| NOBILITY HOMES INC 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 350cmam000 to 132cmam000 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 54prca of all industry retail locations have closed since 1999 and that industry manufacturers have closed 120 manufacturing facilities, representing 36prca of the industryapstas 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 |
| 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 1990apstas, 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 45prca of wholesale floor plan financing, have exited that business in the manufactured housing industry and Transamerica and Bombardierapstas 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 8prca to 10prca 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 |
| 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 dlra617cmam000 in 2005 and dlra1cmam363cmam000 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 25prca 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 &apos 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 dlra250cmam000 for a 50prca interest in a joint venture with 21st Mortgage, to provide mortgage financing on our manufactured homes sold by our retail division |
| As a 50prca partner we do not have any legal authority to manage or control this partnershipapstas operations |
| During fiscal 2004 we transferred dlra250cmam000 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 21apstas 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 75prca of our wholesale shipments of manufactured homes were sold through Prestige Home Centers, our own retail distribution network |
| If Prestigeapstas 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 64prca 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 &apos 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 Nodtta 142, Goodwill and Other Intangible Assets |
| 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, managementapstas 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 |