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5-31 Part 2 Business Analysis and Valuation Tools




Common Stock Prices and Dividend Information

The Company™s common stock is traded on the American Stock Exchange under the sym-
bol MNH.

1986 1985

High Low High Low

First 15 3/4 10 8 3/4 4 3/8
Manufactured Homes




Second 16 1/2 12 1/4 13 1/4 8 1/4
Third 15 9 3/4 15 3/8 10 1/2
Fourth 12 8 7/8 14 8 3/4



The Company has never paid a cash dividend and does not intend to for the foreseeable
future. The weighted average number of shares outstanding for 1986 was 3,660,048
shares, for 1985 and 1984, 3,488,968 shares, for 1983, 2,588,518 shares and for
1982, 2,100,000 shares. The approximate number of stockholders at March 1987 was
2,000.


MANAGEMENT DISCUSSION AND ANALYSIS

The total number of new and used homes sold in
Results of Operations
1986 was 6,239, a 61% increase over the 3,866
1986 Versus 1985
homes sold in 1985. New home sales for both years
were 87% of total home sales.
The Company™s net sales in 1986 were
$106,095,667 compared with $68,674,779 in A manufactured home sales center usually experi-
1985, an increase of $37,420,888 or 54%. ences a ¬ve-year growth and development period.
The Manufactured Homes (AMEX Symbol: MNH)
The Company™s program of managed sales growth
sales center should develop a sales production level
resulted in greater penetration due to:
of at least 100 new homes per year at maturity,
although this average annual sales volume can vary
1986 1985 Increase
widely by geographic location. The Company in
An increase of 44% in 1986 averaged 47 new sales per sales center versus
the number of com- 45 in 1985. The average re¬‚ects the rapid expan-
pany-owned and
sion of new sales centers. Approximately 47% of the
operated sales
average potential capacity per sales center had
centers 92 64 28
been achieved, leaving signi¬cant growth potential
A 100% expansion of
within the Company™s current sales center network
the MANH Indepen-
without the need for signi¬cantly increasing the
dent Retailer net-
number of sales centers.
work 22 11 11
A total increase of New home sales were 80% single-wides in 1986, as
52% in sales cen-
compared with 84% in 1985. This re¬‚ects a shift to
ters for the year 114 75 39
more double-wides resulting from the acquisition of
198 Liability and Equity Analysis




5-32
Liability and Equity Analysis




two subsidiaries. In addition, a number of our cus- credit losses related to mortgage prepayments in
tomers are able to purchase double-wide homes order to address the prospects of mortgage interest
since interest rates are lower. However, the primary rates continuing to remain at present levels of 81„2 to
emphasis of MNH™s marketing plan continues to be 91„2 percent.
towards the less expensive, single-wide home which Repossessions of homes result primarily from cus-
¬ts the economic capability of a signi¬cant percent- tomers™ inability to meet their mortgage payment
age of potential customers within the MNH market commitment. Approximately 70% of all MNH credit
area of the ¬ve southeastern states, plus Virginia sales are with recourse, which means the Company
and West Virginia. will buy back from the ¬nancial institution holding a




Manufactured Homes
The average MNH selling price of new homes by customer™s mortgage those homes repossessed by
Company sales centers for 1986 was $17,300 ver- the mortgage holder which were originally sold by
sus $17,400 in 1985. The gross pro¬t margins were MNH subsidiaries.
unchanged for 1985. The Company™s experience related to repossessions
Craftsman Manufactured Homes, Inc., a wholly has shown very little change during the past
owned subsidiary of MNH, expanded its production ten years. However, during the fourth quarter of
capability from one production line to two. Revenues 1986, approximately $2,000,000 of repossession
in 1986 were in excess of $15,746,000 of which expense and interest chargebacks were experienced
$7,489,000 were direct sales to non-af¬liated deal- and charged off. Therefore, a charge to earnings,
ers with $8,257,000 being sold to Company sales for both prepayments and repossessions, was made
centers for resale. The Company purchased the and the reserve for credit losses was increased to
manufacturing facility in September 1985. The $3,000,000 at December 31, 1986.
Craftsman manufacturing subsidiary sold 481 One of the causes of the $2,000,000 charge was
homes directly to dealers not associated with MNH the refusal of some unrelated ¬nancial institutions to
in 1986 as compared with 130 homes in 1985. re¬nance the repossession that occurred in their
portfolio, and a second cause was that the Com-
Repossessions and Early Pay-offs
pany had to ¬nance them through MANH Financial
Services thereby having an immediate charge in
Manufactured housing, as an industry, has been sig-
¬nance participation on the pay-off and not recog-
ni¬cantly impacted by the slow economic growth of
nizing the ¬nance participation income of the resale.
the economy coupled with an extended period of
low interest rates. These factors are re¬‚ected by a During the ¬rst three quarters of 1986, the provision
year-to-year decrease in 1986 of 15% in manufac- for credit losses was approximately 1% of net sales.
tured homes sold throughout the Company™s market Due to the recent fourth quarter charges, manage-
area. ment will increase the provision for losses for 1987
to 11„2% of net sales as a precautionary measure
Lower interest rates have resulted in two noticeable
against future repossession and early pay-off.
shifts within the housing industry: (1) certain owners
may select conventional homes over manufactured
Finance Participation
homes; and (2) an intensive marketing effort by
¬nancial institutions for mortgage re¬nancing has Finance participation was $12,084,108 in 1986
resulted in many home owners re¬nancing their versus $9,715,558 in 1985, a 24.4% increase. As a
mortgages at lower interest rates, which for MNH percentage of net sales, it was 11.4% in 1986 com-
usually means a mortgage prepayment. pared with 14.1% in 1985. Several factors caused
The Company™s experience relative to prepayments the percentage of decrease in realized ¬nance par-
of home mortgages, until 1986, had been minor. ticipation: (1) increased cash sales; (2) increased
However, late in 1986, prepayments became a rec- non-recourse sales where no ¬nance participation is
ognized concern. Prepayment of mortgages caused received; (3) contributions of manufacturing to the
management to reevaluate certain assumptions sales volume where no ¬nance participation is
resulting in a signi¬cant increase in the reserve for received; and (4) a decrease in the interest rate
199
Liability and Equity Analysis




5-33 Part 2 Business Analysis and Valuation Tools




spread earned by the Company when the sales recourse. This aggressive marketing program was
contracts are sold to ¬nancial institutions. The designed to achieve momentum for a strong 1987,
decreased “spread” was the most important factor but increased SG&A expense signi¬cantly at the
in 1986 as two major ¬nancial institutions changed same time.
their “retail rate” and reduced the “spread” received Several other cost factors effecting SG&A expense
by the Company by 33%. were: (1) An increase in liability insurance rates on
policy renewals during 1986 at an annual rate 40%
Finance participation is an important part of the
higher than in 1985, or approximately an additional
Company™s revenue. This source of revenue is mon-
$350,000; and (2) the cost incurred during the year
itored closely and alternative sources of ¬nancing
Manufactured Homes




related to the completion of a 15-month standard-
are considered for customer mortgage funding on
ization of accounting procedures and data process-
an ongoing basis.
ing enhancement program which centralized the
Insurance Company™s management information with on-line
capability to each subsidiary. This is a signi¬cant
The Company earns commissions for writing home-
step forward in better data management and timely
owner insurance policies at the time of sale of the
preparation of ¬nancial information.
home and from renewal premiums. Income from
insurance sales was $721,758 in 1986 compared
Interest Expense
with $413,282 in 1985, a 75% increase.
Interest expense increased $1,543,352 to
Selling, General and Administrative $3,367,940 in 1986 from $1,824,588 in 1985, or
85%. The increase resulted from a $12,536,000
The Company™s selling, general and administrative
increase in total inventory and approximately an
expense (SG&A) has historically ranged around 17%
$8,000,000 increase in total receivables directly
of revenue. This range varies according to the Com-
related to the expansion of 39 sales centers in 1986.
pany™s growth pattern and marketing emphasis.
In 1986, the signi¬cant factors affecting the Com- Income Taxes
pany™s SG&A expense, which was 19% of revenue,
The Company™s effective income tax rate was 49.8%
were that: (1) the Company initiated a second pro-
in 1986 compared to 47.2% in 1985. This increase
duction line at its manufacturing plant; (2) acquired
resulted primarily from the elimination of investment
two additional subsidiaries ” Piggy Bank Homes of
tax credits under the Tax Reform Act of 1986.
Alabama and Jeff Brown Homes in Virginia and
West Virginia, in mid-September 1986; (3) initiated
Organization
two additional operating subsidiaries ” AAA Mobile
Each of the Company™s nine subsidiaries are pro¬t
Homes (formerly part of MNH), and MANH Inde-
centers. Each subsidiary has its own chief executive
pendent Retailers Corp. (formerly spread among
of¬cer with total pro¬t and loss responsibility. The
several subsidiaries for operational purposes); (4)
Company™s long-range plan for growth is by stra-
opened 13 new company sales centers; added 11
tegic acquisitions, expanding market share, and
independent dealers to the retail network; and (5)
developing management talent through a newly
formed MANH Financial Services Corp. as of Octo-
organized salesperson training program, all to meet
ber 1986. This expansion and realignment of sub-
the need of providing low-cost housing to the Amer-
sidiaries, which occurred mostly during the fourth
ican consumer.
quarter, were part of an overall marketing strategy
to more effectively penetrate the Company™s market.
Manufacturing
The signi¬cant increase in sales over 1985 of 54%
resulted from staf¬ng an additional 13 company- Craftsman Manufactured Homes, Inc., the MNH
owned sales centers, with special emphasis on manufacturing subsidiary, commenced operations in
bonus programs to sell aged inventory and homes September 1985. It has grown from virtually a start-
received in trade for new sales, as well as improving up operation to a sales volume in excess of
the percentage of homes which were sold with $15,000,000 in 1986. Approximately 57% of the
200 Liability and Equity Analysis




5-34
Liability and Equity Analysis




1,119 homes manufactured were sold to and sion of manufacturing sales which do not earn
through Company related sales centers. The bal- ¬nance participation income. Insurance commis-
ance of the homes were sold to non-related inde- sions, interest and other revenues increased propor-
pendent retailers. The Craftsman plant operates two tionally in relation to the increase in sales.
production lines with a plant capacity of approxi- Cost of sales as a percentage increased approxi-
mately 3,500 ¬‚oors (multi-section homes require mately 2% in 1985. This increase was due to the
more than one ¬‚oor) per year. substantial increase in sales to independent retailers
which traditionally have lower margins, and a slight
Financial Services
decrease in margins at Company-owned sales cen-




Manufactured Homes
MANH Financial Services Corp. was organized on ters. Selling, general and administrative expenses
October 14, 1986 to facilitate the marketing of new, increased in 1985 as a result of increased sales vol-
repossessed and pre-owned homes. Two major ume and re¬‚ect the increase in number of sales cen-
retail ¬nancial sources curtailed the purchase of ters and additional personnel to support our
conditional sales contracts which resulted in slow continued growth. Provision for losses on credit sales
response to contract applications and therefore lost remained relatively constant as a percentage of net
sales. The Company responded with the formation sales from 1984 to 1985. Interest rates were gener-
of MANH Financial Services Corp. to operate on a ally lower in 1985; however, total interest cost
limited basis. The growth of this subsidiary will increased signi¬cantly due to increased inventories
depend largely on whether or not the unrelated to support the added sales centers.

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