-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G+7X+X81gFozuxZRc9odIzKSwtcia9nnW8ZKCP8MNGSX2VDBP/CqW/s6v+AB4yWJ kQn5IyVXXfGQSy/QBAjnrg== 0000950168-99-003232.txt : 19991230 0000950168-99-003232.hdr.sgml : 19991230 ACCESSION NUMBER: 0000950168-99-003232 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OAKWOOD HOMES CORP CENTRAL INDEX KEY: 0000073609 STANDARD INDUSTRIAL CLASSIFICATION: MOBILE HOMES [2451] IRS NUMBER: 560985879 STATE OF INCORPORATION: NC FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07444 FILM NUMBER: 99783055 BUSINESS ADDRESS: STREET 1: 7800 MCCLOUD RD CITY: GREENSBORO STATE: NC ZIP: 27409-9634 BUSINESS PHONE: 9198552400 MAIL ADDRESS: STREET 1: 7800 MCCLOUD RD CITY: GREENSBORO STATE: NC ZIP: 27409-9634 10-K 1 OAKWOOD HOMES CORPORATION 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 - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) NORTH CAROLINA 56-0985879 - ---------------------------------------- ------------------------------------ (State of incorporation) (I.R.S. Employer Identification No.) 7800 McCloud Road, Greensboro, NC 27409-9634 - ---------------------------------------- ------------------------------------ (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 ------------------- ---------------- 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 _____ 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:
Parts Into Which Incorporated Documents Incorporated ---------------------- ------------ 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
2 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. 3 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. 4 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 5 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 6 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:
Total Number Of Contracts Delinquency Percentage And Loans September 30, 1999 ---------------------------- --------------------------------------------------------- 30 days 60 days 90 days Total ------- ------- ------- ----- 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%
(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. 7 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:
Total Value Delinquency Percentage of Contracts September 30, 1999 ---------------------------- ------------------------------------------------------------ 30 days 60 days 90 days Total ------- ------- ------- ----- 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%
(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. 8 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 9 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. 10 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 11 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. 12 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:
Name Age Information About Officer - ---- --- ------------------------- 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.
13
Name Age Information About Officer - ---- --- ------------------------- 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.
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 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 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 *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 *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 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.
Signature Capacity Date --------- -------- ---- /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 /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)
20 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 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 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 (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 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. EX-4 2 EXHIBIT 4.2 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 EX-10 3 EXHIBIT 10.13 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: "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 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 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] 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 EX-13 4 OAKWOOD HOMES CORPORATION 1999 ANNUAL REPORT [OAKWOOD LOGO APPEARS HERE] OAKWOOD HOMES CORPORATION 1999 ANNUAL REPORT [PORTIONS OF REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS INCORPORATED BY REFERENCE] FINANCIAL HIGHLIGHTS
Year ended September 30, ------------------------------------------------------------------ (in thousands except per share data) 1999 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- 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
[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 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:
1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ 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
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 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 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 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 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 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:
Weighted average Assumed cash flows interest rate --------------------------------------------------------------------------------- (dollar amounts in thousands) at year end(1) 2000 2001 2002 2003 2004 Thereafter Total Fair value - ----------------------------------------------------------------------------------------------------------------------------------- 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
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 Oakwood Homes Corporation and Subsidiaries Consolidated Statement of Operations
Year ended September 30, --------------------------------------- (in thousands except per share data) 1999 1998 1997 - --------------------------------------------------------------------------------------------- REVENUES 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.
PAGE 19 OAKWOOD HOMES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
September 30, ---------------------------- (in thousands except share and per share data) 1999 1998 - ---------------------------------------------------------------------------------------------- ASSETS 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.
PAGE 20 OAKWOOD HOMES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended September 30, ----------------------------------------------- (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES 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.
PAGE 21 OAKWOOD HOMES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND OTHER COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------------------------ 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 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.
PAGE 22 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 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. 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 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:
(in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------ STATEMENT OF OPERATIONS REVENUES Consumer finance 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 - ------------------------------------------------------------------------------------
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 - -------------------------------------------------------------------------------- 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 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. 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: (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 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 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 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:
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 - -------------------------------------------------------------------------------------------- $ 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 ========= =========
page 32 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 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:
1999 1998 -------------------------------------------------- ESTIMATED CARRYING Estimated Carrying (in thousands) FAIR VALUE AMOUNT fair value amount - ------------------------------------------------------------------------------------------------------------------------------ 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
NOTE 20--QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of quarterly financial information follows:
(in thousands except per share data) First quarter Second quarter Third quarter Fourth quarter Year - --------------------------------------------------------------------------------------------------------------------------- 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 ===========================================================================================================================
The sum of quarterly earnings per share amounts do not necessarily equal earnings per share for the year. page 34 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 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
1999 1998 1997 1996 1995 Quarter High Low High Low High Low High Low High Low - ------------------------------------------------------------------------------------------------------- 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
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. EX-21 5 EXHIBIT 21 EXHIBIT 21 LIST OF MATERIAL SUBSIDIARIES OF THE COMPANY
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
(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." EX-23 6 EXHIBIT 23.1 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 EX-27 7 FDS
5 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. 1,000 U.S. DOLLARS 12-MOS SEP-30-1999 OCT-1-1998 SEP-30-1999 1 26,939 0 532,214 3,032 443,598 0 339,461 88,392 1,437,847 442,811 352,164 0 0 23,554 502,438 1,437,847 1,496,419 1,589,225 1,081,716 1,572,314 25,926 3,261 40,709 (49,724) (18,404) 0 0 0 0 (31,320) (0.67) (0.67)
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