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” 1,324,079
Additions to property, plant and equipment 1,851,773 1,365,703
Current installments and repayment of long-term debt 609,987 1,015,876
Additions to other assets and excess costs 80,000 879,665
2,541,760 4,585,323
Increase in working capital $22,550,855 $14,354,437
Changes in working capital, by component:
Cash and cash equivalents $12,764,329 $ 6,425,144
Finance participation receivable - current portion 1,473,781 239,967
Installment sales contracts held for resale 2,382,573 ”
Other receivables 2,596,189 2,818,093
Refundable income taxes (778,971) ”
Inventories 3,474,740 6,923,301
Prepaid expenses 49,330 59,791
Deferred income taxes 239,000 52,001
Notes payable 1,099,971 (1,391,500)
Long-term debt - current installments 720,863 167,046
Floor plan notes payable 6,900,590 1,424,866
Accounts payable 3,282,486) (2,811,331)
Income taxes (2,469,015) 1,820,226
Accrued expenses and other liabilities (2,620,039) (1,373,167)
Increase in working capital $22,550,855 $14,354,437
218 Liability and Equity Analysis




5-52
Liability and Equity Analysis




Notes to Consolidated Financial Statements
1. Pursuant to an agreement dated February 13, 1987, the Company sold to Prudential
Insurance Company of America Series A and Series B Senior notes in the aggregate of
$25,000,000. The Series A notes in the amount of $15,000,000 bear interest at the rate
of 8.64% and are due February 15, 1990. The Series B notes in the amount of
$10,000,000 bear interest at the rate of 9.42% and are due February 15, 1992. The pro-
ceeds from these notes have been used partially to reduce ¬‚oor plan notes payable and
to fund the Company™s ¬nance subsidiary with the remainder added to working capital.
2. On August 18, 1987, the Company™s ¬nance subsidiary sold, with recourse, a port-




Manufactured Homes
folio of retail installment sales contracts with a principal balance of approximately
$8,300,000 to an unrelated ¬nancial institution. As a result, the Company recognized, in
the third quarter, ¬nance participation income, net of discounts and estimated future ser-
vicing costs, of $1,688,690. The terms of the sale required the Company to provide to
the unrelated ¬nancial institution as security against credit losses, an irrevocable reducing
letter of credit in the amount of $3,000,000 secured by a six-month renewable certi¬cate
of deposit equal in amount to the letter of credit. At September 30, 1987, approximately
$2,200,000 of the proceeds from the sale was held in an escrow account pending
receipt, from the appropriate state agencies, of the titles to certain of the new and pre-
owned homes securing the retail installment sales contracts in accordance with the terms
of the sale.
3. Primary earnings per share are based on the weighted average number of common
and common equivalent shares outstanding. Such average shares are as follows:

Three Months Ended Nine Months Ended
September 30, September 30,
1987 1986 1987 1986

Outstanding shares 3,773,894 3,726,427 3,758,245 3,635,137
Equivalent shares 205,159 195,979 187,848 272,150
3,979,053 3,922,406 3,946,093 3,907,287

The equivalent shares represent shares issuable upon exercise of stock options and war-
rants after the assumed repurchase of common shares with the related proceeds at the
average price during the period.
Fully diluted earnings per share are based on the weighted average number of common
and common equivalent shares outstanding plus the common shares issuable upon the
assumed conversion of the convertible subordinated notes and elimination of the applica-
ble interest expense less related income tax bene¬t. In determining equivalent shares, the
assumed repurchase of common shares is at the higher of the average or period-end
price.
4. Certain amounts in the 1986 ¬nancial statements have been reclassi¬ed to conform
to the presentation adopted in 1987.
5. In the opinion of management, all adjustments which are necessary for a fair presen-
tation of operating results are re¬‚ected in the accompanying interim ¬nancial statements.
All such adjustments are considered to be of a normal recurring nature.
219
Liability and Equity Analysis




5-53 Part 2 Business Analysis and Valuation Tools




MANAGEMENT™S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Results of Operations
The Company™s net sales for the three-month period ended September 30, 1987
were $44,590,244 compared to $29,464,161 for the comparable period of 1986, an
increase of 51%. Net sales for the nine-month period ended September 30, 1987 were
$126,599,392 compared to $76,396,868 for the comparable period of 1986, an
increase of 66%. These increases are due primarily to the acquisitions in September 1986
Manufactured Homes




of Jeff Brown Homes, Inc., with nine retail sales centers, and Piggy Bank Homes of Ala-
bama, Inc., with six retail sales centers, and the opening of 24 additional retail centers
between September 30, 1986 and September 30, 1987. In addition, the average number
of homes sold per retail sales center for the three-month and the nine-month periods
ended September 30, 1987 increased by 28% and 20% respectively, over the corre-
sponding periods of 1986.
Finance participation income for both the three-month and the nine-month periods
ended September 30, 1987 was greater as a percentage of net sales than in the compa-
rable periods of 1986 due primarily to improved ¬nancing terms from third-party ¬nance
sources and the sale in August 1987 of a portfolio of retail installment sales contracts with
a principal balance of approximately $8,300,000, which resulted in ¬nance participation
income of $1,688,690 net of discounts and estimated future servicing costs. This portfolio
consisted of retail installment sales contracts originated during 1987 and the fourth quar-
ter of 1986. Insurance commissions increased as a percentage of net sales due to added
emphasis being placed on this revenue source. Interest income increased signi¬cantly
due to an improved cash position in 1987 and the interest earned on retail installment
sales contracts while held in the Company™s ¬nance subsidiary. Other income increased
primarily due to a gain of $400,000 recognized in September 1987 on the cancellation
of a lease on one of the Company™s sales centers.
Cost of sales increased as a percentage of net sales for the three-month period
ended September 30, 1987 as compared to the corresponding period of 1986 primarily
as a result of extremely competitive market conditions. For the nine-month period ended
September 30, 1987, cost of sales as a percentage of net sales was unchanged from the
comparable period of 1986. Selling, general and administrative expenses were higher, as
a percentage of total revenues, for both the three-month and nine-month periods ended
September 30, 1987 as a result of expenses incurred for the following activities: the
acquisitions in September 1986 of Piggy Bank Homes of Alabama, Inc. and Jeff Brown
Homes, Inc.; the segregation and expanded operations of MANH Independent Retailers
Corp. and AAA Mobile Homes, Inc. as separate subsidiaries of the Company; the
increased number of retail sales centers; and the establishment in October 1986 of the
Company™s ¬nance subsidiary.
The provision for losses on credit sales, as a percentage of total revenues, increased
signi¬cantly for both the three-month and nine-month periods ended September
30,1987 as compared to the corresponding periods of 1986, primarily as a result of
industry-wide problems which became evident in the second half of 1986 and which
caused the Company to incur increased costs relating to the prepayment of retail install-
ment sales contracts, the repossession of homes and the resale of repossessed homes.
220 Liability and Equity Analysis




5-54
Liability and Equity Analysis




Interest rates were generally lower in 1987; however, total interest expense increased
signi¬cantly in 1987 due to increased borrowings to support additional retail sales cen-
ters and to fund the activities of the Company™s ¬nance subsidiary.

Liquidity and Capital Resources
Liquidity and capital resources were greater at September 30, 1987 than at Septem-
ber 30, 1986 due to the sale in February 1987 of $25,000,000 of unsecured senior
notes due in 1990 and 1992 bearing interest at a blended rate of 8.95% and to
increased ¬‚oor plan lines of credit. At September 30, 1987, the Company had available
$3,000,000 in a bank line of credit and approximately $18,500,000 in unused ¬‚oor




Manufactured Homes
plan lines of credit. In addition, the Company ¬led a registration statement with the Secu-
rities and Exchange Commission on September 22, 1987 for the proposed sale by the
Company of 1,200,000 shares of its previously unissued common stock. Due to recent
events in the ¬nancial market place, the status of this proposed sale is now uncertain.
The Tax Reform Act of 1986 is bene¬ting the Company through a reduction of the
corporate income tax rate. However, beginning January 1, 1987, the Act required the
Company to change from the reserve method to the direct write-off method for providing
for losses on credit sales, which is requiring the Company to accelerate the payment of
federal income taxes. However, the Company believes that funds to be generated by
operations, combined with ¬nancial resources and credit lines currently available, will be
suf¬cient to satisfy capital needs for current operations.
6
6 Re ve n ue An al ys is
chapter




Revenues are economic resources earned during a time period. Firms
earn revenues from a variety of different sources. Manufacturers of consumer goods earn
Business Analysis and 2
Valuation Tools


revenues from sales of their products to distributors and to consumers. Banks generate
revenues from interest earned from loans to borrowers. Insurance companies receive
premiums from policyholders. Lawyers receive fees from providing services to clients.
Leasing companies generate income from leasing assets to lessees.
Analysis of revenues focuses on assessing when it is appropriate to recognize reve-
nues in the ¬nancial statements. Should they be recorded when the service is provided
or the product is shipped? Should they be recorded when cash is received from the cus-
tomer? Or should they be recorded after cash is received and the customer has indicated
that the product or service was satisfactory?
Revenue recognition occurs when two critical uncertainties are resolved: the product
or service has been provided, and cash collection is reasonably likely. Management typ-
ically has the best information on these uncertainties. However, given management™s re-
porting incentives and the limitations of accounting rules discussed in Chapter 3, there
are opportunities for analysis of revenues by ¬nancial statement users.
In this chapter, we overview the revenue recognition rule, discuss types of transac-
tions where application of this rule has proven challenging, and identify the key risks
and opportunities for revenue analysis by users of ¬nancial statements.


THE REVENUE RECOGNITION RULE
As discussed in Chapter 1, cash accounting usually does not provide the most informa-
tive or relevant way of measuring a ¬rm™s performance. For example, in some transac-
tions where the ¬rm has received cash, it has yet to ful¬ll any of its contractual
obligations to the customer. In other cases, it has provided the full service or product to
the customer but has yet to receive cash. For both these types of transactions, accoun-
tants argue that cash receipts from customers typically do not re¬‚ect the most relevant
measure of revenue performance for the business.
Accrual accounting attempts to re¬‚ect the economic substance of a ¬rm™s revenue
performance by formulating two criteria for revenue recognition. As Figure 6-1 shows,


6-1




221
222 Revenue Analysis




6-2
Revenue Analysis




Figure 6-1 Criteria for Revenue Recognition and Implementation
Challenges

First Criterion Second Criterion
The good or service has Cash is collected or is
been provided. reasonably likely to be
collected.




Revenue is realizable.



Implementation Challenges
1. Customers pay in advance of delivery.
2. Products/services provided over multiple years.
3. Rights to use product/service sold, but seller retains residual rights.
4. Credit-worthiness of customer questionable.
5. Refunds for dissatis¬ed customers.




the ¬rst criterion deals with uncertainty over whether the earnings process is essentially
complete, that is, whether the ¬rm has provided all, or substantially all, of the goods or

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