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5-43 Part 2 Business Analysis and Valuation Tools




Note 7
Reserve for Losses on Credit Sales
An analysis of the reserve for losses on credit sales follows:

Years Ended
December 31, 1986 1985 1984

Balance at beginning of year $1,863,992 $ 406,394 $197,165
Amount at date of acquisition applicable to acquired
companies, less actual charges of $69,236 in 1986
Manufactured Homes




and $604,403 in 1985 367,429 1,070,597 74,615
Provision for losses 3,777,900 793,497 253,004
Actual charges (3,009,321) (406,496) (118,390)
Balance at end of year $3,000,000 $1,863,992 $406,394


Note 8
Accrued Expenses and Other Liabilities
A summary of accrued expenses and other liabilities follows:

December 31, 1986 1985

Payroll and related costs $1,580,235 $ 697,287
Other 1,151,689 526,015
$2,731,924 $1,223,302


Note 9
Floor Plan Notes Payable
A substantial portion of the Company™s new manufactured home inventories are ¬nanced
through ¬‚oor plan arrangements with certain unrelated ¬nancial institutions. A summary
of ¬‚oor plan notes payable follows:

December 31, Rate Floor Plan Lines 1986 1985

General Electric Credit Corporation Prime + 1.75 (9.25%) $27,052,000 $22,601,520 $17,183,988
ITT Diversi¬ed Credit Corporation Prime + 2.00 (9.50%) 7,200,000 5,869,438 5,224,373
CIT Financial Services Prime + 2.00 (9.50%) 4,000,000 3,958,932 1,761,854
Whirlpool Acceptance Corporation Prime + 1.50 (9.00%) 1,500,000 1,210,586 ”
U.S. Home Acceptance Prime + 0.00 (7.50%) 1,000,000 36,680 815,066
Citicorp Acceptance Company, Inc. Prime + 2.00 (9.50%) 975,000 ” 1,706,728
Others Various 1,850,000 1,530,230 776,144
$43,577,000 $35,207,386 $27,468,153


The ¬‚oor plan liability at December 31, 1986 is collateralized by inventories and contract
proceeds receivable from ¬nancial institutions. The ¬‚oor plan arrangements generally
require periodic partial repayments with the unpaid balance due upon sale of the related
collateral.
210 Liability and Equity Analysis




5-44
Liability and Equity Analysis




The weighted average interest rate paid on the outstanding ¬‚oor plan liability was 10.9%,
11.0%, and 14.7% for 1986, 1985, and 1984, respectively. The maximum amount out-
standing at any month end during each year was $35,207,386 for 1986, $27,468,153
for 1985, and $4,508,319 for 1984, with a weighted average balance outstanding for
each year of approximately $25,500,000, $16,000,000 and $3,750,000, respectively.

Note 10
Long-Term Debt
A summary of long-term debt follows:




Manufactured Homes
December 31, 1986 1985

9% convertible subordinated notes payable, due in annual installments of
$1,800,000 beginning May 15, 1992 through May 15, 2001 $18,000,000 ”
Note payable, due in monthly installments of $66,667 through October 1, 1987,
interest at prime rate (71„2% at December 31, 1986) and collateralized by prop-
erty, plant and equipment with a depreciated cost of $1,160,640 666,670 1,466,667
Obligation payable in January 1988, interest at the prime rate (7 1„2% at December
31, 1986) and collateralized by the common stock of Country Squire Mobile
Homes, Inc. (Note 3) 396,000 ”
Obligation payable in annual installments of $200,000 through April 15, 1987,
repaid in 1986 ” 400,000
Various notes payable, due in monthly installments, including interest at rates
ranging from 8% to 18% 358,218 316,500
19,420,888 2,183,167
Less current installments 810,901 1,100,624
$18,609,987 $1,082,543


The aggregate annual maturities of the long-term debt for the ¬ve years following
December 31, 1986 are: 1987, $810,901; 1988, $508,497; 1989, $53,498; 1990,
$33,255; 1991, $14,737.
Pursuant to an agreement dated April 25, 1986 (the “1986 Agreement”), the Company
sold its Convertible Subordinated Notes due May 15, 2001, in the amount of
$18,000,000 to two lenders. The proceeds from these notes have been used principally
to reduce ¬‚oor plan notes payable. The notes are convertible into shares of the Com-
pany™s common stock at the conversion price of $17.50 per share. The conversion price
is subject to adjustment in the event of stock dividends, stock splits, payment of extraordi-
nary distributions, granting of options or sale of additional shares of common stock. The
notes are subject to prepayment at the option of the Company between October 28,
1986 and May 15, 1996 at 100% of par if for a speci¬ed period preceding the written
notice of prepayment the closing market price per share of the Company™s common stock
is equal to or greater than a percentage of the conversion price. Such percentage
decreases from 200% through May 15, 1989 to 110% at May 15, 2001. The 1986
Agreement contains various restrictive covenants which include, among other things,
maintenance of a minimum level of working capital as de¬ned, maintenance of a mini-
mum level of net earnings available for ¬xed charges as de¬ned, consolidated current
assets as de¬ned, equal or greater than senior debt, payment of cash dividends and the
creation of additional indebtedness.
211
Liability and Equity Analysis




5-45 Part 2 Business Analysis and Valuation Tools




Subsequent to December 31, 1986 and pursuant to Components of income tax expense (bene¬t) are as
an agreement dated February 13, 1987 (the “1987 follows:
Agreement”), the Company sold the Prudential
Years Ended
Insurance Company of America Series A and Series
December 31, 1986 1985 1984
B Senior notes in the aggregate of $25,000,000.
The Series A notes in the amount of $15,000,000 Current:
bear interest at the rate of 8.64% and are due Feb- State $ 550,653 $ 342,085 $ 166,000
ruary 15, 1990. The Series B notes in the amount of Federal 3,942,668 2,366,685 1,075,000
$10,000,000 bear interest at the rate of 9.42% and 4,493,321 2,708,770 1,241,000
Deferred:
are due February 15, 1992. The proceeds from
Manufactured Homes




State (305,198) 20,529 143,000
these notes have been used partially to reduce ¬‚oor
Federal (2,167,428) 147,936 1,073,000
plan notes payable and the remainder added to
(2,472,626) 168,465 1,216,000
corporate funds. The 1987 Agreement also contains
$2,020,695 $2,877,235 $2,457,000
restrictive ¬nancial covenants. The 1987 Agreement
¬nancial covenants were changed to re¬‚ect more
A reconciliation of the statutory Federal income tax
accurately the Company™s current ¬nancial structure.
rate with the Company™s actual income tax rate
follows:
Concurrent with the execution of the 1987 Agree-
ment, the ¬nancial covenants contained in the 1986
Years Ended
Agreement were amended to conform to the cove-
December 31, 1986 1985 1984
nants in the 1987 Agreement. At December 31,
Statutory Federal income
1986, the Company was in compliance with the var-
tax rate 46.0% 46.0% 46.0%
ious restrictive covenants in the 1986 Agreement
State income tax rate less
with the exception of the net earnings available for
applicable Federal
¬xed charges covenant. The Company was in com-
income tax bene¬t 3.2 3.2 3.2
pliance with all of the restrictive covenants in the
Investment and jobs tax
1986 Agreement, as amended. Retained earnings credit ” (1.2) (.4)
available for the payment of cash dividends Nontaxable items “ net 1.1 (.2) .2
amounted to $1,516,712 at December 31, 1986. Other “ net (.5) (.6) (1.3)
Actual income tax rate 49.8% 47.2% 47.7%
Note 11
The sources of deferred income tax expenses (bene-
Income Taxes
¬ts) and their tax effects are as follows:
Income taxes are re¬‚ected in the consolidated state-
ments of earnings as follows:

Years Ended
December 31, 1986 1985 1984
Before cumula-
tive effect of
change in
accounting
principle $2,020,695 $3,327,224 $2,457,000
Cumulative
effect on prior
years of
change in
accounting
principle ” (449,989) ”
$2,020,695 $2,877,235 $2,457,000
212 Liability and Equity Analysis




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Liability and Equity Analysis




than fair market value at date of grant. The Plan
Years Ended
expires June 13, 1993.
December 31, 1986 1985 1984
Provision for Activity and price information regarding the plan
losses on follows:
credit sales $(1,622,079) $743,032 $705,000 Option
Finance partici- Shares Price Range
pation
Balance December 31, 1983 104,750 $2.40“ $3.20
income (778,939) (521,030) 453,000
Granted 119,250 $2.40“ $3.75
Operating loss
Canceled (20,500) $3.20
and tax credit




Manufactured Homes
carryforwards ” ” 244,000 Balance December 31, 1984 203,500 $2.40“ $3.75
Manufacturers™ Granted 297,600 $4.06“$11.25
volume Canceled (5,250) $2.40“ $3.75
bonuses (105,058) (32,062) (203,000) Balance December 31, 1985 495,850 $2.40“$11.25
Depreciation 103,519 50,415 17,000 Granted 32,300 $11.00“$17.50
Accrued (245,00
compensation 63,027 (101,434) ” Exercised 0) $2.40“ $4.06
Allowance for Canceled (18,250) $2.70“$10.38
doubtful Balance December 31, 1986 264,900 $2.40“$17.50
accounts ” 29,544 ”
Other “ net (133,096) ” ”
At December 31, 1986, options for 17,000 shares
$(2,472,626) $168,465 $1,216,000
were currently exercisable. The remaining options
become exercisable through the expiration date of
The operating loss and tax credit carryforwards in
the Plan. The excess, if any, of the fair market value
1984 represent the reinstatement of deferred tax
at date of grant over the exercise price of nonquali-
credit recognized in previous years for ¬nancial
¬ed options is considered compensation and is
reporting purposes.
charged to operations as earned. For 1986 and
The Tax Reform act of 1986 will bene¬t the Com- 1985, the charge to operations was $142,000 and
pany through a reduction of the statutory Federal $206,000, respectively. No options were granted at
income tax rate. prices lower than fair market value prior to 1985.
Note 12 At December 31, 1986, 1,534,971 shares of the
Common Stock Company™s authorized common stock were
reserved for issuance as follows: 142,500 shares for
In connection with a public offering of common stock
the outstanding warrants, 363,900 shares for the
in 1983, the Company sold to the primary underwriter

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