1. An accounting policy that is made byManufactured Homes Inc. was that in order to improve

liquidity, and create a new source of revenue. They began to create installment contracts with

customers paying 5%-10% of the total cost of the home and financing rest with MHI. The

company would then sell these contracts to other financial institutions. Some of these loans are

from 84 to 180 months long. And since Manufactured Homes Inc. was selling these contracts

with recourse, they were taking a large risk. In additionto this, Manufactured Homes Inc. records

the sale of these contracts as a reduction in accounts receivable, rather than in increase in debt,

as reflected on their financials. Though this can be justified as correct it, Manufactured Homes

Inc. should have recorded it as an increase in debt, due to the fact that they now have the

obligation of recourse should any of these contracts default. If they do no record these

transactions correctly, there is no way to show their accurate financial conditions. MHI’s

measures do not reflect the actual risk and debt that they truly hold. And we feel that the

quality of their earnings in not correctly represented. They have become more exposed to

economic conditions, and they also have created a false sense of security among shareholders.

And if, or when, the economy turns, and customers begin to default, the poor quality of their

earnings will be exposed.

2. In 2006 Manufactured Homes experienced a 61% increase in home sales and 87% were new

homes. They increases sales per center to 47 and had a presence in seven states. In 1986,

prepayments became a concern and repossessions increased. As a result, MH increased the

reserve for credit losses to $3,000,000 and incurred a $2,000,000 charge for repossession

expense. The provision for losses was increased from 1% of net sales to 1 ½% in 1987. In 1986,

finance participation income decreased as a percentage of sales to 11.4% due to increased cash

sales, increased non-recourse sales, a decrease in the “spread” of 33%, and increased internal

manufacturing. Selling, general, and administrative expenses increased to 19% of revenues in

1986 due to company expansion and realignment of subsidiaries. In 1986 and 1987,

Manufactured Homes had a major cash infusion by issuing $18 million in convertible notes and

$25 million in unsecured senior notes. This provided increased working capital which was

primarily used to reduce floor plan notes payable, increase cash and cash equivalents, as well as

increase inventories. Manufactured Homes Strategy in 1986 and 1987 has been to focus on

expansion through acquisition. This expansion has resulted in decreased earnings from prior

years, negative working capital from operations, increased SG&A, and increased long term debt.

3. Since Manufactured Homes target market is lower income customers, they have the risk of

default if the economy sours and job availability declines. In this event, they would see the

repossession rate go up, their balance sheet would reflect increased inventory and increased

sales contracts. The increased sales contracts would be returned to them from the institutions

they had bought them with recourse. This would also result in a reduction in a reduction of

finance participation income. Liabilities would also increase as FASB-77 requires the proceeds

from the transfer as a loan against the receivable. While sales have steadily increased, MH has

been able to sell homes using a low price strategy due to volume buying from manufacturers. If

demand decreased due to a weak economy, Manufactured Homes may a face difficulty in

negotiating low prices with manufacturers.

16.13% ROE 1986

2.5% ROA 1986

4,495,809 earnings sept 1986-Sept 1987

Estimated 26% % ROE as of 3rdqtr 1987

3.99% ROA as of 3rdqtr 1987