Manufactured Homes, Inc

1
Manufactured Homes, Inc

• Prepared by
• Chris
• Eric
• Ranbir
• Robert

2
Agenda

• Introduction
• Company background goals
• Strategy Analysis
• Sources of Revenue
• Accounting Analysis
• Revenue Recognition
• Statement Analysis
• Credit Loss (Provision for Losses)
• Risk Analysis
• Implications Conclusion

3
Company Background

• Manufactured Homes founded in 1975
• 1983 went public
• 1987 listed on AMEX
• 1986 established MANH Fin.Services
• Fastest growing company-Bus.Week
• 40 of total US market
• Present in 7 states in U.S.

4
Companys Goals

• Increase profit margins
• Establish broader dealer network
• Increase market share
• Strategic acquisition
• Create skilled management team

5
Industry Analysis

• 10,000 manufactured home retailers
• mom and pop operations
• Increased competition for market share
• Transition and consolidation
• Smaller firms disappearing
• Merging with larger firms
• Increase in price of conventional housing
• 12 mil people in 6 mil homes

6
Market Analysis

• Target Market
• Low-income families
• Age 18-40, blue collar workers
• Essential housing needs
• Repossession rate low
• Seniors
• Vacationers

7
Business Strategy AnalysisBargaining Power of
Buyers

• LOW
• Low income families
• Not likely to buy conventional homes
• Equal features to conventional homes
• Increase in demand expected
• Result Increased Revenue

8
Business Strategy AnalysisBargaining Power of
Suppliers

• HIGH
• Banks-attractive rates to customers
• Banks-refuse installment contracts
• Interest rates-decrease
• Result Decreased Revenue

9
Business Strategy AnalysisThreat of Substitute
Products

• LOW
• Increase in price of conventional housing
• Result Increased Revenue
• HIGH
• Decrease in interest rates
• Result Reduced Revenue

10
Business Strategy AnalysisThreat of New Entrants

• LOW
• Network of National Dealers
• Small firms lack of volume buying powers and
  capitalization
• Strategic acquisition of major home makers

11
Business Strategy AnalysisRivalry Among Existing
Firms

• LOW
• Smaller firms disappear
• Lack of volume buying powers and capitalization

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Business Strategy Analysis Competitive Advantage

• Cost leadership
• Affordable price for low income families
• Volume buyer power-financial advantage
• Differentiation
• Reliable supply of homes
• Designer homes

13
Sources of Revenue

• Revenue from Sale of New Homes
• Revenue from Participation Income
• Define what Participation Income is and how it is
  calculated

14
Class Discussion

• Is the business of buying and selling homes
  contributing to profitability?
• To what extent does Manufactured Homes rely on
  Participation Income?
• Should this be better disclosed?

15
Analysis of Net Income
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Analysis of Net Income

• Conclusion
• Finance participation income is driving Net
  Income
• Home Sales does not contribute significantly to
  Net Income

17
Recognition of Revenue

• Sale is recognized when down payment is received
  or, when installment contract is agreed upon
• The majority of installment contracts are sold
  with recourse to financial institutions
• Installment contracts are normally payable over
  120 to 180 months

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Financial Accounting Boards Statement No. 77

• the seller should be able to estimate
• The amount of bad debts and related costs of
  collection and repossession
• The amount of prepayments

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Summary of Current Accounting
20
Possible Accounting Treatment of Finance
Participation
21
Effects on Income Statement
22
Effects on Balance Sheet
23
Credit Losses and Net Income

• During the 4th quarter of 1986, approximately 2
  million of repossession expense and interest
  chargebacks were experienced and charged off

24
Indicators that Risk has increased re
Participation Income

• Lenders refused to refinance homes that were
  repossessed, one major cause of 2,000,000 new
  charge on Balance Sheet (pg. 194 / 195)
• Two institutions incr. interest rate charged to
  Mftd. Homes, decreasing the spread.
  Participation Income will decrease as a result
  (pg. 194 / 195)

25
Indicators that Risk has increased re
Participation Income

• Mftd. Homes has started own finance subsidiary to
  finance installment contracts receivable,
  probably because the banks are becoming reluctant
  to lend against the contracts (pg 196)
• Installment contracts are not held for resale
  (new line on the Balance Sheet) (page 208)

26
Indicators that Risk has increased re
Participation Income

• Mnfd. Homes must put up an irrevocable letter of
  credit secured by a deposit equal to the letter
  of credit to sell the installment of the
  receivables.

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Discussion

• Based on what we have reviewed
• Do you think Mftd. Homes is in a favorable
  financial position?
• Should they re-think their strategy?
• What are the implications of the points discussed
  so far?

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Implication Risk

• Bank (Lenders) are seeing that the installment
  receivables are becoming more and more risky
• Defaults
• Pre-Payments (due to lower interest rates offered
  by banks)
• Mounting financial difficulty of Mftd. Homes
• Increasing pressure by SEC

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Implications Risk

• Each of the issues discussed would raise small
  red flags on their own, however most not likely
  have a big overall impact
• However, all 5 issues raised together does indeed
  show the problem in accounting Participation
  Income as Mftd. Homes does

30
Implication Revenue Sources

• The business of buying and selling homes is not
  contributing much to profitability finance
  participation income is primary source of income
• Should this be better disclosed?

31
Implication Reporting as Receivables vs. Loan

• Revenue (as reported) or Loan (as recommended)
• Mftd. Homes is liable for 180 million of
  installment loans that are not shown on the
  balance sheet. This loan makes a big difference
  in the D/C and D/E Ratios

32
Implication Reporting as Receivables vs. Loan

• Based on the Estimated Reported vs. Restated
  Balance Sheet
• Debt to Capital
• As Reported .86 Restated 1.00
• Debt to Equity
• As Reported 26.4 Restated -12.29
• Value of loans is greater than the value of the
  assets
• Due to a negative Stockholders Equity

33
Implication Accounting Practices

• How do you estimate an amount for defaults or
  Re-Financing?
• Reliance on the economic conditions Interest
  Rates and we have a price sensitive consumer
• Market Analysis With low income customers, mgmt
  statements may be different than reality

34
Implication Accounting Practices

• The accounting practice used to account for the
  transactions / participation income
• Does it seem murky to you?

35
Subsequent Developments

• Mftd Homes reported a loss of 4.5 million in Q4
  of 87, wiping out most profits.
• Loss due to 300 increase of companys reserve
  for credit losses
• Impact of Auditors
• Disagreement with Auditors

36
Subsequent Developments

• 8.5 million loss in 1988
• Financial institutions not accepting transfer of
  installment notes
• Increase in customer defaults and pre-payments
  (increase credit reserve further)
• Switched Auditing Firms

37
Subsequent Developments

• SEC investigation into accounting practices
• Estimating Credit Losses
• SEC contested by Mftd Homes
• Stock Price moved from 14.88 (March 1988) to
  1.50 by June 1989

38

• Thank You!
• QUESTIONS?