FINANCIAL HIGHLIGHTS
Year ended September 30,
---------------------------------------------------------------------------
(in thousands, except per share data) 1998(1) 1997 1996 1995 1994 1993
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Net sales $1,404,432 $ 952,704 $ 862,079 $ 741,521 $ 595,127 $ 422,103
Total revenues $1,482,553 $1,070,051 $ 973,922 $ 821,412 $ 664,610 $ 483,736
Net income $ 55,353 $ 81,913 $ 68,255 $ 45,318 $ 35,655 $ 25,715
Earnings per common share
Basic $ 1.20 $ 1.79 $ 1.53 $ 1.03 $ 0.82 $ 0.65
Diluted $ 1.17 $ 1.75 $ 1.47 $ 0.99 $ 0.78 $ 0.59
Total assets $1,283,376 $ 904,506 $ 841,977 $ 782,640 $ 590,397 $ 596,950
Notes and bonds payable $ 61,875 $ 78,815 $ 134,379 $ 198,812 $ 207,990 $ 264,225
Cash dividends per common share $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04
(1) Includes special charges of approximately $51.3 million, or $.67 per share,
after tax. See Note 4 to the consolidated financial statements.
(Bar chart appears here. See table below for plot points.)
NET SALES
(in millions)
'93 '94 '95 '96 '97 '98
422 595 742 862 953 1,404
5 year compound growth rate: 27%
(Bar chart appears here. See table below for plot points.)
NET INCOME
(in millions)
'93 '94 '95 '96 '97 '98
26 36 45 68 82 87
5 year compound growth rate, excluding special charges: 28%
(Bar chart appears here. See table below for plot points.)
DILUTED EPS
'93 '94 '95 '96 '97 '98
0.59 0.78 0.99 1.47 1.75 1.84
5 year compound growth rate, excluding special charges: 26%
(Bar chart appears here. See table below for plot points.)
SHAREHOLDERS' EQUITY
(in millions)
'93 '94 '95 '96 '97 '98
240 276 318 392 484 548
5 year compound growth rate: 18%
(Bar chart appears here. See table below for plot points.)
OPERATING CASH FLOWS
(in millions)
'93 '94 '95 '96 '97 '98
33 43 49 69 77 134
5 year compound growth rate: 32%
(Bar chart appears here. See table below for plot points.)
NEW HOMES SOLD AT RETAIL
(in thousands)
'93 '94 '95 '96 '97 '98
Total 9.8 13.0 16.7 20.1 22.1 26.1
Single-section 7.3 9.7 12.1 13.6 11.7 12.4
Multi-section 2.5 3.3 4.6 6.5 10.4 13.7
5 year compound growth rate: 22%
(Bar chart appears here. See table below for plot points.)
NUMBER OF SALES CENTERS
'93 '94 '95 '96 '97 '98
121 152 198 255 300 359
(Line chart appears here. See table below for plot points.)
CUMULATIVE GROWTH
'93 '94 '95 '96 '97 '98
Oakwood retail home sales 0 34 71 106 126 167
Industry shipments 0 19 34 48 45 49
1998 ANNUAL REPORT 1
TO OUR SHAREHOLDERS
As the financial highlights on the preceding page reveal, 1998 was a bittersweet
year for Oakwood Homes. On a positive note, it was a year of significant
achievements in our retailing and manufacturing operations as we expanded our
capabilities dramatically. The year witnessed continued growth in our captive
retailing network as we extended our influence with consumers as the nation's
premier housing retailer. In addition, we comp leted our third major business
combination, a landmark $100 million acquisition of Schult Homes Corporation,
the oldest name in manufactured housing.
(Bar chart appears here. See table below for plot points.)
NET SALES
(in millions)
'93 '94 '95 '96 '97 '98
422 595 742 862 953 1,404
5 year compound growth rate: 27%
(Photo appears here with the following caption)
Nicholas J. St. George
Chairman and Chief Executive Officer
We also faced and met a key challenge in our financial services operation,
which was affected by special asset valuation charges against income related
primarily to loan securitizations. These special non-cash charges obscured the
real progress taking place elsewhere in the Company.
Financial Overview of 1998
Total revenues, which exceeded one billion dollars for the first time last year,
jumped 39% to $1.483 billion in 1998. This growth was propelled by both the
internal expansion of our retail network and the contribution of Schult Homes
following its acquisition on April 1.
Increased distribution through select independent dealers--largely reflecting
standing relationships with our new Schult Homes retailers--helped push total
sales up 47% to $1.404 billion. The other major component of revenues, financial
services income, declined 34% to $67.4 million due to the impact of special
charges totaling $51.3 million or $.67 per share, after tax. Before these
non-cash charges, financial services income rose 15% to a record $118.6 million
in 1998.
Net income totaled $55.4 million or $1.17 per diluted share for 1998, down
32% from earnings of $81.9 million or $1.75 per diluted share in 1997. Excluding
the special charges, net income rose to $87.2 million or $1.84 per diluted
share.
Finally, business generated cash flow was up sharply in 1998, totaling
approximately
1998 ANNUAL REPORT 2
$134.2 million compared to $77.1 million in fiscal 1997.
Special Charges
We were disappointed to see Oakwood's consistent earnings growth interrupted in
1998. Oakwood has built a strong record, virtually unrivaled in our industry,
based on a strategy of complete vertical integration of all the steps necessary
to produce and deliver a quality product for our customers. For a decade, the
financial services element of this vertically integrated business model
contributed to steady profit growth for the Company and, more important,
provided a critical link in the overall selling process that synergistically
expanded our opportunities in retailing and manufacturing. However, the rapidly
changing economic and business environment required that we reassess the risks
of the consumer finance business.
The consumer finance business obtains substantially all its long-term
financing by securitizing the loans it originates. When Oakwood securitizes its
loans, it conveys ownership of the loans to a trust, which in turn issues debt
instruments secured by the loans. All of the cash generated from the loans is
the property of the trust, which uses that cash to pay principal and interest on
the debt, to pay Oakwood a fee to service the loans and, to the extent there is
cash remaining in the trust after absorbing credit losses, the trust pays this
residual cash flow to Oakwood.
"Total revenues, which exceeded one billion dollars for the first time last
year, jumped 39% to $1.483 billion in 1998."
Oakwood is required to estimate the amount and timing of this residual cash
flow when it securitizes loans, and to record an asset for the present value of
that estimate. Estimating residual cash flow necessarily involves making
assumptions about future events over the life of the transaction, which
typically is many years. Two important variables in the estimation process are
the amount and timing of credit losses and the rate at which customers
voluntarily prepay their loans. While these estimates are based, in part, on
historical patterns, changes in economic conditions, interest rates and the
competitive environment will inevitably cause the amount of residual cash flow
actually received to differ from amounts estimated.
(Bar chart appears here. See table below for plot points.)
OPERATING CASH FLOWS
(in millions)
'93 '94 '95 '96 '97 '98
33 43 49 69 77 134
5 year compound growth rate: 32%
1998 ANNUAL REPORT 3
This year we and the mortgage and consumer finance industry experienced
higher voluntary loan prepayments and increased credit losses. The reasons for
the consumer's recent rush to refinance existing loans or purchase a "trade up"
home are apparent: interest rates are at historic lows and competition among
manufactured housing lenders for loan origination business is intense.
Consequentially, we increased our estimates of future credit losses and
prepayments, which resulted in special charges to write down residual interests
in certain loan securitizations. Notwithstanding the effects of special charges
on our results of operations, cash flow from securitized loans rose dramatically
in 1998. Total securitized cash flow, including servicing fees, rose 31% from
approximately $39 million in 1997 to over $51 million in 1998.
Consumer Finance Business Reaffirmed
We have long believed in the power of vertical integration, including the
consumer finance elements of our business. Nevertheless, the write-downs
compelled us to undertake, with ~the assistance of outside consultants, a
detailed study of our business model to look specifically at the operations of
our financial services subsidiary. We approached this review with no
predispositions, only the desire to reduce volatility in our financial services
earnings and to implement business strategies that provide the greatest benefit
for our shareholders. Through this introspective process, we became even more
convinced that our fundamental strategy of vertical integration represents the
best business model for the manufactured housing industry. It is the only model
that positions us to best compete in any business
(Bar chart appears here. See table below for plot points.)
LOAN ORIGINATIONS
(in millions)
'93 '94 '95 '96 '97 '98
212 344 487 721 884 1,236
5 year compound growth rate: 42%
(Photo appears here with the following caption.)
Fine architectural details, including a fireplace, skylights and arches,
heighten Oakwood's value in the minds of customers.
4 1998 ANNUAL REPORT
"Our review and analysis reaffirmed that the availability and control of
financing are key aspects of completing the sale of our products."
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environment. As the final link in the value chain, financial services remains a
key element in our growth strategy.
Specifically, our review and analysis reaffirmed that the availability and
control of financing are key aspects of completing the sale of our products,
clearly providing important support for our other integrated operations, as well
as competitive advantages. We also gain important access to capital, and, as a
result, avoid having to rely on outside finance companies who can exit the
business at any time, a trend we witnessed in the 1980s and that is beginning to
~occur again today. In addition, this business historically has been an
important contributor to our total profitability, and we expect it to be an
important contributor going forward.
Action Steps
We also recognized that Oakwood must work to reduce financial earnings
volatility that has recently plagued the consumer finance industry. To this end,
we have refined our
(Photo appears here with the following caption.)
With its emphasis on higher price point multi-section homes, including modular
homes and even two-story HUD code homes as seen above, Schult has expanded the
Company's product offerings.
(Bar chart appears here. See table below for plot points.)
SERVICING PORTFOLIO
(in millions)
'93 '94 '95 '96 '97 '98
538 843 1,201 1,745 2,547 3,573
1998 ANNUAL REPORT 5
"1998 was truly a banner year for Oakwood as we continued to set the standard
for performance in the manufactured housing industry."
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valuation and accounting assumptions to reflect today's rapidly changing
environment. Although we remain cautious regarding our expectations that current
market conditions will improve in the near future, we expect recognition of
lower gains ~at the time of the sale of loans and lower initial yields recorded
on residual interests. While this may shift the timing of income recognition to
future years when we have actual experience in loan performance, we believe this
approach will minimize the likelihood of future impairment of residual assets
and resulting special charges.
(Bar chart appears here. See table below for plot points.)
CUMULATIVE GROWTH
'93 '94 '95 '96 '97 '98
Oakwood retail home sales 0 34 71 106 126 167
Industry shipments 0 19 34 48 45 49
(Photo appears here with the following caption.)
Oakwood Homes is best positioned to fulfill customers' expectations for quality
and service, because we control all aspects of the manufacturing, retail and
finance processes.
6 1998 ANNUAL REPORT
(Photo appears here with the following caption.)
Oakwood's homes are manufactured with amenities once thought possible only in
site-built homes.
Retail and Manufacturing Operations Post Strong Results
In our retail and manufacturing operations, 1998 was truly a banner year for
Oakwood as we continued to set the standard for performance in the manufactured
housing industry. This ongoing drive for excellence can be seen in the strength
of our network of sales centers, which continues to rank as the largest and most
powerful retailing force in the industry. With steady sales center expansion
during 1998, combined with strong same-store sales, Oakwood's retailing system
achieved continued market share gains. In manufacturing, we solidified our
position as the nation's third largest manufactured homebuilder, reflecting the
addition of 14 Schult Homes manufacturing facilities during the year and
continued growth within our existing plants. Never have our product lines been
more diverse, our market reach greater, and our potential for growth more
attractive.
Outstanding performances in retail and manufacturing produced significant
gross profit gains. Gross margin for 1998, excluding the effects of the Schult
acquisition, rose to 32.8% from 31.6% last year, and relentless execution of our
vertical integration strategy has widened our gross margin from 24.9% just five
years ago.
Record Retail Growth
The growth of our industry over the past several years reflects a number of
factors that will continue to benefit manufactured housing. Strong demographic
trends, along with the increasing affordability and value offered by
manufactured housing, are driving growth. Manufactured housing continues to gain
ground
(Bar chart appears here. See table below for plot points.)
GROWTH PROFIT MARGIN
'93 '94 '95 '96 '97 '98
24.9 25.8 26.7 29.3 31.6 30.7
1998 ANNUAL REPORT 7
"Manufactured housing continues to gain ground on site-built homes in terms of
features, styling, quality, and consumer appeal."
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on site-built homes in terms of features, styling, quality, and consumer appeal.
Against this favorable backdrop, the power of Oakwood's vertically
integrated model is readily apparent. Our 167% growth in retail unit sales over
the past five years is triple the growth rate of the industry. Our market share
gains reflect, more than any other aspect of Oakwood's integration strategy, our
efforts to expand and control our retail distribution. Such control allows us to
respond more quickly to the needs of our customers and remain attuned to the
kinds of homes and features desired. Captive retail distribution also allows us
to avoid reliance on thinly capitalized retailers who may not survive the next
economic downturn, while insulating us from much of the margin pressure to which
pure manufacturers are exposed.
The retail environment remains highly fragmented. While Oakwood is the
largest manufactured housing retailer in America, we control only about 8% of
retail distribution. Much of the remaining 92% is controlled by small
independent retailers. In this highly competitive market, we expect to achieve
continued gains in market share and to be opportunistic in consolidating
fragmented distribution systems. However, we will also remain disciplined, and
will only acquire retailers in the context of our long-term strategic plan and
only at reasonable prices.
Extending Our Lead
The growth of our retail operations in 1998 was excellent. Oakwood sold
more than 26,000 homes at retail, up 18% over the 22,000 homes sold in the
previous year. On the basis of floors sold, which equalizes our shipment data
for the significant shift in sales mix toward multi-section homes that began in
1997, Oakwood's retail sales units increased an even faster rate of 22%.
Several factors have enabled us to extend our lead in home retailing. We
have achieved strong same-store sales growth, reflecting both the ongoing
strength of end retail demand and the favorable impact of our new products.
Oakwood's same-store sales dollars increased 13% in 1998 as the Company
introduced four more editions of its Street of Dreams series, including the
Family Dream Home(TM),
(Bar chart appears here. See table below for plot points.)
NEW HOMES SOLD AT RETAIL
(in thousands)
'93 '94 '95 '96 '97 '98
Multi-section 9.8 13.0 16.7 20.1 22.1 26.1
Single-section PLEASE FILL IN
5 year compound growth rate: 22%
8 1998 ANNUAL REPORT
(Photo appears here with the following caption.)
Increasing popularity is fueling demand for Oakwood's multi-section homes. These
higher end homes accounted for 52% of Oakwood's retail home sales in 1998, up
from 47% in 1997 and 32% in 1996.
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a four bedroom home for growing families, and the Home Theater Dream Home(TM),
featuring a large screen television and home theater sound system. Each new home
targets specific market segments and packs specific features for increased
differentiation in the marketplace. The Street of Dreams program, the first of
its kind to be backed by a national ~advertising campaign, remains a key part of
our plan to strengthen the Oakwood brand image and build greater brand
awareness. Already, market research indicates that Oakwood enjoys higher name
recall than any other home brand.
We have continued to expand our retail network at a rapid pace, increasing
the number of locations by 59 in 1998
(Bar chart appears here. See table below for plot points.)
MULTI-SECTION SALES
(% of new retail home sales)
'93 '94 '95 '96 '97 '98
25 25 28 32 47 52
1998 ANNUAL REPORT 9
"Our market share gains reflect, more than any other aspect of Oakwood's
integration strategy, our efforts to expand and control our retail
distribution."
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and ending the year with a total of 359 retail centers. In 1999, our goal is to
add 60 to 65 new retail centers. Our expansion, almost threefold since 1993, has
focused on adding density to our existing markets, primarily in the Deep South
and in the Pacific Northwest. With our recent acquisition of Schult Homes, we
are also moving into Midwestern markets to leverage the manufacturing capacity
we gained through this acquisition.
Ongoing Gains In
Manufacturing
The final core element of our vertical integration strategy involves the control
of manufacturing--
(Bar chart appears here. See table below for plot points.)
NUMBER OF SALES CENTERS
'93 '94 '95 '96 '97 '98
121 152 198 255 300 359
(Photo appears here with the following caption.)
Advanced manufacturing technology and capabilities have expanded the types of
homes that can be built in a factory, allowing Oakwood to target more
traditional, site-built housing consumers.
10 1998 ANNUAL REPORT
we want to build in our own factories substantially all the homes we sell at
retail. Similar to our control at retail, this command allows us to respond
quickly to changing consumer preferences and ensure consistent product quality
and a high level of after-sale customer service. Moreover, because we control
the ultimate distribution of our homes, we can also operate our manufacturing
plants at higher production levels year round to minimize the impact of business
seasonality. And, by linking our manufacturing capability to retail
distribution, we have achieved one of the shortest order/deliver lead times in
the industry, a huge competitive advantage over non-integrated competitors.
We have purposefully matched our manufacturing expansion to the needs of
our retail system. Since 1994, the Company has accelerated its growth through
three strategic acquisitions that added manufacturing clout in the Pacific
Northwest, the Deep South and the Midwest. Our acquisition of Schult Homes
typifies this strategic advantage, combining one of the strongest, fastest
growing companies in the industry with the oldest name in manufactured housing.
While extending our product line to include additional price points, more
high-end multi-section homes, and entry into modular housing, Schult
complemented our own retail system with over 600 loyal independent dealers. With
the opening of a new facility in Killeen, Texas in September 1998, Oakwood now
has a network of 32 manufacturing plants that will serve as the foundation for
retail expansion in target areas nationwide.
These strategic capacity additions have also allowed Oakwood to greatly
increase the percentage of homes built and sold through its retail system. In
1998, about 96% of the homes we sold at retail were built in our own factories.
Capacity increases have enabled us to respond meaningfully and swiftly to the
affluent customer's increasing interest in multi-section housing. Multi-section
homes, which accounted for just 25% of our retail sales in 1993, jumped to 47%
last year and increased
(Bar chart appears here. See table below for plot points.)
FLOORS PRODUCED
(in thousands)
'93 '94 '95 '96 '97 '98
21.7 27.6 31.1 35.0 40.4 56.2
5 year compound growth rate: 21%
"Since 1994, the Company has accelerated its growth through three strategic
acquisitions which added manufacturing clout in the Pacific Northwest, the Deep
South and the Midwest."
1998 ANNUAL REPORT 11
again to 52% of retail shipments in 1998, with our Street of Dreams program
contributing to this beneficial shift in sales mix.
Maintaining Our Focus
Clearly, we are maintaining a sharp focus on the business drivers that will fuel
Oakwood's growth over the long-term and enable us to achieve the level of
performance that you, our shareholders, have come to expect. These include our
core competencies in retailing and manufacturing, arguably the strongest in ~our
industry, and the way we integrate and leverage these skills to expand market
share, increase sales and create profit opportunities that surpass those of our
competitors.
We faced difficult economic conditions in 1998 and emerged stronger and
smarter for the experience. Our strategic foundation is firmly grounded. We
remain driven to meet and surpass the competition in every step of the
manufacturing and retailing cycle. This Oakwood ~heritage, to be the very best,
continues to guide us as we work to build your trust and confidence in our
future performance and prospects. Thank you for your continued interest and
loyalty.
Sincerely yours,
/s/ N.J. St. George
Nicholas J. St. George
Chairman and
Chief Executive Officer
(Photo appears here with the following caption.)
Directors: (left to right, standing) Clarence W. Walker, Sabin C. Streeter,
Dennis I. Meyer, Kermit G. Phillips, II, William G. Edwards, Lanty L. Smith,
Roger W. Schipke; (seated) Francis T. Vincent, Jr., Nicholas J. St. George;
(not pictured H. Michael Weaver).
12 1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Oakwood Homes Corporation
and Subsidiaries
RESULTS OF OPERATIONS
Fiscal 1998 represented the Company's twelfth consecutive year of record sales
and revenues. Total sales increased 47% to $1.4 billion from $953 million last
year, following an 11% increase in 1997 from the $862 million reported in 1996.
Total revenues rose 39% to $1.5 billion from $1.1 billion last year, compared to
$974 million reported for 1996.
Industry shipments grew in 1998 after a decline for the first time in five years
during 1997. According to industry sources, shipments of manufactured homes were
up approximately 5% for the first nine months of calendar 1998, following a 3%
decrease in calendar 1997. Oakwood's growth continued to far surpass the
industry, as new retail unit sales grew by 18% in fiscal 1998 and 10% in fiscal
1997.
The following table summarizes certain key sales statistics for each of the last
three fiscal years:
1998 1997 1996
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Retail sales (in millions) ............ $1,140.0 $ 858.4 $ 703.2
Other sales (in millions) ............. $ 264.4 $ 94.3 $ 158.9
Total sales (in millions) ............. $1,404.4 $ 952.7 $ 862.1
Gross profit %-
integrated operations .............. 33.7% 33.0% 31.8%
Gross profit %-
wholesale operations ............... 17.7% 19.0% 18.0%
New single-section homes
sold-retail ....................... 12,390 11,670 13,639
New multi-section homes
sold-retail ....................... 13,669 10,418
6,488
Used homes sold-retail ................ 2,349 2,155 1,908
New single-section homes
sold-wholesale .................... 1,638 539 1,334
New multi-section homes
sold-wholesale..................... 6,145 2,508 3,890
Average new single-section
sales price-retail ................ $ 31,400 $29,200 $27,700
Average new multi-section
sales price-retail ................ $ 53,300 $47,900 $47,900
Average new single-section
sales price-wholesale ............. $ 20,900 $15,500 $14,200
Average new multi-section
sales price-wholesale ............. $ 37,000 $31,900 $29,800
Weighted average retail
sales centers open during the year 330 278 227
Average dollar sales per
sales center (in millions) ........ $ 3.5 $ 3.1 $ 3.1
1998 COMPARED TO 1997
NET SALES
Retail sales dollar volume increased 33%, reflecting an 18% increase in new unit
volume and increases of 8% and 11% in the average new unit sales prices of
single-section and multi-section homes, respectively. Average retail sales
prices rose due to price increases and a shift in product mix toward higher
price points. Single-section unit volume increased 6%, while multi-section unit
volume rose 31% from 1997. The Company believes the multi-section performance
reflects the addition of new homes to the Company's product line in response to
continuing consumer preference for multi-section homes.
During 1998 the Company opened or acquired 62 new sales centers compared to 49
sales centers during 1997. The Company also closed three underperforming sales
centers during the year compared to four in 1997. Total new retail sales dollars
at sales centers open more than one year increased 13% during 1998.
Other sales dollar volume, which consists principally of wholesale sales to
independent dealers by the Company's Destiny, Golden West and Schult
subsidiaries, increased 180%, due to an increase in wholesale unit volume
related to the acquisition of Schult on April 1, 1998 in a transaction accounted
for as a purchase. Schult sold 5,386 units, representing $185.9 million of
sales, to independent dealers subsequent to the acquisition. Excluding the
effects of the Schult acquisition, wholesale sales declined 17%, reflecting the
Company's strategy of changing the distribution of products produced by Golden
West and Destiny from non-exclusive independent dealers to Company-owned retail
sales centers. During 1998, 79% of Golden West's and Destiny's shipments were to
Oakwood sales centers, compared to 68% in 1997. The wholesale sales increase
also reflects increases in the average wholesale sales prices of single-section
homes and multi-section homes sold by Destiny and Golden West of 2% and 6%,
respectively. Schult's higher average price points caused the overall average
wholesale selling prices of single-section and multi-section homes to rise 35%
and 16%, respectively.
GROSS PROFIT
Gross profit margin--integrated operations reflects gross profit earned on all
sales at retail as well as the manufacturing gross profit on retail sales of
units manufactured by the Company.Gross profit margin--integrated operations
increased to 33.7 % in 1998 from 33.0 % in 1997. Approximately 96% of new homes
sold at retail were produced in Company-owned manufacturing plants in both 1998
and 1997.
Wholesale gross profit margins decreased as a result of the acquisition of
Schult, whose gross profit margins currently are lower than those of the
Company's other wholesale sales. The combined wholesale gross profit margin of
Golden West and Destiny increased over last year, principally due to improved
efficiencies.
FINANCIAL SERVICES INCOME
Financial services income for 1998 declined to $67.4 million from $1 million in
1 principally due to special charges of $51.3 million (approximately $31.8
million after tax, or $.67 per share), relating primarily to valuation
adjustments of certain retained interests in REMIC securitizations. Interest
income earned on loans held for investment and on loans held for sale prior to
securitization increased from $29.4 million during 1997 to $30.9 million in
1998. The increase reflects higher average outstanding balances of loans held
for sale prior to securitization due to increased origination volume.
1998 ANNUAL REPORT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (cont.)
Oakwood Homes Corporation
and Subsidiaries
This increase was partially offset by lower interest income on loans held for
investment, the principal balance of which is declining as these loans are
liquidated. Loan servicing fees increased from $21.5 million during 1997 to
$27.7 million this year, reflecting the increased size of the Company's
securitized loan servicing portfolio.
The Company finances its consumer lending activities primarily by securitizing
the loans it originates using Real Estate Mortgage Investment Conduits
("REMICs"), and accounts for loan securitizations under Statement of Financial
Accounting Standards No. 125, "Accounting for Transfer and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FAS 125"). Under FAS 125
the Company allocates the sum of its basis in the loans conveyed to each REMIC
and the costs of forming the REMIC among the REMIC interests retained and the
REMIC interests sold to investors based upon the estimated fair values of such
interests. The Company's 50% owned consumer finance joint venture, Deutsche
Financial Capital ("DFC," an equity method investee), also has securitized its
separate loan originations and also applies the provisions of FAS 125.
REMIC interests retained by the Company include servicing assets and REMIC
residual interests. The Company estimates the fair value of retained REMIC
residual interests based, in part, upon default and prepayment assumptions which
management believes market participants would use for similar instruments. The
actual rate of voluntary prepayments and the amount and timing of credit losses
affect the Company's yield on retained REMIC residual interests and the fair
value of such interests in periods subsequent to the securitization; the actual
rate of voluntary prepayments and credit losses typically varies over the life
of each transaction and from transaction to transaction. If over time the
Company's actual experience is more favorable than that assumed, the Company's
yield on its REMIC residual interests will be enhanced. Similarly, if over time
the Company's actual experience is less favorable than that assumed, such yield
will be reduced or impairment of the residuals may result.
During 1998 the financial markets experienced a decline in interest rates and
continued increases in consumer bankruptcies. As a result, mortgage and consumer
finance businesses have suffered increased prepayments and credit losses. The
Company's loan portfolios were also impacted by these market factors. For the
year ended September 30, 1998, total credit losses on loans originated by the
Company, including losses relating to assets securitized by the Company, loans
held for investment, loans held for sale an loans sold with full or partial
recourse, amounted to approximately 1.52% of the average principal balance of
the related loans, compared to approximately 1.30% one year ago. Because losses
on repossessions are reflected in the loss ratio principally in the period
during which the repossessed property is disposed of, fluctuations in the number
of repossessed properties disposed of from period to period may cause variations
in the charge-off ratio.
At September 30, 1998 the delinquency rate on Company originated loans was 4.0
%, compared to 2.6% at September 30, 1997. Increased delinquency rates
ultimately may result in increased repossessions and foreclosures and an
increase in credit losses.
During 1998 the Company experienced a rise in the rate of voluntary prepayments
of loans in a number of its securitized loan pools. This higher rate of
voluntary prepayments, together with increased credit losses with respect to
certain pools of securitized loans, adversely affected the Company's ability to
recover the carrying value of its residual interests in such securitizations. As
a result, the Company recognized an indicated impairment of the Company's
investments in certain securitization residuals in the second and third quarters
totaling approximately $39.5 million.
In late 1996 the Company and an unrelated partner formed Deutsche Financial
Capital ("DFC"), a joint venture engaged in providing consumer financing to
customers of independent retailers of manufactured housing. The Company and its
partner each owned 50% of DFC. During 1998, because of intensified competitive
conditions in the manufactured housing lending industry, the Company agreed with
its joint venture partner to cease the Company's participation in DFC. In the
third quarter the Company recorded a special charge of approximately $4.3
million to reduce the carrying value of its investment in and advances to DFC
to their estimated net realizable values. Subsequent to September 30, 1998, the
Company and its joint venture partner each purchased from DFC approximately one
half of DFC's warehouse of unsecuritized loans, which enabled DFC to retire the
indebtedness incurred to finance the warehouse. As a result, DFC has
substantially been liquidated.
DFC had securitized approximately $390 million of loans originated since its
inception. Credit losses on these loans have been greater than those expected by
the Company or DFC. Because of higher credit losses, the Company increased its
credit loss assumptions with respect to those transactions, which resulted in an
indicated impairment of the residual interests. Accordingly, in the third
quarter, the Company recorded a special charge of approximately $7.5 million to
reduce the carrying value of those investments.
REMIC residual income decreased from $19.4 million in 1997 to $10.3 million in
1998, reflecting a decline in the average balance of residual interests
resulting from the writedowns of those investments during the year and, to a
lesser extent, lower yields on those investments arising from higher credit
losses.
Financial services income for 1998 and 1997 includes gains of approximately
$20.1 million, or $.26 per share, after tax, and $19.3 million, or $.25 per
share, after tax, respectively, from the sale of asset-backed securities.
Financial services income for 1998 also includes $34.0 million in insurance
revenues from the Company's captive reinsurance business which began operations
on June 1, 1997. This
14 1998 ANNUAL REPORT
Oakwood Homes Corporation
and Subsidiaries
subsidiary enables the Company to participate more fully in what management
believes to be the profitable income streams associated with the property and
casualty insurance and service contract business than was possible under the
commission-based insurance agency arrangement which preceded its formation. As
an insurance underwriter, the Company recognizes insurance premium revenues over
the life of the related policies as a component of financial services income,
with the associated claims expenses reflected in financial services operating
expenses. Previously, insurance commission revenue was reported upon the sale of
the policies by Oakwood's retail operations, and was included in other income.
Due to this fundamental change in the Company's business, earnings for insurance
operations are now spread over the lives of the policies rather than being
recognized in full when the policies were sold. Because reinsurance claims costs
are recorded as insured events occur, reinsurance underwriting risk may increase
the volatility of the Company's earnings, particularly with respect to property
and casualty reinsurance. The Company has purchased catastrophe reinsurance to
reduce its underwriting exposure to natural disasters. Prior to June 1, 1997,
insurance revenues related to the Company's credit life insurance underwriting
business which the Company has operated for many years and which was combined
with the property and casualty reinsurance subsidiary on October 1, 1997.
OTHER INCOME
The majority of the 26% decrease in other income reflects decreased insurance
commissions resulting from the formation of the reinsurance subsidiary and the
Company's exit from commission-based insurance agency arrangements. Insurance
commissions totaled $6.4 million in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to 24.3% of net sales for
the year ended September 30, 1998 compared to 24.8% of net sales last year.
Higher retail selling expenses were offset by lower selling, general and
administrative expenses as a percentage of sales at Schult. Excluding the
effects of the Schult acquisition, selling, general and administrative expenses
for 1998 were 26.1% of net sales compared to 24.8% of net sales last year, with
higher retail selling expenses accounting for the majority of the increase,
partially offset by decreased accruals for management compensation.
FINANCIAL SERVICES OPERATING EXPENSES
Financial services operating expenses rose 78% during 1998 due to the addition
of claims and other expenses related to the formation of the captive reinsurance
company. Exclusive of the captive reinsurance costs, financial services
operating expenses increased 19% over 1997 on a 26% increase in the average
number of loans serviced during the year and a 46% increase in total credit
application volume.
INTEREST EXPENSE
Financial services interest expense includes interest expense associated with
long-term debt secured by loans as well as interest expense associated with all
short-term line of credit borrowings. Financial services interest expense
increased 12% primarily due to a $5.2 million increase in interest expense
related to higher average outstanding balances on short-term lines of credit.
This increase was partially offset by lower interest expense on declining and
retired long-term debt balances.
Non-financial services interest expense rose from $3.3 million to $6.0
million due principally to interest costs related to the financing of the Schult
acquisition.
INCOME TAXES
The Company's effective income tax rate was 38.6% in 1998 compared to 38.5% in
1997. The Company currently expects its effective income tax rate to rise
modestly due to anticipated higher state income taxes arising from the Schult
acquisition.
1997 COMPARED TO 1996
NET SALES
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% in 1996 to 47 % in 1997. Single-section unit volume
decreased 14%, while multi-section unit volume rose 61% from 1996. The average
retail sales price for new single-section homes increased primarily due to a
shift in product mix toward higher price points. In 1997 the Company opened or
acquired 49 new sales centers compared to 60 sales centers in 1996. The Company
also closed four underperforming sales centers during 1997 and three in 1996.
Total new retail sales dollars at sales centers open more than one year
increased 8 % during 1997.
Other sales dollar volume, which consists principally of wholesale sales to
independent dealers by the Company's Destiny and Golden West subsidiaries,
declined 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 1997, 68% of Golden West's
and Destiny's shipments were to Oakwood sales centers, compared to 34% in 1996.
GROSS PROFIT
Gross profit margin--integrated operations increased to 33.0% in 1997 from 31.8%
in 1996, reflecting higher operating levels and efficiencies at manufacturing
and greater internal sourcing of retail sales. Manufacturing production
increased 15% over 1996 and the percentage of new homes
1998 ANNUAL REPORT 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont.)
Oakwood Homes Corporation
and Subsidiaries
sold at retail which were produced in Company-owned manufacturing plants
increased from approximately 90% in 1996 to approximately 96% in 1997.
Gross profit margin--wholesale operations increased to 19.0% in 1997 from
18.0% in 1996, reflecting higher operating levels and efficiencies at
manufacturing.
FINANCIAL SERVICES INCOME
Financial services income increased to $102.8 million from $92.3 million in
1996. Interest income earned on loans held for investment and on loans held for
sale prior to securitization decreased from $34.6 million in 1996 to $29.4
million in 1997. The 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.
Loan servicing fees increased from $15.9 million in 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 year. This increase was partially offset by a decrease in the average yield
on those investments, arising principally from higher credit losses. Financial
services income for 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 also
included a non-recurring gain on a resecuritization transaction of $1.4 million,
or $.02 per share, after tax. Financial services income for 1997 also includes
$6.9 million in revenues from the Company's captive reinsurance underwriting
subsidiary which began operations on June 1, 1997. 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% in fiscal 1996. The increase in net credit losses is due in
part to the industrywide 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.
OTHER INCOME
The majority of the 25% decrease in other income reflects decreased insurance
commissions resulting from the formation of the reinsurance subsidiary and the
Company's exit from commission-based insurance agency arrangements. 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
Selling, general and administrative expenses rose to 24.8% of net sales compared
to 24.6% of net sales in 1996. 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
accru als relating to long-term incentive compensation plans.
FINANCIAL SERVICES OPERATING EXPENSES
Financial services operating expenses rose 54% due to a 29% increase in the
average number of loans serviced during the year 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. Exclusive of the
captive reinsurance costs, financial services operating expenses rose $3.9
million or 21% over 1996.
INTEREST EXPENSE
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.
Non-financial services interest expense rose from $2.2 million to $3.3
million due principally to interest costs related to new corporate office
facilities.
YEAR 2000 ISSUES
During 1997 the Company formed an ongoing project team to address the Year 2000
issue. The project has several phases, including assessment of the hardware and
software affected by the Year 2000 issue; identification of critical suppliers
and assessment of their state of readiness; conversion of existing processes,
hardware and software as required; testing of modified, existing and new
processes; implementation of Year 2000 compliant systems; and development and
implementation of contingency and business continuation plans as considered
necessary. The Company is also conducting ongoing awareness campaigns with key
vendors.
16 1998 ANNUAL REPORT
Oakwood Homes Corporation
and Subsidiaries
By December 31, 1998 management believes the assessment, conversion and testing
phases as they relate to the Company's hardware and software will be complete in
all material respects. Based upon the status of remediation undertaken to date,
the Company believes that substantially all significant internal system issues
associated with Year 2000 compliance will be resolved by the end of calendar
1998. In addition, communication and follow-up is ongoing with critical
suppliers whose system failures could potentially have a significant impact on
the Company's operations to verify their stage of Year 2000 readiness.
The costs incurred by the Company to date related to Year 2000 readiness,
which have been charged to expense, have not been material, and the Company does
not anticipate that the expected remaining costs will be material. While the
Company believes its efforts will provide reasonable assurance that material
disruptions will not occur, the potential for interruption still exists,
primarily related to the uncertainty which may surround the Year 2000 readiness
of third-party suppliers. The Company has not yet adopted any formal contingency
plan in the event its Year 2000 project is not completed on schedule. However,
if significant risks are identified, the Company intends to develop contingency
plans as deemed necessary at that time.
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 securitizing
such loans, primarily using REMICs. Since 1994, the Company generally has sold
to investors securities having a principal balance approximately equal to the
principal balance of the loans securitized, and accordingly has not been
required to seek the capital required to fund its finance business outside of
the asset-backed securities market.
Late in 1998, global economic conditions significantly reduced the
liquidity in the asset-backed securities market, and credit spreads over
treasurys demanded by purchasers of the Company's asset-backed securities rose
significantly. In addition, demand for the most deeply subordinated asset-backed
securities offered for sale by the Company has significantly decreased. Widening
credit spreads adversely affect the Company's permanent funding costs, and
adversely affect the Company's profitability if the Company is unable to
increase rates charged to customers to compensate for these higher costs.
Moreover, decreased demand for asset-backed securities could require the Company
to seek alternative sources of financing for the loans originated by the
consumer finance business.
In addition to the ongoing need for long-term capital to fund its
financing operations, the Company will require capital to execute its ongoing
expansion strategy. The Company estimates that its fiscal 1999 capital
expenditures will approximate $70 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 and improvements to manufacturing facilities. In addition to capital
expenditures, the retail expansion will require an investment of approximately
$300,000 to $500,000 of working capital for each new sales center, or
approximately $31 million for fiscal 1999. Capital expenditures and working
capital requirements in later years are dependent upon the extent of expansion
undertaken in such years.
In recent years, the Company has financed internal growth of its retail
and manufacturing business principally using internally generated funds and
short-term lines of credit. In April 1998 the Company borrowed $100 million from
a commercial bank to finance the Schult acquisition, and subsequent to September
30, 1998 borrowed an additional $75 million to refinance its acquisition of
warehoused loans from the DFC joint venture. The aggregate $175 million of
indebtedness matures in March 1999. The Company intends to refinance the $100
million of Schult indebtedness by issuance of long-term debt, using the public
or private debt markets or the commercial bank market, and to repay the $75
million of indebtedness incurred subsequent to year end upon securitization of
the loans acquired from DFC. Depending on market conditions, the Company may
seek to raise additional long-term debt in order to reduce reliance on
short-term bank debt. The Company's senior long-term debt is rated BBB-, which
management believes 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 $325 million credit facility with
a conduit commercial paper issuer to provide warehouse financing for loans prior
to securitization. The Company also has a $175 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.
MARKET RISK
Certain of the Company's financial instruments are subject to market risks,
including interest rate risk. The Company's financial instruments are not
currently subject to foreign currency risk or commodity price risk. The Company
has no financial instruments held for trading purposes.
The Company originates loans, most of which are at fixed rates of
interest, in the ordinary course of business and periodically securitizes them
to obtain permanent financing for such loan originations. Accordingly, the
Company's loans held for sale are exposed to risk from changes in interest rates
between the time loans are originated and the time at which the Company obtains
permanent financing, generally at fixed rates of interest, in the asset-backed
securities market. The Company attempts to manag this risk by minimizing the
1998 ANNUAL REPORT 17
Oakwood Homes Corporation
and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (cont.)
warehousing period of unsecuritized loans and from time to time hedging this
interest rate risk using derivative financial instruments. Loans held for sale
are excluded from the table below as they primarily represent recent
originations which will be securitized in fiscal 1999.
Loans held for investment also are subject to interest rate risk. The
Company currently does not originate any loans with the intention of holding
them for investment.
Retained regular REMIC interests are held as available for sale
securities; the value of these securities may change in response to, among other
things, changes in interest rates. Retained residual interests in REMIC
securitizations are valued as described in Note 4 to the consolidated financial
statements. The value of such residual assets may be influenced by, among other
things, changes in interest rates.
All of the Company's short-term borrowings bear interest at variable
rates. Accordingly, an increase in short-term interest rates would adversely
affect interest expense on short-term debt. In addition, certain of the
Company's notes and bonds payable bear interest at floating rates, and interest
expense on such obligations would be adversely affected by an increase in
short-term interest rates.
The following table sets forth the Company's financial instruments that
are sensitive to changes in interest rates at September 30, 1998.
Weighted Assumed cash flows
average ------------------------------------------------------------
interest rate There- Fair
(dollar amounts in thousands) at year end(1) 1999 2000 2001 2002 2003 after Total value
-------------- ---- ---- ---- ---- ---- ----- ----- -----
Loans held for investment(2)
Fixed rate loans...................13.3% $20,077 $15,971 $12,579 $9,782 $7,350 $10,346 $76,105 $58,275
Variable rate loans................ 9.3% 2,700 2,159 1,715 1,351 1,055 2,228 11,208 7,579
Retained REMIC interests
Regular interests(3)............... 8.7% 1,692 1,877 8,525 1,647 2,267 22,738 38,746 22,822
Residual interests.................16.3% 19,888 10,576 17,706 3,053 15,986 20,041 87,250 53,619
(1) For REMIC residual interests represents the weighted average interest rate
used to discount assumed cash flows.
(2) Assumed cash flows represent contractual cash flows reduced by the effects
of estimated prepayments.
(3) Assumed cash flows reflect the assumed prepayment rates used in estimating
the fair values of the related residual interests.
Weighted
average Maturities
interest rate -------------------------------------------------------------
at year end There- Fair
(dollar amounts in thousands) -------------- 1999 2000 2001 2002 2003 after Total value
---- ---- ---- ---- ---- ----- ----- -----
Short-term borrowings............... 6.1% $375,023 $ -- $ -- $ -- $ -- $ -- $375,023 $375,023
Notes and bonds payable
Fixed rate....................... 9.3% 9,454 7,010 3,837 17,228 60 343 37,932 38,342
Variable rate.................... 5.9% 8,858 7,676 2,470 650 619 3,670 23,943 23,943
NEW ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board (the "Board") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"), and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131"). FAS 130 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. FAS
131 establishes new standards for business segment reporting, which will require
reporting of business segment information that is more comprehensive than that
currently reported in the financial statements. Both statements will be adopted
by the Company in fiscal 1999. The Company does not expect adoption of either
statement to have a material impact on the Company's financial condition or
results of operations.
In June 1998 the Board adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"), which establishes accounting and reporting standards for derivative
instruments and hedging activities. FAS 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company currently is
evaluating the potential effect of FAS 133 on its financial statements.
In October 1998 the Board adopted Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
("FAS 134"), which amends existing classification and accounting treatment of
mortgage-backed securities retained after mortgage loans held for sale are
securitized, for entities engaged in mortgage banking activities. FAS 134 is
effective for the first fiscal quarter beginning after December 15, 1998. The
Company does not expect adoption of FAS 134 to have a material effect on its
financial position or results of operations.
18 1998 ANNUAL REPORT
Oakwood Homes Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Year ended September 30,
------------------------------------
(in thousands except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------
Revenues
Net sales.........................................$1,404,432 $ 952,704 $862,079
Financial services income, net of special
charges of $51,300 in 1998...................... 67,359 102,778 92,346
Other income...................................... 10,762 14,569 19,497
------------------------------------
Total revenue................................. 1,482,553 1,070,051 973,922
------------------------------------
Costs and expenses
Cost of sales..................................... 973,434 651,400 609,303
Selling, general and administrative expenses...... 341,441 236,586 211,759
Financial services operating expenses............. 51,758 29,056 18,810
Provision for losses on credit sales.............. 1,281 -- 1,000
Interest expense
Financial services.............................. 18,579 16,543 20,149
Non-financial services.......................... 5,970 3,274 2,221
------------------------------------
Total costs and expenses...................... 1,392,463 936,859 863,242
------------------------------------
Income before income taxes.......................... 90,090 133,192 110,680
Provision for income taxes.......................... 34,737 51,279 42,425
------------------------------------
Net income..........................................$ 55,353 $ 81,913 $ 68,255
------------------------------------
Earnings per share
Basic.............................................$ 1.20 $ 1.79 $ 1.53
------------------------------------
Diluted...........................................$ 1.17 $ 1.75 $ 1.47
------------------------------------
The accompanying notes are an integral part of the financial statements.
1998 ANNUAL REPORT 19
Oakwood Homes Corporation
and Subsidiaries
CONSOLIDATED BALANCE SHEET
September 30,
---------------------
(in thousands except share and per share data) 1998 1997
---------- --------
Assets
Cash and cash equivalents.......................................$ 28,971 $ 28,717
Loans and investments........................................... 502,583 428,034
Other receivables............................................... 58,774 34,046
Inventories..................................................... 291,352 208,298
Properties and facilities, net of accumulated depreciation
and amortization.............................................. 237,726 139,702
Deferred income taxes........................................... 14,850 12,994
Other assets.................................................... 149,120 52,715
---------- --------
$1,283,376 $904,506
========== ========
Liabilities and shareholders' equity............................$ 375,023 $175,800
Short-term borrowings........................................... 61,875 78,815
Notes and bonds payable......................................... 226,867 122,162
Accounts payable and accrued liabilities........................ 57,419 30,535
Insurance reserves and unearned premiums........................ 14,517 13,312
Other long-term obligations.....................................
Shareholders' equity
Common stock, $.50 par value; 100,000,000 shares authorized;
46,660,000 and 46,299,000 shares issued and outstanding....... 23,330 23,149
Additional paid-in capital.................................... 167,592 159,281
Retained earnings............................................. 360,025 306,533
---------- --------
Unearned compensation......................................... 550,947 488,963
Total shareholders' equity.................................. (3,272) (5,081)
---------- --------
Commitments and contingencies (Notes 4, 10 and 17).............. 547,675 483,882
---------- --------
$1,283,376 $904,506
========== ========
The accompanying notes are an integral part of the financial statements.
20 1998 ANNUAL REPORT
Oakwood Homes Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended September 30,
------------------------------------------
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Operating activities
Net income.................................................................. $ 55,353 $ 81,913 $ 68,255
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization............................................. 24,950 14,325 10,461
Deferred income taxes..................................................... (4,406) (3,320) 5,872
Provision for losses on credit sales ..................................... 1,281 -- 1,000
Gain on sale of loans .................................................... (20,058) (19,255) (19,358)
Special charges .......................................................... 51,300 -- --
Excess of cash receipts over REMIC residual income recognized ............ 19,934 2,535 1,678
Other .................................................................... 5,854 923 720
Changes in assets and liabilities, net of effect of business acquisition
Other receivables ...................................................... (5,414) 7,631 (40,826)
Inventories ............................................................ (62,705) (52,408) (4,700)
Prepaid expenses ....................................................... 344 (4,007) (489)
Deferred insurance policy acquisition costs ............................ (4,260) (6,614) (841)
Accounts payable and accrued liabilities ............................... 48,621 (39,872) 58,105
Insurance reserves and unearned premiums ............................... 26,884 25,001 2,024
Other long-term obligations ............................................ 8,968 3,742 94
-------------------------------------------
Cash provided by operations .............................................. 146,646 10,594 81,995
Loans originated ............................................................. (1,236,436) (883,633) (721,414)
Purchase of loans and securities ............................................. (5,045) (2,636) (1,465)
Sale of loans ................................................................ 1,061,517 913,004 699,552
Principal receipts on loans .................................................. 53,048 34,056 15,651
-------------------------------------------
Cash provided by operating activities ...................................... 19,730 71,385 74,319
-------------------------------------------
Investing activities
Business acquisition ....................................................... (101,829) -- --
Acquisition of properties and facilities ................................... (51,411) (38,402) (41,303)
Investment in and advances to joint venture ................................ (24,454) (5,051) (3,000)
Sale of securities ......................................................... -- -- 21,655
Other ...................................................................... (20,797) (9,607) 22,857
-------------------------------------------
Cash provided (used) by investing activities ............................. (198,491) (53,060) 209
-------------------------------------------
Financing activities
Net borrowings (repayments) on short-term credit facilities................. 94,223 30,294 (8,894)
Proceeds from borrowings related to business acquisition ................... 100,000 -- --
Issuance of notes and bonds payable ........................................ 4,472 -- 1,686
Payments on notes and bonds ................................................ (22,540) (55,084) (49,043)
Cash dividends ............................................................. (1,861) (1,840) (1,795)
Proceeds from exercise of stock options .................................... 4,721 8,445 5,906
-------------------------------------------
Cash provided (used) by financing activities ............................. 179,015 (18,185) (52,140)
-------------------------------------------
Net increase in cash and cash equivalents .................................... 254 140 22,388
Cash and cash equivalents
Beginning of year .......................................................... 28,717 28,577 6,189
-------------------------------------------
End of year ................................................................ $ 28,971 $ 28,717 $ 28,577
-------------------------------------------
The accompanying notes are an integral part of the financial statements.
1998 ANNUAL REPORT 21
Oakwood Homes Corporation
and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
Common Additional
shares Common paid-in Retained Unearned
(in thousands except per share data) outstanding stock capital earnings compensation
- ------------------------------------------------------------------------------------------------------------
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)
Net income ............................ -- -- -- 55,353 --
Exercise of stock options ............. 352 176 4,545 -- --
Issuance of restricted stock .......... 9 5 278 -- (188)
Amortization of unearned compensation . -- -- -- -- 1,517
ESOP shares committed to be released .. -- -- 614 -- 480
Stock options issued in connection with
business acquisition ................ -- -- 2,874 -- --
Cash dividends ($.04 per share) ....... -- -- -- (1,861) --
------------------------------------------------------------
Balance at September 30, 1998 ............. 46,660 $ 23,330 $ 167,592 $ 360,025 $ (3,272)
============================================================
The accompanying notes are an integral part of the financial statements.
22 1998 ANNUAL REPORT
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
modified in certain respects the Company's accounting policies for sales of
receivables. Under FAS 125, the Company allocates the sum of its basis in the
loans conveyed to each REMIC and the costs of forming the REMIC among the REMIC
interests retained and the REMIC interests sold to investors based upon the
relative estimated fair values of such interests. This practice is the same as
that employed by the Company prior to adoption of FAS 125.
In addition to the retained REMIC 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 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 underwriting subsidiary on June 1, 1997, the Company acted
as a sales agent for unrelated insurance companies and received an agent's
commission on sales of insurance policies issued by those insurance companies.
Insurance commissions were included in other income and totaled approximately
$6.4 million and $11.2 million in 1997 and 1996, respectively.
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.
On June 1, 1997 the Company formed a captive reinsurance underwriting
subsidiary, domiciled in Bermuda, for property and casualty and credit life
insurance and service contract business. Premiums from reinsured insurance
policies are deferred and recognized as revenue over the term of the contracts,
generally ranging from one to five years. Claims expenses are recorded as
insured events occur. Policy acquisition costs are deferred and amortized over
the terms of the contracts.
1998 ANNUAL REPORT 23
Oakwood Homes Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
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
Goodwill
Goodwill represents the excess of cost over the fair value of net assets of
businesses acquired and is amortized on a straight-line basis over periods
ranging from approximately 7 years for retail sales center acquisitions to 40
years for manufacturing facilities.
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.
Stock-based compensation
The Company accounts for stock-based compensation plans under the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25").
Cash and cash equivalents
Short-term investments having initial maturities of three months or less are
considered cash equivalents.
Use of estimates in the preparation of
financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts previously reported for 1997 and 1996 have been reclassified to
conform to classifications used in 1998.
NOTE 2--Acquisition
On April 1, 1998 the Company acquired Schult Homes Corporation ("Schult"), a
producer of manufactured and modular housing headquartered in Middlebury,
Indiana. Each outstanding common share of Schult was converted into the right to
receive $22.50 in cash, or approximately $101 million in the aggregate. In
addition, the Company issued options to acquire common stock of the Company in
exchange for certain options to acquire common shares of Schult which were
outstanding as of the acquisition date. The estimated fair market value of
Company stock options issued was approximately $2.9 million, which has been
included as part of the cost of the acquisition, together with costs incurred in
effecting the acquisition of approximately $750,000. The Company financed the
acquisition principally through a $100 million loan from a commercial bank
repayable not later than March 30, 1999. The Company intends to refinance the
acquisition financing using long-term debt.
The acquisition has been accounted for using the purchase method of
accounting. A summary of the consideration paid in
24 1998 ANNUAL REPORT
Oakwood Homes Corporation
and Subsidiaries
the acquisition and the allocation thereof to the net assets acquired is as
follows:
(in thousands)
- ---------------------------------------------------------------
Cash paid to selling shareholders ................. $ 101,079
Acquisition costs ................................. 750
Estimated fair value of stock options issued ...... 2,874
---------
Total consideration issued ...................... 104,703
Long-term debt assumed ............................ 1,608
Deferred income taxes ............................. 2,550
---------
$ 108,861
=========
Allocated to:
Properties and facilities ....................... $ 66,794
Working capital and other assets and liabilities,
excluding intangibles ......................... (15,585)
Intangible assets:
Assembled workforce (amortized using the
straight-line method over five years) ....... 5,562
Dealer distribution network (amortized using
the straight-line method over five years) ... 6,000
Goodwill (amortized using the straight-line
method over 40 years) ....................... 46,090
---------
$ 108,861
=========
Schult's results of operations are included with those of the Company from the
April 1, 1998 acquisition date.
Summarized below is unaudited pro forma financial data of the Company assuming
the Schult acquisition had taken place at the beginning of the fiscal years
presented. The pro forma results are not necessarily indicative of future
earnings or earnings that would have been reported had the acquisition been
completed when assumed.
(in thousands, except per share data) 1998 1997
- --------------------------------------------------------------------------------
(unaudited)
Net sales ................................ $1,572,579 $1,296,582
Net income ............................... $ 52,431 $ 82,918
Earnings per share--diluted .............. $ 1.11 $ 1.77
NOTE 3--Financial services businesses
The Company's financial services businesses are as follows: Oakwood Acceptance
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. Oakwood Financial Corporation is a subsidiary of Oakwood Homes
Corporation which holds the Company's retained interests in REMIC trusts.
Tarheel Insurance Company, Ltd. ("Tarheel") reinsures risk on property and
casualty and credit life insurance policies and extended service contracts
written by an unrelated insurance company in connection with sales of Company
products. On October 1, 1997 the Company dissolved Oakwood Life Ltd., its credit
life reinsurance subsidiary, after transferring its assets and liabilities to
Tarheel.
During the year ended September 30, 1998 the Company decided to cease its
participation in Deutsche Financial Capital ("DFC"), a 50% owned joint venture
engaged in providing consumer financing to customers of independent retail
dealers of manufactured housing, and recorded a provision of approximately $4.3
million to reduce the carrying value of the investment in and advances to the
joint venture to their estimated net realizable values.
The aggregate principal balance of loans sold to third parties, including
securitization transactions, was approximately $1.1 billion, $922 million and
$721 million in 1998, 1997 and 1996, respectively.
Oakwood Acceptance's servicing portfolio totaled approximately $3.6 billion
and $2.5 billion at September 30, 1998 and 1997, respectively, of which
approximately $3.0 billion and $2.1 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) 1998 1997 1996
- --------------------------------------------------------------------------------
Statement of income
Revenues
Consumer finance
Interest income ............ $ 30,918 $ 29,351 $ 34,569
Servicing fees ............. 27,662 21,479 15,857
REMIC residual income ...... 10,282 19,444 16,193
Gain on sale of loans
and securities ........... 20,058 19,255 19,358
Special charges ............ (51,300) -- --
Other ...................... (4,226) 2,187 3,085
-----------------------------------
Total consumer
finance revenues ..... 33,394 91,716 89,062
-----------------------------------
Insurance
Premium revenues ........... 33,435 10,549 3,132
Investment income .......... 2,515 648 287
Less: intercompany
interest income .......... (1,985) (135) (135)
-----------------------------------
Total insurance revenues 33,965 11,062 3,284
-----------------------------------
Total revenues ....... 67,359 102,778 92,346
-----------------------------------
Cost and expenses
Consumer finance
Interest expense ........... 18,579 16,543 20,149
Operating expenses ......... 24,204 20,364 16,792
Provision for credit losses 1,281 -- 1,000
-----------------------------------
Total consumer finance
costs and expenses ... 44,064 36,907 37,941
-----------------------------------
Insurance
Claims expense ............. 18,546 5,037 514
Commissions and
ceding fees .............. 8,063 3,431 1,367
Other ...................... 945 224 137
-----------------------------------
Total insurance costs
and expenses ......... 27,554 8,692 2,018
-----------------------------------
Total costs
and expenses ..... 71,618 45,599 39,959
-----------------------------------
Income (loss) before
income taxes ............... $ (4,259) $ 57,179 $ 52,387
===================================
25 1998 ANNUAL REPORT
Oakwood Homes Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
(in thousands) 1998 1997
- -------------------------------------------------------------
Balance sheet
Loans .................................. $424,231 $328,119
REMIC regular interests ................ 22,822 9,724
REMIC residual interests ............... 53,619 84,228
Loan servicing assets .................. 9,261 3,786
Investment in and advances to
joint venture ........................ 17,823 6,443
Other assets ........................... 74,182 54,533
-------------------
Total assets ....................... $601,938 $486,833
===================
Short-term borrowings .................. $174,200 $ 84,800
Notes payable secured by loans ......... 30,881 48,359
Insurance reserves and unearned premiums 57,419 30,535
Due to affiliates ...................... 154,511 164,621
Other liabilities ...................... 15,574 3,304
Parent company's investment ............ 169,353 155,214
-------------------
Total liabilities and parent
company's investment ............. $601,938 $486,833
===================
Condensed financial information for Oakwood Homes Corporation with its
financial services businesses accounted for using the equity method is as
follows:
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------
Statement of income
Revenues
Net sales ............. $ 1,404,432 $ 952,704 $ 862,079
Equity in income (loss)
of financial services
businesses .......... (4,259) 57,179 52,387
Other income .......... 10,762 14,569 19,971
----------------------------------------
Total revenues .... 1,410,935 1,024,452 934,437
----------------------------------------
Costs and expenses
Cost of sales ......... 973,434 651,400 609,303
Selling, general and
administrative
expenses ............ 341,441 236,586 212,233
Interest expense ...... 5,970 3,274 2,221
----------------------------------------
Total costs
and expenses .... 1,320,845 891,260 823,757
----------------------------------------
Income before
income taxes .......... 90,090 133,192 110,680
Provision for
income taxes .......... 34,737 51,279 42,425
----------------------------------------
Net income .............. $55,353 $ 81,913 $ 68,255
========================================
(in thousands) 1998 1997
- -----------------------------------------------------------------
Balance sheet
Current assets
Cash and cash equivalents .......... $ 24,769 $ 27,715
Receivables ........................ 33,431 18,093
Receivable from financial
services businesses .............. 20,955 3,500
Inventories ........................ 291,352 208,298
Prepaid expenses ................... 6,491 5,857
------------------------
Total current assets ........... 376,998 263,463
Properties and facilities ............ 232,175 136,065
Investment in and advances to
financial services businesses ...... 302,909 316,335
Other assets ......................... 93,220 21,645
------------------------
$1,005,302 $ 737,508
========================
Current liabilities
Short-term borrowings .............. $ 200,823 $ 91,000
Current maturities of long-term debt 1,830 5,524
Accounts payable and
accrued liabilities .............. 211,293 118,858
------------------------
Total current liabilities ...... 413,946 215,382
Long-term debt ....................... 29,164 24,932
Other long-term obligations .......... 14,517 13,312
Shareholders' equity ................. 547,675 483,882
------------------------
$1,005,302 $ 737,508
========================
NOTE 4--Loans and investments
The components of loans and investments are as follows:
(in thousands) 1998 1997
- -------------------------------------------------------------
Loans held for sale ................ $ 365,126 $ 255,944
Loans held for investment .......... 62,669 81,214
Less: reserve for
uncollectible receivables ........ (1,653) (3,076)
----------------------
Total loans ................ 426,142 334,082
----------------------
Retained interests in REMIC
securitizations (exclusive of loan
servicing assets included in
other assets)
Regular interests, at amortized
cost which approximates
fair value ................... 22,822 9,724
Residual interests, at amortized
cost which approximates
fair value ................... 53,619 84,228
----------------------
Total retained
REMIC interests .......... 76,441 93,952
----------------------
$ 502,583 $ 428,034
======================
26 1998 ANNUAL REPORT
Oakwood Homes Corporation
and Subsidiaries
The estimated principal receipts, including estimated prepayments, on loans
held for investment are $15.5 million in 1999, $12.7 million in 2000, $10.4
million in 2001, $8.5 million in 2002, $6.7 million in 2003 and the balance
thereafter.
Loans in which the Company retains an interest, either directly by owning them
or indirectly through the Company's retained interests in REMIC securitizations,
are located in over forty states, with North Carolina, Texas, South Carolina and
Virginia accounting for the majority of the loans. Because of the nature of the
Company's retail business, loans are not concentrated with any single customer
or among any group of customers.
Substantially all the loans included in the Company's GNMA securitizations are
covered by FHA insurance which generally limits the Company's risk to 10% of
credit losses incurred on such loans. The Company's credit risk associated with
nonrecourse debt secured by loans is limited to the Company's equity in the
underlying collateral. The Company retains all of the credit risk associated
with loans used to secure debt issued by the Company and with respect to which
creditors have recourse to the general credit of the Company in addition to the
collateral for the indebtedness. The Company's contingent liability as guarantor
of loans sold to third parties on a recourse basis was approximately $42 million
and $58 million as of September 30, 1998 and 1997, respectively.
The following table summarizes the transactions reflected in the reserve for
credit losses:
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------
Balance at beginning of year ....... $ 4,277 $ 8,261 $ 11,795
Provision for losses on credit sales 1,281 -- 1,000
Losses charged to the reserve ...... (3,491) (3,984) (4,534)
--------------------------------
Balance at end of year ............. $ 2,067 $ 4,277 $ 8,261
================================
The reserve for credit losses is reflected in the consolidated balance sheet
as follows:
(in thousands) 1998 1997
- -----------------------------------------------------------------
Reserve for uncollectible receivables
(included in loans and investments) ......... $1,653 $3,076
Reserve for contingent liabilities (included in
accounts payable and accrued liabilities) ... 414 1,201
---------------
$2,067 $4,277
===============
The Company also retains credit risk on REMIC securitizations because the
related trust agreements provide that all losses incurred on REMIC loans are
charged to REMIC interests retained by the Company (including the Company's
right to receive servicing fees) before any losses are charged to REMIC
interests sold to third party investors. The Company also has guaranteed payment
of principal and interest on subordinated securities issued by REMIC trusts
having an aggregate principal amount outstanding of approximately $55 million
and $30 million as of September 30, 1998 and 1997, respectively. Liabilities
recorded with respect to such guarantees in accordance with FAS 125 were
approximately $5.4 million and $2.9 million at September 30, 1998 and 1997,
respectively, and are included in other long-term obligations.
REMIC interests retained by the Company include servicing assets and REMIC
residual interests. The Company estimates the fair value of retained REMIC
residual interests based, in part, upon default and prepayment assumptions which
management believes market participants would use for similar instruments. The
actual rate of voluntary prepayments and the amount and timing of credit losses
affect the Company's yield on retained REMIC residual interests and the fair
value of such interests in periods subsequent to the securitization; the actual
rate of voluntary prepayments and credit losses typically varies over the life
of each transaction and from transaction to transaction. If over time the
Company's actual experience is more favorable than that assumed, the Company's
yield on its REMIC residual interests will be enhanced. Similarly, if over time
the Company's actual experience is less favorable than that assumed, such yield
will be reduced or impairment of the residuals may result. During the year ended
September 30, 1998 the Company recorded special charges of approximately $39.5
million to reduce the carrying value of Oakwood REMIC residual interests to
reflect higher assumptions for credit losses and voluntary prepayment speeds. In
addition, the Company recorded special charges of approximately $7.5 million
relating to residuals associated with the DFC joint venture.
The following table sets forth certain data with respect to securitized loans
in which the Company retains a residual interest, and with respect to the
assumptions used by the Company in estimating the fair value of such residual
interests, as of the end of 1998 and 1997.
(dollar amounts in thousands) 1998 1997
- --------------------------------------------------------------------
Aggregate unpaid principal
balance of loans ............... $ 2,982,034 $ 2,076,647
Weighted average interest rate
of loans at year end ........... 10.9% 11.0%
Approximate assumed weighted
average constant prepayment
rate as a percentage of unpaid
principal balance of loans ....... 16.6% 10.2%
Approximate remaining assumed
nondiscounted credit losses as a
percentage of unpaid principal
balance of loans ................. 12.0% 9.9%
Approximate weighted average
interest rate used to discount
assumed residual cash flows ...... 16.3% 16.2%
1998 ANNUAL REPORT 27
Oakwood Homes Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
NOTE 5--Other receivables
The components of other receivables are as follows:
(in thousands) 1998 1997
- -------------------------------------------------
Trade receivables ........... $22,768 $ 5,418
Insurance premiums receivable 4,026 4,851
Accrued interest ............ 2,551 2,427
Other receivables ........... 29,429 21,350
-----------------
$58,774 $34,046
=================
Trade receivables represent amounts due from independent manufactured housing
dealers, which are located principally in the Pacific Northwest, Southeast and
Midwest.
NOTE 6--Inventories
The components of inventories are as follows:
(in thousands) 1998 1997
- --------------------------------------------------------------
Manufactured homes ..................... $242,867 $186,767
Work-in-progress, materials and supplies 42,068 17,672
Land/homes under development ........... 6,417 3,859
-------------------
$291,352 $208,298
===================
NOTE 7--Properties and facilities
The components of properties and facilities are as follows:
(in thousands) 1998 1997
- ----------------------------------------------------------
Land and land improvements ...... $ 37,144 $ 24,894
Buildings and field sales offices 129,960 74,793
Furniture, fixtures and equipment 110,724 71,136
Leasehold improvements .......... 25,333 15,255
----------------------
303,161 186,078
Less: accumulated depreciation
and amortization .............. (65,435) (46,376)
----------------------
$ 237,726 $ 139,702
======================
Depreciation and amortization of properties and facilities was approximately
$20.2 million, $12.9 million and $9.5 million in 1998, 1997 and 1996,
respectively.
Note 8--Other assets
The components of other assets are as follows:
(in thousands) 1998 1997
- -----------------------------------------------------------------
Goodwill, net of accumulated amortization
of $2,225 and $668, respectively ........ $ 56,652 $ 3,503
Restricted cash and investments ........... 21,964 16,548
Investment in and advances to joint
venture, net of loss reserves ........... 17,823 6,443
Deferred insurance policy acquisition costs 12,728 8,468
Identifiable intangibles acquired in Schult
acquisition, net of accumulated
amortization of $1,156 .................. 10,406 --
Loan servicing assets, net of accumulated
amortization of $1,416 and
$259, respectively ...................... 9,261 3,786
Prepaid expenses .......................... 7,799 7,329
Other ..................................... 12,487 6,638
-------------------
$149,120 $ 52,715
===================
Amortization expense of goodwill and identifiable intangibles was
approximately $2.7 million, $402,000 and $204,000 in 1998, 1997 and 1996,
respectively.
Restricted cash and investments include custodial cash balances used to secure
a portion of obligations to pay reinsurance claims, trust account cash balances
required by certain OAC servicing agreements and trust account balances required
by certain states for custody of customer deposits until a retail sale is
consummated.
The Company estimates the fair value of loan servicing assets as the present
value of the estimated future net servicing cash flows. Assumptions as to credit
losses and voluntary prepayments used in the valuation of loan servicing assets
are the same as those used in the valuation of retained REMIC residual assets
(see Note 4). The fair values of loan servicing assets approximated their
carrying values as of September 30, 1998 and 1997, and no valuation allowances
have been recorded.
For the years ended September 30, 1998 and 1997, loan servicing assets
recorded on securitizations were approximately $6.6 million and $4.0 million,
respectively, and amortization expense of loan servicing assets was
approximately $1.2 million and $259,000, respectively.
Note 9--Short-term credit facilities
The Company has a $250 million revolving warehouse financing facility with a
conduit commercial paper issuer, secured by loans held for sale. Subsequent to
September 30, 1998 the facility was increased to $325 million. At September 30,
1998 and 1997, $174.2 million and $84.8 million, respectively, was outstanding
under the facility. The weighted average interest rate on borrowings outstanding
at September 30, 1998 was 5.86%, compared to an average rate of 5.92% at
September 30, 1997. The Company also has a $175 million unsecured syndicated
revolving credit facility, borrowings under which currently bear interest at
LIBOR plus .5%. At September 30, 1998 and 1997, $88 million and $91 million,
respectively, was outstanding under the facility. The Company also has a $20
million unsecured cash management line and $20 million of uncommitted credit
lines.
In addition, at September 30, 1998 short-term borrowings include a $100
million short-term loan with a bank related to the Schult acquisition, as
discussed in Note 2. The note bears interest at LIBOR plus 1% and is due March
30, 1999.
28 1998 ANNUAL REPORT
Oakwood Homes Corporation
and Subsidiaries
Note 10--Notes and bonds payable
The components of notes and bonds payable are as follows:
(in thousands) 1998 1997
- -------------------------------------------------------------------
Non-financial services debt
8% reset debentures due 2007 ................ $16,945 $16,945
Industrial revenue bonds due in installments
through 2011, with interest at 3.67%
at September 30, 1998 ......................... 5,492 --
Industrial revenue bond due in installments
through 2001, with interest at 73% of
the lender's prime rate ....................... 2,025 2,125
Facilities loan payable in quarterly
installments through 1998 ................. -- 4,000
Capitalized aircraft lease payable in
monthly installments through 2000, with
interest at LIBOR plus .75% ................... 3,270 3,835
401(k) note payable in quarterly
installments through 2000, with interest
at LIBOR plus 1.25% ........................... 720 1,200
Other notes payable ......................... 2,542 2,351
-----------------
Total non-financial services debt ..... 30,994 30,456
-----------------
Financial services debt collateralized by loans
Nonrecourse debt
Note issued by Oakwood Funding,
payable in monthly installments
through 1999, with interest
at 7.44% ...................................... 3,246 9,699
Subordinated note payable issued by
Oakwood Funding with interest
payable monthly at 12.58%,
amortizing through 2000 ....................... 4,692 7,372
-----------------
Total nonrecourse debt ................ 7,938 17,071
-----------------
Recourse debt
Term loans payable in monthly
installments through July 2000,
with interest ranging from LIBOR
plus .5% to LIBOR plus .75% ................... 11,076 18,334
Subordinated note with interest payable
monthly at 10.51%, amortizing
through 2001 .................................. 11,867 12,954
-----------------
Total recourse debt ................... 22,943 31,288
-----------------
Total financial services debt ......... 30,881 48,359
-----------------
$61,875 $78,815
=================
The interest rate on the reset debentures will reset on June 1, 2002 to a rate
to be determined by the Company at 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
par at the option of the Company.
The payment of notes collateralized by loans generally is based on the
scheduled monthly payment and actual prepayments of principal on the loans
collateralizing the notes. Under the provisions of certain note agreements, the
notes are secured solely by the underlying collateral, which consists
principally of the loans collateralizing the debt. Such collateral had an
aggregate carrying value of approximately $55 million at September 30, 1998.
Land, land improvements, buildings and equipment with a net book value of
approximately $30 million are pledged as collateral for the facilities term
loan, the industrial revenue bonds and certain other notes payable.
In connection with the issuance of certain indebtedness, the Company incurred
certain costs which are being amortized over the life of the related obligations
using the level yield method.
The estimated principal payments under notes and bonds payable, assuming the
reset debentures are redeemed by the holders on the June 1, 2002 redemption
date, are $18.3 million in 1999, $14.7 million in 2000, $6.3 million in 2001,
$17.9 million in 2002, $679,000 in 2003 and the balance thereafter. Interest
paid by the Company on all outstanding debt, including both short-term and
long-term borrowings, was approximately $24.3 million, $20.3 million and $22.5
million in 1998, 1997 and 1996, respectively.
Various of the Company's debt agreements contain covenants which, among other
things, require the Company to maintain certain minimum financial ratios. The
Company was in compliance with all such covenants at September 30, 1998.
At September 30, 1998 commercial banks, at the request of the Company, had
outstanding letters of credit of approximately $59 million in favor of various
creditors of the Company, of which approximately $55 million relates to the
Company's reinsurance business. Such letters of credit have been issued to
secure the reinsurance subsidiary's obligations to pay reinsurance claims and to
meet regulatory capital requirements.
Note 11--Accounts payable and accrued liabilities
The components of accounts payable and accrued liabilities are as follows:
(in thousands) 1998 1997
- ---------------------------------------------------
Accounts payable ............ $133,809 $ 80,834
Accrued compensation ........ 31,017 20,664
Accrued insurance ........... 13,179 3,620
Accrued dealer volume rebates 12,123 1,957
Income taxes payable ........ 5,265 4,793
Other accrued liabilities ... 31,474 10,294
-------------------
$226,867 $122,162
===================
Note 12--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
1998 ANNUAL REPORT 29
Oakwood Homes Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
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 13--Income taxes
The components of the provision for income taxes are as follows:
(in thousands) 1998 1997 1996
- -------------------------------------------------------------
Current
Federal ................ $ 35,854 $ 51,020 $ 32,426
State .................. 3,289 3,579 4,127
--------------------------------
39,143 54,599 36,553
--------------------------------
Deferred
Federal ................ (5,406) (3,027) 5,239
State .................. 1,000 (293) 633
--------------------------------
(4,406) (3,320) 5,872
--------------------------------
Provision for income taxes $ 34,737 $ 51,279 $ 42,425
================================
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rates follows:
1998 1997 1996
- ----------------------------------------------------
Statutory federal income tax rate 35% 35% 35%
State income taxes, less federal
income tax benefit ............ 3 2 3
Other ........................... 1 2 --
----------------
Effective income tax rate ....... 39% 39% 38%
================
Deferred income taxes includes the following components:
(in thousands) 1998 1997
- ----------------------------------------------------------------
Deferred income tax assets
Inventories .......................... $ 1,459 $ 1,325
REMIC residual interests ............. 9,880 8,668
Accrued liabilities .................. 16,463 7,252
Insurance reserves and
unearned premiums .................. 4,503 1,905
Net operating loss carryforward ...... 1,083 1,803
Other ................................ 5,109 1,814
---------------------
Gross deferred income tax assets 38,497 22,767
---------------------
Deferred income tax liabilities
Properties and facilities ............ (14,797) (6,078)
Deferred insurance policy
acquisition costs .................. (4,364) (3,137)
Acquired intangible assets ........... (4,058) --
Other ................................ (428) (558)
---------------------
Gross deferred income
tax liabilities .............. (23,647) (9,773)
---------------------
Net deferred income tax asset ........ $ 14,850 $ 12,994
=====================
At September 30, 1998 the remaining net operating loss carryforward is
approximately $3.1 million for federal income tax purposes. Utilization of such
carryforward is 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 $35.8 million, $44.9 million and $43.6
million in 1998, 1997 and 1996, respectively.
Note 14--Earnings per share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("FAS 128"), which establishes standards for computing and
presenting earnings per share ("EPS") by replacing the presentation of primary
and fully diluted EPS with a presentation of basic and diluted EPS. All current
and prior year EPS amounts herein reflect adoption of FAS 128. The following
reconciliation details the numerator and denominator used in the computation of
basic and diluted EPS:
(in thousands, except per share data) 1998 1997 1996
- ---------------------------------------------------------------------
Numerator for basic and
diluted EPS--Net income ........ $ 55,353 $ 81,913 $ 68,255
--------------------------------
Denominator:
Weighted average number of
common shares outstanding ...... 46,320 45,798 44,880
Unearned shares ................ (81) (122) (161)
--------------------------------
Denominator for basic EPS ...... 46,239 45,676 44,719
Dilutive effect of stock options
and restricted shares
computed using the treasury
stock method ..................... 1,185 1,115 1,741
--------------------------------
Denominator for diluted EPS .... 47,424 46,791 46,460
--------------------------------
Basic earnings per share ....... $ 1.20 $ 1.79 $ 1.53
--------------------------------
Diluted earnings per share ..... $ 1.17 $ 1.75 $ 1.47
--------------------------------
30 1998 ANNUAL REPORT
Oakwood Homes Corporation
and Subsidiaries
Options to purchase 1,604,996 shares of common stock were not included in the
computation of diluted EPS for the fourth quarter of fiscal 1998 because the
options' exercise prices were greater than the average market price of the
Company's common stock for that period and their inclusion would have been
antidilutive.
Note 15--Stock option and award plans
The Company has a Key Employee Stock Plan (the "Stock Plan") under which
4,043,910 common shares were reserved for issuance to key employees at September
30, 1998. The Stock Plan provides that an additional number of common shares
shall be reserved for issuance under the Stock Plan each October 1 equal to 1.5%
of the number of common shares outstanding on such date. Awards or grants under
the plan may be made in the form of stock options, stock appreciation rights,
restricted stock and performance shares.
The Company also has a Director Stock Option Plan under which 180,000 shares
of the Company's common stock were reserved for grant to 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, 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
Granted ......................... 1,235,500 28.50
Exercised ....................... (351,744) 6.79
Terminated ...................... (126,482) 18.36
-----------
Outstanding at September 30, 1998 3,736,857 18.74
=======================
Exercisable at September 30, 1996 1,512,893 5.16
=======================
Exercisable at September 30, 1997 1,323,513 7.67
=======================
Exercisable at September 30, 1998 1,129,438 8.89
=======================
The following is a summary of stock options outstanding at September 30, 1998:
Options outstanding Options exercisable
-------------------------------------------------------- ---------------------------
Range of Number Weighted average contractual Weighted average Number Weighted average
exercise price of shares life remaining (in years) exercise price of shares exercise price
- -------------------------------------------------------------------------------------------------------
$ 1.74-$ 2.84 214,852 1.6 $ 2.28 214,852 $ 2.28
4.05- 6.25 486,733 3.2 4.74 412,573 4.86
10.72- 11.22 53,400 6.2 11.02 45,900 11.07
12.16- 14.72 342,546 5.2 13.02 324,588 13.00
17.97- 18.33 996,496 6.9 18.31 45,193 18.05
19.78- 22.57 371,834 8.6 20.47 27,002 21.88
23.00- 25.94 90,496 8.1 24.45 59,330 23.69
28.85 1,175,500 8.9 28.85 -- --
37.97 5,000 9.4 37.97 -- --
--------- ---------
All options 3,736,857 6.8 $18.74 1,129,438 $ 8.89
========= =========
The following table summarizes restricted stock issued under the Stock Plan:
Weighted average
Number of shares fair value per share
- --------------------------------------------------------
Fiscal 1996...... 200,000 $27.13
Fiscal 1997...... 43,834 $27.45
Fiscal 1998...... 14,439 $28.25
As of September 30, 1998 there were a total of 2,135,770 shares of common
stock reserved for future grants under the Company's stock option plans.
The aggregate compensation expense for stock-based compensation plans,
computed under the provisions of APB 25, was approximately $1.4 million, $3.5
million and $3.7 million in 1998, 1997 and 1996, respectively. Such compensation
expense relates entirely to accruals for restricted stock awards under the Stock
Plan (charged to income over the vesting periods of the related awards) and, in
1996, to stock appreciation rights.
The Financial Accounting Standards Board has adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"), which permits, but does not require, the Company to utilize a fair-value
based method of accounting for stock-based compensation. The Company has elected
to continue use of the APB 25 accounting principles for its stock option plans
and accordingly has recorded no compensation cost for grants of stock options.
Had compensation cost for the Company's stock option plans been determined based
on the estimated fair
1998 ANNUAL REPORT 31
Oakwood Homes Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
value at the grant dates for awards in 1998, 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) 1998 1997 1996
- --------------------------------------------------------------------
Net income--as reported............... $55,353 $81,913 $68,255
Net income--pro forma................. 52,321 79,540 66,388
Basic earnings per share--
as reported ........................ $ 1.20 $ 1.79 $ 1.53
Basic earnings per share--
pro forma........................... 1.13 1.74 1.48
Diluted earnings per share--
as reported......................... $ 1.17 $ 1.75 $ 1.47
Diluted earnings per share--
pro forma .......................... 1.10 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 1998, 1997 and 1996
respectively, of $11.72, $9.32 and $8.30 per share. Such estimated fair values
were computed using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants issued in 1998, 1997 and 1996,
respectively: dividend yield of .14%, .19% and .22%; expected volatility of
36.28%, 38.47% and 41.90%; weighted average risk-free interest rate of 5.75%,
6.68% and 5.79%; and expected lives of 5 years for fiscal 1998, 1997 and 1996.
Note 16--Employee benefit plans
The Company maintains a 401(k) plan in which substantially all employees who
have met certain age and length of service requirements may participate. On
January 1, 1998 the Company's employee stock ownership plan ("ESOP") was merged
with the 401(k) plan. Employee contributions to the 401(k) plan are limited to a
percentage of their compensation and are matched 100% by the Company for the
first 6% of compensation contributed. The Company's match consists of a 50% cash
contribution and a 50% Company stock contribution. The Company also maintains a
401(k) retirement plan for Schult employees, contributions to which are based on
employee earnings.
During 1995 the Company loaned approximately $2.4 million to the ESOP to
enable the ESOP to purchase Company common stock on the open market. The ESOP
refinanced the Company's loan with the proceeds of a loan from a commercial bank
which the Company has guaranteed; the Company has reflected the note payable,
now held by the 401(k) plan, as a liability in the accompanying consolidated
balance sheet. The bank loan provides that shares are released ratably upon
repayment of the principal of the loan. Compensation cost relating to shares
acquired with the proceeds of the loan is measured by reference to the fair
value of the shares committed to be released during the period, in accordance
with Statement of Position 93-6.
At September 30, 1998 the 401(k) plan held a total of 542,293 shares of the
Company's common stock having a fair value of approximately $7.1 million. Of the
total number of shares, 10,160 shares have been committed to be released, 60,968
shares are held in suspense and the balance, representing shares acquired using
cash contributed to the ESOP and 401(k) plan in excess of its debt service
requirements and shares acquired in prior years, have been allocated to plan
participants. To the extent possible, shares held in suspense will be used to
fund the Company's matching 50% stock contribution. Uncommitted shares are
included at cost in unearned compensation in the consolidated balance sheet.
Total compensation cost under the 401(k) and ESOP plans was approximately $6.5
million, $3.4 million and $2.0 million in 1998, 1997 and 1996, respectively.
Note 17--Contingencies
In November 1998 the Company and certain of its present and former officers and
directors were named as defendants in lawsuits filed on behalf of purchasers of
the Company's common stock for various periods between April 11, 1997 and July
21, 1998 (the "Class Period"). These complaints, which seek class action
certification, allege violations of federal securities law based on alleged
false and misleading financial statements, reports filed by the Company and
other representations during the Class Period. The Company intends to defend
such lawsuits vigorously.
In addition, the Company is also subject to legal proceedings and claims which
have arisen in the ordinary course of its business and have not been finally
adjudicated. 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.
The Company is contingently liable under terms of repurchase agreements with
financial institutions providing inventory financing for retailers of their
products. These arrangements, which are customary in the industry, provide for
the repurchase of products sold to retailers in the event of default on
32 1998 ANNUAL REPORT
Oakwood Homes Corporation
and Subsidiaries
payments by the retailer. The risk of loss under these agreements is spread over
numerous retailers and is further reduced by the resale value of repurchased
homes. The estimated potential obligations under such agreements approximated
$150 million at September 30, 1998. Losses under these agreements have not been
significant.
Note 18--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 gain to be realized
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 as described in Note 4. However, there exists
no active market for manufactured housing residual REMIC interests or uniformly
accepted valuation methodologies. The Company estimates the fair value of
guarantee liabilities by reference to the estimated price differential between
guaranteed and unguaranteed securities offered for sale by the Company. Based on
current estimates, management believes that the fair values of the Company's
retained REMIC interests and guarantee liabilities on subordinated REMIC
securities sold approximate 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
consisted of options on forward starting interest rate swaps in the aggregate
notional amount of $185 million expiring on November 20, 1997. These agreements
are valued at the amount payable or receivable by the Company had the contracts
been terminated at year end. There were no such agreements outstanding at
September 30, 1998.
The following table sets forth the carrying amounts and estimated fair values
of the Company's financial instruments at September 30, 1998 and 1997:
1998 1997
- ---------------------------------------------------------------------- --------------------
Estimated Carrying Estimated Carrying
(in thousands) fair value amount fair value amount
- --------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents, including restricted
cash and investments......................... $ 50,935 $ 50,935 $ 45,265 $ 45,265
Loans and investments
Loans held for sale.......................... 364,904 365,126 261,549 255,944
Loans held for investment
Fixed rate loans........................... 58,275 55,090 77,304 71,736
Variable rate loans........................ 7,579 7,579 9,478 9,478
Less: reserve for uncollectible receivables.. -- (1,653) -- (3,076)
Retained REMIC regular interests............. 22,822 22,822 9,724 9,724
Retained REMIC residual interests............ 53,619 53,619 84,228 84,228
Other receivables.............................. 58,774 58,774 34,046 34,046
Liabilities
Short-term borrowings ......................... 375,023 375,023 175,800 175,800
Interest rate protection agreements............ -- -- 1,491 --
Notes and bonds payable
Fixed rate obligations....................... 38,342 37,932 49,597 48,505
Variable rate obligations.................... 23,943 23,943 30,310 30,310
Guarantee liabilities on subordinated REMIC
securities sold.............................. 5,381 5,381 2,915 2,915
1998 ANNUAL REPORT 33
Oakwood Homes Corporation
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)
Note 19--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
- ------------------------------------------------------------------------------------------
1998
Net sales............................ $221,893 $250,352 $440,129 $492,058 $1,404,432
----------------------------------------------------
Gross profit......................... $ 70,067 $ 80,091 $134,659 $146,181 $ 430,998
----------------------------------------------------
Net income(1)........................ $ 17,802 $ 7,648 $ 4,959 $ 24,944 $ 55,353
----------------------------------------------------
Earnings per share
Basic(1)........................... $ 0.39 $ 0.17 $ 0.11 $ 0.54 $ 1.20
----------------------------------------------------
Diluted(1)......................... $ 0.38 $ 0.16 $ 0.10 $ 0.53 $ 1.17
----------------------------------------------------
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
Basic.............................. $ .33 $ .39 $ .49 $ .58 $ 1.79
----------------------------------------------------
Diluted............................ $ .33 $ .38 $ .48 $ .56 $ 1.75
----------------------------------------------------
The sum of quarterly basic earnings per share does not necessarily equal basic
earnings per share for the year.
(1) Includes special charges of approximately $16.3 million and $35.0 million,
respectively, for the second and third quarters of 1998 relating primarily to
write-downs of certain retained REMIC residual interests.
Note 20--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 portion distributed through 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) 1998 1997 1996
- --------------------------------------------------------------------
Revenues
Manufactured housing.. $ 1,414,607 $ 967,000 $ 881,218
Financial services(1) 67,359 102,778 92,346
Investment income .... 587 273 358
------------------------------------------
$ 1,482,553 $ 1,070,051 $ 973,922
------------------------------------------
Operating income
Manufactured housing.. $ 115,874 $ 95,309 $ 82,181
Financial services(1) (4,259) 57,179 52,387
------------------------------------------
Combined ........... 111,615 152,488 134,568
Non-financial services
interest expense ... (5,970) (3,274) (2,221)
Investment income .... 587 273 358
General corporate
expenses ........... (16,142) (16,295) (22,025)
------------------------------------------
Income before
income taxes ..... $ 90,090 $ 133,192 $ 110,680
------------------------------------------
Identifiable assets
Manufactured housing.. $ 629,170 $ 363,206 $ 307,771
Financial services ... 601,938 486,833 490,472
General corporate .... 52,268 54,467 43,734
------------------------------------------
$ 1,283,376 $ 904,506 $ 841,977
------------------------------------------
Depreciation and
amortization
Manufactured housing.. $ 16,264 $ 8,230 $ 7,302
Financial services ... 2,413 1,241 565
General corporate .... 6,273 4,854 2,594
------------------------------------------
$ 24,950 $ 14,325 $ 10,461
------------------------------------------
Capital expenditures
Manufactured housing.. $ 44,365 $ 31,731 $ 24,290
Financial services ... 2,878 1,925 1,247
General corporate .... 4,168 4,746 15,766
------------------------------------------
$ 51,411 $ 38,402 $ 41,303
------------------------------------------
(1) Includes special charges of approximately $51.3 million in 1998 relating
primarily to write-downs of certain retained REMIC residual interests.
34 1998 ANNUAL REPORT
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Oakwood Homes Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of 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, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1998, 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/ Pricewaterhouse Coopers LLP
Greensboro, North Carolina
November 2, 1998, except as to the information presented in the first paragraph
of Note 17 for which the date is November 25, 1998.
1998 ANNUAL REPORT 35
Oakwood Homes Corporation
and Subsidiaries
COMMON STOCK PRICES
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
Quarter High Low High Low High Low High Low High Low
- -------------------------------------------------------------------------------------------------------------
First.............. 33 3/16 24 7/8 29 7/8 21 21 16 5/8 13 1/4 10 3/8 14 1/4 11 1/4
Second............. 41 3/4 33 1/8 23 17 3/8 25 3/4 18 1/2 13 1/2 10 7/8 14 7/8 10 1/8
Third.............. 38 13/16 26 5/16 24 3/4 16 3/4 25 20 13 1/2 11 5/8 11 7/8 9 5/8
Fourth............. 31 7/8 13 1/16 30 23 7/16 28 20 3/8 18 1/8 12 7/8 14 1/2 11 1/8
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, 1998.
36 1998 ANNUAL REPORT