<PAGE>
EXHIBIT 13
ELEVEN YEAR REVIEW
<TABLE>
<CAPTION>
(in thousands except per
share data) 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues
Net Sales $993,916 $1,040,668 $880,856 $822,906 $762,396 $621,351 $510,153 $384,491 $296,849 $257,557 $219,443
Financial services
and other income 299,429 303,615 246,923 198,797 166,345 136,741 118,083 91,750 74,330 62,392 40,316
-----------------------------------------------------------------------------------------------------------------------------------
1,293,345 1,344,283 1,127,779 1,021,703 928,741 758,092 628,236 476,241 371,179 319,949 259,759
-----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales 660,429 705,128 598,589 559,274 521,200 431,826 357,698 267,201 206,049 176,374 153,786
SG&A 384,067 367,430 302,598 270,996 236,188 188,835 153,698 113,695 84,785 76,420 60,220
Financial services
interest 1,032 7,981 2,015 2,885 3,649 5,533 8,196 11,819 16,585 18,198 11,595
Other expenses 20,800 12,459 7,976 1,000 - - - - 3,300 3,772 2,213
-----------------------------------------------------------------------------------------------------------------------------------
1,066,328 1,092,998 911,178 834,155 761,037 626,194 519,592 392,715 310,719 274,764 227,814
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 227,017 251,285 216,601 187,548 167,704 131,898 108,644 83,526 60,460 45,185 31,945
Interest income
(expense), net/other 1,608 (5,317) 5,499 5,152 4,596 3,902 (359) (170) (317) (592) (575)
-----------------------------------------------------------------------------------------------------------------------------------
Income before
income taxes 228,625 245,968 222,100 192,700 172,300 135,800 108,285 83,356 60,143 44,593 31,370
Provision for
income taxes (84,600) (91,000) (84,400) (73,200) (65,500) (48,800) (39,000) (29,600) (20,800) (16,000)(11,500)
-----------------------------------------------------------------------------------------------------------------------------------
Income before
accounting change 144,025 154,968 137,700 119,500 106,800 87,000 69,285 53,756 39,343 28,593 19,870
Cumulative effect of
accounting change - - - - - - 3,000 - - - -
-----------------------------------------------------------------------------------------------------------------------------------
Net income $144,025 $154,968 $137,700 $119,500 $106,800 $87,000 $72,285 $53,756 $39,343 $28,593 $19,870
-----------------------------------------------------------------------------------------------------------------------------------
Net income per share
Basic $1.03 $1.07 $0.93 $0.81 $0.72 $0.59 $0.51 $0.39 $0.30 $0.27 $0.21
Diluted $1.03 $1.06 $0.92 $0.80 $0.72 $0.59 $0.49 $0.37 $0.29 $0.24 $0.18
Average shares
outstanding
Basic 139,474 145,211 148,463 148,324 148,253 147,020 141,046 136,391 130,103 106,884 94,785
Diluted 139,815 145,931 149,504 149,346 149,183 148,285 149,875 149,106 142,100 126,216 120,217
Dividends per common
share $.064 $.064 $.064 $.061 $.049 $.030 - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $1,506,378 $1,417,245 $1,457,757 $1,045,761 $886,350 $761,151 $701,148 $587,032 $554,780 $488,817 $339,099
Debt obligations 99,216 96,477 247,591 22,806 30,290 48,737 70,680 137,038 192,931 227,444 177,374
Shareholders' equity $1,036,375 $ 947,768 $ 881,019 $ 754,526 $650,189 $544,187 $462,154 $348,630 $292,950 $200,992 $108,334
KEY FINANCIAL RATIOS
As a % of revenue
Operating income 17.6% 18.7% 19.2% 18.4% 18.1% 17.4% 17.3% 17.5% 16.3% 14.1% 12.3%
Net income 11.1% 11.5% 12.2% 11.7% 11.5% 11.5% 11.5% 11.3% 10.6% 8.9% 7.6%
Debt as a % of
total capital 8.7% 9.2% 21.9% 2.9% 4.5% 8.2% 13.3% 28.2% 39.7% 53.1% 62.1%
OTHER DATA
Company-owned
retail centers 318 306 273 245 216 192 165 143 127 123 96
Independent retailer 707 671 702 663 580 421 372 371 312 330 322
Manufacturing plants 20 19 18 17 17 16 13 13 11 10 10
Communities 76 75 71 67 64 55 46 33 20 12 9
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
QUARTERLY RESULTS (unaudited)
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------------------------------------------------
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 $337,297 $309,159 $306,981 $339,908 $314,686 $319,120 $308,306 $402,171
Operating income 56,277 55,551 56,725 58,464 53,690 56,841 57,314 83,440
Income before income taxes 56,424 55,831 56,993 59,377 52,697 55,613 55,432 82,226
Net income 35,524 35,231 35,893 37,377 33,197 35,013 34,932 51,826
Earnings per share - Basic $.25 $.25 $.26 $.27 $.23 $.24 $.24 $.36
- Diluted $.25 $.25 $.26 $.27 $.22 $.24 $.24 $.36
Price range of stock - High $11.88 $11.94 $10.13 $10.38 $16.35 $13.81 $15.19 $13.25
- Low $8.56 $8.50 $7.81 $7.94 $12.35 $10.80 $10.69 $10.69
Dividends per common share $.016 $.016 $.016 $.016 $.016 $.016 $.016 $.016
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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,
2000 vs 1999 1999 vs 1998
------------------------------------------------------------------------------
<S> <C> <C>
RETAIL
Dollar sales -0.4% +25.8%
Number of retail centers +7.8% +11.8%
Dollar sales per retail center -7.6% +12.5%
Price of home +8.2% +6.8%
------------------------------------------------------------------------------
WHOLESALE
Dollar sales -16.2% +6.8%
Number of independent retailers +0.4% +0.6%
Dollar sales per independent retailer -16.6% +6.2%
Price of home +2.4% +5.0%
------------------------------------------------------------------------------
COMMUNITIES
Dollar sales +28.4% +2.5%
Number of communities +3.4% +5.8%
Dollar sales per community +24.1% -3.1%
Price of home +2.6% +4.5%
------------------------------------------------------------------------------
</TABLE>
FISCAL 2000 COMPARED TO FISCAL 1999
Total revenues decreased 4% to $1.3 billion, as manufactured housing sales
decreased 4% to $994 million, financial services income decreased 2% to $229
million and rental and other income increased 1% to $71 million.
Current conditions in the manufactured housing industry are highly
competitive at both the retail and wholesale levels. For fiscal 2000, the
industry was faced with over-capacity in manufacturing, too many retail centers,
and high product inventories. This competitive environment, as well as rising
interest rates and general credit tightening, has contributed to decreased
industry and Company sales.
Net sales of the Retail group fell slightly to $670 million. This decline
was the result of an 8% decrease in homes sold, offset by an 8% increase in the
average number of Company-owned retail centers and an 8% increase in the average
price per home. Multi-section homes accounted for 51% of total new homes sold
versus 49% last year.
During the year, the Company opened 26 retail centers and closed
14 under-performing retail centers. The Company continually evaluates
specific markets and opens, acquires or closes retail centers as conditions
warrant. Of the 26 new openings, 10 were acquired and 16 were greenfield
start-ups. Eleven of the new retail centers were opened in the fourth
quarter.
Net sales of the Manufacturing group to independent retailers
decreased 16% to $279 million, as the number of homes sold fell 18%. The
average wholesale price increased 2% principally due to a shift toward
multi-section homes. Multi-section homes accounted for 49% of total
shipments versus 48% last year.
Net sales of the Communities group increased 28% to
$45 million as 25% more homes were sold while the average home selling price
increased 3%. The Company added 460 sites during the year bringing the
total to 20,168 sites.
Within the Financial Services segment, interest and loan servicing
revenues increased $8 million, and insurance related revenues rose $6
million. Rental and other income increased 1% on a 9% rise in
Communities rental income.
The average outstanding balance of receivables owned declined 27% to
$440 million with a weighted average interest rate of 11.9%, up from
10.3%. The average outstanding balance of receivables sold rose 29% to $3.3
billion, And the weighted average loan service spread decreased to 3.3% from
3.7%, as the Federal Reserve increased interest rates.
Financial Services interest expense decreased $7 million to $1 million.
Debt collateralized by installment contract receivables dropped 26% to an
average of $10 million, and the weighted average interest rate increased to
10.5% from 10.4%. Loan covenants preclude prepaying these higher cost
obligations.
Gross profit margins increased to 33.6% from 32.2%. This increase
is attributable to a higher percentage of retail sales in the total sales mix
as well as a shift in mix to multi-section units.
Selling, general and administrative expenses were 29.7% and 27.3% of
revenues for the years ended June 30, 2000, and 1999, respectively. This
increase as a percentage of revenues was primarily due to a decline in overall
sales volume, in addition to growth of Company-owned sales centers without a
corresponding increase in sales. Additional set up costs associated with the
shift in mix toward multi-section units and sales of larger homes was
also a factor.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(continued)
Net losses as a percentage of loans outstanding for fiscal 2000 remained
steady at 1.4% while delinquency rates on all loans increased to 2.2% on a unit
basis from 2.1%. The size, character and rate of change in the credit loss and
contingent liability reserves are dependent upon many factors, including, but
not limited to, origination volume, portfolio performance and market conditions.
The changes in inventory levels at June 30, 2000, compared to June 30,
1999, are shown below in millions:
<TABLE>
<CAPTION>
Increase
<S> <C>
MANUFACTURING
Raw materials $ 2.1
Finished goods 3.6
RETAIL
Inventory to stock 12 new Company-owned
sales centers 8.6
Increase in inventory levels at 306
Company-owned sales centers open at
June 30, 1999 21.0
COMMUNITIES
Inventory to stock one new community 0.3
Increase in inventory levels at 75 communities
open at June 30, 1999 2.4
-------------------------------------------------------
$38.0
-------------------------------------------------------
</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.
Within the Financial Services segment, interest and loan servicing
revenues increased 42% to $166 million, and insurance related revenues rose $8
million. Rental and other income increased 23% on a 19% rise in
Communities rental income.
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 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% from 32.0%.
Selling, general and administrative expenses were 27.3% and 26.8% of
revenues 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% from .8% while delinquency rates on all loans decreased to
2.1% on a unit basis from 3.3%. 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>
Increase(decrease)
<S> <C>
MANUFACTURING
Raw materials $(0.5)
Finished goods 0.4
RETAIL
Inventory to stock 33 new Company-owned
sales centers 14.1
Increase in inventory levels at 273
Company-owned sales centers open at
June 30, 1998 2.0
COMMUNITIES
Inventory to stock four new communities 0.8
Increase in inventory levels at 71 communities
open at June 30, 1998 0.5
-------------------------------------------------------
$17.3
-------------------------------------------------------
</TABLE>
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, 2000,
the Company raised $1.3 billion through asset securitizations.
At June 30, 2000, the Company had long-term debt outstanding of $99
million. Short-term debt available consists of $171 million committed and
$66 million uncommitted lines of credit for working capital needs. Long-
term debt outstanding principally consists of $75 million of privately
issued senior notes, $8 million of installment paper collateralized debt and
$16 million of tax-exempt bonds and other long-term debt.
During fiscal 2000, the Company renewed its committed one-year $300
million commercial paper conduit facility used to facilitate sales of
manufactured housing contracts. At June 30, 2000, the conduit facility was not
utilized, as compared to $105 million being outstanding at June 30, 1999.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(continued)
In fiscal 2000, the Company repurchased 5.4 million shares for $50 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.
The Company originated and acquired approximately $1.2 billion of
installment contracts and mortgage loan receivables during fiscal 2000.
Additional investments were made of approximately $10 million to expand,
develop, or improve manufactured housing communities and $2 million in related
rental units, $12 million for opening and upgrading of Company-owned retail
centers, and $10 million for construction and improvement of manufacturing
facilities.
In fiscal 2001,the Company expects to originate approximately $1 billion
of installment contract and mortgage loan receivables. It expects to
invest approximately $24 million in acquisitions or construction of
manufactured housing communities, up to $13 million for opening and upgrading
Company-owned retail centers and up to $5 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, servicing receivables and
variable rate debt, which principally consists of revolving credit lines. The
Company uses interest rate swaps to minimize interest rate risk on certain
credit lines, effectively converting these to fixed rate debt. Foreign currency
and commodity price risk are not considered to have a material impact on the
Company.
As of June 30, 2000, the Company has outstanding long-term debt of $99
million. There is no significant exposure to changes in interest rates on debt
obligations as the majority of its long-term debt, $83 million, carries fixed
interest rates. Remaining long-term debt of $16 million carries variable
interest rates, which reprice weekly. Holding the variable rate debt constant,
each one percentage point increase in interest rates occurring on the first day
of the year would result in an increase in interest expense for the coming year
of approximately $99,000, net of tax.
The Company has variable interest rate installment paper contract
receivables of $43 million on June 30, 2000. 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 $209,000, net of tax.
The Company has outstanding regular REMIC interests with variable interest
rates collateralized by variable and fixed installment contract receivables of
$1.2 billion on June 30, 2000. Holding the outstanding regular interests
amounts constant, each one percentage point increase in interest rates
occurring on the first day of the year would result in a decrease in
servicing income for the coming year of approximately $5.7 million, net
of tax.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was subsequently amended
by SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133, in June
1999 and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, in June 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. The Company will adopt SFAS No. 133, as amended, in the
first quarter of 2001. Such adoption is not expected to have a material impact
on the Company's reported results of operations, financial position or cash
flows.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. It summarizes the SEC's views in applying generally accepted
accounting principles to selected revenue recognition issues. An amendment was
issued in June 2000, which delays the implementation of SAB 101 until no later
than the fourth quarter of fiscal years beginning after December 15, 1999. The
Company believes that its practices already comply with the provisions of SAB
No. 101, and its adoption is expected to have no material impact on the
Company's reported results of operations, financial position or cash flows.
EFFECTS OF INFLATION
Inflation has had an insignificant impact on the Company during the past
several years.
FORWARD LOOKING STATEMENTS
Certain statements in this annual report are forward looking as defined in
the Private Securities Litigation Reform Law. These statements involve certain
risks and uncertainties that may cause actual results to differ materially from
expectations as of the date of this report. These risks fall generally within
three broad categories consisting of industry factors, management expertise, and
government policy and economic conditions. Industry factors include such
matters as potential periodic inventory adjustments by both captive and
independent retailers, availability of wholesale and retail financing, general
or seasonal weather conditions affecting sales and revenues, catastrophic events
impacting insurance 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 it's overall ability to
anticipate and meet consumer preferences, maintain successful marketing
programs, continue quality manufacturing output, keep a strong cost management
oversight, and project stable gain on sale accounting assumptions. Lastly,
management has the least control over government policy and economic conditions
such as prevailing interest rates, 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>
Clayton Homes, Inc. and Subsidiaries
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, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States 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 8, 2000
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
(in thousands) 2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 43,912 $ 2,680
Trade receivables 21,796 24,998
Other receivables, principally installment contracts, net of reserves for credit
losses and unamortized discounts of $4,217 and $9,133, respectively 500,942 551,744
Residual interests in installment contract receivables 150,329 131,146
Inventories 222,431 184,444
Securities available-for-sale 47,734 19,047
Restricted cash 96,904 100,127
Property, plant and equipment 305,479 291,503
Deferred income taxes 24,284 20,505
Other assets 92,567 91,051
---------------------------------------------------------------------------------------------------------------
Total assets $1,506,378 $1,417,245
---------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 122,760 $ 130,579
Debt obligations 99,216 96,477
Other liabilities 248,027 242,421
---------------------------------------------------------------------------------------------------------------
Total liabilities 470,003 469,477
---------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock, $.10 par value, authorized 1,000 shares, none issued - -
Common stock, $.10 par value, authorized 200,000 shares, issued 137,499
at June 30, 2000, and 142,373 at June 30, 1999 13,750 14,237
Additional paid-in capital 39,500 85,236
Retained earnings 983,806 849,116
Accumulated other comprehensive income (loss) (681) (821)
---------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,036,375 947,768
---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,506,378 $1,417,245
---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
Clayton Homes, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30,
(in thousands except per share data) 2000 1999 1998
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Net sales $ 993,916 $1,040,668 $ 880,856
Financial services 228,642 233,848 190,204
Rental and other income 70,787 69,767 56,719
---------------------------------------------------------------------------------
1,293,345 1,344,283 1,127,779
---------------------------------------------------------------------------------
Costs and expenses
Cost of sales 660,429 705,128 598,589
Selling, general and administrative 384,067 367,430 302,598
Financial services interest 1,032 7,981 2,015
Provision for credit losses 20,800 12,459 7,976
---------------------------------------------------------------------------------
1,066,328 1,092,998 911,178
---------------------------------------------------------------------------------
Operating income 227,017 251,285 216,601
Interest income (expense), net / other 1,608 (5,317) 5,499
---------------------------------------------------------------------------------
Income before income taxes 228,625 245,968 222,100
Provision for income taxes (84,600) (91,000) (84,400)
---------------------------------------------------------------------------------
Net income $ 144,025 $ 154,968 $ 137,700
---------------------------------------------------------------------------------
Net income per common share
Basic $ 1.03 $ 1.07 $ 0.93
Diluted $ 1.03 $ 1.06 $ 0.92
Average shares outstanding
Basic 139,474 145,211 148,463
Diluted 139,815 145,931 149,504
---------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Total Additional Other
Shareholders' Common Paid-in Retained Comprehensive
(in thousands except per share data) Equity Stock Capital Earnings Income (Loss)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 ($.064 per common share) (10,469) - - (10,469) -
Issuances related to stock incentive, employee
benefit plans and other 8,768 111 8,657 - -
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 881,019 14,852 162,413 703,754 -
Net income 154,968 - - 154,968 -
Other comprehensive income, net of tax
Unrealized loss on securities available-for-sale (821) - - - (821)
-----------
Comprehensive income 154,147
Purchase of 6,465 shares of common stock (81,394) (647) (80,747) - -
Dividends declared ($.064 per common share) (9,606) - - (9,606) -
Issuances related to stock incentive, employee
benefit plans and other 3,602 32 3,570 - -
----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 947,768 14,237 85,236 849,116 (821)
NET INCOME 144,025 - - 144,025 -
OTHER COMPREHENSIVE INCOME, NET OF TAX
UNREALIZED LOSS ON SECURITIES AVAILABLE-
FOR-SALE DURING THE YEAR (627) - - - (627)
REALIZED LOSS ON SECURITIES AVAILABLE-
FOR-SALE INCLUDED IN NET INCOME 767 - - - 767
----------- ------
OTHER COMPREHENSIVE INCOME 140 140
-----------
COMPREHENSIVE INCOME 144,165
PURCHASE OF 5,382 SHARES OF COMMON STOCK (49,776) (538) (49,238) - -
DIVIDENDS DECLARED ($.064 PER COMMON SHARE) (9,335) - - (9,335) -
ISSUANCES RELATED TO STOCK INCENTIVE,
EMPLOYEE BENEFIT PLANS AND OTHER 3,553 51 3,502 - -
----------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2000 $1,036,375 $13,750 $ 39,500 $983,806 $(681)
----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
Clayton Homes, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
(in thousands) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 144,025 $ 154,968 $137,700
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 20,422 17,795 14,733
Amortization of installment contract receivables, net of
gain on sale 3,256 (15,089) (31,699)
Provision for credit losses 20,800 12,459 7,976
Realized loss on securities available-for-sale 1,218 - -
Deferred income taxes (3,861) (8,267) (25,830)
Increase in other receivables, net (12,954) (103,070) (25,700)
Increase in inventories (37,987) (17,331) (47,679)
Increase (decrease) in accounts payable, accrued
liabilities, and other (41,510) 24,687 55,429
----------------------------------------------------------------------------------------------------------------
Cash provided by operations 93,409 66,152 84,930
Origination of installment contract receivables (983,090) (1,085,484) (801,865)
Proceeds from sales of originated installment contract receivables 886,040 1,030,442 705,420
Principal collected on originated installment contract receivables 48,040 80,610 50,260
----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 44,399 91,720 38,745
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of installment contract receivables (206,154) (253,625) (520,912)
Proceeds from sales of acquired installment contract receivables 229,412 389,866 230,311
Principal collected on acquired installment contract receivables 19,836 73,200 27,703
Proceeds from sales of securities available-for-sale 37,733 - -
Acquisition of property, plant and equipment (34,398) (47,749) (62,210)
Decrease (increase) in restricted cash 3,223 (13,951) (15,179)
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 49,652 147,741 (340,287)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (9,335) (9,606) (10,469)
Net borrowings (repayment) on credit facilities - (227,873) 227,873
Proceeds from (repayment of) long-term debt 2,739 76,759 (3,088)
Issuance of stock for incentive plans and other 3,553 3,602 8,768
Repurchase of common stock (49,776) (81,394) (9,506)
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (52,819) (238,512) 213,578
----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 41,232 949 (87,964)
Cash and cash equivalents at beginning of year 2,680 1,731 89,695
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 43,912 $ 2,680 $ 1,731
----------------------------------------------------------------------------------------------------------------
Supplemental disclosures for cash flow information
Cash paid during the year for
Interest $ 6,781 $ 19,976 $ 4,285
Income taxes $ 97,903 $ 95,931 $ 93,832
----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
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. (CMH) and its wholly- and majority-owned subsidiaries. CMH and its
subsidiaries are collectively referred to herein as the Company. The Company is
a vertically-integrated manufactured housing company headquartered near
Knoxville, Tennessee. Employing approximately 7,400 people and operating in 33
states, the Company builds, sells, finances and insures manufactured homes, as
well as owns and operates residential manufactured housing communities.
Significant intercompany accounts and transactions have been eliminated in the
financial statements. See Note 10 for information related to the Company's
business segments.
Income Recognition
Sales to independent retailers of homes produced by CMH are recognized as
revenue upon shipment. Retail sales are recognized when: cash payment is
received, or in the case of credit sales, which represent the majority of retail
sales, when a down payment is received and the home buyer enters into an
installment sales contract; construction of the home is complete; the home buyer
has inspected and accepted the home; and title has passed to the retail home
buyer. Most of these installment sales contracts, which are normally payable
over 84 to 360 months, are financed by Vanderbilt Mortgage and Finance, Inc.
(VMF), the Company's financing subsidiary.
The Company acts as agent on physical damage, family protection and home
buyer protection plan insurance policies written by unaffiliated insurance
companies (ceding companies) for the purchasers of manufactured homes. The
insurance policies are in turn reinsured by certain subsidiaries of the Company.
Premiums from policies represent short-duration contracts with terms of one to
10 years and are deferred and recognized as revenue over the terms of the
policies. Claims expenses are recorded as insured events occur. Expenses are
matched to revenue over the terms of the policies by means of deferral and
amortization of policy acquisition costs. Such costs include commissions,
premium taxes and ceding fees, which vary with and are directly related to the
production of insurance policies 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.
Installment contract receivables held for sale are included in other
receivables and are carried at the lower of aggregate cost or market. Certain of
the installment contract receivables are purchased in bulk at a discount. The
purchase discounts are allocated between unamortized discount and 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, 2000, and 1999, including contracts held
for investment, were approximately $3.9 billion and $3.5 billion, respectively.
Most of the installment contract receivables are with borrowers in the east,
south and southwest portions of the United States and are collateralized by
manufactured homes. Interest income on installment contract receivables is
recognized by a method which approximates the simple interest method. Service
fee income is recognized as the service is performed. The Company accrues for
obligations related to cash collections from sold and serviced only loans and
remits these collections to investors on a monthly basis. See "Investors
payable" in Note 11.
The Company utilizes a financial components approach to transfers and
servicing of financial assets, requiring that the carrying amount of the
receivables sold be allocated between the assets sold and the assets
(liabilities) created, if any, based upon their fair value at the date of sale.
The assets (liabilities) created are: 1) an interest-only strip valued as the
discounted present value of the excess (deficiency) interest due the residual
interest owner (VMF) during the expected life of the contracts over: i) the
stated investor yield; ii) the contractual servicing fee; and iii) estimated
credit losses; and 2) servicing asset (liability), representing the discounted
present value of the contractual servicing fee over the cost of servicing the
contracts. Profit (loss) recorded at the time of the sale is computed as the
difference between the allocated carrying amount of the receivables sold and the
proceeds realized from the sale. The servicing asset at June 30, 2000, and 1999,
is as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
---------------------------------------------------------------
<S> <C> <C>
Servicing asset beginning balance $ 27,024 $ 13,043
Servicing asset recognized 23,781 20,718
Amortization (10,101) (6,737)
---------------------------------------------------------------
Servicing asset ending balance $ 40,704 $ 27,024
---------------------------------------------------------------
</TABLE>
The balance represents the estimated fair value of the aggregate servicing
assets at June 30, 2000. 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 available-for-sale 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 equity 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 financial services revenues.
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.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investment Securities
The Company follows SFAS No. 134, Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise, which requires that the Company classify mortgage-backed
securities retained after a securitization in accordance with SFAS No. 115.
Accordingly, these securities are classified as available-for-sale, are stated
at fair value, and can be reasonably expected to mature in 6-10 years. The
Company also has certain other investments that had been designated as
available-for-sale and accordingly have been stated at fair value. The fair
value of these securities is estimated based on quoted market prices, when
available. If not available, fair value is estimated using quoted market prices
for similar financial instruments. Net unrealized holding gains and losses are
reported as a separate component of other comprehensive income, net of tax,
until realized.
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 recorded at estimated wholesale value
(cost) but not in excess of net realizable value.
Property, Plant and Equipment
Land and improvements, buildings, and furniture and equipment are 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 any impairment 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 minimizing interest
incurred on its short-term variable rate debt. The difference between amounts
received and amounts paid under such agreements is recorded as a reduction of,
or addition to, interest expense as incurred over the life of the swap.
Restricted Cash
Restricted cash primarily represents: 1) trust account cash balances
required by certain VMF servicing agreements, and 2) insurance reserves required
by custodial or trust agreements.
Income Taxes
Deferred income taxes are recorded to reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income is presented net of income taxes and
is comprised of unrealized gains and losses on securities available-for-sale.
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 a
5-for-4 stock split paid in December 1998. Certain reclassifications have been
made to the 1998 and the 1999 financial statements to conform to the 2000
presentation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, and subsequently amended by
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133, in June
1999 and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, in June 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. The Company will adopt SFAS No. 133, as amended, in the
first quarter of 2001. Such adoption is not expected to have a material impact
on the Company's reported results of operations, financial position or cash
flows.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
It summarizes the SEC's views in applying generally accepted accounting
principles to selected revenue recognition issues. An amendment was issued in
June 2000, which delays the implementation of SAB 101 until no later than the
fourth quarter of fiscal years beginning after December 15, 1999. The Company
believes that its practices already comply with the provisions of SAB No. 101,
and its adoption is expected to have no material impact on the Company's
reported results of operations, financial position or cash flows.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - INVENTORIES
Inventories at June 30, 2000, and 1999, are as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
------------------------------------------------------
<S> <C> <C>
Manufactured homes
New $148,658 $125,456
Previously-owned 53,593 40,956
Raw materials 20,180 18,032
------------------------------------------------------
$222,431 $184,444
------------------------------------------------------
</TABLE>
If the first-in, first-out (FIFO) method of inventory valuation had been
used, inventories would have been higher by $21,633,000 and $20,591,000 at June
30, 2000, and 1999, respectively.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 2000, and 1999, are as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
-------------------------------------------------------------------
<S> <C> <C>
Land and improvements $199,329 $183,449
Buildings 156,689 147,252
Furniture and equipment 45,964 42,392
-------------------------------------------------------------------
401,982 373,093
Less: accumulated depreciation
and amortization (96,503) (81,590)
-------------------------------------------------------------------
$305,479 $291,503
-------------------------------------------------------------------
</TABLE>
NOTE 4 - DEBT OBLIGATIONS
Debt obligations at June 30, 2000, and 1999, are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Senior notes, 6.25%, due December 2003 $75,000 $75,000
Debt collateralized by installment contract
receivables, average effective rate 10.19% on
June 30, 2000, due through 2004 8,373 11,625
Tax-exempt bonds, effective rate of 4.90% on
June 30, 2000, due through 2030 15,230 9,230
Lines of credit - -
Other notes payable 613 622
--------------------------------------------------------------------------------------
$99,216 $96,477
--------------------------------------------------------------------------------------
</TABLE>
Annual maturities of long-term debt as of June 30, 2000, are as follows:
<TABLE>
<CAPTION>
(in thousands)
-------------------------- ----------------------------
<S> <C> <C> <C>
2001 $3,143 2004 $75,200
2002 3,053 2005 -
2003 1,977 Thereafter 15,843
</TABLE>
In December 1998, the Company issued $75 million of 6.25% Senior
Subordinated Notes due December 2003 (the "6.25% Notes"), with interest payable
each June and December. The 6.25% Notes are redeemable at the option
of the Company, in whole, at 100% of the principal amount plus a make-whole
premium at any time prior to December 30, 2003. The 6.25% Notes are not
subject to any sinking fund requirements.
In January 2000, the Company renewed its committed one-year $300 million
commercial paper conduit facility to facilitate sales of manufactured housing
contracts. Commitment fees are payable quarterly on the unused portion of the
facility. At June 30, 2000, the conduit facility was not utilized, as compared
to $105 million being outstanding at June 30, 1999.
The Company has a $150 million five-year revolving credit facility with its
bank group. This facility's pricing is based on LIBOR rates; commitment fees
are payable quarterly on the unused portion of the facility.
The Company's tax-exempt manufacturing facilities' bonds carry no sinking
fund requirements and bear interest at weekly adjustable rates.
The preceding facilities are governed by various financial covenants which
require maintenance of certain financial ratios and are uncollateralized. In
addition, the Company has committed and uncommitted lines of credit amounting to
$87 million with several banks, prices based on LIBOR rates. 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, 2000, the Company's interest rate swap agreements have an aggregrate
notional amount of $100 million and fix the interest rate on the Company's debt
to rates ranging from 5.42% to 5.62%. If the Company had terminated all swaps
as of June 30, 2000, it would have received a net amount of approximately
$1,946,000 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, 2000, 1999, and 1998,
are as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 44,275 $35,828 $ 8,051
Provision 20,800 12,459 7,976
Charges, net of recoveries applicable
to installment contract receivables
Purchased (12,199) (13,384) (2,762)
Other (20,044) (11,951) (3,981)
Reserves transferred from (to) unamortized
discounts (6,000) (1,981) 2,318
Reserves associated with receivables
purchased 8,893 23,304 24,226
--------------------------------------------------------------------------------------------
Balance, end of year $ 35,725 $44,275 $35,828
--------------------------------------------------------------------------------------------
Reserves for credit losses $ 3,650 $ 8,541 $29,964
Reserve for contingencies 32,075 35,734 5,864
--------------------------------------------------------------------------------------------
$ 35,725 $44,275 $35,828
--------------------------------------------------------------------------------------------
</TABLE>
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, 2000, and 1999, the
outstanding principal balances of these receivables totaled approximately $117
million and $164 million, respectively. The associated contingent liability is
approximately $14 million and $22 million, respectively. There were no
receivables sold with recourse in 2000, 1999 and 1998.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 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
GRANTED 762,325 $9.38 - $11.88 $ 9.91
EXERCISED (208,725) $1.41 - $8.27 $ 2.65
CANCELED (309,295) $3.64 - $15.75 $11.11
----------------------------------------------------------------------------------------------
BALANCE JUNE 30, 2000 5,105,456 $2.16 - $15.75 $10.36 1,655,984 $9.18
----------------------------------------------------------------------------------------------
</TABLE>
Options available for future grant at June 30, 2000, and 1999, were
4,939,727 and 5,077,035, respectively. Options were held by 950 persons at June
30, 2000.
The following table summarizes information about the plans' stock options
at June 30, 2000, including weighted average remaining life (Life) and weighted
average exercise price (Price):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ---------------------
Range Number Life Price Number Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.16 - $ 3.63 14,895 0.4 years $ 2.16 14,895 $ 2.16
$ 3.64 - $ 5.05 290,256 1.4 years $ 4.02 132,044 $ 3.83
$ 7.22 - $10.32 2,239,675 5.5 years $ 8.53 981,236 $ 7.94
$11.50 - $15.75 2,560,630 7.0 years $12.73 527,809 $13.01
</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 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) 2000 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income - as reported $144,025 $154,968 $137,700
Net income - pro forma 141,634 153,610 136,643
Net income per diluted common share - as reported $1.03 $1.06 $0.92
Net income per diluted common share - pro forma 1.01 1.05 0.91
--------------------------------------------------------------------------------------------
</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 1998 to 2000; dividend yields ranging
from 0.41% to 0.78% with a weighted average yield of 0.56%; expected volatility
of 0.29%, risk-free interest rates ranging from 5.70% to 6.25% with a weighted
average rate of 5.98%; and expected lives ranging from 6.47 to 10.00 years with
a weighted average life of 7.19 years. The weighted average grant date fair
value of options granted in fiscal years 2000, 1999 and 1998 was $4.66, $5.66,
and $5.02 per share, respectively.
NOTE 7 - INCOME TAXES
The components of deferred tax assets and liabilities at June 30, 2000, and
1999, are as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
---------------------------------------------------------------------------
<S> <C> <C>
Reserves for credit losses and contingencies
and discounts $ 9,258 $ 11,618
Insurance reserves 9,911 10,216
Unearned premiums 9,348 8,001
Residual interest in installment contract
receivables 11,781 7,934
---------------------------------------------------------------------------
Total deferred tax assets $ 40,298 $ 37,769
---------------------------------------------------------------------------
Deferred costs $ (6,728) $ (5,931)
Other (9,286) (11,333)
---------------------------------------------------------------------------
Total deferred tax liabilities (16,014) (17,264)
---------------------------------------------------------------------------
Net deferred tax asset $ 24,284 $ 20,505
---------------------------------------------------------------------------
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income tax is composed of the following:
<TABLE>
<CAPTION>
(in thousands) 2000 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C>
Current tax provisions
Federal $82,654 $92,706 $103,336
State 5,807 6,561 6,894
Total current $88,461 $99,267 $110,230
Deferred tax benefit (3,861) (8,267) (25,830)
-------------------------------------------------------------------
$84,600 $91,000 $ 84,400
-------------------------------------------------------------------
</TABLE>
At June 30, 2000, 1999, and 1998, a deferred tax provision (benefit) of
$82,000, ($482,000), and $0, respectively, 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 2000,
1999 and 1998, as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999 1998
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at the statutory rate $80,019 $86,089 $77,735
State income taxes, net of federal benefit 3,775 4,265 4,481
Other, net 806 646 2,184
---------------------------------------------------------------------------------
$84,600 $91,000 $84,400
---------------------------------------------------------------------------------
</TABLE>
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) defined contribution plan covering all employees
who meet participation requirements. The amount of the Company's contribution
is discretionary as determined by the Board of Directors, up to the maximum
deduction allowed for federal income tax purposes. Contributions accrued and
paid were $3,169,000, $3,162,000, and $2,488,000 for the years ended June 30,
2000, 1999 and 1998, 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 $5,340,000 in 2000, $5,210,000 in 1999, and $4,440,000 in
1998. Minimum rental commitments under non-cancelable operating leases,
primarily for retail centers, in effect at June 30, 2000 were 2001 - $4,308,000;
2002 - $3,548,000; 2003 - $2,896,000; 2004 - $2,005,000; 2005 - $1,109,000; and
thereafter - $1,807,000.
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
$72 million at June 30, 2000, excluding any resale value.
At June 30, 2000, the Company has letters of credit, primarily related to
insurance reserves and performance guarantees related to asset backed
securitizations of approximately $113 million and $257 million, respectively.
The Company believes a significant loss from any such guarantee is remote.
Please see Note 5 for discussion of guarantees of installment contract
receivables.
NOTE 10 - BUSINESS SEGMENT INFORMATION
The Company has identified four major business segments: Retail,
Manufacturing, Financial Services, and Communities. The Retail group purchases
homes from the Company's manufacturing operations and third party manufacturers
to sell to retail customers. The Manufacturing group builds homes for
Company-owned and independent retailers. Financial Services provides retail
financing of manufactured homes, reinsures risk on family protection, physical
damage, and homebuyer protection plan insurance policies, and offers certain
specialty finance products. Communities owns and operates manufactured housing
communities. Income from operations consists of total revenues less cost of
sales and operating expenses. Identifiable assets are used in the operation of
each business segment.
Information concerning operations by business segment follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Retail $ 733,916 $ 737,044 $ 590,256
Manufacturing 624,586 654,471 599,561
Financial Services 188,365 198,527 158,828
Communities 92,492 78,902 70,740
Intersegment sales (346,014) (324,661) (291,606)
--------------------------------------------------------------------------------
$1,293,345 $1,344,283 $1,127,779
--------------------------------------------------------------------------------
Income from operations
Retail $ 53,623 $ 66,364 $ 59,272
Manufacturing 62,729 72,377 65,437
Financial Services 108,792 117,385 99,685
Communities 16,130 15,850 14,133
Eliminations/Other (14,257) (20,691) (21,926)
--------------------------------------------------------------------------------
$ 227,017 $ 251,285 $ 216,601
Interest
Interest expense (5,749) (11,995) (2,270)
Interest revenue/Other income 7,357 6,678 7,769
--------------------------------------------------------------------------------
Income before taxes $ 228,625 $ 245,968 $ 222,100
--------------------------------------------------------------------------------
Identifiable assets
Retail $ 287,705 $ 247,009 $ 208,064
Manufacturing 100,112 94,773 80,487
Financial Services 902,913 901,769 1,003,528
Communities 185,784 177,723 166,871
Eliminations/Other 29,864 (4,029) (1,193)
--------------------------------------------------------------------------------
$1,506,378 $1,417,245 $1,457,757
--------------------------------------------------------------------------------
Depreciation and amortization
Retail $ 5,639 $ 4,684 $ 3,725
Manufacturing 6,516 5,478 5,016
Financial Services 472 235 121
Communities 6,724 6,412 5,418
Eliminations/Other 1,071 986 453
--------------------------------------------------------------------------------
$ 20,422 $ 17,795 $ 14,733
--------------------------------------------------------------------------------
Capital expenditures
Retail $ 11,535 $ 18,152 $ 15,147
Manufacturing 9,558 12,971 5,721
Financial Services 454 576 931
Communities 12,059 14,703 31,316
Eliminations/Other 792 1,347 9,095
--------------------------------------------------------------------------------
$ 34,398 $ 47,749 $ 62,210
--------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - OTHER ASSETS AND LIABILITIES
At June 30, 2000, and 1999, other assets and liabilities consisted of:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
------------------------------------------------------------------
<S> <C> <C>
Other assets
Interest and other receivables $ 52,605 $ 56,674
Deferred policy acquisition costs 19,304 16,693
Prepaid expenses and other 20,658 17,684
------------------------------------------------------------------
$ 92,567 $ 91,051
------------------------------------------------------------------
Other liabilities
Investors payable $ 85,161 $ 89,925
Reserve for contingencies (Note 5) 32,075 35,734
Escrow deposits 10,603 11,378
Unearned insurance premiums 94,669 82,199
Other 25,519 23,185
------------------------------------------------------------------
$248,027 $242,421
------------------------------------------------------------------
</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:
<TABLE>
<CAPTION>
JUNE 30, 2000 June 30, 1999
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 $140,816 $140,816 $102,807 $102,807
Residual interests in installment contract receivables 150,329 150,329 131,146 131,146
Contracts held for sale and as collateral, including accrued
interest receivable 450,531 448,446 486,717 482,881
Financial liabilities
Senior notes, 6.25% 75,000 72,160 75,000 72,661
Debt collateralized by installment contract receivables 8,373 9,006 11,625 12,190
-------------------------------------------------------------------------------------------------------------------
</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) 2000 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $144,025 $154,968 $137,700
Average shares outstanding
Basic 139,474 145,211 148,463
Add: common stock equivalents 341 720 1,041
Diluted 139,815 145,931 149,504
Earnings per share - Basic $ 1.03 $ 1.07 $ 0.93
- Diluted $ 1.03 $ 1.06 $ 0.92
----------------------------------------------------------------------------------
</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 50% ownership interest. The Company acquired approximately
$92,000,000, $147,000,000, and $192,000,000 in installment contract receivables
and received interest and other related fees totaling approximately $1,618,000,
$2,038,000, and $1,735,000 during fiscal 2000, 1999 and 1998, respectively.
The Company paid approximately $82,000, $89,000, and $196,000, in 2000,
1999 and 1998, respectively, for legal services provided by a law firm, a
partner of which serves as a director of the Company.
24
