Consolidated Balance Sheets
- --------------------------------------------------------------------------------
November 6, 2004 and November 1, 2003
2004 2003
Assets
Current assets:
Cash and cash equivalents $ 14,588,332 $ 10,641,748
Short-term investments 777,042 342,550
Accounts receivable 1,869,449 2,096,128
Inventories 6,908,557 6,557,659
Prepaid expenses and other current assets 397,179 501,014
Deferred income taxes 392,594 485,716
-------------------- ---------------------
Total current assets 24,933,153 20,624,815
Property, plant and equipment, net 3,265,042 3,136,506
Long-term investments 8,342,382 5,249,825
Other investments 1,446,012 1,203,804
Deferred income taxes - noncurrent - 15,050
Other assets 1,988,882 2,474,905
-------------------- ---------------------
Total assets $ 39,975,471 $ 32,704,905
==================== =====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,494,163 $ 1,484,997
Accrued compensation 1,031,819 524,784
Accrued expenses and other current liabilities 977,848 757,498
Income taxes payable 617,737 890,675
Customer deposits 4,327,647 2,230,633
-------------------- ---------------------
Total current liabilities 8,449,214 5,888,587
Deferred income taxes 152,630 -
-------------------- ---------------------
Total liabilities 8,601,844 5,888,587
-------------------- ---------------------
Commitments and contingent liabilities (Note 14)
Stockholders' equity:
Preferred stock, $.10 par value, 500,000 shares authorized;
none issued - -
Common stock, $.10 par value, 10,000,000 shares
authorized; 5,364,907 shares issued 536,491 536,491
Additional paid-in capital 8,719,130 8,613,640
Retained earnings 29,732,071 25,500,362
Accumulated other comprehensive income 77,788 35,516
Less treasury stock at cost, 1,334,361 and 1,354,663
shares, respectively, in 2004 and 2003 (7,691,853) (7,869,691)
-------------------- ---------------------
Total stockholders' equity 31,373,627 26,816,318
-------------------- ---------------------
Total liabilities and stockholders' equity $ 39,975,471 $ 32,704,905
==================== =====================
The accompanying notes are an integral part of these financial statements.
1
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
For the years ended November 6, 2004, November 1, 2003 and November 2, 2002
2004 2003 2002
Net sales $ 50,018,542 $ 39,229,156 $ 37,916,463
Cost of goods sold (37,013,892) (29,362,197) (28,114,834)
-------------------- ------------------ ---------------
Gross profit 13,004,650 9,866,959 9,801,629
Selling, general and administrative expenses (6,803,806) (5,789,361) (5,871,930)
-------------------- ------------------ ---------------
Operating income 6,200,844 4,077,598 3,929,699
Other income:
Interest income 376,753 211,018 196,026
Undistributed earnings in joint
venture - Majestic 21 342,509 220,148 291,081
Receipt of stock in connection with
demutualization of insurance company - 167,930 -
Gain on recovery of TLT, Inc. note
receivable - - 320,764
Miscellaneous 112,703 56,785 72,332
-------------------- ------------------ ---------------
831,965 655,881 880,203
-------------------- ------------------ ---------------
Income before provision for income taxes 7,032,809 4,733,479 4,809,902
Provision for income taxes (2,400,000) (1,655,000) (1,675,000)
-------------------- ------------------ ---------------
Net income 4,632,809 3,078,479 3,134,902
Other comprehensive income, net of tax:
Unrealized investment gains 42,272 35,516 -
-------------------- ------------------ ---------------
Comprehensive income $ 4,675,081 $ 3,113,995 $ 3,134,902
==================== ================== ===============
Average shares outstanding
Basic 4,016,797 3,996,424 4,107,748
Diluted 4,116,337 4,021,996 4,130,464
Earnings per share
Basic $ 1.15 $ 0.77 $ 0.76
Diluted $ 1.13 $ 0.77 $ 0.76
Cash dividends paid per common share $ 0.10 $ - $ -
The accompanying notes are an integral part of these financial statements.
2
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the years ended November 6, 2004, November 1, 2003 and November 2, 2002
Accumulated
Additional Other
Common Common Paid-in Retained Comprehensive Treasury
Stock Shares Stock Capital Earnings Income Stock Total
Balance at 11/3/2001 4,144,438 $ 536,491 $ 8,629,144 $ 19,286,981 $ - $(6,728,914) $ 21,723,702
Purchase of
treasury stock (127,225) - - - - (1,079,712) (1,079,712)
Net income - - - 3,134,902 - - 3,134,902
------------- ---------- ------------ ------------- ----------- ------------ -------------
Balance at 11/2/2002 4,017,213 536,491 8,629,144 22,421,883 - (7,808,626) 23,778,892
Purchase of
treasury stock (29,700) - - - - (260,158) (260,158)
Exercise of employee
stock options 19,635 - (16,759) - - 172,003 155,244
Payment of employee
benefit plan expenses
with treasury stock 3,096 - 1,255 - - 27,090 28,345
Unrealized investment
gains - - - - 35,516 - 35,516
Net income - - - 3,078,479 - - 3,078,479
------------- ---------- ------------ ------------- ----------- ------------ -------------
Balance at 11/1/2003 4,010,244 536,491 8,613,640 25,500,362 35,516 (7,869,691) 26,816,318
Exercise of employee
stock options 20,302 - 29,738 - - 177,838 207,576
Unrealized investment
gains - - - - 42,272 42,272
Cash dividends paid - - - (401,100) - (401,100)
Income tax reduction
due to the exercise of
employee stock options - - 75,752 - - 75,752
Net income - - - 4,632,809 - - 4,632,809
------------- ---------- ------------ ------------- ----------- ------------ -------------
Balance at 11/6/2004 4,030,546 $ 536,491 $ 8,719,130 $ 29,732,071 $ 77,788 $(7,691,853) $ 31,373,627
============= ========== ============ ============= =========== ============ =============
The accompanying notes are an integral part of these financial statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For the years ended November 6, 2004, November 1, 2003 and November 2, 2002
2004 2003 2002
Cash flows from operating activities:
Net income $ 4,632,809 $ 3,078,479 $ 3,134,902
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 288,942 232,377 236,176
Deferred income taxes 318,438 130,634 110,800
Undistributed earnings in joint venture - Majestic 21 (342,509) (220,148) (291,081)
Distributions from joint venture - Majestic 21 100,500 36,400 73,200
Loss on disposal of property, plant and equipment 2,775 - -
Increase in cash surrender value of life insurance (111,001) (91,480) (89,529)
Payment of employee benefit plan expenses
with treasury stock - 28,345 -
Gain on recovery of TLT, Inc. note receivable - - (320,764)
Decrease (increase) in:
Accounts receivable 226,679 (1,021,647) (700,336)
Inventories (350,898) 31,417 1,017,835
Prepaid expenses and other current assets 103,835 (132,885) (106,192)
(Decrease) increase in:
Accounts payable 9,166 306,602 64,151
Accrued compensation 507,035 (179,338) 293,216
Accrued expenses and other current liabilities 220,350 39,798 154,310
Income taxes payable (272,938) 890,675 (325,553)
Customer deposits 2,097,014 1,113,368 (486,051)
------------------- ------------------ ----------------
Net cash provided by operating activities 7,430,197 4,242,597 2,765,084
------------------- ------------------ ----------------
Cash flows from investing activities:
Purchase of investments (3,591,860) (5,556,859) -
Proceeds from maturity of investments 125,000 - -
Proceeds from repayment of receivable from officer 597,024 - -
Purchase of property, plant and equipment (420,253) (420,787) (529,437)
Collection of TLT, Inc. note receivable - - 320,764
------------------- ------------------ ----------------
Net cash used in investing activities (3,290,089) (5,977,646) (208,673)
------------------- ------------------ ----------------
Cash flows from financing activities:
Payment of cash dividends (401,100) - -
Proceeds from exercise of employee stock options 207,576 155,244 -
Purchase of treasury stock - (260,158) (1,079,712)
------------------- ------------------ ----------------
Net cash used in financing activities (193,524) (104,914) (1,079,712)
------------------- ------------------ ----------------
Increase (decrease) in cash and cash equivalents 3,946,584 (1,839,963) 1,476,699
Cash and cash equivalents at beginning of year 10,641,748 12,481,711 11,005,012
------------------- ------------------ ----------------
Cash and cash equivalents at end of year $ 14,588,332 $10,641,748 $12,481,711
=================== ================== ================
Supplemental disclosure of cash flow information
Income taxes paid $ 2,292,000 $ 620,000 $ 2,227,000
=================== ================== ================
Interest paid $ - $ - $ -
=================== ================== ================
Non-cash investing and financing activities:
Income tax reduction due to the exercise of
employee stock options $ 75,752 $ - $ -
=================== ================== ================
Receipt of stock in connection with demutualization
of insurance company $ - $ 167,930 $ -
=================== ================== ================
The accompanying notes are an integral part of these financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Nobility Homes,
Inc. ("Nobility"), its wholly-owned subsidiary, Prestige Home Centers, Inc.
("Prestige") and Prestige's wholly-owned subsidiaries, Mountain Financial, Inc.,
an independent insurance agency and mortgage broker, and Majestic Homes, Inc.,
(collectively the "Company"). The Company is engaged in the manufacture and sale
of manufactured homes to various dealerships, including its own retail sales
centers, and manufactured housing communities throughout Florida. The Company
has two manufacturing plants located in and near Ocala, Florida. Prestige
currently operates seventeen Florida retail sales centers: Ocala (3),
Tallahassee, St. Augustine, Tampa, Chiefland, Lake City, Auburndale,
Jacksonville, Hudson, Inverness, Fort Walton, Pace, Tavares, Panama City, and
Yulee.
All intercompany accounts and transactions have been eliminated in
consolidation.
FISCAL YEAR
The Company's fiscal year ends on the first Saturday on or after October 31. The
year ended November 6, 2004 consisted of a fifty-three week period and the years
ended November 1, 2003 and November 2, 2002 consisted of fifty-two week periods.
REVENUE RECOGNITION
The Company recognizes revenue for its retail sales upon the occurrence of the
following:
o Its receipt of a down payment (or with cash sales, its receipt of
total payments),
o Completion of the home,
o Title having passed to the retail home buyer,
o Funds having been deposited in the company's account,
o The home having been delivered and set up at the retail home buyer's
site, and
o Completion of any other significant obligations.
The Company recognizes revenue to independent dealers upon receiving wholesale
floor plan financing or establishing retail credit approval for terms, shipping
of the home, and transferring title and risk of loss to the independent dealer.
For wholesale shipments to independent dealers, the Company has no obligation to
set up the home or to complete any other significant obligations.
Through its wholly-owned subsidiary, Mountain Financial, Inc., an independent
insurance agency and mortgage broker, the Company offers credit life and
homeowners insurance, service warranty products, and brokering of mortgage loans
to the retail home buyer.
Approximately 56%, 48% and 42% of the Company's installment sales contracts in
fiscal years 2004, 2003 and 2002, respectively, which are normally payable over
84 to 360 months, are financed by Majestic 21, the Company's joint venture
financing partnership (see Note 3).
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. As of November
6, 2004 and November 1, 2003, approximately $11,161,000 and $8,815,000,
respectively, of the cash and cash equivalents were held in the form of
certificates of deposit and governmental securities. All of the governmental
securities are held by one trustee bank, are backed by letters of credit
provided by the issuers and are due on demand at the original purchase price
paid by the Company.
INVESTMENTS
The Company's investments consist of municipal and other debt securities as well
as equity securities of a public company. Investments with maturities of less
than one year are classified as short-term investments. Debt securities that the
Company has the positive intent and ability to hold until maturity are accounted
for as "held-to-maturity" securities and are carried at amortized cost. The
Company's equity investment in a public company is classified as
5
"available-for-sale" and carried at fair value. Unrealized gains on the
available-for-sale securities, net of taxes, are recorded in accumulated other
comprehensive income.
The Company continually reviews its investments to determine whether a decline
in fair value below the cost basis is other than temporary. If the decline in
fair value is judged to be other than temporary, the cost basis of the security
is written down to fair value and the amount of the write-down is included in
the accompanying consolidated statements of income.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost of finished home
inventories is determined on the specific identification method. Other inventory
costs are determined on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated over their
estimated useful lives using the straight-line method. Routine maintenance and
repairs are charged to expense when incurred. Major replacements and
improvements are capitalized. Gains or losses are credited or charged to
earnings upon disposition.
OTHER INVESTMENTS
The Company owns a 50% interest in a joint venture, Majestic 21, engaged in
providing mortgage financing on manufactured homes. This investment is accounted
for using the equity method of accounting (see Note 3). The Company also
participates in a finance revenue sharing agreement with a corporation in
providing mortgage financing on manufactured homes sold through the Company's
retail sales centers. In connection with the finance revenue sharing agreement,
the Company has made a deposit of $250,000, which is included in other
investments in the accompanying consolidated balance sheets.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the carrying value of a
long-lived asset may be impaired, an evaluation of recoverability is performed
by comparing the estimated future undiscounted cash flows associated with the
asset to the asset's carrying amount to determine if a write-down is required.
If such evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values.
GOODWILL - ADOPTION OF FAS STATEMENT 142
Goodwill represents the excess of the purchase price paid over the fair value of
the net assets acquired in connection with business acquisitions. The Company
adopted SFAS No. 142, Goodwill and Other Intangible Assets, ("FAS 142")
effective November 3, 2002. FAS 142 requires the Company to compare the fair
value of the net assets underlying all acquisition-related goodwill on a
reporting unit basis to its carrying amount on an annual basis to determine if
there is potential goodwill impairment. If the fair value of the reporting unit
is less than its carrying value, an impairment loss is recorded to the extent
that the fair value of goodwill within the reporting unit is less than its
carrying value. The approach to evaluating the recoverability of goodwill as
outlined in FAS 142 requires the use of valuation techniques utilizing estimates
and assumptions about projected future operating results and other variables.
FAS 142 also requires entities to discontinue the amortization of goodwill,
including amortization of goodwill acquired in past business combinations.
Accordingly, the Company no longer amortized goodwill beginning in fiscal year
2003 (see Note 6).
At November 6, 2004 and November 1, 2003, goodwill, net of accumulated
amortization, totaled $298,708. Accumulated amortization of goodwill totaled
$185,669 at November 6, 2004 and November 1, 2003. Amortization of goodwill
totaled $29,000 for fiscal year 2002.
WARRANTY COSTS
The Company provides for a warranty as the manufactured homes are sold. Amounts
related to these warranties for fiscal years 2004, 2003, and 2002 are as
follows:
2004 2003 2002
----------- ---------- ----------
Beginning accrued warranty expense $ 165,000 $ 165,000 $ 165,000
Less: reduction for payments (626,300) (492,400) (456,800)
Plus: additions to accrual 646,300 492,400 456,800
----------- ---------- ----------
Ending accrued warranty expense $ 185,000 $ 165,000 $ 165,000
=========== ========== ==========
6
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximates fair value because of the short
maturity of those instruments. The carrying amount and fair market value of the
Company's investments at November 6, 2004 and November 1, 2003 are as follows:
2004 2003
----------------- -----------------
Carrying amount $ 9,119,424 $ 5,592,375
Fair value 9,196,012 5,604,596
STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation ("FAS 123"), encourages
the use of a fair-value method of accounting for stock-based awards under which
the fair value of stock options is determined on the date of grant and expensed
over the vesting. As allowed by FAS 123, we have elected to account for our
stock-based compensation plans under an intrinsic value method that requires
compensation expense to be recorded only if, on the grant date, the current
market price of our common stock exceeds the exercise price the employee must
pay for the stock. Our policy is to grant stock options at the fair market value
of our underlying stock at the date of grant.
The Company has adopted the disclosure-only provisions of FAS 123. Accordingly,
no compensation cost has been recognized for the stock option plans. Had
compensation cost for the Company's Plan been determined based on the fair value
at the grant date, as prescribed by FAS 123, the Company's net income and
earnings per share would have been as follows:
2004 2003 2002
---------------- --------------- ----------------
Net income, as reported $ 4,632,809 $ 3,078,479 $ 3,134,902
Add: Stock-based employee expense included in
net income, net of related tax effects - 18,424 -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method net related tax effects (19,954) (32,468) (27,532)
---------------- --------------- ----------------
Pro forma net income $ 4,612,855 $ 3,064,435 $ 3,107,370
================ =============== ================
Basic earnings per share:
As reported $ 1.15 $ 0.77 $ 0.76
Pro forma $ 1.15 $ 0.77 $ 0.76
Diluted earnings per share:
As reported $ 1.13 $ 0.77 $ 0.76
Pro forma $ 1.12 $ 0.76 $ 0.75
REBATE PROGRAM
The Company has a rebate program for all dealers which pays rebates based upon
sales volume to the dealers. Volume rebates are recorded as a reduction of sales
in the accompanying consolidated financial statements. The rebate liability is
calculated and recognized as eligible homes are sold based upon factors
surrounding the activity and prior experience of specific dealers and is
included in accrued expenses in the accompanying consolidated balance sheets
(see Note 8).
ADVERTISING
Advertising for Prestige retail sales centers consists primarily of newspaper,
radio and television advertising. All costs are expensed as incurred.
Advertising expense amounted to approximately $455,000, $470,000 and $472,000
for fiscal years 2004, 2003 and 2002, respectively.
INCOME TAXES
The Company accounts for income taxes utilizing the asset and liability method.
This approach requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
7
EARNINGS PER SHARE
These financial statements include "basic" and "diluted" earnings per share
information for all periods presented. Basic earnings per share is calculated by
dividing net income by the weighted-average number of shares outstanding.
Diluted earnings per share is calculated by dividing net income by the
weighted-average number of shares outstanding, adjusted for dilutive common
shares. Diluted earnings per share calculations include dilutive common share
stock options of 99,540, 25,572 and 22,716 for fiscal years 2004, 2003 and 2002,
respectively. Stock options to purchase -0-, 7,810 and 113,251 shares of common
stock for the fiscal years 2004, 2003, and 2002, respectively, were not included
in the computation of diluted earnings per share because their inclusion would
have been anti-dilutive.
CONCENTRATION OF CREDIT RISK
The Company's customers are concentrated in the State of Florida. One customer,
a multi-park owner, accounted for over 13%, 12% and 11% of the Company's sales
during the fiscal years ended 2004, 2003 and 2002, respectively. The Company had
an approximate $1,771,000 and $1,807,000 receivable balance with this customer
at November 6, 2004 and November 1, 2003, respectively. There were no other
customers that accounted for over 10% of the Company's sales during fiscal years
2004, 2003 or 2002.
SHIPPING AND HANDLING COSTS
Net sales include the revenue related to shipping and handling charges billed to
customers. The related costs associated with shipping and handling are included
as a component of cost of goods sold.
COMPREHENSIVE INCOME
Comprehensive income includes net income as well as additional other
comprehensive income. The Company's other comprehensive income consists of
unrealized gains on available-for-sale securities, net of tax.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation 46R, Consolidation of Variable Interest Entities ("FIN 46R")
which was generally effective as of March 31, 2004. Variable interest entities
("VIE's") are primarily entities that lack sufficient equity to finance their
activities without additional support from other parties or whose equity holders
lack adequate decision making ability. All VIE's with which the Company is
involved must be evaluated to determine the primary beneficiary of the risks and
rewards of the VIE. The primary beneficiary is required to consolidate the VIE
for financial reporting purposes.
Upon adoption of FIN 46R, the Company has concluded that its equity investments
do not require consolidation as either they are not VIE's, or in the event that
they are VIE's, the Company is not the primary beneficiary. The VIE's identified
do not involve any material exposure to the Company.
In December 2003, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104, "Revenue Recognition," which revises or
rescinds portions of the interpretive guidance included in SAB No. 101, "Revenue
Recognition in Financial Statements," in order to make the guidance consistent
with authoritative accounting and auditing guidance and with SEC rules and
regulations. The principal revisions relate to the rescission of material no
longer necessary because of private sector developments in United States
generally accepted accounting principles. The adoption of SAB No. 104 did not
have any impact on the Company's consolidated financial position or results of
operations.
In November 2004, the FASB issued SFAS 151, Inventory Costs -- an amendment of
ARB No. 43, Chapter 4 ("FAS 151"). FAS 151 amends the guidance in Accounting
Research Bulletin (ARB) No. 43, Chapter 4, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). FAS 151 requires that these costs be recognized as current
period charges regardless of whether they are abnormal. In addition, FAS 151
requires that allocation of fixed production overheads to the costs of
manufacturing be based on the normal capacity of the production facilities. The
provisions of FAS 151 are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company does not expect this new
standard to have a material effect on its consolidated financial position or
results of operations.
8
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, ("FAS
123R"), which requires that the cost resulting for all share-based payment
transactions be recognized in the financial statements. This Statement requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award--the requisite service period (usually the vesting period). No
compensation cost is recognized for equity instruments for which employees do
not render the requisite service. Employee share purchase plans will not result
in recognition of compensation cost if certain conditions are met; those
conditions are much the same as the related conditions in FAS 123. The
provisions of FAS 123R are effective as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. The Company does not
expect this new standard to have a material effect on its consolidated financial
position or results of operations.
2. INVESTMENTS
Investments in "held-to-maturity" and "available-for-sale" debt and equity
securities at November 6, 2004 and November 1, 2003 were as follows:
November 6, 2004
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
Held-to-maturity securities (carried at
amortized cost):
Municipal securities $ 8,842,382 $ 89,655 $ (13,067) $ 8,918,970
Available-for-sale securities (carried at
fair value):
Debt securities classified as
cash equivalents 7,160,000 - - 7,160,000
Equity securities in a public company 165,519 111,523 - 277,042
------------ --------- ---------- ------------
Total investments $ 16,167,901 $ 201,178 $ (13,067) $ 16,356,012
============ ========= ========== ============
November 1, 2003
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
Held-to-maturity securities (carried at
amortized cost):
Municipal securities $ 5,375,721 $ 31,487 $ (19,266) $ 5,387,942
Available-for-sale securities (carried at
fair value):
Debt securities classified as
cash equivalents 8,815,000 - - 8,815,000
Equity securities in a public company 165,519 51,135 - 216,654
------------ --------- ---------- ------------
Total investments $ 14,356,240 $ 82,622 $ (19,266) $ 14,419,596
============ ========= ========== ============
The fair values were estimated based on quoted market prices using current
market rates at each respective period end.
9
Contractual maturities of "held-to-maturity" debt securities at November 6, 2004
and November 1, 2003 were as follows:
November 6, 2004 November 1, 2003
Estimated Estimated
Cost Fair Value Cost Fair Value
Due in less than one year $ 500,000 $ 500,000 $ 125,896 $ 125,559
Due in 1 - 5 years 5,202,592 5,237,826 3,049,120 3,039,947
Due in 5 - 10 years 3,139,790 3,181,144 2,200,705 2,222,436
---------- ---------- ---------- ----------
$8,842,382 $8,918,970 $5,375,721 $5,387,942
========== ========== ========== ==========
There were no sales of "available-for-sale" securities during the fiscal years
2004 or 2003.
A summary of the carrying values and balance sheet classification of all
investments in debt and equity securities including "held-to-maturity" and
"available-for-sale" securities disclosed above was as follows:
November 6, November 1,
2004 2003
----------------- ----------------
Held-to-maturity debt securities $ 500,000 $ 125,896
Available-for-sale equity securities 277,042 216,654
----------------- ----------------
Short-term investments 777,042 342,550
Available-for-sale debt securities included in cash & cash equivalents 7,160,000 8,815,000
Held-to-maturity debt securities included in long-term investments 8,342,382 5,249,825
----------------- ----------------
Total investments $ 16,279,424 $ 14,407,375
================= ================
3. RELATED PARTY TRANSACTIONS
RECEIVABLE FROM OFFICER FOR LIFE INSURANCE PREMIUMS
In previous years, the Company had funded premiums for the President on two
split-dollar life insurance policies with a face value of $1,000,000. These
policies insure the President and name his family as beneficiaries. The
cumulative premiums advanced under these arrangements amounted to approximately
$597,000 at November 1, 2003 and November 2, 2002. The advances were
non-interest bearing. Net cash surrender value of approximately $1,128,000 and
$1,062,000 at November 1, 2003 and November 2, 2002, respectively, was pledged
to the Company as collateral for advances under this arrangement. These advances
of approximately $597,000 were repaid to the Company during fiscal year 2004.
AFFILIATED ENTITIES
TLT, Inc.
The President and Chairman of the Board of Directors ("President") and the
Executive Vice President each own 50% of the stock of TLT, Inc. TLT, Inc. is the
general partner of limited partnerships which are developing manufactured
housing communities in Central Florida (the "TLT Communities"). The President
owns between a 24.75% and a 49.5% direct and indirect interests in each of these
limited partnerships. The Executive Vice President owns between a 49.5% and a
57.75% direct and indirect interests in each of these limited partnerships. The
TLT Communities have purchased manufactured homes exclusively from the Company
since 1990.
Beginning in 1990 and continuing into 1993, the Company made advances to TLT,
Inc. to fund working capital needs of the TLT Communities in return for
exclusive sales rights at these communities. These advances are non-interest
bearing and were fully reserved in fiscal 1991. TLT paid approximately $0, $0,
and $321,000 to the Company to reduce these outstanding advances in fiscal 2004,
2003 and 2002, respectively. The amounts collected have been recorded as a gain
on recovery of the fully reserved TLT, Inc. note receivable in the accompanying
consolidated financial statements. The balance of the reserved advances at
November 6, 2004 and November 1, 2003 was approximately $232,000.
Investment in Joint Venture - Majestic 21
During fiscal 1997, the Company contributed $250,000 for a 50% interest in a
joint venture engaged in providing mortgage financing on manufactured homes.
This investment is accounted for under the equity method of accounting.
10
The following is summarized financial information of the Company's joint
venture:
2004 2003 2002
Total Assets $ 11,284,661 $6,518,794 $ 1,916,112
Total Liabilities $ 9,017,437 $4,163,661 $ -
Total Equity $ 2,267,224 $2,355,133 $ 1,916,112
Net Income $ 685,018 $ 440,296 $ 582,162
Distributions received from the joint venture amounted to $100,500, $36,400 and
$73,200 in fiscal years 2004, 2003 and 2002, respectively. In addition, during
fiscal year 2004, $250,000 was transferred for participation in the finance
revenue sharing agreement.
Finance Revenue Sharing Agreement
During fiscal 2004, the Company transferred $250,000 from its existing joint
venture in Majestic 21 in order to participate in a finance revenue sharing
agreement with a corporation who is also the Company's joint venture partner in
Majestic 21. In connection with this revenue sharing agreement, mortgage
financing will be provided on manufactured homes sold through the Company's
retail sales centers to customers who qualify for such mortgage financing.
4. INVENTORIES
Inventories at November 6, 2004 and November 1, 2003 are summarized as follows:
2004 2003
Raw materials $ 818,762 $ 680,036
Work-in-process 126,169 109,947
Finished homes 5,597,646 5,272,867
Pre-owned manufactured homes 240,833 401,728
Model home furniture 125,147 93,081
---------------- ----------------
$6,908,557 $ 6,557,659
================ ================
The finished homes, pre-owned manufactured homes and model home furniture are
maintained at the Prestige retail sales centers.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, along with their estimated useful lives and
related accumulated depreciation, as of November 6, 2004 and November 1, 2003
are summarized as follows:
Range of Lives
in Years 2004 2003
Land - $1,235,247 $ 1,235,247
Land and leasehold improvements 10-20 536,159 528,874
Buildings and improvements 15-40 2,215,164 2,101,623
Machinery and equipment 3-10 1,221,716 1,002,362
Furniture and fixtures 3-10 613,680 576,159
----------------- -----------------
5,821,966 5,444,265
Less accumulated depreciation (2,556,924) (2,307,759)
----------------- -----------------
$3,265,042 $ 3,136,506
================= =================
Depreciation expense totaled approximately $289,000, $232,000 and $207,000 for
fiscal years 2004, 2003 and 2002, respectively.
11
6. GOODWILL
Effective November 3, 2002, the Company adopted FAS 142, Goodwill and Other
Intangible Assets. Under FAS 142, goodwill is no longer amortized but rather
tested for impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired. This new approach
requires the use of valuation techniques and methodologies significantly
different from the undiscounted cash flow policy previously followed by the
Company.
The goodwill was tested for impairment during the first quarters of fiscal years
2004 and 2003 and as a result of these valuation processes, the Company
concluded that there was no impairment of goodwill.
Prior to the adoption of FAS 142, the Company amortized goodwill on a
straight-line basis over 15 years. Had the Company accounted for goodwill
consistent with the provisions of FAS 142 in prior years, the Company's net
income, basic and diluted earnings per share would have been affected as
follows:
Fiscal Years Ended
2004 2003 2002
Net income, as reported $ 4,632,809 $ 3,078,479 $ 3,134,902
Add: goodwill amortization,
net of tax - - 18,900
----------- ----------- -----------
Adjusted net income $ 4,632,809 $ 3,078,479 $ 3,153,802
=========== =========== ===========
There would have been no effect on basic or diluted earnings per share except
for basic earnings per share in fiscal 2002 would have been $0.77 vs. $0.76
actual had the Company accounted for goodwill consistent with the provisions of
FAS 142 in prior years.
7. OTHER ASSETS
Other assets at November 6, 2004 and November 1, 2003 are comprised of the
following:
2004 2003
Cash surrender value of life insurance $ 1,690,174 $1,579,173
Receivable from officer for life
insurance premiums (see Note 3) - 597,024
Goodwill, net (see Note 6) 298,708 298,708
------------------ ---------------
$ 1,988,882 $2,474,905
================== ===============
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at November 6, 2004 and November
1, 2003 are comprised of the following:
2004 2003
Accrued sales taxes $ 344,490 $ 149,481
Accrued volume rebate 199,475 204,243
Accrued warranty expense 185,000 165,000
Other accrued expenses 248,883 238,774
----------------- ----------------
$ 977,848 $ 757,498
================= =================
12
9. INCOME TAXES
The provision for income taxes for the years ended November 6, 2004, November 1,
2003 and November 2, 2002 consists of the following:
2004 2003 2002
Current tax expense:
Federal $ 1,766,200 $ 1,366,600 $ 1,414,000
State 364,300 157,800 150,200
--------------- ---------------- --------------
2,130,500 1,524,400 1,564,200
Deferred tax expense 269,500 130,600 110,800
--------------- ---------------- --------------
Provision for income taxes $ 2,400,000 $ 1,655,000 $ 1,675,000
--------------- ---------------- --------------
The following table shows the reconciliation between the statutory federal
income tax rate and the actual provision for income taxes for the years ended
November 6, 2004, November 1, 2003 and November 2, 2002:
2004 2003 2002
Provision - federal statutory tax rate $ 2,391,200 $ 1,609,400 $ 1,620,000
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 250,000 115,000 173,000
Permanent differences:
Tax exempt interest (118,000) (75,500) (60,500)
Other (123,200) 6,100 (57,500)
--------------- ---------------- --------------
Provision for income taxes $ 2,400,000 $ 1,655,000 $ 1,675,000
=============== ================ ==============
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts and the related deferred tax
assets and deferred tax liabilities are as follows:
2004 2003
Gross deferred tax assets:
Allowance for doubtful accounts $ 87,300 $ 87,300
Inventories 52,700 54,000
Other assets 182,994 336,300
Accrued expenses 69,600 62,100
--------------- ----------------
Total deferred tax assets 392,594 539,700
Gross deferred tax liabilities:
Depreciation (130,930) (38,934)
Amortization (21,700) -
--------------- ----------------
Net deferred tax asset $ 239,964 $ 500,766
=============== ================
13
These amounts are included in the accompanying consolidated balance sheets under
the following captions:
2004 2003
Current assets:
Deferred tax assets $ 392,594 $ 485,716
Non-current assets:
Deferred tax assets - 15,050
Non-current liabilities:
Deferred tax liabilities (152,630) -
--------------- ----------------
Net deferred tax asset $ 239,964 $ 500,766
=============== ================
The Company believes that it is more likely than not that the net deferred tax
assets of $239,964 at November 6, 2004 will be realized on future tax returns,
primarily from the generation of future taxable income.
10. FINANCING AGREEMENTS
REVOLVING CREDIT AGREEMENT
The Company maintains a revolving credit agreement (the "Agreement") with a bank
which provides for borrowings of up to $4,000,000. The Agreement provides for
interest at the bank prime rate less 0.5% (3.50% at November 6, 2004) on the
outstanding balance. The Agreement is uncollateralized, due on demand and
includes certain restrictive covenants relating to tangible net worth and
acquiring new debt. There are no commitment fees or compensating balance
arrangements associated with the Agreement. At November 6, 2004 and November 1,
2003, there were no borrowings outstanding under the Agreement.
11. STOCKHOLDERS' EQUITY
Authorized preferred stock may be issued in series with rights and preferences
designated by the Board of Directors at the time it authorizes the issuance of
such stock. The Company has never issued any preferred stock. Treasury stock is
recorded at cost and is presented as a reduction of stockholders' equity in the
accompanying consolidated financial statements. The Company repurchased 0,
29,700, and 127,225 shares of its common stock during fiscal years 2004, 2003
and 2002, respectively. These shares were acquired for general corporate
purposes. The Company reissued 20,302 and 22,731 shares of treasury stock during
fiscal years 2004 and 2003, respectively, for employee stock option exercises
and the payment of employee benefit plan expenses.
12. STOCK OPTION PLAN
During fiscal 1996, the Company's Board of Directors adopted a stock incentive
plan (the "Plan"), which authorizes the issuance of options to purchase common
stock. The Plan provides for the issuance of options to purchase up to 495,000
shares of common stock to employees and directors. Options granted are
exercisable after one or more years and expire no later than six to ten years
from the date of grant or upon termination of employment, retirement or death.
Options available for future grant were 301,192 and 294,440 at November 6, 2004
and November 1, 2003. Options were held by 13 persons at November 6, 2004.
14
Information with respect to options granted at November 6, 2004 is as follows:
Weighted
Average
Number of Stock Option Exercise
Shares Price Range Price
--------------- -------------------- -------------
Outstanding at 11/3/2001 230,190 $ 5.50 - 12.81 $ 8.12
Granted 8,950 8.30 8.30
Exercised - - -
Canceled (23,980) 7.73 - 12.81 8.62
--------------- -------------------- -------------
Outstanding at 11/2/2002 215,160 5.50 - 12.81 8.10
Granted 11,550 8.83 8.83
Exercised (19,635) 7.73 7.73
Canceled (6,515) 5.50 - 12.81 7.93
--------------- -------------------- -------------
Outstanding at 11/1/2003 200,560 5.50 - 12.81 8.18
Granted 17,200 11.42 11.42
Exercised (20,302) 5.50 - 17.61 10.17
Canceled (3,650) 8.30 - 11.42 10.64
--------------- -------------------- -------------
Outstanding at 11/6/2004 193,808 $ 5.50 - 11.42 $ 8.26
=============== ==================== =============
The following table summarizes information about the Plan's stock options at
November 6, 2004:
Options Outstanding Options Exercisable
Remaining Weighted Weighted
Exercise Shares Contractual Average Shares Average
Prices Outstanding Life (years) Exercise Price Outstanding Exercise Price
$ 5.50 2,200 1 $ 5.50 2,200 $ 5.50
6.00 5,183 2 6.00 5,183 6.00
8.03 153,500 2 8.03 153,500 8.03
8.30 6,825 3 8.30 6,825 8.30
8.83 11,550 4 8.83 11,550 8.83
11.42 14,550 5 11.42 - 11.42
--------- ----------- ----------- --------- --------
193,808 2 $ 8.26 179,258 $ 8.00
========= =========== =========== ========= ========
The fair value of each option is determined using the Black-Scholes
option-pricing model which values options based on the stock price at the grant
date, the expected life of the option, the estimated volatility of the stock,
expected dividend payments, and the risk-free interest rate over the expected
life of the option. The dividend yield was calculated by dividing the current
annualized dividend by the option exercise price for each grant. The expected
volatility was determined considering stock prices for the fiscal year the grant
occurred and prior fiscal years, as well as considering industry volatility
data. The risk-free interest rate was the rate available on zero coupon U.S.
government obligations with a term equal to the remaining term for each grant.
The expected life of the option was estimated based on the exercise history from
previous grants.
15
The weighted-average assumptions used in the Black-Scholes model were as
follows:
Stock Option Granted in Fiscal Year
2004 2003 2002
Risk-free interest rate 3.3% 3.3% 4.7%
Expected volatility of stock 45% 45% 45%
Dividend yield 1.1% 0% 0%
Expected option life 2 - 4 years 2 - 4 years 2 - 4 years
13. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution retirement plan (the "Plan") qualifying
under Section 401(k) of the Internal Revenue Code. The Plan covers employees who
have met certain service requirements. The Company makes a matching contribution
of 15% of an employee's contribution up to a maximum of 3% of an employee's
compensation. The Company's contribution charged to operations was approximately
$24,000, $23,000 and $6,000 in fiscal years 2004, 2003 and 2002, respectively.
14. COMMITMENTS AND CONTINGENT LIABILITIES
OPERATING LEASES
The Company leases the property for the Prestige retail sales centers from
various unrelated entities under operating lease agreements expiring through
November 2006. The Company also leases certain equipment under unrelated
operating leases. These leases have varying renewal options. Total rent expense
for operating leases, including those with terms of less than one year, amounted
to approximately $575,000, $639,000 and $585,000 in fiscal years 2004, 2003 and
2002, respectively.
Future minimum payments by year and in the aggregate, under the aforementioned
leases and other non-cancelable operating leases with initial or remaining terms
in excess of one year, as of November 6, 2004 are as follows:
Fiscal Year Ending
2005 231,000
2006 32,000
2007 14,000
REPURCHASE AGREEMENTS
The Company is contingently liable under terms of repurchase agreements covering
dealer floor plan financing arrangements. These arrangements, which are
customary in the industry, provide for the repurchase of homes sold to dealers
in the event of default on payments by the dealer to the dealer's financing
source. The contingent liability under these agreements amounted to
approximately $1,363,000 and $1,900,000 at November 6, 2004 and November 1,
2003, respectively. The risk of loss is spread over numerous dealers and
financing institutions and is further reduced by the resale value of any homes
which may be repurchased. There were no homes repurchased in fiscal years 2004,
2003 or 2002.
OTHER CONTINGENT LIABILITIES
Certain claims and suits arising in the ordinary course of business have been
filed or are pending against the Company. In the opinion of management, the
ultimate outcome of these matters will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
16
15. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
Following is a summary of the unaudited interim results of operations for each
quarter in the years ended November 6, 2004 and November 1, 2003.
First Second Third Fourth
Year ended November 6, 2004
Net sales $10,198,241 $13,112,600 $12,310,878 $14,396,823
Cost of goods sold 7,611,701 9,778,658 9,070,731 10,552,802
Net income 783,881 1,153,357 1,220,138 1,475,433
Earnings per share
Basic 0.19 0.29 0.30 0.37
Diluted 0.19 0.28 0.30 0.36
Dividends per common share 0.10 - - -
Year ended November 1, 2003
Net sales $ 8,482,415 $ 8,354,762 $ 9,465,179 $12,926,800
Cost of goods sold 6,258,985 6,127,236 7,167,499 9,808,477
Net income 600,584 677,231 633,730 1,166,934
Earnings per share
Basic 0.15 0.17 0.16 0.29
Diluted 0.15 0.17 0.16 0.29
The sum of quarterly earnings per share amounts does not necessarily equal
earnings per share for the year. The Company historically records the increase
in cash surrender value related to its life insurance policies on the Company's
president during the fourth quarter. Accordingly, the Company recorded credits
of approximately $111,000, $91,000 and $90,000 in fiscal years 2004, 2003 and
2002, respectively, to insurance expense in the fourth quarter of the respective
years. In addition, the receipt of stock during fiscal year 2003 in connection
with the demutualization of an insurance company in the amount of approximately
$168,000 was recorded as other income during the fourth quarter of fiscal year
2003.
16. SUBSEQUENT EVENT (UNAUDITED)
Subsequent to year-end, the Company's Board of Directors declared an annual cash
dividend of $0.20 per common share, payable on January 14, 2005 to stockholders
of record as of January 3, 2005.
17
Report of Independent Registered Certified Public Accounting Firm
To the Board of Directors and
Stockholders of Nobility Homes, Inc.
We have audited the accompanying consolidated balance sheets of Nobility Homes,
Inc. and Subsidiaries (the "Company") as of November 6, 2004 and November 1,
2003, and the related consolidated statements of income and comprehensive
income, changes in stockholders' equity, and cash flows for each of the three
years in the period ended November 6, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nobility Homes, Inc.
and Subsidiaries as of November 6, 2004 and November 1, 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended November 6, 2004 in conformity with U.S. generally accepted accounting
principles.
/s/ Tedder, James, Worden & Associates, P.A.
Orlando, Florida
December 17, 2004
18