0000719547-01-500032.txt : 20011009 0000719547-01-500032.hdr.sgml : 20011009 ACCESSION NUMBER: 0000719547-01-500032 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010921 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLAYTON HOMES INC CENTRAL INDEX KEY: 0000719547 STANDARD INDUSTRIAL CLASSIFICATION: MOBILE HOMES [2451] IRS NUMBER: 621671360 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08824 FILM NUMBER: 1741662 BUSINESS ADDRESS: STREET 1: 5000 CLAYTON ROAD CITY: MARYVILLE STATE: TN ZIP: 37804 BUSINESS PHONE: 8653803000 MAIL ADDRESS: STREET 1: 5000 CLAYTON ROAD CITY: MARYVILLE STATE: TN ZIP: 37804 10-K405 1 annrpt.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------ ------ Commission file number 1-8824 CLAYTON HOMES, INC. (Exact name of registrant as specified in its charter) Delaware 62-1671360 ---------------------------------- ---------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 5000 Clayton Road Maryville, Tennessee 37804 ---------------------------------- ---------------------------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: 865-380-3000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ----------------------------------------- -------------------------------- COMMON STOCK, $.10 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock held by non-affiliates of the registrant on August 15, 2001, was approximately $1,501,377,348 (99,693,051 shares at closing price on the NYSE of $15.06). Shares of common stock, $.10 par value, outstanding on August 15, 2001, were 138,089,368. Exhibit index appears on pages 14-15. DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Documents from which portions are incorporated by reference ----------------------------------------------------- ----------------------------------------------------------------- Part II (except for Item 5) Annual Report to Shareholders for fiscal year ended June 30, 2001 Part III Proxy Statement relating to Company's Annual Meeting of Shareholders on October 30, 2001
1 CLAYTON HOMES, INC. PART I ITEM 1. BUSINESS. GENERAL Clayton Homes, Inc. and its subsidiaries (the Company) produce, sell, finance and insure primarily low to medium-priced manufactured homes. The Company's 20 manufacturing plants produce homes which are marketed in 33 states through 1,012 retailers, of which 297 are Company-owned sales centers and 81 are Company-owned community sales offices. Installment financing and insurance products are offered to its home buyers and those buying from selected independent retailers. Such financing is provided through its wholly-owned finance subsidiary, Vanderbilt Mortgage and Finance, Inc. (VMF). The Company acts as agent, earns commissions and reinsures risks on physical damage, family protection, and home buyer protection insurance policies issued by a non-related insurance company (ceding company) in connection with its home sales. The Company also develops, owns, and manages manufactured housing communities. The Company is a Delaware corporation whose predecessor was incorporated in 1968 in Tennessee. Its principal executive offices are located near Knoxville, Tennessee. The following table indicates the percentage of revenue derived from sales by Company-owned retail centers, sales to independent retailers and financial services operations and other income for each of the last three fiscal years.
YEAR ENDED JUNE 30, 2001 2000 1999 ------ ------ ------ Sales by Company-owned retail centers and communities 54% 55% 53% Sales to independent retailers 19% 22% 25% Financial services and other 27% 23% 22% ------ ------ ------ Total 100% 100% 100% ------ ------ ------
For information relating to the Company's four major business segments, see Note 11 to the Consolidated Financial Statements in the Company's Annual Report to Shareholders. MANUFACTURED HOMES A manufactured home made by the Company is a factory-built, completely finished dwelling. Constructed to be transported by truck, the home is mounted on wheels attached to its frame. Manufactured homes are designed to be permanent, owner-occupied residences sited and attached to utilities. The Company manufactures a variety of single and multi-section homes in a wide price range. Retail prices range from $10,000 to $75,000 with sizes from 500 to 2,400 square feet. The Company markets homes under the names of Clayton and Norris. Included standard features are central heating, range, refrigerator, and color-coordinated window, wall and floor treatments. Optional features include central air conditioning, wood-burning fireplaces, hardwood floors, whirlpool tubs, entertainment systems, microwaves, dishwashers, washers and dryers, skylights and furniture. MANUFACTURING OPERATIONS The Company manufactures homes in 20 facilities, ranging in size from 63,000 to 194,000 square feet. See "Item 2. Properties" for a listing by location. The Company's manufactured homes are built in its plants using assembly-line techniques. Completion of a home ordinarily takes two days. Homes are generally produced to fill orders received from independent and Company-owned retail centers; therefore the Company does not normally maintain a significant inventory of homes at its plants. Completed homes are transported to the retail centers by independent carriers. 2 The Company's plants operate on a one-shift-per-day basis, normally for a five-day week, with the capacity to produce approximately 35,000 homes per year. During the fiscal year ended June 30, 2001, the Company produced 19,701 homes. The principal materials utilized in the production of the Company's homes are steel, aluminum, wood, fiberglass, carpet, vinyl floor covering, hardware items, appliances and electrical items. The Company purchases these and other items from a number of supply sources, and it believes that the materials and parts necessary for the construction and assembly of its homes will remain readily available from these sources. In the event that any of these items are not readily available or are available at a higher cost than could be passed on to consumers, the operations of the Company could be adversely affected. The Company offers one year limited warranty programs covering manufacturing defects in materials or workmanship in a home. Warranties covering appliances and equipment installed in the homes generally are obligations of the manufacturers of such items and not those of the Company. Warranty and service costs during the years ended June 30, 2001, June 30, 2000, and June 30, 1999, amounted to approximately $14,193,000, $14,589,000, and $16,085,000, respectively. The backlog of firm orders for homes manufactured by the Company, including orders from Company-owned retail centers, was approximately $35,000,000 and $16,000,000 on June 30, 2001, and 2000, respectively. Based on the Company's production rate, approximately three weeks would be required to fill backlog orders at June 30, 2001. SALES OF HOMES MANUFACTURED BY THE COMPANY The following table sets forth manufacturing sales and other data for the periods indicated.
YEAR ENDED JUNE 30, 2001 2000 1999 ---- ---- ---- Number of homes sold to independent retailers 9,119 12,247 14,980 Number of homes shipped to Company-owned retail centers 10,804 14,101 13,364 ------ ------ ------ Total 19,923 26,348 28,344 ====== ====== ====== Number of plants operating 20 20 19 Number of independent retailers 634 707 671 Number of Company-owned communities 81 76 75 Number of Company-owned retail centers 297 318 306
COMPANY RETAIL OPERATIONS As of June 30, 2001, the Company sold homes through 297 Company-owned retail centers in 23 states. In addition to selling homes built by the Company, virtually all of these retail centers sell new homes manufactured by other companies and previously-owned manufactured homes. The following table indicates the number of Company-owned retail centers and certain information relating to homes sold during the last three fiscal years.
YEAR ENDED JUNE 30, 2001 2000 1999 ------- ------- ------- Number of Company-owned retail centers 297 318 306 Number of new homes sold (including homes built by the Company and by other manufacturers) 12,346 14,022 14,894 Average retail price of new homes sold $43,643 $43,892 $41,173 Number of previously-owned homes sold 3,556 3,910 4,580
All of the Company-owned retail centers employ salespeople who are primarily compensated on a commission basis. The retail centers do not have administrative staffs since most administrative functions are performed at the Company's corporate headquarters. 3 To provide customers a wider price range of homes, the Company purchases and acquires on trade previously-owned homes from individuals and from other retailers, as well as foreclosed homes from lenders throughout its trade territory. Homes sold by Company-owned retail centers are delivered to the homeowners' sites by trucks either owned by the Company or leased for the particular delivery. The purchase price of the home may include delivery and setup of the home at the retail homeowner's site. Electrical, water, and gas connections are performed by licensed technicians. INDEPENDENT RETAILERS In the years ended June 30, 2001, and 2000, 46% of homes manufactured by the Company were sold to its independent retailers. As of June 30, 2001, the Company supplied 634 independent retailers in 32 states with homes. The Company's independent retailer network enables it to distribute homes to more markets, more quickly, without as large an investment in management resources and overhead expenses as is required with Company-owned retail centers. Sales to independent retailers ensure the Company that its homes are competitive with other manufacturers in terms of consumer acceptability, product design, quality and price. The Company's finance subsidiary, VMF, provides financing for retail customers of select independent retailers with terms and conditions similar to those provided to Company-owned locations. In addition, VMF also provides inventory financing for certain independent retailers. The Company establishes relationships with independent retailers through sales representatives from its manufacturing plants. These representatives visit independent retailers in assigned areas to solicit orders for the Company's homes. The area is generally limited to a 500 mile radius from each of the Company's manufacturing plants due to the relatively significant cost of transporting a home. Depending on the cost of the home and the manufacturing competition within the area, a home may be competitively shipped shorter or longer distances. During each of the last three fiscal years no retailer accounted for more than 2% of the Company's consolidated revenues. The Company's independent retailers generally provide their own inventory financing, allowing the Company to receive payment for homes within two weeks after the home is constructed. The Company does not require agreements with its independent retailers, and the relationship between the Company and each of its independent retailers may be terminated at any time by either party. The Company believes its relationships with independent retailers are good, and has experienced relatively little turnover among independent retailers in the past several years. The Company generally has little control over the operations of independent retailers. Typically the Company neither provides inventory financing arrangements for independent retailer purchases nor consigns homes. As is customary in the industry, lenders financing independent retailer purchases require that the Company execute repurchase agreements which provide that, in the event of retailer default under the retailer's inventory financing arrangements, the Company will repurchase homes for the amount remaining unpaid to the lender, excluding interest and repossession costs. Historically, any homes repurchased under such agreements are immediately resold to other retailers, including Company-owned retail centers, at approximately the repurchase price. During the last five fiscal years, the Company has incurred no significant losses resulting from these contingent obligations, but there can be no assurance that losses will not occur in the future. FINANCIAL SERVICES The Company believes that the ability to make financing available to retail purchasers is a material factor affecting the market acceptance of its product. The Company facilitates retail sales by offering various finance and insurance programs. The following table reflects the relative percentages of homes sold by Company-owned retail centers which were financed through the Company, either by VMF or by conventional lenders, and those sales made to customers who arranged their own financing or paid cash. 4
YEAR ENDED JUNE 30, 2001 2000 1999 ----- ----- ----- VMF 74% 76% 72% Conventional lenders 2% 3% 7% Customer arranged or cash 24% 21% 21% ----- ----- ----- Total 100% 100% 100% ===== ===== =====
VMF also purchases and originates manufactured housing installment contract receivables (also referred to as manufactured housing contracts) on an individual basis from independent retailers. Retailers submit home buyer applications to VMF for approval and, provided that credit reports, employment verification, and income and debt analysis meet VMF's criteria, a contract purchase commitment is issued to the selling retailer. VMF makes bulk purchases of manufactured housing contracts from banks and commercial lenders. It also performs, on behalf of other institutions, servicing of manufactured housing contracts that were not purchased or originated by VMF. These purchases and servicing arrangements may relate to the portfolios of other lenders or finance companies, governmental agencies, or other entities that purchase and hold manufactured housing contracts. UNDERWRITING POLICIES. Retail customers of the Company who express a desire to obtain financing by or through the Company complete a credit application form which is initially reviewed by the manager of the retail center and then forwarded to VMF. VMF's underwriting guidelines require that each applicant's credit, residence, employment history and income to debt payment ratios meet predetermined guidelines. If in the judgment of the VMF credit manager an applicant does not meet minimum underwriting criteria, there must be other determining criteria in order for an applicant to be approved. Credit managers confirm that the credit investigation gives a complete and up-to-date accounting of the applicant's creditworthiness and are encouraged to obtain second opinions on loans for relatively large dollar amounts or those which tend to rank lower in terms of underwriting criteria. Generally, the sum of the monthly installment housing obligation, which includes the manufactured home loan payment and monthly site costs, should not exceed 35% of the applicant's gross monthly income. With respect to those home buyers which are approved, VMF requires a down payment in the form of cash, the trade-in value of a previously-owned manufactured home, and/or the estimated value of equity in real property pledged as additional collateral. For previously-owned homes, the trade-in allowance accepted by the retailer must be consistent with the value of the home as determined by VMF in light of current market conditions. The value of real property pledged as additional collateral is estimated by licensed appraisers or by retail personnel, who are not appraisers but are familiar with the area in which the property is located. The average down-payment for 2001 was 19% of the purchase price, while the minimum down-payment for qualified buyers was 5%. The purchase price includes the stated cash sale price of the manufactured home, sales or other taxes and fees and set-up costs. The balance of the purchase price is financed using various installment sales contracts or mortgage instruments providing for a purchase money security interest in the manufactured home and a mortgage on any real property pledged as additional collateral. Normally, the contracts provide for equal monthly payments, generally over a period of seven to thirty years at fixed or variable rates of interest. VMF believes the typical manufactured home purchaser is primarily sensitive to the amount of the monthly payment and not necessarily to the underlying interest rate. The Company offers a bi-weekly payment program which provides for 26 payments per year, allowing home buyers the convenience of electronically drafting payments from their checking accounts while reducing the overall term of the loan. The Company believes that such financing options are attractive to the customer and improve market acceptance of its homes as well as improve delinquency and repossession experience. During the last 13 fiscal years, VMF was the most significant source of financing for purchasers of homes sold by the Company-owned retail centers. In fiscal 1988, VMF originated 5,692 contracts and in fiscal 2001, VMF originated 21,720 contracts. At June 30, 2001, VMF was servicing approximately 148,000 5 contracts with an aggregate dollar amount of $4.3 billion. VMF originated or purchased approximately 138,000 of these contracts with an aggregate dollar amount of $4.1 billion. The Company expects that VMF will continue to originate a significant portion of the financing for purchasers of its homes. The volume of manufactured housing contracts originated by VMF for the periods indicated below and certain other information at the end of such periods is as follows:
CONTRACT ORIGINATIONS YEAR ENDED JUNE 30, 2001 2000 1999 --------- --------- ----------- Principal balance of contracts originated (in thousands) $815,058 $982,570 $1,085,484 Number of contracts originated 21,720 26,161 30,165 Average contract size $ 37,526 $ 37,559 $ 35,985 Average interest rate 11.67% 10.85% 10.40%
The following table indicates the number of loans (in thousands) serviced by VMF on the dates indicated:
LOANS SERVICED (IN THOUSANDS) YEAR ENDED JUNE 30, 2001 2000 1999 ---- ---- ---- Originated and purchased loans serviced 138 130 120 Master servicing contracts 10 12 15 ---- ---- ---- Total 148 142 135
VMF FUNDING. VMF draws on its short-term credit facilities with the Company to fund manufactured home loans, while long-term financing is obtained through the capital markets. In fiscal 2001, VMF completed three public offerings of asset-backed securities totaling $886 million. In excess of $6.4 billion of securities have been issued and sold since 1991. VMF's capital market activity, the primary source of permanent funding for its lending activities, is in the form of asset-backed securities issued through its special purpose entity. These securities, which are sold in public markets, are collateralized by manufactured housing receivables which are either originated or acquired by VMF. Certain of these receivables are originated and subserviced by other entities. With respect to the securitized pools that contain receivables originated or acquired by other entities, VMF is servicer for all loans in the pools, with a subservicing arrangement on some loans originated or acquired from other entities. Loans insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) are permanently funded through the Government National Mortgage Association (GNMA) pass-through program. Under the GNMA program, installment sales contracts are warehoused by VMF and then pooled in denominations of approximately $2,500,000 to collateralize the issuance by VMF of securities guaranteed by GNMA under the provisions of the National Housing Act. Under the GNMA program, VMF retains the servicing of the installment sales contracts and is responsible for passing through payments under the contracts to GNMA security holders. During the fiscal year ended June 30, 2001, VMF originated installment sales contracts eligible for financing under the GNMA program having aggregate principal balances of $1,647,000. As of June 30, 2001, VMF was servicing 226 GNMA pools totaling $85 million in principal balances. Use of FHA financing minimizes the Company's contingent liability for these installment sales contracts because of the government-insured nature of the loans. Accordingly, the Company believes that the use of this form of financing, for customers who qualify, increases the marketability of its manufactured homes. Certain of the agreements related to borrowings include covenants with respect to the Company's financial condition and corporate existence. The Company is contingently liable as guarantor on installment contract receivables sold with recourse. At June 30, 2001, and 2000, the outstanding principal balances of these receivables totaled approximately $84 million and $117 million, respectively. There were no receivables sold with recourse in 2001, 2000 and 1999. 6 ACQUIRED CONTRACTS AND SERVICING ARRANGEMENTS. Certain acquired contracts are originated by banks or commercial lenders, and acquired indirectly or directly by VMF. The acquired contracts are purchased on the basis of underwriting criteria that may be different from and may not be as strict as VMF's underwriting criteria. In fiscal 1994 and 1998, VMF became the servicer of 20,180 and 10,013 manufactured housing installment sales contracts with approximate principal balances of $285 million and $267 million, respectively. VMF acts solely as servicer with respect to these contracts and, thus, has no ownership interest nor contingent liability related to these portfolios. At June 30, 2001, VMF was servicing approximately 10,000 of these installment sales contracts with an approximate principal balance of $188 million. DELINQUENCY AND REPOSSESSION EXPERIENCE. VMF performs recordkeeping and collection activities on all loans that it originates or purchases through portfolio acquisitions. Although the terms of the installment sales contracts vary according to the financial institutions which purchase the contracts, most contracts provide that the failure to make a payment as scheduled is an event of default which gives rise to the right to repossess the home. However, generally the Company does not repossess the home until payments are three months delinquent, unless the borrower does not have apparent ability to bring payments current, in which case repossession may occur sooner. The Company generally follows the same policy with respect to loans insured by the FHA or guaranteed by the VA, although the Company must also file a notice of claim within nine months after default with the agency to preserve its rights under the programs. The following table sets forth delinquent installment sales contracts as a percentage of the total number of installment sales contracts on which the Company provided servicing and was either contingently liable or owner. An account is considered delinquent if any payment is past-due 30 days or more.
DELINQUENCY PERCENTAGE AT JUNE 30, 2001 2000 1999 ---- ---- ---- Total delinquencies as percentage of contracts outstanding All contracts 2.59% 2.19% 2.07% Contracts originated by VMF 2.12 1.67 1.84 Contracts acquired from other institutions 4.89 4.88 3.14
The following table sets forth information related to loan loss/repossession experience for all installment contract receivables on which the Company is either owner or contingently liable:
YEAR ENDED JUNE 30, 2001 2000 1999 ---- ---- ---- Net losses as percentage of average loans outstanding All contracts 1.8% 1.4% 1.4% Contracts originated by VMF 1.7% 1.2% 1.0% Contracts acquired from other institutions 2.5% 2.8% 3.7% Number of contracts in repossession All contracts 2,652 2,231 1,857 Contracts originated by VMF 2,191 1,774 1,374 Contracts acquired from other institutions 461 457 483 Total number of contracts in repossession as percentage of total contracts 1.93% 1.72% 1.54%
The Company pays the unpaid balance of an installment sales contract for which it is liable upon repossession of the home. The Company believes that as long as it is able to sell repossessed homes promptly at satisfactory prices, the costs associated with remarketing these homes can be mitigated. There can be no assurance that the Company's future results with respect to the payoff and resale of repossessed homes will be consistent with its past experience. See Note 6 to the Consolidated Financial Statements in the Company's Annual Report to Shareholders. 7 INSURANCE OPERATIONS. The Company acts as agent on physical damage, family protection, and home buyer protection plan insurance policies written by unaffiliated insurance companies (ceding companies) for purchasers of its manufactured homes. During the fiscal year ended June 30, 2001, the Company acted as the agent on physical damage, family protection, and home buyer protection policies on approximately 67%, 54%, and 78%, respectively, of Company retail sales. Physical damage and home buyer protection plan policies issued through the Company's agency are reinsured through Vanderbilt Property and Casualty Insurance Co., LTD (VPAC), a wholly-owned subsidiary of the Company. The family protection insurance policies issued through the Company's agency are reinsured through Vanderbilt Life and Casualty Insurance Co., LTD, (VLAC), Midland States Life Insurance Company (MSLC) and Eastern States Life Insurance Company (ESLC), which are majority-owned subsidiaries of the Company. MANUFACTURED HOUSING COMMUNITIES The Company owns and operates 81 manufactured home communities in 12 states. These communities provide attractive living environments to residents leasing sites for manufactured homes, many of which are built and sold by the Company. In addition, these communities also lease sites to residents who already own their homes. Some communities also lease or rent Company-owned manufactured homes and the sites. In fiscal 2001 the Communities group purchased or developed 733 home sites in five communities and added 220 sites at existing locations, bringing total sites owned to 21,121 at June 30, 2001, a 5% increase from the prior year. See "Item 2. Properties." Communities' overall revenues were down 3% in 2001. Rental revenues rose 8% and sales decreased 12%. The following table lists the number of community sites owned and the aggregate occupancy rate at the end of the last three fiscal years:
JUNE 30, 2001 2000 1999 ---- ---- ---- Homes sites owned 21,121 20,168 19,708 Occupancy rate 75% 75% 73%
REGULATION The Company's manufactured homes are subject to a number of federal, state and local laws. Construction of manufactured housing is governed by the National Mobile Home Construction and Safety Standards Act of 1974. In 1976, the Department of Housing and Urban Development (HUD) issued regulations under this Act establishing comprehensive national construction standards. The HUD regulations cover all aspects of manufactured home construction, including structural integrity, fire safety, wind loads and thermal protection. The Company's manufacturing facilities and the plans and specifications for its manufactured homes have been approved by a HUD-designated inspection agency. A HUD-approved organization regularly inspects the Company's manufactured homes for compliance during construction. Failure to comply with the HUD regulations could expose the Company to a wide variety of sanctions, including closing the Company's plants. The Company believes the homes it manufactures comply with all present HUD requirements. In addition, certain components of manufactured homes are subject to regulation by the Consumer Product Safety Commission which is empowered, in certain circumstances, to ban the use of component materials believed to be hazardous to health and to require the manufacturer to repair defects in components in its homes. In February 1983, the Federal Trade Commission adopted regulations requiring disclosure of a manufactured home's insulation specifications. A variety of laws affect the sale of manufactured homes on credit by the Company. The Federal Consumer Credit Protection Act (Truth-in-Lending) and Regulation Z (issued by the Board of Governors of the Federal Reserve System) require written disclosure of information relative to such credit sales, including the amount of the annual percentage rate and the finance charge. The Federal Fair Credit Reporting Act also requires disclosure of certain information used as a basis to deny credit. The Federal Equal Credit Opportunity Act and Regulation B (issued by the Board of Governors of the Federal Reserve System) prohibit discrimination against any credit applicant based on sex, marital status, race, color, religion, national origin, age (provided the applicant has the capacity to contract), receipt of income from any public assistance program or the good faith exercise by the applicant of any right under the Consumer Credit Protection Act. Regulation B establishes administrative requirements for compliance with the Equal Credit Opportunity Act and, among other things, requires the Company to provide a customer whose credit request has been denied with a 8 statement of reasons for the denial. The Federal Trade Commission has issued or proposed various Trade Regulation Rules dealing with unfair credit practices, collection efforts, preservation of consumers' claims and defenses and the like. Installment sales contracts eligible for inclusion in the GNMA Program are subject to credit underwriting requirements of the FHA or the VA. The movement and use of the Company's manufactured homes are subject to highway use laws, ordinances and regulations of various federal, state and local authorities. Such regulations may prescribe size and road use limitations and impose lower than normal speed limits and various other requirements. The Company's manufactured homes and its development of manufactured housing communities are also subject to local zoning and housing regulations. The Company is subject to the Magnuson-Moss Warranty Improvement Act which regulates the descriptions of warranties on products. The description and substance of the Company's warranties are also subject to a variety of state laws and regulations. Insurance agency activities are subject to state insurance laws and regulations as determined by the particular insurance commissioner for each state in accordance with the McCarran-Ferguson Act. Sales practices are governed at both the federal and state level through various consumer protection trade practices and public accommodation laws and regulations. VPAC and VLAC are subject to insurance and other regulations of the British Virgin Islands. MSLC and ESLC are subject to insurance and other regulations of the Turks and Caicos Islands. COMPETITION The manufactured housing industry is highly competitive at the manufacturing, retail and finance levels in terms of price, service, delivery capabilities and product performance. There are many firms in direct competition with the Company. The Company believes it has a competitive advantage over firms which do not have manufacturing, retailing and financing capabilities. Since the Company's homes are a form of low-cost housing, they compete with other forms of such housing including apartments and conventionally-built and prefabricated homes. Some of the Company's competitors are larger and have significant financial resources while other competitors are quite small in relation to the size of the Company. The capital requirements for entry into both the manufacturing and retail segments are relatively small, with financing available to them. The Company is not able to estimate the total number of competitors in its marketing area. EMPLOYEES As of June 30, 2001, the Company employed 6,554 persons. Of these, 1,905 were employed in retail, 3,529 in manufacturing, 580 in financial services, 455 in communities and 85 in executive and administrative positions. The Company does not have any collective bargaining agreements and considers its employee relations to be good. ITEM 2. PROPERTIES. The Company's Financial Services operations and executive offices are located near Knoxville, Tennessee in a wholly-owned, two-story building with 135,000 square feet of space. The following table sets forth the properties which the Company uses for its manufacturing operations and locations of its manufactured housing communities. All of the buildings used for manufacturing operations are constructed of fabricated metal on a concrete slab. 9 LOCATION OF PROPERTY
APPROXIMATE APPROXIMATE MANUFACTURING OPERATIONS SQUARE FEET MANUFACTURING OPERATIONS SQUARE FEET Owned by Company Owned by Company Arizona Tennessee (continued) El Mirage 123,000 Ardmore 100,000 Georgia Rutledge 87,000 Waycross 100,000 Bean Station #1 114,000 Kentucky Bean Station #2 137,000 Hodgenville 130,000 Andersonville 128,000 North Carolina White Pine 137,000 Henderson 112,000 Texas Oxford 92,000 Waco #1 148,000 Richfield 194,000 Waco #2 99,000 Tennessee Bonham 117,000 Maynardville 110,000 Sulphur Springs 113,000 Savannah #1 104,000 Savannah #2 109,000 Leased Halls, Tennessee 63,000
APPROXIMATE APPROXIMATE COMMUNITIES ACRES COMMUNITIES ACRES Owned by Company Owned by Company Arizona Tennessee El Mirage 35 Chattanooga 34 Glendale 14 Knoxville (4) 202 Phoenix 47 LaVergne 76 Florida Louisville 41 Gainesville (2) 132 Millington 29 Jacksonville (5) 330 Morristown 12 Kissimmee 41 Maryville (2) 34 Mulberry (2) 162 Powell (2) 69 Plant City 38 Sevierville 115 Princeton 37 Smyrna 26 Tallahassee 39 Tullahoma 18 Georgia Texas Douglasville (2) 97 Arlington 39 Rossville 78 Dallas (3) 140 Iowa Denton (3) 201 Carter Lake 41 Fort Worth (4) 154 Michigan Flower Mound 18 Kalamazoo 126 Greenville 40 Missouri Houston (3) 153 Independence 90 Humble 55 North Carolina Little Elm 86 Greensboro 83 Pearland 50 Oklahoma San Angelo 90 Edmond 37 San Antonio (6) 294 Enid 20 Schertz 71 Lawton 38 Wilmer 69 Midwest City 25 Wylie (2) 209 Norman 44 Virginia Oklahoma City (2) 116 Evington 70 South Carolina Blacksburg 38 Columbia 97 Florence (2) 97
10 The Company-owned retail centers are three to four acre sites with a special manufactured office unit serving as the sales office. The remainder of the retail center site is devoted to the display of homes. Of the 297 retail centers, 162 are owned and 135 occupy leased property. The Company does not believe that any individual retail sales center property is material to its overall business. All of the properties described above are well maintained and suitable for the purposes for which they are being used. The Company believes that its properties are adequate for its near-term needs. ITEM 3. LEGAL PROCEEDINGS. No material legal proceedings are pending other than routine litigation incidental to the business of the Company. The Company believes that such proceedings will not have any material adverse effect on it or its operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS. No matters were submitted to shareholders during the last quarter of the fiscal year. 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) The Company's Common Stock is traded on the New York Stock Exchange. The following table sets forth, for fiscal years 2001 and 2000, respectively, the range of high and low closing sale prices as reported by the New York Stock Exchange, Inc.
Fiscal Fiscal 2001 2000 ---- ---- Quarter Ended High Low High Low September $10.00 $8.13 $11.88 $8.56 December 12.88 8.75 11.94 8.50 March 14.50 12.05 10.13 7.81 June 15.82 11.55 10.38 7.94
(b) As of August 15, 2001, there were 9,687 holders of record (approximately 44,000 beneficial holders) of the Company's Common Stock. (c) It is the policy of the Board of Directors of the Company to reinvest substantially all earnings in the business. At its April 2001 meeting, the Board of Directors changed the Company dividend policy from quarterly payments to an annual payment. The first annual dividend of 6.4 cents per share will be paid in January 2002. Future dividend policy will depend on the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Board of Directors. Additionally, certain of the Company's financing agreements have various covenants that restrict payments which may be made for dividends and other stock transactions. The following portions of the Company's 2001 Annual Report to Shareholders are incorporated herein by reference (page number references are to Annual Report): ITEM 6. SELECTED FINANCIAL DATA. Eleven Year Review on page 12. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 13-15. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market Risk on page 14-15. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - Quarterly Results (unaudited) on page 15. - Report of Independent Accountants on page 16. - Consolidated Balance Sheets on page 16. - Consolidated Statements of Income on page 17. - Consolidated Statements of Shareholders' Equity on page 17. - Consolidated Statements of Cash Flows on page 18. - Notes to the Consolidated Financial Statements on pages 19-25. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION Kevin T. Clayton 38 Chief Executive Officer, President, and President, Financial Services (a) David M. Booth 48 Executive Vice President and President, Retail (b) Richard D. Strachan 59 Executive Vice President and President, Manufacturing (c) John J. Kalec 51 Senior Vice President and Chief Financial Officer (d) Allen Morgan 54 Vice President and General Manager, Communities (e) Amber W. Krupacs 37 Vice President Finance (f) Greg A. Hamilton 43 Vice President and Controller (g)
(a) Mr. Clayton has been President of Financial Services since 1995. Prior to that time, he served in various management positions with the Company. In August 1997, he was named President and Chief Operating Officer of the Company. In July 1999, he was named Chief Executive Officer. (b) Mr. Booth has been Executive Vice President of the Company since 1997 and President of Retail since 1995. Prior to that time, he served as Executive Vice President of Retail and in other management positions with the Company. (c) Mr. Strachan has been Executive Vice President of the Company and President of Manufacturing since 1998 and President of Manufacturing since 1997. Prior to that time, he served as Vice President and General Manager of Manufacturing as well as other significant management positions with the Company and within the industry. (d) Mr. Kalec rejoined the Company in 2001. From January 2000 to August 2001, he was Chief Financial Officer and Executive Vice President of iPIX. From August 1998 to January 2000, he served as Vice President and Chief Financial Officer of Interactive Pictures. Prior to that time, he served as Senior Vice President, Chief Financial Officer, and Secretary of Clayton Homes, Inc. from 1996 to 1998. (e) Prior to joining the Company in 1998, as General Manager of the Communities Group, Mr. Morgan was Superintendent of Knox County, Tennessee Schools from 1992 to 1998. In September 1999, he was named Vice President of the Company. (f) Ms. Krupacs has been Vice President Finance since 1998. She joined the Company in December 1993 as Tax Manager. From August 1998 through August 1999, she served as Secretary. (g) Mr. Hamilton joined the Company in February 1997 as Corporate Controller and was named Vice President and Controller of the Company in August 1998. From 1984 to 1997, he served in various finance and accounting positions with Philips Consumer Electronics Company. The Company's executive officers serve at the pleasure of the Board of Directors. All other required information is incorporated by reference to the Company's Proxy Statement under the heading ELECTION OF DIRECTORS. ITEM 11. EXECUTIVE COMPENSATION. Incorporated by reference to the Company's Proxy Statement under the heading COMPENSATION OF MANAGEMENT TABLE. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference to the Company's Proxy Statement under the headings ELECTION OF DIRECTORS and PRINCIPAL STOCKHOLDERS; SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference to the Company's Proxy Statement. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements: (Included in Annual Report - Exhibit 13). The following Consolidated Financial Statements of Clayton Homes, Inc. and its subsidiaries included in Part II, Item 8 are incorporated by reference to the 2001 Annual Report to Shareholders for the year ended June 30, 2001. Report of Independent Accountants. Consolidated Balance Sheets - June 30, 2001, and 2000. Consolidated Statements of Income - years ended June 30, 2001, 2000 and 1999. Consolidated Statements of Shareholders' Equity - years ended June 30, 2001, 2000 and 1999. Consolidated Statements of Cash Flows - years ended June 30, 2001, 2000 and 1999. Notes to the Consolidated Financial Statements. 3. Exhibits: 3. (a) Restated charter as amended. (F) (b) Bylaws. (H) 4. (a) Specimen stock certificates. (H) (b) The Company agrees to furnish to the Commission, upon request, instruments relating to the long term debt of the Company or its subsidiaries. 10. (a) Lease Agreement, dated June 29, 1972, as amended, between Clayton Homes, Inc. and Dean Planters Warehouse, Inc. (A) (subsequently assigned to CLF, a limited partnership which includes a related party). *(b) 1991 Employees Stock Option Plan. (C) *(c) Clayton Homes, Inc. 1997 Employees Stock Incentive Plan. (G) *(d) Director's Equity Plan. (E) *(e) Directors' Equity Plan. (E) *(f) 1996 Outside Directors Equity Plan. (D) 13. Annual Report to Shareholders for year ended June 30, 2001. (B) 21. List of Subsidiaries of the Registrant (filed herewith). 23. Consent of independent accountants (filed herewith). ________________________________________________________________ 14 (A) Filed as Exhibits to Registration Statement on Form S-1 (SEC File No. 2-83705) and incorporated by reference thereto. (B) For the information of the Commission only, except to the extent of portions specifically incorporated by reference. (C) Filed with Registration Statement on Form S-8 (SEC File No. 333-83565) and incorporated by reference thereto. (D) Filed with Registration Statement on Form S-8 (SEC File No. 333-83543) and incorporated by reference thereto. (E) Filed with Registration Statement on Form S-8 (SEC File No. 333-83545) and incorporated by reference thereto. (F) Filed with the Company's Proxy Statement for the Annual Meeting of Shareholders held November 14, 1996, and incorporated by reference thereto. (G) Filed with the Company's Proxy Statement for the Annual Meeting of Shareholders held November 12, 1997, and incorporated by reference thereto. (H) Filed with the Company's Form 10K for the fiscal year ended June 30, 1998, and incorporated by reference thereto. * Management and Director's Compensation plans. ________________________________________________________________ (b) Reports on Form 8-K. No reports were filed in the Registrant's last quarter. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Alcoa, State of Tennessee, on September 21, 2001. CLAYTON HOMES, INC. By: /s/ Kevin T. Clayton ----------------------- Kevin T. Clayton Chief Executive Officer, President and President, Financial Services Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
/s/ James L. Clayton September 21, 2001 Chairman of the Board ------------------------------------- James L. Clayton /s/ Kevin T. Clayton September 21, 2001 Chief Executive Officer, President ------------------------------------- and President, Financial Services Kevin T. Clayton (Principal Executive Officer) /s/ John J. Kalec September 21, 2001 Senior Vice President and ------------------------------------- Chief Financial Officer John J. Kalec /s/ Amber W. Krupacs September 21, 2001 Vice President Finance ------------------------------------- Amber W. Krupacs /s/ Greg A. Hamilton September 21, 2001 Vice President and Controller ------------------------------------- Greg A. Hamilton /s/ B. Joe Clayton September 21, 2001 Director ------------------------------------- B. Joe Clayton /s/ Dan W. Evins September 21, 2001 Director ------------------------------------- Dan W. Evins /s/ Wilma H. Jordan September 21, 2001 Director ------------------------------------- Wilma H. Jordan /s/ Thomas N. McAdams September 21, 2001 Director ------------------------------------- Thomas N. McAdams /s/ C. Warren Neel September 21, 2001 Director ------------------------------------- C. Warren Neel
16 EX-13 3 doc2.txt
EXHIBIT 13 (in thousands except per share and other data) 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 ----------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Revenues Net sales $849,157 $993,916 $1,040,668 $880,856 $822,906 $762,396 $621,351 $510,153 $384,491 $296,849 $257,557 Financial services and other income 301,799 299,429 303,615 246,923 198,797 166,345 136,741 118,083 91,750 74,330 62,392 ----------------------------------------------------------------------------------------------------------------------------------- 1,150,956 1,293,345 1,344,283 1,127,779 1,021,703 928,741 758,092 628,236 476,241 371,179 319,949 ----------------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of sales 562,267 660,429 705,128 598,589 559,274 521,200 431,826 357,698 267,201 206,049 176,374 SG&A 374,628 384,067 367,430 302,598 270,996 236,188 188,835 153,698 113,695 84,785 76,420 Financial services interest 706 1,032 7,981 2,015 2,885 3,649 5,533 8,196 11,819 16,585 18,198 Provision for credit losses 42,500 20,800 12,459 7,976 1,000 - - - - 3,300 3,772 ----------------------------------------------------------------------------------------------------------------------------------- 980,101 1,066,328 1,092,998 911,178 834,155 761,037 626,194 519,592 392,715 310,719 274,764 ----------------------------------------------------------------------------------------------------------------------------------- Operating income 170,855 227,017 251,285 216,601 187,548 167,704 131,898 108,644 83,526 60,460 45,185 Interest income (expense), net/other (1,504) 1,608 (5,317) 5,499 5,152 4,596 3,902 (359) (170) (317) (592) ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 169,351 228,625 245,968 222,100 192,700 172,300 135,800 108,285 83,356 60,143 44,593 Provision for income taxes (62,700) (84,600) (91,000) (84,400) (73,200) (65,500) (48,800) (39,000) (29,600) (20,800)(16,000) ----------------------------------------------------------------------------------------------------------------------------------- Income before accounting change 106,651 144,025 154,968 137,700 119,500 106,800 87,000 69,285 53,756 39,343 28,593 Cumulative effect of accounting change - - - - - - - 3,000 - - - ----------------------------------------------------------------------------------------------------------------------------------- Net income $106,651 $144,025 $154,968 $137,700 $119,500 $106,800 $87,000 $72,285 $53,756 $39,343 $28,593 ----------------------------------------------------------------------------------------------------------------------------------- Net income per share Basic $0.77 $1.03 $1.07 $0.93 $0.81 $0.72 $0.59 $0.51 $0.39 $0.30 $0.27 Diluted $0.77 $1.03 $1.06 $0.92 $0.80 $0.72 $0.59 $0.49 $0.37 $0.29 $0.24 Average shares outstanding Basic 137,702 139,474 145,211 148,463 148,324 148,253 147,020 141,046 136,391 130,103 106,884 Diluted 138,340 139,815 145,931 149,504 149,346 149,183 148,285 149,875 149,106 142,100 126,216 Dividends per common share $.064 $.064 $.064 $.064 $.061 $.049 $.030 - - - - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Total assets $1,654,170 $1,506,378 $1,417,245 $1,457,757 $1,045,761 $886,350 $761,151 $701,148 $587,032 $554,780 $488,817 Debt obligations 141,862 99,216 96,477 247,591 22,806 30,290 48,737 70,680 137,038 192,931 227,444 Shareholders' equity $1,147,478 $1,036,375 $947,768 $881,019 $754,526 $650,189 $544,187 $462,154 $348,630 $292,950 $200,992 KEY FINANCIAL RATIOS As a % of revenue Operating income 14.8% 17.6% 18.7% 19.2% 18.4% 18.1% 17.4% 17.3% 17.5% 16.3% 14.1% Net income 9.2% 11.1% 11.5% 12.2% 11.7% 11.5% 11.5% 11.5% 11.3% 10.6% 8.9% Debt as a % of total capital 11.0% 8.7% 9.2% 21.9% 2.9% 4.5% 8.2% 13.3% 28.2% 39.7% 53.1% OTHER DATA Company-owned retail centers 297 318 306 273 245 216 192 165 143 127 123 Independent retailers 634 707 671 702 663 580 421 372 371 312 330 Manufacturing plants 20 20 19 18 17 17 16 13 13 11 10 Communities 81 76 75 71 67 64 55 46 33 20 12 -----------------------------------------------------------------------------------------------------------------------------------
12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table reflects the percentage changes in sales by the Company's retail and community sales centers and in wholesale sales to independent retailers. It also shows the percentage changes in the average number of Company-owned retail centers, communities and independent retailers, the average sales per location, and the average price per home sold in each category.
Year ended June 30, 2001 vs 2000 2000 vs 1999 ---------------------------------------------------------------------- RETAIL Dollar sales -12.5% -0.4% Number of retail centers -1.4% 7.8% Dollar sales per retail center -11.2% -7.6% Price of home -1.3% 8.2% ---------------------------------------------------------------------- WHOLESALE Dollar sales -19.9% -16.2% Number of independent retailers -2.7% 0.4% Dollar sales per independent retailer -17.7% -16.6% Price of home 7.6% 2.4% ---------------------------------------------------------------------- COMMUNITIES Dollar sales -12.3% 28.4% Number of communities 4.0% 3.4% Dollar sales per community -15.6% 24.1% Price of home -1.5% 2.6% ----------------------------------------------------------------------
FISCAL 2001 COMPARED TO FISCAL 2000 Total revenues decreased 11% to $1.2 billion, as manufactured housing sales decreased 15% to $849 million, financial services income decreased slightly to $228 million and rental and other income increased 4% to $74 million. Current conditions in the manufactured housing industry remain highly competitive at both the retail and wholesale levels. For fiscal 2001, the industry was faced with manufacturing over-capacity and too many retail centers. This competitive environment, as well as an increase in industry foreclosures and aging retail inventory, has contributed to decreased industry and Company sales, and significant closings of retail centers. Net sales of the Retail group fell 13% to $586 million. This decline was the result of an 11% decrease in homes sold, a 1% decrease in the average number of Company-owned retail centers and a 1% decrease in the average price per home. Multi-section homes accounted for 50% of total new homes sold versus 51% last year. During the year, the Company opened seven retail centers and closed 28 under-performing retail centers. The Company continually evaluates specific markets and opens, acquires or closes retail centers as conditions warrant. All of the sales centers opened in fiscal 2001 were acquisitions. Two of the new retail centers were opened in the fourth quarter. Net sales of the Manufacturing group to independent retailers decreased 20% to $223 million, as the number of homes sold fell 26%. The average wholesale price increased 8% principally due to a shift toward multi-section homes which accounted for 52% of total shipments versus 49% last year. Net sales of the Communities group decreased 12% to $39 million as 11% fewer homes were sold, and the average home selling price decreased 1%. The Company added 953 sites during the year bringing the total to 21,121 sites at June 30, 2001. Within the Financial Services segment, interest and loan servicing revenues increased $16 million, and insurance related revenues rose $6 million. Rental and other income increased 4% on an 8% rise in Communities rental income. The average outstanding balance of installment contract and mortgage receivables declined slightly to $437 million with a weighted average interest rate of 9.8%, down from 11.9%. The average outstanding balance of receivables sold rose 12% to $3.7 billion, and the weighted average loan service spread increased to 3.4% from 3.3%. Financial Services interest expense decreased $0.3 million to $0.7 million. Debt collateralized by installment contract receivables dropped 32% to an average of $7 million, and the weighted average interest rate increased to 10.6% from 10.5%. Loan covenants preclude prepaying these higher cost obligations. Gross profit margins on retail, manufacturing, and communities sales increased to 33.8% from 33.6%. Selling, general and administrative expenses were 32.5% and 29.7% of revenues for the years ended June 30, 2001, and 2000, respectively. This increase was primarily due to a decline in overall sales volume and reduced capacity utilization in manufacturing. Additional costs associated with portfolio acquisitions and fixed costs being spread over lower revenues were also a factor. The provision for credit losses and contingent liabilities increased to $42.5 million in 2001 from $20.8 million in 2000 which was primarily due to the additional number of contracts in foreclosure as compared to the same period last year. Net credit losses as a percentage of loans outstanding for fiscal 2001 increased to 1.8% from 1.4% while delinquency rates on all loans increased to 2.6% on a unit basis from 2.2%. The size, character and rate of change in the credit loss and contingent liability reserves are dependent upon many factors, including, but not limited to, origination volume, portfolio performance and market conditions. The changes in inventory levels at June 30, 2001, compared to June 30, 2000, are shown as follows in millions:
Increase (decrease) MANUFACTURING Raw materials $ (3.5) Finished goods (1.9) RETAIL Inventory levels at Company-owned retail centers (30.3) COMMUNITIES Inventory to stock five new Communities 0.5 Inventory levels at 76 Communities open at June 30, 2000 (1.5) -------------------------------------------------------------- $(36.7) --------------------------------------------------------------
FISCAL 2000 COMPARED TO FISCAL 1999 Total revenues decreased 4% to $1.3 billion, as manufactured housing sales decreased 4% to $994 million, financial services income decreased 2% to $229 million and rental and other income increased 1% to $71 million. Conditions in the manufactured housing industry are highly competitive at both the retail and wholesale levels. For fiscal 2000, the industry was faced with over-capacity in manufacturing, too many retail centers, and high product inventories. This competitive environment, as well as rising interest rates and general credit tightening, has contributed to decreased industry and Company sales. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net sales of the Retail group fell slightly to $670 million. This decline was the result of an 8% decrease in homes sold, offset by an 8% increase in the average number of Company-owned retail centers and an 8% increase in the average price per home. Multi-section homes accounted for 51% of total new homes sold versus 49% last year. During the year, the Company opened 26 retail centers and closed 14 under-performing retail centers. The Company continually evaluates specific markets and opens, acquires or closes retail centers as conditions warrant. Of the 26 new openings, 10 were acquired and 16 were greenfield start-ups. Eleven of the new retail centers were opened in the fourth quarter. Net sales of the Manufacturing group to independent retailers decreased 16% to $279 million, as the number of homes sold fell 18%. The average wholesale price increased 2% principally due to a shift toward multi-section homes. Multi-section homes accounted for 49% of total shipments versus 48% last year. Net sales of the Communities group increased 28% to $45 million as 25% more homes were sold while the average home selling price increased 3%. The Company added 460 sites during the year bringing the total to 20,168 sites. Within the Financial Services segment, interest and loan servicing revenues increased $8 million, and insurance related revenues rose $6 million. Rental and other income increased 1% on a 9% rise in Communities rental income. The average outstanding balance of receivables owned declined 27% to $440 million with a weighted average interest rate of 11.9%, up from 10.3%. The average outstanding balance of receivables sold rose 29% to $3.3 billion, and the weighted average loan service spread decreased to 3.3% from 3.7%, as the Federal Reserve increased interest rates. Financial Services interest expense decreased $7 million to $1 million. Debt collateralized by installment contract receivables dropped 26% to an average of $10 million, and the weighted average interest rate increased to 10.5% from 10.4%. Loan covenants preclude prepaying these higher cost obligations. Gross profit margins increased to 33.6% from 32.2%. This increase is attributable to a higher percentage of retail sales in the total sales mix as well as a shift in mix to multi-section units. Selling, general and administrative expenses were 29.7% and 27.3% of revenues for the years ended June 30, 2000, and 1999, respectively. This increase as a percentage of revenues was primarily due to a decline in overall sales volume, in addition to growth of Company-owned sales centers without a corresponding increase in sales. Additional set up costs associated with the shift in mix toward multi-section units and sales of larger homes was also a factor. Net losses as a percentage of loans outstanding for fiscal 2000 remained steady at 1.4% while delinquency rates on all loans increased to 2.2% on a unit basis from 2.1%. The size, character and rate of change in the credit loss and contingent liability reserves are dependent upon many factors, including, but not limited to, origination volume, portfolio performance and market conditions. The changes in inventory levels at June 30, 2000, compared to June 30, 1999, are shown below in millions:
Increase MANUFACTURING Raw materials $2.1 Finished goods 3.6 RETAIL Inventory to stock 12 new Company- owned sales centers 8.6 Inventory levels at 306 Company-owned sales centers open at June 30, 1999 21.0 COMMUNITIES Inventory to stock one new community 0.3 Inventory levels at 75 communities open at June 30, 1999 2.4 ----------------------------------------------------------- $38.0 -----------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES The Company anticipates meeting cash requirements with proceeds from asset securitizations, cash provided from operations, revolving credit lines, a participation facility and long-term debt. A principal strength of the Company is its ability to access global capital markets; continued access to the public and private capital markets is critical to the Company's ability to continue to fund its finance operations. During the year ended June 30, 2001, the Company raised $886 million through asset securitizations. At June 30, 2001, the Company had debt outstanding of $142 million. Short-term debt available consists of $165 million committed and $71 million uncommitted lines of credit for working capital needs. Debt outstanding principally consists of $75 million of privately issued senior notes, $46 million of short-term borrowings, $5 million of installment paper collateralized debt and $16 million of tax-exempt bonds. On January 11, 2001, the Company cancelled its committed one-year $300 million commercial paper conduit facility. Subsequent to June 30, 2001, the Company entered into a one-year committed $150 million participation facility to be used to facilitate the sale of manufactured housing contracts and mortgages. In fiscal 2001, the Company repurchased 60,000 shares for $482,000. Under Board approved repurchase programs, all shares may be acquired, at management's discretion, over time on the open market. Shares repurchased are retired. The Company originated and acquired approximately $1.1 billion of installment contracts and mortgage loan receivables during fiscal 2001. Additional investments were made of approximately $14 million to expand, develop, or improve manufactured housing communities, $5 million for opening and upgrading Company-owned retail centers, $4 million for construction and improvement of manufacturing facilities, and $2 million for other fixed assets. In fiscal 2002, the Company expects to originate approximately $900 million of installment contract and mortgage loan receivables. It expects to invest approximately $24 million in acquisitions or construction of manufactured housing communities, up to $12 million for opening and upgrading Company-owned retail centers, up to $6 million for construction and improvement of manufacturing facilities, and up to $2 million for other fixed assets. MARKET RISK The Company is exposed to market risks related to fluctuations in interest rates on its installment paper contract receivables, related residual interests and variable rate debt, which principally consists of revolving 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) credit lines. The Company uses interest rate swaps to minimize interest rate risk on certain credit lines, effectively converting these to fixed rate debt. Foreign currency and commodity price risk are not considered to have a material impact on the Company. The Company has variable interest rate installment contract receivables of $14 million at June 30, 2001. Holding the outstanding principal amount constant, each one percentage point increase in interest rates occurring on the first day of the year would result in an increase in interest income for the coming year of approximately $42,000, net of tax. The Company has residual interests collateralized by installment contract receivables with variable interest rate terms. These installment contract receivables aggregate $928 million on June 30, 2001. Holding the receivable balances constant, each one percentage point increase in interest rates occurring on the first day of the year would result in a decrease in financial services income for the coming year of approximately $3.7 million, net of tax. As of June 30, 2001, the Company has outstanding debt of $142 million. There is no significant exposure to changes in interest rates on debt obligations as the majority of its long-term debt, $80 million, carries fixed interest rates. Remaining debt of $62 million carries variable interest rates, which reprice weekly. Holding the variable rate debt constant, each one percentage point increase in interest rates occurring on the first day of the year would result in an increase in interest expense for the coming year of approximately $391,000, net of tax. EFFECTS OF INFLATION Inflation has had an insignificant impact on the Company during the past several years. FORWARD LOOKING STATEMENTS Certain statements in this annual report are forward looking as defined in the Private Securities Litigation Reform Law. These statements involve certain risks and uncertainties that may cause actual results to differ materially from expectations as of the date of this report. These risks fall generally within three broad categories consisting of industry factors, management expertise, and government policy and economic conditions. Industry factors include such matters as potential periodic inventory adjustments by both captive and independent retailers, availability of wholesale and retail financing, general or seasonal weather conditions affecting sales and revenues, catastrophic events impacting insurance costs, cost of labor and/or raw materials and industry consolidation trends creating fewer, but stronger, competitors capable of sustaining competitive pricing pressures. Management expertise and experience affects its overall ability to anticipate and meet consumer preferences, maintain successful marketing programs, continue quality manufacturing output, keep a strong cost management oversight, and achieve stable results from its securitization activities. Lastly, management has little control over government policy and economic conditions such as prevailing interest rates, capital market liquidity, government monetary policy, stable regulation of manufacturing standards, consumer confidence, favorable trade policies, and general prevailing economic and employment conditions. QUARTERLY RESULTS (unaudited)
2001 2000 ------------------------------------------------------------------------------------------------------------------------------- FIRST SECOND THIRD FOURTH First Second Third Fourth (in thousands except per share data) SEPT. 30 DEC. 31 MAR. 31 JUNE 30 Sept. 30 Dec. 31 Mar. 31 June 30 ------------------------------------------------------------------------------------------------------------------------------- Revenues $300,807 $284,853 $272,070 $293,226 $337,297 $309,159 $306,981 $339,908 Operating income 45,408 45,468 38,620 41,359 56,277 55,551 56,725 58,464 Income before income taxes 45,982 43,565 37,752 42,052 56,424 55,831 56,993 59,377 Net income 28,982 27,465 23,752 26,452 35,524 35,231 35,893 37,377 Earnings per share - Basic $.21 $.20 $.17 $.19 $.25 $.25 $.26 $.27 - Diluted $.21 $.20 $.17 $.19 $.25 $.25 $.26 $.27 Price range of stock - High $10.00 $12.88 $14.50 $15.82 $11.88 $11.94 $10.13 $10.38 - Low $8.13 $8.75 $12.05 $11.55 $8.56 $8.50 $7.81 $7.94 Dividends per common share $.016 $.016 $.016 $.016 $.016 $.016 $.016 $.016 -------------------------------------------------------------------------------------------------------------------------------
15 REPORT OF INDEPENDENT ACCOUNTANTS In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Clayton Homes, Inc. and Subsidiaries at June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Knoxville, Tennessee August 7, 2001 CONSOLIDATED BALANCE SHEETS
June 30, (in thousands) 2001 2000 ------------------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 47,763 $ 43,912 Trade receivables 14,683 21,796 Other receivables, principally installment contracts, net of reserves for credit losses and unamortized discounts of $20,560 in 2001 and $4,217 in 2000 657,224 500,942 Residual interests in installment contract and mortgage receivables 170,122 150,329 Inventories, net 185,695 222,431 Securities available-for-sale 30,956 47,734 Restricted cash 111,060 96,904 Property, plant and equipment, net 309,438 305,479 Deferred income taxes 22,710 24,284 Other assets 104,519 92,567 ------------------------------------------------------------------------------------------------------------- Total assets $1,654,170 $1,506,378 ------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued liabilities $ 118,057 $ 122,760 Debt obligations 141,862 99,216 Other liabilities 246,773 248,027 ------------------------------------------------------------------------------------------------------------- Total liabilities 506,692 470,003 ------------------------------------------------------------------------------------------------------------- Shareholders' equity Preferred stock, $.10 par value, authorized 1,000 shares, none issued - - Common stock, $.10 par value, authorized 200,000 shares, issued 137,991 at June 30, 2001, and 137,499 at June 30, 2000 13,799 13,750 Additional paid-in capital 43,593 39,500 Retained earnings 1,081,137 983,806 Accumulated other comprehensive income (loss) 8,949 (681) ------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,147,478 1,036,375 ------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,654,170 $1,506,378 -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Clayton Homes, Inc. and Subsidiaries 16 CONSOLIDATED STATEMENTS OF INCOME
Year ended June 30, (in thousands except per share data) 2001 2000 1999 --------------------------------------------------------------------------------------------- Revenues Net sales $ 849,157 $ 993,916 $1,040,668 Financial services 227,916 228,642 233,848 Rental and other income 73,883 70,787 69,767 --------------------------------------------------------------------------------------------- 1,150,956 1,293,345 1,344,283 --------------------------------------------------------------------------------------------- Costs and expenses Cost of sales 562,267 660,429 705,128 Selling, general and administrative 374,628 384,067 367,430 Financial services interest 706 1,032 7,981 Provision for credit losses 42,500 20,800 12,459 --------------------------------------------------------------------------------------------- 980,101 1,066,328 1,092,998 --------------------------------------------------------------------------------------------- Operating income 170,855 227,017 251,285 Interest expense (5,561) (5,749) (11,995) Interest revenue/other 4,057 7,357 6,678 --------------------------------------------------------------------------------------------- Income before income taxes 169,351 228,625 245,968 Provision for income taxes (62,700) (84,600) (91,000) --------------------------------------------------------------------------------------------- Net income $ 106,651 $ 144,025 $ 154,968 --------------------------------------------------------------------------------------------- Net income per common share Basic $0.77 $1.03 $1.07 Diluted $0.77 $1.03 $1.06 Average shares outstanding Basic 137,702 139,474 145,211 Diluted 138,340 139,815 145,931 ---------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Total Additional Other Shareholders' Common Paid-in Retained Comprehensive (in thousands except share data) Equity Stock Capital Earnings Income (Loss) --------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1998 $ 881,019 $14,852 $162,413 $703,754 $ - Net income 154,968 - - 154,968 - Other comprehensive income, net of tax Unrealized loss on securities available- for-sale (821) - - - (821) -------- Comprehensive income 154,147 Purchase of 6,465,000 shares of common stock (81,394) (647) (80,747) - - Dividends declared ($.064 per common share) (9,606) - - (9,606) - Issuances related to stock incentive, employee benefit plans and other 3,602 32 3,570 - - --------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1999 947,768 14,237 85,236 849,116 (821) Net income 144,025 - - 144,025 - Other comprehensive income, net of tax Unrealized loss on securities available- for-sale during the year (627) - - - (627) Realized loss on securities available- for-sale included in net income 767 - - - 767 -------- Comprehensive income 144,165 Purchase of 5,382,000 shares of common stock (49,776) (538) (49,238) - - Dividends declared ($.064 per common share) (9,335) - - (9,335) - Issuances related to stock incentive, employee benefit plans and other 3,553 51 3,502 - - --------------------------------------------------------------------------------------------------------------------- Balance at June 30, 2000 1,036,375 13,750 39,500 983,806 (681) NET INCOME 106,651 - - 106,651 - OTHER COMPREHENSIVE INCOME, NET OF TAX UNREALIZED GAIN ON RESIDUAL INTERESTS 7,591 - - - 7,591 UNREALIZED GAIN ON SECURITIES AVAILABLE- FOR-SALE DURING THE YEAR 1,732 - - - 1,732 REALIZED LOSS ON SECURITIES AVAILABLE- FOR-SALE INCLUDED IN NET INCOME 307 - - - 307 -------- COMPREHENSIVE INCOME 116,281 PURCHASE OF 60,000 SHARES OF COMMON STOCK (482) (6) (476) - - DIVIDENDS DECLARED ($.064 PER COMMON SHARE) (9,320) - - (9,320) - ISSUANCES RELATED TO STOCK INCENTIVE, EMPLOYEE BENEFIT PLANS AND OTHER 4,624 55 4,569 - - --------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2001 $1,147,478 $13,799 $43,593 $1,081,137 $8,949 ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Clayton Homes, Inc. and Subsidiaries 17 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30, (in thousands) 2001 2000 1999 -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $106,651 $144,025 $154,968 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 20,600 20,422 17,795 Amortization of residual interests, net of gain on sale 14,205 3,256 (15,089) Provision for credit losses 42,500 20,800 12,459 Realized loss on securities available-for-sale 488 1,218 - Deferred income taxes (4,082) (3,861) (8,267) Decrease (increase) in other receivables, net 1,200 5,720 (93,014) Decrease (increase) in inventories 36,736 (37,987) (17,331) Increase (decrease) in accounts payable, accrued liabilities, and other (55,766) (60,184) 14,631 -------------------------------------------------------------------------------------------------------------------- Cash provided by operations 162,532 93,409 66,152 Origination of installment contract receivables (815,546) (983,090) (1,085,484) Proceeds from sales of originated installment contract receivables 660,802 886,040 1,030,442 Principal collected on originated installment contract receivables 40,686 48,040 80,610 -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 48,474 44,399 91,720 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of installment contract receivables (321,711) (206,154) (253,625) Proceeds from sales of acquired installment contract receivables 225,654 229,412 389,866 Principal collected on acquired installment contract receivables 23,154 19,836 73,200 Proceeds from sales of securities available-for-sale 29,527 37,733 - Acquisition of property, plant and equipment (24,559) (34,398) (47,749) Decrease (increase) in restricted cash (14,156) 3,223 (13,951) -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (82,091) 49,652 147,741 CASH FLOWS FROM FINANCING ACTIVITIES Dividends (9,320) (9,335) (9,606) Net borrowings (repayment) on credit facilities 45,800 - (227,873) Proceeds from (repayment of) long-term debt (3,154) 2,739 76,759 Issuance of stock for incentive plans and other 4,624 3,553 3,602 Repurchase of common stock (482) (49,776) (81,394) -------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 37,468 (52,819) (238,512) -------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 3,851 41,232 949 Cash and cash equivalents at beginning of year 43,912 2,680 1,731 -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $47,763 $43,912 $2,680 -------------------------------------------------------------------------------------------------------------------- Supplemental disclosures for cash flow information Cash paid during the year for Interest $6,267 $6,781 $19,976 Income taxes $76,723 $97,903 $95,931 --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. Clayton Homes, Inc. and Subsidiaries 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidated Financial Statements The consolidated financial statements include the accounts of Clayton Homes, Inc. (CMH) and its wholly- and majority-owned subsidiaries. CMH and its subsidiaries are collectively referred to herein as the Company. The Company is a vertically-integrated manufactured housing company headquartered near Knoxville, Tennessee. Employing approximately 6,500 people and operating in 33 states, the Company builds, sells, finances and insures manufactured homes, as well as owns and operates residential manufactured housing communities. Significant intercompany accounts and transactions have been eliminated in the financial statements. See Note 11, Business Segment Information. Income Recognition Sales to independent retailers of homes produced by CMH are recognized as revenue upon shipment. Retail sales are recognized when: cash payment is received, or in the case of credit sales, which represent the majority of retail sales, when a down payment is received and the home buyer enters into an installment sales contract; construction of the home is complete; the home buyer has inspected and accepted the home; and title has passed to the retail home buyer. Most of these installment sales contracts, which are normally payable over 84 to 360 months, are financed by Vanderbilt Mortgage and Finance, Inc. (VMF), the Company's financing subsidiary. The Company acts as agent on physical damage, family protection and home buyer protection plan insurance policies written by unaffiliated insurance companies (ceding companies) for the purchasers of manufactured homes. The insurance policies are in turn reinsured by certain subsidiaries of the Company. Premiums from policies represent short-duration contracts with terms of one to 10 years and are deferred and recognized as revenue over the terms of the policies. Claims expenses are recorded as insured events occur. Expenses are matched to revenue over the terms of the policies by means of deferral and amortization of policy acquisition costs; such costs include commissions, premium taxes and ceding fees, which vary with and are directly related to the production of insurance policies. During the fourth quarter of 2001, the Company adopted Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, and determined that its practices already comply with the revenue recognition policy. Thus, such adoption did not have a material impact on the Company's reported results of operations, financial position or cash flows. Installment Contract and Mortgage Receivables Installment contract receivables and mortgage loan receivables originated or purchased by VMF are generally sold to investors through an asset-backed securities vehicle, with VMF retaining residual interests and servicing on the contracts. Installment contract receivables held for sale are included in other receivables and are carried at the lower of aggregate cost or market. Certain of the installment contract receivables are purchased in bulk at a discount. The purchase discounts are allocated between discount and reserves for credit losses and contingent liabilities based on management's assessment of risks existing in the portfolio. Discount is accreted over the life of the related portfolio after giving consideration to anticipated prepayments. Adjustments between the reserves for credit losses and contingent liabilities and discount are periodically made to reflect changes in the estimated collectibility of each portfolio purchased. VMF provides servicing for investors in installment contract receivables. Total contracts serviced at June 30, 2001, and 2000, including contracts held for investment, were approximately $4.3 billion and $3.9 billion, respectively. Most of the installment contract receivables are with borrowers in the east, south and southwest portions of the United States and are collateralized by manufactured homes. Interest income on installment contract receivables is recognized by a method which approximates the simple interest method. Service fee income is recognized as the service is performed. The Company accrues for obligations related to cash collections from sold and serviced only loans and remits these collections to investors on a monthly basis. See Note 12, Other Assets and Other Liabilities. Retained Interests The Company utilizes a financial components approach to transfers and servicing of financial assets, requiring that the carrying amount of the receivables sold be allocated between the assets sold and the assets (liabilities) created, if any, based upon their estimated fair value at the date of sale. The assets (liabilities) created are: 1) an interest-only strip valued as the discounted present value of the excess (deficiency) interest due the residual interest owner (VMF) during the expected life of the contracts over: i) the stated investor yield; ii) the contractual servicing fee; and iii) estimated credit losses; and 2) servicing asset (liability), representing the discounted present value of the contractual servicing fee over the cost of servicing the contracts. Profit (loss) recorded at the time of the sale is computed as the difference between the allocated carrying amount of the receivables sold and the proceeds realized from the sale. The servicing asset at June 30, 2001, and 2000, is as follows:
(in thousands) 2001 2000 ------------------------------------------------------------- Servicing asset beginning balance $ 40,704 $ 27,024 Servicing asset recognized 15,994 23,781 Amortization (11,570) (10,101) ------------------------------------------------------------- Servicing asset ending balance $ 45,128 $ 40,704 -------------------------------------------------------------
The balance represents the estimated fair value of the aggregate servicing assets at June 30, 2001. The estimate of fair value assumes: 1) discount rates which, at the time the asset was created, approximate current market rates; and 2) expected prepayment rates based on loan prepayment experience for similar transactions. Servicing assets are periodically evaluated in a deal by deal basis for impairment based on the fair value of those assets. The Company has not experienced any impairment losses. The servicing assets are amortized using the effective interest method over the estimated weighted average life of the underlying securities. Interest-only securities represent the right to receive future cash flows from securitization transactions. Such cash flows generally are equal to the value of the principal and interest to be collected on the underlying financial contracts of each securitization in excess of the sum of the principal and interest to be paid on the securities sold and contractual servicing fee, less estimated credit losses. The Company carries interest-only securities at estimated fair value. As market quotes are generally not available, fair value is determined by discounting the projected cash flows over the expected life of the receivables sold using current prepayment, default, loss and interest rate assumptions. Estimates for prepayments, defaults, and losses are determined based on a model developed by the Company Clayton Homes, Inc. and Subsidiaries 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) and refined to reflect Company-specific experience and trends. See Note 2, Securitizations. The residual interests in the installment receivables sold are classified as available-for-sale securities (as defined by Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities). On April 1, 2001, the Company adopted the consensus under Emerging Issues Task Force Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Assets. Under previously existing accounting requirements, declines in fair value of such beneficial interests were recognized as other than temporary impairment when the present value of the underlying cash flows discounted at a risk-free rate using current assumptions were less than the carrying value of such assets. Pursuant to EITF Issue No. 99-20, declines in fair value are to be considered other than temporary when: (i) the carrying value of the beneficial interests exceeds the fair value of such beneficial interests using current assumptions, and (ii) the timing and/or extent of cash flows expected to be received on the beneficial interests has adversely changed - as defined - from the previous valuation date. Under the new guidelines, the Company evaluated the expected future cash flows from its interest-only securities and determined that there was a favorable difference in estimated cash flows of $12.0 million ($7.6 million after tax) for the year ended June 30, 2001. This favorable adjustment has been recorded as an element of accumulated other comprehensive income. The Company follows SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, which requires that the Company classify mortgage-backed securities retained after a securitization in accordance with SFAS No. 115. Accordingly, these securities, valued at $25.2 million, are classified as available-for-sale, are stated at fair value, and can be reasonably expected to mature in 3-10 years. The Company also has certain other investments that had been designated as available-for-sale and accordingly have been stated at fair value. The fair value of these securities is estimated based on quoted market prices, when available. If not available, fair value is estimated using quoted market prices for similar financial instruments. Net unrealized holding gains and losses are reported as a separate component of accumulated other comprehensive income, net of tax, until realized. Cash Equivalents For purposes of the statements of cash flows, all unrestricted highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents. Inventories New homes and raw materials are carried at the lower of cost or market, using the last-in, first-out (LIFO) method of inventory valuation. Previously-owned manufactured homes are recorded at estimated wholesale value (cost) but not in excess of net realizable value. Property, Plant and Equipment Land and improvements, buildings, and furniture and equipment are recorded at cost. Major renewals and improvements are capitalized while replacements, maintenance and repairs which do not improve or extend the life of the respective assets, are expensed currently. When depreciable assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss is included in earnings for the period. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the respective assets ranging from three to 40 years. The Company follows SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires recognition of impairment losses for long-lived assets whenever events or changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future undiscounted cash flows associated with such assets. The measurement of the impairment losses recognized is based on the difference between the fair values and the carrying amounts of the assets. SFAS 121 also requires that long-lived assets held for sale be reported at the lower of carrying amount or fair value less cost to sell. The Company has not experienced any impairment losses. Reserves for Credit Losses and Contingent Liabilities Reserves for credit losses and contingent liabilities are established related to installment contract receivables and contracts in foreclosure. Actual credit losses are charged to the reserves when incurred. The reserves established for such losses are determined based on the Company's historical loss experience after adjusting for current economic conditions. Management, in assessing the loss experience and economic conditions, adjusts reserves through periodic provisions. The Company also maintains a reserve for contingent liabilities related to guarantees of installment contract receivables sold with recourse. Interest Rate Swaps The Company uses interest rate swaps to assist in minimizing interest incurred on its short-term variable rate debt. The difference between amounts received and amounts paid under such agreements is recorded as a reduction of, or addition to, interest expense as incurred over the life of the swap. In 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which was subsequently amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. See Note 5, Debt Obligations. Restricted Cash Restricted cash primarily represents: 1) trust account cash balances required by certain VMF servicing agreements, and 2) insurance reserves required by custodial or trust agreements. Income Taxes Deferred income taxes are recorded to reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Accumulated Other Comprehensive Income Accumulated other comprehensive income is presented net of income taxes and is comprised of unrealized gains and temporary losses on securities available-for-sale, as described under Retained Interests. Management Estimates 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 disclosures 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. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Other Per share and share data have been retroactively adjusted to reflect a 5-for-4 stock split paid in December 1998. Certain reclassifications have been made to the 1999 and the 2000 financial statements to conform to the 2001 presentation. New Accounting Pronouncements In June 2001, the FASB issued Statement No. 141 (FAS 141), Business Combinations, and Statement No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 141 supercedes APB 16, Business Combinations, and primarily addresses the accounting for the cost of an acquired business (i.e., the purchase price allocation), including any subsequent adjustments to its cost. FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition (i.e., the post-acquisition accounting) and supercedes APB 17, Intangible Assets. The most significant changes made by FAS 141 involve the requirement to use the purchase method of accounting for all business combinations, thereby eliminating use of the pooling-of-interests method along with the establishment of new criteria for determining whether intangible assets acquired in a business combination should be recognized separately from goodwill. FAS 141 is effective for all business combinations (as defined in the Statement) initiated after June 30, 2001, and for all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of acquisition is July 1, 2001, or later). Under FAS 142, goodwill and indefinite lived intangible assets will no longer be amortized and will be tested for impairment at least annually at a reporting unit level. Additionally, the amortization period of intangible assets with finite lives is no longer limited to forty years. FAS 142 is effective for fiscal years beginning after December 15, 2001, to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim period financial statements have not been issued previously. The Company does not expect adoption of either FAS 141 or FAS 142 to have a material impact on the Company's reported results of operations, financial position or cash flows. NOTE 2 - SECURITIZATIONS In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and requires certain additional disclosures. SFAS No. 140 was effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The original key economic assumptions used in measuring the retained interests at the date of securitization resulting from securitizations completed in 2001, the key economic assumptions used to measure all retained interests at June 30, 2001, the sensitivity of the current fair value to adverse changes in the assumptions, and certain cash flows received from securitization trusts in 2001 are presented as follows:
($ in millions) ------------------------------------------------------------------ ORIGINAL KEY ECONOMIC ASSUMPTIONS Prepayment speed (% MHP Model) 300 Weighted average life (in years) 4.66 Expected credit losses 2.48% Residual cash flow discount rate 15.75% ------------------------------------------------------------------ CURRENT ECONOMIC ASSUMPTIONS AND SENSITIVITY ANALYSIS Carrying value (fair value) of retained interests $ 195.3 Weighted average life (in years) 4.49 Prepayment speed (% MHP Model) 200-400% Impact of 10% adverse change ($8.6) Impact of 20% adverse change ($16.4) Expected credit losses 1.90% Impact of 10% adverse change ($10.4) Impact of 20% adverse change ($20.9) Residual cash flow discount rate 15.75% Impact of 10% adverse change ($6.7) Impact of 20% adverse change ($12.8) ------------------------------------------------------------------ CASH FLOW ACTIVITY Proceeds from new securitizations $ 886.5 Servicing fees received $ 48.9 Cash flow received from retained interests $ 70.9 ------------------------------------------------------------------
The sensitivity analysis is hypothetical and should be used with caution. For instance, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. In addition, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption, when in reality, changes in any one factor may result in changes in another factor. Managed receivables at June 30, 2001, and related receivables past due 90 days are as follows:
Total Principal 90 Days or More ($ in millions) Amount Past Due (a) ----------------------------------------------------------------- Held in portfolio $ 649 $14.7 Securitized 3,532 51.2 ----------------------------------------------------------------- $4,181 $65.9 -----------------------------------------------------------------
(a) Includes bankruptcies and foreclosures. Net credit losses for the year ended June 30, 2001 totaled $51.1 million. See Note 6, Reserves for Credit Losses and Contingent Liabilities. NOTE 3 - INVENTORIES Inventories at June 30, 2001, and 2000, are as follows:
(in thousands) 2001 2000 ------------------------------------------------ Manufactured homes New $114,874 $148,658 Previously-owned 54,171 53,593 Raw materials 16,650 20,180 ------------------------------------------------ $185,695 $222,431 ------------------------------------------------
If the first-in, first-out (FIFO) method of inventory valuation had been used, inventories would have been higher by $20,282,000 and $21,633,000 at June 30, 2001, and 2000, respectively. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 4 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at June 30, 2001, and 2000, are as follows:
(in thousands) 2001 2000 --------------------------------------------------------- Land and improvements $ 215,910 $199,329 Buildings 150,000 156,689 Furniture and equipment 50,422 45,964 --------------------------------------------------------- 416,332 401,982 Less: accumulated depreciation and amortization (106,894) (96,503) --------------------------------------------------------- $ 309,438 $305,479 ---------------------------------------------------------
NOTE 5 - DEBT OBLIGATIONS Debt obligations at June 30, 2001, and 2000, are summarized as follows:
(in thousands) 2001 2000 ------------------------------------------------------------------------------ Senior notes, 6.25%, due December 2003 $ 75,000 $75,000 Debt collateralized by installment contract receivables, average effective rate 10.18% on June 30, 2001, due through 2004 5,229 8,373 Tax-exempt bonds, effective rate of 2.85% on June 30, 2001, due through 2030 15,230 15,230 Lines of credit 45,800 - Other notes payable 603 613 ------------------------------------------------------------------------------ $141,862 $99,216 ------------------------------------------------------------------------------
Annual maturities of debt as of June 30, 2001, are 2002 - $48,853,000; 2003 - $1,977,000; 2004 - $75,199,000; 2005 - $0; and 2006 - $0. In December 1998, the Company issued $75 million of 6.25% Senior Subordinated Notes due December 2003 (the "6.25% Notes"), with interest payable each June and December. The 6.25% Notes are redeemable at the option of the Company, in whole, at 100% of the principal amount plus a make-whole premium at any time prior to December 30, 2003. The 6.25% Notes are not subject to any sinking fund requirements. On January 11, 2001, the Company cancelled its committed one-year $300 million commercial paper conduit facility. Subsequent to June 30, 2001, the Company entered into a $150 million participation facility to be used to facilitate the sale of manufactured housing contracts. The Company has a $150 million five-year revolving credit facility with its bank group. This facility's pricing is based on LIBOR rates; commitment fees are payable quarterly on the unused portion of the facility. The Company's tax-exempt manufacturing facilities' bonds carry no sinking fund requirements and bear interest at weekly adjustable rates. The preceding facilities are governed by various financial covenants which require maintenance of certain financial ratios and are uncollateralized. In addition, the Company has committed and uncommitted lines of credit amounting to $86 million with several banks, interest based on LIBOR rates, of which $46 million was outstanding at June 30, 2001. These lines are subject to periodic review by each bank and may be canceled by the Company at any time. Under certain interest rate swap agreements, the Company agrees with other parties to exchange the difference between fixed rate and variable rate interest amounts calculated by reference to an agreed upon notional principal amount. At June 30, 2001, the Company's interest rate swap agreements have an aggregate notional amount of $100 million. The interest rates on the notional amounts range from 5.42% to 5.62%. NOTE 6 - RESERVES FOR CREDIT LOSSES AND CONTINGENT LIABILITIES An analysis of the reserves for losses on installment contract receivables and contingent liabilities including those contracts in foreclosure for the years ended June 30, 2001, 2000, and 1999, are as follows:
(in thousands) 2001 2000 1999 ----------------------------------------------------------------------------------------------- Balance, beginning of year $ 35,725 $ 44,275 $ 35,828 Provision 42,500 20,800 12,459 Charges, net of recoveries applicable to installment contract receivables Purchased (13,105) (12,199) (13,384) Other (37,974) (20,044) (11,951) Reserves transferred to unamortized discounts (1,000) (6,000) (1,981) Reserves associated with receivables purchased 4,390 8,893 23,304 ----------------------------------------------------------------------------------------------- Balance, end of year $ 30,536 $ 35,725 $ 44,275 -----------------------------------------------------------------------------------------------
The reserves for credit losses are netted against receivables and the reserve for contingent liabilities is included in other liabilities on the consolidated balance sheets. The Company is contingently liable as guarantor on installment contract receivables sold with recourse. At June 30, 2001, and 2000, the outstanding principal balances of these receivables totaled approximately $84 million and $117 million, respectively. There were no receivables sold with recourse in 2001, 2000 and 1999. NOTE 7 - SHAREHOLDERS' EQUITY Stock Option Plan In 1983, 1985, 1991, and 1997, the Company established Stock Option Plans for a total of 17,021,036 shares of common stock which provide for granting "incentive stock options" or "non-qualified options" and stock appreciation rights to officers and key employees of the Company. In addition, non-management members of the Board of Directors have, with shareholder approval of prices and provisions for exercise, been granted options to purchase shares of common stock. The option prices were established at not less than the fair market value as of the date of grant. Options are exercisable after one or more years and expire no later than 10 years from the date of grant. Activity and price information regarding the plans are as follows:
WEIGHTED WEIGHTED AVG STOCK AVG STOCK OPTION EXERCISE OPTIONS EXERCISE SHARES PRICE RANGE PRICE EXERCISABLE PRICE ------------------------------------------------------------------------------ Balance June 30, 1998 4,303,038 $1.41 - $13.70 $ 9.32 1,187,395 $ 7.29 Granted 1,477,846 $8.19 - $15.75 $12.73 Exercised (162,002) $1.41 - $13.70 $ 5.03 Canceled (757,731) $1.76 - $15.75 $11.55 ------------------------------------------------------------------------------ Balance June 30, 1999 4,861,151 $1.41 - $15.75 $10.15 1,449,866 $ 8.13 Granted 762,325 $9.38 - $11.88 $ 9.91 Exercised (208,725) $1.41 - $ 8.27 $ 2.65 Canceled (309,295) $3.64 - $15.75 $11.11 ------------------------------------------------------------------------------ Balance June 30, 2000 5,105,456 $2.16 - $15.75 $10.36 1,655,984 $ 9.18 GRANTED 875,825 $8.38 - $ 9.31 $ 9.10 EXERCISED (278,401) $2.16 - $13.70 $ 5.88 CANCELED (242,418) $7.22 - $15.75 $10.24 ------------------------------------------------------------------------------ BALANCE JUNE 30, 2001 5,460,462 $3.83 - $15.75 $10.40 1,901,452 $ 9.84 ------------------------------------------------------------------------------
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Options available for future grant at June 30, 2001, and 2000, were 4,299,675 and 4,939,727, respectively. Options were held by 880 persons at June 30, 2001. The following table summarizes information about the plans' stock options at June 30, 2001, including weighted average remaining life (Life) and weighted average exercise price (Price):
Options Outstanding Options Exercisable ----------------------------- ------------------- Range Number Life Price Number Price ------------------------------------------------------------------------------- $ 3.83 - $ 5.05 155,857 0.6 years $ 4.24 102,489 $ 3.83 $ 7.22 - $10.32 2,849,779 5.8 years $ 8.72 1,051,092 $ 8.26 $11.50 - $15.75 2,454,826 6.0 years $12.73 747,871 $12.89
The Company has elected to continue following Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plans rather than the alternative fair value accounting provided for under SFAS 123, Accounting for Stock-Based Compensation. Under APB 25, because the exercise price of the Company's employee and director stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the accompanying financial statements. Pro forma information regarding net income and net income per common share is required by SFAS 123 and has been determined as if the Company has accounted for its stock options under the fair value method of that standard. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The pro forma results do not purport to indicate the effects on reported net income for recognizing compensation expense which are expected to occur in future years. The Company's pro forma information is as follows:
June 30, (in thousands except per share data) 2001 2000 1999 ---------------------------------------------------------------------------------- Net income - as reported $ 106,651 $144,025 $154,968 Net income - pro forma 104,352 141,634 153,610 Net income per diluted common share - as reported $.77 $1.03 $1.06 Net income per diluted common share - pro forma .75 1.01 1.05 ----------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants issued from 1999 to 2001; dividend yields ranging from 0.41% to 0.76% with a weighted average yield of 0.59%; expected volatility of 0.34%, risk-free interest rates ranging from 4.10% to 6.54% with a weighted average rate of 5.65%; and expected lives ranging from 6.47 to 10.00 years with a weighted average life of 8.75 years. The weighted average grant date fair value of options granted in fiscal years 2001, 2000 and 1999 was $4.06, $4.66, and $5.66 per share, respectively. NOTE 8 - INCOME TAXES The components of deferred tax assets and liabilities at June 30, 2001, and 2000, are as follows:
(in thousands) 2001 2000 -------------------------------------------------------- Reserves for credit losses and contingencies and discounts $ 8,388 $ 9,258 Insurance reserves 10,850 9,911 Unearned premiums 9,604 9,348 Residual interest in installment contract receivables 12,729 11,781 -------------------------------------------------------- Total deferred tax assets 41,571 40,298 -------------------------------------------------------- Deferred costs (6,549) (6,728) Other comprehensive income (5,256) - Other (7,056) (9,286) -------------------------------------------------------- Total deferred tax liabilities (18,861) (16,014) -------------------------------------------------------- Net deferred tax asset $ 22,710 $ 24,284 --------------------------------------------------------
The provision for income tax is composed of the following:
(in thousands) 2001 2000 1999 ------------------------------------------------------ Current tax provisions Federal $64,010 $82,654 $92,706 State 2,772 5,807 6,561 ------------------------------------------------------ Total current 66,782 88,461 99,267 Deferred tax benefit (4,082) (3,861) (8,267) ------------------------------------------------------ $62,700 $84,600 $91,000 ------------------------------------------------------
At June 30, 2001, 2000, and 1999, a deferred tax provision (benefit) of $5,656,000, $82,000, and ($482,000), respectively, was allocated directly to shareholders' equity for the unrealized gain (loss) on residual interests and securities available-for-sale. The provision for income tax reflected in the financial statements differs from income taxes calculated at the statutory federal income tax rate of 35% in 2001, 2000 and 1999, as follows:
(in thousands) 2001 2000 1999 ---------------------------------------------------------------- Income taxes at the statutory rate $59,273 $80,019 $86,089 State income taxes, net of federal benefit 1,802 3,775 4,265 Other, net 1,625 806 646 ---------------------------------------------------------------- $62,700 $84,600 $91,000 ----------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFIT PLANS The Company has a 401(k) defined contribution plan covering all employees who meet participation requirements. The amount of the Company's contribution is discretionary as determined by the Board of Directors, up to the maximum deduction allowed for federal income tax purposes. Contributions accrued and paid were $2,938,000, $3,169,000, and $3,162,000 for the years ended June 30, 2001, 2000 and 1999, respectively. NOTE 10 - COMMITMENTS AND CONTINGENCIES Certain operating properties are rented under non-cancelable operating leases which expire at various dates through 2009. Total rental expense under operating leases was $5,280,000 in 2001, $5,340,000 in 2000, and $5,210,000 in 1999. Minimum rental commitments under non-cancelable operating leases, primarily for retail centers, in effect at June 30, 2001 were: 2002 - $3,951,000; 2003 - $3,217,000; 2004 - $2,391,000; 2005 - $1,531,000; 2006 - $902,000; and thereafter - $1,279,000. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Institutions financing independent retailer purchases require the Company to execute repurchase agreements. As a result of these agreements, the Company is contingently liable for repurchasing homes in the event of a default by the dealer to the lending institution. These agreements are customary in the manufactured housing industry, and the Company's losses in the past have not been significant. The maximum potential repurchase obligation is approximately $74 million at June 30, 2001, excluding any resale value. At June 30, 2001, the Company has letters of credit, primarily related to insurance reserves and performance guarantees related to asset backed securitizations of approximately $118 million and $324 million, respectively. The Company believes a significant loss from any such guarantee is remote. Please see Note 6 for discussion of guarantees of installment contract receivables. NOTE 11 - BUSINESS SEGMENT INFORMATION The Company has identified four major business segments: Retail, Manufacturing, Financial Services, and Communities. The Retail group purchases homes from the Company's manufacturing operations and third party manufacturers to sell to retail customers. The Manufacturing group builds homes for Company-owned and independent retailers. Financial Services provides retail financing of manufactured homes, reinsures risk on family protection, physical damage, and homebuyer protection plan insurance policies, and offers certain specialty finance products. Communities owns and operates manufactured housing communities. Income from operations consists of total revenues less cost of sales and operating expenses. Identifiable assets are used in the operation of each business segment. Information concerning operations by business segment follows:
(in thousands) 2001 2000 1999 ----------------------------------------------------------------------- Revenues Retail $ 651,133 $ 733,916 $ 737,044 Manufacturing 496,154 624,586 654,471 Financial Services 184,253 188,365 198,527 Communities 89,699 92,492 78,902 Intersegment sales (270,283) (346,014) (324,661) ----------------------------------------------------------------------- $1,150,956 $1,293,345 $1,344,283 ----------------------------------------------------------------------- Income from operations Retail $ 28,712 $ 53,623 $ 66,364 Manufacturing 36,637 62,729 72,377 Financial Services 95,469 108,792 117,385 Communities 14,022 16,130 15,850 Eliminations/other (3,985) (14,257) (20,691) ----------------------------------------------------------------------- 170,855 227,017 251,285 ----------------------------------------------------------------------- Interest Interest expense (5,561) (5,749) (11,995) Interest revenue/other income 4,057 7,357 6,678 ----------------------------------------------------------------------- Income before taxes $ 169,351 $ 228,625 $ 245,968 ----------------------------------------------------------------------- Identifiable assets Retail $ 255,793 $ 287,705 $ 247,009 Manufacturing 82,616 100,112 94,773 Financial Services 1,080,416 902,913 901,769 Communities 191,802 185,784 177,723 Eliminations/other 43,543 29,864 (4,029) ----------------------------------------------------------------------- $1,654,170 $1,506,378 $1,417,245 ----------------------------------------------------------------------- Depreciation and amortization Retail $ 6,161 $ 5,639 $ 4,684 Manufacturing 5,767 6,516 5,478 Financial Services 512 472 235 Communities 7,030 6,724 6,412 Eliminations/other 1,130 1,071 986 ----------------------------------------------------------------------- $ 20,600 $ 20,422 $ 17,795 ----------------------------------------------------------------------- Capital expenditures Retail $ 5,211 $ 11,535 $ 18,152 Manufacturing 4,346 9,558 12,971 Financial Services 88 454 576 Communities 13,920 12,059 14,703 Eliminations/other 994 792 1,347 ----------------------------------------------------------------------- $ 24,559 $ 34,398 $ 47,749 -----------------------------------------------------------------------
NOTE 12 - OTHER ASSETS AND LIABILITIES At June 30, 2001, and 2000, other assets and liabilities consisted of:
(in thousands) 2001 2000 ------------------------------------------------------------- Other assets Interest and other receivables $ 63,442 $ 52,605 Deferred policy acquisition costs 19,716 19,304 Prepaid expenses and other 21,361 20,658 ------------------------------------------------------------- $104,519 $ 92,567 ------------------------------------------------------------- Other liabilities Investors payable $101,379 $ 85,161 Reserve for contingent liabilities 9,970 32,075 Escrow deposits 11,494 10,603 Unearned insurance premiums 96,555 94,669 Other 27,375 25,519 ------------------------------------------------------------- $246,773 $248,027 -------------------------------------------------------------
NOTE 13 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires that the Company disclose the estimated fair values of its financial instruments. The following methodologies and assumptions were used by the Company to estimate its fair value disclosures for financial instruments. Fair value estimates are made at a specific point in time, based on relevant market data and information about the financial instrument. The estimates do not reflect any premium or discount that could result from offering for sale in a single transaction the Company's entire holdings of a particular financial instrument. The lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values. Comparability to financial instruments between similar companies may not be reasonable because of varying assumptions concerning the estimates of fair value. Cash and Cash Equivalents The carrying values for cash and cash equivalents, including those restricted by agreement, approximate the fair value of the assets. Contracts Held For Sale and as Collateral Contracts held for sale are generally recent originations or purchased portfolios which will be sold with limited or no recourse during the following year. The Company does not charge fees to originate loans, and, as such, its contracts have origination rates in excess of rates on the securities into which they will be pooled. The Company estimates the fair value of the contracts held for sale using expected future cash flows of the portfolio discounted at the current origination rate. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The carrying values of contracts pledged as collateral to long-term lenders are estimated using discounted cash flow analyses and interest rates being offered for similar contracts. The carrying amount of contracts with a variable rate of interest is estimated to be at fair value. The carrying value of accrued interest adjusted for credit risk equals its fair value. Debt Collateralized by Installment Contract Receivables Debt collateralized by installment contract receivables consists primarily of notes collateralized by contracts with maturities that coincide with the underlying contract maturities. The fair value of these financial instruments is based on the current rates offered to the Company for debt of similar maturities using a discounted cash flow calculation. Loan covenants preclude prepayment. The carrying amounts and estimated fair values of the Company's financial assets and liabilities are as follows:
JUNE 30, 2001 June 30, 2000 CARRYING ESTIMATED Carrying Estimated (in thousands) AMOUNT FAIR VALUE Amount Fair Value ----------------------------------------------------------------------------------------------- Financial assets Cash and cash equivalents, including restricted cash $158,823 $158,823 $140,816 $140,816 Contracts held for sale and as collateral, including accrued interest receivable 655,011 653,129 450,531 448,446 Financial liabilities Senior notes, 6.25% 75,000 73,642 75,000 72,160 Debt collateralized by installment contract receivables 5,229 5,645 8,373 9,006 -----------------------------------------------------------------------------------------------
Retained interests in installment contract receivables - see Note 2, Securitizations NOTE 14 - EARNINGS PER SHARE The following reconciliation details the numerators and denominators used to calculate basic and diluted earnings per share for the respective periods:
(in thousands except per share data) 2001 2000 1999 ---------------------------------------------------------------------- Net income $106,651 $144,025 $154,968 Average shares outstanding Basic 137,702 139,474 145,211 Add: common stock equivalents 638 341 720 Diluted 138,340 139,815 145,931 Earnings per share - Basic $0.77 $1.03 $1.07 - Diluted $0.77 $1.03 $1.06 ----------------------------------------------------------------------
NOTE 15 - RELATED PARTY TRANSACTIONS The Company maintains an agreement to purchase certain installment contract receivables originated or acquired by a finance company in which the Company maintains a 50% ownership interest. The Company acquired approximately $110,000,000, $92,000,000, and $147,000,000 in installment contract receivables and received interest and other related fees totaling approximately $1,880,000, $1,618,000, and $2,038,000 during fiscal 2001, 2000 and 1999, respectively. 25 EX-21 4 doc3.txt EXHIBIT 21. LIST OF SUBSIDIARIES AND PARTNERSHIPS OF THE REGISTRANT.
SUBSIDIARY STATE OR COUNTRY OF INCORPORATION ORGANIZATION ---------- ---------------------------------------------- Clayton Homes, Inc. Delaware CMH Manufacturing, Inc. Tennessee CMH Homes, Inc. Tennessee Vanderbilt Mortgage & Finance, Inc. Tennessee Clayton-Vanderbilt, Inc. Arizona Vanderbilt Property and Casualty Insurance Co., LTD British Virgin Islands CMH Insurance Agency, Inc. Tennessee CMH Parks, Inc. Tennessee CMH Capital, Inc. Delaware Vanderbilt SPC, Inc. Delaware CMH Services, Inc. Tennessee CMH of KY, Inc. Kentucky HomeFirst Agency, Inc. Delaware Vanderbilt Life and Casualty Insurance Co., LTD British Virgin Islands Eastern States Life Insurance Co. Turks & Caicos Islands Midland States Life Insurance Co. Turks & Caicos Islands Clayton SPC, Inc. Tennessee Clayton Commercial Buildings, Inc. Tennessee CMH Hodgenville, Inc. Tennessee PARTNERSHIP Redwood Partners Limited Colorado
EX-23 5 doc4.txt EXHIBIT 23. CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (Nos. 333-83535, 333-83543, 333-83545, and 333-83565) and on Form S-3 (No. 333-57532) of Clayton Homes, Inc. of our report dated August 7, 2001, relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP -------------------------------- PricewaterhouseCoopers LLP Knoxville, TN September 21, 2001