Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2003
-----------------------
COMMISSION FILE NUMBER 1-8824
---------
CLAYTON HOMES, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1671360
- ----------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
5000 Clayton Road
Maryville, Tennessee 37804
- ----------------------------------- -----------------------------------
(Address of principal (zip code)
executive offices)
865-380-3000
- -----------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No.
--
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X.
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of common stock $.10 par value, outstanding on April 30, 2003:
136,210,180.
1
CLAYTON HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
-------- -------- --------- ---------
REVENUES
Net sales $190,304 $187,174 $626,449 $622,430
Financial services 67,861 63,845 202,261 185,802
Rental and other income 18,960 18,889 55,301 54,866
-------- -------- --------- ---------
Total revenues 277,125 269,908 884,011 863,098
-------- -------- --------- ---------
COSTS AND EXPENSES
Cost of sales 123,792 122,421 409,251 406,945
Selling, general and administrative 81,308 79,159 243,948 235,748
Financial services operating expenses 21,698 19,505 63,922 60,552
Provision for credit losses 10,200 5,000 26,100 15,500
-------- -------- --------- ---------
Total expenses 236,998 226,085 743,221 718,745
-------- -------- --------- ---------
OPERATING INCOME 40,127 43,823 140,790 144,353
Interest income (expense), net and other 1,437 2,558 (3,616) (2,444)
-------- -------- --------- ---------
Income before income taxes 41,564 46,381 137,174 141,909
Provision for income taxes 15,400 17,200 50,800 52,500
-------- -------- --------- ---------
Net income $ 26,164 $ 29,181 $ 86,374 $ 89,409
======== ======== ========= =========
NET INCOME PER COMMON SHARE
Basic $ 0.19 $ 0.21 $ 0.63 $ 0.65
Diluted 0.19 0.21 0.63 0.64
AVERAGE SHARES OUTSTANDING
Basic 136,111 137,602 136,244 137,675
Diluted 136,482 138,804 136,709 138,782
Dividends per share $ 0.064 $ 0.064 $ 0.064 $ 0.064
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, June 30,
2003 2002
---------- ----------
ASSETS
Cash and cash equivalents $ 28,999 $ 83,729
Trade receivables 6,733 9,308
Inventory finance receivables 136,583 43,859
Other receivables, net 658,592 744,074
Residual interests in installment contract receivables 186,256 181,344
Inventories 194,153 189,976
Property, plant and equipment, net 316,091 310,764
Other assets 322,835 265,349
---------- ----------
Total assets $1,850,242 $1,828,403
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 117,043 $ 139,308
Debt obligations 115,904 92,912
Other liabilities 300,510 334,226
---------- ----------
Total liabilities 533,457 566,446
SHAREHOLDERS' EQUITY
Accumulated other comprehensive income 9,337 7,818
Other shareholders' equity 1,307,448 1,254,139
---------- ----------
Total shareholders' equity 1,316,785 1,261,957
---------- ----------
Total liabilities and shareholders' equity $1,850,242 $1,828,403
========== ==========
(See accompanying notes to the condensed consolidated financial statements)
2
CLAYTON HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
Nine Months Ended
March 31,
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 86,374 $ 89,409
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 15,280 14,519
Amortization associated with sale of installment contract receivables 10,481 36,012
Gain on sale of installment contract receivables (17,859) (38,675)
Income accretion from residual interests in installment contract receivables (18,662) -
Provision for credit losses 26,100 15,500
Realized loss on securities available-for-sale 330 466
Deferred income taxes (13,007) (2,181)
Increase in inventory finance receivables (92,724) (28,972)
Decrease (increase) in other receivables, net 73,246 (24,996)
Increase in inventories (4,177) (1,419)
Decrease in accounts payable, accrued liabilities, and increase in other assets (133,691) (20,181)
---------- ----------
Cash provided by (used in) operations (68,309) 39,482
Origination of installment contract receivables (686,366) (648,398)
Proceeds from sales of originated installment contract receivables 879,012 864,463
Principal collected on originated installment contract receivables 37,943 31,377
---------- ----------
Net cash provided by operating activities 162,280 286,924
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of installment contract receivables (523,267) (955,519)
Proceeds from sales of acquired installment contract receivables 247,909 703,998
Principal collected on acquired installment contract receivables 45,790 39,691
Proceeds from residual interests in installment contract receivables 15,338 -
Proceeds from sales of securities available-for-sale 11,887 25,312
Acquisition of property, plant and equipment (20,607) (16,421)
Decrease (increase) in restricted cash 18,298 (2,488)
---------- ----------
Net cash used in investing activities (204,652) (205,427)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (8,707) (8,800)
Proceeds from (repayment of) debt obligations 22,992 (48,168)
Decrease in cash in excess of bank balances (2,285) (10,988)
Issuance of stock for incentive plans and other 6,506 5,239
Repurchase of common stock (30,864) (9,637)
---------- ----------
Net cash used in financing activities (12,358) (72,354)
---------- ----------
Net increase (decrease) in cash and cash equivalents (54,730) 9,143
Cash and cash equivalents at beginning of period 83,729 47,763
---------- ----------
Cash and cash equivalents at end of period $ 28,999 $ 56,906
========== ==========
(See accompanying notes to the condensed consolidated financial statements)
3
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The condensed consolidated financial statements of Clayton Homes, Inc.
and its wholly and majority owned subsidiaries (the Company) have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been omitted. The condensed consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report to Shareholders for the year ended June 30, 2002.
The information furnished reflects all adjustments that are necessary for a fair
statement of the Company's financial position as of March 31, 2003, and the
results of its operations and its cash flows for the three and nine-month
periods ended March 31, 2003 and 2002. All such adjustments are of a normal
recurring nature. The results of operations for the three and nine months ended
March 31, 2003, are not necessarily indicative of the results to be expected for
the full year ending June 30, 2003.
2. New inventories are valued using the last-in-first-out method. Used
inventory is valued based on local market conditions. The overall change in
inventories as of March 31, 2003, from June 30, 2002, was as follows:
($in thousands) March 31, 2003 June 30, 2002 Increase (decrease)
----------------------------------------------------
Manufacturing
- -------------
Finished goods $ 5,812 $ 1,027 $ 4,785
Raw materials 11,742 16,850 (5,108)
Retail
- ------
Inventory levels at Company-
owned retail centers 158,747 156,228 2,519
Communities
- -----------
Inventory levels at Company-
owned communities 17,852 15,871 1,981
----------------------------------------------------
$194,153 $189,976 $ 4,177
----------------------------------------------------
3. The components of Accounts Payable and Accrued Liabilities as of March 31,
2003 and June 30, 2002, was as follows:
($ in thousands) March 31, 2003 June 30, 2002
--------------- --------------
Accounts Payable and Accrued Liabilities
Accounts payable $ 57,982 $ 79,648
Accrued liabilities & other 59,061 59,660
--------------- --------------
$117,043 $139,308
--------------- --------------
4
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. The Company follows the guidance of the Emerging Issues Task Force in its
issue No. 99-20 (EITF 99-20), Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial Assets.
Under these guidelines, the Company evaluates the expected future cash flows
from its residual interests in asset-backed securitizations on a disaggregated
security-by-security basis. During the nine months ended March 31, 2003, there
was a $12.1 million ($7.6 million after tax) increase in the excess of the
estimated market value over the accreted book value of interest-only securities.
This favorable adjustment has been recorded as an element of accumulated other
comprehensive income. Additionally, an other than temporary impairment was
determined to exist on certain of the Company's interest-only securities
resulting in a charge of $2.1 million ($1.3 million after tax) which was
recorded in March 2003.
Changes in accumulated other comprehensive income, net of the related income tax
effects, are as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
-------- -------- -------- --------
Beginning balance $ 8,085 $10,771 $ 7,818 $ 8,949
Unrealized gains (losses) on securities
available-for-sale, net of tax (3,364) (98) (7,788) (374)
Unrealized gains (losses) on residual interests, net of tax 3,299 (456) 7,619 1,642
Reclassification of realized losses on residual interests
and securities included in net income, net of tax 1,317 944 1,688 944
-------- -------- -------- --------
Ending balance $ 9,337 $11,161 $ 9,337 $11,161
======== ======== ======== ========
5. The Company follows the provisions of SFAS 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. The key
economic assumptions used in the valuation of the residual interests for
securitizations completed during the nine month period ending March 31, 2003 and
2002, were:
For the quarter ended For the quarter ended
Mar. 31, 2003 Mar. 31, 2002 Dec. 31, 2002 Dec. 31, 2001
-------------- -------------- -------------- --------------
Prepayment speed (multiple of the manufactured
housing prepayment model) 300% 300% 300% 300%
Constant prepayment rate (CPR) 17.08% 17.69% 17.08% 17.93%
Weighted average life in years 4.61 4.48 4.61 4.48
Expected credit losses 2.12% 2.13% 2.19% 2.47%
Residual cash flow discount rate 15.75% 15.75% 15.75% 15.75%
For the quarter ended
Sept. 30, 2002 Sept. 30, 2001
-------------- --------------
Prepayment speed (multiple of the manufactured
housing prepayment model) 310% 300%
Constant prepayment rate (CPR) 17.64% 18.42%
Weighted average life in years 4.36 4.52
Expected credit losses 2.74% 1.98%
Residual cash flow discount rate 14.23% 15.75%
5
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following represents the key economic assumptions used in the valuation of
the existing portfolio at June 30, 2002 and have generally remained the same for
the valuation at March 31, 2003:
Constant prepayment rate (CPR) 10.7% - 24.10%
Weighted average life in years 4.27
Expected credit losses 2.43%
Residual cash flow discount rate 13.70%
Note: The discount rate is reflective of a servicing liability which is
discounted at the risk-free rate.
6. The following tables reconcile the numerators and denominators used to
calculate basic and diluted earnings per share for the respective periods:
Three Months Ended Nine Months Ended
March 31, March 31,
(in thousands except per share data) 2003 2002 2003 2002
---------- ---------- -------- --------
Net income $ 26,164 $ 29,181 $ 86,374 $ 89,409
Average shares outstanding
Basic 136,111 137,602 136,244 137,675
Add: common stock equivalents (1) 371 1,202 465 1,107
---------- ---------- -------- --------
Diluted 136,482 138,804 136,709 138,782
Net income per common share
Basic. . . . . . . . . . . . . . . . $ 0.19 $ 0.21 $ 0.63 $ 0.65
Diluted. . . . . . . . . . . . . . . $ 0.19 $ 0.21 $ 0.63 $ 0.64
(1) Common stock equivalents are principally stock options. Stock options to
purchase 3,010,089 and 0 shares of common stock for the three months ended March
31, 2003, and 2002, respectively, and stock options to purchase 2,202,484 and
200,645 shares of common stock for the nine month periods ending March 31, 2003,
and 2002, respectively, were not included in the computation of diluted earnings
per share because their inclusion would have been antidilutive.
7. The Company grants stock options to certain 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 market value as of the date of the grant. Options
are exercisable after one or more years and expire no later than 10 years from
the date of the grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations, and, accordingly, recognizes no
compensation expense for the stock option grants.
6
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table represents the effect on net income and earnings per share
if the Company had applied the fair value based method and recognition
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation:
Three Months Ended Nine Months Ended
March 31, March 31,
(in thousands except per share data) 2003 2002 2003 2002
---------- ---------- --------- ---------
Net income as reported $ 26,164 $ 29,181 $ 86,374 $ 89,409
Add: Stock-based compensation cost, net of tax,
included in net income as reported - - - -
Less: Stock-based compensation cost, net of tax,
if fair value based method were used - - (3,092) (3,506)
---------- ---------- --------- ---------
Net income pro forma $ 26,164 $ 29,181 $ 83,282 $ 85,903
Net income per common share as reported
Basic $ 0.19 $ 0.21 $ 0.63 $ 0.65
Diluted $ 0.19 $ 0.21 $ 0.63 $ 0.64
Net income per common share pro forma
Basic $ 0.19 $ 0.21 $ 0.61 $ 0.62
Diluted $ 0.19 $ 0.21 $ 0.61 $ 0.62
Weighted average shares used in calculation
Basic 136,111 137,602 136,244 137,675
Diluted 136,482 138,804 136,709 138,782
8. The Company maintains an agreement to purchase certain installment
contract receivables originated or acquired by an affiliate, 21st Mortgage
Corporation, in which the Company maintains a 50% ownership interest. 21st
Mortgage Corporation, a Delaware Corporation headquartered in Knoxville,
Tennessee, acts as servicer for those receivables it originates or acquires.
Certain of those receivables are subsequently securitized along with receivables
originated and acquired by the Company. The Company is servicer for such
receivables and maintains a servicing agreement with 21st Mortgage to
sub-service those receivables it sold to the Company.
9. In June 2002, the FASB issued Statement No. 146 (SFAS 146), Accounting
for Costs Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity. This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not presently anticipate any of the exit or disposal
activities so the provisions of this statement will not have a material impact
on the Company's reported results of operations, financial positions, or cash
flows.
7
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires the
guarantor to recognize, at the inception of the guarantee, a liability for the
fair value of obligations undertaken in issuing the guarantee. The disclosure
requirements are effective for quarters ending after December 15, 2002, and the
liability recognition is in effect for guarantees issued after December 31,
2002. The Company has historically provided limited guarantees on certain
certificates offered in conjunction with installment contract receivable
securitization transactions for which it is issuer. These securitizations have
been accounted for in accordance with SFAS 140, and to the extent that the
guarantee was issued, the fair value of that guarantee was considered in the
calculation of the residual interest. The Company does not anticipate that the
provisions of this interpretation will have a material impact on the Company's
reported results of operations, financial positions, or cash flows. The Company
issued no guarantees during the quarter ending March 31, 2003.
In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus
regarding EITF Issue No. 02-16, Accounting by a Customer (including a Reseller)
for Certain Consideration Received from a Vendor. Issue No. 02-16 addresses the
timing of recognition and classification of consideration received from vendors,
including rebates and allowances. Issue No. 02-16 is effective for certain of
our vendor rebates and allowances commencing in January 2003. The adoption of
Issue No. 02-16 did not have a material impact on the reported results of
operations, financial positions, or cash flows.
In December 2002, the FASB issued Statement No. 148 (SFAS 148), Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company will continue to follow the intrinsic value-based method in accounting
for its stock option plans. Accordingly, the Company does not anticipate that
the provisions of this statement will have a material impact on the reported
results of operations, financial positions, or cash flows.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN
46 requires an investor with a majority of the variable interests in a variable
interest entity (VIE) to consolidate the entity and also requires majority and
significant variable interest investors to provide certain disclosures. A VIE is
an entity in which the equity investor does not have a controlling interest, or
the equity investment at risk is insufficient to finance the entity's activities
without receiving additional subordinated financial support from the other
parties. For arrangements entered into with VIEs created prior to January 31,
8
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2003, the provisions of FIN 46 are required to be adopted at the beginning of
the first interim or annual period beginning after June 15, 2003. The Company is
currently reviewing its investments and other arrangements to determine whether
any of its investee entities are VIEs. The company does not expect to identify
any significant VIEs that would be consolidated, but may be required to make
additional disclosures. The company's maximum exposure related to any investment
that may be determined to be in a VIE is limited to the amount invested. The
provisions of FIN 46 are effective immediately for all arrangements entered into
with new VIEs created after January 31, 2003. The company has not invested in
any new VIEs created after January 31, 2003.
In April 2003, FASB issued Statement of Financial Accounting Standards No. 149
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
FASB Statements No. 133 Accounting for Derivative Instruments and Hedging
Activities and No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, establish accounting and reporting standards for
derivative instruments including derivatives embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. This
Statement 149 amends Statement 133 for certain decisions made by the Board as
part of the Derivatives Implementation Group (DIG) process. This Statement
contains amendments relating to FASB Concepts Statement No. 7, Using Cash Flow
Information and Present Value in Accounting Measurements, and FASB Statements
No. 65, Accounting for Certain Mortgage Banking Activities, No. 91 Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases, No. 95, Statement of Cash Flows, and No.
126, Exemption from Certain Required Disclosures about Financial Instruments for
Certain Nonpublic Entities. The Company is presently evaluating the effect of
this pronouncement.
10. The Company is the provider of limited guarantees in connection with its
securitizations. The guarantees, totaling $454 million at March 31, 2003, are
for payment of principal and interest due on certain subordinated certificates
issued through securitizations for which the Company is also subservicer. These
guarantees are limited to principal and/or interest payments due the subordinate
bondholders. Other guarantees, totaling $71 million at March 31, 2003, are with
respect to the Company's servicing obligations for those GNMA certificates for
which it is servicer. The Company believes that the probability of its having
to perform under these guarantees is remote. The following table summarizes the
Company's significant contractual obligations and other contingencies as of
March 31, 2003:
9
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
($ - in thousands)
Contractual Obligations (1) Payments due by period
----------------------------------------------------------------------------------
Total FY03 FY04 FY05 FY06 FY07 Thereafter
----------------------------------------------------------------------------------
Debt obligations $115,904 $ 25,089 $ 75,325 $ 134 $ 35 $ - $ 15,321
Capital leases $ 313 $ 73 $ 240 $ - $ - $ - $ -
Operating leases $ 8,317 $ 946 $ 2,697 $ 1,833 $ 1,242 $ 740 $ 859
Other Contingencies (2) Amount of contingency expiration per period
----------------------------------------------------------------------------------
Total FY03 FY04 FY05 FY06 FY07 Thereafter
----------------------------------------------------------------------------------
Letters of credit $140,587 $ 50,000 $ 90,587 $ - $ - $ - $ -
Guarantees $524,505 $ 5,267 $ 19,446 $ 26,383 $ 28,349 $ 45,130 $399,930
Repurchase agreements $ 54,930 $ 10,986 $ 32,958 $ 10,986 $ - $ - $ -
(1) Debt obligations consist primarily of $25 million in short term borrowings, $75 million Senior Notes due December
2003, and $15 million tax-exempt bonds due through 2030. Capital leases represent amounts due on computer-related
equipment. Operating leases represent minimum rental commitments primarily for retail centers in effect on March 31,
2003.
(2) Letters of credit primarily relate to insurance reserves. Guarantees are described in detail above. The
repurchase agreements represent the maximum potential repurchase obligations in the event of a default by an
independent retailer to the institution providing its floorplan lending. These agreements are customary in the
manufactured housing industry, and the Companys losses in the past have not been significant.
10
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. The Company operates primarily in four business segments: Retail,
Manufacturing, Financial Services and Communities. Any selling, general, and
administrative expenses that can be directly identified with a specific business
segment are reflected in that segment's operating income. Any other selling,
general, and administrative expenses that cannot be directly identified with a
specific business segment remain unallocated and are reflected in the
Eliminations/other line of the operating income detail. The following table
summarizes information with respect to the Company's business segments for the
three and nine-month periods ended March 31, 2003, and 2002:
Three Months Ended Nine Months Ended
March 31, March 31,
(in thousands) 2003 2002 2003 2002
-------------------------- --------------------------
REVENUES
NET SALES
Retail $ 141,148 $ 131,208 $ 459,373 $ 434,569
Manufacturing 106,604 129,719 359,893 395,685
Communities 14,308 8,088 39,088 23,939
Intersegment sales (71,756) (81,841) (231,905) (231,763)
---------- ----------- ---------- ----------
Total Net Sales $ 190,304 $ 187,174 $ 626,449 $ 622,430
========== =========== ========== ==========
FINANCIAL SERVICES
Retail $ 12,680 $ 11,334 $ 35,604 $ 32,839
Financial Services 54,141 51,717 163,847 150,690
Communities 1,040 794 2,810 2,273
---------- ----------- ---------- ----------
Total Financial Services $ 67,861 $ 63,845 $ 202,261 $ 185,802
========== =========== ========== ==========
RENTAL AND OTHER INCOME
Retail $ 6,200 $ 5,923 $ 17,809 $ 18,481
Manufacturing 122 458 364 381
Communities 13,009 12,306 38,118 36,168
Intersegment sales (371) 202 (990) (164)
---------- ----------- ---------- ----------
Total Rental and other income $ 18,960 $ 18,889 $ 55,301 $ 54,866
========== =========== ========== ==========
Total Revenue $ 277,125 $ 269,908 $ 884,011 $ 863,098
========== =========== ========== ==========
INCOME FROM OPERATIONS
Retail $ 4,057 $ 5,211 $ 13,818 $ 19,027
Manufacturing 6,180 11,018 26,978 35,273
Financial Services 32,208 29,934 103,708 93,428
Communities 4,633 4,164 11,363 9,157
Eliminations/Other (6,951) (6,504) (15,077) (12,532)
---------- ----------- ---------- ----------
Total income from operations $ 40,127 $ 43,823 $ 140,790 $ 144,353
========== =========== ========== ==========
CAPITAL EXPENDITURES
Retail $ 458 $ 1,531 $ 2,171 $ 3,772
Manufacturing 1,693 1,937 5,633 4,558
Financial Services 59 202 276 282
Communities 9,290 2,896 10,320 6,832
Eliminations/Other 379 303 2,207 977
---------- ----------- ---------- ----------
Total capital expenditures $ 11,879 $ 6,869 $ 20,607 $ 16,421
========== =========== ========== ==========
As of March 31, As of June 30,
2003 2002
---------------- -----------
IDENTIFIABLE ASSETS
Retail $ 277,494 $ 271,421
Manufacturing 76,395 79,102
Financial Services 1,237,285 1,210,460
Communities 196,758 191,147
Eliminations/Other 62,310 76,273
---------- -----------
Total identifiable assets $1,850,242 $1,828,403
========== ===========
11
PART I - - FINANCIAL INFORMATION (Unaudited)
ITEM 1. Financial Statements.
----------------------
See pages 2 through 11.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------
Results of Operations.
----------------------
CRITICAL ACCOUNTING POLICIES:
The Company believes the following represents its critical accounting policies:
Revenue Recognition
- - Retail sales are recognized when:
1) Cash payment is received, or the approved down payment, either in the
form of cash, trade equity or land, is received for credit sales and, subsequent
to credit approval, the home buyer enters into an installment sales contract,
and
2) The home buyer has inspected and accepted the completed home at the home
buyer's site, and
3) Title has passed to the home buyer.
- - Sales of homes produced by the Company to independent retailers are
recognized as revenue upon shipment if:
1) a) Payment has been received; or b) a commitment is received from an
approved wholesale lender that they will provide financing for the unit, and
2) Title has passed to the retailer.
- - Revenue from rental of homesites and homes is accrued and recognized based
on the terms of the resident's lease agreement with the Company.
- - Premiums from insurance policies represent short-duration contracts with
terms of one to 10 years and are deferred and recognized as revenue over the
terms of the policies.
- - Vanderbilt Mortgage and Finance, Inc. (VMF), the Company's financing
subsidiary, originates and sells installment contract and mortgage loan
receivables (receivables), retaining the servicing thereon. It also provides
servicing for investors in receivables on a contract basis. Interest income on
receivables held, either for sale or as an investment, is recognized in
accordance with the terms of the underlying installment contracts. For
receivables sold with servicing retained and receivables serviced under
servicing agreements, service fee income is recognized as the service is
performed. Interest income on interest-only residual interests is recognized in
accordance with the consensus of the Emerging Issues Task Force in its Issue No.
99-20 (EITF 99-20), Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Assets. Accordingly, interest
income is recognized through an effective yield method, with the yield computed
prospectively over the life of the residual interests after adjustments in the
estimated cash flows are made to reflect prepayments, defaults and other
factors.
12
Valuation of Residual Interests
The Company engages in securitization activities in connection with certain of
its businesses. Gains and losses from securitizations are recognized in the
consolidated statements of income when the Company relinquishes control of the
transferred financial assets in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
The gain or loss on the sale of financial assets depends in part on the previous
carrying amount of the assets involved in the transfer, allocated between the
assets sold and the retained interests based upon their respective fair values
at the date of the sale.
Interest-only securities are periodically valued using a discounted cash flow
model. The future cash flows for the estimated life of each securitized pool
are projected as the excess interest received from borrowers over the interest
paid to the securityholders, less contractual servicing fees, after giving
effect to estimated prepayments and credit losses. Estimates for prepayments,
defaults, and losses are determined based on a model developed by the Company
that considers both Company-specific experience and current economic conditions.
The residual interests in the installment receivables sold are classified as
available-for-sale securities. Accordingly, changes in fair market value are
recorded as other comprehensive income (loss) unless an other than temporary
adverse change is determined. Such changes are reflected in net income. In
September 2002 and March 2003, other than temporary charges of $.6 million and
$2.1 million, respectively, were recorded as a reduction of financial services
revenues in relation to the Company's residual interests. The valuation of
residual interests requires various assumptions and estimates. Any actual
significant change in those original assumptions and estimates could have a
material impact on the Company's reported financial position and cash flows.
Servicing assets are periodically evaluated on a transaction basis for
impairment based on the fair value of those assets. The estimate of fair value
assumes: 1) discount rates which, at the time the asset was created, approximate
current market rates; and 2) expected prepayment rates based on loan prepayment
experience for similar transactions. The servicing asset or liability is
amortized in proportion to and over the period of estimated net servicing income
or net servicing loss.
Reserves for Credit Losses and Contingent Liabilities
Reserves for credit losses and contingent liabilities are established for
receivables held for sale or investment and certain inventory. 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.
Warranty Costs
The Company offers a limited one-year warranty for the homes it manufactures.
Generally, the independent or Company-owned retailer performs the warranty
repairs, with the costs being billed back to the originating Company
manufacturing plant. Costs associated with any installed equipment or
appliances are subsequently billed back to the original equipment manufacturer.
For the nine months ended March 31, 2003 and March 31, 2002, net warranty costs
were less than 2.5% of manufacturing sales.
13
NINE MONTHS ENDED MARCH 31, 2003:
Total revenues for the nine months ended March 31, 2003, increased 2% to $884
million from the same period in 2002. The main reasons for this increase were a
1% increase in manufactured housing sales to $626 million, a 9% increase in
financial services revenue to $202 million and a 1% increase in rental and other
income to $55 million.
Total units sold declined 9% to 16,782 from 18,420 in the prior year period as
total floors shipped decreased 8% to 25,300 from 27,514 in the prior year
period. This decline in unit sales was primarily attributable to the reduction
of dependable financing sources for independent retailers within the
manufacturing segment. A 23% decline in manufacturing shipments to independent
retailers and a 5% decline in retail unit shipments was, to a certain extent,
offset by a 52% increase in units sold within the communities segment.
Gross profit margins on net sales increased slightly to 34.7% from 34.6%, while
selling, general and administrative expenses, as a percent of total revenues,
increased to 27.6% from 27.3% in the prior year period. The $8.2 million
increase in selling, general, and administrative expenses was primarily
attributable to additional volume-related selling costs in the retail and
communities segment.
Financial services operating expenses increased $3.4 million for the nine months
ending March 31, 2003, which can be primarily attributed to rising
insurance-related costs. Additional costs associated with portfolio acquisitions
were also a contributing factor. Operating income decreased to 15.9% of total
revenues in the nine-month period from 16.7% in 2002.
Provision for credit losses increased $10.6 million to $26.1 million for the
nine-month period. The increase is due to the higher level of sell-through of
foreclosed units in the acquired portfolios, coupled with lower recovery rates
resulting from the continued repossession inventory overhang in the industry.
The total number of contracts in foreclosure as a percentage of total contracts
increased slightly to 2.0% from 1.9% last year.
Interest expense (net of interest income) increased $1.2 million to $3.6 million
for the nine-month period ending March 31, 2003, as compared to $2.4 million net
expense in the same period last year. The net expense was primarily attributable
to overall declining interest rates during the nine-month period, which had a
negative impact on the value of the Company's interest rate swaps. During the
nine-month period ended March 31, 2003, there was an unfavorable mark-to-market
adjustment of $3.5 million relating to the swaps. In the comparable period last
year, there was a $1.7 million mark-to-market unfavorable swap adjustment.
RETAIL. Within the Retail segment revenues, the average number of homes sold
per sales center decreased 5% and the total number of homes sold declined 5% to
10,809. Despite the decline in units sold, the group experienced a 6% increase
in net sales to $459 million due to the larger proportion of new units sold this
year over last year as well as a greater mix of multi-section homes. The
proportion of new units sold was 86% of the total number of units versus 79% new
units sold for the same period last year. Same store dollar sales increased 5%
for the nine-month period.
14
Nine Months Ended
March 31, %
2003 2002 Change
-------- -------- -------
Sales of new homes (in thousands) $437,109 $402,301 8.7%
Sales of previously-owned homes (in thousands) $ 22,264 $ 32,269 -31.0%
Average number of retail centers 292 293 -0.3%
Dollar sales per retail center (in thousands) $ 1,576 $ 1,486 6.1%
Average price of home $ 42,499 $ 38,130 11.5%
New homes sold 9,243 9,078 1.8%
Previously-owned homes sold 1,566 2,319 -32.5%
Percentage single-section/multi-section mix (new only) 46/54 48/52
MANUFACTURING. Within the Manufacturing segment revenues, the group experienced
a 22% decline to $128 million in net sales to independent retailers and a 23%
decrease in the number of homes sold to 4,861. This decline is primarily due to
the lack of dependable financing for our independent retailer network. The
average number of independent retailers decreased slightly to 606.
Manufacturing segment operating income decreased $8 million to $27 million as
compared to the prior year, as capacity utilization decreased to 55% versus 60%
for the same period last year.
Nine Months Ended
March 31, %
2003 2002 Change
-------- -------- -------
Wholesale dollar sales (in thousands) $127,988 $163,921 -21.9%
Number of plants operating 20 20 -
Number of independent retailers (average) 606 609 -0.4%
Dollar sales per independent retailer (in thousands) $ 211 $ 269 -21.6%
Average price of home $ 26,329 $ 26,052 1.1%
Homes sold to independent retailers 4,861 6,292 -22.7%
Percentage single-section/multi-section mix 38/62 40/60
FINANCIAL SERVICES. Revenues for the Financial Services segment increased $13
million, as insurance related revenues rose $5 million. Originations of $647
million and acquisitions of $508 million were completed during the nine-month
period, bringing the total serviced portfolio to $5.3 billion. Inventory finance
receivables increased $93 million to $137 million, as compared to $44 million in
June 2002. This increase was a result of competing lenders exiting the
manufactured housing finance business. Loans sold through asset-backed
securities transactions totaled $1.2 billion (of which $89.9 million of
securities were retained with $12.1 million subsequently sold) for the nine
months ending March 31, 2003. In the same period last year, $1.1 billion of
loans were sold through asset-backed securities transactions (of which $9.1
million was retained) and an additional $26 million of securities retained in
prior period transactions were also sold. Delinquency on the originated
portfolio increased 20 basis points to 2.54%. Overall delinquency, including the
serviced portfolio and the recent portfolio purchases, increased slightly from
2.84% in June 2002 to 2.86% in March 2003, but declined 16 basis points from
March last year. Total Financial Services operating income increased 11% to $104
million. The increase in the net losses on repossessed homes as a percentage of
average loans outstanding is principally the result of the portfolios acquired
in 2002. Many of these portfolios were purchased in anticipation of higher than
normal losses, and were priced accordingly. For originated loans, losses as a
percent of originated loan balances outstanding increased 0.2% from March 2002
to March 2003.
15
The following table sets forth information related to loan loss experience for
all installment contract receivables that the Company either owns or for which
it is contingently liable.
Nine Months Ended
March 31,
2003 2002
------- -------
Net losses as a percentage of average loans outstanding (annualized)
All contracts 2.5% 2.0%
Contracts originated by VMF 2.2% 2.0%
Contracts acquired from other institutions 3.5% 1.8%
Loans Serviced (in millions)
Originated and purchased loans serviced $5,179 $4,703
Master servicing contracts 140 166
------- -------
Total $5,319 $4,869
======= =======
Number of contracts in repossession
Contracts originated by VMF 2,516 2,208
Contracts acquired from other institutions 752 682
------- -------
All contracts 3,268 2,890
======= =======
Total number of contracts in repossession as a percentage of total contracts 2.0% 1.9%
COMMUNITIES. Within the Communities segment revenues, net sales increased 63%
to $39 million, the average home selling price increased 7%, and 52% more homes
were sold as a result of certain promotional programs. Communities rental
income rose 5% as segment operating income increased 24% to $11 million.
Nine Months Ended
March 31, %
2003 2002 Change
------- ------- -------
Sales of new homes (in thousands) $25,738 $16,865 52.6%
Sales of previously-owned homes (in thousands) $13,350 $ 7,074 88.7%
Number of communities (average) 84 81 3.1%
Dollar sales per community (in thousands) $ 468 $ 296 58.4%
Average price of home $35,151 $32,748 7.3%
New homes sold 634 442 43.4%
Previously-owned homes sold 478 289 65.4%
THREE MONTHS ENDED MARCH 31, 2003:
Total revenues for the three months ended March 31, 2003, increased 3% to $277
million from the same period in 2002, which consisted of a 2% increase in
manufactured housing sales to $190 million, a 6% increase in financial services
revenues to $68 million and a slight increase in rental and other income to $19
million. The lack of reliable independent retailer financing contributed to
the decline of 10% in total units sold to 5,060 from 5,616 in the prior year
period as total floors shipped decreased 9% to 7,531 from 8,285 in the prior
year period.
16
Gross profit margins on net sales increased to 35.0% from 34.6%, while selling,
general and administrative expenses, as a percent of total revenues, remained
steady at 29.3%. Operating income decreased to 14.5% of total revenues in the
three-month period from 16.2% in 2002.
Provision for credit losses increased $5.2 million to $10.2 million for the
quarter ending March 31, 2003. The increase is due to the higher level of
sell-through of foreclosed units in the acquired portfolios, coupled with lower
recovery rates as a result of the continuing repossession inventory overhang in
the industry.
Interest income (net of interest expense) declined from $2.6 million to $1.4
million for the three-month period ending March 31, 2003. During the three
month period ended March 31, 2003, there was a favorable mark-to-market
adjustment of $.4 million relating to the swaps. In the comparable period last
year, there was a $1.6 million mark-to-market favorable swap adjustment.
RETAIL. Within the Retail segment revenues, the group experienced an 8%
increase in net sales to $141 million, as the average home price increased 13%,
the average number of homes sold per sales center decreased 6%, and the total
number of homes sold declined 5% to 3,357. Same store dollar sales increased 5%
for the quarter.
Three Months Ended
March 31, %
2003 2002 Change
-------- -------- -------
Sales of new homes (in thousands) $135,124 $120,069 12.5%
Sales of previously-owned homes (in thousands) $ 6,023 $ 11,140 -45.9%
Average number of retail centers 293 290 1.0%
Dollar sales per retail center (in thousands) $ 482 $ 452 6.5%
Average price of home $ 42,046 $ 37,233 12.9%
New homes sold 2,866 2,750 4.2%
Previously-owned homes sold 491 774 -36.6%
Percentage single-section/multi-section mix (new only) 48/52 50/50
MANUFACTURING. Within the Manufacturing segment revenues, the group experienced
a 27% decline to $35 million in net sales to independent retailers and a 30%
decrease in the number of homes sold to 1,292 as the average number of
independent retailers increased 6% to 617. This decline is primarily due to a
lack of dependable financing available to our independent dealer network.
Manufacturing segment operating income decreased $5 million to $6 million as
compared to the same quarter last year. Capacity utilization decreased to 48%
versus 57% for the comparable quarter last year.
Three Months Ended
March 31, %
2003 2002 Change
------- ------- -------
Wholesale dollar sales (in thousands) $34,849 $47,877 -27.2%
Number of plants operating 20 20 -
Number of independent retailers (average) 617 581 6.2%
Dollar sales per independent retailer (in thousands) $ 57 $ 82 -31.5%
Average price of home $26,973 $26,034 3.6%
Homes sold to independent retailers 1,292 1,839 -29.7%
Percentage single-section/multi-section mix 36/64 39/61
FINANCIAL SERVICES. Revenues for the Financial Services segment increased $4
million, as insurance related revenues rose $2 million. Originations of $207
million and acquisitions of $225 million were completed
17
during the quarter, bringing the total serviced portfolio to $5.3 billion.
Inventory finance receivables increased slightly during the quarter bringing the
balance to $137 million. Loans sold through asset-backed securities transactions
totaled $290 million (of which $28.4 million of securities were retained),
compared to $252 million during the same period last year. In addition, $12.1
million in securities retained in prior transactions in the current fiscal year
were also sold in the quarter ending March 31, 2003. Delinquency on the
originated portfolio increased 20 basis points to 2.54% at the end of the
quarter versus the comparable period last year. Overall delinquency, including
the serviced portfolio and the recent portfolio purchases, increased slightly
from 2.84% in June 2002 to 2.86% in March, but declined 16 basis points from
March last year. Total Financial Services operating income increased 8% to $32
million. The increase in the net losses on repossessed homes as a percentage of
average loans outstanding is principally the result of the portfolios acquired
in 2002. Many of these portfolios were purchased in anticipation of higher than
normal losses, and were priced accordingly.
The following table sets forth information related to loan loss experience for
all installment contract receivables that the Company either owns or for which
it is contingently liable.
Three Months Ended
March 31,
2003 2002
----- -----
Net losses as a percentage of average loans outstanding (annualized)
All contracts 2.5% 2.1%
Contracts originated by VMF 2.1% 2.0%
Contracts acquired from other institutions 3.8% 2.5%
COMMUNITIES. Within the Communities segment revenues, net sales increased 77%
to $14 million, the average home selling price increased 9%, and 62% more homes
were sold. The overall increase in volume is partially attributable to certain
promotional programs. Communities rental income rose 5% as segment operating
income increased 11% to $5 million.
Three Months Ended
March 31, %
2003 2002 Change
------- ------- -------
Sales of new homes (in thousands) $ 9,726 $ 5,126 89.7%
Sales of previously-owned homes (in thousands) $ 4,582 $ 2,962 54.7%
Number of communities (average) 84 81 3.7%
Dollar sales per community (in thousands) $ 170 $ 100 70.6%
Average price of home $34,813 $31,968 8.9%
New homes sold 243 134 81.3%
Previously-owned homes sold 168 119 41.2%
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at March 31, 2003, were $29 million as compared to $84
million at June 30, 2002. The Company anticipates meeting cash requirements
with cash flow from operations, revolving credit lines, a commercial paper sales
facility, a participation facility, senior notes, and sales of installment
contract and mortgage loan receivables and GNMA certificates.
Cash provided by operating activities was $162 million for the nine months
ending March 31, 2003, as compared to $287 million being provided from
operations for the same period last year. The decrease was
18
primarily due to an additional $64 million being used for inventory finance
receivables and a net increase of $74 million retained from asset-backed
securitization transactions. The Company used $205 million in investing
activities, primarily for the acquisition of installment contract receivables.
In addition, $12 million in cash was used in financing activities, principally
consisting of $23 million in proceeds from debt obligations offset by $31
million being used for repurchase of common stock, as compared to $72 million
being used in the same period last year, generally to repay debt obligations,
pay dividends and repurchase common stock.
The Company's debt to capital ratio was 8% at March 31, 2003. Short-term debt
available consists of $190 million committed and $37 million uncommitted lines
of credit. These lines of credit do not require collateral and are priced in
relation to LIBOR. The committed credit lines are guaranteed by all significant
subsidiaries of the Company and are governed by various financial covenants that
require maintenance of certain financial ratios. The Company had debt
outstanding of $116 million and $93 million at March 31, 2003, and June 30,
2002, respectively.
The Company has $75 million of 6.25% Senior Notes due December 30, 2003, which
are primarily to facilitate the purchase, origination and warehousing of loan
portfolios. The Senior Notes are guaranteed by all significant subsidiaries of
the Company and are governed by various financial covenants that require
maintenance of certain financial ratios. At March 31, 2003, the Company was in
compliance with all financial covenants.
A $300 million one-year sales facility is available of which $150 million is
committed. This facility was not utilized at March 31, 2003. Approximately
$175 million in installment contract receivables were sold through the facility
during the quarter. In addition, a committed one-year $150 million
participation facility is also available to facilitate the future sale of
manufactured housing contracts. This participation facility was not utilized
during the quarter ended March 31, 2003. In accordance with the agreements of
the sales facility and participation facility, utilization of any unfunded
commitment is permitted as long as certain criteria are met. The criteria for
the sales facility include maintenance of minimum credit ratings, various
financial covenants that require maintenance of certain ratios, and certain
collateral characteristics. The minimum credit ratings required for funding
under the sales facility are: S&P (BBB-), Moody's (Baa3) and Fitch (BB+). The
criteria for the participation facility contain no minimum ratings criteria, but
have financial covenants that require maintenance of certain ratios and certain
collateral characteristics. At March 31, 2002, the Company was in compliance
with requirements requisite to accessing the sales and participation facilities.
The current credit ratings for the company are: S&P (BBB), Moody's (Baa2) and
Fitch (BB+). The Company owns its inventory; therefore, no floorplanning
arrangements are necessary.
The Company is the provider of limited guarantees in connection with its
securitizations. The guarantees, totaling $454 million at March 31, 2003, are
for payment of principal and interest due on certain subordinated certificates
issued through securitizations for which the Company is also subservicer. These
guarantees are limited to principal and/or interest payments due the subordinate
bondholders. Other guarantees, totaling $71 million at March 31, 2003, are with
respect to the Company's servicing obligations for those GNMA certificates for
which it is servicer. The Company believes that the probability of its having
to perform under these guarantees is remote. The following table summarizes the
Company's significant contractual obligations and other contingencies as of
March 31, 2003:
19
($ - in thousands)
Contractual Obligations (1) Payments due by period
----------------------------------------------------------------------------------
Total FY03 FY04 FY05 FY06 FY07 Thereafter
----------------------------------------------------------------------------------
Debt obligations $115,904 $ 25,089 $ 75,325 $ 134 $ 35 $ - $ 15,321
Capital leases $ 313 $ 73 $ 240 $ - $ - $ - $ -
Operating leases $ 8,317 $ 946 $ 2,697 $ 1,833 $ 1,242 $ 740 $ 859
Other Contingencies (2) Amount of contingency expiration per period
----------------------------------------------------------------------------------
Total FY03 FY04 FY05 FY06 FY07 Thereafter
----------------------------------------------------------------------------------
Letters of credit $140,587 $ 50,000 $ 90,587 $ - $ - $ - $ -
Guarantees $524,505 $ 5,267 $ 19,446 $ 26,383 $ 28,349 $ 45,130 $399,930
Repurchase agreements $ 54,930 $ 10,986 $ 32,958 $ 10,986 $ - $ - $ -
(1) Debt obligations consist primarily of $25 million in short term borrowings, $75 million Senior Notes due December
2003, and $15 million tax-exempt bonds due through 2030. Capital leases represent amounts due on computer-related
equipment. Operating leases represent minimum rental commitments primarily for retail centers in effect on March 31,
2003.
(2) Letters of credit primarily relate to insurance reserves. Guarantees are described in detail above. The
repurchase agreements represent the maximum potential repurchase obligations in the event of a default by an
independent retailer to the institution providing its floorplan lending. These agreements are customary in the
manufactured housing industry, and the Companys losses in the past have not been significant.
FORWARD LOOKING STATEMENTS:
This report contains "forward looking statements" within the meaning of the
federal securities laws regarding the business and industry of Clayton Homes,
Inc. (the "Company"). Such forward-looking statements can be identified by the
use of the words "believes," "estimates," "expects," "projects" and words of
similar import and include, without limitation, statements regarding the growth
and financing strategies of the Company, projections of revenues, income,
earnings per share or other financial items, the effective implementation of the
Company's business or regarding trends relating to the manufactured home
industry and various other items. Forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
financial condition, results of operations, performance and achievements of the
Company to be materially different from any of the results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include general economic and business conditions; industry trends;
demographic changes; competition; raw material and labor costs and availability;
import protection and regulation; relationships with customers, distributors or
dealers; changes in the business strategy or development plans of the Company;
the availability of other forms of housing; the availability of consumer credit;
general inflationary pressures; the availability and terms of capital; general
interest rate risk; and government regulation.
Such forward looking statements are based on current expectations, estimates and
projections about the industry and markets in which the Company operates, as
well as management's beliefs and assumptions. Although the Company believes its
current expectations to be based upon reasonable assumptions, there can be no
assurance that such expectations will be attained or that actual results will
not differ materially. The Company undertakes no obligation to publicly update
or revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
RECENT EVENTS:
On April 1, 2003, the Company agreed to be acquired by Berkshire Hathaway Inc.
at a price of $12.50 per share, payable in cash. The plan of merger and the
stockholders agreement in relation to the merger of a subsidiary of Berkshire
Hathaway Inc. with and into and Clayton Homes, Inc. were filed with the
Securities
20
and Exchange Commission (SEC) on April 2, 2003 as exhibits to Form 8-K. On April
18, 2003, the preliminary proxy statement was filed with the SEC as schedule
14A.
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk.
There were no material changes during the quarter.
ITEM 4 - Controls and Procedures.
Within the 45 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded the Company's disclosure controls and procedures are
effective. There were no significant changes in the company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
21
PART II - - OTHER INFORMATION
ITEM 1 - There were no reportable events for Items 1 through 5.
ITEM 6 - Exhibits and Reports for Form 8-K.
---------------------------------------
(a) Reports on Form 8-K.
Clayton Homes, Inc. Press Release reporting the appointment of new board member
Steven G. Davis. Filed February 7, 2003.
Clayton Homes, Inc. Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed February
12, 2003.
Clayton Homes, Inc. Press Release reporting preliminary operating results for
the month of January 2003. Filed February 14, 2003.
Clayton Homes, Inc./Vanderbilt Mortgage & Finance, Inc. incorporation of
financial statements of Clayton Homes, Inc. into registration statement file no.
333-100319 pertaining to Senior Subordinate Pass-Through Certificates Series
2003A. Filed March 4, 2003.
Clayton Homes, Inc. Press Release reporting preliminary operating results for
the month of February 2003. Filed March 14, 2003.
Clayton Homes, Inc./Vanderbilt Mortgage & Finance, Inc. Senior Subordinate
Pass-Through Certificates Series 2003A. Filed March 14, 2003.
22
CLAYTON HOMES, INC.
-------------------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLAYTON HOMES, INC.
---------------------
(Registrant)
Date: May 13, 2003 /s/ Kevin T. Clayton
------------------- -----------------------
Kevin T. Clayton
Chief Executive Officer and President
(Principal Executive Officer)
Date: May 13, 2003 /s/ John J. Kalec
------------------- -----------------------
John J. Kalec
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
23
CERTIFICATIONS
(a) CEO Certification
I, Kevin T. Clayton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Clayton Homes,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 45 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or person performing equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Kevin T. Clayton
-----------------------
Kevin T. Clayton
Chief Executive Officer, President, and President,
Financial Services
24
(b) CFO Certification
I, John J. Kalec, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Clayton Homes,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 45 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or person performing equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ John J. Kalec
--------------------
John J. Kalec
Executive Vice President and Chief
Financial Officer
25