EXHIBIT 11
OAKWOOD HOMES CORPORATION AND SUBSIDIARIES
CALCULATION OF PRIMARY AND FULLY DILUTED EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, September 30, September 30,
1997 1996 1995
------------ ------------- -------------
Weighted average number of common shares
outstanding 45,798 44,880 44,182
Add: Dilutive effect of stock options and
restricted shares computed using the
treasury stock method 1,115 1,741 1,912
Less: Unearned ESOP shares (122) (161) (96)
----------- ----------- ----------
Weighted average number of common and common
equivalent shares outstanding
46,791 46,460 45,998
=========== ============ ===========
Net income $ 81,913 $ 68,255 $ 45,318
=========== ============ ===========
Earnings per common share--primary $ 1.75 $ 1.47 $ .99
=========== ============ ===========
Weighted average number of common shares 45,798 44,880 44,182
outstanding
Add: Dilutive effect of stock options and
restricted shares, computed using the
treasury stock method 1,170 1,802 2,027
Less: Unearned ESOP shares (122) (161) (96)
----------- ----------- ----------
Weighted average number of common shares
outstanding assuming
full dilution 46,846 46,521 46,113
=========== ============ ===========
Net income $ 81,913 $ 68,255 $ 45,318
=========== ============ ===========
Earnings per common share--fully $ 1.75 $ 1.47 $ .98
diluted =========== ============ ===========
[Photo of Jockeys on Horses racing around track appears here]
Oakwood Homes OAKWOOD
Logo HOMES
Appears Here CORPORATION
1997 Annual Report
Ahead
of the
Pack
PROFILE
Ahead of the Pack
Oakwood Homes Corporation, founded in 1946, is a fully integrated housing
company--manufacturing, retailing and financing quality factory-built homes in a
28-state region stretching from coast to coast. Oakwood was one of the first
companies in the industry to vertically integrate its manufacturing, retailing
and financing operations, and it has implemented this strategy more completely
than any other company in the industry. This enables it to control all the
factors that influence a customer's home buying decision: from product features
and design to quality of materials and workmanship, from a helpful sales staff
and extensive financing options to service after the sale.
With 300 retail sales centers, Oakwood sells more homes than any other retailer,
registering strong same-store sales growth in fiscal 1997. As the third largest
manufacturer in the industry, the Company's 17 plants located across its market
areas support the needs of Company-owned retail centers and, in certain markets,
independent dealers. In addition, Oakwood's financial services arm makes the
American dream of home ownership come true, providing almost $900 million in
customer financing last year as well as property and casualty insurance
coverages for the homes it sells.
With agility and innovation, Oakwood continues to expand its line of products
for today's manufactured housing buyer, combining quality, construction,
features, value, and floor plans like no other company in the industry. In
addition, Oakwood has built a reputation for service and responsiveness to its
customers that is unmatched in the industry, delivering the promise of complete
satisfaction that consumers expect and demand. More than 50 years in the making,
this success is a tribute to the Company's 7,000 employees-- a dedicated team of
the most talented people in manufactured housing.
Oakwood Homes is headquartered in Greensboro, North Carolina. Its common shares
are listed on the New York Stock Exchange under the ticker symbol OH.
Retail Center Network
Map of U.S.A. Appears Here of Retail Center Network
Of the following locations:
(triangle) Company Owned Sales Centers
(box) Substantially Complete
(box) Markets Under Development
(box) Focus of 1998 Retail Expansion
(box) Future Expansion
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales ............................. $ 952,704 $862,079 $741,521 $595,127 $422,103 $313,272
Total revenues ........................ $1,070,051 $973,922 $821,412 $664,610 $483,736 $360,446
Net income ............................ $ 81,913 $ 68,255 $ 45,318 $ 35,655 $ 25,715 $ 14,334
Earnings per common share
Primary ............................. $ 1.75 $ 1.47 $ 0.99 $ 0.78 $ 0.61 $ 0.46
Fully diluted ....................... $ 1.75 $ 1.47 $ 0.98 $ 0.78 $ 0.59 $ 0.42
Total assets .......................... $ 904,506 $841,977 $782,640 $590,397 $596,950 $459,924
Notes and bonds payable ............... $ 78,815 $134,379 $198,812 $207,990 $264,225 $297,033
Cash dividends per
common share ........................ $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.03
- ------------------------------------------------------------------------------------------------------------------------------
Net Sales Net Income
(in millions) (in millions)
'92 313 '92 14.3
'93 422 '93 25.7
'94 595 '94 35.7
'95 742 '95 45.3
'96 862 '96 68.3
'97 953 '97 81.9
5 year compound growth rate: 25% 5 year compound growth rate: 42%
Fully Diluted EPS
'92 0.42
'93 0.59
'94 0.78
'95 0.98
'96 1.47
'97 1.75
5 year compound growth rate: 33%
To Our Shareholders:
If you've watched manufactured housing for the past year, you know the landscape
has changed dramatically. Increasing industry-wide production capacity, coupled
with significant growth in the number of retail dealers and dealer locations
over the past few years, has resulted in a real and substantial shift in the
balance of power between the manufacturing and distribution arms of our
industry. While end consumer demand has remained strong, competition among
manufacturers has intensified, encouraging dealers to seek greater concessions
and incentives from manufacturers for access to their "shelf space." This, in
turn, has resulted in flat or lower sales and profits at many of the
manufactured housing companies that lack retail clout.
Does this scenario sound familiar? If you're a longtime Oakwood shareholder,
then you recognize this message from our past communications in which we
discussed the benefits of our vertical integration. More important, you can see
the difference in our results for the fiscal year ended September 30, 1997,
which stand in sharp contrast to most other manufactured housing companies as we
set new records across the board in virtually all financial and operational
areas.
For the first time, Oakwood's revenues surpassed the one-billion-dollar mark,
rising 10% to nearly $1.1 billion. Reflecting strengthening same-store retail
sales as we moved through the year, this revenue growth combined with steadily
increasing gross margins and a strong performance from our financial services
operations to produce a more pronounced profit improvement. Net income for the
year increased 20% to $82 million or $1.75 per share from $68 million or $1.47
per share last year. These results have culminated in five-year compound growth
rates for revenues and net income of 24% and 42%, respectively, rivaling the
performance of some of the best growth stocks.
The increasing importance of retail distribution was not the only change that
confronted the industry in 1997. Consumer preference for multi-section homes
increased greatly during the year. Our response to this challenge--with speed
and flexibility unprecedented in our industry--allowed Oakwood to remain in the
mainstream of this movement as multi-section homes accounted for 47% of the new
homes we sold at retail versus 32% in 1996 and just 25% in 1992.
Yet even these figures do not completely show the powerful capabilities of our
fully integrated operations. As we recognized the slowdown in single-section
sales in the fall of 1996, we not only began to adapt our production capacity to
meet new market trends, we also formulated a revolutionary plan to build a
standard model multi- section home--our Sunrise Dream Home--for inventory over
the slower winter months. In breaking with the industry's tradition of primarily
building more expensive multi-section units only as ordered, and by introducing
the industry's first standard, no-options model home in 1997, we were able to
preserve the advantages of vertical integration in a seasonal business
Market Capitalization
(in millions)
'90 46
'91 125
'92 220
'93 567
'94 553
'95 782
'96 1,237
'97 1,314
"Our results for the fiscal year ended September 30, 1997, stand in sharp
contrast to most other manufactured housing companies as we set new records
across the board in virtually all financial and operational areas."
NICHOLAS J. ST. GEORGE
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
and thereby maintain significant manufacturing efficiencies.
Initiating this approach at the manufacturing level was just part of the success
story behind our new Sunrise Dream Home. During the year, we also initiated the
first-ever nationwide advertising campaign in our industry to support the
introduction of this new product and begin building brand awareness for Oakwood.
This is not the first or the last time that Oakwood has provided a new business
model for the industry. Recently, other companies have begun to embrace the
concept of vertical integration, hinting at plans to establish exclusive dealer
networks or build a captive retail system. We're gratified that, after
pioneering these strategies, some of our more distinguished competitors have
recognized the true market power that can be harnessed by linking manufacturing,
retail and finance so seamlessly and completely as we have done. It's a tribute
to all the people at Oakwood, too, who have played such an essential role in the
Company's success. Muscle-building our organization--making sure that we have
highly committed, qualified and motivated people throughout our Company--has
always been a priority for us. I think it is one more critical factor that sets
us apart from the competition, contributing to a growth rate that is twice as
great as the industry's over the past five years.
With the conclusion of fiscal 1997, Oakwood marked its eighth consecutive year
of record results--32 straight quarters of prosperous growth. An equally
impressive measure of our progress can be seen in the Company's market
capitalization, which has increased from just under $50 million at the turn of
the decade to more than $1.3 billion at September 30, 1997. Oakwood's position
as the largest and most experienced retailer of manufactured housing in the
country, with 300 retail locations at year end, positions the Company to extend
its strong record of growth and increase its lead over competitors who are only
now trying to develop similar but untested retail capabilities.
Sincerely yours,
/s/ Nicholas J. St. George
Nicholas J. St. George
Chairman, President and
Chief Executive Officer
PHOTO OF DIRECTORS: (LEFT TO RIGHT, STANDING) CLARENCE W. WALKER, NICHOLAS J.
ST. GEORGE, SABIN C. STREETER, LANTY L. SMITH, C. MICHAEL KILBOURNE; (SEATED)
DENNIS I. MEYER, KERMIT G. PHILLIPS, II, ROGER W. SCHIPKE, H. MICHAEL WEAVER;
(NOT PICTURED FRANCIS T. VINCENT, JR.).
(PICTURES APPEARS HERE OF A JOCKEY ON A RACEHORSE & AN OAKWOOD HOME)
PERFORMANCE
The Company has consistently delivered sales and earnings results that are
unmatched by other manufactured housing companies.
Ahead of the Pack
Oakwood's position as an industry leader is unmistakable: The Company has
consistently delivered sales and earnings results that are unmatched by other
manufactured housing companies. Oakwood's retail home sales have expanded twice
as fast as industry shipments over the last five years and, with net income
advancing at a compound rate of 42% over the same period, Oakwood compares
favorably across a spectrum of high growth stocks regardless of industry. This
rapid growth, as longstanding Oakwood shareholders know, reflects the Company's
successful implementation of several key strategies, the most important of which
is Oakwood's vertically
STRIKING ARCHITECTURAL DETAILS TYPICALLY ASSOCIATED WITH SITE-BUILT HOMES, SUCH
AS TILE ROOFS, DISTINGUISH HOMES PRODUCED BY OAKWOOD'S GOLDEN WEST HOMES
SUBSIDIARY AND HELP INCREASE THE COMPANY'S PENETRATION OF THE HIGH-END MARKET.
(PICTURE APPEARS HERE OF A COUPLE UNLOADING BOXES)
"It is amazing how fast we realigned our production capacity earlier in the year
to roll out our first Dream Home. But by pulling together manufacturing, retail
and finance we accomplished a seemingly impossible task."
WILLIAM G. EDWARDS
EXECUTIVE VICE PRESIDENT
HOUSING OPERATIONS
integrated business model, which the Company has implemented more extensively
than any other company in manufactured housing.
Oakwood's continued strong growth in 1997 stands in stark contrast to the
slowdown being reported by other manufacturers and underscores the rationale for
vertical integration. Make no mistake: Consumer interest in manufactured housing
has never been greater. Housing alternatives remain limited for many people. Job
growth has typically involved lower wage positions. Low inflation has diminished
much of the "investment" appeal of site-built homes. Last, and perhaps most
important, today's spacious, feature-rich multi-section manufactured homes are
virtually indistinguishable from site-built homes, a fact that has fostered
their increased popularity among traditional home buyers. With accelerating
same-store sales, Oakwood's own retail sales statistics affirm the fundamental
strength of the end-consumer market, which is expected to increase again in
1998. It also highlights the Company's continuing ability to gain market share
from competitors.
Setting the Pace
As 1997 began, Oakwood recognized the burgeoning consumer interest in
multi-section homes, which suggested a dramatic shift in the future mix of home
sales. To meet this growing demand and minimize the risk of overbuilding
single-section homes, Oakwood devised a revolutionary plan that would capitalize
on the Company's powerful vertical integration,
Net Sales
Cumulative Growth (in millions)
'92 0 0 '92 313
'93 26.73 31 '93 422
'94 50.93 75 '94 595
'95 69.38 124 '95 742
'96 87.24 170 '96 862
'97 83.24 196 '97 953
Oakwood Retail Home Sales Retail Sales
Industry Shipments Wholesale and Other
(PICTURES APPEARS HERE OF A HOUSE EXTERIOR & BATHROOM DETAIL)
requiring every aspect of Oakwood's operations to collaborate and adapt as never
before. The goal: To create a STANDARD multi-section home built for inventory--a
bold initiative never before attempted by the industry. Until that time, the
more expensive multi-section homes traditionally had been built to customer
order. Oakwood's Sunrise Dream Home, the first in a line of new, no-option
multi-section homes, would go on to break new ground in many other ways as well.
Oakwood realized that in building a new line of products for inventory, it could
continue to achieve tremendous efficiencies by maintaining constant levels of
production over the slower winter months. Not only did this strategy produce
higher gross margins for Oakwood, it allowed the Company to pack great value
into the product for the consumer, including an attractive new floor plan,
appliance upgrades and other amenities. In addition, the timing was right for
the introduction of a new standard model home, which hit the market
simultaneously with the surge in multi-section home sales. As a result, Oakwood
sold more than 3,400 Sunrise Dream Homes during the fiscal year ended September
30, 1997, helping boost its multi-section unit sales 61% in 1997.
Another first for the industry could be found in the way Oakwood merchandised
the Sunrise Dream Home. Since it was available at every Oakwood retail location,
this product roll-out also could be backed by the industry's first national
advertising campaign to build product and brand awareness. Completing the
essential package of skills needed to launch the program successfully, the
Company's financial services subsidiary provided financing to make the Sunrise
Dream Home the most successful new product introduction in the Company's
history.
While nearly every phase of this new program could be characterized as
"unconventional," perhaps the most challenging aspect involved manufacturing.
Unprecedented in speed and scope, Oakwood's realignment of its manufacturing
capacity to accommodate the shift to multi-section products was a feat that
required a nimble organization and highly flexible manufacturing operations.
By January 31, 1997, eight of the Company's then
SPACIOUS BATHROOMS, FEATURING GARDEN TUBS AND OTHER LUXURIES, HAVE BECOME A
FAVORITE WITH OAKWOOD'S CUSTOMERS.
Floors Produced
Gross Profit Margin (in thousands)
'92 24.3 '92 18.2
'93 24.9 '93 21.7
'94 25.8 '94 27.6
'95 26.7 '95 31.1
'96 29.3 '96 35.0
'97 31.6 '97 40.4
5 year compound growth rate: 13%
(PICTURE APPEARS HERE OF A FAMILY AND AN OAKWOOD HOME EXTERIOR)
MULTI-SECTION HOMES HAVE ENJOYED INCREASING POPULARITY AMONG CUSTOMERS DURING
THE PAST YEAR. MULTI-SECTIONS ACCOUNTED FOR ABOUT 47% OF OAKWOOD'S RETAIL HOME
SALES IN 1997, UP FROM 32% IN 1996.
16 manufacturing facilities were entirely dedicated to multi-section production
while another four could produce either multi-section or single-section homes.
Few companies in the industry have ever moved farther, faster, or with such
agility.
Oakwood already has begun to take advantage of the momentum created by its
entry-level Sunrise Dream Home, introducing a larger Family Dream Home(TM) in
October 1997 and planning two more models in fiscal 1998. In keeping with its
original formula, these "Dream Home" products will offer no options, but will
include combinations of site-built amenities such as wireless security systems,
media rooms, dry wall construction, entertainment centers, appliance upgrades,
etc., continuing the tradition of excellent value
Oakwood sold more than 3,400 Sunrise Dream Homes during the fiscal year ended
September 30, 1997, helping boost its multi-section unit sales 61% in 1997.
PACESETTER
POWERFUL
(PICTURE APPEARS HERE OF JOCKEYS RACING HORSES)
Oakwood's distribution network accounted for more than 22,000 homes sold at
retail during 1997, reflecting a compound annual growth rate of 24% over the
past five years.
that began with the Sunrise Dream Home. Moreover, each new product roll-out will
be supported by advertising in every Oakwood market which will not only promote
the product, but also continue to enhance the Company's efforts to build the
industry's first true, nationally recognized brand name.
Expanding Retail Distribution
By embracing the need for rapid change, Oakwood's retail operation made an
important contribution to the Company's launch of its new standard line of
(PICTURE APPEARS HERE OF AN OAKWOOD INTERIOR)
WITH VIRTUALLY EVERY AMENITY AVAILABLE IN SITE-BUILT HOMES, OAKWOOD'S NEW
HIGH-END MULTI-SECTION HOME OFFERS CONSUMERS A COMFORTABLE, ATTRACTIVE
ALTERNATIVE TO TRADITIONAL HOUSING AT A FRACTION OF THE COST.
"By reengineering our mortgage loan operations, we are positioning ourselves
more strongly than ever to compete for business in the attractive segment of
manufactured home and land sales transactions. This will definitely help move
our mix to higher-end products."
C. MICHAEL KILBOURNE
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PICTURE APPEARS HERE OF AN OAKWOOD INTERIOR)
multi-section products in 1997. Yet the success of its retail operation during
the past year can be measured in many more and equally important ways.
During 1997, Oakwood continued to expand its retail distribution network, which
now extends to 28 states. Oakwood ended the year with 300 retail locations
versus 255 last year. The focus of this expansion was primarily in the Deep
South, Southwest and Pacific Northwest market areas. Retail expansion in 1998
will remain primarily centered on these areas as Oakwood continues to fill in
its markets.
Oakwood's retail network accounted for more than 22,000 homes sold at retail
during 1997, reflecting a compound annual growth rate of 24% over the past five
years. This growth is nearly double the estimated growth rate of 14% for
industry retail sales and shows the dramatic market share gains achieved as the
Company has leveraged its retail power.
Importantly, Oakwood's retail system now handles approximately 7% of all retail
distribution nationally. Of course, Oakwood's market share is much higher in
states where the Company has maintained a presence for some time. Over 80% of
the country's retail distribution is highly fragmented among independent dealers
who in many cases have only one or a few locations. This segment, clearly
ill-suited to absorb any heightened competitive conditions or wield any
meaningful marketing clout, represents an attractive target for future
consolidation as Oakwood continues to expand its network.
New Homes Sold at Retail Number of Sales Centers
(in thousands)
'92 106
'92 3.5 '93 121
'93 9.2 '94 152
'94 12.0 '95 192
'95 16.3 '96 255
'96 20.1 '97 300
'97 22.1
Multi section
Single section
5 year compound growth rate: 24%
(PICTURE APPEARS HERE OF A HOME INTERIOR)
Supporting Growth
Oakwood's financial services business has long been a key partner in the success
of the Company's integrated retail and manufacturing operations. In 1997,
financial services contributed $57 million to Oakwood's pre-tax income, up from
$52 million in 1996 and $8 million in 1992. This increase, which represents a
compound annual growth rate of 48% over the past five years, reflects the steady
growth in Oakwood's retail sales as the Company typically finances more than 85%
of its retail sales transactions. In 1997, Oakwood's loan originations totaled
$884 million, up from $721 million in 1996 and pushing the Company's total
serviced loan portfolio to more than $2.5 billion by year's end.
Financial services capabilities benefit Oakwood in many obvious ways, from
supporting retail sales and promoting maximum manufacturing throughput to making
one-stop shopping a convenient reality for every Oakwood customer. In less
obvious ways, however, financial services maximize the Company's opportunity to
profit from each sales transaction. Sales of insurance products and extended
service contracts generate revenues long after the sale and, together with the
Company's sizable serviced loan portfolio, will continue to contribute to
earnings well into the future.
Several factors have contributed to the expansion of Oakwood's financial
services, aside from the Company's steadily rising retail sales. In recent
years, these operations have become self-sustaining through Oakwood's periodic
sale of asset-backed securities--securities sold into the public secondary
market which are secured by loans originated in connection with retail home
sales. A steady stream of these securitizations over the past several years has
helped Oakwood not only avoid further capital commitments to fund the growth of
its financial services, they also have reduced the Company's cost of capital
through regular access to the public securities markets. A joint venture with
Deutsche Financial Services also allows Oakwood to compete for loan originations
relating to retail sales by independent dealers--a market estimated at more than
$10 billion per year.
During 1997, Oakwood's financial services subsidiary completely reengineered all
of its mortgage loan origination and processing tasks to provide a faster,
simplified transaction flow. With streamlined processes, the Company is now
strongly positioned to participate in loan transactions involving higher-end
manufactured home and land sales, a market in which the Company has had only
limited penetration to date.
Oakwood also formed a captive reinsurance company in 1997, replacing its
commissioned-based insurance agency relationships. By underwriting its
Loan Originations
(in millions)
'92 131
'93 212
'94 344
'95 487
'96 721
'97 884
5 year compound growth rate: 43%
(PICTURE APPEARS HERE OF A COUPLE IN A LIVING ROOM)
WITH SPACIOUS ROOMS, A SEE-THROUGH FIREPLACE AND WIRELESS SECURITY SYSTEM,
OAKWOOD'S FAMILY DREAM HOME(TM) IS THE SECOND PRODUCT ROLLED OUT IN ITS "DREAM
HOME" LINE. THE COMPANY PLANS TO INTRODUCE TWO NEW DREAM HOMES LATER IN 1998.
own business, the Company can participate more fully in yet another revenue
stream associated with the retail sale of new homes.
Looking Ahead
As Oakwood enters a new fiscal year, the Company's strategy of vertical
integration will continue to drive well-coordinated growth in its retail
distribution network, manufacturing capabilities and financial services.
Highlights of Oakwood's goals and plans for next year include:
o New factories, like the one opened at the end of fiscal 1997 and another
planned for fiscal 1998, represent a totally new design for Oakwood
manufacturing facilities. These plants, the most flexible and automated ever
built by the Company, will offer "tape and texture," dry wall and
Oakwood's
financial services subsidiary has
long been a key partner in the
success of the Company's
integrated retail and manufacturing operations.
PERSEVERANCE
Servicing Portfolio
(in millions)
'92 246
'93 522
'94 242
'95 1,201
'96 1,345
'97 2,540
(PICTURE APPEARS HERE OF JOCKEYS & HORSES)
PREEMINENT
A pioneer in the industry for more than 50 years, Oakwood has become the
country's preeminent fully integrated manufactured housing company.
other finishes targeted at the higher end of the market--a segment Oakwood
believes will grow more rapidly than the market as a whole.
o A new computer aided design system will be implemented to reduce lead times
to market and enhance the Company's market agility. This new system is
expected to cut by two-thirds the time needed to go from design to prototype.
o The Company also will continue to muscle-build its organization by investing
in human resources with new training programs across the Company. These will
support quality, reduce employee turnover, improve safety and strengthen
skills. Oakwood also will begin to benefit more fully from new
incentive-based compensation programs put in place last year.
o Oakwood will move into new phases of its successful Dream Home campaign with
two new products for 1998. The Company will support these new product
launches, which will aid in the Company's efforts to reach faster-growing,
higher end markets, with an even larger advertising commitment.
o The Company also will continue to expand its retail distribution network,
adding a minimum of 45 to 50 locations in the coming year to take full
advantage of our growing brand awareness. Potential consolidation in the
industry, especially at the retail level, may provide opportunities to grow
even more rapidly through selective acquisitions.
o Oakwood's financial services, bolstered with the addition of captive property
and casualty insurance and service contract underwriting capabilities in
1997, will support its anticipated growth while providing yet another avenue
for profit participation.
A pioneer in the industry for more than 50 years, Oakwood has become the
country's preeminent fully integrated manufactured housing company. Its
financial and operational results have proven Oakwood's ability to remain ahead
of the pack across all kinds of market conditions. Even now as others try to
imitate its methods, Oakwood's experience, resources and depth remain unique in
a changing industry--changes that favor those who are prepared. Oakwood Homes.
Operating Margin
'92 3.2
'93 2.6
'94 2.5
'95 3.0
'96 11.6
'97 12.3
Oakwood Homes Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
During fiscal 1997 the Company reported its eighth consecutive year of record
revenues and earnings. Total revenues increased 10% to $1.1 billion from $974
million last year, following a 19% increase in 1996 from the $821 million
reported for 1995. Net income rose 20% in 1997 to $81.9 million compared to net
income of $68.3 million in 1996 and pro forma net income of $45.3 million in
1995.
Industry shipments declined for the first time in five years during 1997.
According to industry sources, shipments of manufactured homes were down
approximately 3% for the first nine months of calendar 1997, following a 7%
increase in calendar 1996. Oakwood's growth continued to far surpass the
industry, as new retail unit sales grew by 10% in fiscal 1997 and 20% in fiscal
1996. Retail unit sales growth was particularly strong in the fourth quarter of
fiscal 1997, which increased 24% over the 1996 period.
The following table summarizes certain key sales statistics for each of the last
three fiscal years:
------------------------------------
1997 1996 1995
------------------------------------
Retail sales (in millions) $ 858.4 $ 703.2 $ 544.6
Other sales (in millions) $ 94.3 $ 158.9 $ 196.9
Total sales (in millions) $ 952.7 $ 862.1 $ 741.5
Gross profit % 31.6% 29.3% 26.7%
New single-section
homes sold--retail 11,670 13,639 12,073
New multi-section homes
sold--retail 10,418 6,488 4,638
Used homes sold--retail 2,155 1,908 1,940
New single-section homes
sold--wholesale 539 1,334 2,168
New multi-section homes
sold--wholesale 2,508 3,890 4,923
Average new single-section
sales price--retail $29,200 $27,700 $25,900
Average new multi-section
sales price--retail $47,900 $47,900 $46,500
Average new single-section
sales price--wholesale $15,500 $14,200 $14,100
Average new multi-section
sales price--wholesale $31,900 $29,800 $31,200
Weighted average retail
sales centers open
during the year 278 227 178
Average dollar sales per sales
center (in millions) $ 3.1 $ 3.1 $ 3.1
1997 Compared to 1996
Retail sales dollar volume increased 22%, reflecting a 10% increase in new unit
volume, a 5% increase in the average new single-section sales price and an
increase in the percentage of total retail new unit volume represented by multi-
section homes from 32% last year to 47% in fiscal 1997. Single-section unit
volume decreased 14%, while multi- section unit volume rose 61% from fiscal
1996. The average selling price for new single-section homes sold at retail
increased primarily due to a shift in product mix toward higher price points.
The retail sales increase reflects the effects of the Company's capacity
realignment towards multi-section homes late in the second quarter of fiscal
1997. Redirecting manufacturing capacity to multi-section products helped reduce
manufacturing backlogs and enabled the Company to offer a broader assortment of
products to consumers. The increase in multi-section home sales is also
attributable to the introduction of the Sunrise Dream Home, a high volume price
point multi-section home supported by the Company's first national marketing
campaign. Since its introduction in February 1997, over 3,400 Sunrise Dream
Homes have been sold. In fiscal 1997, the Company opened or acquired 49 new
sales centers compared to 60 sales centers in fiscal 1996. The Company also
closed 4 underperforming sales centers during 1997 and 3 during fiscal 1996.
Total new retail sales dollars at sales centers open more than one year
increased 8% during fiscal 1997 and posted a significant 18% increase during the
fourth quarter of the year.
Other sales dollar volume declined by 41%, reflecting the Company's strategy of
changing the distribution of products produced by Golden West and Destiny from
non-exclusive independent dealers to Company-owned retail sales centers. During
fiscal 1997, 68% of Golden West's and Destiny's shipments were to Oakwood sales
centers, compared to 34% in fiscal 1996; these shipments are not included in the
dollar and unit sales in the accompanying table.
Gross profit margin increased to 31.6% in 1997 from 29.3% in 1996, reflecting
higher operating levels and efficiencies in manufacturing, greater internal
sourcing of retail sales and the reduced significance of relatively lower margin
wholesale sales. Manufacturing production increased 15% over 1996 and the
percentage of new homes sold at retail which were produced in Company-owned
manufacturing plants increased from approximately 90% in fiscal 1996 to
approximately 96% in 1997.
13
Financial services income increased to $102.8 million from $92.3 million last
year. Interest income earned on loans held for investment and on loans held for
sale prior to securitization decreased from $34.6 million in fiscal 1996 to
$29.4 million this year. This decrease reflects the decline in the principal
balance of loans held for investment and loans held for sale, as well as a
decrease in the average yield on those assets as older, higher-yielding loans
are liquidated. The Company continues to sell via securitization substantially
all the loans it originates, and accordingly interest income should continue to
decline as the remaining loans held for investment are liquidated. Loan
servicing fees increased from $15.9 million in fiscal 1996 to $21.5 million in
1997, reflecting the increased size of the Company's securitized loan servicing
portfolio. REMIC residual income increased from $16.2 million to $19.4 million,
reflecting an increase in the average balance of REMIC residual interests during
the period. This increase was partially offset by a decrease in the average
yield on those investments, arising principally from higher credit losses more
fully described below. Other financial services income decreased from $6.4
million for fiscal 1996 to $6.3 million for the current year, due to the
Company's equity in losses generated by the Company's joint venture, Deutsche
Financial Capital, offset in part by increases in miscellaneous fees and other
income.
Financial services income for fiscal 1997 and 1996 includes gains of
approximately $19.3 million, or $.25 per share, after tax, and $19.4 million, or
$.26 per share, after tax, respectively, from the sale of asset-backed
securities. Fiscal 1996 amounts include a non-recurring gain on a
resecuritization transaction of $1.4 million, or $.02 per share, after tax.
Financial services income for fiscal 1997 also includes $6.9 million in revenues
from the Company's new captive reinsurance business which began operations on
June 1, 1997. This new subsidiary will enable the Company to participate more
fully in what management believes to be the profitable income streams associated
with the property and casualty insurance and service contract business than was
possible under the commission-based insurance agency arrangement which preceded
its formation. As a reinsurer, the Company recognizes insurance premium revenues
over the life of the related policies as a component of financial services
income, with the associated claims expenses reflected in financial services
operating expenses. Previously, insurance commission revenue was reported upon
the sale of the policies by Oakwood's retail operations, and was included in
other income.Due to this fundamental change in the Company's business, earnings
for insurance operations are now spread over the lives of the policies rather
than being recognized in full when the policies were sold. Management estimates
that this conversion from an insurance agency to a reinsurer penalized fourth
quarter 1997 earnings by approximately $2.5 million (approximately $1.5 million
after tax, or approximately $.03 per share). This anomaly in comparisons is
expected to continue, with decreasing effect, through mid-1999. Because
reinsurance claims costs are recorded as insured events occur, underwriting
reinsurance risk may increase the volatility of the Company's earnings,
particularly with respect to property and casualty reinsurance. The Company has
purchased catastrophe reinsurance to reduce its exposure to natural disasters.
The Company estimates the fair value of retained residual interests in REMIC
securitizations based upon default, credit loss, voluntary prepayment and
interest rate assumptions which management believes market participants would
use for similar instruments. Such estimated fair values have a direct impact on
the magnitude of the gain or loss recorded on the sale of asset-backed
securities. The actual rate of voluntary prepayments and the amount and timing
of credit losses affect the Company's yield on retained REMIC residual interests
and the fair value of such interests in periods subsequent to the
securitization. For the year ended September 30, 1997, total credit losses on
loans originated by the Company, including losses relating to securitized
assets, loans held for investment, loans held for sale and loans sold with full
or partial recourse, amounted to approximately 1.30% of the average principal
balance of the related loans, compared to approximately 1.01% for fiscal 1996.
The increase in net credit losses is due in part to the industry-wide trend
toward lower down payments which began in 1994. The higher loss ratio also
reflects increased frequency of repossession in addition to loss severity, and
had the effect of reducing the yields on the Company's retained interests in
securitized assets. Continuation of these trends could adversely affect future
yields on or the carrying value of certain retained REMIC residual interests. To
counteract this trend, the Company tightened underwriting standards and focused
additional emphasis on closing retail sales with relatively higher credit
quality customers. In addition, the Company has begun implementing programs to
improve
14
recovery rates on defaulted loans in order to reduce the severity of credit
losses.
The majority of the 25% decrease in other income reflects decreased insurance
commissions resulting from the formation of a reinsurance subsidiary and the
Company's exit from commission-based insurance agency arrangements discussed
above. An increase in multi-section unit sales with respect to which the
Company's insurance penetration rate is lower because of more competitive market
conditions adversely affected commission income prior to formation of the
reinsurance business.
Selling, general and administrative expenses rose to 24.8% of net sales compared
to 24.6% of net sales last year. The increase in selling, general and
administrative expenses as a percentage of net sales was caused primarily by
higher selling expenses at retail and the integration of Destiny and Golden
West, whose general and administrative expenses are increasingly spread over the
Company's retail sales volumes as the Company reduces wholesale sales to
non-exclusive independent dealers. This was partially offset by a reduction in
accruals relating to long-term incentive compensation plans.
Financial services operating expenses rose 54% due to a 29% increase in the
average number of loans serviced during the period and an 18% increase in total
credit application volume, as well as the addition of claims and other expenses
related to the formation of the captive reinsurance company discussed above.
Exclusive of the captive reinsurance costs, financial services operating
expenses rose $3.9 million or 21% over 1996.
Non-financial services interest expense rose from $2,221,000 to $3,274,000 due
principally to interest costs related to new corporate office facilities.
Financial services interest expense includes interest expense associated with
long-term debt secured by loans and interest expense associated with short-term
line of credit borrowings used to fund the warehousing of loans prior to their
securitization. Financial services interest expense decreased 18% primarily due
to declining and retired long-term debt balances. This decrease was offset by a
$2.9 million increase in short-term interest expense related to higher average
outstanding balances, offset by lower weighted average interest rates on
short-term lines of credit. Financial services interest expense associated with
notes and bonds payable is expected to continue to decline as the Company
retires its outstanding debt secured by loans.
1996 Compared to 1995
Retail sales dollar volume increased 29%, reflecting a 20% increase in new home
volume, an increase in the percentage of multi-section homes sold and increases
of 7% and 3% in the average new home sales prices of single-section and
multi-section homes, respectively. New home volume rose due to a 28% increase in
the weighted average number of sales centers open during the year, reflecting
the rapid pace of retail expansion during fiscal 1996, in which the Company
added a net 57 new sales centers compared to 46 centers in fiscal 1995. The
increase in average selling prices was principally due to product mix. Average
dollar sales per center were constant due to the increased significance of
multi-section homes in the retail unit mix. Retail sales of multi-section homes
accounted for 32% of new home unit sales in 1996 versus 28% in 1995. Total new
home sales dollars at sales centers open more than one year rose 6% in 1996.
Other sales dollar volume declined 19%, reflecting execution of the Company's
strategy of changing the distribution of products produced by Golden West and
Destiny from independent dealers to Company-owned retail sales centers. In 1996,
34% of Golden West's and Destiny's shipments were to Oakwood sales centers,
compared to only 8% in 1995. Shipments to Oakwood sales centers from Golden West
and Destiny are not included in the dollar sales and unit sales in the
accompanying table.
Gross profit margin increased to 29.3% in 1996 from 26.7% in fiscal 1995. The
increase in gross margin reflects improved sourcing of retail unit sales from
Company-owned manufacturing plants. Approximately 90% of the total new home
retail sales volume was manufactured by the Company in fiscal 1996 compared to
76% in 1995. Manufacturing production increased 12% over 1995, and improved
manufacturing margins, particularly at newer plants, contributed to the increase
in gross margins overall. These increases were partially offset by start-up
costs incurred in a plant expansion at the Albany, Oregon facility, which
increased capacity by approximately 40% during the first quarter of fiscal 1996.
For the full year, production at the Albany plant rose 22% from the level in
1995.
15
Financial services income increased 49% to $92.3 million from $62.0 million in
fiscal 1995. Interest income earned on loans held for investment and on loans
held for sale prior to securitization decreased from $38.2 million in 1995 to
$34.6 million in 1996. This decrease reflects the amortization of and
prepayments on loans held for investment, a decrease in the average balance of
loans held for sale resulting from more frequent loan securitization, and a
decrease in the average yield on these assets as older, higher-yielding loans
are liquidated. Loan servicing fees increased from $12.2 million in 1995 to
$15.9 million in 1996, reflecting the increased size of the Company's
securitized loan servicing portfolio. REMIC residual income increased from $7.2
million to $16.2 million, reflecting the shift in the Company's financing
strategy toward securitization of its loans from holding loans for investment.
Other financial services revenues, which consist principally of credit life
insurance premiums, miscellaneous fees and other income, increased to $6.4
million from $3.6 million, and reflect the increasing size of the Company's loan
servicing portfolio.
Financial services income for 1996 and 1995 also includes gains of approximately
$19.4 million, or $.26 per share, after tax, and $776,000, or $.01 per share,
after tax, respectively, from the sale of asset-backed securities. The
substantially increased gains in 1996 resulted from a widening of the excess
servicing spread in two securitizations due to a bond market rally, improved
credit ratings assigned to the securities sold, and a reduction in the credit
spread over treasurys demanded by purchasers of the securities. In addition, the
shift in the Company's sales mix toward multi-section homes resulted in
multi-section loans comprising a larger percentage of the assets sold.
Multi-section loans have longer average terms and lower anticipated credit
losses than loans for single-section homes, which contribute to the value of
residual interest in securitizations. Finally, the Company experienced a
continuing decline in its transaction costs, reflecting competitive conditions
on Wall Street and the Company's increased experience in securitizing loans in
the public market. Fiscal 1996 gains include a $1.4 million nonrecurring gain on
the resecuritization of approximately $32 million of subordinated REMIC
securities.
The rate of voluntary prepayments and the amount and timing of credit losses
affect the Company's yield on retained REMIC residual interests and the fair
value of such interests in periods subsequent to the securitization. For the
year ended September 30, 1996, total credit losses on loans originated by the
Company, including losses relating to securitized assets, loans held for
investment, loans held for sale and loans sold with full or partial recourse,
amounted to approximately 1.01% of the average principal balance of the related
loans, compared to approximately .75% in 1995. The increase in net credit losses
is due principally to higher numbers of defaulted loans rather than to decreased
recovery rates on defaults. To counteract this trend, in the third and fourth
quarters the Company tightened underwriting standards and focused additional
emphasis on closing retail sales with relatively higher credit quality
customers.
The majority of the 9% increase in other income is related to increased
insurance commissions resulting from the increase in retail home sales.
Selling, general and administrative expenses rose to 24.6% of net sales compared
to 22.3% of net sales in 1995. The percentage increase reflects in part the
integration of Destiny and Golden West, whose general and administrative
expenses are increasingly spread over the Company's retail sales volume as the
Company reduces wholesale sales to non-exclusive independent dealers. Selling,
general and administrative expenses also increased as a result of the increased
accruals for long-term management incentive compensation payable based upon the
level of Company profitability for fiscal 1994 through 1996, expenses related to
the increased number of retail sales centers opened during the year compared to
the prior year and costs incurred in connection with sales centers scheduled to
open in future quarters. New retail sales centers typically require a period of
several months to reach unit sales levels similar to existing outlets. Increased
accruals for compensation payable under long-term incentive compensation plans
increased selling, general and administrative expenses by .9% of net sales
compared to 1995.
Financial services operating expenses rose 47% on a 26% increase in the average
number of loans serviced during the period and a 55% increase in total credit
application volume. In addition to cost increases associated with higher
origination and servicing volume, financial services operating expenses have
increased as a result of allocation to this business unit of certain direct
operating costs (principally related to telecommunications) formerly absorbed by
the parent company and allocated to non-financial operations.
16
The provision for credit losses decreased 53% from 1995, principally as a result
of the decrease in the balance of loans held for investment and a decrease in
the Company's contingent liability on loans sold with full or partial recourse.
The Company provides for estimated losses based on the Company's historical loss
experience, current repossession trends and costs and management's assessment of
the current credit quality of the loan portfolio.
Financial services interest expense includes interest expense associated with
long-term debt secured by loans and interest associated with short-term line of
credit borrowings used principally to fund the warehousing of loans prior to
their securitization. Financial services interest expense decreased 11% due to
declining and retired long-term debt balances. This decrease was offset by a
$2.4 million increase in short-term interest expense, reflecting higher average
outstanding balances on lines of credit due to the significant increase in loan
volume. Financial services interest expense associated with notes and bonds
payable is expected to continue to decline as the Company retires its
outstanding debt secured by loans.
The Company's effective income tax rate was 38.3% in fiscal 1996 compared to a
pro forma rate of 37.9% in fiscal 1995. The increase in the effective tax rate
is due primarily to higher state income taxes.
Liquidity and Capital Resources
Retail financing of sales of the Company's products is an integral part of the
Company's vertical integration strategy. Such financing consumes substantial
amounts of capital, which the Company has obtained principally by issuing debt
collateralized by its loans or by securitizing such loans, primarily using
REMICs. Over the past five years, the Company has been able to obtain from
investors and lenders an increasing percentage of the capital required to fund
its finance business, and the related yield over treasurys required by investors
generally has declined, principally because of increasing investor and lender
familiarity with asset-backed financing transactions in the manufactured housing
industry, declining interest rates, and because of the Company's increasingly
strong financial performance. Management believes it can finance substantially
all of its fiscal 1998 loan originations through asset securitization. During
1997 the Company raised approximately $922 million to finance its loans,
including $869 million of REMIC certificates sold by Oakwood Mortgage Investors,
substantially all of which were sold to the public. In November 1997 Oakwood
Mortgage Investors completed another REMIC offering, the proceeds of which were
approximately $252 million.
In each of the Company's four recurring 1997 securitizations, the Company has
sold REMIC interests having a principal balance equal to 100% of the par value
of the related loans, and the Company intends to sell all of the regular REMIC
interests in its future securitizations. This decision eliminates the Company's
need for cash to finance retained REMIC interests and substantially reduces the
need to obtain other long-term financing. The Company's planned growth will
require substantial capital to fund its loans in the coming years, and intends
to utilize both the public and private asset-backed markets to maximize the
number of sources of financing and minimize its financing costs.
In addition to the ongoing need to access the asset-backed capital market to
fund its financing operations, the Company will require capital to execute its
ongoing expansion strategy. The Company estimates that its fiscal 1998 capital
expenditures will approximate $39 million, comprised principally of offices,
leasehold improvements and fixtures relating to retail expansion, computer
hardware and software associated with new and enhanced management information
systems, improvements to manufacturing facilities and a new manufacturing plant
in Texas. In addition to capital expenditures, the retail expansion will require
an investment of approximately $500,000 of working capital for each new sales
center, or approximately $25 million for fiscal 1998. Capital expenditures and
working capital requirements in later years are dependent upon the extent of
expansion undertaken in such years.
The Company intends to finance internal growth of its retail and
manufacturing business principally using internally generated funds and
short-term lines of credit. Because the Company sells all of the regular REMIC
interests in its securitizations, additional permanent corporate financing is
not expected to be required to fund internal expansion of the financial services
businesses. However, should the Company expand its businesses through a
significant acquisition, additional permanent capital could be required. In
addition, the Company continues to monitor the debt and equity markets and
evaluate sources and cost of long-term capital in light of management's
assessment of existing and future conditions in the capital markets and its
assessment of the appropriate components of the Company's capital structure.
While management believes that existing financing is sufficient to provide for
17
the Company's internal growth for the foreseeable future, the Company may seek
to raise additional long-term debt or equity if compelling market conditions
arise. During 1997 Standard & Poor's Ratings Group, Moody's Investors Service
and Fitch Investors Service, L.P. each raised its rating of the Company's senior
long-term debt to BBB-. Management believes that achieving an investment grade
rating from major credit rating agencies enhances the Company's flexibility in
obtaining both short and long-term financing.
The Company has several credit facilities in place to provide for its short-term
liquidity needs. The Company has a $175 million credit facility with a conduit
commercial paper issuer to provide warehouse financing for loans prior to
securitization. The Company also has a $125 million revolving credit facility
with a group of banks which is available to fund additional working capital
needs, a $20 million cash management line of credit and $20 million of
uncommitted lines of credit.
New Accounting Standards
In February 1997 the Financial Accounting Standards Board (the "Board") adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128"), which establishes standards for computing and presenting earnings per
share ("EPS") by replacing the presentation of primary EPS with a presentation
of basic EPS. In addition, FAS 128 requires dual presentation of basic and
diluted EPS on the face of the income statement and requires a reconciliation of
the numerator and denominator of the diluted EPS calculation. The Company will
adopt FAS 128 in fiscal 1998 and does not expect its adoption will result in
reporting materially different EPS amounts than those reported under current
accounting pronouncements.
In June 1997 the Board issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("FAS 130"), which requires that changes
in the amounts of comprehensive income items, currently reported as separate
components of equity, be shown in a financial statement, displayed as
prominently as other financial statements. The most common components of other
comprehensive income include foreign currency translation adjustments, minimum
pension liability adjustments and/or unrealized gains and losses on
available-for-sale securities. FAS 130 does not require a specific format for
the new financial statement, but does require that an amount representing total
comprehensive income be reported. The Company plans to adopt FAS 130 in fiscal
1999.
In June 1997 the Board also adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"), which establishes new standards for business segment reporting.
Requirements of FAS 131 include reporting of (a) financial and descriptive
information about reportable operating segments, (b) a measure of segment profit
or loss, certain specific revenue and expense items and segment assets with
reconciliations of such amounts to the Company's financial statements and (c)
information regarding revenues derived from the Company's products and services,
information about major customers and information related to geographic areas.
FAS 131 is effective for fiscal years beginning after December 15, 1997 and thus
will be adopted by the Company in fiscal 1999. Adoption of FAS 131 will require
reporting of business segment information that is more comprehensive than that
currently reported in the financial statements.
18
Oakwood Homes Corporation and Subsidiaries
Consolidated Statement of Income
(in thousands except per share data)
Year ended September 30,
--------------------------------------
1997 1996 1995
--------------------------------------
Revenues
Net sales .................................. $ 952,704 $862,079 $741,521
Financial services income (Note 3) ......... 102,778 92,346 61,995
Other income (Note 4) ...................... 14,569 19,497 17,896
--------------------------------------
Total revenues ......................... 1,070,051 973,922 821,412
--------------------------------------
Costs and expenses ...........................
Cost of sales .............................. 651,400 609,303 543,320
Selling, general and administrative expenses 236,586 211,759 165,290
Financial services operating expenses ...... 29,056 18,810 12,799
Provision for losses on credit sales ....... -- 1,000 2,109
Interest expense ...........................
Non-financial services ................... 3,274 2,221 2,259
Financial services ....................... 16,543 20,149 22,638
--------------------------------------
Total costs and expenses ............... 936,859 863,242 748,415
--------------------------------------
Income before income taxes ................... 133,192 110,680 72,997
Provision for income taxes (Note 6) .......... 51,279 42,425 26,374
--------------------------------------
Net income ................................... $ 81,913 $ 68,255 $ 46,623
======================================
Pro forma information (unaudited) (Note 1)
Historical income before income taxes ...... $ 72,997
Pro forma provision for income taxes ....... 27,679
--------
Pro forma net income ....................... $ 45,318
========
Earnings per share (1995 amounts are pro
forma and unaudited) (Note 1)
Primary .................................... $ 1.75 $ 1.47 $ .99
======================================
Fully diluted .............................. $ 1.75 $ 1.47 $ .98
======================================
The accompanying notes are an integral part of the financial statements.
19
Oakwood Homes Corporation and Subsidiaries Consolidated Balance Sheet
(in thousands except share and per share data)
September 30,
----------------------
1997 1996
----------------------
Assets
Cash and cash equivalents ............................... $ 28,717 $ 28,577
Receivables and investments (Notes 5 and 11) ............ 462,080 508,825
Inventories (Note 7) .................................... 208,298 155,890
Properties and facilities, net of accumulated depreciation
and amortization (Notes 8 and 11) ..................... 139,702 113,764
Deferred income taxes (Note 6) .......................... 12,994 9,674
Other assets (Note 9) ................................... 52,715 25,247
----------------------
$904,506 $841,977
======================
Liabilities and shareholders' equity
Short-term borrowings (Note 10) ......................... $175,800 $145,506
Notes and bonds payable (Note 11) ....................... 78,815 134,379
Accounts payable and accrued liabilities (Note 12) ...... 122,162 157,929
Insurance policy reserves ............................... 30,535 5,534
Other long-term obligations ............................. 13,312 6,655
Shareholders' equity (Notes 13 and 14)
Common stock, $.50 par value; 100,000,000 shares authorized;
46,299,000 and 45,621,000 shares issued and outstanding 23,149 22,811
Additional paid-in capital ............................ 159,281 149,501
Retained earnings ..................................... 306,533 226,460
----------------------
488,963 398,772
Unearned compensation (Notes 14 and 15) ............... (5,081) (6,798)
----------------------
Total shareholders' equity .......................... 483,882 391,974
----------------------
Contingencies (Notes 5, 11 and 16) ...................... $904,506 $841,977
======================
The accompanying notes are an integral part of the financial statements.
20
Oakwood Homes Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(in thousands)
Year ended September 30,
---------------------------------------------------
1997 1996 1995
---------------------------------------------------
Operating activities
Net income ..................................................... $ 81,913 $ 68,255 $ 46,623
Items not requiring (providing) cash
Depreciation and amortization ................................ 14,325 10,461 8,278
Deferred income taxes ........................................ (3,320) 5,872 (7,060)
Provision for credit losses .................................. -- 1,000 2,109
Gain on sale of loans and securities ......................... (19,255) (19,358) (776)
Other ........................................................ 3,458 720 --
(Increase) decrease in other receivables ..................... 7,631 (39,148) (21,617)
(Increase) in inventories .................................... (52,408) (4,700) (52,502)
(Increase) in prepaid expenses ............................... (4,007) (489) (59)
(Increase) in deferred insurance policy acquisition costs .... (6,614) (841) (506)
Increase (decrease) in accounts payable and accrued liabilities (39,872) 58,105 19,121
Increase in insurance policy reserves ........................ 25,001 2,024 1,404
Increase in other long-term obligations ...................... 3,742 94 10,061
---------------------------------------------------
Cash provided by operations ............................. 10,594 81,995 5,076
Loans originated ............................................. (883,633) (721,414) (486,601)
Purchase of loans and securities ............................. (2,636) (1,465) --
Sale of loans ................................................ 913,004 699,552 355,486
Principal receipts on loans .................................. 34,056 15,651 34,915
---------------------------------------------------
Cash provided (used) by operating activities ............ 71,385 74,319 (91,124)
---------------------------------------------------
Investing activities
Additions to properties and facilities ......................... (38,402) (41,303) (41,870)
Investment in and advances to joint venture .................... (5,051) (3,000) --
Sale of securities ............................................. -- 21,655 7,586
Sales of manufactured housing communities ...................... -- 20,301 --
Other .......................................................... (9,607) 2,556 (1,054)
---------------------------------------------------
Cash provided (used) by investing activities ............ (53,060) 209 (35,338)
---------------------------------------------------
Financing activities
Net borrowings (repayments) on short-term credit facilities .... 30,294 (8,894) 129,400
Issuance of notes and bonds payable ............................ -- 1,686 29,890
Payments on notes and bonds .................................... (55,084) (49,043) (41,228)
Cash dividends ................................................. (1,840) (1,795) (1,712)
Proceeds from exercise of stock options ........................ 8,445 5,906 1,438
Cash dividends to shareholders of acquired company ............. -- -- (2,111)
---------------------------------------------------
Cash provided (used) by financing activities ............ (18,185) (52,140) 115,677
---------------------------------------------------
Net increase (decrease) in cash and cash equivalents ............. 140 22,388 (10,785)
Cash and cash equivalents
Beginning of year .............................................. 28,577 6,189 16,974
---------------------------------------------------
End of year .................................................... $ 28,717 $ 28,577 $ 6,189
==================================================
The accompanying notes are an integral part of the financial statements.
21
Oakwood Homes Corporation and Subsidiaries Consolidated Statement of Changes in
Shareholders' Equity (in thousands except per share data)
Common Additional
shares Common paid-in Retained Unearned
outstanding stock capital earnings compensation
------------------------------------------------------
Balance at September 30, 1994 ...................................... 22,010 $11,005 $148,125 $117,200 $ --
Net income ....................................................... -- -- -- 46,623 --
Exercise of stock options ........................................ 161 81 1,357 -- --
Purchase of ESOP shares .......................................... -- -- -- -- (2,398)
ESOP shares committed to be released ............................. -- -- -- -- 238
Cash dividends ($.04 per share) .................................. -- -- -- (1,712) --
Cash dividends to shareholders of
acquired company ............................................... -- -- -- (2,111) --
------------------------------------------------------
Balance at September 30, 1995 ...................................... 22,171 11,086 149,482 160,000 (2,160)
Net income ....................................................... -- -- -- 68,255 --
Exercise of stock options ........................................ 730 365 5,541 -- --
Issuance of restricted stock ..................................... 200 100 5,325 -- (5,118)
ESOP shares committed to be released ............................. -- -- 413 -- 480
Cash dividends ($.04 per share) .................................. -- -- -- (1,795) --
2-for-1 stock split .............................................. 22,520 11,260 (11,260) -- --
------------------------------------------------------
Balance at September 30, 1996 ...................................... 45,621 22,811 149,501 226,460 (6,798)
Net income ....................................................... -- -- -- 81,913 --
Exercise of stock options ........................................ 634 316 8,129 -- --
Issuance of restricted stock ..................................... 44 22 1,181 -- (824)
Amortization of unearned compensation ............................ -- -- -- -- 2,061
ESOP shares committed to be released ............................. -- -- 470 -- 480
Cash dividends ($.04 per share) .................................. -- -- -- (1,840) --
------------------------------------------------------
Balance at September 30, 1997 ...................................... 46,299 $23,149 $159,281 $306,533 ($5,081)
======================================================
The accompanying notes are an integral part of the financial statements
22
Oakwood Homes Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1--Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of Oakwood Homes
Corporation and its subsidiaries (collectively, the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
Retail financing
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, or, to a much lesser extent, by third party
financial institutions.
The Company finances its lending activities primarily by securitizing the loans
it originates using Real Estate Mortgage Investment Conduits ("REMICs") or, for
certain FHA-insured loans, using collateralized mortgage obligations issued
under authority granted to the Company by the Government National Mortgage
Association ("GNMA").
Effective January 1, 1997 the Company adopted prospectively Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("FAS 125"), which
modifies in certain respects the Company's accounting policies for sales of
receivables. Under FAS 125, the Company allocates the sum of its basis in the
loans conveyed to each REMIC and the costs of forming the REMIC among the REMIC
interests retained and the REMIC interests sold to investors based upon the
relative estimated fair values of such interests. This practice is the same as
that employed by the Company prior to adoption of FAS 125.
In addition to the retained REMIC residual interests recognized by the Company
prior to January 1, 1997, FAS 125 requires recognition as a retained REMIC
interest of the estimated fair value of the servicing contract entered into by
the Company in connection with each securitization. Recognition of such
servicing assets has the effect of increasing the gain recorded on the Company's
securitizations. Further, FAS 125 requires recognition, as a reduction in the
sales price of REMIC interests sold, of the estimated fair value of any
guarantee made by the Company of payment of principal or interest on REMIC
interests sold. Recognition of the fair value of such guarantees, which was not
required prior to adoption of FAS 125, has the effect of decreasing the gain
recorded on the Company's securitizations.
Servicing assets are amortized in proportion to and over the period of estimated
net servicing income. Guarantee liabilities are amortized to income over the
period during which the guarantee is outstanding.
Adoption of FAS 125 had no material effect on the Company's financial position
or results of operations.
REMIC interests retained by the Company following securitization are considered
available for sale and are carried at their amortized cost which approximates
fair value. The Company has no securities held for trading purposes.
Loans held for investment are carried at their outstanding principal amounts,
less unamortized discounts and plus unamortized premiums. Loans held for sale
are carried at the lower of cost or market.
Revenue recognition--manufactured housing
The Company records a retail sale upon passage of title to the home to the
customer and, in the case of credit sales, upon execution of the loan agreement
and other required documentation and receipt of a designated minimum down
payment. Homes sold to independent dealers are manufactured to order; the
Company recognizes a sale upon completion and transfer of title to the home.
Prior to the formation of the Company's property and casualty and service
contract reinsurance subsidiary on June 1, 1997, the Company acted as a sales
agent for unrelated insurance companies and received an agent's commission on
sales of insurance policies issued by those insurance companies. Insurance
commissions were recognized in income at the time the policies were written.
Revenue recognition--financial services
Interest income on loans is recognized in accordance with the terms of the loans
(principally 30 day accrual). The Company retains servicing rights for
substantially all loans it originates, except for loans sold without recourse.
Servicing fee income is recognized as earned. Income on retained REMIC
interests, net of associated credit losses, is recorded as earned using the
level yield method over the period such interests are outstanding.
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.
23
On June 1, 1997 the Company formed a captive reinsurance subsidiary, domiciled
in Bermuda, for property and casualty insurance and service contract business.
Premiums from reinsured insurance policies are deferred and recognized as
revenue on a pro rata basis over the term of the policies, generally ranging
from one to five years. Claims expenses are recorded as insured events occur.
Policy acquisition costs are deferred and amortized over the terms of the
contracts.
Interest rate risk management
The Company periodically enters into off-balance sheet financial agreements,
principally forward contracts to enter into interest rate swaps and options on
such contracts, in order to hedge the sales price of REMIC interests to be sold
in securitization transactions. The net settlement proceeds or cost from
termination of the agreements is included in the determination of gain or loss
on the sale of the REMIC interests.
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
- --------------------------------------------------------------------------------
Income taxes
The Company accounts for deferred income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are based on the
temporary differences between the financial reporting basis and tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled.
Reserve for credit losses
The Company maintains reserves for estimated credit losses on loans held for
investment, on loans warehoused prior to securitization and on loans sold to
third parties with full or limited recourse. The Company provides for losses in
amounts necessary to maintain the reserves at amounts the Company believes are
sufficient to provide for future losses based upon the Company's historical loss
experience, current economic conditions and an assessment of current portfolio
performance measures.
Unaudited pro forma information
Prior to its acquisition by the Company, Destiny Industries, Inc. ("Destiny,"
see Note 2) was an S corporation, and accordingly its earnings were includable
in the income tax returns of its former shareholders. As a consequence,
Destiny's financial statements did not reflect a provision for income taxes for
periods prior to its acquisition by the Company. The pro forma provision for
income taxes and pro forma net income set forth in the statement of income
reflect the Company's provision for income taxes on a pro forma basis assuming
Destiny's results of operations had been included in the Company's income tax
returns for preacquisition periods. Deferred income taxes relating to Destiny's
assets and liabilities as of the acquisition date were not material and have
been charged to the provision for income taxes for the year ended September 30,
1995.
The pro forma provision for income taxes and amounts derived therefrom are
unaudited.
Earnings per share
Earnings per share is computed by dividing net income (pro forma net income in
1995) by the weighted average number of common and dilutive common equivalent
shares outstanding during the year. The weighted average number of shares used
in the computation of primary earnings per share was 46,791,000, 46,460,000 and
45,998,000 in 1997, 1996 and 1995, respectively. The weighted average number of
shares used in the computation of fully diluted earnings per share was
46,846,000, 46,521,000 and 46,113,000 in 1997, 1996 and 1995, respectively. The
dilutive effect of stock options and unearned restricted stock awards is
computed using the treasury stock method.
Because the Company's historical results of operations do not reflect a
provision for income taxes on Destiny's earnings for preacquisition periods,
historical earnings per share amounts for 1995 are not meaningful and
accordingly have been omitted.
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.
24
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.
Reclassifications
Certain amounts previously reported for 1996 and 1995 have been reclassified to
conform to classifications used in 1997.
Note 2--Acquisition
On June 30, 1995 the Company completed its business combination with Destiny.
The Company issued 1,850,000 shares of its common stock in exchange for all the
outstanding common stock of Destiny (an exchange ratio of approximately 4.63
Company common shares for each outstanding Destiny common share).
This business combination has been accounted for as a pooling of interests, and
accordingly the accompanying financial statements reflect the combined results
of operations and financial position of the Company and Destiny for all periods
presented.
Note 3--Financial Services Businesses
The Company's financial services businesses are as follows: Oakwood Acceptance
Corporation ("Oakwood Acceptance") purchases a substantial portion of the loans
originated by the Company's retail operations. Oakwood Acceptance also purchases
loans from unrelated retailers and from time to time purchases portfolios of
loans from third parties. Oakwood Acceptance retains servicing on substantially
all loans held for investment or securitized by Oakwood Acceptance or its
subsidiary, Oakwood Mortgage Investors, Inc. Oakwood Funding Corporation
("Oakwood Funding") is a special-purpose subsidiary of Oakwood Acceptance which
has issued non-recourse notes secured by specific pools of loans. Oakwood
Acceptance has from time to time also issued notes in its own name secured by
loans. Deutsche Financial Capital ("DFC") is a 50% owned investee of Oakwood
Acceptance which provides consumer financing to retail customers of independent
manufactured housing dealers. Oakwood Acceptance accounts for its interest in
DFC using the equity method. Oakwood Financial Corporation is a subsidiary of
Oakwood Homes Corporation which holds the Company's retained interests in REMIC
trusts. Oakwood Life Ltd. reinsures risk on credit life insurance policies
written by an unrelated insurance company in connection with sales of Company
products. Blue Ridge Insurance Company, Ltd. ("Blue Ridge") reinsures risk on
property and casualty 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 $922 million in 1997, $721
million in 1996 and $368 million in 1995.
Oakwood Acceptance's servicing portfolio totaled approximately $2.5 billion and
$1.7 billion at September 30, 1997 and 1996, respectively, of which
approximately $2.1 billion and $1.3 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) 1997 1996 1995
--------------------------
Statement of income
Revenues
Consumer finance
Interest income ........... $ 29,351 $34,569 $38,185
Servicing fees ............ 21,479 15,857 12,202
REMIC residual income ..... 19,444 16,193 7,212
Gain on sale of loans
and securities .......... 19,255 19,358 776
Other ..................... 2,187 3,085 1,072
--------------------------
Total consumer
finance revenues .... 91,716 89,062 59,447
--------------------------
Insurance
Premium revenues .......... 10,549 3,160 2,263
Investment income ......... 513 124 285
--------------------------
Total insurance revenues 11,062 3,284 2,548
--------------------------
Total revenues ...... 102,778 92,346 61,995
--------------------------
Cost and expenses
Consumer finance
Interest expense .......... 16,543 20,149 22,638
Operating expenses ........ 20,364 16,792 11,591
Provision for credit losses -- 1,000 2,109
--------------------------
Total consumer finance
costs and expenses .. 36,907 37,941 36,338
--------------------------
Insurance
Claims expense ............ 5,037 514 338
Commissions and
ceding fees ............. 3,431 1,367 747
Other ..................... 224 137 123
--------------------------
Total insurance costs
and expenses ........ 8,692 2,018 1,208
--------------------------
Total costs
and expenses ...... 45,599 39,959 37,546
--------------------------
Income before income taxes .... $ 57,179 $52,387 $24,449
==========================
25
--------------------
(in thousands) 1997 1996
--------------------
Balance Sheet
Loans .................................... $328,119 $395,688
REMIC regular interests .................. 9,724 9,724
REMIC residual interests ................. 84,228 48,971
Loan servicing assets .................... 3,786 --
Other assets ............................. 60,976 36,089
--------------------
Total assets ........................... $486,833 $490,472
====================
Short-term borrowings .................... $ 84,800 $126,800
Notes payable secured by loans ........... 48,359 69,980
Insurance policy reserves ................ 30,535 5,534
Due to affiliates ........................ 161,121 163,590
Other liabilities ........................ 6,804 6,580
Parent company's investment .............. 155,214 117,988
--------------------
Total liabilities and parent
company's investment ................. $486,833 $490,472
====================
Condensed financial information for Oakwood Homes Corporation with its financial
services businesses accounted for using the equity method is as follows:
------------------------------------
(in thousands) 1997 1996 1995
------------------------------------
Statement of income
Revenues
Net sales ....................... $ 952,704 $862,079 $741,521
Equity in income of financial
services businesses ........... 57,179 52,387 24,449
Other income .................... 14,569 19,971 18,331
------------------------------------
Total revenues ................ 1,024,452 934,437 784,301
------------------------------------
Costs and expenses
Cost of sales ................... 651,400 609,303 543,320
Selling, general and
administrative expenses ....... 236,586 212,233 165,725
Interest expense ................ 3,274 2,221 2,259
------------------------------------
Total costs and expenses ...... 891,260 823,757 711,304
------------------------------------
Income before income taxes ........ 133,192 110,680 72,997
Provision for income taxes(1) ..... 51,279 42,425 27,679
------------------------------------
Net income(1) ..................... $ 81,913 $ 68,255 $ 45,318
====================================
(1) Amounts for 1995 are pro forma. See Note 1
------------------------
(in thousands) 1997 1996
------------------------
Balance Sheet
Current assets
Cash and cash equivalents .......... $ 27,715 $ 26,393
Receivables ........................ 21,593 37,166
Inventories ........................ 208,298 155,890
Prepaid expenses ................... 5,857 3,275
------------------------
Total current assets ........... 263,463 222,724
Properties and facilities ............ 136,065 111,339
Investment in and advances to
financial services businesses ..... 316,335 281,578
Other assets ......................... 21,645 17,442
------------------------
$737,508 $633,083
------------------------
Current liabilities
Short-term borrowings .............. $ 91,000 $ 18,706
Current maturities of long-term debt 5,524 6,071
Accounts payable and
accrued liabilities .............. 118,858 151,314
------------------------
Total current liabilities ...... 215,382 176,091
Long-term debt ....................... 24,932 58,328
Other long-term obligations .......... 13,312 6,690
Shareholders' equity ................. 483,882 391,974
------------------------
$737,508 $633,083
========================
Note 4--Other Income
The components of other income are as follows:
----------------------------
(in thousands) 1997 1996 1995
----------------------------
Insurance commissions. $ 6,364 $11,171 $10,198
Endorsement fees ..... 455 783 1,151
Investment income .... 273 358 1,047
Other ................ 7,477 7,185 5,500
----------------------------
$14,569 $19,497 $17,896
============================
26
Note 5--Receivables and Investments
The components of receivables and investments are as follows:
-------------------
(in thousands) 1997 1996
-------------------
Loans held for sale ............................ $255,944 $306,465
Loans held for investment ...................... 81,214 98,503
Trade receivables .............................. 5,418 5,771
Reinsurance premiums receivable ................ 4,851 700
Accrued interest ............................... 2,427 2,696
Other receivables .............................. 21,350 42,326
Less: reserve for uncollectible receivables .... (3,076) (6,331)
-------------------
Total receivables ...................... 368,128 450,130
-------------------
Retained interests in REMIC
securitizations (exclusive of loan
servicing assets included in other assets)
Regular interests, at amortized cost
which approximates fair value ............ 9,724 9,724
Residual interests, at amortized cost
which approximates fair value ............ 84,228 48,971
-------------------
Total retained REMIC interests ......... 93,952 58,695
-------------------
$462,080 $508,825
===================
The estimated principal receipts, including estimated prepayments, on loans held
for investment are $13.3 million in 1998, $12.4 million in 1999, $11.6 million
in 2000, $10.9 million in 2001, $10.3 million in 2002 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. Trade receivables represent amounts due from
independent dealers, which are located principally in the Pacific Northwest and
in the Southeast.
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 $58 million
as of September 30, 1997.
The following table summarizes the transactions reflected in the reserve for
credit losses:
--------------------------------
(in thousands) 1997 1996 1995
--------------------------------
Balance at beginning of year ...... $ 8,261 $ 11,795 $ 14,623
Provision for losses .............. -- 1,000 2,109
Losses charged to the reserve ..... (3,984) (4,534) (4,937)
--------------------------------
Balance at end of year ............ $ 4,277 $ 8,261 $ 11,795
================================
The reserve for credit losses is reflected in the consolidated balance sheet as
follows:
-----------------
(in thousands) 1997 1996
-----------------
Reserve for uncollectible receivables ... $3,076 $6,331
Reserve for contingent liabilities
(included in accounts payable
and accrued liabilities) ............... 1,201 1,930
-----------------
$4,277 $8,261
=================
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 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 $30 million as of September 30, 1997. The Company's yields on its
investments in REMIC residual interests are influenced by default, credit loss
and voluntary prepayment assumptions which management believes to be reasonable.
The actual rate of voluntary prepayments and the amount and timing of credit
losses affect the Company's yield on retained REMIC residual interests and the
fair value of such interests in periods subsequent to the securitization; the
actual rate of voluntary prepayments and credit losses typically varies over the
life of each transaction and from transaction to transaction. If over time the
Company's actual experience is more favorable than that assumed, the Company's
yield on its REMIC residual investments will be enhanced. Similarly, if over
time the Company's actual experience is less favorable than that assumed, such
yield could be reduced or, in extreme cases, impairment of the investments could
result.
The Company has retained servicing on substantially all loans it has originated
since 1989 with respect to which the Company has retained any credit risk.
Golden West Homes ("Golden West") and Destiny are contingently liable under
terms of repurchase agreements with financial institutions providing inventory
financing for retailers
27
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. Although Golden West and Destiny are contingently
liable under these agreements, the risk of loss is spread over numerous
retailers and financing institutions and is further reduced by the resale value
of repurchased homes. The estimated potential obligations under such agreements
approximated $31 million at September 30, 1997. Losses under these agreements
have not been significant.
Note 6--Income Taxes
The components of the provision for income taxes are as follows:
--------------------------------
(in thousands) 1997 1996 1995
--------------------------------
Current
Federal ........................ $ 51,020 $32,426 $30,524
State .......................... 3,579 4,127 2,910
--------------------------------
54,599 36,553 33,434
--------------------------------
Deferred
Federal ........................ (3,027) 5,239 (6,449)
State .......................... (293) 633 (611)
--------------------------------
(3,320) 5,872 (7,060)
--------------------------------
Historical provision for
income taxes ................... 51,279 42,425 26,374
Pro forma provision for income
taxes on Destiny's earnings for
preacquisition periods ......... -- -- 1,305
--------------------------------
Pro forma provision for
income taxes ................... $ 51,279 $42,425 $27,679
================================
A reconciliation of the statutory federal income tax rate to the Company's
historical and pro forma effective income tax rates follows:
------------------------------------
1997 1996 1995
------------------------------------
Statutory federal income
tax rate ........................... 35% 35% 35%
State income taxes, less federal
income tax benefit ................. 2 3 2
Reduction in valuation allowance
for deferred income tax assets ..... -- -- (1)
Other ................................ 2 -- 2
------------------------------------
Pro forma effective income
tax rate ........................... 39 38 38
Effect of Destiny's preacquisition
earnings includable in the
income tax returns of its
former shareholders ................ -- -- (2)
------------------------------------
Historical effective income
tax rate ........................... 39% 38% 36%
------------------------------------
Deferred income taxes includes the following components:
------------------------------
(in thousands) 1997 1996
------------------------------
Deferred income tax assets
Reserve for credit losses ................. $ 1,397 $ 2,764
REMIC residual interests .................. 8,668 3,492
Accrued liabilities ....................... 7,252 4,899
Insurance reserves ........................ 1,905 --
Net operating loss carryforward ........... 1,803 1,558
Inventories ............................... 1,325 1,144
Other ..................................... 417 803
------------------------------
Gross deferred income tax assets ........ 22,767 14,660
------------------------------
Deferred income tax liabilities
Properties and facilities ................. (6,078) (3,696)
Deferred insurance policy
acquisition costs ....................... (3,137) (319)
Discounts on acquired portfolios .......... (304) (344)
Other ..................................... (254) (627)
------------------------------
Gross deferred income tax liabilities ... (9,773) (4,986)
------------------------------
Net deferred income tax asset ........... $ 12,994 $ 9,674
==============================
At September 30, 1997 the remaining net operating loss carryforward is
approximately $5,150,000 for federal income tax purposes, of which approximately
$3,870,000 represents net operating losses of Golden West relating to
preacquisition periods, and approximately $1,280,000 arose in 1997 at Blue
28
Ridge. Blue Ridge incurred a loss for income tax purposes because policy
acquisition costs are deductible currently for income tax purposes but are
deferred and amortized for financial reporting purposes. Such loss cannot be
offset against U.S. source income, but may be carried forward to offset future
taxable income of Blue Ridge through 2017. Utilization of the Golden West
carryforward is similarly dependent upon the realization of taxable income by
Golden West and is further limited to a maximum of approximately $774,000
annually through 2002.
Income tax payments were approximately $44.9 million, $43.6 million and $27.4
million in 1997, 1996 and 1995, respectively.
Note 7--Inventories
The components of inventories are as follows:
-------------------
(in thousands) 1997 1996
-------------------
Manufactured homes ............. $186,767 $136,905
Work-in-progress, materials
and supplies ................. 17,672 14,165
Land/homes under development ... 3,859 4,820
-------------------
$208,298 $155,890
===================
Note 8--Properties and Facilities
The components of properties and facilities are as follows:
-------------------------
(in thousands) 1997 1996
-------------------------
Land and land improvements .................... $ 24,894 $ 16,435
Buildings and field sales offices ............. 74,793 64,321
Furniture, fixtures and equipment ............. 71,136 58,393
Leasehold improvements ........................ 15,255 10,903
-------------------------
186,078 150,052
Less: accumulated depreciation
and amortization .............................. (46,376) (36,288)
-------------------------
$139,702 $113,764
=========================
Depreciation and amortization of properties and facilities was approximately
$12,878,000, $9,502,000 and $7,337,000 in 1997, 1996 and 1995, respectively.
Note 9--Other Assets
The components of other assets are as follows:
--------------------
(in thousands) 1997 1996
--------------------
Restricted cash and investments .. $16,548 $ 6,395
Deferred insurance policy
acquisition costs .............. 8,468 1,854
Prepaid expenses ................. 7,329 3,322
Investment in and advances to
joint venture .................. 6,443 3,000
Loan servicing assets, net of
accumulated amortization of $259 3,786 --
Goodwill ......................... 3,503 3,986
Other ............................ 6,638 6,690
--------------------
$52,715 $25,247
====================
Restricted cash and investments include custodial cash balances used to secure a
portion of the reinsurance subsidiaries' obligations to pay reinsurance claims
and trust account cash balances required by certain OAC servicing agreements.
Note 10--Short-term Credit Facilities
The Company has a $175 million revolving warehouse financing facility with a
conduit commercial paper issuer, secured by loans held for sale. The weighted
average interest rate on borrowings outstanding at September 30, 1997 was 5.92%,
compared to an average rate of 5.86% at September 30, 1996. The Company also has
a $125 million unsecured syndicated revolving credit facility, borrowings under
which currently bear interest at LIBOR plus .5%. The Company also has a $20
million unsecured cash management line and $20 million of uncommitted credit
lines.
29
Note 11--Notes and Bonds Payable
The components of notes and bonds payable are as follows:
-------------------
(in thousands) 1997 1996
-------------------
Non-financial services debt
8% reset debentures due 2007
(9% at September 30, 1996) .................. $ 6,944 $ 22,933
8% reset debentures due 2007
(9.125% at September 30, 1996) .............. 10,001 16,975
Facilities loan payable in quarterly
installments through 1998, with
interest at LIBOR plus .875% ................ 4,000 8,000
Capitalized aircraft lease payable in
monthly installments through 2000,
with interest at LIBOR plus .75% ............ 3,835 4,916
Industrial revenue bonds with interest
at a variable rate (3.70% at
September 30, 1996) ......................... -- 4,700
Industrial revenue bond due in
installments through 2001, with interest
at 73% of the lender's prime rate ........... 2,125 2,250
Other mortgage notes with interest rates
ranging from 8% to 9.375%, payable in
varying installments through 2008 ........... 2,351 2,945
ESOP note payable in quarterly installments
through 2000, with interest at LIBOR
plus 1.25% .................................. 1,200 1,680
-------------------
Total non-financial services debt ....... 30,456 64,399
-------------------
Financial services debt collateralized by loans
Nonrecourse debt
Notes issued by Oakwood Funding,
payable in monthly installments through
February 2000, with interest at an
average rate of 8.01% (8.65%
at September 30, 1996) .................... 9,699 22,936
Subordinated note payable issued by
Oakwood Funding with interest payable
monthly at 12.58%, amortizing
through 2001 .............................. 7,372 8,350
-------------------
Total nonrecourse debt .................. 17,071 31,286
-------------------
Recourse debt
Term loans payable in monthly installments through December 2000, with
interest ranging from LIBOR plus .5% to LIBOR plus .75% (LIBOR plus .75%
at September 30, 1996)..................... 18,334 25,740
Subordinated note with interest payable
monthly at 10.5%, amortizing in 2000
through 2003 .............................. 12,954 12,954
-------------------
Total recourse debt ..................... 31,288 38,694
-------------------
Total financial services debt ........... 48,359 69,980
-------------------
$ 78,815 $134,379
===================
The interest rates on the reset debentures reset from 9% and 9.125% to 8%
effective June 1997. These interest rates will again reset on June 1, 2002 to a
rate to be determined by the Company in its sole discretion. 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 the option of the Company at par.
The payment of notes collateralized by loans generally is based on the scheduled
monthly payments 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 $73 million at September 30, 1997.
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 unamortized portion of these costs, which is
included in other assets, was approximately $705,000 and $1,422,000 at September
30, 1997 and 1996, respectively. Land, land improvements, buildings and
equipment with a net book value of approximately $26 million are pledged as
collateral for the facilities term loan, the mortgage notes and the industrial
revenue bonds.
The estimated principal payments under notes and bonds payable, assuming the
reset debentures are neither called by the Company nor presented for redemption
by the holders as of the June 1, 2002 redemption date, are $20.6 million in
1998, $13.6 million in 1999, $13.3 million in 2000, $7.1 million in 2001, $4.6
million in 2002 and the balance thereafter. Interest paid by the Company was
approximately $20.3 million in 1997, $22.5 million in 1996 and $24.3 million in
1995.
Various of the Company's debt agreements and loan servicing agreements contain
covenants which, among other things, require the Company and/or Oakwood
Acceptance to maintain certain minimum financial ratios. The Company and Oakwood
Acceptance were in compliance with all such covenants at September 30, 1997.
At September 30, 1997 commercial banks, at the request of the Company, had
outstanding letters of credit of approximately $26 million in favor of various
creditors of the Company, of which approximately $24 million relates to the
Company's reinsurance business. Such letters of credit have
30
been issued to secure obligations to pay reinsurance claims and to meet
regulatory capital requirements for Blue Ridge.
Note 12--Accounts Payable and Accrued Liabilities
The components of accounts payable and accrued liabilities are as follows:
-----------------------
(in thousands) 1997 1996
-----------------------
Accounts payable .................. $ 80,834 $ 88,710
Accrued compensation .............. 20,664 46,198
Income taxes payable .............. 4,793 791
Accrued dealer volume bonus ....... 1,957 2,631
Reserve for contingent liabilities. 1,201 1,930
Other accrued liabilities ......... 12,713 17,669
-------- --------
$122,162 $157,929
======== ========
Note 13--Shareholders' Equity
The Company has adopted a Shareholder Protection Rights Plan (the "Plan") to
protect shareholders against unsolicited attempts to acquire control of the
Company that do not offer what the Company believes to be an adequate price to
all shareholders. Under the Plan, each outstanding share of the Company's common
stock has associated with it a right to purchase (each, a "Right" and,
collectively, the "Rights"), upon the occurrence of certain events, one
two-hundredth of a share of junior participating Class A preferred stock
("Preferred Stock") at an exercise price of $20. The Rights will become
exercisable only if a person or group (an "Acquiring Person"), without the
Company's consent, commences a tender or exchange offer for, or acquires 20% or
more of the voting power of, the Company.
In such event, each holder of Preferred Stock, other than the Acquiring Person,
will be entitled to acquire that number of shares of the Company's common stock
having a market value of twice the exercise price. Similarly, if, without the
Company's consent, the Company is acquired in a merger or other business
combination transaction, each holder of Preferred Stock, other than the
Acquiring Person, will be entitled to acquire voting shares of the acquiring
company having a value of twice the exercise price. The Rights may be redeemed
at a price of $.005 per Right by the Company at any time prior to any person or
group acquiring 20% or more of the Company's voting power or certain other
triggering events, and will expire on August 22, 2001.
The Company's authorized capital stock includes 500,000 shares of $100 par value
preferred stock. The preferred stock may be issued in one or more series with
such terms, preferences, limitations and relative rights as the Board of
Directors shall determine. No preferred stock has been issued.
Note 14--Stock Option and Award Plans
The Company has a Key Employee Stock Plan (the "Stock Plan") under which
3,349,428 common shares were reserved for issuance to key employees at September
30, 1997. 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's Board of Directors has approved, subject to ratification by the
Company's shareholders, the 1997 Director Stock Option Plan under which 180,000
shares of the Company's common stock were reserved for grant to non-employee
directors of the Company. The exercise price of options granted is the fair
market value of the Company's common stock on the date of grant. Options granted
under the plan become exercisable six months from the date of grant and expire
10 years from the date of grant.
The following table summarizes the changes in the number of shares under option
pursuant to the plans described above and pursuant to certain earlier plans
under which options may no longer be granted:
Weighted
average
Number exercise
of shares price
- --------------------------------------------------------------------------------
Outstanding at September 30, 1994 .. 3,267,896 $ 5.28
Granted ............................ 352,000 11.77
Exercised .......................... (329,098) 3.02
Terminated ......................... (52,024) 8.62
---------
Outstanding at September 30, 1995 .. 3,238,774 5.93
Granted ............................ 1,345,496 18.58
Exercised .......................... (1,079,434) 4.06
Terminated ......................... (80,334) 13.84
---------
Outstanding at September 30, 1996 .. 3,424,502 11.31
Granted ............................ 331,000 21.19
Exercised .......................... (633,913) 6.10
Terminated ......................... (142,006) 16.61
---------
Outstanding at September 30, 1997 .. 2,979,583 13.26
--------- ------
Exercisable at September 30, 1995 .. 1,434,744 3.95
--------- ------
Exercisable at September 30, 1996 .. 1,512,893 5.16
--------- ------
Exercisable at September 30, 1997 .. 1,323,513 7.67
========= ======
31
The following is a summary of stock options outstanding at September 30, 1997:
Options outstanding Options exercisable
- --------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Range of Number of contractual exercise Number of exercise
exercise price shares life remaining price shares price
- --------------------------------------------------------------------------------
$ 1.62-$ 3.33 328,932 2.2 $ 2.20 325,928 $ 2.18
4.05- 6.25 597,400 4.2 4.80 498,520 4.95
6.82- 11.54 121,016 6.4 10.53 98,012 10.57
12.16- 14.72 385,907 6.4 13.06 313,545 12.99
17.97- 20.38 1,413,832 8.4 18.72 28,681 18.06
21.88- 25.94 132,496 8.9 23.73 58,827 22.80
--------- ---------
All options 2,979,583 6.5 $13.26 1,323,513 $ 7.67
========= =========
The following table summarizes restricted stock issued under the Stock Plan:
Weighted
average
Number fair value
of shares per share
- --------------------------------------------------------------------------------
Fiscal 1996 ...................... 200,000 $27.13
Fiscal 1997 ...................... 43,834 $27.45
As of September 30, 1997 there were a total of 1,684,094 shares of common stock
reserved for future grants under the Company's stock option plans.
The aggregate compensation expense for stock-based compensation plans, computed
under the provisions of APB 25, was approximately $2,138,000, $3,005,000 and
$2,017,000 in 1997, 1996 and 1995, respectively. Such compensation expense
relates entirely to restricted stock awards granted under the Stock Plan (which
is being charged to income over the vesting periods of the related awards) and,
in 1996 and 1995, to stock appreciation rights.
In October 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), which permits, but does not require, the Company to
adopt 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 1997 and 1996 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) 1997 1996
- --------------------------------------------------------------------------------
Net income--as reported .................. $81,913 $68,255
Net income--pro forma .................... 79,540 66,388
Primary earnings per share--as reported .. $ 1.75 $ 1.47
Primary earnings per share--pro forma .... 1.70 1.43
Fully diluted earnings
per share--as reported ................. $ 1.75 $ 1.47
Fully diluted earnings
per share--pro forma ................... 1.70 1.43
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 1997 and 1996 of $9.32
and $8.30 per share, respectively. Such estimated fair values were computed
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants issued in 1997 and 1996, respectively: dividend
yield of .19% and .22%; expected volatility of 38.47% and 41.90%; weighted
average risk-free interest rate of 6.68% and 5.79%; and expected lives of 5
years for both fiscal 1997 and 1996.
Note 15--Employee Benefit Plans
The Company maintains an employee stock ownership plan ("ESOP") and a 401(k)
plan in which substantially all employees who have met certain age and length of
service requirements may participate. Contributions to the ESOP are determined
at the discretion of the Board of Directors; employee contributions to this plan
are not permitted. Employee contributions to the 401(k) plan are limited to a
percentage of their compensation and are matched 50% by the Company for the
first 6% contributed. Compensation cost under the 401(k) plan was approximately
$2,371,000, $1,041,000 and $837,000 in 1997, 1996 and 1995, respectively.
32
During 1995 the Company loaned approximately $2,398,000 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 as
a liability in the accompanying consolidated balance sheet. The bank loan
provides that shares are released ratably upon repayment of the principal of the
loan. Compensation cost relating to shares acquired with the proceeds of the
loan is measured by reference to the fair value of the shares committed to be
released during the period, in accordance with Statement of Position 93-6. Total
compensation cost under the ESOP was approximately $1,053,000, $997,000 and
$1,067,000 in 1997, 1996 and 1995, respectively, which, in 1995, includes
discretionary cash contributions to the ESOP unrelated to the debt service on
the bank loan.
At September 30, 1997 the ESOP held a total of 495,682 shares of the Company's
common stock having a fair value of approximately $14 million. Of the total
number of shares, 40,640 shares have been committed to be released, 101,608
shares are held in suspense and the balance, representing shares acquired using
cash contributed to the ESOP in excess of its debt service requirements and
shares acquired in prior years, have been allocated to plan participants.
Uncommitted ESOP shares are included at cost in unearned compensation in the
consolidated balance sheet.
Note 16--Contingencies
The Company is subject to legal proceedings and claims which have arisen in the
ordinary course of its business and have not been finally adjudicated. These
actions, when ultimately concluded and determined will not, in the opinion of
management, have a material effect on the results of operations or financial
condition of the Company.
Note 17--Fair Value of Financial Instruments
The Company is a party to on- and off-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 estimated net proceeds to be
received on the securitization of such loans. The Company has estimated the fair
value of loans held for investment by discounting the estimated future cash
flows relating thereto using interest rates which approximate the interest rates
charged by Oakwood Acceptance as of year end for loans of similar character and
duration. Due to their short-term nature, the fair values of trade and other
receivables approximates their carrying values.
The Company estimates the fair value of retained regular and residual interests
in REMIC securitizations based upon default, prepayment and interest rate
assumptions which management believes market participants would use for similar
instruments. However, there exists no active market for manufactured housing
residual REMIC interests or uniformly accepted valuation methodologies. Based on
current estimates, management believes that the fair value of the Company's
retained REMIC interests, as well as related loan servicing assets and guarantee
liabilities on subordinated REMIC securities sold, approximates their carrying
values.
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 reset debentures, by reference to
quoted market prices.
Off-balance sheet interest rate protection agreements at September 30, 1997 and
1996 consisted of options on forward starting interest rate swaps in the
aggregate notional amount of $185 million expiring on November 20, 1997 and $193
million expiring on October 17, 1996, respectively. These agreements are valued
at the amount payable or receivable by the Company had the contracts been
terminated at year end.
The following table sets forth the carrying amounts and estimated fair values of
the Company's financial instruments at September 30, 1997 and 1996:
33
------------------------------------------------------------------
(in thousands) 1997 1996
------------------------------------------------------------------
Estimated Carrying Estimated Carrying
fair value amount fair value amount
------------------------------------------------------------------
Assets
Cash and cash equivalents, including restricted cash
and investments ....................................... $ 45,265 $ 45,265 $ 34,972 $ 34,972
Receivables and investments
Loans held for sale ................................... 261,549 255,944 311,840 306,465
Loans held for investment
Fixed rate loans .................................... 77,304 71,736 93,434 87,526
Variable rate loans ................................. 9,478 9,478 10,977 10,977
Trade receivables ..................................... 5,418 5,418 5,771 5,771
Other receivables ..................................... 28,628 28,628 45,722 45,722
Less: reserve for uncollectible receivables ........... -- (3,076) -- (6,331)
Retained REMIC regular interests ...................... 9,724 9,724 9,724 9,724
Retained REMIC residual interests ..................... 84,228 84,228 48,971 48,971
Loan servicing assets ................................... 3,786 3,786 -- --
Liabilities
Short-term borrowings ................................... 175,800 175,800 145,506 145,506
Interest rate protection agreements ..................... 1,491 -- 1,362 --
Notes and bonds payable
Fixed rate obligations ................................ 49,597 48,505 87,691 86,252
Variable rate obligations ............................. 30,310 30,310 48,127 48,127
Guarantee liabilities on subordinated
REMIC securities sold ............................... 2,915 2,915 -- --
Note 18--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
---------------------------------------------------------------------------
1997
Net sales .................................... $177,782 $190,652 $266,015 $318,255 $952,704
==========================================================================
Gross profit ................................. $ 53,970 $ 61,614 $ 84,499 $101,221 $301,304
==========================================================================
Net income $ 15,193 $ 17,714 $ 22,497 $ 26,509 $ 81,913
==========================================================================
Earnings per share
Primary .................................... $ .33 $ .38 $ .48 $ .56 $ 1.75
==========================================================================
Fully diluted .............................. $ .33 $ .38 $ .48 $ .56 $ 1.75
==========================================================================
1996
Net sales .................................... $176,269 $191,223 $239,305 $255,282 $862,079
==========================================================================
Gross profit ................................. $ 46,046 $ 54,379 $ 73,552 $ 78,799 $252,776
==========================================================================
Net income ................................... $ 13,877 $ 16,152 $ 17,869 $ 20,357 $ 68,255
==========================================================================
Earnings per share
Primary .................................... $ .30 $ .35 $ .38 $ .44 $ 1.47
==========================================================================
Fully diluted .............................. $ .30 $ .35 $ .38 $ .44 $ 1.47
===========================================================================
34
Note 19--Business Segment Information
The Company operates in two principal businesses. The manufactured housing
segment includes the Company's retail and manufacturing operations. 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 substantial majority of its homes to the Company's retail operations,
with a lesser portion distributed through exclusive independent dealers.
The financial services 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 segment also
reinsures credit life insurance risk on policies sold to retail customers, and
beginning June 1, 1997 reinsures insurance risk on property and casualty
insurance and extended service contracts sold to retail customers.
Segment operating income is income before general corporate expenses,
non-financial 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) 1997 1996 1995
--------------------------------------------
Revenues
Manufactured housing ....................................................... $ 967,000 $881,218 $758,370
Financial services ......................................................... 102,778 92,346 61,995
Investment income .......................................................... 273 358 1,047
--------------------------------------------
$1,070,051 $973,922 $821,412
============================================
Operating income
Manufactured housing(1) .................................................... $ 95,309 $ 82,181 $ 60,806
Financial services 57,179 52,387 24,449
--------------------------------------------
Combined 152,488 134,568 85,255
Non-financial interest expense ............................................. (3,274) (2,221) (2,259)
Investment income .......................................................... 273 358 1,047
General corporate expenses(2) .............................................. (16,295) (22,025) (11,046)
--------------------------------------------
Income before income taxes ............................................... $ 133,192 $110,680 $ 72,997
============================================
Identifiable assets
Manufactured housing ....................................................... $ 363,206 $307,771 $286,147
Financial services ......................................................... 486,833 490,472 477,262
General corporate .......................................................... 54,467 43,734 19,231
$ 904,506 $841,977 $782,640
============================================
Depreciation and amortization
Manufactured housing ....................................................... $ 8,230 $ 7,302 $ 5,683
Financial services ......................................................... 1,241 565 765
General corporate .......................................................... 4,854 2,594 1,830
--------------------------------------------
$ 14,325 $ 10,461 $ 8,278
=============================================
Capital expenditures
Manufactured housing ....................................................... $ 31,731 $ 24,290 $ 25,276
Financial services ......................................................... 1,925 1,247 956
General corporate .......................................................... 4,746 15,766 15,638
--------------------------------------------
$ 38,402 $ 41,303 $ 41,870
=============================================
(1) Includes one-time charges of approximately $663,000 in 1995 relating to the
sale of a manufactured housing facility
(2) Includes one-time charges of approximately $537,000 in 1995 relating to
downsizing corporate overhead staff at Golden West
35
Report of Independent Accountants
To the Board of Directors and Shareholders of
Oakwood Homes Corporation
[PRICE WATERHOUSE LLP LOGO]
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
Oakwood Homes Corporation and its subsidiaries at September 30, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Winston-Salem, North Carolina
November 3, 1997
Oakwood Homes Corporation and Subsidiaries
Common Stock Prices
-----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------
Quarter High Low High Low High Low High Low High Low
-----------------------------------------------------------------------------------
First ......... 297/8 21 21 165/8 131/4 103/8 141/4 111/4 105/8 61/2
Second ........ 23 173/8 253/4 181/2 131/2 107/8 147/8 101/8 113/4 83/4
Third ......... 243/4 163/4 25 20 131/2 115/8 117/8 95/8 105/8 85/8
Fourth ........ 30 237/16 28 203/8 181/8 127/8 141/2 111/8 13 103/8
Dividend Information
The Company declared a cash dividend of $.01 per common share during each of the
eight quarters in the period ended September 30, 1997.
36
Shareholder Information Guide
Directors Executive Officers Mailing Address
Nicholas J. St. George Nicholas J. St. George Oakwood Homes Corporation
Elected 1972 Chairman, President and Post Office Box 27081
Chairman, President and Chief Executive Officer Greensboro, North Carolina 27425-7081
Chief Executive Officer (336) 664-2400
C. Michael Kilbourne
C. Michael Kilbourne Executive Vice President and Legal Counsel
Elected 1995 Chief Financial Officer Kennedy Covington Lobdell &
Executive Vice President and Hickman, L.L.P.
Chief Financial Officer William G. Edwards Charlotte, North Carolina
Executive Vice President
Clarence W. Walker* Housing Operations Independent Accountants
Elected 1971 Price Waterhouse LLP
Partner, Kennedy Covington Douglas R. Muir Winston-Salem, North Carolina
Lobdell & Hickman, L.L.P. Senior Vice President,
Attorneys at Law Secretary and Treasurer Transfer Agent and Registrar
First Union National Bank of North Carolina
Kermit G. Phillips, II* Jeffrey D. Mick Shareholder Services Group
Elected 1979 Senior Vice President 1525 West W.T. Harris Boulevard
Chairman, Phillips Management Strategic Services NC-1153
Group, Inc. (Real Estate Charlotte, North Carolina 28288
Development and Management) Myles E. Standish (800) 829-8432
Senior Vice President and
Dennis I. Meyer General Counsel Securities Exchange Listing
Elected 1983 New York Stock Exchange
Partner, Baker & McKenzie, Lisa K. Carter Ticker Symbol--OH
Attorneys at Law Vice President and Controller
Shareholders
H. Michael Weaver* J. Michael Stidham At December 12, 1997, the Company
Elected 1991 Executive Vice President had an estimated 23,000 shareholders,
Private Investor; Retail Operations including beneficial owners holding shares
Owner, Weaver Investment Company in nominee and "street" name.
(Real Estate Investments) Larry M. Walker
Executive Vice President Cash Dividends
Sabin C. Streeter* Manufacturing Operations Cash dividends on Oakwood Common
Elected 1993 Stock have been paid for 22 consecutive
Private Investor; Robert A. Smith years. Cash dividends are ordinarily paid on
Executive-In-Residence, Executive Vice President or about the end of November, February,
Columbia Business School Consumer Finance Operations May and August.
Francis T. Vincent, Jr.+ Shareholder Inquiries
Elected 1993 Inquiries by shareholders and securities
Private Investor analysts should be directed to
Douglas R. Muir, Senior Vice President
Roger W. Schipke (336) 664-2360
Elected 1996
Private Investor Annual Meeting
The 1998 annual meeting of shareholders
Lanty L. Smith will be held in Greensboro, North Carolina at
Elected 1997 2 p.m. on Wednesday, February 11, 1998.
Chairman, The Greenwood Group, Inc. and
Precision Fabrics Group, Inc. Report on Form 10-K
The Company will provide without charge
* Member of the Audit Committee a copy of its annual report on Form 10-K
+ Member of the Compensation as filed with the Securities and Exchange
Committee Commission upon receipt of a written
request. This request should be addressed
to the Corporate Secretary.
Website
www.oakwoodhomes.com
Designed by Curran & Connors, Inc.
(blank page appears here as the inside back cover)
Oakwood Homes Logo Appears Here
Oakwood
Homes
Corporation
P.O. BOX 27081
Greensboro, NC 27425-7081
336-664-2400
(PHOTO OF JOCKEYS ON HORSES)