1
ELEVEN YEAR REVIEW
(in thousands
except per share) 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Revenues:
Net sales $ 822,906 $762,396 $621,351 $510,153 $384,491 $296,849 $257,557 $219,443 $208,624 $196,110 $166,272
Financial services
and other income 198,797 166,345 136,741 118,083 91,750 74,330 62,392 40,316 33,270 28,671 20,659
- ------------------------------------------------------------------------------------------------------------------------------------
1,021,703 928,741 758,092 628,236 476,241 371,179 319,949 259,759 241,894 224,781 186,931
- ------------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 559,274 521,200 431,826 357,698 267,201 206,049 176,374 153,786 147,982 138,468 117,538
SG&A 270,996 236,188 188,835 153,698 113,695 84,785 76,420 60,220 55,456 50,781 40,222
Financial services
interest 2,885 3,649 5,533 8,196 11,819 16,585 18,198 11,595 9,911 10,127 6,628
Other expenses 1,000 0 0 0 0 3,300 3,772 2,213 1,539 2,010 1,863
- ------------------------------------------------------------------------------------------------------------------------------------
834,155 761,037 626,194 519,592 392,715 310,719 274,764 227,814 214,888 201,386 166,251
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 187,548 167,704 131,898 108,644 83,526 60,460 45,185 31,945 27,006 23,395 20,680
Interest income (expense),
net/other 5,152 4,596 3,902 (359) (170) (317) (592) (575) (1,042) (1,073) (838)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 192,700 172,300 135,800 108,285 83,356 60,143 44,593 31,370 25,964 22,322 19,842
Provision for income taxes (73,200) (65,500) (48,800) (39,000) (29,600) (20,800) (16,000) (11,500) (9,714) (8,370) (9,486)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before
accounting change 119,500 106,800 87,000 69,285 53,756 39,343 28,593 19,870 16,250 13,952 10,356
Cumulative effect of
accounting change 0 0 0 3,000 0 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 119,500 $106,800 $ 87,000 $ 72,285 $ 53,756 $ 39,343 $ 28,593 $ 19,870 $ 16,250 $ 13,952 $ 10,356
====================================================================================================================================
Income before accounting change per share:
Primary $ 1.00 $ .89 $ .73 $ .60 $ .48 $ .37 $ .33 $ .26 $ .22 $ .18 $ .13
Fully diluted $ 1.00 $ .89 $ .73 $ .59 $ .47 $ .36 $ .30 $ .23 $ .19 $ .17 $ .12
Net income per share:
Primary $ 1.00 $ .89 $ .73 $ .63 $ .48 $ .37 $ .33 $ .26 $ .22 $ .18 $ .13
Fully diluted $ 1.00 $ .89 $ .73 $ .61 $ .47 $ .36 $ .30 $ .23 $ .19 $ .17 $ .12
Average shares
outstanding:
Primary 119,477 119,346 118,628 115,076 111,500 105,895 86,912 76,814 76,350 76,211 77,869
Fully diluted 119,477 119,346 118,628 119,900 119,285 113,680 100,973 96,174 95,945 96,207 91,230
Dividends per share $ .076 $ .061 $ .038 -- -- -- -- -- -- -- --
BALANCE SHEET DATA:
Total assets $1,045,761 $886,350 $761,151 $701,148 $587,032 $554,780 $488,817 $339,099 $294,754 $275,835 $232,159
Long-term debt 22,806 30,290 48,737 70,680 137,038 192,931 227,444 177,374 163,471 157,153 132,220
Shareholders' equity $ 754,526 $650,189 $544,187 $462,154 $348,630 $292,950 $200,992 $108,334 $ 87,462 $ 70,651 $ 58,530
KEY FINANCIAL RATIOS:
As a % of Revenue:
Operating income 18.4% 18.1% 17.4% 17.3% 17.5% 16.3% 14.1% 12.3% 11.2% 10.4% 11.1%
Net income 11.7% 11.5% 11.5% 11.5% 11.3% 10.6% 8.9% 7.6% 6.7% 6.2% 5.5%
Debt as a % of
total capital 2.9% 4.5% 8.2% 13.3% 28.2% 39.7% 53.1% 62.1% 65.1% 69.0% 69.3%
OTHER DATA:
Company-owned sales
centers 245 216 192 165 143 127 123 96 99 100 88
Independent retailers 663 580 421 372 371 312 330 322 269 245 240
Manufacturing plants 17 17 16 13 13 11 10 10 10 10 8
Communities 67 64 55 46 33 20 12 9 7 4 --
====================================================================================================================================
12
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table reflects the percentage changes in sales by the
Company's retail and community sales centers and in wholesale sales to
independent retailers. It also shows the percentage changes in the average
number of Company-owned retail centers, communities and independent retailers,
the average sales per location and the average price per home sold in each
category.
Year Ended June 30,
1997 vs 1996 1996 vs 1995
- ----------------------------------------------------------
RETAIL
Dollar sales +10.1% +20.7%
Number of retail centers +13.0% +14.0%
Dollar sales per retail center -2.6% +5.6%
Price of home +2.0% +7.7%
- ----------------------------------------------------------
WHOLESALE
Dollar sales +3.5% +25.0%
Number of independent
retailers +24.2% +26.1%
Dollar sales per
independent retailer -16.6% -0.8%
Price of home +1.3% -2.0%
- ----------------------------------------------------------
COMMUNITIES
Dollar sales +15.7% +32.5%
Number of communities +10.1% +16.7%
Dollar sales per community +5.1% +12.3%
Price of home +6.6% +11.1%
- ----------------------------------------------------------
FISCAL 1997 COMPARED TO FISCAL 1996
Total revenues grew 10% on an 8% increase in Manufactured Housing sales and
a 20% rise in Financial Services and other income.
Net sales of the Retail group rose 10% to $497 million. This growth was the
result of a 13% increase in the average number of Company owned retail centers
and a 3% decline in the average dollar sales per location.
During the year, the Company opened or acquired 31 retail locations and
closed two underperforming retail centers. The Company constantly evaluates
specific local markets and opens, acquires, or closes retail centers as
conditions warrant. Of the 31 new openings, 14 were acquired and 17 were
greenfield start ups. Seventeen of the new retail centers were opened in the
fourth quarter.
Net sales of the Manufacturing group to independent retailers increased 4%
to $288 million and the number of homes sold rose 2%. The average wholesale
price increased 1% due in part to a shift toward multi-section homes.
Multi-section homes accounted for 35% of total shipments versus 32% last year.
Net sales of the Communities group rose 16% to $38 million principally as a
result of a 9% rise in home sales and a 6% improvement in the average sales
price per home. Four acquisitions brought the number of communities to 67 at
year end.
Financial Services and other income grew 20% to $199 million, mainly due
to VMF, $20 million, and earned insurance premiums and commissions, $7 million.
Interest and loan servicing revenues increased 10% to $78 million. The average
balance of receivables owned rose 3% to $224 million with a weighted average
interest rate of 12.2%, down from 12.8%. The average balance of receivables sold
rose 28% to $1.4 billion and the weighted average loan service spread was 3.5%
compared to 3.8%.
Financial Services interest expense decreased $.8 million, or 21%, to $2.9
million. Debt collateralized by installment contract receivables dropped 25% to
an average of $26 million and the weighted average interest rate moved to 11.1%
from 10.8%. Loan covenants preclude prepaying these relatively higher cost
obligations.
Gross profit margins improved from 31.6% to 32.0%. The increase primarily
results from a greater mix of Clayton manufactured product sold to the Retail
group. Manufacturing sales to Retail were 54.9% of new retail sales compared to
54.5% in 1996.
Selling, general and administrative expenses were 32.9% and 31.0% of sales
for the years ended June 30, 1997 and 1996, respectively. Expenses associated
with the start-up of 31 new sales centers, acquired communities and initial
costs of the Financial Services' MBUs were primary causes of the increase.
Net losses as a percentage of loans outstanding for fiscal 1997 decreased
to 0.2% from 0.3% last year while delinquency rates on all loans increased
slightly to 2.1%. On June 30, 1997 reserves equaled 1.6% of outstanding loans
owned or on which the Company has contingent liability.
The changes in inventory levels at June 30, 1997 compared to June 30, 1996
are shown below in millions:
Increase (decrease)
MANUFACTURING
Raw materials $ (1.4)
Finished goods (1.2)
RETAIL
Net increase of 29 Company-owned
sales centers 11.8
Decrease in average inventory levels
at 216 Company-owned sales centers (14.1)
COMMUNITIES
Inventory at 4 manufactured housing
communities acquired during the year 0.7
Decrease in average inventory levels
at 63 manufactured housing communities (0.6)
- -------------------------------------------------------
$ (4.8)
=======================================================
13
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
FISCAL 1996 COMPARED TO FISCAL 1995
Total revenues grew 23% on a 23% increase in Manufactured Housing sales and
a 22% rise in Financial Services and other income.
Net sales of the Retail group rose 21% to $451 million. This growth was the
result of a 14% increase in the average number of Company owned retail centers
and a 6% improvement in the average dollar sales per location. During the year,
the Company opened or acquired 29 retail locations and closed five
underperforming retail centers.
Net sales of the Manufacturing group to independent retailers increased 25%
to $278 million and the number of homes sold rose 28%. The average wholesale
price declined 2% as the product mix shifted toward single-section homes.
Multi-section homes accounted for 32% of total shipments versus 35% in 1995.
Net sales of the Communities group climbed 33% to $33 million principally
as a result of a 19% rise in home sales and an 11% improvement in the average
sales price per home. Nine acquisitions brought the number of communities to 64
at year end.
Financial Services and other income grew 22% to $166 million from $137
million. Significant contributors were a $5 million gain on sale of two
communities, a $5 million increase in rental revenues from Community operations
and $6 million of growth in earned insurance premiums and commissions.
Interest and loan servicing revenues increased 19% to $71 million. The
average balance of receivables owned rose 6% to $218 million with a weighted
average interest rate of 12.8%, up slightly from 12.7%. The average balance of
receivables sold climbed 25% to $1.1 billion and the weighted average loan
service spread was 3.8% compared to 3.6%.
Financial Services interest expense decreased $1.9 million, or 34%, to $3.6
million. Debt collateralized by installment contract receivables dropped 36% to
an average of $34 million and the weighted average interest rate moved to 10.8%
from 10.6%.
Gross profit margins improved from 30.5% to 31.6%. The increase primarily
results from a greater mix of Clayton manufactured product sold to the Retail
group. Manufacturing sales to Retail were 54.5% of new retail sales compared to
49.8% in 1995.
Selling, general and administrative expenses were 31.0% and 30.4% of sales
for the years ended June 30, 1996 and 1995, respectively. Expenses associated
with the start-up of a new plant in the third quarter and from additional
reserves in the insurance group were the primary causes of the increase.
No provision for credit losses and contingencies was made in 1996 or 1995
because of excellent loss and delinquency experience of receivables for which
the Company is directly or contingently liable. Net losses as a percentage of
loans outstanding for fiscal 1996 increased to 0.3% from 0.2% in 1995 while
delinquency rates on all loans remained constant at 2.0%. On June 30, 1996,
reserves equaled 1.2% of outstanding loans owned or on which the Company has
contingent liability.
The changes in inventory levels at June 30, 1996, compared to June 30,
1995, are shown below in millions:
Increase (decrease)
MANUFACTURING
Raw materials $ 5.9
Finished goods (1.2)
RETAIL
Net increase of 24 Company-owned sales centers 11.4
Increase in average inventory levels
at 192 Company-owned sales centers 17.2
COMMUNITIES
Inventory at 9 manufactured housing
communities acquired during the year 1.6
Increase in average inventory levels at
55 manufactured housing communities .9
- -------------------------------------------------------
$35.8
=======================================================
FOURTH QUARTER RESULTS
The increase in revenues and net income during the fourth quarters of
fiscal 1997 and 1996 are not indicative of future operating trends but rather
reflect the seasonality of the manufactured housing industry. In recent years,
approximately 31% of the Company's sales have occurred in the fourth quarter.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1997, the Company originated and acquired approximately $844
million of installment contract and mortgage loan receivables. The Company
financed these originations and acquisitions primarily with $782 million in
proceeds from the pooling and sale of installment contract and mortgage loan
receivables. Additional funding came from operating cash flow and collection of
installment contract and mortgage loan receivables. Utilizing cash generated
from operations, the Company invested approximately $10 million in the
acquisition of land or existing manufactured housing communities and $9 million
in related rental units, $7 million for the opening of Company-owned retail
centers, $8 million including the construction of one new plant and the
improvement of existing manufacturing facilities and $2 million for other fixed
assets.
The Company expects to invest approximately $25 million in 1998 in the
acquisition or construction of manufactured housing communities, up to $12
million for new Company-owned retail centers, up to $13 million for the
construction and improvement of manufacturing facilities and to originate $725
million of installment contract and mortgage loan receivables. Cash needs for
1998 and thereafter are expected to be met with cash flows from operations,
current cash balances, and sales of installment contract and mortgage loan
receivables and GNMA certificates.
14
4
QUARTERLY RESULTS (UNAUDITED)
First Second Third Fourth
(in thousands except per share) Sept. 30 Dec. 31 Mar. 31 June 30 Year
- --------------------------------------------------------------------------------------------------------------------------
1997
REVENUES $236,204 $234,672 $226,624 $324,203 $1,021,703
OPERATING INCOME 40,099 41,953 42,014 63,482 187,548
NET INCOME 25,603 26,676 26,298 40,923 119,500
EARNINGS PER SHARE $ .22 $ .22 $ .22 $ .34 $ 1.00
EQUIVALENT SHARES OUTSTANDING 119,903 119,628 119,214 119,163 119,477
PRICE RANGE OF STOCK:
HIGH $ 17.90 $ 17.20 $ 15.38 $ 15.25 $ 17.90
LOW 13.80 12.60 13.00 12.63 12.60
CLOSE 17.60 13.50 13.13 14.38 14.38
DIVIDENDS PER SHARE $ .016 $.020 $ .020 $ .020 $ .076
- --------------------------------------------------------------------------------------------------------------------------
1996
Revenues $215,312 $211,183 $211,374 $290,872 $ 928,741
Operating income 35,113 34,986 37,400 60,205 167,704
Net income 22,563 22,713 23,954 37,570 106,800
Earnings per share $ .19 $.19 $ .20 $ .31 $ .89
Equivalent shares outstanding 118,736 119,140 119,733 119,774 119,346
Price range of stock:
High $ 15.60 $ 18.64 $ 17.70 $ 16.90 $ 18.64
Low 10.56 14.96 14.70 14.30 10.56
Close 15.20 17.10 16.70 16.00 16.00
Dividends per share $ .013 $ .016 $ .016 $ .016 $ .061
- --------------------------------------------------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Accounting Standards No.
128, Earnings Per Share (EPS). The Statement simplifies the standards for
computing earnings per share by replacing the presentation of primary earnings
per share with a presentation of basic earnings per share. Additionally, the
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement and requires a reconciliation of the numerator and denominator
of the diluted EPS calculation. The Company plans to adopt the provisions of the
Statement in fiscal 1998 and had the Statement been in effect for the fiscal
years presented herein, basic earnings per share would be equivalent to primary
earnings per share as reported.
In June 1997, the FASB issued Statement of Accounting Standards No. 130,
Reporting Comprehensive Income, which requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. This statement is effective for fiscal years
beginning after December 15, 1997 and is not expected to have a material effect
on the Company's financial position or results of operations.
Additionally, in June 1997, the FASB issued Statement of Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, which requires that an enterprise (a) report financial and
descriptive information about its reportable operating segments and (b) report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets with reconciliations of such amounts to the enterprise's
financial statements and (c) report information about revenues derived from the
Company's products or services and information about major customers. This
Statement is effective for fiscal years beginning after December 15, 1997.
EFFECTS OF INFLATION
Inflation has had an insignificant impact on the Company during the past
several years.
FORWARD LOOKING STATEMENTS
Certain statements in this annual report are forward looking as defined in
the Private Securities Litigation Reform Law. These statements involve certain
risks and uncertainties that may cause actual results to differ materially from
expectations as of the date of this report. These risks include, but are not
limited to, adverse weather conditions impacting sales; inventory adjustments by
major retailers; competitive pricing pressures; success of marketing and
cost-management programs and shifts in market demand.
15
5
CONSOLIDATED BALANCE SHEETS
Clayton Homes, Inc. and Subsidiaries
June 30,
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 89,695 $ 47,400
Receivables, principally installment contracts and residual interests, net of
reserves for credit losses of $4,917 and $4,787, respectively and
unamortized discount of $2,853 and $4,359, respectively 478,691 402,039
Inventories 119,434 124,280
Securities held-to-maturity, approximate value of $19,988 and $19,774 20,361 20,361
Restricted cash and investments 70,997 70,403
Property, plant and equipment, net 214,072 184,271
Other assets 52,511 37,596
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,045,761 $ 886,350
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 99,498 $ 91,064
Long-term debt 22,806 30,290
Deferred income taxes 14,074 5,680
Other liabilities 154,857 109,127
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 291,235 236,161
===========================================================================================================================
Shareholders' equity
Preferred stock, $.10 par value, authorized 1,000 shares, none issued -- --
Common stock, $.10 par value, authorized 200,000 shares, issued 118,497
at June 30, 1997 and 118,864 at June 30, 1996 11,850 11,886
Additional paid-in capital 166,153 172,265
Retained earnings 576,523 466,038
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 754,526 650,189
===========================================================================================================================
Total liabilities and shareholders' equity $ 1,045,761 $ 886,350
===========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of Clayton
Homes, Inc. and Subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended June 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Clayton Homes,
Inc. and Subsidiaries as of June 30, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its methods of accounting for securitization of installment
contract receivables in 1997 and securities in 1995.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
August 12, 1997
16
6
CONSOLIDATED STATEMENTS OF INCOME
Clayton Homes, Inc. and Subsidiaries
Year ended June 30,
(in thousands except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Net sales $ 822,906 $762,396 $621,351
Financial services 148,515 115,987 102,108
Other income 50,282 50,358 34,633
- ---------------------------------------------------------------------------------------------------------------------------
1,021,703 928,741 758,092
- ---------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 559,274 521,200 431,826
Selling, general and administrative 270,996 236,188 188,835
Financial service interest 2,885 3,649 5,533
Provision for credit losses 1,000 - -
- ---------------------------------------------------------------------------------------------------------------------------
834,155 761,037 626,194
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 187,548 167,704 131,898
Interest income (expense), net/other 5,152 4,596 3,902
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 192,700 172,300 135,800
Provision for income taxes (73,200) (65,500) (48,800)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 119,500 $106,800 $ 87,000
===========================================================================================================================
Net income per common share:
Primary $ 1.00 $ .89 $ .73
Fully diluted $ 1.00 $ .89 $ .73
Average shares outstanding:
Primary 119,477 119,346 118,628
Fully diluted 119,477 119,346 118,628
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total Common Additional Retained
(in thousands except per share data) Shareholders' Equity Stock Paid-In Capital Earnings
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 $462,154 $11,766 $166,252 $284,136
Net income 87,000 -- -- 87,000
Purchase of 396 shares of common stock (5,156) (50) (5,106) --
Dividends declared ($.038 per share) (4,675) -- -- (4,675)
Issuances related to stock incentive, employee
benefit plans and other 4,864 91 4,773 --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 544,187 11,807 165,919 366,461
Net income 106,800 -- -- 106,800
Purchase of 125 shares of common stock (1,893) (16) (1,877) --
Dividends declared ($.061 per share) (7,223) -- -- (7,223)
Issuances related to stock incentive, employee
benefit plans and other 8,318 95 8,223 --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 650,189 11,886 172,265 466,038
NET INCOME 119,500 -- -- 119,500
PURCHASE OF 840 SHARES OF COMMON STOCK (11,349) (84) (11,265) --
DIVIDENDS DECLARED ($.076 PER SHARE) (9,015) -- -- (9,015)
ISSUANCES RELATED TO STOCK INCENTIVE, EMPLOYEE
BENEFIT PLANS AND OTHER 5,201 48 5,153 --
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 $754,526 $11,850 $166,153 $576,523
===========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
17
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Clayton Homes, Inc. and Subsidiaries
Year ended June 30,
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 119,500 $ 106,800 $ 87,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 13,058 11,163 8,296
Gain on sale of installment contract
receivables, net of amortization (21,541) (11,315) (14,744)
Gain on sale of property -- (4,828) --
Provision for credit losses 1,000 -- --
Deferred income taxes 8,394 (3,702) 2,124
Increase in other receivables, net (27,383) (16,972) (22,964)
Decrease (increase) in inventories 4,846 (35,825) (11,138)
Increase in accounts payable, accrued liabilities, and other 39,249 25,633 5,516
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by operations 137,123 70,954 54,090
Origination of installment contract receivables (646,624) (476,467) (345,260)
Proceeds from sales of originated installment contract receivables 614,588 394,087 369,873
Principal collected on originated installment contract receivables 39,668 35,199 25,003
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 144,755 23,773 103,706
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of installment contract receivables (206,937) (36,105) (26,074)
Proceeds from sales of acquired installment contract receivables 167,138 36,007 7,112
Principal collected on acquired installment contract receivables 3,439 16,935 17,760
Acquisition of property, plant and equipment, net (42,859) (40,829) (44,462)
Proceeds from sale of property -- 21,271 --
Decrease (increase) in restricted cash and investments (594) (4,189) 3,141
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (79,813) (6,910) (42,523)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (9,015) (6,835) (3,162)
Proceeds from short-term borrowings 198,963 208,949 111,394
Repayment of short-term borrowings (198,963) (208,949) (136,394)
Repayment of long-term debt (7,484) (18,447) (21,943)
Issuance of stock for incentive plans and other 5,201 8,318 4,550
Repurchase of common stock (11,349) (1,893) (5,156)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (22,647) (18,857) (50,711)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 42,295 (1,994) 10,472
Cash and cash equivalents at beginning of year 47,400 49,394 38,922
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 89,695 $ 47,400 $ 49,394
============================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,912 $ 4,016 $ 5,823
Income taxes $ 62,269 $ 63,366 $ 54,725
Supplemental disclosure of non-cash activities:
In 1995, pass-through certificates aggregating
$9,500 were received coincidental with the sale
of receivables.
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
18
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Clayton Homes, Inc. and Subsidiaries
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The consolidated financial statements include the accounts of Clayton
Homes, Inc. (CHI) and its wholly-owned subsidiaries. CHI and its subsidiaries
are collectively referred to as the Company. The Company is a
vertically-integrated manufactured housing company headquartered in Knoxville,
Tennessee. Employing more than 5,900 people and operating in 28 states, the
Company builds, sells, finances and insures manufactured homes, as well as owns
and operates residential manufactured housing communities. Significant
intercompany accounts and transactions have been eliminated in the financial
statements. See Note 11 for information related to the Company's business
segments.
Income Recognition
Sales to independent retailers of homes produced by CHI are recognized as
revenue upon shipment. Retail sales are recognized when cash payment is received
or, in the case of credit sales, which represent the majority of retail sales,
when a down payment is received and the customer enters into an installment
sales contract. Most of these installment sales contracts, which are normally
payable over 36 to 180 months, are financed by Vanderbilt Mortgage and Finance,
Inc. (VMF), the Company's mortgage banking subsidiary.
Premiums from family protection, physical damage, and home buyer protection
plan insurance policies reinsured by the insurance subsidiaries which represent
single payment contracts with terms of one to ten years, are recognized as
income over the terms of the contracts. Claims and expenses are matched to
recognize profits over the life of the contracts. This matching is accomplished
by means of the deferral and recognition of unearned premiums and the deferral
and amortization of policy acquisition costs.
Installment Contract Receivables and Mortgage Loan Receivables
Installment contract receivables and mortgage loan receivables originated
or purchased by VMF are generally sold to investors through an asset backed
securities facility, with VMF retaining servicing on the contracts. Certain
purchased mortgage loan receivables are sold to financial institutions with
servicing released. In 1997, $769 million in installment contract receivables
and mortgage loan receivables were securitized with VMF retaining servicing,
while $12 million in mortgage loan receivables were sold with servicing
released.
Installment contract receivables held for sale of $254 million and $226
million in 1997 and 1996, respectively, are included in Receivables and are
carried at the lower of aggregate cost or market. Certain of the installment
contract receivables are purchased in bulk at a discount. The purchase discounts
are allocated between unamortized discount and the reserve for credit losses
based on management's assessment of risks existing in the portfolio. Unamortized
discount is amortized over the life of the related portfolio after giving
consideration to anticipated prepayments. Adjustments between the reserve for
credit losses and unamortized discount are made to reflect changes in the
estimated collectibility of each portfolio purchased. Estimated principal
receipts under installment contract receivables for each of the five fiscal
years subsequent to 1997 are as follows:
1998 $227,000,000
1999 20,000,000
2000 16,000,000
2001 13,000,000
2002 11,000,000
The estimated principal receipts are based on the scheduled payments and
estimated prepayments of principal of the installment contract receivables.
Estimated principal receipts for the year ending June 30, 1998 include amounts
relating to the sale of $220 million of installment contract receivables in
August, 1997. VMF provides servicing for investors in installment contract
receivables. Total contracts serviced at June 30, 1997 and 1996, including
contracts held for investment, were approximately $2,044 million and $1,638
million, respectively. Most of the installment contract receivables are with
borrowers in the east, south and southwest portions of the United States and are
collateralized by manufactured homes. Interest income on installment contract
receivables is recognized by a method which approximates the interest method.
Service fee income is recognized as the service is performed.
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standard No. 125 (SFAS 125), Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. SFAS 125 utilizes a
financial components approach, requiring that the carrying amount of the
receivables sold be allocated between the assets sold and the assets
(liabilities) created, if any, at their fair value at the date of sale. The
assets (liabilities) created are: 1) an interest-only strip valued as the
discounted present value of the excess (deficiency) interest due the servicer
(VMF) during the expected life of the contracts over: i) the stated investor
yield; ii) the contractual servicing fee; and iii) estimated credit losses; and
2) servicing asset (liability), representing the discounted present value of the
contractual servicing fee over the cost of servicing the contracts. Profit
(loss) recorded at the time of the sale is computed as the difference between
the allocated carrying amount of the receivables sold and the proceeds realized
from the sale. The adjustment to income in 1997 was immaterial with respect to
the adoption of this statement.
(in thousands)
Servicing Assets recognized in 1997 $ 7,080
Amortization (1,436)
-------
Balance, June 30, 1997 $ 5,644
The balance represents the estimated fair value of the aggregate servicing
assets recognized during 1997. The estimate of fair value assumes: 1) discount
rates which, at the time the asset was created, approximate current market
rates; and 2) expected prepayment rates based on loan prepayment experience for
similar transactions.
19
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investment Securities
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain Investments
in Debt and Equity Securities. Investments in certain debt and equity securities
are classified as either Held-to-Maturity (reported at amortized cost), Trading
(reported at fair value with unrealized gains and losses included in earnings),
or Available-for-Sale (reported at fair value with unrealized gains and losses
excluded from earnings and reported as a separate component of shareholders'
equity).
Premiums and discounts on debt securities are recognized in interest income
on the level interest yield method over the period to maturity.
Gains and losses on the sale of securities are determined using the
specific identification method.
Inventories
New homes and raw materials are valued at the lower of cost, using the
last-in, first-out (LIFO) method of inventory valuation, or market.
Previously-owned manufactured homes are valued at estimated wholesale prices,
which are not in excess of net realizable value.
Property, Plant and Equipment
Land and improvements, buildings, and furniture and equipment are valued at
cost. Major renewals and improvements are capitalized while replacements,
maintenance and repairs, which do not improve or extend the life of the
respective assets, are expensed currently. When depreciable assets are sold or
retired, the cost and related accumulated depreciation are removed from the
accounts, and any gain or loss is included in earnings for the period.
Depreciation is computed primarily by the straight-line method over the
estimated useful lives of the respective assets.
The Company evaluates the carrying values of property and equipment for
impairment losses by analyzing the operating performance and future cash flows
of the various business activities. The Company adjusts the net book value of
the underlying assets if the sum of expected future cash flows is less than fair
market value.
Reserves for Credit Losses and Contingent Liabilities
Reserves for credit losses are established related to installment contract
receivables. Actual credit losses are charged to the reserves when incurred. The
reserves established for such losses are determined based on the Company's
historical loss experience after adjusting for current economic conditions.
Management, in assessing the loss experience and economic conditions, adjusts
reserves through periodic provisions. The Company also maintains a reserve for
contingent liabilities related to guarantees of installment contract receivables
sold with recourse. Reserves and the applicable provisions related to guarantees
are considered as part of the Manufactured Housing business segment.
Earnings Per Share
Earnings per share is computed based on the weighted average number of
shares of common stock outstanding during the periods presented, adjusted for
subsequent common stock splits and includes common share equivalents arising
from stock options.
Cash Equivalents
For purposes of the statements of cash flows, all unrestricted highly
liquid debt instruments purchased with an original maturity of three months or
less are considered to be cash equivalents.
Other
Per share and share data have been retroactively adjusted to reflect
5-for-4 stock splits in December 1996, December 1995, and December 1994. Certain
reclassifications have been made to the 1995 and the 1996 financial statements
to conform to the 1997 presentation.
Restricted Cash and Investments
Restricted cash and investments represent reserves required by: 1) certain
VMF servicing and debt agreements to be maintained until such time as specified
minimum repayments have been made, 2) trust account cash balances required by
certain VMF servicing agreements, and 3) insurance reserves required by escrow
or trust agreements.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2 - INVENTORIES
Inventories at June 30, 1997, and 1996 are as follows:
(in thousands) 1997 1996
- ------------------------------------------------------------
Manufactured homes:
New $ 81,963 $ 89,699
Previously-owned 22,805 18,458
Raw materials 14,666 16,123
- ------------------------------------------------------------
$119,434 $124,280
============================================================
If the first-in, first-out (FIFO) method of inventory valuation had been
used, inventories would have been higher by $18,196,000 and $17,637,000 at June
30, 1997, and 1996, respectively.
NOTE 3 - SECURITIES HELD-TO-MATURITY
At June 30, 1997 and 1996, manufactured housing contract senior/subordinate
pass-through certificates have been classified in the consolidated financial
statements according to management's intent. These securities can be reasonably
expected to mature after ten years.
20
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 1997, and 1996 are as follows:
(in thousands) 1997 1996
- ----------------------------------------------------------
Land and improvements $135,027 $115,647
Buildings 104,560 88,749
Furniture and equipment 28,200 24,445
- ----------------------------------------------------------
267,787 228,841
Less: accumulated depreciation
and amortization (53,715) (44,570)
- ----------------------------------------------------------
$214,072 $184,271
==========================================================
Depreciation charged to operations was $13,058,000, $11,163,000, and
$8,296,000 for each of the years ended June 30, 1997, 1996, and 1995,
respectively.
NOTE 5 - LONG-TERM DEBT
Long-term debt at June 30, 1997, and 1996 is summarized as follows:
(in thousands) 1997 1996
- ---------------------------------------------------------------
Debt collateralized by installment
contract receivables:
Maturing in fiscal years through:
1998 to 2004: weighted average
rate of 10.10% at June 30, 1997 $22,013 $27,380
1998 to 2002: adjustable rates,
weighted average rate of 10.20%
at June 30, 1997, weighted
average maximum rate 14.27%
at June 30, 1997 228 1,091
1998 to 2001: adjustable rates,
average rate of 7.06% at
June 30, 1997, no maximum rate 429 1,666
Other notes payable 136 153
- ---------------------------------------------------------------
Total $22,806 $30,290
===============================================================
Expected principal payments of long-term debt collateralized by installment
contract receivables for the five fiscal years subsequent to 1997 and thereafter
are as follows:
1998 $6,857,000 2001 $3,144,000
1999 4,131,000 2002 2,805,000
2000 3,314,000 Thereafter 2,419,000
The estimated principal payments are based on the scheduled payments and
estimated prepayments of principal of the installment contract receivables
collateralizing such debt.
Certain debt agreements require fixed payments which approximate the
scheduled payments of the underlying installment contract receivables.
Certain of the long-term debt have various covenants, which among other
things, require a minimum tangible net worth and the maintenance of certain
financial ratios.
NOTE 6 - RESERVES FOR CREDIT LOSSES AND CONTINGENT LIABILITIES
An analysis of the reserve for losses on installment contract receivables
and reserve for contingent liabilities for the years ended June 30, 1997, 1996
and 1995 is as follows:
(in thousands) 1997 1996 1995
- -----------------------------------------------------------
Balance, beginning of year $7,766 $11,895 $14,082
Provision 1,000 -- --
Losses, net of recoveries
applicable to installment
contract receivables:
Purchased (2,337) (2,494) (1,900)
Other 1,622 442 (287)
Reserves associated with
receivables purchased (sold) -- (2,077) --
- -----------------------------------------------------------
Balance, end of year $8,051 $ 7,766 $11,895
===========================================================
Reserves for credit losses $4,917 $ 4,787 $ 8,329
Reserve for contingencies 3,134 2,979 3,566
- -----------------------------------------------------------
$8,051 $ 7,766 $11,895
===========================================================
The reserves for credit losses are netted against receivables and the
reserve for contingencies is included in other liabilities on the consolidated
balance sheet. The Company is contingently liable as guarantor on installment
contract receivables sold with recourse. The installment contract receivables
and related contingent liabilities are shown in the table below.
Total Installment Contingent
Contract Receivables Contingent Liabilities
(in thousands) Liability % (in thousands)
- --------------------------------------------------------
June 30, 1997
$ 23,000 30% - 88% $ 8,000
36,000 11% - 25% 7,000
182,000 10% and below 18,000
- --------------------------------------------------------
$241,000 $33,000
========================================================
June 30, 1996
$ 33,000 30% - 88% $13,000
56,000 11% - 25% 11,000
203,000 10% and below 20,000
- --------------------------------------------------------
$292,000 $44,000
========================================================
There were no proceeds from receivables sold with recourse in 1997; $12
million, and $7 million, during 1996, and 1995, respectively. Approximately 90%
of the installment contract receivables both owned and sold with recourse have
fixed rates of interest and approximately 10% are at variable rates of interest
based on either the prime rate, U.S. Treasury rates or LIBOR.
Virtually all of the Company's servicing arrangements are based on interest
spreads with fixed rates or variable rates with ceilings.
NOTE 7 - SHAREHOLDERS' EQUITY
Stock Option Plan
In 1983, 1985 and 1991, the Company established Stock Option Plans for a
total of 8,616,829 shares of common stock which provide for granting "incentive
stock options" or
21
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
"non-qualified options" and stock appreciation rights to officers and key
employees of the Company. In addition, non-management members of the Board of
Directors have, with shareholder approval of prices and provisions for exercise,
been granted options to purchase shares of common stock. The option prices were
established at not less than the fair market value as of the date of grant.
Options are exercisable after one or more years and expire no later than 10
years from the date of grant.
Activity and price information regarding the plans follow:
Weighted Weighted
Avg Stock Avg
Stock Option Exercise Options Excercise
Shares Price Range Price Excercisable Price
- ----------------------------------------------------------------------------------------
Balance
June 30, 1994 3,860,538 $ .84 - $12.93 $ 5.66 924,386 $3.62
Granted 590,770 $ 9.02 - $10.18 $ 9.11
Exercised (694,008) $ .84 - $ 9.26 $ 1.95
Canceled (265,740) $ 1.16 - $12.93 $ 5.58
- ----------------------------------------------------------------------------------------
Balance
June 30, 1995 3,491,560 $ 1.16 - $12.93 $ 6.99 1,289,298 $4.95
Granted 840,373 $10.64 - $17.12 $12.64
Exercised (628,845) $ 1.16 - $10.37 $ 4.28
Canceled (378,975) $ 2.20 - $17.12 $ 8.69
- ----------------------------------------------------------------------------------------
Balance
June 30, 1996 3,324,113 $ 1.16 - $17.12 $ 8.74 1,145,403 $6.65
GRANTED 569,684 $12.90 - $16.00 $14.38
EXERCISED (161,144) $ 1.38 - $10.37 $ 4.37
CANCELED (199,095) $ 1.78 - $17.12 $11.84
- ----------------------------------------------------------------------------------------
BALANCE
JUNE 30, 1997 3,533,558 $ 1.38 - $17.12 $ 9.67 1,511,148 $7.90
========================================================================================
Options available for future grant at June 30, 1997 and 1996 were 803,019
and 1,183,139, respectively. Options were held by 611 persons at June 30, 1997.
The following table summarizes information about the plan's stock options
at June 30, 1997:
Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------
Weighted Weighted
Number Weighted Avg Avg Number Avg
Range of Outstanding Remaining Excercise Exercisable Excercise
Exercise Price at 6/30/97 Contractual Life Price at 6/30/97 Price
- --------------------------------------------------------------------------------------------
$ 1.38 - $ 2.70 375,771 2.03 years $ 1.88 224,454 $ 1.92
$ 4.55 - $ 6.31 425,718 4.50 years $ 5.22 260,635 $ 5.16
$ 9.02 - $12.90 2,209,007 7.15 years $10.14 945,791 $ 9.29
$14.32 - $17.12 523,062 8.46 years $16.93 80,268 $17.12
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation
(SFAS 123). Accordingly, no compensation cost has been recognized for the stock
option plans. Had compensation cost for the Company's stock option plans been
based on the fair value at the grant date for awards from 1996 and 1997
consistent with the provisions of SFAS 123, the Company's net earnings and
earnings per share for 1997 would have been reduced to the pro forma amounts
indicated below:
June 30,
1997 1996
- -----------------------------------------------------------------
Net income - as reported $119,500 $106,800
Net income - pro forma 118,481 106,309
Net income per common share - as reported 1.00 0.89
Net income per common share - pro forma 0.99 0.89
- -----------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants issued from 1996 and 1997; dividend yields ranging
from 0.46% to 0.73% with a weighted average yield of 0.55%; expected volatility
of 0.311%, risk-free interest rates ranging from 6.44% to 6.57% with a weighted
average rate of 6.47%; and expected lives ranging from 7.50 to 9.75 years with a
weighted average life of 8.19 years.
NOTE 8 - INCOME TAXES
Components of the provision for income tax for each of the three years
ended June 30, 1997, 1996, and 1995 are as follows:
(in thousands) 1997 1996 1995
- -----------------------------------------------------------
Current tax provisions:
Federal $58,591 $63,274 $41,292
State 6,215 5,928 5,384
- -----------------------------------------------------------
64,806 69,202 46,676
- -----------------------------------------------------------
Deferred tax provision/
(benefit) 8,394 (3,702) 2,124
- -----------------------------------------------------------
$73,200 $65,500 $48,800
===========================================================
The sources and tax effect of temporary differences at June 30, 1997 and
1996 are as follows:
(in thousands) 1997 1996
- -----------------------------------------------------------
Reserves for credit losses and
contingencies and discounts $ 4,712 $ 4,584
Insurance reserves 5,377 4,919
Unearned premiums 5,074 3,952
- -----------------------------------------------------------
Total deferred tax assets 15,163 $ 13,455
- -----------------------------------------------------------
Residual interest in installment
contract receivables (16,881) (8,863)
Deferred costs (3,904) (3,123)
Other (8,452) (7,149)
- -----------------------------------------------------------
Total deferred tax liabilities (29,237) (19,135)
- -----------------------------------------------------------
Net deferred tax liability $ (14,074) $ (5,680)
===========================================================
The provision for income taxes reflected in the financial statements differs
from income taxes calculated at the statutory federal income tax rate of 35% in
1997, 1996 and 1995 as follows on next page:
22
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands) 1997 1996 1995
- ----------------------------------------------------------
Income taxes at statutory rate $67,451 $60,305 $47,530
State income taxes, net of
federal benefit 4,040 4,150 3,769
Other, net 1,709 1,045 (2,499)
- ----------------------------------------------------------
$73,200 $65,500 $48,800
==========================================================
NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit-sharing plan covering all employees who
meet participation requirements. The amount of the Company's contribution is
discretionary as determined by the Board of Directors, up to the maximum
deduction allowed for federal income tax purposes. Contributions accrued were
$2,874,000, $4,274,000, and $3,461,000 for the years ended June 30, 1997, 1996,
and 1995, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Leases
Certain operating properties are rented under non-cancelable operating
leases which expire at various dates through 2009. Total rental expense under
operating leases was $3,705,000 in 1997, $2,722,000 in 1996, and $2,721,000 in
1995. The following is a schedule of minimum rental commitments under
non-cancelable operating leases, primarily for retail centers, in effect at June
30, 1997:
1998 $3,320,000 2001 $1,558,000
1999 2,612,000 2002 991,000
2000 2,083,000 Thereafter 2,246,000
Repurchase Agreements
Institutions financing independent retailer purchases require the Company
to execute repurchase agreements. As a result of these agreements, the Company
is contingently liable for repurchasing homes in the event of a default by the
dealer to the lending institution. These agreements are customary in the
manufactured housing industry, and the Company's losses in the past have not
been significant.
Guarantor of Installment Contract Receivables
Please see discussion of contingencies at Note 6.
Other
The Company has lines of credit totaling $145 million for working capital
needs of which zero borrowings were outstanding at June 30, 1997. Additionally,
the Company has letters of credit of which $48 million was outstanding at June
30, 1997, primarily related to insurance reserve requirements.
NOTE 11 - INDUSTRY SEGMENT INFORMATION
The Company operates in three major business segments: Manufactured
Housing, Financial Services and Communities. The Manufactured Housing segment is
engaged in the production, wholesale and retail sale of manufactured homes.
Financial Services includes retail financing of manufactured homes, reinsuring
risk on family protection, physical damage, and home buyer protection plan
insurance policies, and certain specialty finance products. Communities is
engaged in marketing and management of manufactured housing communities.
Operating income consists of total revenues less cost of sales, operating
expenses and financial interest expense. The following items have not been
included in the computation of operating income: non-operating income and
expenses and income taxes. Identifiable assets are those assets used in the
operation of each industry segment. Corporate assets primarily consist of
short-term investments.
Information concerning operations by industry segment follows:
- -----------------------------------------------------------------------------------------------------------------------
Manufactured Financial
(in thousands) Housing Services Communities Corporate Total
- -----------------------------------------------------------------------------------------------------------------------
1997
REVENUES $827,383 $124,076 $ 70,244 $ -- $1,021,703
INTERSEGMENT INCOME 8,432 93 -- (8,525) --
OPERATING INCOME 95,958 77,459 14,131 -- 187,548
IDENTIFIABLE ASSETS 219,321 610,642 147,814 67,984 1,045,761
DEPRECIATION AND AMORTIZATION 8,348 -- 4,710 -- 13,058
CAPITAL EXPENDITURES $ 21,404 $ -- $ 21,455 $ -- $ 42,859
- -----------------------------------------------------------------------------------------------------------------------
1996
Revenues $761,111 $ 99,443 $ 68,187 $ -- $ 928,741
Intersegment income 7,436 103 94 (7,633) --
Operating income 89,504 62,600 15,600 -- 167,704
Identifiable assets 197,938 493,622 142,331 52,459 886,350
Depreciation and amortization 6,671 -- 4,492 -- 11,163
Capital expenditures $ 16,483 $ -- $ 24,346 $ -- $ 40,829
- -----------------------------------------------------------------------------------------------------------------------
1995
Revenues $ 621,474 $ 88,749 $ 47,869 $ -- $ 758,092
Intersegment income 11,406 274 1,194 (12,874) --
Operating income 67,898 54,800 9,200 -- 131,898
Identifiable assets 176,632 413,072 122,408 49,039 761,151
Depreciation and amortization 5,132 -- 3,164 -- 8,296
Capital expenditures $ 21,933 $ -- $ 22,529 $ -- $ 44,462
=======================================================================================================================
23
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12 - Other Assets and Liabilities
At June 30, 1997 and 1996, other assets and liabilities consisted of:
(in thousands) 1997 1996
- --------------------------------------------------------------------
Other Assets
Interest receivable and
future servicing rights $ 26,229 $ 17,312
Prepaid expenses and other 26,282 20,284
- --------------------------------------------------------------------
$ 52,511 $ 37,596
====================================================================
Other Liabilities
Investors payable $ 69,847 $ 40,286
Reserve for contingencies (Note 6) 3,134 2,979
Escrow deposits 15,220 14,495
Unearned insurance premiums 50,610 39,628
Other 16,046 11,739
- --------------------------------------------------------------------
$154,857 $ 109,127
====================================================================
NOTE 13 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS No.107),
Disclosures about Fair Value of Financial Instruments, requires that CHI
disclose the estimated fair values of its financial instruments. The following
methodologies and assumptions were used by CHI to estimate its fair value
disclosures for financial instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument. The
estimates do not reflect any premium or discount that could result from offering
for sale in a single transaction CHI's entire holdings of a particular financial
instrument. The lack of uniform valuation methodologies introduces a greater
degree of subjectivity to these estimated fair values. Comparability to
financial instruments between similar companies may not be reasonable because of
varying assumptions concerning the estimates of fair value.
Cash and Cash Equivalents
The carrying values for cash and cash equivalents, including those
restricted by agreement, equal the fair value of the assets.
Residual Interests in Installment Contract Receivables
Residual interests in installment contract receivables are calculated using
prepayment, default and interest rate assumptions that the Company believes are
appropriate at the time of the sale of the installment contract receivables.
Projected performance is monitored after the sale; the Company alters the
underlying rate at which the future estimated cash flows are discounted once the
sale has been recorded. The fair value primarily revolves around an appropriate
discount rate to be applied to the asset as a whole.
The Company used a discount rate and such other assumptions as it believed
to be used for similar instruments. The Company has estimated the fair value of
its residual interests in installment contract receivables to approximate its
carrying value as of June 30, 1997 and 1996.
Contracts Held For Sale and as Collateral
Contracts held for sale are generally recent originations or purchased
portfolios which will be sold with limited or no recourse during the following
year. CHI does not charge fees to originate loans, and, as such, its contracts
have origination rates in excess of rates on the securities into which they will
be pooled. CHI estimates the fair value of the contracts held for sale using
expected future cash flows of the portfolio discounted at the current
origination rate.
The carrying values of contracts pledged as collateral to long-term lenders
are estimated using discounted cash flow analyses and interest rates being
offered for similar contracts. The carrying amount of contracts with a variable
rate of interest is estimated to be at fair value. The carrying value of accrued
interest adjusted for credit risk equals its fair value.
Long-term Debt
Long-term debt consist primarily of debt collateralized by contracts with
maturities that coincide with the underlying contract maturities. The fair value
of these financial instruments is based on the current rates offered to CHI for
debt of similar maturities using a discounted cash flow calculation. Loan
covenants preclude prepayment.
The carrying amounts and estimated fair values of CHI's financial
assets and liabilities are as follows:
JUNE 30, 1997 June 30, 1996
CARRYING ESTIMATED Carrying Estimated
(in thousands) AMOUNT FAIR VALUE Amount Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents, including restricted
investments and securities held-to-maturity $181,053 $180,680 $138,164 $138,157
Residual interests in installment contract receivables 135,208 135,208 85,020 85,020
Contracts held for sale and as collateral, including
accrued interest receivable 283,378 293,268 263,719 264,477
Financial liabilities:
Long-term debt $ 22,806 $ 25,859 $ 30,290 $ 34,003
- ---------------------------------------------------------------------------------------------------------------------------
24