<PAGE> 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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
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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
or organization Identification Number)
623 Market Street
Knoxville, Tennessee 37902
- -------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 423-970-7200
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. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant on August 31, 1997, was approximately $1,446,741,684 (86,051,550
shares at closing price on the NYSE of $16.8125). For this purpose all shares
beneficially held by executive officers and the Board of Directors of the
Registrant are shares owned by "affiliates," a status which each of the officers
and directors individually disclaims.
Shares of common stock, $.10 par value, outstanding on August 31, 1997, were
118,689,342.
Exhibit index appears on pages 15-16.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Documents from which portions are
Form 10-K incorporated by reference
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Part II (except for Item 5)
Annual Report to Shareholders for
fiscal year ended June 30, 1997
Part III Proxy Statement relating to Company's
Annual Meeting of Shareholders on
November 12, 1997
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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 17
manufacturing plants produce homes which are marketed in 28 states through 975
retailers, of which 245 are Company-owned sales centers and 67 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. 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.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SALES BY COMPANY-OWNED RETAIL CENTERS
AND COMMUNITIES............................... 52% 52% 53%
SALES TO INDEPENDENT RETAILERS................. 28% 30% 29%
FINANCIAL SERVICES AND OTHER................... 20% 18% 18%
---- ---- ----
TOTAL.......................................... 100% 100% 100%
</TABLE> ==== ==== ====
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
2,150 square feet.
The Company markets homes under a variety of model names. Homes include as
standard equipment 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.
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MANUFACTURING OPERATIONS
The Company owns or leases 17 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 one in Bonham 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 34,000 homes per year.
During the fiscal year ended June 30, 1997, the Company produced 25,830 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, 1997, and June 30, 1996, amounted to
approximately $12,308,000 and $12,343,000, respectively.
The backlog of firm orders for homes manufactured by the Company, including
orders from Company-owned retail centers, was approximately $40,500,000 and
$30,800,000 on June 30, 1997, and 1996, respectively. Based on the Company's
production rate, approximately four weeks would be required to fill backlog
orders at June 30, 1997.
SALES OF HOMES MANUFACTURED BY THE COMPANY
The following table sets forth manufacturing sales data for 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.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED JUNE 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NUMBER OF HOMES SOLD TO INDEPENDENT RETAILERS............... 14,375 14,068 11,025
NUMBER OF HOMES SHIPPED TO COMPANY-OWNED RETAIL CENTERS .... 11,455 10,613 7,917
------ ------ ------
TOTAL....................................................... 25,830 24,681 18,942
====== ====== ======
NUMBER OF PLANTS OPERATING.................................. 17 17 16
NUMBER OF INDEPENDENT RETAILERS............................. 663 580 421
NUMBER OF COMPANY-OWNED COMMUNITIES......................... 67 64 55
NUMBER OF COMPANY-OWNED RETAIL CENTERS...................... 245 216 192
</TABLE>
COMPANY RETAIL OPERATIONS
As of June 30, 1997, the Company sold homes through 245 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.
The following table indicates the number of Company-owned retail centers and
certain information relating to homes sold during the last three fiscal years.
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<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NUMBER OF COMPANY-OWNED CENTERS............. 245 216 192
NUMBER OF NEW HOMES SOLD (INCLUDING HOMES
BUILT BY THE COMPANY AND BY OTHER
MANUFACTURERS)............................ 13,425 12,750 11,352
AVERAGE RETAIL PRICE OF NEW HOMES SOLD...... $34,209 $33,043 $30,565
NUMBER OF PREVIOUSLY-OWNED HOMES SOLD....... 3,621 3,039 2,746
</TABLE>
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 home owners'
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 purchaser's site. Electrical, water, and gas connections are
performed by licensed technicians.
INDEPENDENT RETAILERS
In the years ended June 30, 1997, and 1996, 56% and 57%, respectively, of homes
manufactured by the Company were sold to its independent retailers. As of June
30, 1997, the Company had 663 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, Vanderbilt Mortgage and Finance, Inc. (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 relations with independent retailers are good, and has experienced
relatively little turnover among independent retailers in the past five 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 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.
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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 the Company's 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.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
VMF........................................ 77% 76% 72%
CONVENTIONAL LENDERS....................... 3% 5% 5%
CUSTOMER ARRANGED OR CASH.................. 20% 19% 23%
---- ---- ----
TOTAL...................................... 100% 100% 100%
---- ---- ----
</TABLE>
VMF also purchases and originates manufactured housing installment contract
receivables (also referred to as manufactured housing contracts) on an
individual basis from retailers not owned by the Company. 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 history,
residence history, 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 retailer 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 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 five 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.
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<PAGE> 6
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 ten fiscal years, VMF was the most significant source of
financing for purchasers of homes sold by the Company's retail locations. In
fiscal 1988, VMF originated 5,692 contracts and in fiscal 1997, VMF originated
21,691 contracts. At June 30, 1997, VMF was servicing approximately 102,000
contracts with an aggregate dollar amount of $2,044 million of which VMF has
ownership interest or contingent liability on approximately 87,000 contracts
with an aggregate dollar amount of $1,910 million. 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:
<TABLE>
<CAPTION>
CONTRACT ORIGINATIONS
YEAR ENDED JUNE 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
PRINCIPAL BALANCE OF CONTRACTS
ORIGINATED (IN THOUSANDS)........ $646,624 $476,467 $345,260
NUMBER OF CONTRACTS ORIGINATED.... 21,691 16,910 13,857
AVERAGE CONTRACT SIZE ............ $ 29,811 $ 28,177 $ 24,916
AVERAGE INTEREST RATE ............ 11.10% 10.72% 12.24%
</TABLE>
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:
<TABLE>
<CAPTION>
CONTRACT SERVICING PORTFOLIO
YEAR ENDED JUNE 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
TOTAL NUMBER OF CONTRACTS BEING
SERVICED......................... 87,126 74,154 66,960
ORIGINATED BY VMF................ 76,403 64,298 55,923
ACQUIRED FROM OTHER
INSTITUTIONS.................... 10,723 9,856 11,037
</TABLE>
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 1997, the Company completed
four public offerings of asset-backed securities totaling $756 million. In
excess of $1.9 billion of securities has been issued and sold since 1991.
SECURITIZATIONS. VMF maintains long-term committed credit facilities and other
arrangements or relationships with institutional investors. It acts as a
permanent lender on certain conventional loans in that it holds these loans as
long-term receivables, pledging them as collateral for borrowings. VMF also
permanently funds conventional loans by pooling them for sale to institutional
investors. Proceeds of both sources of funding are principally used to repay
short-term borrowings. VMF retains servicing in both cases.
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 $1,000,000 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, 1997, VMF
originated installment sales contracts eligible for financing under the GNMA
program having aggregate principal balances of $20 million. As of June 30, 1997,
VMF was servicing 268 GNMA pools totaling $182 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,
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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 $33 million as of June 30, 1997.
See Note 6 to the Consolidated Financial Statements in the Company's Annual
Report to Shareholders.
The interest rates on 99% of the long-term credit facilities or the pass-through
certificates representing ownership of the pools are fixed or have adjustable
rates with ceilings, while the remaining 1% have variable rates which provide
for no minimum or maximum rate of interest. VMF attempts to match liabilities
and assets as to both term and rate. This reduces loss exposure from interest
rate fluctuations. VMF uses a number of techniques to achieve this result,
principally by pricing its fixed rate receivables at or above the maximum rate
allowed under such arrangements. When loans are funded under arrangements which
do not have a maximum rate, the Company attempts to price these loans at or
above forecasted interest rates. The Company minimizes the use of credit
facilities which do not carry a maximum rate.
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.
Generally, the Company's and VMF's existing borrowing arrangements do not
provide for interest rate hedging.
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 1992 and 1994, VMF became the servicer of 15,409 and 20,180
manufactured housing installment sales contracts with approximate principal
balances of $199 million and $285 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, 1997, VMF was
servicing approximately 14,769 of these installment sales contracts with an
approximate principal balance of $134 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.
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<TABLE>
<CAPTION>
DELINQUENCY PERCENTAGE AT JUNE 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
TOTAL DELINQUENCIES AS PERCENTAGE OF
CONTRACTS OUTSTANDING:
ALL CONTRACTS................................ 2.08% 2.04% 2.03%
CONTRACTS ORIGINATED BY VMF.................. 1.99 1.88 1.67
CONTRACTS ACQUIRED FROM OTHER INSTITUTIONS... 2.68 3.04 4.04
</TABLE>
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:
<TABLE>
<CAPTION>
LOAN LOSS/REPOSSESSION EXPERIENCE
AT OR FOR THE YEAR ENDED JUNE 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET LOSSES AS PERCENTAGE OF
AVERAGE LOANS OUTSTANDING:
ALL CONTRACTS................................ 0.2% 0.3% 0.2%
CONTRACTS ORIGINATED BY VMF.................. 0.0% 0.0% 0.0%
CONTRACTS ACQUIRED FROM OTHER INSTITUTIONS... 1.8% 1.4% 1.4%
NUMBER OF CONTRACTS IN REPOSSESSION:
TOTAL........................................ 755 709 540
CONTRACTS ORIGINATED BY VMF.................. 703 635 422
CONTRACTS ACQUIRED FROM OTHER INSTITUTIONS... 52 74 118
TOTAL NUMBER OF CONTRACTS IN REPOSSESSION AS
PERCENTAGE OF TOTAL CONTRACTS................. 0.87% 0.96% 0.81%
</TABLE>
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. See Note 6 to
the Consolidated Financial Statements in the Company's Annual Report to
Shareholders. 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.
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, 1997, the Company
acted as the agent on physical damage, family protection, and home buyer
protection policies on approximately 71%, 56%, and 74%, 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 1997 the Communities group acquired 964 sites in 4 communities and
developed 48 sites at existing communities, bringing total sites owned to 17,797
at June 30, 1997, a 6% increase from the prior 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:
8
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<TABLE>
<CAPTION>
JUNE 30,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
HOME SITES OWNED 17,797 16,780 15,541
OCCUPANCY RATE 70% 64% 68%
</TABLE>
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 specification.
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.
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
<PAGE> 10
COMPETITION
The manufactured housing industry is highly competitive at the manufacturing and
retail 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 fields
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, 1997, the Company employed 5,991 persons. Of these, 1,571 were
employed in retail sales, 3,590 in manufacturing, 361 in financial services, 413
in communities and 56 in executive and administrative positions. The Company
does not have any collective bargaining agreements and considers its employee
relations to be good.
SECTION 16 COMPLIANCE
For the fiscal year ended June 30, 1997, all Forms 3, 4 and 5, as required by
the Securities and Exchange Commission Rules under Section 16 of the Securities
Exchange Act of 1934, were filed on time.
ITEM 2. PROPERTIES.
The Company's Financial Services operations and executive offices are located in
Knoxville, Tennessee in several wholly-owned one-story buildings made up of
modular units (built by the Bean Station single-section plant) which total
approximately 38,000 square feet of office space and approximately 16,000 square
feet in an office building owned previously 50% by the Company and 50% by a
related party. On June 30, 1997, the Company converted its ownership in the
office building into a leasehold interest in preparation for its relocation to
new Corporate facilities in fiscal year 1998. See "Item 13. Certain
Relationships and Related Transactions." 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
<TABLE>
<CAPTION>
MANUFACTURING OPERATIONS APPROXIMATE MANUFACTURING OPERATIONS APPROXIMATE
SQUARE FEET SQUARE FEET
Owned by company Owned by company
<S> <C> <C> <C>
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 Leased
Ardmore 100,000 Halls, Tennessee 63,000
Rutledge 87,000
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
COMMUNITIES APPROXIMATE COMMUNITIES APPROXIMATE
ACRES ACRES
Owned by company Owned by company
<S> <C> <C> <C>
Arizona Tennessee
Glendale 14 Farragut 23
Mirage 35 Knoxville (3) 147
Phoenix 47 LaVergne 76
Florida Millington 29
Gainesville (2) 132 Morristown 12
Jacksonville (4) 254 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) 115
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
Florence 50 Virginia
Evington 70
</TABLE>
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 245 retail centers, 109
are owned and 136 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
<PAGE> 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, 1995 to June 30, 1997,
the range of high and low closing sale prices as reported by the New York Stock
Exchange, Inc.
<TABLE>
<CAPTION>
FISCAL FISCAL
1997 1996
---- ----
QUARTER ENDED HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
SEPTEMBER $17.90 $13.80 $15.60 $10.56
DECEMBER 17.20 12.60 18.64 14.96
MARCH 15.38 13.00 17.70 14.70
JUNE 15.25 12.63 16.90 14.30
</TABLE>
(b) As of August 31, 1997, there were 9,152 holders of record (approximately
54,000 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 its 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 1997 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
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
JAMES L. CLAYTON 63 CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER
JOSEPH H. STEGMAYER 46 VICE CHAIRMAN OF THE BOARD AND CHAIRMAN OF
THE EXECUTIVE COMMITTEE (a)
KEVIN T. CLAYTON 34 PRESIDENT AND PRESIDENT - FINANCIAL
SERVICES (b)
DAVID M. BOOTH 44 EXECUTIVE VICE PRESIDENT AND PRESIDENT -
RETAIL GROUP
JOHN J. KALEC 47 SENIOR VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND SECRETARY (PRINCIPAL
ACCOUNTING OFFICER) (c)
RICHARD D. STRACHAN 55 VICE PRESIDENT AND PRESIDENT -
MANUFACTURING GROUP (d)
PAUL W. BOYD 39 TREASURER (e)
</TABLE>
(a) Mr. Stegmayer joined the Company in July 1993 as President and Chief
Operating Officer. From 1982 to July 1993, he served as Vice President, Chief
Financial Officer, Treasurer and Director of Worthington Industries, Inc. In
August 1997, he was elected Vice Chairman of the Company.
(b) Mr. K. T. Clayton has been President - Financial Services since 1995. Prior
to that time, he served in various management positions with the Company. In
August 1997, he was named President of the Company.
(c) Mr. Kalec joined the Company in September 1996 as Vice President and Chief
Financial Officer. From 1973 to 1996, he served in various senior level finance
and accounting positions with Philips Electronics, including Managing Director
Finance and Accounting for Philips Components, B.V. in the Netherlands, 1992-96;
and Senior Vice President and Chief Financial Officer for U.S. Philips Consumer
Electronics, 1985-1992. In August 1997, he was named Senior Vice President,
Chief Financial Officer and Secretary.
(d) 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.
(e) 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.
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.
13
<PAGE> 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the Company's Proxy Statement under the headings
ELECTION OF DIRECTORS and PRINCIPAL SHAREHOLDER THEREOF; SECURITY OWNERSHIP OF
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Company's Proxy Statement.
14
<PAGE> 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 1997 Annual Report to
Shareholders for the year ended June 30, 1997.
Report of Independent Accountants.
Consolidated Balance Sheets - June 30, 1997 and 1996.
Consolidated Statements of Income - years ended June 30, 1997,
1996 and 1995.
Consolidated Statements of Shareholders' Equity - years ended
June 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows - years ended June 30,
1997, 1996 and 1995.
Notes to the Consolidated Financial Statements.
3. Exhibits:
3. (a) Restated charter as amended. (A)
(b) Bylaws. (B)
(c) Amendment to Bylaws. (A)
4. (a) Specimen stock certificates. (E)
(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) Form of shareholders' agreement between Clayton
Homes, Inc. and Progressive Partners. (B)
(b) Lease Agreement, dated June 29, 1972, as amended, between
Clayton Homes, Inc. and Dean Planters Warehouse, Inc. (B)
(subsequently assigned to CLF, a limited partnership which
includes a related party).
(c) Clayton Homes, Inc. 1983 Stock Option Plan. (B)
(d) Clayton Homes, Inc. 1985 Stock Option Plan. (F)
(e) 1991 Employee Stock Incentive Plan. (G)
(f) Directors' Equity Plan. (G)
(g) Directors' Equity Plan. (H)
(h) Directors' Equity Plan. (I)
(i) Clayton Homes, Inc. Employee Savings Plan and
Partnership. (C)
(j) Description of Clayton Homes, Inc. bonus arrangement for
key executives. (I)
15
<PAGE> 16
13. Annual Report to Shareholders for year ended June
30, 1997. (D)
21. List of Subsidiaries of the Registrant.
23. Consent of independent accountants.
27. Financial Data Schedule (for SEC use only)
- -----------------------------------------------------------------
(A) Filed with the Company's Form 10-K for the year ended June 30, 1992, and
incorporated by reference thereto.
(B) Filed as Exhibits to Registration Statement on Form S-1(SEC File No.
2-83705) and incorporated by reference thereto.
(C) Filed with Registration Statement on Form S-1(SEC File No. 2-92565) and
incorporated by reference thereto.
(D) For the information of the Commission only, except to the extent of
portions specifically incorporated by reference.
(E) Filed as Exhibits to Registration Statement on Form S-1(SEC File No.
33-2665) and incorporated by reference thereto.
(F) Filed with the Company's Proxy Statement for the Annual Meeting of
Shareholders held November 4, 1985, and incorporated by reference thereto.
(G) Filed with the Company's Proxy Statement for the Annual Meeting of
Shareholders held November 12, 1991, and incorporated by reference
thereto.
(H) Filed with the Company's Proxy Statement for the Annual Meeting of
Shareholders held November 11, 1992, and incorporated by reference
thereto.
(I) Filed with the Company's Proxy Statement for the Annual Meeting of
Shareholders held November 10, 1993, and incorporated by reference
thereto.
- -------------------------------
(b) Reports on Form 8-K.
No reports were filed in the Registrant's last quarter.
16
<PAGE> 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 23, 1997
CLAYTON HOMES, INC.
By: s/Joseph H. Stegmayer
-------------------------
Joseph H. Stegmayer
Vice Chairman of the Board and
Chairman of the Executive Committee
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.
<TABLE>
<S> <C> <C>
/s/James L. Clayton September 23, 1997 Chairman of the Board and
- ----------------------- James L. Clayton
Chief Executive Officer (Principal Executive Officer)
/s/Joseph H. Stegmayer September 23, 1997 Vice Chairman of the Board and
- ------------------------ Chairman of the Executive
Joseph H. Stegmayer Committee
/s/John J. Kalec September 23, 1997 Senior Vice President and Chief
- ------------------------ Financial Officer and Secretary
John J. Kalec (Principal Financial Officer)
/s/B. Joe Clayton September 23, 1997 Director
- ------------------------
B. Joe Clayton
/s/James D. Cockman September 23, 1997 Director
- ------------------------
James D. Cockman
/s/Wallace C. Doud September 23, 1997 Director
- ------------------------
Wallace C. Doud
/s/Dan W. Evins September 23, 1997 Director
- ------------------------
Dan W. Evins
/s/Wilma H. Jordan September 23, 1997 Director
- ------------------------
Wilma H. Jordan
/s/C. Warren Neel September 23, 1997 Director
- ------------------------
C. Warren Neel
</TABLE>
17
<PAGE> 1
ELEVEN YEAR REVIEW
<TABLE>
<CAPTION>
(in thousands
except per share) 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Net sales $ 822,906 $762,396 $621,351 $510,153 $384,491 $296,849 $257,557 $219,443 $208,624 $196,110 $166,272
Financial services
and other income 198,797 166,345 136,741 118,083 91,750 74,330 62,392 40,316 33,270 28,671 20,659
- ------------------------------------------------------------------------------------------------------------------------------------
1,021,703 928,741 758,092 628,236 476,241 371,179 319,949 259,759 241,894 224,781 186,931
- ------------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 559,274 521,200 431,826 357,698 267,201 206,049 176,374 153,786 147,982 138,468 117,538
SG&A 270,996 236,188 188,835 153,698 113,695 84,785 76,420 60,220 55,456 50,781 40,222
Financial services
interest 2,885 3,649 5,533 8,196 11,819 16,585 18,198 11,595 9,911 10,127 6,628
Other expenses 1,000 0 0 0 0 3,300 3,772 2,213 1,539 2,010 1,863
- ------------------------------------------------------------------------------------------------------------------------------------
834,155 761,037 626,194 519,592 392,715 310,719 274,764 227,814 214,888 201,386 166,251
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 187,548 167,704 131,898 108,644 83,526 60,460 45,185 31,945 27,006 23,395 20,680
Interest income (expense),
net/other 5,152 4,596 3,902 (359) (170) (317) (592) (575) (1,042) (1,073) (838)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 192,700 172,300 135,800 108,285 83,356 60,143 44,593 31,370 25,964 22,322 19,842
Provision for income taxes (73,200) (65,500) (48,800) (39,000) (29,600) (20,800) (16,000) (11,500) (9,714) (8,370) (9,486)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before
accounting change 119,500 106,800 87,000 69,285 53,756 39,343 28,593 19,870 16,250 13,952 10,356
Cumulative effect of
accounting change 0 0 0 3,000 0 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 119,500 $106,800 $ 87,000 $ 72,285 $ 53,756 $ 39,343 $ 28,593 $ 19,870 $ 16,250 $ 13,952 $ 10,356
====================================================================================================================================
Income before accounting change per share:
Primary $ 1.00 $ .89 $ .73 $ .60 $ .48 $ .37 $ .33 $ .26 $ .22 $ .18 $ .13
Fully diluted $ 1.00 $ .89 $ .73 $ .59 $ .47 $ .36 $ .30 $ .23 $ .19 $ .17 $ .12
Net income per share:
Primary $ 1.00 $ .89 $ .73 $ .63 $ .48 $ .37 $ .33 $ .26 $ .22 $ .18 $ .13
Fully diluted $ 1.00 $ .89 $ .73 $ .61 $ .47 $ .36 $ .30 $ .23 $ .19 $ .17 $ .12
Average shares
outstanding:
Primary 119,477 119,346 118,628 115,076 111,500 105,895 86,912 76,814 76,350 76,211 77,869
Fully diluted 119,477 119,346 118,628 119,900 119,285 113,680 100,973 96,174 95,945 96,207 91,230
Dividends per share $ .076 $ .061 $ .038 -- -- -- -- -- -- -- --
BALANCE SHEET DATA:
Total assets $1,045,761 $886,350 $761,151 $701,148 $587,032 $554,780 $488,817 $339,099 $294,754 $275,835 $232,159
Long-term debt 22,806 30,290 48,737 70,680 137,038 192,931 227,444 177,374 163,471 157,153 132,220
Shareholders' equity $ 754,526 $650,189 $544,187 $462,154 $348,630 $292,950 $200,992 $108,334 $ 87,462 $ 70,651 $ 58,530
KEY FINANCIAL RATIOS:
As a % of Revenue:
Operating income 18.4% 18.1% 17.4% 17.3% 17.5% 16.3% 14.1% 12.3% 11.2% 10.4% 11.1%
Net income 11.7% 11.5% 11.5% 11.5% 11.3% 10.6% 8.9% 7.6% 6.7% 6.2% 5.5%
Debt as a % of
total capital 2.9% 4.5% 8.2% 13.3% 28.2% 39.7% 53.1% 62.1% 65.1% 69.0% 69.3%
OTHER DATA:
Company-owned sales
centers 245 216 192 165 143 127 123 96 99 100 88
Independent retailers 663 580 421 372 371 312 330 322 269 245 240
Manufacturing plants 17 17 16 13 13 11 10 10 10 10 8
Communities 67 64 55 46 33 20 12 9 7 4 --
====================================================================================================================================
</TABLE>
12
<PAGE> 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.
<TABLE>
<CAPTION>
Year Ended June 30,
1997 vs 1996 1996 vs 1995
- ----------------------------------------------------------
<S> <C> <C>
RETAIL
Dollar sales +10.1% +20.7%
Number of retail centers +13.0% +14.0%
Dollar sales per retail center -2.6% +5.6%
Price of home +2.0% +7.7%
- ----------------------------------------------------------
WHOLESALE
Dollar sales +3.5% +25.0%
Number of independent
retailers +24.2% +26.1%
Dollar sales per
independent retailer -16.6% -0.8%
Price of home +1.3% -2.0%
- ----------------------------------------------------------
COMMUNITIES
Dollar sales +15.7% +32.5%
Number of communities +10.1% +16.7%
Dollar sales per community +5.1% +12.3%
Price of home +6.6% +11.1%
- ----------------------------------------------------------
</TABLE>
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.
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%. On June 30, 1997 reserves equaled 1.6% of outstanding loans
owned or on which the Company has contingent liability.
The changes in inventory levels at June 30, 1997 compared to June 30, 1996
are shown below in millions:
<TABLE>
<CAPTION>
Increase (decrease)
<S> <C>
MANUFACTURING
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)
=======================================================
</TABLE>
13
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FISCAL 1996 COMPARED TO FISCAL 1995
Total revenues grew 23% on a 23% increase in Manufactured Housing sales and
a 22% rise in Financial Services and other income.
Net sales of the Retail group rose 21% to $451 million. This growth was the
result of a 14% increase in the average number of Company owned retail centers
and a 6% improvement in the average dollar sales per location. During the year,
the Company opened or acquired 29 retail locations and closed five
underperforming retail centers.
Net sales of the Manufacturing group to independent retailers increased 25%
to $278 million and the number of homes sold rose 28%. The average wholesale
price declined 2% as the product mix shifted toward single-section homes.
Multi-section homes accounted for 32% of total shipments versus 35% in 1995.
Net sales of the Communities group climbed 33% to $33 million principally
as a result of a 19% rise in home sales and an 11% improvement in the average
sales price per home. Nine acquisitions brought the number of communities to 64
at year end.
Financial Services and other income grew 22% to $166 million from $137
million. Significant contributors were a $5 million gain on sale of two
communities, a $5 million increase in rental revenues from Community operations
and $6 million of growth in earned insurance premiums and commissions.
Interest and loan servicing revenues increased 19% to $71 million. The
average balance of receivables owned rose 6% to $218 million with a weighted
average interest rate of 12.8%, up slightly from 12.7%. The average balance of
receivables sold climbed 25% to $1.1 billion and the weighted average loan
service spread was 3.8% compared to 3.6%.
Financial Services interest expense decreased $1.9 million, or 34%, to $3.6
million. Debt collateralized by installment contract receivables dropped 36% to
an average of $34 million and the weighted average interest rate moved to 10.8%
from 10.6%.
Gross profit margins improved from 30.5% to 31.6%. The increase primarily
results from a greater mix of Clayton manufactured product sold to the Retail
group. Manufacturing sales to Retail were 54.5% of new retail sales compared to
49.8% in 1995.
Selling, general and administrative expenses were 31.0% and 30.4% of sales
for the years ended June 30, 1996 and 1995, respectively. Expenses associated
with the start-up of a new plant in the third quarter and from additional
reserves in the insurance group were the primary causes of the increase.
No provision for credit losses and contingencies was made in 1996 or 1995
because of excellent loss and delinquency experience of receivables for which
the Company is directly or contingently liable. Net losses as a percentage of
loans outstanding for fiscal 1996 increased to 0.3% from 0.2% in 1995 while
delinquency rates on all loans remained constant at 2.0%. On June 30, 1996,
reserves equaled 1.2% of outstanding loans owned or on which the Company has
contingent liability.
The changes in inventory levels at June 30, 1996, compared to June 30,
1995, are shown below in millions:
<TABLE>
<CAPTION>
Increase (decrease)
<S> <C>
MANUFACTURING
Raw materials $ 5.9
Finished goods (1.2)
RETAIL
Net increase of 24 Company-owned sales centers 11.4
Increase in average inventory levels
at 192 Company-owned sales centers 17.2
COMMUNITIES
Inventory at 9 manufactured housing
communities acquired during the year 1.6
Increase in average inventory levels at
55 manufactured housing communities .9
- -------------------------------------------------------
$35.8
=======================================================
</TABLE>
FOURTH QUARTER RESULTS
The increase in revenues and net income during the fourth quarters of
fiscal 1997 and 1996 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 1997, the Company originated and acquired approximately $844
million of installment contract and mortgage loan receivables. The Company
financed these originations and acquisitions primarily with $782 million in
proceeds from the pooling and sale of installment contract and mortgage loan
receivables. 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 $10 million in the
acquisition of land or existing manufactured housing communities and $9 million
in related rental units, $7 million for the opening of Company-owned retail
centers, $8 million including the construction of one new plant and the
improvement of existing manufacturing facilities and $2 million for other fixed
assets.
The Company expects to invest approximately $25 million in 1998 in the
acquisition or construction of manufactured housing communities, up to $12
million for new Company-owned retail centers, up to $13 million for the
construction and improvement of manufacturing facilities and to originate $725
million of installment contract and mortgage loan receivables. Cash needs for
1998 and thereafter are expected to be met with cash flows from operations,
current cash balances, and sales of installment contract and mortgage loan
receivables and GNMA certificates.
14
<PAGE> 4
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
(in thousands except per share) Sept. 30 Dec. 31 Mar. 31 June 30 Year
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $ .22 $ .22 $ .22 $ .34 $ 1.00
EQUIVALENT SHARES OUTSTANDING 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 SHARE $ .016 $.020 $ .020 $ .020 $ .076
- --------------------------------------------------------------------------------------------------------------------------
1996
Revenues $215,312 $211,183 $211,374 $290,872 $ 928,741
Operating income 35,113 34,986 37,400 60,205 167,704
Net income 22,563 22,713 23,954 37,570 106,800
Earnings per share $ .19 $.19 $ .20 $ .31 $ .89
Equivalent shares outstanding 118,736 119,140 119,733 119,774 119,346
Price range of stock:
High $ 15.60 $ 18.64 $ 17.70 $ 16.90 $ 18.64
Low 10.56 14.96 14.70 14.30 10.56
Close 15.20 17.10 16.70 16.00 16.00
Dividends per share $ .013 $ .016 $ .016 $ .016 $ .061
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Accounting Standards No.
128, Earnings Per Share (EPS). 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. Additionally, the
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement and requires a reconciliation of the numerator and denominator
of the diluted EPS calculation. The Company plans to adopt the provisions of the
Statement in fiscal 1998 and had the Statement been in effect for the fiscal
years presented herein, basic earnings per share would be equivalent to primary
earnings per share as reported.
In June 1997, the FASB issued Statement of Accounting Standards No. 130,
Reporting Comprehensive Income, which requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. This statement is effective for fiscal years
beginning after December 15, 1997 and is not expected to have a material effect
on the Company's financial position or results of operations.
Additionally, in June 1997, the FASB issued Statement of Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, which requires that an enterprise (a) report financial and
descriptive information about its reportable operating segments and (b) report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets with reconciliations of such amounts to the enterprise's
financial statements and (c) report information about revenues derived from the
Company's products or services and information about major customers. This
Statement is effective for fiscal years beginning after December 15, 1997.
EFFECTS OF INFLATION
Inflation has had an insignificant impact on the Company during the past
several years.
FORWARD LOOKING STATEMENTS
Certain statements in this annual report are forward looking as defined in
the Private Securities Litigation Reform Law. These statements involve certain
risks and uncertainties that may cause actual results to differ materially from
expectations as of the date of this report. These risks include, but are not
limited to, adverse weather conditions impacting sales; inventory adjustments by
major retailers; competitive pricing pressures; success of marketing and
cost-management programs and shifts in market demand.
15
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
Clayton Homes, Inc. and Subsidiaries
<TABLE>
<CAPTION>
June 30,
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 89,695 $ 47,400
Receivables, principally installment contracts and residual interests, net of
reserves for credit losses of $4,917 and $4,787, respectively and
unamortized discount of $2,853 and $4,359, respectively 478,691 402,039
Inventories 119,434 124,280
Securities held-to-maturity, approximate value of $19,988 and $19,774 20,361 20,361
Restricted cash and investments 70,997 70,403
Property, plant and equipment, net 214,072 184,271
Other assets 52,511 37,596
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,045,761 $ 886,350
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 99,498 $ 91,064
Long-term debt 22,806 30,290
Deferred income taxes 14,074 5,680
Other liabilities 154,857 109,127
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 291,235 236,161
===========================================================================================================================
Shareholders' equity
Preferred stock, $.10 par value, authorized 1,000 shares, none issued -- --
Common stock, $.10 par value, authorized 200,000 shares, issued 118,497
at June 30, 1997 and 118,864 at June 30, 1996 11,850 11,886
Additional paid-in capital 166,153 172,265
Retained earnings 576,523 466,038
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 754,526 650,189
===========================================================================================================================
Total liabilities and shareholders' equity $ 1,045,761 $ 886,350
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of Clayton
Homes, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended June 30, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Clayton Homes,
Inc. and Subsidiaries as of June 30, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its methods of accounting for securitization of installment
contract receivables in 1997 and securities in 1995.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
August 12, 1997
16
<PAGE> 6
CONSOLIDATED STATEMENTS OF INCOME
Clayton Homes, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year ended June 30,
(in thousands except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net sales $ 822,906 $762,396 $621,351
Financial services 148,515 115,987 102,108
Other income 50,282 50,358 34,633
- ---------------------------------------------------------------------------------------------------------------------------
1,021,703 928,741 758,092
- ---------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 559,274 521,200 431,826
Selling, general and administrative 270,996 236,188 188,835
Financial service interest 2,885 3,649 5,533
Provision for credit losses 1,000 - -
- ---------------------------------------------------------------------------------------------------------------------------
834,155 761,037 626,194
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 187,548 167,704 131,898
Interest income (expense), net/other 5,152 4,596 3,902
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 192,700 172,300 135,800
Provision for income taxes (73,200) (65,500) (48,800)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 119,500 $106,800 $ 87,000
===========================================================================================================================
Net income per common share:
Primary $ 1.00 $ .89 $ .73
Fully diluted $ 1.00 $ .89 $ .73
Average shares outstanding:
Primary 119,477 119,346 118,628
Fully diluted 119,477 119,346 118,628
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total Common Additional Retained
(in thousands except per share data) Shareholders' Equity Stock Paid-In Capital Earnings
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 30, 1994 $462,154 $11,766 $166,252 $284,136
Net income 87,000 -- -- 87,000
Purchase of 396 shares of common stock (5,156) (50) (5,106) --
Dividends declared ($.038 per share) (4,675) -- -- (4,675)
Issuances related to stock incentive, employee
benefit plans and other 4,864 91 4,773 --
- ---------------------------------------------------------------------------------------------------------------------------
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 ($.061 per share) (7,223) -- -- (7,223)
Issuances related to stock incentive, employee
benefit plans and other 8,318 95 8,223 --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 650,189 11,886 172,265 466,038
NET INCOME 119,500 -- -- 119,500
PURCHASE OF 840 SHARES OF COMMON STOCK (11,349) (84) (11,265) --
DIVIDENDS DECLARED ($.076 PER 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
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Clayton Homes, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Year ended June 30,
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 119,500 $ 106,800 $ 87,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 13,058 11,163 8,296
Gain on sale of installment contract
receivables, net of amortization (21,541) (11,315) (14,744)
Gain on sale of property -- (4,828) --
Provision for credit losses 1,000 -- --
Deferred income taxes 8,394 (3,702) 2,124
Increase in other receivables, net (27,383) (16,972) (22,964)
Decrease (increase) in inventories 4,846 (35,825) (11,138)
Increase in accounts payable, accrued liabilities, and other 39,249 25,633 5,516
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by operations 137,123 70,954 54,090
Origination of installment contract receivables (646,624) (476,467) (345,260)
Proceeds from sales of originated installment contract receivables 614,588 394,087 369,873
Principal collected on originated installment contract receivables 39,668 35,199 25,003
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 144,755 23,773 103,706
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of installment contract receivables (206,937) (36,105) (26,074)
Proceeds from sales of acquired installment contract receivables 167,138 36,007 7,112
Principal collected on acquired installment contract receivables 3,439 16,935 17,760
Acquisition of property, plant and equipment, net (42,859) (40,829) (44,462)
Proceeds from sale of property -- 21,271 --
Decrease (increase) in restricted cash and investments (594) (4,189) 3,141
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (79,813) (6,910) (42,523)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (9,015) (6,835) (3,162)
Proceeds from short-term borrowings 198,963 208,949 111,394
Repayment of short-term borrowings (198,963) (208,949) (136,394)
Repayment of long-term debt (7,484) (18,447) (21,943)
Issuance of stock for incentive plans and other 5,201 8,318 4,550
Repurchase of common stock (11,349) (1,893) (5,156)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (22,647) (18,857) (50,711)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 42,295 (1,994) 10,472
Cash and cash equivalents at beginning of year 47,400 49,394 38,922
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 89,695 $ 47,400 $ 49,394
============================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,912 $ 4,016 $ 5,823
Income taxes $ 62,269 $ 63,366 $ 54,725
Supplemental disclosure of non-cash activities:
In 1995, pass-through certificates aggregating
$9,500 were received coincidental with the sale
of receivables.
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Clayton Homes, Inc. and Subsidiaries
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 5,900 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 36 to 180 months, are financed by Vanderbilt Mortgage and Finance,
Inc. (VMF), the Company's mortgage banking subsidiary.
Premiums from family protection, physical damage, and home buyer protection
plan insurance policies reinsured by the insurance subsidiaries which represent
single payment contracts with terms of one to ten years, are recognized as
income over the terms of the contracts. Claims and expenses are matched to
recognize profits over the life of the contracts. This matching is accomplished
by means of the 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 1997, $769 million in installment contract receivables
and mortgage loan receivables were securitized with VMF retaining servicing,
while $12 million in mortgage loan receivables were sold with servicing
released.
Installment contract receivables held for sale of $254 million and $226
million in 1997 and 1996, 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 1997 are as follows:
<TABLE>
<S> <C>
1998 $227,000,000
1999 20,000,000
2000 16,000,000
2001 13,000,000
2002 11,000,000
</TABLE>
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, 1998 include amounts
relating to the sale of $220 million of installment contract receivables in
August, 1997. VMF provides servicing for investors in installment contract
receivables. Total contracts serviced at June 30, 1997 and 1996, including
contracts held for investment, were approximately $2,044 million and $1,638
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 Statement of Financial
Accounting Standard No. 125 (SFAS 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)
<TABLE>
<S> <C>
Servicing Assets recognized in 1997 $ 7,080
Amortization (1,436)
-------
Balance, June 30, 1997 $ 5,644
</TABLE>
The balance represents the estimated fair value of the aggregate servicing
assets recognized during 1997. 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.
19
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investment Securities
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (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, using the
last-in, first-out (LIFO) method of inventory valuation, or market.
Previously-owned manufactured homes are valued at 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.
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.
Earnings Per Share
Earnings per share is computed based on the weighted average number of
shares of common stock outstanding during the periods presented, adjusted for
subsequent common stock splits and includes common share equivalents arising
from stock options.
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.
Other
Per share and share data have been retroactively adjusted to reflect
5-for-4 stock splits in December 1996, December 1995, and December 1994. Certain
reclassifications have been made to the 1995 and the 1996 financial statements
to conform to the 1997 presentation.
Restricted Cash and Investments
Restricted cash and investments represent reserves required by: 1) certain
VMF servicing and debt agreements to be maintained until such time as specified
minimum repayments have been made, 2) trust account cash balances required by
certain VMF servicing agreements, and 3) 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.
NOTE 2 - INVENTORIES
Inventories at June 30, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Manufactured homes:
New $ 81,963 $ 89,699
Previously-owned 22,805 18,458
Raw materials 14,666 16,123
- ------------------------------------------------------------
$119,434 $124,280
============================================================
</TABLE>
If the first-in, first-out (FIFO) method of inventory valuation had been
used, inventories would have been higher by $18,196,000 and $17,637,000 at June
30, 1997, and 1996, respectively.
NOTE 3 - SECURITIES HELD-TO-MATURITY
At June 30, 1997 and 1996, 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.
20
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Land and improvements $135,027 $115,647
Buildings 104,560 88,749
Furniture and equipment 28,200 24,445
- ----------------------------------------------------------
267,787 228,841
Less: accumulated depreciation
and amortization (53,715) (44,570)
- ----------------------------------------------------------
$214,072 $184,271
==========================================================
</TABLE>
Depreciation charged to operations was $13,058,000, $11,163,000, and
$8,296,000 for each of the years ended June 30, 1997, 1996, and 1995,
respectively.
NOTE 5 - LONG-TERM DEBT
Long-term debt at June 30, 1997, and 1996 is summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Debt collateralized by installment
contract receivables:
Maturing in fiscal years through:
1998 to 2004: weighted average
rate of 10.10% at June 30, 1997 $22,013 $27,380
1998 to 2002: adjustable rates,
weighted average rate of 10.20%
at June 30, 1997, weighted
average maximum rate 14.27%
at June 30, 1997 228 1,091
1998 to 2001: adjustable rates,
average rate of 7.06% at
June 30, 1997, no maximum rate 429 1,666
Other notes payable 136 153
- ---------------------------------------------------------------
Total $22,806 $30,290
===============================================================
</TABLE>
Expected principal payments of long-term debt collateralized by installment
contract receivables for the five fiscal years subsequent to 1997 and thereafter
are as follows:
<TABLE>
<S> <C> <C> <C>
1998 $6,857,000 2001 $3,144,000
1999 4,131,000 2002 2,805,000
2000 3,314,000 Thereafter 2,419,000
</TABLE>
The estimated principal payments are based on the scheduled payments and
estimated prepayments of principal of the installment contract receivables
collateralizing such debt.
Certain debt agreements require fixed payments which approximate the
scheduled payments of the underlying installment contract receivables.
Certain of the long-term debt have various covenants, which among other
things, require a minimum tangible net worth and the maintenance of certain
financial ratios.
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, 1997, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $7,766 $11,895 $14,082
Provision 1,000 -- --
Losses, net of recoveries
applicable to installment
contract receivables:
Purchased (2,337) (2,494) (1,900)
Other 1,622 442 (287)
Reserves associated with
receivables purchased (sold) -- (2,077) --
- -----------------------------------------------------------
Balance, end of year $8,051 $ 7,766 $11,895
===========================================================
Reserves for credit losses $4,917 $ 4,787 $ 8,329
Reserve for contingencies 3,134 2,979 3,566
- -----------------------------------------------------------
$8,051 $ 7,766 $11,895
===========================================================
</TABLE>
The reserves for credit losses are netted against receivables and the
reserve for contingencies is included in other liabilities on the consolidated
balance sheet. 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.
<TABLE>
<CAPTION>
Total Installment Contingent
Contract Receivables Contingent Liabilities
(in thousands) Liability % (in thousands)
- --------------------------------------------------------
<S> <C> <C>
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
========================================================
June 30, 1996
$ 33,000 30% - 88% $13,000
56,000 11% - 25% 11,000
203,000 10% and below 20,000
- --------------------------------------------------------
$292,000 $44,000
========================================================
</TABLE>
There were no proceeds from receivables sold with recourse in 1997; $12
million, and $7 million, during 1996, and 1995, respectively. Approximately 90%
of the installment contract receivables both owned and sold with recourse have
fixed rates of interest and approximately 10% are at variable rates of interest
based on either the prime rate, U.S. Treasury rates or LIBOR.
Virtually all of the Company's servicing arrangements are based on interest
spreads with fixed rates or variable rates with ceilings.
NOTE 7 - SHAREHOLDERS' EQUITY
Stock Option Plan
In 1983, 1985 and 1991, the Company established Stock Option Plans for a
total of 8,616,829 shares of common stock which provide for granting "incentive
stock options" or
21
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
"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:
<TABLE>
<CAPTION>
Weighted Weighted
Avg Stock Avg
Stock Option Exercise Options Excercise
Shares Price Range Price Excercisable Price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance
June 30, 1994 3,860,538 $ .84 - $12.93 $ 5.66 924,386 $3.62
Granted 590,770 $ 9.02 - $10.18 $ 9.11
Exercised (694,008) $ .84 - $ 9.26 $ 1.95
Canceled (265,740) $ 1.16 - $12.93 $ 5.58
- ----------------------------------------------------------------------------------------
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 $ 1.16 - $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
========================================================================================
</TABLE>
Options available for future grant at June 30, 1997 and 1996 were 803,019
and 1,183,139, respectively. Options were held by 611 persons at June 30, 1997.
The following table summarizes information about the plan's stock options
at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------
Weighted Weighted
Number Weighted Avg Avg Number Avg
Range of Outstanding Remaining Excercise Exercisable Excercise
Exercise Price at 6/30/97 Contractual Life Price at 6/30/97 Price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.38 - $ 2.70 375,771 2.03 years $ 1.88 224,454 $ 1.92
$ 4.55 - $ 6.31 425,718 4.50 years $ 5.22 260,635 $ 5.16
$ 9.02 - $12.90 2,209,007 7.15 years $10.14 945,791 $ 9.29
$14.32 - $17.12 523,062 8.46 years $16.93 80,268 $17.12
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation
(SFAS 123). 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 1996 and 1997
consistent with the provisions of SFAS 123, the Company's net earnings and
earnings per share for 1997 would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
June 30,
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Net income - as reported $119,500 $106,800
Net income - pro forma 118,481 106,309
Net income per common share - as reported 1.00 0.89
Net income per common share - pro forma 0.99 0.89
- -----------------------------------------------------------------
</TABLE>
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 and 1997; dividend yields ranging
from 0.46% to 0.73% with a weighted average yield of 0.55%; expected volatility
of 0.311%, risk-free interest rates ranging from 6.44% to 6.57% with a weighted
average rate of 6.47%; and expected lives ranging from 7.50 to 9.75 years with a
weighted average life of 8.19 years.
NOTE 8 - INCOME TAXES
Components of the provision for income tax for each of the three years
ended June 30, 1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C>
Current tax provisions:
Federal $58,591 $63,274 $41,292
State 6,215 5,928 5,384
- -----------------------------------------------------------
64,806 69,202 46,676
- -----------------------------------------------------------
Deferred tax provision/
(benefit) 8,394 (3,702) 2,124
- -----------------------------------------------------------
$73,200 $65,500 $48,800
===========================================================
</TABLE>
The sources and tax effect of temporary differences at June 30, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- -----------------------------------------------------------
<S> <C> <C>
Reserves for credit losses and
contingencies and discounts $ 4,712 $ 4,584
Insurance reserves 5,377 4,919
Unearned premiums 5,074 3,952
- -----------------------------------------------------------
Total deferred tax assets 15,163 $ 13,455
- -----------------------------------------------------------
Residual interest in installment
contract receivables (16,881) (8,863)
Deferred costs (3,904) (3,123)
Other (8,452) (7,149)
- -----------------------------------------------------------
Total deferred tax liabilities (29,237) (19,135)
- -----------------------------------------------------------
Net deferred tax liability $ (14,074) $ (5,680)
===========================================================
</TABLE>
The provision for income taxes reflected in the financial statements differs
from income taxes calculated at the statutory federal income tax rate of 35% in
1997, 1996 and 1995 as follows on next page:
22
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Income taxes at statutory rate $67,451 $60,305 $47,530
State income taxes, net of
federal benefit 4,040 4,150 3,769
Other, net 1,709 1,045 (2,499)
- ----------------------------------------------------------
$73,200 $65,500 $48,800
==========================================================
</TABLE>
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
$2,874,000, $4,274,000, and $3,461,000 for the years ended June 30, 1997, 1996,
and 1995, 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 $3,705,000 in 1997, $2,722,000 in 1996, and $2,721,000 in
1995. The following is a schedule of minimum rental commitments under
non-cancelable operating leases, primarily for retail centers, in effect at June
30, 1997:
<TABLE>
<S> <C> <C> <C>
1998 $3,320,000 2001 $1,558,000
1999 2,612,000 2002 991,000
2000 2,083,000 Thereafter 2,246,000
</TABLE>
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.
Other
The Company has lines of credit totaling $145 million for working capital
needs of which zero borrowings were outstanding at June 30, 1997. Additionally,
the Company has letters of credit of which $48 million was outstanding at June
30, 1997, primarily related to insurance reserve requirements.
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 home buyer 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, operating
expenses and financial interest expense. 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
short-term investments.
Information concerning operations by industry segment follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Manufactured Financial
(in thousands) Housing Services Communities Corporate Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
REVENUES $827,383 $124,076 $ 70,244 $ -- $1,021,703
INTERSEGMENT INCOME 8,432 93 -- (8,525) --
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
Intersegment income 7,436 103 94 (7,633) --
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
- -----------------------------------------------------------------------------------------------------------------------
1995
Revenues $ 621,474 $ 88,749 $ 47,869 $ -- $ 758,092
Intersegment income 11,406 274 1,194 (12,874) --
Operating income 67,898 54,800 9,200 -- 131,898
Identifiable assets 176,632 413,072 122,408 49,039 761,151
Depreciation and amortization 5,132 -- 3,164 -- 8,296
Capital expenditures $ 21,933 $ -- $ 22,529 $ -- $ 44,462
=======================================================================================================================
</TABLE>
23
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12 - Other Assets and Liabilities
At June 30, 1997 and 1996, other assets and liabilities consisted of:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- --------------------------------------------------------------------
<S> <C> <C>
Other Assets
Interest receivable and
future servicing rights $ 26,229 $ 17,312
Prepaid expenses and other 26,282 20,284
- --------------------------------------------------------------------
$ 52,511 $ 37,596
====================================================================
Other Liabilities
Investors payable $ 69,847 $ 40,286
Reserve for contingencies (Note 6) 3,134 2,979
Escrow deposits 15,220 14,495
Unearned insurance premiums 50,610 39,628
Other 16,046 11,739
- --------------------------------------------------------------------
$154,857 $ 109,127
====================================================================
</TABLE>
NOTE 13 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (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.
Fair value estimates are made at a specific point in time, based on
relevant market information 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, equal 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 Company alters the
underlying rate at which the future estimated cash flows are discounted once the
sale has been recorded. The fair value primarily revolves around an appropriate
discount rate to be applied to the asset as a whole.
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, 1997 and 1996.
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.
Long-term Debt
Long-term debt consist primarily of debt 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:
<TABLE>
<CAPTION>
JUNE 30, 1997 June 30, 1996
CARRYING ESTIMATED Carrying Estimated
(in thousands) AMOUNT FAIR VALUE Amount Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents, including restricted
investments and securities held-to-maturity $181,053 $180,680 $138,164 $138,157
Residual interests in installment contract receivables 135,208 135,208 85,020 85,020
Contracts held for sale and as collateral, including
accrued interest receivable 283,378 293,268 263,719 264,477
Financial liabilities:
Long-term debt $ 22,806 $ 25,859 $ 30,290 $ 34,003
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 1
EXHIBIT 21. LIST OF SUBSIDIARIES AND PARTNERSHIPS OF THE REGISTRANT.
<TABLE>
<CAPTION>
SUBSIDIARY STATE OR COUNTRY OF INCORPORATION ORGANIZATION
---------- ----------------------------------------------
<S> <C>
100% OWNED ENTITIES
CLAYTON HOMES, INC. DELAWARE
CMH MANUFACTURING, INC. (2) TENNESSEE
CMH HOMES, INC. (2) TENNESSEE
VANDERBILT MORTGAGE & FINANCE, INC. (3) TENNESSEE
CLAYTON-VANDERBILT, INC. (2) ARIZONA
VANDERBILT PROPERTY AND CASUALTY INSURANCE CO., LTD (2) BRITISH VIRGIN ISLANDS
CMH INSURANCE AGENCY, INC. (2) TENNESSEE
CABS, INC. (4) TENNESSEE
CMH PARKS, INC. (2) TENNESSEE
CMH CAPITAL, INC. (1) DELAWARE
VANDERBILT SPC, INC. (4) DELAWARE
CMH SERVICES, INC. (1) TENNESSEE
CMH OF KY, INC. (5) KENTUCKY
50% TO 99% OWNED ENTITIES
CLAYTON'S - TULLAHOMA, INC. (2) TENNESSEE
VANDERBILT LIFE AND CASUALTY INSURANCE CO., LTD (2) BRITISH VIRGIN ISLANDS
EASTERN STATES LIFE INSURANCE CO., INC. (2) TURKS & CAICOS ISLANDS
MIDLAND STATES LIFE CO., INC. (2) TURKS & CAICOS ISLANDS
(1) OWNED BY CLAYTON HOMES, INC.
(2) OWNED BY CMH CAPITAL, INC.
(3) OWNED BY CMH SERVICES, INC.
(4) OWNED BY VANDERBILT MORTGAGE & FINANCE, INC.
(5) OWNED BY CMH HOMES, INC. AND BY CMH INSURANCE AGENCY, INC.
PARTNERSHIP
-----------
50% TO 99% OWNED ENTITIES
BLEVINS PARTNERSHIP TENNESSEE
CLAYTON-CAMBRIDGE, J/V TENNESSEE
REDWOOD PARTNERS LIMITED COLORADO
PINE LAKE WEST ASSOCIATES LIMITED PARTNERSHIP GEORGIA
SOUTHGATE MOBILE HOME PARK TENNESSEE
CMH MANAGEMENT, LP TENNESSEE
</TABLE>
<PAGE> 1
EXHIBIT 23. CONSENT OF INDEPENDENT ACCOUNTANTS
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. 333-14033) of our report dated August 12, 1997, on our audits of the
consolidated financial statements of Clayton Homes, Inc. as of June 30, 1997 and
1996, and for the years ended June 30, 1997, 1996 and 1995, which report is
included in this Annual report on Form 10-k.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Knoxville, Tennesse
September 22, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CLAYTON HOMES, INC. FOR THE YEAR ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 89,695
<SECURITIES> 0
<RECEIVABLES> 483,608
<ALLOWANCES> 4,917
<INVENTORY> 119,434
<CURRENT-ASSETS> 0
<PP&E> 267,787
<DEPRECIATION> 53,715
<TOTAL-ASSETS> 1,045,761
<CURRENT-LIABILITIES> 99,498
<BONDS> 22,806
0
0
<COMMON> 11,850
<OTHER-SE> 742,676
<TOTAL-LIABILITY-AND-EQUITY> 1,045,761
<SALES> 822,906
<TOTAL-REVENUES> 1,021,703
<CGS> 559,274
<TOTAL-COSTS> 830,270
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,000
<INTEREST-EXPENSE> (2,267)
<INCOME-PRETAX> 192,700
<INCOME-TAX> 73,200
<INCOME-CONTINUING> 119,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 119,500
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
</TABLE>
