Manufactured Homes, Inc

Prepared by:ChrisEricRanbirRobert

Agenda Introduction Company background & goals Strategy Analysis Sources of Revenue Accounting Analysis

Revenue Recognition Statement Analysis Credit Loss (Provision for Losses) Risk Analysis

Implications & Conclusion

Company Background Manufactured Homes founded in 1975 1983 went public 1987 listed on AMEX 1986 established MANH Fin.Services Fastest growing company-Bus.Week

40% of total US market Present in 7 states in U.S.

Company’s Goals: Increase profit margins

Establish broader dealer network Increase market share

Strategic acquisition Create skilled management team

Industry Analysis 10,000 manufactured home retailers

mom and pop” operations Increased competition for market share Transition and consolidation

Smaller firms disappearing Merging with larger firms

Increase in price of conventional housing 12 mil people in 6 mil homes

Market Analysis Target Market:

Low-income families• Age 18-40, blue collar workers• Essential housing needs• Repossession rate low

Seniors Vacationers

Business Strategy AnalysisBargaining Power of BuyersBargaining Power of Buyers

LOW Low income families Not likely to buy conventional homes Equal features to conventional homes Increase in demand expected

Result: Increased Revenue

Business Strategy AnalysisBargaining Power of SuppliersBargaining Power of Suppliers

HIGH Banks-attractive rates to customers Banks-refuse installment contracts Interest rates-decrease

Result: Decreased Revenue

Business Strategy AnalysisThreat of Substitute ProductsThreat of Substitute Products

LOW Increase in price of conventional housing Result: Increased Revenue

HIGH Decrease in interest rates Result: Reduced Revenue

Business Strategy AnalysisThreat of New EntrantsThreat of New Entrants

LOW Network of National Dealers Small firms – lack of volume buying

powers and capitalization Strategic acquisition of major home

makers

Business Strategy AnalysisRivalry Among Existing FirmsRivalry Among Existing Firms

LOW Smaller firms disappear

Lack of volume buying powers and capitalization

Business Strategy Analysis Competitive AdvantageCompetitive Advantage

Cost leadership Affordable price for low income families Volume buyer power-financial advantage

Differentiation Reliable supply of homes Designer homes

Sources of RevenueSources of Revenue Revenue from Sale of New Homes Revenue from Participation Income Define what Participation Income is

and how it is calculated

Class Discussion Is the business of ‘buying and selling’

homes contributing to profitability?

To what extent does Manufactured Homes rely on ‘Participation Income’?

Should this be better disclosed?

Analysis of Net Income

1986 1985 1984

Net Sales 106 69 30

COGS -86 -56 -24

80% of SGA

-18 -11 -5

Prov.for loss

-4 -1 0

NI from sales

-2 1 1

Analysis of Net Income Conclusion:

Finance participation income is driving Net Income

Home Sales does not contribute significantly to Net Income

Recognition of Revenue Sale is recognized when down

payment is received or, when installment contract is agreed upon

The majority of installment contracts are sold with recourse to financial institutions

Installment contracts are normally payable over 120 to 180 months

Financial Accounting Board’s Statement No. 77

…the seller should be able to estimate: The amount of bad debts and related

costs of collection and repossession The amount of prepayments

Summary of Current Accounting

Action Cash Non-cash assets

Liabilities Retained earnings

Revenue Expense

Contract signed, DP

5 95(90)

100 90

Provision for losses

5 5

Sale of receivable

95 (95)

Finance participation

5 5 10

Possible Accounting Treatment of Finance Participation

Action Cash Non-cash assets

Liabilities R.E. Revenue Expense

Contract signed, DP

5 95(90)

100 90

Provision for losses

5 5

Sale of receivable

95 95

Finance participation(recognize when received)

5 5

Effects on Income Statement

As Reported RestatedRevenues 168969 169448

Costs and Expenses 179257 177828

Loss before income taxes

(10288) (8380)

Net Losses (8512) (6604)

Effects on Balance SheetAs Reported Restated

Current Assets 79876 80010

Net finance participation receivable (N.C)

20131 -

Installment contracts receivable

- 303000

Total Assets 119377 402380

Notes payable to finance companies

- 303000

Deferred finance participation income

- 20771

Stockholder’s Equity 3880 (32976)

Total Liabilities and Equity

119377 402380

Credit Losses and Net Income During the 4th quarter of 1986,

approximately 2 million of repossession expense and interest chargebacks were experienced and charged off

1st Q 2nd Q 3rd Q 4th Q

Net Income per share ’86

.17 .40 .30 (.36)

Net Income per share ‘85

.21 .34 .29 .14

Indicators that Risk has increased re: Participation Income

Lenders refused to refinance homes that were repossessed, one major cause of $2,000,000 new charge on Balance Sheet (pg. 194 / 195)

Two institutions incr. interest rate charged to Mftd. Homes, decreasing the spread. Participation Income will decrease as a result (pg. 194 / 195)

Indicators that Risk has increased re: Participation Income

Mftd. Homes has started own finance subsidiary to finance installment contracts receivable, probably because the banks are becoming reluctant to lend against the contracts (pg 196)

Installment contracts are not held for resale (new line on the Balance Sheet) (page 208)

Indicators that Risk has increased re: Participation Income

Mnfd. Homes must put up an irrevocable letter of credit secured by a deposit equal to the letter of credit to sell the installment of the receivables.

Discussion

Based on what we have reviewed:

Do you think Mftd. Homes is in a favorable financial position?

Should they re-think their strategy?

What are the implications of the points discussed so far?

Implication: Risk

Bank (Lenders) are seeing that the installment receivables are becoming more and more risky: Defaults Pre-Payments (due to lower interest

rates offered by banks) Mounting financial difficulty of Mftd.

Homes Increasing pressure by SEC

Implications: Risk

Each of the issues discussed would raise small red flags on their own, however most not likely have a big overall impact

However, all 5 issues raised together does indeed show the problem in accounting Participation Income as Mftd. Homes does

Implication: Revenue Sources

The business of buying and selling homes is not contributing much to profitability & finance participation income is primary source of income

Should this be better disclosed?

Implication: Reporting as Receivables vs. Loan

Revenue (as reported) or Loan (as recommended) Mftd. Homes is liable for 180 million of

installment loans that are not shown on the balance sheet. This loan makes a big difference in the D/C and D/E Ratio’s:

Implication: Reporting as Receivables vs. Loan

Based on the Estimated Reported vs. Restated Balance Sheet: Debt to Capital: As Reported: .86 Restated: 1.00 Debt to Equity: As Reported: 26.4 Restated: -12.29 Value of loans is greater than the value

of the assets Due to a ‘negative’ Stockholders Equity

Implication: Accounting Practices

How do you estimate an amount for defaults or Re-Financing?

Reliance on the economic conditions: Interest Rates and we have a price sensitive consumer

Market Analysis: With low income customers, mgmt statements may be different than reality

Implication: Accounting Practices

The accounting practice used to account for the transactions / participation income:

Does it seem murky to you?

Subsequent Developments Mftd Homes reported a loss of 4.5

million in Q4 of 87, wiping out most profits.

Loss due to 300% increase of company’s reserve for credit losses

Impact of Auditors Disagreement with Auditors

Subsequent Developments 8.5 million loss in 1988

Financial institutions not accepting transfer of installment notes

Increase in customer defaults and pre-payments (increase credit reserve further)

Switched Auditing Firms

Subsequent Developments SEC investigation into accounting

practices Estimating Credit Losses SEC contested by Mftd Homes

Stock Price moved from $14.88 (March 1988) to $1.50 by June 1989

Thank You!

QUESTIONS?