the Company sold its 50% interest to the
managing partner.
Competition
The manufactured housing industry is highly competitive with particular
emphasis on price, financing terms and features offered. There are numerous
retail dealers and financing sources in most locations where the Company
conducts retail and financing operations. Several of these financing sources are
larger than the Company and have greater financial resources. There are numerous
firms producing manufactured homes in the Company's market area, many of which
are in direct competition with the Company. Several of these manufacturers,
which sell the majority of their homes through independent dealers, are larger
than the Company and have greater financial resources.
The Company believes that its vertical integration gives it a
competitive advantage over many of its competitors. However, a number of the
Company's manufacturing competitors are establishing their own retail
distribution systems. To the extent such competitors successfully enter the
retail market, the
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Company could face increased competition at that level. The Company competes on
the basis of reputation, quality, financing ability, service, features offered
and price.
Manufactured homes are a form of permanent, low-cost housing and are
therefore in competition with other forms of housing, including site-built and
prefabricated homes and apartments. Historically, manufactured homes have been
financed as personal property with financing that has shorter maturities and
higher interest rates than have been available for site-built homes. In recent
years, however, there has been a growing trend toward financing manufactured
housing with maturities more similar to the financing of real estate, especially
when the manufactured housing is attached to permanent foundations on
individually-owned lots. Multi-section homes are often attached to permanent
foundations on individually-owned lots. As a result, maturities for certain
manufactured housing loans have moved closer to those for site-built housing.
Regulation
A variety of laws affect the financing of manufactured homes by the
Company. The Federal Consumer Credit Protection Act (Truth-in-Lending) and
Regulation Z promulgated thereunder require written disclosure of information
relating to such financing, including the amount of the annual percentage rate
and the finance charge. The Federal Fair Credit Reporting Act also requires
certain disclosures to potential customers concerning credit information used as
a basis to deny credit. The Federal Equal Credit Opportunity Act and Regulation
B promulgated thereunder prohibit discrimination against any credit applicant
based on certain specified grounds. The Federal Trade Commission has adopted or
proposed various Trade Regulation Rules dealing with unfair credit and
collection practices and the preservation of consumers' claims and defenses. The
Federal Trade Commission's regulations also require disclosure of a manufactured
home's insulation specification. Installment sale contracts and loans eligible
for inclusion in the GNMA Program are subject to the credit underwriting
requirements of the FHA. A variety of state laws also regulate the form of the
installment sale contracts and loan documents and the allowable deposits,
finance charge and fees chargeable pursuant to installment sale contracts and
loan documents. The sale of insurance products by the Company is subject to
various state insurance laws and regulations which govern allowable charges and
other insurance practices.
The Company is also subject to the provisions of the Fair Debt
Collection Practices Act, which regulates the manner in which the Company
collects payments on installment sale contracts, and the Magnuson-Moss Warranty-
Federal Trade Commission Improvement Act, which regulates descriptions of
warranties on products. The descriptions and substance of the Company's
warranties are also subject to state laws and regulations.
The Company's manufacture of homes generally is subject to the National
Manufactured Housing Construction and Safety Standards Act of 1974. In 1976, the
Department of Housing and Urban Development ("HUD") promulgated regulations,
which have been amended from time to time, under this Act establishing
comprehensive national construction standards covering many aspects of
manufactured home construction and installation, including structural integrity,
fire safety, wind loads and thermal protection. The Company's modular homes are
subject to state and local building codes.
The transportation of manufactured homes on highways is subject to
regulation by various federal, state and local authorities. Such regulations may
prescribe size and road use limitations and impose lower than normal speed
limits and various other requirements. Manufactured homes are also subject to
local zoning and other regulations.
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The Company's operations are subject to a variety of other statutes and
regulations.
Financial Information About Industry Segments
Financial information for each of the three fiscal years in the period ended
September 30, 1999 with respect to the Company's operating segments is
incorporated herein by reference to page 35 of the Company's 1999 Annual Report
to Shareholders.
Employees
At September 30, 1999, the Company employed 11,315 persons, of which
3,440 were engaged in sales and service, 6,772 in manufacturing, 568 in consumer
finance, and 535 in executive, administrative and clerical positions.
ITEM 2. DESCRIPTION OF PROPERTIES.
Offices
The Company owns its executive office space in Greensboro, North
Carolina. The Company also owns two additional office buildings, which formerly
served as its executive office space, located in two adjacent three-story
buildings in Greensboro, North Carolina. The Company leases office space in
Texas, Arizona, Indiana, Washington and Florida.
Manufacturing Facilities
The location and ownership of the Company's production lines, including
idled lines, are as follows:
Location Owned/Leased
Hillsboro, Texas (2 lines) Owned
Kileen, Texas Owned
Navasota, Texas (2 lines) Owned
Richfield, North Carolina Owned
Rockwell, North Carolina (2 lines) Owned
Pinebluff, North Carolina Owned
Moultrie, Georgia (4 lines) Owned
Etna Green, Indiana (2 lines) Owned
Middlebury, Indiana (2 lines) Owned
Buckeye, Arizona (2 lines) Owned
Albany, Oregon (2 lines) Leased/Owned
Hermiston, Oregon (2 lines) Owned
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Lewiston, Pennsylvania Owned
Milton, Pennsylvania Owned
Perris, California Owned
Fort Morgan, Colorado Owned
Plainville, Kansas Owned
Redwood Falls, Minnesota Owned
Pulaski, Tennessee Leased
The Company also has a manufacturing line that is currently being held
for sale located at Ennis, Texas.
The Company's manufacturing facilities are generally one story metal
prefabricated structures. The Company believes its facilities are in good
condition. These facilities are located on tracts of land generally ranging from
10 to 50 acres. The production area in these facilities ranges from
approximately 50,000 to 250,000 square feet. In addition, the Company owns a
112,000 square foot warehouse in Elkhart, Indiana.
The land and buildings at all of the facilities owned by the Company
were subject to mortgages with an aggregate balance of $12,107,000 at September
30, 1999.
Based on the Company's normal manufacturing schedule of one shift per
day for a five-day week, the Company believes that its currently operating
manufacturing plants have the capacity to produce approximately 70,000 floors
annually, depending on product mix. During fiscal 1999, the Company manufactured
67,825 floors at its plants.
Manufactured Home Sales Centers
The Company's manufactured home retail sales centers consist of tracts
of from 3/4 to 4 1/2 acres of land on which manufactured homes are displayed,
each with a sales office containing from approximately 600 to 1,300 square feet
of floor space. The Company operated 412 sales centers at September 30, 1999
located in 30 states distributed as follows: Texas (72), North Carolina (65),
South Carolina (25), Georgia (23), Tennessee (23), Virginia (18), Alabama (18),
Arizona (15), Kentucky (14), New Mexico (14), Ohio (13), Washington (13),
Mississippi (12), Florida (11), Oregon (9), Louisiana (8), Colorado (8), West
Virginia (8), Arkansas (7), Missouri (7), Idaho (6), Oklahoma (6), Nevada (4),
Delaware (3), Utah (3), California (2), Kansas (2), Indiana (1), Michigan (1)
and Wyoming (1). Subsequent to September 30, 1999, the Company closed 41
underperforming sales centers.
Thirty-two sales centers are on property owned by the Company and the
other locations are leased by the Company for a specified term of from one to
ten years or on a month-to-month basis. Rents paid by the Company during the
year ended September 30, 1999 for the leased sales centers totaled approximately
$15,006,000.
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Manufactured Housing Communities
The Company has under development a manufactured housing subdivision in
Hendersonville, North Carolina. The Company also owns property in Pinehurst,
North Carolina on which it intended to develop a manufactured housing
subdivision. The Company intends to offer the property for sale.
The Company also owned a 50% interest in a recreational vehicle
campground and adjoining undeveloped land located in Deltaville, Virginia.
Subsequent to September 30, 1999, the Company sold its 50% interest to the
managing partner.
ITEM 3. LEGAL PROCEEDINGS.
In November 1998 the Company and certain of its present and former
officers and directors were named as defendants in lawsuits filed on behalf of
purchasers of the Company's common stock for various periods between April 11,
1997 and July 21, 1998 (the "Class Period"). In June 1999 a consolidated amended
complaint was filed in the United States Middle District Court in Guilford
County, North Carolina. The amended compliant, which seeks class action
certification, alleges violations of federal securities law based on alleged
fraudulent acts, false and misleading financial statements, reports filed by the
Company and other representations during the Class Period and seeks the loss of
value in class members' stockholdings. The Company has filed a motion to dismiss
the amended complaint which has not yet been ruled upon by the court. The
Company intends to defend such lawsuit vigorously.
The Company is a defendant in a number of other lawsuits that are
incidental to the conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
SEPARATE ITEM. EXECUTIVE OFFICERS OF THE COMPANY.
Information as to executive officers of the Company who are directors
and nominees of the Company is incorporated herein by reference to the section
captioned "Election of Directors" of the Company's Proxy Statement for the
Substitute Annual Meeting of Shareholders to be held February 9, 2000.
Information as to the executive officers of the Company who are not directors or
nominees is as follows:
<TABLE>
<CAPTION>
Name Age Information About Officer
- ---- --- -------------------------
<S> <C> <C>
Eric D. Burgess 31 Vice President, Chief Accounting Officer and Controller since June
1999; Vice President and Controller of Oakwood Acceptance Corporation
(the Company's finance subsidiary) from June 1998 to May 1999; Audit
Manager, Price Waterhouse LLP 1996 to 1998; Audit Senior, Price
Waterhouse LLP from 1994 to 1996.
Douglas R. Muir 45 Senior Vice President and Secretary since 1994; Treasurer since 1993;
Partner, Price Waterhouse LLP from 1988 to 1993.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Name Age Information About Officer
- ---- --- -------------------------
<S> <C> <C>
Robert A. Smith 54 Executive Vice President and Chief Financial Officer since October
1998; Executive Vice President, Finance and Chief Operating Officer
of Oakwood Acceptance Corporation (the Company's finance subsidiary)
from September 1997 to October 1998; Senior Vice President of the
Company from February 1997 to September 1997; Partner, Price
Waterhouse LLP from 1984 to 1997.
Myles E. Standish 45 Executive Vice President, Chief Administrative Officer since November
1998; General Counsel since 1995; Senior Vice President from 1995 to
1998; Partner, Kennedy Covington Lobdell & Hickman, L.L.P., Attorneys
at Law, from 1987 to 1995.
J. Michael Stidham 46 Executive Vice President, Distribution since 1999; Executive Vice
President, Retail and Chief Operating Officer of Oakwood Mobile
Homes, Inc. (the Company's retail sales subsidiary) from 1994 to 1999.
Larry M. Walker 44 Executive Vice President, Manufacturing Operations and Chief Operating
Officer of Homes by Oakwood, Inc. (the Company's primary manufacturing
subsidiary) since 1997; Senior Vice President - Manufacturing of the
Company 1997; Senior Vice President - Quality and Service 1996; Senior
Vice President - Manufacturing Eastern Region 1993 to 1995.
Suzanne H. Wood 39 Vice President, Investor Relations and Financial Risk Management of
the Company since November 1998; Vice President and Chief Financial
Officer of Tultex Corporation (a manufacturer, marketer and
distributor of activewear) from February 1996 to November 1998;
Controller of Tultex Corporation from 1993 to February 1996. In
December 1999, Tultex Corporation filed for reorganization under
Chapter 11 of the bankruptcy code.
</TABLE>
Each officer holds office until his or her death, resignation,
retirement, removal or disqualification or until his or her successor is elected
and qualified.
14
<PAGE>
PART II
ITEMS 5-8.
Items 5, 7, 7A and 8 are incorporated herein by reference to pages 19
to 36 of the Company's 1999 Annual Report to Shareholders and to the sections
captioned "Securities Exchange Listing" and "Shareholders" on the inside back
cover page of the Company's 1999 Annual Report to Shareholders. Item 6 is
incorporated herein by reference to the information captioned "Net sales,"
"Total revenues," "Net income," "Earnings per common share--Basic and Diluted,"
"Total assets," "Notes and bonds payable" and "Cash dividends per common share"
for each of the five fiscal years in the period ended September 30, 1999 on page
1 of the Company's 1999 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
PART III
ITEMS 10-13.
Items 10-13 are incorporated herein by reference to the sections
captioned "Principal Holders of Common Stock and Holdings of Management,"
"Election of Directors," "Compensation Committee Interlocks and Insider
Participation," "Certain Relationships and Related Transactions," "Compensation
Committee Report," "Executive Compensation," "Director Compensation,"
"Employment Contracts, Termination of Employment and Change of Control
Arrangements" and "Section 16(a) Beneficial Ownership Reporting Compliance" of
the Company's Proxy Statement for the Substitute Annual Meeting of Shareholders
to be held February 9, 2000 and to the separate item in Part I of this Annual
Report on Form 10-K captioned "Executive Officers of the Company." Such Proxy
Statement will be filed with the Commission prior to January 28, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
EXHIBITS.
List the following documents filed as part of this report:
1. Financial Statements.
The following financial statements of the Company are
included as part of Exhibit 13 hereof:
Report of PricewaterhouseCoopers LLP
Consolidated Statements of Operations for the Years
ended September 30, 1999, 1998 and 1997
15
<PAGE>
Consolidated Balance Sheets as of September 30, 1999
and 1998
Consolidated Statements of Cash Flows for the Years
ended September 30, 1999, 1998 and 1997
Consolidated Statement of Changes in Shareholders'
Equity and Other Comprehensive Income for the Years
ended September 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
See the accompanying Index to Financial Statement
Schedules at page F-1.
3. Exhibits
3.1 Restated Charter of the Company dated January 25,
1984 (Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30,
1984)
3.2 Amendment to Restated Charter of the Company dated
February 18, 1988 (Exhibit 3 to the Company's Annual
Report on Form 10-K for the fiscal year ended
September 30, 1988)
3.3 Amendment to Restated Charter of the Company dated
April 23, 1992 (Exhibit 3.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended
September 30, 1992)
3.4 Amended and Restated Bylaws of the Company adopted
February 1, 1995 (Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994)
4.1 Shareholder Protection Rights Agreement between the
Company and Wachovia Bank of North Carolina, N.A., as
Rights Agent (Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1991)
4.2 Agreement to Furnish Copies of Instruments With
Respect to Long Term Debt (filed herewith)
4.3 Indenture dated as of March 2, 1999 between the
Company and The First National Bank of Chicago, as
Trustee (Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999)
4.4 First Supplemental Indenture dated as of March 2,
1999 between the Company and The First National Bank
of Chicago, as Trustee (Exhibit 4.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999)
16
<PAGE>
*10.1 Oakwood Homes Corporation 1985 Non-Qualified Stock
Option Plan (Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended
September 30, 1985)
*10.2 Oakwood Homes Corporation 1986 Nonqualified Stock
Option Plan for Nonemployee Directors (Exhibit 10.1
to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1986)
*10.3 Oakwood Homes Corporation 1981 Incentive Stock Option
Plan, as amended and restated (Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1987)
*10.4 Oakwood Homes Corporation 1990 Director Stock Option
Plan (Exhibit 10.24 to the Company's Registration
Statement on Form S-2 filed on April 13, 1991)
*10.5 Form of Executive Retirement Benefit Employment
Agreement between the Company and each of J. Michael
Stidham and Larry M. Walker (Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1993)
*10.6 Schedule identifying omitted Executive Retirement
Benefit Employment Agreements which are substantially
identical to the Form of Executive Retirement Benefit
Agreement described in Exhibit 10.12 and payment
schedules under Executive Retirement Benefit
Employment Agreements (Exhibit 10.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1993)
*10.7 Oakwood Homes Corporation Executive Incentive
Compensation Plan (Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996)
*10.8 Oakwood Homes Corporation Key Employee Stock Plan
(Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996)
*10.9 Oakwood Homes Corporation 1997 Director Stock Option
Plan (Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998)
*10.10 Oakwood Homes Corporation Director Deferral Plan
(Exhibit 10.18 to the Company's Annual Report on Form
10-K for the year ended September 30, 1998)
*10.11 Form of Employment Agreement between the Company and
each of William G. Edwards, Robert A. Smith, Myles E.
Standish and J. Michael Stidham (Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the year
ended September 30, 1998)
17
<PAGE>
*10.12 First Amendment to Amended and Restated Executive
Retirement Benefit Employment Agreement between the
Company and J. Michael Stidham (Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year
ended September 30, 1998)
*10.13 Employment Agreement dated as of September 27, 1999
by and between the Company and Nicholas J. St. George
(filed herewith)
13 The Company's 1999 Annual Report to Shareholders.
This Annual Report to Shareholders is furnished for
the information of the Commission only and, except
for the parts thereof expressly incorporated by
reference in this Annual Report on Form 10-K, is not
deemed to be "filed" as a part of this filing (filed
herewith)
21 List of the Company's subsidiaries (filed herewith)
23.1 Consent of PricewaterhouseCoopers LLP (filed
herewith)
27 Financial Data Schedule (filed in electronic format
only). This schedule is furnished for the information
of the Commission and shall not be deemed "filed" for
purposes of Section 11 of the Securities Act of 1933,
Section 18 of the Securities Exchange Act of 1934 and
Section 323 of the Trust Indenture Act.
- -------------
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K.
(b) REPORTS ON FORM 8-K. On August 11, 1999, the Company filed a Current Report
on Form 8-K in which it reported, pursuant to Item 5 thereof (Other Events),
that it had issued a press release relating to several developments, including
its decision to terminate its exploration of strategic alternatives and the
retirement of Mr. Nicholas J. St. George, its Chief Executive Officer and
Chairman of the Board. No financial statements were filed as part of such
Current Report on Form 8-K.
On July 15, 1999, the Company filed a Current Report on Form 8-K in
which it reported, pursuant to Item 5 thereof (Other Events), that it had issued
a press release relating to retail sales and earnings expectations for the third
quarter of its fiscal year. No financial statements were filed as part of such
Current Report on Form 8-K.
(c) EXHIBITS. See Item 14(a)(3).
(d) FINANCIAL STATEMENT SCHEDULES. See Item 14(a)(2).
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
OAKWOOD HOMES CORPORATION
By: /s/ Robert A. Smith
-----------------------------
Robert A. Smith
Executive Vice President and
Chief Financial Officer
Dated: December 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
the Company and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ William G. Edwards Director, Chairman, Chief December 29, 1999
- ----------------------------- Executive Officer and President
William G. Edwards (Principal Executive Officer)
/s/ Dennis I. Meyer Director December 29, 1999
- -----------------------------
Dennis I. Meyer
/s/ Kermit G. Phillips, II Director December 29, 1999
- -----------------------------
Kermit G. Phillips, II
/s/ Roger W. Schipke Director December 29, 1999
- -----------------------------
Roger W. Schipke
19
<PAGE>
/s/ Sabin C. Streeter Director December 29, 1999
- -----------------------------
Sabin C. Streeter
/s/ Francis T. Vincent, Jr. Director December 29, 1999
- -----------------------------
Francis T. Vincent, Jr.
/s/ Clarence W. Walker Director December 29, 1999
- -----------------------------
Clarence W. Walker
/s/ H. Michael Weaver Director December 29, 1999
- -----------------------------
H. Michael Weaver
/s/ Robert A. Smith Executive Vice President and December 29, 1999
- ----------------------------- Chief Financial Officer
Robert A. Smith (Principal Financial Officer)
/s/ Eric D. Burgess Vice President and December 29, 1999
- ----------------------------- Controller
Eric D. Burgess (Principal Accounting Officer)
</TABLE>
20
<PAGE>
OAKWOOD HOMES CORPORATION
INDEX TO FINANCIAL STATEMENT SCHEDULES
The financial statements, together with the report thereon of
PricewaterhouseCoopers LLP dated November 9, 1999, except for the information
presented in the third pargraph in Note 9 for which the date is December 22,
1999, appearing on pages 19 to 36 of the Company's 1999 Annual Report to
Shareholders, are incorporated by reference in this Annual Report on Form 10-K.
With the exception of the aforementioned information and the information
incorporated in Items 1, 5, 6, 7, 7A and 8, the 1999 Annual Report to
Shareholders is not deemed to be filed as part of this report. Financial
statement schedules not included in this Annual Report on Form 10-K have been
omitted because they are not applicable or the required information is shown in
the financial statements or notes thereto.
PAGE
----
Supplementary information to notes to
consolidated financial statements F-2
F-1
<PAGE>
OAKWOOD HOMES CORPORATION
AND CONSOLIDATED SUBSIDIARIES
SUPPLEMENTARY INFORMATION TO NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The components of inventories are as follows:
September 30, September 30, September 30,
1999 1998 1997
---------- ----------- ----------
New manufactured homes $364,770,000 $234,606,000 $180,813,000
Used manufactured homes 18,047,000 8,261,000 5,954,000
Homes in progress 6,924,000 6,119,000 2,948,000
Land/Homes under development 14,318,000 6,417,000 3,859,000
Raw materials and supplies 39,539,000 35,949,000 14,724,000
------------ ------------ ------------
$443,598,000 $291,352,000 $208,298,000
============ ============ ============
F-2
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
EXHIBITS
ITEM 14(a)(3)
ANNUAL REPORT ON FORM 10-K
Commission
For the fiscal year ended File Number
September 30, 1999 1-7444
OAKWOOD HOMES CORPORATION
EXHIBIT INDEX
Exhibit No. Exhibit Description
- ----------- -------------------
3.1 Restated Charter of the Company dated January 25,
1984 (Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30,
1984)
3.2 Amendment to Restated Charter of the Company dated
February 18, 1988 (Exhibit 3 to the Company's Annual
Report on Form 10-K for the fiscal year ended
September 30, 1988)
3.3 Amendment to Restated Charter of the Company dated
April 23, 1992 (Exhibit 3.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended
September 30, 1992)
3.4 Amended and Restated Bylaws of the Company adopted
February 1, 1995 (Exhibit 3.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1994)
4.1 Shareholder Protection Rights Agreement between the
Company and Wachovia Bank of North Carolina, N.A.,
as Rights Agent (Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991)
4.2 Agreement to Furnish Copies of Instruments With
Respect to Long Term Debt (filed herewith)
4.3 Indenture dated as of March 2, 1999 between the
Company and The First National Bank of Chicago, as
Trustee (Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999)
4.4 First Supplemental Indenture dated as of March 2,
1999 between the Company and The First National Bank
of Chicago, as Trustee
<PAGE>
(Exhibit 4.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999)
10.1 Oakwood Homes Corporation 1985 Non-Qualified Stock
Option Plan (Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended
September 30, 1985)
10.2 Oakwood Homes Corporation 1986 Nonqualified Stock
Option Plan for Nonemployee Directors (Exhibit 10.1
to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1986)
10.3 Oakwood Homes Corporation 1981 Incentive Stock
Option Plan, as amended and restated (Exhibit 10.1
to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1987)
10.4 Oakwood Homes Corporation 1990 Director Stock Option
Plan (Exhibit 10.24 to the Company's Registration
Statement on Form S-2 filed on April 13, 1991)
10.5 Form of Executive Retirement Benefit Employment
Agreement between the Company and each of J. Michael
Stidham and Larry M. Walker (Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1993)
10.6 Schedule identifying omitted Executive Retirement
Benefit Employment Agreements which are
substantially identical to the Form of Executive
Retirement Benefit Agreement described in Exhibit
10.12 and payment schedules under Executive
Retirement Benefit Employment Agreements (Exhibit
10.8 to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1993)
10.7 Oakwood Homes Corporation Executive Incentive
Compensation Plan (Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996)
10.8 Oakwood Homes Corporation Key Employee Stock Plan
(Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996)
10.9 Oakwood Homes Corporation 1997 Director Stock Option
Plan (Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998)
10.10 Oakwood Homes Corporation Director Deferral Plan
(Exhibit 10.18 to the Company's Annual Report on
Form 10-K for the year ended September 30, 1998)
10.11 Form of Employment Agreement between the Company and
each of William G. Edwards, Robert A. Smith, Myles
E. Standish and J. Michael
<PAGE>
Stidham (Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the year ended September 30,
1998)
10.12 First Amendment to Amended and Restated Executive
Retirement Benefit Employment Agreement between the
Company and J. Michael Stidham (Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year
ended September 30, 1998)
10.13 Employment Agreement dated as of September 27, 1999
by and between the Company and Nicholas J.
St. George (filed herewith)
13 The Company's 1999 Annual Report to Shareholders.
This Annual Report to Shareholders is furnished for
the information of the Commission only and, except
for the parts thereof expressly incorporated by
reference in this Annual Report on Form 10-K, is not
deemed to be "filed" as a part of this filing (filed
herewith).
21 List of the Company's subsidiaries (filed herewith)
23.1 Consent of PricewaterhouseCoopers LLP (filed
herewith)
27 Financial Data Schedule (filed in electronic format
only). This schedule is furnished for the
information of the Commission and shall not be
deemed "filed" for purposes of Section 11 of the
Securities Act of 1933, Section 18 of the Securities
Exchange Act of 1934 and Section 323 of the Trust
Indenture Act.
EXHIBIT 4.2
Agreement to Furnish Copies of Instruments
With Respect to Long Term Debt
The Company has entered into certain agreements with respect to
long-term indebtedness which do not exceed ten percent of the total assets of
the Company and its subsidiaries on a consolidated basis. The Company hereby
agrees to furnish a copy of such agreements to the Commission upon request of
the Commission.
OAKWOOD HOMES CORPORATION
By: /s/ Robert A. Smith
Robert A. Smith
Executive Vice President and
Chief Financial Officer
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of September 27, 1999 by and between OAKWOOD HOMES CORPORATION, a North Carolina
corporation (the "Company"), and NICHOLAS J. ST. GEORGE ("Executive").
STATEMENT OF PURPOSE
The Company desires to secure Executive's employment and participation
in the business of the Company in the manner hereinafter specified and to make
provision for payment of reasonable and proper compensation to Executive for
such services. Executive is willing to be so employed by the Company and to
perform the duties incident to such employment upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the aforesaid Statement of Purpose,
the terms and provisions of this Agreement and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto mutually consent, covenant, represent, warrant and agree as
follows:
1. Employment. During the term of this Agreement as provided in
paragraph 2 below (the "Term"), the Company agrees to employ Executive, and
Executive agrees to be employed by the Company, with the duties and
responsibilities hereinafter set forth, subject to the other terms and
conditions of this Agreement. Executive shall perform such services during
regular business hours as may be assigned to him from time to time by the Chief
Executive Officer of the Company or the Board of Directors of the Company.
2. Term. This Agreement shall commence as of October 1, 1999 and shall
terminate at the close of business on September 30, 2002, unless earlier
terminated as follows:
(i) Death. Executive's employment hereunder shall terminate
automatically upon Executive's death.
(ii) Disability. The Company may terminate Executive's employment
hereunder upon the determination by the Company of the
"Disability" (as defined below) of Executive, said termination
to be effective as of the date of such determination.
(iii) Cause. The Company may terminate Executive's employment
hereunder at any time for "Cause" (as defined below) upon
giving Executive notice of such termination, said termination
to be effective as of the date specified in such notice.
For purposes of this Agreement, the following terms shall have the following
meanings:
<PAGE>
"CAUSE" means Executive's termination of employment with the Company as
the result of (i) an act or acts of dishonesty on the part of Executive
constituting a felony and resulting or intended to result in
substantial gain or personal enrichment at the expense of the Company,
or (ii) a willful and substantial breach by Executive of Executive's
duties to the Company after written notice to Executive of such breach
and failure to correct within thirty (30) days, which such breach has
caused substantial injury to the Company. In no event shall Executive's
termination of employment with the Company be considered to have been
for Cause if such termination took place as a result of (i) Executive's
bad judgment or negligence or (ii) any act or omission without intent
of gaining a profit to which Executive was not legally entitled or
(iii) any act or omission believed by Executive in good faith to have
been in, or not opposed to, the interests of the Company.
"DISABILITY" means "Disability" under and as defined in the Oakwood
Homes Corporation Key Employee Stock Plan.
3. Compensation and Benefits. Subject to the terms of this Agreement,
and except as otherwise expressly provided herein, until the termination of
Executive's employment hereunder, the Company shall pay compensation and provide
benefits to Executive as follows:
(i) Salary. The Company shall pay to Executive a base salary (the
"Salary") at an annual rate of Two Hundred Thousand Dollars
($200,000). Salary shall be payable at such intervals as shall
be in conformity with the Company's practices, as such
practices shall be established or modified from time to time.
(ii) Reimbursements for Incidental Expenses. The Company shall
reimburse Executive for certain incidental expenses approved
by the Company, which such reimbursements shall not exceed
Twenty Thousand Dollars ($20,000) for each twelve (12) month
period during the Term commencing on October 1 and ending on
September 30.
(iii) Employee Benefits. Executive shall be entitled to participate
in such medical, dental, disability, hospitalization, life
insurance, profit sharing and other benefit plans or programs
as the Company shall maintain from time to time generally for
the benefit of full-time employees of the Company, on the
terms and subject to the conditions set forth in such plans or
programs.
(iv) Supplemental Retirement Benefits. The Company and Executive
entered into an Amended and Restated Executive Retirement
Benefit Agreement dated December 31, 1991 (the "Retirement
Agreement"), pursuant to which Executive (or his beneficiary
in the case of his death) may become eligible for certain
benefits payable over a fifteen year period following his
retirement from the Company or his death prior to retirement.
The Retirement Agreement is hereby terminated. In lieu of the
benefits
<PAGE>
Executive would have otherwise been entitled to under the
Retirement Agreement, the Company shall pay Executive one
hundred eighty (180) monthly payments of Thirty-Three Thousand
Three Hundred Thirty-Three and 33/100 Dollars ($33,333.33)
each commencing on the first day of the calendar month
following the calendar month in which Executive's employment
with the Company is terminated. Notwithstanding the foregoing,
Executive may irrevocably elect at any time on or before
January 31, 2000, on a form furnished by the Company, to be
paid such supplemental retirement benefits in a single cash
payment payable on or before (at the Company's option)
December 31, 2000. The amount of such single cash payment
shall equal the present value as of the month of payment of
the monthly payments beginning April 1, 2000 calculated using
a six percent (6%) discount rate. In the event of Executive's
death prior to the payment of all amounts due to Executive
under this paragraph 3(iv), the remaining payment(s) shall be
made to such beneficiary(ies) as Executive may designate to
the Company in writing as and when such payments would have
otherwise been made to Executive had he not died.
4. Miscellaneous.
(a) Payments of benefits under this Agreement shall be subject to any
applicable payroll and withholding taxes.
(b) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, by agreement in form
and substance reasonably satisfactory to Executive, expressly to assume and
agree to perform this Agreement in the same manner and to the same extent that
the Company would be required to perform if no succession had taken place. As
used in this Agreement, "Company" shall mean the Company as defined above and
any successor to its business or assets which executes and delivers the
agreement provided for in this paragraph 4(b) or which otherwise becomes bound
by all of the terms and provisions of this Agreement by operation of law.
(c) The right of Executive to any compensation under this Agreement may
not be assigned, pledged or transferred by Executive. To the extent Executive
acquires a right to receive compensation under this Agreement, such right shall
be no greater than the right of any unsecured general creditor of the Company.
Nothing contained herein shall be deemed to create a trust of any kind or any
fiduciary relationship between the Company and Executive.
(d) Should any provision of this Agreement be declared invalid or
unenforceable as a matter of law, such invalidity or unenforceability shall not
affect or impair the validity or enforceability of any other provision of this
Agreement or the remainder of this Agreement as a whole.
(e) This Agreement constitutes the entire Agreement and sets forth all
the terms of the understanding between the parties hereto with respect to the
subject matter hereof, and any
<PAGE>
amendment, change or modification in any provision of this Agreement or any
waiver of this Agreement shall be in writing signed by the parties hereto.
(f) The section headings inserted in this Agreement are for convenience
of reference only and shall not be deemed to have any legal effect whatsoever on
the interpretation of this Agreement.
(g) This Agreement shall be governed, enforced and construed according
to the laws of the State of North Carolina.
(h) This Agreement shall be binding upon, and shall inure to the
benefit of, the parties hereto and their respective heirs, personal
representatives, and permitted successors and assigns.
(i) No provision of this Agreement shall be deemed to restrict the
absolute right of the Company, at any time, to sell or dispose of all or any
part of its assets, or reconstitute the same into any one or more subsidiary
corporations, or to merge, consolidate, sell or to otherwise dispose of said
subsidiary corporation or any of the assets thereof.
(j) This Agreement is executed in duplicate originals, one of which is
being retained by each of the parties hereto, and each of which shall be deemed
an original hereof.
[SIGNATURES ON NEXT PAGE]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the day and year first above set forth.
OAKWOOD HOMES CORPORATION
By: /s/ Dennis I. Meyer
---------------------
Name: Dennis I. Meyer
----------------
Title: Director
---------------
EXECUTIVE:
/s/ Nicholas J. St. George
--------------------------
Nicholas J. St. George
[OAKWOOD LOGO APPEARS HERE]
OAKWOOD
HOMES
CORPORATION
1999 ANNUAL REPORT
[PORTIONS OF REGISTRANT'S
ANNUAL REPORT TO SHAREHOLDERS
INCORPORATED BY REFERENCE]
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------------------------
(in thousands except per share data) 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,496,419 $1,404,432 $ 952,704 $862,079 $741,521 $595,127
Total revenues $1,589,225 $1,482,553 $1,070,051 $973,922 $821,412 $664,610
Net income (loss) $ (31,320) $ 55,353 $ 81,913 $ 68,255 $ 45,318 $ 35,655
Earnings (loss) per common share
Basic $ (0.67) $ 1.20 $ 1.79 $ 1.53 $ 1.03 $ 0.82
Diluted $ (0.67) $ 1.17 $ 1.75 $ 1.47 $ 0.99 $ 0.78
Total assets $1,437,847 $1,283,376 $ 904,506 $841,977 $782,640 $590,397
Notes and bonds payable $ 352,164 $ 61,875 $ 78,815 $134,379 $198,812 $207,990
Cash dividends per common share $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04
</TABLE>
[Bar chart appears here. See table below for plot points.]
NET SALES
(in millions)
'94 '95 '96 '97 '98 '99
595 742 862 953 1,404 1,496
5 year compound growth rate: 20%
[Bar chart appears here. See table below for plot points.]
SHAREHOLDERS'
EQUITY
(in millions)
'94 '95 '96 '97 '98 '99
276 318 392 484 548 526
5 year compound growth rate: 14%
[Bar chart appears here. See table below for plot points.]
EBITDA
(in millions)
'94 '95 '96 '97 '98 '99
86 105 143 167 139 36
[Bar chart appears here. See table below for plot points.]
NEW HOMES SOLD AT RETAIL
(in thousands)
'94 '95 '96 '97 '98 '99
Total 13.0 16.7 20.1 22.1 26.1 22.1
Single-section 9.7 12.1 13.6 11.7 12.4 9.3
Multi-section 3.3 4.6 6.5 10.4 13.7 12.8
5 year compound growth rate: 11%
[Bar chart appears here. See table below for plot points.]
NUMBER OF SALES CENTERS
'94 '95 '96 '97 '98 '99
152 198 255 300 359 412
[Line chart appears here. See table below for plot points.]
CUMULATIVE GROWTH
'94 '95 '96 '97 '98 '99
Oakwood retail home sales 0 28 54 69 100 69
Industry shipments 0 12 24 21 25 25
page 1
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UNLESS OTHERWISE INDICATED, ALL REFERENCES TO ANNUAL PERIODS REFER TO FISCAL
YEARS ENDED SEPTEMBER 30.
RESULTS OF OPERATIONS
Total sales increased 7% to $1.496 billion from $1.404 billion last year,
following a 47% increase in 1998 from the $953 million reported in 1997. Total
revenues rose 7% to $1.6 billion from $1.5 billion last year, compared to $1.1
billion reported for 1997.
The following table summarizes certain key sales statistics for each of
the last three years:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Retail sales (in millions) $ 1,037 $ 1,140 $ 859
Wholesale sales (in millions) $ 459 $ 264 $ 94
Total sales (in millions) $ 1,496 $ 1,404 $ 953
Gross profit %--integrated operations 33.0% 33.7% 33.0%
Gross profit %--wholesale operations 15.8% 17.7% 19.0%
New single-section homes sold--retail 9,256 12,390 11,670
New multi-section homes sold--retail 12,810 13,669 10,418
Used homes sold--retail 2,190 2,349 2,155
New single-section homes sold--wholesale 3,087 1,638 539
New multi-section homes sold--wholesale 10,153 6,145 2,508
Average new single-section sales price--retail $ 32,400 $ 31,400 $29,200
Average new multi-section sales price--retail $ 56,100 $ 53,300 $47,900
Average new singe-section sales price--wholesale $ 21,800 $ 20,900 $15,500
Average new multi-section sales price--wholesale $ 38,000 $ 37,000 $31,900
Weighted average retail sales centers open during the year 383 330 278
Average dollar sales per sales center (in millions) $ 2.7 $ 3.5 $ 3.1
</TABLE>
1999 COMPARED TO 1998
NET SALES
The Company's sales volume was adversely affected by competitive industry
conditions in 1999. Retail sales dollar volume decreased 9%, reflecting a 15%
decrease in new unit volume partially offset by increases of 3% and 5% 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 58% of retail new unit sales
compared to 52% in 1998.
During 1999 the Company opened or acquired 60 new sales centers
compared to 62 sales centers during 1998. The Company also closed seven
underperforming sales centers during the year compared to three in 1998. Total
new retail sales dollars at sales centers open more than one year decreased 20%
during 1999. During September 1999 the Company announced plans to close
approximately 40 additional sales centers that were not meeting profitability
targets. The anticipated effects of such actions are more fully described in
"Restructuring charges" below.
Wholesale sales dollar volume increased 74% due to an increase in
wholesale unit volume related to the acquisition of Schult on April 1, 1998.
Schult sold 10,464 units, representing $366.8 million of sales, to independent
dealers during 1999 compared to 5,386 units, representing $185.9 million of
sales, in 1998 subsequent to the acquisition. Excluding the effects of the
Schult acquisition, wholesale sales dollars increased 18% during 1999,
reflecting primarily higher sales volume.
GROSS PROFIT
Gross profit margin--integrated operations reflects gross profit earned on all
sales at retail as well as the manufacturing gross profit on retail sales of
units manufactured by the Company. Gross profit margin--integrated operations
decreased from 33.7% in 1998 to 33.0% primarily as a result of competitive
pricing and unfavorable manufacturing variances caused by reduced production
schedules experienced during the fourth quarter of 1999.
Wholesale gross profit margins decreased from 17.7% in 1998 to 15.8% in
1999 as a result of the acquisition of Schult, whose gross profit margins are
lower than those of the Company's other wholesale sales, and unfavorable
manufacturing variances caused by reduced production schedules experienced
during the fourth quarter of 1999. Schult represented approximately 80% of
wholesale sales dollars during 1999 compared to 70% in 1998.
FINANCIAL SERVICES INCOME
Financial services income for 1999 includes impairment and valuation
provisions totaling $35.8 million (approximately $22.5 million after tax, or
$.48 per share) relating to impairment of the value of certain retained
interests in loan securitizations and other financial services-related charges,
of which $29.1 million (approximately $18.4 million after tax, or $.39 per
share) was recorded in the fourth quarter. During 1998 the Company recorded
impairment and valuation provisions totaling $53.7 million (approximately $33.3
million after tax, or $.70 per share), relating primarily to valuation
adjustments of certain retained interests in REMIC securitizations. The
impairment and valuation provisions are more fully described in Note 3 to the
consolidated financial statements. The impairment and valuation provisions
generally reflect higher than anticipated credit losses on securitized loans
and, in 1998, an increase in the assumed rate of voluntary loan prepayments.
For the year ended September 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 1.72% of the average
principal balance of the related loans, compared to approximately 1.52% 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 September 30, 1999 the Company had
a total of 2,417 unsold properties in repossession or foreclosure (approximately
1.97% of the total number of Oakwood originated serviced assets) compared to
1,430 and 1,016 at September 30, 1998 and 1997, respectively (approximately
1.28% and 1.14%, respectively, of the
PAGE 13
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
total number of Oakwood originated serviced assets). Of the total number of
unsold properties in repossession or foreclosure, 417, 295 and 54 relate to
loans originated on behalf of Deutsche Financial Capital ("DFC"), the Company's
former consumer finance joint venture, at September 30, 1999, 1998 and 1997,
respectively.
At September 30, 1999 the delinquency rate on Company originated loans,
excluding loans originated on behalf of DFC, was 4.9%, compared to 3.9% at
September 30, 1998. In September 1999 the Company physically and operationally
reorganized its consumer finance business, which the Company believes will
improve the effectiveness of its loan originations and servicing functions over
the long term. The Company believes that the reorganization, which included
geographic decentralization of the Company's loan servicing operations,
temporarily disrupted collection relationships with borrowers and adversely
affected delinquency rates at year end. The delinquency rate at August 31, 1999
was 4.2% compared to 4.1% at August 31, 1998. Increased delinquency rates
ultimately may result in increased repossessions and foreclosures and an
increase in credit losses.
Financial services revenues include losses on the sale of asset-backed
securities of $10.8 million, or $.15 per share, after tax, in 1999, compared to
gains in 1998 of $20.1 million, or $.26 per share, after tax. 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 as compared to when they were securitized. 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.
REMIC residual income decreased from $10.3 million in 1998 to $8.0
million in 1999, reflecting primarily a decline in the average balance of
residual interests.
Interest income increased from $30.9 million during 1998 to $41.7
million in 1999. The increase primarily reflects higher average outstanding
balances of loans held for sale prior to securitization due to increased
origination volume and the timing of securitizations. The increase also reflects
incremental interest income on retained regular REMIC interests from certain of
the Company's 1998 and 1999 securitizations. These increases were partially
offset by lower interest income on loans held for investment, the principal
balance of which is declining as these loans are liquidated.
Loan servicing fees, which are reported net of amortization of
servicing assets, decreased from $27.7 million during 1998 to $25.6 million in
1999. 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.
Insurance revenues from the Company's captive reinsurance business
increased 46% to $49.6 million in 1999 from $34.0 million in 1998. The increase
is due to the increased size of the Company's portfolio, offset by an increase
in catastrophe reinsurance premium expense recorded during the fourth quarter of
1999 of approximately $1.8 million associated with Hurricane Floyd. See
additional discussion below under "Financial services operating expenses."
OTHER INCOME
Other income increased from $10.8 million during 1998 to $13.4 million in 1999.
During 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 1999
the Company also sold two airplanes at a gain of $1.4 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to 27.5% of net
sales for the year ended September 30, 1999, from 24.3% of net sales in 1998.
The most significant component of the increase was higher retail selling
expenses, both in absolute terms and as a percentage of retail sales. Higher
retail selling expenses reflect increased fixed costs associated with additional
sales centers as well as higher retail compensation costs.
FINANCIAL SERVICES OPERATING EXPENSES
Consumer finance operating expenses rose $13.3 million, or 55%, during 1999. Of
the total dollar increase, approximately $5.3 million represents higher
compensation costs, including headcount additions in the loan origination and
servicing functions. Management believes that committing additional resources to
these functions is consistent with its desire to improve the performance of the
loan servicing portfolio over the long term. In addition, allocations of parent
company costs, principally occupancy and telecommunications, increased by
approximately $2.4 million. During 1999 the average number of loans serviced and
applications processed increased 15% and 10%, respectively.
Insurance operating costs increased 40% during 1999 principally due to
higher claims costs associated with the increased size of the business.
Insurance operating costs also include estimated losses, net of recoveries from
the Company's reinsurers, of approximately $5.6 million associated with flooding
and other storm damage claims from Hurricane Floyd.
RESTRUCTURING CHARGES
During the fourth quarter of 1999 the Company recorded restructuring charges of
approximately $25.9 million, or $.35 per share, after tax. These charges relate
primarily to the closing of four manufacturing lines, temporarily idling five
others and the closing of approximately 40 sales centers that were not meeting
profitability targets. The charges include approximately $7.4 million related to
severance and other termination costs, approximately $11.2 million related to
asset writedowns and approximately $7.4 million related to estimated costs to
close the manufacturing lines and sales centers.
INTEREST EXPENSE
Nonfinancial services interest expense rose from $6.0 million in 1998 to $10.6
million in 1999, due principally to interest expense associated with $100
million of debt incurred in connection with the April 1, 1998 Schult
acquisition, which was refinanced in March 1999 using a portion of the proceeds
of the Company's $300 million senior note offering.
PAGE 14
<PAGE>
Financial services interest expense consists principally of
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.
The increase in financial services interest expense primarily reflects interest
costs related to the senior note offering. 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 37.0% in 1999 compared to 38.6% in
1998. The decrease reflects primarily limited state income tax benefits
associated with certain losses and charges.
1998 COMPARED TO 1997
NET SALES
Retail sales dollar volume increased 33%, reflecting an 18% increase in new unit
volume and increases of 8% and 11% in the average new unit sales prices of
single-section and multi-section homes, respectively. Average retail sales
prices rose due to price increases and a shift in product mix toward higher
price points. Single-section unit volume increased 6%, while multi-section unit
volume rose 31% from 1997.
During 1998 the Company opened or acquired 62 new sales centers
compared to 49 sales centers during 1997. The Company also closed three
underperforming sales centers during 1998 compared to four in 1997. Total new
retail sales dollars at sales centers open more than one year increased 13%
during 1998.
Wholesale sales dollar volume increased 180% due to an increase in
wholesale unit volume related to the acquisition of Schult on April 1, 1998.
Schult sold 5,386 units, representing $185.9 million of sales, to independent
dealers subsequent to the acquisition. Excluding the effects of the Schult
acquisition, wholesale sales declined 17%, reflecting the Company's strategy
prior to the Schult acquisition of changing the distribution of products
produced by Golden West and Destiny from nonexclusive independent dealers to
Company-owned retail sales centers. The wholesale sales increase also reflects
increases in the average wholesale sales prices of single-section homes and
multi-section homes at Destiny and Golden West of 2% and 6%, respectively.
Schult's higher average price points caused the overall average wholesale
selling prices of single-section and multi-section homes to rise 35% and 16%,
respectively.
GROSS PROFIT
Gross profit margin--integrated operations increased to 33.7% in 1998 from 33.0%
in 1997.
Wholesale gross profit margins decreased as a result of the acquisition
of Schult, whose gross profit margins are lower than those of the Company's
other wholesale sales. The combined wholesale gross profit margin of Golden West
and Destiny increased over 1997, principally due to improved efficiencies.
FINANCIAL SERVICES INCOME
During 1998 the Company recorded charges of $53.7 million (approximately $33.0
million after tax, or $.70 per share), relating primarily to valuation
adjustments of certain retained interests in REMIC securitizations. Excluding
the effects of these charges, consumer finance revenues for 1998 declined to
$87.1 million from $91.7 million in 1997.
For the year ended September 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 1.52% of the average
principal balance of the related loans, compared to approximately 1.30% in 1997.
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 September 30, 1998 the Company had a
total of 1,430 unsold properties in repossession or foreclosure (approximately
1.28% of the total number of Oakwood originated serviced assets) compared to
1,016 and 642 at September 30, 1997 and 1996, respectively (approximately 1.14%
and 0.96%, respectively, of the total number of Oakwood originated serviced
assets). Of the total number of unsold properties in repossession or
foreclosure, 295 and 54 relate to loans originated on behalf of DFC at September
30, 1998 and 1997, respectively.
Financial services revenues for 1998 and 1997 includes gains of
approximately $20.1 million, or $.26 per share, after tax, and $19.3 million, or
$.25 per share, after tax, respectively, from the sale of asset-backed
securities.
REMIC residual income decreased from $19.4 million in 1997 to $10.3
million in 1998, reflecting a decline in the average balance of residual
interests resulting from the writedowns of those investments during the year
and, to a lesser extent, lower yields on those investments arising from higher
credit losses.
Interest income increased from $29.4 million during 1997 to $30.9
million in 1998. The increase reflects higher average outstanding balances of
loans held for sale prior to securitization due to increased origination volume.
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 $21.5 million during 1997 to
$27.7 million in 1998, reflecting the increased size of the Company's
securitized loan servicing portfolio.
Financial services income for 1998 also includes $34.0 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
PAGE 15
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
were sold. 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. Prior to June 1, 1997, insurance
revenues primarily related to the Company's credit life insurance underwriting
business which the Company has operated for many years and which was combined
with the property and casualty reinsurance subsidiary on October 1, 1997.
OTHER INCOME
The majority of the 26% 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 totaled $6.4 million in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to 24.3% of net sales for
the year ended September 30, 1998, compared to 24.8% of net sales in 1997.
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, nonfinancial selling, general and
administrative expenses for 1998 were 26.1% of net sales compared to 24.8% of
net sales in 1997, with higher retail selling expenses accounting for the
majority of the increase, partially offset by decreased accruals for management
compensation.
FINANCIAL SERVICES OPERATING EXPENSES
Financial services operating expenses rose 78% during 1998 due to the addition
of claims and other expenses related to the formation of the captive reinsurance
company discussed above. Exclusive of the captive reinsurance costs, financial
services operating expenses increased 19% over 1997 on a 26% increase in the
average number of loans serviced during 1998 and a 46% increase in total credit
application volume.
INTEREST EXPENSE
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 12% primarily due to a $5.2 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.
Nonfinancial services interest expense rose from $3.3 million to $6.0
million due principally to interest costs related to the financing of the Schult
acquisition.
INCOME TAXES
The Company's effective income tax rate was 38.6% in 1998 compared to 38.5% in
1997.
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 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 had 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 has also been
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 noncompliant. Based upon the
status of remediation and verification undertaken to date, the Company believes
that substantially all significant internal system issues associated with Year
2000 compliance have been resolved.
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.
The Company also focused significant attention on mission critical
suppliers of raw materials. 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 planning a modified holiday
vacation schedule around the first of the year. In addition, the Company
has finished goods inventory that can be sold if supplier problems persist.
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 noncompliant. The Company has worked with these organizations in order to
obtain significant 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. While the costs associated with this effort have not been
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.
PAGE 16
<PAGE>
Should disruptions occur, the Company has planned contingencies that
call for expeditious replacement of troublesome computing hardware and/or
software, manual operating procedures, use of alternative suppliers and frequent
system backup procedures.
LIQUIDITY AND CAPITAL RESOURCES
The increase in inventories from September 30, 1998 reflects primarily an
increase in finished goods inventory due to 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
affected by competitive market conditions at retail and softness in retail
sales. The Company responded to these conditions during the fourth quarter of
1999 by closing four manufacturing lines, temporarily idling five others and
closing approximately 40 sales centers that were not meeting profitability
targets.
The decrease in loans and investments from September 30, 1998
principally reflects a decrease in loans held for sale from $365 million at
September 30, 1998 to $280 million at September 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. Beginning in 1994 the Company
generally sold to investors securities having a principal balance approximately
equal to the principal balance of the loans securitized, and accordingly was not
required to seek the permanent capital required to fund its finance business
outside of the asset-backed securities market.
Fiscal 1999 was characterized by turbulent market conditions for many
kinds of asset-backed securities, including those historically offered for sale
by the Company. Early in the fiscal year, global economic conditions
significantly reduced liquidity in the asset-backed securities market, and
credit spreads over treasurys demanded by investors in asset-backed securities
rose significantly. While the Company's ability to sell asset-backed securities
was not materially adversely affected by liquidity conditions early in the
fiscal year, the Company incurred increased permanent funding costs as a
consequence of wider credit spreads. While credit spreads fluctuated over the
balance of the fiscal year, and market liquidity improved significantly by
mid-fiscal year, in general credit spreads for fiscal 1999 were significantly
greater than in 1998, which resulted in increased funding costs to the Company.
In the summer of 1999 market liquidity again contracted, caused in part
by investor concerns over potential Year 2000 issues and the potential for
higher interest rates as a consequence of possible monetary policy actions by
the Federal Reserve Board in response to strong economic conditions. In addition
to these factors, which the Company believes affected many issuers of
asset-backed securities in addition to the Company, management believes that
demand for the relatively more subordinated asset-backed securities offered for
sale by the Company decreased because of the Company's poor financial
performance. As a consequence of decreased demand, the Company did not sell any
asset-backed securities rated less than single-A created in its June and
September loan securitizations at the closing of those transactions. The
aggregate principal balance of the securities rated below single-A represented
approximately 11% of the aggregate principal balance of the loans securitized in
those transactions.
At September 30, 1999 the Company owned subordinate asset-backed
securities having a carrying value of approximately $60.7 million associated
with certain of the Company's 1998 and 1999 securitizations, as well as
subordinate asset-backed securities having a carrying value of approximately
$8.6 million retained from securitization transactions prior to 1994. The
Company considers these securities to be available for sale, and would consider
opportunities to liquidate these securities based upon market conditions.
Continued decreased demand for subordinate asset-backed securities at prices
acceptable to the Company would be likely to require the Company to seek
alternative sources of financing for the loans originated by the consumer
finance business, or require the Company to seek alternative long-term financing
for subordinate asset-backed securities. There can be no assurance that such
alternative financing can be obtained.
The Company estimates that in 2000 capital expenditures will
approximate $35 million, comprised principally of systems implementations and
various computer equipment, expansion of its House Smart(TM) retail locations
and improvements at certain manufacturing facilities.
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 8.125% senior notes due on
March 1, 2009 and $125 million of 7.875% senior notes due on March 1, 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 $125 million revolving credit facility
with a group of banks which is available to fund additional working capital
needs. The Company believes that these facilities, together with a facility
currently under negotiation to finance retained REMIC interests, should be
adequate to meet the Company's short-term liquidity needs.
MARKET RISK
Certain of the Company's financial instruments are subject to market risk,
including interest rate risk. The Company's financial instruments are not
currently subject to foreign currency risk or commodity price risk. The Company
has no financial instruments held for trading purposes.
The Company originates loans, most of which are at fixed rates of
interest, in the ordinary course of business and periodically securitizes them
to obtain permanent financing for such loan originations. Accordingly, the
Company's loans held for sale are exposed to risk from changes in interest rates
between the times loans are originated and the time at which the Company obtains
permanent financing, generally at fixed rates of interest, in the asset-backed
securities market. The Company attempts to manage this risk by minimizing the
warehousing period of unsecuritized loans. Loans held for sale are excluded from
the table below as
PAGE 17
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
they primarily represent recent originations which will be securitized in fiscal
2000.
Loans held for investment also are subject to interest rate risk. The
Company currently does not originate any loans with the intention of holding
them for investment.
Retained regular and residual REMIC interests are held as available for
sale securities; the value of these securities may change in response to, among
other things, changes in interest rates. Such interests in REMIC securitizations
are valued as described in Notes 1 and 4 to the consolidated financial
statements.
All of the Company's short-term credit facilities provide for interest
at variable rates. Accordingly, an increase in short-term interest rates would
adversely affect interest expense on short-term debt. In addition, certain of
the Company's notes and bonds payable bear interest at floating rates, and
interest expense on such obligations would be adversely affected by an increase
in short-term interest rates.
The following table sets forth the Company's financial instruments that
are sensitive to changes in interest rates at September 30, 1999:
<TABLE>
<CAPTION>
Weighted
average Assumed cash flows
interest rate ---------------------------------------------------------------------------------
(dollar amounts in thousands) at year end(1) 2000 2001 2002 2003 2004 Thereafter Total Fair value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans held for investment(2)
Fixed rate loans 13.6% $ 16,924 $13,249 $10,028 $ 6,804 $4,780 $ 4,679 $ 56,464 $ 43,271
Variable rate loans 8.6% 2,165 1,717 1,352 1,055 813 1,436 8,538 5,703
Retained REMIC interests(3)
Regular interests 7.3% 6,610 12,691 5,541 5,661 6,534 105,188 142,225 69,325
Residual interests 17.1% 13,421 16,486 1,014 14,165 4,929 3,136 53,151 36,630
(1) For REMIC residual interests represents the weighted average interest rate used to discount assumed cash flows.
(2) Assumed cash flows represent contractual cash flows reduced by the effects of estimated prepayments.
(3) Assumed cash flows reflect the assumed prepayment rates used in estimating the fair values of the related REMIC interests.
Weighted
average Maturities
interest rate --------------------------------------------------------------------------------
(dollar amounts in thousands) at year end 2000 2001 2002 2003 2004 Thereafter Total Fair value
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 5.8% $199,800 $ -- $ -- $ -- $ -- $ -- $199,800 $199,800
Notes and bonds payable
Fixed rate 8.1% 11,862 529 17,240 70 124,762 174,330 328,793 239,065
Variable rate 5.6% 6,612 4,819 2,825 2,792 1,167 5,156 23,371 23,371
</TABLE>
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), which establishes accounting and reporting standards
for derivative instruments and hedging activities, and which is effective for
fiscal years beginning after June 15, 2000. The Company currently is evaluating
the potential effect of FAS 133 on its financial statements upon adoption in
2001.
FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements and information
based on the beliefs of the Company's management as well as assumptions made by,
and information currently available to, the Company's management. Words like
"believe," "expect," "should," and similar expressions used in this annual
report are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to a number of uncertainties, and assumptions, including industry
conditions, management expertise, government policy and regulations, general
economic conditions, catastrophic events, litigation and other risk factors in
the Company's Registration Statement on Form S-3 filed February 22, 1999. Should
underlying assumptions prove incorrect or should one or more of the risks and
uncertainties materialize, actual events or results may vary from those
described herein as anticipated, expected, believed or estimated.
PAGE 18
<PAGE>
Oakwood Homes Corporation and Subsidiaries
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------------
(in thousands except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C> <C>
Net sales $1,496,419 $1,404,432 $ 952,704
Financial services
Consumer finance, net of impairment and
valuation provisions 29,747 33,394 91,716
Insurance 49,643 33,965 11,062
- ---------------------------------------------------------------------------------------------
79,390 67,359 102,778
Other income 13,416 10,762 14,569
- ---------------------------------------------------------------------------------------------
Total revenues 1,589,225 1,482,553 1,070,051
- ---------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 1,081,716 973,434 651,400
Selling, general and administrative expenses 411,344 341,441 236,586
Financial services operating expenses
Consumer finance 37,530 24,204 20,364
Insurance 38,463 27,554 8,692
- ---------------------------------------------------------------------------------------------
75,993 51,758 29,056
Restructuring charges 25,926 -- --
Provision for losses on credit sales 3,261 1,281 --
Interest expense
Nonfinancial services 10,580 5,970 3,274
Financial services 30,129 18,579 16,543
- ---------------------------------------------------------------------------------------------
Total costs and expenses 1,638,949 1,392,463 936,859
- ---------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (49,724) 90,090 133,192
Provision for income taxes (18,404) 34,737 51,279
- ---------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (31,320) $ 55,353 $ 81,913
- ---------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE
Basic $ (0.67) $ 1.20 $ 1.79
- ---------------------------------------------------------------------------------------------
Diluted $ (0.67) $ 1.17 $ 1.75
- ---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
PAGE 19
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
----------------------------
(in thousands except share and per share data) 1999 1998
- ----------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 26,939 $ 28,971
Loans and investments 430,865 502,583
Other receivables 98,317 58,774
Inventories 443,598 291,352
Properties and facilities 251,069 237,726
Deferred income taxes 30,712 14,850
Other assets 156,347 149,120
- ----------------------------------------------------------------------------------------------
$1,437,847 $1,283,376
- ----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 199,800 $ 375,023
Notes and bonds payable 352,164 61,875
Accounts payable and accrued liabilities 243,525 226,867
Insurance reserves and unearned premiums 89,404 57,419
Other long-term obligations 26,962 14,517
Shareholders' equity
Common stock, $.50 par value; 100,000,000 shares authorized;
47,107,000 and 46,660,000 shares issued and outstanding 23,554 23,330
Additional paid-in capital 171,185 167,592
Retained earnings 326,825 360,025
- ----------------------------------------------------------------------------------------------
521,564 550,947
Accumulated other comprehensive income 7,021 --
Unearned compensation (2,593) (3,272)
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 525,992 547,675
Commitments and contingencies (Notes 4, 10 and 18)
- ----------------------------------------------------------------------------------------------
$1,437,847 $1,283,376
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
PAGE 20
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------------
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ (31,320) $ 55,353 $ 81,913
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization 45,559 24,950 14,325
Deferred income taxes (21,992) (4,406) (3,320)
Provision for losses on credit sales 3,261 1,281 --
(Gain) loss on sale of loans 10,790 (20,058) (19,255)
Impairment and valuation provisions 35,759 53,712 --
Excess of cash receipts over REMIC residual income recognized 29,338 19,934 2,535
Noncash restructuring charges 10,798 -- --
Other 2,478 3,442 923
Changes in assets and liabilities, net of effect of business acquisition
Other receivables (45,314) (5,414) 7,631
Inventories (152,346) (62,705) (52,408)
Deferred insurance policy acquisition costs (3,323) (4,260) (6,614)
Other assets (9,190) 344 (4,007)
Accounts payable and accrued liabilities 777 48,621 (39,872)
Insurance reserves and unearned premiums 31,985 26,884 25,001
Other long-term obligations 1,626 8,968 3,742
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by operations (91,114) 146,646 10,594
Loans originated (1,364,133) (1,236,436) (883,633)
Purchase of loans and securities (108,297) (5,045) (2,636)
Sale of loans 1,469,134 1,061,517 913,004
Principal receipts on loans 33,282 53,048 34,056
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by operating activities (61,128) 19,730 71,385
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Business acquisition -- (101,829) --
Acquisition of properties and facilities (46,936) (51,411) (38,402)
Investment in and advances to joint venture 22,150 (24,454) (5,051)
Other (27,526) (20,797) (9,607)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash (used) by investing activities (52,312) (198,491) (53,060)
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net borrowings (repayments) on short-term credit facilities (175,223) 94,223 30,294
Proceeds from borrowings related to business acquisition -- 100,000 --
Proceeds from issuance of notes and bonds payable 305,275 4,472 --
Payments on notes and bonds (17,182) (22,540) (55,084)
Cash dividends (1,880) (1,861) (1,840)
Proceeds from exercise of stock options 418 4,721 8,445
- ---------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by financing activities 111,408 179,015 (18,185)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,032) 254 140
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR 28,971 28,717 28,577
- ---------------------------------------------------------------------------------------------------------------------------------
END OF YEAR $ 26,939 $ 28,971 $ 28,717
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
PAGE 21
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Additional other Total
shares Common paid-in Retained comprehensive Unearned shareholders'
(in thousands except per share data) outstanding stock capital earnings income compensation equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1996 45,621 $ 22,811 $ 149,501 $ 226,460 $ -- $ (6,798) $ 391,974
Net income -- -- -- 81,913 -- -- 81,913
Exercise of stock options 634 316 8,129 -- -- -- 8,445
Issuance of restricted stock 44 22 1,181 -- -- (824) 379
Amortization of unearned
compensation -- -- -- -- -- 2,061 2,061
ESOP shares committed to
be released -- -- 470 -- -- 480 950
Cash dividends ($.04 per share) -- -- -- (1,840) -- -- (1,840)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1997 46,299 23,149 159,281 306,533 -- (5,081) 483,882
Net income -- -- -- 55,353 -- -- 55,353
Exercise of stock options 352 176 4,545 -- -- -- 4,721
Issuance of restricted stock 9 5 278 -- -- (188) 95
Amortization of unearned
compensation -- -- -- -- -- 1,517 1,517
ESOP shares committed to
be released -- -- 614 -- -- 480 1,094
Stock options issued in connection
with business acquisition -- -- 2,874 -- -- -- 2,874
Cash dividends ($.04 per share) -- -- -- (1,861) -- -- (1,861)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1998 46,660 23,330 167,592 360,025 -- (3,272) 547,675
Comprehensive income:
Net loss -- -- -- (31,320) -- -- (31,320)
Unrealized gain on securities
available for sale -- -- -- -- 7,021 -- 7,021
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) -- -- -- (31,320) 7,021 -- (24,299)
Exercise of stock options 99 50 1,586 -- -- -- 1,636
Issuance of restricted stock 348 174 1,924 -- -- (2,096) 2
Amortization of unearned
compensation -- -- -- -- -- 2,295 2,295
ESOP shares committed to
be released -- -- 83 -- -- 480 563
Cash dividends ($.04 per share) -- -- -- (1,880) -- -- (1,880)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
SEPTEMBER 30, 1999 47,107 $23,554 $171,185 $326,825 $7,021 $(2,593) $525,992
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
</TABLE>
PAGE 22
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Oakwood Homes Corporation and its subsidiaries (collectively, the "Company") are
engaged in the production, sale, financing and insuring of manufactured housing
throughout the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Oakwood Homes
Corporation and its subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
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, 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.
Prior to the formation of the Company's reinsurance subsidiary on June
1, 1997, the Company acted as a sales agent for unrelated insurance companies
and received an agent's commission on sales of insurance policies issued by
those insurance companies. Insurance commissions were included in other income
and totaled approximately $6.4 million in 1997.
CONSUMER FINANCE
A substantial majority of the Company's retail customers purchase homes on
credit. The related loans are evidenced by either installment sale contracts or
mortgages originated by the Company's finance subsidiary, Oakwood Acceptance
Corporation ("Oakwood Acceptance"), or, to a lesser extent, by third-party
financial institutions.
INTEREST INCOME
Interest income on loans is recognized in accordance with the terms of the loans
(principally 30-day accrual).
LOAN SECURITIZATION
The Company finances its lending activities primarily by securitizing the loans
it originates using Real Estate Mortgage Investment Conduits ("REMICs") or, for
certain FHA-insured loans, using collateralized mortgage obligations issued
under authority granted to the Company by the Government National Mortgage
Association ("GNMA").
Effective January 1, 1997 the Company adopted prospectively Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 125"),
which modified in certain respects the Company's accounting policies for sales
of receivables. 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
relative estimated fair values of such interests. This practice is the same as
that employed by the Company prior to adoption of FAS 125.
In addition to the retained REMIC interests recognized by the Company
prior to January 1, 1997, FAS 125 requires recognition as a retained REMIC
interest of the estimated fair value of the servicing contract entered into by
the Company in connection with each securitization, which may be an asset or
liability, and the estimated fair value of any guarantee made by the Company of
payment of principal or interest on REMIC interests sold. Adoption of FAS 125
had no material effect on the Company's financial position or results of
operations.
The Company estimates the fair value of retained REMIC interests,
including regular and residual interests and servicing contracts, as well as
guarantee liabilities, based, in part, upon default and prepayment assumptions
which management believes market participants would use for similar instruments.
Income on retained REMIC regular and residual interests is recorded
using the level yield method over the period such interests are outstanding. The
rate of voluntary prepayments and the amount and timing of credit losses affect
the Company's yield on retained REMIC regular and residual interests and the
fair value of such interests and of servicing contracts 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 prepayment and credit loss 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. The
yield to maturity of regular REMIC interests may be influenced by prepayment
rates and credit losses, but is less likely to be influenced by such factors
because cash distributions on regular REMIC interests are senior to
distributions on residual REMIC interests. If the estimated yield to maturity of
a REMIC regular or residual interest is less than a risk-free rate, the Company
considers the asset to be impaired and records a charge to earnings equal to the
excess of the asset's amortized cost over its estimated fair value.
REMIC residual and regular interests retained by the Company following
securitization are considered available for sale and are carried at their
estimated fair value. The Company has no securities held for trading purposes.
SERVICING CONTRACTS AND FEES
Servicing fee income is recognized as earned, net of amortization of servicing
assets and liabilities, which are amortized in proportion to and over the period
of estimated net servicing income. If the estimated fair value of a servicing
contract is less than its carrying value, the Company records a valuation
allowance by a charge to earnings to reduce the carrying value of the contract
to its estimated fair value.
GUARANTEE LIABILITIES
The Company estimates the fair value of guarantee liabilities as the
greater of the estimated price differential between guaranteed and substantially
similar unguaranteed securities offered for sale by
PAGE 23
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PAGE 24
the Company and the present value of payments, if any, estimated to be made as a
result of such guarantees. Guarantee liabilities are amortized to income over
the period during which the guarantee is outstanding.
If the present value of any estimated guarantee payments exceeds the
amount recorded with respect to such guarantee, the Company records a charge to
earnings to increase the guarantee liability to such present value.
INTEREST RATE RISK MANAGEMENT
The Company periodically enters into off-balance sheet financial agreements,
principally forward contracts to enter into interest rate swaps and options on
such contracts, in order to hedge the sales price of REMIC interests to be sold
in securitization transactions. The net settlement proceeds or cost from
termination of the agreements is included in the determination of gain or loss
on the sale of the REMIC interests.
LOANS HELD FOR SALE OR INVESTMENT
Loans held for sale are carried at the lower of cost or market. Loans held for
investment are carried at their outstanding principal amounts, less unamortized
discounts and plus unamortized premiums.
RESERVE FOR CREDIT LOSSES
The Company maintains reserves for estimated credit losses on loans held for
investment, on loans warehoused prior to securitization and on loans sold to
third parties with full or limited recourse. The Company provides for losses in
amounts necessary to maintain the reserves at amounts the Company believes are
sufficient to provide for future losses based upon the Company's historical loss
experience, current economic conditions and an assessment of current portfolio
performance measures.
ACQUIRED LOAN PORTFOLIOS
The Company periodically purchases portfolios of loans. The Company adds to the
reserve for credit losses an estimate of future credit losses on such loans and
includes such amount as a component of the purchase price of the acquired
portfolios. The difference between the aggregate purchase price of the acquired
portfolios and the aggregate principal balance of the loans included therein,
representing discount or premium on the loans, is amortized to income over the
life of the loans using the level yield method.
INSURANCE UNDERWRITING
On June 1, 1997 the Company formed a captive reinsurance underwriting
subsidiary, domiciled in Bermuda, for property and casualty and credit life
insurance and service contract business. Premiums from reinsured insurance
policies are deferred and recognized as revenue over the term of the contracts,
generally ranging from one to five years. Claims expenses are recorded as
insured events occur. Policy acquisition costs, which consist principally of
sales commissions and ceding fees, are deferred and amortized over the terms of
the contracts.
The Company estimates liabilities for reported unpaid insurance claims,
which are reflected at undiscounted amounts, based upon reports from adjusters
with respect to adjusted claims and based on historical average costs per claim
for similar claims with respect to unadjusted claims. Adjustment expenses are
accrued based on contractual rates with the ceding company. Liabilities for
claims incurred but not reported are estimated by the ceding company using a
development factor that reflects historical average costs per claim and
historical reporting lag trends. The Company does not consider anticipated
investment income in determining whether premium deficiencies exist. The Company
accounts for catastrophe reinsurance ceded in accordance with Emerging Issues
Task Force Issue No. 93-6, "Accounting for Multi-Year Retrospectively Rated
Contracts by Ceding and Assuming Enterprises."
INVENTORIES
Inventories are valued at the lower of cost or fair value, with cost determined
using the specific identification method for new and used manufactured homes and
the first-in, first-out method for all other items.
PROPERTIES AND FACILITIES
Properties and facilities are carried at cost less accumulated depreciation and
amortization. The Company provides depreciation and amortization using
principally the straight-line method over the assets' estimated useful lives,
which are as follows:
Estimated
Classification useful lives
- --------------------------------------------------------------------------------
Land improvements 3-20 years
Buildings and field sales offices 5-39 years
Furniture, fixtures and equipment 3-12 years
Leasehold improvements 1-10 years
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of," the
Company records assets to be disposed of at the lower of historical cost less
accumulated depreciation or amortization or estimated net realizable value.
Depreciation of such assets is terminated at the time the assets are determined
to be held for sale.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net assets of
businesses acquired and is amortized on a straight-line basis over periods
ranging from approximately 7 years for retail sales centers to 40 years for
manufacturing operations. Costs assigned to assembled workforces and dealer
distribution networks in business combinations are amortized using the
straight-line method over five years. The Company reevaluates goodwill and other
intangible assets based on undiscounted operating cash flows whenever
significant events or changes occur which might impair recovery of recorded
costs, and writes down recorded costs to the assets' fair value (based on
discounted cash flows or fair values) when recorded costs, prior to impairment,
are in excess of amounts estimated to be recoverable.
ADVERTISING COSTS
Advertising costs are generally expensed as incurred and totaled approximately
$30.4 million, $18.6 million and $10.2 million in 1999, 1998 and 1997,
respectively.
<PAGE>
INCOME TAXES
The Company accounts for deferred income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are based on the
temporary differences between the financial reporting basis and tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled. Valuation allowances are provided
against assets if it is anticipated that some or all of a deferred tax asset may
not be realized.
WARRANTY OBLIGATIONS
The Company provides consumer warranties against manufacturing defects in all
new homes it sells. Estimated future warranty costs are accrued at the time of
sale.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation plans under the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25").
CASH AND CASH EQUIVALENTS
Short-term investments having initial maturities of three months or less are
considered cash equivalents.
USE OF ESTIMATES IN THE PREPARATION OF
FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income is presented net of income taxes and is
comprised of unrealized gains and losses on securities available for sale. There
were no items of accumulated other comprehensive income in 1998 or 1997.
FISCAL YEAR
Unless otherwise indicated, all references to annual periods refer to fiscal
years ended September 30.
RECLASSIFICATIONS
Certain amounts previously reported for 1998 and 1997 have been reclassified to
conform to classifications used in 1999.
NOTE 2--ACQUISITION
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 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 of approximately $750,000.
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 is as follows:
[GRAPHIC APPEARS HERE]
(in thousands)
- --------------------------------------------------------------------------------
Cash paid to selling shareholders $101,079
Acquisition costs 750
Estimated fair value of
stock options issued 2,874
- --------------------------------------------------------------------------------
Total consideration issued 104,703
Long-term debt assumed 1,608
Deferred income taxes 2,550
- --------------------------------------------------------------------------------
$108,861
- --------------------------------------------------------------------------------
Allocated to:
Properties and facilities $ 66,794
Working capital and other assets and
liabilities, excluding intangibles (15,585)
Intangible assets:
Assembled workforce 5,562
Dealer distribution network 6,000
Goodwill 46,090
- --------------------------------------------------------------------------------
$108,861
- --------------------------------------------------------------------------------
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 years
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. [GRAPHIC APPEARS HERE]
(in thousands except per share data) 1998 1997
- --------------------------------------------------------------------------------
(unaudited)
Net sales $1,572,579 $1,296,582
Net income $ 52,431 $ 82,918
Earnings per share--diluted $ 1.11 $ 1.77
NOTE 3--FINANCIAL SERVICES BUSINESSES
The Company's financial services businesses are as follows: Oakwood Acceptance
purchases a substantial portion of the loans originated by the Company's retail
operations. Oakwood Acceptance also purchases loans from unrelated retailers and
from time to time purchases portfolios of loans from third parties. Oakwood
Acceptance retains servicing on substantially all loans held for investment or
securitized by Oakwood Acceptance or its subsidiary, Oakwood Mortgage Investors,
Inc. Oakwood Funding Corporation ("Oakwood Funding") is a special-purpose
subsidiary of Oakwood Acceptance which has issued nonrecourse notes secured by
specific pools of loans. Oakwood Acceptance has from time to time also issued
notes in its own name secured by loans. Oakwood Financial Corporation is a
subsidiary of Oakwood Homes Corporation which holds the Company's retained
interests in REMIC trusts. Tarheel Insurance Company, Ltd. ("Tarheel") reinsures
risk on property and casualty and credit life insurance policies and extended
service contracts written by an unrelated insurance company in connection with
sales of Company products.
PAGE 25
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PAGE 26
The aggregate principal balance of loans sold to third parties,
including securitization transactions, was approximately $1.5 billion, $1.1
billion and $922 million in 1999, 1998 and 1997, respectively.
Oakwood Acceptance's servicing portfolio totaled approximately $4.2
billion and $3.6 billion at September 30, 1999 and 1998, respectively, of which
approximately $4.0 billion and $3.0 billion, respectively, represented loans
owned by REMIC trusts and other loans sold to third parties.
Condensed financial information for the Company's financial services
businesses is set forth below:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------
STATEMENT OF
OPERATIONS
REVENUES
Consumer finance
<S> <C> <C> <C>
Interest income $ 41,655 $ 30,918 $ 29,351
Servicing fees 25,632 27,662 21,479
REMIC residual income 7,955 10,282 19,444
Gain (loss) on sale of loans (10,790) 20,058 19,255
Impairment and valuation
provisions (35,759) (53,712) --
Other 1,054 (1,814) 2,187
- ------------------------------------------------------------------------------------
Total consumer
finance revenues 29,747 33,394 91,716
- ------------------------------------------------------------------------------------
Insurance
Premiums earned 52,018 35,226 10,971
Catastrophe reinsurance
premiums ceded (3,575) (1,791) (422)
Investment income 5,167 2,515 648
Less: intercompany
interest income (3,967) (1,985) (135)
- ------------------------------------------------------------------------------------
Total insurance revenues 49,643 33,965 11,062
- ------------------------------------------------------------------------------------
Total revenues 79,390 67,359 102,778
- ------------------------------------------------------------------------------------
COST AND EXPENSES
Consumer finance
Interest expense 30,129 18,579 16,543
Operating expenses 37,530 24,204 20,364
Provision for credit losses 3,261 1,281 --
- ------------------------------------------------------------------------------------
Total consumer finance
costs and expenses 70,920 44,064 36,907
- ------------------------------------------------------------------------------------
Insurance
Gross claims expenses 35,059 18,546 5,037
Catastrophe reinsurance
recoveries (7,600) -- --
Commissions and ceding fees 9,299 8,063 3,431
Other expenses 1,705 945 224
- ------------------------------------------------------------------------------------
Total insurance costs
and expenses 38,463 27,554 8,692
- ------------------------------------------------------------------------------------
Total costs
and expenses 109,383 71,618 45,599
- ------------------------------------------------------------------------------------
Income (loss) before
income taxes $ (29,993) $ (4,259) $ 57,179
- ------------------------------------------------------------------------------------
</TABLE>
Impairment and valuation provisions recorded in 1999 and 1998 are
summarized as follows:
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Impairment writedowns of residual
and regular REMIC interests (exclusive
of DFC residuals) $19,590 $41,871
Valuation provisions on servicing contracts 8,713 --
Additional provisions for potential
guarantee obligations on REMIC
securities sold 3,794 --
Valuation allowance on loans held for sale 3,662 --
Impairment writedowns of DFC
REMIC interests -- 7,541
Provision for loss on investment in
DFC joint venture -- 4,300
- --------------------------------------------------------------------------------
$35,759 $53,712
- --------------------------------------------------------------------------------
The assumptions used in the valuation of retained REMIC interests are
described in Note 4.
During the year ended September 30, 1998 the Company decided to cease
its participation in Deutsche Financial Capital ("DFC"), a 50% owned joint
venture engaged in providing consumer financing to customers of independent
retail dealers of manufactured housing, and recorded provisions to reduce the
carrying value of the investment in and advances to the joint venture to their
estimated net realizable values and to reduce the carrying value of REMIC
residual assets related to DFC to their estimated fair values. During 1999 the
Company and its joint venture partner each purchased from DFC approximately
one-half of DFC's warehouse of unsecuritized loans, which enabled DFC to retire
the indebtedness incurred to finance the warehouse. The Company subsequently
securitized the substantial majority of loans it acquired from DFC.
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
BALANCE SHEET
Loans $318,123 $424,231
REMIC regular interests 69,325 22,822
REMIC residual interests 36,630 53,619
Loan servicing assets 8,731 9,261
Restricted cash 40,376 13,376
Investment in DFC joint venture -- 17,823
Catastrophe reinsurance
claims receivable 11,400 --
Other assets 78,767 60,806
- --------------------------------------------------------------------------------
Total assets $563,352 $601,938
- --------------------------------------------------------------------------------
Short-term borrowings $144,800 $174,200
Notes payable secured by loans 23,758 30,881
Insurance reserves, including
unearned premiums of $70,764
and $53,008, respectively 89,404 57,419
Due to affiliates 125,106 154,511
Loan servicing liabilities 4,759 --
Other liabilities 29,126 15,574
Parent company's investment 146,399 169,353
- --------------------------------------------------------------------------------
Total liabilities and parent
company's investment $563,352 $601,938
- --------------------------------------------------------------------------------
<PAGE>
Gross insurance premiums written, which consist entirely of reinsurance
assumed from the ceding company, were approximately $69.8 million, $59.8 million
and $10.8 million in 1999, 1998 and 1997, respectively. The amounts reflected in
the preceding balance sheet for catastrophe reinsurance claims receivable
exceeds the related amount credited to financial services expenses because a
portion of such claims receivable arose from losses relating to risks of the
Company's domestic subsidiaries insured by Tarheel, the premiums and claims with
respect to which have been eliminated in consolidation.
The Company cedes catastrophe reinsurance premiums to minimize its loss
exposure from natural disasters (principally hurricane and flood related risks).
The Company's catastrophe coverage generally provides that the Company absorbs
the first $5 million of losses from a single insured event. The reinsurers bear
95% of the next $20 million of losses. The catastrophe reinsurance is ceded with
a number of reinsurers; approximately 80% of the catastrophe reinsurance is
ceded on a three-year basis with three reinsurers, with the balance placed
annually with other reinsurers.
Condensed financial information for Oakwood Homes Corporation with its
financial services businesses accounted for using the equity method is as
follows:
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
STATEMENT OF
OPERATIONS
REVENUES
Net sales $1,496,419 $1,404,432 $ 952,704
Equity in earnings
(losses) of financial
services businesses (29,993) (4,259) 57,179
Other income 13,416 10,762 14,569
- --------------------------------------------------------------------------------
Total revenues 1,479,842 1,410,935 1,024,452
- --------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 1,081,716 973,434 651,400
Selling, general and
administrative
expenses 411,344 341,441 236,586
Restructuring charges 25,926 -- --
Interest expense 10,580 5,970 3,274
- --------------------------------------------------------------------------------
Total costs and
expenses 1,529,566 1,320,845 891,260
- --------------------------------------------------------------------------------
Income (loss) before
income taxes (49,724) 90,090 133,192
Provision for income taxes (18,404) 34,737 51,279
- --------------------------------------------------------------------------------
Net income (loss) $ (31,320) $ 55,353 $ 81,913
- --------------------------------------------------------------------------------
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
BALANCE SHEET
Current assets
Cash and cash equivalents $ 19,096 $ 24,769
Receivables 64,299 33,431
Receivable from financial
services businesses -- 20,955
Inventories 443,598 291,352
Prepaid expenses 4,312 6,491
- --------------------------------------------------------------------------------
Total current assets 531,305 376,998
Properties and facilities 245,824 232,175
Investment in and advances to
financial services businesses 271,505 302,909
Other assets 97,366 93,220
- --------------------------------------------------------------------------------
$1,146,000 $1,005,302
- --------------------------------------------------------------------------------
Current liabilities
Short-term borrowings $ 55,000 $ 200,823
Current maturities of long-term debt 1,133 1,830
Accounts payable and accrued liabilities 209,358 211,293
- --------------------------------------------------------------------------------
Total current liabilities 265,491 413,946
Long-term debt 327,273 29,164
Other long-term obligations 27,244 14,517
Shareholders' equity 525,992 547,675
- --------------------------------------------------------------------------------
$1,146,000 $1,005,302
- --------------------------------------------------------------------------------
NOTE 4--LOANS AND INVESTMENTS
The components of loans and investments are as follows:
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Loans held for sale, net of valuation
allowance of $3,662 in 1999 $279,927 $365,126
Loans held for investment 48,015 62,669
Less: reserve for uncollectible receivables (3,032) (1,653)
- --------------------------------------------------------------------------------
Total loans receivable 324,910 426,142
- --------------------------------------------------------------------------------
Retained interests in REMIC
securitizations, exclusive of loan
servicing assets and liabilities
Regular interests 69,325 22,822
Residual interests 36,630 53,619
- --------------------------------------------------------------------------------
Total retained REMIC interests 105,955 76,441
- --------------------------------------------------------------------------------
$430,865 $502,583
- --------------------------------------------------------------------------------
The estimated principal receipts, including estimated prepayments, on
loans held for investment are $13.6 million in 2000, $11.1 million in 2001, $8.8
million in 2002, $6.2 million in 2003, $4.7 million in 2004 and the balance
thereafter.
Loans in which the Company retains an interest, either directly by
owning them or indirectly through the Company's retained interests in REMIC
securitizations, are located in over forty states, with North Carolina, Texas,
South Carolina and Virginia accounting for the majority of the loans. Because of
the nature of the Company's retail business, loans are not concentrated with any
single customer or among any group of customers.
PAGE 27
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PAGE 28
Substantially all the loans included in the Company's GNMA
securitizations are covered by FHA insurance which generally limits the
Company's risk to 10% of credit losses incurred on such loans. The Company's
credit risk associated with nonrecourse debt secured by loans is limited to the
Company's equity in the underlying collateral. The Company retains all of the
credit risk associated with loans used to secure debt issued by the Company and
with respect to which creditors have recourse to the general credit of the
Company in addition to the collateral for the indebtedness. The Company's
contingent liability as guarantor of loans sold to third parties on a recourse
basis was approximately $24 million and $42 million as of September 30, 1999 and
1998, respectively.
The following table summarizes the transactions reflected in the
reserve for credit losses:
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of year $ 2,067 $ 4,277 $ 8,261
Provision for losses on
credit sales 3,261 1,281 --
Reserve recorded related
to acquired portfolios 1,896 -- --
Losses charged to the reserve (3,678) (3,491) (3,984)
- --------------------------------------------------------------------------------
Balance at end of year $ 3,546 $ 2,067 $ 4,277
- --------------------------------------------------------------------------------
The reserve for credit losses is reflected in the consolidated balance
sheet as follows:
[GRAPHIC APPEARS HERE]
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Reserve for uncollectible receivables
(included in loans and investments) $3,032 $1,653
Reserve for contingent liabilities
(included in accounts payable and
accrued liabilities) 514 414
- --------------------------------------------------------------------------------
$3,546 $2,067
- --------------------------------------------------------------------------------
The Company also retains credit risk on REMIC securitizations because
the related trust agreements provide that all losses incurred on REMIC loans are
charged to REMIC interests retained by the Company (including the Company's
right to receive servicing fees) before any losses are charged to REMIC
interests sold to third-party investors. The Company also has guaranteed payment
of principal and interest on subordinated securities issued by REMIC trusts
having an aggregate principal amount outstanding of approximately $123 million
and $55 million as of September 30, 1999 and 1998, respectively. Liabilities
recorded with respect to such guarantees in accordance with FAS 125 were
approximately $19.0 million and $5.4 million at September 30, 1999 and 1998,
respectively, and are included in other long-term obligations.
The following table sets forth certain data with respect to securitized
loans in which the Company retains a residual interest, and with respect to the
assumptions used by the Company in estimating the fair value of such residual
interests, as of the end of 1999 and 1998.
(dollar amounts in thousands) 1999 1998
- --------------------------------------------------------------------------------
Aggregate unpaid principal
balance of loans $3,925,317 $2,982,034
Weighted average interest rate of
loans at year end 10.7% 10.9%
Approximate assumed weighted
average constant prepayment
rate as a percentage of unpaid
principal balance of loans 17.7% 16.6%
Approximate remaining assumed
nondiscounted credit losses
as a percentage of unpaid
principal balance of loans 13.0% 12.0%
Approximate weighted average
interest rate used to discount
assumed residual cash flows 17.1% 16.3%
The following table sets forth certain data with respect to retained
REMIC interests at September 30, 1999:
(in thousands) 1999
- ------------------------------------------------------------------
Regular interests:
Amortized cost $71,451
Gross unrealized gains 486
Gross unrealized losses (2,612)
- ------------------------------------------------------------------
Estimated fair value $69,325
- ------------------------------------------------------------------
Residual interests:
Amortized cost $23,702
Gross unrealized gains 12,934
Gross unrealized losses (6)
- ------------------------------------------------------------------
Estimated fair value $36,630
- ------------------------------------------------------------------
Gross unrealized gains $13,420
Gross unrealized losses (2,618)
Deferred income tax asset (3,781)
- ------------------------------------------------------------------
Accumulated other comprehensive income $ 7,021
- ------------------------------------------------------------------
NOTE 5--OTHER RECEIVABLES
The components of other receivables are as follows:
(in thousands) 1999 1998
- -----------------------------------------------------------------------
Trade receivables $30,843 $22,768
Federal income taxes refundable 11,728 --
Catastrophe reinsurance claims receivable 11,400 --
Insurance premiums receivable 3,027 4,026
Accrued interest 1,952 2,551
Other receivables 39,367 29,429
- -----------------------------------------------------------------------
$98,317 $58,774
- -----------------------------------------------------------------------
Trade receivables represent amounts due from independent manufactured
housing dealers, which are located principally in the Pacific Northwest,
Southeast and Midwest.
<PAGE>
NOTE 6--INVENTORIES
The components of inventories are as follows:
(in thousands) 1999 1998
- -------------------------------------------------------------------------
Manufactured homes $382,817 $242,867
Work-in-progress, materials and supplies 46,463 42,068
Land/homes under development 14,318 6,417
- -------------------------------------------------------------------------
$443,598 $291,352
- -------------------------------------------------------------------------
NOTE 7--PROPERTIES AND FACILITIES
The components of properties and facilities are as follows:
(in thousands) 1999 1998
- -------------------------------------------------------------------------
Land and land improvements $ 42,254 $ 37,144
Buildings and field sales offices 145,668 129,960
Furniture, fixtures and equipment 118,056 110,724
Leasehold improvements 33,483 25,333
- -------------------------------------------------------------------------
339,461 303,161
Less: accumulated depreciation
and amortization (88,392) (65,435)
- -------------------------------------------------------------------------
$251,069 $237,726
- -------------------------------------------------------------------------
Depreciation and amortization of properties and facilities was
approximately $28.2 million, $20.2 million and $12.9 million in 1999, 1998 and
1997, respectively.
At September 30, 1999 the Company held for sale a manufacturing
facility that was closed during the fourth quarter of 1999. Included in the
restructuring provision was a charge of approximately $1.3 million to reduce the
carrying value of the facility to its estimated net realizable value of $1.3
million.
NOTE 8--OTHER ASSETS
The components of other assets are as follows:
(in thousands) 1999 1998
- -----------------------------------------------------------------------------
Goodwill, net of accumulated amortization
of $4,703 and $2,225, respectively $ 55,832 $ 56,652
Restricted cash and investments 50,342 21,964
Deferred insurance policy acquisition costs 16,051 12,728
Loan servicing assets 8,731 9,261
Identifiable intangibles acquired in Schult
acquisition, net of accumulated amortiza-
tion of $3,282 and $1,156, respectively 7,620 10,406
Prepaid expenses 5,847 7,799
Investment in and advances to joint
venture, net of loss reserves -- 17,823
Other 11,924 12,487
- -----------------------------------------------------------------------------
$156,347 $149,120
- -----------------------------------------------------------------------------
Amortization expense of goodwill and identifiable intangibles was
approximately $5.2 million, $2.7 million and $402,000 in 1999, 1998 and 1997,
respectively.
Restricted cash and investments include custodial cash balances used to
secure a portion of obligations to pay reinsurance claims, trust account cash
balances required by certain OAC servicing agreements and trust account balances
required by certain states for custody of customer deposits until a retail sale
is consummated.
A reconciliation of amounts recorded for servicing contracts follows:
<PAGE>
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of year $ 9,261 $ 3,786 $ --
Servicing assets recorded 11,082 6,630 4,036
Amortization of servicing contracts (7,658) (1,155) (250)
Valuation allowances recorded (8,713) -- --
- --------------------------------------------------------------------------------
Balance at end of year $ 3,972 $ 9,261 $3,786
- --------------------------------------------------------------------------------
Amounts recorded for servicing contracts are recorded in the
consolidated balance sheet as follows:
(in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Servicing assets $ 8,731 $ 9,261 $3,786
Servicing liabilities (Note 11) (4,759) -- --
- --------------------------------------------------------------------------------
$ 3,972 $ 9,261 $3,786
- --------------------------------------------------------------------------------
NOTE 9--SHORT-TERM CREDIT FACILITIES
The Company has a $325 million revolving warehouse financing facility with a
conduit commercial paper issuer, secured by loans held for sale. At September
30, 1999 and 1998, $144.8 million and $174.2 million, respectively, was
outstanding under the facility. The weighted average interest rate on borrowings
outstanding at September 30, 1999 was 5.80%, compared to an average rate of
5.86% at September 30, 1998.
The Company also has a $125 million syndicated revolving credit
facility, borrowings under which bear interest at LIBOR plus 2.5% (LIBOR plus
.5% prior to November 1999). At September 30, 1999 and 1998, $55 million and $88
million, respectively, was outstanding under the facility.
On December 22, 1999 the Company completed an agreement with the
syndication group with respect to the revolving credit facility's borrowing base
and financial covenants. Borrowings under this facility are secured by
substantially all inventory owned by the Company's retail operations and are
limited to a specified percentage of eligible inventory. The agreement contains
financial covenants, which, among other things, specify minimum levels of
tangible net worth, sales and interest coverage and limit capital expenditures.
The agreement also limits dividend payments to $500,000 per quarter.
In addition, at September 30, 1998 short-term borrowings include a $100
million short-term loan with a bank related to the Schult acquisition discussed
in Note 2.
PAGE 29
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--NOTES AND BONDS PAYABLE
The components of notes and bonds payable are as follows:
(in thousands) 1999 1998
- --------------------------------------------------------------------------
Nonfinancial services debt
8 1/8% senior notes due March 2009 $174,050 $ --
7 7/8% senior notes due March 2004 124,693 --
8% reset debentures due 2007 16,925 16,945
Industrial revenue bonds due in installments
through 2011, with interest payable at
4% at September 30, 1999 7,099 5,492
Industrial revenue bond due in installments
through 2001, with interest payable
at 73% of the lender's prime rate 1,925 2,025
Capitalized aircraft lease with interest
payable at LIBOR plus .75% -- 3,270
401(k) note payable in quarterly installments
through 2000, with interest payable at
LIBOR plus 1.25% 240 720
Other notes payable 3,474 2,542
- ----------------------------------------------------------------------------
Total nonfinancial services debt 328,406 30,994
- ----------------------------------------------------------------------------
Financial services debt collateralized by loans
Nonrecourse debt
Note issued by Oakwood Funding 231 3,246
Subordinated note payable issued by Oakwood
Funding bearing interest payable monthly
at 12.58%, amortizing through 2000 2,075 4,692
- --------------------------------------------------------------------------
Total nonrecourse debt 2,306 7,938
- --------------------------------------------------------------------------
Recourse debt
Term loans payable in monthly installments through
October 2003, with interest ranging from LIBOR
plus .5% to LIBOR plus 1.25% 12,615 11,076
Subordinated note with interest payable
monthly at 10.51%, payable on demand 8,837 11,867
- --------------------------------------------------------------------------
Total recourse debt 21,452 22,943
- --------------------------------------------------------------------------
Total financial services debt 23,758 30,881
- --------------------------------------------------------------------------
$352,164 $61,875
- --------------------------------------------------------------------------
The interest rate on the reset debentures will reset on June 1, 2002 to
a rate to be determined by the Company. The reset debentures are redeemable at
par at the option of the holders thereof upon the occurrence of certain events,
the most significant of which, generally, involve a substantial recapitalization
of the Company, merger or consolidation of the Company, or acquisition of more
than 30% of the beneficial ownership in the Company by any person. In addition,
the holders of the reset debentures may call for their redemption as of the
interest reset date. The reset debentures are callable at par at the option of
the Company.
The payment of notes collateralized by loans generally is based on the
scheduled monthly payment and actual prepayments of principal on the loans
collateralizing the notes. Under the provisions of certain note agreements, the
notes are secured solely by the underlying collateral, which consists
principally of the loans collateralizing the debt. Such collateral had an
aggregate carryingvalue of approximately $45 million at September 30, 1999.
Land, land improvements, buildings and equipment with a net book value of
approximately $27 million are pledged as collateral for the industrial revenue
bonds and certain other notes payable.
In connection with the issuance of certain indebtedness, the Company
incurred certain costs which are being amortized over the life of the related
obligations using the level yield method.
The estimated principal payments under notes and bonds payable,
assuming the reset debentures are redeemed by the holders on the June 1, 2002
redemption date, are $18.5 million in 2000, $5.3 million in 2001, $20.1 million
in 2002, $2.9 million in 2003, $125.9 million in 2004 and the balance
thereafter. Interest paid by the Company on all outstanding debt, including both
short-term and long-term borrowings, was approximately $39.0 million, $24.3
million and $20.3 million in 1999, 1998 and 1997, respectively.
Various of the Company's debt agreements contain covenants which, among
other things, require the Company to comply with certain financial and other
covenants. The Company has complied with or obtained compliance waivers for all
financial covenants with respect to which any failure to comply would have a
material adverse effect on the Company's liquidity.
At September 30, 1999 commercial banks, at the request of the Company,
had outstanding letters of credit of approximately $58 million in favor of
various creditors of the Company. Approximately $8 million of such letters of
credit secure certain industrial revenue bonds, and approximately $46 million
have been issued to secure the reinsurance subsidiary's obligations to pay
reinsurance claims and to meet regulatory capital requirements.
NOTE 11--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities are as follows:
(in thousands) 1999 1998
- ----------------------------------------------------------------------
Accounts payable $119,575 $133,809
Accrued self-insurance reserves 24,849 13,179
Accrued compensation 15,526 31,017
Accrued dealer volume rebates 14,558 12,123
Restructuring accrual 12,886 --
Servicing liabilities (Note 8) 4,759 --
Income taxes payable 2,263 5,265
Other accrued liabilities 49,109 31,474
- -----------------------------------------------------------------------
$243,525 $226,867
- -----------------------------------------------------------------------
NOTE 12--RESTRUCTURING PROVISION
During 1999 the Company recorded restructuring charges of approximately $25.9
million, related primarily to the closing of four manufacturing lines,
temporarily idling five others and the closing of approximately 40 sales
centers. The charges include severance and other termination costs related to
approximately 2,000 employees, costs associated with closing plants and sales
centers, and asset writedowns of certain affected assets. The complete
restructuring plan including plant and sales center closings is expected to be
completed during the year ended September 30, 2000.
PAGE 30
<PAGE>
The components of the restructuring provision recorded in 1999 and
utilized through September 30, 1999 are as follows:
Severance Plant
and other and sales
termination center Asset
(in thousands) charges closing writedowns Total
- ------------------------------------------------------------------------
Original provision $ 7,350 $ 7,384 $ 11,192 $ 25,926
Payments and
balance sheet
charges in 1999 (1,707) (141) (11,192) (13,040)
- ------------------------------------------------------------------------
Balance at
Sept. 30, 1999 $ 5,643 $ 7,243 $ -- $ 12,886
========================================================================
NOTE 13--SHAREHOLDERS' EQUITY
The Company has adopted a Shareholder Protection Rights Plan (the "Plan") to
protect shareholders against unsolicited attempts to acquire control of the
Company that do not offer what the Company believes to be an adequate price to
all shareholders. Under the Plan, each outstanding share of the Company's common
stock has associated with it a right to purchase (each, a "Right" and,
collectively, the "Rights"), upon the occurrence of certain events, one
two-hundredth of a share of junior participating Class A preferred stock
("Preferred Stock") at an exercise price of $20. The Rights will become
exercisable only if a person or group (an "Acquiring Person"), without the
Company's consent, commences a tender or exchange offer for, or acquires 20% or
more of the voting power of, the Company.
In such event, each holder of Preferred Stock, other than the Acquiring
Person, will be entitled to acquire that number of shares of the Company's
common stock having a fair value of twice the exercise price. Similarly, if,
without the Company's consent, the Company is acquired in a merger or other
business combination transaction, each holder of Preferred Stock, other than the
Acquiring Person, will be entitled to acquire voting shares of the acquiring
company having a value of twice the exercise price. The Rights may be redeemed
at a price of $.005 per Right by the Company at any time prior to any person or
group acquiring 20% or more of the Company's voting power or certain other
triggering events, and will expire on August 22, 2001.
The Company's authorized capital stock includes 500,000 shares of $100
par value preferred stock. The preferred stock may be issued in one or more
series with such terms, preferences, limitations and relative rights as the
Board of Directors shall determine. No preferred stock has been issued.
Note 14--INCOME TAXES
The components of the provision for income taxes are
as follows:
(in thousands) 1999 1998 1997
- ----------------------------------------------------------
Current
Federal $ 2,657 $35,854 $51,020
State 931 3,289 3,579
- ----------------------------------------------------------
3,588 39,143 54,599
- ----------------------------------------------------------
Deferred
Federal (18,163) (5,406) (3,027)
State (3,829) 1,000 (293)
- ----------------------------------------------------------
(21,992) (4,406) (3,320)
- ----------------------------------------------------------
$(18,404) $34,737 $51,279
==========================================================
A reconciliation of a provision for income taxes computed at the
statutory federal income tax rate to the Company's actual provision for income
taxes follows:
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------
Tax at statutory federal
income tax rate $(17,403) $31,531 $46,617
State income taxes, less
federal income tax benefit (1,884) 2,787 2,136
Nondeductible goodwill
amortization 509 202 --
Other 374 217 2,526
- ------------------------------------------------------------------------
Total provision for income taxes $(18,404) $34,737 $51,279
========================================================================
Deferred income taxes include the following components:
(in thousands) 1999 1998
- ----------------------------------------------------------------------
Deferred income tax assets
Inventories $ 3,876 $ 1,459
REMIC interests 12,079 9,880
Accrued liabilities 26,119 16,463
Insurance reserves and unearned premiums 7,173 4,503
Net operating loss carryforwards 4,216 1,083
Other 2,177 5,109
- ----------------------------------------------------------------------
Gross deferred income tax assets 55,640 38,497
Valuation allowance (1,702) --
- ----------------------------------------------------------------------
Net deferred income tax assets 53,938 38,497
- ----------------------------------------------------------------------
Deferred income tax liabilities
Properties and facilities (14,667) (14,797)
Deferred insurance policy acquisition costs (5,498) (4,364)
Acquired intangible assets (2,972) (4,058)
Other (89) (428)
- ----------------------------------------------------------------------
Gross deferred income tax liabilities (23,226) (23,647)
- ----------------------------------------------------------------------
Net deferred income tax asset $ 30,712 $ 14,850
======================================================================
At September 30, 1999 the Company had a federal net operating loss
carryforward of approximately $2.3 million. Utilization of such carryforward is
dependent upon the realization of taxable income by an acquired business and is
further limited to a maximum of approximately $774,000 annually through 2002.
The Company also had state loss carryforwards, the tax effect of which was
approximately $3.4 million. These carryforwards will expire between 2002 and
2019 and may be used only to offset the taxable income of certain subsidiaries.
A valuation allowance of approximately $1.7 million has been established against
the state tax carryforwards.
Income tax payments were approximately $17.6 million, $35.8 million and
$44.9 million in 1999, 1998 and 1997, respectively.
page 31
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--EARNINGS PER SHARE
The following table displays the derivation of the number of weighted average
shares outstanding used in the computation of basic and diluted EPS:
(in thousands except per share data) 1999 1998 1997
- ----------------------------------------------------------------------
Numerator for basic and diluted
EPS--net income (loss) $(31,320) $55,353 $81,913
- ----------------------------------------------------------------------
Denominator:
Weighted average number of
common shares outstanding 46,502 46,320 45,798
Unearned shares (40) (81) (122)
- ----------------------------------------------------------------------
Denominator for basic EPS 46,462 46,239 45,676
Dilutive effect of stock options
and restricted shares, computed
using the treasury stock method -- 1,185 1,115
- ----------------------------------------------------------------------
Denominator for diluted EPS 46,462 47,424 46,791
======================================================================
Basic earnings (loss) per share $ (.67) $ 1.20 $ 1.79
======================================================================
Diluted earnings (loss) per share $ (.67) $ 1.17 $ 1.75
======================================================================
Stock options and unearned restricted shares were not included in the
computation of diluted earnings per share for 1999 because their inclusion would
have been antidilutive.
Options to purchase 1,604,996 shares of common stock were not included
in the computation of diluted earnings per share for the fourth quarter of 1998
because their inclusion would have been antidilutive.
NOTE 16--STOCK OPTION AND AWARD PLANS
The Company has a Key Employee Stock Plan (the "Stock Plan") under
which 4,743,815 common shares were reserved for issuance to key employees at
September 30, 1999. The Stock Plan provides that an additional number of common
shares shall be reserved for issuance under the Stock Plan each October 1 equal
to 1.5% of the number of common shares outstanding on such date. Awards or
grants under the plan may be made in the form of stock options, stock
appreciation rights, restricted stock and performance shares.
The Company also has a Director Stock Option Plan under which 180,000
shares of the Company's common stock were reserved for grant to nonemployee
directors of the Company. The exercise price of options granted is the fair
value of the Company's common stock on the date of grant. Options granted under
the plan become exercisable six months from the date of grant and expire 10
years from the date of grant.
The following table summarizes the changes in the number of shares
under option pursuant to the plans described above and pursuant to certain
earlier plans under which options may no longer be granted:
Weighted
average
Number exercise
of shares price
- ----------------------------------------------------------------------
Outstanding at September 30, 1996 3,424,502 $11.31
Granted 331,000 21.19
Exercised (633,913) 6.10
Terminated (142,006) 16.61
- ----------------------------------------------------------------------
Outstanding at September 30, 1997 2,979,583 13.26
Granted 1,235,500 28.50
Exercised (351,744) 6.79
Terminated (126,482) 18.36
- ----------------------------------------------------------------------
Outstanding at September 30, 1998 3,736,857 18.74
Granted 1,199,953 16.10
Exercised (98,682) 4.24
Terminated (993,378) 27.65
- ----------------------------------------------------------------------
Outstanding at September 30, 1999 3,844,750 15.98
======================================================================
Exercisable at September 30, 1997 1,323,513 $ 7.67
======================================================================
Exercisable at September 30, 1998 1,129,438 $ 8.89
======================================================================
Exercisable at September 30, 1999 2,110,825 $14.06
======================================================================
The following is a summary of stock options outstanding at September
30, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------------------- -----------------------
Weighted Weighted Weighted
average average average
Range of Number contractual life exercise Number exercise
exercise price of shares remaining (in years) price of shares price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.74-$ 2.84 147,103 1.2 $ 2.33 141,670 $ 2.37
4.05- 6.25 479,733 2.2 4.72 430,293 4.80
10.72- 11.31 47,900 5.8 11.04 40,400 10.99
12.16- 15.04 431,000 5.6 13.38 318,668 13.02
15.38- 18.72 1,953,323 7.5 16.95 971,863 18.33
19.78- 22.57 333,834 7.7 20.48 93,168 20.76
23.00- 25.94 86,996 7.0 24.39 70,663 24.05
26.69- 29.14 364,861 8.2 28.70 44,100 28.34
--------- ---------
All options 3,844,750 6.4 $15.98 2,110,825 $14.06
========= =========
</TABLE>
page 32
<PAGE>
The following table summarizes restricted stock issued under the
Stock Plan:
Weighted average fair
Number of shares value per share
- -----------------------------------------------------
1997 43,834 $27.45
1998 14,439 $28.25
1999 350,903 $12.91
As of September 30, 1999 there were a total of 1,569,802 shares of
common stock reserved for future grants under the Company's stock option plans.
The aggregate compensation expense for stock-based compensation
plans, computed under the provisions of APB 25, was approximately $2.1 million,
$1.4 million and $3.5 million in 1999, 1998 and 1997, respectively. Such
compensation expense relates entirely to accruals for restricted stock awards
under the Stock Plan (charged to income over the vesting periods of the related
awards).
The Financial Accounting Standards Board has adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which permits, but does not require, the Company to
utilize a fair-value based method of accounting for stock-based compensation.
The Company has elected to continue use of the APB 25 accounting principles for
its stock option plans and accordingly has recorded no compensation cost for
grants of stock options. Had compensation cost for the Company's stock option
plans been determined based on the estimated fair value at the grant dates for
awards in 1999, 1998 and 1997 consistent with the provisions of FAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
(in thousands except per share data) 1999 1998 1997
- ----------------------------------------------------------------------------
Net income (loss)--as reported $(31,320) $55,353 $81,913
Net income (loss)--pro forma (34,470) 52,321 79,540
Basic earnings (loss) per share--
as reported $ (.67) $ 1.20 $ 1.79
Basic earnings (loss) per share--
pro forma (.74) 1.13 1.74
Diluted earnings (loss) per share--
as reported $ (.67) $ 1.17 $ 1.75
Diluted earnings (loss) per share--
pro forma (.74) 1.10 1.70
The pro forma information set forth in the preceding table does not
reflect application of the FAS 123 measurement principles to options granted
prior to October 1, 1995. Accordingly, the pro forma information does not
necessarily reflect the Company's results of operations on a pro forma basis
assuming the FAS 123 measurement principles had been applied to all stock
options granted prior to October 1, 1995 and which were not vested at that date,
and is not necessarily representative of the pro forma effects on the results of
operations of future years had the Company adopted the measurement principles of
FAS 123.
The pro forma information set forth in the preceding table reflects a
weighted average estimated fair value of stock options granted in 1999, 1998 and
1997 respectively, of $6.54, $11.72 and $9.32 per share. Such estimated fair
values were computed using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants issued in 1999, 1998 and
1997, respectively: dividend yield of .26%, .14% and .19%; expected volatility
of 41.83%, 36.28% and 38.47%; weighted average risk-free interest rate of 4.54%,
5.75% and 6.68%; and expected lives of 5 years for 1999, 1998 and 1997.
NOTE 17--EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan in which substantially all employees who
have met certain age and length of service requirements may participate. On
January 1, 1998 the Company's employee stock ownership plan ("ESOP") was merged
with the 401(k) plan. Employee contributions to the 401(k) plan are limited to a
percentage of their compensation and are matched 100% by the Company for the
first 6% of compensation contributed. The Company's match consists of a 50% cash
contribution and a 50% Company stock contribution.
During 1995 the Company loaned approximately $2.4 million to the ESOP
to enable the ESOP to purchase Company common stock on the open market. The ESOP
refinanced the Company's loan with the proceeds of a loan from a commercial bank
which the Company has guaranteed; the Company has reflected the note payable,
now held by the 401(k) plan, as a liability in the accompanying consolidated
balance sheet. The bank loan provides that shares are released ratably upon
repayment of the principal of the loan. Compensation cost relating to shares
acquired with the proceeds of the loan is measured by reference to the fair
value of the shares committed to be released during the period, in accordance
with Statement of Position 93-6.
At September 30, 1999 the 401(k) plan held a total of 1,002,919 shares
of the Company's common stock having a fair value of approximately $4.5 million.
Of the total number of shares, 294,733 shares have been committed to be
released, 20,321 shares are held in suspense and the balance, representing
shares acquired using cash contributed to the ESOP and 401(k) plan in excess of
its debt service requirements and shares acquired in prior years, have been
allocated to plan participants. To the extent possible, shares held in suspense
will be used to fund the Company's matching 50% stock contribution. Uncommitted
shares are included at cost in unearned compensation in the consolidated balance
sheet.
Total compensation cost under the 401(k) and ESOP plans was
approximately $9.2 million, $6.5 million and $3.4 million in 1999, 1998 and
1997, respectively.
NOTE 18--CONTINGENCIES
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 has filed a motion to
dismiss the amended complaint which has not yet been ruled upon by the court.
The Company intends to defend such lawsuit vigorously.
In addition, the Company is also subject to legal proceedings and
claims which have arisen in the ordinary course of its business and have not
been finally adjudicated. In management's opinion, the ultimate resolution of
these matters will have no material effect on the Company's results of
operations or financial condition.
The Company is contingently liable under terms of repurchase agreements
with financial institutions providing inventory financing
page 33
<PAGE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for retailers of their products. These arrangements, which are
customary in the industry, provide for the repurchase of products sold to
retailers in the event of default on payments by the retailer. The risk of loss
under these agreements is spread over numerous retailers and is further reduced
by the resale value of repurchased homes. The estimated potential obligations
under such agreements approximated $208 million at September 30, 1999. Losses
under these agreements have not been significant.
NOTE 19--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is a party to on-balance sheet financial instruments as a result of
its financing and funding activities. On-balance sheet financial assets include
loans originated in conjunction with retail home sales, loans purchased from
third parties, trade receivables arising from sales of homes to independent
dealers and other receivables. The Company has estimated the fair value of loans
held for sale by reference to the gain or loss estimated to have resulted had
the loans been securitized at period end. The Company has estimated the fair
value of loans held for investment by discounting the estimated future cash
flows relating thereto using interest rates which approximate the interest rates
charged by Oakwood Acceptance as of year end for loans of similar character and
duration. Due to their short-term nature, the fair values of trade and other
receivables approximates their carrying values.
The Company estimates the fair value of retained regular
and residual interests in REMIC securitizations and any related guarantee
obligations as described in Notes 1 and 4. However, there exists no active
market for manufactured housing residual REMIC interests or uniformly accepted
valuation methodologies.
On-balance sheet financial obligations consist of amounts outstanding
under the Company's short-term credit facilities and notes and bonds payable.
The Company estimates the fair values of debt obligations using rates currently
offered to the Company for borrowings having similar character, collateral and
duration or, in the case of the Company's outstanding senior notes and reset
debentures, by reference to quoted market prices.
The following table sets forth the carrying amounts and estimated fair
values of the Company's financial instruments at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------
ESTIMATED CARRYING Estimated Carrying
(in thousands) FAIR VALUE AMOUNT fair value amount
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents, including restricted cash and investments $ 77,281 $ 77,281 $ 50,935 $ 50,935
Loans and investments
Loans held for sale 279,927 279,927 364,904 365,126
Loans held for investment
Fixed rate loans 43,271 42,312 58,275 55,090
Variable rate loans 5,703 5,703 7,579 7,579
Less: reserve for uncollectible receivables -- (3,032) -- (1,653)
Retained REMIC regular interests 69,325 69,325 22,822 22,822
Retained REMIC residual interests 36,630 36,630 53,619 53,619
Other receivables 98,317 98,317 58,774 58,774
Liabilities
Short-term borrowings 199,800 199,800 375,023 375,023
Notes and bonds payable
Fixed rate obligations 239,065 328,793 38,342 37,932
Variable rate obligations 23,371 23,371 23,943 23,943
Guarantee liabilities on subordinated REMIC securities sold 18,954 18,954 5,381 5,381
</TABLE>
NOTE 20--QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of quarterly financial information follows:
<TABLE>
<CAPTION>
(in thousands except per share data) First quarter Second quarter Third quarter Fourth quarter Year
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Net sales $359,814 $367,095 $404,346 $365,164 $1,496,419
===========================================================================================================================
Gross profit $104,633 $107,091 $116,540 $ 86,439 $ 414,703
===========================================================================================================================
Net income (loss) $ 11,459 $ 9,673 $ 7,854 $(60,306) $ (31,320)
===========================================================================================================================
Earnings (loss) per share
Basic $ .25 $ .21 $ .17 $ (1.30) $ (.67)
===========================================================================================================================
Diluted $ .24 $ .21 $ .17 $ (1.30) $ (.67)
===========================================================================================================================
1998
Net sales $221,893 $250,352 $440,129 $492,058 $1,404,432
===========================================================================================================================
Gross profit $ 70,067 $ 80,091 $134,659 $146,181 $ 430,998
===========================================================================================================================
Net income $ 17,802 $ 7,648 $ 4,959 $ 24,944 $ 55,353
===========================================================================================================================
Earnings per share
Basic $ 0.39 $ 0.17 $ 0.11 $ 0.54 $ 1.20
===========================================================================================================================
Diluted $ 0.38 $ 0.16 $ 0.10 $ 0.53 $ 1.17
===========================================================================================================================
</TABLE>
The sum of quarterly earnings per share amounts do not necessarily
equal earnings per share for the year.
page 34
<PAGE>
NOTE 21--BUSINESS SEGMENT INFORMATION
Effective September 30, 1999 the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("FAS 131"). The Company operates in four major business
segments. Management has determined these segments, in the case of housing
operations, based upon the principal business activities conducted by housing
business units, which are retail distribution of homes to consumers in the case
of retail operations, and manufacturing of homes for distribution to the
Company's retail operations and to independent dealers in the case of
manufacturing operations. For financial services operations, management
determined segments based upon the principal products offered to consumers:
retail financing in the case of consumer finance and insurance products in the
case of insurance operations. The business segments identified by management are
consistent with organization structure used by the Company to manage its
business.
The Company's retail business purchases homes primarily from the
Company's manufacturing operations but supplements these purchases in certain
markets with purchases from third-party manufacturers. The Company's
manufacturing operations sell a majority of their homes to the Company's retail
operations, with a portion distributed through independent dealers. The consumer
finance segment provides retail financing to customers of the manufactured
housing segment as well as to customers of independent retail dealers. This
segment both originates and services loans, and securitizes the loans in the
public and private markets as a source of capital. The insurance segment
reinsures credit life insurance risk on policies sold to retail customers, and
beginning June 1, 1997, reinsures insurance risk on property and casualty
insurance and extended service contracts sold to retail customers.
Segment operating income is income before general corporate expenses,
nonfinancial interest expense, investment income and income taxes. Identifiable
assets include those assets directly related to the Company's operations in the
different segments; general corporate assets consist principally of cash,
certain property and other investments.
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------
Revenues
Retail $1,047,035 $1,149,438 $ 872,309
Manufacturing 1,088,447 912,632 595,043
Consumer finance 29,747 33,414 91,743
Insurance 61,482 36,834 11,170
Eliminations/other (637,486) (649,765) (500,214)
- ---------------------------------------------------------------------------
$1,589,225 $1,482,553 $1,070,051
===========================================================================
Income (loss) from operations
Retail $ (39,285) $ 43,934 $ 49,310
Manufacturing 76,064 101,383 68,945
Consumer finance (41,173) (10,651) 54,836
Insurance 11,181 6,409 2,477
Eliminations/other (46,525) (45,602) (39,375)
- ---------------------------------------------------------------------------
$ (39,738) $ 95,473 $ 136,193
===========================================================================
Nonfinancial services
interest expense $ (10,580) $ (5,970) $ (3,274)
Investment income 594 587 273
- ---------------------------------------------------------------------------
Income (loss) before
income taxes $ (49,724) $ 90,090 $ 133,192
===========================================================================
Identifiable assets
Retail $ 368,322 $ 184,389
Manufacturing 909,603 1,248,259
Consumer finance 252,300 335,147
Insurance 83,501 44,437
Eliminations/other (175,879) (528,856)
- ---------------------------------------------------------------------------
$1,437,847 $1,283,376
===========================================================================
Depreciation and amortization
Retail $ 9,149 $ 6,154 $ 4,355
Manufacturing 19,847 10,083 3,820
Consumer finance 8,760 2,413 1,241
Insurance -- -- --
Elimination/other 7,803 6,300 4,909
- ---------------------------------------------------------------------------
$ 45,559 $ 24,950 $ 14,325
===========================================================================
Capital expenditures
Retail $ 24,267 $ 19,831 $ 19,096
Manufacturing 20,459 24,432 14,232
Consumer finance 268 2,878 1,925
Insurance -- -- --
General corporate 1,942 4,270 3,149
- ---------------------------------------------------------------------------
$ 46,936 $ 51,411 $ 38,402
===========================================================================
page 35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Oakwood Homes Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of changes in
shareholders' equity and other comprehensive income present fairly, in all
material respects, the financial position of Oakwood Homes Corporation and its
subsidiaries at September 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1999, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
- --------------------------------
PricewaterhouseCoopers LLP
Greensboro, North Carolina
November 9, 1999, except for the information presented in the third paragraph in
Note 9 for which the date is December 22, 1999.
page 36
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
COMMON STOCK PRICES
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
Quarter High Low High Low High Low High Low High Low
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First 16 7/8 11 7/16 33 3/16 24 7/8 29 7/8 21 21 16 5/8 13 1/4 10 3/8
Second 20 13 5/16 41 3/4 33 1/8 23 17 3/8 25 3/4 18 1/2 13 1/2 10 7/8
Third 15 3/16 12 1/16 38 13/16 26 5/16 24 3/4 16 3/4 25 20 13 1/2 11 5/8
Fourth 13 1/16 4 1/2 31 7/8 13 1/16 30 23 7/16 28 20 3/8 18 1/8 12 7/8
</TABLE>
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
DIVIDEND INFORMATION
The Company declared a cash dividend of $.01 per common share during each of the
eight quarters in the period ended September 30, 1999.
EXHIBIT 21
LIST OF MATERIAL SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
<S> <C>
Name of Subsidiary (1) Jurisdiction of Incorporation
------------------- -----------------------------
Destiny Industries, Inc. Georgia
Golden Circle Financial Services California
Golden West Homes California
Homes by Oakwood, Inc. North Carolina
Marlette Homes, Inc. Indiana
Oakwood Acceptance Corporation (2) North Carolina
Oakwood Financial Corporation Nevada
Oakwood Funding Corporation Nevada
Oakwood Holdings, Inc. Nevada
Oakwood Mobile Homes, Inc. (3) North Carolina
Oakwood Mortgage Investors, Inc. Nevada
Oakwood Realty Services, Inc. North Carolina
OFC, LLC Nevada
Schult Homes Corporation Indiana
Schult Operating Company (4) Indiana
Suburban Homes Sales, Inc. Michigan
Tarheel Insurance Company, Ltd. Bermuda
</TABLE>
(1) Each subsidiary does business under its corporate name.
(2) Also does business under the names "Nationwide
Mortgage" and "Golden Circle Financial Services."
(3) Also does business under the names "Freedom Homes,"
"Victory Homes," "Golden West Homes" and "Schult
Homes."
(4) Also does business under the name "Crest Homes."
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in (a) the Registration
Statements on Form S-8 (Nos. 2-81624, 33-3797, 33-50414, 33-50416, 333-01023 and
333-52569) of Oakwood Homes Corporation, (b) the Registration Statement on Form
S-3 (No. 333-47053) of Oakwood Homes Corporation and (c) the Registration
Statement on Form S-3 (No. 333-72621) of Oakwood Mortgage Investors, Inc. of our
report dated November 9, 1999, except for the information presented in the third
paragraph in Note 9 for which the date is December 22, 1999, appearing on page
36 of the Annual Report to Stockholders which is incorporated in this Annual
Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Greensboro, North Carolina
December 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) the
Registrant's consolidated financial statements for the fiscal year ended
September 30, 1999 filed as a part of the Registrant's Form 10-K for the fiscal
year ended September 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH (B) FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 26,939
<SECURITIES> 0
<RECEIVABLES> 532,214
<ALLOWANCES> 3,032
<INVENTORY> 443,598
<CURRENT-ASSETS> 0
<PP&E> 339,461
<DEPRECIATION> 88,392
<TOTAL-ASSETS> 1,437,847
<CURRENT-LIABILITIES> 442,811
<BONDS> 352,164
0
0
<COMMON> 23,554
<OTHER-SE> 502,438
<TOTAL-LIABILITY-AND-EQUITY> 1,437,847
<SALES> 1,496,419
<TOTAL-REVENUES> 1,589,225
<CGS> 1,081,716
<TOTAL-COSTS> 1,572,314
<OTHER-EXPENSES> 25,926
<LOSS-PROVISION> 3,261
<INTEREST-EXPENSE> 40,709
<INCOME-PRETAX> (49,724)
<INCOME-TAX> (18,404)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,320)
<EPS-BASIC> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
