Transcript Manufactured Homes, Inc Prepared by: Chris Eric

Manufactured Homes, Inc
Prepared by:
Chris
Eric
Ranbir
Robert
Agenda
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
Introduction
Company background & goals
Strategy Analysis
Sources of Revenue
Accounting Analysis
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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
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Increase market share
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Establish broader dealer network
Strategic acquisition
Create skilled management team
Industry Analysis
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10,000 manufactured home retailers
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Increased competition for market share
Transition and consolidation
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mom and pop” operations
Smaller firms disappearing
Merging with larger firms
Increase in price of conventional housing
12 mil people in 6 mil homes
Market Analysis
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Target Market:

Low-income families
• Age 18-40, blue collar workers
• Essential housing needs
• Repossession rate low
Seniors
 Vacationers

Business Strategy Analysis
Bargaining Power of Buyers
LOW
 Low income families
 Not likely to buy conventional homes
 Equal features to conventional homes
 Increase in demand expected
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Result: Increased Revenue
Business Strategy Analysis
Bargaining Power of Suppliers
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HIGH
Banks-attractive rates to customers
Banks-refuse installment contracts
Interest rates-decrease
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Result: Decreased Revenue
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Business Strategy Analysis
Threat of Substitute Products
LOW
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Increase in price of conventional housing
Result: Increased Revenue
HIGH
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Decrease in interest rates
Result: Reduced Revenue
Business Strategy Analysis
Threat 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 Analysis
Rivalry Among Existing Firms
LOW
 Smaller firms disappear
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Lack of volume buying powers and
capitalization
Business Strategy Analysis
Competitive Advantage
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Cost leadership
Affordable price for low income families
 Volume buyer power-financial advantage
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Differentiation
Reliable supply of homes
 Designer homes
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Sources of Revenue
Revenue from Sale of New Homes
 Revenue from Participation Income
 Define what Participation Income is
and how it is calculated
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Class Discussion
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Is the business of ‘buying and selling’
homes contributing to profitability?
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To what extent does Manufactured Homes
rely on ‘Participation Income’?
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Should this be better disclosed?
Analysis of Net Income
1986
1985
1984
Net Sales 106
69
30
COGS
-86
-56
-24
80% of
SGA
Prov.for
loss
NI from
sales
-18
-11
-5
-4
-1
0
-2
1
1
Analysis of Net Income
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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
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Financial Accounting Board’s
Statement No. 77
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…the seller should be able to
estimate:
The amount of bad debts and related
costs of collection and repossession
 The amount of prepayments
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Summary of Current
Accounting
Action
Cash
Noncash
assets
Contract
signed,
DP
5
95
(90)
Provision
for losses
Liabilities
Retained Revenue
earnings
100
5
Sale of
receivable
95
(95)
Finance
participation
5
5
Expense
90
5
10
Possible Accounting Treatment
of Finance Participation
Action
Cash
Noncash
assets
Contract
signed,
DP
5
95
(90)
Liabilities
R.E.
Revenue
Expense
100
90
5
Provision
for losses
Sale of
receivable
95
Finance
participation
(recognize
when
received)
5
5
95
5
Effects on Income
Statement
As Reported
Restated
Revenues
168969
169448
Costs and Expenses
179257
177828
Loss before income
taxes
(10288)
(8380)
Net Losses
(8512)
(6604)
Effects on Balance Sheet
As 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
402380
119377
Credit Losses and Net
Income
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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)
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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)
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Indicators that Risk has increased
re: Participation Income
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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
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Based on what we have reviewed:
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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
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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
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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?
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Implication: Reporting as
Receivables vs. Loan
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Revenue (as reported) or Loan (as
recommended)
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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
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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
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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
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Implication: Accounting
Practices
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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
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Subsequent Developments
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8.5 million loss in 1988
Financial institutions not accepting
transfer of installment notes
 Increase in customer defaults and prepayments (increase credit reserve
further)
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Switched Auditing Firms
Subsequent Developments
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SEC investigation into accounting
practices
Estimating Credit Losses
 SEC contested by Mftd Homes
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Stock Price moved from $14.88
(March 1988) to $1.50 by June 1989
Thank You!
QUESTIONS?