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Incentive Stock Option Plan, and 1,028,571 shares
warrants to purchase 142,500 shares of common
for the convertible subordinated notes.
stock at a price equal to 120% of the public offering
price. The warrants are exercisable for a four-year
Note 13
period beginning in 1984 at $3.84 per share. On
Commitments and Contingent Liabilities
June 14, 1983, the Board of Directors approved an
Incentive Stock Option Plan and reserved 608,900 The Company leases of¬ce space, the majority of its
shares of the Company™s authorized common stock retail sales centers and certain equipment under
for award to of¬cers, directors and key employees. noncancellable operating leases that expire over the
Under the Plan, options are granted at the discretion next ¬ve years. Total rental expense under such
of a committee appointed by the Board of Directors leases amounted to $1,335,809 in 1986, $888,719
and may be either incentive stock options or nonqual- in 1985, and $433,759 in 1984. Approximately
i¬ed stock options. Incentive options must be at a price 10%, 18%, and 22%, respectively, of such amounts
equal to or greater than fair market value at date of were paid to the Company™s majority stockholder
grant. Nonquali¬ed options may be at a price lower and the of¬cers of certain subsidiaries.
213
Liability and Equity Analysis




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Future minimum payments under noncancellable Note 14
operating leases as of December 31, 1986 follow: Supplementary Income Statement Information

Year Ending December 31, Minimum Payments Advertising costs amounted to $1,569,658,
$1,021,978 and $311,285 in 1986, 1985 and
1987 $1,298,346
1984, respectively. Maintenance and repairs, depre-
1988 787,572
ciation and amortization of intangible assets, pre-
1989 498,572
operating costs and similar deferrals, taxes, other
1990 312,510
than payroll and income taxes, and royalties did not
1991 192,912
exceed 1% of revenues in 1986, 1985 or 1984.
$3,089,912
Manufactured Homes




At December 31, 1986 the Company was contin-
gently liable as guarantor on approximately $180
million (net) of installment sales contracts sold to
¬nancial institutions on a recourse basis. [Case
writer™s note: This contingent liability was $150 mil-
lion at December 31, 1985, $116 million at
December 31, 1984, and $45 million at December
31, 1983.]




REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

THE BOARD OF DIRECTORS AND STOCKHOLDERS MANUFACTURED HOMES, INC.:

We have examined the consolidated balance sheets of Manufactured Homes, Inc. and
subsidiaries as of December 31, 1986 and 1985 and the related consolidated statements
of earnings, stockholders™ equity and changes in ¬nancial position for each of the years in
the three-year period ended December 31, 1986. Our examinations were made in accor-
dance with generally accepted auditing standards and, accordingly, included such tests of
the accounting records and such other auditing procedures as we considered necessary in
the circumstances.

In our opinion, the aforementioned consolidated ¬nancial statements present fairly the
¬nancial position of Manufactured Homes, Inc. and subsidiaries at December 31, 1986
and 1985 and the results of their operations and the changes in their ¬nancial position for
each of the years in the three-year period ended December 31, 1986, in conformity with
generally accepted accounting principles consistently applied during the period except for
the change, with which we concur, in the method of recording the uncollected portion
of ¬nance participation income as explained in Note 2 to the consolidated ¬nancial
statements.

PEAT, MARWICK, MITCHELL & CO.
Charlotte, North Carolina
March 10, 1987
214 Liability and Equity Analysis




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Liability and Equity Analysis




EXHIBIT 3
Manufactured Homes, Consolidated Financial Statements for the First Nine Months
of 1987

CONSOLIDATED BALANCE SHEETS (unaudited)

September 30, December 31,
1987 1986




Manufactured Homes
ASSETS
Current Assets:
Cash and cash equivalents:
Cash and temporary investments (includes) $5,212,849 of
restricted cash in 1987 $9,311,240 $2,486,024
Contract proceeds receivable from ¬nancial institutions 17,435,191 11,496,098
Total cash and cash equivalents 26,746,431 13,982,102
Finance participation receivable - current portion 4,572,042 2,691,497
Deferred ¬nance participation income (1,208,275) (801,511)
Net ¬nance participation receivable 3,363,767 1,889,986
Installment sales contracts held for resale (less unearned interest
of $3,648,675) 2,382,573 ”
Other receivables 6,343,052 3,746,863
Refundable income taxes ” 778,971
Inventories 41,638,452 38,163,712
Prepaid expenses 587,749 538,419
Deferred income taxes 1,000,262 761,262
Total current assets 82,062,286 59,861,315
Finance participation receivable - noncurrent portion 25,020,194 16,128,799
Deferred ¬nance participation income (5,984,910) (3,923,178)
Net ¬nance participation receivable 19,035,284 12,205,621
Property, plant and equipment, at cost 9,248,065 7,504,272
Accumulated depreciation and amortization (3,166,445) (2,410,812)
Net property, plant and equipment 6,081,620 5,093,460
Deferred income taxes 1,847,735 ”
Excess of costs over net assets of acquired companies, less
amortization 2,130,099 2,107,874
Other assets 1,446,657 2,109,533
$112,603,681 $81,377,803
(continued)
215
Liability and Equity Analysis




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September 30, December 31,
1987 1986

LIABILITIES AND STOCKHOLDERS™ EQUITY
Current liabilities:
Notes payable $ ” $ 1,099,971
Long-term debt”current installments 90,038 810,901
Floor plan notes payable. 28,306,796 35,207,386
Accounts payable 8,181,736 4,899,250
Manufactured Homes




Income taxes 2,469,015 ”
Accrued expenses and other liabilities 5,351,963 2,731,924
Total current liabilities 44,399,548 44,749,432
Long-term debt - noncurrent installments 43,000,000 18,609,987
Reserve for losses on credit sales 4,850,000 3,000,000
Deferred income taxes ” 851,265
Total liabilities 92,249,548 67,210,684
Stockholder™s equity:
Common stock”$.50 par value per share; authorized 10,000
shares; issued and outstanding 3,777,168 shares in 1987
and 3,733,968 in 1986 1,888,584 1,866,984
Additional paid-in capital 3,830,314 3,508,351
Retained earnings 14,635,235 8,791,784
Total stockholders™ equity 20,354,133 14,167,119
$112,603,681 $81,377,803
216 Liability and Equity Analysis




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Liability and Equity Analysis




CONSOLIDATED STATEMENT OF EARNINGS (unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,

1987 1986 1987 1986

Revenues:
Net sales $44,590,244 $29,464,161 $126,599,392 $76,396,868
Finance participation income 8,439,473 3,277,085 18,895,975 8,629,223




Manufactured Homes
Insurance commissions 291,868 180,870 976,128 465,577
Interest 373,415 98,327 925,116 230,602
Other 534,916 121,378 786,971 221,448
Total revenues 54,229,916 33,141,821 148,183,582 85,943,718
Costs and expenses:
Cost of sales 36,325,647 23,741,484 101,997,757 61,554,367
Selling, general and adminis-
trative 10,806,534 5,905,930 27,973,865 14,823,385
Provision for losses on credit
sales 1,096,027 294,716 3,203,913 772,417
Interest 1,568,906 877,531 4,416,596 2,303,482
Total costs and expenses 49,797,114 30,819,661 137,592,131 79,453,651
Earnings before income taxes 4,432,802 2,322,160 10,591,451 6,490,067
Income taxes 2,038,000 1,145,000 4,748,000 3,109,000
Net earnings $2,394,302 $1,177,160 $5,843,451 $3,381,067
Net earnings per share:
Primary $ .60 $ .30 $ 1.48 $ .87
Fully diluted $ .53 $ .28 $ 1.31 $ .83
217
Liability and Equity Analysis




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CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (unaudited)
Nine Months Ended September 30

1987 1986

Working capital was provided by:
Operations:
Net earnings $ 5,843,451 $ 3,381,067
Adjustments for items not requiring (providing) working capital:
Depreciation and amortization 921,388 664,769
Manufactured Homes




Noncurrent deferred income taxes (2,699,000) (345,000)
Provision for losses on credit sales, net of actual changes 1,850,000 (318,539)
Issuance of nonquali¬ed stock options 39,000 106,500
Finance participation income (18,895,975) (8,629,223)
Collections and net change in noncurrent portion of ¬nance partici-
pation receivable 12,066,312 5,019,381
Working capital used by operations (874,824) (121,045)
Proceeds from long-term debt 25,000,000 18,000,000
Exercise of stock options 304,563 1,060,805
Decrease in other assets 662,876 ”
25,092,615 18,939,760
Working capital was used for:
Net assets, exclusive of working capital, of acquired companies:
Finance participation receivable ” 349,749
Property and equipment ” 212,716
Other assets ” 509,514
Long-term debt ” (257,571)
Reserve for losses on credit sales ” (436,664)
Deferred income taxes ” 78,486
Excess of costs over net assets of acquired companies ” 867,849

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