EX-13 3 dkm63i.txt EXHIBIT 13 - CONSOLIDATED FINANCIAL STATEMENTS TEDDER, JAMES, WORDEN & ASSOCIATES, P.A. CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS ADVISORS AN INDEPENDENTLY OWNED MEMBER OF THE RSM MCGLADREY NETWORK Independent Auditors' Report To the Board of Directors and Stockholders of Nobility Homes, Inc. We have audited the accompanying consolidated balance sheet of Nobility Homes, Inc. and Subsidiaries (the "Company") as of November 1, 2003, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity, and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides 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 1, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill as of November 3, 2002 as required by the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. /s/ TEDDER, JAMES, WORDEN & ASSOCIATES, P.A. Orlando, Florida December 17, 2003 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PRICEWATERHOUSECOOPERS -------------------------------------------------------------------------------- PricewaterhouseCoopers LLP 101 East Kennedy Boulevard Suite 1500 Tampa FL 33602-5147 Telephone (813) 229 0221 Facsimile (813) 229 3646 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 subsidiaries (the "Company") at November 2, 2002 and November 3, 2001, and the results of their operations and their cash flows for each of the three years in the period ended November 2, 2002 in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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 over-all financial presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP December 13, 2002 2 CONSOLIDATED BALANCE SHEETS -------------------------------------------------------------------------------- November 1, 2003 and November 2, 2002
2003 2002 Assets Current assets: Cash and cash equivalents $ 10,641,748 $ 12,481,711 Short-term investments (Note 2) 342,550 - Accounts receivable 2,096,128 1,074,481 Inventories 6,557,659 6,589,076 Deferred income taxes 485,716 608,700 Prepaid expenses and other current assets 501,014 368,129 -------------------- --------------------- Total current assets 20,624,815 21,122,097 Property, plant and equipment, net 3,136,506 2,948,096 Long-term investments (Note 2) 5,249,825 - Investment in joint venture - Majestic 21 1,203,804 1,020,056 Deferred income taxes 15,050 22,700 Other assets 2,474,905 2,383,425 -------------------- --------------------- Total assets $ 32,704,905 $ 27,496,374 -------------------- ---------------------
The accompanying notes are an integral part of these financial statements. 3 CONSOLIDATED BALANCE SHEETS (CONTINUED) -------------------------------------------------------------------------------- November 1, 2003 and November 2, 2002
2003 2002 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,484,997 $ 1,178,395 Accrued expenses and other current liabilities 2,988,131 1,834,965 Accrued compensation 524,784 704,122 Income taxes payable 890,675 - ------------------- -------------------- Total current liabilities 5,888,587 3,717,482 ------------------- -------------------- 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 in 2003 and 2002 536,491 536,491 Additional paid-in capital 8,613,640 8,629,144 Retained earnings 25,500,362 22,421,883 Accumulated other comprehensive income 35,516 - Less treasury stock at cost, 1,354,663 and 1,347,694 shares, respectively, in 2003 and 2002 (7,869,691) (7,808,626) ------------------- -------------------- Total stockholders' equity 26,816,318 23,778,892 ------------------- -------------------- Total liabilities and stockholders' equity $ 32,704,905 $ 27,496,374 ------------------- --------------------
The accompanying notes are an integral part of these financial statements. 4 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME -------------------------------------------------------------------------------- For the years ended November 1, 2003, November 2, 2002 and November 3, 2001
2003 2002 2001 Net sales $ 39,205,481 $ 37,872,138 $ 30,278,768 Net sales - related parties 23,675 44,325 8,895 -------------------- ------------------- -------------------- Total net sales 39,229,156 37,916,463 30,287,663 Cost of goods sold (29,362,197) (28,114,834) (21,851,960) -------------------- ------------------- -------------------- Gross profit 9,866,959 9,801,629 8,435,703 Selling, general and administrative expenses (5,789,361) (5,871,930) (5,435,803) -------------------- ------------------- -------------------- Operating income 4,077,598 3,929,699 2,999,900 -------------------- ------------------- -------------------- Other income: Interest income 211,018 196,026 365,029 Undistributed earnings in joint venture - Majestic 21 220,148 291,081 285,534 Gain on recovery of TLT, Inc. note receivable (Note 3) - 320,764 200,000 Receipt of stock in connection with demutualization of insurance company 167,930 - - Miscellaneous 56,785 72,332 62,889 -------------------- ------------------- -------------------- 655,881 880,203 913,452 -------------------- ------------------- -------------------- Income before provision for income taxes 4,733,479 4,809,902 3,913,352 Provision for income taxes (1,655,000) (1,675,000) (1,358,000) -------------------- ------------------- -------------------- Income before cumulative effect adjustment 3,078,479 3,134,902 2,555,352 Cumulative effect adjustment, net of tax - - (77,439) -------------------- ------------------- -------------------- Net income 3,078,479 3,134,902 2,477,913 Other comprehensive income, net of tax Unrealized investment gains 35,516 - - -------------------- ------------------- -------------------- Comprehensive income $ 3,113,995 $ 3,134,902 $ 2,477,913 -------------------- ------------------- -------------------- Average shares outstanding Basic 3,996,424 4,107,748 4,200,863 Diluted 4,021,996 4,130,464 4,286,778 Earnings per share Basic $ 0.77 $ 0.76 $ 0.59 Diluted $ 0.77 $ 0.76 $ 0.58
The accompanying notes are an integral part of these financial statements. 5 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -------------------------------------------------------------------------------- For the years ended November 1, 2003, November 2, 2002 and November 3, 2001
Accumulated Additional Other Common Common Paid-in Retained Comprehensive Treasury Stock Shares Stock Capital Earnings Income Stock Total Balance at 11/4/2000 4,421,938 $ 536,491 $ 8,629,144 $ 16,809,068 $ - $ (4,949,732) $21,024,971 Purchase of treasury stock (277,500) - - - - (1,779,182) (1,779,182) Net income - - - 2,477,913 - - 2,477,913 ------------- ------------ ------------- ---------------- ------------ ----------------- ------------- 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 ------------- ------------ ------------- ---------------- ------------ ----------------- -------------
The accompanying notes are an integral part of these financial statements. 6 CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------------------------------------------------- For the years ended November 1, 2003, November 2, 2002 and November 3, 2001
2003 2002 2001 Cash flows from operating activities: Net income $ 3,078,479 $ 3,134,902 $ 2,477,913 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 232,377 236,176 200,458 Deferred income taxes 130,634 110,800 116,500 Undistributed earnings in joint venture - Majestic 21 (220,148) (291,081) (285,534) Distributions from joint venture - Majestic 21 36,400 73,200 108,000 Increase in cash surrender value of life insurance (91,480) (89,529) (92,328) Payment of employee benefit plan expenses with treasury stock 28,345 - - Gain on recovery of TLT, Inc. note receivable - (320,764) (200,000) Cumulative effect of accounting change - - 77,439 Decrease (increase) in: Accounts receivable - trade (1,021,647) (700,336) (344,075) Inventories 31,417 1,017,835 4,285 Prepaid expenses and other current assets (132,885) (106,192) (94,874) (Decrease) increase in: Accounts payable 306,602 64,151 88,780 Accrued expenses and other current liabilities 1,153,166 (331,741) 735,164 Accrued compensation (179,338) 293,216 (112,975) Income taxes payable 890,675 (325,553) 298,003 ------------------ ----------------- ------------------ Net cash provided by operating activities 4,242,597 2,765,084 2,976,756 ------------------ ----------------- ------------------ Cash flows from investing activities: Purchase of property, plant and equipment (420,787) (529,437) (220,684) Collection of TLT, Inc. note receivable - 320,764 200,000 ------------------ ----------------- ------------------ Net cash used in investing activities (420,787) (208,673) (20,684) ------------------ ----------------- ------------------ Cash flows from financing activities: Purchase of investments (5,556,859) - - Purchase of treasury stock (260,158) (1,079,712) (1,779,182) Proceeds from exercise of employee stock options 155,244 - - ------------------ ----------------- ------------------ Net cash used in investing activities (5,661,773) (1,079,712) (1,779,182) ------------------ ----------------- ------------------ Net (decrease) increase in cash and cash equivalents (1,839,963) 1,476,699 1,176,890 Cash and cash equivalents at beginning of year 12,481,711 11,005,012 9,828,122 ------------------ ----------------- ------------------ Cash and cash equivalents at end of year $ 10,641,748 $ 12,481,711 $ 11,005,012 ------------------ ----------------- ------------------ Supplemental disclosure of cash flow information Interest paid $ - $ - $ - ------------------ ----------------- ------------------ Income taxes paid $ 620,000 $ 2,227,000 $ 884,000 ------------------ ----------------- ------------------
The accompanying notes are an integral part of these financial statements. 7 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 years ended November 1, 2003, November 2, 2002 and November 3, 2001 consisted of fifty-two week periods. 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 1, 2003 and November 2, 2002, approximately $8,815,000 and $10,139,000, 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 ability and intent 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 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. 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. INVESTMENT IN JOINT VENTURE -- MAJESTIC 21 The Company owns a 50% interest in a joint venture engaged in providing mortgage financing on manufactured homes. This investment is accounted for using the equity method of accounting (see Note 3). 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 writedown 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. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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 entities to assess the fair value of the net assets underlying all acquisition-related goodwill on a reporting unit basis beginning in fiscal year 2003. When the fair value is less than the related goodwill value, entities are required to reduce the amount of goodwill. The approach to evaluating the recoverability of goodwill as outlined 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 1, 2003 and November 2, 2002, goodwill, net of accumulated amortization, totaled $298,708. Accumulated amortization of goodwill totaled $185,669 at November 1, 2003 and November 2, 2002. Amortization of goodwill totaled $29,000 and $25,000 for fiscal years 2002 and 2001, respectively. WARRANTY COSTS The Company provides for a warranty as the manufactured homes are sold. Amounts related to these warranties are immaterial for all periods presented. 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 1, 2003 totaled $5,592,375 and $5,604,596, respectively. 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 SFAS No. 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 dates, as prescribed by FAS 123, the Company's net income and earnings per share would have been as follows: 2003 2002 2001 ---- ---- ---- Net income, as reported $3,078,479 $3,134,902 $2,477,913 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 of related tax effects (32,468) (27,532) (49,153) --------- --------- --------- Pro forma net income $3,064,435 $3,107,370 $2,428,760 --------- --------- --------- 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Basic earnings per share: As reported $ 0.77 $ 0.76 $ 0.59 Pro forma $ 0.77 $ 0.76 $ 0.58 Diluted earnings per share: As reported $ 0.77 $ 0.76 $ 0.58 Pro forma $ 0.76 $ 0.75 $ 0.57 REVENUE RECOGNITION Effective November 5, 2000, the Company adopted the Securities Exchange Commission (SEC) Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") and recorded a charge of approximately $77,000, or 2 cents per diluted share, as a cumulative effect of an accounting change as of that date. The pro forma effects of this accounting change for the prior periods have not been presented because information related to the installation and set up of homes was not previously maintained in the Company's accounting systems, and thus the amounts are not readily determinable. Historically, the Company recognized revenue for retail cash sales when the cash payment was received, construction of the home was complete, title had passed to the retail homebuyer and funds had been deposited into the Company's accounts. In the case of credit sales which represent the majority of retail sales, revenue was recognized when a down payment was received and the home buyer entered into an installment sales contract, construction of the home was complete, title had passed to the retail home buyer, and funds had been received from the finance company and deposited into the Company's accounts. As a result of adopting the provisions of SAB 101 during 2001, the Company now recognizes retail sales based upon occurrence of all of the above conditions plus delivery and set up of the home at the retail homebuyer's site, and completion of any other significant obligations. Approximately 48% of these installment sales contracts, which are normally payable over 84 to 360 months, are financed by Majestic 21, the Company's joint venture financing partnership (see Note 3). Historically, for wholesale home sales to independent retailers, the Company recognized revenue based upon shipment of the home since risk of loss passed to the independent retailer at that time. As a result of adopting the provisions of SAB 101 during 2001, the Company now recognizes wholesale home sales to independent retailers upon receiving wholesale floor plan financing or establishing retailer credit approval for terms, shipping of the home, and transferring title and risk of loss to the independent retailer. For wholesale shipments to independent retailers, 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. 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 other accrued expenses in the accompanying consolidated balance sheets. 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 $470,000, $472,000 and $508,000 for fiscal years 2003, 2002 and 2001, respectively. INCOME TAXES Deferred tax assets and liabilities are determined based on differences between financial reporting and taxes bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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 25,572, 22,716, and 85,915 for fiscal years 2003, 2002 and 2001, respectively. Stock options to purchase 7,810, 113,251 and 142,340 shares of common stock for the fiscal years 2003, 2002, and 2001, 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 12% and 11% of the Company's sales during the fiscal years ended 2003 and 2002, respectively. The Company had an approximate $1,807,000 and $835,000 receivable balance with this customer at November 1, 2003 and November 2, 2002, respectively. There were no other customers that accounted for over 10% of the Company's sales during fiscal 2003 or 2002. 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. 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 Effective November 3, 2002, the Company adopted FAS 142, Goodwill and Other Intangible Assets. FAS 142 requires entities to assess the fair value of the net assets underlying all acquisition-related goodwill on a reporting unit basis (see Note 6). In August 2001, the FASB issued Statement No. 144 ("FAS 144"), Accounting for the Impairment or Disposal of Long-Lived Assets. FAS 144 supersedes FAS 121 and applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 ("APB 30"), Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. FAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. FAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and generally, its provisions are to be applied prospectively. The adoption of FAS 144 in fiscal year 2003 had no material impact on the Company's reported consolidated results of operations, financial position or cash flows. In December 2002, the FASB issued Statement No. 148 ("FAS 148"), Accounting for Stock-Based Compensation- Transition and Disclosure. FAS 148 amends FAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of FAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. FAS 148 is effective for financial statements for fiscal years ending after December 15, 2002. The Company adopted this Statement in fiscal year 2003 and had no significant impact from this adoption. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- Financial Accounting Standards Board Interpretation ("FIN") 46, Consolidation of Variable Interest Entities, was issued in January 2003. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 will be effective for any variable interest entities of the Company in the second quarter of fiscal 2004. The Company is in the process of evaluating the impact of the adoption of FIN 46; however, the Company does not believe that the consolidation of any potential variable interest entities would be required nor would it have a material impact on its consolidated financial statements. 2. INVESTMENTS Investments in held-to-maturity and available-for-sale debt and equity securities were as follows at 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): Equity securities in a public company 165,519 51,135 - 216,654 -------------- ------------- --------------- --------------- Total investments $ 5,541,240 $ 82,622 $ (19,266) $ 5,604,596 -------------- ------------- --------------- ---------------
The fair values were estimated based on quoted market prices using current market rates. Contractual maturities of held-to-maturity debt securities at November 1, 2003 were as follows: Estimated Cost Fair Value ----------------- ----------------- Due in less than one year $ 125,896 $ 125,559 Due in 1 - 5 years 3,049,120 3,039,947 Due in 5 - 10 years 2,200,705 2,222,436 ----------------- ----------------- $ 5,375,721 $ 5,387,942 ----------------- ----------------- There were no sales of available-for-sale securities during the fiscal year ended 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 at November 1, 2003:
Held-to-maturity debt securities $ 125,896 Available-for-sale equity securities 216,654 ----------------- Short-term investments 342,550 Held-to-maturity debt securities included in long-term investments 5,249,825 ----------------- Total investments $ 5,592,375 -----------------
12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 3. RELATED PARTY TRANSACTIONS RECEIVABLE FROM OFFICER FOR LIFE INSURANCE PREMIUMS The Company 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 are noninterest 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. Subsequent to November 1, 2003, the advances were repaid (see Note 16). AFFILIATED ENTITIES TLT, Inc. The President, Chairman of the Board of Directors, a 54% stockholder of the Company, ("President") and the Executive Vice President, an 11% stockholder of the Company, each own 50% of the stock of TLT, Inc. TLT, Inc. is the general partner of two 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. The Company sells manufactured homes to unaffiliated customers under various terms which require payment between 7 and 90 days from the date of shipment. The Company charges the same sales price to both unaffiliated customers and related party customers. The Company's net sales to TLT, Inc. and TLT Communities were $23,675, $44,325 and $8,895 in fiscal 2003, 2002 and 2001, respectively. 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, $321,000 and $200,000 to the Company to reduce these outstanding advances in fiscal 2003, 2002 and 2001, 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 1, 2003 was approximately $232,000. 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. 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. The following is summarized financial information of the Company's joint venture: 2003 2002 2001 Total Assets $ 6,518,794 $ 1,916,112 $ 5,692,176 Total Liabilities $ 4,163,661 $ - $ 4,211,826 Total Equity $ 2,355,133 $ 1,916,112 $ 1,480,350 Net Income $ 440,296 $ 582,162 $ 571,068 Distributions received from the joint venture amounted to $36,400, $73,200 and $108,000 in fiscal years 2003, 2002 and 2001, respectively. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 4. INVENTORIES Inventories at November 1, 2003 and November 2, 2002 are summarized as follows: 2003 2002 Raw materials $ 680,036 $ 555,231 Work-in-process 109,947 113,375 Finished homes 5,272,867 5,525,607 Pre-owned manufactured homes 401,728 320,564 Model home furniture 93,081 74,299 ---------------- ---------------- $ 6,557,659 $ 6,589,076 ---------------- ---------------- 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 1, 2003 and November 2, 2002 are summarized as follows:
Range of Lives in Years 2003 2002 Land - $ 1,235,247 $ 1,235,247 Land and leasehold improvements 10-20 528,874 503,867 Buildings and improvements 15-40 2,101,623 2,031,038 Machinery and equipment 3-10 1,002,362 730,335 Furniture and fixtures 3-10 576,159 541,159 ----------------- ----------------- 5,444,265 5,041,646 Less accumulated depreciation (2,307,759) (2,093,550) ----------------- ----------------- $ 3,136,506 $ 2,948,096 ================= =================
Depreciation expense totaled approximately $232,000, $207,000 and $174,000 for fiscal years 2003, 2002 and 2001, respectively. 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 quarter of fiscal year 2003 and as a result of this valuation process, 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: 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --------------------------------------------------------------------------------
Fiscal Years Ended -------------------------------------------------------- 2003 2002 2001 Net income, as reported $ 3,078,479 $ 3,134,902 $ 2,477,913 Add: goodwill amortization, net of tax - 18,900 16,300 ---------------- ----------------- ----------------- Adjusted net income $ 3,078,479 $ 3,153,802 $ 2,494,213 ---------------- ----------------- -----------------
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 1, 2003 and November 2, 2002 are comprised of the following:
2003 2002 Cash surrender value of life insurance $ 1,579,173 $ 1,487,693 Receivable from officer for life insurance premiums (see Notes 3 and 16) 597,024 597,024 Goodwill, net (see Note 6) 298,708 298,708 ------------------ --------------- $ 2,474,905 $ 2,383,425 ------------------ ---------------
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities at November 1, 2003 and November 2, 2002 are comprised of the following: 2003 2002 Customer deposits $ 2,230,633 $ 1,117,265 Accrued sales taxes 149,481 119,674 Accrued warranty expense 165,000 165,000 Other accrued expenses 443,017 433,026 --------------------- ----------------- $ 2,988,131 $ 1,834,965 --------------------- ----------------- 9. INCOME TAXES The provision for income taxes for the years ended November 1, 2003, November 2, 2002 and November 3, 2001 consists of the following:
2003 2002 2001 Current tax expense: Federal $ 1,366,600 $ 1,414,000 $ 1,103,800 State 157,800 150,200 137,700 ================= ================ =============== 1,524,400 1,564,200 1,241,500 Deferred tax expense 130,600 110,800 116,500 ----------------- ---------------- --------------- Provision for income taxes $ 1,655,000 $ 1,675,000 $ 1,358,000 ================= ================ ===============
15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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 1, 2003, November 2, 2002 and November 3, 2001:
2003 2002 2001 Provision - federal statutory tax rate $ 1,609,400 $ 1,620,000 $ 1,330,500 Increase (decrease) resulting from: State taxes, net of federal tax benefit 115,000 173,000 142,100 Permanent differences: Tax exempt interest (75,500) (60,500) (92,400) Other 6,100 (57,500) (22,200) ---------------- --------------- --------------- Provision for income taxes $ 1,655,000 $ 1,675,000 $ 1,358,000 ---------------- --------------- ---------------
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: 2003 2002 Gross deferred tax assets: Allowance for doubtful accounts $ 87,300 $ 87,300 Inventories 54,000 79,400 Other assets 336,300 447,000 Accrued expenses 62,100 62,100 --------------- -------------- Total deferred tax assets 539,700 675,800 Gross deferred tax liabilities: Depreciation (38,934) (44,400) --------------- -------------- Net deferred tax asset $ 500,766 $ 631,400 =============== ============== The Company believes that it is more likely than not that the net deferred tax assets of $500,766 at November 1, 2003 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 1, 2003) 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 1, 2003 and November 2, 2002, 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 29,700, 127,225 and 277,500 shares of its common stock during fiscal years 2003, 2002 and 2001, respectively. These shares were acquired for general corporate purposes. The Company reissued 22,731 shares of treasury stock during fiscal year 2003 for employee stock option exercises and the payment of employee benefit plan expenses. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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 294,440 and 279,840 at November 1, 2003 and November 2, 2002. Options were held by 13 persons at November 1, 2003. Information with respect to options granted at November 1, 2003 is as follows:
Number of Stock Option Weighted Average Shares Price Range Exercise Price ----------------- ------------------ ------------------- Outstanding at 11/4/2000 219,340 $ 7.73 - 12.81 $ 8.26 Granted 12,350 5.50 - 6.00 5.86 Exercised - - - Canceled (1,500) 6.00 6.00 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
The following table summarizes information about the Plan's stock options at November 1, 2003:
Options Outstanding Options Exercisable ----------------------------------------------------------- ---------------------------------- Weighted Average Remaining Weighted Weighted Shares Contractual Life Average Shares Average Exercise prices Outstanding (years) Exercise Price Outstanding Exercise Price -------------------- --------------- ------------------------ ----------------- ---------------- ---------------- $ 5.50 2,300 2 $ 5.50 2,300 $ 5.50 6.00 5,950 3 6.00 5,950 6.00 8.03 165,000 3 8.03 165,000 8.03 8.30 7,950 4 8.30 7,950 8.30 8.83 11,550 5 8.83 - 8.83 12.81 7,810 1 12.81 7,810 12.81 --------------- ------------------------ ----------------- -------------- ---------------- 200,560 3 $ 8.18 189,010 $ 8.14 =============== ======================== ================= ============== ================
17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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. The weighted-average assumptions used in the Black-Scholes model were as follows:
Stock Option Granted in Fiscal Year ------------------------------------------------- 2003 2002 2001 ------------- --------------- --------------- Risk-free interest rate 3.3% 4.7% 6.6% 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 $28,000, $6,000 and $18,000 in fiscal years 2003, 2002 and 2001, 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 $639,000, $585,000 and $582,000 in fiscal years 2003, 2002 and 2001, respectively. Future minimum payments by year and in the aggregate, under the aforementioned leases and other noncancelable operating leases with initial or remaining terms in excess of one year, as of November 1, 2003 are as follows: Fiscal Year Ending 2004 $77,000 2005 42,000 2006 18,000 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 $1,900,000 and $1,497,000 at November 1, 2003 and November 2, 2002, 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 2003, 2002 or 2001. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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. 15. QUARTERLY FINANCIAL SUMMARY (UNAUDITED) Following is a summary of the unaudited interim results of operations for each quarter in the years ended November 1, 2003 and November 2, 2002.
First Second Third Fourth 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 Year ended November 2, 2002 Net sales $ 8,288,448 $ 8,945,759 $ 8,335,919 $ 12,346,337 Cost of goods sold 6,180,373 6,588,885 6,092,161 9,253,415 Net income 592,934 770,834 728,815 1,042,319 Earnings per share Basic 0.14 0.19 0.18 0.26 Diluted 0.14 0.19 0.18 0.26
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 $91,000, $90,000 and $92,000 in fiscal years 2003, 2002 and 2001, 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 EVENTS (UNAUDITED) Subsequent to November 1, 2003, the receivable from the Company's president for split-dollar life insurance premiums in the amount of approximately $597,000 (see Notes 3 and 7) was repaid to the Company. Subsequent to year-end, the Company's Board of Directors declared an annual cash dividend of $0.10 per common share, payable on January 12, 2004 to stockholders of record as of December 29, 2003. 19