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company to a third party on a recourse basis. Transfers of receivables that are subject to
recourse must be reported as sales if the following three conditions are satis¬ed:
Manufactured Homes

1. The seller unequivocally surrenders the receivable to the buyer.
2. The seller™s remaining obligations to the buyer under the recourse provision must
be subject to reasonable estimation on the date of the transfer of the receivable.
For this purpose, the seller should be able to estimate:
(a) The amount of bad debts and related costs of collection and repossession, and
(b) The amount of prepayments. If the seller cannot make these estimates reason-
ably well, a transfer of the receivable cannot be reported as a sale.
3. The seller cannot be required to repurchase the receivable from the buyer except
in accordance with the recourse provision.
If any of the above conditions is not satis¬ed, the seller of the receivable must report
the proceeds from the transfer as a loan against the receivable.

Manufactured Homes™ revenues increased rapidly in recent years, from $11 million in
1983 to $120 million in 1986. In the company™s 1986 annual report, Robert Sauls, the
CEO, forecasted the company™s growth to continue and expected the 1987 revenues to
be $140“$145 million. Herman noted that the company™s sales for the ¬rst nine months
of 1987 exceeded this forecast. The company™s latest 10-Q statement reported $148 mil-
lion revenues for the nine months ended September 30, 1987.
Based on the performance in the ¬rst nine months of 1987, the Value Line Investment
Survey forecasted that Manufactured Homes would achieve $180 million revenues and
$6 million net income (or $1.65 per share) in 1987, and $210 million revenues and $7.5
million net income (or $2.00 per share) in 1988. Value Line commented on the com-
pany™s near term prospects as follows:1
We look forward for [per] share net [income] to advance 20% in 1988, despite a
dif¬cult selling environment. Industrywide shipments for the company™s core
Carolina markets were down in the December quarter and are likely to remain soft

1. Reprinted with permission from Value Line Investment Survey, February 26, 1988.
190 Liability and Equity Analysis

Liability and Equity Analysis

in the year ahead. We think, however, that Manufactured Homes will nevertheless
¬nd growth opportunities. True, the number of retail centers probably won™t in-
crease much this year. On the other hand, the rapid expansion of retail centers
over the past ¬ve years has put in place a large number of dealerships that have
plenty of opportunity for increasing volume.
Management is seeking to average 100 units per store as these sales locations
mature. At the end of 1986, stores were selling 47 units per year on average, and
that figure rose 20% for the first nine months of 1987. Although the market will be
very competitive this year, we think the company™s special attention to the low-end

Manufactured Homes
of the market, to which many large competitors pay less attention, will give Man-
ufactured Homes a solid niche position. Adding in the reduced tax rate, we think
full year [per] share net [income] may well reach the $2.00 mark.
Volume buying gives this retailer an edge. Because Manufactured Homes buys
in bulk, it can negotiate lower prices from the manufacturers it deals with. And by
passing the savings on to customers, the company is able to underprice smaller,
“mom and pop” outlets. Furthermore, because of its size, the company is able to
more efficiently handle inventory financing and mortgage assistance for its cus-
Before making a ¬nal recommendation to Edwards, Herman wanted to take a detailed
look at Manufactured Homes™ ¬nancial statements for the ¬scal year 1986 (Exhibit 2)
and the interim statements for the ¬rst nine months of 1987 (Exhibit 3).

1. Identify the accounting policies of Manufactured Homes which have the most signif-
icant impact on the company™s financial statements. What are the key assumptions
behind these policies? Do you think that these assumptions are justified?
2. Evaluate the company™s financial and operating performance during 1986 and the
first nine months of 1987.
3. Given the company™s business strategy, accounting policies, and recent performance,
what is your assessment of its current condition and future potential?
Liability and Equity Analysis

5-25 Part 2 Business Analysis and Valuation Tools

Performance of Manufactured Homes™ Common Stock and S&P 500 Stock Index
Relative to Their Levels on January 2, 1987
Performance of Manufactured Homes™ Common Stock and S&P 500 Stock Index

Manufactured Homes



1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/1 1/1 2/1 3/1

Manufactured Homes Common Stock S&P 500 Stock Index

Manufactured Homes™
Stock Price S&P 500
January 2, 1987 $ 9.000 246.45
March 1, 1988 14.875 267.82
Value Line estimated β 1.05 1.0
192 Liability and Equity Analysis

Liability and Equity Analysis

Manufactured Homes, Annual Report for the Year Ended December 31, 1986
Chairman™s Letter to Stockholders
The year 1986 was a period of signi¬cant accom- While we are extremely pleased with our revenue
plishment for your company which served to performance, we are also mindful that we must
strengthen our leadership position in the manufac- operate pro¬tably. Net earnings per share for 1986
tured homes industry. The results achieved were the were only 53 cents. The sharp decline in 1986 earn-

Manufactured Homes
culmination of a corporate development plan set in ings is directly related to a fourth quarter net loss of
motion years ago. For the fourth consecutive year $1,347,642. Charges against earnings in the fourth
revenues reached record levels, $120 million com- quarter for losses on credit sales and other charges
pared with $80 million in 1985. We are now one of totaling more than three million dollars, coupled
the largest retailers of manufactured, single-family with the cost of strengthening your company™s posi-
homes in the nation. tion in the marketplace, created a temporary set-
back in earnings while establishing a basis for a
As part of our long-term efforts to increase market
strong 1987.
share, we added 39 retail outlets, bringing the total
to 114 at year end. We now have retail outlets in A strategic plan can only be con¬rmed as correct
seven states that combined represent approximately when tested by adversity; and last year was some-
40 percent of the total U.S. market for manufactured thing of an acid test for our industry. During 1986,
homes. many retailers, in hopes of gaining greater market
share, or in some cases hoping for survival,
We continue to be primarily a sales and marketing
engaged in excessive price cutting. In addition,
company with manufacturing and retail ¬nancing
¬nancial institutions in response to concern over the
on a limited basis to support the company™s growth
economy in some geographic areas tightened their
policies. We not only dealt with the problems that
We completed a major ¬nancing in April 1986 and confronted us but turned some into opportunities.
a second ¬nancing in February 1987, both man-
Over the years management has made it a practice
aged by Wertheim Schroder and Company, that
to monitor the various retailers of the manufactured
totaled $43 million. A portion of the proceeds was
homes in our operating area. First, we wanted to
used to pay down variable rate debt associated with
understand our competition; and second, we were
inventory ¬nancing with ¬xed rate debt and save
looking for acquisition candidates. From a large list
money in the process. The remainder of the pro-
of companies, we singled out those that best met
ceeds is to be used for general corporate purposes.
our standards of performance. We wanted only
We were pleased at the recognition we received for
those ¬rms with superior management and sales
the growth we have achieved over the last four years
teams. We were able to acquire two of these ¬rms
as both Business Week and INC. Magazine included
on favorable terms and left management in place.
our company in their lists of the fastest growing
As a result we succeeded in not only enlarging our
companies in America. Some describe our growth
market penetration in our traditional states of North
as explosive. We, however, consider these accom-
Carolina, South Carolina, Georgia, Florida and
plishments a direct result of a well-structured and
Alabama, but were able to enter new markets with
carefully executed corporate development plan. Our
nine retail outlets in Virginia and West Virginia and
plans for growth are founded on the basic premise
six additional outlets in Alabama.
that expansion not exceed our ability to manage our
affairs. Our independent dealer network continues to grow,
From $11 million in revenues in 1983 and a posi- and now numbers 26 in ¬ve states. The independent
tion of near obscurity in the industry, our progress dealer program offers important advantages and
has led us to a position of leadership in the industry. opportunities. Because of the advantages we bring
Liability and Equity Analysis

5-27 Part 2 Business Analysis and Valuation Tools

to these small dealers, we continue to receive more tion. We ask only that they perform to the highest
requests to join our team. level of ability and be innovative in terms of how we
can best operate our business.
During the last half of 1986 we sacri¬ced short-term
We believe that the results of the past four years
results to increase market share. We attained that
speak for themselves in terms of the invaluable con-
share and as expected it cost us dearly. Selling, gen-
tributions made by our management team and
eral and administrative expense increased from an
average of $4.5 million in the ¬rst and second quar-
ters to $6 million in the third quarter and to $8 mil-
lion in the fourth quarter. Industry Profile
Manufactured Homes

As we look to 1987, it is with the knowledge that we
The manufactured homes industry is fragmented. At
are working from a solid foundation. Our ¬nancial
this time there are approximately 10,000 manufac-
position is strong. Our debt service requirements are
tured home retailers throughout the nation, most of
manageable without impairing future earnings per-
which fall into the category of “mom and pop” oper-
formance. Our retail network continues to mature,
ations. The industry is presently undergoing a period
and sales by location will increase.
of transition and consolidation. More and more of
Our goal in 1987 is to maintain our market share the smaller ¬rms, lacking volume buying power and
and show a substantial increase in pro¬t margins. adequate capitalization, are disappearing or
Your Board of Directors has shown con¬dence in our becoming a part of a larger company like Manufac-
ability to perform by authorizing me to give you a tured Homes.
conservative estimate of our 1987 revenues. Our
The industry has always been competitive but has
¬rst quarter revenues are expected to be $32 million
become more so in recent years. The continuing
with earnings per share of 24 cents. If current eco-


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