<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
-------------- ----------------
Commission file number 1-8824
CLAYTON HOMES, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1671360
- ------------------------------ ---------------------------------------
State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization
5000 Clayton Road
Maryville, Tennessee 37804
- ------------------------------ ---------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 423-380-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- -------------------------------------- ------------------------
COMMON STOCK, $.10 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant on August 31, 1999, was approximately $955,496,520 (100,578,581
shares at closing price on the NYSE of $9.50).
Shares of common stock, $.10 par value, outstanding on August 31, 1999, were
140,302,550.
Exhibit index appears on pages 14-15.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Part of Form 10-K Documents from which portions are incorporated by reference
- ----------------- -----------------------------------------------------------
<S> <C>
Part II (except for Item 5) Annual Report to Shareholders for fiscal year ended June 30, 1999
Part III Proxy Statement relating to Company's
Annual Meeting of Shareholders on October 27, 1999
</TABLE>
1
<PAGE> 2
CLAYTON HOMES, INC.
PART I
ITEM 1. BUSINESS.
GENERAL
Clayton Homes, Inc. and its subsidiaries (the Company) produce, sell, finance
and insure primarily low to medium-priced manufactured homes. The Company's 19
manufacturing plants produce homes which are marketed in 31 states through 1,052
retailers, of which 306 are Company-owned sales centers and 75 are Company-owned
community sales offices. Installment financing and insurance products are
offered to its homebuyers and those buying from selected independent retailers.
Such financing is provided through its wholly-owned finance subsidiary,
Vanderbilt Mortgage and Finance, Inc. (VMF). The Company acts as agent, earns
commissions and reinsures risks on physical damage, family protection, and home
buyer protection insurance policies issued by a non-related insurance company
(ceding company) in connection with its home sales. The Company also develops,
owns, and manages manufactured housing communities.
The Company is a Delaware corporation whose predecessor was incorporated in 1968
in Tennessee. Its principal executive offices are located near Knoxville,
Tennessee.
The following table indicates the percentage of revenue derived from sales by
Company-owned retail centers, sales to independent retailers and financial
services operations and other income for each of the last three fiscal years.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales by Company-owned retail centers
and communities .................. 53% 50% 52%
Sales to independent retailers ...... 25% 28% 28%
Financial services and other ........ 22% 22% 20%
---- ---- ----
Total ............................... 100% 100% 100%
==== ==== ====
</TABLE>
For information relating to the Company's four major business segments, see Note
10 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 30-31% 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,
owner-occupied residences sited and attached to utilities.
The Company manufactures a variety of single and multi-section homes in a wide
price range. Retail prices range from $10,000 to $75,000 with sizes from 500 to
2,400 square feet.
The Company markets homes under the names of Clayton and Norris. Included
standard features are central heating, range, refrigerator, and
color-coordinated window, wall and floor treatments. Optional features include
central air conditioning, wood-burning fireplaces, hardwood floors, whirlpool
tubs, entertainment systems, microwaves, dishwashers, washers and dryers,
skylights and furniture.
2
<PAGE> 3
MANUFACTURING OPERATIONS
The Company manufactures homes in 19 facilities, ranging in size from 63,000 to
194,000 square feet. See "Item 2. Properties" for a listing by location. The
Company's manufactured homes are built in its plants using assembly-line
techniques. Completion of a home ordinarily takes two days. Homes are generally
produced 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 36,000 homes per year.
During the fiscal year ended June 30, 1999, the Company produced 28,370 homes.
The principal materials utilized in the production of the Company's homes are
steel, aluminum, wood, fiberglass, carpet, vinyl floor covering, hardware items,
appliances and electrical items. The Company purchases these and other items
from a number of supply sources, and it believes that the materials and parts
necessary for the construction and assembly of its homes will remain readily
available from these sources. In the event that any of these items are not
readily available or are available at a higher cost than could be passed on to
consumers, the operations of the Company could be adversely affected.
The Company offers one year limited warranty programs covering manufacturing
defects in materials or workmanship in a home. Warranties covering appliances
and equipment installed in the homes generally are obligations of the
manufacturers of such items and not those of the Company. Warranty and service
costs during the years ended June 30, 1999, June 30, 1998, and June 30, 1997,
amounted to approximately $16,085,000, $14,801,000, and $12,308,000,
respectively.
The backlog of firm orders for homes manufactured by the Company, including
orders from Company-owned retail centers, was approximately $42,600,000 and
$54,800,000 on June 30, 1999, and 1998, respectively. Based on the Company's
production rate, approximately three weeks would be required to fill backlog
orders at June 30, 1999.
SALES OF HOMES MANUFACTURED BY THE COMPANY
The following table sets forth manufacturing sales data for the number of homes
shipped to Company-owned retail centers and to independent retailers, total
number of homes sold, number of plants, number of independent retailers and
number of Company-owned retail centers for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED JUNE 30,
----------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Number of homes sold to independent retailers ......... 14,980 14,728 14,375
Number of homes shipped to Company-owned retail centers 13,364 12,922 11,455
------ ------ ------
Total ................................................. 28,344 27,650 25,830
====== ====== ======
Number of plants operating ............................ 19 18 17
Number of independent retailers ....................... 671 702 663
Number of Company-owned communities ................... 75 71 67
Number of Company-owned retail centers ................ 306 273 245
</TABLE>
COMPANY RETAIL OPERATIONS
As of June 30, 1999, the Company sold homes through 306 Company-owned retail
centers in 22 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.
3
<PAGE> 4
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Number of Company-owned retail centers ............... 306 273 245
Number of new homes sold (including homes built by the
Company and by other manufacturers) .............. 14,894 13,250 13,425
Average retail price of new homes sold ............... $41,173 $37,864 $34,209
Number of previously-owned homes sold ................ 4,580 3,287 3,621
</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
foreclosed homes from lenders throughout its trade territory.
Homes sold by Company-owned retail centers are delivered to the homeowners'
sites by trucks either owned by the Company or leased for the particular
delivery. The purchase price of the home may include delivery and setup of the
home at the retail homeowner's site. Electrical, water, and gas connections are
performed by licensed technicians.
INDEPENDENT RETAILERS
In the years ended June 30, 1999, and 1998, 53% of homes manufactured by the
Company were sold to its independent retailers. As of June 30, 1999, the Company
supplied 671 independent retailers in 29 states with homes. The Company's
independent retailer network enables it to distribute homes to more markets,
more quickly, without as large an investment in management resources and
overhead expenses as is required with Company-owned retail centers. Sales to
independent retailers ensure the Company that its homes are competitive with
other manufacturers in terms of consumer acceptability, product design, quality
and price.
The Company's finance subsidiary, VMF, provides financing for retail customers
of selected independent retailers 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 500 mile radius from each of the
Company's manufacturing plants due to the relatively significant cost of
transporting a home. Depending on the cost of the home and the manufacturing
competition within the area, a home may be competitively shipped shorter or
longer distances. During each of the last three fiscal years no retailer
accounted for more than 2% of the Company's consolidated revenues.
The Company's independent retailers provide their own inventory financing,
allowing the Company to receive payment for homes within two weeks after the
home is constructed. The Company does not require agreements with its
independent retailers, and the relationship between the Company and each of its
independent retailers may be terminated at any time by either party. The Company
believes its relationships with independent retailers are good, and has
experienced relatively little turnover among independent retailers in the past
several years. The Company generally has little control over the operations of
independent retailers.
Typically the Company neither provides inventory financing arrangements for
independent retailer purchases nor consigns homes. As is customary in the
industry, lenders financing independent retailer purchases require that the
Company execute repurchase agreements which provide that, in the event of
retailer default under the retailer's inventory financing arrangements, the
Company will repurchase homes for the amount remaining unpaid to the lender,
excluding interest and repossession costs. Historically, any homes repurchased
under such agreements are immediately resold to other retailers, including
Company-owned retail centers, at 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.
4
<PAGE> 5
FINANCIAL SERVICES
The Company believes that the ability to make financing available to retail
purchasers is a material factor affecting the market acceptance of its product.
The Company facilitates retail sales by offering various finance and insurance
programs, and by maintaining relationships with conventional lenders such as
banks and finance companies for the pre-arranged sale of retail installment
contracts. The following table reflects the relative percentages of homes sold
by Company-owned retail centers which were financed through the Company, either
by VMF or by conventional lenders, and those sales made to customers who
arranged their own financing or paid cash.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
VMF ..................... 72% 75% 77%
Conventional lenders .... 7% 5% 3%
Customer arranged or cash 21% 20% 20%
---- ---- ----
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 independent retailers. Retailers submit homebuyer
applications to VMF for approval and, provided that credit reports, employment
verification, and income and debt analysis meet VMF's criteria, a contract
purchase commitment is issued to the selling retailer.
VMF makes bulk purchases of manufactured housing contracts from banks and
commercial lenders. It also performs, on behalf of other institutions, servicing
of manufactured housing contracts that were not purchased or originated by VMF.
These purchases and servicing arrangements may relate to the portfolios of other
lenders or finance companies, governmental agencies, or other entities that
purchase and hold manufactured housing contracts.
UNDERWRITING POLICIES. Retail customers of the Company who express a desire to
obtain financing by or through the Company complete a credit application form
which is initially reviewed by the manager of the retail center and then
forwarded to VMF.
VMF's underwriting guidelines require that each applicant's credit, residence,
employment history and income to debt payment ratios meet predetermined
guidelines. If in the judgment of the VMF credit manager an applicant does not
meet minimum underwriting criteria, there must be other determining criteria in
order for an applicant to be approved. Credit managers confirm that the credit
investigation gives a complete and up-to-date accounting of the applicant's
creditworthiness and are encouraged to obtain second opinions on loans for
relatively large dollar amounts or those which tend to rank lower in terms of
underwriting criteria. Generally, the sum of the monthly installment housing
obligation, which includes the manufactured home loan payment and monthly site
costs, should not exceed 28% of the applicant's gross monthly income.
With respect to those homebuyers which are approved, VMF requires a down payment
in the form of cash, the trade-in value of a previously-owned manufactured home,
and/or the estimated value of equity in real property pledged as additional
collateral. For previously-owned homes, the trade-in allowance accepted by the
retailer must be consistent with the value of the home as determined by VMF in
light of current market conditions. The value of real property pledged as
additional collateral is estimated by retail personnel, who are not appraisers
but are familiar with the area in which the property is located. The average
down-payment for 1999 was 17% of the purchase price, while the minimum
down-payment for exceptional buyers was 5%. The purchase price includes the
stated cash sale price of the manufactured home, sales or other taxes and fees
and set-up costs.
The balance of the purchase price is financed using various installment sales
contracts or mortgage instruments providing for a purchase money security
interest in the manufactured home and a mortgage on any real property pledged as
additional collateral. Normally, the contracts provide for equal monthly
payments, generally over a period of seven to thirty years at fixed or variable
rates of interest. VMF believes the typical manufactured home purchaser is
primarily sensitive to the amount of the monthly payment and not necessarily to
the underlying interest rate.
5
<PAGE> 6
VMF has developed financing options such as contracts with a seven-year term
(compared to the industry norm of 15 to 30 years) which provide financing to its
customers at a relatively lower cost. The Company offers a bi-weekly payment
program which provides for 26 payments per year, allowing homebuyers the
convenience of electronically drafting payments from their checking accounts.
The Company believes that such financing options are attractive to the customer
and improve market acceptance of its homes as well as improve delinquency and
repossession experience.
During the last 12 fiscal years, VMF was the most significant source of
financing for purchasers of homes sold by the Company-owned retail centers. In
fiscal 1988, VMF originated 5,692 contracts and in fiscal 1999, VMF originated
30,165 contracts. At June 30, 1999, VMF was servicing approximately 135,000
contracts with an aggregate dollar amount of $3.5 billion. VMF originated or
purchased approximately 120,000 of these contracts with an aggregate dollar
amount of $3.2 billion. The Company expects that VMF will continue to originate
a significant portion of the financing for purchasers of its homes.
The volume of manufactured housing contracts originated by VMF for the periods
indicated below and certain other information at the end of such periods is as
follows:
<TABLE>
<CAPTION>
CONTRACT ORIGINATIONS
YEAR ENDED JUNE 30,
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Principal balance of contracts originated
(in thousands) ...................... $1,085,484 $801,865 $646,624
Number of contracts originated .......... 30,165 24,304 21,691
Average contract size ................... $ 35,985 $ 32,993 $ 29,811
Average interest rate ................... 10.40% 10.51% 11.10%
</TABLE>
The following table indicates the number of loans (in thousands) serviced by VMF
on the dates indicated:
<TABLE>
<CAPTION>
LOANS SERVICED (IN THOUSANDS)
YEAR ENDED JUNE 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Originated and purchased loans serviced . 120 109 87
Master servicing contracts .............. 15 17 15
---- ---- ----
Total ................................... 135 126 102
</TABLE>
VMF FUNDING. VMF draws on its short-term credit facilities with the Company to
fund manufactured home loans, while long-term financing is obtained through the
capital markets. In fiscal 1999, VMF completed four public offerings of
asset-backed securities totaling $1.3 billion. In excess of $4.1 billion of
securities have been issued and sold since 1991.
VMF's capital market activity, the primary source of permanent funding for its
lending activities, is in the form of asset-backed securities issued through its
special purpose entity. These securities, which are sold in public markets, are
collateralized by manufactured housing receivables which are either originated
or acquired by VMF. Certain of these receivables are originated and subserviced
by other entities. With respect to the securitized pools that contain
receivables originated or acquired by other entities, VMF is servicer for all
loans in the pools, with a subservicing arrangement on some loans originated or
acquired from other entities.
Loans insured by the Federal Housing Administration (FHA) or guaranteed by the
Veterans Administration (VA) are permanently funded through the Government
National Mortgage Association (GNMA) pass-through program. Under the GNMA
program, installment sales contracts are warehoused by VMF and then pooled in
denominations of approximately $2,500,000 to collateralize the issuance by VMF
of securities guaranteed by GNMA under the provisions of the National Housing
Act. Under the GNMA program, VMF retains the servicing of the installment sales
contracts and is responsible for passing through payments under the contracts to
GNMA security holders. During the fiscal year ended June 30, 1999, VMF
originated installment sales contracts eligible for financing under the GNMA
program having aggregate principal balances of $89,000. As of June 30, 1999, VMF
was servicing 246 GNMA pools totaling $125 million in principal balances. Use of
FHA financing minimizes the Company's contingent liability for these
6
<PAGE> 7
installment sales contracts because of the government-insured nature of the
loans. Accordingly, the Company believes that the use of this form of financing,
for customers who qualify, increases the marketability of its manufactured
homes.
Certain of the agreements related to borrowings include covenants with respect
to the Company's financial condition, corporate existence and employment of
certain key individuals. The Company is contingently liable as guarantor on
installment contract receivables sold with recourse. At June 30, 1999, and 1998,
the outstanding principal balances of these receivables totaled approximately
$164 million and $188 million, respectively. The associated contingent liability
is approximately $22 million and $23 million, respectively. There were no
receivables sold with recourse in 1999, 1998 and 1997.
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 lending practices and pricing
policies, changes in interest rates will not materially affect its business.
There can be no assurance, however, that a significant change in interest rates
will not materially affect the Company's business and financial condition.
ACQUIRED CONTRACTS AND SERVICING ARRANGEMENTS. Certain acquired contracts are
originated by banks or commercial lenders, and acquired indirectly or directly
from them by VMF. The acquired contracts are purchased on the basis of
underwriting criteria that may be different from and may not be as strict as
VMF's underwriting criteria.
In fiscal 1994 and 1998, VMF became the servicer of 20,180 and 10,013
manufactured housing installment sales contracts with approximate principal
balances of $285 million and $267 million, respectively. VMF acts solely as
servicer with respect to these contracts and, thus, has no ownership interest
nor contingent liability related to this portfolio. At June 30, 1999, VMF was
servicing approximately 15,000 of these installment sales contracts with an
approximate principal balance of $269 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. The Company has not experienced losses from contracts
sold to other lenders.
Although the terms of the installment sales contracts vary according to the
financial institutions which purchase the contracts, most contracts provide that
the failure to make a payment as scheduled is an event of default which gives
rise to the right to repossess the home. However, generally the Company does not
repossess the home until payments are three months delinquent, unless the
borrower does not have apparent ability to bring payments current, in which case
repossession may occur sooner. The Company generally follows the same policy
with respect to loans insured by the FHA or guaranteed by the VA, although the
Company must also file a notice of claim within nine months after default with
the agency to preserve its rights under the programs.
The following table sets forth delinquent installment sales contracts as a
percentage of the total number of installment sales contracts on which the
Company provided servicing and was either contingently liable or owner. An
account is considered delinquent if any payment is past-due 30 days or more.
7
<PAGE> 8
<TABLE>
<CAPTION>
DELINQUENCY PERCENTAGE AT JUNE 30,
1999 1998 1997
---- ---- ----
*Including Excluding *Including Excluding
Access Access Access Access
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Total delinquencies as percentage of
contracts outstanding
All contracts ........................ 2.07% 1.87% 3.34% 2.16% 2.08%
Contracts originated by VMF .......... 1.84 1.84 1.98 1.98 1.99
Contracts acquired from other
institutions .................... 3.14 2.08 8.68 3.26 2.68
</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,
1999 1998 1997
---- ---- ----
*Including Excluding *Including Excluding
Access Access Access Access
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net losses as percentage of average
loans outstanding
All contracts ...................... 1.4% 1.2% 0.8% 0.8% 0.2%
Contracts originated by VMF ........ 1.0% 1.0% 0.8% 0.8% 0.0%
Contracts acquired from other
institutions .................. 3.7% 3.7% 1.8% 1.7% 1.8%
Number of contracts in repossession
Total ............................ 1,857 1,514 1,682 1,343 937
Contracts originated by VMF ...... 1,374 1,374 1,229 1,229 885
Contracts acquired from other
Institutions .................. 483 140 453 114 52
Total number of contracts in repossession
as percentage of total contracts . 1.54% 1.27% 1.54% 1.33% 0.87%
</TABLE>
* In May 1998, the Company purchased $245 million in loans from Access
Financial Lending Corporation (Access) and contracted to service an additional
$267 million - for a total of $512 million in servicing.
The Company pays the unpaid balance of an installment sales contract for which
it is liable upon repossession of the home. The Company believes that as long as
it is able to sell repossessed homes promptly at satisfactory prices, the costs
associated with remarketing the foreclosed homes can be largely recovered. There
can be no assurance that the Company's future results with respect to the payoff
and resale of repossessed homes will be consistent with its past experience. See
Note 5 to the Consolidated Financial Statements in the Company's Annual Report
to Shareholders.
INSURANCE OPERATIONS. The Company acts as agent on physical damage, family
protection, and home buyer protection plan insurance policies written by
unaffiliated insurance companies (ceding companies) for purchasers of its
manufactured homes. During the fiscal year ended June 30, 1999, the Company
acted as the agent on physical damage, family protection, and home buyer
protection policies on approximately 69%, 54%, and 76%, 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.
8
<PAGE> 9
MANUFACTURED HOUSING COMMUNITIES
The Company owns and operates 75 manufactured home communities in 12 states.
These communities provide attractive living environments to residents leasing
sites for manufactured homes, many of which are built and sold by the Company.
In addition, these communities also lease sites to residents who already own
their homes. Some communities also lease or rent Company-owned manufactured
homes and the sites.
In fiscal 1999 the Communities group purchased or developed 383 home sites in 4
communities and added 361 sites at existing locations, bringing total sites
owned to 19,708 at June 30, 1999, a 4% increase from the prior year. See "Item
2. Properties." Communities' overall revenues were up 11.5% in 1999. Rental
revenues rose 18.8% and sales increased 2.5%. The following table lists the
number of community sites owned and the aggregate occupancy rate at the end of
the last three fiscal years:
<TABLE>
<CAPTION>
JUNE 30,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Home sites owned 19,708 18,964 17,797
Occupancy rate 73% 72% 70%
</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 specifications.
A variety of laws affect the sale of manufactured homes on credit by the
Company. The Federal Consumer Credit Protection Act (Truth-in-Lending) and
Regulation Z (issued by the Board of Governors of the Federal Reserve System)
require written disclosure of information relative to such credit sales,
including the amount of the annual percentage rate and the finance charge. The
Federal Fair Credit Reporting Act also requires disclosure of certain
information used as a basis to deny credit. The Federal Equal Credit Opportunity
Act and Regulation B (issued by the Board of Governors of the Federal Reserve
System) prohibit discrimination against any credit applicant based on sex,
marital status, race, color, religion, national origin, age (provided the
applicant has the capacity to contract), receipt of income from any public
assistance program or the good faith exercise by the applicant of any right
under the Consumer Credit Protection Act. Regulation B establishes
administrative requirements for compliance with the Equal Credit Opportunity Act
and, among other things, requires the Company to provide a customer whose credit
request has been denied with a statement of reasons for the denial. The Federal
Trade Commission has issued or proposed various Trade Regulation Rules dealing
with unfair credit practices, collection efforts, preservation of consumers'
claims and defenses and the like. Installment sales contracts eligible for
inclusion in the GNMA Program are subject to credit underwriting requirements of
the FHA or the VA.
The movement and use of the Company's manufactured homes are subject to highway
use laws, ordinances and regulations of various federal, state and local
authorities. Such regulations may prescribe size and road use limitations and
impose lower than normal speed limits and various other requirements. The
Company's manufactured homes and its development of manufactured housing
communities are also subject to local zoning and housing regulations.
9
<PAGE> 10
The Company is subject to the Magnuson-Moss Warranty Improvement Act which
regulates the descriptions of warranties on products. The description and
substance of the Company's warranties are also subject to a variety of state
laws and regulations. Insurance agency activities are subject to state insurance
laws and regulations as determined by the particular insurance commissioner for
each state in accordance with the McCarran-Ferguson Act. Sales practices are
governed at both the federal and state level through various consumer protection
trade practices and public accommodation laws and regulations.
VPAC and VLAC are subject to insurance and other regulations of the British
Virgin Islands. MSLC and ESLC are subject to insurance and other regulations of
the Turks and Caicos Islands.
COMPETITION
The manufactured housing industry is highly competitive at the manufacturing,
retail and finance levels in terms of price, service, delivery capabilities and
product performance. There are many firms in direct competition with the
Company. The Company believes it has a competitive advantage over firms which do
not have manufacturing, retailing and financing capabilities. Since the
Company's homes are a form of low-cost housing, they compete with other forms of
such housing including apartments and conventionally-built and prefabricated
homes. Some of the Company's competitors are larger and have significant
financial resources while other competitors are quite small in relation to the
size of the Company. The capital requirements for entry into both the
manufacturing and retail segments are relatively small, with financing available
to them. The Company is not able to estimate the total number of competitors in
its marketing area.
EMPLOYEES
As of June 30, 1999, the Company employed 7,292 persons. Of these, 2,028 were
employed in retail sales, 4,169 in manufacturing, 565 in financial services, 449
in communities and 81 in executive and administrative positions. The Company
does not have any collective bargaining agreements and considers its employee
relations to be good.
ITEM 2. PROPERTIES.
The Company's Financial Services operations and executive offices are located
near Knoxville, Tennessee in a wholly-owned, two-story building with 135,000
square feet of space. The following table sets forth the properties which the
Company uses for its manufacturing operations and locations of its manufactured
housing communities. All of the buildings used for manufacturing operations are
constructed of fabricated metal on a concrete slab.
LOCATION OF PROPERTY
<TABLE>
<CAPTION>
MANUFACTURING OPERATIONS APPROXIMATE MANUFACTURING OPERATIONS APPROXIMATE
SQUARE FEET SQUARE FEET
<S> <C> <C> <C>
Owned by company Owned by company
Arizona Tennessee (continued)
El Mirage 123,000 Rutledge 87,000
Georgia Bean Station #1 114,000
Waycross 100,000 Bean Station #2 137,000
North Carolina Andersonville 128,000
Henderson 112,000 White Pine 137,000
Oxford 92,000 Texas
Richfield 194,000 Waco #1 148,000
Tennessee Waco #2 99,000
Maynardville 110,000 Bonham 117,000
Savannah #1 104,000 Sulphur Springs 113,000
Savannah #2 109,000 Leased
Ardmore 100,000 Halls, Tennessee 63,000
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
COMMUNITIES APPROXIMATE COMMUNITIES APPROXIMATE
ACRES ACRES
<S> <C> <C> <C>
Owned by company Owned by company
Arizona Tennessee
El Mirage 35 Farragut 23
Glendale 14 Knoxville (3) 147
Phoenix 47 LaVergne 76
Florida Millington 29
Gainesville (2) 132 Morristown 12
Jacksonville (5) 330 Maryville (2) 67
Kissimmee 41 Powell 23
Mulberry (2) 91 Rockford 13
Princeton 37 Sevierville 115
Tallahassee 39 Smyrna 26
Georgia Tullahoma 18
Douglasville (2) 97 Texas
Iowa Arlington 39
Carter Lake 41 Dallas (3) 130
Michigan Denton (3) 201
Kalamazoo 126 Fort Worth (4) 154
Missouri Flower Mound 18
Independence 90 Greenville 36
North Carolina Houston (3) 153
Greensboro 83 Humble 55
Oklahoma Little Elm 86
Edmond 37 Pearland 45
Enid 20 San Angelo 90
Lawton 38 San Antonio (5) 240
Midwest City 25 Schertz 71
Norman 44 Wylie (2) 179
Oklahoma City (2) 116 Virginia
South Carolina Evington 70
Columbia 97 Blacksburg 38
Florence (2) 97
</TABLE>
The Company-owned retail centers are three to four acre sites with a special
manufactured office unit serving as the sales office. The remainder of the
retail center site is devoted to the display of homes. Of the 306 retail
centers, 145 are owned and 161 occupy leased property. The Company does not
believe that any individual retail sales center property is material to its
overall business.
All of the properties described above are well maintained and suitable for the
purposes for which they are being used. The Company believes that its properties
are adequate for its near-term needs.
ITEM 3. LEGAL PROCEEDINGS.
No material legal proceedings are pending other than routine litigation
incidental to the business of the Company. The Company believes that such
proceedings will not have any material adverse effect on it or its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
No matters were submitted to shareholders during the last quarter of the fiscal
year.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) The Company's Common Stock is traded on the New York Stock Exchange. The
following table sets forth, for fiscal years 1999 and 1998, respectively, the
range of high and low closing sale prices as reported by the New York Stock
Exchange, Inc.
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
----------- -----------
Quarter Ended High Low High Low
<S> <C> <C> <C> <C>
September $ 16.35 $ 12.35 $ 15.00 $ 11.40
December 13.81 10.80 15.55 12.60
March 15.19 10.69 17.05 13.00
June 13.25 10.69 17.90 13.65
</TABLE>
(b) As of August 31, 1999, there were 12,041 holders of record (approximately
62,000 beneficial holders) of the Company's Common Stock.
(c) It is the policy of the Board of Directors of the Company to reinvest
substantially all earnings in the business. The Board of Directors initiated the
payment of cash dividends at the November 9, 1994 shareholders meeting of $.02
per share per quarter, amounting to $0.016 per share on a split-adjusted basis
following the December 1998 stock split. 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 1999 Annual Report to Shareholders are
incorporated herein by reference (page number references are to Annual Report):
ITEM 6. SELECTED FINANCIAL DATA.
Eleven Year Review on page 12.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 13-15.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk on page 14.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- Quarterly Results (unaudited) on page 12.
- Consolidated Balance Sheets on page 16.
- Report of Independent Accountants 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>
Kevin T. Clayton 36 Chief Executive Officer, President, and President, Financial Services (a)
David M. Booth 46 Executive Vice President and President, Retail Group (b)
Richard D. Strachan 57 Executive Vice President and President, Manufacturing Group (c)
Allen Morgan 52 Vice President and General Manager, Communities (d)
Amber W. Krupacs 35 Vice President Finance (e)
Greg A. Hamilton 41 Vice President and Controller (f)
</TABLE>
(a) Mr. Clayton has been President of Financial Services since 1995. Prior to
that time, he served in various management positions with the Company. In August
1997, he was named President and Chief Operating Officer of the Company. In July
1999, he was named Chief Executive Officer.
(b) Mr. Booth has been Executive Vice President of the Company since 1997 and
President of Retail since 1995. Prior to that time, he served as Executive Vice
President of Retail and in other management positions with the Company.
(c) 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. In August 1998, he was named Executive Vice President of the Company.
(d) Prior to joining the Company in 1998, as General Manager of the Communities
Group, Mr. Morgan was Superintendent of Knox County, Tennessee Schools from 1992
to 1998. In September 1999, he was named Vice President of the Company.
(e) In August 1998, Ms. Krupacs was named Vice President Finance. She joined the
Company in December 1993 as Tax Manager. From August 1998 through August 1999,
she served as Secretary.
(f) Mr. Hamilton joined the Company in February 1997 as Corporate Controller and
was named Vice President and Controller of the Company in August 1998. From 1984
to 1997, he served in various finance and accounting positions with Philips
Consumer Electronics Company.
The Company's executive officers serve at the pleasure of the Board of
Directors.
All other required information is incorporated by reference to the Company's
Proxy Statement under the heading ELECTION OF DIRECTORS.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the Company's Proxy Statement under the heading
COMPENSATION OF MANAGEMENT TABLE.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the Company's Proxy Statement under the headings
ELECTION OF DIRECTORS and PRINCIPAL SHAREHOLDER THEREOF; SECURITY OWNERSHIP OF
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Company's Proxy Statement.
13
<PAGE> 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements: (Included in Annual Report - Exhibit 13).
The following Consolidated Financial Statements of Clayton Homes,
Inc. and its subsidiaries included in Part II, Item 8 are
incorporated by reference to the 1999 Annual Report to
Shareholders for the year ended June 30, 1999.
Report of Independent Accountants.
Consolidated Balance Sheets - June 30, 1999 and 1998.
Consolidated Statements of Income - years ended June 30, 1999,
1998 and 1997.
Consolidated Statements of Shareholders' Equity - years ended
June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows - years ended June 30,
1999, 1998 and 1997.
Notes to the Consolidated Financial Statements.
3. Exhibits:
3. (a) Restated charter as amended. (F)
(b) Bylaws. (H)
4. (a) Specimen stock certificates. (H)
(b) The Company agrees to furnish to the Commission, upon
request, instruments relating to the long term debt of the
Company or its subsidiaries.
10. (a) Lease Agreement, dated June 29, 1972, as amended, between
Clayton Homes, Inc. and Dean Planters Warehouse, Inc. (A)
(subsequently assigned to CLF, a limited partnership which
includes a related party).
*(b) Clayton Homes, Inc. 1983 Stock Option Plan. (A)
*(c) Clayton Homes, Inc. 1985 Stock Option Plan. (C)
*(d) 1991 Employees Stock Option Plan. (D)
*(e) Clayton Homes, Inc. 1997 Employees Stock Incentive Plan. (G)
*(f) Director's Equity Plan. (H)
*(g) Director's Equity Plan. (H)
*(h) Director's Equity Plan. (I)
*(i) Director's Equity Plan. (E)
*(j) 1996 Outside Directors Equity Plan. (F)
14
<PAGE> 15
13. Annual Report to Shareholders for year ended June 30, 1999. (B)
21. List of Subsidiaries of the Registrant (filed herewith).
23. Consent of independent accountants (filed herewith).
27. Financial Data Schedule (for SEC use only).
- ----------
(A) Filed as Exhibits to Registration Statement on Form S-1 (SEC File No.
2-83705) and incorporated by reference thereto.
(B) For the information of the Commission only, except to the extent of
portions specifically incorporated by reference.
(C) Filed with Registration Statement on Form S-8 (SEC File No. 33-7156) and
incorporated by reference thereto.
(D) Filed with Registration Statement on Form S-8 (SEC File No. 333-83565) and
incorporated by reference thereto.
(E) Filed with the Company's Proxy Statement for the Annual Meeting of
Shareholders held November 9, 1994, and incorporated by reference thereto.
(F) Filed with the Company's Proxy Statement for the Annual Meeting of
Shareholders held November 14, 1996, and incorporated by reference thereto.
(G) Filed with the Company's Proxy Statement for the Annual Meeting of
Shareholders held November 12, 1997, and incorporated by reference thereto.
(H) Filed with the Company's Form 10K for the fiscal year ended June 30, 1998,
and incorporated by reference thereto.
(I) Filed in electronic format only. The Company will provide full written
copies of the exhibits to any eligible shareholder who may request them.
Request for copies should be mailed to Clayton Homes, Inc., Attn Investor
Relations, Box 15169, Knoxville, TN 37901.
* Management and Director's Compensation plans.
- ----------
(b) Reports on Form 8-K.
Clayton Homes, Inc./Vanderbilt Mortgage & Finance, Inc. Senior Subordinate
Pass-Through Certificates Series 1998. Filed May 21, 1999, and May 25,
1999.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Alcoa,
State of Tennessee, on September 20, 1999.
CLAYTON HOMES, INC.
By: /s/ Kevin T. Clayton
------------------------------------
Kevin T. Clayton
Chief Executive Officer, President
and President, Financial Services
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<S> <C> <C>
/s/ James L. Clayton September 20, 1999 Chairman of the Board
- ------------------------------------
James L. Clayton
/s/ Kevin T. Clayton September 20, 1999 Chief Executive Officer, President
- ------------------------------------ and President, Financial Services
Kevin T. Clayton (Principal Executive Officer)
/s/ Amber W. Krupacs September 20, 1999 Vice President Finance
- ------------------------------------
Amber W. Krupacs
/s/ Greg A. Hamilton September 20, 1999 Vice President and Controller
- ------------------------------------
Greg A. Hamilton
/s/ B. Joe Clayton September 20, 1999 Director
- ------------------------------------
B. Joe Clayton
/s/ Dan W. Evins September 20, 1999 Director
- ------------------------------------
Dan W. Evins
/s/ Wilma H. Jordan September 20, 1999 Director
- ------------------------------------
Wilma H. Jordan
/s/ John J. Kalec September 20, 1999 Director
- ------------------------------------
John J. Kalec
/s/ Thomas N. McAdams September 20, 1999 Director
- ------------------------------------
Thomas N. McAdams
/s/ C. Warren Neel September 20, 1999 Director
- ------------------------------------
C. Warren Neel
</TABLE>
16
<PAGE> 1
EXHIBIT 10(h)
1992 DIRECTORS' EQUITY PLAN
NOVEMBER 11, 1992
STOCK OPTION GRANT
PURPOSE
The purpose of the 1992 Directors' Equity Plan is to provide Clayton
Homes, Inc., Common Stock as a component of the compensation package for B. Joe
Clayton, Dan Evins, and Joseph H. Stegmayer non-employee directors of the
Company on November 11, 1992 (the "Participating Directors") in order to
strengthen the commonality of interest between the Participating Directors and
shareholders and improve the Company's ability to attract and retain talented
individuals to serve as Company directors.
STOCK OPTION AWARD TO EACH PARTICIPATING DIRECTOR
The Stock Option is a right to purchase 2,500 shares of Clayton Homes,
Inc., Common Stock at the market value at the date of grant of $22.60 (option
price), which shall be November 11, 1992.
STOCK OPTION TERMS
Each of the non-qualified stock options becomes exercisable in 20%
installments beginning one year after the date of grant and becomes exercisable
20% each year thereafter, provided, however, that the first installment of the
grant hereunder shall become exercisable six months and one day following
shareholder approval of this plan. Should a Participating Director's Board
service terminate prior to all or a portion of an option becoming exercisable,
the portion of the option not then exercisable will be canceled unless such
termination is due to death or disability. (See discussion below.) Options will
have generally a 10-year term and are not transferable by a Participating
Director other than by will or the laws of descent.
Once the stock option becomes exercisable, a Participating Director may
purchase some or all of the exercisable shares by notifying the Secretary of the
Company, in writing, of his intent to exercise and by concurrently submitting a
check in payment of the exercise cost (i.e., number of shares being exercised
times the option price).
Upon retirement from the Board or upon earlier termination as described
herein, the exercisable portion of any stock option will remain exercisable for
two years from such termination date.
DEATH OR DISABILITY
If a Participating Director's service as a director terminates because
of death or permanent disability, he (or the named beneficiary or estate) will
receive the awards
<PAGE> 2
through such termination of service. For these purposes, permanent disability
will be considered to have occurred if a Participating Director would be
eligible to receive a Primary Social Security Disability benefit under the
definition of such laws and regulations. In either event, stock options will
become immediately exercisable, if not already exercisable. Options will then
have a two-year period from the date of termination of Board service during
which it can be exercised by the beneficiary, or the estate. Should a
Participating Director die during such two-year post-termination exercise
period, the beneficiary or estate will have the greater of: (1) the remainder of
the two-year post-termination exercise period or (2) one year from the date of
death in which to exercise the stock option.
CHANGES IN CAPITALIZATION
In the event of any change in outstanding Clayton Homes, Inc., Stock
which requires an adjustment in stock options and/or stock awards under the
Company's stock incentive plans for employees, any such adjustment or
adjustments will also be made to the stock options hereunder.
AUTHORIZED SHARES
The maximum number of authorized shares which may be issued to the
Participating Directors under this Program shall be 7,500 subject to adjustment
as described in "Changes in Capitalization."
SHAREHOLDER APPROVAL
This program is subject to approval by the Company's shareholders at
the 1993 Annual Meeting.
<PAGE> 1
EXHIBIT 13
ELEVEN YEAR REVIEW
<TABLE>
<CAPTION>
(in thousands except per
share and other data) 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Net sales $1,040,668 $880,856 $822,906 $762,396 $621,351 $510,153 $384,491 $296,849 $257,557 $219,443 $208,624
Financial services
and other income 303,615 246,923 198,797 166,345 136,741 118,083 91,750 74,330 62,392 40,316 33,270
- ------------------------------------------------------------------------------------------------------------------------------------
1,344,283 1,127,779 1,021,703 928,741 758,092 628,236 476,241 371,179 319,949 259,759 241,894
Costs and expenses:
Cost of sales 705,128 598,589 559,274 521,200 431,826 357,698 267,201 206,049 176,374 153,786 147,982
SG&A 367,430 302,598 270,996 236,188 188,835 153,698 113,695 84,785 76,420 60,220 55,456
Financial services
interest 7,981 2,015 2,885 3,649 5,533 8,196 11,819 16,585 18,198 11,595 9,911
Other expenses 12,459 7,976 1,000 0 0 0 0 3,300 3,772 2,213 1,539
- ------------------------------------------------------------------------------------------------------------------------------------
1,092,998 911,178 834,155 761,037 626,194 519,592 392,715 310,719 274,764 227,814 214,888
Operating income 251,285 216,601 187,548 167,704 131,898 108,644 83,526 60,460 45,185 31,945 27,006
Interest income
(expense), net/other (5,317) 5,499 5,152 4,596 3,902 (359) (170) (317) (592) (575) (1,042)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before
income taxes 245,968 222,100 192,700 172,300 135,800 108,285 83,356 60,143 44,593 31,370 25,964
Provision for
income taxes (91,000) (84,400 ) (73,200) (65,500) (48,800) (39,000) (29,600) (20,800) (16,000) (11,500) (9,714)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before
accounting change 154,968 137,700 119,500 106,800 87,000 69,285 53,756 39,343 28,593 19,870 16,250
Cumulative effect of
accounting change 0 0 0 0 0 3,000 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $154,968 $137,700 $119,500 $106,800 $87,000 $72,285 $53,756 $39,343 $28,593 $19,870 $16,250
====================================================================================================================================
Net income per share:
Basic $1.07 $0.93 $0.81 $0.72 $0.59 $0.51 $0.39 $0.30 $0.27 $0.21 $0.17
Diluted $1.06 $0.92 $0.80 $0.72 $0.59 $0.49 $0.37 $0.29 $0.24 $0.18 $0.15
Average shares
outstanding:
Basic 145,211 148,463 148,324 148,253 147,020 141,046 136,391 130,103 106,884 94,785 95,639
Diluted 145,931 149,504 149,346 149,183 148,285 149,875 149,106 142,100 126,216 120,217 119,932
Dividends per common
share $.064 $.064 $.061 $.049 $.030 -- -- -- -- -- --
====================================================================================================================================
BALANCE SHEET DATA:
Total assets $1,417,245 $1,457,757 $1,045,761 $886,350 $761,151 $701,148 $587,032 $554,780 $488,817 $339,099 $294,754
Debt obligations 96,477 247,591 22,806 30,290 48,737 70,680 137,038 192,931 227,444 177,374 163,471
Shareholders' equity $947,768 $881,019 $754,526 $650,189 $544,187 $462,154 $348,630 $292,950 $200,992 $108,334 $87,462
KEY FINANCIAL RATIOS:
As a % of revenue:
Operating income 18.7% 19.2% 18.4% 18.1% 17.4% 17.3% 17.5% 16.3% 14.1% 12.3% 11.2%
Net income 11.5% 12.2% 11.7% 11.5% 11.5% 11.5% 11.3% 10.6% 8.9% 7.6% 6.7%
Debt as a % of
total capital 9.2% 21.9% 2.9% 4.5% 8.2% 13.3% 28.2% 39.7% 53.1% 62.1% 65.1%
OTHER DATA:
Company-owned
retail centers 306 273 245 216 192 165 143 127 123 96 99
Independent retailers 671 702 663 580 421 372 371 312 330 322 269
Manufacturing plants 19 18 17 17 16 13 13 11 10 10 10
Communities 75 71 67 64 55 46 33 20 12 9 7
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
(in thousands except per share data) Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $314,686 $319,120 $308,306 $402,171 $262,695 $251,069 $268,375 $345,640
OPERATING INCOME 53,690 56,841 57,314 83,440 46,745 48,537 49,234 72,085
NET INCOME 33,197 35,013 34,932 51,826 29,679 31,109 31,118 45,794
EARNINGS PER SHARE - BASIC $ .23 $.24 $.24 $.36 $.20 $.21 $.21 $.31
- DILUTED (a) $ .22 $.24 $.24 $.36 $.20 $.21 $.21 $.31
PRICE RANGE OF STOCK - HIGH $16.35 $13.81 $15.19 $13.25 $15.00 $15.55 $17.05 $17.90
LOW $12.35 $10.80 $10.69 $10.69 $11.40 $12.60 $13.00 $13.65
DIVIDENDS PER COMMON SHARE $.016 $.016 $.016 $.016 $.016 $.016 $.016 $.016
==============================================================================================================================
</TABLE>
(a) Earnings per share are computed independently for each of the
quarters presented. Therefore, the sum of the quarterly per share
information may not equal the annual earnings per share.
12
<PAGE> 3
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,
1999 vs 1998 1998 vs 1997
- -----------------------------------------------------------------------
<S> <C> <C>
RETAIL
Dollar sales +25.8% +7.6%
Number of retail centers +11.8% +12.4%
Dollar sales per retail
center +12.5% -4.2%
Price of home +6.8% +10.9%
- -----------------------------------------------------------------------
WHOLESALE
Dollar sales +6.8% +8.3%
Number of independent
retailers +0.6% +9.8%
Dollar sales per
independent retailer +6.2% -1.4%
Price of home +5.0% +5.7%
- -----------------------------------------------------------------------
COMMUNITIES
Dollar sales +2.5% -10.1%
Number of communities +5.8% +5.3%
Dollar sales per community -3.1% -14.6%
Price of home +4.5% +6.4%
- -----------------------------------------------------------------------
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Total revenues grew 19% on an 18% increase in Manufactured Housing
sales and a 23% rise in Financial Services and other income.
Net sales of the Retail group rose 26% to $673 million. This growth was
the result of a 12% increase in the average number of Company-owned retail
centers, a 7% increase in the average price per home, and an 18% increase in
homes sold. Multi-section homes accounted for 49% of total new homes sold versus
46% last year.
During the year, the Company opened 38 retail centers and closed five
under-performing retail centers. The Company continually evaluates specific
markets and opens, acquires, or closes retail centers as conditions warrant. Of
the 38 new openings, 15 were acquired and 23 were greenfield start-ups. Ten of
the new retail centers were opened in the fourth quarter.
Net sales of the Manufacturing group to independent retailers increased
7% to $333 million and the number of homes sold rose 2%. The average wholesale
price increased 5% principally due to a shift toward multi-section homes.
Multi-section homes accounted for 48% of total shipments versus 44% last year.
Net sales of the Communities group increased 3% to $35 million as 2%
less homes were sold while the average home selling price increased 5%. Two
acquisitions and two greenfield start-ups brought the number of communities to
75 at year end.
Financial Services revenues increased 23% mainly due to VMF, $32
million, and earned insurance premiums and commissions, $8 million. Rental and
other income increased 23% on a 19% rise in Communities rental income.
Interest and loan servicing revenues increased 42% to $166 million. The
average outstanding balance of receivables owned rose 55% to $600 million with a
weighted average interest rate of 10.3%, up from 10.2%. The average outstanding
balance of receivables sold rose 35% to $2.5 billion and the weighted average
loan service spread was 3.7% compared to 3.6%.
Financial Services interest expense increased $6 million to $8 million.
Debt collateralized by installment contract receivables dropped 28% to an
average of $13 million, and the weighted average
<PAGE> 4
interest rate increased to 10.4% from 10.1%. Loan covenants preclude prepaying
these relatively higher cost obligations.
Gross profit margins increased slightly to 32.2%.
Selling, general and administrative expenses were 35.3% and 34.4% of
net sales for the years ended June 30, 1999 and 1998, respectively. Expenses
associated with the start-up of 38 new sales centers, four additional
communities, one new plant, the reconstruction of the Waycross plant, and costs
associated with portfolio acquisitions were primary causes of the increase.
Net losses as a percentage of loans outstanding for fiscal 1999
increased to 1.4% while delinquency rates on all loans decreased to 1.9%
(excluding the purchased Access portfolio). Increases in the reserve for credit
losses and contingent liabilities were related to purchases of installment
contract receivable portfolios. The size, character and rate of change in the
credit loss and contingent liability reserves are dependent upon many factors,
including, but not limited to, origination volume, portfolio performance and
market conditions.
The changes in inventory levels at June 30, 1999, compared to June 30,
1998, are shown below in millions:
<TABLE>
<CAPTION>
MANUFACTURING Increase(decrease)
<S> <C>
Raw materials $(0.5)
Finished goods 0.4
RETAIL
Net increase of 33 Company-owned sales centers 14.1
Increase in average inventory levels at 273
Company-owned sales centers 2.0
COMMUNITIES
Inventory at four manufactured housing communities acquired
and developed during the year 0.8
Increase in average inventory levels at 71
manufactured housing communities 0.5
- ------------------------------------------------------------------------------
$17.3
==============================================================================
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Total revenues grew 10% on a 7% increase in Manufactured Housing sales
and a 24% rise in Financial Services and other income.
Net sales of the Retail group rose 8% to $535 million. This growth was
the result of a 12% increase in the average number of Company-owned retail
centers and an 11% increase in the average price per home offset partially by a
3% decline in homes sold. Multi-section homes accounted for 46% of total new
homes sold versus 40% last year.
During the year, the Company opened 33 retail centers and closed five
under-performing retail centers. The Company continually evaluates specific
markets and opens, acquires or closes retail centers as conditions warrant. Of
the 33 new openings, 22 were acquired and 11 were greenfield start-ups. Seven of
the new retail centers were opened in the fourth quarter.
Net sales of the Manufacturing group to independent retailers increased
8% to $312 million and the number of homes sold rose 2%. The average wholesale
price increased 6% principally due to a shift toward multi-section homes.
Multi-section homes accounted for 44% of total shipments versus 35% last year.
13
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net sales of the Communities group declined 10% to $34 million as 15%
less homes were sold while the average home selling price increased 6%. Four
acquisitions brought the number of communities to 71 at year end.
Financial Services revenues increased 28% mainly due to VMF, $34
million, and earned insurance premiums and commissions, $5 million. Rental and
other income increased 13% on a 21% rise in Communities rental income.
Interest and loan servicing revenues increased 31% to $117 million. The
average outstanding balance of receivables owned rose 72% to $386 million with a
weighted average interest rate of 10.2%, down from 12.2%. The average
outstanding balance of receivables sold rose 36% to $1.9 billion and the
weighted average loan service spread was 3.6% compared to 3.5%.
Financial Services interest expense decreased $.9 million, or 30%, to
$2 million. Debt collateralized by installment contract receivables dropped 29%
to an average of $19 million and the weighted average interest rate declined to
10.1% from 11.1%. Loan covenants preclude prepaying these relatively higher cost
obligations.
Gross profit margins remained consistent at 32%.
Selling, general and administrative expenses were 34.4% and 32.9% of
sales for the years ended June 30, 1998, and 1997, respectively. Expenses
associated with the start-up of 33 new sales centers, acquired communities and
initial costs of the Financial Services' MBUs were primary causes of the
increase.
Net losses as a percentage of loans outstanding for fiscal 1998
increased to .8% while delinquency rates on all loans increased to 2.2%
(excluding the purchased Access portfolio). Increases in the reserve for credit
losses and contingent liabilities were related to purchases of installment
contract receivable portfolios. The size, character and rate of change in the
credit loss and contingent liability reserves are dependent upon many factors,
including, but not limited to, origination volume, portfolio performance and
market conditions.
The changes in inventory levels at June 30, 1998, compared to June 30,
1997, are shown below in millions:
<TABLE>
<CAPTION>
MANUFACTURING Increase
<S> <C>
Raw materials $3.9
Finished goods 0.6
RETAIL
Net increase of 28 Company-owned sales centers 16.5
Increase in average inventory levels at 245
Company-owned sales centers 25.0
COMMUNITIES
Inventory at four manufactured housing communities acquired
during the year 0.1
Increase in average inventory levels at 67
manufactured housing communities 1.6
- ------------------------------------------------------------------------------
$47.7
==============================================================================
</TABLE>
FOURTH QUARTER RESULTS
The increase in revenues and net income during the fourth quarters of
fiscal 1999 and 1998 are not indicative of future operating trends but rather
reflect the seasonality of the manufactured housing industry. In recent years,
approximately 30-31% of the Company's sales have occurred in the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates meeting cash requirements with proceeds from
asset securitizations, cash provided from operations, a commercial paper conduit
facility, revolving credit lines and long-term debt. A principal strength of the
Company is its ability to access global capital markets; continued access to the
public and private capital markets is critical to the Company's ability to
continue to fund its finance operations. During the year ended June 30, 1999,
the Company raised $1.3 billion through asset securitizations.
At June 30, 1999, the Company had short- and long-term debt outstanding
of $0 and $96.5 million, respectively. Short-term debt available consists of
$150.0 million committed and $56.7
<PAGE> 6
million uncommitted lines of credit for working capital needs. Long-term debt
outstanding principally consists of $75.0 million of privately issued senior
notes, $11.6 million of installment paper collateralized debt and $9.2 million
of tax-exempt bonds.
During fiscal 1999, the Company repurchased 6.5 million shares for a
cost of $81.4 million. Under board approved repurchase programs, all shares may
be acquired, at management's discretion, over time on the open market. Shares
repurchased will be retired.
During fiscal 1999, the Company originated and acquired approximately
$1.3 billion of installment contracts and mortgage loan receivables. Additional
investments were made of approximately $10 million to acquire land or existing
manufactured housing communities and $5 million in related rental units, $18
million for opening and upgrading of Company-owned retail centers, $13 million
for construction and improvement of manufacturing facilities, and $2 million for
other fixed assets.
In fiscal 2000, the Company expects to originate approximately $1.1
billion of installment contract and mortgage loan receivables. It will invest
approximately $25 million in acquisitions or construction of manufactured
housing communities, up to $27 million for opening and upgrading Company-owned
retail centers and up to $15 million for construction and improvement of
manufacturing facilities.
MARKET RISK
The Company is exposed to market risks related to fluctuations in
interest rates on its installment paper contract receivables, excess servicing
receivable and variable rate debt, which principally consists of revolving
credit lines. The Company uses interest rate swaps to manage interest rate risk
on certain credit lines, effectively converting these to fixed rate debt.
Foreign currency and commodity price risk are not considered to have a material
impact on the Company.
As of June 30, 1999, the Company has outstanding long-term debt of
$96.5 million. There is no significant exposure to changes in interest rates on
debt obligations as the majority of its long-term debt of $86.6 million carries
fixed interest rates. Remaining long-term debt of $9.9 million carries variable
interest rates, which reprice frequently. Holding the variable rate debt
constant, each one percentage point increase in interest rates occurring on the
first day of the year would result in an increase in interest expense for the
coming year of approximately $58,000, net of tax.
The Company has variable interest rate installment paper contract
receivables of $114.5 million on June 30, 1999. Holding the outstanding
principal amount constant, each one percentage point increase in interest rates
occurring on the first day of the year would result in an increase in interest
income for the coming year of approximately $721,000, net of tax.
The Company has outstanding regular REMIC interests with variable
interest rates collateralized by fixed installment contract receivables of
$241.3 million on June 30, 1999. Holding the outstanding regular interests
amount constant, each one percentage point increase in interest rates occurring
on the first day of the year would result in a decrease in excess servicing
income for the coming year of approximately $1,520,000, net of tax.
14
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
During the year, the AICPA issued Statement of Position 98-1 (SOP
98-1), Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use, and SOP 98-5, Reporting on the Costs of Start-Up Activities. In
addition, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 137 (SFAS 137), Deferral of the Effective
Date of SFAS 133. See Note 1 of Notes to Consolidated Financial Statements for
further discussion.
EFFECTS OF INFLATION
Inflation has had an insignificant impact on the Company during the
past several years.
YEAR 2000
Management believes the majority of the Company's mission critical
systems and related software are Year 2000 compliant. The Company has executed a
plan to address potential disruptions to normal business activities related to
the Year 2000. Areas addressed by the plan include information systems (hardware
and software), non-information systems, embedded chips, and supply chain
continuance. Currently, the Company has completed its mission critical Year 2000
projects and based on the test results of these systems, management believes the
operation of the Company will not be materially impacted by the new millennium.
At this point, the Company believes that any problems relating to the Year 2000
will be manifested as minor inconveniences and reasonable precautions have been
taken to prevent major disruptions to normal business activities.
Information systems, consisting of hardware and software, have been
modified or replaced to ensure Year 2000 compliance. The Company's hardware
consists of a mainframe, networks and personal computers. All desktop computers
utilized in mission critical functions have been tested and are in compliance.
The mainframe computers are compliant with respect to the hardware and operating
systems. Many of the Company's critical software systems, such as the general
ledger, accounts payable, payroll, human resources, and credit application
tracking systems have been replaced by Year 2000 compliant packages. The Company
tested each of these software systems using a standardized testing methodology
which includes millennium testing, millennium leap year testing and cross over
year testing.
Non-information systems at corporate such as HVAC, elevator, phone,
security, vaults, and computer rooms are Year 2000 compliant as a direct result
of building a new Corporate office. Similar equipment at field locations is not
dependent on embedded chip technologies and is not considered an area of
material exposure.
The Company has completed its survey of major suppliers and vendors of
raw materials for Year 2000 compliance. The Company is not directly dependent on
electronic data interchange (EDI) for the purchase of raw materials, though some
of the Company's suppliers may be. Moreover, the bulk of raw materials (mostly
lumber) is readily available from other suppliers. Possible interruptions in the
supply chain can be circumvented by purchasing raw materials from an alternate
local supplier. Responses from the Company's surveys provide assurance that our
critical suppliers, including Financial Services providers, will be compliant.
Through June 30, 1999, the Company has incurred approximately $250,000
in costs associated with Year 2000 compliance. The total costs are not expected
to exceed $500,000 or to have a material impact on the Company's financial
position, results of operations, or cash flows in future periods. Most of the
hardware, software, and non-information system replacements have been due to
growth of the Company and Year 2000 compliance is a by-product of the
replacement systems. The custom written software is addressed by the in-house
programming staff and contract programming services. Most costs directly
associated with Year 2000 compliance were incurred during fiscal 1999.
Contingency plans, both short-term and long-term, for critical
processes for each business unit have been developed. To mitigate any unexpected
problems with the Year 2000, plans could include but are not limited to: (1)
rapid transitions to alternative suppliers of services and materials, (2)
replacement of errant equipment or software, (3) manual ledgers, (4) increased
work hours by Company personnel, (5) temporary personnel, (6) outsourcing and
(7) routine backup of critical data to different platforms. While contingency
plans have been developed, opportunities for refinement and improvements will be
incorporated into each business unit's contingency plan throughout 1999. Should
the Company be required to execute a long-term contingency plan, an adverse
material effect to operations could result.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
<PAGE> 8
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
could have a material impact on the Company's results of operations, liquidity
or financial condition. The Year 2000 project is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its critical
suppliers and financial services providers. The Company believes that, with the
implementation of new business systems and completion of the project as
scheduled, the exposure to significant interruptions of normal operations should
be reduced.
FORWARD LOOKING STATEMENTS
Certain statements in this annual report are forward looking as defined
in the Private Securities Litigation Reform Law. These statements involve
certain risks and uncertainties that may cause actual results to differ
materially from expectations as of the date of this report. These risks fall
generally within three broad categories consisting of industry factors,
management expertise, and government policy and economic conditions. Industry
factors include such matters as potential periodic inventory adjustments by both
captive and independent retailers, general or seasonal weather conditions
affecting sales and revenues, catastrophic events impacting insurance reserves,
cost of labor and/or raw materials and industry consolidation trends creating
fewer, but stronger competitors capable of sustaining competitive pricing
pressures.
Management expertise is affected by management's overall ability to
anticipate and meet consumer preferences, maintain successful marketing
programs, continue quality manufacturing output, keep a strong cost management
oversight, meet the Year 2000 compliance plan, and project stable gain on sale
accounting assumptions. Lastly, management has the least control over government
policy and economic conditions such as prevailing interest rates, capital market
liquidity, government monetary policy, stable regulation of manufacturing
standards, consumer confidence, favorable trade policies, and general prevailing
economic and employment conditions.
15
<PAGE> 9
Clayton Homes, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
(in thousands) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,680 $ 1,731
Trade receivables 24,998 21,332
Other receivables, principally installment contracts and residual interests, net of
reserves for credit losses and unamortized discounts of $9,133 and $30,291,
respectively 682,890 815,865
Inventories 184,444 167,113
Securities available-for-sale 19,047 20,361
Restricted cash 100,127 86,176
Property, plant and equipment 291,503 261,549
Deferred income taxes 20,505 11,756
Other assets 91,051 71,874
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $1,417,245 $1,457,757
==============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 130,579 $ 138,557
Debt obligations 96,477 247,591
Other liabilities 242,421 190,590
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 469,477 576,738
==============================================================================================================================
Shareholders' equity
Preferred stock, $.10 par value, authorized 1,000 shares, none issued -- --
Common stock, $.10 par value, authorized 200,000 shares, issued 142,373
at June 30, 1999, and 148,520 at June 30, 1998 14,237 14,852
Additional paid-in capital 85,236 162,413
Retained earnings 849,116 703,754
Other comprehensive income (821) --
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 947,768 881,019
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,417,245 $1,457,757
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Clayton Homes, Inc. and Subsidiaries at June 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Knoxville, Tennessee
August 5, 1999
16
<PAGE> 10
Clayton Homes, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30,
(in thousands except per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net sales $ 1,040,668 $ 880,856 $ 822,906
Financial services 233,848 190,204 148,515
Rental and other income 69,767 56,719 50,282
- -----------------------------------------------------------------------------------------------
1,344,283 1,127,779 1,021,703
- -----------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 705,128 598,589 559,274
Selling, general and administrative 367,430 302,598 270,996
Financial services interest 7,981 2,015 2,885
Provision for credit losses 12,459 7,976 1,000
- -----------------------------------------------------------------------------------------------
1,092,998 911,178 834,155
- -----------------------------------------------------------------------------------------------
Operating income 251,285 216,601 187,548
Interest income (expense), net / other (5,317) 5,499 5,152
- -----------------------------------------------------------------------------------------------
Income before income taxes 245,968 222,100 192,700
Provision for income taxes (91,000) (84,400) (73,200)
- -----------------------------------------------------------------------------------------------
Net income $ 154,968 $ 137,700 $ 119,500
===============================================================================================
Net income per common share:
Basic $ 1.07 $ 0.93 $ 0.81
Diluted $ 1.06 $ 0.92 $ 0.80
Average shares outstanding:
Basic 145,211 148,463 148,324
Diluted 145,931 149,504 149,346
- -----------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total Additional Other
Shareholders' Common Paid-in Retained Comprehensive
(in thousands except per share data) Equity Stock Capital Earnings Income
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 650,189 $ 14,858 $ 169,293 $ 466,038 $ --
Net income 119,500 -- -- 119,500 --
Purchase of 1,050 shares of common stock (11,349) (105) (11,244) -- --
Dividends declared ($.061 per common share) (9,015) -- -- (9,015) --
Issuances related to stock incentive, employee
benefit plans and other 5,201 59 5,142 -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 754,526 14,812 163,191 576,523 --
Net income 137,700 -- -- 137,700 --
Purchase of 713 shares of common stock (9,506) (71) (9,435) -- --
Dividends declared ($.064 per common share) (10,469) -- -- (10,469) --
Issuances related to stock incentive, employee
benefit plans and other 8,768 111 8,657 -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 881,019 14,852 162,413 703,754 --
COMPREHENSIVE INCOME
NET INCOME 154,968 -- -- 154,968 --
UNREALIZED LOSS ON SECURITIES AVAILABLE-
FOR-SALE (821) -- -- -- (821)
-------
TOTAL COMPREHENSIVE INCOME 154,147
PURCHASE OF 6,465 SHARES OF COMMON STOCK (81,394) (647) (80,747) -- --
DIVIDENDS DECLARED ($.064 PER COMMON SHARE) (9,606) -- -- (9,606) --
ISSUANCES RELATED TO STOCK INCENTIVE, EMPLOYEE
BENEFIT PLANS AND OTHER 3,602 32 3,570 -- --
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999 $ 947,768 $ 14,237 $ 85,236 $ 849,116 $(821)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 11
Clayton Homes, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
(in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $154,968 $137,700 $119,500
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 17,795 14,733 13,058
Gain on sale of installment contract receivables, net of
amortization (15,089) (31,699) (21,541)
Provision for credit losses 12,459 7,976 1,000
Deferred income taxes (8,267) (25,830) 8,394
Increase in other receivables, net (103,070) (25,700) (27,383)
Decrease (increase) in inventories (17,331) (47,679) 4,846
Increase in accounts payable, accrued liabilities, and other 24,687 55,429 39,249
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by operations 66,152 84,930 137,123
Origination of installment contract receivables (1,085,484) (801,865) (646,624)
Proceeds from sales of originated installment contract receivables 1,030,442 705,420 614,588
Principal collected on originated installment contract receivables 80,610 50,260 39,668
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 91,720 38,745 144,755
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of installment contract receivables (253,625) (520,912) (206,937)
Proceeds from sales of acquired installment contract receivables 389,866 230,311 167,138
Principal collected on acquired installment contract receivables 73,200 27,703 3,439
Acquisition of property, plant and equipment (47,749) (62,210) (42,859)
Increase in restricted cash (13,951) (15,179) (594)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 147,741 (340,287) (79,813)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (9,606) (10,469) (9,015)
Net borrowings (repayment) on credit facilities (227,873) 227,873 --
Proceeds from (repayment of) long-term debt 76,759 (3,088) (7,484)
Issuance of stock for incentive plans and other 3,602 8,768 5,201
Repurchase of common stock (81,394) (9,506) (11,349)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (238,512) 213,578 (22,647)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 949 (87,964) 42,295
Cash and cash equivalents at beginning of year 1,731 89,695 47,400
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,680 $ 1,731 $ 89,695
===========================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 19,976 $ 4,285 $ 3,912
Income taxes $ 95,931 $ 93,832 $ 62,269
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 12
Clayton Homes, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The consolidated financial statements include the accounts of Clayton
Homes, Inc. (CHI) and its wholly and majority-owned subsidiaries. CHI and its
subsidiaries are collectively referred to herein as the Company. The Company is
a vertically-integrated manufactured housing company headquartered in Knoxville,
Tennessee. Employing approximately 7,300 people and operating in 31 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 10 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 home buyer enters into an
installment sales contract; construction of the home is complete; the home buyer
has inspected and accepted the home; and title has passed to the retail home
buyer. Most of these installment sales contracts, which are normally payable
over 84 to 360 months, are financed by Vanderbilt Mortgage and Finance, Inc.
(VMF), the Company's financing subsidiary.
The Company acts as agent on physical damage, family protection and
home buyer protection plan insurance policies written by unaffiliated insurance
companies (ceding companies) for the purchasers of manufactured homes. The
insurance policies are in turn reinsured by certain subsidiaries of the Company.
Premiums from policies represent short-duration contracts with terms of one to
10 years and are deferred and recognized as revenue over the term of the
contracts. Claims expenses are recorded as insured events occur. Expenses are
matched to revenue over the terms of the contracts by means of deferral and
amortization of policy acquisition costs. Such costs include commissions,
premium taxes and ceding fees, which vary with and are directly related to the
production of insurance policies and are deferred and amortized over the terms
of the related policies.
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 1999, $1.3 billion in installment contract
receivables and mortgage loan receivables were securitized with VMF retaining
servicing. In May 1998, the Company purchased $245 million in loans from Access
Financial Lending Corporation and contracted to service an additional $267
million portfolio. In February 1999, the Company purchased $94 million in loans
from United Companies Funding Corporation.
Installment contract receivables held for sale of $467 million and $655
million in 1999 and 1998, respectively, are included in other receivables and
are carried at the lower of aggregate cost or market. Certain of the installment
contract receivables are purchased in bulk at a discount. The purchase discounts
are allocated between unamortized discount and the reserves for credit losses
and contingent liabilities 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 reserves for credit losses and contingent liabilities and
unamortized discount are made to reflect changes in the estimated collectibility
of each portfolio purchased.
VMF provides servicing for investors in installment contract
receivables. Total contracts serviced at June 30, 1999, and 1998, including
contracts held for investment, were approximately $3.5 billion and $2.9 billion,
respectively. Most of the installment contract receivables are with borrowers in
the east, south and southwest portions of the United States and are
collateralized by manufactured homes. Interest income on installment contract
receivables is recognized by a method which approximates the interest method.
Service fee income is recognized as the service is performed. The Company
accrues for obligations related to cash collections from sold and serviced only
loans and remits these collections to investors on a monthly basis. See
"Investors payable" in Note 11.
<PAGE> 13
The Company utilizes a financial components approach to transfers and
servicing of financial assets, requiring that the carrying amount of the
receivables sold be allocated between the assets sold and the assets
(liabilities) created, if any, 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 servicing asset at June 30, 1999, and 1998, is as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Servicing asset beginning balance $ 13,043 $ 5,644
Servicing asset recognized 20,718 10,823
Amortization (6,737) (3,424)
- --------------------------------------------------------------------
Servicing asset ending balance $ 27,024 $ 13,043
</TABLE>
The balance represents the estimated fair value of the aggregate
servicing assets at June 30, 1999. 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. The servicing assets are amortized using
the effective interest method over the estimated weighted average life of the
underlying securities.
The residual interests in the installment receivables sold are
classified as trading securities (as defined by SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities) and changes in their value
are recorded as adjustments to income in the period of change. The Company
assesses the fair value of the residual interests periodically. Amortization of
the residual interest balances is calculated using the effective interest method
over the estimated weighted average life of the underlying securities and is
reflected as a reduction of net revenues.
19
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash Equivalents
For purposes of the statements of cash flows, all unrestricted highly
liquid debt instruments purchased with an original maturity of three months or
less are considered to be cash equivalents.
Investment Securities
During the quarter ended March 31, 1999, the Company adopted SFAS No.
134, Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. The standard
requires that the Company classify mortgage-backed securities and other
beneficial interests retained after a securitization in accordance with SFAS No.
115. The effect of the adoption was to reclassify certain manufactured housing
contract senior/subordinate pass-thru certificates totaling $20.4 million
(aggregate cost) from the held-to-maturity category to the available-for-sale
category. Accordingly, these securities are stated at fair value. In accordance
with SFAS No. 130, Reporting Comprehensive Income, net unrealized holding gains
and losses are reported as a separate component of other comprehensive income,
net of tax, until realized. The fair value of these securities is estimated
based on quoted market prices, when available. If not available, fair value is
estimated using quoted market prices for similar financial instruments. These
securities can be reasonably expected to mature in 6-10 years.
Inventories
New homes and raw materials are valued at the lower of cost or market,
using the last-in, first-out (LIFO) method of inventory valuation.
Previously-owned manufactured homes are valued at estimated wholesale prices,
which are not in excess of net realizable value.
Property, Plant and Equipment
Land and improvements, buildings, and furniture and equipment are
valued at cost. Major renewals and improvements are capitalized while
replacements, maintenance and repairs, which do not improve or extend the life
of the respective assets, are expensed currently. When depreciable assets are
sold or retired, the cost and related accumulated depreciation are removed from
the accounts, and any gain or loss is included in earnings for the period.
Depreciation is computed primarily by the straight-line method over the
estimated useful lives of the respective assets ranging from three to 40 years.
The Company follows SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
recognition of impairment losses for long-lived assets whenever events or
changes in circumstances result in the carrying amount of the assets exceeding
the sum of the expected future undiscounted cash flows associated with such
assets. The measurement of the impairment losses recognized is based on the
difference between the fair values and the carrying amounts of the assets. SFAS
121 also requires that long-lived assets held for sale be reported at the lower
of carrying amount or fair value less cost to sell. The Company has not
experienced such losses.
Reserves for Credit Losses and Contingent Liabilities
Reserves for credit losses and contingent liabilities 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.
Interest Rate Swaps
The Company uses interest rate swaps to assist in managing interest
incurred on its short-term variable rate debt. The difference between amounts
received and amounts paid under such agreements is recorded as a reduction of,
or addition to, interest expense as incurred over the life of the swap.
Restricted Cash
Restricted cash primarily represents reserves required by: 1) trust
account cash balances required by certain VMF servicing agreements, and 2)
insurance reserves required by escrow or trust agreements.
<PAGE> 15
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.
Other
Per share and share data have been retroactively adjusted to reflect
5-for-4 stock splits in December 1998 and December 1996. Certain
reclassifications have been made to the 1997 and the 1998 financial statements
to conform to the 1999 presentation.
New Accounting Pronouncements
In March 1998, the AICPA issued Statement of Position 98-1 (SOP 98-1),
Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 is effective for financial statements for the years beginning
after December 15, 1998. SOP 98-1 provides guidance on accounting for computer
software developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. The Company will
adopt the provisions of SOP 98-1 in its fiscal year ending June 30, 2000, and
does not expect such adoption to have a material effect on the Company's
reported results of operations, financial position, or cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities, which is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 provides guidance on the financial reporting of
start-up and organization costs. It requires start-up activities and
organization costs to be expensed as incurred. The adoption of this standard is
not expected to have a material impact on the Company's reported results of
operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives
and Financial Instruments and Hedging Activities. SFAS 133 establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In July 1999, the FASB issued SFAS No. 137, Deferral of the Effective Date of
SFAS 133, which amends SFAS 133 by deferring the effective date to fiscal years
beginning after June 15, 2000. The adoption of SFAS 133 is not expected to have
a material impact on the Company's reported results of operations, financial
position or cash flows.
20
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - INVENTORIES
Inventories at June 30, 1999, and 1998, are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- -----------------------------------------------------
<S> <C> <C>
Manufactured homes
New $125,456 $114,577
Previously-owned 40,956 33,991
Raw materials 18,032 18,545
- -----------------------------------------------------
$184,444 $167,113
=====================================================
</TABLE>
If the first-in, first-out (FIFO) method of inventory valuation had
been used, inventories would have been higher by $20,591,000 and $18,331,000 at
June 30, 1999, and 1998, respectively.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 1999, and 1998, are as
follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- -----------------------------------------------------
<S> <C> <C>
Land and improvements $183,449 $166,692
Buildings 147,252 126,085
Furniture and equipment 42,392 34,964
- -----------------------------------------------------
373,093 327,741
Less: accumulated
depreciation and
amortization (81,590) (66,192)
- -----------------------------------------------------
$291,503 $261,549
=====================================================
</TABLE>
Depreciation charged to operations was $17,795,000, $14,733,000, and
$13,058,000 for each of the years ended June 30, 1999, 1998 and 1997,
respectively.
NOTE 4 - DEBT OBLIGATIONS
Debt obligations at June 30, 1999, and 1998, is summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Lines of credit $ -- $227,873
Senior notes, 6.25%, due December 2003 75,000 --
Debt collateralized by installment contract
receivables, average effective rate 10.19%, due
through 2004 11,625 15,557
Tax-exempt bonds, effective rate of 3.75% on June 30,
1999, due through 2028 9,230 4,030
Other notes payable 622 131
- --------------------------------------------------------------------------------------
Total $96,477 $247,591
======================================================================================
</TABLE>
Annual maturities of long-term debt as of June 30, 1999, are as follows:
<TABLE>
<CAPTION>
(in thousands)
----------------------------------------------------------------------
<S> <C> <C> <C>
2000 $ 3,252 2003 2,097
2001 3,144 2004 75,325
2002 3,139 Thereafter 9,520
</TABLE>
In December 1998, the Company issued $75.0 million of 6.25% Senior
Subordinated Notes due December 2003 (the "6.25% Notes"), with interest payable
each June and December. The 6.25% Notes are redeemable at the option of the
Company, in whole, at 100% of the principal amount plus a make-whole premium at
any time prior to December 30, 2003. The 6.25% Notes are not subject to any
sinking fund requirements. The net proceeds from this offering were used to
repay borrowings under the Company's credit facilities.
In January 1999, the Company entered into a committed one-year $300.0
million commercial paper conduit facility to facilitate interim sales of
manufactured housing contracts. Commitment fees are payable quarterly on the
unused portion of the facility.
<PAGE> 17
In May 1999, the Company repaid and canceled a one-year committed line
of credit for $200.0 million entered into July 1998, primarily to facilitate the
purchase and warehousing of manufactured housing loan portfolios.
The Company has a $150.0 million five-year revolving credit facility
with its bank group. This line is priced on LIBOR plus rates ranging from .15%
to .30%; commitment fees are payable quarterly on the unused portion of the
facility.
The Company's tax-exempt manufacturing facilities' bonds carry no
sinking fund requirements and bear interest at weekly adjustable rates.
The preceding facilities are governed by various financial covenants
which require maintenance of certain financial ratios and are uncollateralized.
In addition, the Company has uncommitted lines of credit amounting to $56.7
million with several banks, priced at LIBOR plus rates ranging from .10% to
.40%. These lines are subject to periodic review by each bank and may be
canceled by the Company at any time.
Under certain interest rate swap agreements, the Company agrees with
other parties to exchange the difference between fixed rate and variable rate
interest amounts calculated by reference to an agreed upon notional principal
amount. At June 30, 1999, the Company's interest rate swap agreements have an
aggregrate notional amount of $150.0 million and fix the interest rate on the
Company's debt to rates ranging from 5.07% to 5.62%. If the Company had
terminated all swaps as of June 30, 1999, it would have received a net amount of
approximately $390,000 based on quoted market values from the other parties
holding the swaps.
NOTE 5 - RESERVES FOR CREDIT LOSSES AND CONTINGENT LIABILITIES
An analysis of the reserves for losses on installment contract
receivables and contingent liabilities for the years ended June 30, 1999, 1998,
and 1997, are as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 35,828 $ 8,051 $ 7,766
Provision 12,459 7,976 1,000
Charges, net of recoveries applicable to
installment contract receivables
Purchased (13,384) (2,762) (2,337)
Other (11,951) (3,981) 1,622
Reserves transferred from unamortized
discounts (1,981) 2,318 --
Reserves associated with receivables
purchased 23,304 24,226 --
- -------------------------------------------------------------------------------------
Balance, end of year $ 44,275 $ 35,828 $ 8,051
=====================================================================================
Reserves for credit losses $ 8,541 $ 29,964 $ 4,917
Reserve for contingencies 35,734 5,864 3,134
- -------------------------------------------------------------------------------------
$ 44,275 $ 35,828 $ 8,051
=====================================================================================
</TABLE>
21
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reserves for credit losses are netted against receivables and the
reserve for contingencies is included in other liabilities on the consolidated
balance sheets. The Company is contingently liable as guarantor on installment
contract receivables sold with recourse. At June 30, 1999, and 1998, the
outstanding principal balances of these receivables totaled approximately $164
million and $188 million, respectively. The associated contingent liability is
approximately $22 million and $23 million, respectively. There were no
receivables sold with recourse in 1999, 1998 and 1997.
NOTE 6 - SHAREHOLDERS' EQUITY
Stock Option Plan
In 1983, 1985, 1991, and 1997, the Company established Stock Option
Plans for a total of 17,021,036 shares of common stock which provide for
granting "incentive stock options" or "non-qualified options" and stock
appreciation rights to officers and key employees of the Company. In addition,
non-management members of the Board of Directors have, with shareholder approval
of prices and provisions for exercise, been granted options to purchase shares
of common stock. The option prices were established at not less than the fair
market value as of the date of grant. Options are exercisable after one or more
years and expire no later than 10 years from the date of grant. Activity and
price information regarding the plans are as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Avg Stock Avg
Stock Option Exercise Options Exercise
Shares Price Range Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1996 4,155,141 $ 1.10 - $13.70 $ 6.99 1,431,754 $5.32
Granted 712,105 $10.32 - $12.80 $11.50
Exercised (201,430) $ 1.10 - $ 8.30 $ 3.50
Canceled (248,868) $ 1.42 - $13.70 $ 9.47
- ---------------------------------------------------------------------------------------------------------------
Balance June 30, 1997 4,416,948 $ 1.10 - $13.70 $ 7.74 1,888,935 $6.32
Granted 1,529,856 $ 8.19 - $12.60 $11.61
Exercised (1,193,195) $ 1.10 - $13.70 $ 6.21
Canceled (450,571) $ 1.41 - $13.70 $ 9.90
- ---------------------------------------------------------------------------------------------------------------
Balance June 30, 1998 4,303,038 $ 1.41 - $13.70 $ 9.32 1,187,395 $7.29
GRANTED 1,477,846 $ 8.19 - $15.75 $12.73
EXERCISED (162,002) $ 1.41 - $13.70 $ 5.03
CANCELED (757,731) $ 1.76 - $15.75 $11.55
- ---------------------------------------------------------------------------------------------------------------
BALANCE JUNE 30, 1999 4,861,151 $ 1.41 - $15.75 $10.15 1,449,866 $8.13
===============================================================================================================
</TABLE>
Options available for future grant at June 30, 1999, and 1998, were
5,077,035 and 6,118,238, respectively. Options were held by 754 persons at June
30, 1999.
The following table summarizes information about the plans' stock
options at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- ----------------------------------
Number Weighted Avg Weighted Number Weighted
Range of Outstanding Remaining Avg Exercise Exercisable Avg Exercise
Exercise Price at 6/30/99 Contractual Life Price at 6/30/99 Price
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.41 - $ 2.16 179,016 0.77 years $ 1.54 101,575 $ 1.58
$ 3.64 - $ 5.05 303,598 2.49 years $ 4.03 136,809 $ 3.83
$ 7.22 - $10.32 1,807,093 5.41 years $ 8.25 924,888 $ 7.85
$11.50 - $15.75 2,571,444 8.29 years $12.81 286,594 $13.38
</TABLE>
The Company has elected to continue following Accounting Principles
Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock option plans rather than the
alternative fair value accounting provided for under SFAS 123, Accounting for
Stock-Based Compensation. Under APB 25, because the exercise price of the
Company's employee and director stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized in
the accompanying financial statements. Pro forma information regarding net
income and net income per common share is required by SFAS 123 and has been
determined as if the Company has accounted for its stock options under the fair
value method of that standard. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting periods. The pro forma results do not
<PAGE> 19
purport to indicate the effects on reported net income for recognizing
compensation expense which are expected to occur in future years. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
June 30,
(in thousands except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $154,968 $137,700 $119,500
Net income - pro forma 153,610 136,643 118,481
Net income per diluted common share - as reported $1.06 $0.92 $0.80
Net income per diluted common share - pro forma 1.05 0.91 0.79
- --------------------------------------------------------------------------------------------------------------------------
</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 1997 to 1999; dividend yields ranging
from 0.41% to 0.78% with a weighted average yield of 0.55%; expected volatility
of 0.293%, risk-free interest rates ranging from 5.70% to 5.99% with a weighted
average rate of 5.90%; and expected lives ranging from 7.50 to 9.75 years with a
weighted average life of 7.74 years. The weighted average grant date fair value
of options granted in fiscal years 1999, 1998 and 1997, was $5.66, $5.02, and
$4.67 per share, respectively.
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The components
of deferred tax assets and liabilities at June 30, 1999, and 1998, are as
follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
Reserves for credit losses and contingencies
and discounts $ 11,618 $ 4,064
Insurance reserves 9,717 9,162
Unearned premiums 8,001 6,355
Residual interest in installment contract
receivables 6,607 5,652
- ----------------------------------------------------------------------------------
Total deferred tax assets $35,943 $25,233
==================================================================================
Deferred costs $ (5,931) $ (4,789)
Other (9,507) (8,688)
- ----------------------------------------------------------------------------------
Total deferred tax liabilities $(15,438) $(13,477)
- ----------------------------------------------------------------------------------
Net deferred tax asset $20,505 $11,756
==================================================================================
</TABLE>
22
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income tax is composed of the following:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provisions:
Federal $92,706 $103,336 $58,591
State 6,561 6,894 6,215
- -----------------------------------------------------------------------------------------------------
Total current $99,267 $110,230 $64,806
- -----------------------------------------------------------------------------------------------------
Deferred tax provision / (benefit) (8,267) (25,830) 8,394
- -----------------------------------------------------------------------------------------------------
Total $91,000 $84,400 $73,200
- -----------------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1999, a deferred tax benefit of $482,000 was allocated
directly to shareholders' equity for the unrealized loss on securities
available-for-sale.
The provision for income tax reflected in the financial statements
differs from income taxes calculated at the statutory federal income tax rate of
35% in 1999, 1998 and 1997, as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at the statutory rate $86,089 $77,735 $67,451
State income taxes, net of federal benefit 4,265 4,481 4,040
Other, net 646 2,184 1,709
- -----------------------------------------------------------------------------------
Total $91,000 $84,400 $73,200
===================================================================================
</TABLE>
NOTE 8 - 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 paid and
accrued were $3,162,000, $2,488,000, and $2,874,000 for the years ended June 30,
1999, 1998 and 1997, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Certain operating properties are rented under non-cancelable operating
leases which expire at various dates through 2009. Total rental expense under
operating leases was $5,210,000 in 1999, $4,440,000 in 1998, and $3,705,000 in
1997. The following is a schedule of minimum rental commitments under
non-cancelable operating leases, primarily for retail centers, in effect at June
30, 1999:
<TABLE>
<S> <C> <C> <C> <C> <C>
2000 $4,528,000 2002 $3,006,000 2004 $1,376,000
2001 3,798,000 2003 2,227,000 Thereafter 3,696,000
</TABLE>
Institutions financing independent retailer purchases require the
Company to execute repurchase agreements. As a result of these agreements, the
Company is contingently liable for repurchasing homes in the event of a default
by the dealer to the lending institution. These agreements are customary in the
manufactured housing industry, and the Company's losses in the past have not
been significant. The maximum potential repurchase obligation is approximately
$70 million at June 30, 1999, excluding any resale value.
At June 30, 1999, the Company has outstanding letters of credit,
primarily related to insurance reserves and performance guarantees related to
asset backed securizations of approximately $93 million and $206 million,
respectively. The Company believes a significant loss from any such guarantee is
remote. Please see discussion of Guarantor of Installment Contract Receviables
at Note 5.
NOTE 10 - BUSINESS SEGMENT INFORMATION
Effective June 30, 1999, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which supersedes
previously issued segment reporting disclosure rules and requires reporting of
segment information that is consistent with the way in which management operates
the Company. Its adoption did not have any impact on the Company's financial
position or the result of operations. The segment disclosures presented for
prior years have been restated to conform with the presentation adopted for the
current year. The Company has identified four major business segments: Retail,
Manufacturing, Financial Services, and Communities. The Retail group purchases
homes from the Company's manufacturing operations and
<PAGE> 21
third party manufacturers to sell to retail customers. The Manufacturing group
builds homes for Company-owned and independent retailers. Financial Services
provides retail financing of manufactured homes, reinsures risk on family
protection, physical damage, and homebuyer protection plan insurance policies,
and offers certain specialty finance products. Communities owns and operates
manufactured housing communities. Income from operations consists of total
revenues less cost of sales and operating expenses. Identifiable assets are used
in the operation of each business segment.
Information concerning operations by business segment follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Retail $ 737,044 $ 590,256 $ 542,279
Manufacturing 654,471 599,561 540,485
Financial Services 198,527 158,828 125,914
Communities 78,902 70,740 70,244
Intersegment sales (324,661) (291,606) (257,219)
- -------------------------------------------------------------------------------------
$ 1,344,283 $ 1,127,779 $ 1,021,703
=====================================================================================
Income from operations:
Retail $ 66,364 $ 59,272 $ 53,102
Manufacturing 72,377 65,437 61,352
Financial Services 117,385 99,685 76,341
Communities 15,850 14,133 14,332
Eliminations/Other (20,691) (21,926) (17,579)
- -------------------------------------------------------------------------------------
$ 251,285 $ 216,601 $ 187,548
=====================================================================================
Interest:
Interest expense (11,995) (2,270) (1,027)
Interest revenue/Other income 6,678 7,769 6,179
- -------------------------------------------------------------------------------------
Income before taxes $ 245,968 $ 222,100 $ 192,700
=====================================================================================
Identifiable assets:
Retail $ 247,009 $ 208,064 $ 152,728
Manufacturing 94,773 80,487 77,133
Financial Services 901,769 1,003,528 610,639
Communities 177,723 166,871 147,815
Eliminations/Other (4,029) (1,193) 57,446
- -------------------------------------------------------------------------------------
$ 1,417,245 $ 1,457,757 $ 1,045,761
=====================================================================================
Depreciation and Amoritization:
Retail $ 4,684 $ 3,725 $ 2,866
Manufacturing 5,478 5,016 4,427
Financial Services 235 121 --
Communities 6,412 5,418 4,710
Eliminations/Other 986 453 1,055
- -------------------------------------------------------------------------------------
$ 17,795 $ 14,733 $ 13,058
=====================================================================================
Capital expenditures:
Retail $ 18,152 $ 15,147 $ 7,389
Manufacturing 12,971 5,721 8,368
Financial Services 576 931 --
Communities 14,703 31,316 21,455
Eliminations/Other 1,347 9,095 5,647
- -------------------------------------------------------------------------------------
$ 47,749 $ 62,210 $ 42,859
=====================================================================================
</TABLE>
23
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - OTHER ASSETS AND LIABILITIES
At June 30, 1999, and 1998, other assets and liabilities consisted of:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Other assets:
Interest receivable and future servicing rights $ 56,674 $ 38,157
Deferred policy acquisition costs 16,693 13,180
Prepaid expenses and other 17,684 20,537
- ------------------------------------------------------------------------------
$ 91,051 $ 71,874
==============================================================================
Other liabilities:
Investors payable $ 89,925 $ 86,804
Reserve for contingencies (Note 5) 35,734 5,864
Escrow deposits 11,378 10,779
Unearned insurance premiums 82,199 65,048
Other 23,185 22,095
- ------------------------------------------------------------------------------
$242,421 $190,590
==============================================================================
</TABLE>
NOTE 12 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires that the Company disclose the estimated fair values of its financial
instruments. The following methodologies and assumptions were used by the
Company to estimate its fair value disclosures for financial instruments.
Fair value estimates are made at a specific point in time, based on
relevant market data and information about the financial instrument. The
estimates do not reflect any premium or discount that could result from offering
for sale in a single transaction the Company's entire holdings of a particular
financial instrument. The lack of uniform valuation methodologies introduces a
greater degree of subjectivity to these estimated fair values. Comparability to
financial instruments between similar companies may not be reasonable because of
varying assumptions concerning the estimates of fair value.
Cash and Cash Equivalents
The carrying values for cash and cash equivalents, including those
restricted by agreement, approximate the fair value of the assets.
Residual Interests in Installment Contract Receivables
Residual interests in installment contract receivables are calculated
using prepayment, default and interest rate assumptions that the Company
believes are appropriate at the time of the sale of the installment contract
receivables. Projected performance is monitored after the sale. The fair value
primarily assumes an appropriate discount rate to be applied to the asset as a
whole. The Company used a discount rate and such other assumptions as it
believed to be used for similar instruments.
Contracts Held For Sale and as Collateral
Contracts held for sale are generally recent originations or purchased
portfolios which will be sold with limited or no recourse during the following
year. The Company does not charge fees to originate loans, and, as such, its
contracts have origination rates in excess of rates on the securities into which
they will be pooled. The Company estimates the fair value of the contracts held
for sale using expected future cash flows of the portfolio discounted at the
current origination rate.
The carrying values of contracts pledged as collateral to long-term
lenders are estimated using discounted cash flow analyses and interest rates
being offered for similar contracts. The carrying amount of contracts with a
variable rate of interest is estimated to be at fair value. The carrying value
of accrued interest adjusted for credit risk equals its fair value.
Debt Collateralized by Installment Contract Receivables
Debt collateralized by installment contract receivables consists
primarily of notes collateralized by contracts with maturities that coincide
with the underlying contract maturities. The fair value of these financial
instruments is based on the current rates offered to the Company for debt of
similar maturities using a discounted cash flow calculation. Loan covenants
preclude prepayment.
The carrying amounts and estimated fair values of the Company's
financial assets and liabilities are as follows:
<PAGE> 23
<TABLE>
<CAPTION>
JUNE 30, 1999 June 30, 1998
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 cash $102,807 $102,807 $ 87,907 $ 87,907
Residual interests in installment contract receivables 131,146 131,146 127,705 127,705
Contracts held for sale and as collateral, including accrued
interest receivable 486,717 482,881 673,847 661,069
Financial liabilities:
Senior notes, 6.25%, due December 2003 75,000 72,661 -- --
Debt collateralized by installment contract receivables,
average effective rate 10.19%, due through 2004 $ 11,625 $ 12,190 $ 15,557 $ 16,469
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13 - EARNINGS PER SHARE
The following reconciliation details the numerators and denominators
used to calculate basic and diluted earnings per share for the respective
periods:
<TABLE>
<CAPTION>
(in thousands except per share data) 1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $154,968 $137,700 $119,500
Average shares outstanding:
Basic 145,211 148,463 148,324
Add: common stock equivalents 720 1,041 1,022
Diluted 145,931 149,504 149,346
Earnings per share - Basic $ 1.07 $ 0.93 $ 0.81
Diluted $ 1.06 $ 0.92 $ 0.80
- ---------------------------------------------------------------------------------
</TABLE>
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company maintains an agreement to purchase certain installment
contract receivables originated or acquired by 21st Century Mortgage Corp. in
which the Company maintains a 25% ownership interest. The Company acquired
approximately $147,000,000, $192,000,000, and $102,000,000 in installment
contract receivables and received interest and other related fees totaling
approximately $2,038,000, $1,735,000, and $926,000 during fiscal 1999, 1998 and
1997, respectively.
The Company paid approximately $89,000, $196,000, and $87,000, in 1999,
1998 and 1997, respectively, for legal services provided by a law firm, a
partner of which serves as a director of the Company.
During 1999, the Company purchased certain real estate properties from
the Chairman for approximately $1,450,000, based upon independently obtained
appraisals.
24
<PAGE> 1
EXHIBIT 21. LIST OF SUBSIDIARIES AND PARTNERSHIPS OF THE REGISTRANT.
<TABLE>
<CAPTION>
SUBSIDIARY STATE OR COUNTRY OF INCORPORATION ORGANIZATION
- ---------- ----------------------------------------------
<S> <C>
Clayton Homes, Inc. Delaware
CMH Manufacturing, Inc. Tennessee
CMH Homes, Inc. Tennessee
Vanderbilt Mortgage & Finance, Inc. Tennessee
Clayton-Vanderbilt, Inc. Arizona
Vanderbilt Property and Casualty Insurance Co., LTD British Virgin Islands
CMH Insurance Agency, Inc. Tennessee
CMH Parks, Inc. Tennessee
CMH Capital, Inc. Delaware
Vanderbilt SPC, Inc. Delaware
CMH Services, Inc. Tennessee
CMH of KY, Inc. Kentucky
HomeFirst Agency, Inc. Delaware
Vanderbilt Life and Casualty Insurance Co., LTD British Virgin Islands
Eastern States Life Insurance Co. Turks & Caicos Islands
Midland States Life Insurance Co. Turks & Caicos Islands
Clayton SPC, Inc. Tennessee
Clayton Commercial Buildings Tennessee
CMH Hodgenville, Inc. Tennessee
PARTNERSHIP
Redwood Partners Limited Colorado
CMH Management, LP Tennessee
</TABLE>
17
<PAGE> 1
EXHIBIT 23. CONSENT OF INDEPENDENT ACCOUNTANTS
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 33-7156, 33-3011, 333-83535, 333-83543, 333-83545,
333-83565, and 333-83537) and on Form S-3 (No. 333-75405) of Clayton Homes, Inc.
of our report dated August 5, 1999, relating to the financial statements, which
appears in the Annual Report to Shareholders, which is incorporated in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers
- ----------------------------------------
PricewaterhouseCoopers
Knoxville, TN
September 20, 1999
18
<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, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 2,680
<SECURITIES> 19,047
<RECEIVABLES> 716,429
<ALLOWANCES> 8,541
<INVENTORY> 184,444
<CURRENT-ASSETS> 0
<PP&E> 373,093
<DEPRECIATION> 81,590
<TOTAL-ASSETS> 1,417,245
<CURRENT-LIABILITIES> 130,579
<BONDS> 96,477
0
0
<COMMON> 14,237
<OTHER-SE> 933,531
<TOTAL-LIABILITY-AND-EQUITY> 1,417,245
<SALES> 1,040,668
<TOTAL-REVENUES> 1,344,283
<CGS> 705,128
<TOTAL-COSTS> 1,072,558
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 12,459
<INTEREST-EXPENSE> 13,298
<INCOME-PRETAX> 245,968
<INCOME-TAX> 91,000
<INCOME-CONTINUING> 154,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 154,968
<EPS-BASIC> 1.07
<EPS-DILUTED> 1.06
</TABLE>
