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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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 incorporation (I.R.S. Employer
or organization) Identification Number)
5000 Clayton Road
Maryville, Tennessee 37804
- --------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 865-380-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ---------------------- -----------------
COMMON STOCK, $.10 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE*
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether 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 check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On August 7, 2003, Clayton Homes, Inc. filed a certificate of merger with the
Secretary of State of Delaware to make effective its merger with a wholly-owned
subsidiary of Berkshire Hathaway Inc. ("Berkshire Hathaway"). In addition, on
August 7, 2003, The New York Stock Exchange (the "NYSE") suspended trading of
Clayton Homes, Inc. stock, and subsequently delisted Clayton Homes, Inc stock on
October 8, 2003 . The aggregate market value of the voting stock held by
non-affiliates of the registrant on August 6, 2003, the day before the merger
became effective, was approximately $1,218,765,707 (97,579,320 shares at
closing price on the NYSE of $12.49).
Shares of common stock, $.10 par value (the "Common Stock"), outstanding on
August 6, 2003, were 136,269,337.
Exhibit index appears on pages 55-56.
*The New York Stock Exchange delisted Clayton Homes, Inc. stock on October 8,
2003.
1
CLAYTON HOMES, INC.
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. and its subsidiaries. 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.
PART I
ITEM 1. BUSINESS.
GENERAL
Clayton Homes, Inc. and its subsidiaries produce, sell, finance and insure
primarily low to medium-priced manufactured homes. Throughout the remainder of
this report, including exhibits and attachments, the term "Company" may be used
to refer to Clayton Homes, Inc. or any of its subsidiaries, either individually
or collectively as a group. The term "Company-owned" will generally be used to
address the subsidiary that owns a particular asset or group of assets or
performs a particular function being discussed. Clayton Homes, Inc. and the
individual subsidiaries may also be referred to by name or segment description.
The Company's 20 manufacturing plants produce homes that are marketed in 32
states through 976 retailers, of which 302 are Company-owned sales centers, 86
are Company-owned community sales offices and 588 are independent retailers.
Installment financing and insurance products are offered to its homebuyers and
those buying from selected independent retailers. Such financing is provided
through its wholly owned finance subsidiary, Vanderbilt Mortgage and Finance,
Inc. ("VMF"). The Company acts as agent, earns commissions and reinsures 100%
of the risks on physical damage insurance policies, family protection insurance
policies, home buyer protection insurance policies, and extended service
contracts issued by a non-related insurance company (ceding company) in
connection with its home sales. The Company also develops, owns, and manages
manufactured housing communities.
The Company is a Delaware corporation whose predecessor was incorporated in 1968
in Tennessee. Its principal executive offices are located near Knoxville,
Tennessee.
The following table indicates the percentage of revenue derived from sales by
Company-owned retail centers, sales to independent retailers and financial
services operations and other income for each of the last three fiscal years.
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Year ended June 30,
2003 2002 2001
----- ----- -----
Sales by Company-owned retail centers and communities 57% 55% 54%
Sales to independent retailers 15% 18% 19%
Financial services and other 28% 27% 27%
----- ----- -----
Total 100% 100% 100%
===== ===== =====
MANUFACTURED HOMES
A manufactured home made by the Company is a factory-built, completely finished
dwelling. Constructed to be transported by truck, the home is mounted on wheels
attached to its frame. Manufactured homes are designed to be permanent,
owner-occupied residences sited and attached to utilities.
The Company manufactures a variety of single and multi-section homes in a wide
price range. Retail prices range from $10,000 to $97,000 with sizes from 500 to
2,400 square feet.
The Company markets the homes it manufactures under the names of Clayton and
Norris. Included standard features are central heating, range, refrigerator, and
color-coordinated window, wall and floor treatments. Optional features include
central air conditioning, wood-burning fireplaces, hardwood floors, whirlpool
tubs, entertainment systems, microwaves, dishwashers, washers and dryers,
skylights and furniture. When combined with land and as a land-home package,
other features such as driveways, carports and decks are common.
MANUFACTURING OPERATIONS
The Company manufactures homes in 20 facilities, ranging in size from 87,000 to
194,000 square feet. See "Item 2. Properties" for a listing by location of the
Company's facilities. The Company's manufactured homes are built in its plants
using assembly-line techniques. Completion of a home ordinarily takes two days.
Homes are generally produced to fill orders received from independent and
Company-owned retail centers; therefore, the Company does not normally maintain
a significant inventory of homes at its plants. Independent carriers transport
completed homes to the retail centers.
The Company's plants operate on a one-shift-per-day basis, normally for a
five-day week, with the capacity to produce approximately 35,000 homes per year.
During the fiscal year ended June 30, 2003, the Company produced 18,063 homes.
The principal materials utilized in the production of the Company's homes are
steel, aluminum, wood, fiberglass, carpet, vinyl floor covering, hardware items,
appliances and electrical items. The Company purchases these and other items
from a number of supply sources, and it believes that the materials and parts
necessary for the construction and assembly of its homes will remain readily
available from these sources. The Company is not dependent on any particular
manufacturer or supplier as a source for these principal materials. In the
event that any of these items are not readily available or are available at a
higher cost than could be passed on to consumers, the operations of the Company
could be adversely affected. Construction of the Company's manufactured homes
and the plumbing, heating and electrical systems installed in them must comply
with standards set by the Federal Department of Housing and Urban Development
under the National Manufactured Home Construction and Safety Standards Act of
1974. See "Regulation."
The Company offers one-year limited warranty programs covering manufacturing
defects in materials or workmanship in a home. Warranties covering appliances
and equipment installed in the homes generally are obligations of the
manufacturers of such items and are not those of the Company. Warranty and
service costs during the years ended June 30, 2003, June 30, 2002, and June 30,
2001, amounted to approximately $11,157,000, $13,522,000, and $14,193,000,
respectively.
The backlog of firm orders for homes manufactured by the Company, including
orders from Company-owned retail centers, was approximately $21,500,000 and
$22,000,000 on June 30, 2003, and 2002,
3
respectively. Based on the Company's production rate, approximately two weeks
would be required to fill backlog orders at June 30, 2003.
SALES OF HOMES MANUFACTURED BY THE COMPANY
The following table sets forth manufacturing sales and other data for the
periods indicated.
Year ended June 30,
2003 2002 2001
------ ------ ------
Number of homes sold to independent retailers 6,575 8,240 9,119
Number of homes shipped to Company-owned retail centers 11,532 12,168 10,804
------ ------ ------
Total 18,107 20,408 19,923
====== ====== ======
Number of plants operating 20 20 20
Number of independent retailers 588 601 634
Number of Company-owned communities 86 82 81
Number of Company-owned retail centers 302 287 297
COMPANY RETAIL OPERATIONS
As of June 30, 2003, the Company sold homes through 302 Company-owned retail
centers in 25 states. In addition to selling homes built by the Company,
virtually all of these retail centers sell new homes manufactured by other
companies and previously-owned manufactured homes.
The following table indicates the number of Company-owned retail centers and
certain information relating to homes sold during the last three fiscal years.
Year ended June 30,
2003 2002 2001
------- ------- -------
Number of Company-owned retail centers 302 287 297
Number of new homes sold (including homes built by the
Company and by other manufacturers) 12,548 12,772 12,346
Average retail price of new homes sold $47,348 $44,759 $43,643
Number of previously-owned homes sold 2,078 3,105 3,556
All of the Company-owned retail centers employ salespeople who are primarily
compensated on a commission basis. The retail centers generally do not have
administrative staffs since most administrative functions are performed at the
Company's corporate headquarters.
To provide customers a wider price range of homes, the Company purchases and
acquires on trade previously owned manufactured homes from individuals and from
other retailers. It also purchases foreclosed homes from lenders throughout its
trade territory.
Homes sold by Company-owned retail centers are delivered to the homeowners'
sites by trucks either owned by the Company or leased for the particular
delivery. The purchase price of the home may include delivery and setup of the
home at the retail homeowner's site. Electrical, water, and gas connections are
performed by licensed technicians.
Generally, homes are sold at retail in one of three types of transactions. In a
home-only transaction, which is the most common, the home is placed on a site
that the homebuyer either owns or leases and the site is not part of the
collateral. Additionally, the homebuyer may pledge land that they own as
additional collateral, or instead of a down payment. This is commonly referred
to as a "land-in-lieu" transaction and the home remains personal property. The
third type of transaction is known as a "land-home" transaction. In this case,
the land is purchased for the customer and the home and land may be recorded as
real property, or the home may retain its title as personal property, with the
land being recorded as real property.
4
INDEPENDENT RETAILERS
In the fiscal year ended June 30, 2003, 36% of homes manufactured by the Company
were sold to its independent retailers, compared to 40% for the year ended June
30, 2002. As of June 30, 2003, the Company supplied its manufactured homes to
588 independent retailers in 32 states. The Company's independent retailer
network enables it to distribute homes to more markets, more quickly, without as
large an investment in management resources and overhead expenses as is required
with Company-owned retail centers. Sales to independent retailers helps to
ensure that Company's homes are competitive with other manufacturers in terms of
consumer acceptability, product design, quality and price.
The Company's finance subsidiary, VMF, provides financing for retail customers
of select independent retailers with terms and conditions similar to those
provided to Company-owned locations. In addition, VMF also provides inventory
financing for certain independent retailers.
The Company establishes relationships with its independent retailers through
sales representatives from its manufacturing plants. These representatives
visit independent retailers in assigned areas to solicit orders for the
Company's homes. The area is generally limited to a 500-mile radius from each
of the Company's manufacturing plants due to the relatively significant cost of
transporting a home. Depending on the cost of the home and the manufacturing
competition within the area, some homes may be shipped longer distances while
remaining competitively priced. During each of the Company's last three fiscal
years, no single independent retailer accounted for more than 2% of the
Company's consolidated revenues.
The Company's independent retailers generally provide their own inventory
financing; allowing the Company to receive payment for homes within two weeks
after the home is constructed. The Company does not require agreements with its
independent retailers, and either party may terminate the relationship between
the Company and each of its independent retailers at any time. The Company
believes its relationships with its independent retailers are good. The Company
generally has little control over the operations of independent retailers.
As is customary in the industry, lenders providing financing for independent
retailer purchases require that the Company execute repurchase agreements that
include provisions requiring the Company to repurchase homes for the amount
remaining unpaid to the lender, excluding interest and repossession costs,
should the retailer default under its inventory financing arrangements.
Historically, any homes repurchased under such agreements are immediately resold
to other retailers, including Company-owned retail centers, at approximately the
repurchase price. During the prior five fiscal years, the Company has incurred
no significant losses resulting from these contingent obligations, but there can
be no assurance that losses will not occur in the future.
FINANCIAL SERVICES
The Company maintains that the ability to make financing available to retail
purchasers is a material factor affecting the market acceptance of its product.
The Company facilitates retail sales by offering various finance and insurance
programs. The following table reflects the relative percentages of homes sold
by Company-owned retail centers that were financed through the Company, either
by VMF or by conventional lenders, and those sales made to customers who
arranged their own financing or paid cash.
Year ended June 30,
2003 2002 2001
----- ----- -----
VMF 71% 71% 74%
Conventional lenders 6% 5% 2%
Customer arranged or cash 23% 24% 24%
----- ----- -----
Total 100% 100% 100%
===== ===== =====
VMF also purchases and originates manufactured housing installment contract
receivables (also referred to as manufactured housing contracts) on an
individual basis from select independent retailers. Retailers submit homebuyer
applications to VMF for approval and, provided that credit reports, employment
verification, and income and debt analysis meet VMF's criteria, a contract
purchase commitment is issued to the selling retailer.
5
VMF makes bulk purchases of manufactured housing contracts from banks and other
lenders. It also performs, on behalf of other institutions, servicing of
manufactured housing contracts that were not purchased or originated by VMF.
These purchases and servicing arrangements may relate to the portfolios of other
lenders or finance companies, governmental agencies, or other entities that
purchase and hold manufactured housing contracts.
UNDERWRITING POLICIES. Retail customers of the Company who express a desire to
obtain financing by or through the Company complete a credit application that is
initially reviewed by the manager of the retail center who then determines
whether to forward the application to VMF.
VMF's underwriting guidelines require that each applicant's credit, residence,
employment history and income to debt payment ratios meet predetermined
guidelines. If, in the judgment of the VMF credit manager, an applicant does not
meet minimum-underwriting criteria, there must be other determining criteria in
order for an applicant to be approved. Credit managers confirm that the credit
investigation gives a complete and up-to-date accounting of the applicant's
creditworthiness and are encouraged to obtain second opinions on loans for
relatively large dollar amounts or those which tend to rank lower in terms of
underwriting criteria. Generally, the sum of the monthly installment housing
obligation, which includes the manufactured home loan payment and monthly site
costs, should not exceed 35% of the applicant's gross monthly income.
With respect to those homebuyers that are approved, VMF requires a down payment
in the form of cash, the trade-in value of a previously owned manufactured home,
and/or the estimated value of equity in real property pledged as additional
collateral. For previously owned homes, the trade-in allowance accepted by the
retailer must be consistent with the market value of the home in light of
current local market conditions. The value of real property pledged as
additional collateral is estimated by licensed appraisers or by retail
personnel, who are not appraisers but are familiar with the area in which the
property is located. The average down-payment, including cash, trade equity, or
land, for 2003 was 24% of the purchase price, while the minimum down-payment for
qualified buyers was generally 5%. The purchase price includes the stated cash
sale price of the manufactured home, sales or other taxes and fees and set-up
costs.
The balance of the purchase price is financed using various installment sales
contracts or mortgage instruments providing for a purchase money security
interest in the manufactured home and a mortgage on any real property pledged as
additional collateral. Normally, the contracts provide for equal monthly
payments, generally over a period of seven to thirty years at fixed or variable
rates of interest.
The Company offers a bi-weekly payment program that provides for 26 payments per
year, allowing homebuyers the convenience of electronically drafting payments
from their checking accounts while reducing the overall term of the loan. The
Company maintains that such financing options are attractive and beneficial to
the customer and improve market acceptance of its homes. Because of the shorter
term, the customer will increase the rate at which equity is built, translating
into improved delinquency and repossession experience.
During the Company's last 15 fiscal years, VMF was the most significant source
of financing for purchasers of homes sold by the Company-owned retail centers.
In fiscal year 2003, VMF originated 23,248 contracts, as compared to 23,204 in
fiscal year 2002. At June 30, 2003, VMF was servicing approximately 170,000
contracts with an aggregate dollar amount of approximately $5.5 billion. VMF
originated or purchased approximately 162,000 of these contracts with an
aggregate dollar amount of approximately $5.3 billion. The Company expects that
VMF will continue to provide a significant portion of the financing for
purchasers of its homes.
The volume of manufactured housing contracts originated by VMF for the periods
indicated below and certain other information at the end of such periods is as
follows:
6
Contract Originations
Year ended June 30,
2003 2002 2001
--------- --------- ---------
Principal balance of contracts originated
(in thousands) $947,775 $912,508 $815,058
Number of contracts originated 23,248 23,204 21,720
Average contract size $ 40,558 $ 39,325 $ 37,526
Average interest rate 9.62% 10.10% 11.67%
The following table indicates the number of loans (in thousands) serviced by VMF
on the dates indicated:
Loans serviced (in thousands)
Year ended June 30,
2003 2002 2001
---- ---- ----
Originated and purchased loans serviced 163 153 138
Master servicing contracts 7 9 10
---- ---- ----
Total 170 162 148
VMF FUNDING. VMF draws on its short-term credit facilities with the Company to
fund manufactured home loans, while long-term financing has been obtained
through the capital markets. In fiscal 2003, VMF completed three public
offerings of asset-backed securities totaling approximately $1.2 billion,
including $15 million in mortgage-backed securities offered through the
Government National Mortgage Association (GNMA).
VMF's capital market activity, historically the primary source of permanent
funding for its lending activities, was in the form of asset-backed securities
issued through its special purpose entity. These securities, sold in public
markets, are collateralized by manufactured housing receivables that were either
originated or acquired by VMF. Certain of these receivables were originated and
are being subserviced by other entities. With respect to the securitized pools
that contain receivables originated or acquired by other entities, VMF is
servicer for all loans in the pools, with a subservicing arrangement on those
receivables that are originated by or acquired from other entities.
Loans insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA") are permanently funded through the Government
National Mortgage Association ("GNMA") pass-through program. Under the GNMA
program, installment sales contracts are warehoused by VMF and then pooled in
denominations of approximately $3,000,000 to collateralize the issuance by VMF
of securities guaranteed by GNMA under the provisions of the National Housing
Act. Under the GNMA program, VMF retains the servicing of the installment sales
contracts and is responsible for passing through payments under the contracts to
GNMA security holders. During the fiscal year ended June 30, 2003, VMF
originated installment sales contracts eligible for financing under the GNMA
program having aggregate principal balances of $44,967,000. As of June 30,
2003, VMF was servicing 205 GNMA pools totaling $70 million in principal
balances. Use of FHA financing minimizes the Company's contingent liability for
these installment sales contracts because of the government-insured nature of
the loans. Accordingly, the Company maintains that the use of this form of
financing, for customers who qualify, increases the marketability of its
manufactured homes.
Certain of the agreements related to borrowings include covenants with respect
to the Company's financial condition and corporate existence. The Company is
contingently liable as guarantor on installment contract receivables sold with
recourse. For the year ending June 30, 2003, there were $15 million of these
receivables sold. No receivables were sold with recourse in 2002 and 2001. At
June 30, 2003, and 2002, the outstanding principal balances of these receivables
totaled approximately $70 million and $68 million, respectively.
ACQUIRED CONTRACTS AND SERVICING ARRANGEMENTS. Certain acquired contracts are
originated by banks or commercial lenders, and acquired indirectly or directly
by VMF. The acquired contracts are purchased on the basis of underwriting
criteria that may be different from and may not be as strict as VMF's
underwriting criteria.
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In fiscal year 1998, VMF became the servicer of 10,013 manufactured housing
installment sales contracts with approximate principal balances of $267 million.
VMF acts solely as servicer with respect to these contracts and, thus, has no
ownership interest or contingent liability related to these portfolios. At June
30, 2003, VMF was servicing approximately 7,000 of these installment sales
contracts with an approximate principal balance of $134 million. In addition, in
2002, VMF acquired 22,996 contracts with an aggregate principal balance of
approximately $900 million. VMF has contracted with an affiliate finance company
to sub-service approximately $450 million of these receivables. In 2003, VMF
acquired contracts with an aggregate principal balance of $732 million,
including approximately $286 million from an affiliate with the affiliate
retaining the servicing. For its own servicing portfolio, the Company acquired
9,256 contracts with an aggregate principal balance of approximately $446
million.
DELINQUENCY AND REPOSSESSION EXPERIENCE. VMF performs record keeping,
collections and other servicing activities on all loans that it originates or
purchases through portfolio acquisitions. Although the terms of the installment
sales contracts vary according to the financial institutions that purchased the
contracts, most contracts provide that the failure to make a payment as
scheduled is an event of default that allows the lender to repossess the home.
Generally the Company does not repossess the home until payments are three
months delinquent, unless the borrower does not have apparent ability to bring
payments current, in which case repossession may occur sooner. The Company
generally follows the same policy with respect to loans insured by the FHA or
guaranteed by the VA, although the Company must also file a notice of claim
within nine months after default with the agency to preserve its rights under
the programs.
The following table sets forth delinquent installment sales contracts as a
percentage of the total number of installment sales contracts on which the
Company provided servicing and was either contingently liable or owner. An
account is considered delinquent if any payment is past due more that 30 days.
Delinquency Percentage at June 30,
2003 2002 2001
----- ----- -----
Total delinquencies as percentage of
contracts outstanding
All contracts 2.99% 2.84% 2.59%
Contracts originated by VMF 2.67 2.29 2.12
Contracts acquired from other institutions 4.17 4.96 4.89
The following table sets forth information related to loan loss/repossession
experience for all installment contract receivables on which the Company is
either owner or contingently liable:
Year ended June 30,
2003 2002 2001
------ ------ ------
Net losses as percentage of average
loans outstanding
All contracts 2.6% 2.2% 1.8%
Contracts originated by VMF 2.3% 2.1% 1.7%
Contracts acquired from other institutions 3.7% 2.5% 2.5%
Number of contracts in repossession
All contracts 3,029 2,790 2,652
Contracts originated by VMF 2,348 2,061 2,191
Contracts acquired from other institutions 681 729 461
Total number of contracts in repossession as
percentage of total contracts 1.86% 1.83% 1.93%
With respect to repossessions of homes securing installment sales contracts that
are included in securitized pools that it issued, the Company currently, at its
option, remits to the related trust, or other custodian, the unpaid balance of
an installment sales contract it originated through its company owned stores or
communities, upon repossession of the home. For those contracts, including
contracts acquired from other institutions and contracts originated through
other channels that are included in securitized pools issued by the Company,
remittance of the unpaid balance of the installment contract is made, at the
option of the Company, to the related trust, or other custodian, upon sale of
the repossessed collateral. The Company
8
maintains that as long as it is able to sell repossessed homes promptly at
satisfactory prices, the costs associated with remarketing these homes can be
mitigated. There can be no assurance, however, that the Company's future
results with respect to the payoff and resale of repossessed homes will be
consistent with its past experience. See Note 7, Item 8, within this document.
INSURANCE OPERATIONS. The Company acts as agent on physical damage insurance
policies, family protection insurance policies, home buyer protection plan
insurance policies, and extended service contracts written by unaffiliated
insurance companies (ceding companies) for purchasers of its manufactured homes.
During the fiscal year ended June 30, 2003, the Company acted as the agent on
physical damage, family protection, and homebuyer protection policies on
approximately 62%, 42%, and 78%, respectively, of Company retail sales.
Physical damage and home buyer protection plan policies issued through the
Company's agency are reinsured through Vanderbilt Property and Casualty
Insurance Co., LTD ("VPAC"), a wholly-owned subsidiary of the Company. The
family protection insurance policies issued through the Company's agency are
reinsured through Vanderbilt Life and Casualty Insurance Co., LTD, ("VLAC"),
Midland States Life Insurance Company ("MSLC") and Eastern States Life Insurance
Company ("ESLC"), which are majority-owned subsidiaries of the Company.
MANUFACTURED HOUSING COMMUNITIES
The Company owns and operates 86 manufactured home communities in 12 states.
These communities provide attractive living environments to residents leasing
sites for manufactured homes, many of which are built and sold by the Company.
In addition, these communities also lease sites to residents who already own
their homes. Some communities also lease or rent Company-owned manufactured
homes and the sites.
In fiscal 2003 the Communities group developed 902 home sites in four
communities and added 393 sites at existing locations, bringing total sites
owned to 22,677 at June 30, 2003, a 6% increase from the prior year. See "Item
2. Properties." Communities' overall revenues were up 15% in 2003. Rental
revenues rose 5% and sales increased 27%. The following table lists the number
of community sites owned and the aggregate occupancy rate at the end of the last
three fiscal years:
June 30,
2003 2002 2001
------- ------- -------
Homes sites owned 22,677 21,382 21,121
Occupancy rate 74% 76% 75%
REGULATION
The Company's manufactured homes are subject to a number of federal, state and
local laws. The National Mobile Home Construction and Safety Standards Act of
1974 governs construction of manufactured housing. In 1976, the Department of
Housing and Urban Development ("HUD") issued regulations under this Act
establishing comprehensive national construction standards. The HUD regulations
cover all aspects of manufactured home construction, including structural
integrity, fire safety, wind loads and thermal protection. The Company's
manufacturing facilities and the plans and specifications for its manufactured
homes have been approved by a HUD-designated inspection agency. A HUD-approved
organization regularly inspects the Company's manufactured homes for compliance
during construction. Failure to comply with the HUD regulations could expose
the Company to a wide variety of sanctions, including closing the Company's
plants. The Company believes the homes it manufactures comply with all present
HUD requirements. In addition, certain components of manufactured homes are
subject to regulation by the Consumer Product Safety Commission which is
empowered, in certain circumstances, to ban the use of component materials
believed to be hazardous to health and to require the manufacturer to repair
defects in components in its homes. In February 1983, the Federal Trade
Commission adopted regulations requiring disclosure of a manufactured home's
insulation specifications.
A variety of laws affect the sale of manufactured homes on credit by the
Company. Regulation Z (issued by the Board of Governors of the Federal Reserve
System) requires written disclosure of information relative to such credit
sales, including the amount of the annual percentage rate and the finance
charge. The Federal Fair Credit Reporting Act also requires disclosure of
certain information used as a basis to deny
9
credit. The Federal Equal Credit Opportunity Act (Regulation B issued by the
Board of Governors of the Federal Reserve System) prohibits discrimination
against any credit applicant based on sex, marital status, race, color,
religion, national origin, age (provided the applicant has the capacity to
contract), receipt of income from any public assistance program or the good
faith exercise by the applicant of any right under the Consumer Credit
Protection Act. Regulation B establishes administrative requirements for
compliance with the Equal Credit Opportunity Act and, among other things,
requires the Company to provide a customer whose credit request has been denied
with a statement of reasons for the denial. Installment sales contracts
eligible for inclusion in the GNMA Program are subject to credit underwriting
requirements of the FHA or the VA. The Company is subject to the Federal Fair
Debt Collection Practices Act, which regulates the manner in which the Company
collects payments on its installment sales contracts.
The transportation and use of the Company's manufactured homes are subject to
highway use laws, ordinances and regulations of various federal, state and local
authorities. Such regulations may prescribe size and road use limitations and
impose lower than normal speed limits and various other requirements. The
Company's manufactured homes and its development of manufactured housing
communities are also subject to local zoning and housing regulations.
The Magnuson-Moss Warranty Improvement Act regulates the descriptions of
warranties on products. The description and substance of the Company's
warranties are also subject to a variety of state laws and regulations.
Insurance agency activities are subject to state insurance laws and regulations
as determined by the particular insurance commissioner for each state in
accordance with the McCarran-Ferguson Act. Sales practices are governed at both
the federal and state level through various consumer protection trade practices
and public accommodation laws and regulations.
VPAC and VLAC are subject to insurance and other regulations of the British
Virgin Islands. MSLC and ESLC are subject to insurance and other regulations of
the Turks and Caicos Islands. The Company's operations are subject to a variety
of other statutes and regulations.
COMPETITION
The manufactured housing industry is highly competitive at the manufacturing,
retail and finance levels in terms of price, service, delivery capabilities and
product performance. There are many firms in direct competition with the
Company. The Company believes it has a competitive advantage over firms in the
industry that do not have manufacturing, retailing and financing capabilities.
Since the Company's homes are a form of low-cost housing, they compete with
other forms of such housing including apartments and site built homes.
Historically, so long as the spread between mortgage interest rates for site
built homes and those for manufactured housing remain within 3%, the Company has
been able to remain competitive with site built homes. However, the combination
of mortgage interest rates nearing a 40-year low, and the deterioration of the
market for manufactured housing asset-backed securities causing the cost of
funds for the asset-backed securities issued by the Company to rise, the spread
between site built mortgage interest rates and manufactured housing rates are
above 5% on some products. The resulting relatively smaller payment for the
site built home, which is a product of both the lower rate and longer term, will
generally attract the more qualified homebuyers and places manufactured housing
at a competitive disadvantage. The capital requirements for entry into both
the manufacturing and retail segments are relatively small. A major factor that
limits entry into the sector is the scarcity of financing available to retail
dealers, both for consumer sales financing and inventory purchases. Several
national lenders, in the retail and wholesale sectors of the industry, have
filed for bankruptcy protection or exited the industry leaving a financing
vacuum. The scarcity of inventory financing availability creates pressure on
manufacturing shipments, stifling any potential new entrants into the sector.
The Company is not able to estimate the total number of competitors in its
marketing area.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information with respect to the Company's operating segments is
incorporated herewith by reference to item 8, Note 12, within this document.
10
EMPLOYEES
As of June 30, 2003, the Company employed 6,661 persons. Of these, 2,041 were
employed in retail, 3,368 in manufacturing, 708 in financial services, 443 in
communities and 101 in corporate and administrative positions. The Company does
not have any collective bargaining agreements and considers its employee
relations to be good.
OTHER
The Company's website address is www.clayton.net. Any Securities and Exchange
---------------
Commission (SEC) filing through the SEC's EDGAR database for the Company may be
obtained free of charge via the Company's website. Copies of any Form 10-K,
Form 10-Q, or Form 8-K filed with the SEC may also be obtained free of charge by
written request to:
Investor Relations, Clayton Homes, Inc.
P.O. Box 15169, Knoxville, TN 37901
ITEM 2. PROPERTIES.
The Company's Financial Services operations and executive offices are located
near Knoxville, Tennessee in a wholly owned, two-story building with 135,000
square feet of space. The following table sets forth the properties that the
Company uses for its manufacturing operations and locations of its manufactured
housing communities. All of the buildings used for manufacturing operations are
constructed of fabricated metal on a concrete slab.
LOCATION OF PROPERTY
APPROXIMATE APPROXIMATE
MANUFACTURING OPERATIONS SQUARE FEET MANUFACTURING OPERATIONS SQUARE FEET
Owned by Company: Owned by Company:
Arizona Tennessee (continued)
El Mirage 123,000 Ardmore 100,000
Georgia Rutledge 87,000
Waycross 100,000 Bean Station #1 114,000
Kentucky Bean Station #2 137,000
Hodgenville 130,000 Andersonville 128,000
North Carolina White Pine 137,000
Henderson 112,000 Texas
Oxford 92,000 Waco #1 148,000
Richfield 194,000 Waco #2 99,000
Tennessee Bonham 117,000
Maynardville 110,000 Sulphur Springs 113,000
Savannah #1 104,000 Leased:
Savannah #2 109,000 Halls, Tennessee 129,000
11
APPROXIMATE APPROXIMATE
COMMUNITIES ACRES COMMUNITIES ACRES
Owned by Company: Owned by Company:
Arizona Tennessee
El Mirage 35 Antioch 66
Glendale 14 Chattanooga 34
Phoenix 47 Knoxville (4) 202
Florida LaVergne 76
Gainesville (2) 132 Louisville 41
Jacksonville (5) 330 Millington 29
Kissimmee 41 Morristown 12
Mulberry (2) 162 Maryville (2) 34
Plant City 38 Powell (2) 69
Princeton 37 Sevierville 115
Tallahassee 39 Smyrna 26
Georgia Tullahoma 18
Douglasville (2) 97 Texas
Rossville 78 Arlington 39
Iowa Dallas (3) 140
Carter Lake 41 Denton (3) 201
Michigan Fort Worth (4) 154
Kalamazoo 126 Flower Mound 18
Missouri Greenville 40
Independence 90 Houston (3) 158
North Carolina Humble 55
Greensboro 83 Little Elm 86
Kannapolis 85 Pearland 50
Winston-Salem 80 Princeton 69
Oklahoma San Angelo 90
Edmond 37 San Antonio (7) 360
Enid 20 Schertz 71
Lawton 38 Wilmer 69
Midwest City 25 Wylie (2) 209
Norman 44 Virginia
Oklahoma City (2) 116 Evington 70
South Carolina Blacksburg 38
Columbia 97
Florence (2) 97
The Company-owned retail centers are three to four acre sites with a special
manufactured office unit serving as the sales office. The remainder of the
retail center site is devoted to the display of homes. Of the 302 retail
centers, the Company owns 164 and leases 138. The Company does not believe
that any individual retail sales center property is material to its overall
business.
All of the properties described above are well maintained and suitable for the
purposes for which they are being used. The Company believes that its
properties are adequate for its near-term needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company and/or its former directors are currently engaged in merger-related
litigation in state courts in both Delaware and Tennessee.
On May 16, 2003, a putative class action lawsuit was filed by Mark Blosser, an
alleged shareholder of Clayton Homes, in the Delaware Chancery Court in New
Castle County. The defendants named in the complaint are Clayton Homes and
directors James L. Clayton, B. Joe Clayton, Kevin T. Clayton, Dan W. Evins,
Wilma H. Jordan, Thomas N. McAdams and C. Warren Neel. The complaint alleges
that the individual defendants breached their fiduciary duties to the
shareholders of Clayton Homes by agreeing to
12
the merger. The complaint seeks (a) a declaration that the action is properly
maintainable as a class action, (b) an injunction prohibiting the completion of
the merger, (c) if the merger is completed, rescission of the merger agreement
or damages, (d) a declaration that the merger agreement is null and void, and
(e) costs.
On July 25, 2003, a putative class action and shareholders' derivative lawsuit
was filed by Denver Area Meat Cutters and Employers Pension Plan in the Circuit
Court for Blount County, Tennessee. The defendants named in the complaint are
Clayton Homes and directors James L. Clayton, Kevin T. Clayton, C. Warren Neel,
B. Joe Clayton, Steven G. Davis, Dan W. Evins, Wilma H. Jordan and Thomas N.
McAdams. The complaint alleges that the individual defendants breached their
fiduciary duties to the shareholders of Clayton Homes by agreeing to the merger.
The complaint seeks (a) a declaration that the action is properly maintainable
as a class action, (b) a declaration that the individual defendants breached
their fiduciary duties by agreeing to the merger; (c) a declaration that the
individual defendants bear the burden of showing the entire fairness of the
merger, and that they cannot meet that burden, (d) damages, (e) disgorgement of
any benefits improperly received by the individual defendants, and (f) costs.
Otherwise, no material legal proceedings are pending other than routine
non-material litigation incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
No matters were submitted to a vote to shareholders during the last quarter of
the Company's fiscal year ended June 30, 2003. On July 30, 2003, a special
shareholders' meeting was held to consider the merger between Clayton Homes,
Inc. and a subsidiary of Berkshire Hathaway Inc. The majority of the shares
outstanding, 52.4%, voted for the proposed merger.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) On August 7, 2003, the Company filed a certificate of merger with a
subsidiary of Berkshire Hathaway Inc. with the Secretary of State of Delaware.
In addition, on August 7, 2003, the NYSE suspended trading of the Company's
common stock and subsequently delisted Clayton Homes, Inc. stock on October 8,
2003. However, for the entirety of the Company's Fiscal 2003, the Common Stock
was traded on the NYSE. The following table sets forth, for fiscal years 2003
and 2002, respectively, the range of high and low closing sale prices as
reported by the NYSE.
FISCAL FISCAL
2003 2002
------ ------
QUARTER ENDED HIGH LOW HIGH LOW
---- ---- ---- ----
September 30 $15.66 $10.84 $16.50 $10.75
December 31 13.80 9.40 17.41 12.60
March 31 12.85 10.10 17.21 14.49
June 30 13.16 11.13 19.28 15.10
(b) On August 6, 2003, there were 8,541 holders of record (approximately 21,000
beneficial holders) of the Company's Common Stock.
(c) Through the fiscal year ended on June 30, 2003, it was the policy of the
Board of Directors of the Company to reinvest substantially all earnings in the
business. At its April 2001 meeting, the Board of Directors changed the Company
dividend policy from quarterly payments to an annual payment. The first annual
dividend of 6.4 cents per share was paid in January 2002. The Company also paid
an annual dividend of 6.4 cents per share in January 2003.
14
ITEM 6. SELECTED FINANCIAL DATA.
TEN YEAR REVIEW
(in thousands except
per share and other
data) 2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA
Revenues
Net sales $ 850,010 $ 871,108 $ 849,157 $ 993,916 $1,040,668
Financial services
and other income 338,401 327,740 301,799 299,429 303,615
----------- ----------- ----------- ----------- -----------
1,188,411 1,198,848 1,150,956 1,293,345 1,344,283
----------- ----------- ----------- ----------- -----------
Costs and expenses
Cost of sales 551,055 565,322 562,267 660,429 705,128
SG&A 327,810 323,814 306,699 319,581 305,931
Financial services
operating expenses 84,978 83,245 68,635 65,518 69,480
Provision for credit
losses 43,700 25,100 42,500 20,800 12,459
----------- ----------- ----------- ----------- -----------
1,007,543 997,481 980,101 1,066,328 1,092,998
----------- ----------- ----------- ----------- -----------
Operating income 180,868 201,367 170,855 227,017 251,285
Interest income
(expense), net/other (1,386) (4,321) (1,504) 1,608 (5,317)
----------- ----------- ----------- ----------- -----------
Income before
income taxes 179,482 197,046 169,351 228,625 245,968
Provision for
income taxes (66,400) (72,900) (62,700) (84,600) (91,000)
----------- ----------- ----------- ----------- -----------
Income before
accounting change 113,082 124,146 106,651 144,025 154,968
Cumulative effect of
accounting change - - - - -
----------- ----------- ----------- ----------- -----------
Net income $ 113,082 $ 124,146 $ 106,651 $ 144,025 $ 154,968
----------- ----------- ----------- ----------- -----------
Net income per share
Basic $0.83 $0.90 $0.77 $1.03 $1.07
Diluted $0.83 $0.89 $0.77 $1.03 $1.06
Average shares
outstanding
Basic 136,237 137,726 137,702 139,474 145,211
Diluted 136,707 138,872 138,340 139,815 145,931
Dividends per common
share $0.064 $0.064 $0.064 $0.064 $0.064
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA
Total assets $2,241,314 $1,828,403 $1,654,170 $1,506,378 $1,417,245
Debt obligations 459,047 92,912 141,862 99,216 96,477
Shareholders' equity $1,339,698 $1,261,957 $1,147,478 $1,036,375 $ 947,768
KEY FINANCIAL RATIOS
As a % of revenue
Operating income 15.2% 16.8% 14.8% 17.6% 18.7%
Net income 9.5% 10.4% 9.3% 11.1% 11.5%
Debt as a % of
total capital 25.5% 6.9% 11.0% 8.7% 9.2%
OTHER DATA
Company-owned
retail centers 302 287 297 318 306
Independent retailers 588 601 634 707 671
Manufacturing plants 20 20 20 20 19
Communities 86 82 81 76 75
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA
Revenues
Net sales $ 880,856 $ 822,906 $ 762,396 $ 621,351 $ 510,153
Financial services
and other income 246,923 198,797 166,345 136,741 118,083
----------- ----------- ----------- ----------- -----------
1,127,779 1,021,703 928,741 758,092 628,236
----------- ----------- ----------- ----------- -----------
Costs and expenses
Cost of sales 598,589 559,274 521,200 431,826 357,698
SG&A 253,792 229,826 203,685 163,119 135,672
Financial services
operating expenses 50,821 44,055 36,152 31,249 26,222
Provision for credit
Losses 7,976 1,000 - - -
----------- ----------- ----------- ----------- -----------
911,178 834,155 761,037 626,194 519,592
----------- ----------- ----------- ----------- -----------
Operating income 216,601 187,548 167,704 131,898 108,644
Interest income
(expense), net/other 5,499 5,152 4,596 3,902 (359)
----------- ----------- ----------- ----------- -----------
Income before
income taxes 222,100 192,700 172,300 135,800 108,285
Provision for
income taxes (84,400) (73,200) (65,500) (48,800) (39,000)
----------- ----------- ----------- ----------- -----------
Income before
accounting change 137,700 119,500 106,800 87,000 69,285
Cumulative effect of
accounting change - - - - 3,000
----------- ----------- ----------- ----------- -----------
Net income $ 137,700 $ 119,500 $ 106,800 $ 87,000 $ 72,285
----------- ----------- ----------- ----------- -----------
Net income per share
Basic $0.93 $0.81 $0.72 $0.59 $0.51
Diluted $0.92 $0.80 $0.72 $0.59 $0.49
Average shares
outstanding
Basic 148,463 148,324 148,253 147,020 141,046
Diluted 149,504 149,346 149,183 148,285 149,875
Dividends per common
share $0.064 $0.061 $0.049 $0.030 -
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA
Total assets $1,457,757 $1,045,761 $ 886,350 $ 761,151 $ 701,148
Debt obligations 247,591 22,806 30,290 48,737 70,680
Shareholders' equity $ 881,019 $ 754,526 $ 650,189 $ 544,187 $ 462,154
KEY FINANCIAL RATIOS
As a % of revenue
Operating income 19.2% 18.4% 18.1% 17.4% 17.3%
Net income 12.2% 11.7% 11.5% 11.5% 11.5%
Debt as a % of
total capital 21.9% 2.9% 4.5% 8.2% 13.3%
OTHER DATA
Company-owned
retail centers 273 245 216 192 165
Independent retailers 702 663 580 421 372
Manufacturing plants 18 17 17 16 13
Communities 71 67 64 55 46
15
ITEM 7. 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 home sites 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.
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 security holders, less contractual servicing fees and estimated
credit losses, after giving effect to estimated prepayments. 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. Any permanent impairment charges are reflected in
net income. In September 2002, March 2003, and June 2003, other-than-temporary
charges of $0.6 million, $2.1 million and $13.2 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.
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
16
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 years ended June 30, 2003, 2002, and 2001, net warranty costs were 2.4%,
2.6%, and 2.9%, respectively, of manufacturing sales.
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
Total revenues of $1.2 billion in 2003 were down 1% from 2002. Although sales
of homes through retail and communities increased 2.7% to $674 million from $656
million, manufacturing sales to independent dealers decreased 18%, from $215
million to $175 million. This decrease is a result of negative economic
conditions coupled with scarcity of consumer financing available to customers of
independent dealers and the continuing overhang of foreclosed units
cannibalizing sales of new and used homes due to the bankruptcy of certain large
lenders. Total financial services revenues in 2003 were up 4% over 2002, while
rental and other revenue remained flat.
Total units sold declined 11% to 22,644 from 25,322 last year further reflecting
the industry downturn. The shift toward multi section sales mitigated the 9%
decline in total floors shipped to 34,201, down from 37,789 in the prior year.
Of the 2,678 decline in units sold in 2003, 905 were used units, reflecting the
cannibalization of sales and shelf space by the excessive foreclosed inventory.
In the Manufacturing segment, total units shipped declined 20% in 2003. This
decrease was primarily a result of negative economic conditions coupled with
both the scarcity of consumer financing available to customers of independent
dealers, and the continuing overhang of foreclosed units attributable to the
bankruptcy of certain large lenders in the industry cannibalizing sales of new
homes. A 20% decline in manufacturing shipments to independent retailers and an
8% decline in retail unit shipments was somewhat offset by a 20% increase in
units sold within the communities segment.
Gross profit margins on retail, manufacturing and communities sales increased
slightly to 35.2% from 35.1%, primarily due to a higher rate of internalization
of retail sales, improved efficiencies, and higher average retail and wholesale
selling prices. Selling, general and administrative expenses were 27.6% and
27.0% of revenues for the years ended June 30, 2003, and 2002, respectively.
The $4.1 million increase in selling, general, and administrative expenses was
partially attributable to additional volume-related selling costs in the retail
and communities segment. In addition, approximately $1.4 million of the
increase was due to fees and expenses related to the merger of the Company with
a subsidiary of Berkshire Hathaway Inc. See "Subsequent Events". Operating
income decreased to 15.2% of total revenues from 16.8% last year.
Financial services operating expenses increased $1.6 million to $85 million.
This increase can be primarily attributable to rising insurance-related costs.
Additional costs associated with portfolio acquisitions were also a contributing
factor. Provision for credit losses increased $18.6 million to $43.7 million,
as compared to $25.1 million last year. The increase is due to the higher level
of sell-through of foreclosed units in the acquired portfolios, coupled with
lower recovery rates. The total number of contracts in foreclosure as a
percentage of total contracts increased slightly to 1.9% from 1.8% last year.
Interest expense (net of interest income) decreased $2.9 million to $1.4 million
as compared to $4.3 million in the same period last year. The net decrease in
expense was partially attributable to declining interest rates during the year,
which had a negative impact on the value of the Company's interest rate swaps,
offset by a $4.1 million gain recognized from the sale of investments. During
the fiscal year ended June 30, 2003, there was an unfavorable mark-to-market
adjustment of $5.0 million relating to the swaps, as compared to a $3.3 million
unfavorable adjustment in the same period last year. Income tax for the year
ended June 30, 2003, was $66.4 million, which represents an effective tax rate
of 37%.
17
RETAIL. Within the Retail segment revenues, the average number of homes sold
per sales center decreased 9% and the total number of homes sold declined 8% to
14,626. Despite the decline in units sold, the group experienced a 1% increase
in net sales to $623 million due to the larger proportion of new units sold this
year over last year as well as a slightly greater mix of multi-section homes.
The proportion of new units sold was 86% of the total number of units versus 80%
new units sold last year. Same store dollar sales remained constant as compared
to the prior year.
Year ended June 30, %
2003 2002 Change
-------- -------- -------
Sales of new homes (in thousands) $594,124 $571,656 3.9%
Sales of previously-owned (in thousands) $ 29,041 $ 44,568 -34.8%
Average number of retail centers 295 292 0.9%
Dollar sales per retail center (in thousands) $ 2,116 $ 2,110 0.3%
Average price of home $ 42,607 $ 38,812 9.8%
New homes sold 12,548 12,772 -1.8%
Previously-owned homes sold 2,078 3,105 -33.1%
Percentage single-section/multi-section mix (new only) 46/54 47/53
During the year, the Company opened 20 retail centers and closed five
under-performing retail centers. The Company continually evaluates specific
markets and opens, acquires or closes retail centers as conditions warrant. All
of the 20 new openings were acquired. Four of the new retail centers were
opened in the fourth quarter.
MANUFACTURING. Within the Manufacturing segment revenues, the group experienced
an 18% decline to $176 million in net sales to independent retailers and a 20%
decrease in the number of homes sold to 6,575. This decline is primarily due to
the lack of dependable financing for customers of our independent retailer
network and the continuing presence of excess foreclosure inventory in the
marketplace. The average number of independent retailers decreased 4% to 595.
Manufacturing segment operating income decreased $9 million to $38 million from
$47 million in the prior year. Capacity utilization decreased to 54%, as
compared to 60% last year. On June 30, 2003, the order backlog for the
Manufacturing group (consisting of Company-owned and independent retailer
orders) decreased 3% to $22 million as compared to last year.
Year ended June 30, %
2003 2002 Change
-------- -------- -------
Wholesale dollar sales (in thousands) $175,973 $214,769 -18.1%
Number of plants operating 20 20 --
Number of independent retailers (average) 595 618 -3.7%
Dollar sales per independent retailer (in thousands) $ 296 $ 348 -14.9%
Average price of home $ 26,764 $ 26,064 2.7%
New homes sold to independent retailers 6,575 8,240 -20.2%
Percentage single-section/multi-section mix 38/62 39/61
FINANCIAL SERVICES. Financial Services revenues decreased $2 million to $204
million, as insurance related revenues increased $7 million, primarily
attributable to the impact of multi-year policies generated in prior periods.
Non-insurance related revenues in 2003 declined $8 million despite the increase
in the aggregate balance of loans serviced of 8%. The deterioration of the
asset-backed securities (ABS) market for manufactured housing contributed to a
reduced gain on sale amount as the increased retention of securitized bonds and
wider spreads required by ABS investors combined to reduce the residual interest
of new securitized pools. Receivable originations of $948 million and
acquisitions with aggregate principal balances of approximately $732 million
were completed during the year, bringing the total serviced portfolio to $5.5
billion. Inventory finance receivables increased $95 million to $139 million, as
compared to $44 million in June 2002. This increase was due to acquisitions
relating to the fact that competing lenders exited the manufactured housing
finance sector. Loans sold through asset-backed security transactions (including
those sold through the GNMA-sponsored program) totaled $1.2 billion in 2003. Of
these, $90 million in securities were retained at the point of the transaction
with $12.1 million sold later in the year. In 2002, $1.9 billion in loans were
sold through asset-backed security transactions. Of these,
18
$19.1 million were retained at the point of the transaction with $9.1 million
subsequently sold. Delinquency on the originated portfolio increased 38 basis
points to 2.67%. Overall delinquency, including the serviced portfolio and the
recent portfolio purchases, increased 15 basis points to 2.99%. Total Financial
Services operating income decreased 6% to $117 million. Net credit losses for
all contracts owned or purchased, including losses on securitized mortgages, as
a percentage of loans outstanding for fiscal 2003 increased to 2.6% from 2.2%.
This is principally the result of losses on portfolios acquired in 2002 and
2003. 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 .2% from 2.1% for
fiscal 2002 to 2.3% for fiscal 2003, which is reflective of the depressed
recoveries due to the continuing presence of excess foreclosure inventory.
The average outstanding balance of installment contract and mortgage receivables
increased 27% to $663 million with a weighted average interest rate of 8.90%,
down slightly from 9.03%. The average outstanding balance of receivables sold
rose 10% to $4.5 billion.
COMMUNITIES. Within the Communities segment revenues, net sales increased 27%
to $51 million, the average home selling price increased 6%, and 20% more homes
were sold as a result of certain promotional programs. Rental income for the
group rose 5%. Segment operating income increased 2%. The Company added 1,295
sites during the year bringing the total to 22,677 sites at June 30, 2003.
Year ended June 30, %
2003 2002 Change
------- ------- -------
Sales of new homes (in thousands) $34,098 $27,801 22.7%
Sales of previously-owned homes (in thousands) $16,774 $12,314 36.2%
Number of communities (average) 84 82 3.1%
Dollar sales per community (in thousands) $ 606 $ 492 23.0%
Average price of home $35,254 $33,290 5.9%
New homes sold 840 724 16.0%
Previously-owned homes sold 603 481 25.4%
FISCAL 2002 COMPARED TO FISCAL 2001
Total revenues increased 4% to $1.2 billion, as manufactured housing sales
increased 3% to $871 million, financial services income increased 11% to $252
million and rental and other income increased 2% to $75 million.
Total units sold declined 3% to 25,322 from 26,215 last year as total floors
shipped declined 1% to 37,789 from 38,171 in the prior year. A 10% decline in
manufacturing shipments to independent retailers and a slight decline in retail
unit shipments was, to a certain extent, offset by a 1% increase in units sold
within the communities segment.
Gross profit margins on retail, manufacturing and communities sales increased to
35.1% from 33.8%, primarily due to a higher rate of internalization of retail
sales, improved efficiencies, and higher average retail and wholesale selling
prices. Selling, general and administrative expenses were 27.0% and 26.6% of
revenues for the years ended June 30, 2002, and 2001, respectively. Additional
costs associated with portfolio acquisitions contributed to the increase.
Financial services operating expenses increased $14.6 million primarily due to
costs associated with portfolio acquisitions. Operating income as a percentage
of revenues increased to 16.8% from 14.8% last year.
Provision for credit losses was $25.1 million (excluding $40.2 million that has
been included in Financial Services revenue for 2002 related to the losses on
securitized mortgages), as compared to $42.5 million last year. This combined
increase was primarily due to the additional contracts in foreclosure from the
same period for 2001. The total number of contracts in foreclosure as a
percentage of total contracts decreased to 1.8% from 1.9% for 2001.
Interest and other expense increased to $4.3 million. This increase was
partially due to an overall declining interest rate outlook which adversely
impacted the value of the Company's interest rate swaps. During the
19
fiscal year ended June 30, 2002, there was an unfavorable mark-to-market
adjustment of $3.3 million relating to the swaps, as compared to a $2.1 million
unfavorable adjustment in the same period for 2001. Income tax for the year
ended June 30, 2002, was $72.9 million, which represents an effective tax rate
of 37%.
Conditions in the manufactured housing industry continued to be highly
competitive at both the retail and wholesale levels. For fiscal 2002, the
industry was faced with manufacturing over-capacity and too many retail centers.
This competitive environment, as well as an increase in industry foreclosures
and aging retail inventory, contributed to the idling and closing of
manufacturing plants, and declining wholesale shipments resulting in significant
closings of retail centers.
RETAIL. Within the Retail segment, the group experienced a 5% increase in net
sales to $616 million as the total number of homes sold decreased slightly to
15,877 and the average home price increased 5%. The average number of homes
sold per sales center increased 5% as same store sales dollars increased 12%.
The average number of Company-owned retail centers declined 5%. Retail segment
operating income increased 12% to $32 million from $29 million last year.
Year ended June 30, %
2003 2002 Change
-------- -------- -------
Sales of new homes (in thousands) $571,656 $538,812 6.1%
Sales of previously-owned homes (in thousands) $ 44,568 $ 47,449 -6.1%
Average number of retail centers 292 308 -5.0%
Dollar sales per retail center (in thousands) $ 2,110 $ 1,907 10.7%
Average price of home $ 38,812 $ 36,867 5.3%
New homes sold 12,772 12,346 3.5%
Previously-owned homes sold 3,105 3,556 -12.7%
Percentage single-section/multi-section mix (new only) 47/53 50/50
During the year, the Company opened seven retail centers and closed 17
under-performing retail centers. The Company continually evaluates specific
markets and opens, acquires or closes retail centers as conditions warrant. Of
the seven new openings, six were acquired and one was a startup. Four of the
new retail centers were opened in the fourth quarter.
MANUFACTURING. Within the Manufacturing segment, the group experienced a 4%
decline in net sales to independent retailers to $215 million, while the number
of homes sold decreased 10% to 8,240. The average number of independent
retailers decreased 8%. Manufacturing segment operating income increased 28% to
$47 million from $37 million in the prior year. Capacity utilization increased
to 60%, as compared to 57% last year. On June 30, 2002, the order backlog for
the Manufacturing group (consisting of Company-owned and independent retailer
orders) decreased 36% to $22 million, compared to $35 million last year.
Year ended June 30, %
2003 2002 Change
-------- -------- -------
Wholesale dollar sales (in thousands) $214,769 $223,476 -3.9%
Number of plants operating 20 20 --
Number of independent retailers (average) 618 671 -7.9%
Dollar sales per independent retailer (in thousands) $ 348 $ 333 4.4%
Average price of home $ 26,064 $ 24,507 6.4%
Homes sold to independent retailers 8,240 9,119 -9.6%
Percentage single-section/multi-section mix 39/61 45/55
FINANCIAL SERVICES. Revenues for the Financial Services segment increased $22
million to $206 million, primarily due to a larger servicing portfolio and
improved spreads over last year. Insurance related revenues increased $4
million, primarily attributable to the impact of multi-year policies generated
in prior periods. Receivable originations of $913 million and acquisitions of
$1.2 billion were completed during the year, bringing the total serviced
portfolio to $5.0 billion, an increase of 15% over the prior year. Inventory
20
finance receivables increased $37 million to $44 million, as compared to $7
million in June 2001. Loans sold through asset-backed securities totaled $1.9
billion, as compared to $886 million last year. Delinquency on the originated
portfolio increased 17 basis points to 2.29%. Overall delinquency, including the
serviced portfolio, increased 25 basis points to 2.84%. Total Financial
Services operating income increased 31% to $125 million.
The average outstanding balance of installment contract and mortgage receivables
increased 19% to $520 million with a weighted average interest rate of 9.0%,
down from 9.8%. The average outstanding balance of receivables sold rose 12% to
$4.1 billion, and the weighted average loan service spread increased to 3.5%
from 3.4%. Net credit losses, including losses on securitized mortgages, as a
percentage of loans outstanding for fiscal 2002 increased to 2.2% from 1.8%.
COMMUNITIES. Within the Communities segment revenues, net sales increased 2% to
$40 million as the number of homes sold increased 1% and the average home
selling price increased 1%. Communities rental income rose 2%. Segment
operating income declined 1%. The Company added 261 sites during the year
bringing the total to 21,382 sites at June 30, 2002.
Year ended June 30, %
2002 2001 Change
------- ------- -------
Sales of new homes (in thousands) $27,801 $28,689 -3.1%
Sales of previously-used homes (in thousands) $12,314 $10,731 14.8%
Number of communities (average) 82 79 3.8%
Dollar sales per community (in thousands) $ 492 $ 502 -2.0%
Average price of home $33,290 $33,015 0.8%
New homes sold 724 755 -4.1%
Previously-owned homes sold 481 439 9.6%
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company anticipated meeting cash requirements with cash flow
from operations, revolving credit lines, a commercial paper sales facility,
senior notes, and sales of installment contract and mortgage loan receivables
and GNMA certificates. A concern of the Company is its ability to efficiently
access global capital markets. In the past year the market for asset-backed
certificates backed by manufactured home installment loans, such as those the
Company has historically issued, has deteriorated such that the Company is
unable to sell all of the certificates it creates. This inefficiency has forced
the Company to retain unsold certificates with a cost basis of approximately $96
million at the end of 2003. At June 30, 2002, the Company held certificates
costing approximately $21 million. During the year ended June 30, 2003, the
Company raised $1.2 billion through asset securitizations as compared to $1.8
billion in fiscal 2002. The origination and acquisition of installment contract
receivables resulted in a net cash requirement of $1.68 billion in 2003 and
$1.96 billion in 2002.
Cash and cash equivalents at June 30, 2003, were $37 million as compared to $84
million at June 30, 2002. Cash used in operating activities was $102 million for
the year ending June 30, 2003, as compared to $97 million provided by operating
activities last year. The overall decline was primarily due to an additional $58
million being used for inventory finance receivables, an increase of $35 million
in originations, a $20 million increase in income taxes paid, and an additional
$74 million being retained from asset-backed securitization transactions. Cash
used for investing activities was $266 million, as compared to $8 million last
year. This change was largely due to a decline in the securitization of acquired
contracts during the year. In 2002, contracts acquired exceeded the amount of
acquired contracts that were included in securitizations by $105 million. For
fiscal 2003, the amount that contracts acquired exceeded acquired contracts
securitized increased to $429 million. In addition, $321 million in cash was
provided by financing activities as compared to $53 million used in financing
activities in the same period last year. The Company had restricted cash
balances of $139 million at June 30, 2003, which includes trust account cash
balances required by certain VMF servicing agreements, and insurance reserves
required by ceding companies. The majority of the restricted cash balance
represents funds held in accordance with certain servicing agreements that will
be disbursed within 15 days of the end of the accounting period.
21
At June 30, 2003, and at June 30, 2002, the Company had debt outstanding of $459
million and $93 million, respectively. Debt outstanding principally consists of
$368 million of long and short-term promissory notes, $75 million of privately
issued senior notes, and $15 million of tax-exempt bonds. The Company's debt to
total capital ratio increased to 25% as compared to 7% last year. A $1.875
billion line of credit is available with Berkshire Hathaway, with $368 million
being utilized on June 30, 2003. Of the amount due Berkshire Hathaway, $318
million was secured by manufactured housing contracts with the remaining $50
million being unsecured. The notes to Berkshire Hathaway are due in March 2004.
Short-term debt available consists of $90 million committed (including the
aforementioned $50 million from Berkshire Hathaway) and $36 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 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 June 20, 2003, the Company was in
compliance with all financial covenants with the exception of a pledged debt
covenant that, upon the effectiveness of the merger, was resolved.
A $300 million one-year sales facility is available of which $150 million is
committed. This facility was not utilized at June 30, 2003. Approximately $175
million in installment contract receivables were sold through the facility
during the year. In addition, a committed one-year $150 million participation
facility was also available to facilitate the future sale of manufactured
housing contracts. This participation facility was not utilized at June 30,
2003, and expired in August 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 June 30, 2003, 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 $425 million at June 30, 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 $70 million at June 30, 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 June
30, 2003:
22
(in thousands)
Contractual Obligations (1) Payments due by period
- ---------------------------------------------------------------------------------------------------------------
Total FY04 FY05 FY06 FY07 FY08 Thereafter
------------------------------------------------------------------------------------
Debt obligations $459,047 $443,568 $ 134 $ 35 $ - $ 4,030 $11,280
Capital leases $ 216 $ 216 $ - $ - $ - $ - $ -
Operating leases $ 8,434 $ 3,063 $ 2,123 $ 1,473 $ 860 $ 198 $ 717
Other Contingencies (2) Amount of contingency expiration per period
- ---------------------------------------------------------------------------------------------------------------
Total FY04 FY05 FY06 FY07 FY08 Thereafter
------------------------------------------------------------------------------------
Letters of credit $144,686 $128,847 $ - $15,839 $ - $ - $ -
Guarantees $494,806 $ 2,033 $ 5,201 $14,152 $45,869 $ 83,892 $343,659
Repurchase agreements $ 55,704 $ 44,563 $11,141 $ - $ - $ - $ -
(1) Debt obligations consist primarily of $368 million Berkshire Hathaway 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 June 30, 2003.
(2) Letters of credit primarily relate to insurance reserves and guarantees relate to asset-backed securitizations. The
Company believes the probability of having to make guarantee payments under the terms of the guarantees is remote. 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 Company's losses in the past have not been significant.
In fiscal 2003, the Company repurchased 2,441,900 shares of Company common stock
for $30.9 million. The most recent repurchase was made on October 23, 2002.
Acquisitions of property, plant and equipment consisted of approximately $16
million to expand, develop, or improve manufactured housing communities, $5
million for opening and upgrading Company-owned retail centers, $7 million for
construction and improvement of manufacturing facilities, and $3 million for
other fixed assets.
For the next twelve months, the Company expects to originate approximately $900
million of installment contract and mortgage loan receivables and $35 million
for inventory finance receivables. It also expects to purchase approximately
$200 million in manufactured housing installment contract receivables from an
affiliate and acquire loan receivables in bulk from banks or other commercial
lenders with aggregate principal balances of approximately $300 million. It
expects to invest approximately $16 million in acquisitions or construction of
manufactured housing communities, $11 million for opening and upgrading
Company-owned retail centers, $5 million for construction and improvement of
manufacturing facilities, and $5 million for other fixed assets.
MARKET RISK
The Company is exposed to market risks related to fluctuations in interest rates
on certain of its assets and liabilities. These instruments include certain
installment contract receivables, residual interests in asset-backed
securitizations and variable rate debt, which principally consists of revolving
credit lines. The Company utilizes interest rate swaps to minimize interest
rate risk on certain credit lines, effectively converting these to fixed rate
debt. Foreign currency and commodity price risk are not considered to have a
material impact on the Company.
The Company had variable interest rate installment contract receivables of
approximately $3.3 million at June 30, 2003. Holding the outstanding principal
amount constant, each one percentage point increase in interest rates occurring
on the first day of the year would result in an increase in cash flow for the
coming year of approximately $19,000.
Certain of the coupon rates on certificates payable to investors in asset-backed
securities are based on variable interest rates. These certificates total $853
million at June 30, 2003. The balance of installment contract receivables with
variable interest rate terms collateralizing these certificates was $642
million,
23
with the remainder having fixed interest rate terms. Holding the receivable
balances constant, each one percentage point increase in interest rates
occurring on the first day of the year would result in a net decrease in cash
flow for the coming year of approximately $4.9 million.
Of the $459 million outstanding debt as of June 30, 2003, $65 million had terms
that included variable interest rates that reset weekly. The remaining $394
million of outstanding debt had fixed interest rate terms. Holding the variable
rate debt constant, each one percentage point increase in interest rates
occurring on the first day of the year would result in an increase in interest
expense for the coming year of approximately $357,000, net of tax.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (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.
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 six months ended June 30, 2003.
In November 2002, the 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.
Subsequent to June 30, 2003, the Company cancelled all stock option plans (See
note 18 to the accompanying financial statements). 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 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
24
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, 2003, the provisions of FIN 46 are
required to be adopted at the beginning of the first interim or annual period
beginning after December 15, 2003. The Company is currently reviewing its
investments and other arrangements to determine whether any of its investee
entities are VIEs. 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. The Company is presently evaluating
any significant VIEs that would be consolidated.
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 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.
EFFECTS OF INFLATION
Inflation has had an insignificant impact on the Company during the past several
years.
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. and its subsidiaries. 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.
25
SUBSEQUENT EVENTS
On April 1, 2003, the Company entered into an agreement and plan of merger with
Berkshire Hathaway and its subsidiary pursuant to which the Company would be
acquired by Berkshire Hathaway at a price of $12.50 per share, payable in cash.
The agreement and plan of merger and the stockholders agreement relating to the
merger of a subsidiary of Berkshire Hathaway with and into the Company were
filed with the Securities 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, and the definitive proxy statement was filed on June 12,
2003.
At a special meeting of stockholders held on July 30, 2003 for purposes of
voting on the proposed merger, a majority of the shares outstanding, 52.4%,
voted in favor of the proposed merger. On August 7, 2003, the merger became
effective with the filing of the certificate of merger with the Secretary of
State of Delaware.
As of the date of this filing, the Company has incurred approximately $9.2
million of merger related expenses. In addition, on August 15, 2003, the Company
paid approximately $19.1 million to purchase for cancellation those options to
purchase common stock of the Company from all eligible option holders as
described in Form SC-TO-I/A, Schedule to Tender Offer Statement, filed with the
SEC on June 16, 2003. As a result of the purchase on that date, those options
available to eligible option holders were cancelled.
The Company is presently involved in litigation pertaining to merger related
activities. See Item 3 "Legal Proceedings" on pages 12-13 for further details.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Market Risk" contained in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
- ---------------------------------
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Clayton
Homes, Inc. and its subsidiaries at June 30, 2003 and June 30, 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Knoxville, Tennessee
September 5, 2003
27
CLAYTON HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share amounts)
June 30,
2003 2002
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 37,027 $ 83,729
Trade receivables 8,467 9,308
Other receivables, principally installment contracts, net of reserves for
credit losses of $23,309 in 2003 and $18,876 in 2002 1,012,555 744,074
Inventory finance receivables 138,907 43,859
Residual interests in installment contract and mortgage receivables sold 106,441 129,348
Servicing assets from installment contract and mortgage receivables sold 49,037 51,996
Inventories, net 193,104 189,976
Securities available-for-sale 89,535 25,729
Restricted cash 139,464 126,155
Property, plant and equipment, net 321,450 310,764
Deferred income taxes 41,058 19,793
Other assets 104,269 93,672
- ----------------------------------------------------------------------------------------------------------------
Total assets $2,241,314 $1,828,403
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 123,123 $ 139,308
Debt obligations 459,047 92,912
Other liabilities 319,446 334,226
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 901,616 566,446
- ----------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 2, 6, 7, 11 & 16)
Shareholders' equity
Common stock, $.10 par value, authorized 200,000 shares, issued 136,253
at June 30, 2003, and 138,002 at June 30, 2002 13,625 13,800
Additional paid-in capital 20,998 44,193
Retained earnings 1,300,183 1,196,146
Accumulated other comprehensive income 4,892 7,818
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,339,698 1,261,957
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,241,314 $1,828,403
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
28
CLAYTON HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(dollars in thousands except per share amounts)
Year ended June 30,
(in thousands except per share data) 2003 2002 2001
- -----------------------------------------------------------------------------------------
Revenues
Net sales $ 850,010 $ 871,108 $ 849,157
Financial services 262,985 252,499 227,916
Rental and other income 75,416 75,241 73,883
- -----------------------------------------------------------------------------------------
1,188,411 1,198,848 1,150,956
- -----------------------------------------------------------------------------------------
Costs and expenses
Cost of sales 551,055 565,322 562,267
Selling, general and administrative 327,810 323,814 306,699
Financial services operating expenses 84,978 83,245 68,635
Provision for credit losses 43,700 25,100 42,500
- -----------------------------------------------------------------------------------------
1,007,543 997,481 980,101
- -----------------------------------------------------------------------------------------
Operating income 180,868 201,367 170,855
Interest expense (10,492) (8,975) (5,561)
Interest revenue/ other 9,106 4,654 4,057
- -----------------------------------------------------------------------------------------
Income before income taxes 179,482 197,046 169,351
Provision for income taxes (66,400) (72,900) (62,700)
- -----------------------------------------------------------------------------------------
Net income $ 113,082 $ 124,146 $ 106,651
- -----------------------------------------------------------------------------------------
Net income per common share
Basic $0.83 $0.90 $0.77
Diluted $0.83 $0.89 $0.77
Average shares outstanding
Basic 136,237 137,726 137,702
Diluted 136,707 138,872 138,340
- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
29
CLAYTON HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands except per share amounts)
Accumulated
Total Additional Other
Shareholders' Common Paid-in Retained Comprehensive
(in thousands except share data) Equity Stock Capital Earnings Income (Loss)
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 $1,036,375 $13,750 $ 39,500 $ 983,806 ($681)
Net income 106,651 - - 106,651 -
Other comprehensive income, net of tax of $5,656
Unrealized gain on residual interests 7,591 - - - 7,591
Unrealized gain on securities available-for-sale
during the year 1,732 - - - 1,732
Realized loss on securities available-for-sale
included in net income 307 - - - 307
---------------
Comprehensive income 116,281
Purchase of 60,000 shares of common stock (482) (6) (476) - -
Dividends declared ($.064 per common share) (8,814) - - (8,814) -
Issuances related to stock incentive,
employee benefit plans and other 4,118 55 4,569 (506) -
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 1,147,478 13,799 43,593 1,081,137 8,949
Net income 124,146 - - 124,146 -
Other comprehensive income, net of tax of ($665)
Unrealized loss on residual interests (2,134) - - - (2,134)
Unrealized gain on securities available-for-sale
during the year 1,350 - - - 1,350
Realized gain on securities available-for-sale
included in net income (347) - - - (347)
---------------
Comprehensive income 123,015
Purchase of 827,400 shares of common stock (9,637) (83) (9,554) - -
Dividends paid ($.064 per common share) (8,800) - - (8,800) -
Issuances related to stock incentive,
employee benefit plans and other 9,901 84 10,154 (337) -
- ----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 1,261,957 13,800 44,193 1,196,146 7,818
NET INCOME 113,082 - - 113,082 -
OTHER COMPREHENSIVE INCOME, NET OF TAX OF ($1,718)
UNREALIZED GAIN ON RESIDUAL INTERESTS 4,044 - - - 4,044
UNREALIZED LOSS ON SECURITIES AVAILABLE-FOR-SALE
DURING THE YEAR (4,557) - - - (4,557)
REALIZED GAIN ON SECURITIES AVAILABLE-FOR-SALE
INCLUDED IN NET INCOME (2,413) - - - (2,413)
---------------
COMPREHENSIVE INCOME 110,156
PURCHASE OF 2,441,900 SHARES OF COMMON STOCK (30,864) (244) (30,620) - -
DIVIDENDS PAID ($.064 PER COMMON SHARE) (8,707) - - (8,707) -
ISSUANCES RELATED TO STOCK INCENTIVE,
EMPLOYEE BENEFIT PLANS AND OTHER 7,156 69 7,425 (338) -
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2003 $1,339,698 $13,625 $ 20,998 $1,300,183 $4,892
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
30
CLAYTON HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year ended June 30,
(in thousands) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 113,082 $ 124,146 $ 106,651
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Depreciation and amortization 20,504 19,161 20,600
Amortization associated with sale of installment contract receivables 13,854 13,201 39,798
Gain on sale of installment contract receivables (17,957) (39,875) (25,593)
Income accretion from residual interests in installment contract receivables (108,118) (75,543) -
Impairments on residual interests 15,899 - -
Provision for credit losses 43,700 25,100 42,500
Realized loss (gain) on securities available-for-sale (4,115) (550) 488
Deferred income taxes (19,547) 3,582 (4,082)
Increase in inventory finance receivables (95,048) (36,559) -
Decrease (increase) in other receivables, net 57,430 (18,289) 1,200
Decrease (increase) in inventories (3,128) (4,281) 36,736
Increase (decrease) in accounts payable, accrued
liabilities, and increase in other assets (114,914) 87,070 (54,074)
- -----------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operations (98,358) 97,163 164,224
Origination of installment contract receivables (947,755) (912,536) (815,546)
Proceeds from sales of originated installment contract receivables 893,804 871,619 660,802
Principal collected on originated installment contract receivables 50,404 40,725 40,686
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided (used in) by operating activities (101,905) 96,971 50,166
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of installment contract receivables (732,281) (1,049,851) (321,711)
Proceeds from sales of acquired installment contract receivables 303,180 944,253 225,654
Principal collected on acquired installment contract receivables 88,874 54,530 23,154
Proceeds from sales of securities available-for-sale 18,304 25,312 29,527
Proceeds from residual interests in installment contract receivables 100,375 52,972 -
Acquisition of property, plant and equipment (31,190) (20,487) (24,559)
Increase in restricted cash (13,309) (15,095) (14,156)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (266,047) (8,366) (82,091)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (8,707) (8,800) (8,814)
Net borrowings (repayment) on credit facilities - (45,800) 45,800
Proceeds from debt obligations 366,255 - -
Repayment of debt obligations (120) (3,150) (3,154)
Increase (decrease) of cash in excess of bank balances (12,470) 4,847 (1,692)
Issuance of stock for incentive plans and other 7,156 9,901 4,118
Purchase of common stock (30,864) (9,637) (482)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 321,250 (52,639) 35,776
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (46,702) 35,966 3,851
Cash and cash equivalents at beginning of year 83,729 47,763 43,912
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 37,027 $ 83,729 $ 47,763
- -----------------------------------------------------------------------------------------------------------------------
Supplemental disclosures for cash flow information
Cash paid during the year for
Interest $ 10,605 $ 9,379 $ 6,267
Income taxes $ 81,296 $ 60,421 $ 76,723
- -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
31
CLAYTON HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The consolidated financial statements include the accounts of Clayton Homes,
Inc. and its wholly- and majority-owned subsidiaries. The Company is a
vertically integrated manufactured housing company headquartered near Knoxville,
Tennessee. Employing approximately 6,700 people and operating in 32 states, the
Company builds, sells, finances and insures manufactured homes. It also owns
and operates residential manufactured housing communities. Significant
intercompany accounts and transactions have been eliminated in the financial
statements. See Note 12, Business Segment Information, for further details of
intercompany activity.
Revenue Recognition
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.
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. Most of these installment sales contracts, which are normally payable
over 84 to 360 months, are financed by Vanderbilt Mortgage and Finance, Inc.
(VMF), the Company's financing subsidiary. In the case of retail customers,
title passes at the point of acceptance of the delivered and installed product
by the customer at their site. The site may be, and often is, a rental site in
a manufactured housing community. Revenue from rental of Company-owned home
sites and homes is accrued and recognized based on the terms of the resident's
lease agreement with the Company.
The Company acts as agent on physical damage, family protection and homebuyer
protection plan insurance policies written by unaffiliated insurance companies
(ceding companies) for the purchasers of manufactured homes. The insurance
policies are in turn reinsured by certain subsidiaries of the Company. Premiums
from policies represent short-duration contracts with terms of one to 10 years
and are deferred and recognized as revenue over the terms of the policies.
Claims expenses are recorded as insured events occur. Expenses are matched to
revenue over the terms of the policies by means of deferral and amortization of
policy acquisition costs; such costs include commissions, premium taxes and
ceding fees, which vary with and are directly related to the production of
insurance policies.
Installment Contract and Mortgage Receivables
Installment contract and mortgage loan receivables (receivables) originated or
purchased by VMF are generally sold into asset-backed security vehicles, which,
in turn, issue certificates to investors. VMF retains the servicing and the
residual interest associated with these instruments.
Receivables held for sale are included in other receivables and are carried at
the lower of aggregate cost or market. Certain of the receivables are purchased
in bulk at a discount. The purchase discounts are allocated between discount and
reserves for credit losses and contingent liabilities based on management's
assessment of risks existing in the portfolio. Discounts are accreted over the
life of the related portfolio using the interest method after giving
consideration to anticipated prepayments. In the event such receivables are
sold, discounts attributable to the sold receivables are recognized.
Most of the receivables are with borrowers in the east, south and southwest
portions of the United States and are collateralized by manufactured homes.
Interest income on receivables held, either for sale or as an
32
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 Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized
Assets (EITF 99-20). 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.
The Company accrues for obligations related to cash collections arising from its
own securitized receivables and receivables serviced under contract and remits
these collections to the paying agent or trustee in accordance with the
provisions of the servicing agreements. See Note 13, Other Assets and
Liabilities.
Retained Interests
The Company follows the provisions of SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which utilizes
a financial components approach to transfers and servicing of financial assets,
requiring that the carrying amount of the receivables sold be allocated between
the assets sold and the assets (liabilities) created, if any, based upon their
estimated fair value at the date of sale. The assets (liabilities) created are:
1) an interest-only security or a residual liability valued as the discounted
present value of the excess (deficiency) interest due the residual interest
owner (VMF) during the expected life of the contracts over: i) the stated
investor yield; ii) the contractual servicing fee; and iii) estimated credit
losses; and 2) servicing asset (liability), representing the discounted present
value of the excess of the contractual servicing fee over the cost of servicing
the contracts plus a normal profit margin. Gain (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.
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.
Interest-only securities represent the right to receive future cash flows from
securitization transactions. Such cash flows generally are equal to the value
of the excess of the principal and interest to be collected on the underlying
receivables collateralizing each transaction over the sum of the principal and
interest to be paid to the holders of the securities sold net of estimated
credit losses and contractual servicing fee. The Company carries interest-only
securities at estimated fair value. As market quotes are generally not
available, fair value is determined by discounting the projected cash flows over
the expected remaining life of the securities outstanding, on a transaction
basis, using current prepayment, default, loss and interest rate assumptions.
Estimates for prepayments, defaults, and losses are determined based on a model
developed by the Company and refined to reflect Company-specific experience and
trends as well as current market conditions. See Note 2, Securitizations.
The residual interests in the installment receivables sold are classified as
available-for-sale securities as defined by Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115). In accordance with EITF 99-20, declines in fair value are
to be considered other than temporary when: (i) the carrying value of the
beneficial interests exceeds the fair value of such beneficial interests using
current assumptions, and (ii) the timing and/or extent of cash flows expected to
be received on the beneficial interests has adversely changed - as defined -
from the previous valuation date. During the period ending June 30, 2003, the
Company recognized $15.9 million of other than temporary charges as a reduction
of financial services revenues in the income statement. The Company did not
determine any declines in fair value to be permanent for the three-year period
ending June 30, 2002.
The Company follows SFAS No. 134, Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise, which requires that the Company classify mortgage-backed
securities retained after a securitization in accordance with SFAS 115.
Accordingly, these securities, aggregating at $89.5 million, are classified as
available-for-sale, are stated at fair value, and can be reasonably expected to
mature in 3-11 years. Net unrealized holding gains and losses,
33
determined using a specific identification cost basis, are reported as a
separate component of accumulated other comprehensive income, net of tax, until
realized. See Note 4, Securities Available-For-Sale.
Cash Equivalents
For purposes of the statements of cash flows, all unrestricted highly liquid
debt instruments purchased with an original maturity of three months or less are
considered to be cash equivalents.
Inventories
New homes and raw materials are carried at the lower of cost or market, using
the last-in, first-out (LIFO) method of inventory valuation. Previously owned
manufactured homes are recorded at estimated wholesale value (cost) but not in
excess of net realizable value. The retail store manager, based on his
experience in the local market, determines the value of the previously owned
manufactured homes.
Property, Plant and Equipment
Land and improvements, buildings, and furniture and equipment are recorded at
cost. Major renewals and improvements are capitalized while replacements,
maintenance and repairs that 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. Those assets' estimated useful lives are summarized as
follows: Land and improvements, 8 to 20 years; Buildings, 7 to 20 years; and
Furniture and all other equipment, 3 to 7 years.
The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which superceded SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144
requires recognition of impairment losses for long-lived assets whenever events
or changes in circumstances result in the carrying amount of the assets
exceeding the sum of the expected future undiscounted cash flows associated with
such assets. The measurement of the impairment losses recognized is based on
the difference between the fair values and the carrying amounts of the assets.
SFAS 144 also requires that long-lived assets held for sale be reported at the
lower of carrying amount or fair value less cost to sell. The Company has not
experienced any impairment losses.
Accounts Payable
Accounts payable includes checks written in excess of bank balances of
$12,456,000 and $19,693,000 at June 30, 2003, and June 30, 2002, respectively.
Reserves for Credit Losses and Contingent Liabilities
Reserves for credit losses and contingent liabilities are established related to
receivables held, either for sale or investment. Actual credit losses are
charged to the reserves when incurred. The reserves established for such losses
are determined based on the Company's historical loss experience after adjusting
for current economic conditions. Management, in assessing the loss experience
and economic conditions, adjusts reserves through periodic provisions. The
Company also maintains a reserve for contingent liabilities related to
guarantees of installment contract receivables sold with recourse.
Interest Rate Swaps
The Company uses interest rate swaps to assist in minimizing interest incurred
on its short-term variable rate debt. The difference between amounts received
and amounts paid under such agreements is recorded as a reduction of, or
addition to, interest expense as incurred over the life of the swap.
The Company follows SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which was subsequently amended by SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments
embedded in other contracts and for hedging activities. See Note 6, Debt
Obligations.
34
Restricted Cash
Restricted cash primarily represents: 1) trust account cash balances required by
certain VMF servicing agreements, and 2) insurance reserves required by ceding
companies. The majority of the restricted cash balance represents funds held in
accordance with certain servicing agreements that will be disbursed within 15
days of the end of the accounting period.
Income Taxes
Deferred income taxes are recorded to reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income is presented net of income taxes and is
comprised of unrealized gains and temporary losses on securities
available-for-sale, as described under Retained Interests.
Shipping and Handling Costs
The estimated shipping and handling costs for the transportation of the home
from the manufacturing facility to either a Company-owned or independent retail
center are included as an item on the invoice to the retailer and are reflected
as part of net sales revenues. The actual costs incurred are included as cost
of sales.
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 years ended June 30, 2003, 2002, and 2001, net warranty costs were 2.4%,
2.6%, and 2.9%, respectively, of manufacturing sales.
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.
Material estimates may include, but are not limited to, certain revenue and
expense accruals, timing and frequency of foreclosures, rates of recovery on
foreclosures, the timing and rate of voluntary prepayments and interest rates.
Actual results could differ from those estimates.
Other
Certain reclassifications have been made to the 2001 and the 2002 financial
statements to conform to the 2003 presentation.
New Accounting Pronouncements
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.
35
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 quarters ending March 31, 2003, and June 30,
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.
Subsequent to June 30, 2003, the company cancelled all stock option plans (see
note 18 to these financial statements). 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,
2003, the provisions of FIN 46 are required to be adopted at the beginning of
the first interim or annual period beginning after December 15, 2003. The
Company is currently reviewing its investments and other arrangements to
determine whether any of its investee entities are VIEs. The company's maximum
exposure related to any investment that may be determined to be in a VIE is
limited to the amount invested. Other risks include balance sheet effect. 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. The Company is presently evaluating
any significant VIEs that would be consolidated.
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 does not anticipate that the provisions
of
36
this statement will have a material impact on the reported results of
operations, financial positions, or cash flows.
NOTE 2 - SECURITIZATIONS
The Company accessed capital through asset-backed securitization activities in
connection with certain of its businesses. Subsequent to the securitization of
receivables, the Company continues to maintain account relationships and provide
servicing for those receivables transferred. As Seller and Servicer, the Company
retains residual interests that were created as a result of its securitization
activity. The Company estimates the fair value of the retained interests by
using discounted expected future cash flows that incorporate key assumptions
including prepayment speed and credit losses. The valuation of retained
interests is affected by the projected level and timing of prepayments of
principal and net credit losses. Should actual timing or level of losses differ
materially from the Company's projections, it could have a material effect on
the valuation of the Company's retained interests.
There were three securitization transactions completed during 2003, and four
transactions during 2002. Each transaction establishes a trust, which issues
certificates representing ownership in that trust. Although there are some
differences, structure provisions are generally the same for each issue. The
structures call for time tranched senior and subordinated classes of securities.
Additional credit support is provided by excess spread and, in some cases, over
collateralization. The Company also provides additional credit support by
placing a limited guarantee on certain of the subordinated certificates. See
Note 11, Commitment and Contingencies.
The Company accounts for the transactions as sales and records any gains or
losses in accordance with the provisions of SFAS 140. Certain data pertaining
to securitizations completed during 2003, 2002, and 2001, including the key
economic assumptions used to measure the retained interests created, are as
follows:
($ in millions) 2003 2002 2001
- -----------------------------------------------------------------------------------------------
Number of transactions completed 3 4 3
Aggregate balance of certificates issued $1,105 $1,825 $ 886
Aggregate principal balance of contracts sold $1,182 $1,875 $ 896
Average balance of securitized contracts outstanding at June 30 $5,150 $4,453 $3,702
Weighted average interest rate of contracts sold 10.05% 10.41% 11.31%
Aggregate amount of net gain (loss) recognized* $ 18.0 $ 39.9 $ 25.6
ORIGINAL KEY ECONOMIC ASSUMPTIONS
Approximate assumed weighted average constant prepayment
rate as a percentage of unpaid principal balance 17.13% 20.01% 18.25%
Weighted average life (in years) 4.46 4.52 4.66
Weighted average expected credit losses 2.33% 4.08% 2.48%
Weighted average residual cash flow discount rate** 15.75% 11.44% 15.75%
- -----------------------------------------------------------------------------------------------
* Net of issuance costs
** Residual liability discounted at 4.38%
- -----------------------------------------------------------------------------------------------
37
Key economic assumptions used to determine the estimated fair value of the
retained interests in securitizations and the sensitivity of the current fair
value of residual cash flows to immediate 10 percent and 20 percent adverse
changes in those assumptions are as follows:
2003 2002
- -------------------------------------------------------------------------------------
($ in thousands)
Interest-Only (I/O) securities $69,445 $93,673
Servicing assets 49,037 51,996
Residual liability (11,950) (52,161)
Retained certificates 89,535 20,136
---------------------------------
Carrying value (fair value) of retained interests. $196,067 $113,644
---------------------------------
($ in millions)
Weighted average life (in years) 4.29 4.27
Prepayment speed (constant prepayment rate) 10.7% - 24.10% 10.7% - 24.10%
Impact of 10% adverse change ($12.5) ($11.7)
Impact of 20% adverse change ($23.2) ($22.6)
Expected credit losses 4.09% 2.43%
Impact of 10% adverse change ($24.0) ($21.6)
Impact of 20% adverse change ($46.7) ($43.5)
Residual cash flow discount rate 12.71% 13.70%
Impact of 10% adverse change ($3.5) ($6.2)
Impact of 20% adverse change ($6.8) ($11.9)
- -------------------------------------------------------------------------------------
The sensitivity analysis is hypothetical and should be used with caution. For
instance, changes in fair value based on a 10 percent variation in assumptions
generally cannot be extrapolated because the relationship of the change in a
particular assumption to the change in fair value may not be linear. In
addition, the effect of a variation in a particular assumption on the fair value
of the retained interest is calculated without changing any other assumption,
when in reality, changes in any one factor may result in changes in another
factor.
The following table summarizes certain cash flow activity with respect to
securitizations in 2003, 2002, and 2001:
(in millions) 2003 2002 2001
- -------------------------------------------------------------------------
CASH FLOW ACTIVITY
Proceeds from new securitizations $1,197 $1,816 $ 887
Servicing fees received $ 52 $ 54 $ 49
Cash flow received from retained interests $ 100 $ 53 $ 71
- -------------------------------------------------------------------------
Total contracts serviced at June 30, 2003, and 2002, including contracts held
for investment, had aggregate principal balances of approximately $5.5 billion
and $5.0 billion, respectively. Managed receivables at June 30, 2003, and the
related receivables past due at least 90 days are as follows:
Principal Amount
Total Principal 90 Days or More
(in millions) Amount Past Due (a)
- -------------------------------------------------------
Held in portfolio $ 1,086 $ 46
Securitized 4,384 84
- -------------------------------------------------------
$ 5,470 $ 130
- -------------------------------------------------------
(a) Includes bankruptcies and foreclosures.
38
Changes related to the servicing assets during the years ended June 30, 2003,
2002, and 2001, are as follows:
(in thousands) 2003 2002 2001
- -------------------------------------------------------------
Beginning balance $ 51,996 $ 45,128 $ 40,704
Servicing assets recognized 10,895 19,605 15,994
Amortization (13,854) (12,737) (11,570)
- -------------------------------------------------------------
$ 49,037 $ 51,996 $ 45,128
- -------------------------------------------------------------
NOTE 3 - INVENTORIES
Inventories at June 30, 2003, and 2002, are as follows:
(in thousands) 2003 2002
- ------------------------------------------
Manufactured homes
New $120,685 $123,482
Previously-owned 55,026 49,644
Raw materials 17,393 16,850
- ------------------------------------------
$193,104 $189,976
- ------------------------------------------
If the first-in, first-out (FIFO) method of inventory valuation had been used,
inventories would have been higher by $23,800,000 and $20,500,000 at June 30,
2003, and 2002, respectively.
NOTE 4 - SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale at June 30, 2003, and 2002, are as follows:
GROSS GROSS REALIZED OTHER ESTIMATED
UNREALIZED UNREALIZED THAN TEMPORARY FAIR
COST GAINS LOSSES LOSSES VALUE
(in thousands) -------- ------- -------- --------- --------
Residual interests in installment contract receivables $ 70,263 $15,081 $ - $(15,899) $ 69,445
Retained securities held-for-sale 96,851 1 (7,317) - 89,535
-------- ------- -------- --------- --------
Total June 30, 2003 $167,114 $15,082 $(7,317) $(15,899) $158,980
======== ======= ======== ========= ========
Residual interests in installment contract receivables $ 85,012 $13,850 $(5,189) $ - $ 93,673
Retained securities held-for-sale 20,691 147 (702) - 20,136
Other securities held-for-sale 1,291 4,302 - - 5,593
-------- ------- -------- --------- --------
Total June 30, 2002 $106,994 $18,299 $(5,891) $ - $119,402
======== ======= ======== ========= ========
The unrealized gain and loss, net of tax, are recorded as an element of
accumulated other comprehensive income. The residual interests in installment
contract receivables does not include over collateralization of $36,996,000 and
$35,675,000 as of June 30, 2003, and 2002, respectively.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at June 30, 2003, and 2002, are as follows:
(in thousands) 2003 2002
- ------------------------------------------------------------
Land and improvements $ 249,767 $ 226,953
Buildings 152,763 152,353
Furniture and all other equipment 55,870 53,008
- ------------------------------------------------------------
458,400 432,314
Less: accumulated depreciation
and amortization (136,950) (121,550)
- ------------------------------------------------------------
$ 321,450 $ 310,764
- ------------------------------------------------------------
The Company entered into capital lease arrangements in fiscal 2002 for computer
related equipment valued at $568,000. The remaining contractual obligation as
of June 30, 2003, was $216,000, all due in fiscal 2004.
39
NOTE 6 - DEBT OBLIGATIONS
Debt obligations at June 30, 2003, and 2002, are summarized as follows:
(in thousands) 2003 2002
- ------------------------------------------------------------------------------------
Senior notes, 6.25%, due December 2003 $ 75,000 $75,000
Debt collateralized by installment contract receivables,
effective rate of 6.15% at June 30, 2003, due March 2004 318,243 -
Promissory note, effective rate of 2.165% at
June 30, 2003, due March 2004 50,000 -
Debt collateralized by installment contract
receivables, average effective rate 9.92% at
June 30, 2003, due through 2004 199 2,176
Tax-exempt bonds, effective rate of 1.10% at
June 30, 2003, due through 2030 15,230 15,230
Lines of credit - -
Other notes payable 375 506
- ------------------------------------------------------------------------------------
$459,047 $92,912
- ------------------------------------------------------------------------------------
Annual maturities of debt as of June 30, 2003, are: 2004 - $443,568,000; 2005 -
$134,000; 2006 - $35,000; 2008 - $4,030,000; $11,280,000 after 2008.
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 June 30, 2003, the Company was in
compliance with all financial covenants with the exception of a pledged debt
covenant that, upon the effectiveness of the merger, was resolved.
A $300 million one-year sales facility is available of which $150 million is
committed. This facility was not utilized at June 30, 2003. Approximately $175
million in installment contract receivables were sold through the facility
during the year. 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 at June 30, 2003, and
expired in August 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 June 30, 2003, 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.
In addition, the Company has committed and uncommitted lines of credit amounting
to $76 million with several banks, which bear interest in relation to LIBOR.
These lines were unused at June 30, 2003. These lines are subject to periodic
review by each bank and may be canceled by the Company at any time.
A $1.875 billion line of credit is available with Berkshire Hathaway, with $368
million being utilized on June 30, 2003. Of the amount due Berkshire Hathaway,
$318 million was secured by manufactured housing contracts with the remaining
$50 million being unsecured. Effective rates of interest range from 2.165% to
6.15%. The notes are due March 2004.
Under certain interest rate swap agreements, the Company agrees with other
parties to exchange the difference between fixed rate and variable rate interest
amounts calculated by reference to an agreed upon notional principal amount. At
June 30, 2003, the Company's interest rate swap agreements have an aggregate
notional amount of $75 million. The interest rates on the notional amounts
range from 5.44% to 5.62%. At June 30, 2003, the fair value of the swap
agreement was $10.7 million as compared to $5.7
40
million in the prior year. As a result, there was a $5.0 million negative
adjustment recorded for the swaps in the period ending June 30, 2003.
NOTE 7 - RESERVES FOR CREDIT LOSSES AND CONTINGENT LIABILITIES
Analysis of the reserves for credit losses on installment contract receivables
and contingent liabilities for the years ended June 30, 2003, 2002, and 2001, is
as follows:
(in thousands) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 24,540 $ 30,536 $ 35,725
Additions to reserves 43,700 25,100 42,500
Charges, net of recoveries applicable to installment contract receivables
Purchased (18,595) (14,880) (13,105)
Other (19,720) (21,884) (37,974)
Reserves transferred to unamortized discounts - - (1,000)
Reserves associated with receivables purchased - 5,668 4,390
- ------------------------------------------------------------------------------------------------------------
Balance, end of year 29,925 24,540 30,536
- ------------------------------------------------------------------------------------------------------------
The reserves for credit losses are netted against receivables and the reserve
for contingent liabilities is included in other liabilities on the consolidated
balance sheets. The Company is contingently liable as guarantor on installment
contract receivables sold with recourse. At June 30, 2003, and 2002, the
outstanding principal balances of these receivables totaled approximately $70
million and $68 million, respectively. There were $15 million of receivables
sold with recourse in 2003. There were no receivables sold with recourse in
2002 and 2001.
NOTE 8 - SHAREHOLDERS' EQUITY
Stock Option Plan
In 1983, 1985, 1991, and 1997, the Company established Stock Option Plans for a
total of 17,021,036 shares of common stock, which provide for granting
"incentive stock options" or "non-qualified options" and stock appreciation
rights to officers and key employees of the Company. In addition,
non-management members of the Board of Directors were, with shareholder approval
of prices and provisions for exercise, 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 were exercisable after one or more
years and expired no later than 10 years from the date of grant. Activity and
price information regarding the plans are as follows:
41
Weighted Weighted
Avg Stock Avg
Stock Option Exercise Options Exercise
Shares Price Range Price Exercisable Price
- --------------------------------------------------------------------------------------
Balance
June 30, 2000 5,105,456 $ 2.16 - $15.75 $10.36 1,655,984 $ 9.18
Granted 875,825 $ 8.38 - $ 9.31 $ 9.10
Exercised (278,401) $ 2.16 - $13.70 $ 5.88
Canceled (242,418) $ 7.22 - $15.75 $10.24
- --------------------------------------------------------------------------------------
Balance
June 30, 2001 5,460,462 $ 3.83 - $15.75 $10.40 1,901,452 $ 9.84
Granted 1,121,390 $ 8.19 - $15.75 $13.82
Exercised (582,957) $ 3.83 - $13.70 $ 8.40
Canceled (268,941) $ 7.22 - $15.75 $11.29
- --------------------------------------------------------------------------------------
Balance
June 30, 2002 5,729,954 $ 7.22 - $15.75 $11.23 1,835,540 $10.29
GRANTED 963,250 $11.19 - $15.65 $11.93
EXERCISED (309,424) $ 7.22 - $12.60 $ 7.92
CANCELED (517,744) $ 7.54 - $15.75 $12.65
- --------------------------------------------------------------------------------------
BALANCE
JUNE 30, 2003 5,866,036 $ 7.22 - $15.75 $11.39 2,342,482 $10.62
- --------------------------------------------------------------------------------------
Options available for future grant at June 30, 2003, and 2002, were 2,786,594
and 3,317,696, respectively. 1,010 persons held options at June 30, 2003.
The following table summarizes information about the plans' stock options at
June 30, 2003, including weighted average remaining life (Life) and weighted
average exercise price (Price):
Options Outstanding Options Exercisable
----------------------------------- ------------------------
Range Number Life Price Number Price
- ------------------------------------------------------------------------------
$ 6.30 - $ 7.88 423,544 1.0 year $ 7.24 400,364 $ 7.23
$ 7.88 - $ 9.45 1,392,853 5.7 years $ 9.08 610,028 $ 9.07
$ 9.45 - $11.03 247,787 3.4 years $10.32 233,729 $10.32
$11.03 - $12.60 2,003,106 6.7 years $11.75 696,297 $12.26
$12.60 - $14.18 1,524,871 6.6 years $13.62 402,064 $13.65
$14.18 - $15.75 273,875 7.7 years $15.51 - $ -
- ------------------------------------------------------------------------------
In accordance with the guidance provided by SFAS 123, Accounting for Stock-Based
Compensation (SFAS 123), the Company has elected to continue following the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related
interpretations in accounting for its stock option plans. Under the intrinsic
value based method, compensation cost is computed as the excess, if any, of the
quoted market price of the stock at grant date over the amount the grantee must
pay to acquire the stock. Because all option plans provided for grants at
market price, there is no intrinsic value in the stock options on the grant
date, therefore no compensation cost is recognized. SFAS 123 describes the
fair value method of measuring and recording compensation cost as an alternative
to the intrinsic value based method. Under the fair value method, compensation
cost is measured at the grant date based on the computed fair value of the grant
and is recognized over the vesting period of the options. SFAS 123 also
requires that companies using the intrinsic value based method must present pro
forma disclosure of net income and earnings per share as if the fair value
method had been applied. The pro forma results do not purport to indicate the
effects on reported net income for recognizing compensation expense that is
expected to occur in future years. If the options had been expensed in the
current year, the pro forma results would have been:
42
Year ended June 30,
(in thousands except per share data) 2003 2002 2001
- ---------------------------------------------------------------------------------
Net income - as reported $113,082 $124,146 $106,651
Net income - pro forma 109,990 120,640 104,352
Net income per diluted common share - as reported $0.83 $0.89 $0.77
Net income per diluted common share - pro forma 0.80 0.87 0.75
- ---------------------------------------------------------------------------------
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 2001 to 2003: dividend yields ranging
from 0.43% to 0.84% with a weighted average yield of 0.65%; expected volatility
of 45.69%; risk-free interest rates ranging from 3.63% to 5.40% with a weighted
average rate of 4.49%; and expected lives ranging from 9.86 to 10.00 years with
a weighted average life of 9.95 years. The weighted average grant date fair
value of options granted in fiscal years 2003, 2002 and 2001 was $6.85, $7.15,
and $4.53 per share, respectively.
As required by the Securities and Exchange Commission final release no. 33-8048,
the table provided below represents the equity compensation plan disclosure in
aggregate. All information presented below is reported at June 30, 2003.
NUMBER OF SECURITIES
(A) REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
- -----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 5,866,036 $11.39 2,786,594
Equity compensation plans not
approved by security holders - - -
- -----------------------------------------------------------------------------------------------------------------------
Total 5,866,036 $11.39 2,786,594
- -----------------------------------------------------------------------------------------------------------------------
Subsequent to June 30, 2003, the Company cancelled all stock option plans. See
note 18 to these financial statements.
NOTE 9 - INCOME TAXES
The components of deferred tax assets and liabilities at June 30, 2003, and
2002, are as follows:
(in thousands) 2003 2002
- ----------------------------------------------------------------------------------
Reserves for credit losses and contingencies and discounts $ 18,870 $ 6,981
Insurance reserves 12,737 12,086
Unearned insurance premiums 10,463 10,038
Residual interest in installment contract receivables 21,978 12,005
- ----------------------------------------------------------------------------------
Total deferred tax assets 64,048 41,110
- ----------------------------------------------------------------------------------
Deferred costs (7,330) (7,088)
Other comprehensive income (2,873) (4,591)
Other (12,787) (9,638)
- ----------------------------------------------------------------------------------
Total deferred tax liabilities (22,990) (21,317)
- ----------------------------------------------------------------------------------
Net deferred tax asset $ 41,058 $ 19,793
- ----------------------------------------------------------------------------------
The provisions for income taxes for each of the years ending June 30, 2003,
2002, and 2001 are composed of the following:
43
(in thousands) 2003 2002 2001
- ---------------------------------------------------------------
Current tax provisions
Federal $80,689 $65,232 $64,010
State 5,258 4,086 2,772
- ---------------------------------------------------------------
Total current 85,947 69,318 66,782
Deferred tax provision (benefit) (19,547) 3,582 (4,082)
- ---------------------------------------------------------------
$66,400 $72,900 $62,700
- ---------------------------------------------------------------
At June 30, 2003, 2002, and 2001, a deferred tax provision (benefit) of
($1,718,000), ($665,000), and $5,656,000, respectively, was allocated directly
to shareholders' equity for the unrealized gain (loss) on residual interests and
securities available-for-sale. The provision for income tax reflected in the
financial statements differs from income taxes calculated at the statutory
federal income tax rate of 35% in 2003, 2002 and 2001, as follows:
(in thousands) 2003 2002 2001
- ----------------------------------------------------------------------
Income taxes at the statutory rate $62,818 $68,966 $59,273
State income taxes, net of federal benefit 3,418 2,656 1,802
Other, net 164 1,278 1,625
- ----------------------------------------------------------------------
$66,400 $72,900 $62,700
- ----------------------------------------------------------------------
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) defined contribution plan covering all employees who
meet participation requirements. The amount of the Company's contribution is
discretionary as determined by the Board of Directors, up to the maximum
deduction allowed for federal income tax purposes. Company contributions accrued
and paid were $4,042,000, $4,708,000, and $2,938,000 for the years ended June
30, 2003, 2002 and 2001, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Certain operating properties are rented under non-cancelable operating leases
that expire at various dates through 2010. Total rental expense under operating
leases was $5,360,000 in 2003, $5,080,000 in 2002, and $5,280,000 in 2001.
Minimum rental commitments under non-cancelable operating leases primarily for
retail centers, in effect at June 30, 2003, were:
(in thousands)
Contractual Obligations Payments due by period
- ---------------------------------------------------------------------------------------------------------------
Total FY04 FY05 FY06 FY07 FY08 Thereafter
------------------------------------------------------------------------------------
Operating leases $ 8,434 $ 3,063 $ 2,123 $ 1,473 $ 860 $ 198 $ 717
The following table summarizes the Company's other contingencies as of June 30,
2003:
(in thousands)
Other Contingencies Amount of contingency expiration per period
- ---------------------------------------------------------------------------------------------------------------
Total FY04 FY05 FY06 FY07 FY08 Thereafter
------------------------------------------------------------------------------------
Letters of credit $144,686 $128,847 $ - $15,839 $ - $ - $ -
Guarantees $494,806 $ 2,033 $ 5,201 $14,152 $45,869 $ 83,892 $343,659
Repurchase agreements $ 55,704 $ 44,563 $11,141 $ - $ - $ - $ -
At June 30, 2003, the Company has letters of credit, primarily related to
insurance reserves and performance guarantees related to asset-backed
securitizations outstanding for which the Company provides a limited guarantee.
The Company believes a significant loss from any such guarantee is remote. See
Note 7 for discussion of guarantees on installment contract receivables.
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.
44
NOTE 12 - BUSINESS SEGMENT INFORMATION
The Company has identified four major business segments: Retail, Manufacturing,
Financial Services, and Communities. The Retail group purchases homes from the
Company's manufacturing operations and third party manufacturers to sell to
retail customers. The Manufacturing group builds homes for Company-owned and
independent retailers. Financial Services provides retail financing of
manufactured homes, reinsures risk on family protection, physical damage, and
homebuyer protection plan insurance policies, and offers certain specialty
finance products. The Communities group owns and operates manufactured housing
communities. Income from operations consists of total revenues less cost of
sales and operating expenses. Identifiable assets are used in the operation of
each business segment.
The sales of units shipped to the Retail sales centers from the Manufacturing
facilities are eliminated in the intersegment sales line of the Revenues
section. The Eliminations/other line as represented below includes other
intercompany eliminations required in accordance with generally accepted
accounting principles. Information concerning operations by business segment
follows:
45
(in thousands) 2003 2002 2001
- ---------------------------------------------------------------------------------
REVENUES
NET SALES
Retail $ 623,165 $ 616,224 $ 586,261
Manufacturing 489,304 535,508 495,610
Communities 50,872 40,115 39,420
Intersegment sales (313,331) (320,739) (272,134)
- ---------------------------------------------------------------------------------
Total Net Sales $ 850,010 $ 871,108 $ 849,157
- ---------------------------------------------------------------------------------
FINANCIAL SERVICES
Retail $ 54,772 $ 43,375 $ 40,870
Financial Services 204,306 206,061 184,250
Communities 3,907 3,063 2,796
- ---------------------------------------------------------------------------------
Total Financial Services $ 262,985 $ 252,499 $ 227,916
- ---------------------------------------------------------------------------------
RENTAL AND OTHER INCOME
Retail $ 25,768 $ 26,352 $ 24,003
Manufacturing 606 497 545
Communities 51,255 48,993 47,484
Intersegment sales (2,213) (601) 1,851
- ---------------------------------------------------------------------------------
Total Rental and other income $ 75,416 $ 75,241 $ 73,883
- ---------------------------------------------------------------------------------
Total Revenue $1,188,411 $1,198,848 $1,150,956
- ---------------------------------------------------------------------------------
OPERATING INCOME
Retail $ 28,677 $ 32,177 $ 28,712
Manufacturing 37,706 46,761 36,637
Financial Services 116,083 124,909 95,469
Communities 14,276 13,938 14,022
Eliminations/other (15,874) (16,418) (3,985)
- ---------------------------------------------------------------------------------
Total income from operations $ 180,868 $ 201,367 $ 170,855
- ---------------------------------------------------------------------------------
INTEREST
Interest expense (10,492) (8,975) (5,561)
Interest revenue/other income 9,106 4,654 4,057
- ---------------------------------------------------------------------------------
INCOME BEFORE TAXES $ 179,482 $ 197,046 $ 169,351
- ---------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Retail $ 272,000 $ 271,421 $ 255,793
Manufacturing 77,913 79,102 82,616
Financial Services 1,625,966 1,210,460 1,080,416
Communities 201,267 191,147 191,802
Eliminations/other 64,168 76,273 43,543
- ---------------------------------------------------------------------------------
Total identifiable assets $2,241,314 $1,828,403 $1,654,170
- ---------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Retail $ 4,714 $ 4,753 $ 6,161
Manufacturing 6,158 5,781 5,767
Financial Services 541 283 512
Communities 7,237 7,071 7,030
Eliminations/other 1,854 1,273 1,130
- ---------------------------------------------------------------------------------
Total depreciation and amortization $ 20,504 $ 19,161 $ 20,600
- ---------------------------------------------------------------------------------
CAPITAL EXPENDITURES
Retail $ 5,206 $ 5,797 $ 5,211
Manufacturing 6,844 5,834 4,346
Financial Services 459 87 88
Communities 16,193 7,033 13,920
Eliminations/other 2,488 1,736 994
- ---------------------------------------------------------------------------------
Total capital expenditures $ 31,190 $ 20,487 $ 24,559
- ---------------------------------------------------------------------------------
46
NOTE 13 - OTHER ASSETS, ACCOUNTS PAYABLE AND OTHER LIABILITIES
At June 30, 2003, and 2002, other assets and liabilities consisted of:
(in thousands) 2003 2002
- ------------------------------------------------------------------
Other assets
Interest and other receivables $ 53,998 $ 48,233
Deferred insurance policy acquisition costs 21,344 20,529
Prepaid expenses and other 28,927 24,910
- ------------------------------------------------------------------
$104,269 $ 93,672
- ------------------------------------------------------------------
Accounts payable and accrued liabilities
Accounts payable $ 74,851 $ 79,648
Accrued liabilities and other 48,272 59,660
- ------------------------------------------------------------------
$123,123 $139,308
- ------------------------------------------------------------------
Other liabilities
Investors payable $147,607 $131,720
Reserve for contingent liabilities 6,615 5,664
Escrow deposits 19,538 15,747
Unearned insurance premiums 106,093 100,712
Residual liability 11,950 52,161
Other 27,643 28,222
- ------------------------------------------------------------------
$319,446 $334,226
- ------------------------------------------------------------------
NOTE 14 - FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
that the Company disclose the estimated fair values of its financial
instruments. The following methodologies and assumptions were used by the
Company to estimate its fair value disclosures for financial instruments.
Fair value estimates are made at a specific point in time, based on relevant
market data and information about the financial instrument. The estimates do not
reflect any premium or discount that could result from offering for sale in a
single transaction the Company's entire holdings of a particular financial
instrument. The lack of uniform valuation methodologies introduces a greater
degree of subjectivity to these estimated fair values. Comparability to
financial instruments between similar companies may not be reasonable because of
varying assumptions concerning the estimates of fair value.
Cash and Cash Equivalents
The carrying values for cash and cash equivalents, including those restricted by
agreement, approximate the fair value of the assets.
Contracts Held For Sale and as Collateral
Contracts held for sale are generally recent originations or purchased
portfolios. The Company estimates the fair value of the contracts held for sale
using expected future cash flows of the portfolio discounted at the current
origination rate.
The carrying values of contracts pledged as collateral to long-term lenders are
estimated using discounted cash flow analyses and interest rates being offered
for similar contracts. The carrying amount of contracts with a variable rate of
interest is estimated to be fair value. The carrying value of accrued interest
adjusted for credit risk equals its fair value.
Debt Collateralized by Installment Contract Receivables
Debt collateralized by installment contract receivables consists primarily of
notes due in March 2004. The fair value of these financial instruments is based
on the current rates offered to the Company for debt of similar maturities using
a discounted cash flow calculation.
The carrying amounts and estimated fair values of the Company's financial assets
and liabilities are as follows:
47
JUNE 30, 2003 June 30, 2002
CARRYING ESTIMATED Carrying Estimated
(in thousands) AMOUNT FAIR VALUE Amount Fair Value
- -------------------------------------------------------------------------------------------------------------------
Financial assets
Cash and cash equivalents, including restricted cash $ 176,491 $ 176,491 $209,884 $ 209,884
Contracts held for sale and as collateral, including accrued
interest receivable 1,055,920 1,056,042 718,265 716,400
Residual interests in installment contract receivables 106,441 106,441 129,348 129,348
Servicing asset 49,037 52,000 51,966 53,000
Securities available-for-sale 89,535 89,535 25,729 25,729
Financial liabilities
Senior notes, 6.25% 75,000 76,522 75,000 74,705
Debt collateralized by installment contract receivables, 6.15% 318,243 318,005 - -
Promissory notes, 2.165% 50,000 50,000 - -
Debt collateralized by installment contract receivables, 10.12% 199 215 2,176 2,462
Tax exempt bonds 15,230 15,230 15,230 15,230
Residual liability 11,950 11,950 52,161 52,161
- -------------------------------------------------------------------------------------------------------------------
NOTE 15 - EARNINGS PER SHARE
The following reconciliation details the numerators and denominators used to
calculate basic and diluted earnings per share for the respective periods:
(in thousands except per share data) 2003 2002 2001
- -------------------------------------------------------------------------
Net income $113,082 $124,146 $106,651
Average shares outstanding
Basic 136,237 137,726 137,702
Add: common stock equivalents (1) 470 1,146 638
Diluted 136,707 138,872 138,340
Earnings per share - Basic $0.83 $0.90 $0.77
- Diluted. $0.83 $0.89 $0.77
- --------------------------------------------------------------------------
(1) Common stock equivalents are principally stock options. Stock options to
purchase 2,181,247, 69,000 and 2,414,826 shares of common stock for the years
ended June 30, 2003, 2002, and 2001, respectively, were not included in the
computation of diluted earnings per share because their inclusion would have
been antidilutive.
NOTE 16 - RELATED PARTY TRANSACTIONS
The Company maintains an agreement to purchase certain installment contract
receivables originated or acquired by an affiliate, 21st Mortgage Corporation
("21st"), in which the Company maintains a 50% ownership interest. 21st, a
Delaware Corporation headquartered in Knoxville, Tennessee, acts as servicer for
those receivables it originates or acquires. Certain of the receivables
originated or acquired by 21st were securitized along with other receivables
originated and acquired by the Company. The Company is servicer for such
receivables and maintains a subservicing agreement with 21st to sub-service
those receivables it sold to the Company. The amount paid to the affiliate in
fiscal 2003 to sub-service those receivables was $37,600,000. The Company
acquired approximately $286,000,000, $190,000,000, and $110,000,000 in
installment contract receivables from the affiliate and received interest and
other related fees from the affiliate totaling approximately $3,419,000,
$2,232,000, and $1,880,000 during fiscal 2003, 2002 and 2001, respectively.
On December 21, 2001, the Company acquired approximately $900 million of
installment contract receivables. 21st was contracted to service approximately
$450 million of these installment contract receivables. At June 30, 2003, 2002
and 2001, the affiliate was servicing installment contract receivables for the
Company totaling approximately $1,144,035,000, $1,016,088,000 and $444,495,000,
respectively.
One of the Company's counsel is Bernstein, Stair, and McAdams, LLP, of which one
of the Company's former directors, Thomas N. McAdams, is a partner. During
fiscal year 2003, payments to Bernstein, Stair, and McAdams, LLP for legal
services rendered were $61,947. In addition, the Company's primary insurance
carrier made payments to Bernstein, Stair, and McAdams, LLP of $99,658.
48
NOTE 17 - QUARTERLY DATA
2003
- --------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
(in thousands except per share data) SEPT. 30 DEC. 31 MAR. 31 JUNE 30 TOTAL
- --------------------------------------------------------------------------------------------------------
NET SALES FROM MANUFACTURED HOUSING OPERATIONS $ 221,221 $214,924 $190,304 $223,561 $ 850,010
REVENUES 306,934 299,952 277,125 304,400 $1,188,411
GROSS PROFIT FROM MANUFACTURED HOUSING OPERATIONS 76,488 74,198 66,512 81,757 $ 298,955
OPERATING INCOME 51,163 49,500 40,127 40,078 $ 180,868
INCOME BEFORE INCOME TAXES 47,021 48,589 41,564 42,308 $ 179,482
NET INCOME 29,621 30,589 26,164 26,708 $ 113,082
EARNINGS PER SHARE - BASIC $0.22 $0.22 $0.19 $0.20 $0.83
- DILUTED $0.22 $0.22 $0.19 $0.20 $0.83
PRICE RANGE OF STOCK - HIGH $15.66 $13.80 $12.85 $13.16 $15.66
- LOW $10.84 $9.40 $10.10 $11.13 $9.40
DIVIDENDS PER COMMON SHARE - - $0.064 - $0.064
- --------------------------------------------------------------------------------------------------------
2002
- --------------------------------------------------------------------------------------------------------
First Second Third Fourth
(in thousands except per share data) Sept. 30 Dec. 31 Mar. 31 June 30 Total
- --------------------------------------------------------------------------------------------------------
Net sales from manufactured housing operations $ 227,503 $207,753 $187,174 $248,678 $ 871,108
Revenues (1) 296,370 296,820 269,908 335,750 $1,198,848
Gross profit from manufactured housing operations 78,404 72,328 64,753 90,301 $ 305,786
Operating income 47,122 53,408 43,823 57,014 $ 201,367
Income before income taxes 42,120 53,408 46,381 55,137 $ 197,046
Net income 26,520 33,708 29,181 34,737 $ 124,146
Earnings per share - Basic $0.19 $0.25 $0.21 $0.25 $0.90
- Diluted $0.19 $0.24 $0.21 $0.25 $0.89
Price range of stock - High $16.50 $17.41 $17.21 $19.28 $19.28
- Low $10.75 $12.60 $14.49 $15.10 $10.75
Dividends per common share - - $0.064 - $0.064
- --------------------------------------------------------------------------------------------------------
(1) Revenues for 2002 reflect losses related to securitized mortgages of approximately $9,700,000,
$10,000,000, $10,800,000, and $9,700,000 for the quarters ending September 30, 2001, December 31, 2001,
March 31, 2002, and June 30, 2002, respectively.
NOTE 18 - SUBSEQUENT EVENTS
On April 1, 2003, the Company entered into an agreement and plan of merger with
Berkshire Hathaway and its subsidiary pursuant to which the Company would be
acquired by Berkshire Hathaway at a price of $12.50 per share, payable in cash.
The agreement and plan of merger and the stockholders agreement relating to the
merger of a subsidiary of Berkshire Hathaway with and into the Company were
filed with the Securities 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, and the definitive proxy statement was filed on June 12,
2003.
At a special meeting of stockholders held on July 30, 2003 for purposes of
voting on the proposed merger, a majority of the shares outstanding, 52.4%,
voted in favor of the proposed merger. On August 7, 2003, the merger became
effective with the filing of the certificate of merger with the Secretary of
State of Delaware.
As of the date of this filing, the Company has incurred approximately $9.2
million of merger related expenses. In addition, on August 15, 2003, the Company
paid approximately $19.1 million to purchase for cancellation those options to
purchase common stock of the Company from all eligible option holders as
described in Form SC-TO-I/A, Schedule to Tender Offer Statement, filed with the
SEC on June 16, 2003. As a result of the purchase on that date, those options
available to eligible option holders were cancelled.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable during the Company's fiscal year ended June 30, 2003, and through
the date of this report.
49
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS OF THE COMPANY
On August 7, 2003, the Company filed a certificate of merger with the Secretary
of State of Delaware to make effective its merger with a wholly-owned subsidiary
of Berkshire Hathaway. In addition, on August 7, 2003, The New York Stock
Exchange (the "NYSE") suspended trading of Company stock, and subsequently
delisted the Company stock on October 8, 2003. Prior to the merger on August 7,
2003, the Board of Directors consisted of:
NAME AGE POSITION/ BIOGRAPHY
James L. Clayton 69 Director since 1967: Founder and Chairman of the Board of Clayton
Homes, Inc; Chief Legal Officer of Clayton Homes, Inc.; Retired as Chief
Executive Officer of Clayton Homes; Inc. in 1999; and Member of the
Boards of: Dollar General Corporation and, Branch Banking & Trust Co.
of North Carolina.
B. Joe Clayton 67 Director since 1967: Chief Executive Officer of Clayton Automotive
Group since its inception in 1961; Member of the Regional Board of
First Tennessee Bank.
Kevin T. Clayton (1) 40 Director since 1998. See Executive Officers of the Company for biography.
Dan W. Evins 67 Director since 1991, member of audit committee: Co-founder and
Chairman of the Board of CBRL Group, since its inception in 1970.
Wilma H. Jordan 55 Director since 1994, chairperson of compensation committee, member
of audit committee: Co-founder and Chief Executive Officer, Jordan
Edmiston Group, Inc. since its inception in 1988; Member of the Board
of LIN TV Corp.
Thomas N. McAdams 50 Director since 1997, member of the compensation committee:
Partner, Bernstein, Stair & McAdams LLP since 1982; Member of the
Board of RaffertyInc.
C. Warren Neel 66 Director since 1993, chairperson of audit committee, member of
compensation committee: Executive Director, Corporate Governance
Center, The University of Tennessee, since 2003, Commissioner,
Finance and Administration, State of Tennessee 2000-2003; Dean of
the College of Business Administration of the University of Tennessee
from 1977 to 2000; Member of the Boards of: SakInc.,
and American Healthways, Inc.
Steven Davis 52 Director since 2003, member of the audit committee: General Partner of
M&D Pacific, Member of Board of Advisors, Arlen Capital since 1998,
Member of the Board of Chateau Communities, Inc., 1993 to 2002,
CFO and Executive Vice President of ROC 1993 to 1996.
(1) Son of James L. Clayton and nephew of B. Joe Clayton
In connection with the merger, all directors with the exception of Kevin T.
Clayton have resigned from the Board of Directors of the Company.
50
Executive Officers of the Company
NAME AGE POSITION
Kevin T. Clayton 40 Chief Executive Officer and President (a)
David M. Booth 51 Executive Vice President and President, Retail (b)
Richard D. Strachan 62 Executive Vice President and President, Manufacturing (c)
John J. Kalec 53 Executive Vice President and Chief Financial Officer (d)
Allen Morgan 56 Vice President and General Manager, Communities (e)
(a) Mr. Clayton has been President of Financial Services since 1995. Prior to
that time, he served in various management positions with the Company. In
August 1997, he was named President and Chief Operating Officer of the Company.
In July 1999, he was named Chief Executive Officer.
(b) Mr. Booth has been Executive Vice President of the Company since 1997 and
President of Retail since 1995. Prior to that time, he served as Executive Vice
President of Retail and in other management positions with the Company.
(c) Mr. Strachan has been Executive Vice President of the Company and President
of Manufacturing since 1998 and President of Manufacturing since 1997. Prior to
that time, he served as Vice President and General Manager of Manufacturing as
well as other significant management positions with the Company and within the
industry.
(d) Mr. Kalec rejoined the Company in 2001 as Senior Vice President and Chief
Financial Officer. From January 2000 to August 2001, he was Chief Financial
Officer and Executive Vice President of iPIX. From August 1998 to January 2000,
he served as Vice President and Chief Financial Officer of Interactive Pictures.
Prior to that time, he served as Senior Vice President, Chief Financial Officer,
and Secretary of Clayton Homes, Inc. from 1996 to 1998. In 2002, he was named
Executive Vice President and Chief Financial Officer.
(e) Mr. Morgan joined the Company in 1998, as General Manager of the
Communities Group. In September 1999, he was named Vice President of the
Company. From 1992 to 1998 he was Superintendent of Knox County, Tennessee
Schools.
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION OF MANAGEMENT
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
- ---------------------------------------------------------------------------------------------------
FISCAL OPTIONS OTHER ANNUAL
NAME AND POSITION YEAR SALARY BONUS (# OF SHARES) (1) COMPENSATION (2)
- ---------------------------------------------------------------------------------------------------
Kevin T. Clayton 2003 $330,000 $ 954,000 60,000 $ 8,764
Chief Executive Officer 2002 $330,000 $1,670,000 60,000 $13,121
and President 2001 $300,000 $ 325,000 50,000 $ 8,399
- ---------------------------------------------------------------------------------------------------
David M. Booth 2003 $300,000 $ 868,000 60,000 $ 8,774
Executive Vice President 2002 $300,000 $1,518,000 60,000 $13,253
President, Retail 2001 $275,000 $ 325,000 50,000 $ 8,424
- ------------------------------------------------------------------ ---------------------------------
Richard D. Strachan 2003 $300,000 $ 868,000 60,000 $ 8,775
Executive Vice President 2002 $300,000 $1,518,000 60,000 $13,163
President, Manufacturing 2001 $275,000 $ 325,000 50,000 $ 8,364
- ---------------------------------------------------------------------------------------------------
John J. Kalec 2003 $185,000 $ 180,000 40,000 $ 9,371
Executive Vice President, 2002 $156,500 $ 180,000 80,000 $10,697
Chief Financial Officer 2001 --- --- --- ---
- ---------------------------------------------------------------------------------------------------
Allen Morgan 2003 $159,000 $ 123,000 20,000 $ 9,610
Vice President and General 2002 $158,000 $ 194,000 40,000 $11,497
Manager, Communities 2001 $150,000 $ 25,000 15,000 $ 6,921
- ---------------------------------------------------------------------------------------------------
1. Represents Company contributions and reallocated forfeitures in the Company's 401(k)
plan, health, life and disability insurance premiums.
51
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED IN FISCAL YEAR ($/ SHARE) DATE
- -----------------------------------------------------------------------------------------
Kevin T. Clayton 60,000 6.23% $11.19 10/31/2012
David M. Booth 60,000 6.23% $11.19 10/31/2012
Richard D. Strachan 60,000 6.23% $11.19 10/31/2012
John Kalec 40,000 4.15% $11.19 10/31/2012
Allen Morgan 20,000 2.08% $11.19 10/31/2012
- -----------------------------------------------------------------------------------------
* All such options were granted on October 30, 2002, but were subsequently
cancelled on August 15, 2003 in connection with the Company's tender offer to
purchase for cancellation all of the options held by eligible option holders as
described in Form SC-TO-1/A, Schedule to Tender Offer Statement, filed with the
SEC on June 16, 2003.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE OPTIONS AT FISCAL AT FISCAL YEAR END (1)
EXERCISE REALIZED YEAR END
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------
Kevin T. Clayton 5,718 $28,958 265,679 235,500 $542,053 $247,175
David M. Booth 57,211 $38,197 296,194 235,500 $704,722 $247,175
Richard D. Strachan --- --- 110,438 265,500 $ 83,650 $343,075
John J. Kalec --- --- 6,000 114,000 --- $ 54,400
Allen Morgan --- --- 28,000 74,500 $ 54,515 $ 77,035
- ------------------------------------------------------------------------------------------------------------
1. Market value of underlying securities at our fiscal year end of June 30,
2003, minus exercise price.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT +.
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
NAME OF NUMBER OF SHARES RIGHT TO PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED (1) ACQUIRE (2) OF CLASS
- ---------------------------------------------------------------------------------------
James L. Clayton (3) 37,718,282 208,302 27.8%
B. Joe Clayton 139,284 9,404 *
Kevin T. Clayton (4) 661,644 265,679 *
Dan W. Evins 69,520 9,404 *
Wilma H. Jordan 14,167 31,377 *
John J. Kalec 5,251 6,000 *
Thomas N. McAdams 3,481 8,450 *
C. Warren Neel 4,587 39,920 *
Steven G. Davis - - *
David M. Booth 66,240 296,194 *
Richard D. Strachan 5,640 110,438 *
Allen Morgan 1,921 28,000 *
All Directors and Executive
Officers as a Group (12 persons) 36,690,017 1,051,728 29.1%
- ---------------------------------------------------------------------------------------
+As of fiscal year end, June 30, 2003.
*Less than 1%
(1) These amounts include shares for which the named person has sole voting and
investment power or shares such powers with his or her spouse. They also
include shares credited to the named person's account under the 401(k)
Plan, in the following amounts:
- James L. Clayton - 13,568
- David Booth - 7,779
- Kevin T. Clayton - 7,643
- Richard D. Strachan - 4,127
- Allen Morgan - 1,796
- All executive officers as a group (6)- 36,008
(2) These amounts reflect shares that could be purchased on exercise of stock
options as of August 6, 2003 under stock incentive plans.
52
(3) Includes 9,175,411 shares held by the Clayton Family Foundation, a
non-profit corporation, of which James L. Clayton is director and
president.
(4) Includes 400,923 shares held in trust in which Kevin T. Clayton is a
trustee, but not a beneficiary; includes 6,100 shares held in trust of
which Kevin T. Clayton is a trustee and beneficiary; does not include
9,175,411 shares held by the Clayton Family Foundation of which Kevin T.
Clayton is a director.
PRINCIPAL STOCKHOLDERS +
NAME AND ADDRESS OF AMOUNT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------ --------------------- -----------------
Berkshire Hathaway, Inc. 136,269,337 100.0%
1440 Kiewit Plaza
Omaha, NE 68131
+ As of the effective date of the above described merger of the Company and the
Berkshire Hathaway subsidiary on August 7, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to Item 8, Note 16, "Related Party Transactions".
53
PART IV
ITEM 14. 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.
ITEM 15. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
PricewaterhouseCoopers, LLC (PwC) serves as the Company's principal accountant.
PwC's fees paid relating to the fiscal year 2003 audit, including reviews of
financial statements included in Forms 10-Q, totaled $300,000. There were no
fees incurred related to financial information systems design and
implementation. All other fees of PwC, principally securitization, tax planning
and other services, totaled $127,348. The Company's Audit Committee determined
that PwC's provision for services of all non-audit fees in 2003 was compatible
with maintaining PwC's independence.
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements, as well as the Report of
Independent Accountants, are included in Part II Item 8 of this report:
PAGE
----
Report of Independent Accountants 27
Consolidated Balance Sheets - June 30, 2003, and 2002 28
Consolidated Statements of Income - years ended
June 30, 2003, 2002 and 2001. 29
Consolidated Statements of Shareholders' Equity - years
ended June 30, 2003, 2002 and 2001 30
Consolidated Statements of Cash Flows - years ended
June 30, 2003, 2002 and 2001 31
Notes to the Consolidated Financial Statements 32-49
3. Exhibits:
3. (a) Restated charter as amended. (D)
(b) Bylaws. (D)
4. (a) Specimen stock certificates. (E)
(b) The Company agrees to furnish to the Commission, upon
request, instruments relating to the long term debt of
the Company or its subsidiaries.
54
10. (a) Lease Agreement, dated June 29, 1972, as amended, between
Clayton Homes, Inc. and Dean Planters Warehouse, Inc. (A)
(subsequently assigned to CLF, a limited partnership which
includes a related party).
*(b) Clayton Homes, Inc. 1997 Employees Stock Incentive
Plan. (C)
*(c) 1996 Outside Directors Equity Plan. (B)
21. List of Subsidiaries of the Registrant (filed herewith).
23. Consent of independent auditors (filed herewith).
31. Certifications required by 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
32. Certifications required by 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).
________________________________________________________________
(A) Filed as Exhibits to Registration Statement on Form S-1 (SEC File No.
2-83705) and incorporated by reference thereto.
(B) Filed with Registration Statement on Form S-8 (SEC File No. 333-83543)
and incorporated by reference thereto.
(C) Filed with the Company's Proxy Statement for the Annual Meeting of
Shareholders held November 12, 1997, and incorporated by reference
thereto.
(D) Filed in electronic format only. The Company will provide copies of the
exhibits to any eligible shareholder who requests them. Request
of copies should be mailed to Clayton Homes, Inc., Attn. Investor
Relations, P.O. Box 15169, Knoxville, TN 37901.
(E) Filed with the Company's Form 10K for the fiscal year ended June 30,
1998, and incorporated by reference thereto.
* Management and Director's Compensation plans.
________________________________________________________________
(b) Reports on Form 8-K:
(i) Clayton Homes, Inc., Berkshire Hathaway Inc., B Merger Sub Inc.,
Agreement and Plan of Merger, dated as of April 1, 2003. Filed
with the Commission on April 2, 2003.
(ii) Clayton Homes, Inc., press release reporting the earnings for the
quarter ended March 31, 2003, dated April 16, 2003. Filed with the
Commission on April 17, 2003.
(iii) Clayton Homes, Inc., press release reporting preliminary operating
results for the month of April 2003. Filed with the Commission on
May 9, 2003.
(iv) Clayton Homes, Inc. Certification pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Filed with the Commission on May 13, 2003.
(v) Clayton Homes, Inc, press release reporting preliminary operating
results for the month of May 2003. Filed with the Commission on
June 9, 2003.
(vi) Clayton Homes, Inc., press release announcing the date of the special
shareholders' meeting, dated June 10, 2003. Filed with the Commission
on June 11, 2003.
(vii) Clayton Homes, Inc., notice to Directors and Officers with respect to
a blackout period, dated June 12, 2003. Filed with the Commission
June 12, 2003.
(viii) Clayton Homes, Inc., press release regarding decision by Delaware
Chancery Court, dated June 27, 2003. Filed with the Commission on
June 30, 2003.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Alcoa,
State of Tennessee, on October 14, 2003.
CLAYTON HOMES, INC.
By: /s/ Kevin T. Clayton
-----------------------
Kevin T. Clayton
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
/s/ Kevin T. Clayton October 14, 2003 Chief Executive Officer, President
- ------------------------------------- and President, Financial Services
Kevin T. Clayton (Principal Executive Officer)
/s/ John J. Kalec October 14, 2003 Executive Vice President and
- ------------------------------------- Chief Financial Officer
John J. Kalec (Principal Financial Officer &
Principal Accounting Officer)
56