-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LXol6IY1uNGW1Ac9AUxxDq1OSx28UHBoj6wz5PSp44X0OHqy8EczivSgqqDS1R01 r6vy12YH0AMmNSsj4PyAYw== 0000897069-06-000254.txt : 20060201 0000897069-06-000254.hdr.sgml : 20060201 20060201123903 ACCESSION NUMBER: 0000897069-06-000254 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20051105 FILED AS OF DATE: 20060201 DATE AS OF CHANGE: 20060201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOBILITY HOMES INC CENTRAL INDEX KEY: 0000072205 STANDARD INDUSTRIAL CLASSIFICATION: MOBILE HOMES [2451] IRS NUMBER: 591166102 STATE OF INCORPORATION: FL FISCAL YEAR END: 1027 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-06506 FILM NUMBER: 06568662 BUSINESS ADDRESS: STREET 1: 3741 S W 7TH ST CITY: OCALA STATE: FL ZIP: 34478 BUSINESS PHONE: 3527325157 MAIL ADDRESS: STREET 1: P O BOX 1659 CITY: OCALA STATE: FL ZIP: 34478-1659 10-K 1 dkm830.txt FORM 10-K FYE NOVEMBER 5, 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended November 5, 2005 Commission file number 0-6506 NOBILITY HOMES, INC. (Name of issuer in its charter) Florida 59-1166102 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3741 S.W. 7th Street Ocala, Florida 34474 (Address of principal executive offices) (Zip Code) (352) 732-5157 (Issuer's telephone number, including area code) Securities registered under Section 12(b) of the Act: Title of each class Name of each exchange ------------------- on which registered None ------------------- None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.10 par value (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes _____ No X Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes _____ No X Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _________ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes _____ No X Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No X State the aggregate market value of the voting stock held by non-affiliates of the registrant on May 6, 2005, the last business day of the registrant's most recently completed second fiscal quarter, computed by reference to the average high and low prices on that date: $36,133,609. (APPLICABLE ONLY TO CORPORATE ISSUERS) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of January 27, 2006: 4,058,725 shares of common stock. DOCUMENTS INCORPORATED BY REFERENCE Incorporated at ----------------------------------- --------------- Nobility Homes, Inc. Proxy Statement Part III, Items 10, for the 2006 Annual Meeting of 11, 12 and 13 Shareholders 2 PART I Item 1. Description of Business - ------ ----------------------- Nobility Homes, Inc., a Florida corporation incorporated in 1967, designs, manufactures and sells a broad line of manufactured homes through a network of its own retail sales centers throughout Florida. Nobility also sells its manufactured homes on a wholesale basis to independent manufactured home retail dealers and manufactured home communities. Manufactured Homes - ------------------ Nobility's homes are available in approximately 100 active models sold under the trade names "Kingswood," "Richwood," "Springwood," "Springwood Special," "Tropic Isle Special," "Regency Manor Special," and "Special Edition." The homes, ranging in size from 672 to 2,650 square feet and containing from one to five bedrooms, are available in o single-wide widths of 14 and 16 feet ranging from 48 to 72 feet in length; o double-wide widths of 24, 26, 28 and 32 feet ranging from 32 to 76 feet in length; and o triple-wide widths of 36, 38 and 42 feet ranging from 46 to 72 feet in length. o Quad-unit 2 sections 28 feet long by 48 feet long and 2 sections 28 feet long by 52 feet long Nobility's homes are sold primarily as unfurnished dwellings ready for permanent occupancy. Interiors are designed and color coordinated in a range of decors. Depending on the size of the unit and quality of appliances and other appointments, retail prices for Nobility's homes typically range from approximately $25,000 to $100,000. Most of the prices of Nobility's homes are considered by it to be within the low to medium price range of the industry. Both of Nobility's manufacturing plants utilize assembly line techniques in manufactured home production. Both plants manufacture and assemble the floors, sidewalls, end walls, roofs and interior cabinets for their homes. Nobility purchases from outside suppliers various other components that are built into its homes including the axles, frames, tires, doors, windows, pre-finished sidings, plywood, ceiling panels, lumber, rafters, insulation, gypsum board, appliances, lighting and plumbing fixtures, carpeting and drapes. Nobility is not dependent upon any one particular supplier for its raw materials or component parts, and is not required to carry significant amounts of inventory to assure itself of a continuous allotment of goods from suppliers. Nobility's two manufacturing plants operated at an average of approximately 65% of their single shift capacity in fiscal 2005 and 60% in 2004 and 50% in 2003, respectively. Nobility generally does not manufacture its homes to be held by it as inventory (except for model home inventory of its wholly-owned retail network subsidiary, Prestige Home Centers, Inc.), but, rather, manufactures its homes after receipt of orders. Although Nobility attempts to maintain a consistent level of production of homes throughout the fiscal year, seasonal fluctuations do occur, with sales of homes generally lower during the first fiscal quarter due to the holiday season. The sales area for a manufactured home manufacturer is limited by substantial delivery costs of the finished product. Nobility's homes are delivered by outside trucking companies. Nobility estimates that it can compete effectively within a range of approximately 350 miles from its manufacturing plants. During the last three fiscal years, substantially all of Nobility's sales were made in Florida. Retail Sales - ------------ Prestige Home Centers, Inc. operates 19 retail sales centers in north and central Florida. Its principal executive offices are located at Nobility's headquarters in Ocala, Florida. Sales by Prestige accounted for 82.7%, 72.1% and 74.7% of Nobility's sales during fiscal 2005, 2004 and 2003, respectively. 3 Each of Prestige's retail sales centers is located within 350 miles of Nobility's two manufacturing facilities. Prestige owns the land at four of its retail sales centers and leases the remaining 15 retail sales centers from unaffiliated parties under leases with terms of between one and three years with renewal options. The primary customers of Prestige are homebuyers who generally purchase manufactured homes to place on their own home sites. Prestige operates its retail sales centers with a model home concept. Each of the homes displayed at its retail sales centers is furnished and decorated as a model home. Although the model homes may be purchased from Prestige's model home inventory, generally, customers order homes which are shipped directly from the factory to their home site. Prestige sales generally are to purchasers living within a radius of approximately 100 miles from the selling retail lot. In fiscal 1997, Nobility entered into a joint venture agreement with 21st Century Mortgage Corporation to provide financing to retail customers purchasing homes from Prestige. Additionally, financing for home purchases is provided by eight other independent sources that specialize in manufactured housing lending and numerous banks that finance manufactured home purchases. Prestige and Nobility are not required to sign any recourse agreements with any of these retail financing sources, nor does Prestige itself finance customers' new home purchases. The retail sale of manufactured homes is a highly competitive business. Because of the large number of retail sales centers located throughout Nobility's market area, potential customers typically can find several sales centers within a 100 mile radius of their present home. Prestige competes with over 100 other retailers in its primary market area, some of which may have greater financial resources than Prestige. In addition, manufactured homes offered by Prestige compete with conventional site-built housing. Prestige's wholly-owned subsidiary, Mountain Financial, Inc., an independent insurance agent and mortgage broker, provides mortgage brokerage services, automobile, extended warranty coverage and property and casualty insurance to Prestige customers in connection with their purchase and financing of manufactured homes. Mountain Financial, Inc., receives a mortgage brokerage fee at the time a loan is originated and a commission on the insurance premium collected at the time an insurance policy is written and in future years if the homeowner renews the policy. Its revenues were approximately $479,000, $329,000 and $311,000 in fiscal 2005, 2004 and 2003, respectively. Wholesale Sales to Manufactured Home Communities - ------------------------------------------------ Nobility currently sells its homes on a wholesale basis exclusively through four full-time salespersons to approximately 60 manufactured home communities. Nobility continues to seek new opportunities in the areas in which it operates, as there is ongoing turnover in the manufactured home communities as they achieve full occupancy levels. As is common in the industry, most of Nobility's customers other than its subsidiary, Prestige, sell homes produced by several manufacturers. No customer accounted for more than 10% of Nobility's total sales in fiscal 2005, and no customer other than Mobile Home Lifestyles accounted for more than 10% of Nobility's total sales in fiscal 2004. Mobile Home Lifestyles, which operates multiple manufactured home communities, accounted for approximately $6.7 million or 13% of Nobility's total sales in fiscal 2004. Dealers generally obtain inventory financing from financial institutions (usually banks and finance companies) on a "floor plan" basis where the financial institution obtains a security interest in all or part of the dealer's manufactured home inventory. Nobility from time to time enters into repurchase agreements with the lending institutions which provide that, in the event of a dealer's default, Nobility will, at the lender's request, repurchase the home provided that Nobility's liability will not exceed the manufacturer's invoice price and that the repurchased home is new and unused. Generally, the repurchase agreement expires within one year after a home is sold to the dealer, and the repurchase price is limited to between 70% to 100% of the original invoice price to the dealer, depending on the length of time that has expired since the original sale. Generally, repurchase is conditioned upon the dealer's insolvency. Any losses incurred as a result of such repurchases would be limited to the difference between the repurchase price and the subsequent resale value of the home repurchased. Nobility was not required to repurchase any homes during fiscal 2005, 2004 or 2003. For additional information, see "Notes to Consolidated Financial Statements." Nobility does not finance retail sales of new homes for customers of its independent dealers. 4 Nobility does not generally offer consigned inventory programs or other credit terms to its customers and ordinarily receives payment for its homes within 15 to 30 days of delivery. However, Nobility may offer extended terms to unrelated park dealers who do a high volume of business with Nobility. In order to stimulate sales, Nobility sells homes for display to selected manufactured home communities on special terms. The high visibility of Nobility's homes in such communities generates additional sales of its homes through such dealers. Regulation - ---------- The manufacture, distribution and sale of homes is subject to governmental regulation at the federal, state and local levels. The Department of Housing and Urban Development has adopted national construction and safety standards that have priority over existing state standards. In addition, HUD regulations require that manufactured homes be constructed to more stringent wind load and thermal standards. Compliance with these standards involves approval by a HUD approved engineering firm of engineering plans and specifications on all models. HUD's standards also require periodic inspection by state or other third party inspectors of plant facilities and construction procedures, as well as inspection of manufactured home units during construction. In addition, some components of manufactured homes may also be subject to Consumer Product Safety Commission standards and recall requirements. Nobility also manufactures modular homes which are required to comply with the standard building code established by the Florida Department of Community Affairs. Nobility estimates that compliance with federal, state and local environmental protection laws will have no material effect upon capital expenditures for plant or equipment modifications or earnings for the next fiscal year. The transportation of manufactured homes is subject to state regulation. Generally, special permits must be obtained to transport the home over public highways, and restrictions are imposed to promote travel safety including those relating to routes, travel periods, speed limits, safety equipment and size. Nobility's homes are subject to the requirements of the Magnuson-Moss Warranty Act and Federal Trade Commission rulings which regulate warranties on consumer products. Nobility provides a limited warranty of one year on the structural components of its homes. Competition - ----------- The manufactured home industry is highly competitive. The initial investment required for entry into the business of manufacturing homes is not unduly large. State bonding requirements for entry in the business vary from state to state. The bond requirement for Florida is $50,000. Nobility competes directly with other manufacturers, some of whom are both considerably larger and possess greater financial resources than Nobility. Based on number of units sold, Nobility ranks 5th in the state of Florida out of the top 45 manufacturers selling manufactured homes in the state. Nobility estimates that of those 45 manufacturers approximately 15 manufacture homes of the same type as Nobility and compete in the same market area. Nobility believes that it is generally competitive with most of those manufacturers in terms of price, service, warranty and product performance. According to statistics compiled by Statistical Surveys, Inc. from records on file with the State of Florida, Prestige has been one of the largest retail dealers of multi-section manufactured homes in Florida since 1994, based on number of home sales. Employees - --------- As of January 6, 2006, Nobility had 261 full-time employees, including 81 employed by Prestige. Approximately 139 employees are factory personnel compared to approximately 122 in such positions a year ago, and 116 are in management, administrative, supervisory, sales and clerical positions (including 75 management and sales personnel employed by Prestige) compared to approximately 106 a year ago. In addition, Nobility employs part-time employees when necessary. 5 Nobility makes contributions toward employees' group health and life insurance and to the Nobility 401(k) plan. Nobility, which is not subject to any collective bargaining agreements, has not experienced any work stoppage or labor disputes and considers its relationship with employees to be generally satisfactory. Item 1A. Risk Factors _______ ____________ COMPANY RISK FACTORS The ownership of our common stock involves a number of risks and uncertainties. You should carefully consider the following risks, together with the information provided elsewhere in our 10-K and Annual Report. The risks described below are not the only ones facing us. Additional risks that are currently unknown to us or that we currently consider to be immaterial may also impair our business or adversely affect our financial condition or results of operations. MANUFACTURED HOUSING INDUSTRY IS HIGHLY CYCLICAL The manufactured and modular housing industry is highly cyclical and seasonal and has experienced wide fluctuations in aggregate sales in the past. We are subject to volatility in operating results due to external factors beyond our control such as: o availability of retail financing; o the level and stability of interest rates; o unemployment trends; o impact of hurricanes or seasonal weather conditions; o the availability of wholesale financing; o housing supply and demand; o defaults by retail customers resulting in repossessions; o industry level of used or repossessed manufactured homes; o international tensions and hostilities; o levels of consumer confidence; o inventory levels; o regulatory and zoning matters; o access to capital markets; o changes in general economic conditions; and o commodity prices Sales in our market area are also seasonal in nature, with sales of homes traditionally being stronger in the summer and fall months. The cyclical and seasonal nature of our business causes our revenues and operating results to fluctuate and makes it difficult for management to forecast sales and profits in uncertain times. As a result of seasonal and cyclical downturns, results from any quarter should not be relied upon as being indicative of performance in future quarters. MANUFACTURED HOUSING INDUSTRY EXPERIENCING A SIGNIFICANT DOWNTURN Since mid-1999, the manufactured housing industry has experienced a prolonged and significant downturn. Annual shipments have declined from approximately 350,000 to 132,000 in 2005. This downturn has resulted in part from the fact that, beginning in 1999, consumer lenders in the sector began to tighten underwriting standards and curtail credit availability in response to higher than anticipated rates of loan defaults and significant losses upon the repossession and resale of homes securing defaulted loans. Other causes of the downturn include a reduced number of consumer lenders in the traditional chattel (home-only) lending sector, higher interest rates on home-only loans and generally unfavorable economic conditions. These factors have resulted in declining wholesale shipments, excess manufacturing and retail locations and surplus inventory. 6 As a result of the foregoing factors, based on industry data, we estimate that approximately 54% of all industry retail locations have closed since 1999 and that industry manufacturers have closed 120 manufacturing facilities, representing 36% of the industry's manufacturing facilities. It is possible that the current industry downturn is likely to continue, at least in the near term. The availability of consumer financing for the purchase of manufactured homes continues to be constrained. In addition, the number of repossessed homes being offered for sale continues to have an adverse impact on demand for new manufactured homes. Although it is difficult to predict future industry conditions, these factors tend to indicate that a sustained recovery in the manufactured housing industry is unlikely to occur in the near term. If the current industry downturn gets materially worse, we may incur operating and net income reductions, and may be required to take steps in an attempt to mitigate the effect of unfavorable industry conditions, such as the closure of facilities, retail sales centers, or consolidation of existing operations. These steps could impair our ability to conduct our business in a manner consistent with past practice and could make it more difficult for us to expand our operations if and when industry conditions improve. Furthermore, some of these steps could lead to fixed asset impairment charges and goodwill impairment charges. MANUFACTURED HOUSING INDUSTRY IS VERY COMPETITIVE The manufactured and modular housing industry is highly competitive and some of our competitors are larger and have stronger balance sheets and cash flow, as well as greater access to capital, than we do. Competition at both the manufacturing and retail levels is based upon several factors, including price, product features, reputation for service and quality, merchandising, terms of retailer promotional programs and the terms of retail customer financing. Numerous companies produce manufactured homes in our market. In addition, our homes compete with repossessed homes that are offered for sale in our market. A number of our manufacturing competitors also have their own retail distribution systems and consumer finance and insurance operations. The ability to offer consumer finance and insurance products may provide some larger competitors with an advantage. Based on retail sales, the ten largest manufacturers accounted for approximately 80 percent of the retail manufactured housing market. In addition, there are many independent manufactured housing retail locations in most areas where we have retail operations. Because barriers to entry for manufactured housing retailers are low, we believe that where wholesale floor plan financing is available, it is relatively easy for new retailers to enter into our market as competitors. In addition, our products compete with other forms of low to moderate-cost housing, including new and existing site-built homes, apartments, townhouses and condominiums. If we are unable to compete effectively in this environment, our retail sales, wholesale shipments and operating results could be reduced. As a result, our growth could be limited. REDUCED AVAILABILITY OF CONSUMER FINANCING The reduced availability of financing for our retail customers could continue to affect our sales volume. Our retailers, as well as retail buyers of our products, generally secure financing from third party lenders, which, in the case of manufactured housing, have been negatively affected by adverse loan experience. For example, Conseco, Associate, Chase and GreenPoint, which have been very important lenders for customers of ours and of our dealers in the 1990's, have withdrawn from the manufactured housing finance business. A consumer seeking to finance the purchase of a manufactured home without land will generally pay a higher interest rate and have a shorter loan maturity than a consumer seeking to finance the purchase of land and the home. In addition, home-only financing is at times more difficult to obtain than the financing for site-built homes. Reduced availability of such financing, tightened underwriting standards, and high interest rates are currently having an adverse effect on the manufactured housing business and our housing sales. In addition, quasi-governmental agencies such as Fannie Mae and Freddie Mac, which are important purchasers of loans from financial institutions, have tightened standards relating to the manufactured housing loans that they will buy. There can be no assurance that affordable retail financing for manufactured or modular homes will be available on a widespread basis. If third party financing were to become unavailable or were to be further restricted, this could have a material adverse effect on our results of operations. 7 Availability of financing is dependent on the lending practices of financial institutions, financial markets, governmental policies and economic conditions, all of which are largely beyond our control. For example, since 1999 floor plan lenders have tightened credit availability and Conseco Finance and Deutsche Financial Services, which accounted for approximately 45% of wholesale floor plan financing, have exited that business in the manufactured housing industry and Transamerica and Bombardier's manufactured housing wholesale finance businesses have been acquired by General Electric Corp. There are currently three national lending institutions that specialize in providing wholesale floor plan financing to manufactured housing retailers. Reduced availability of floor plan lending may affect the inventory levels of our independent retailers, their number of retail sales centers and related wholesale demand. INCREASE IN PRICES AND UNAVAILABILITY OF RAW MATERIALS Our results of operations can be affected by the pricing and availability of raw materials. In our last two fiscal years, for example, we experienced an increase in prices of our raw materials of approximately 8% to 10% per year. Although we attempt to increase the sales prices of our homes in response to higher materials costs, such increases typically lag behind the escalation of materials costs. Three of the most important raw materials used in our operations, lumber, gypsum wallboard and insulation, have experienced significant price fluctuations in the past fiscal year. Sudden increases in demand for these construction materials, as has recently occurred, caused by natural disasters or other market forces, can greatly increase the costs of materials or limit the availability of such materials. Although we have not experienced any shortage of such building materials today, there can be no assurance that sufficient supplies of lumber, gypsum wallboard and insulation, as well as other materials, will continue to be available to us on terms we regard as satisfactory. GEOGRAPHIC CONCENTRATION We are concentrated geographically in Florida which could adversely affect our business. In fiscal year 2005, approximately 100% of our revenues were generated in Florida. A decline in the demand for manufactured housing in Florida, a decline in the economy of Florida, and the impact of hurricanes in Florida or other adverse conditions could have a material adverse affect on our results of operations. ZONING REGULATIONS FOR OUR HOMES If the factory-built housing industry is not able to secure favorable local zoning ordinances, or if there are changes in zoning regulations, our sales could decline and our operating results could suffer. Any limitation on the growth of the number of sites available for manufactured or modular homes, or on the operation or starting new of manufactured housing communities, could adversely affect our sales. In addition, new product opportunities that we may wish to pursue for our manufactured or modular housing business could cause us to encounter new zoning regulations and affect the potential market for these new products. Manufactured housing communities and individual home placements are subject to local zoning ordinances and other local regulations relating to utility service and construction of roadways. In the past, there has been resistance by property owners to the adoption of zoning ordinances permitting the location of manufactured or modular homes in residential areas, and we believe that this resistance has adversely affected the growth of the industry. The inability of the manufactured home industry to affect change in these zoning ordinances could have an adverse effect on our results of operations and we cannot be certain that manufactured homes will receive more widespread acceptance or that additional localities will adopt zoning ordinances permitting the location of manufactured homes. CONTINGENT LIABILITIES We have, and will continue to have, contingent wholesale repurchase obligations which could become actual obligations that we must satisfy. We may incur losses under these wholesale repurchase obligations or be required to fund these or other contingent obligations that would reduce our earnings. In connection with a floor plan arrangement for our home shipments to independent retailers, the financial institution that provides the retailer financing customarily requires 8 us to enter into a separate repurchase agreement with the financial institution. Under this separate agreement, generally for a period 12 to 18 months from the date of our sale to the retailer, upon default by the retailer and repossession of the home by the financial institution, we are generally obligated to purchase from the lender the related floor plan loan or the home at a price equal to the unpaid principal amount of the loan, plus certain administrative and handling expenses, reduced by the cost of any damage to the home and any missing parts or accessories. The difference between the gross repurchase price and the price at which the repurchased manufactured home can then be resold, which is typically at a discount to the original sale price, is an expense to us. Thus, if we were obligated to repurchase a large number of manufactured homes in the future, this would increase our costs, which could have a negative effect on our earnings. During fiscal 2005 and 2004, there were no losses incurred under these repurchase agreements. We estimate that our potential obligations under such repurchase agreements were approximately $617,000 in 2005 and $1,363,000 in 2004. We may be required to honor contingent repurchase obligations in the future and may incur additional expense as a consequence of these repurchase agreements. Tightened credit standards by lenders and more aggressive attempts to accelerate collection of outstanding accounts with retailers could result in defaults by retailers and consequently repurchase obligations on our part may be higher than has historically been the case. DEPENDENCE UPON INDEPENDENT RETAILERS If we are unable to establish or maintain relationships with independent retailers who sell our homes, our sales could decline and our operating results could suffer. During fiscal 2005, approximately 25% of our wholesale shipments of manufactured homes were made to independent retail locations in Florida. As is common in the industry, independent retailers may sell manufactured homes produced by competing manufacturers. We may not be able to establish relationships with new independent retailers or maintain good relationships with independent retailers that sell our homes. Even if we do establish and maintain relationships with independent retailers, these retailers are not obligated to sell our manufactured homes exclusively, and may choose to sell our competitors' homes instead. The independent retailers with whom we have relationships can cancel these relationships on short notice. In addition, these retailers may not remain financially solvent as they are subject to industry, economic, demographic and seasonal trends similar to the ones we face. If we do not establish and maintain relationships with solvent independent retailers in our market, sales could decline. DEPENDENCE UPON MAJESTIC 21 During fiscal 1997, we contributed $250,000 for a 50% interest in a joint venture with 21st Mortgage, to provide mortgage financing on our manufactured homes sold by our retail division. As a 50% partner we do not have any legal authority to manage or control this partnership's operations. During fiscal 2004 we transferred $250,000 from our existing joint venture in Majestic 21 in order to participate in a new finance revenue sharing agreement with 21st Mortgage. This revenue sharing agreement will continue to provide mortgage financing to customers who qualify for such mortgage financing, and who purchase homes through our Prestige Homes retail sales centers. The management of 21st Mortgage has industry experience in managing, servicing and collecting loan portfolios; however, many borrowers require notices and reminders to keep their loans current and to prevent delinquencies and foreclosures. A substantial increase in the delinquency rate that results from improper servicing or mortgage loan performance in general could adversely affect the profitability and cash flow from the loan portfolio for Majestic 21. Majestic 21 makes loans to borrowers that it believes are credit worthy based on its credit guidelines. However, the ability of these customers to repay their loans may be affected by a number of factors, including, but not limited to national, regional and local economic conditions; changes or continued weakness in specific industry segments; natural hazard risks affecting the region in which the borrower resides; and employment, financial or life circumstances. Therefore, if Majestic 21's operations are not financially successful, our results may also be adversely affected, and we could lose some or all of our investment in Majestic 21. 9 DEPENDENCE UPON PRESTIGE HOME CENTERS During fiscal 2005 approximately 75% of our wholesale shipments of manufactured homes were sold through Prestige Home Centers, our own retail distribution network. If Prestige's retail sales are adversely affected by changes in conditions such as economic, demographics, weather, repossessions, unemployment trends, interest rates, availability of retail financing, personnel, and housing demand, our revenue and operating results could decline. DEPENDENCE UPON TWO EXECUTIVE OFFICERS We are dependent to a significant extent upon the efforts of our two principal executive officers, Terry Trexler, Chairman of the Board and Chief Executive Officer and Tom Trexler, Executive Vice President and President of Prestige Home Centers, our retail distribution network. Tom Trexler is also responsible for the operations of the mortgage and insurance divisions. The loss or the prolonged absence of the services of either or both principal executive officers could have a material adverse effect upon our business, financial condition and results of operations. Our continued growth is also dependent upon our ability to attract and retain additional skilled management personnel. CONTROLLED BY TWO SHAREHOLDERS Approximately 64% of our outstanding common stock is beneficially owned or controlled by our Chairman and CEO, Terry Trexler and our Executive Vice President and President of Prestige Home Centers, Tom Trexler. As a result, these shareholders, acting together, are able to determine the outcome of elections of our directors and thereby control the management of our business. VOLATILITY OF STOCK PRICE Our common stock price has been volatile and may continue to be volatile. The price of our common stock may fluctuate widely, depending upon a number of factors, many of which are beyond our control. These factors include the perceived prospects of our business and the manufactured housing industry as a whole; differences between our actual financial and operating results and those expected by investors and analysts; changes in analysts' recommendations or projections; changes affecting the availability of financing in the wholesale and consumer lending markets; future issuances of our common stock for stock options or acquisitions; actions or announcements by competitors; lack of liquidity in our stock; changes in the regulatory environment in which we operate; and changes in general economic or market conditions. In addition, stock markets generally experience significant price and volume volatility from time to time which may adversely affect the market price of our common stock for reasons unrelated to our performance. All of these factors may adversely impact the market prices of our common stock in the future. GOVERNMENT REGULATIONS Our manufactured housing business is subject to extensive federal and state regulations, including construction and safety standards for manufactured homes. Amendments to any of these regulations and the implementation of new regulations could significantly increase the costs of manufacturing, purchasing, operating or selling our products and could have an adverse effect on our results of operations. Our failure to comply with present or future regulations could result in fines, potential civil and criminal liability, suspension of sales or production, or cessation of operations. In addition, a major product recall could have an adverse effect on our results of operations. Our operations are subject to a variety of Federal and state environmental regulations relating to noise pollution and the use, generation, storage, treatment, emission and disposal of hazardous materials and wastes. Although we believe that we are currently in material compliance with applicable environmental regulations, our failure to comply with present or future regulations could result in fines, potential civil and criminal liability, suspension of production or operations, alterations to the manufacturing process, costly cleanup or capital expenditures. 10 GOODWILL IMPAIRMENT A portion of our total assets at fiscal year end 2005 consisted of goodwill, all of which is attributable to our retail operations. Effective in fiscal 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. As a result, we no longer amortize goodwill. Instead, we review goodwill at least annually to determine whether it has become impaired. If goodwill has become impaired, we charge the impairment as an expense in the period in which the impairment occurred. Our goodwill could be impaired if developments affecting the acquired locations of our retail operations, lead us to conclude that the earnings we expect to derive from the acquired locations of our retail operations will be substantially reduced. A write off of all or part of our goodwill could adversely affect our results of operations and financial condition. WARRANTY CLAIMS We are subject to warranty claims in the ordinary course of our business. Although we maintain reserves for such claims, which to date have been adequate, there can be no assurance that warranty expense levels will remain at current levels or that such reserves will continue to be adequate. A large number of warranty claims exceeding our current warranty expense levels could have an adverse effect on our results of operations. SARBANES-OXLEY - SECTION 404 By fiscal year end 2007, we must comply with Section 404 of the Sarbanes-Oxley Act which requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal controls over financial reporting in our annual report. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management's assessment of our internal controls over financial reporting. If we fail to meet our deadline for adoption or we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we cannot assure you that we will be able to conclude in the future that we have effective internal controls over financial reporting in accordance with Section 404. If we fail to maintain a system of effective internal controls, it could have an adverse effect on our business and stock price. Item 2. Properties - ------ ---------- As of November 5, 2005, Nobility owned and operated two manufacturing plants: Location Approximate Size -------- ---------------- Belleview, Florida 33,500 sq. ft. Ocala, Florida(1) 72,000 sq ft. (1)Nobility's Ocala facility is a 72,000 square foot plant and is located on approximately 35.5 acres of land on which an additional two-story structure adjoining the plant serves as Nobility's corporate offices. Nobility's Belleview plant is of metal and concrete construction and the Ocala plant is of metal construction. Both properties are in good condition and require little maintenance. Prestige has acquired the properties on which it's Pace, Panama City, Yulee and Punta Gorda, Florida retail sales centers are located. Prestige leases the property for its other 15 retail sales centers. Item 3. Legal Proceedings - ------ ----------------- Certain claims and suits arising in the ordinary course of business have been filed or are pending against Nobility or Prestige. In the opinion of management, any related liabilities that might arise would be covered under terms of Nobility's liability insurance policies or would not have a material adverse impact on Nobility's financial position, results of operations or cash flows. 11 Item 4. Submission of Matters to a Vote of Security Holders - ------ --------------------------------------------------- None 12 PART II Item 5. Market for the Registrant's Common Equity and Related - ------ ----------------------------------------------------- Stockholder Matters and Issuer Repurchases of Equity Securities --------------------------------------------------------------- Market Information - ------------------ Nobility's common stock is listed on the Nasdaq National Market under the symbol NOBH. The following table shows the range of high and low sales prices for the common stock for each fiscal quarter of 2005 and 2004.
Fiscal Year End ------------------------------------------------------------------------ Fiscal November 5, 2005 November 6, 2004 Quarter High Low High Low ------- ---- --- ---- --- 1st $ 23.99 $ 19.50 $ 11.77 $ 11.75 2nd 24.00 19.50 17.81 16.52 3rd 28.60 23.00 20.71 20.41 4th 35.50 22.21 22.20 19.95
Holders - ------- At January 27, 2006, the approximate number of holders of record of common stock was 203 (not including individual participants in security position listings). Dividend - -------- The Board of Directors declared an annual cash dividend of $0.30 per common share for fiscal year 2005, paid January 13, 2006 to stockholders of record as of January 3, 2006. The Company paid an annual cash dividend of $0.20 per common share for fiscal year 2004, and paid an annual cash dividend of $0.10 per common share for fiscal 2003. The payment of future cash dividends is within the discretion of Nobility's board of directors and will depend, among other factors, on Nobility's earnings, capital requirements and operating and financial condition. Securities Authorized for Issuance Under Equity Compensation Plans The following table displays equity compensation plan information as of the fiscal year ended November 5, 2005. For further information, see Note 12 of "Notes to Consolidated Financial Statements."
Equity Compensation Plan Information Number of securities to be Weighted-average Number of securities remaining issued upon exercise of exercise price of available for issuance under equity outstanding options, outstanding options, compensation plans (excluding warrants and rights warrants and rights securities reflected in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 165,915 $10.82 329,085 Equity compensation plans not approved by security holders None ----------------------------- ----------------------- --------------------------------------- Total 165,915 $10.82 329,085
13 Issuer Purchases of Equity Securities - ------------------------------------- Nobility repurchased in the open market 24,200 of its common stock during fiscal 2005. Recent Sales of Unregistered Securities - --------------------------------------- Nobility has not sold any securities within the past three years which were not registered under the Securities Act. Item 6. Selected Financial Data - ------ ----------------------- The following table sets forth Selected Financial Data for each of Nobility's last five fiscal years. This information should be read in conjunction with Nobility's consolidated financial statements (including the related notes thereto) and Management's Discussion and Analysis of Financial Condition and Results of Operations, each included elsewhere in this Form 10-K.
Years Ended(1) - ---------------------------------------------------------------------------------------------------------------------- November 5, November 6, November 1, November 2, November 3, 2005 2004 2003 2002 2001 (in thousands except per share data) ---------------------------------------------------------------------------------------- Total net sales $56,711 $50,019 $39,229 $37,916 $30,288 Income from operations 8,342 6,201 4,078 3,930 3,000 Other income 1,030 832 656 880 913 Net income 6,172 4,633 3,079 3,135 2,478 Weighted average shares outstanding Basic 4,043,394 4,016,797 3,996,424 4,107,748 4,200,863 Diluted 4,134,923 4,116,337 4,021,996 4,130,464 4,286,778 Earnings per share Basic $1.53 $1.15 $ .77 $ .76 $ .59 Diluted 1.49 1.13 .77 .76 .58 Total assets 45,057 39,975 32,705 27,496 25,741 Long term obligations -0- -0- -0- -0- -0- Stockholders' equity 37,069 31,374 26,816 23,779 21,724 Cash dividends per common $0.20 $0.10 -0- -0- -0- share
Item 7. Management's Discussion and Analysis of Financial Condition and - ------ --------------------------------------------------------------- Results of Operations --------------------- General - ------- Nobility's primary focus is homebuyers who generally purchase their manufactured homes from retail sales centers to locate on property they own. Nobility has aggressively pursued this market through its Prestige retail sales centers. While Nobility actively seeks to make wholesale sales to independent retail dealers, its presence as a competitor limits potential sales to dealers located in the same geographic areas serviced by its Prestige retail sales centers. Nobility has also aggressively targeted the retirement community market, which is made up of retirees moving to Florida and typically purchasing homes to be located on sites leased from park communities offering a variety of amenities. 14 Sales are not limited by the presence of the Company's Prestige retail sales centers in this type of arrangement, as the retirement community sells homes only within their community. Nobility sold 1,044 homes in fiscal 2005, of which 259 homes, representing sales of $7,593,725, were sold to independent dealers. Nobility sold 1,028 homes in fiscal 2004, of which 435 homes, representing sales of $12,029,893, were sold to independent dealers. Nobility sold 831 homes in fiscal 2003, of which 336 homes, representing sales of $8,427,790, were sold to independent dealers. The balance of Nobility sales in fiscal 2005, 2004 and 2003, representing 82.7%, 72.1% and 74.7% of net sales, respectively, were made on a retail basis through the Company's retail sales centers. Nobility has a product line of approximately 100 active models. Although market demand can fluctuate on a fairly short-term basis, the manufacturing process is such that Nobility can alter its product mix relatively quickly in response to changes in the market. During fiscal 2005, 2004 and 2003, Nobility's product mix was affected by the number of "Special Edition" homes marketed by Prestige and by larger, more expensive multi-wide homes resulting from the availability of varied types of financing at competitive rates. Most family buyers today purchase three-, four- or five-bedroom manufactured homes, compared with the two-bedroom home that typically appeals to the retirement buyers who reside in the manufactured housing communities. Majestic 21, Nobility's joint venture with 21st Mortgage Corporation provides mortgage financing to retail customers who purchase Nobility's manufactured homes at Prestige retail sales centers. This joint venture, which originates and services loans, has given Prestige more control over the financing aspect of the retail home sales process and allowed it to offer better services to its retail customers. Management believes that the joint venture gives Prestige an additional potential for profit by providing finance products to retail customers. In addition, management believes that Prestige has more input in the design of unique finance programs for prospective homebuyers, and that the joint venture has resulted in more profitable sales at its Prestige retail sales centers. In an effort to make manufactured homes more competitive with site-built housing, financing packages are available to provide (1) 30-year financing, (2) an interest rate reduction program, (3) combination land/manufactured home loans, and (4) a 5% down payment program for qualified buyers. Prestige also maintains eight outside financing sources that provide financing to retail homebuyers for its manufactured homes. Prestige's wholly-owned subsidiary, Mountain Financial, Inc., is an independent insurance agent and mortgage broker, provides mortgage brokerage services, automobile, extended warranty coverage and property and casualty insurance to Prestige customers in connection with their purchase and financing of manufactured homes. The years ended November 5, 2005 and November 1, 2003 consisted of a fifty-two (52) week period. The year ended November 6, 2004 consisted of a fifty-three (53) week period. Results of Operation - -------------------- For fiscal years ended November 5, 2005, November 6, 2004 and November 1, 2003, results of operations are as follows. Net sales in fiscal 2005 were $56,710,925 compared to $50,018,542 in fiscal 2004 and $39,229,156 in fiscal 2003. Net sales increased 13.4% in fiscal 2005, 27.5% in fiscal 2004 and 3.5% in fiscal 2003 as compared to the prior year net sales. The increased sales in fiscal 2005 was primarily due to the 30.1% increase in sales from the Company's retail sales centers. The increased sales in fiscal 2004 was primarily due to the 42.7% increase in sales to outside dealers coupled with an increase of 23.2% in the Company's retail sales centers same store revenues. Management remains optimistic for fiscal year 2006, convinced that our specific geographic market is one of the best long-term growth areas in the country and because of the strong operating leverage inherent in the Company. With an improving economy, declining unemployment claims, and increasing but still low interest rates in 2006, management expects the demand for our homes to improve. Increased demand should also result from building replacement homes due to the hurricanes. We anticipate continued pressure on both sales and earnings resulting from continuous price increases in lumber and oriented strand board (OSB), sheetrock, steel and oil related products and services. Overall, most construction materials, including materials used in the set-up of our homes, have increased or fluctuated widely in price over the past year with little price stability in sight. 15 Combined industry-wide shipment of multi-section and single-section homes for the first ten months of calendar 2005 increased approximately 6% from the like period last year and declined 2% in calendar 2004 and 23% in calendar 2003. Florida combined industry shipments of multi-section homes and single-section homes in the first ten months of calendar 2005 increased approximately 23% from the like period last year and increased 9% in calendar 2004 and declined 6% in calendar 2003. The increase in Florida shipments in 2005 was positively impacted by both FEMA purchased temporary housing and customers replacing homes due to the hurricanes in 2004. Approximately 99% of Nobility's home sales are multi-section homes. Gross profit as a percentage of net sales was 29.0% in fiscal 2005 compared to 26.0% in fiscal 2004 and 25.2% in fiscal 2003. The increase in gross profit, as a percentage of sales, in fiscal year 2005 and 2004 was primarily due to an increase in sales from the Company's retail sales centers and manufacturing operations. The Company also increased the lumber surcharge to off-set higher material costs, primarily in lumber and oriented strand board (OSB), sheetrock, steel and oil-related products and services. Selling, general and administrative expenses as a percent of net sales were 14.3% in fiscal 2005 compared to 13.6% in fiscal 2004 and 14.8% in fiscal 2003. The increase in selling, general and administrative expenses, as a percent of net sales, resulted from the increase in compensation expenses directly related to the increased sales at the Company's retail sales centers. The Company earned interest on cash equivalents and investments in the amount of $598,904 for fiscal 2005, $376,753 for fiscal 2004 and $211,018 for fiscal 2003. The increased interest income was primarily due to a change in the investment portfolio to long-term marketable securities to obtain a higher yield. The Company earned from Majestic 21 $373,481 in fiscal 2005, $342,509 in fiscal 2004 and $220,148 in fiscal 2003. Income reported for Majestic 21 results from the Company's 50% share in the equity in the earnings of this joint venture. Majestic 21 is a financing joint venture accounted for under the equity method of accounting. Income for the joint venture fluctuates due to higher amortization of prepaid finance charges on the portfolio. The Company believes that its historical loss experience has been favorable impacted by its ability to resell foreclosed/repossessed units through its network of retail sales centers. As a result of the factors discussed above, earnings for fiscal 2005 were $6,172,217 or $1.49 per diluted share compared to $4,632,810 or $1.13 per diluted share for fiscal 2004 and $3,078,479 or $.77 per diluted share for fiscal 2003. Liquidity and Capital Resources - ------------------------------- Cash and cash equivalents were $14,368,183 at November 5, 2005 compared to $14,588,332 at November 6, 2004. Short and long-term investments were $12,247,591 at November 5, 2005 compared to $9,119,424 at November 6, 2004. Working capital was $17,555,635 at November 5, 2005 compared to $16,483,939 at November 6, 2004. Nobility owns the entire inventory for its Prestige retail sales centers and does not incur any third party floor plan financing expenses. Inventories increased to $9,549,486 at November 5, 2005 from $6,908,557 at November 6, 2004 primarily due to a planned increase in the number of homes in inventory at the Company's retail sales centers. Nobility paid an annual cash dividend of $0.20 per common share for fiscal year 2004 on January 14, 2005 in the amount of $807,826 and paid an annual cash dividend of $0.10 per common share for fiscal year 2003 on January 12, 2004 in the amount of $401,100. Nobility repurchased in the open market 24,200 shares of its common stock for $494,925 during fiscal 2005 and did not repurchase any shares of its common stock during the fiscal year 2004. Nobility maintains a revolving credit agreement with a major bank providing for borrowing up to $4,000,000. At November 5, 2005 and November 6, 2004, there were no amounts outstanding under this agreement. 16 Consistent with normal practices, Nobility's operations are not expected to require significant capital expenditures during fiscal year 2006. Working capital requirements for any increase in the new home inventory for existing and additional retail sales centers and any increase in manufacturing capacity will be met with internal sources. Critical Accounting Policies and Estimates - ------------------------------------------ The Company applies judgment and estimates, which may have a material effect in the eventual outcome of assets, liabilities, revenues and expenses, for accounts receivable, inventory and goodwill. The following explains the basis and the procedure for each asset account where judgment and estimates are applied. Revenue Recognition The Company recognizes revenue for the majority of 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 construction of the home is complete, o title having passed to the retail home buyer, o funds having been deposited into the company's bank 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 sales 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. Goodwill Between 1995 and 1998 the Company acquired retail sales centers using the purchase method of accounting. As a result, goodwill is reflected on the consolidated balance sheets. A valuation was performed by the Company and it was determined that the estimated fair value of the goodwill in the accounts exceeded its book value. There is no assurance that the value of the acquired sales centers will not decrease in the future due to changing business conditions. Vendor Volume Rebates The Company receives volume rebates from its vendors based upon reaching a certain level of purchased materials during a specified period of time. Volume rebates are estimated based upon annual purchases, and are adjusted quarterly if the accrued volume rebate is applicable. Dealer Volume Rebate The Company pays a volume rebate to independent dealers based upon the dollar volume of homes purchased and paid for by the dealer in excess of a certain specific dollar amount during a specific time period. Dealer volume rebates are accrued when sales are recognized. Off-Balance Sheet Arrangements - ------------------------------ As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities ("SPE's"), which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As of November 5, 2005, we are not involved in any material unconsolidated SPE transactions. 17 Contractual Obligations - ----------------------- The impact of our contractual obligations as of November 5, 2005 is expected to have on our liquidity and cash flow in future periods is as follows:
Payments Due By Period ------------------------------------------- Total Less Than 1-3 Years 1 Year -------------- -------------- ------------- Operating lease obligations $362,019 $244,140 $117,879
Forward Looking Statements - -------------------------- Certain statements in this report are forward-looking statements within the meaning of the federal securities laws, including our statement that working capital requirements will be met with internal sources. Although Nobility believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there are risks and uncertainties that may cause actual results to differ materially from expectations. These risks and uncertainties include, but are not limited to, competitive pricing pressures at both the wholesale and retail levels, increasing material costs, continued excess retail inventory, increase in repossessions, changes in market demand, changes in interest rates, availability of financing for retail and wholesale purchasers, consumer confidence, adverse weather conditions that reduce sales at retail centers, the risk of manufacturing plant shutdowns due to storms or other factors, the impact of marketing and cost-management programs, reliance on the Florida economy, impact of labor shortage, impact of materials shortage, increasing labor cost, cyclical nature of the manufactured housing industry, impact of rising fuel costs, catastrophic events impacting insurance costs, availability of insurance coverage for various risks to Nobility, market demographics, management's ability to attract and retain executive officers and key personnel, increased global tensions, market disruptions resulting from terrorist or other attack and any armed conflict involving the United States and the impact of inflation. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ------- ---------------------------------------------------------- Certain of the Company's financial instruments are subject to market risk, including interest rate and equity price risks; however, due to the makeup of our investment portfolio this market risk is considered minimal. The Company manages its exposure to these risks through its regular operating and financing activities. We do not engage in investing in or trading market risk sensitive financial instruments. We also do not purchase for investing, hedging, or for purposes "other than trading" financial instruments that are likely to expose us to significant market risk, whether interest rate, foreign currency, commodity price, or equity price risk. The Company's financial instruments are not currently subject to foreign currency or commodity risk. The Company has no financial instrument held for trading purposes. We do not have any indebtedness as of November 5, 2005. If we were to borrow from our revolving credit agreement, we would be exposed to changes in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. Item 8. Consolidated Financial Statements and Supplementary Data Financial statements incorporated herein from Nobility's 2005 Annual Report to Shareholders are attached as Exhibit 13 and are listed at Part IV, Item 15(a), "Consolidated Financial Statements and Schedules." Item 9. Changes in and Disagreements with Accountants on Accounting and - ------ --------------------------------------------------------------- Financial Disclosure -------------------- As previously reported in our report on Form 8-K filed July 22, 2003, on July 15, 2003, we dismissed our auditors, PricewaterhouseCoopers LLP and appointed Tedder, James, Worden & Associates, P.A. as our new independent auditors, effective July 15, 2003. 18 Item 9A. Controls and Procedures - ------- ----------------------- Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a - 14c and 15d - 14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report (the "Evaluation Date"). Based on such evaluation such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's reports filed or submitted under the Exchange Act. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. PART III Item 10. Directors and Executive Officers of the Registrant - ------- -------------------------------------------------- Information concerning Nobility's directors is incorporated by reference pursuant to Instruction G of Form 10-K from its definitive proxy statement for the 2006 annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A on or before March 5, 2006. The following table provides the names, ages and business experience for the past five years for each of Nobility's executive officers. Executive officers are each elected for one year terms. Executive Officers Terry E. Trexler (66) Chairman of the Board and President of Nobility for more than five years; Mr. Trexler is also President of TLT, Inc. Thomas W. Trexler (42) Executive Vice President and Chief Financial Officer of Nobility since December 1994; President of Prestige Home Centers, Inc. since June 1995; Director of Prestige since 1993 and Vice President from 1991 to June 1995; President of Mountain Financial, Inc. since August 1992; Vice President of TLT, Inc. since September 1991. Jean Etheredge (60) Secretary. Lynn J. Cramer, Jr. (60) Treasurer. Thomas W. Trexler, Executive Vice President, Chief Financial Officer and a director, is the son of Terry E. Trexler, Nobility's President and Chairman of the Board. There are no other family relationships between any directors or executive officers. Section 16(a) Beneficial Ownership Reporting Compliance - ------------------------------------------------------- Under Section 16(a) of the Securities Exchange Act, a Form 4 reporting the acquisition or disposition of Company securities by an officer, director or 10% shareholder must be filed with the Securities and Exchange Commission no later than the second business day after the date on which the transaction occurred unless certain exceptions apply. Most transactions not reported on Form 4 must be reported on Form 5 within 45 days after the end of Nobility's fiscal year. Based on information provided by Nobility's directors and executive officers, during the fiscal year ended November 5, 2005, all required reports were filed when due. 19 Code of Ethics - -------------- We have adopted a code of ethics that applies to the principal executive officer, principal financial officer, executive vice presidents and controller. The code has been designed in accordance with provisions of the Sarbanes-Oxley Act of 2002, to promote honest and ethical conduct. The code is included as an exhibit to this annual report. Our code of ethics is available on our website at www.nobilityhomes.com. You may also obtain a copy of the Nobility Homes, Inc. Code of Ethics, at no cost, by forwarding a written request to the Secretary of Nobility at Post Office Box 1659, Ocala, Florida 34478. Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference pursuant to Instruction G of Form 10-K from Nobility's definitive proxy statement for the 2006 annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A on or before March 5, 2006. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------- -------------------------------------------------------------- Information concerning security ownership of certain beneficial owners and management is incorporated by reference pursuant to Instruction G of Form 10-K from Nobility's definitive proxy statement for the 2006 annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A on or before March 5, 2006. Item 13. Certain Relationships and Related Transactions - ------- ---------------------------------------------- Information concerning certain relationships and related transactions is incorporated by reference pursuant to Instruction G of Form 10-K from Nobility's definitive proxy statement for the 2006 annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A on or before March 5, 2006. Item 14. Principal Accountant Fees and Services - ------- -------------------------------------- Information concerning principal accountant fees and services is incorporated by reference pursuant to Instruction G of Form 10-K from Nobility's definitive proxy statement for the 2006 annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A on or before March 5, 2006. 20 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------- --------------------------------------------------------------- (a) Consolidated Financial Statements and Schedules: Report of Tedder, James, Worden & Associates, P.A. Consolidated Balance Sheets at November 5, 2005 and November 6, 2004 Consolidated Statements of Income and Comprehensive Income for the Years Ended November 5, 2005, November 6, 2004 and November 1, 2003 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended November 5, 2005, November 6, 2004 and November 1, 2003 Consolidated Statements of Cash Flows for the Years Ended November 5, 2005, November 6, 2004 and November 1, 2003 Notes to Consolidated Financial Statements (b) Reports on Form 8-K: None (c) Exhibits: 3. (a) Nobility's Articles of Incorporation, as amended (filed as an exhibit to Nobility's Form 10-K for the fiscal year ended November 1, 1997 and incorporated herein by reference). (b) Bylaws, as amended March 28, 1994, (filed as an exhibit to Nobility's Form 10-KSB for the fiscal year ended October 29, 1994 and incorporated herein by reference.) 10. (a) Joint Venture Agreement with 21st Century Mortgage Corporation (filed as an exhibit to Nobility's Form 10-K for the fiscal year ended November 1, 1997 and incorporated herein by reference). (b) Stock Incentive Plan (filed as an exhibit to Nobility's registration statement on Form S-8, registration no. 333-44769, and incorporated herein by reference). (c) Revolving Credit Agreement dated April 18, 2001 with SunTrust Bank, a Georgia state-chartered bank (filed as an exhibit to Nobility's Form 10-K for the fiscal year ended November 3, 2001 and incorporated herein by reference). (d) Agreement dated September 7, 2001 between Nobility and Terry E. Trexler relating to use of life insurance proceeds (filed as an exhibit to Nobility's Form 10-K for the fiscal year ended November 3, 2001 and incorporated herein by reference). 13. Consolidated Financial Statements from 2005 Annual Report to Shareholders. 14. Code of Ethics 21. Subsidiaries of Nobility. 23. Consent of Tedder, James, Worden & Associates, P.A. 31. (a) Written Statement of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)or 15d-14(a) under the Securities Exchange Act of 1934. 21 (b) Written Statement of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)or 15d-14(a) under the Securities Exchange Act of 1934. 32. (a) Written Statement of Chief Executive Officer pursuant to 18 U.S.C. ss.1350. (b) Written Statement of Chief Financial Officer pursuant to 18 U.S.C. ss.1350. 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NOBILITY HOMES, INC. DATE: January 30, 2006 By: /s/ Terry E. Trexler ---------------------------------------- Terry E. Trexler, Chairman, President and Chief Executive Officer DATE: January 30, 2006 By: /s/ Thomas W. Trexler ---------------------------------------- Thomas W. Trexler, Executive Vice President, and Chief Financial Officer DATE: January 30, 2006 By: /s/ Lynn J. Cramer, Jr. ---------------------------------------- Lynn J. Cramer, Jr., Treasurer and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: DATE: January 30, 2006 By: /s/ Terry E. Trexler ---------------------------------------- Terry E. Trexler, Director DATE: January 30, 2006 By: /s/ Richard C. Barberie ---------------------------------------- Richard C. Barberie, Director DATE: January 30, 2006 By: /s/ Robert Holliday ---------------------------------------- Robert Holiday, Director DATE: January 30, 2006 By: /s/ Robert P. Saltsman ---------------------------------------- Robert P. Saltsman, Director DATE: January 30, 2006 By: /s/ Thomas W. Trexler ---------------------------------------- Thomas W. Trexler, Director 23 EXHIBIT INDEX 3. (a) Nobility's Articles of Incorporation, as amended (filed as an exhibit to Nobility's Form 10-K for the fiscal year ended November 1, 1997 and incorporated herein by reference). (b) Bylaws, as amended March 28, 1994, (filed as an exhibit to Nobility's Form 10-KSB for the fiscal year ended October 29, 1994 and incorporated herein by reference.) 10. (a) Joint Venture Agreement with 21st Century Mortgage Corporation (filed as an exhibit to Nobility's Form 10-K for the fiscal year ended November 1, 1997 and incorporated herein by reference). *(b) Stock Incentive Plan (filed as an exhibit to Nobility's registration statement on Form S-8, registration no. 333-44769, and incorporated herein by reference). (c) Revolving Credit Agreement dated April 18, 2001 with SunTrust Bank, a Georgia state-chartered bank (filed as an exhibit to Nobility's Form 10-K for the fiscal year ended November 3, 2001 and incorporated herein by reference). (d) Agreement dated September 7, 2001 between Nobility and Terry E. Trexler relating to use of life insurance proceeds (filed as an exhibit to Nobility's Form 10-K for the fiscal year ended November 3, 2001 and incorporated herein by reference). 13. Consolidated Financial Statements from 2004 Annual Report to Shareholders. 14. Code of Ethics 21. Subsidiaries of Nobility. 23. Consent of Tedder, James, Worden & Associates, P.A. 31. (a) Written Statement of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)or 15d-14(a) under the Securities Exchange Act of 1934. (b) Written Statement of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)or 15d-14(a) under the Securities Exchange Act of 1934. 32. (a) Written Statement of Chief Executive Officer pursuant to 18 U.S.C. ss.1350. (b) Written Statement of Chief Financial Officer pursuant to 18 U.S.C. ss.1350. ___________________________ *Management Remuneration Plan. 24 EX-13 2 dkm830a.txt EXHIBIT 13 - FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- November 5, 2005 and November 6, 2004
2005 2004 Assets Current assets: Cash and cash equivalents $ 14,368,183 $ 14,588,332 Short-term investments 414,526 777,042 Accounts receivable 250,376 1,869,449 Inventories 9,549,486 6,908,557 Prepaid income taxes 248,958 - Prepaid expenses and other current assets 484,109 397,179 Deferred income taxes 225,245 392,594 -------------------- --------------------- Total current assets 25,540,883 24,933,153 Property, plant and equipment, net 3,791,558 3,265,042 Long-term investments 11,833,065 8,342,382 Other investments 1,819,494 1,446,012 Other assets 2,071,862 1,988,882 -------------------- --------------------- Total assets $ 45,056,862 $ 39,975,471 -------------------- --------------------- Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 1,390,218 $ 1,494,163 Accrued compensation 1,311,854 1,031,819 Accrued expenses and other current liabilities 1,318,657 977,848 Income taxes payable - 617,737 Customer deposits 3,964,519 4,327,647 -------------------- --------------------- Total current liabilities 7,985,248 8,449,214 Deferred income taxes 2,152 152,630 -------------------- --------------------- Total liabilities 7,987,400 8,601,844 -------------------- --------------------- Commitments and contingent liabilities (Note 14) Stockholders' equity: Preferred stock, $.10 par value, 500,000 shares authorized; none issued and outstanding - - Common stock, $.10 par value, 10,000,000 shares authorized; 5,364,907 shares issued and 536,491 536,491 outstanding in 2005 and 2004 Additional paid-in capital 9,005,610 8,719,130 Retained earnings 35,096,462 29,732,071 Accumulated other comprehensive income 174,027 77,788 Less treasury stock at cost, 1,306,182 and 1,334,361 shares, respectively, in 2005 and 2004 (7,743,128) (7,691,853) -------------------- --------------------- Total stockholders' equity 37,069,462 31,373,627 -------------------- --------------------- Total liabilities and stockholders' equity $ 45,056,862 $ 39,975,471 -------------------- ---------------------
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - -------------------------------------------------------------------------------- For the years ended November 5, 2005, November 6, 2004 and November 1, 2003
2005 2004 2003 Net sales $ 56,710,925 $ 50,018,542 $ 39,229,156 Cost of goods sold (40,243,309) (37,013,892) (29,362,197) -------------------- ------------------ --------------------- Gross profit 16,467,616 13,004,650 9,866,959 Selling, general and administrative expenses (8,125,206) (6,803,806) (5,789,361) -------------------- ------------------ --------------------- Operating income 8,342,410 6,200,844 4,077,598 Other income: Interest income 598,904 376,753 211,018 Undistributed earnings in joint venture - Majestic 21 373,482 342,509 220,148 Receipt of stock in connection with demutualization of insurance company - - 167,930 Miscellaneous 57,421 112,703 56,785 -------------------- ------------------ --------------------- Total other income 1,029,807 831,965 655,881 -------------------- ------------------ --------------------- Income before provision for income taxes 9,372,217 7,032,809 4,733,479 Provision for income taxes (3,200,000) (2,400,000) (1,655,000) -------------------- ------------------ --------------------- Net income 6,172,217 4,632,809 3,078,479 Other comprehensive income, net of tax: Unrealized investment gains 96,239 42,272 35,516 -------------------- ------------------ --------------------- Comprehensive income $ 6,268,456 $ 4,675,081 $ 3,113,995 -------------------- ------------------ --------------------- Weighted average number of shares outstanding Basic 4,043,394 4,016,797 3,996,424 Diluted 4,134,923 4,116,337 4,021,996 Earnings per share Basic $ 1.53 $ 1.15 $ 0.77 Diluted $ 1.49 $ 1.13 $ 0.77 Cash dividends paid per common share $ 0.20 $ 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 5, 2005, November 6, 2004 and November 1, 2003
Accumulated Additional Other Common Common Paid-in Retained Comprehensive Treasury Stock Shares Stock Capital Earnings Income Stock Total ------------- ------------ ------------- -------------- -------------- -------------- --------------- 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 Cash dividends paid - - - (401,100) - - (401,100) Income tax reduction due to the exercise of employee stock options - - 75,752 - - - 75,752 Unrealized investment gains - - - - 42,272 - 42,272 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 Purchase of treasury stock (24,200) - - - - (494,925) (494,925) Exercise of employee stock options 52,143 - (29,589) - - 441,650 412,061 Cash dividends paid - - - (807,826) - - (807,826) Income tax reduction due to the exercise of employee stock options - - 316,069 - - - 316,069 Payment of employee benefit plan expenses with treasury stock 236 - - - - 2,000 2,000 Unrealized investment gains - - - - 96,239 - 96,239 Net income - - - 6,172,217 - - 6,172,217 ------------- ------------ ------------- -------------- -------------- -------------- --------------- Balance at 11/5/2005 4,058,725 $ 536,491 $9,005,610 $ 35,096,462 $ 174,027 $ (7,743,128) $ 37,069,462 ------------- ------------ ------------- -------------- -------------- -------------- ---------------
The accompanying notes are an integral part of these financial statements. 3 CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- For the years ended November 5, 2005, November 6, 2004 and November 1, 2003
2005 2004 2003 Cash flows from operating activities: Net income $ 6,172,217 $ 4,632,809 $ 3,078,479 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 297,114 288,942 232,377 Deferred income taxes 291,695 318,438 130,634 Undistributed earnings in joint venture - Majestic 21 (373,482) (342,509) (220,148) Distributions from joint venture - Majestic 21 - 100,500 36,400 Loss on disposal of property, plant and equipment 11,417 2,775 - Increase in cash surrender value of life insurance (82,980) (111,001) (91,480) Payment of employee benefit plan expenses with treasury stock 2,000 - 28,345 Decrease (increase) in: Accounts receivable 1,619,073 226,679 (1,021,647) Inventories (2,640,929) (350,898) 31,417 Prepaid income taxes (248,958) - - Prepaid expenses and other current assets (86,930) 103,835 (132,885) (Decrease) increase in: Accounts payable (103,945) 9,166 306,602 Accrued compensation 280,035 507,035 (179,338) Accrued expenses and other current liabilities 340,809 220,350 39,798 Income taxes payable (617,737) (272,938) 890,675 Customer deposits (363,128) 2,097,014 1,113,368 ------------------- ------------------ ------------------- Net cash provided by operating activities 4,496,271 7,430,197 4,242,597 ------------------- ------------------ ------------------- Cash flows from investing activities: Purchase of investments (3,490,683) (3,591,860) (5,556,859) Purchase of property, plant and equipment (849,655) (420,253) (420,787) Proceeds from maturity of investments 500,000 125,000 - Proceeds from repayment of receivable from officer - 597,024 - Proceeds from the sale of property, plant and equipment 14,608 - - ------------------- ------------------ ------------------- Net cash used in investing activities (3,825,730) (3,290,089) (5,977,646) ------------------- ------------------ ------------------- Cash flows from financing activities: Payment of cash dividends (807,826) (401,100) - Proceeds from exercise of employee stock options 412,061 207,576 155,244 Purchase of treasury stock (494,925) - (260,158) ------------------- ------------------ ------------------- Net cash used in financing activities (890,690) (193,524) (104,914) ------------------- ------------------ ------------------- (Decrease) increase in cash and cash equivalents (220,149) 3,946,584 (1,839,963) Cash and cash equivalents at beginning of year 14,588,332 10,641,748 12,481,711 ------------------- ------------------ ------------------- Cash and cash equivalents at end of year $ 14,368,183 $14,588,332 $ 10,641,748 ------------------- ------------------ ------------------- Supplemental disclosure of cash flow information Income taxes paid $ 3,817,000 $ 2,292,000 $ 620,000 ------------------- ------------------ ------------------- Non-cash investing and financing activities: Income tax reduction due to the exercise of employee stock options $ 316,069 $ 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 1. 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 nineteen Florida retail sales centers: Ocala (3), St. Augustine, Chiefland, Tallahassee, Tampa, Lake City, Auburndale, Inverness, Hudson, Tavares, Jacksonville, Yulee, Fort Walton, Pace, Panama City, Punta Gorda and Sebastian. 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 5, 2005 and November 1, 2003 consisted of fifty-two week periods. The year ended November 6, 2004 consisted of a fifty-three week period. REVENUE RECOGNITION The Company recognizes revenue for the majority of 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 Construction of the home is completed, o Title having passed to the retail home buyer, o Funds having been deposited in the Company's bank 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 revenues 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 agent and mortgage broker, the Company provides mortgage brokerage services, automobile, extended warranty coverage and casualty insurance to the retail home buyer in connection with their purchase and financing of manufactured homes. Approximately 61%, 56% and 48% of the Company's installment sales contracts in fiscal years 2005, 2004 and 2003, respectively, which are normally payable over 84 to 360 months, were 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 5 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 5, 2005 and November 6, 2004, approximately $9,774,000 and $11,161,000, respectively, of the cash and cash equivalents were held in the form of municipal and other debt securities. All of the municipal and other debt 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 "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. 6 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). Goodwill, net of accumulated amortization, totaled $298,708 and accumulated amortization of goodwill totaled $185,669 for fiscal years 2005 and 2004. WARRANTY COSTS The Company provides for a warranty as the manufactured homes are sold. Amounts related to these warranties for fiscal years 2005, 2004 and 2003 are as follows:
2005 2004 2003 -------------- -------------- -------------- Beginning accrued warranty expense $ 185,000 $ 165,000 $ 165,000 Less: reduction for payments (861,000) (626,300) (492,400) Plus: additions to accrual 891,000 646,300 492,400 -------------- -------------- -------------- Ending accrued warranty expense $ 215,000 $ 185,000 $ 165,000 -------------- -------------- --------------
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 short and long-term investments at November 5, 2005 and November 6, 2004 are as follows: 2005 2004 ------------------ ------------------ Carrying amount $ 12,247,591 $ 9,119,424 Fair value 12,069,701 9,196,012 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, the Company has 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 7 pay for the stock. The Company's 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:
2005 2004 2003 ---------------- ---------------- ---------------- Net income, as reported $ 6,172,217 $ 4,632,809 $ 3,078,479 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 (21,052) (19,954) (32,468) ---------------- ---------------- ---------------- Pro forma net income $ 6,151,165 $ 4,612,855 $ 3,064,435 ---------------- ---------------- ---------------- Basic earnings per share: As reported $ 1.53 $ 1.15 $ 0.77 Pro forma $ 1.52 $ 1.15 $ 0.77 Diluted earnings per share: As reported $ 1.49 $ 1.13 $ 0.77 Pro forma $ 1.49 $ 1.12 $ 0.76
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 $458,000, $455,000 and $470,000 for fiscal years 2005, 2004 and 2003, 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 8 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. 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 91,529, 99,540 and 25,572 for fiscal years 2005, 2004 and 2003, respectively. Stock options to purchase 7,810 shares of common stock for the fiscal year 2003 were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive. 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 November 2004, the Financial Accounting Standards Board ("FASB") issued FAS 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. In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, ("FAS 153"), which requires that exchange transactions that lack commercial substance be measured based on the recorded amount less impairment and not on the fair values of the exchanged assets. Exchange transactions that lack commercial substance are transactions that are not expected to result in significant changes in the cash flows of the reporting entity. The provisions of FAS 153 become effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this Statement to have a material effect on the Company's consolidated financial statements. 9 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. FAS 123R 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 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. In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, ("FAS 154"). FAS 154 replaces APB No. 20, "Accounting Changes", and FAS 3, "Reporting Changes in Interim Financial Statements". FAS 154 changes the accounting for, and reporting of, a change in accounting principle. FAS 154 requires retrospective application to the prior period's financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impractical to do so. FAS 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005. Currently, the Company is not aware of any financial impact that the adoption of this Statement will have on its consolidated financial statements. 2. INVESTMENTS Investments in "held-to-maturity" and "available-for-sale" debt and equity securities at November 5, 2005 and November 6, 2004 were as follows:
November 5, 2005 ------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ----------------- ----------------- ------------------ ----------------- Held-to-maturity securities (carried at amortized cost): Municipal securities $ 11,833,065 $ 3,168 $ (181,058) $ 11,655,175 - Available-for-sale securities (carried at fair value): Debt securities classified as cash equivalents 9,774,000 - - 9,774,000 Equity securities in a public company 165,519 249,007 - 414,526 ----------------- ----------------- ------------------ ----------------- Total investments $ 21,772,584 $ 252,175 $ (181,058) $ 21,843,701 ----------------- ----------------- ------------------ -----------------
10
November 6, 2004 ------------------------------------------------------------------------------- Gross Gross Amortized 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 ----------------- ----------------- ------------------ -----------------
The fair values were estimated based on quoted market prices using current market rates at each respective period end. Contractual maturities of "held-to-maturity" debt securities at November 5, 2005 and November 6, 2004 were as follows:
November 5, 2005 November 6, 2004 ------------------------------------- ------------------------------------ Estimated Estimated Cost Fair Value Cost Fair Value ----------------- ----------------- ---------------- ---------------- Due in less than one year $ - $ - $ 500,000 $ 500,000 Due in 1 - 5 years 9,479,610 9,319,804 5,202,592 5,237,826 Due in 5 - 10 years 2,353,455 2,335,371 3,139,790 3,181,144 ----------------- ----------------- ---------------- ---------------- $ 11,833,065 $ 11,655,175 $ 8,842,382 $ 8,918,970 ----------------- ----------------- ---------------- ----------------
There were no sales of "available-for-sale" securities during the fiscal years 2005 or 2004. The unrealized losses on municipal securities were primarily due to changes in interest rates. Because the decline in market values of these securities is attributable to changes in interest rates and not credit quality and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be until maturity, the Company does not believe any of the unrealized losses represent other than temporary impairment based on evaluations of available evidence as of November 5, 2005. All municipal securities were in an unrealized loss position for 12 months or longer as of November 5, 2005. 11 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 5, 2005 November 6, 2004 ------------------ -------------------- Held-to-maturity debt securities $ - $ 500,000 Available-for-sale equity securities 414,526 277,042 ------------------ -------------------- Short-term investments 414,526 777,042 Available-for-sale debt securities included in cash & cash equivalents 9,774,000 7,160,000 Held-to-maturity debt securities included in long-term investments 11,833,065 8,342,382 ------------------ -------------------- Total investments $ 22,021,591 $ 16,279,424 ------------------ --------------------
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. The advances were non-interest bearing. Net cash surrender value of approximately $1,128,000 at November 1, 2003 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. The balance of the reserved advances at November 5, 2005 and November 6, 2004 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. 12 The following is summarized financial information of the Company's joint venture:
November 5, November 6, November 1, 2005 2004 2003 ------------------- -------------------- ------------------- Total Assets $ 12,361,812 $ 11,284,661 $ 6,518,794 Total Liabilities $ 9,347,627 $ 9,017,437 $ 4,163,661 Total Equity $ 3,014,185 $ 2,267,224 $ 2,355,133 Net Income $ 746,961 $ 685,018 $ 440,296
Distributions received from the joint venture amounted to $0, $100,500 and $36,400 in fiscal years 2005, 2004 and 2003, 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 finance 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 5, 2005 and November 6, 2004 are summarized as follows: 2005 2004 Raw materials $ 810,550 $ 818,762 Work-in-process 119,932 126,169 Finished homes 8,145,376 5,597,646 Pre-owned manufactured homes 325,887 240,833 Model home furniture 147,741 125,147 ---------------- ---------------- $ 9,549,486 $ 6,908,557 ---------------- ---------------- 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 5, 2005 and November 6, 2004 are summarized as follows: 13
Range of Lives in Years 2005 2004 Land - $ 1,609,301 $ 1,235,247 Land and leasehold improvements 10-20 665,700 536,159 Buildings and improvements 15-40 2,372,692 2,215,164 Machinery and equipment 3-10 1,301,959 1,221,716 Furniture and fixtures 3-10 655,091 613,680 ----------------- ----------------- 6,604,743 5,821,966 Less accumulated depreciation (2,813,185) (2,556,924) ----------------- ----------------- $ 3,791,558 $ 3,265,042 ----------------- -----------------
Depreciation expense totaled approximately $297,000, $289,000 and $232,000 for fiscal years 2005, 2004 and 2003, 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. 7. OTHER ASSETS Other assets at November 5, 2005 and November 6, 2004 are comprised of the following: 2005 2004 Cash surrender value of life insurance $ 1,773,154 $ 1,690,174 Goodwill, net (see Note 6) 298,708 298,708 ------------------ -------------- $ 2,071,862 $ 1,988,882 ------------------ -------------- 8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities at November 5, 2005 and November 6, 2004 are comprised of the following: 2005 2004 Accrued sales taxes $ 284,579 $ 261,306 Accrued volume rebate 185,854 199,475 Accrued warranty expense 215,000 185,000 Other accrued expenses 277,205 320,414 Accrued home setup costs 356,019 11,653 ----------------- ---------------- $ 1,318,657 $ 977,848 ----------------- ---------------- 14 9. INCOME TAXES The provision for income taxes for the years ended November 5, 2005, November 6, 2004 and November 1, 2003 consists of the following:
2005 2004 2003 Current tax expense: Federal $ 2,715,700 $ 1,766,200 $ 1,366,600 State 468,000 364,300 157,800 --------------- ---------------- ---------------- 3,183,700 2,130,500 1,524,400 Deferred tax expense 16,300 269,500 130,600 --------------- ---------------- ---------------- Provision for income taxes $ 3,200,000 $ 2,400,000 $ 1,655,000 --------------- ---------------- ----------------
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 5, 2005, November 6, 2004 and November 1, 2003:
2005 2004 2003 Provision - federal statutory tax rate $ 3,186,500 $ 2,391,200 $ 1,609,400 Increase (decrease) resulting from: State taxes, net of federal tax benefit 309,400 250,000 115,000 Permanent differences: Tax exempt interest (224,000) (118,000) (75,500) Other (71,900) (123,200) 6,100 --------------- ---------------- ---------------- Provision for income taxes $ 3,200,000 $ 2,400,000 $ 1,655,000 --------------- ---------------- ----------------
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: 2005 2004 Gross deferred tax assets: Allowance for doubtful accounts $ 87,300 $ 87,300 Inventories 63,900 52,700 Other assets 133,173 182,994 Accrued expenses 80,900 69,600 --------------- ---------------- Total deferred tax assets 365,273 392,594 Gross deferred tax liabilities: Depreciation (112,828) (130,930) Amortization (29,352) (21,700) --------------- ---------------- Net deferred tax asset $ 223,093 $ 239,964 --------------- ---------------- 15 These amounts are included in the accompanying consolidated balance sheets under the following captions: 2005 2004 Current assets: Deferred tax assets $ 225,245 $ 392,594 Non-current liabilities: Deferred tax liabilities (2,152) (152,630) --------------- ---------------- Net deferred tax asset $ 223,093 $ 239,964 --------------- ---------------- The Company believes that it is more likely than not that the net deferred tax assets of $223,093 at November 5, 2005 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% (6.50% at November 5, 2005) 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 5, 2005 and November 6, 2004, 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 24,200, 0 and 29,700 shares of its common stock during fiscal years 2005, 2004 and 2003, respectively. These shares were acquired for general corporate purposes. The Company reissued 52,379, 20,302 and 22,731 shares of treasury stock during fiscal years 2005, 2004 and 2003, respectively, for employee stock option exercises and the payment of employee benefit plan expenses. 16 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 329,085 and 301,192 at November 5, 2005 and November 6, 2004. Options were held by 14 persons at November 5, 2005. Information with respect to options granted at November 5, 2005 is as follows:
Weighted Average Number of Stock Option Exercise Shares Price Range Price --------------------------------------------------- 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 Granted 26,400 23.76 23.76 Exercised (52,143) 5.50 - 11.42 7.89 Canceled (2,150) 6.00 - 11.42 9.58 --------------- -------------------- ------------- Outstanding at 11/5/2005 165,915 $ 6.00 - 23.76 $ 10.82
17 The following table summarizes information about the Plan's stock options at November 5, 2005:
Options Outstanding Options Exercisable ------------------------------------------------------ ---------------------------------- Weighted Average Remaining Weighted Weighted Exercise Shares Contractual Average Number Average Prices Outstanding Life (years) Exercise Price Exercisable Exercise Price ------------ ---------------- ---------------- ---------------- ---------------- ----------------- $ 6.00 3,548 1 $ 6.00 3,548 $ 6.00 8.03 106,600 1 8.03 106,600 8.03 8.30 5,820 2 8.30 5,820 8.30 8.83 10,047 3 8.83 10,047 8.83 11.42 13,500 4 11.42 13,500 11.42 23.76 26,400 5 23.76 - 23.76 ---------------- ---------------- ---------------- ---------------- ----------------- 165,915 2 $ 10.82 139,515 $ 10.82 ---------------- ---------------- ---------------- ---------------- -----------------
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. 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 ---------------------------------------------------- 2005 2004 2003 -------------- ------------- ------------------ Risk-free interest rate 4.3% 3.3% 3.3% Expected volatility of stock 45% 45% 45% Dividend yield 1.2% 1.1% 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 $40,000, $24,000 and $23,000 in fiscal years 2005, 2004 and 2003, respectively. 18 14. COMMITMENTS AND CONTINGENT LIABILITIES OPERATING LEASES The Company leases the property for several Prestige retail sales centers from various unrelated entities under operating lease agreements expiring through November 2007. 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 $623,000, $575,000 and $639,000 in fiscal years 2005, 2004 and 2003, 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 5, 2005 are as follows: Fiscal Year Ending 2006 244,000 2007 78,000 2008 40,000 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 $617,000 and $1,363,000 at November 5, 2005 and November 6, 2004, 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 2005, 2004 or 2003. INCOME TAX MATTERS The Company has been subject to an ongoing Internal Revenue Service ("IRS") examination for the years ended November 6, 2004 and November 1, 2003. The IRS Agent's report for fiscal years 2004 and 2003 proposes additional taxes of approximately $426,000 and $732,000, respectively, which relates to a potential accumulated earnings tax. Management intends to vigorously contest the IRS Agent's position. Accordingly, no accrual has been made in the accompanying consolidated financial statements for the contested tax adjustments since the ultimate liability, if any, cannot be reasonably estimated at this time. Any ultimate liability related to this accumulated earnings tax is not expected to be material in relation to the consolidated financial position of the Company, but could be material in relation to the earnings of the period in which a determination occurs. 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. 19 15. QUARTERLY FINANCIAL SUMMARY (UNAUDITED) Following is a summary of the unaudited interim results of operations for each quarter in the years ended November 5, 2005 and November 6, 2004.
First Second Third Fourth Year ended November 5, 2005 Net sales $ 11,511,134 $ 15,529,132 $ 13,652,618 $ 16,018,041 Cost of goods sold 8,299,701 10,960,299 9,744,681 11,238,628 Net income 1,072,780 1,692,002 1,500,744 1,906,691 Earnings per share Basic 0.27 0.42 0.37 0.47 Diluted 0.26 0.41 0.37 0.46 Dividends per common share 0.20 - - - 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 - - -
The sum of quarterly earnings per share amounts does not necessarily equal earnings per share for the year. 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 November 5, 2005, the Company's Board of Directors declared an annual cash dividend of $0.30 per common share, paid on January 13, 2006 to stockholders of record as of January 3, 2006. 20 TEDDER, JAMES, WORDEN & ASSOCIATES, P.A. CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS ADVISORS AN INDEPENDENTLY OWNED MEMBER OF THE RSM MCGLADREY NETWORK - -------------------------------------------------------------------------------- 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 5, 2005 and November 6, 2004, 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 5, 2005. 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 5, 2005 and November 6, 2004, and the results of their operations and their cash flows for each of the three years in the period ended November 5, 2005, in conformity with U.S. generally accepted accounting principles. /s/ Tedder, James, Worden & Associates, P.A. Orlando, Florida December 21, 2005, except for the income tax matters paragraph of Note 14, as to which the date is January 23, 2006 21 EX-14 3 dkm830b.txt EXHIBIT 14 - CODE OF ETHICS Exhibit 14 NOBILITY HOMES, INC. Code of Ethics for Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer (Controller), or Persons Performing Similar Functions This Code of Ethics is adopted by Nobility Homes, Inc. (the "Company") pursuant to Section 406 of the Sarbanes-Oxley Act and the rules and regulations promulgated by the Securities and Exchange Commission thereunder. This Code provides principles which the principal executive officer, principal financial officer, principal accounting officer (and controller, if different) and other persons performing similar functions (collectively, "Covered Senior Officers") are expected to adhere to and advocate. This Code embodies rules regarding individual responsibilities as well as responsibilities to their peers, the Company and its shareholders. Covered Senior Officers should always strive to: Act with honesty and integrity, avoiding actual or apparent conflicts of interest between personal and professional relationships. Provide constituents with information that is accurate, complete, objective, relevant, timely and understandable. Comply with rules and regulations of federal, state and local governments, and other appropriate private and public regulatory agencies. Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing their independent judgment to be subordinated. Respect the confidentiality of information acquired in the course of their work except when authorized or otherwise legally obligated to disclose. Confidential information acquired in the course of a Covered Senior Officer's work should not be used for personal advantage. Share knowledge and maintain skills important and relevant to their constituents' needs. Proactively promote ethical behavior as a responsible partner among peers in their work environment. Achieve responsible use of and control over all assets and resources employed or entrusted to them. Report to an appropriate Senior Officer or member of the Company's Audit Committee or Board of Directors, on a timely basis, violations of this Code of Ethics. Covered Senior Officers will be asked to certify, to their best knowledge, their compliance with this Code of Ethics periodically, but not less than annually. Covered Senior Officers will be subject to disciplinary action for violating this Code of Ethics, which may include termination of employment and depending on the violation, civil damages, criminal fines and prison terms. This Code of Ethics is intended to supplement, and not substitute for, the Code of Business Conduct which the Company has adopted for its employees and directors generally, and the Covered Senior Officers will be responsible for complying with this Code of Ethics and all other Company policies and practices, including the Code of Business Conduct. EX-21 4 dkm830c.txt EXHIBIT 21 - SUBSIDIARIES OF REGISTRANT Exhibit 21 Subsidiaries of Registrant Prestige Home Centers, Inc. Florida Mountain Financial, Inc. Florida Majestic Homes, Inc. Florida EX-23 5 dkm830d.txt EXHIBIT 23 - CONSENT OF TEDDER, JAMES Exhibit 23 CONSENT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement No. 333-44769 on Form S-8 of our report, dated December 21, 2005, except for the income tax matters paragraph of Note 14, as to which the date is January 23, 2006, appearing in this Annual Report on Form 10-K of Nobility Homes, Inc., for the year ended November 5, 2005. /s/ Tedder, James, Worden & Associates, P.A. Orlando, Florida January 30, 2006 EX-31 6 dkm830e.txt EXHIBIT 31(A) - CERTIFICATION OF CEO Exhibit 31(a) Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 I, Terry E. Trexler, certify that: 1. I have reviewed this Annual Report on Form 10-K of Nobility Homes, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: January 30, 2006 By: /s/ Terry E. Trexler ---------------------------------------- Terry E. Trexler, Chairman, President and Chief Executive Officer EX-31 7 dkm830f.txt EXHIBIT 31(B) - CERTIFICATION OF CFO Exhibit 31(b) Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 I, Thomas W. Trexler, certify that: 1. I have reviewed this Annual Report on Form 10-K of Nobility Homes, Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. DATE: January 30, 2006 By: /s/ Thomas W. Trexler ---------------------------------------- Thomas W. Trexler, Executive Vice President, and Chief Financial Officer EX-32 8 dkm830g.txt EXHIBIT 32(A) - WRITTEN STATEMENT OF CEO Exhibit 32(a) Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. ss.1350 Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Chairman and Chief Executive Officer of Nobility Homes, Inc. (the "Company"), hereby certify that: 1. The Annual Report on Form 10-K of the Company for the year ended November 5, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. DATE: January 30, 2006 By: /s/ Terry E. Trexler ---------------------------------------- Terry E. Trexler, Chairman, President and Chief Executive Officer EX-32 9 dkm830h.txt EXHIBIT 32(B) - WRITTEN STATEMENT OF CFO Exhibit 32(b) Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. ss.1350 Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Executive Vice President and Chief Financial Officer of Nobility Homes, Inc. (the "Company"), hereby certify that: 1. The Annual Report on Form 10-K of the Company for the year ended November 5, 2005 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. DATE: January 30, 2006 By: /s/ Thomas W. Trexler ---------------------------------------- Thomas W. Trexler, Executive Vice President, and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----