-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BcCicg039tY8qay6Cu86iOPLRh8SLMyy4osIJPtHxlu0DTkEDIdVk33/B79nylh8 JLDAJWsbCwlcX6svhWi9ZA== 0000950144-98-010898.txt : 19980923 0000950144-98-010898.hdr.sgml : 19980923 ACCESSION NUMBER: 0000950144-98-010898 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980922 SROS: CSX SROS: NYSE SROS: PHLX 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: TN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08824 FILM NUMBER: 98712961 BUSINESS ADDRESS: STREET 1: 500 ALOCA TRAIL CITY: MARYVILLE STATE: TN ZIP: 37804 BUSINESS PHONE: 4233803000 MAIL ADDRESS: STREET 1: PO BOX 9790 CITY: MARYVILLE STATE: TN ZIP: 37804 10-K405 1 CLAYTON HOMES INC. FORM 10-K405 1 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, 1998 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 of incorporation (I.R.S. Employer Identification Number) or organization 5000 Clayton Road Maryville, Tennessee 37804 - -------------------------------------------- --------------------------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 423-380-3000 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 31, 1998, was approximately $1,332,713,123 (86,329,595 shares at closing price on the NYSE of $15.4375). Shares of common stock, $.10 par value, outstanding on August 31, 1998, were 118,463,076. Exhibit index appears on pages 15-16. 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, 1998 Part III Proxy Statement relating to Company's Annual Meeting of Shareholders on November 12, 1998
1 2 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 18 manufacturing plants produce homes which are marketed in 28 states through 1,046 retailers, of which 273 are Company-owned sales centers and 71 are Company-owned community sales operations. The Company provides installment financing to purchasers of manufactured homes sold by its retail centers and by 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 the Company's retail 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 in Knoxville, Tennessee. The following table shows 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, 1998 1997 1996 ---- ---- ---- Sales by Company-owned retail centers and communities .................................... 50% 52% 52% Sales to independent retailers ........................ 28% 28% 30% Financial services and other .......................... 22% 20% 18% ---- ---- ---- Total ................................................. 100% 100% 100% ==== ==== ====
For information relating to the Company's three major business segments, see Note 11 to the Consolidated Financial Statements in the Company's Annual Report to Shareholders. Company sales reflect the seasonality of the manufactured housing industry. In recent years, approximately 31% of the Company's sales have occurred in its fourth quarter ended June 30. 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, primary 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 2,330 square feet. The Company markets homes under a variety of model names. Homes include as standard features central heating, range, refrigerator, and color-coordinated window, wall and floor coverings. Optional features include central air conditioning, wood-burning fireplaces, bay windows, hardwood floors, whirlpool tubs, skylights, and furniture. 2 3 MANUFACTURING OPERATIONS The Company owns or leases 18 manufacturing plants, ranging in size from 63,000 to 194,000 square feet. Plants are located in Andersonville, Ardmore, two in Bean Station, Halls, Maynardville, Rutledge, White Pine, and two in Savannah, Tennessee; in Henderson, Oxford and Richfield, North Carolina; in Waycross, Georgia; and in Bonham, Sulphur Springs, and two in Waco, Texas. See "Item 2. Properties." 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 against 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. 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, 1998, the Company produced 27,640 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 to five 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, 1998, and June 30, 1997, amounted to approximately $14,801,000 and $12,308,000, respectively. The backlog of firm orders for homes manufactured by the Company, including orders from Company-owned retail centers, was approximately $54,800,000 and $40,500,000 on June 30, 1998, and 1997, respectively. Based on the Company's production rate, approximately four weeks would be required to fill backlog orders at June 30, 1998. SALES OF HOMES MANUFACTURED BY THE COMPANY The following table sets forth manufacturing sales data for the number of homes shipped to Company-owned retail centers and to independent retailers, total number of homes sold, number of plants, number of independent retailers and number of Company-owned retail centers for the periods indicated.
AT OR FOR THE YEAR ENDED JUNE 30, 1998 1997 1996 ---- ---- ---- Number of homes sold to independent retailers ......................... 14,728 14,375 14,068 Number of homes shipped to Company-owned retail centers................ 12,922 11,455 10,613 ------ ------ ------ Total .............................................................. 27,650 25,830 24,681 ====== ====== ====== Number of plants operating ............................................ 18 17 17 Number of independent retailers ....................................... 702 663 580 Number of Company-owned communities ................................... 71 67 64 Number of Company-owned retail centers ................................ 273 245 216
COMPANY RETAIL OPERATIONS As of June 30, 1998, the Company sold homes through 273 Company-owned retail centers in 21 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. 3 4 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, 1998 1997 1996 ---- ---- ---- Number of Company-owned retail centers ................................ 273 245 216 Number of new homes sold (including homes built by the Company and by other manufacturers) ............................... 13,250 13,425 12,750 Average retail price of new homes sold ................................ $37,864 $34,209 $33,043 Number of previously-owned homes sold ................................. 3,287 3,621 3,039
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. To provide customers a wider price range of homes, the Company purchases previously-owned homes from individuals and from other retailers, as well as repossessed 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 homeowners' site. Electrical, water, and gas connections are performed by licensed technicians. INDEPENDENT RETAILERS In the years ended June 30, 1998, and 1997, 53% and 56%, respectively, of homes manufactured by the Company were sold to its independent retailers. As of June 30, 1998, the Company had 702 independent retailers in 26 states. 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 also help the Company ensure that its homes are competitive with other manufacturers in terms of consumer acceptability, product design, quality and price. The Company's finance subsidiary, VMF, generally does not, but may provide financing for retail customers of selected independent retailer locations with terms and conditions similar to those provided to Company-owned locations. 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 400 to 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 wholesale 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. Because independent retailers have their own source of inventory financing, the Company typically receives payment for homes within two weeks of delivery to the independent retailer. The Company has no written 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 no 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 4 5 for the amount remaining unpaid to the lender, excluding interest and repossession costs. Historically, any homes repurchased under such agreements have been resold to other retailers, including Company-owned retail centers, at no less than 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 making loans through its finance subsidiary, VMF, and by maintaining relationships with conventional lenders such as banks and finance companies for the pre-arranged sale of retail installment contracts. 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.
YEAR ENDED JUNE 30, 1998 1997 1996 ---- ---- ---- VMF ................................................... 75% 77% 76% Conventional lenders .................................. 5% 3% 5% Customer arranged or cash ............................. 20% 20% 19% ---- ---- ---- 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. Such retailers must make an application to VMF for approval. Upon satisfactory results of VMF's investigation of the credit worthiness and general business reputation, VMF and the retailer enter into a contractual agreement. In addition to purchasing manufactured housing contracts from Company-owned and independent retailers on an individual basis, VMF makes bulk purchases of manufactured housing contracts. 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 instrumentalities, 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 is forwarded to VMF or another source of financing. Credit applications are then evaluated by VMF credit managers. VMF's underwriting guidelines generally require that each applicant's credit, residence, and employment history and income to debt payment ratios be examined. There are no requirements on the basis of which, if met, credit is routinely approved; or if they are not met, credit is routinely denied. If in the judgment of the VMF credit manager an applicant does not meet minimum underwriting criteria, there generally must be compensating higher ratings with respect to other criteria in order for an applicant to be approved. Credit managers must confirm that the credit investigation gave a complete and up-to-date accounting of the applicant's creditworthiness. Credit managers are encouraged to obtain second opinions on loans for relatively large dollar amounts or those which in their judgment, 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 28% of the applicant's gross monthly income. With respect to those customers determined to be credit worthy, 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 retail personnel, who are not appraisers but are familiar with the area in which the property is located. The minimum amount of the down payment is 5% of the purchase price. The purchase price includes the stated cash sale price of the manufactured home, sales or other taxes and fees, set-up costs and certain 5 6 insurance premiums (including up to five years of premiums on required physical damage insurance). The balance of the purchase price is financed by an installment sales contract 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 twenty 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 interest rate. VMF has developed financing options such as contracts with a seven-year term (compared to the industry norm of 15 to 20 years) which provide financing to its customers at a relatively lower cost. The Company also offers a bi-weekly payment contract which provides for 26 payments a year which are made by electronically drafting the purchaser's checking account. The Company believes that such financing options are attractive to the customer and improve market acceptance of its homes as well as improve its delinquency and repossession experience. During the last 11 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 1998, VMF originated 24,304 contracts. At June 30, 1998, VMF was servicing approximately 126,000 contracts with an aggregate dollar amount of $2.9 billion of which VMF has ownership interest or contingent liability on approximately 109,000 contracts with an aggregate dollar amount of $2.6 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 are as follows:
CONTRACT ORIGINATIONS YEAR ENDED JUNE 30, 1998 1997 1996 ---- ---- ---- Principal balance of contracts originated (in thousands) ...................................... $801,865 $646,624 $476,467 Number of contracts originated ........................ 24,304 21,691 16,910 Average contract size ................................. $ 32,993 $ 29,811 $ 28,177 Average interest rate.................................. 10.51% 11.10% 10.72%
The following table shows the size of the portfolio of manufactured housing contracts serviced by VMF on which it was contingently liable or owner on the dates indicated:
CONTRACT SERVICING PORTFOLIO YEAR ENDED JUNE 30, 1998 1997 1996 ---- ---- ---- Total number of contracts being serviced .............. 109,191 87,126 74,154 Originated by VMF...................................... 88,378 76,403 64,298 Acquired from other institutions....................... 20,813 10,723 9,856
VMF FUNDING. VMF draws on its short-term credit facilities with the Company to fund manufactured home loans. Additionally, the Company funds home lending activities through the capital markets. In fiscal 1998, the Company completed four public offerings of asset-backed securities totaling $899 million. In excess of $2.8 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 subsidiary. 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 for those loans originated or acquired by those entities. 6 7 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, 1998, VMF originated installment sales contracts eligible for financing under the GNMA program having aggregate principal balances of $4 million. As of June 30, 1998, VMF was servicing 253 GNMA pools totaling $157 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, corporate existence and employment of certain key individuals. The Company may remain contingently liable on installment sales contracts sold with recourse to institutional investors; this contingent liability amounted to approximately $23 million as of June 30, 1998. See Note 6 to the Consolidated Financial Statements in the Company's Annual Report to Shareholders. The Company believes that, as long as buyers of the Company's homes remain sensitive primarily to the amount of their monthly payments rather than interest rates and VMF is able to continue to implement its loan practice and pricing policies, changes in interest rates will not materially effect its business. There can be no assurance, however, that a significant change in interest rates will not materially effect the Company's business and financial condition. ACQUIRED CONTRACTS AND SERVICING ARRANGEMENTS. The Acquired Contracts were originated by savings and loan associations, savings banks, or other lenders, and acquired indirectly or directly from them by VMF. The Acquired Contracts were underwritten on the basis of underwriting criteria that were different from and, as a whole, not 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 this portfolio. At June 30, 1998, VMF was servicing approximately 17,094 of these installment sales contracts with an approximate principal balance of $332 million. DELINQUENCY AND REPOSSESSION EXPERIENCE. VMF performs recordkeeping and collection activities on all loans that it originates or purchases through portfolio acquisitions. Unrelated institutions purchasing the Company's installment sales contracts individually and directly from Company-owned retail centers perform their own recordkeeping and collection activities, although the Company is in some cases responsible for repossessing homes in the event such action becomes necessary. 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, it is the policy of the Company, not to repossess the home until payments are three months delinquent, unless the borrower has no 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. A contract is considered delinquent if any payment is past-due 30 days or more. 7 8
DELINQUENCY PERCENTAGE AT JUNE 30, 1998 1997 1996 ----- ---- ---- *Including Excluding Access Access ------ ------ Total delinquencies as percentage of contacts outstanding All contracts..................................... 3.34% 2.16% 2.08% 2.04% Contracts originated by VMF ...................... 1.98 1.98 1.99 1.88 Contracts acquired from other institutions........ 8.68 3.26 2.68 3.04
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:
LOAN LOSS/REPOSSESSION EXPERIENCE AT OR FOR THE YEAR ENDED JUNE 30, 1998 1997 1996 ---- ---- ---- *Including Excluding Access Access ------ ------ Net losses as percentage of average loans outstanding: All contracts .................................... 0.8% 0.8% 0.2% 0.3% Contracts originated by VMF ...................... 0.8% 0.8% 0.0% 0.0% Contracts acquired from other institutions ....... 1.8% 1.7% 1.8% 1.4% Number of contracts in repossession: Total............................................. 1,682 1,343 937 709 Contracts originated by VMF....................... 1,229 1,229 885 635 Contracts acquired from other institutions........ 453 114 52 74 Total number of contracts in repossession as percentage of total contracts.................. 1.54% 1.33% 0.87% 0.96%
* In the month of May, the Company purchased $245 million in loans from Access Financial Lending Corporation (Access) and contracted to service an additional $267 million - for a total of $512 million in servicing. Generally, the Company pays off the related installment sales contract upon repossession of a home and then resells the home. The Company believes that as long as it is able to sell repossessed homes at satisfactory margins, the increased repossession costs associated with payoffs of installment sales contracts will be largely offset by resales of repossessed homes. 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. 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, 1998, the Company acted as the agent on physical damage, family protection, and home buyer protection policies on approximately 71%, 54%, and 77%, 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 In fiscal 1998 the Communities group acquired 945 sites in 4 communities and developed 222 sites at existing communities, bringing total sites owned to 18,964 at June 30, 1998, a 7% increase from the prior 8 9 year. See "Item 2. Properties." 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, 1998 1997 1996 ---- ---- ---- Home sites owned ..................... 18,964 17,797 16,780 Occupancy rate ....................... 72% 70% 64%
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 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. 9 10 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 levels are relatively small, with retail and inventory financing generally available to a prospective retailer. The Company is not able to estimate the total number of competitors in its marketing area. EMPLOYEES As of June 30, 1998, the Company employed 6,703 persons. Of these, 1,818 were employed in retail sales, 3,929 in manufacturing, 492 in financial services, 392 in communities and 72 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 in 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. LOCATION OF PROPERTY
MANUFACTURING OPERATIONS APPROXIMATE MANUFACTURING OPERATIONS APPROXIMATE SQUARE FEET SQUARE FEET Owned by company Owned by company Georgia Tennessee (continued) Waycross 100,000 Bean Station #1 114,000 North Carolina Bean Station #2 137,000 Henderson 112,000 Andersonville 128,000 Oxford 92,000 White Pine 137,000 Richfield 194,000 Texas Tennessee Waco #1 148,000 Maynardville 110,000 Waco #2 99,000 Savannah #1 104,000 Bonham 117,000 Savannah #2 109,000 Sulphur Springs 113,000 Ardmore 100,000 Leased Rutledge 87,000 Halls, Tennessee 63,000
10 11
COMMUNITIES APPROXIMATE COMMUNITIES APPROXIMATE ACRES ACRES Owned by company Owned by company Arizona Tennessee Glendale 14 Farragut 23 Mirage 35 Knoxville (3) 147 Phoenix 47 LaVergne 76 Florida Millington 29 Gainesville (2) 132 Morristown 12 Jacksonville (5) 334 Maryville (2) 67 Kissimmee 41 Powell 23 Mulberry (2) 91 Rockford 13 Princeton 37 Smyrna 26 Tallahassee 39 Tullahoma 18 Georgia Texas Douglasville (2) 97 Arlington 43 Iowa Dallas (2) 84 Carter Lake 41 Denton (3) 201 Michigan Fort Worth (4) 142 Kalamazoo 126 Flower Mound 18 Missouri Greenville 25 Independence 90 Houston (3) 142 North Carolina Humble 55 Greensboro 83 Little Elm 48 Oklahoma Mesquite 27 Edmond 37 Pearland 30 Midwest City 25 San Angelo 90 Norman 44 San Antonio (4) 206 Oklahoma City (2) 116 Schertz 71 South Carolina Wylie (2) 179 Columbia 97 Virginia Florence (2) 97 Evington 70 Blacksburg 38
The Company-owned retail centers are generally one to four acre sites with a manufactured office unit serving as the sales office. The balance of a retail center site is devoted to the display of homes. Of the 273 retail centers, 131 are owned and 142 occupy leased property. The Company does not believe that any of the property owned or leased for an individual retail center is material to its overall business. All of the properties described above are well maintained, adequately insured and suitable for the purposes for which they are being used by the Company. 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 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. (a) The Company's Common Stock is traded on the New York Stock Exchange. The following table sets forth, for the period from July 1, 1997 to June 30, 1998, the range of high and low closing sale prices as reported by the New York Stock Exchange, Inc.
Fiscal Fiscal 1998 1997 ---- ---- Quarter Ended High Low High Low September $18.75 $14.25 $17.90 $13.80 December 19.44 15.75 17.20 12.60 March 21.31 16.25 15.38 13.00 June 22.38 17.06 15.25 12.63
(b) As of August 31, 1998, there were 12,023 holders of record (approximately 64,000 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. The Board of Directors initiated the payment of cash dividends at the November 9, 1994 shareholders meeting of $.02 per share per quarter. 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 1998 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 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 19-24. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 12 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. EXECUTIVE OFFICERS OF THE COMPANY
Name Age Position James L. Clayton 64 Chairman of the Board and Chief Executive Officer Kevin T. Clayton 35 President, Chief Operating Officer and President, Financial Services (a) David M. Booth 45 Executive Vice President and President, Retail Group Richard D. Strachan 56 Vice President and President, Manufacturing Group (b) Paul W. Boyd 40 Treasurer (c) Amber W. Krupacs 34 Vice President, Finance and Secretary (d) Greg A. Hamilton 40 Vice President and Controller (e)
(a) Mr. K. T. 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. (b) Prior to joining the Company in 1994, Mr. Strachan was President and Chief Operating Officer of the Visador Company from 1989 to 1994. He was named Vice President of the Company and President of the Manufacturing Group in August 1997. (c) Mr. Boyd joined the Company in April 1996 as Director of Finance. From 1994 to 1995, he served as Senior Vice President of Victoria Bankshares, Inc. From 1989 to 1994, he served as Senior Vice President and Chief Financial Officer of FNB Financial Corporation, a Tennessee bank holding company. In August 1997, he was named Treasurer of the Company. (d) Ms. Krupacs joined the Company in December 1993 as Tax Manager. From 1987 to 1993, she served in various positions with Coopers & Lybrand LLP, including Tax Manager. In August 1998, she was named Vice President, Finance and Secretary of the Company. (e) Mr. Hamilton joined the Company in February 1997 as Corporate Controller. From 1984 to 1997, he served in various finance and accounting positions with Philips Consumer Electronics Company including Director of Finance and Business Planning, 1995-1997; Sales and Marketing Controller, 1994-1995; and Controller, Professional/Commercial Sales and Purchased Product Marketing, 1993-1994. In August 1998, he was named Vice President and Controller of the Company. All other officers have been in their positions for at least five years. 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 13 14 PRINCIPAL SHAREHOLDER THEREOF; SECURITY OWNERSHIP OF MANAGEMENT. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference to the Company's Proxy Statement. 14 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (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 1998 Annual Report to Shareholders for the year ended June 30, 1998. Report of Independent Accountants. Consolidated Balance Sheets - June 30, 1998 and 1997. Consolidated Statements of Income - years ended June 30, 1998, 1997 and 1996. Consolidated Statements of Shareholders' Equity - years ended June 30, 1998, 1997 and 1996. Consolidated Statements of Cash Flows - years ended June 30, 1998, 1997 and 1996. Notes to the Consolidated Financial Statements. 3. Exhibits: 3. (a) Restated charter as amended. (E) (b) Bylaws. (G) 4. (a) Specimen stock certificates. (G) (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) Clayton Homes, Inc. 1983 and 1985 Stock Option Plan. (C) *(c) 1991 Employees Stock Incentive Plan. (C) *(d) Clayton Homes, Inc. 1997 Employees Stock Incentive Plan. (F) *(e) Director's Equity Plan. (G) *(f) Director's Equity Plan. (G) *(g) Director's Equity Plan. (C) *(h) Director's Equity Plan. (D) *(i) 1996 Outside Directors Equity Plan. (E) *(j) Description of Clayton Homes, Inc. bonus arrangement for key executives. (C)
15 16 13. Annual Report to Shareholders for year ended June 30, 1998. (B) 21. List of Subsidiaries of the Registrant. 23. Consent of independent accountants. 27. Financial Data Schedule (for SEC use only).
- ---------------------------------------------------------------- (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 the Company's Proxy Statement for the Annual Meeting of Shareholders held November 10, 1993, and incorporated by reference thereto. (D) Filed with the Company's Proxy Statement for the Annual Meeting of Shareholders held November 9, 1994, and incorporated by reference thereto. (E) Filed with the Company's Proxy Statement for the Annual Meeting of Shareholders held November 14, 1996, and incorporated by reference thereto. (F) Filed with the Company's Proxy Statement for the Annual Meeting of Shareholders held November 12, 1997, and incorporated by reference thereto. (G) Filed in electronic format only. The Company will provide full written copies of the exhibits to any eligible shareholder who may request them. Request for copies should be mailed to Clayton Homes, Inc., Attn. Investor Relations, Box 15169, Knoxville, TN 37901. * Management and Director's Compensation plans. - -------------------------------------------------------------------------------- (b) Reports on Form 8-K. Clayton Homes, Inc./Vanderbilt Mortgage & Finance, Inc. Senior Subordinate Pass-Through Certificates Series 1998. Filed May 26, 1998. 16 17 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 Knoxville, State of Tennessee, on September 21, 1998 CLAYTON HOMES, INC. By: /s/ Kevin T. Clayton ------------------------------------- Kevin T. Clayton President, Chief Operating Officer 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, 1998 Chairman of the Board and - ------------------------------------ Chief Executive Officer James L. Clayton (Principal Executive Officer) /s/ Kevin T. Clayton September 21, 1998 President, Chief Operating Officer - ------------------------------------ and President, Financial Services Kevin T. Clayton /s/ Amber W. Krupacs September 21, 1998 Vice President, Finance - ------------------------------------ and Secretary Amber W. Krupacs /s/ Greg A. Hamilton September 21, 1998 Vice President - ------------------------------------ and Controller Greg A. Hamilton /s/ B. Joe Clayton September 21, 1998 Director - ------------------------------------ B. Joe Clayton /s/ James D. Cockman September 21, 1998 Director - ------------------------------------ James D. Cockman /s/ Dan W. Evins September 21, 1998 Director - ------------------------------------ Dan W. Evins /s/ Wilma H. Jordan September 21, 1998 Director - ------------------------------------ Wilma H. Jordan /s/ Thomas N. McAdams September 21, 1998 Director - ------------------------------------ Thomas N. McAdams /s/ C. Warren Neel September 21, 1998 Director - ------------------------------------ C. Warren Neel
17 EX-3.B 2 BYLAWS 1 EXHIBIT 3(b) BYLAWS OF CLAYTON HOMES, INC. (DELAWARE CORPORATION EFFECTIVE JANUARY 1, 1997) OFFICE 1. The principal office of the Corporation shall be in Wilmington, Delaware, and the Corporation shall have such other offices at such other places within or without the State of Delaware as the Board of Directors may from time to time determine or as the business of the Corporation may require. SHAREHOLDERS' MEETINGS 2. Annual Meeting. An annual meeting of the shareholders of the Corporation shall be held on such date as may be determined by the Board of Directors. The business to be transacted at such meeting shall be the election of directors and such other business as shall be properly brought before the meeting. If the election of directors shall not be held on the day designated by the Board of Directors for any annual meeting, or at any adjournment of such meeting, the Board of Directors shall call a special meeting of the shareholders as soon as conveniently possible thereafter. At such special meeting the election of directors shall take place and such election and any other business transacted thereat shall have the same force and effect as if transacted at an annual meeting duly called and held. 1 2 3. Special Meetings. Special meetings of the shareholders, unless otherwise required by law, may be called at any time by the Chairman, President or Secretary and shall be called by the Chairman, President or Secretary at the request in writing of a majority of the Board of Directors or of shareholders owning 10% or more of the entire capital stock of the Corporation issued and outstanding and entitled to vote at such meeting. Such request must state the purpose or purposes for which the meeting is called and the person or persons calling the meeting. 4. Place of Meetings. Annual and special meetings of the shareholders shall be held at the Corporation's principal office or at such other place within or without the State of Delaware as may be designated by the Board of Directors. 5. Notice of Meetings; Waiver. (a) Annual Meetings. Written or printed notice stating the place, day and hour of the annual meeting of shareholders shall be given in person or by mail to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be delivered not less than ten (10) days nor more than sixty (60) days before the meeting. Mailed notice shall be deemed to be delivered when deposited, with postage prepaid, in the United States mail addressed to the shareholder at his address as it appears on the records of the Corporation at the close of business on the record dates established for such meeting. If delivered 2 3 personally, such notice shall be delivered not less than five (5) nor more than sixty (60) days before the date of the meeting and shall be deemed delivered when actually received by the shareholder. (b) Special Meetings. Written or printed notice of every special meeting of shareholders shall be given in person or by mail to each shareholder of record entitled to vote at such meeting. Such notice shall state the place, day, hour, purpose or purposes for which the meeting is called, and the person or persons calling the meeting. If mailed, such notice shall be delivered not less than ten (10) days nor more than sixty (60) days before the meeting. Mailed notice shall be deemed to be delivered when deposited, with postage prepaid, in the United States mail addressed to the shareholder at his address as it appears on the records of the Corporation at the close of business on the record date established for such meeting. If delivered personally, such notice shall be delivered not less than five (5) nor more than sixty (60) days before the date of the meeting and shall be deemed delivered when actually received by the shareholder. (c) Waiver. A shareholder may waive the notice of either an annual or a special meeting by the submission by the shareholder or his proxy holder of a written waiver of notice either before or after such meeting. 6. Quorum. Except as otherwise required by law or provided in these Bylaws, a quorum at any meeting of shareholders shall consist of the holders of record of a majority of the shares issued and outstanding and entitled to vote thereat, present 3 4 in person or by proxy. If, however, such majority shall not be present or represented at any meeting of the shareholders, the shareholders present in person or by proxy and entitled to vote thereat shall have power to adjourn the meeting from time to time, and to any other place, without notice other than announcement at the meeting of the time and place to which the meeting is adjourned. At any adjourned meeting at which the requisite amount of voting stock to constitute a quorum shall be represented, any business may be transacted which might have been transacted at the meeting as originally called. 7. Record Dates. The record date for the determination of shareholders entitled to notice of and entitled to vote at any meeting of shareholders or any adjournment thereof, shall be such date as shall be determined by the Board of Directors, but which in any event shall not be less than ten (10) days prior to the date of such meeting. If the Board of Directors does not fix such record date, the record date for the determination of shareholders entitled to notice of and entitled to vote at any meeting of shareholders or any adjournment thereof shall be the close of business on the day next preceding the day on which notice is given. 8. Voting of Shares. Unless otherwise provided in the Charter, such shareholder of the Corporation shall be entitled, at each meeting of the shareholders and upon each proposal presented at such meeting, to one vote for each share of the capital stock having voting power registered in his name on the books of the Corporation on the 4 5 record date. Each shareholder having the right to vote shall be entitled to vote in person or by proxy appointed by an instrument in writing executed by such shareholder or his duly authorized attorney-in-fact and bearing a date not more than eleven (11) months prior to said meeting, unless said instrument provides for a longer period. Unless the Charter, these Bylaws or applicable law specifically provide otherwise, the affirmative vote of a majority of shares represented and entitled to vote at a meeting at which a quorum is present shall be the act of the shareholders, except that directors shall be elected by a plurality of the votes cast in the election. At each election of directors, every shareholder shall have the right to vote the number of shares which he is entitled to vote at such meeting for as many persons as there are directors to be elected at said meeting, but cumulative voting for such business shall not be permitted unless the Charter otherwise provides. 9. Presiding Officer. Meetings of the shareholders shall be presided over by the Chairman, or if he is not present, by the President, or if he is not present, by a Vice President, or if neither the Chairman, President nor a Vice President is present, by a chairman to be chosen by a majority of the shareholders entitled to vote at such meeting. The Secretary of the Corporation or, in his absence, an Assistant Secretary shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present, the shareholders entitled to vote at such meeting shall choose any person present to act as secretary of the meeting. 5 6 DIRECTORS 10. Powers and Duties. The business and affairs of the Corporation shall be managed by the Board of Directors. In addition to the powers and authority expressly conferred upon them by these Bylaws, the Board may exercise all the powers of the Corporation and do all lawful acts and things as are not by applicable law, by the Charter of the Corporation or by these Bylaws directed or required so be exercised or done by the shareholders. 11. Number, Term, Qualification, and Vacancies. (a) Number. The Board of Directors shall consist of not less than three (3) nor more than eight (8) members, unless all of the outstanding stock of the Corporation is owned of record by less than three (3) shareholders, in which case the number of directors may be less than three (3), but not less than the number of shareholders of record. Subject to the provisions of paragraph 11(b), the exact number within such maximum and minimum numbers shall be determined from time to time by resolution adopted by a majority of the entire Board of Directors, except as hereinafter provided, directors shall be elected at the first meeting of shareholders and thereafter at the annual meeting of shareholders and each director shall serve for a term not to exceed three (3) years and until his successor shall be elected and qualified. (b) Increase in Number. The number of members of the Board of Directors may be increased from time to time by either the directors or the 6 7 shareholders. The number of directors may be increased by the Board of Directors upon the affirmative vote of a majority of the entire Board. If the number of directors is increased by the Board, a vacancy or vacancies caused by such increase shall be filled by the vote of a majority of the directors then in office although less than a quorum exists. The number of directors may also be increased by the shareholders at any meeting thereof by a majority vote of the shares represented and entitled to vote. If the number of directors be increased by action of the shareholders, a vacancy or vacancies caused by such increase shall be filled by the shareholders in the same manner as at an annual meeting. Directors elected to fill vacancies caused by increase in number of members of the Board shall hold office until the next annual meeting of shareholders and thereafter until their successors are elected and qualified. (c) Decrease in Number. The number of members of the Board of Directors may be decreased by either the directors or the shareholders at any time there is an unfilled vacancy or there are unfilled vacancies on the Board of Directors, provided that the number of members may be decreased only to the extent of the number of vacancies on the Board of Directors existing at that time. If the number of directors is decreased by the Board, such action shall be taken by the vote of a majority of the directors then in office although less than a quorum exists. If the number of directors is decreased by the shareholders, such action shall be taken by a majority vote of the shares represented at any meeting and entitled to vote thereat. 7 8 (d) Vacancies. In case there are vacancies on the Board of Directors, other than vacancies created by the removal of a director or directors (which shall be governed by paragraph 15(b)) and other than vacancies created by an increase in the number of directors (which shall be governed by paragraph 11(b)), the remaining directors may by a majority vote of the directors then in office elect a successor or successors who shall hold office until the next annual meeting of shareholders and until his or their successors are elected and qualified. (e) Qualification. Directors need not be shareholders of the Corporation or residents of Delaware, but must be of legal age. 12. Quorum. A majority of the total number of directors in office shall constitute a quorum for the transaction of business. If, at any meeting of the Board of Directors, there shall be less than a quorum present, a majority of those present may adjourn the meeting, without further notice, from time to time until a quorum shall have been obtained. 13. Manner of Acting. The act of a majority of the directors present at a meeting at which a quorum is present shall, unless otherwise provided by applicable law or those Bylaws, be the act of the Board of Directors. Any action required or permitted to be taken at a meeting of directors may be taken without a meeting if a consent in writing, setting forth the action is taken, is signed by all the directors. Such written consent shall have the same force and effect as a unanimous vote at a 8 9 meeting of the Board of Directors. 14. Meetings; Notice. Meetings of the Board of Directors may be held either within or without the State of Delaware. Notice of a meeting of the Board of Directors need not state the purpose of, nor the business to be transacted at, such meeting. (a) Regular Meetings. Regular meetings of the Board of Directors shall be held at such times as are fixed from time to time by resolution of the Board, and may be held without notice of the time or place therefor. (b) Special Meetings. Special meetings may be held at any time upon call of the Chairman, the President or a Vice President. Notice of the time and place of each special meeting shall be given to each director at either his business address, as shown by the records of the Corporation, at least forty-eight (48) hours prior thereto if mailed and on the day prior thereto if delivered or given in person or by telephone or telegraph. If mailed, such notice shall be deemed to be delivered when deposited, so addressed and with postage prepaid, in the United States mail. If notice is given by telegram, such notice shall be deemed to be delivered when the telegram, so addressed, is delivered to the telegraph company. If notice is given in person, such notice shall be deemed to have seen given when it is hand delivered to the director at his business or residence address. Any director may waive notice of any meeting before, at or after such meeting and the attendance of a director at a meeting shall constitute a waiver of notice of such meeting except when a director attends for the sole, express purpose of objecting 9 10 to the transaction of business thereat, on the ground that the meeting is not lawfully called or convened, and so states in writing prior to the conduct of any business at the meeting. 15. Removal. (a) By Shareholders. Unless the Charter otherwise provides, at any meeting of the shareholders, the entire Board of Directors or any number of directors may be removed from office, with or without cause, by a majority vote of the shares represented and entitled to vote thereat. (b) Replacement. When any director or directors are removed, new directors may be elected to fill the vacancies thereby at the same meeting of the shareholders or Board of Directors, as the case may be, for the unexpired term of the director or directors removed. If the shareholders fail to elect persons to fill the unexpired term or terms of the director or directors removed by them, such unexpired terms shall be considered vacancies on the Board to be filled by the remaining directors as provided in paragraph 11(d). 16. Compensation. Directors, and members of any committee of the Board of Directors shall be entitled to such reasonable compensation for their services as directors and members of any such committee as shall be fixed from time to time by resolution of the Board of Directors, and shall also be entitled to reimbursement for any reasonable expense incurred in attending such meetings. Any director receiving compensation under these provisions shall not be barred from serving the 10 11 Corporation in any other capacity and receiving reasonable compensation for such other services. COMMITTEES 17. Executive Committee. There may be, if so determined by a resolution adopted by a majority of the entire Board of Directors, an Executive Committee of the Board consisting of two (2) or more directors. The Board of Directors may delegate to such Executive Committee all the power and authority of the Board that it deems desirable, except for any matters which cannot by law be delegated by the Board of Directors. Unless specifically authorized by the Board, the Executive Committee shall not have the power to adopt, amend or repeal these Bylaws, to submit to shareholders any matter that by law requires their authorization, to fill vacancies in the Board of Directors or in any committee or to declare dividends or make other corporate distributions. 18. Other Committees. The Board of Directors may create such other committees as it may determine to be helpful in discharging its responsibilities for the management and administration of the Corporation. Each such committee shall consist of such persons, whether directors, officers or others, as may be elected thereto by the Board of Directors, and each committee shall perform such functions as may be lawfully assigned to it by the Board of Directors. 11 12 OFFICERS 19. Number. The officers of the Corporation shall be a Chairman, a President, a Secretary and such other officers as may be from time to time elected by the Board of Directors. One person may hold more than one office except the President may not hold the office of Secretary. 20. Election and Term of Office. The principal officers shall be elected annually by the Board of Directors at the first meeting of the Board following the shareholders' annual meeting, or as soon thereafter as is conveniently possible. Subordinate officers may be elected from time to time. Each officer shall serve at the pleasure of the Board for such term as the Board of Directors may set and until his successor shall have seen elected and qualified, or until his death, resignation or removal. 21. Removal. Any officer may be removed from office by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall not prejudice the contract rights, if any, of the persons so removed. 22. Vacancies. Any vacancy in an office from any cause may be filled for the unexpired portion of the term by the Board of Directors. 12 13 23. Duties. (a) Chairman. The Chairman shall preside at all meetings of the shareholders and the Board of Directors, shall be the Chief Executive Officer of the Corporation, and shall see that all orders and resolutions of the Board of Directors are carried into effect. (b) President. The President shall be the Chief Operating Officer of the Corporation and shall have general supervision over the active management of the business of the Corporation. He shall have the general powers and duties of supervision and management usually vested in the office of the President of a Corporation and shall perform such other duties as the Board of Directors may from time to time prescribe. (c) Vice President. The Vice President or Vice Presidents (if any) shall be active executive officers of the Corporation, shall assist the Chairman and the President in the business, and shall perform such other duties as the Board of Directors may from time to time prescribe. (d) Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose; he shall perform like duties for any committee when required. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors when required, and unless directed otherwise by the Board of Directors, shall keep a stock record containing the names of all persons who are shareholders of the 13 14 Corporation, showing their place of residence and the number of shares held by them respectively. The Secretary shall perform such other duties as may be prescribed from time to time by the Board of Directors. (e) Treasurer. The Treasurer shall have the custody of the Corporation's funds and securities, shall keep or cause to be kept full and accurate account of receipts and disbursements in books belonging to the Corporation, and shall deposit or cause to be deposited all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse or cause to be disbursed the funds of the Corporation as required in the ordinary course of business or as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Chairman, the President and directors at the regular meetings of the Board, or whenever they may require it, an account of all of his transactions as Treasurer and the financial condition of the Corporation. He shall perform such other duties as may be incident to his office or as prescribed from time to time by the Board of Directors. The Treasurer shall give the Corporation's bond, if required by the Board of Directors, in a sum and with one or more sureties satisfactory to the Board for the faithful performance of the duties of his office and for the restoration to the Corporation in case of his death, resignation, retirement, or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. 14 15 (f) Other Officers. Other officers appointed by the Board of Directors shall exercise such powers and perform such duties as may be delegated to them. (g) Delegation of Duties. In case of the absence or disability of any officer of the Corporation or of any person authorized to act in his place, the Board of Directors may from time to time delegate the powers and duties of such officer to any officer, or any director, or any other person whom it may select, during such period of absence or disability. 24. Indemnification of Officers and Directors. The Corporation shall indemnify each present and future director and officer of the Corporation, or any person who may have served at its request as a director or officer of another company (and, in either case, his heirs, executors and administrators) to the full extent allowed by the laws of the State of Delaware, both as now in effect and as hereafter adopted. CERTIFICATES FOR SHARES OF STOCK 25. Form. (a) Stock Certificates. The Interest of each shareholder of the Corporation shall be evidenced by a certificate or certificates for shares of stock. The certificate shall include the following on its face: (i) the Corporation's name, (ii) the fact that the Corporation is organized under the laws of the State of Delaware, (iii) the name of the owner of record of the shares represented thereby, (iv) the number of shares represented thereby, (v) the class of shares and the 15 16 designation of the series, if any, which the certificate represents, (vi) the par value of each share or a statement that the shares are without par value, and (vii) such other information as applicable law may require or as may be lawful. (b) Signatures. The certificates for stock shall be signed by the Chairman, the President or a Vice President, and by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer. Where any certificate is manually countersigned by a transfer agent or registered by a registrar who is not an officer or employee of the Corporation, the signatures of the Chairman, President, Vice President, Secretary, Assistant Secretary, and/or Treasurer upon such certificate may be facsimiles, engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any certificate shall have ceased to be such before the certificate is issued, it may be issued by the Corporation with the same effect as if such officer had not caused to be such at the time of its issue. 26. Subscriptions for Shares. Subscriptions for shares of the Corporation shall be valid only if they are in writing, signed and delivered by the subscriber. Unless the subscription agreement provides otherwise, subscriptions for shares, regardless of the time when they are made, shall be paid in full at such time, or in such installments and at such periods, as shall be so determined by the Board of Directors. All calls for payments on subscriptions shall be uniform as to all shares of the same class or of the same series. 16 17 27. Transfers. Transfers of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by (i) the holder of record thereof, (ii) by his legal representative, who shall furnish proper evidence of authority to transfer, or (iii) his attorney, authorized by a power of attorney duly executed and filed with the Secretary of the Corporation or as duly appointed transfer agent. Such transfers shall be made only upon surrender of the certificate or certificates for such shares properly endorsed and with all taxes thereon paid. 28. Loss, Destroyed, or Stolen Certificates. No certificate for shares of stock of the Corporation shall be issued in place of any certificate alleged to have been lost, destroyed, or stolen except in production of evidence, satisfactory to the Board of Directors, of such loss, destruction or theft, and, if the Board of Directors so requires, upon the furnishing of an indemnity bond in such amount (but not to exceed twice the value of the shares represented by the certificate) and with such terms and such surety as the Board of Directors may in its discretion require. CORPORATE ACTIONS 29. Contracts. Unless otherwise required by the Board of Directors, the Chairman, the President or any Vice President shall execute contracts or other instruments on behalf of and in the name of the Corporation. The Board of Directors may from time to time authorize any other officer or officers or agent or agents to enter into 17 18 any contract or execute any instrument in the name of and on behalf of the Corporation as it may deem appropriate, and such authority may be general or confined to specific instances. 30. Loans. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the Chairman, the President or the Board of Directors. Such authority may be general or confined to specific instances. 31. Checks, Drafts, etc. Unless otherwise required by the Board of Directors, all checks, drafts, bills of exchange and other negotiable instruments of the Corporation shall be signed by either the Chairman, the President, a Vice President or such other officer or agent of the Corporation as may be authorized to do so by the Board of Directors. Such authority may be general or confined to specific business, and, if so directed by the Board, the signatures of two or more such officers may be required. 32. Deposits. All funds of the Company not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks or other depositories as the Board of Directors may authorize. 33. Voting Securities Held by the Corporation. Unless otherwise required by the Board of Directors, the Chairman or the President shall have full power and authority on behalf of the Corporation to 18 19 attend any meeting of security holders, or to take action on written consent as a security holder, of other corporations in which the Corporation may hold securities in connection therewith the Chairman or the President shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the Corporation possesses. The Board of Directors may, from time to time, confer like powers upon any other person or persons. 34. Dividends. The Board of Directors may, from time to time and the Corporation may pay, dividends on its outstanding shares of capital stock in the manner and upon the terms and conditions provided by applicable law. The record date for the determination of shareholders entitled to receive the payment of any dividend shall be determined by the Board of Directors, but which in any event shall not be less than ten (10) days prior to the date of such payment. FISCAL YEAR 35. The fiscal year of the Corporation shall be determined by the Board of Directors, and in the absence of such determination, shall be the calendar year. CORPORATE SEAL 36. The Corporation shall have a corporate seal, which seal shall have the letters CHI in the middle and the words Clayton Homes, Inc. on the border. 19 20 AMENDMENT OF BYLAWS 37. These Bylaws may be altered, amended or repealed, and new Bylaws may be adopted at any meeting of the shareholders by the affirmative vote of a majority of the stock represented at such meeting, or by the affirmative vote of a majority of the members of the Board of Directors who are present at any regular or special meeting; provided, however, that any amendment to these Bylaws changing the number of directors, if adopted by the Board of Directors, shall require the affirmative vote of a majority of the members of the entire Board of Directors. 20 EX-4.A 3 SPECIMEN STOCK CERTIFICATES 1 EXHIBIT 4(a) NUMBER SHARES S Common Stock PAR VALUE $.10 PER SHARE CLAYTON HOMES, INC. INCORPORATED UNDER THE LAWS CUSIP 184190 10 6 OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT IS THE OWNER OF FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF Clayton Homes, Inc. transferable on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. DATED COUNTERSIGNED AND REGISTERED. AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW YORK, NY) TRANSFER AGENT AND REGISTRAR PRESIDENT BY AUTHORIZED SIGNATURE SECRETARY [SEAL] 2 CLAYTON HOMES, INC. The Corporation will furnish without charge to each shareholder who so requests a copy of the statement of the rights, preferences, privileges and restrictions granted to or imposed upon each class or series of shares authorized to be issued and upon the holders thereof. Such request may be directed to the Secretary of the Corporation at its principal office in the city of Knoxville, Tennessee. The Board of Directors of the Corporation has authority to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices and liquidation preferences of any wholly unissued series of preferred stock of the Corporation, the number of shares constituting such series, and the designation of such series. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT--_________ Custodian _________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act _________________________ in common (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, _________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ _______________________________________________________________________________ _______________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE _______________________________________________________________________________ _______________________________________________________________________________ _________________________________________________________________________SHARES OF THE COMMON STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT ____________________________________________ ______________________________________________________________________ ATTORNEY TO TRANSFER THE SAID STOCK ON THE BOOKS OF CLAYTON HOMES, INC. WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. DATED, __________________ _________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. ____________________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.E 4 DIRECTOR'S EQUITY PLAN NOV 13 1990 1 Exhibit 10(e) Directors' Equity Plan November 13, 1990 Stock Option Grant PURPOSE The purpose of the 1990 Stock Option Grant is to provide Clayton Homes, Inc., common stock as a component of the compensation package for non-employee directors of the Company (the "Participating Directors") in order to strengthen the commonality of interest between Participating Directors and shareholders and improve the Company's ability to attract and retain talented individuals to serve as company directors. STOCK OPTION AWARD TO EACH PARTICIPATING DIRECTOR The Stock Option is a right to purchase 2,500 shares of Clayton Homes, Inc., common stock at the market value at the date of grant (option price), which shall be November 13, 1990. STOCK OPTION TERMS Each of the non-qualified stock options becomes exercisable in 20% installments beginning one year after the date of grant and becomes exercisable 20% each year thereafter, provided, however, that the first installment of the grant hereunder shall become exercisable six months and one day following shareholder approval of this plan. Should a Participating Director's Board service terminate prior to all or a portion of an option becoming exercisable, the portion of the option not then exercisable will be canceled unless such termination is due to death or disability. (See discussion below). Options will have generally a ten-year term and are not transferable by the Participating Director other than by will or the laws of descent. Once the stock option becomes exercisable, a Participating Director may purchase some or all of the exercisable shares by notifying the Secretary of the Company, in writing, of his or her intent to exercise and by concurrently submitting a check in payment of the exercise cost (i.e., number of shares being exercised times the option price). Upon retirement from the Board or upon earlier termination as described herein, the exercisable portion of any stock option will remain exercisable for two years from such termination date. 2 DEATH OR DISABILITY If a Participating Director's service as a director terminates because of death or permanent disability, he or she (or the named beneficiary or estate) will receive the awards granted through such termination of service. For these purposes, permanent disability will be considered to have occurred if the Participating Director would be eligible to receive a Primary Social Security Disability benefit under the definition of such laws and regulations. In either event, stock options will become immediately exercisable, if not already exercisable. Options will then have a two-year period from the date of termination of Board service during which it can be exercised by the beneficiary, or the estate. Should the Participating Director die during such two-year post-termination exercise period, the beneficiary or estate will have the greater of: (1) the remainder of the two-year post-termination exercise period or (ii) one year from the date of death in which to exercise the stock option. CHANGES IN CAPITALIZATION In the event of any change in outstanding Clayton Homes, Inc., Stock (including the stock dividend to be paid on December 12, 1990) which requires an adjustment in stock option and/or stock awards under the Company's stock incentive plans for employees, any such adjustment or adjustments will also be made to the stock options hereunder. AUTHORIZED SHARES The maximum number of authorized shares which may be issued to each of the four participating Directors under this Program shall be 2,500 (10,000 shares in aggregate) subject to adjustment as described in "Changes in Capitalization." SHAREHOLDER APPROVAL This program is subject to approval by the Company's shareholders at the 1991 Annual Meeting. EX-10.F 5 DIRECTOR'S EQUITY PLAN NOV 12 1991 1 Exhibit 10(f) DIRECTOR'S EQUITY PLAN NOVEMBER 12, 1991 STOCK OPTION GRANT PURPOSE The purpose of the Director's Equity Plan is to provide Clayton Homes, Inc., common stock as a component of the compensation package for Dan Evins, a non-employee director of the Company elected to the Board of Directors on November 12, 1991 (the "Participating Director") in order to strengthen the commonality of interest between the Participating Director and shareholders and improve the Company's ability to attract and retain talented individuals to serve as Company directors. STOCK OPTION AWARD TO THE PARTICIPATING DIRECTOR The Stock Option is a right to purchase 10,000 shares of Clayton Homes, Inc., common stock at the market value at the date of grant (option price), which shall be November 12, 1991. STOCK OPTION TERMS Each of the non-qualified stock options becomes exercisable in 20% installments beginning one year after the date of grant and becomes exercisable 20% each year thereafter, provided, however, that the first installment of the grant hereunder shall become exercisable six months and one day following shareholder approval of this plan. Should the Participating Director's Board service terminate prior to all or a portion of an option becoming exercisable, the portion of the option not then exercisable will be canceled unless such termination is due to death or disability (see discussion below). Options will have generally a 10-year term and are not transferable by the Participating Director other than by will or the laws of descent. Once the stock option becomes exercisable, the Participating Director may purchase some or all of the exercisable shares by notifying the Secretary of the Company, in writing, of his intent to exercise and by concurrently submitting a check in payment of the exercise cost (i.e., number of shares being exercised times the option price). Upon retirement from the Board or upon earlier termination as described herein, the exercisable portion of any stock option will remain exercisable for two years from such termination date. 2 DEATH OR DISABILITY If the Participating Director's service as a director terminates because of death or permanent disability, he (or the named beneficiary or estate) will receive the awards granted through such termination of service. For these purposes, permanent disability will be considered to have occurred if the Participating Director would be eligible to receive a Primary Social Security Disability benefit under the definition of such laws and regulations. In either event, stock options will become immediately exercisable, if not already exercisable. Options will then have a two-year period from the date of termination of Board service during which it can be exercised by the beneficiary, or the estate. Should the Participating Director die during such two-year post-termination exercise period, the beneficiary or estate will have the greater of: (i) the remainder of the two-year post-termination exercise period or (ii) one year from the date of death in which to exercise the stock option. CHANGES IN CAPITALIZATION In the event of any change in outstanding Clayton Homes, Inc., Stock (including the stock dividend paid on December 10, 1991) which requires an adjustment in stock options and/or stock awards under the Company's stock incentive plans for employees, and such adjustment or adjustments will also be made to the stock options hereunder. AUTHORIZED SHARES The maximum number of authorized shares which may be issued to the Participating Director under the Program shall be 10,000 subject to adjustment as described in "Changes in Capitalization". SHAREHOLDER APPROVAL This program is subject to approval by the Company's shareholders at the 1992 Annual Meeting. EX-13 6 ANNUAL REPORT TO SHAREHOLDERS JUNE 30 1998 1 EXHIBIT 13 ELEVEN YEAR REVIEW - ------------------
(in thousands except per share and other data) 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Revenues: Net sales $880,856 $822,906 $762,396 $621,351 $510,153 $384,491 $296,849 $257,557 $219,443 $208,624 $196,110 Financial services and other income 246,923 198,797 166,345 136,741 118,083 91,750 74,330 62,392 40,316 33,270 28,671 - ----------------------------------------------------------------------------------------------------------------------------------- 1,127,779 1,021,703 928,741 758,092 628,236 476,241 371,179 319,949 259,759 241,894 224,781 - ----------------------------------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of sales 598,589 559,274 521,200 431,826 357,698 267,201 206,049 176,374 153,786 147,982 138,468 SG&A 302,598 270,996 236,188 188,835 153,698 113,695 84,785 76,420 60,220 55,456 50,781 Financial services interest 2,015 2,885 3,649 5,533 8,196 11,819 16,585 18,198 11,595 9,911 10,127 Other expenses 7,976 1,000 0 0 0 0 3,300 3,772 2,213 1,539 2,010 - ----------------------------------------------------------------------------------------------------------------------------------- 911,178 834,155 761,037 626,194 519,592 392,715 310,719 274,764 227,814 214,888 201,386 - ----------------------------------------------------------------------------------------------------------------------------------- Operating income 216,601 187,548 167,704 131,898 108,644 83,526 60,460 45,185 31,945 27,006 23,395 Interest income (expense), net/ other 5,499 5,152 4,596 3,902 (359) (170) (317) (592) (575) (1,042) (1,073) - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 222,100 192,700 172,300 135,800 108,285 83,356 60,143 44,593 31,370 25,964 22,322 Provision for income taxes (84,400) (73,200) (65,500) (48,800) (39,000) (29,600) (20,800) (16,000) (11,500) (9,714) (8,370) - ----------------------------------------------------------------------------------------------------------------------------------- Income before accounting change 137,700 119,500 106,800 87,000 69,285 53,756 39,343 28,593 19,870 16,250 13,952 Cumulative effect of accounting change 0 0 0 0 3,000 0 0 0 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $137,700 $119,500 $106,800 $87,000 $72,285 $53,756 $39,343 $28,593 $19,870 $16,250 $13,952 =================================================================================================================================== Net income per share: Basic $1.16 $1.01 $0.90 $0.74 $0.64 $0.49 $0.38 $0.33 $0.26 $0.21 $0.18 Diluted $1.15 $1.00 $0.89 $0.73 $0.61 $0.47 $0.36 $0.30 $0.23 $0.19 $0.17 Average shares outstanding: Basic 118,770 118,659 118,602 117,616 112,837 109,113 104,082 85,507 75,828 76,511 76,703 Diluted 119,603 119,477 119,346 118,628 119,900 119,285 113,680 100,973 96,174 95,945 96,207 Dividends per common share $.080 $.076 $.061 $.038 -- -- -- -- -- -- -- BALANCE SHEET DATA: Total assets $1,457,757 $1,045,761 $886,350 $761,151 $701,148 $587,032 $554,780 $488,817 $339,099 $294,754 $275,835 Debt obligations 247,591 22,806 30,290 48,737 70,680 137,038 192,931 227,444 177,374 163,471 157,153 Shareholders' equity $881,019 $754,526 $650,189 $544,187 $462,154 $348,630 $292,950 $200,992 $108,334 $87,462 $70,651 KEY FINANCIAL RATIOS: As a % of revenue: Operating income 19.2% 18.4% 18.1% 17.4% 17.3% 17.5% 16.3% 14.1% 12.3% 11.2% 10.4% Net income 12.2% 11.7% 11.5% 11.5% 11.5% 11.3% 10.6% 8.9% 7.6% 6.7% 6.2% Debt as a % of total capital 21.9% 2.9% 4.5% 8.2% 13.3% 28.2% 39.7% 53.1% 62.1% 65.1% 69.0% OTHER DATA: Company-owned sales centers 273 245 216 192 165 143 127 123 96 99 100 Independent retailers 702 663 580 421 372 371 312 330 322 269 245 Manufacturing plants 18 17 17 16 13 13 11 10 10 10 10 Communities 71 67 64 55 46 33 20 12 9 7 4 - ------------------------------------------------------------------------------------------------------------------------------------
12 2 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, ---------------------------------- 1998 VS 1997 1997 vs 1996 ================================================================= RETAIL Dollar sales +7.6% +10.1% Number of retail centers +12.4% +13.0% Dollar sales per retail center -4.2% -2.6% Price of home +10.9% +2.0% - ----------------------------------------------------------------- WHOLESALE Dollar sales +8.3% +3.5% Number of independent retailers +9.8% +24.2% Dollar sales per independent retailer -1.4% -16.6% Price of home +5.7% +1.3% - ----------------------------------------------------------------- COMMUNITIES Dollar sales -10.1% +15.7% Number of communities +5.3% +10.1% Dollar sales per community -14.6% +5.1% Price of home +6.4% +6.6%
FISCAL 1998 COMPARED TO FISCAL 1997 Total revenues grew 10% on a 7% increase in Manufactured Housing sales and a 24% rise in Financial Services and other income. Net sales of the Retail group rose 8% to $535 million. This growth was the result of a 12% increase in the average number of Company-owned retail centers and an 11% increase in the average price per home offset partially by a 3% decline in homes sold. Multi-section homes accounted for 46% of total new homes sold versus 40% last year. During the year, the Company opened or acquired 33 retail locations and closed five underperforming retail centers. The Company constantly evaluates specific local markets and opens, acquires, or closes retail centers as conditions warrant. Of the 33 new openings, 22 were acquired and 11 were greenfield start-ups. Seven of the new retail centers were opened in the fourth quarter. Net sales of the Manufacturing group to independent retailers increased 8% to $312 million and the number of homes sold rose 2%. The average wholesale price increased 6% principally due to a shift toward multi-section homes. Multi-section homes accounted for 44% of total shipments versus 35% last year. Net sales of the Communities group declined 10% to $34 million as 15% less homes were sold while the average home selling price increased 6%. Four acquisitions brought the number of communities to 71 at year end. Financial Services and other income grew 24%, mainly due to VMF, $34 million, and earned insurance premiums and commissions, $5 million. Interest and loan servicing revenues increased 31% to $117 million. The average balance of receivables owned rose 72% to $386 million with a weighted average interest rate of 10.2%, down from 12.2%. The average balance of receivables sold rose 36% to $1.9 billion and the weighted average loan service spread was 3.6% compared to 3.5%. Financial Services interest expense decreased $.9 million, or 30%, to $2 million. Debt collateralized by installment contract receivables dropped 29% to an average of $19 million and 3 the weighted average interest rate declined to 10.1% from 11.1%. Loan covenants preclude prepaying these relatively higher cost obligations. Gross profit margins remained consistent at 32%. Selling, general and administrative expenses were 34.4% and 32.9% of sales for the years ended June 30, 1998 and 1997, respectively. Expenses associated with the start-up of 33 new sales centers, acquired communities and initial costs of the Financial Services' MBUs were primary causes of the increase. Net losses as a percentage of loans outstanding for fiscal 1998 increased to .8% while delinquency rates on all loans increased to 2.2% (excluding Access). The changes in inventory levels at June 30, 1998 compared to June 30, 1997 are shown below in millions:
MANUFACTURING Increase Raw materials $ 3.9 Finished goods 0.6 RETAIL Net increase of 28 Company-owned sales centers 16.5 Increase in average inventory levels at 245 Company-owned sales centers 25.0 COMMUNITIES Inventory at 4 manufactured housing communities acquired during the year 0.1 Increase in average inventory levels at 67 manufactured housing communities 1.6 - -------------------------------------------------------------------------------- $ 47.7 ================================================================================
FISCAL 1997 COMPARED TO FISCAL 1996 Total revenues grew 10% on an 8% increase in Manufactured Housing sales and a 20% rise in Financial Services and other income. Net sales of the Retail group rose 10% to $497 million. This growth was the result of a 13% increase in the average number of Company-owned retail centers and a 3% decline in the average dollar sales per location. During the year, the Company opened or acquired 31 retail locations and closed two underperforming retail centers. The Company constantly evaluates specific local markets and opens, acquires, or closes retail centers as conditions warrant. Of the 31 new openings, 14 were acquired and 17 were greenfield start ups. Seventeen of the new retail centers were opened in the fourth quarter. Net sales of the Manufacturing group to independent retailers increased 4% to $288 million and the number of homes sold rose 2%. The average wholesale price increased 1% due in part to a shift toward multi-section homes. Multi-section homes accounted for 35% of total shipments versus 32% last year. Net sales of the Communities group rose 16% to $38 million principally as a result of a 9% rise in home sales and a 6% improvement in the average sales price per home. Four acquisitions brought the number of communities to 67 at year end. 13 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - ------------------------------------------------------ Financial Services and other income grew 20% to $199 million, mainly due to VMF, $20 million, and earned insurance premiums and commissions, $7 million. Interest and loan servicing revenues increased 10% to $78 million. The average balance of receivables owned rose 3% to $224 million with a weighted average interest rate of 12.2%, down from 12.8%. The average balance of receivables sold rose 28% to $1.4 billion and the weighted average loan service spread was 3.5% compared to 3.8%. Financial Services interest expense decreased $.8 million, or 21%, to $2.9 million. Debt collateralized by installment contract receivables dropped 25% to an average of $26 million and the weighted average interest rate moved to 11.1% from 10.8%. Loan covenants preclude prepaying these relatively higher cost obligations. Gross profit margins improved from 31.6% to 32.0%. The increase primarily results from a greater mix of Clayton manufactured product sold to the Retail group. Manufacturing sales to Retail were 54.9% of new retail sales compared to 54.5% in 1996. Selling, general and administrative expenses were 32.9% and 31.0% of sales for the years ended June 30, 1997 and 1996, respectively. Expenses associated with the start-up of 31 new sales centers, acquired communities and initial costs of the Financial Services' MBUs were primary causes of the increase. Net losses as a percentage of loans outstanding for fiscal 1997 decreased to 0.2% from 0.3% last year while delinquency rates on all loans increased slightly to 2.1%. The changes in inventory levels at June 30, 1997 compared to June 30, 1996 are shown below in millions:
MANUFACTURING Increase (decrease) Raw materials $ (1.4) Finished goods (1.2) RETAIL Net increase of 29 Company-owned sales centers 11.8 Decrease in average inventory levels at 216 Company-owned sales centers (14.1) COMMUNITIES Inventory at 4 manufactured housing communities acquired during the year 0.7 Decrease in average inventory levels at 63 manufactured housing communities (0.6) - ------------------------------------------------------------------------------- $ (4.8) ===============================================================================
FOURTH QUARTER RESULTS The increase in revenues and net income during the fourth quarters of fiscal 1998 and 1997 are not indicative of future operating trends but rather reflect the seasonality of the manufactured housing industry. In recent years, approximately 31% of the Company's sales have occurred in the fourth quarter. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1998, the Company originated and acquired approximately $1.3 billion of installment contract and mortgage loan receivables. The Company financed these originations and acquisitions primarily with $936 million in proceeds from the pooling and sale of installment contract and mortgage loan receivables as well as a revolving credit facility. Additional funding came from operating cash flow and collection of installment contract and mortgage loan receivables. Utilizing cash generated from operations, the Company invested approximately $23 million in the acquisition of land or existing manufactured housing communities and $8 million in related rental units, $15 million for the opening of Company-owned retail centers, $5 million 5 including the construction of one new plant and the improvement of existing manufacturing facilities, and $11 million for other fixed assets. The Company expects to invest approximately $25 million in Fiscal 1999 in the acquisition or construction of manufactured housing communities, up to $10 million for new Company-owned retail centers, up to $12 million for the construction and improvement of manufacturing facilities, and to originate $900 million of installment contract and mortgage loan receivables. Cash needs for 1999 and thereafter are expected to be met with cash flows from operations, revolving credit lines, and sales of installment contract and mortgage loan receivables and GNMA certificates. NEW ACCOUNTING PRONOUNCEMENTS During fiscal 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS 130 requires disclosure of comprehensive income and its components in a company's financial statements and is effective for fiscal years beginning after December 15, 1997. SFAS 131 requires new disclosures of segment information in a company's financial statements and is effective for fiscal years beginning after December 15, 1997. These statements will be effective for the Company in fiscal 1999. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows. On June 15, 1998, the FASB issued SFAS No. 133, Accounting for Derivative and Financial Instruments and Hedging Activities. SFAS 133 establishes a new model for accounting for derivatives and hedging activities based on these fundamental principles: i) derivatives represent assets and liabilities that should be recognized at fair value on the balance sheet; ii) derivative gains and losses do not represent liabilities or assets and therefore, should not be reported on the balance sheet as deferred credits or deferred debits; and iii) special hedge accounting should be provided only for transactions that meet certain specified criteria, which include a requirement that the change in the fair value of the derivative be highly effective in offsetting the change in the fair value or cash flows of the hedged item. This statement is effective for fiscal years beginning after June 15, 1999 and is not expected to have a material effect on the Company's financial position or results of operations. EFFECTS OF INFLATION Inflation has had an insignificant impact on the Company during the past several years. 14 6 QUARTERLY RESULTS (UNAUDITED) =============================
First Second Third Fourth (in thousands except per share data) Sept. 30 Dec. 31 Mar. 31 June 30 Year ========================================================================================================== 1998 REVENUES $262,695 $251,069 $268,375 $345,640 $1,127,779 OPERATING INCOME 46,745 48,537 49,234 72,085 216,601 NET INCOME 29,679 31,109 31,118 45,794 137,700 EARNINGS PER SHARE: BASIC $ .25 $ .26 $ .26 $ .39 $ 1.16 DILUTED $ .25 $ .26 $ .26 $ .38 $ 1.15 EQUIVALENT SHARES OUTSTANDING: BASIC 118,574 118,716 118,887 118,904 118,770 DILUTED 119,347 119,600 119,728 119,739 119,603 PRICE RANGE OF STOCK: HIGH $ 18.75 $ 19.44 $ 21.31 $ 22.38 $ 22.38 LOW 14.25 15.75 16.25 17.06 14.25 CLOSE 18.56 18.00 20.25 19.00 19.00 DIVIDENDS PER COMMON SHARE $ .020 $ .020 $ .020 $ .020 $ .080 =========================================================================================================== 1997 Revenues $236,204 $234,672 $226,624 $324,203 $1,021,703 Operating income 40,099 41,953 42,014 63,482 187,548 Net income 25,603 26,676 26,298 40,923 119,500 Earnings per share: Basic $ .22 $ .22 $ .22 $ .35 $ 1.01 Diluted $ .22 $ .22 $ .22 $ .34 $ 1.00 Equivalent shares outstanding: Basic 118,952 118,768 118,457 118,457 118,659 Diluted 119,903 119,628 119,214 119,163 119,477 Price range of stock: High $ 17.90 $ 17.20 $ 15.38 $ 15.25 $ 17.90 Low 13.80 12.60 13.00 12.63 12.60 Close 17.60 13.50 13.13 14.38 14.38 Dividends per common share $ .016 $ .020 $ .020 $ .020 $ .076 ===========================================================================================================
YEAR 2000 The Company recognizes the need to ensure its operations will not be adversely impacted by year 2000 software failures and has performed a review of its computer applications related to their continuing functionality for the year 2000 and beyond. Certain of the Company's existing systems have been upgraded and the Company expects to upgrade its remaining systems through modification or replacement by the end of fiscal 1999. As a result, the Company does not believe that it has material exposure to the year 2000 issue with respect to its own computer applications. The Company does not expect the cost of the modifications will have a material impact on the Company's financial position, results of operations, or cash flows in future periods. The year 2000 issue may impact the operations of the Company indirectly by affecting the operations of its suppliers, business partners, customers and other parties that provide significant services to the Company. The Company expects to complete during fiscal 1999 an assessment of potential year 2000 issues with these parties. The Company is currently unable to predict to what extent year 2000 software issues will affect these parties and, consequently, the Company. 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, 7 general or seasonal weather conditions affecting sales and revenues, catastrophic events impacting insurance reserves, cost of labor and/or raw materials and industry concentration trends creating fewer, but stronger competitors capable of sustaining competitive pricing pressures. Management expertise is affected by management's overall ability to anticipate and meet consumer preferences, maintain successful marketing programs, continue quality manufacturing output, keep a strong cost management oversight, and project stable gain on sale accounting assumptions. Lastly, management has the least control over government policy and economic conditions such as prevailing interest rates, government monetary policy, stable regulation of manufacturing standards, consumer confidence, favorable trade policies, and general prevailing economic and employment conditions. 15 8 Clayton Homes, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS - ---------------------------
June 30, (in thousands) 1998 1997 ======================================================================================================================== ASSETS Cash and cash equivalents $ 1,731 $ 89,695 Receivables, principally installment contracts and residual interests, net of reserves for credit losses and unamortized discounts of $30,291 and $7,770, respectively 837,197 478,691 Inventories 167,113 119,434 Securities held-to-maturity, approximate market value of $20,647 and $19,988 20,361 20,361 Restricted cash and investments 86,176 70,997 Property, plant, and equipment, net 261,549 214,072 Deferred income taxes 11,756 -- Other assets 71,874 52,511 - ------------------------------------------------------------------------------------------------------------------------ Total assets $1,457,757 $1,045,761 ======================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued liabilities $ 138,557 $ 99,498 Debt obligations 247,591 22,806 Deferred income taxes -- 14,074 Other liabilities 190,590 154,857 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 576,738 291,235 - ------------------------------------------------------------------------------------------------------------------------ Shareholders' equity Preferred stock, $.10 par value, authorized 1,000 shares, none issued -- -- Common stock, $.10 par value, authorized 200,000 shares, issued 118,816 at June 30, 1998 and 118,497 at June 30, 1997 11,882 11,850 Additional paid-in capital 165,383 166,153 Retained earnings 703,754 576,523 - ------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 881,019 754,526 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $1,457,757 $1,045,761 ========================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. REPORT OF INDEPENDENT ACCOUNTANTS August 5, 1998 In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Clayton Homes, Inc. and Subsidiaries at June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP 16 9 Clayton Homes, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME - ---------------------------------
Year ended June 30, (in thousands except per share data) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Revenues: Net sales $ 880,856 $ 822,906 $ 762,396 Financial services 190,204 148,515 115,987 Other income 56,719 50,282 50,358 - ------------------------------------------------------------------------------------------------------ 1,127,779 1,021,703 928,741 - ------------------------------------------------------------------------------------------------------ Costs and expenses: Cost of sales 598,589 559,274 521,200 Selling, general and administrative 302,598 270,996 236,188 Financial services interest 2,015 2,885 3,649 Provision for credit losses 7,976 1,000 -- - ------------------------------------------------------------------------------------------------------ 911,178 834,155 761,037 - ------------------------------------------------------------------------------------------------------ Operating income 216,601 187,548 167,704 Interest income (expense), net/other 5,499 5,152 4,596 - ------------------------------------------------------------------------------------------------------ Income before income taxes 222,100 192,700 172,300 Provision for income taxes (84,400) (73,200) (65,500) - ------------------------------------------------------------------------------------------------------ Net income $ 137,700 $ 119,500 $ 106,800 ====================================================================================================== Net income per common share: Basic $ 1.16 $ 1.01 $ 0.90 Diluted $ 1.15 $ 1.00 $ 0.89 Average shares outstanding: Basic 118,770 118,659 118,602 Diluted 119,603 119,477 119,346 - ------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - -----------------------------------------------
Total Additional Shareholders' Common Paid-in Retained (in thousands except per share data) Equity Stock Capital Earnings ================================================================================================================== Balance at June 30, 1995 $544,187 $11,807 $165,919 $366,461 Net income 106,800 -- -- 106,800 Purchase of 125 shares of common stock (1,893) (16) (1,877) -- Dividends declared ($.061 per common share) (7,223) -- -- (7,223) Issuances related to stock incentive, employee benefit plans and other 8,318 95 8,223 -- - ------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1996 650,189 11,886 172,265 466,038 Net income 119,500 -- -- 119,500 Purchase of 840 shares of common stock (11,349) (84) (11,265) -- Dividends declared ($.076 per common share) (9,015) -- -- (9,015) Issuances related to stock incentive, employee benefit plans and other 5,201 48 5,153 -- - ------------------------------------------------------------------------------------------------------------------ Balance at June 30, 1997 754,526 11,850 166,153 576,523 NET INCOME 137,700 -- -- 137,700 PURCHASE OF 570 SHARES OF COMMON STOCK (9,506) (57) (9,449) -- DIVIDENDS DECLARED ($.080 PER COMMON SHARE) (10,469) -- -- (10,469) ISSUANCES RELATED TO STOCK INCENTIVE, EMPLOYEE BENEFIT PLANS AND OTHER 8,768 89 8,679 -- - ------------------------------------------------------------------------------------------------------------------ BALANCE AT JUNE 30, 1998 $881,019 $11,882 $165,383 $703,754 - ------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. ===================================================================================================================
17 10 Clayton Homes, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------
Year ended June 30, (in thousands) 1998 1997 1996 ========================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 137,700 $ 119,500 $ 106,800 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,733 13,058 11,163 Gain on sale of installment contract receivables, net of amortization (31,699) (21,541) (11,315) Gain on sale of property -- -- (4,828) Provision for credit losses 7,976 1,000 -- Deferred income taxes (25,830) 8,394 (3,702) Increase in other receivables, net (25,700) (27,383) (16,972) Decrease (increase) in inventories (47,679) 4,846 (35,825) Increase in accounts payable, accrued liabilities, and other 55,429 39,249 25,633 - --------------------------------------------------------------------------------------------------------------------------- Cash provided by operations 84,930 137,123 70,954 Origination of installment contract receivables (801,865) (646,624) (476,467) Proceeds from sales of originated installment contract receivables 705,420 614,588 394,087 Principal collected on originated installment contract receivables 50,260 39,668 35,199 - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operations 38,745 144,755 23,773 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of installment contract receivables (520,912) (206,937) (36,105) Proceeds from sales of acquired installment contract receivables 230,311 167,138 36,007 Principal collected on acquired installment contract receivables 27,703 3,439 16,935 Acquisition of property, plant and equipment, net (62,210) (42,859) (40,829) Proceeds from sale of property -- -- 21,271 Increase in restricted cash and investments (15,179) (594) (4,189) - --------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (340,287) (79,813) (6,910) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends (10,469) (9,015) (6,835) Net borrowings on credit facilities 227,873 -- -- Repayment of long-term debt (3,088) (7,484) (18,447) Issuance of stock for incentive plans and other 8,768 5,201 8,318 Repurchase of common stock (9,506) (11,349) (1,893) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 213,578 (22,647) (18,857) - --------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (87,964) 42,295 (1,994) Cash and cash equivalents at beginning of year 89,695 47,400 49,394 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1,731 $ 89,695 $ 47,400 =========================================================================================================================== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 4,285 $ 3,912 $ 4,016 Income taxes $ 93,832 $ 62,269 $ 63,366 - ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 18 11 Clayton Homes, Inc. and Subsidiaries 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. (CHI) and its wholly-owned subsidiaries. CHI and its subsidiaries are collectively referred to as the Company. The Company is a vertically integrated manufactured housing company headquartered in Knoxville, Tennessee. Employing more than 6,700 people and operating in 28 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 for information related to the Company's business segments. Income Recognition Sales to independent retailers of homes produced by CHI 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 customer enters into an installment sales contract. Most of these installment sales contracts, which are normally payable over 84 to 240 months, are financed by Vanderbilt Mortgage and Finance, Inc. (VMF), the Company's mortgage banking subsidiary. Premiums from physical damage, family protection and homebuyer protection plan insurance policies reinsured by the insurance subsidiaries are recognized as income over the terms of the contracts. The policies represent single payment contracts with terms of one to ten years. Claims and expenses are matched to recognize profits over the terms of the contracts. This matching is accomplished by means of deferral and recognition of unearned premiums and the deferral and amortization of policy acquisition costs. Installment Contract Receivables and Mortgage Loan Receivables Installment contract receivables and mortgage loan receivables originated or purchased by VMF are generally sold to investors through an asset backed securities facility, with VMF retaining servicing on the contracts. Certain purchased mortgage loan receivables are sold to financial institutions with servicing released. In 1998, $903 million in installment contract receivables and mortgage loan receivables were securitized with VMF retaining servicing, while $33 million in mortgage loan receivables were sold with servicing released. In May 1998, the Company purchased $245 million in loans from Access Financial Lending Corporation and contracted to service an additional $267 million portfolio. The purchased loans are presented net of an approximate $24 million reserve for credit losses in the accompanying financial statements. Installment contract receivables held for sale of $622 million and $254 million in 1998 and 1997, respectively, are included in 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 unamortized discount and the reserve for credit losses based on management's assessment of risks existing in the portfolio. Unamortized discount is amortized over the life of the related portfolio after giving consideration to anticipated prepayments. Adjustments between the reserve for credit losses and unamortized discount are made to reflect changes in the estimated collectibility of each portfolio purchased. Estimated principal receipts under installment contract receivables for each of the five fiscal years subsequent to 1998 and thereafter are as follows:
1999 $180,000,000 2000 86,000,000 2001 70,000,000 2002 60,000,000 2003 52,000,000 Thereafter 174,000,000
The estimated principal receipts are based on the scheduled payments and estimated prepayments of principal of the installment contract receivables. Estimated principal receipts for the year ending June 30, 1999 include amounts relating to the sale of $240 million of installment 12 contract receivables in August 1998. VMF provides servicing for investors in installment contract receivables. Total contracts serviced at June 30, 1998 and 1997, including contracts held for investment, were approximately $2,925 million and $2,044 million, 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 interest method. Service fee income is recognized as the service is performed. Effective January 1, 1997, the Company adopted SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS 125 utilizes a financial components approach, requiring that the carrying amount of the receivables sold be allocated between the assets sold and the assets (liabilities) created, if any, at their 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 servicer (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 adjustment to income in 1997 was immaterial with respect to the adoption of this statement.
(in thousands) 1998 1997 - --------------------------------------------------------------------- Servicing asset beginning balance $ 5,644 $ 0 Servicing asset recognized 10,823 7,080 Amortization (3,424) (1,436) - --------------------------------------------------------------------- Servicing asset ending balance $ 13,043 $ 5,644
The balance represents the estimated fair value of the aggregate servicing assets recognized during 1998. 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. 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. Investment Securities Effective July 1, 1994, the Company adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Investments in certain debt and equity securities are classified as either Held-to-Maturity (reported at amortized cost), Trading (reported at fair value with unrealized gains and losses included in earnings), or Available-for-Sale (reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity). Premiums and discounts on debt securities are recognized in interest income on the level interest yield method over the period to maturity. Gains and losses on the sale of securities are determined using the specific identification method. Inventories New homes and raw materials are valued at the lower of cost or market, using the last-in, first-out (LIFO) method of inventory valuation. Previously-owned manufactured homes are valued at 19 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------ estimated wholesale prices, which are not in excess of net realizable value. Property, Plant and Equipment Land and improvements, buildings, and furniture and equipment are valued 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 27 1/2 years. The Company evaluates the carrying values of property and equipment for impairment losses by analyzing the operating performance and future cash flows of the various business activities. The Company adjusts the net book value of the underlying assets if the sum of expected future cash flows is less than fair market value. Reserves for Credit Losses and Contingent Liabilities Reserves for credit losses are established related to installment contract receivables. 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. Reserves and the applicable provisions related to guarantees are considered as part of the Manufactured Housing business segment. Interest Rate Swaps Interest rate swaps are entered into as a hedge against interest exposure of variable rate debt. The differences to be paid or received on swaps are included in interest expense. The fair value of the Company's interest rate swap agreements is estimated using present value discounting techniques. These values represent the amounts the Company would receive or pay to terminate the agreements taking into consideration current interest rates. Other Per share and share data have been retroactively adjusted to reflect 5-for-4 stock splits in December 1996 and December 1995. Certain reclassifications have been made to the 1996 and the 1997 financial statements to conform to the 1998 presentation. Restricted Cash and Investments Restricted cash and investments primarily represent reserves required by: 1) trust account cash balances required by certain VMF servicing agreements, and 2) insurance reserves required by escrow or trust agreements. 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. New Accounting Pronouncements During fiscal 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS 130 requires disclosure of comprehensive income and its components in a company's financial statements and is effective for fiscal years beginning after December 15, 1997. SFAS 131 requires new disclosures of segment information in a company's financial statements and is effective for fiscal years beginning after December 15, 1997. These statements will be effective 14 for the Company in fiscal 1999. Adoption of these statements will not impact the Company's consolidated financial position, results of operations or cash flows. On June 15, 1998, the FASB issued SFAS No. 133, Accounting for Derivative and Financial Instruments and Hedging Activities. SFAS 133 establishes a new model for accounting for derivatives and hedging activities based on these fundamental principles: i) derivatives represent assets and liabilities that should be recognized at fair value on the balance sheet; ii) derivative gains and losses do not represent liabilities or assets and therefore, should not be reported on the balance sheet as deferred credits or deferred debits; and iii) special hedge accounting should be provided only for transactions that meet certain specified criteria, which include a requirement that the change in the fair value of the derivative be highly effective in offsetting the change in the fair value or cash flows of the hedged item. This statement is effective for fiscal years beginning after June 15, 1999 and is not expected to have a material effect on the Company's financial position or results of operations. NOTE 2 - INVENTORIES Inventories at June 30, 1998, and 1997 are as follows:
(in thousands) 1998 1997 ========================================================================= Manufactured homes: New $114,577 $ 81,963 Previously-owned 33,991 22,805 Raw materials 18,545 14,666 - ------------------------------------------------------------------------- $167,113 $119,434 =========================================================================
If the first-in, first-out (FIFO) method of inventory valuation had been used, inventories would have been higher by $18,331,000 and $18,196,000 at June 30, 1998 and 1997, respectively. NOTE 3 - SECURITIES HELD-TO-MATURITY At June 30, 1998 and 1997, manufactured housing contract senior/subordinate pass-through certificates have been classified in the consolidated financial statements according to management's intent. These securities can be reasonably expected to mature after ten years. NOTE 4 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at June 30, 1998, and 1997 are as follows:
(in thousands) 1998 1997 ====================================================================== Land and improvements $166,692 $135,027 Buildings 126,085 104,560 Furniture and equipment 34,964 28,200 - ---------------------------------------------------------------------- 327,741 267,787 Less: accumulated depreciation and amortization (66,192) (53,715) - ---------------------------------------------------------------------- $261,549 $214,072 ======================================================================
Depreciation charged to operations was $14,733,000, $13,058,000, and $11,163,000 for each of the years ended June 30, 1998, 1997, and 1996, respectively. NOTE 5 - DEBT OBLIGATIONS Debt obligations at June 30, 1998 and 1997 are summarized as follows: 20 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------
(in thousands) 1998 1997 ======================================================================== Lines of credit $227,873 $ -- Debt collateralized by installment contract receivables maturing in fiscal years through 1999 to 2004: weighted average rate of 10.14% at June 30, 1998 15,557 22,013 Other notes payable 4,161 793 ------------------------------------------------------------------------ Total $247,591 $ 22,806 =========================================================================
The Company has committed and uncommitted lines of credit totaling $150 million and $82.5 million for working capital needs of which $150 million and $77.9 million, respectively, were outstanding at June 30, 1998. These lines of credit do not require collateral and are priced based on LIBOR plus rates ranging from 0.10% to 0.45%. The $150 million line is a five-year revolving credit facility guaranteed by all material subsidiaries of the Company and is governed by various financial covenants which require maintenance of certain financial ratios. Additionally, the Company has letters of credit of which $69 million was outstanding at year end, primarily related to insurance reserve requirements. On July 1, 1998, the Company entered into a short-term, committed line of credit for $200 million, primarily to facilitate the purchase and warehousing of a manufactured housing loan portfolio. This line is also subject to certain financial covenants. Debt collateralized by installment contract receivables and other notes payable are scheduled to mature as follows: 1999 $3,936,000 2000 3,253,000 2001 3,144,000 2002 2,944,000 2003 2,059,000 Thereafter 4,382,000
Under certain interest rate swap agreements, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. The fair value of the interest rate swap agreements is estimated using present value discounting techniques and approximates the cash requirement at year end to cancel the agreements. At June 30, 1998 the Company's interest rate swap agreements had a notional amount of $150,000,000 with a fair value of $(649,500). NOTE 6 - RESERVES FOR CREDIT LOSSES AND CONTINGENT LIABILITIES An analysis of the reserve for losses on installment contract receivables and reserve for contingent liabilities for the years ended June 30, 1998, 1997, and 1996 is as follows:
(in thousands) 1998 1997 1996 =============================================================================== Balance, beginning of year $ 8,051 $ 7,766 $11,895 Provision 7,976 1,000 -- Losses, net of recoveries applicable to installment contract receivables: Purchased (2,762) (2,337) (2,494) Other (3,981) 1,622 442 Reserves transferred from unamortized discount 2,318 -- -- Reserves associated with receivables purchased (sold) 24,226 -- (2,077) - ------------------------------------------------------------------------------- Balance, end of year $35,828 $ 8,051 $ 7,766 =============================================================================== Reserves for credit losses $29,964 $ 4,917 $ 4,787 Reserve for contingencies 5,864 3,134 2,979 - ------------------------------------------------------------------------------- $35,828 $ 8,051 $ 7,766 ===============================================================================
16 The reserves for credit losses are netted against receivables and the reserve for contingencies is included in other liabilities on the consolidated balance sheets. The Company is contingently liable as guarantor on installment contract receivables sold with recourse. The installment contract receivables and related contingent liabilities are shown in the table below.
Total Installment Contingent Contract Receivables Contingent Liabilities (in thousands) Liability % (in thousands) ================================================================================ JUNE 30, 1998 $ 15,000 30% - 88% $ 4,000 16,000 11% - 25% 3,000 157,000 10% AND BELOW 16,000 - -------------------------------------------------------------------------------- $ 188,000 $ 23,000 ================================================================================ June 30, 1997 $ 23,000 30% - 88% $ 8,000 36,000 11% - 25% 7,000 182,000 10% and below 18,000 - -------------------------------------------------------------------------------- $ 241,000 $ 33,000 ================================================================================
There were no proceeds from receivables sold with recourse in 1998 and 1997; and $12 million during 1996. NOTE 7 - SHAREHOLDERS' EQUITY Stock Option Plan In 1983, 1985, 1991 and 1997, the Company established Stock Option Plans for a total of 13,616,829 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 follow:
Weighted Weighted Avg Stock Avg Stock Option Exercise Options Exercise Shares Price Range Price Exercisable Price ================================================================================================== Balance June 30, 1995 3,491,560 $ 1.16 - $12.93 $ 6.99 1,289,298 $ 4.95 Granted 840,373 $10.64 - $17.12 $12.64 Exercised (628,845) $ 1.16 - $10.37 $ 4.28 Canceled (378,975) $ 2.20 - $17.12 $ 8.69 - ------------------------------------------------------------------------------------------------- Balance June 30, 1996 3,324,113 $ 1.38 - $17.12 $ 8.74 1,145,403 $ 6.65 Granted 569,684 $12.90 - $16.00 $14.38 Exercised (161,144) $ 1.38 - $10.37 $ 4.37 Canceled (199,095) $ 1.78 - $17.12 $11.84 - ------------------------------------------------------------------------------------------------- Balance June 30, 1997 3,533,558 $ 1.38 - $17.12 $ 9.67 1,511,148 $ 7.90 GRANTED 1,223,885 $10.24 - $15.75 $14.51 EXERCISED (954,556) $ 1.38 - $17.12 $ 7.76 CANCELED (360,457) $ 1.76 - $17.12 $12.38 - ------------------------------------------------------------------------------------------------- BALANCE JUNE 30, 1998 3,442,430 $ 1.76 - $17.12 $11.65 949,916 $ 9.11 =================================================================================================
Options available for future grant at June 30, 1998 and 1997 were 4,894,590 and 803,019, respectively. Options were held by 717 persons at June 30, 1998. 21 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------ The following table summarizes information about the plan's stock options at June 30, 1998:
Options Outstanding Options Exercisable -------------------------------------------------- ---------------------------- Number Weighted Avg Weighted Number Weighted Range of Outstanding Remaining Avg Exercise Exercisable Avg Exercise Exercise Price at 6/30/98 Contractual Life Price at 6/30/98 Price - --------------------------------------------------------------------------------------------------------- $ 1.76 - $ 2.70 205,896 1.55 years $ 1.90 101,044 $ 1.96 $ 4.55 - $ 6.31 255,472 3.51 years $ 5.07 112,884 $ 4.78 $ 9.02 - $12.90 1,650,598 6.49 years $10.36 623,542 $ 9.61 $14.32 - $17.12 1,330,464 8.64 years $16.01 112,446 $17.12
The Company has adopted the disclosure-only provisions of SFAS No. 123 Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been based on the fair value at the grant date for awards from 1998, 1997, and 1996 consistent with the provisions of SFAS 123, the Company's net earnings and earnings per share for 1998 would have been reduced to the pro forma amounts indicated below:
June 30, 1998 1997 1996 - ------------------------------------------------------------------------------------ Net income - as reported $137,700 $119,500 $106,800 Net income - pro forma 136,643 118,481 106,309 Net income per diluted common share - as reported 1.15 1.00 0.89 Net income per diluted common share - pro forma 1.14 0.99 0.89 - ------------------------------------------------------------------------------------
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 1996 to 1998; dividend yields ranging from 0.44% to 0.78% with a weighted average yield of 0.55%; expected volatility of 0.295%, risk-free interest rates ranging from 5.45% to 5.59% with a weighted average rate of 5.51%; and expected lives ranging from 7.50 to 9.75 years with a weighted average life of 7.98 years. NOTE 8 - INCOME TAXES Deferred income taxes 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. The components of deferred tax assets and liabilities at June 30, 1998 and 1997 are as follows:
(in thousands) 1998 1997 - ----------------------------------------------------------------------------- Reserves for credit losses and contingencies and discounts $ 4,064 $ 4,712 Insurance reserves 9,162 5,377 Unearned premiums 6,355 5,074 Residual interest in installment contract receivables 5,652 -- - ----------------------------------------------------------------------------- Total deferred tax assets $ 25,233 $ 15,163 ============================================================================= Residual interest in installment contract receivables $ -- $(16,881) Deferred costs (4,789) (3,904) Other (8,688) (8,452) - ----------------------------------------------------------------------------- Total deferred tax liabilities $(13,477) $(29,237) - ----------------------------------------------------------------------------- Net deferred tax asset (liability) $ 11,756 $(14,074) =============================================================================
The provision for income tax is composed of the following: 18
(in thousands) 1998 1997 1996 ================================================================================= Current tax provisions: Federal $103,336 $58,591 $63,274 State 6,894 6,215 5,928 - --------------------------------------------------------------------------------- Total current $110,230 $64,806 $69,202 - --------------------------------------------------------------------------------- Deferred tax provision/(benefit) (25,830) 8,394 (3,702) - --------------------------------------------------------------------------------- Total $ 84,400 $73,200 $65,500 =================================================================================
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 1998, 1997 and 1996 as follows:
(in thousands) 1998 1997 1996 =========================================================================== Income taxes at the statutory rate $77,735 $67,451 $60,305 State income taxes, net of federal benefit 4,481 4,040 4,150 Other, net 2,184 1,709 1,045 - --------------------------------------------------------------------------- Total $84,400 $73,200 $65,500 ===========================================================================
NOTE 9 - EMPLOYEE BENEFIT PLANS The Company has a 401(k) profit-sharing 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 were $2,488,000, $2,874,000, and $4,274,000 for the years ended June 30, 1998, 1997, and 1996, respectively. NOTE 10 - COMMITMENTS AND CONTINGENCIES Leases Certain operating properties are rented under non-cancelable operating leases which expire at various dates through 2009. Total rental expense under operating leases was $4,440,000 in 1998, $3,705,000 in 1997, and $2,722,000 in 1996. The following is a schedule of minimum rental commitments under non-cancelable operating leases, primarily for retail centers, in effect at June 30, 1998: 1999 $ 3,994,000 2000 3,055,000 2001 2,534,000 2002 1,818,000 2003 1,101,000 Thereafter 2,313,000
Repurchase Agreements 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. Guarantor of Installment Contract Receivables Please see discussion of contingencies at Note 6. 22 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------ NOTE 11 - INDUSTRY SEGMENT INFORMATION The Company operates in three major business segments: Manufactured Housing, Financial Services, and Communities. The Manufactured Housing segment is engaged in the production, wholesale and retail sale of manufactured homes. Financial Services includes retail financing of manufactured homes, reinsuring risk on family protection, physical damage, and homebuyer protection plan insurance policies, and certain specialty finance products. Communities is engaged in marketing and management of manufactured housing communities. Operating income consists of total revenues less cost of sales and operating expenses. The following items have not been included in the computation of operating income: non-operating income and expenses and income taxes. Identifiable assets are those assets used in the operation of each industry segment. Corporate assets primarily consist of fixed assets. Information concerning operations by industry segment follows:
Manufactured Financial (in thousands) Housing Services Communities Corporate Total ========================================================================================================= 1998 REVENUES $ 898,342 $ 158,697 $ 70,740 $ -- $1,127,779 OPERATING INCOME 105,971 96,402 14,228 -- 216,601 IDENTIFIABLE ASSETS 275,036 1,003,528 166,870 12,323 1,457,757 DEPRECIATION AND AMORTIZATION 8,741 121 5,418 453 14,733 CAPITAL EXPENDITURES $ 20,868 $ 931 $ 31,316 $ 9,095 $ 62,210 - --------------------------------------------------------------------------------------------------------- 1997 Revenues $ 827,383 $ 124,076 $ 70,244 $ -- $1,021,703 Operating income 95,958 77,459 14,131 -- 187,548 Identifiable assets 219,321 610,642 147,814 67,984 1,045,761 Depreciation and amortization 8,348 -- 4,710 -- 13,058 Capital expenditures $ 21,404 $ -- $ 21,455 $ -- $ 42,859 - --------------------------------------------------------------------------------------------------------- 1996 Revenues $ 761,111 $ 99,443 $ 68,187 $ -- $ 928,741 Operating income 89,504 62,600 15,600 -- 167,704 Identifiable assets 197,938 493,622 142,331 52,459 886,350 Depreciation and amortization 6,671 -- 4,492 -- 11,163 Capital expenditures $ 16,483 $ -- $ 24,346 $ -- $ 40,829 ==========================================================================================================
NOTE 12 - OTHER ASSETS AND LIABILITIES At June 30, 1998 and 1997, other assets and liabilities consisted of:
(in thousands) 1998 1997 ================================================================================ Other Assets Interest receivable and future servicing rights $38,157 $26,229 Prepaid expenses and other 33,717 26,282 - -------------------------------------------------------------------------------- $71,874 $52,511 ================================================================================ Other Liabilities Investors payable $86,804 $69,847 Reserve for contingencies (Note 6) 5,864 3,134 Escrow deposits 10,779 15,220 Unearned insurance premiums 65,048 50,610 Other 22,095 16,046 - -------------------------------------------------------------------------------- $190,590 $154,857 ================================================================================
NOTE 13 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires that CHI disclose the estimated fair values of its financial instruments. The following methodologies and assumptions were used by CHI to estimate its fair value disclosures for financial instruments. 20 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 CHI'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. Residual Interests in Installment Contract Receivables Residual interests in installment contract receivables are calculated using prepayment, default and interest rate assumptions that the Company believes are appropriate at the time of the sale of the installment contract receivables. Projected performance is monitored after the sale. The fair value primarily assumes an appropriate discount rate to be applied to the asset as a whole. 23 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - ------------------------------------------------------ The Company used a discount rate and such other assumptions as it believed to be used for similar instruments. The Company has estimated the fair value of its residual interests in installment contract receivables to approximate its carrying value as of June 30, 1998 and 1997. 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. CHI 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. CHI estimates the fair value of the contracts held for sale using expected future cash flows of the portfolio discounted at the current origination rate. 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 consist 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 CHI for debt of similar maturities using a discounted cash flow calculation. Loan covenants preclude prepayment. The carrying amounts and estimated fair values of CHI's financial assets and liabilities are as follows:
JUNE 30, 1998 June 30, 1997 CARRYING ESTIMATED Carrying Estimated (in thousands) AMOUNT FAIR VALUE Amount Fair Value =============================================================================================================== Financial assets: Cash and cash equivalents, including restricted investments and securities held-to-maturity $108,268 $108,554 $181,053 $180,680 Residual interests in installment contract receivables 127,705 127,705 135,208 135,208 Contracts held for sale and as collateral, including accrued interest receivable 673,847 661,069 287,457 297,347 Financial liabilities: Debt collateralized by installment contract receivables $ 15,557 $ 16,469 $ 22,670 $ 25,723 - -------------------------------------------------------------------------------------------------------------
NOTE 14 - EARNINGS PER SHARE Effective for the quarter ended December 31, 1997, the Company adopted SFAS No. 128, Earnings per Share. The Statement simplifies the standards for computing earnings per share by replacing the presentation of primary earnings per share with a presentation of basic earnings per share. Prior years have been restated to reflect this change. Per share and share data have been retroactively adjusted to reflect 5-for-4 stock splits in December 1996 and December 1995. 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) 1998 1997 1996 ==================================================================================== Net income $137,700 $119,500 $106,800 Average shares outstanding: Basic 118,770 118,659 118,602 Add: common stock equivalents 833 818 744 Diluted 119,603 119,477 119,346 Earnings per share: Basic $ 1.16 $ 1.01 $ 0.90 Diluted $ 1.15 $ 1.00 $ 0.89 - ------------------------------------------------------------------------------------
24 EX-21 7 LIST OF SUBSIDIARIES OF THE REGISTRANT 1 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. Tennessee Vanderbilt Life and Casualty Insurance Co., LTD British Virgin Islands Eastern States Life Insurance Co., Inc. Turks & Caicos Islands Midland States Life Co., Inc. Turks & Caicos Islands PARTNERSHIP - ----------- Redwood Partners Limited Colorado Pine Lake West Associates Limited Partnership Georgia CMH Management, LP Tennessee
EX-23 8 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Vanderbilt Mortgage and Finance, Inc. and Clayton Homes, Inc. on Form S-3 (File No. 333-43583) of our report dated August 5, 1998, on our audits of the consolidated financial statements of Clayton Homes, Inc. as of June 30, 1998 and 1997, and for the years ended June 30, 1998, 1997 and 1996, which report is incorporated by reference in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP ---------------------------------------- PricewaterhouseCoopers LLP Knoxville, Tennessee September 16, 1998 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CLAYTON HOMES INC FOR THE YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 1,731 0 867,161 29,964 167,113 0 327,741 66,192 261,549 138,557 247,591 0 0 11,882 869,137 1,457,757 880,856 1,127,779 598,589 901,187 0 7,976 (3,484) 222,100 84,400 137,700 0 0 0 137,700 1.16 1.15
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