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Manufactured Homes, Inc

Manufactured Homes, Inc. Prepared by: Chris Eric Ranbir Robert. 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.

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Manufactured Homes, Inc

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  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. Company’s 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

  12. 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

  16. 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

  18. Financial Accounting Board’s 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

  19. 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.

  27. 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?

  28. 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

  29. 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 Ratio’s:

  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 company’s 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?

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