Report of Independent Certified Public Accountants
To the Board of Directors and
Stockholders of Nobility Homes, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Nobility Homes, Inc. and its subsidiary at November
2, 1996 and November 4, 1995, and the results of their operations and
their cash flows for each of the three years in the period ended November
2, 1996 in conformity with generally accepted accounting principles.
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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 109 in 1994.
Price Waterhouse LLP
Orlando, Florida
December 30, 1996
Nobility Homes, Inc.
Consolidated Balance Sheets
November 2, 1996 and November 4, 1995
1996 1995
Assets
Current assets:
Cash and cash equivalents $ 2,049,184 $ 932,432
Accounts receivable 642,626 544,620
Accounts receivable - trade, from
related parties 350,379 956,037
Inventories 7,820,908 6,786,159
Deferred income taxes - current 145,400 152,700
Other current assets 368,466 342,702
--------- ---------
Total current assets 11,376,963 9,714,650
Property, plant and equipment, net 1,166,429 994,376
Deferred income taxes - noncurrent 707,200 694,305
Other assets 1,620,046 1,493,084
---------- ----------
Total assets $ 14,870,638 $12,896,415
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,368,168 $ 1,453,823
Accrued expenses 692,737 866,499
Other current liabilities 553,477 437,899
---------- ----------
Total current liabilities 2,614,382 2,758,221
Notes payable - cash surrender value of
life insurance - 652,424
Note payable after one year - 6,644
---------- ----------
Total liabilities 2,614,382 3,417,289
---------- ----------
Stockholders' equity:
Preferred stock, $.10 par value, 500,000
shares authorized, none issued - -
Common stock, $.10 par value, 4,000,000
shares authorized, 3,436,790 and
3,351,306 shares issued in 1996 and
1995, respectively 343,679 335,130
Additional paid-in capital 2,345,715 1,972,264
Retained earnings 11,246,929 8,851,799
Less treasury stock at cost, 465,836
shares in 1996 and 1995 (1,680,067) (1,680,067)
---------- ----------
Total stockholders' equity 12,256,256 9,479,126
---------- ----------
Commitments and contingent liabilities
(Note 13) - -
---------- ----------
Total liabilities and
stockholders' equity $ 14,870,638 $12,896,415
========== ==========
The accompanying notes are an integral part of these financial statements.
Nobility Homes, Inc.
Consolidated Statements of Income
For the years ended November 2, 1996, November 4, 1995 and
October 29, 1994
1996 1995 1994
Net sales $35,738,608 $29,119,703 $21,209,805
Net sales - related parties 716,587 1,686,132 1,872,586
---------- ---------- ----------
Total net sales 36,455,195 30,805,835 23,082,391
Less cost of goods sold (27,159,157) (23,584,591) (17,997,513)
---------- ---------- ----------
Gross profit 9,296,038 7,221,244 5,084,878
Selling, general and
administrative expenses (5,456,774) (4,348,797) (3,295,053)
Interest expense on floor
plan financing - (162,752) (204,697)
---------- ---------- ----------
Operating income 3,839,264 2,709,695 1,585,128
Other income (expense):
Life insurance proceeds - 1,000,000 -
Gain on sale of idle facility - - 231,327
Gain on related party
installment sale - 348,884 162,530
Interest income 19,544 33,842 81,308
Interest expense (62,849) (72,172) (53,567)
Miscellaneous income
(expense) 90,171 29,189 (47,550)
---------- ---------- ----------
46,866 1,339,743 374,048
---------- ---------- ----------
Income before provision for
income taxes and cumulative
effect 3,886,130 4,049,438 1,959,176
Less provision for income taxes (1,491,000) (1,092,000) (770,000)
---------- ---------- ----------
Income before cumulative effect 2,395,130 2,957,438 1,189,176
Cumulative effect of change to
FAS 109 - - 580,000
---------- ---------- ----------
Net income $2,395,130 $2,957,438 $ 1,769,176
========== ========== ==========
Weighted average shares
outstanding 2,961,970 2,882,990 2,896,879
Earnings per share
Income before cumulative
effect $ .81 $ 1.03 $ .41
Cumulative effect - - .20
---------- ---------- ----------
Net income $ .81 $ 1.03 $ .61
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Nobility Homes, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended November 2, 1996, November 4, 1995 and
October 29, 1994
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
Balance at October 30, 1993 $ 172,473 $ 1,934,921 $ 4,125,185 $(1,412,880) $ 4,819,699
Treasury stock purchased
(12,000 shares) (108,000) (108,000)
Net income 1,769,176 1,769,176
---------- ---------- ---------- ---------- ----------
Balance at October 29, 1994 172,473 1,934,921 5,894,361 (1,520,880) 6,480,875
Common stock issued for
acquisition of retail
centers (23,529 shares) 2,353 197,647 200,000
Treasury stock purchased
(19,600 shares) (159,187) (159,187)
Stock split,
three-for-two, effective
December 22, 1995 64,122 (64,122) - -
Stock split,
three-for-two, effective
July 26, 1996 96,182 (96,182) - -
Net income 2,957,438 2,957,438
---------- ---------- ---------- ---------- ----------
Balance at November 4, 1995 335,130 1,972,264 8,851,799 (1,680,067) 9,479,126
Common stock issued for
acquisition of retail
centers (18,000 shares) 1,800 250,200 252,000
Stock options exercised
(5,000 shares at $5.00 per
share and 15,000 shares at
$7.00 per share) 2,000 128,000 130,000
Stock split,
three-for-two, effective
December 22, 1995 1,900 (1,900) -
Stock split,
three-for-two, effective
July 26, 1996 2,849 (2,849) -
Net income 2,395,130 2,395,130
---------- ---------- ---------- ---------- ----------
Balance at November 2, 1996 $ 343,679 $ 2,345,715 $11,246,929 $(1,680,067) $12,256,256
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Nobility Homes, Inc.
Consolidated Statements of Cash Flows
For the years ended November 2, 1996, November 4, 1995 and
October 29, 1994
1996 1995 1994
Cash flows from operating
activities:
Net income $ 2,395,130 $ 2,957,438 $ 1,769,176
Adjustments to reconcile net
income to net cash flows
provided by (used in)
operating activities:
Depreciation and amortization 144,519 114,861 104,569
Gain on sale of idle facility - - (231,327)
Gain on related party
installment sale - (348,884) (162,530)
Deferred income taxes 7,300 945,730 (945,730)
Deferred income taxes -
noncurrent (12,895) (847,005) 445,730
(Increase) decrease in:
Accounts receivable - trade (77,935) (165,737) (115,282)
Accounts receivable - trade,
from related parties 605,658 (164,026) 136,453
Inventories (939,776) (2,145,476) (565,142)
Other current assets (25,654) 74,593 (271,808)
Increase (decrease) in:
Accounts payable (85,655) 360,649 214,364
Accrued expenses (173,762) 227,834 28,150
Other current liabilities 115,578 108,320 (619,385)
---------- ---------- ----------
Net cash flows provided
by (used in) operating
activities 1,952,508 1,118,297 (212,762)
---------- ---------- ----------
Cash flows from investing
activities:
Purchase of investments - - (3,000,000)
Maturity of investments - - 3,040,000
Purchase of plant and equipment (239,039) (163,204) (96,446)
Proceeds from sale of property
and equipment - - 323,670
Issuance of notes receivable (25,778) - (47,500)
Collections of notes receivable 25,668 17,605 14,649
Collections of note receivable
from related party installment
sale - 297,584 120,558
Issuance of note receivable
from related party - - (862,500)
Collections of notes receivables
from related parties - - 965,500
Increase in receivables from
Officers for life insurance
premiums (19,975) (19,975) (19,975)
Increase in cash surrender
value of life insurance (47,564) (97,062) (87,447)
Net cash flows (used in)
provided by investing
activities (306,688) 34,948 350,509
---------- ---------- ---------
The accompanying notes are an integral part of these financial statements.
Nobility Homes, Inc.
Consolidated Statements of Cash Flows
For the years ended November 2, 1996, November 4, 1995 and
October 29, 1994
1996 1995 1994
Cash flows from financing
activities:
Decrease in floor plan
financing $ - $(1,553,602) $(1,185,847)
Principal payments on note
payable to stockholders - (266,666) (43,334)
Additions to notes payable -
cash surrender value of
life insurance 24,929 31,459 30,917
Principal payments on notes
payable (683,997) (15,919) (14,051)
Additions to notes payable - - 8,000
Proceeds from exercise of
stock options 130,000 - -
Purchase of treasury stock - (159,187) (108,000)
---------- ---------- ----------
Net cash flows used in
financing activities (529,068) (1,963,915) (1,312,315)
---------- ---------- ----------
Increase (decrease) in cash and
cash equivalents 1,116,752 (810,670) (1,174,568)
Cash and cash equivalents at
beginning of year 932,432 1,743,102 2,917,670
---------- ---------- ----------
Cash and cash equivalents at
end of year $ 2,049,184 $ 932,432 $ 1,743,102
========== ========== ==========
Supplemental disclosure of
cash flow information
Interest paid $ 50,839 $ 183,624 $ 224,682
========== ========== ==========
Income taxes paid $ 1,200,000 $ 920,000 $ 1,426,000
========== ========== ==========
Nobility Homes, Inc.
Notes to Consolidated Financial Statements
November 2, 1996 and November 4, 1995
1. Reporting Entity and Significant Accounting Policies
Operations
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 subsidiary,
Prestige Insurance Services, Inc., an independent insurance agency
(collectively the "Company"). The Company is engaged in the
manufacture and sale of manufactured homes to various dealerships
including their 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 fifteen Florida retail sales centers in Ocala (3),
Tallahassee, St. Augustine, Tampa, Chiefland (2), Lake City,
Auburndale, Jacksonville, Brooksville, Inverness, Tavares and Perry.
All intercompany accounts and transactions of Nobility and its wholly-
owned subsidiary have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the first Saturday on or after
October 31. Prior to 1995, the Company's fiscal year ended on the
Saturday closest to October 31. The years ended November 2, 1996 and
November 4, 1995 consisted of a fifty-three week period and the year
ended October 29, 1994 consisted of a fifty-two week period.
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. Cash and cash equivalents in the accompanying
consolidated financial statements represent bank deposits.
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.
Other Assets
Other assets includes Receivables from Officers for Life Insurance
Premiums, Cash Surrender Value of Life Insurance (see Note 4) and
Goodwill. Goodwill represents costs in excess of the fair value of
net assets of businesses acquired and is amortized using the straight-
line method over 15 years. The Company periodically reviews goodwill
to assess recoverability. An impairment would be recognized if a
permanent diminution in value were to occur.
Revenue Recognition
The Company recognizes revenue on the sale of a manufactured home when
title transfers to an unrelated third party.
Gain on Related Party Installment Sale
Gain on related party installment sale represents gain associated with
the sale of the Company's limited partnership interest in a
manufactured housing community. The final amount recognized upon
collection of the related note receivable appears in the fiscal 1995
consolidated financial statements.
Other Current Liabilities
Other current liabilities primarily includes customer deposits of
approximately $451,000 and $312,000 and deferred gross profit on
related party sales of approximately $58,000 and $125,000, as of
November 2, 1996 and November 4, 1995, respectively. Gross profit on
sales of manufactured homes to certain related parties is deferred
until these manufactured homes are sold to unrelated third parties, at
which point the gross profit is recognized as earnings in the
accompanying consolidated financial statements.
Warranty Costs
Estimated costs related to product warranties are accrued as the
manufactured homes are sold and are included in accrued expenses in
the accompanying consolidated financial statements.
Income Taxes
The Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" (FAS 109) during the first quarter
of fiscal 1994. Under provisions of FAS 109, the Company elected not
to restate prior years' consolidated financial statements. The
$580,000 cumulative effect of initial adoption on prior years'
retained earnings has been included in the 1994 consolidated financial
statements as the cumulative effect of a change in accounting
principle.
FAS 109 requires the recognition of deferred taxes for the expected
future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Temporary
differences that give rise to the Company's deferred tax assets and
liabilities relate primarily to the allowance for doubtful accounts.
Treasury Stock
Treasury stock is recorded at its cost to the Company and is presented
as a reduction to stockholders' equity in the accompanying
consolidated financial statements.
Earnings Per Share
Earnings per share information was retroactively restated to give
effect to the stock splits as discussed in Note 14. Earnings per
share are computed by dividing net income by the weighted average
number of common shares outstanding during the period.
Concentration of Credit Risk
The Company's customers are concentrated in the State of Florida. No
single customer accounted for over 10% of the Company's sales.
Fair Value of Financial Instruments
The carrying amount of accounts receivable and accounts payable
approximates fair value because of the short maturity of those
instruments. The fair value of the revolving line of credit,
revolving credit agreement and floor plan financing is assumed to
approximate the recorded value because there have not been any
significant changes in market conditions or specific circumstances
since the instruments were originally recorded.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" (FAS 121). FAS 121 establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets to be held and used and for long-
lived assets and certain identifiable intangibles to be disposed of.
FAS 121 is effective for fiscal years beginning after December 15,
1995. Management believes there will be no impact on the Company's
consolidated financial statements if FAS 121 were adopted currently.
Reclassifications
Certain amounts in the prior year consolidated financial statements
have been reclassified to conform to current year presentation.
2. Acquisitions
On November 22, 1995, the Company acquired three manufactured home
retail sales centers in Florida in an asset acquisition by issuing
18,000 shares of common stock valued at $252,000. On May 8, 1995, the
Company acquired two manufactured home retail sales centers in Florida
in an asset acquisition by issuing 23,529 shares of common stock
valued at $200,000. Both transactions were accounted for using the
purchase method of accounting. The purchased assets were recorded at
the estimated fair value at the date of acquisition. Approximately
$74,000 and $147,000 of goodwill was recorded for each acquisition,
respectively, which is being amortized on a straight-line basis over
15 years. The results of operations of the acquired businesses have
been included in the consolidated financial statements from the date
of acquisition.
3. Related Party Transactions
Affiliated Entities
The President, Chairman of the Board of Directors and 49% stockholder
of the Company (the "President") owns 100% of the stock of TLT, Inc.
TLT, Inc. is the general partner of three limited partnerships which
are developing manufactured housing communities in Central and North
Florida (the "TLT Communities"). The President owns between a 23% and
a 100% direct and indirect interest in each of these limited
partnerships. The TLT Communities purchased manufactured homes
exclusively from the Company during fiscal 1996, 1995 and 1994.
Terms of Sales to Related Parties
The Company sells manufactured homes to unaffiliated customers under
various terms which require payment between 15 and 180 days from the
date of shipment. The Company charges the same sales price to both
unaffiliated customers and related party customers. As discussed in
Note 1, the Company defers gross profits on sales to TLT Communities,
a related party, until such time as the manufactured homes are sold to
a retail buyer.
Accounting Services
The Company provides certain accounting services for TLT, Inc. and the
TLT Communities at no charge in return for exclusive sales rights at
these communities.
Volume Rebate Program
The Company has a volume rebate program for all dealers which pays
rebates based upon sales volume. Volume rebates are recorded as a
reduction of sales in the accompanying financial statements. Volume
rebates for the TLT Communities amounted to $28,000 in 1996, $91,000
in 1995 and $97,000 in 1994.
Net Sales and Deferred Gross Profit
The following summarizes the portion of the Company's net sales and
deferred gross profit for the years ended November 2, 1996, November
4, 1995 and October 29, 1994 resulting from related party
transactions:
1996 1995 1994
Net Deferred Net Deferred Net Deferred
Sales Profit Sales Profit Sales Profit
TLT, Inc. and TLT
Communities $716,587 $58,000 $1,280,109 $124,695 $1,395,207 $84,633
Notes Receivable from Related Parties
Beginning in 1990, 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. As of November 2, 1996 and
November 4, 1995, advances amounted to $1,919,000. These advances are
non-interest bearing and have been fully reserved since 1991. No
additional amounts have been advanced for working capital needs since
1993.
Receivable from Officers for Life Insurance Premiums
The Company funds premiums for the President on two split-dollar life
insurance policies with a face value of $1,000,000 at November 2, 1996
and November 4, 1995. Commencing in fiscal year 1996, the Company
paid premiums for the Executive Vice President on a split-dollar life
insurance policy with a face value of $1,200,000 at November 2, 1996.
These policies insure the President and the Executive Vice President
and name their respective families as beneficiary. The cumulative
premiums advanced under this arrangement amounted to $498,560 at
November 2, 1996 and $478,585 at November 4, 1995. The advances are
non-interest bearing. Net cash surrender value at November 2, 1996 of
approximately $591,700 and approximately $563,000 at November 4, 1995
was pledged to the Company as security for advances under this
arrangement.
4. Other Assets
Other assets at November 2, 1996 and November 4, 1995 are comprised of
the following:
1996 1995
Goodwill $206,779 $147,356
Receivables from Officers for
life insurance premiums 498,560 478,585
Cash surrender value of
life insurance 914,707 867,143
--------- ---------
$1,620,046 $1,493,084
========= =========
5. Inventories
Inventories at November 2, 1996 and November 4, 1995 are summarized as
follows:
1996 1995
Raw materials $554,255 $530,061
Work-in-process 95,279 73,068
Finished homes 6,302,097 5,366,658
Pre-owned manufactured homes 311,133 292,374
Model home furniture 558,144 523,998
--------- ---------
$7,820,908 $6,786,159
========= =========
The finished homes, pre-owned manufactured homes and model home
furniture are maintained at the Prestige retail sales centers.
6. Property, Plant and Equipment
Property, plant and equipment along with their estimated useful lives
and related accumulated depreciation as of November 2, 1996 and
November 4, 1995 is summarized as follows:
Range
of Lives
in Years 1996 1995
Land - $ 286,639 $ 286,639
Land and leasehold improvements 10-20 214,133 186,751
Buildings and improvements 15-40 1,221,332 1,054,374
Machinery and equipment 3-10 477,870 533,997
Furniture and fixtures 3-10 243,325 201,637
---------- ----------
2,443,299 2,263,398
Less accumulated depreciation (1,276,870) (1,269,022)
---------- ----------
$ 1,166,429 $ 994,376
========== ==========
Depreciation expense totaled $129,700, $114,900 and $104,600 for
fiscal 1996, 1995 and 1994, respectively.
7. Income Taxes
The provision for income taxes for the years ended November 2, 1996,
November 4, 1995 and October 29, 1994 consists of the following:
1996 1995 1994
Current tax expense:
Federal $ 1,282,000 $ 843,000 $ 592,000
State 215,000 150,000 98,000
----------- ---------- ----------
1,497,000 993,000 690,000
Deferred tax expense:
Federal (6,000) 99,000 80,000
----------- ---------- ----------
Provision for income
taxes $ 1,491,000 $ 1,092,000 $ 770,000
=========== ========== ==========
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 2, 1996,
November 4, 1995 and October 29, 1994.
1996 1995 1994
Provision - federal
statutory tax rate $ 1,331,000 $ 1,328,000 $ 666,000
Increase (decrease)
resulting from:
State taxes, net of
federal tax benefit 131,000 99,000 71,000
Permanent differences:
Proceeds from officers
life insurance - (340,000) -
Other 29,000 5,000 33,000
----------- ------------ ----------
Provision for income
taxes $ 1,491,000 $ 1,092,000 $ 770,000
=========== ============ ==========
The types of temporary differences between the tax bases of assets
and liabilities and their financial reporting amounts that give rise
to deferred tax assets and deferred tax liabilities are as follows
(these numbers are shown net of tax):
1996 1995
Gross deferred tax assets:
Allowance for doubtful accounts $ 722,000 $ 740,000
Deferred gross profit on related
party sales 22,000 47,000
Accrued expenses 83,900 66,200
Reserve for warranty expense 39,500 39,500
---------- ----------
Total deferred tax assets 867,400 892,700
---------- ----------
Gross deferred tax liabilities:
Depreciation (14,800) (44,000)
Accrued expenses - (1,695)
---------- ----------
Total deferred tax liabilities (14,800) (45,695)
---------- ----------
Net deferred tax asset $ 852,600 $ 847,005
========== ==========
The Company believes that, based upon the lengthy and consistent
history of profitable operations, it is probable that the net
deferred tax assets of $852,600 at November 2, 1996 will be realized
on future tax returns, primarily from the generation of future
taxable income.
8. Life Insurance Policies
The Company owns certain life insurance policies with a total face
value of approximately $960,000 at November 2, 1996 and November 4,
1995. These policies insure the President of the Company and name
the Company as beneficiary. The accompanying consolidated financial
statements include the cash surrender value of these policies as a
noncurrent other asset in the amount of $914,707, and $867,143 as of
November 2, 1996 and November 4, 1995, respectively.
The Company had loans outstanding against the cash surrender value
of these policies totaling $652,000 as of November 4, 1995. In July
1996, the Company paid in full loans outstanding against the cash
surrender value of the life insurance policies.
The Company received $1,000,000 from the proceeds of a life
insurance policy on the former President of Prestige who died during
fiscal 1995. This amount has been included as a component of other
income in the accompanying consolidated statement of income.
9. Financing Agreements
Revolving Line of Credit
On July 17, 1996, the Company entered into a revolving line of
credit agreement ("line of credit") with a bank which provides for
borrowings up to $1,500,000. The line of credit is payable on
demand and provides for monthly interest on the outstanding balance
at the 30-day LIBOR rate plus 2.25% (7.75% at November 2, 1996).
The line of credit is due on demand and includes certain restrictive
covenants relating to tangible net worth, minimum levels of working
capital and acquiring new debt.
Revolving Credit Agreement
The Company also maintains a revolving credit agreement (the
"Agreement") with a bank which provides for borrowings up to
$2,500,000. The Agreement expires on demand and provides for
interest at the annual LIBOR rate plus 2.5% (8.21% at November 2,
1996) on the outstanding balance.
As of November 4, 1995, borrowings outstanding under the Agreement
totaled $919,000. This amount has been netted against cash and cash
equivalents in the consolidated balance sheet due to the legal right
of offset established by a Cash Management Agreement with the bank.
The outstanding advance was repaid on the first business day of
fiscal year 1996. Interest expense under the Agreement was
approximately $26,000 and $19,800 for 1996 and 1995, respectively.
There are no commitment fees or compensating balance arrangements
associated with the line of credit or the Agreement. At November 2,
1996 there were no borrowings outstanding under either credit
facility.
Floor Plan Financing
The Company has floor plan arrangements with certain finance
companies to finance a portion of its inventory. Amounts are
borrowed on individual manufactured homes up to the invoice price.
These loans bear interest at annual rates up to 1.50% above the
prime interest rate, with interest payable monthly, and are secured
by the related manufactured home. These loans are due at the
earlier of the sale of the manufactured home to retail customers or
various terms which range from 360 days to 540 days.
Amounts outstanding under these arrangements totaled $1,553,600 at
October 29, 1994. There were no amounts outstanding at November 2,
1996 or November 4, 1995. The Company incurred interest expense
under these arrangements of approximately $163,000 and $205,000 in
1995 and 1994, respectively.
10. 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.
On December 18, 1995, an investor relations consultant exercised
certain stock options granted in February 1993 to purchase 20,000
shares of common stock. The shares were purchased at an exercise
price of $5.00 per share for 5,000 shares and $7.00 per share for
the remaining 15,000 shares.
11. 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 $568,300, $422,400 and
$340,800 for fiscal 1996, 1995 and 1994, respectively.
12. Significant Fourth Quarter Adjustment
The Company recorded an adjustment in the fourth quarter of 1995 to
defer gross profit on certain intercompany and related party sales,
primarily due to additional inventory at new retail sales centers.
The adjustment amounted to approximately $322,000 and represented a
charge to the earnings of the Company. This adjustment impacts all
quarters previously presented by the Company for fiscal 1995.
13. Commitments and Contingent Liabilities
Leases - Operating
The Company leases the property for the Prestige retail sales
centers from various unrelated entities under operating lease
agreements expiring through September 1999. The Company also leases
certain equipment under operating leases. Total lease expense
amounted to approximately $413,000, $360,000 and $241,000 in fiscal
1996, 1995 and 1994, respectively.
Future minimum lease payments under operating leases with initial or
remaining noncancelable lease terms in excess of one year at
November 2, 1996 are as follows:
Year
1997 $ 140,540
1998 97,282
1999 50,510
---------
Total $ 288,332
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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 $1,270,000, $781,000 and $273,000 at November 2, 1996,
November 4, 1995 and October 29, 1994, 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 1996, 1995 or 1994.
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, any related liabilities that might arise would not
have a material adverse effect on the Company's financial position
or results of operations.
14. Stock Splits
On November 7, 1995 and July 9, 1996, the Company declared a three-
for-two stock split in the form of a stock dividend, payable on
January 31, 1996 and August 16, 1996 to stockholders of record as of
December 22, 1995 and July 26, 1996, respectively. Fiscal 1995
stockholders' equity has been restated to give retroactive
recognition to the stock splits in prior periods by reclassifying
from additional paid-in-capital to common stock the par value of the
1,650,530 shares arising from the split. In addition, all
references in the financial statements to per share amounts of the
Company's common stock have been restated.