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increases in the average price of conventional hous-
nomic conditions continue, we expect 1987 reve-
ing have forced low income families to seek other
nues to be $140-145 million. The expected
alternatives. And more and more are turning to
signi¬cant increase in margins should make this a
manufactured homes, which have much more to
great year.
offer than an apartment with the added advantage
I am grateful for the con¬dence and support of our of equal to lower monthly payments.
employees, ¬nancial institutions, suppliers and cus- In the past, the manufactured home industry suf-
tomers; and to you, our shareholders, I would like to fered from consumer misconceptions created in
say a special “Thanks!” large part by the use of the term “mobile home.”
While manufactured homes can be transported
Robert M. Sauls from place to place, only ¬ve percent are ever relo-
Chairman of the Board, President cated once in place. In addition, 60 percent of all
and Chief Executive Of¬cer homes sold are placed on private property.
Furthermore, the features offered in today™s homes
Operating Philosophy are equal to that found in conventional housing but
at far less cost.
We are convinced that a company is no better than
the people selected to manage its affairs. Quality of Industry estimates indicate there are 12 million peo-
product and service are vital to any successful enter- ple living in 6 million manufactured homes. Because
prise; but again without quality managers and line of the quality and price advantage, this number is
employees, the business will not succeed. Manufac- expected to increase on a year-to-year basis for the
tured Homes has consistently sought and employed foreseeable future.
only the highest quality individuals at every level As competition for market share increases, compa-
within the organization. nies like Manufactured Homes will bene¬t if for no
It is our practice to provide our employees, at all lev- other reason than the ¬nancial advantages volume
els with suitable working conditions and remunera- buying affords. This is the primary reason so many
194 Liability and Equity Analysis

Liability and Equity Analysis

independent dealers are actively seeking a working has become a graveyard for many manufactured
relationship with our company. The same can be home retail companies.
said of those companies willing to be acquired. Like many other retail businesses, presence in the
marketplace is critical. After determining to concen-
Retail Operations trate in the seven states management selected,
North Carolina, South Carolina, Georgia, Ala-
bama, Florida, Virginia and West Virginia, we
During 1986 we sold 6,239 new and used homes, a
moved aggressively to open new retail outlets and
61 percent increase over the previous year. These
acquire others. In 1983, we had 13 retail outlets; in
sales generated $113 million in revenues or 46 per-

Manufactured Homes
1984, the number was 32 and as of March 31,
cent above the previous year. With our enlarged
1987 it™s 120.
retail network in place, we anticipate that sales will
again reach record levels in 1987. One of the major keys to success for our company is
the insistence that our retail people listen to the cus-
The potential market for manufactured homes
tomers in terms of interior design and features.
includes individuals seeking a single-family resi-
When we sense a major trend developing, we go to
dence, but lacking the ability to purchase conven-
our suppliers seeking what eventually becomes an
tional housing. In addition, these homes are sold to
entire new line of homes.
retirees and those wanting a second home for vaca-
tion purposes. The latter two groups are increasing We also provide important incentives for our retail
in great numbers as our population grows older. managers and sales force. Our base salaries are
However, for our company we have concentrated on among the ¬nest in the industry, and we add to that
a single portion of the marketplace, those individu- a bonus incentive plan tied directly to margin perfor-
als in the low income category. This market segment mance. When times require, we can deal with com-
is in great numbers in our seven-state operating petitive pricing, but our goal is to maximize sales
area as well as other parts of the nation. without sacri¬cing margins.
Manufactured Homes had its beginning 11 years
ago in Winston-Salem, North Carolina. We began
with one retail outlet. Our initial growth took place We acquired a manufacturing facility but not as a
in North Carolina and eventually South Carolina. means of competing with the major manufacturers.
These two states accounted for 90 percent of sales In fact, last year we were the largest single retailer of
in 1985. To continue to market only in these two Fleetwood and Redman homes, two of the nation™s
states eventually could have resulted in corporate largest builders of manufactured homes. We
stagnation. In 1983, the year we became a publicly- acquired the facility to safeguard the company dur-
held company, we began to formulate what might ing periods when demand for homes outpaced sup-
be best termed as a geographic expansion plan. ply. It also provides the opportunity to manufacture
The real question was, in which states could we especially designed homes in smaller numbers,
operate most effectively and pro¬tably. thereby eliminating the major commitment that
would be required by unaf¬liated suppliers.
Our initial planning went beyond the southeastern
states, which remain the largest single regional The ¬rm we acquired was Craftsman Homes, and
source of manufactured home sales. We looked at a we continue to manufacture under this brand name.
number of states including Texas which, at the time, When we acquired the company in 1985, it was
was the number one state in manufactured home producing one home per day. That operation is now
sales. After careful evaluation, we concluded that producing ten ¬‚oors per day. Large numbers of our
our interests and those of our stockholders would customers have been asking for more entertainment
best be served in the southeastern portion of the features in the home. With our manufacturing capa-
United States. Texas was the most tempting, but it bilities, we have responded with a home we call the
was obvious to management that the reward was Entertainment Center, and sales have been most
not worth the risk; and as time has proven, Texas rewarding.
Liability and Equity Analysis

5-29 Part 2 Business Analysis and Valuation Tools

We have no immediate need nor intention to refurbish them and have them resold, normally
enlarge this facility. As it stands, manufacturing can within 60 to 90 days, at a price equal to or greater
make important contributions, but we can also put than the loan payoff.
this operation on hold without damage to either rev- We also make provisions for those instances when
enues or earnings. loan losses do occur. Based on our historical experi-
ence, we now maintain a ¬nancial reserve equal to
Financial Considerations 1.7 percent of total net contingent liability for credit
sales. Our annual loan loss provisions have consis-
Believing that interest rates will eventually return to
tently exceeded actual losses by more than 20 per-
the double digit range, we have been successful in
Manufactured Homes

cent, even though homes which have been sold for
replacing our variable rate debt with ¬xed rate debt.
four or more years are seldom repossessed. Finance
In April 1986, we completed an $18 million private
participation is an important source of income for
placement of 9% convertible subordinated notes,
the Company. Simply, funds derived from ¬nance
due 2001. The notes are convertible into common
participation is the “spread” between the ¬nance
stock at $17.50 per share. The notes were pur-
charges included in the mortgage agreement initi-
chased by Prudential Insurance Company of Amer-
ated by the Company and those required by the
ica and Equity-Linked Investors.
¬nancial institution. A portion of the “spread” is paid
In February 1987, we completed a private place- in cash to the Company and the remainder over the
ment of $25 million of unsecured senior notes in life of the mortgage contract. The portion retained
two series. Series A notes, due 1990, were issued by the ¬nancial institution is accounted for by dis-
in the amount of $15 million at an interest rate of counting to present value based on the time period,
8.64%. Series B notes, due 1992, were issued in the normally 120 to 180 months, required to actually
amount of $10 million at an interest rate of 9.42%. collect the funds.
The entire placement was managed by Wertheim
Schroder and Co. and purchased by Prudential
Financial Services Subsidiary
Insurance Company of America, and we are grati-
¬ed with the trust they have placed in the future of Plans for our ¬nance operations, MANH Financial
Manufactured Homes. Services Corp., are similar in nature to that for our
manufacturing division. The company did not enter
There are four key elements that bear on our ¬nan-
this business segment to compete with the ¬nancial
cial performance related to the sale of homes. These
institutions that have historically provided our mort-
elements are repossessions, recourse ¬nancing,
gage banking requirements. This new entity will be
loan losses and ¬nance participation.
employed primarily to facilitate ¬nancing agree-
In almost all cases mortgages executed by the Com-
ments with our banks.
pany are sold to ¬nancial institutions. At this
Financial Services does have mortgage lending
moment all of the elements mentioned come into
capabilities that will only be employed at those times
play. The recourse ¬nancing provision requires that
when our conventional banking arrangements are
the Company reassume ownership of the home
unable to act on a timely basis. Again, like our man-
when the buyer becomes in default of mortgage
ufacturing operations, management has no inten-
payments. We knew this when the company was
tion of expanding Financial Services. As it exists now,
started 11 years ago, and the actions required to
it provides the Company with the ¬‚exibility required
deal with this situation are a part of each year™s
to deal quickly with mortgage ¬nance transactions.
operating plan.
The possibility of repossessions is another reason for
selecting the low income segment of the market-
place. Families in this category will make extreme
sacri¬ces to save their homes. We experience one of
the lowest repossession rates in the industry. Of the
homes returned, we move quickly to renovate and
196 Liability and Equity Analysis

Liability and Equity Analysis

Selected Financial Data

Years Ended December 31, 1986 1985 1984 1983 1982

Operating Results:
Revenues $120,264,954 $79,525,988 $36,195,802 $10,986,036 $7,477,966
Earnings (loss) before cumu-
lative effect of change in
accounting principle1 2,033,425 3,718,325 2,694,529 536,881 (59,570)
Earning (loss) per share .53 .98 .77 .21 (.03)

Manufactured Homes
Net earnings (loss) 2,033,425 3,213,754 2,694,529 536,881 (59,570)
Net earnings (loss) per share .53 .85 .77 .21 (.03)
Financial Position at Year-End:
Total assets $81,377,803 $50,944,924 $17,660,984 $6,836,087 $5,025,130
Long-term debt 18,609,987 1,082,543 400,000 ” 491,280
Stockholders™ equity 14,167,119 11,052,759 7,633,005 4,938,654 733,195
Working capital 15,111,883 4,820,912 4,819,203 3,699,184 (147,124)

Quarterly Financial Data (unaudited)

Quarter First Second Third Fourth Total

Revenues $23,324,633 $29,724,418 $33,295,241 $33,920,662 $120,264,954
Net earnings (loss) 641,702 1,562,205 1,177,160 (1,347,642) 2,033,425
Net earnings (loss) per share .17 .40 .30 (.36) .53
Average shares and equiva-
lents 3,850,277 3,944,518 3,922,406 3,733,968 3,864,161
Revenues $10,965,457 $22,103,134 $24,083,556 $22,373,841 $ 79,525,988
Earnings before cumulative
effect of change in
accounting principle1 741,395 1,312,511 1,112,714 551,705 3,718,325
Earnings per share .21 .34 .29 .14 .98
Net earnings 236,824 1,312,511 1,112,714 551,705 3,213,754
Net earnings per share .08 .34 .29 .14 .85
Proforma amounts:
Net earnings 741,395 1,312,511 1,112,714 551,705 3,718,325
Net earnings per share .21 .34 .29 .14 .98
Average shares and equiv-
alents 3,488,968 3,820,016 3,870,857 3,838,486 3,802,693

See Note 2 of notes to consolidated ¬nancial statements for information regarding a change in accounting principle for ¬nance
participation income in 1985.
During the fourth quarter of 1986, the Company provided approximately $3,000,000 for losses on credit sales, primarily due to industry
conditions, which are causing unusually high costs relating to the repossession of homes. In addition, the Company incurred abnormal
costs in the fourth quarter of approximately $300,000 relating primarily to the write-off of previously recognized ¬nance participation
income. The aggregate provision for these items amounted to approximately $3,300,000 in the fourth quarter. The Company cannot
determine the extent to which these fourth quarter provisions may be applicable to the ¬rst, second and third quarter of 1986.
Liability and Equity Analysis


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