EXHIBIT 13
(in thousands except per
share and other data) 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Revenues
Net sales $849,157 $993,916 $1,040,668 $880,856 $822,906 $762,396 $621,351 $510,153 $384,491 $296,849 $257,557
Financial services
and other income 301,799 299,429 303,615 246,923 198,797 166,345 136,741 118,083 91,750 74,330 62,392
-----------------------------------------------------------------------------------------------------------------------------------
1,150,956 1,293,345 1,344,283 1,127,779 1,021,703 928,741 758,092 628,236 476,241 371,179 319,949
-----------------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales 562,267 660,429 705,128 598,589 559,274 521,200 431,826 357,698 267,201 206,049 176,374
SG&A 374,628 384,067 367,430 302,598 270,996 236,188 188,835 153,698 113,695 84,785 76,420
Financial services
interest 706 1,032 7,981 2,015 2,885 3,649 5,533 8,196 11,819 16,585 18,198
Provision for credit
losses 42,500 20,800 12,459 7,976 1,000 - - - - 3,300 3,772
-----------------------------------------------------------------------------------------------------------------------------------
980,101 1,066,328 1,092,998 911,178 834,155 761,037 626,194 519,592 392,715 310,719 274,764
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 170,855 227,017 251,285 216,601 187,548 167,704 131,898 108,644 83,526 60,460 45,185
Interest income
(expense), net/other (1,504) 1,608 (5,317) 5,499 5,152 4,596 3,902 (359) (170) (317) (592)
-----------------------------------------------------------------------------------------------------------------------------------
Income before
income taxes 169,351 228,625 245,968 222,100 192,700 172,300 135,800 108,285 83,356 60,143 44,593
Provision for
income taxes (62,700) (84,600) (91,000) (84,400) (73,200) (65,500) (48,800) (39,000) (29,600) (20,800)(16,000)
-----------------------------------------------------------------------------------------------------------------------------------
Income before
accounting change 106,651 144,025 154,968 137,700 119,500 106,800 87,000 69,285 53,756 39,343 28,593
Cumulative effect of
accounting change - - - - - - - 3,000 - - -
-----------------------------------------------------------------------------------------------------------------------------------
Net income $106,651 $144,025 $154,968 $137,700 $119,500 $106,800 $87,000 $72,285 $53,756 $39,343 $28,593
-----------------------------------------------------------------------------------------------------------------------------------
Net income per share
Basic $0.77 $1.03 $1.07 $0.93 $0.81 $0.72 $0.59 $0.51 $0.39 $0.30 $0.27
Diluted $0.77 $1.03 $1.06 $0.92 $0.80 $0.72 $0.59 $0.49 $0.37 $0.29 $0.24
Average shares
outstanding
Basic 137,702 139,474 145,211 148,463 148,324 148,253 147,020 141,046 136,391 130,103 106,884
Diluted 138,340 139,815 145,931 149,504 149,346 149,183 148,285 149,875 149,106 142,100 126,216
Dividends per common
share $.064 $.064 $.064 $.064 $.061 $.049 $.030 - - - -
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $1,654,170 $1,506,378 $1,417,245 $1,457,757 $1,045,761 $886,350 $761,151 $701,148 $587,032 $554,780 $488,817
Debt obligations 141,862 99,216 96,477 247,591 22,806 30,290 48,737 70,680 137,038 192,931 227,444
Shareholders' equity $1,147,478 $1,036,375 $947,768 $881,019 $754,526 $650,189 $544,187 $462,154 $348,630 $292,950 $200,992
KEY FINANCIAL RATIOS
As a % of revenue
Operating income 14.8% 17.6% 18.7% 19.2% 18.4% 18.1% 17.4% 17.3% 17.5% 16.3% 14.1%
Net income 9.2% 11.1% 11.5% 12.2% 11.7% 11.5% 11.5% 11.5% 11.3% 10.6% 8.9%
Debt as a % of
total capital 11.0% 8.7% 9.2% 21.9% 2.9% 4.5% 8.2% 13.3% 28.2% 39.7% 53.1%
OTHER DATA
Company-owned
retail centers 297 318 306 273 245 216 192 165 143 127 123
Independent retailers 634 707 671 702 663 580 421 372 371 312 330
Manufacturing plants 20 20 19 18 17 17 16 13 13 11 10
Communities 81 76 75 71 67 64 55 46 33 20 12
-----------------------------------------------------------------------------------------------------------------------------------
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table reflects the percentage changes in sales by the
Company's retail and community sales centers and in wholesale sales to
independent retailers. It also shows the percentage changes in the average
number of Company-owned retail centers, communities and independent retailers,
the average sales per location, and the average price per home sold in each
category.
Year ended June 30,
2001 vs 2000 2000 vs 1999
----------------------------------------------------------------------
RETAIL
Dollar sales -12.5% -0.4%
Number of retail centers -1.4% 7.8%
Dollar sales per retail center -11.2% -7.6%
Price of home -1.3% 8.2%
----------------------------------------------------------------------
WHOLESALE
Dollar sales -19.9% -16.2%
Number of independent retailers -2.7% 0.4%
Dollar sales per independent retailer -17.7% -16.6%
Price of home 7.6% 2.4%
----------------------------------------------------------------------
COMMUNITIES
Dollar sales -12.3% 28.4%
Number of communities 4.0% 3.4%
Dollar sales per community -15.6% 24.1%
Price of home -1.5% 2.6%
----------------------------------------------------------------------
FISCAL 2001 COMPARED TO FISCAL 2000
Total revenues decreased 11% to $1.2 billion, as manufactured housing sales
decreased 15% to $849 million, financial services income decreased slightly to
$228 million and rental and other income increased 4% to $74 million.
Current conditions in the manufactured housing industry remain highly
competitive at both the retail and wholesale levels. For fiscal 2001, the
industry was faced with manufacturing over-capacity and too many retail centers.
This competitive environment, as well as an increase in industry foreclosures
and aging retail inventory, has contributed to decreased industry and Company
sales, and significant closings of retail centers.
Net sales of the Retail group fell 13% to $586 million. This decline was
the result of an 11% decrease in homes sold, a 1% decrease in the average number
of Company-owned retail centers and a 1% decrease in the average price per home.
Multi-section homes accounted for 50% of total new homes sold versus 51% last
year.
During the year, the Company opened seven retail centers and closed 28
under-performing retail centers. The Company continually evaluates specific
markets and opens, acquires or closes retail centers as conditions warrant. All
of the sales centers opened in fiscal 2001 were acquisitions. Two of the new
retail centers were opened in the fourth quarter.
Net sales of the Manufacturing group to independent retailers decreased 20%
to $223 million, as the number of homes sold fell 26%. The average wholesale
price increased 8% principally due to a shift toward multi-section homes which
accounted for 52% of total shipments versus 49% last year.
Net sales of the Communities group decreased 12% to $39 million as 11%
fewer homes were sold, and the average home selling price decreased 1%. The
Company added 953 sites during the year bringing the total to 21,121 sites at
June 30, 2001.
Within the Financial Services segment, interest and loan servicing revenues
increased $16 million, and insurance related revenues rose $6 million. Rental
and other income increased 4% on an 8% rise in Communities rental income.
The average outstanding balance of installment contract and mortgage
receivables declined slightly to $437 million with a weighted average interest
rate of 9.8%, down from 11.9%. The average outstanding balance of receivables
sold rose 12% to $3.7 billion, and the weighted average loan service spread
increased to 3.4% from 3.3%.
Financial Services interest expense decreased $0.3 million to $0.7 million.
Debt collateralized by installment contract receivables dropped 32% to an
average of $7 million, and the weighted average interest rate increased to 10.6%
from 10.5%. Loan covenants preclude prepaying these higher cost obligations.
Gross profit margins on retail, manufacturing, and communities sales
increased to 33.8% from 33.6%.
Selling, general and administrative expenses were 32.5% and 29.7% of
revenues for the years ended June 30, 2001, and 2000, respectively. This
increase was primarily due to a decline in overall sales volume and reduced
capacity utilization in manufacturing. Additional costs associated with
portfolio acquisitions and fixed costs being spread over lower revenues were
also a factor.
The provision for credit losses and contingent liabilities increased to
$42.5 million in 2001 from $20.8 million in 2000 which was primarily due to the
additional number of contracts in foreclosure as compared to the same period
last year. Net credit losses as a percentage of loans outstanding for fiscal
2001 increased to 1.8% from 1.4% while delinquency rates on all loans increased
to 2.6% on a unit basis from 2.2%. The size, character and rate of change in the
credit loss and contingent liability reserves are dependent upon many factors,
including, but not limited to, origination volume, portfolio performance and
market conditions.
The changes in inventory levels at June 30, 2001, compared to June 30,
2000, are shown as follows in millions:
Increase (decrease)
MANUFACTURING
Raw materials $ (3.5)
Finished goods (1.9)
RETAIL
Inventory levels at Company-owned
retail centers (30.3)
COMMUNITIES
Inventory to stock five new Communities 0.5
Inventory levels at 76 Communities open
at June 30, 2000 (1.5)
--------------------------------------------------------------
$(36.7)
--------------------------------------------------------------
FISCAL 2000 COMPARED TO FISCAL 1999
Total revenues decreased 4% to $1.3 billion, as manufactured housing sales
decreased 4% to $994 million, financial services income decreased 2% to $229
million and rental and other income increased 1% to $71 million.
Conditions in the manufactured housing industry are highly competitive at
both the retail and wholesale levels. For fiscal 2000, the industry was faced
with over-capacity in manufacturing, too many retail centers, and high product
inventories. This competitive environment, as well as rising interest rates and
general credit tightening, has contributed to decreased industry and Company
sales.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Net sales of the Retail group fell slightly to $670 million. This decline
was the result of an 8% decrease in homes sold, offset by an 8% increase in the
average number of Company-owned retail centers and an 8% increase in the average
price per home. Multi-section homes accounted for 51% of total new homes sold
versus 49% last year.
During the year, the Company opened 26 retail centers and closed 14
under-performing retail centers. The Company continually evaluates specific
markets and opens, acquires or closes retail centers as conditions warrant. Of
the 26 new openings, 10 were acquired and 16 were greenfield start-ups. Eleven
of the new retail centers were opened in the fourth quarter.
Net sales of the Manufacturing group to independent retailers decreased 16%
to $279 million, as the number of homes sold fell 18%. The average wholesale
price increased 2% principally due to a shift toward multi-section homes.
Multi-section homes accounted for 49% of total shipments versus 48% last year.
Net sales of the Communities group increased 28% to $45 million as 25% more
homes were sold while the average home selling price increased 3%. The Company
added 460 sites during the year bringing the total to 20,168 sites.
Within the Financial Services segment, interest and loan servicing revenues
increased $8 million, and insurance related revenues rose $6 million. Rental
and other income increased 1% on a 9% rise in Communities rental income.
The average outstanding balance of receivables owned declined 27% to $440
million with a weighted average interest rate of 11.9%, up from 10.3%. The
average outstanding balance of receivables sold rose 29% to $3.3 billion, and
the weighted average loan service spread decreased to 3.3% from 3.7%, as the
Federal Reserve increased interest rates.
Financial Services interest expense decreased $7 million to $1 million.
Debt collateralized by installment contract receivables dropped 26% to an
average of $10 million, and the weighted average interest rate increased to
10.5% from 10.4%. Loan covenants preclude prepaying these higher cost
obligations.
Gross profit margins increased to 33.6% from 32.2%. This increase is
attributable to a higher percentage of retail sales in the total sales mix as
well as a shift in mix to multi-section units.
Selling, general and administrative expenses were 29.7% and 27.3% of
revenues for the years ended June 30, 2000, and 1999, respectively. This
increase as a percentage of revenues was primarily due to a decline in overall
sales volume, in addition to growth of Company-owned sales centers without a
corresponding increase in sales. Additional set up costs associated with the
shift in mix toward multi-section units and sales of larger homes was also a
factor.
Net losses as a percentage of loans outstanding for fiscal 2000 remained
steady at 1.4% while delinquency rates on all loans increased to 2.2% on a unit
basis from 2.1%. The size, character and rate of change in the credit loss and
contingent liability reserves are dependent upon many factors, including, but
not limited to, origination volume, portfolio performance and market conditions.
The changes in inventory levels at June 30, 2000, compared to June 30,
1999, are shown below in millions:
Increase
MANUFACTURING
Raw materials $2.1
Finished goods 3.6
RETAIL
Inventory to stock 12 new Company-
owned sales centers 8.6
Inventory levels at 306 Company-owned
sales centers open at June 30, 1999 21.0
COMMUNITIES
Inventory to stock one new community 0.3
Inventory levels at 75 communities
open at June 30, 1999 2.4
-----------------------------------------------------------
$38.0
-----------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates meeting cash requirements with proceeds from asset
securitizations, cash provided from operations, revolving credit lines, a
participation facility and long-term debt. A principal strength of the Company
is its ability to access global capital markets; continued access to the public
and private capital markets is critical to the Company's ability to continue to
fund its finance operations. During the year ended June 30, 2001, the Company
raised $886 million through asset securitizations.
At June 30, 2001, the Company had debt outstanding of $142 million.
Short-term debt available consists of $165 million committed and $71 million
uncommitted lines of credit for working capital needs. Debt outstanding
principally consists of $75 million of privately issued senior notes, $46
million of short-term borrowings, $5 million of installment paper collateralized
debt and $16 million of tax-exempt bonds.
On January 11, 2001, the Company cancelled its committed one-year $300
million commercial paper conduit facility. Subsequent to June 30, 2001, the
Company entered into a one-year committed $150 million participation facility to
be used to facilitate the sale of manufactured housing contracts and mortgages.
In fiscal 2001, the Company repurchased 60,000 shares for $482,000. Under
Board approved repurchase programs, all shares may be acquired, at management's
discretion, over time on the open market. Shares repurchased are retired.
The Company originated and acquired approximately $1.1 billion of
installment contracts and mortgage loan receivables during fiscal 2001.
Additional investments were made of approximately $14 million to expand,
develop, or improve manufactured housing communities, $5 million for opening and
upgrading Company-owned retail centers, $4 million for construction and
improvement of manufacturing facilities, and $2 million for other fixed assets.
In fiscal 2002, the Company expects to originate approximately $900 million
of installment contract and mortgage loan receivables. It expects to invest
approximately $24 million in acquisitions or construction of manufactured
housing communities, up to $12 million for opening and upgrading Company-owned
retail centers, up to $6 million for construction and improvement of
manufacturing facilities, and up to $2 million for other fixed assets.
MARKET RISK
The Company is exposed to market risks related to fluctuations in interest
rates on its installment paper contract receivables, related residual interests
and variable rate debt, which principally consists of revolving
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
credit lines. The Company uses interest rate swaps to minimize interest rate
risk on certain credit lines, effectively converting these to fixed rate debt.
Foreign currency and commodity price risk are not considered to have a material
impact on the Company.
The Company has variable interest rate installment contract receivables of
$14 million at June 30, 2001. Holding the outstanding principal amount
constant, each one percentage point increase in interest rates occurring on the
first day of the year would result in an increase in interest income for the
coming year of approximately $42,000, net of tax.
The Company has residual interests collateralized by installment contract
receivables with variable interest rate terms. These installment contract
receivables aggregate $928 million on June 30, 2001. Holding the receivable
balances constant, each one percentage point increase in interest rates
occurring on the first day of the year would result in a decrease in financial
services income for the coming year of approximately $3.7 million, net of tax.
As of June 30, 2001, the Company has outstanding debt of $142 million.
There is no significant exposure to changes in interest rates on debt
obligations as the majority of its long-term debt, $80 million, carries fixed
interest rates. Remaining debt of $62 million carries variable interest rates,
which reprice weekly. Holding the variable rate debt constant, each one
percentage point increase in interest rates occurring on the first day of the
year would result in an increase in interest expense for the coming year of
approximately $391,000, net of tax.
EFFECTS OF INFLATION
Inflation has had an insignificant impact on the Company during the past
several years.
FORWARD LOOKING STATEMENTS
Certain statements in this annual report are forward looking as defined in
the Private Securities Litigation Reform Law. These statements involve certain
risks and uncertainties that may cause actual results to differ materially from
expectations as of the date of this report. These risks fall generally within
three broad categories consisting of industry factors, management expertise, and
government policy and economic conditions. Industry factors include such
matters as potential periodic inventory adjustments by both captive and
independent retailers, availability of wholesale and retail financing, general
or seasonal weather conditions affecting sales and revenues, catastrophic events
impacting insurance costs, cost of labor and/or raw materials and industry
consolidation trends creating fewer, but stronger, competitors capable of
sustaining competitive pricing pressures.
Management expertise and experience affects its overall ability to
anticipate and meet consumer preferences, maintain successful marketing
programs, continue quality manufacturing output, keep a strong cost management
oversight, and achieve stable results from its securitization activities.
Lastly, management has little control over government policy and economic
conditions such as prevailing interest rates, capital market liquidity,
government monetary policy, stable regulation of manufacturing standards,
consumer confidence, favorable trade policies, and general prevailing economic
and employment conditions.
QUARTERLY RESULTS (unaudited)
2001 2000
-------------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH First Second Third Fourth
(in thousands except per share data) SEPT. 30 DEC. 31 MAR. 31 JUNE 30 Sept. 30 Dec. 31 Mar. 31 June 30
-------------------------------------------------------------------------------------------------------------------------------
Revenues $300,807 $284,853 $272,070 $293,226 $337,297 $309,159 $306,981 $339,908
Operating income 45,408 45,468 38,620 41,359 56,277 55,551 56,725 58,464
Income before income taxes 45,982 43,565 37,752 42,052 56,424 55,831 56,993 59,377
Net income 28,982 27,465 23,752 26,452 35,524 35,231 35,893 37,377
Earnings per share - Basic $.21 $.20 $.17 $.19 $.25 $.25 $.26 $.27
- Diluted $.21 $.20 $.17 $.19 $.25 $.25 $.26 $.27
Price range of stock - High $10.00 $12.88 $14.50 $15.82 $11.88 $11.94 $10.13 $10.38
- Low $8.13 $8.75 $12.05 $11.55 $8.56 $8.50 $7.81 $7.94
Dividends per common share $.016 $.016 $.016 $.016 $.016 $.016 $.016 $.016
-------------------------------------------------------------------------------------------------------------------------------
15
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Clayton Homes, Inc. and Subsidiaries at June 30, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Knoxville, Tennessee
August 7, 2001
CONSOLIDATED BALANCE SHEETS
June 30,
(in thousands) 2001 2000
-------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 47,763 $ 43,912
Trade receivables 14,683 21,796
Other receivables, principally installment contracts, net of reserves for credit
losses and unamortized discounts of $20,560 in 2001 and $4,217 in 2000 657,224 500,942
Residual interests in installment contract and mortgage receivables 170,122 150,329
Inventories, net 185,695 222,431
Securities available-for-sale 30,956 47,734
Restricted cash 111,060 96,904
Property, plant and equipment, net 309,438 305,479
Deferred income taxes 22,710 24,284
Other assets 104,519 92,567
-------------------------------------------------------------------------------------------------------------
Total assets $1,654,170 $1,506,378
-------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 118,057 $ 122,760
Debt obligations 141,862 99,216
Other liabilities 246,773 248,027
-------------------------------------------------------------------------------------------------------------
Total liabilities 506,692 470,003
-------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock, $.10 par value, authorized 1,000 shares, none issued - -
Common stock, $.10 par value, authorized 200,000 shares, issued 137,991
at June 30, 2001, and 137,499 at June 30, 2000 13,799 13,750
Additional paid-in capital 43,593 39,500
Retained earnings 1,081,137 983,806
Accumulated other comprehensive income (loss) 8,949 (681)
-------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,147,478 1,036,375
-------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,654,170 $1,506,378
-------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Clayton Homes, Inc. and Subsidiaries
16
CONSOLIDATED STATEMENTS OF INCOME
Year ended June 30,
(in thousands except per share data) 2001 2000 1999
---------------------------------------------------------------------------------------------
Revenues
Net sales $ 849,157 $ 993,916 $1,040,668
Financial services 227,916 228,642 233,848
Rental and other income 73,883 70,787 69,767
---------------------------------------------------------------------------------------------
1,150,956 1,293,345 1,344,283
---------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales 562,267 660,429 705,128
Selling, general and administrative 374,628 384,067 367,430
Financial services interest 706 1,032 7,981
Provision for credit losses 42,500 20,800 12,459
---------------------------------------------------------------------------------------------
980,101 1,066,328 1,092,998
---------------------------------------------------------------------------------------------
Operating income 170,855 227,017 251,285
Interest expense (5,561) (5,749) (11,995)
Interest revenue/other 4,057 7,357 6,678
---------------------------------------------------------------------------------------------
Income before income taxes 169,351 228,625 245,968
Provision for income taxes (62,700) (84,600) (91,000)
---------------------------------------------------------------------------------------------
Net income $ 106,651 $ 144,025 $ 154,968
---------------------------------------------------------------------------------------------
Net income per common share
Basic $0.77 $1.03 $1.07
Diluted $0.77 $1.03 $1.06
Average shares outstanding
Basic 137,702 139,474 145,211
Diluted 138,340 139,815 145,931
---------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Total Additional Other
Shareholders' Common Paid-in Retained Comprehensive
(in thousands except share data) Equity Stock Capital Earnings Income (Loss)
---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $ 881,019 $14,852 $162,413 $703,754 $ -
Net income 154,968 - - 154,968 -
Other comprehensive income, net of tax
Unrealized loss on securities available- for-sale (821) - - - (821)
--------
Comprehensive income 154,147
Purchase of 6,465,000 shares of common stock (81,394) (647) (80,747) - -
Dividends declared ($.064 per common share) (9,606) - - (9,606) -
Issuances related to stock incentive,
employee benefit plans and other 3,602 32 3,570 - -
---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 947,768 14,237 85,236 849,116 (821)
Net income 144,025 - - 144,025 -
Other comprehensive income, net of tax
Unrealized loss on securities available-
for-sale during the year (627) - - - (627)
Realized loss on securities available-
for-sale included in net income 767 - - - 767
--------
Comprehensive income 144,165
Purchase of 5,382,000 shares of common stock (49,776) (538) (49,238) - -
Dividends declared ($.064 per common share) (9,335) - - (9,335) -
Issuances related to stock incentive,
employee benefit plans and other 3,553 51 3,502 - -
---------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 1,036,375 13,750 39,500 983,806 (681)
NET INCOME 106,651 - - 106,651 -
OTHER COMPREHENSIVE INCOME, NET OF TAX
UNREALIZED GAIN ON RESIDUAL INTERESTS 7,591 - - - 7,591
UNREALIZED GAIN ON SECURITIES AVAILABLE-
FOR-SALE DURING THE YEAR 1,732 - - - 1,732
REALIZED LOSS ON SECURITIES AVAILABLE-
FOR-SALE INCLUDED IN NET INCOME 307 - - - 307
--------
COMPREHENSIVE INCOME 116,281
PURCHASE OF 60,000 SHARES OF COMMON STOCK (482) (6) (476) - -
DIVIDENDS DECLARED ($.064 PER COMMON SHARE) (9,320) - - (9,320) -
ISSUANCES RELATED TO STOCK INCENTIVE,
EMPLOYEE BENEFIT PLANS AND OTHER 4,624 55 4,569 - -
---------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2001 $1,147,478 $13,799 $43,593 $1,081,137 $8,949
---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Clayton Homes, Inc. and Subsidiaries
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
(in thousands) 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $106,651 $144,025 $154,968
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 20,600 20,422 17,795
Amortization of residual interests, net of gain on sale 14,205 3,256 (15,089)
Provision for credit losses 42,500 20,800 12,459
Realized loss on securities available-for-sale 488 1,218 -
Deferred income taxes (4,082) (3,861) (8,267)
Decrease (increase) in other receivables, net 1,200 5,720 (93,014)
Decrease (increase) in inventories 36,736 (37,987) (17,331)
Increase (decrease) in accounts payable, accrued
liabilities, and other (55,766) (60,184) 14,631
--------------------------------------------------------------------------------------------------------------------
Cash provided by operations 162,532 93,409 66,152
Origination of installment contract receivables (815,546) (983,090) (1,085,484)
Proceeds from sales of originated installment contract receivables 660,802 886,040 1,030,442
Principal collected on originated installment contract receivables 40,686 48,040 80,610
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 48,474 44,399 91,720
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of installment contract receivables (321,711) (206,154) (253,625)
Proceeds from sales of acquired installment contract receivables 225,654 229,412 389,866
Principal collected on acquired installment contract receivables 23,154 19,836 73,200
Proceeds from sales of securities available-for-sale 29,527 37,733 -
Acquisition of property, plant and equipment (24,559) (34,398) (47,749)
Decrease (increase) in restricted cash (14,156) 3,223 (13,951)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (82,091) 49,652 147,741
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (9,320) (9,335) (9,606)
Net borrowings (repayment) on credit facilities 45,800 - (227,873)
Proceeds from (repayment of) long-term debt (3,154) 2,739 76,759
Issuance of stock for incentive plans and other 4,624 3,553 3,602
Repurchase of common stock (482) (49,776) (81,394)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 37,468 (52,819) (238,512)
--------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 3,851 41,232 949
Cash and cash equivalents at beginning of year 43,912 2,680 1,731
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $47,763 $43,912 $2,680
--------------------------------------------------------------------------------------------------------------------
Supplemental disclosures for cash flow information
Cash paid during the year for
Interest $6,267 $6,781 $19,976
Income taxes $76,723 $97,903 $95,931
--------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Clayton Homes, Inc. and Subsidiaries
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The consolidated financial statements include the accounts of Clayton
Homes, Inc. (CMH) and its wholly- and majority-owned subsidiaries. CMH and its
subsidiaries are collectively referred to herein as the Company. The Company is
a vertically-integrated manufactured housing company headquartered near
Knoxville, Tennessee. Employing approximately 6,500 people and operating in 33
states, the Company builds, sells, finances and insures manufactured homes, as
well as owns and operates residential manufactured housing communities.
Significant intercompany accounts and transactions have been eliminated in the
financial statements. See Note 11, Business Segment Information.
Income Recognition
Sales to independent retailers of homes produced by CMH are recognized as
revenue upon shipment. Retail sales are recognized when: cash payment is
received, or in the case of credit sales, which represent the majority of retail
sales, when a down payment is received and the home buyer enters into an
installment sales contract; construction of the home is complete; the home buyer
has inspected and accepted the home; and title has passed to the retail home
buyer. Most of these installment sales contracts, which are normally payable
over 84 to 360 months, are financed by Vanderbilt Mortgage and Finance, Inc.
(VMF), the Company's financing subsidiary.
The Company acts as agent on physical damage, family protection and home
buyer protection plan insurance policies written by unaffiliated insurance
companies (ceding companies) for the purchasers of manufactured homes. The
insurance policies are in turn reinsured by certain subsidiaries of the Company.
Premiums from policies represent short-duration contracts with terms of one to
10 years and are deferred and recognized as revenue over the terms of the
policies. Claims expenses are recorded as insured events occur. Expenses are
matched to revenue over the terms of the policies by means of deferral and
amortization of policy acquisition costs; such costs include commissions,
premium taxes and ceding fees, which vary with and are directly related to the
production of insurance policies.
During the fourth quarter of 2001, the Company adopted Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, and
determined that its practices already comply with the revenue recognition
policy. Thus, such adoption did not have a material impact on the Company's
reported results of operations, financial position or cash flows.
Installment Contract and Mortgage Receivables
Installment contract receivables and mortgage loan receivables originated
or purchased by VMF are generally sold to investors through an asset-backed
securities vehicle, with VMF retaining residual interests and servicing on the
contracts.
Installment contract receivables held for sale are included in other
receivables and are carried at the lower of aggregate cost or market. Certain of
the installment contract receivables are purchased in bulk at a discount. The
purchase discounts are allocated between discount and reserves for credit losses
and contingent liabilities based on management's assessment of risks existing in
the portfolio. Discount is accreted over the life of the related portfolio
after giving consideration to anticipated prepayments. Adjustments between the
reserves for credit losses and contingent liabilities and discount are
periodically made to reflect changes in the estimated collectibility of each
portfolio purchased.
VMF provides servicing for investors in installment contract receivables.
Total contracts serviced at June 30, 2001, and 2000, including contracts held
for investment, were approximately $4.3 billion and $3.9 billion, respectively.
Most of the installment contract receivables are with borrowers in the east,
south and southwest portions of the United States and are collateralized by
manufactured homes. Interest income on installment contract receivables is
recognized by a method which approximates the simple interest method. Service
fee income is recognized as the service is performed. The Company accrues for
obligations related to cash collections from sold and serviced only loans and
remits these collections to investors on a monthly basis. See Note 12, Other
Assets and Other Liabilities.
Retained Interests
The Company utilizes a financial components approach to transfers and
servicing of financial assets, requiring that the carrying amount of the
receivables sold be allocated between the assets sold and the assets
(liabilities) created, if any, based upon their estimated fair value at the date
of sale. The assets (liabilities) created are: 1) an interest-only strip
valued as the discounted present value of the excess (deficiency) interest due
the residual interest owner (VMF) during the expected life of the contracts
over: i) the stated investor yield; ii) the contractual servicing fee; and iii)
estimated credit losses; and 2) servicing asset (liability), representing the
discounted present value of the contractual servicing fee over the cost of
servicing the contracts. Profit (loss) recorded at the time of the sale is
computed as the difference between the allocated carrying amount of the
receivables sold and the proceeds realized from the sale.
The servicing asset at June 30, 2001, and 2000, is as follows:
(in thousands) 2001 2000
-------------------------------------------------------------
Servicing asset beginning balance $ 40,704 $ 27,024
Servicing asset recognized 15,994 23,781
Amortization (11,570) (10,101)
-------------------------------------------------------------
Servicing asset ending balance $ 45,128 $ 40,704
-------------------------------------------------------------
The balance represents the estimated fair value of the aggregate servicing
assets at June 30, 2001. The estimate of fair value assumes: 1) discount rates
which, at the time the asset was created, approximate current market rates; and
2) expected prepayment rates based on loan prepayment experience for similar
transactions. Servicing assets are periodically evaluated in a deal by deal
basis for impairment based on the fair value of those assets. The Company has
not experienced any impairment losses. The servicing assets are amortized using
the effective interest method over the estimated weighted average life of the
underlying securities.
Interest-only securities represent the right to receive future cash flows
from securitization transactions. Such cash flows generally are equal to the
value of the principal and interest to be collected on the underlying financial
contracts of each securitization in excess of the sum of the principal and
interest to be paid on the securities sold and contractual servicing fee, less
estimated credit losses. The Company carries interest-only securities at
estimated fair value. As market quotes are generally not available, fair value
is determined by discounting the projected cash flows over the expected life of
the receivables sold using current prepayment, default, loss and interest rate
assumptions. Estimates for prepayments, defaults, and losses are determined
based on a model developed by the Company
Clayton Homes, Inc. and Subsidiaries
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and refined to reflect Company-specific experience and trends. See Note 2,
Securitizations.
The residual interests in the installment receivables sold are classified
as available-for-sale securities (as defined by Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities). On April 1, 2001, the Company adopted the consensus
under Emerging Issues Task Force Issue No. 99-20, Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized
Assets. Under previously existing accounting requirements, declines in fair
value of such beneficial interests were recognized as other than temporary
impairment when the present value of the underlying cash flows discounted at a
risk-free rate using current assumptions were less than the carrying value of
such assets. Pursuant to EITF Issue No. 99-20, declines in fair value are to be
considered other than temporary when: (i) the carrying value of the beneficial
interests exceeds the fair value of such beneficial interests using current
assumptions, and (ii) the timing and/or extent of cash flows expected to be
received on the beneficial interests has adversely changed - as defined - from
the previous valuation date. Under the new guidelines, the Company evaluated
the expected future cash flows from its interest-only securities and determined
that there was a favorable difference in estimated cash flows of $12.0 million
($7.6 million after tax) for the year ended June 30, 2001. This favorable
adjustment has been recorded as an element of accumulated other comprehensive
income.
The Company follows SFAS No. 134, Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise, which requires that the Company classify mortgage-backed
securities retained after a securitization in accordance with SFAS No. 115.
Accordingly, these securities, valued at $25.2 million, are classified as
available-for-sale, are stated at fair value, and can be reasonably expected to
mature in 3-10 years. The Company also has certain other investments that had
been designated as available-for-sale and accordingly have been stated at fair
value. The fair value of these securities is estimated based on quoted market
prices, when available. If not available, fair value is estimated using quoted
market prices for similar financial instruments. Net unrealized holding gains
and losses are reported as a separate component of accumulated other
comprehensive income, net of tax, until realized.
Cash Equivalents
For purposes of the statements of cash flows, all unrestricted highly
liquid debt instruments purchased with an original maturity of three months or
less are considered to be cash equivalents.
Inventories
New homes and raw materials are carried at the lower of cost or market,
using the last-in, first-out (LIFO) method of inventory valuation.
Previously-owned manufactured homes are recorded at estimated wholesale value
(cost) but not in excess of net realizable value.
Property, Plant and Equipment
Land and improvements, buildings, and furniture and equipment are recorded
at cost. Major renewals and improvements are capitalized while replacements,
maintenance and repairs which do not improve or extend the life of the
respective assets, are expensed currently. When depreciable assets are sold or
retired, the cost and related accumulated depreciation are removed from the
accounts, and any gain or loss is included in earnings for the period.
Depreciation is computed primarily by the straight-line method over the
estimated useful lives of the respective assets ranging from three to 40 years.
The Company follows SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
recognition of impairment losses for long-lived assets whenever events or
changes in circumstances result in the carrying amount of the assets exceeding
the sum of the expected future undiscounted cash flows associated with such
assets. The measurement of the impairment losses recognized is based on the
difference between the fair values and the carrying amounts of the assets. SFAS
121 also requires that long-lived assets held for sale be reported at the lower
of carrying amount or fair value less cost to sell. The Company has not
experienced any impairment losses.
Reserves for Credit Losses and Contingent Liabilities
Reserves for credit losses and contingent liabilities are established
related to installment contract receivables and contracts in foreclosure. Actual
credit losses are charged to the reserves when incurred. The reserves
established for such losses are determined based on the Company's historical
loss experience after adjusting for current economic conditions. Management, in
assessing the loss experience and economic conditions, adjusts reserves through
periodic provisions. The Company also maintains a reserve for contingent
liabilities related to guarantees of installment contract receivables sold with
recourse.
Interest Rate Swaps
The Company uses interest rate swaps to assist in minimizing interest
incurred on its short-term variable rate debt. The difference between amounts
received and amounts paid under such agreements is recorded as a reduction of,
or addition to, interest expense as incurred over the life of the swap.
In 2001, the Company adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which was subsequently amended by SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments embedded in other contracts and for hedging activities.
See Note 5, Debt Obligations.
Restricted Cash
Restricted cash primarily represents: 1) trust account cash balances
required by certain VMF servicing agreements, and 2) insurance reserves required
by custodial or trust agreements.
Income Taxes
Deferred income taxes are recorded to reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income is presented net of income taxes and
is comprised of unrealized gains and temporary losses on securities
available-for-sale, as described under Retained Interests.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other
Per share and share data have been retroactively adjusted to reflect a
5-for-4 stock split paid in December 1998. Certain reclassifications have been
made to the 1999 and the 2000 financial statements to conform to the 2001
presentation.
New Accounting Pronouncements
In June 2001, the FASB issued Statement No. 141 (FAS 141), Business
Combinations, and Statement No. 142 (FAS 142), Goodwill and Other Intangible
Assets. FAS 141 supercedes APB 16, Business Combinations, and primarily
addresses the accounting for the cost of an acquired business (i.e., the
purchase price allocation), including any subsequent adjustments to its cost.
FAS 142 primarily addresses the accounting for goodwill and intangible assets
subsequent to their acquisition (i.e., the post-acquisition accounting) and
supercedes APB 17, Intangible Assets.
The most significant changes made by FAS 141 involve the requirement to use
the purchase method of accounting for all business combinations, thereby
eliminating use of the pooling-of-interests method along with the establishment
of new criteria for determining whether intangible assets acquired in a business
combination should be recognized separately from goodwill. FAS 141 is effective
for all business combinations (as defined in the Statement) initiated after June
30, 2001, and for all business combinations accounted for by the purchase method
that are completed after June 30, 2001 (that is, the date of acquisition is July
1, 2001, or later).
Under FAS 142, goodwill and indefinite lived intangible assets will no
longer be amortized and will be tested for impairment at least annually at a
reporting unit level. Additionally, the amortization period of intangible assets
with finite lives is no longer limited to forty years. FAS 142 is effective for
fiscal years beginning after December 15, 2001, to all goodwill and other
intangible assets recognized in an entity's statement of financial position at
that date, regardless of when those assets were initially recognized. Early
application is permitted for entities with fiscal years beginning after March
15, 2001, provided that the first interim period financial statements have not
been issued previously.
The Company does not expect adoption of either FAS 141 or FAS 142 to have a
material impact on the Company's reported results of operations, financial
position or cash flows.
NOTE 2 - SECURITIZATIONS
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
requires certain additional disclosures. SFAS No. 140 was effective for all
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001.
The original key economic assumptions used in measuring the retained
interests at the date of securitization resulting from securitizations completed
in 2001, the key economic assumptions used to measure all retained interests at
June 30, 2001, the sensitivity of the current fair value to adverse changes in
the assumptions, and certain cash flows received from securitization trusts in
2001 are presented as follows:
($ in millions)
------------------------------------------------------------------
ORIGINAL KEY ECONOMIC ASSUMPTIONS
Prepayment speed (% MHP Model) 300
Weighted average life (in years) 4.66
Expected credit losses 2.48%
Residual cash flow discount rate 15.75%
------------------------------------------------------------------
CURRENT ECONOMIC ASSUMPTIONS AND SENSITIVITY ANALYSIS
Carrying value (fair value) of retained interests $ 195.3
Weighted average life (in years) 4.49
Prepayment speed (% MHP Model) 200-400%
Impact of 10% adverse change ($8.6)
Impact of 20% adverse change ($16.4)
Expected credit losses 1.90%
Impact of 10% adverse change ($10.4)
Impact of 20% adverse change ($20.9)
Residual cash flow discount rate 15.75%
Impact of 10% adverse change ($6.7)
Impact of 20% adverse change ($12.8)
------------------------------------------------------------------
CASH FLOW ACTIVITY
Proceeds from new securitizations $ 886.5
Servicing fees received $ 48.9
Cash flow received from retained interests $ 70.9
------------------------------------------------------------------
The sensitivity analysis is hypothetical and should be used with caution.
For instance, changes in fair value based on a 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. In
addition, the effect of a variation in a particular assumption on the fair value
of the retained interest is calculated without changing any other assumption,
when in reality, changes in any one factor may result in changes in another
factor.
Managed receivables at June 30, 2001, and related receivables past due 90
days are as follows:
Total Principal 90 Days or More
($ in millions) Amount Past Due (a)
-----------------------------------------------------------------
Held in portfolio $ 649 $14.7
Securitized 3,532 51.2
-----------------------------------------------------------------
$4,181 $65.9
-----------------------------------------------------------------
(a) Includes bankruptcies and foreclosures.
Net credit losses for the year ended June 30, 2001 totaled $51.1 million.
See Note 6, Reserves for Credit Losses and Contingent Liabilities.
NOTE 3 - INVENTORIES
Inventories at June 30, 2001, and 2000, are as follows:
(in thousands) 2001 2000
------------------------------------------------
Manufactured homes
New $114,874 $148,658
Previously-owned 54,171 53,593
Raw materials 16,650 20,180
------------------------------------------------
$185,695 $222,431
------------------------------------------------
If the first-in, first-out (FIFO) method of inventory valuation had been
used, inventories would have been higher by $20,282,000 and $21,633,000 at June
30, 2001, and 2000, respectively.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 2001, and 2000, are as follows:
(in thousands) 2001 2000
---------------------------------------------------------
Land and improvements $ 215,910 $199,329
Buildings 150,000 156,689
Furniture and equipment 50,422 45,964
---------------------------------------------------------
416,332 401,982
Less: accumulated depreciation
and amortization (106,894) (96,503)
---------------------------------------------------------
$ 309,438 $305,479
---------------------------------------------------------
NOTE 5 - DEBT OBLIGATIONS
Debt obligations at June 30, 2001, and 2000, are summarized as follows:
(in thousands) 2001 2000
------------------------------------------------------------------------------
Senior notes, 6.25%, due December 2003 $ 75,000 $75,000
Debt collateralized by installment contract receivables,
average effective rate 10.18% on June 30, 2001,
due through 2004 5,229 8,373
Tax-exempt bonds, effective rate of 2.85% on
June 30, 2001, due through 2030 15,230 15,230
Lines of credit 45,800 -
Other notes payable 603 613
------------------------------------------------------------------------------
$141,862 $99,216
------------------------------------------------------------------------------
Annual maturities of debt as of June 30, 2001, are 2002 - $48,853,000; 2003
- $1,977,000; 2004 - $75,199,000; 2005 - $0; and 2006 - $0.
In December 1998, the Company issued $75 million of 6.25% Senior
Subordinated Notes due December 2003 (the "6.25% Notes"), with interest payable
each June and December. The 6.25% Notes are redeemable at the option of the
Company, in whole, at 100% of the principal amount plus a make-whole premium at
any time prior to December 30, 2003. The 6.25% Notes are not subject to any
sinking fund requirements.
On January 11, 2001, the Company cancelled its committed one-year $300
million commercial paper conduit facility. Subsequent to June 30, 2001, the
Company entered into a $150 million participation facility to be used to
facilitate the sale of manufactured housing contracts.
The Company has a $150 million five-year revolving credit facility with its
bank group. This facility's pricing is based on LIBOR rates; commitment fees
are payable quarterly on the unused portion of the facility.
The Company's tax-exempt manufacturing facilities' bonds carry no sinking
fund requirements and bear interest at weekly adjustable rates.
The preceding facilities are governed by various financial covenants which
require maintenance of certain financial ratios and are uncollateralized. In
addition, the Company has committed and uncommitted lines of credit amounting to
$86 million with several banks, interest based on LIBOR rates, of which $46
million was outstanding at June 30, 2001. These lines are subject to periodic
review by each bank and may be canceled by the Company at any time.
Under certain interest rate swap agreements, the Company agrees with other
parties to exchange the difference between fixed rate and variable rate interest
amounts calculated by reference to an agreed upon notional principal amount. At
June 30, 2001, the Company's interest rate swap agreements have an aggregate
notional amount of $100 million. The interest rates on the notional amounts
range from 5.42% to 5.62%.
NOTE 6 - RESERVES FOR CREDIT LOSSES AND CONTINGENT LIABILITIES
An analysis of the reserves for losses on installment contract receivables
and contingent liabilities including those contracts in foreclosure for the
years ended June 30, 2001, 2000, and 1999, are as follows:
(in thousands) 2001 2000 1999
-----------------------------------------------------------------------------------------------
Balance, beginning of year $ 35,725 $ 44,275 $ 35,828
Provision 42,500 20,800 12,459
Charges, net of recoveries applicable to installment
contract receivables
Purchased (13,105) (12,199) (13,384)
Other (37,974) (20,044) (11,951)
Reserves transferred to unamortized discounts (1,000) (6,000) (1,981)
Reserves associated with receivables purchased 4,390 8,893 23,304
-----------------------------------------------------------------------------------------------
Balance, end of year $ 30,536 $ 35,725 $ 44,275
-----------------------------------------------------------------------------------------------
The reserves for credit losses are netted against receivables and the
reserve for contingent liabilities is included in other liabilities on the
consolidated balance sheets. The Company is contingently liable as guarantor on
installment contract receivables sold with recourse. At June 30, 2001, and
2000, the outstanding principal balances of these receivables totaled
approximately $84 million and $117 million, respectively. There were no
receivables sold with recourse in 2001, 2000 and 1999.
NOTE 7 - SHAREHOLDERS' EQUITY
Stock Option Plan
In 1983, 1985, 1991, and 1997, the Company established Stock Option Plans
for a total of 17,021,036 shares of common stock which provide for granting
"incentive stock options" or "non-qualified options" and stock appreciation
rights to officers and key employees of the Company. In addition,
non-management members of the Board of Directors have, with shareholder approval
of prices and provisions for exercise, been granted options to purchase shares
of common stock. The option prices were established at not less than the fair
market value as of the date of grant. Options are exercisable after one or more
years and expire no later than 10 years from the date of grant. Activity and
price information regarding the plans are as follows:
WEIGHTED WEIGHTED
AVG STOCK AVG
STOCK OPTION EXERCISE OPTIONS EXERCISE
SHARES PRICE RANGE PRICE EXERCISABLE PRICE
------------------------------------------------------------------------------
Balance June 30, 1998 4,303,038 $1.41 - $13.70 $ 9.32 1,187,395 $ 7.29
Granted 1,477,846 $8.19 - $15.75 $12.73
Exercised (162,002) $1.41 - $13.70 $ 5.03
Canceled (757,731) $1.76 - $15.75 $11.55
------------------------------------------------------------------------------
Balance June 30, 1999 4,861,151 $1.41 - $15.75 $10.15 1,449,866 $ 8.13
Granted 762,325 $9.38 - $11.88 $ 9.91
Exercised (208,725) $1.41 - $ 8.27 $ 2.65
Canceled (309,295) $3.64 - $15.75 $11.11
------------------------------------------------------------------------------
Balance June 30, 2000 5,105,456 $2.16 - $15.75 $10.36 1,655,984 $ 9.18
GRANTED 875,825 $8.38 - $ 9.31 $ 9.10
EXERCISED (278,401) $2.16 - $13.70 $ 5.88
CANCELED (242,418) $7.22 - $15.75 $10.24
------------------------------------------------------------------------------
BALANCE JUNE 30, 2001 5,460,462 $3.83 - $15.75 $10.40 1,901,452 $ 9.84
------------------------------------------------------------------------------
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Options available for future grant at June 30, 2001, and 2000, were
4,299,675 and 4,939,727, respectively. Options were held by 880 persons at June
30, 2001.
The following table summarizes information about the plans' stock options
at June 30, 2001, including weighted average remaining life (Life) and weighted
average exercise price (Price):
Options Outstanding Options Exercisable
----------------------------- -------------------
Range Number Life Price Number Price
-------------------------------------------------------------------------------
$ 3.83 - $ 5.05 155,857 0.6 years $ 4.24 102,489 $ 3.83
$ 7.22 - $10.32 2,849,779 5.8 years $ 8.72 1,051,092 $ 8.26
$11.50 - $15.75 2,454,826 6.0 years $12.73 747,871 $12.89
The Company has elected to continue following Accounting Principles Board
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related
interpretations in accounting for its stock option plans rather than the
alternative fair value accounting provided for under SFAS 123, Accounting for
Stock-Based Compensation. Under APB 25, because the exercise price of the
Company's employee and director stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized in
the accompanying financial statements. Pro forma information regarding net
income and net income per common share is required by SFAS 123 and has been
determined as if the Company has accounted for its stock options under the fair
value method of that standard. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting periods. The pro forma results do not purport to indicate the effects
on reported net income for recognizing compensation expense which are expected
to occur in future years. The Company's pro forma information is as follows:
June 30,
(in thousands except per share data) 2001 2000 1999
----------------------------------------------------------------------------------
Net income - as reported $ 106,651 $144,025 $154,968
Net income - pro forma 104,352 141,634 153,610
Net income per diluted common share - as reported $.77 $1.03 $1.06
Net income per diluted common share - pro forma .75 1.01 1.05
----------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants issued from 1999 to 2001; dividend yields ranging
from 0.41% to 0.76% with a weighted average yield of 0.59%; expected volatility
of 0.34%, risk-free interest rates ranging from 4.10% to 6.54% with a weighted
average rate of 5.65%; and expected lives ranging from 6.47 to 10.00 years with
a weighted average life of 8.75 years. The weighted average grant date fair
value of options granted in fiscal years 2001, 2000 and 1999 was $4.06, $4.66,
and $5.66 per share, respectively.
NOTE 8 - INCOME TAXES
The components of deferred tax assets and liabilities at June 30, 2001, and
2000, are as follows:
(in thousands) 2001 2000
--------------------------------------------------------
Reserves for credit losses and
contingencies and discounts $ 8,388 $ 9,258
Insurance reserves 10,850 9,911
Unearned premiums 9,604 9,348
Residual interest in installment
contract receivables 12,729 11,781
--------------------------------------------------------
Total deferred tax assets 41,571 40,298
--------------------------------------------------------
Deferred costs (6,549) (6,728)
Other comprehensive income (5,256) -
Other (7,056) (9,286)
--------------------------------------------------------
Total deferred tax liabilities (18,861) (16,014)
--------------------------------------------------------
Net deferred tax asset $ 22,710 $ 24,284
--------------------------------------------------------
The provision for income tax is composed of the following:
(in thousands) 2001 2000 1999
------------------------------------------------------
Current tax provisions
Federal $64,010 $82,654 $92,706
State 2,772 5,807 6,561
------------------------------------------------------
Total current 66,782 88,461 99,267
Deferred tax benefit (4,082) (3,861) (8,267)
------------------------------------------------------
$62,700 $84,600 $91,000
------------------------------------------------------
At June 30, 2001, 2000, and 1999, a deferred tax provision (benefit) of
$5,656,000, $82,000, and ($482,000), respectively, was allocated directly to
shareholders' equity for the unrealized gain (loss) on residual interests and
securities available-for-sale. The provision for income tax reflected in the
financial statements differs from income taxes calculated at the statutory
federal income tax rate of 35% in 2001, 2000 and 1999, as follows:
(in thousands) 2001 2000 1999
----------------------------------------------------------------
Income taxes at the statutory rate $59,273 $80,019 $86,089
State income taxes, net of
federal benefit 1,802 3,775 4,265
Other, net 1,625 806 646
----------------------------------------------------------------
$62,700 $84,600 $91,000
----------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) defined contribution plan covering all employees
who meet participation requirements. The amount of the Company's contribution is
discretionary as determined by the Board of Directors, up to the maximum
deduction allowed for federal income tax purposes. Contributions accrued and
paid were $2,938,000, $3,169,000, and $3,162,000 for the years ended June 30,
2001, 2000 and 1999, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Certain operating properties are rented under non-cancelable operating
leases which expire at various dates through 2009. Total rental expense under
operating leases was $5,280,000 in 2001, $5,340,000 in 2000, and $5,210,000 in
1999. Minimum rental commitments under non-cancelable operating leases,
primarily for retail centers, in effect at June 30, 2001 were: 2002 -
$3,951,000; 2003 - $3,217,000; 2004 - $2,391,000; 2005 - $1,531,000; 2006 -
$902,000; and thereafter - $1,279,000.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Institutions financing independent retailer purchases require the Company
to execute repurchase agreements. As a result of these agreements, the Company
is contingently liable for repurchasing homes in the event of a default by the
dealer to the lending institution. These agreements are customary in the
manufactured housing industry, and the Company's losses in the past have not
been significant. The maximum potential repurchase obligation is approximately
$74 million at June 30, 2001, excluding any resale value.
At June 30, 2001, the Company has letters of credit, primarily related to
insurance reserves and performance guarantees related to asset backed
securitizations of approximately $118 million and $324 million, respectively.
The Company believes a significant loss from any such guarantee is remote.
Please see Note 6 for discussion of guarantees of installment contract
receivables.
NOTE 11 - BUSINESS SEGMENT INFORMATION
The Company has identified four major business segments: Retail,
Manufacturing, Financial Services, and Communities. The Retail group purchases
homes from the Company's manufacturing operations and third party manufacturers
to sell to retail customers. The Manufacturing group builds homes for
Company-owned and independent retailers. Financial Services provides retail
financing of manufactured homes, reinsures risk on family protection, physical
damage, and homebuyer protection plan insurance policies, and offers certain
specialty finance products. Communities owns and operates manufactured housing
communities. Income from operations consists of total revenues less cost of
sales and operating expenses. Identifiable assets are used in the operation of
each business segment.
Information concerning operations by business segment follows:
(in thousands) 2001 2000 1999
-----------------------------------------------------------------------
Revenues
Retail $ 651,133 $ 733,916 $ 737,044
Manufacturing 496,154 624,586 654,471
Financial Services 184,253 188,365 198,527
Communities 89,699 92,492 78,902
Intersegment sales (270,283) (346,014) (324,661)
-----------------------------------------------------------------------
$1,150,956 $1,293,345 $1,344,283
-----------------------------------------------------------------------
Income from operations
Retail $ 28,712 $ 53,623 $ 66,364
Manufacturing 36,637 62,729 72,377
Financial Services 95,469 108,792 117,385
Communities 14,022 16,130 15,850
Eliminations/other (3,985) (14,257) (20,691)
-----------------------------------------------------------------------
170,855 227,017 251,285
-----------------------------------------------------------------------
Interest
Interest expense (5,561) (5,749) (11,995)
Interest revenue/other income 4,057 7,357 6,678
-----------------------------------------------------------------------
Income before taxes $ 169,351 $ 228,625 $ 245,968
-----------------------------------------------------------------------
Identifiable assets
Retail $ 255,793 $ 287,705 $ 247,009
Manufacturing 82,616 100,112 94,773
Financial Services 1,080,416 902,913 901,769
Communities 191,802 185,784 177,723
Eliminations/other 43,543 29,864 (4,029)
-----------------------------------------------------------------------
$1,654,170 $1,506,378 $1,417,245
-----------------------------------------------------------------------
Depreciation and amortization
Retail $ 6,161 $ 5,639 $ 4,684
Manufacturing 5,767 6,516 5,478
Financial Services 512 472 235
Communities 7,030 6,724 6,412
Eliminations/other 1,130 1,071 986
-----------------------------------------------------------------------
$ 20,600 $ 20,422 $ 17,795
-----------------------------------------------------------------------
Capital expenditures
Retail $ 5,211 $ 11,535 $ 18,152
Manufacturing 4,346 9,558 12,971
Financial Services 88 454 576
Communities 13,920 12,059 14,703
Eliminations/other 994 792 1,347
-----------------------------------------------------------------------
$ 24,559 $ 34,398 $ 47,749
-----------------------------------------------------------------------
NOTE 12 - OTHER ASSETS AND LIABILITIES
At June 30, 2001, and 2000, other assets and liabilities consisted of:
(in thousands) 2001 2000
-------------------------------------------------------------
Other assets
Interest and other receivables $ 63,442 $ 52,605
Deferred policy acquisition costs 19,716 19,304
Prepaid expenses and other 21,361 20,658
-------------------------------------------------------------
$104,519 $ 92,567
-------------------------------------------------------------
Other liabilities
Investors payable $101,379 $ 85,161
Reserve for contingent liabilities 9,970 32,075
Escrow deposits 11,494 10,603
Unearned insurance premiums 96,555 94,669
Other 27,375 25,519
-------------------------------------------------------------
$246,773 $248,027
-------------------------------------------------------------
NOTE 13 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires that the Company disclose the estimated fair values of its financial
instruments. The following methodologies and assumptions were used by the
Company to estimate its fair value disclosures for financial instruments.
Fair value estimates are made at a specific point in time, based on
relevant market data and information about the financial instrument. The
estimates do not reflect any premium or discount that could result from offering
for sale in a single transaction the Company's entire holdings of a particular
financial instrument. The lack of uniform valuation methodologies introduces a
greater degree of subjectivity to these estimated fair values. Comparability to
financial instruments between similar companies may not be reasonable because of
varying assumptions concerning the estimates of fair value.
Cash and Cash Equivalents
The carrying values for cash and cash equivalents, including those
restricted by agreement, approximate the fair value of the assets.
Contracts Held For Sale and as Collateral
Contracts held for sale are generally recent originations or purchased
portfolios which will be sold with limited or no recourse during the following
year. The Company does not charge fees to originate loans, and, as such, its
contracts have origination rates in excess of rates on the securities into which
they will be pooled. The Company estimates the fair value of the contracts held
for sale using expected future cash flows of the portfolio discounted at the
current origination rate.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The carrying values of contracts pledged as collateral to long-term lenders
are estimated using discounted cash flow analyses and interest rates being
offered for similar contracts. The carrying amount of contracts with a variable
rate of interest is estimated to be at fair value. The carrying value of accrued
interest adjusted for credit risk equals its fair value.
Debt Collateralized by Installment Contract Receivables
Debt collateralized by installment contract receivables consists primarily
of notes collateralized by contracts with maturities that coincide with the
underlying contract maturities. The fair value of these financial instruments is
based on the current rates offered to the Company for debt of similar maturities
using a discounted cash flow calculation. Loan covenants preclude prepayment.
The carrying amounts and estimated fair values of the Company's financial
assets and liabilities are as follows:
JUNE 30, 2001 June 30, 2000
CARRYING ESTIMATED Carrying Estimated
(in thousands) AMOUNT FAIR VALUE Amount Fair Value
-----------------------------------------------------------------------------------------------
Financial assets
Cash and cash equivalents,
including restricted cash $158,823 $158,823 $140,816 $140,816
Contracts held for sale and as collateral,
including accrued interest receivable 655,011 653,129 450,531 448,446
Financial liabilities
Senior notes, 6.25% 75,000 73,642 75,000 72,160
Debt collateralized by installment
contract receivables 5,229 5,645 8,373 9,006
-----------------------------------------------------------------------------------------------
Retained interests in installment contract receivables - see Note 2,
Securitizations
NOTE 14 - EARNINGS PER SHARE
The following reconciliation details the numerators and denominators used
to calculate basic and diluted earnings per share for the respective periods:
(in thousands except per share data) 2001 2000 1999
----------------------------------------------------------------------
Net income $106,651 $144,025 $154,968
Average shares outstanding
Basic 137,702 139,474 145,211
Add: common stock equivalents 638 341 720
Diluted 138,340 139,815 145,931
Earnings per share - Basic $0.77 $1.03 $1.07
- Diluted $0.77 $1.03 $1.06
----------------------------------------------------------------------
NOTE 15 - RELATED PARTY TRANSACTIONS
The Company maintains an agreement to purchase certain installment contract
receivables originated or acquired by a finance company in which the Company
maintains a 50% ownership interest. The Company acquired approximately
$110,000,000, $92,000,000, and $147,000,000 in installment contract receivables
and received interest and other related fees totaling approximately $1,880,000,
$1,618,000, and $2,038,000 during fiscal 2001, 2000 and 1999, respectively.
25