1
EXHIBIT 13
- - ------------------------------------------------------------- Year Ended June 30,
(dollars in thousands, except per share) 1994 1993 % Change
============================================================= =========== ======== ========
INCOME STATEMENT DATA:
Revenues $ 628,236 $476,241 31.9%
Income before income taxes and accounting change $ 108,285 $ 83,356 29.9%
Income before accounting change $ 69,285 $ 53,756 28.9%
Net income $ 72,285 $ 53,756 34.5%
Earnings per common share before accounting change:
Primary $ 1.18 $ .94 25.5%
Fully diluted $ 1.15 $ .91 26.4%
Earnings per common share:
Primary $ 1.23 $ .94 30.9%
Fully diluted $ 1.20 $ .91 31.9%
- - ------------------------------------------------------------- ---------- -------- -----
BALANCE SHEET DATA:
Total assets $ 701,148 $587,032 19.4%
Shareholders' equity $ 462,154 $348,630 32.6%
Return on average shareholders' equity 18.0% 16.9%
- - ------------------------------------------------------------- ---------- -------- -----
PORTFOLIO DATA:
Loans serviced $1,316,000 $961,000 36.9%
Delinquency % (over 30 days):
Originated contracts 1.2% 1.4%
All contracts serviced (including purchased portfolios) 1.9% 1.6%
Net write-offs as % of average loans outstanding:
Originated contracts .1% .2%
All contracts (including purchased portfolios) .3% .6%
- - ------------------------------------------------------------- ---------- -------- -----
OTHER DATA:
Total homes sold 22,791 18,440 23.6%
Market share (nation) 7.1% 7.1% --
Manufacturing plants 13 13 --
Independent dealers 372 371 0.3%
Company-owned retail centers 165 143 15.4%
Community home sites owned 13,003 9,950 30.7%
Employees 3,955 3,414 15.8%
- - ------------------------------------------------------------- ---------- -------- -----
Where appropriate, all per share data in this report has been adjusted for the
5 for 4 stock split paid December 8, 1993.
1
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table reflects the percentage changes in sales by the Company's
retail and community sales centers and in wholesale sales to independent
dealers. It also shows the percentage changes in the average number of
company-owned retail centers, communities and independent dealers.
YEAR ENDED JUNE 30,
1994 VS 1993 1993 vs 1992
============================= ============ ============
Retail
Dollar sales +26.1% +25.9%
Average number of
retail centers +14.9% +5.8%
Average dollar sales per
retail center +9.7% +20.1%
Average home price +8.9% +10.5%
- - ----------------------------- ------------ ------------
Wholesale
Dollar sales +47.2% +30.9%
Average number of
independent dealers +11.6% +5.0%
Average dollar sales to
independent dealers +32.0% +24.7%
Average home price +8.0% +6.2%
- - ----------------------------- ------------ ------------
Communities
Dollar sales +29.6% +112.7%
Average number of
communities +36.2% +75.4%
Average dollar sale
per community -4.8% +21.3%
Average home price +7.8% -7.3%
- - ----------------------------- ------------ ------------
FISCAL 1994 COMPARED TO FISCAL 1993
Total revenues for the year ended June 30, 1994, increased 32% because of the
33% increase in manufactured housing sales and the 29% rise in financial
services and other income.
Net sales of the Retail Group rose 26% to $318 million primarily due to a
15% rise in the average number of company-owned retail centers open during the
year, a 9% increase in the average home price and a slight increase in the
average number of homes sold per Company retail center. The rise in the
average home price resulted from a continued shift in product mix toward larger
single and multi-section homes. Multi-section homes represented 30% of all
homes sold by the Retail Group versus 28% in the prior year.
During the year, the Company acquired or opened 23 retail locations while
one unprofitable retail center was closed. The Company constantly evaluates
specific local markets and opens, acquires, or closes retail centers as
conditions warrant.
Net sales of the Manufacturing Group to independent dealers increased 47% to
$173 million due to the 36% increase in the number of homes sold and an 8%
increase in the average wholesale price. The increase in the average home
price is due mainly to improved recouping of raw materials costs and a shift in
the product mix toward the more expensive multi-section home. Multi-section
homes accounted for 34% of total shipments versus 31% last year.
Net sales of the Communities Group rose 30% to $20 million primarily due to
a 20% rise in unit sales and an 8% improvement in the average home price.
The 29% increase in financial services and other income to $118 million from
$92 million resulted principally from a $7 million increase in the gains on
sale of installment contract receivables, net of amortization, from the
wholly-owned finance subsidiary, Vanderbilt Mortgage and Finance, Inc. (VMF), a
$5 million rise in rental revenues in the Communities operation, and a $10
million growth in earned insurance premiums and commissions.
The following table reflects the fluctuations in interest and loan servicing
revenues and financial services interest expense related to changes in interest
and servicing rates and changes in the average balances of receivables owned,
receivables sold and debt. Receivables owned or sold are the installment
contract receivables related to the retail sale of homes by the Company and
independent dealers and purchases of contracts from unrelated financial
institutions. Receivables owned generate interest income and are used to
collateralize debt or, in certain cases, represent the Company's subordinated
interest in a pool of receivables accounted for on the consolidated basis.
Receivables sold are pooled and generate loan service revenues equal to the
excess of principal and interest collected over the amount required to be
remitted to investors after deducting net credit losses. Servicing is retained
by the Company in all cases. The change due to both rate and volume has been
allocated in proportion to the relationship of the absolute dollar amounts of
the change in each. Comparative fluctuations are given between the years ended
June 30, 1994, 1993 and 1992:
RATE/VOLUME ANALYSIS
1994 VS 1993 1993 vs 1992
INCREASE (DECREASE) Increase (Decrease)
(in thousands) DUE TO Due to
- - ------------------------------------- ------- ------ ------- ------- ------ -------
RATE VOLUME TOTAL Rate Volume Total
===================================== ======= ====== ======= ======= ====== =======
Interest and loan servicing revenues:
Receivables owned $(4,968) $ 351 $(4,617) $(3,785) $(5,287) $(9,072)
Receivables sold 1,526 6,657 8,183 (290) 5,490 5,200
Master servicing contract (1,466) 2,640 1,174 -- 1,455 1,455
- - ------------------------------------- ------- ------ ------- ------- ------- -------
$(4,908) $9,648 $ 4,740 $(4,075) $ 1,658 $(2,417)
===================================== ======= ====== ======= ======= ======= =======
12
3
QUARTERLY RESULTS
(Unaudited)
First Second Third Fourth
(in thousands except per share data) Sept. 30 Dec. 31 Mar. 31 June 30 Year
==================================== ======== ======== ======== ======== ========
1994
REVENUES $135,959 $145,951 $150,236 $196,090 $628,236
OPERATING INCOME 24,049 23,375 27,058 34,162 108,644
INCOME BEFORE ACCOUNTING CHANGE 14,828 14,834 17,521 22,102 69,285
NET INCOME 17,828 14,834 17,521 22,102 72,285
EARNINGS PER SHARE BEFORE
ACCOUNTING CHANGE:
PRIMARY $ .26 $ .26 $ .29 $ .37 $ 1.18
FULLY DILUTED .25 .25 .29 .36 1.15
EARNINGS PER SHARE:
PRIMARY $ .31 $ .26 $ .29 $ .37 $ 1.23
FULLY DILUTED .30 .25 .29 .36 1.20
SHARES OUTSTANDING:
PRIMARY 57,335 57,543 59,497 61,302 58,919
FULLY DILUTED 61,321 61,471 61,461 61,302 61,389
PRICE RANGE OF COMMON STOCK:
HIGH $ 24.60 $ 24.25 $ 26.63 $ 22.50 $ 26.63
LOW 18.40 18.20 19.63 17.00 17.00
CLOSE 21.70 24.25 21.13 17.63 17.63
==================================== ======== ======== ======== ======== ========
1993
Revenues $109,847 $106,010 $112,218 $148,166 $476,241
Operating income 17,236 16,300 21,375 28,615 83,526
Net income 11,163 10,412 13,800 18,381 53,756
Earnings per share:
Primary $ .20 $ .18 $ .24 $ .32 $ .94
Fully diluted .19 .18 .23 .31 .91
Shares outstanding:
Primary 56,954 57,056 57,184 57,160 57,088
Fully diluted 60,939 61,041 61,170 61,145 61,074
Price range of common stock:
High $ 15.84 $ 20.80 $ 21.20 $ 20.60 $ 21.20
Low 12.16 14.08 18.00 16.50 12.16
Close 15.04 20.50 18.70 18.40 18.40
==================================== ======== ======== ======== ======== ========
For the year ended June 30, 1994, interest and loan servicing revenues
rose $5 million, or 9%, to $60 million. The average balance of receivables
owned increased 1% to $248 million with a decrease in the weighted averaged
interest rate to 11.6% from 13.6%. The average balance of receivables sold
increased 32% to $658 million with an increase in the weighted average loan
service spread to 4.2% from 3.9%.
Financial Services' interest expense decreased $4 million, or 33%, to
$8 million. Average debt collateralized by installment contract receivables
dropped 35% to $74 million with an increase in the weighted average interest
rate to 10.8% from 10.1%. Loan covenants preclude prepaying these obligations.
Gross profit margins in 1994 declined slightly to 29.9% from 30.5%
last year. The decrease is primarily the result of higher lumber costs
temporarily absorbed by the Manufacturing Group during the second and third
quarters and a shift in the Manufacturing/Retail sales mix to a greater
proportion of manufacturing wholesale sales which have lower margins.
Selling, general and administrative expenses were 30.1% and 29.6% of
sales for the years ended June 30, 1994 and 1993, respectively. Substantially
all of the increase is attributable to the Financial Services operations:
additional staff to service the 37% growth in receivables serviced and the
claims costs of the insurance subsidiaries formed in January 1993.
No provision for credit losses and contingencies was made in 1994 or
1993 due to the excellent loss and delinquency experience of the receivables
for which the Company is directly or contingently liable. Net losses as a
percentage of loans outstanding for fiscal 1994 dropped to 0.3% from 0.6% last
year while delinquency rates declined to 1.2% of contracts originated by VMF at
June 30, 1994, versus 1.4% at the same time last year. On June 30, 1994,
reserves equaled 1.5% of outstanding loans owned or on which the Company has
contingent liability.
13
4
TEN YEAR REVIEW
(in thousands except per
share and Other Data) 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
============================== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
INCOME STATEMENT DATA:
Revenues:
Net sales $510,153 $384,491 $296,849 $257,557 $219,443 $208,624 $196,110 $166,272 $152,742 $111,539
Financial services
and other income 118,083 91,750 74,330 62,392 40,316 33,270 28,671 20,659 15,709 10,309
- - ------------------------------ -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
628,236 476,241 371,179 319,949 259,759 241,894 224,781 186,931 168,451 121,848
Cost and expenses:
Cost of sales 357,698 267,201 206,049 176,374 153,786 147,982 138,468 117,538 108,886 82,056
Selling, general and
administrative 153,698 113,695 84,785 76,420 60,220 55,456 50,781 40,222 36,914 22,573
Financial services interest 8,196 11,819 16,585 18,198 11,595 9,911 10,127 6,628 5,658 3,889
Provision for credit losses
and contingencies 0 0 3,300 3,772 2,213 1,539 2,010 1,863 1,600 1,600
- - ------------------------------ -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
519,592 392,715 310,719 274,764 227,814 214,888 201,386 166,251 153,058 110,118
- - ------------------------------ -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income 108,644 83,526 60,460 45,185 31,945 27,006 23,395 20,680 15,393 11,730
Interest income (expense) (359) (170) (317) (592) (575) (1,042) (1,073) (838) (276) 1,180
- - ------------------------------ -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes 108,285 83,356 60,143 44,593 31,370 25,964 22,322 19,842 15,117 12,910
Provision for income taxes (39,000) (29,600) (20,800) (16,000) (11,500) (9,714) (8,370) (9,486) (6,741) (5,775)
- - ------------------------------ -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income before accounting
change 69,285 53,756 39,343 28,593 19,870 16,250 13,952 10,356 8,376 7,135
Cumulative effect of
accounting change 3,000 0 0 0 0 0 0 0 0 0
- - ------------------------------ -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income $ 72,285 $ 53,756 $ 39,343 $ 28,593 $ 19,870 $ 16,250 $ 13,952 $ 10,356 $ 8,376 $ 7,135
============================== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Income before accounting
change per share:
Primary $ 1.18 $ .94 $ .72 $ .65 $ .50 $ .42 $ .36 $ .26 $ .22 $ .18
Fully diluted 1.15 .91 .71 .59 .45 .37 .33 .24 .21 .18
Net income per common share:
Primary $ 1.23 $ .94 $ .72 $ .65 $ .50 $ .42 $ .36 $ .26 $ .22 $ .18
Fully diluted 1.20 .91 .71 .59 .45 .37 .33 .24 .21 .18
Average shares outstanding:
Primary 58,919 57,088 54,218 44,499 39,329 39,091 39,020 39,869 39,688 39,108
Fully diluted 61,389 61,074 58,204 51,698 49,241 49,124 49,258 46,710 41,979 39,108
BALANCE SHEET DATA:
Total assets $701,148 $587,032 $554,780 $488,817 $339,099 $294,754 $275,835 $232,159 $164,835 $114,853
Long-term obligations 70,680 137,038 192,931 227,444 177,374 163,471 157,153 132,220 85,225 49,719
Shareholders' equity 462,154 348,630 292,950 200,992 108,334 87,462 70,651 58,530 49,257 40,661
OTHER DATA:
Company-owned retail
centers 165 143 127 123 96 99 100 88 86 85
Independent dealers 372 371 312 330 322 269 245 240 218 200
Manufacturing plants 13 13 11 10 10 10 10 8 7 6
- - ------------------------------ -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Inventories increased at June 30, 1994 from June 30, 1993:
Change
(in millions)
MANUFACTURING GROUP
Increase in raw materials $ 0.2
Increase in finished goods 2.5
RETAIL GROUP
Net increase of 22 company-owned retail centers 8.0
Increase in average inventory levels at 143
company-owned sales centers 1.0
COMMUNITIES GROUP
Acquisition of 13 manufactured housing
communities and related inventory 2.6
Decrease in average inventory levels at
33 manufactured housing communities (1.7)
- - ------------------------------------------------- -----
$12.6
================================================= =====
FISCAL 1993 COMPARED TO FISCAL 1992
Total revenues for the year ended June 30, 1993, increased 28% because of the
30% increase in manufactured housing sales and the 23% rise in financial
services and other income.
Net sales of the Retail Group rose 26% to $252 million primarily due
to an 8% increase in the average number of homes sold per company-owned retail
center, a 6% rise in the average number of company-owned retail centers open
during the year, and an 11% increase in the average home price. The rise in
the average home price is primarily attributable to a shift in the product mix
toward multi-section homes and larger single-section homes. Multi-section
homes represented 28% of all homes sold by the Retail Group versus 26% in the
prior year. The Company increased prices, in certain cases, on retail sales,
which are individually negotiated transactions, in response to market factors
and an increase in lumber prices over the prior year.
During the year, the Company acquired or opened 19 retail locations
while three unprofitable retail centers were closed. The Company constantly
evaluates specific local markets and opens, acquires, or closes retail centers
as conditions warrant.
Net sales of the Manufacturing Group to independent dealers increased
31% to $117 million due to the 23% increase in the number of homes sold and a
6% increase in the average wholesale price. The increase in the average home
price is due mainly to the rise in lumber prices from the prior year partially
offset by a shift in the product mix toward the less expensive single-section
home: 69% of units sold in fiscal 1993 versus 66% in the prior year.
14
5
Production capacity for single-section models was added in July 1992. Two
additional production facilities for multi-section homes were acquired in the
spring and summer of 1993.
Net sales of the Communities Group rose 113% to $15 million primarily
due to the 75% increase in the average number of communities owned and a 21%
increase in the average number of homes sold per community, partially offset by
a 7% drop in the average home price. The decline in the average home price
relates to a slight shift in product mix toward less expensive used and
single-section models.
The 23% increase in financial services and other income to $92 million
from $74 million resulted principally from a $7 million increase in the gains
on sale of installment contract receivables, net of amortization, by VMF an $8
million rise in rental revenues in the communities operation, and a $3 million
growth in insurance premiums and commissions. Of the $7 million increase in
gains on sale of installment contract receivables, net of amortization,
approximately $3 million was reported in the fourth quarter as the result of an
adjustment to the discount rate. The adjustment to the discount rate resulted
from an analysis of relevant factors such as the impact of the continuing
decline of interest rates, actual prepayment experience and consultations with
investment advisors.
For the year ended June 30, 1993, interest and loan servicing revenues
fell $2 million, or 4%, to $55 million. The average balance of receivables
owned decreased 13% to $246 million with a decrease in the weighted averaged
interest rate to 13.6% from 15.1%. The average balance of receivables sold
increased 39% to $497 million with a decrease in the weighted average loan
service spread to 3.9% from 4.0%. In March 1992, the Resolution Trust
Corporation (RTC) contracted with the Company to act as master servicer for
manufactured housing contract receivables. The average balance of receivables
serviced was $167 million with a service fee of 1.2%. The increase in 1993
revenues reflects a full year of servicing under this contract compared to
approximately three months in 1992.
Financial Services' interest expense decreased $5 million, or 30%, to
$12 million. Average debt collateralized by installment contract receivables
dropped 28% to $115 million with a decline in the weighted average interest
rate to 10.1% from 10.4%. Loan covenants preclude prepaying these obligations.
Gross profit margins in 1993 dropped to 30.5% from 30.6% last year.
The decrease is primarily attributable to a higher charge to earnings than in
the prior year related to the last-in, first-out (LIFO) method of inventory
valuation ($4 million charge in 1993 versus $1 million in 1992). The decrease
in gross profit margins related to the LIFO adjustment is almost completely
offset by an improvement in margins mainly due to increased retail prices.
Selling, general and administrative expenses were 29.6% and 28.6% of
sales for the years ended June 30, 1993 and 1992, respectively. The rise is
due mainly to higher incentive compensation costs in the Retail Group and
increased compensation and fixed expense items such as property taxes,
insurance and depreciation in communities. The fixed expenses of the
Communities Group rose as a percentage of consolidated sales since there was an
86% increase in home sites owned and a 117% rise in sites rented during fiscal
1993. Partially offsetting the increase in expenses were improvements in
general corporate insurance costs for the entire Company and home delivery and
set-up expenses in retail operations.
No provision for credit losses and contingencies was made this year
compared to a provision of 1.1% of sales last year due to the excellent
charge-off and delinquency experience of the receivables for which the Company
is directly or contingently liable, the level of reserves for credit losses and
contingent liabilities in light of the portfolio performance, and the practice
begun in fiscal 1993 of selling most of the Company's conventional receivables
without recourse (versus selling them with limited recourse or borrowing
against the receivables as in the past). Net losses as a percentage of loans
outstanding for fiscal 1993 dropped to .2% from .4% last year while delinquency
rates declined to 1.4% of contracts originated by VMF at June 30, 1993, versus
2.0% at the same time last year. On June 30, 1993 reserves equaled 2.3% of
outstanding loans owned or on which the Company had contingent liability.
Inventories increased at June 30, 1993, from June 30, 1992:
Change
(in millions)
MANUFACTURING GROUP
Increase in raw materials $ 4.2
Increase in finished goods .2
RETAIL GROUP
Net increase of 16 company-owned retail centers 5.1
Decrease in average inventory levels at 127
company-owned retail centers (1.2)
COMMUNITIES GROUP
Acquisition of 13 manufactured housing
communities and related inventory 4.1
- - ------------------------------------------------------ -----
$12.4
====================================================== =====
FOURTH QUARTER RESULTS
The increase in revenues and net income during the fourth quarters of fiscal
1994 and 1993 are not indicative of future operating trends but rather reflect
the seasonality of the manufactured housing industry. In recent years,
approximately 30% of the Company's sales have occurred in the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1994, the Company originated and acquired approximately $384
million of installment contract receivables. The Company financed these
originations and acquisitions primarily through the pooling and sale of
approximately $320 million of installment contract receivables. The remainder
of the funding came from cash flows and cash balances. The Company invested
approximately $14 million in the acquisition of 13 properties for manufactured
housing communities and $8 million in related rental units, approximately $9
million for the opening of company-owned retail centers, $4 million for
improvement of existing manufacturing facilities and approximately $1 million
for other fixed assets using cash generated from operations.
The Company expects to invest approximately $27 million in 1995 in the
acquisition or construction of properties for manufactured housing communities,
up to $6 million for new company-owned retail centers, up to $14 million for
the construction and improvement of manufacturing facilities and to originate
$350 million of installment contract receivables. The Company anticipates to
meet cash needs for 1995 and thereafter with cash flows from operations,
current cash balances, and sale of installment contract receivables and GNMA
certificates.
NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board issued a new accounting standard (SFAS
No. 109) that revises the accounting for income taxes. The Company adopted
SFAS No. 109 effective July 1, 1993. The $3 million cumulative effect of the
change in method of accounting for income taxes was reported in the fiscal
quarter ending September 30, 1993. The accounting standard is discussed in
Note 1 to the consolidated financial statements.
EFFECTS OF INFLATION
Inflation has had an insignificant impact on the Company over the past several
years.
15
6
CONSOLIDATED BALANCE SHEETS
Clayton Homes, Inc. and Subsidiaries
June 30,
(in thousands) 1994 1993
================================================================================================== ======== ========
ASSETS
Cash and cash equivalents $ 38,922 $ 28,668
Receivables, principally installment contracts and residual interests, net of reserve for credit
losses of $9,877 and $11,692 and unamortized discount of $12,022 and $16,384 354,114 319,159
Inventories 77,317 64,727
Property, plant and equipment, net 129,883 100,938
Other assets 100,912 73,540
- - -------------------------------------------------------------------------------------------------- -------- --------
Total assets $701,148 $587,032
================================================================================================== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 55,844 $ 35,644
Long-term obligations 70,680 137,038
Deferred income taxes 7,258 7,334
Other liabilities 105,212 58,386
- - -------------------------------------------------------------------------------------------------- -------- --------
Total liabilities 238,994 238,402
Shareholders' equity
Preferred stock, $.10 par value, authorized 1,000 shares, none issued -- --
Common stock, $.10 par value, authorized 100,000 shares, issued 60,240
at June 30, 1994 and 44,816 at June 30, 1993 6,024 4,482
Additional paid-in capital 171,994 132,297
Retained earnings 284,136 211,851
- - -------------------------------------------------------------------------------------------------- -------- --------
Total shareholders' equity 462,154 348,630
- - -------------------------------------------------------------------------------------------------- -------- --------
Total liabilities and shareholders' equity $701,148 $587,032
================================================================================================== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of
Clayton Homes, Inc. and Subsidiaries as of June 30, 1994 and 1993, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended June 30, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Clayton Homes, Inc. and Subsidiaries as of June 30, 1994, and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1994, in conformity with generally
accepted accounting principles.
On July 1, 1993, the Company changed its method of accounting for
income taxes as described in Note 1.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
August 3, 1994
16
7
CONSOLIDATED STATEMENTS OF INCOME
Clayton Homes, Inc. and Subsidiaries
Year ended June 30,
(in thousands except per share data) 1994 1993 1992
================================================================================== ======== ======== ========
Revenues:
Net sales $510,153 $384,491 $296,849
Financial services and other income 118,083 91,750 74,330
- - ---------------------------------------------------------------------------------- -------- -------- --------
628,236 476,241 371,179
Costs and expenses:
Cost of sales 357,698 267,201 206,049
Selling, general and administrative 153,698 113,695 84,785
Financial services interest 8,196 11,819 16,585
Provision for credit losses and contingencies -- -- 3,300
- - ---------------------------------------------------------------------------------- -------- -------- --------
519,592 392,715 310,719
- - ---------------------------------------------------------------------------------- -------- -------- --------
Operating income 108,644 83,526 60,460
Interest expense, net (359) (170) (317)
- - ---------------------------------------------------------------------------------- -------- -------- --------
Income before income taxes and cumulative effect of change in method of accounting 108,285 83,356 60,143
Provision for income taxes (39,000) (29,600) (20,800)
- - ---------------------------------------------------------------------------------- -------- -------- --------
Income before change in method of accounting $ 69,285 $ 53,756 $ 39,343
Cumulative effect as of July 1, 1993 of change in method of
accounting for income taxes 3,000 -- --
- - ---------------------------------------------------------------------------------- -------- -------- --------
Net income $ 72,285 $ 53,756 $ 39,343
================================================================================== ======== ======== ========
Net income per common share before change in method of accounting:
Primary $ 1.18 $ .94 $ .72
Fully diluted 1.15 .91 .71
Cumulative effect of change in method of accounting per common share:
Primary $ .05 -- --
Fully diluted .05 -- --
Net income per common share:
Primary $ 1.23 $ .94 $ .72
Fully diluted 1.20 .91 .71
Average shares outstanding:
Primary 58,919 57,088 54,218
Fully diluted 61,389 61,074 58,204
- - ---------------------------------------------------------------------------------- -------- -------- --------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Total Additional
Shareholders' Common Paid-in Retained
(in thousands) Equity Stock Capital Earnings
========================================================== ============ ====== ========== ========
Balance at June 30, 1991 $200,992 $2,638 $ 79,602 $118,752
Net income 39,343 -- -- 39,343
Five-for-four stock split -- 665 (665) --
Issuance of 2,300 shares of stock, net 48,809 230 48,579 --
Issuance related to stock incentive plans, employee
benefit plans and other 3,806 34 3,772 --
- - ---------------------------------------------------------- -------- ------ -------- --------
Balance at June 30, 1992 292,950 3,567 131,288 158,095
Net income 53,756 -- -- 53,756
Five-for-four stock split -- 896 (896) --
Issuance related to stock incentive plans, employee
benefit plans and other 1,924 19 1,905 --
- - ---------------------------------------------------------- -------- ------ -------- --------
Balance at June 30, 1993 348,630 4,482 132,297 211,851
NET INCOME 72,285 -- -- 72,285
FIVE-FOR-FOUR STOCK SPLIT -- 1,126 (1,126) --
CONVERSION OF SUBORDINATED DEBT 40,265 398 39,867 --
PURCHASE OF 210 SHARES OF COMMON STOCK (4,175) (21) (4,154) --
ISSUANCE RELATED TO STOCK INCENTIVE PLANS, EMPLOYEE
BENEFIT PLANS AND OTHER 5,149 39 5,110 --
- - ---------------------------------------------------------- -------- ------ -------- --------
BALANCE AT JUNE 30, 1994 $462,154 $6,024 $171,994 $284,136
========================================================== ======== ====== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
17
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Clayton Homes, Inc. and Subsidiaries
Year ended June 30,
(in thousands) 1994 1993 1992
=============================================================================== ========= ========= =========
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 72,285 $ 53,756 $ 39,343
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,679 4,991 3,533
Provision for credit losses and contingencies -- -- 3,300
Amortization of discount and accretion on
installment contract receivables (5,204) (6,823) (5,140)
Gain on sale of installment contract receivables, net of amortization (16,276) (9,472) (2,534)
Stock issued for profit-sharing 401(k) contribution 2,171 1,682 2,229
Deferred income taxes 2,924 2,200 (1,160)
Cumulative effect of change in method of accounting for income taxes (3,000) -- --
Increase in other receivables (8,086) (5,927) (2,428)
(Increase) decrease in inventories (12,590) (12,403) 7,904
Increase in accounts payable and accrued liabilities 21,393 5,116 389
Net increase in other assets and other liabilities 28,908 20,529 1,790
- - ------------------------------------------------------------------------------- --------- --------- ---------
Cash provided by operations 89,204 53,649 47,226
Origination of installment contract receivables (292,435) (230,733) (177,311)
Proceeds from sales of originated installment contract receivables 262,346 195,037 118,556
Principal collected on originated installment contract receivables 33,046 34,442 37,621
- - ------------------------------------------------------------------------------- --------- --------- ---------
Net cash provided by operations 92,161 52,395 26,092
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of installment contract receivables (91,882) (21,258) (18,323)
Proceeds from sales of acquired installment contract receivables 57,588 14,371 1,300
Principal collected on acquired installment contract receivables 15,098 15,376 12,842
Acquisition of partnership interest in Communities:
Property, plant and equipment -- (14,723) --
Debt Assured -- 4,975 --
Acquisition of property, plant and equipment, net (35,601) (22,705) (19,073)
Increase in restricted cash and investments (21,149) (4,736) (12,845)
- - ------------------------------------------------------------------------------- --------- --------- ---------
Net cash used in investing activities (75,946) (28,700) (36,099)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt collateralized by installment
contract receivables -- -- 26,000
Short term borrowing 106,319 2,202 --
Repayment of short-term borrowing (83,521) -- --
Repayment of debt collateralized by installment contract receivable (26,368) (57,522) (53,976)
Repayment of manufactured housing obligations -- (3,346) (6,537)
Proceeds from capital stock issued -- -- 48,809
Proceeds from stock issued for incentive and employee benefit plans and other 1,784 242 1,577
Purchase of common stock (4,175) -- --
- - ------------------------------------------------------------------------------- --------- --------- ---------
Net cash (used) provided by financing activities (5,961) (58,424) 15,873
- - ------------------------------------------------------------------------------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents 10,254 (34,729) 5,866
Cash and cash equivalents at beginning of year 28,668 63,397 57,531
- - ------------------------------------------------------------------------------- --------- --------- ---------
Cash and cash equivalents at end of year $ 38,922 $ 28,668 $ 63,397
=============================================================================== ========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 10,049 $ 16,176 $ 20,067
Income taxes 22,441 25,047 21,154
Supplemental disclosure of non-cash activities: In February 1994, installment
contracts aggregating $10,850 were transferred to investments coincident
with a sale of receivables
- - ------------------------------------------------------------------------------ --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
18
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Clayton Homes, Inc. and Subsidiaries
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The consolidated financial statements include the accounts of Clayton
Homes, Inc. (CHI) and its wholly-owned subsidiaries. Financial Services
subsidiaries consist of Vanderbilt Mortgage and Finance, Inc. (VMF), a finance
subsidiary, and Clayton-Vanderbilt, Inc. (CV), Vanderbilt Life and Casualty
Insurance Co. Ltd. (VLAC), and Vanderbilt Property and Casualty Insurance Co.
Ltd. (VPC), insurance subsidiaries. CHI and its subsidiaries are collectively
referred to as the Company. Significant intercompany accounts and
transactions have been eliminated in the financial statements. The Company
operates in three principal business segments: Manufactured Housing, Financial
Services, and Communities.
PARENT COMPANY
Condensed financial information of CHI with VMF, CV, VLAC and VPC
accounted for on the equity basis is as follows:
CONDENSED BALANCE SHEETS
June 30,
(in thousands) 1994 1993
=============================================== ======== ========
Cash and cash equivalents $ 37,905 $ 26,368
Receivables 21,999 18,148
Inventories 77,317 64,727
Advances to unconsolidated subsidiaries 48,000 43,000
- - ----------------------------------------------- -------- --------
Current assets 185,221 152,243
Investments in and advances to
unconsolidated subsidiaries 235,056 193,932
Property, plant and equipment, at cost, net of
accumulated depreciation and amortization 129,883 100,938
Other assets 0 4,264
- - ----------------------------------------------- -------- --------
Total assets $550,160 $451,377
=============================================== ======== ========
Short-term obligations $ 25,144 $ 2,245
Accounts payable 28,803 26,759
Accrued expenses and other liabilities 16,443 8,510
Federal and state income taxes 1,366 2,680
- - ----------------------------------------------- -------- --------
Current liabilities 71,756 40,194
Long-term obligations less current maturities 5,089 45,123
Notes payable to unconsolidated subsidiaries 7,053 7,430
Reserve for credit losses and contingencies 2,650 6,782
Deferred income taxes 1,458 3,218
Shareholders' equity 462,154 348,630
- - ----------------------------------------------- -------- --------
Total liabilities and shareholders' equity $550,160 $451,377
=============================================== ======== ========
CONDENSED STATEMENTS OF INCOME
Year ended June 30,
(in thousands) 1994 1993 1992
======================================= ======== ======== ========
Revenues:
Net sales $510,153 $384,491 $296,849
Equity in net income of
unconsolidated subsidiaries 34,066 27,062 20,336
Insurance commissions, rent
and other 34,026 27,659 17,273
Interest and dividend income 5,965 4,252 7,177
- - --------------------------------------- -------- -------- --------
584,210 443,464 341,635
Costs and expenses:
Cost of sales 357,697 267,201 206,049
Selling, general and administrative 134,773 105,842 79,618
Provision for credit losses
and contingencies -- -- 2,729
Interest 655 1,425 3,656
- - --------------------------------------- -------- -------- --------
493,125 374,468 292,052
- - --------------------------------------- -------- -------- --------
Income before income taxes 91,085 68,996 49,583
Provision for income taxes (21,800) (15,240) (10,240)
- - --------------------------------------- -------- -------- --------
Income before accounting change 69,285 53,756 39,343
Cumulative effect of accounting change 3,000 -- --
- - --------------------------------------- -------- -------- --------
Net income $ 72,285 $ 53,756 $ 39,343
======================================= ======== ======== ========
Subsidiaries
The following information is provided for the consolidated financial
services subsidiaries. Such subsidiaries consist of VMF, CV, VLAC and VPC.
Through VMF, CHI arranges to finance a portion of its retail sales. CV, VLAC
and VPC reinsure risk on credit life and physical damage insurance policies
issued by a non-related insurance company (ceding company) in connection with
credit sales. The financial statements of the Manufactured Home Contracts
1990-1 Trust and CABS, Inc., a special purpose finance subsidiary of VMF, are
also included in the condensed combined financial statements below. Condensed
combined financial information for these subsidiaries is as follows:
CONDENSED COMBINED BALANCE SHEETS
June 30,
(in thousands) 1994 1993
================================================= ======== ========
Installment contract receivables, net of reserve
for credit losses of $7,227 and $7,274 and
unamortized discount of $12,022 and $16,384
(pledged $100,000 and $125,000 at June 30,
1994, and 1993, respectively) $335,785 $308,960
Other assets 104,907 74,411
- - ------------------------------------------------- -------- --------
Total assets $440,692 $383,371
================================================= ======== ========
Notes payable collateralized by installment
contract receivables $ 65,447 $ 91,872
Unearned premiums 25,257 13,080
Other liabilities 77,831 42,718
Due to CHI 155,934 149,936
Shareholders' equity 116,223 85,765
- - ------------------------------------------------- -------- --------
Total liabilities and shareholder's equity $440,692 $383,371
================================================= ======== ========
CONDENSED COMBINED STATEMENTS OF INCOME
Year ended June 30,
(in thousands) 1994 1993 1992
==================================== ======= ======= =======
Revenues $84,657 $64,684 $64,526
Expenses:
Interest expense 12,422 16,375 21,270
Other 20,969 6,887 11,914
Provision for credit losses
and contingencies -- -- 571
Income taxes 17,200 14,360 10,560
- - ------------------------------------ ------- ------- -------
50,591 37,622 44,315
- - ------------------------------------ ------- ------- -------
Net income $34,066 $27,062 $20,211
==================================== ======= ======= =======
VMF paid CHI endorsement fees of $10,414,000 in 1994; $8,222,000 in
1993; and $6,390,000 in 1992. VMF also paid interest to CHI of $7,136,000 in
1994; $4,555,000 in 1993; and $4,652,000 in 1992. Such intercompany payments
have been eliminated in the consolidated financial statements but are expensed
on VMF's separate financial statements to arrive at operating income for the
Financial Services Group.
Estimated principal receipts under installment contract receivables
for each of the five fiscal years subsequent to 1994 are as follows:
1995 $180,000,000
1996 18,000,000
1997 17,000,000
1998 16,000,000
1999 14,000,000
The estimated principal receipts are based on the scheduled payment
and estimated prepayment of principal of the installment contract receivables.
Principal receipts during the year ending June 30, 1994, include amounts
relating to the sale of $164 million of installment contract receivables in
August 1994.
19
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
VMF provides servicing for investors in installment contract
receivables. Total contracts serviced at June 30, 1994, and 1993, including
contracts held for investment, were approximately $1,316 million and $961
million, respectively.
INCOME RECOGNITION
Sales to independent dealers of homes produced by CHI are recognized
as revenue upon shipment. Retail sales are recognized when cash payment is
received, or in the case of credit sales, which represent the majority of
retail sales, when a down payment is received and the customer enters into an
installment sales contract. Most of these installment sales contracts, which
are normally payable over 36 to 180 months, are sold to VMF.
As is customary in the manufactured housing industry, CHI receives
from VMF and other financial institutions endorsement fees over the lives of
installment contract receivables in consideration for CHI's guaranty of such
installment contract receivables. Additionally, CHI receives agent's
commissions on physical damage and credit life insurance sold to manufactured
home purchasers. Premiums from credit life and physical damage insurance
policies reinsured by CV, VLAC and VPC, which represent single payment
contracts with terms of one to five years, are recognized as income over the
terms of the contracts. Claims and expenses are matched to recognize profits
over the life of the contracts. This matching is accomplished by means of the
provision for unearned premiums and the deferral and subsequent amortization of
policy acquisition costs.
Installment contract receivables originated or purchased by VMF are
sold to investors or pledged as collateral to long-term lenders. VMF retains
servicing in both cases. Profit (loss) on installment contract receivables
sold to investors is recorded at the time of sale and represents the discounted
present value of the excess (deficiency) of principal and interest to be
collected during the expected normal life of the contracts over: 1) the amount
required to be remitted to investors; 2) the normal service spread of
comparable contracts; and 3) the estimated net credit losses. Profit from
installment contract receivables sold without recourse is increased, in certain
cases, by the reversal of the reserve for credit losses attributable to the
receivables sold.
Certain of the installment contract receivables are purchased in bulk
at a discount. The purchase discounts are allocated between unamortized
discount and the reserve for credit losses based on management's assessment of
risks existing in the portfolio. Unamortized discount is amortized into
revenue over the life of the related portfolio after giving consideration to
prepayments. Adjustments between the reserve for credit losses and unamortized
discount are made to reflect changes in the estimated collectibility of each
portfolio purchased.
Most of the installment contract receivables are with borrowers in the
southern portion of the United States and are collateralized by manufactured
homes.
Interest income on installment contract receivables is recognized by a
method which approximates the interest method. Service fee income is
recognized as the service is performed.
Inventories - Manufactured Housing
New homes and raw materials are valued at the lower of cost, using the
last-in, first-out (LIFO) method of inventory valuation, or market.
Previously-owned manufactured homes are valued at estimated wholesale prices,
which are not in excess of net realizable value.
Property, Plant and Equipment - Manufactured Housing
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 with estimated
useful lives as follows:
Land improvements . . . . . . . . . . 3-28 years
Buildings . . . . . . . . . . . . . . 7-25 years
Furniture and equipment . . . . . . . 3-10 years
Warranty Obligation - Manufactured Housing
Manufactured Housing warrants its homes against manufacturing defects
for a period of one year commencing at the time of the retail sale. Warranty
costs are accrued for sales to independent dealers. Warranty costs related to
the sales at company-owned retail centers are not material and are recognized
as incurred.
Income Taxes
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes."
Under SFAS No. 109, deferred tax assets and liabilities are computed based on
the difference between the financial statement and income tax basis of assets
and liabilities using the enacted marginal tax rate. Deferred income tax
expenses or credits are based on the changes in the asset or liability from
period to period. The adoption resulted in a decrease in the deferred tax
liability of $3 million.
Reserves for Credit Losses and Contingent Liabilities
Reserves for credit losses are established related to installment
contract receivables. Actual credit losses are charged to 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 loss experience and economic conditions,
adjusts reserves through periodic provisions. The Company also maintains a
reserve for contingent liabilities related to guarantees of installment
contract receivables sold with recourse. Reserves and the applicable
provisions related to guarantees are considered as part of the Manufactured
Housing business segment.
20
11
Net Income Per Share
Primary earnings per share are computed based on the weighted average
number of shares of common stock outstanding during the periods presented,
including common share equivalents arising from stock options. Fully diluted
earnings per share have been computed assuming conversion of the Company's
convertible subordinated debentures. The fully diluted computation adds to net
income the interest expense (net of income tax) on the debentures.
Cash Equivalents
For purposes of the statement of cash flows, all unrestricted highly
liquid debt instruments purchased with a maturity of three months or less are
considered to be cash equivalents.
Other
Certain reclassifications have been made to the 1993 and 1992
financial statements to conform to the 1994 presentation.
Per share and share data have been retroactively adjusted to reflect a
5-for-4 stock split effected as a 25% stock dividend in December 1993.
NOTE 2 - INVENTORIES
Inventories at June 30, 1994, and 1993 are as follows:
(in thousands) 1994 1993
========================= ======= =======
Manufactured homes:
New $55,651 $45,592
Previously-owned 10,953 8,642
Raw materials 10,713 10,493
- - ------------------------- ------- -------
$77,317 $64,727
========================= ======= =======
If the first-in, first-out (FIFO) method of inventory valuation had
been used, inventories would have been higher by $11,972,000 and $8,510,000 at
June 30, 1994, and 1993, respectively.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 1994, and 1993 are as
follows:
(in thousands) 1994 1993
=================================================== ======== ========
Land and improvements $ 92,277 $ 71,626
Buildings 49,395 36,990
Furniture and equipment 15,393 13,324
- - --------------------------------------------------- -------- --------
157,065 121,940
Less: accumulated depreciation and amortization (27,182) (21,002)
- - --------------------------------------------------- -------- --------
$129,883 $100,938
=================================================== ======== ========
Depreciation charged to operations was $6,656,000, $4,900,000, and
$3,442,000 for each of the years ended June 30, 1994, 1993, and 1992,
respectively. Included in Property, Plant and Equipment are $11 million of
assets acquired from the Company's principal shareholder during 1994.
NOTE 4 - LONG-TERM OBLIGATIONS
Long-term obligations at June 30, 1994, and 1993 are summarized as
follows:
(in thousands) 1994 1993
========================================== ======= ========
CHI
Convertible subordinated debentures:
7.75%, due 2003 $ -- $ 40,000
10% note payable due June 1, 1998 4,960 4,960
Other notes payable 273 206
- - ------------------------------------------ ------- --------
5,233 45,166
VMF
Debt collateralized by installment
contract receivables:
Demand note payable to Clayton
Employees Savings Plan at .5%
above prime 3,000 3,000
Maturing in fiscal years through:
1995 to 2004: average interest
rate of 10.00% at June 30, 1994 40,623 49,735
1995 to 2005:9.4%REMIC
trust senior certificates 13,699 26,068
1995 to 2003: adjustable rates,
average interest 9.95% at June 30,
1994, average maximum rate
14.97% at June 30, 1994 4,768 8,376
1996 to 2001: adjustable rates,
5.54% at June 30, 1994, no
maximum rate 3,357 4,693
- - ------------------------------------------ ------- --------
65,447 91,872
- - ------------------------------------------ ------- --------
Total $70,680 $137,038
========================================== ======= ========
The aggregate maturities of long-term debt of CHI for fiscal years
subsequent to 1994 are as follows:
1995 $ 144,000
1996 113,000
1997 90,000
1998 81,000
1999 87,000
Thereafter 4,718,000
Expected principal payments of long-term debt of VMF for the five
fiscal years subsequent to 1994 are as follows:
1995 $11,000,000
1996 10,000,000
1997 9,000,000
1998 10,000,000
1999 7,000,000
The estimated principal payments on the debt of VMF are based on the
scheduled payment and estimated prepayment of principal of the installment
contract receivables collateralizing such debt. Certain debt agreements
require fixed payments which approximate the scheduled payments of the
underlying installment contract receivables.
On March 1, 1994, the Company called for redemption all of its 7.75%
convertible subordinated debentures due 2003. Substantially all of the $40
million of such debentures converted into approximately 4 million shares of
common stock.
Certain of the long-term obligations have various covenants relating
to working capital, total indebtedness and dividend payments. At June 30,
1994, the aggregate amount of earnings available for cash dividends or for
repurchase of Company stock was approximately $281 million.
21
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 5 - RESERVES FOR CREDIT LOSSES AND CONTINGENT LIABILITIES
An analysis of the reserve for losses on installment contract
receivables and reserve for contingent liabilities for the years ended June 30,
1994, 1993 and 1992 is as follows:
(in thousands) 1994 1993 1992
=================================== ======= ======= =======
Balance, beginning of year $17,229 $25,279 $26,591
Provision -- -- 3,300
Losses, net of recoveries
applicable to installment
contract receivables:
Purchased (2,230) (4,092) (5,107)
Other (526) (1,126) (2,141)
Reserves transferred from
(to) unamortized discount (1,598) 690 --
Reserves applicable to
installment contract
receivables purchased
(sold) 1,207 (3,522) 2,636
- - ----------------------------------- ------- ------- -------
Balance, end of year $14,082 $17,229 $25,279
=================================== ======= ======= =======
Reserve for credit losses $ 9,877 $11,692 $16,457
Reserve for contingencies 4,205 5,537 8,822
- - ----------------------------------- ------- ------- -------
$14,082 $17,229 $25,279
=================================== ======= ======= =======
The reserve for credit losses is netted against receivables and the
reserve for contingencies is included in other liabilities on the consolidated
balance sheet.
The Company is contingently liable as guarantor on installment
contract receivables sold with recourse. The installment contract receivables
and related contingent liabilities are shown in the table below.
Total Installment Contingent
Contract Receivables Contingent Liabilities
(in thousands) Liability % (in thousands)
==============================================================
June 30, 1994
$ 20,000 100% $20,000
122,000 11% - 30% 28,000
147,000 10% and below 15,000
- - --------------------------------------------------------------
$289,000 $63,000
==============================================================
June 30, 1993
$ 29,000 100% $29,000
162,000 11% - 30% 39,000
153,000 10% and below 15,000
- - --------------------------------------------------------------
$344,000 $83,000
==============================================================
Proceeds from receivables sold with recourse amounted to $20 million,
$34 million and $120 million, during 1994, 1993 and 1992, respectively.
Approximately 90% of the installment contract receivables both owned
and sold with recourse have fixed rates of interest and approximately 10% are
at variable rates of interest based on either the prime rate or the U.S.
Treasury rates.
Approximately 98% of the Company's servicing arrangements are based on
interest spreads with fixed rates or variable rates with ceilings while the
remaining 2% have variable rates which provide for no minimum or maximum rate
of interest.
NOTE 6 - SHAREHOLDERS' EQUITY
Stock Option Plan
In 1983, 1985 and 1991, the Company established Stock Option Plans for
a total of 4,411,816 shares of common stock which provide for granting
"incentive stock options" or "non-qualified options" at not less than the fair
market value as of the date of grant and stock appreciation rights to officers
and key employees of the Company. Options are exercisable after one or more
years and expire no later than 10 years from the date of grant.
Non-eligible members of the Board of Directors have granted options to
purchase shares of common stock to the Company's non-management directors. The
option prices were established at not less than the fair market value either as
of the date of grant, or as of February 1988. The option prices and provisions
for exercise were approved by shareholders. 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 plan follows:
Stock Option
Shares Price Range
=================================================================
Balance June 30, 1991 1,682,943 $ 1.64 - $ 9.02
Granted 456,640 $ 8.90 - $12.32
Exercised (203,235) $ 1.64 - $ 4.35
Canceled (19,083) $ 2.14 - $ 8.90
- - -----------------------------------------------------------------
Balance June 30, 1992 1,917,265 $ 1.64 - $12.32
Granted 254,814 $12.32 - $18.08
Exercised (196,091) $ 1.64 - $ 9.34
Canceled (98,334) $ 1.64 - $18.08
- - -----------------------------------------------------------------
Balance June 30, 1993 1,877,654 $ 1.64 - $18.08
GRANTED 485,325 $18.40 - $25.25
EXERCISED (353,264) $ 1.64 - $18.08
CANCELED (33,120) $ 1.64 - $25.25
- - -----------------------------------------------------------------
BALANCE JUNE 30, 1994 1,976,595 $ 1.64 - $25.25
=================================================================
Options available for future grant at June 30, 1994 and 1993 were
1,086,532 and 1,501,215, respectively.
At June 30, 1994, and 1993 options for 473,286 and 617,594 shares,
respectively, were exercisable. Options were held by 333 persons at June 30,
1994.
Stock Purchase Plan
In 1986 the Company established an employee stock purchase plan for a
total of 1,907,350 shares of common stock which provide for granting options at
85% of the lower of the closing market price on the first trading day of the
plan period or the closing market price on the last trading day of the plan
period. A plan period is six months beginning each January 1 and July 1 of
each plan year. The Stock Purchase Plan was suspended during 1992. There were
105,506 shares issued in 1992 at an average price of $7.41 per share. At June
30, 1994, there were 996,993 shares reserved for the plan.
NOTE 7 - INCOME TAXES
Components of income tax provisions for each of the three years ended
June 30, 1994, 1993 and 1992 were as follows:
(in thousands) 1994 1993 1992
================================== ======= ======= =======
Current tax provisions:
Federal $32,772 $24,798 $20,267
State 3,304 2,602 1,693
- - ---------------------------------- ------- ------- -------
36,076 27,400 21,960
Deferred tax provision (credit) 2,924 2,200 (1,160)
- - ---------------------------------- ------- ------- -------
$39,000 $29,600 $20,800
================================== ======= ======= =======
The sources and tax effect of temporary differences at June 30, 1994
are as follows:
(in thousands)
=============================================== ========
Reserve for credit losses and contingencies $ 2,070
Insurance reserves 1,650
- - ----------------------------------------------- --------
Total assets 3,720
Future servicing fees and discounts (6,597)
Deferred costs (1,053)
Other (3,328)
- - ----------------------------------------------- --------
Total liabilities (10,978)
- - ----------------------------------------------- --------
Net deferred tax liability $ (7,258)
=============================================== ========
22
13
The provision for income taxes reflected in the financial statements
differs from income taxes calculated at statutory federal income tax rates of
35% in 1994 and 34% in 1993 and 1992 as follows:
(in thousands) 1994 1993 1992
=================================== ======= ======= =======
Income taxes at statutory rate $37,900 $28,758 $20,448
State income taxes, net of
federal benefit 2,313 1,704 1,117
Other, net (1,213) (862) (765)
- - ----------------------------------- ------- ------- -------
$39,000 $29,600 $20,800
=================================== ======= ======= =======
In 1993 and 1992, deferred income tax credits and provisions resulted
from timing differences in the recognition of revenues and expenses for tax and
financial statement purposes. The sources of these differences and the tax
effect of each were as follows:
(in thousands) 1993 1992
=============================== ====== ========
Reserves for credit losses
and contingencies $1,184 $ (361)
Future servicing fees 1,330 862
Installment method (398) (1,792)
Insurance reserves (157) 270
Other items 241 (139)
- - ------------------------------- ------ -------
$2,200 $(1,160)
=============================== ====== =======
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit-sharing plan covering all employees
who meet participation requirements. The amount of the Company's contribution
is discretionary as determined by the Board of Directors, up to the maximum
deduction allowed for federal income tax purposes. Contributions accrued were
$2,171,000, $1,689,000, and $1,425,000, for the years ended June 30, 1994,
1993, and 1992, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Leases
Certain operating properties are rented under non-cancelable operating
leases which expire at various dates through 2001. Total rental expense under
operating leases was $2,159,000 in 1994, $3,100,000 in 1993, and $1,863,000 in
1992. The following is a schedule of minimum rental commitments under
non-cancelable operating leases, primarily for retail centers, in effect at
June 30, 1994:
1995 $1,822,000
1996 1,682,000
1997 1,270,000
1998 871,000
1999 and thereafter 548,000
Repurchase Agreements
Institutions financing independent dealer purchases require the
Company to execute repurchase agreements. As a result of these agreements, the
Company is contingently liable for repurchasing units in the event of a default
by the dealer to the lending institution. These agreements are customary in
the manufactured housing industry, and the Company's losses in the past have
not been significant.
Guarantor of Installment Contract Receivables
Please see discussion of contingencies at Note 5.
NOTE 10 - INDUSTRY SEGMENT INFORMATION
The Company operates in three major business segments: Manufactured
Housing, Financial Services and Communities. The Manufactured Housing segment
is engaged in the production, wholesale and retail sale of manufactured homes.
Financial Services is composed of VMF, which is engaged in retail financing of
manufactured homes, and CV, VLAC and VPC which reinsure risk on credit life and
physical damages insurance policies. Communities is engaged in marketing and
management of manufactured housing communities. Operating profit is total
revenue less cost of sales, operating expenses and financial interest expense.
The following items have not been included in the computation of operating
income: non-operating income and expenses and income taxes. Identifiable
assets are those assets used in the operation of each industry segment.
Corporate assets primarily consist of short-term investments.
Information concerning operations by industry segment follows:
Manufactured Financial
(in thousands) Housing Services Communities Corporate Total
================================== ============ ========= =========== ========= =====
1994
REVENUES $510,329 $ 80,741 $37,166 $ -- $628,236
INTERSEGMENT INCOME 19,630 -- 1,224 (20,854) --
OPERATING INCOME 48,183 53,620 6,841 -- 108,644
IDENTIFIABLE ASSETS 122,101 440,690 99,032 39,325 701,148
DEPRECIATION AND AMORTIZATION 3,982 -- 2,674 -- 6,656
CAPITAL EXPENDITURES 12,777 -- 22,824 -- 35,601
- - ---------------------------------- -------- --------- ------- -------- --------
1993
Revenues $384,235 $ 64,684 $27,322 $ -- $476,241
Intersegment Income 14,162 -- 1,041 (15,203) --
Operating income 37,229 41,422 4,875 -- 83,526
Identifiable assets 104,067 383,371 69,521 30,073 587,032
Depreciation and amortization 3,235 -- 1,756 -- 4,991
Capital expenditures 10,301 -- 27,127 -- 37,428
- - ---------------------------------- -------- --------- ------- -------- --------
1992
Revenues $295,258 $ 64,526 $11,395 $ -- $371,179
Intersegment Income 10,713 -- 329 (11,042) --
Operating income 28,921 30,771 768 -- 60,460
Identifiable assets 85,693 358,207 45,070 65,810 554,780
Depreciation and amortization 2,474 -- 1,059 -- 3,533
Capital expenditures 5,638 -- 13,435 -- 19,073
================================== ======== ========= ======= ======== ========
23
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11 - OTHER ASSETS AND LIABILITIES
At June 30, 1994, and 1993 other assets and liabilities consisted of:
(in thousands) 1994 1993
===================================================== ======== =======
Other Assets
Restricted cash and investments $ 69,354 $48,205
Interest receivable and future servicing rights 12,672 14,541
Deferred debt costs and prepaid expenses 3,314 2,621
Other 15,572 8,173
- - ----------------------------------------------------- -------- -------
$100,912 $73,540
===================================================== ======== =======
Other Liabilities
Investors payable $ 24,067 $21,293
Reserve for contingencies (Note 6) 4,205 5,537
Escrow deposits 13,904 15,357
Unearned insurance premiums 25,257 13,080
Short-term borrowing 25,000 2,202
Other 12,779 917
- - ----------------------------------------------------- -------- -------
$105,212 $58,386
===================================================== ======== =======
Restricted cash and investments represent reserves required by: 1)
certain VMF servicing and debt agreements to be maintained until such time as
specified minimum repayments have been made; 2) trust account cash balances
required by certain VMF servicing agreements; and 3) insurance reserves
required by escrow or trust agreements.
CHI and VMF have lines of credit totaling $60 million with $25 million
outstanding at June 30, 1994. This short-term borrowing is included in other
liabilities and bears interest at an average rate of 4.9% based on the banks'
transactional rates at June 30, 1994.
NOTE 12 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS No. 107),
"Disclosures About Fair Value of Financial Instruments," requires that the CHI
disclose the estimated fair values of its financial instruments. The following
methodologies and assumptions were used by CHI to estimate its fair value
disclosures for financial instruments.
Cash and Cash Equivalents
The carrying values for cash and cash equivalents, including those
restricted by agreement, equal those assets' fair values.
Future Servicing Rights Receivable
Future servicing rights receivable is calculated using prepayment,
default and interest rate assumptions that CHI believes are appropriate at the
time of the sale of the installment contract receivables. Although projected
performance is monitored after the sale, the Company does not alter the
underlying rate at which the future estimated cash flows are discounted once
the sale has been recorded. The fair value of future servicing rights
receivable primarily revolves around an appropriate discount rate to be applied
to the asset as a whole.
CHI used a discount rate and such other assumptions as it believed to
be used for similar instruments. CHI has estimated the fair value of its future
servicing rights receivable to approximate its carrying value as of June 30,
1994.
Contracts Held for Sale and as Collateral
Contracts held for sale are generally recent originations or purchased
portfolios which will be sold with limited or no recourse during the following
year. CHI does not charge fees to originate loans, and, as such, its contracts
have origination rates in excess of rates on the securities into which they
will be pooled. CHI estimates the fair value of the contracts held for sale to
be the carrying amount plus the cost of origination.
The carrying values of contracts pledged as collateral to long-term
lenders are estimated using discounted cash flow analyses and interest rates
being offered for similar contracts. The carrying amount of contracts with a
variable rate of interest is estimated to be at fair value. The carrying value
of accrued interest adjusted for credit risk equals its fair value.
Long-term Obligations
Long-term obligations consist primarily of debt collateralized by
contracts with maturities that coincide with the underlying contract
maturities. The fair value of these financial instruments is based on the
current rates offered to CHI for debt of similar maturities using a discounted
cash flow calculation. Loan covenants preclude prepaying VMF obligations.
The carrying amounts and estimated fair values of CHI's financial
assets and liabilities are as follows:
June 30, 1994
Carrying Estimated
(in thousands) Amount Fair Value
======================================================================
Financial assets:
Cash and cash equivalents, including
restricted investments $108,276 $108,276
Future servicing rights receivable 6,243 6,243
Contracts held for sale and as
collateral, including accrued
interest receivable 295,669 299,773
Financial liabilities:
Long-term obligations 70,680 75,126
- - ----------------------------------------------------------------------
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
The estimates do not reflect any premium or discount that could result from
offering for sale in a single transaction CHI's entire holdings of a particular
financial instrument. The lack of uniform valuation methodologies introduces a
greater degree of subjectivity to these estimated fair values. Comparability
to financial instruments between similar companies may not be reasonable
because of varying assumptions concerning the estimates of fair value.
24
15
DIRECTORS, OFFICERS AND SHAREHOLDER INFORMATION
BOARD OF DIRECTORS
(PHOTO) (PHOTO) (PHOTO) (PHOTO)
JAMES L. CLAYTON B. JOE CLAYTON JAMES D. COCKMAN (1)(2) WALLACE C. DOUD
Chairman of the Board and Chief Executive Officer, Chairman of the Board, Vice President - Commercial and
Chief Executive Officer, Clayton Motors, Inc. Ocean Fresh Express Industry Relations (Retired),
Clayton Homes, Inc. Regional Director, International, Inc. IBM Corporation
Director, Dollar General First Tennessee Bank Director, Dollar General Director, Motorola Corporation
Corporation Corporation and Ryan's
Chairman of the Board, Family Steakhouses, Inc.
BankFirst
(PHOTO) (PHOTO) (PHOTO) (PHOTO)
DAN W. EVINS (1)(2) WILMA H. JORDAN C. WARREN NEEL (1) JOSEPH H. STEGMAYER
Chairman of the Board, Co-Chairman, Dean, College of Business President and Chief Operating
Chief Executive Officer, The Jordan, Edmiston Administration, University Officer, Clayton Homes, Inc.
President Cracker Barrel, Group, Inc. of Tennessee Director, The Cardinal Funds
Inc. Director, LIN Broadcasting Director, O'Charleys, Inc.,
Director, Pricor Corporation Proffitts', Inc., and
Incorporated American Health Corp., Inc.
(1) Audit Committee
(2) Compensation Committee
CORPORATE OFFICERS
JAMES L. CLAYTON DAVID BOOTH RICHARD B. RAY TIMOTHY R. RHOADES
Chairman of the Board and Executive Vice President Executive Vice President - Treasurer
Chief Executive Officer Retail Group Finance
Chief Financial Officer
JOSEPH H. STEGMAYER TIMOTHY W. WILLIAMS JAMES R. CONNER KEVIN T. CLAYTON
President and Chief Executive Vice President Vice President Secretary
Operating Officer Financial Services Computer Services
SHAREHOLDER INFORMATION
FORM 10-K COUNSEL COMMON SHARE INFORMATION ANNUAL MEETING
Clayton's Form 10-K Annual Bernstein, Stair & McAdams The Company's common shares The annual meeting of shareholders
Report to the Securities Knoxville, Tennessee (symbol CMH) are listed on the will be held on November 9, 1994 at
and Exchange Commission is New York Stock Exchange. 10:30 a.m. (EST) at the Appalachia
available without charge to S.E.C. COUNSEL Homes Plant, 1420 Mountain Road,
shareholders upon written Baker, Worthington, SHAREHOLDERS Andersonville, Tennessee.
request to: Crossley and Stansberry There were approximately 28,700 Shareholders of record at close of
Investor Relations Nashville, Tennessee beneficial holders of common business on September 12, 1994
Clayton Homes, Inc. stock on June 30, 1994. will be entitled to vote.
P.O. Box 15169 INDEPENDENT ACCOUNTANTS
Knoxville, Tennessee 37901 Coopers & Lybrand L.L.P. REGISTRAR AND TRANSFER AGENT
Knoxville, Tennessee Trust Company Bank
P.O. Box 4625
Atlanta, Georgia 30302
(404) 581-1579
16
DIFFERENCES BETWEEN THE ELECTRONIC FILING AND THE PRINTED BOOK
On page 25 of the printed Annual Report, photographs of the Board of
Directors appear, while the electronic filing replaces each photograph with the
word '(PHOTO)'.