[PORTIONS OF THE COMPANY'S 2000 ANNUAL REPORT TO SHAREHOLDERS
INCORPORATED BY REFERENCE INTO THE ANNUAL REPORT ON FORM 10-K]
Financial Highlights
Year ended September 30,
-----------------------------------------------------------------------------
(in thousands, except per share data) 2000 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Net sales $1,189,885 $1,496,419 $1,404,432 $ 952,704 $862,079 $741,521
Total revenues $1,284,132 $1,589,225 $1,482,553 $ 1,070,051 $973,922 $821,412
Net income (loss) $ (120,865) $ (31,320) $ 55,353 $ 81,913 $ 68,255 $ 45,318
Earnings (loss) per common share
Basic $ (2.60) $ (0.67) $ 1.20 $ 1.79 $ 1.53 $ 1.03
Diluted $ (2.60) $ (0.67) $ 1.17 $ 1.75 $ 1.47 $ 0.99
Total assets $1,148,772 $1,437,847 $1,283,376 $ 904,506 $841,977 $782,640
Notes and bonds payable $ 329,929 $ 352,164 $ 61,875 $ 78,815 $134,379 $198,812
Cash dividends per common share $ 0.03 $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Oakwood Homes Corporation and Subsidiaries
Unless otherwise indicated, all references to annual periods refer to fiscal
years ended September 30.
RESULTS OF OPERATIONS
Total sales decreased 20% to $1.2 billion in fiscal 2000 from
$1.5 billion last year, following a 7% increase in 1999 from the $1.4 billion
reported in 1998. Total revenues declined 19% to $1.3 billion from $1.6 billion
last year, compared to $1.5 billion reported for 1998.
The following table summarizes certain key sales statistics for each of the
last three years:
2000 1999 1998
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Retail sales (in millions) $ 769 $ 1,037 $ 1,140
Wholesale sales (in millions) $ 421 $ 459 $ 264
Total sales (in millions) $ 1,190 $ 1,496 $ 1,404
Gross profit %--
integrated operations 26.5% 33.0% 33.7%
Gross profit %--
wholesale operations 14.0% 15.8% 17.7%
New single-section
homes sold--retail 5,761 9,256 12,390
New multi-section
homes sold--retail 10,333 12,810 13,669
Used homes sold--retail 1,587 2,190 2,349
New single-section
homes sold--wholesale 2,867 3,087 1,638
New multi-section
homes sold--wholesale 9,307 10,153 6,145
Average new single-section
sales price--retail $31,300 $32,400 $31,400
Average new multi-section
sales price--retail $55,200 $56,100 $53,300
Average new single-section
sales price--wholesale $21,200 $21,800 $20,900
Average new multi-section
sales price--wholesale $38,300 $38,000 $37,000
Weighted average retail sales
centers open during the year 384 383 330
Average dollar sales per sales
center (in millions) $ 2.0 $ 2.7 $ 3.5
2000 COMPARED TO 1999
Net sales
The Company's sales volume continued to be adversely affected by extremely
competitive industry conditions in 2000. Retail sales dollar volume decreased
26%, reflecting a 27% decrease in new unit volume and decreases of 3% and 2% in
the average new unit sales prices of single-section and multi-section homes,
respectively. These decreases were partially offset by a shift in product mix
toward multi-section homes, which have higher average selling prices than
single-section homes. Average retail sales prices declined as a result of
competitive pricing pressure and various promotional programs targeted at
selling older inventory models. Multi-section homes accounted for 64% of retail
new unit sales compared to 58% in 1999.
During 2000 the Company opened or acquired 11 new sales centers compared to
60 sales centers during 1999. The Company also closed 45 underperforming sales
centers during the year, primarily as part of its restructuring plans announced
during the fourth quarter of fiscal 1999. During 1999 seven sales centers were
closed. Total new retail sales dollars at sales centers open more than one year
decreased 33% during 2000.
Wholesale sales dollar volume decreased 8% due to an 8% decrease in wholesale
unit volume and a 3% decrease in the average new unit sales price of
single-section homes. These decreases were partially offset by a 1% increase in
the average new unit sales price of multi-section homes.
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 33.0% in 1999 to 26.5% primarily as a result of competitive
pricing pressures, various promotional programs and unfavorable manufacturing
variances caused by reduced production schedules experienced during fiscal year
2000.
Wholesale gross profit margins decreased from 15.8% in 1999 to 14.0% in 2000
as a result of competitive pricing pressures and unfavorable manufacturing
variances as described above.
Consumer finance revenues
Consumer finance revenues are summarized as follows:
(in thousands) 2000 1999
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Interest income $ 36,993 $ 41,655
Servicing fees 23,464 25,632
REMIC residual income 16,055 7,955
Losses on loans sold or held for sale:
Loss on sale of loans (12,360) (10,790)
Valuation provision on loans held for sale (11,951) (3,662)
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(24,311) (14,452)
Loss on sale of securities (4,463) --
Impairment and valuation provisions (21,627) (32,097)
Other 1,852 1,054
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$ 27,963 $ 29,747
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The decrease in interest income primarily reflects lower average outstanding
balances of loans held for sale prior to securitization, as well as lower
interest income on loans held for investment, the principal balance of which is
declining as these loans are liquidated. These decreases were partially offset
by incremental interest income on retained regular REMIC interests from certain
of the Company's post-1997 securitizations.
Loan servicing fees, which are reported net of amortization of servicing
assets, declined as a result of increased servicing asset amortization and lower
servicing cash flows from the Company's securitizations. 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.
Oakwood Homes Corporation 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Oakwood Homes Corporation and Subsidiaries
The increase in REMIC residual income reflects higher yields on retained
residual interests in REMIC securitizations primarily due to favorable cash flow
performance on certain interests whose values were previously written down.
The loss on sale of loans reflects the completion of four securitizations for
both 2000 and 1999. In addition, during fiscal 2000 and 1999 the Company
recorded provisions of $12.0 million and $3.7 million, respectively, to reduce
the carrying value of loans held for sale to the lower of cost or market,
resulting in aggregate losses on loans sold or held for sale of $24.3 million in
2000, compared to $14.5 million in 1999. The increase in securitization losses
reflects principally a significant decline in the spread between the yield on
loans originated by the Company and the cost of funds obtained when the loans
were securitized.
The loss on sale of securities reflects the sale in the quarter ending March
31, 2000 of all BBB rated asset-backed securities retained by the Company from
securitizations prior to December 31, 1999.
Impairment and valuation provisions are summarized as follows:
(in thousands) 2000 1999
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Impairment writedowns of residual
REMIC interests $ 103 $18,217
Impairment writedowns of regular
REMIC interests 3,690 1,373
Valuation provisions on servicing contracts 5,979 8,713
Provisions for potential guarantee
obligations on REMIC securities sold 11,855 3,794
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$21,627 $32,097
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Except for the impairment charge relating to regular REMIC interests, these
charges and credits generally resulted from changes in assumptions of credit
losses and recovery rates on securitized loans. The impairment writedown of
regular REMIC interests reflects the Company's determination that the decline in
fair value of a retained REMIC regular interest below its amortized cost was
other than temporary.
For the year ended September 30, 2000 total credit losses on loans originated
by the Company, including losses relating to assets securitized by the Company,
loans held for investment, loans held for sale and loans sold with full or
partial recourse, amounted to approximately 2.03% of the average principal
balance of the related loans, compared to approximately 1.72% 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, 2000 the Company had a
total of 2,603 unsold properties in repossession or foreclosure (approximately
2.06% of the total number of Oakwood originated serviced assets) compared to
2,417 and 1,430 at September 30, 1999 and 1998, respectively (approximately
1.97% and 1.28%, respectively, of the total number of Oakwood originated
serviced assets). Of the total number of unsold properties in repossession or
foreclosure, 301, 417 and 295 relate to loans originated on behalf of Deutsche
Financial Capital ("DFC"), the Company's former consumer finance joint venture,
at September 30, 2000, 1999 and 1998, respectively.
At September 30, 2000 the delinquency rate on Company originated loans,
excluding loans originated on behalf of DFC, was 4.4%, compared to 4.9% at
September 30, 1999.
Insurance revenues
Insurance revenues from the Company's captive reinsurance business increased 14%
to $56.4 million in 2000 from $49.6 million in 1999. A substantial portion of
insurance revenues is derived from insurance policies sold in connection with
new home sales by the Company's retail operations. If the adverse retail sales
trends experienced in fiscal 2000 continue, insurance revenues should decline in
future periods.
Effective June 1, 2000 the Company entered into a quota share agreement that
will reduce the volatility of the Company's earnings by lowering its
underwriting exposure to natural disasters such as hurricanes and floods. The
agreement will reduce the levels of credit support, which currently take the
form of letters of credit and cash, to secure the reinsurance subsidiary's
obligations to pay claims and to meet regulatory capital requirements. Under the
new arrangement, which covers physical damage policies, the Company will
retro-cede 50% of the Company's physical damage premiums and losses on an
ongoing basis. In return, the Company will receive a nonrefundable commission
with the potential to receive an incremental commission based on favorable loss
experience. The Company estimates that this quota share arrangement reduced
insurance revenues and expenses by $7.1 million and $5.6 million, respectively,
in the last four months of fiscal 2000.
In order to further reduce volatility and the required levels of credit
support, effective August 1, 2000 the Company entered into a commission-based
arrangement for its extended service contract line of business. Policies in
force on August 1, 2000 will continue to earn out over the policy term, while
the Company will earn a commission on all new business written.
Other income
Other income decreased from $13.4 million in 1999 to $9.9 million in 2000.
Results for 1999 included a $1.1 million insurance settlement gain and a $1.4
million gain on sale, as more fully described in the "1999 Compared to
1998--Other income" discussion below.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $76.2 million, or 19%, in
fiscal 2000 compared to 1999. This decrease resulted from cost reduction
initiatives undertaken during the prior twelve months, particularly at retail,
as well as lower sales volumes. However, as a percentage of net sales, selling,
general and administrative expenses increased to 28.2% of net sales for the year
ended September 30, 2000, from 27.5% of net sales in 1999 as a result of a lower
sales base over which to spread the Company's fixed portion of distribution and
overhead costs and higher service costs.
Consumer finance operating expenses
Consumer finance operating expenses rose $5.7 million, or 15%, during 2000. Of
the total dollar increase, approximately $3.7 million represents higher
compensation costs, including headcount additions to the loan servicing
functions in order to improve the performance of the loan servicing portfolio
over the long term.
6 2000 Annual Report
Occupancy and telecommunications costs increased by approximately $1.0 million.
During 2000 the average number of loans serviced increased 8%.
Insurance operating expenses
Insurance operating costs decreased 16% to $32.3 million during 2000 despite an
increase in insurance revenues. Expenses did not increase commensurately with
the increase in insurance revenues because a larger percentage of insurance
revenues were derived from products with lower expense ratios, as well as more
favorable loss ratios across all products in 2000. In addition, insurance
operating costs in 1999 included 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. 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. However, the reinsurance agreement described
previously, as well as the Company's purchase of catastrophe reinsurance, should
reduce the Company's underwriting exposure to natural disasters.
Restructuring charges
During the fourth quarter of 1999 the Company recorded restructuring charges of
approximately $25.9 million, as more fully described in the "1999 Compared to
1998--Restructuring charges" section below. During 2000 the Company reevaluated
its restructuring plans and determined that the losses associated with the
closing of retail sales centers and the idling or closing of manufacturing
plants were less than anticipated, and a portion of the charges was reversed.
During 2000 the Company recorded additional restructuring provisions of $3.8
million, primarily related to severance costs associated with a reduction in
headcount of approximately 250 people and the closure of certain offices and
facilities.
Interest expense
Interest expense increased $9.6 million, or 24%, during 2000 primarily due to
interest expense associated with the Company's March 1999 $300 million senior
note offering. A portion of the proceeds from the senior note offering was used
to retire $100 million of debt incurred in connection with the April 1, 1998
Schult acquisition. This increase was partially offset by lower interest expense
on declining and retired long-term debt balances. Interest expense on short-term
lines of credit declined slightly, reflecting an approximate $104 million
reduction in average balances outstanding offset by higher interest rates and
fees.
Income taxes
During 2000 the Company charged against earnings a valuation allowance of $66.4
million related to deferred income tax assets in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"). Because the Company has operated at a loss in its two most
recent fiscal years and because management believes difficult competitive
conditions will continue for the foreseeable future, management believes that
under the technical provisions of FAS 109, it is not appropriate to record
income tax benefits on current losses in excess of anticipated refunds of taxes
previously paid. Accordingly, the Company established valuation allowances
against the tax benefits of substantially all its net operating loss
carryforwards and deductible temporary differences between financial and taxable
income. As a consequence, the Company's results for fiscal 2000 reflect income
tax expense, notwithstanding the fact that the Company reported losses for the
year. The valuation allowance will be reversed to income in future periods to
the extent that the related deferred income tax assets are realized as a
reduction of taxes otherwise payable on any future earnings or the valuation
allowances are otherwise no longer required.
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 then
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 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.
Oakwood Homes Corporation 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Oakwood Homes Corporation and Subsidiaries
Consumer finance revenues
Consumer finance revenues are summarized as follows:
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Interest income $ 41,655 $ 30,918
Servicing fees 25,632 27,662
REMIC residual income 7,955 10,282
Gains/(losses) on loans sold or held for sale:
Gain/(loss) on sale of loans (10,790) 20,058
Valuation provision on loans held for sale (3,662) --
- --------------------------------------------------------------------------------
(14,452) 20,058
Impairment and valuation provisions (32,097) (53,712)
Other 1,054 (1,814)
- --------------------------------------------------------------------------------
$ 29,747 $ 33,394
- --------------------------------------------------------------------------------
The increase in interest income 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, declined as a result of increased servicing asset amortization and lower
servicing cash flows from the Company's securitizations. 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.
The decrease in REMIC residual income primarily reflects a decline in the
average balance of residual interests.
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.
Impairment and valuation provisions are summarized as follows:
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Impairment writedowns of residual
REMIC interests $18,217 $41,871
Impairment writedowns of regular
REMIC interests 1,373 --
Impairment writedowns of DFC REMIC interests -- 7,541
Valuation provisions on servicing contracts 8,713 --
Provisions for potential guarantee obligations
on REMIC securities sold 3,794 --
Provision for loss on investment in DFC
joint venture -- 4,300
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$32,097 $53,712
- --------------------------------------------------------------------------------
Except for impairment writedowns of regular REMIC interests, 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% the prior year.
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 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 DFC, 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.
Insurance revenues
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 "Insurance operating expenses."
8 2000 Annual Report
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 for 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.
Consumer finance 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. 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 expenses
Insurance operating costs increased 40% during 1999 principally due to higher
claims costs associated with the increased size of the business. Insurance
operating costs in 1999 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, the temporary idling of
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
Interest expense increased $16.2 million, or 66%, during 1999 primarily due to
interest expense associated with the Company's March 1999 $300 million senior
note offering. A portion of the proceeds from the senior note offering was used
to retire $100 million of debt incurred in connection with the Schult
acquisition. Interest expense on short-term lines of credit also increased due
to an increase in the average balances outstanding offset by slightly lower
interest rates.
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.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended September 30, 2000 the Company reported a net loss of $120.9
million. The net loss included pre-tax restructuring charges of $3.8 million,
noncash charges of $50.4 million related to the financial services business and
a $66.4 million noncash charge to establish valuation allowances against
deferred income tax assets as more fully described in Note 15 to the
Consolidated Financial Statements. For the year ended September 30, 1999 the
Company reported a net loss of $31.3 million. The net loss included pre-tax
restructuring charges of $25.9 million related to closing or idling certain
production facilities and retail sales centers and a reduction in workforce. The
loss also included noncash charges of $46.6 million related to the financial
services business.
The financial results reported by the Company during 2000 and 1999 reflect
business conditions within the manufactured housing industry. The Company is
currently operating in a highly competitive environment caused principally by
the industry's aggressive expansion in the retail channel, excessive amounts of
finished goods inventory and a general reduction in the availability of
financing at both the wholesale and retail levels. The industry estimates that
shipments of manufactured homes from production facilities has declined by
approximately 25% during the first ten months of calendar 2000.
The Company began to experience the effect of these cyclical industry factors
during late fiscal 1999 and took steps to begin to lower inventory levels,
reduce operating expenses and maximize cash flow. These efforts continued during
2000 as the Company maintained its focus on areas considered to be within its
span of control, principally cost control and inventory management. Many of the
actions taken, most notably plant and sales center closings, curtailed
production schedules and competitive pricing to effect a $120.6 million
reduction in inventories, negatively affected the Company's reported earnings
for 2000. However, cash flow improved significantly as a result of such
initiatives, and the Company generated $145.6 million in cash flow from
operating activities, including the sale of previously retained subordinated
asset-backed securities of $37.8 million, for the year ended September 30, 2000.
Because the Company expects competitive market conditions to continue during
2001, it does not expect to generate income from operations; however, it plans
to manage operations to generate positive cash flow. The Company believes that
operating cash flow, coupled with borrowings under its credit facilities, as
amended and extended on December 27, 2000 and further described in Note 10 to
the Consolidated Financial Statements, will provide sufficient liquidity to meet
obligations and execute its business plan during 2001.
During 2000 and 1999 the Company violated certain covenants included in its
credit facilities but was able to obtain waivers or amendments as needed. The
Company is currently negotiating new multi-year credit facilities, which would
replace both of its existing facilities. One of the proposed facilities could
Oakwood Homes Corporation 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
include the issuance of a significant number of stock warrants to the
prospective lender. However, there can be no assurance that the Company will be
able to finalize such facilities.
In the event of further deterioration in market conditions, the Company would
take additional steps to protect liquidity and manage cash flow. Among other
things, these actions might include further production curtailments, closing of
additional retail sales centers or the selective sale of operating or financial
assets.
The Company operates its plants to support its captive retail sales centers
and its independent retailer base. The Company has, and will continue to, adjust
production capacity in line with demand, producing at a rate that will allow the
Company to lower its inventories. At September 30, 2000 the Company was
operating approximately 20 plants, though many were operating at reduced
production schedules. Should market conditions worsen from that anticipated, the
Company will continue to curtail production by lowering production speed or
idling additional production facilities.
Retail financing of sales of the Company's products is an integral part of
the Company's integration strategy. Such financing consumes substantial amounts
of capital, which the Company has obtained principally by regularly securitizing
such loans through the asset-backed securities market. Should the Company's
ability to access the asset-backed securities market become impaired, the
Company would be required to seek additional sources of funding for its finance
business. Such sources might include, but would not be limited to, the sale of
whole loans to unrelated third parties and the increased utilization of FHA
financing.
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. Over the last two years, demand for subordinated securities,
particularly securities rated below BBB, has decreased. As a result, the Company
has retained certain subordinated asset-backed securities rated below BBB. The
aggregate principal balance of the retained securities rated below BBB
(including any initial overcollateralization) represents approximately 9% of the
aggregate principal balance of the loans securitized in transactions during
fiscal 2000.
At September 30, 2000 the Company owned subordinate asset-backed securities
rated below BBB having a carrying value of approximately $74.2 million
associated with certain of the Company's 1998, 1999 and 2000 securitizations, as
well as subordinate asset-backed securities having a carrying value of
approximately $3.0 million retained from securitization transactions prior to
1994. The Company considers these securities to be available for sale, and would
consider opportunities to liquidate these securities based upon market
conditions. Continued decreased demand for 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 2001 capital expenditures will approximate $24
million, comprised principally of improvements at existing facilities, computer
equipment and the replacement of certain computer information systems.
During the year ended September 30, 2000 the Company decreased inventories by
$121 million as a result of inventory reduction measures described previously.
The decrease in loans and investments from September 30, 1999 principally
reflects a decrease in loans held for sale from $280 million at September 30,
1999 to $211 million at September 30, 2000. The Company originates loans and
warehouses them until sufficient receivables have been accumulated for a
securitization. Changes in loan origination volume, which is significantly
affected by retail sales, and the timing of loan securitization transactions
affect the amount of loans held for sale at any point in time.
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 they primarily represent recent originations which are intended for
securitization in fiscal 2001.
Loans held for investment act as collateral for certain of the Company's debt
obligations and 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 5 to
the Consolidated Financial Statements.
All of the Company's revolving credit facilities provide for interest at
variable rates. Accordingly, an increase in short-term interest rates would
adversely affect interest expense on such revolving facilities. 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.
10 2000 Annual Report
The following table sets forth the Company's financial instruments that are
sensitive to changes in interest rates at September 30, 2000:
Weighted Assumed cash flows
average ------------------------------------------------------------------------------
interest rate Estimated
(dollar amounts in thousands) at year end(1) 2001 2002 2003 2004 2005 Thereafter Total fair value
- ------------------------------------------------------------------------------------------------------------------------------------
Loans held for investment(2)
Fixed rate loans 12.23% $ 3,964 $ 3,048 $ 1,587 $ 1,105 $ 625 $ 1,907 $ 12,236 $ 8,418
Retained REMIC interests(3)
Regular interests 8.0% 10,172 10,113 10,584 13,749 11,630 158,169 214,417 77,229
Residual Interests 16.9% 9,975 3,106 11,219 6,850 1,489 34,558 67,197 28,685
(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 Maturities
average ------------------------------------------------------------------------------
interest rate Estimated
(dollar amounts in thousands) at year end 2001 2002 2003 2004 2005 Thereafter Total fair value
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 8.2% $65,500 $ -- $ -- $ -- $-- $ -- $ 65,500 $65,500
Notes and bonds payable
Fixed rate 8.0% 318 17,085 67 124,822 72 174,328 316,692 87,026
Variable rate 7.2% 4,663 2,068 632 632 573 4,669 13,237 13,237
NEW ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board (the "Board") issued
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. In
June 2000 the Board issued Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities"
("FAS 138"), which amends FAS 133 and addresses a limited number of
implementation issues related to FAS 133. FAS 133, as amended by FAS 138, is
effective for the Company as of October 1, 2000 and is not expected to have a
material impact on the Company's financial condition or results of operations.
In December 1999 the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which summarizes the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues. SAB 101, as
amended, will be effective for the Company no later than the fourth quarter of
fiscal 2001. The Company plans to adopt SAB 101 in the fourth quarter of fiscal
2001. SAB 101 allows companies to report any changes in revenue recognition
related to adopting its provisions as an accounting change at the time of
implementation in accordance with APB Opinion No. 20, "Accounting Changes." Upon
adoption, the Company will record a cumulative effect of change in accounting
principle, effective October 1, 2000. Under its current policy, the Company
recognizes revenue for the majority of retail sales upon closing, which
includes, for the great majority of retail sales, execution of loan documents
and related paperwork and receipt of the customer's down payment. To adopt the
provisions of SAB 101, the Company currently plans to change its revenue
recognition policy on these retail sales to a method based upon placement of the
home at the customer's site. The Company has not yet determined the effect of
this change on its consolidated financial position and results of operations.
In September 2000 the Board issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities-- A Replacement of FASB Statement No. 125"
("FAS 140"), which revises the standards of accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures. FAS 140 is effective for transfers occurring after March 31, 2001
and for disclosures relating to securitization transactions and collateral for
fiscal years ended after December 15, 2000. The Company is in the process of
evaluating the potential effect of FAS 140 on its financial statements.
In October 2000 the Emerging Issues Task Force of the Board (the "EITF")
reached a consensus on a new accounting requirement for the recognition of other
than temporary impairments on purchased and retained beneficial interests
resulting from securitization transactions. This requirement is summarized in
EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets"
("EITF 99-20"). Under previously
Oakwood Homes Corporation 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
existing accounting requirements, declines in the fair value of such beneficial
interests were recognized as other than temporary impairment when the present
value of the underlying cash flows discounted at a risk-free rate using current
assumptions were less than the carrying value of such assets. Pursuant to EITF
Issue No. 99-20, declines in fair value are to be considered other than
temporary when: (i) the carrying value of the beneficial interests exceeds the
fair value of such beneficial interests using current assumptions and (ii) the
timing and/or extent of cash flows expected to be received on the beneficial
interests has adversely changed from the previous valuation date. Initial
adoption of this new accounting guidance will be required for the Company's
fiscal year beginning October 1, 2001, although early adoption is permitted, and
is to be reflected as a cumulative effect of an accounting change at the time of
adoption. The Company is currently determining the timing of adoption of this
new accounting requirement and its potential impact on the accounting for the
Company's REMIC interests retained at the time of its securitization
transactions.
FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements and
information based on beliefs of the Company's management as well as assumptions
made by, and information currently available to, the Company's management. These
statements include, among others, statements relating to our ability to reduce
our inventory levels, our ability to generate positive cash flow, the adequacy
of our existing credit facilities together with our operating cash flow to
provide us with sufficient liquidity to meet our obligations and execute our
business plan during 2001, and the ability of the quota share agreement to
reduce the Company's underwriting exposure to natural disasters. Words like
"believe," "expect," "should" and similar expressions used in this Annual Report
are intended to identify other such forward-looking statements.
These forward-looking statements reflect the current views of the Company
with respect to future events and are subject to a number of risks, including,
among others, the following: competitive industry conditions could further
adversely affect sales and profitability; we may be unable to access sufficient
capital to fund our operations; we may recognize special charges or experience
increased costs in connection with our securitization or other financing
activities; adverse changes in governmental regulations applicable to our
business could negatively impact us; we could suffer losses resulting from
litigation (including shareholder class actions or other class action suits);
our captive Bermuda reinsurance subsidiary could experience significant losses;
we could experience increased credit losses or higher delinquency rates on loans
that we originate; negative changes in general economic conditions in our
markets could adversely impact us; we could lose the services of our key
management personnel; and any other factors that generally affect companies in
our lines of business could also adversely impact us. Should our underlying
assumptions prove incorrect or should one or more of the risks and uncertainties
materialize, actual events or results may vary materially and adversely from
those described herein as anticipated, expected, believed or estimated.
12 2000 Annual Report
CONSOLIDATED STATEMENT OF OPERATIONS
Oakwood Homes Corporation and Subsidiaries
Year ended September 30,
(in thousands except per share data) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Net sales $1,189,885 $1,496,419 $1,404,432
Financial services
Consumer finance, net of impairment and
valuation provisions 27,963 29,747 33,394
Insurance 56,430 49,643 33,965
- ------------------------------------------------------------------------------------------------------------------------------------
84,393 79,390 67,359
Other income 9,854 13,416 10,762
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 1,284,132 1,589,225 1,482,553
- ------------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales 927,517 1,081,716 973,434
Selling, general and administrative expenses 335,123 411,344 341,441
Financial services operating expenses
Consumer finance 43,220 37,530 24,204
Insurance 32,316 38,463 27,554
- ------------------------------------------------------------------------------------------------------------------------------------
75,536 75,993 51,758
Restructuring charges (reversals) (2,597) 25,926 --
Provision for losses on credit sales 3,000 3,261 1,281
Interest expense 50,289 40,709 24,549
- ------------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 1,388,868 1,638,949 1,392,463
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (104,736) (49,724) 90,090
Provision for income taxes 16,129 (18,404) 34,737
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (120,865) $ (31,320) $ 55,353
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share
Basic $ (2.60) $ (0.67) $ 1.20
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted $ (2.60) $ (0.67) $ 1.17
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
Oakwood Homes Corporation 13
CONSOLIDATED BALANCE SHEET
Oakwood Homes Corporation and Subsidiaries
September 30,
(in thousands except share and per share data) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 22,523 $ 26,939
Loans and investments 322,166 430,865
Other receivables 113,460 98,317
Inventories 323,003 443,598
Properties and facilities 241,107 251,069
Deferred income taxes -- 30,712
Other assets 126,513 156,347
- ------------------------------------------------------------------------------------------------------------------------------------
$1,148,772 $1,437,847
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Short-term borrowings $ 65,500 $ 199,800
Notes and bonds payable 329,929 352,164
Accounts payable and accrued liabilities 261,888 243,525
Insurance reserves and unearned premiums 44,602 89,404
Deferred income taxes 6,169 --
Other long-term obligations 35,400 26,962
Shareholders' equity
Common stock, $.50 par value; 100,000,000 shares authorized;
47,105,000 and 47,107,000 shares issued and outstanding 23,552 23,554
Additional paid-in capital 169,742 171,185
Retained earnings 204,546 326,825
- ------------------------------------------------------------------------------------------------------------------------------------
397,840 521,564
Accumulated other comprehensive income 7,625 7,021
Unearned compensation (181) (2,593)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 405,284 525,992
Commitments and contingencies (Notes 5, 11 and 19)
- ------------------------------------------------------------------------------------------------------------------------------------
$1,148,772 $1,437,847
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
14 2000 Annual Report
CONSOLIDATED STATEMENT OF CASH FLOWS
Oakwood Homes Corporation and Subsidiaries
Year ended September 30,
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income (loss) $ (120,865) $ (31,320) $ 55,353
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization 50,328 45,559 24,950
Deferred income taxes 36,881 (21,992) (4,406)
Provision for losses on credit sales 3,000 3,261 1,281
(Gain) loss on loans sold or held for sale 24,311 14,452 (20,058)
Loss on sale of securities 4,463 -- --
Impairment and valuation provisions 21,627 32,097 53,712
Excess of cash receipts over REMIC residual income recognized 6,776 29,338 19,934
Reversal of restructuring charges (6,366) -- --
Noncash restructuring charges 1,190 10,455 --
Other (8,611) (10,663) (2,089)
Changes in assets and liabilities, net of effect of business acquisition
Other receivables (15,804) (31,832) (4,027)
Inventories 120,595 (152,346) (62,705)
Deferred insurance policy acquisition costs 10,379 (3,323) (4,260)
Other assets (11,911) (9,190) 344
Accounts payable and accrued liabilities 9,265 (439) 48,621
Insurance reserves and unearned premiums (44,802) 31,985 26,884
Other long-term obligations (3,417) 1,626 8,968
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by operations 77,039 (92,332) 142,502
Loans originated (1,037,872) (1,364,133) (1,232,292)
Purchase of loans and securities (3,536) (108,297) (5,045)
Sales of loans 1,088,487 1,469,134 1,061,517
Principal receipts on loans 21,480 33,282 53,048
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by operating activities 145,598 (62,346) 19,730
- ------------------------------------------------------------------------------------------------------------------------------------
Investing activities
Business acquisition -- -- (101,829)
Acquisition of properties and facilities (20,964) (46,936) (51,411)
Investment in and advances to joint venture -- 22,150 (24,454)
Other 28,453 (27,526) (20,797)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by investing activities 7,489 (52,312) (198,491)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing activities
Net borrowings (repayments) on short-term credit facilities (134,300) (175,223) 94,223
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 (22,126) (17,182) (22,540)
Cash dividends (1,414) (1,880) (1,861)
Proceeds from exercise of stock options 337 1,636 4,721
- ------------------------------------------------------------------------------------------------------------------------------------
Cash provided (used) by financing activities (157,503) 112,626 179,015
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,416) (2,032) 254
Cash and cash equivalents
Beginning of year 26,939 28,971 28,717
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 22,523 $ 26,939 $ 28,971
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
Oakwood Homes Corporation 15
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY AND OTHER
COMPREHENSIVE INCOME
Oakwood Homes Corporation and Subsidiaries
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, 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
Comprehensive income:
Net loss -- -- -- (120,865) -- -- (120,865)
Unrealized gain on securities
available for sale -- -- -- -- 604 -- 604
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) -- -- -- (120,865) 604 -- (120,261)
Exercise of stock options 18 8 329 -- -- -- 337
Forfeiture of restricted stock (20) (10) (1,523) -- -- -- (1,533)
Amortization of unearned compensation -- -- -- -- -- 2,172 2,172
ESOP shares committed to be released -- -- (249) -- -- 240 (9)
Cash dividends ($.03 per share) -- -- -- (1,414) -- -- (1,414)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 47,105 $23,552 $169,742 $ 204,546 $7,625 $ (181) $ 405,284
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
16 2000 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oakwood Homes Corporation and Subsidiaries
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 occur 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.
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").
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.
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 and
the carrying value of the Company's investment may be impaired. 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 or
investment 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 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
Oakwood Homes Corporation 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Oakwood Homes Corporation and Subsidiaries
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 probable 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."
Effective June 1, 2000 the Company entered into a quota share agreement that
will reduce the levels of credit support to secure the reinsurance subsidiary's
obligations to pay claims and to meet regulatory capital requirements. Under the
new arrangement, which covers physical damage policies, the Company will
retro-cede 50% of the Company's physical damage premiums and losses on an
ongoing basis. In return, the Company will receive a nonrefundable commission
with the potential to receive an incremental commission based on favorable loss
experience.
In order to further reduce volatility and the required levels of credit
support, effective August 1, 2000 the Company entered into a commission-based
arrangement for its extended service contract line of business. Policies in
force on August 1, 2000 will continue to earn out over the policy term, while
the Company will earn a commission on all new business written.
Inventories
Inventories are valued at the lower of cost or market, 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 seven 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
$17.2 million, $30.4 million and $18.6 million in 2000, 1999 and 1998,
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
18 2000 Annual Report
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 it is more likely than not 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.
Fiscal year
Unless otherwise indicated, all references to annual periods refer to fiscal
years ended September 30.
Reclassifications
Certain amounts previously reported for 1999 and 1998 have been reclassified to
conform to classifications used in 2000.
New accounting pronouncements
In June 1998 the Financial Accounting Standards Board (the "Board") issued
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. In
June 2000 the Board issued Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities"
("FAS 138"), which amends FAS 133 and addresses a limited number of
implementation issues related to FAS 133. FAS 133, as amended by FAS 138, is
effective for the Company as of October 1, 2000 and is not expected to have a
material impact on the Company's financial condition or results of operations.
In December 1999 the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which summarizes the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues. SAB 101, as
amended, will be effective for the Company no later than the fourth quarter of
fiscal 2001. The Company plans to adopt SAB 101 in the fourth quarter of fiscal
2001. SAB 101 allows companies to report any changes in revenue recognition
related to adopting its provisions as an accounting change at the time of
implementation in accordance with APB Opinion No. 20, "Accounting Changes." Upon
adoption, the Company will record a cumulative effect of change in accounting
principle, effective October 1, 2000. Under its current policy, the Company
recognizes revenue for the majority of retail sales upon closing, which
includes, for the great majority of retail sales, execution of loan documents
and related paperwork and receipt of the customer's down payment. To adopt the
provisions of SAB 101, the Company currently plans to change its revenue
recognition policy on these retail sales to a method based upon placement of the
home at the customer's site. The Company has not yet determined the effect of
this change on its consolidated financial position and results of operations.
In September 2000 the Board issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities-- A Replacement of FASB Statement No. 125"
("FAS 140"), which revises the standards of accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures. FAS 140 is effective for transfers occurring after March 31, 2001
and for disclosures relating to securitization transactions and collateral for
fiscal years ended after December 15, 2000. The Company is in the process of
evaluating the potential effect of FAS 140 on its financial statements.
In October 2000 the Emerging Issues Task Force of the Board (the "EITF")
reached a consensus on a new accounting requirement for the recognition of other
than temporary impairments on purchased and retained beneficial interests
resulting from securitization transactions. This requirement is summarized in
EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets"
("EITF 99-20"). Under previously existing accounting requirements, declines in
the fair value of such beneficial interests were recognized as other than
temporary impairment when the present value of the underlying cash flows
discounted at a risk-free rate using current assumptions were less than the
carrying value of such assets. Pursuant to EITF Issue No. 99-20, declines in
fair value are to be considered other than temporary when: (i) the carrying
value of the beneficial interests exceeds the fair value of such beneficial
interests using current assumptions and (ii) the timing and/or extent of cash
flows expected to be received on the beneficial interests has adversely changed
from the previous valuation date. Initial adoption of this new accounting
guidance will be required for the Company's fiscal year beginning October 1,
2001, although early adoption is permitted, and is to be reflected as a
cumulative effect of an accounting change at the time of adoption. The Company
is currently determining the timing of adoption of this new accounting
requirement and its potential impact on the accounting for the Company's REMIC
interests retained at the time of its securitization transactions.
Oakwood Homes Corporation 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Oakwood Homes Corporation and Subsidiaries
NOTE 2--BUSINESS CONDITIONS AND LIQUIDITY CONSIDERATIONS
For the year ended September 30, 2000 the Company reported a net loss of $120.9
million. The net loss included pre-tax restructuring charges of $3.8 million,
noncash charges of $50.4 million related to the financial services business and
a $66.4 million noncash charge to establish valuation allowances against
deferred income tax assets as more fully described in Note 15. For the year
ended September 30, 1999 the Company reported a net loss of $31.3 million. The
net loss included pre-tax restructuring charges of $25.9 million related to
closing or idling certain production facilities and retail sales centers and a
reduction in workforce. The loss also included noncash charges of $46.6 million
related to the financial services business.
The financial results reported by the Company reflect business conditions
within the manufactured housing industry. The Company is currently operating in
a highly competitive environment caused principally by the industry's aggressive
expansion in the retail channel, excessive amounts of finished goods inventory
and a general reduction in the availability of financing at both the wholesale
and retail levels. The industry estimates that shipments of manufactured homes
from production facilities has declined by approximately 25% during the first
ten months of calendar 2000.
The Company began to experience the effect of these cyclical industry factors
during late fiscal 1999 and took steps to begin to lower inventory levels,
reduce operating expenses and maximize cash flow. These efforts continued during
2000 as the Company maintained its focus on areas considered to be within its
span of control, principally cost control and inventory management. Many of the
actions taken, most notably plant and sales center closings, curtailed
production schedules and competitive pricing to effect a $120.6 million
reduction in inventories, negatively affected the Company's reported earnings
for 2000. However, cash flow improved significantly as a result of such
initiatives, and the Company generated $145.6 million in cash flow from
operating activities, including the sale of previously retained subordinated
asset-backed securities of $37.8 million, for the year ended September 30, 2000.
Because the Company expects competitive market conditions to continue during
2001, it does not expect to generate income from operations; however, it plans
to manage operations to generate positive cash flow. The Company believes that
operating cash flow, coupled with borrowings under its credit facilities, as
amended and extended on December 27, 2000 and further described in Note 10, will
provide sufficient liquidity to meet obligations and execute its business plan
during 2001.
During 2000 and 1999 the Company violated certain covenants included in its
credit facilities but was able to obtain waivers or amendments as needed. The
Company is currently negotiating new multi-year credit facilities, which would
replace both of its existing facilities. One of the proposed facilities could
include the issuance of a significant number of stock warrants to the
prospective lender. However, there can be no assurance that the Company will be
able to finalize such facilities.
In the event of further deterioration in market conditions, the Company would
take additional steps to protect liquidity and manage cash flow. Among other
things, these actions might include further production curtailments, closing of
additional retail sales centers or the selective sale of operating or financial
assets.
The Company operates its plants to support its captive retail sales centers
and its independent retailer base. The Company has, and will continue to, adjust
production capacity in line with demand, producing at a rate that will allow the
Company to lower its inventories. At September 30, 2000 the Company was
operating approximately 20 plants, though many were operating at reduced
production schedules. Should market conditions worsen from that anticipated, the
Company will continue to curtail production by lowering production speed or
idling additional production facilities.
Retail financing of sales of the Company's products is an integral part of
the Company's integration strategy. Such financing consumes substantial amounts
of capital, which the Company has obtained principally by regularly securitizing
such loans through the asset-backed securities market. Should the Company's
ability to access the asset-backed securities market become impaired, the
Company would be required to seek additional sources of funding for its finance
business. Such sources might include, but would not be limited to, the sale of
whole loans to unrelated third parties and the increased utilization of FHA
financing.
NOTE 3--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:
(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.
20 2000 Annual Report
Summarized below is unaudited pro forma financial data of the Company
assuming the Schult acquisition had taken place at the beginning of the year
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.
(in thousands except per share data) 1998
- -------------------------------------------------------------------------------------------------------------------
(unaudited)
Net sales $1,572,579
Net income $ 52,431
Earnings per share--diluted $ 1.11
NOTE 4--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 Capital Corporation is a special-purpose subsidiary of Oakwood
Acceptance which facilitates borrowings under the revolving warehouse financing
credit facility. 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 Funding was dissolved during
2000 when the nonrecourse notes held were repaid. 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.
The aggregate principal balance of loans sold to third parties, including
securitization transactions, was approximately $1.1 billion, $1.5 billion and
$1.1 billion in 2000, 1999 and 1998, respectively.
Oakwood Acceptance's servicing portfolio totaled approximately $4.6 billion
and $4.2 billion at September 30, 2000 and 1999, respectively, of which
approximately $4.4 billion and $4.0 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) 2000 1999 1998
- --------------------------------------------------------------------------------
Statement of operations
Revenues
Consumer finance
Interest income $ 36,993 $ 41,655 $ 30,918
Servicing fees 23,464 25,632 27,662
REMIC residual income 16,055 7,955 10,282
Gain (loss) on loans sold or
held for sale (24,311) (14,452) 20,058
Loss on sale of securities (4,463) -- --
Impairment and
valuation provisions (21,627) (32,097) (53,712)
Other 1,852 1,054 (1,814)
- --------------------------------------------------------------------------------
Total consumer
finance revenues 27,963 29,747 33,394
- --------------------------------------------------------------------------------
Insurance
Premiums earned 55,625 52,018 35,226
Catastrophe reinsurance
premiums ceded (1,120) (3,575) (1,791)
Investment income 8,258 5,167 2,515
Less: intercompany
interest income (6,333) (3,967) (1,985)
- --------------------------------------------------------------------------------
Total insurance revenues 56,430 49,643 33,965
- --------------------------------------------------------------------------------
Total revenues 84,393 79,390 67,359
Cost and expenses
Consumer finance
Interest expense 38,534 30,129 18,579
Operating expenses 43,220 37,530 24,204
Provision for losses
on credit sales 3,000 3,261 1,281
- --------------------------------------------------------------------------------
Total consumer finance
costs and expenses 84,754 70,920 44,064
- --------------------------------------------------------------------------------
Insurance
Gross claims expenses 19,338 35,059 18,546
Catastrophe reinsurance
recoveries -- (7,600) --
Commissions and ceding fees 10,845 9,299 8,063
Other expenses 2,133 1,705 945
- --------------------------------------------------------------------------------
Total insurance costs
and expenses 32,316 38,463 27,554
- --------------------------------------------------------------------------------
Total costs and expenses 117,070 109,383 71,618
- --------------------------------------------------------------------------------
Loss before income taxes $(32,677) $(29,993) $ (4,259)
- --------------------------------------------------------------------------------
Oakwood Homes Corporation 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Oakwood Homes Corporation and Subsidiaries
Impairment and valuation provisions recorded in 2000, 1999 and 1998 are
summarized as follows:
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Impairment writedowns of residual
and regular REMIC interests
(exclusive of DFC residuals) $ 3,793 $19,590 $41,871
Valuation provisions on
servicing contracts 5,979 8,713 --
Additional provisions for potential
guarantee obligations on REMIC
securities sold 11,855 3,794 --
Impairment writedowns of
DFC REMIC interests -- -- 7,541
Provision for loss on investment
in DFC joint venture -- -- 4,300
- --------------------------------------------------------------------------------
$21,627 $32,097 $53,712
- --------------------------------------------------------------------------------
The assumptions used in the valuation of retained REMIC interests are
described in Note 5.
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) 2000 1999
- --------------------------------------------------------------------------------
Balance sheet
Loans $209,899 $318,123
REMIC regular interests 77,229 69,325
REMIC residual interests 28,685 36,630
Loan servicing assets 11,863 8,731
Restricted cash 10,849 40,376
Catastrophe reinsurance
claims receivable -- 11,400
Other assets 92,744 78,767
- --------------------------------------------------------------------------------
Total assets $431,269 $563,352
- --------------------------------------------------------------------------------
Short-term borrowings $ 64,000 $144,800
Notes payable secured by loans 3,560 23,758
Insurance reserves, including
unearned premiums of $33,945
and $70,764, respectively 44,602 89,404
Due to affiliates 118,455 125,106
Loan servicing liabilities 14,930 4,759
Other liabilities 50,150 29,126
Parent company's investment 135,572 146,399
- --------------------------------------------------------------------------------
Total liabilities and parent
company's investment $431,269 $563,352
- --------------------------------------------------------------------------------
Gross insurance premiums written, which consist entirely of reinsurance
assumed from the ceding company, were approximately $55.9 million, $69.8 million
and $59.8 million in 2000, 1999 and 1998, 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 significantly amended the structure of this catastrophe coverage
program. Effective June 1, 2000 the Company shares 50% of all risks on a quota
share basis with American Bankers Insurance Company ("ABI"). Both the Company
and ABI jointly share in the cost of, and jointly share in the protection
provided by, a reinsurance placement that generally provides protection in
excess of a single aggregate loss occurrence of $5 million from a single insured
event. The reinsurers bear 95% of the next $25 million of losses. The Company
and ABI share any aggregate loss in excess of $30 million from a single loss
occurrence arising from a single insured event on a 50/50 basis. The catastrophe
reinsurance is ceded with a number of reinsurers; approximately 80% of the
catastrophe reinsurance is ceded on a multi-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) 2000 1999 1998
- --------------------------------------------------------------------------------
Statement of operations
Revenues
Net sales $1,189,885 $1,496,419 $1,404,432
Equity in losses of
financial services
businesses (32,677) (29,993) (4,259)
Other income 9,854 13,416 10,762
- --------------------------------------------------------------------------------
Total revenues 1,167,062 1,479,842 1,410,935
- --------------------------------------------------------------------------------
Costs and expenses
Cost of sales 927,517 1,081,716 973,434
Selling, general and
administrative
expenses 335,123 411,344 341,441
Restructuring charges
(reversals) (2,597) 25,926 --
Interest expense 11,755 10,580 5,970
- --------------------------------------------------------------------------------
Total costs and
expenses 1,271,798 1,529,566 1,320,845
- --------------------------------------------------------------------------------
Income (loss) before
income taxes (104,736) (49,724) 90,090
Provision for income taxes 16,129 (18,404) 34,737
- --------------------------------------------------------------------------------
Net income (loss) $ (120,865) $ (31,320) $ 55,353
- --------------------------------------------------------------------------------
22 2000 Annual Report
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Balance sheet
Current assets
Cash and cash equivalents $ 18,130 $ 19,096
Receivables 69,773 64,299
Inventories 323,003 443,598
Prepaid expenses 12,276 4,312
- --------------------------------------------------------------------------------
Total current assets 423,182 531,305
Properties and facilities 233,036 245,824
Investment in and advances to
financial services businesses 254,027 271,505
Other assets 83,097 97,366
- --------------------------------------------------------------------------------
$993,342 $1,146,000
- --------------------------------------------------------------------------------
Current liabilities
Short-term borrowings $ 1,500 $ 55,000
Current maturities of long-term debt 2,834 1,133
Accounts payable and accrued liabilities 196,537 209,358
- --------------------------------------------------------------------------------
Total current liabilities 200,871 265,491
Long-term debt 323,534 327,273
Other long-term obligations 63,653 27,244
Shareholders' equity 405,284 525,992
- --------------------------------------------------------------------------------
$993,342 $1,146,000
- --------------------------------------------------------------------------------
NOTE 5--LOANS AND INVESTMENTS
The components of loans and investments are as follows:
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Loans held for sale, net of valuation
allowance of $2,563 and $3,662
in 2000 and 1999, respectively $211,296 $279,927
Loans held for investment 8,512 48,015
Less: reserve for uncollectible receivables (3,556) (3,032)
- --------------------------------------------------------------------------------
Total loans receivable 216,252 324,910
- --------------------------------------------------------------------------------
Retained interests in REMIC
securitizations, exclusive of loan
servicing assets and liabilities
Regular interests 77,229 69,325
Residual interests 28,685 36,630
- --------------------------------------------------------------------------------
Total retained REMIC interests 105,914 105,955
- --------------------------------------------------------------------------------
$322,166 $430,865
- --------------------------------------------------------------------------------
The estimated principal receipts, including estimated prepayments, on loans
held for investment are $3.0 million in 2001, $2.4 million in 2002, $1.2 million
in 2003, $860,000 in 2004, $464,000 in 2005 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.
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 $17 million
and $24 million as of September 30, 2000 and 1999, respectively.
The following table summarizes the transactions reflected in the reserve for
credit losses:
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Balance at beginning of year $ 3,546 $ 2,067 $ 4,277
Provision for losses on
credit sales 3,000 3,261 1,281
Reserve recorded related
to acquired portfolios 796 1,896 --
Losses charged to the reserve (3,359) (3,678) (3,491)
- --------------------------------------------------------------------------------
Balance at end of year $ 3,983 $ 3,546 $ 2,067
- --------------------------------------------------------------------------------
The reserve for credit losses is reflected in the consolidated balance sheet
as follows:
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Reserve for uncollectible receivables $3,556 $3,032
(included in loans and investments)
Reserve for contingent liabilities
(included in accounts payable
and accrued liabilities) 427 514
- --------------------------------------------------------------------------------
$3,983 $3,546
- --------------------------------------------------------------------------------
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
as of September 30, 2000 and 1999. Liabilities recorded with respect to such
guarantees in accordance with FAS 125 were approximately $30.8 million and $19.0
million at September 30, 2000 and 1999, respectively, and are included in other
long-term obligations.
The valuation of residual interests is affected not only by the projected
level of prepayments of principal and net credit losses, but also by the
projected timing of such prepayments and net credit losses. Should such timing
differ materially from the Company's projections, it could have a material
effect on the valuation of the Company's residual interests. Additionally, such
valuation is determined by discounting cash flows over the entire expected life
of the receivables sold.
Oakwood Homes Corporation 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Oakwood Homes Corporation and Subsidiaries
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 2000 and 1999:
(dollar amounts in thousands) 2000 1999
- --------------------------------------------------------------------------------
Aggregate unpaid principal
balance of loans $4,639,507 $3,925,317
Weighted average interest rate of
loans at year end 10.3% 10.7%
Approximate assumed weighted average
constant prepayment rate as a percentage
of unpaid principal balance of loans 17.5% 17.7%
Approximate remaining assumed
nondiscounted credit losses as a
percentage of unpaid principal
balance of loans 12.9% 13.0%
Approximate weighted average
interest rate used to discount
assumed residual cash flows 16.9% 17.1%
The following table sets forth certain data with respect to retained REMIC
interests at September 30, 2000 and 1999:
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Regular interests
Amortized cost $79,034 $71,451
Gross unrealized gains 1,244 486
Gross unrealized losses (3,049) (2,612)
- --------------------------------------------------------------------------------
Estimated fair value $77,229 $69,325
- --------------------------------------------------------------------------------
Residual interests
Amortized cost $15,473 $23,702
Gross unrealized gains 13,212 12,934
Gross unrealized losses -- (6)
- --------------------------------------------------------------------------------
Estimated fair value $28,685 $36,630
- --------------------------------------------------------------------------------
Gross unrealized gains $14,456 $13,420
Gross unrealized losses (3,049) (2,618)
Deferred income taxes (3,782) (3,781)
- --------------------------------------------------------------------------------
Accumulated other comprehensive income $ 7,625 $ 7,021
- --------------------------------------------------------------------------------
NOTE 6--OTHER RECEIVABLES
The components of other receivables are as follows:
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Trade receivables $ 29,701 $30,843
Federal income taxes refundable 18,228 11,728
Receivable from REMICs 17,668 7,366
Extensions receivable 16,955 8,299
Escrow advances receivable 10,674 5,825
Insurance premiums receivable 2,181 3,027
Accrued interest 493 1,952
Catastrophe reinsurance claims receivable -- 11,400
Other receivables 17,560 17,877
- --------------------------------------------------------------------------------
$113,460 $98,317
- --------------------------------------------------------------------------------
Trade receivables represent amounts due from independent manufactured housing
dealers, which are located throughout the United States.
NOTE 7--INVENTORIES
The components of inventories are as follows:
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Manufactured homes $272,828 $382,817
Work-in-progress, materials and supplies 35,847 46,463
Land/homes under development 14,328 14,318
- --------------------------------------------------------------------------------
$323,003 $443,598
- --------------------------------------------------------------------------------
NOTE 8--PROPERTIES AND FACILITIES
The components of properties and facilities are as follows:
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Land and land improvements $ 46,267 $ 42,254
Buildings and field sales offices 144,758 145,668
Furniture, fixtures and equipment 126,995 118,056
Leasehold improvements 35,304 33,483
- --------------------------------------------------------------------------------
353,324 339,461
Less: accumulated depreciation
and amortization (112,217) (88,392)
- --------------------------------------------------------------------------------
$ 241,107 $251,069
- --------------------------------------------------------------------------------
Depreciation and amortization of properties and facilities was approximately
$29.5 million, $28.2 million and $20.2 million in 2000, 1999 and 1998,
respectively.
At September 30, 2000 the Company held for sale two manufacturing facilities.
Included in the restructuring provision for 2000 and 1999 were charges of
approximately $1.2 million and $1.3 million, respectively, to reduce the
carrying value of the facilities to their estimated net realizable value.
NOTE 9--OTHER ASSETS
The components of other assets are as follows:
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Goodwill, net of accumulated amortization of
$7,603 and $4,703, respectively $ 53,434 $ 55,832
Restricted cash and investments 25,758 50,342
Prepaid expenses 13,848 5,847
Loan servicing assets 11,863 8,731
Deferred insurance policy acquisition costs 5,672 16,051
Identifiable intangibles acquired in Schult
acquisition, net of accumulated amortization
of $5,458 and $3,282, respectively 5,443 7,620
Other 10,495 11,924
- --------------------------------------------------------------------------------
$126,513 $156,347
- --------------------------------------------------------------------------------
Amortization expense of goodwill and identifiable intangibles was
approximately $5.1 million, $5.2 million and $2.7 million in 2000, 1999 and
1998, 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.
24 2000 Annual Report
A reconciliation of amounts recorded for loan servicing contracts follows:
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Balance at beginning of year $ 3,972 $ 9,261 $ 3,786
Servicing assets recorded 10,054 11,082 6,630
Amortization of servicing contracts (11,114) (7,658) (1,155)
Valuation allowances recorded (5,979) (8,713) --
- --------------------------------------------------------------------------------
Balance at end of year $ (3,067) $ 3,972 $ 9,261
- --------------------------------------------------------------------------------
Amounts recorded for servicing contracts are recorded in the consolidated
balance sheet as follows:
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Loan servicing assets $ 11,863 $ 8,731 $9,261
Loan servicing liabilities (Note 12) (14,930) (4,759) --
- --------------------------------------------------------------------------------
$ (3,067) $ 3,972 $9,261
- --------------------------------------------------------------------------------
NOTE 10--SHORT-TERM CREDIT FACILITIES
The Company has a $250 million revolving warehouse financing facility with a
conduit commercial paper issuer, collateralized by loans held for sale. At
September 30, 2000 and 1999, $64.0 million and $144.8 million, respectively, was
outstanding under the facility. The weighted average interest rate on borrowings
outstanding at September 30, 2000 was 8.12%, compared to an average rate of
5.80% at September 30, 1999.
The Company also has a $75 million syndicated revolving credit facility,
borrowings under which bear interest at LIBOR plus 2.5%. At September 30, 2000
and 1999, $1.5 million and $55.0 million, respectively, was outstanding under
the facility. Borrowings under the revolving credit facility are collateralized
by substantially all assets of the Company excluding raw materials and loans
held for sale.
On December 27, 2000 the Company completed agreements with its lenders to
amend and extend both its credit facilities and related financial covenants.
Both facilities will mature on October 1, 2001 and contain financial covenants
which, among other things, specify minimum levels of tangible net worth and
earnings before interest, tax and depreciation expenses (EBITDA) as adjusted in
the agreements for certain noncash charges and limit capital expenditures.
NOTE 11--NOTES AND BONDS PAYABLE
The components of notes and bonds payable are as follows:
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Nonfinancial services debt
81/8% senior notes due March 2009 $174,120 $174,050
77/8% senior notes due March 2004 124,754 124,693
8% reset debentures due 2007 16,783 16,925
Industrial revenue bonds due in
installments through 2011, with
interest payable at 5.8% at
September 30, 2000 6,700 7,099
Industrial revenue bond due in
installments through 2001, with interest
payable at 73% of the lender's prime rate 1,825 1,925
401(k) note paid in 2000 -- 240
Other notes payable 2,187 3,474
- --------------------------------------------------------------------------------
Total nonfinancial services debt 326,369 328,406
- --------------------------------------------------------------------------------
Financial services debt collateralized by loans
Nonrecourse debt
Note issued by Oakwood Funding -- 231
Subordinated note payable issued by
Oakwood Funding bearing interest
payable monthly at 12.58%,
amortizing through 2000 -- 2,075
- --------------------------------------------------------------------------------
Total nonrecourse debt -- 2,306
- --------------------------------------------------------------------------------
Recourse debt
Term loan payable in monthly installments
through April 2002, with interest
payable at LIBOR (6.6% and 5.3% at
September 30, 2000 and 1999,
respectively) plus 2.50% 3,560 12,615
Subordinated note with interest payable
monthly at 10.51% payable on demand -- 8,837
- --------------------------------------------------------------------------------
Total recourse debt 3,560 21,452
- --------------------------------------------------------------------------------
Total financial services debt 3,560 23,758
- --------------------------------------------------------------------------------
$329,929 $352,164
- --------------------------------------------------------------------------------
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 carrying value of approximately $5.5 million at September 30, 2000.
Land, land improvements, buildings and equipment with a net book value of
approximately $31.5 million are pledged as collateral for the industrial revenue
bonds and certain other notes payable.
Oakwood Homes Corporation 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Oakwood Homes Corporation and Subsidiaries
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 $5.0 million in 2001, $19.2 million in 2002, $700,000 in 2003, $125.5
million in 2004, $600,000 in 2005 and the balance thereafter. Interest paid by
the Company on all outstanding debt, including both short-term and long-term
borrowings, was approximately $50.1 million, $39.0 million and $24.3 million in
2000, 1999 and 1998, 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, 2000 commercial banks, at the request of the Company, had
outstanding letters of credit of approximately $35 million in favor of various
creditors of the Company. Approximately $7 million of such letters of credit
secure certain industrial revenue bonds and approximately $26 million relates to
the Company's reinsurance business. Such letters of credit have been issued to
secure the reinsurance subsidiary's obligations to pay reinsurance claims and to
meet regulatory capital requirements.
NOTE 12--ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities are as follows:
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Accounts payable $129,898 $119,575
Accrued self-insurance reserves 24,792 24,849
Accrued compensation 17,949 15,526
Accrued warranty 17,232 18,554
Servicing liabilities (Note 9) 14,930 4,759
Accrued dealer volume rebates 11,569 14,558
Restructuring accrual (Note 13) 1,811 12,886
Income taxes payable -- 2,263
Other accrued liabilities 43,707 30,555
- --------------------------------------------------------------------------------
$261,888 $243,525
- --------------------------------------------------------------------------------
NOTE 13--RESTRUCTURING PROVISIONS
During 1999 the Company recorded restructuring charges of approximately $25.9
million, related primarily to the closing of four manufacturing lines, the
temporary idling of five others and the closing of approximately 40 sales
centers. During 2000 the Company reevaluated its restructuring plans and
determined that the losses associated with the closing of retail sales centers
and the idling or closing of manufacturing plants were less than anticipated and
a portion of the charges was reversed. During 2000 the Company recorded an
additional $3.8 million charge, primarily related to severance costs associated
with a reduction in headcount of 250 people and the closure of certain offices
and facilities. The charges in 1999 include severance and other termination
costs related to approximately 2,250 employees, costs associated with closing
plants and sales centers, and asset writedowns of certain affected assets. The
restructuring plan including plant and sales center closings was substantially
complete at September 30, 2000.
The components of the restructuring provisions are as follows:
Severance Plant,
and sales
other center Asset
termination and office write-
(in thousands) charges closings downs 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
September 30, 1999 5,643 7,243 -- 12,886
Reversal of
restructuring charges (3,912) (2,076) (378) (6,366)
Additional provision 1,974 1,780 15 3,769
Payments and balance
sheet charges in 2000 (2,946) (5,895) 363 (8,478)
- --------------------------------------------------------------------------------
Balance at
September 30, 2000 $ 759 $ 1,052 $ -- $ 1,811
- --------------------------------------------------------------------------------
NOTE 14--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.
26 2000 Annual Report
NOTE 15--INCOME TAXES
The components of the provision for income taxes are as follows:
(in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------
Current
Federal $(18,344) $ 2,657 $35,854
State (918) 931 3,289
- --------------------------------------------------------------------------------
(19,262) 3,588 39,143
- --------------------------------------------------------------------------------
Deferred
Federal 29,439 (18,163) (5,406)
State 5,952 (3,829) 1,000
- --------------------------------------------------------------------------------
35,391 (21,992) (4,406)
- --------------------------------------------------------------------------------
$ 16,129 $(18,404) $34,737
- --------------------------------------------------------------------------------
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) 2000 1999 1998
- --------------------------------------------------------------------------------
Tax at statutory federal
income tax rate $(36,658) $(17,403) $31,531
State income taxes, less
federal income tax benefit (11,059) (1,884) 2,787
Nondeductible goodwill
amortization 536 509 202
Valuation allowances 66,447 -- --
Other (3,137) 374 217
- --------------------------------------------------------------------------------
Total provision for income taxes $ 16,129 $(18,404) $34,737
- --------------------------------------------------------------------------------
Deferred income taxes include the following components:
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
Deferred income tax assets
Inventories $ 3,706 $ 3,876
REMIC interests 24,551 15,860
Accrued liabilities 12,366 19,230
Insurance reserves and unearned premiums 2,540 7,173
Net operating loss carryforwards 32,565 4,216
Warranty reserves 6,742 7,094
Accrued dealer bonuses and incentives 608 115
Other 4,855 2,869
- --------------------------------------------------------------------------------
Gross deferred income tax assets 87,933 60,433
Valuation allowances (71,930) (5,483)
- --------------------------------------------------------------------------------
Deferred income tax assets, net of
valuation allowances 16,003 54,950
- --------------------------------------------------------------------------------
Deferred income tax liabilities
Properties and facilities (15,101) (15,657)
Prepaid expenses (2,597) --
Deferred insurance policy acquisition costs (1,497) (5,498)
Acquired intangible assets (2,278) (2,972)
Other (699) (111)
- --------------------------------------------------------------------------------
Gross deferred income tax liabilities (22,172) (24,238)
- --------------------------------------------------------------------------------
Net deferred income tax asset
(liability) $(6,169) $ 30,712
- --------------------------------------------------------------------------------
At September 30, 2000 an additional valuation allowance of $66.4 million was
established, in accordance with the requirements of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109").
Realization of the deferred tax assets (net of recorded valuation allowances) is
largely dependent upon future profitable operations and future reversals of
existing taxable temporary differences. Because the Company has operated at a
loss in its two most recent fiscal years and because it believes difficult
competitive conditions will continue for the foreseeable future, the Company
believes that under the standards of FAS 109 it is not appropriate to record
income tax benefits on current losses in excess of anticipated refunds of taxes
previously paid. The valuation allowance may be reversed to income in future
periods to the extent that the related deferred income tax assets are realized
as a reduction of taxes otherwise payable on any future earnings or the
valuation allowances are otherwise no longer required.
At September 30, 2000 a deferred tax benefit of $1.5 million was allocated
directly to shareholders' equity for the income tax benefits of employee stock
option compensation expense for tax purposes in excess of amounts recognized for
financial reporting purposes, the effect of which reduces the net decrease in
deferred income tax assets to $35.4 million.
The Company's federal income tax returns for the fiscal years ended 1997 and
1998 are currently under examination. While the Company cannot predict the final
outcome of this examination, management believes that such outcome will not have
a material adverse effect on the Company's consolidated financial condition or
results of operations.
Income tax payments were approximately $1.1 million, $17.6 million and $35.8
million in 2000, 1999 and 1998, respectively.
NOTE 16--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 earnings per
share ("EPS"):
(in thousands except per share data) 2000 1999 1998
- --------------------------------------------------------------------------------
Numerator for basic and diluted
EPS--net income (loss) $(120,865) $(31,320) $55,353
- --------------------------------------------------------------------------------
Denominator
Weighted average number of
common shares outstanding 46,572 46,502 46,320
Unearned shares (3) (40) (81)
- --------------------------------------------------------------------------------
Denominator for basic EPS 46,569 46,462 46,239
Dilutive effect of stock options
and restricted shares,
computed using the
treasury stock method -- -- 1,185
- --------------------------------------------------------------------------------
Denominator for diluted EPS 46,569 46,462 47,424
- --------------------------------------------------------------------------------
Basic earnings (loss) per share $ (2.60) $ (0.67) $ 1.20
Diluted earnings (loss) per share $ (2.60) $ (0.67) $ 1.17
- --------------------------------------------------------------------------------
Stock options to purchase 4,140,703 and 3,844,750 shares of common stock and
535,797 and 568,412 unearned restricted shares were not included in the
computation of diluted earnings per share for 2000 and 1999, respectively,
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.
Oakwood Homes Corporation 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Oakwood Homes Corporation and Subsidiaries
NOTE 17--STOCK OPTION AND AWARD PLANS
The Company has a Key Employee Stock Plan (the "Stock Plan") under which
5,450,918 common shares were reserved for issuance to key employees at September
30, 2000. 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 table to the immediate right 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, 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
Granted 1,413,500 3.99
Exercised (17,500) 1.74
Terminated (1,100,047) 13.91
- --------------------------------------------------------------------------------
Outstanding at September 30, 2000 4,140,703 $12.50
- --------------------------------------------------------------------------------
Exercisable at September 30, 1998 1,129,438 $ 8.89
Exercisable at September 30, 1999 2,110,825 $14.06
Exercisable at September 30, 2000 1,965,004 $14.40
- --------------------------------------------------------------------------------
The following is a summary of stock options outstanding at September 30,
2000:
Options outstanding Options exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Range of Number of contractual life exercise Number of exercise
exercise price shares remaining (in years) price shares price
- ------------------------------------------------------------------------------------------------------------------------------------
$ 1.41-$ 2.97 221,983 5.5 $ 2.05 101,483 $ 2.29
4.05- 6.25 1,422,233 5.9 4.33 342,513 4.78
10.72- 11.31 36,900 3.7 11.02 36,900 11.02
12.16- 15.04 361,500 3.9 13.36 288,168 13.11
15.38- 18.72 1,479,564 5.4 16.81 984,917 17.53
19.78- 22.57 286,500 5.9 20.48 86,500 20.73
23.00- 25.94 81,496 6.1 24.29 73,996 24.12
26.69- 29.14 250,527 7.1 28.63 50,527 27.76
- ------------- --------- ---------
All options 4,140,703 5.6 $12.50 1,965,004 $14.40
- ------------- --------- ---------
The following table summarizes restricted stock issued under the Stock
Plan:
Weighted
average
Number fair value
of shares per share
- --------------------------------------------------------------------------------
1998 14,439 $28.25
1999 350,903 $12.91
As of September 30, 2000 there were a total of 1,731,279 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 $1.9 million, $2.1
million and $1.4 million in 2000, 1999 and 1998, 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 2000, 1999 and 1998
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) 2000 1999 1998
- --------------------------------------------------------------------------------
Net income (loss)--as reported $(120,865) $(31,320) $55,353
Net income (loss)--pro forma (124,959) (34,470) 52,321
Basic earnings (loss) per share--
as reported $ (2.60) $ (0.67) $ 1.20
Basic earnings (loss) per share--
pro forma (2.68) (0.74) 1.13
Diluted earnings (loss) per share--
as reported $ (2.60) $ (0.67) $ 1 .17
Diluted earnings (loss) per share--
pro forma (2.68) (0.74) 1.10
28 2000 Annual Report
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 2000, 1999 and
1998 respectively, of $3.99, $6.54 and $11.72 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 2000, 1999 and
1998, respectively: dividend yield of .00%, .26% and .14%; expected volatility
of 46.90%, 41.83% and 36.28%; weighted average risk-free interest rate of 6.10%,
4.54% and 5.75%; and expected lives of 5 years for 2000, 1999 and 1998.
NOTE 18--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 67% cash
contribution and a 33% Company stock contribution if certain targets are met.
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
September 30, 1999 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, 2000 the 401(k) plan held a total of 1,156,477 shares of the
Company's common stock having a fair value of approximately $1.7 million.
Total compensation cost under the 401(k) and ESOP plans was approximately
$4.7 million, $9.2 million and $6.5 million in 2000, 1999 and 1998,
respectively.
NOTE 19--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 in the United States Middle District Court in Guilford County, North
Carolina. The amended complaint, which seeks class action certification, alleges
violations of federal securities law based on alleged fraudulent acts, false and
misleading financial statements, reports filed by the Company and other
representations during the Class Period and seeks the loss of value in class
members' stockholdings. The Company filed a motion to dismiss the amended
complaint. In July 2000 the magistrate submitted a recommended order dismissing
the complaint with prejudice. This order was affirmed by the District Court
judge in October 2000 and has not yet been appealed.
During 2000 two lawsuits were filed against the Company's subsidiaries,
Oakwood Mobile Homes, Inc. and Oakwood Acceptance Corporation, and certain of
their employees in the Circuit Court of Jefferson County, Mississippi. These
lawsuits generally allege that the Company's subsidiaries and their employees
engaged in various improper business practices including false advertising and
misrepresentation of material facts relating to financing and insurance matters.
In October 2000 the attorneys for the plaintiffs filed a motion to consolidate
the two cases, add a large number of additional plaintiffs residing in various
parts of the United States to the case and add the Company as a defendant. As
the lawsuits are in the early stages of discovery, the Company is unable to
determine the effect, if any, on its financial position or results of
operations. The Company intends to defend these lawsuits 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 is not expected to have a 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 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 $138 million
at September 30, 2000. Losses under these agreements have not been significant.
NOTE 20--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.
Oakwood Homes Corporation 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Oakwood Homes Corporation and Subsidiaries
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 5. 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, 2000 and 1999:
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
(in thousands) fair value amount fair value amount
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents, including restricted
cash and investments $ 48,281 $ 48,281 $ 77,281 $ 77,281
Loans and investments
Loans held for sale 211,296 211,296 279,927 279,927
Loans held for investment
Fixed rate loans 8,418 8,512 43,271 42,312
Variable rate loans -- -- 5,703 5,703
Less: reserve for uncollectible receivables -- (3,556) -- (3,032)
Retained REMIC regular interests 77,229 77,229 69,325 69,325
Retained REMIC residual interests 28,685 28,685 36,630 36,630
Other receivables 113,460 113,460 98,317 98,317
Liabilities
Short-term borrowings 65,500 65,500 199,800 199,800
Notes and bonds payable
Fixed rate obligations 87,026 316,692 239,065 328,793
Variable rate obligations 13,237 13,237 23,371 23,371
Guarantee liabilities on subordinated
REMIC securities sold 26,807 30,809 18,954 18,954
NOTE 21--QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of quarterly financial information follows:
First Second Third Fourth
(in thousands except per share data) quarter quarter quarter quarter Year
- ------------------------------------------------------------------------------------------------------------------------------------
2000
Net sales $297,494 $271,349 $310,558 $310,484 $1,189,885
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit $ 61,245 $ 55,838 $ 74,042 $ 71,243 $ 262,368
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss $ (14,852) $ (11,976) $(11,125) $ (82,912) $ (120,865)
Loss per share
Basic $ (0.32) $ (0.26) $ (0.24) $ (1.78) $ (2.60)
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted $ (0.32) $ (0.26) $ (0.24) $ (1.78) $ (2.60)
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 0.25 $ 0.21 $ 0.17 $ (1.30) $ (0.67)
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.24 $ 0.21 $ 0.17 $ (1.30) $ (0.67)
- ------------------------------------------------------------------------------------------------------------------------------------
30 2000 Annual Report
The sum of quarterly earnings per share amounts do not necessarily equal
earnings per share for the year. In the fourth quarter of fiscal 2000 the
Company recorded valuation provisions against its previously recorded
deferred tax assets of $66.4 million or $1.43 per share.
NOTE 22--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 insurance risk on
property and casualty insurance, extended service contracts and credit life
insurance 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) 2000 1999 1998
- --------------------------------------------------------------------------------
Revenues
Retail $ 778,479 $1,047,035 $1,149,438
Manufacturing 821,429 1,088,447 912,632
Consumer finance 27,963 29,747 33,414
Insurance 67,503 61,482 36,834
Eliminations/other (411,242) (637,486) (649,765)
- --------------------------------------------------------------------------------
$1,284,132 $1,589,225 $1,482,553
- --------------------------------------------------------------------------------
Income (loss) from
operations
Retail $ (60,074) $ (39,285) $ 43,934
Manufacturing 45,772 76,064 101,383
Consumer finance (57,647) (41,173) (10,651)
Insurance 24,114 11,181 6,409
Eliminations/other (45,647) (46,525) (45,602)
- --------------------------------------------------------------------------------
(93,482) (39,738) 95,473
Nonfinancial services
interest expense (11,755) (10,580) (5,970)
Investment income 501 594 587
- --------------------------------------------------------------------------------
Income (loss) before
income taxes $ (104,736) $ (49,724) $ 90,090
- --------------------------------------------------------------------------------
Identifiable assets
Retail $ 475,227 $ 560,253
Manufacturing 604,946 1,038,673
Consumer finance 637,264 491,585
Insurance 115,959 132,691
Eliminations/other (684,624) (785,355)
- --------------------------------------------------------------------------------
$1,148,772 $1,437,847
- --------------------------------------------------------------------------------
Depreciation and
amortization
Retail $ 10,247 $ 9,149 $ 6,154
Manufacturing 17,240 19,847 10,083
Consumer finance 12,378 8,760 2,413
Insurance -- -- --
Eliminations/other 10,463 7,803 6,300
- --------------------------------------------------------------------------------
$ 50,328 $ 45,559 $ 24,950
- --------------------------------------------------------------------------------
Capital expenditures
Retail $ 7,632 $ 24,267 $ 19,831
Manufacturing 6,092 20,459 24,432
Consumer finance 3,741 268 2,878
Insurance -- -- --
General corporate 3,499 1,942 4,270
- --------------------------------------------------------------------------------
$ 20,964 $ 46,936 $ 51,411
- --------------------------------------------------------------------------------
Oakwood Homes Corporation 31
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, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 2000, in conformity with accounting principles generally accepted in the
United States of America. 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 of America, 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.
As more fully described in Notes 2 and 10, on December 27, 2000 the Company
amended and extended its credit facilities and related financial covenants
through October 1, 2001. These credit facilities are necessary to fund
continuing operations. The Company has incurred net losses in each of the two
fiscal years ended September 30, 2000. The Company does not expect to generate
income from operations during 2001.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Greensboro, North Carolina
November 28, 2000, except for the information presented in the third paragraph
of Note 10 for which the date is December 27, 2000.
COMMON STOCK PRICES
Oakwood Homes Corporation and Subsidiaries
2000 1999 1998 1997 1996
Quarter High Low High Low High Low High Low High Low
- ------------------------------------------------------------------------------------------------------------------------------------
First 4 7/8 1 3/16 16 7/8 11 7/16 33 3/16 24 7/8 29 7/8 21 21 16 5/8
Second 4 7/8 2 5/16 20 13 5/16 41 3/4 33 1/8 23 17 3/8 25 3/4 18 1/2
Third 3 15/16 1 13/16 15 3/16 12 1/16 38 13/16 26 5/16 24 3/4 16 3/4 25 20
Fourth 2 7/16 1 3/16 13 1/16 4 1/2 31 7/8 13 1/16 30 23 7/16 28 20 3/8
DIVIDEND INFORMATION
Oakwood Homes Corporation and Subsidiaries
The Company's Board of Directors suspended the payment of cash dividends on
common stock in August 2000. Prior to that time, the Company declared a cash
dividend of $.01 per common share during each of the seven quarters in the
period ended June 30, 2000.
32 2000 Annual Report
Securities Exchange Listing
New York Stock Exchange
Ticker Symbol--OH
Shareholders
At December 8, 2000, the Company has
an estimated 26,000 shareholders, including
beneficial owners holding shares in nominee
and "street" name.