| **ANNUAL  REPORT TO SHAREHOLDERS** | **Exhibit 13** |
|------------------------------------|----------------|

** **

 

**THE COMPANY**

 

**LIBERTY HOMES, INC.** and Subsidiaries design andmanufacture a broad line of single and multi-section manufactured homes andmodular homes and sell to numerous independent dealers throughout most of theUnited States and to consumers at the Company’s two retail operations.  The Company currently operates manufacturingplants in Syracuse, Indiana; Yoder, Kansas; Dorchester, Wisconsin; Leola,Pennsylvania; Sheridan, Oregon; Statesville, North Carolina; and Hamilton,Alabama.  Corporate offices, includingengineering and design facilities, are located in Goshen, Indiana.

 

**SELECTED FINANCIAL DATA**

as of or for the year ending December 31,

(Amountsin Thousands Except per Share Data)

 
|                           |   | **2002** |   | **2001** |   | **2000** |   | **1999** |    | **1998** |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|---------|----------|--------|
| Net Sales                      |   | $        | 91,861 |     | $      | 112,266  |   | $        | 128,165 |     | $      | 181,736 |   | $ | 190,412 |   |
| Net income (loss)              |   | $        | (4,551 | )        | $      | (1,574   | )      | $        | (5,916  | )        | $      | 2,162 |   | $ | 4,562 |   |
| Net income (loss) per share    |   | $        | (1.22  | )        | $      | (.42     | )      | $        | (1.53   | )        | $      | .55 |   | $ | 1.15 |   |
|                           |   |     |   |     |   |     |   |     |    |     |   |
| Total assets                   |   | $        | 53,020 |     | $      | 61,499   |   | $        | 69,769  |     | $      | 75,088 |   | $ | 77,219 |   |
| Long term obligations          |   | —   |   | —   |   | —   |   | —   |    | —   |   |
| Cash dividends paid per share: |   |     |   |     |   |     |   |     |    |     |   |
| Class A & B common stock   |   | $        | .28    |     | $      | .28      |   | $        | .28     |     | $      | .28 |   | $ | .28 |   |

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONANDRESULTS OF OPERATIONS**

 

**General** – The condition of the manufactured housingindustry provided many challenges during 2002. Factors that shaped those challenges include credit issues, excessinventory and excess manufacturing capacity.

 

The number of financial institutionsproviding national wholesale lending programs continued to decline during theyear including the notable exit of Conseco Finance Corp. (“Conseco”) andDeutsche Financial Services. Furthermore, Conseco’s decision to restructure under bankruptcyprotection effectively eliminated a significant source of retailfinancing.  That development along withthe withdrawal of other major retail lenders in recent years reduced the availabilityof consumer credit for the purchase of manufactured housing.  The remaining retail finance sourcessubjected potential customers to tighter credit standards.  As a result, the reduced level of creditavailability greatly lowered demand for manufactured housing.

 

An increased default rate on consumer loansin recent years has driven the inventory of repossessed retail homeshigher.  The number of dealer defaultson wholesale financing has fallen from recent prior years, but repossessedwholesale inventory continues to be a factor. Both retail and wholesale repossessions compete with new home orders andin the year 2002, discounting on repossessions was substantial.  Such discounting put pricing pressure onmanufacturers and often resulted in the loss of new home orders.  The 

 

1

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liquidation of repossessed homes by Conseco,a major holder of such homes, will likely in the short run further depress thepricing of these homes.

 

The Institute of Building Technology andSafety (“Institute”) reported new home shipments during 2002 were 13% less thanthe prior year.  Since 1999, the yearduring which the current slump began, new home shipments have dropped 52% intotal.  As a result, this lower volumehas placed pressure on manufacturers’ abilities to absorb fixed costs.  Accordingly during 2002, manufacturerscontinued to place production facilities off stream and sell or offer for salemany of these plants.  The Institutereported there were 233 plants producing homes at the end of 2002 after beginningthe year with 277.  At the end of 1999,323 plants were producing homes.

 

**Results of Operations** – Operations by the Companyduring 2002 were greatly impacted by the conditions of the industry.  The Company marketed its products in mostareas of the United States during 2002. Multi-section homes accounted for 76% of shipments.  Industry-wide, 78% of homes shipped weremulti-section homes.

 

Net sales for 2002 were $91,861,000, a$20,405,000 decrease from the year 2001. Net sales in 2001 decreased by $ 15,899,000 to $112,266,000 from 2000net sales of $128,165,000.  The Companysold 20% fewer homes during 2002 than during 2001 and 22% fewer in 2001 than2000.

 

Gross profit was $10,875,000 or 12% of netsales in 2002, $16,565,000 or 15% of net sales in 2001 and $11,779,000 or 9% ofnet sales in 2000.  In the face ofdeclining revenues, fixed manufacturing costs were difficult to absorb.  The focus on cost controls continuedthroughout the year.  In a major costcutting effort made at the end of 2002, the Company ceased production at theCompany’s Ocala Florida plant.  Theplant is held for sale.

 

Selling, delivery, general and administrativeexpenses totaled $18,239,000 in 2002, including $877,000 reserved as closingcosts for the Florida facility.  Theseexpenses were $18,976,000 and $22,189,000 in 2001 and 2000, respectively.

 

Interest and other income was $55,000 in2002, $562,000 in 2001 and $813,000 in 2000 and primarily results from interestincome earned from the Company’s investment of cash.  Variances are due to varying interest rates and the amount ofcash available to invest.

 

Continued declining sales created a difficultenvironment in which to operate.  TheCompany was unable to fully counteract this condition and with the costsassociated with the closed Ocala, Florida facility, operations for the yearproduced a net loss of $4,551,000 in 2002 compared to a net loss of $1,574,000in 2001 and net loss of $5,916,000 in 2000.

 

**Liquidity and Capital Resources** – Cash andcash equivalents and short-term investments decreased during the year to$4,608,000 at December 31, 2002, compared to $7,523,000 at the end of2001.  Working capital was $18,305,000at year end 2002 and $23,031,000 at year end 2001. The current ratio was 2.8 to1 at the end of both years.

 

2

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During 2000, the Company consolidated theoperations of one of its Wisconsin manufacturing facilities and one of itsAlabama manufacturing facilities into nearby production facilities.  These two facilities were listed for saleduring 2001 with the appraisal values and asking prices in excess of the netbook value of each.  At the end of 2002,the Company ended production at its Ocala, Florida plant and began preparationsto market the facility.  The Company hasneither listed the property for sale nor had an appraisal of fair market valuemade.  Based on discussions with arealtor, the Company believes the fair market value of the Florida propertyalso exceeds net book value.  All threefacilities are conducive to manufacturing or warehousing operations and can fita wide variety of uses.  The Companyhopes to sell all of these properties during the next year for amounts thatexceed their net book value plus the costs of disposal.  At December 31, 2002, the aggregate net bookvalue of all these facilities was $4,581,000.

 

The Company is contingently liable underagreements to third party financing companies that require the Company, undercertain conditions, to repurchase homes it sells to its dealers.  The Company believes, as of December 31,2002, the value of all homes subject to repurchase is approximately$14,000,000.  The risk of loss underthese agreements is spread over many dealers and is further reduced by theresale value of the homes.  During 2001and 2002, the Company funded all of its repurchase obligations through internalsources.  As of December 31, 2002, theCompany has made provisions for all obligations of which it is aware plus anypotential repurchases the Company deems likely to be required.  Any significant change could place unplanneddemands on future cash flows.

 

The Company has secured line of creditagreements, which provide up to $2,790,000 to finance some of its inventoryheld for retail sale and an unsecured line of credit of $5,000,000.  At December 31, 2002, $895,000 was payableon the secured credit agreements and nothing was borrowed on the unsecuredcredit line.

 

The Company believes that cash flow fromoperations, cash reserves and credit arrangements currently in place will besufficient to meet the Company’s requirements in the year 2003.  The Company has taken into consideration thecurrent conditions in which the Company operates.  Any additional downturn in the industry could affect the Companyand cause it to seek additional lines of credit.

 

**Outlook and Risk Factors** – Nationally themanufactured housing industry has experienced a severe slump, which began inmid-1999.  Year on year shipmentsdeclined 13% and 23% for the years ended 2002 and 2001, respectively and manyof the factors that precipitated this downturn continue to impact the industry.

 

Restated underwriting standards and a reducednumber of retail lenders are factors which will affect the industry for theforeseeable future.  This constrictionof credit will keep many potential homebuyers out of the marketplace formanufactured housing.

 

It is a common practice for manufacturedhousing producers to participate in dealer financing programs which require themanufacturer to repurchase homes which remain unsold and in dealer inventorywithin a certain time period following delivery to the dealer, if 

 

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the dealer defaults on its financingobligations.  When initiated, thisrepurchase obligation brings homes back into the wholesale market and mayresult in some discounting as the units are resold.  Currently, the industry has a significant level of theserepurchased homes as well as homeowner repossessions that will compete withfuture orders to factories for new homes.

 

The spate of dealer failures that occurredindustry-wide in 2000 slowed during the last two years. However, it isdifficult to project what may happen with the existing dealer base in thefuture.  Continued fallout among thispart of the distribution chain may disrupt the market.

 

The distribution system for the Company’smodular homes may be somewhat different. While the Company sells some of its modular homes to traditionalmanufactured home retailers, a large percentage of modular homes are sold tobuilder developers who do not as a rule stock homes for display.  Consequently, homes sold to such builderdevelopers are not subject to repurchase as described above.  As the modular portion of the Company’sbusiness grows, the Company’s contingent liability for repurchase of homesshould proportionately shrink.

 

The Company’s operations run parallel to theforces in the industry and are impacted by the same risk factors affecting theindustry.  Since the Company producesonly to dealers’ orders and sales backlogs are traditionally short, the orderactivity at the Company is indicative of the day to day retail sales activityof its products. Any changes affecting retail customer demand, such as cost,unemployment and the factors previously mentioned, may have an immediate effecton the Company’s operations. Additional risk factors of the Company aredescribed in the Liquidity and Capital Resources section of this discussion andin the Notes to Consolidated Financial Statements, Note Six, ContingentLiabilities.

 

**Critical Accounting Policies and Estimates** – The Notes toConsolidated Financial Statements contain descriptions in Note One, AccountingPolicies, of the Company’s accounting policies which were used in thepreparation of the financial information used in this report and in otherpublicly disclosed information.  Thesepolicies are Generally Accepted Accounting Policies used in the United States(GAAP).  The preparation of thefinancial information requires management’s use of judgment and estimates inthe valuation of certain assets and liabilities, recognition of certainexpenses and the disclosure of contingencies. It is management’s opinion that this use of judgment and estimates hasbeen done in compliance with GAAP.

 

The Company’s critical accounting policiesand estimates are used in establishing amounts for warranty, repurchaseobligations, lawsuit reserves, deferred tax valuation and the valuation ofproperty held for sale.  Management hasdiscussed with the Company’s Audit Committee the effects of the application ofthese critical accounting policies and estimates.  All of these estimates relate to unsettled transactions andevents.  Accordingly, upon settlement,actual amounts may differ from these estimated amounts.

 

4

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Warranty – Management uses a combination ofthe analysis of historical warranty expense and judgments regarding the averageperiod of time after the sale of its homes in which warranty claims arise toestablish reserves for the cost of potential warranty work that may need to beperformed on homes sold by the Company.

 

Repurchase Obligations – Estimates are usedto determine reserves for potential losses the Company may realize on theresale of homes that it has received requests to repurchase but not yetrepurchased or on homes that management deems likely to be repurchased.  These estimates are based on current marketconditions of the supply of repurchased homes and the value for which recentrepurchased homes have been sold.  TheLiquidity and Capital Resources section of Management’s Discussion andAnalysis, and Note Six, Contingent Liabilities, in the Notes to ConsolidatedFinancial Statements include additional discussion about the Company’srepurchase obligations.

 

Lawsuits – The Company is party to variouslegal proceedings from the normal course of operations. Management analyzes thefacts and circumstances of each specific claim and determines the merit ofestablishing a reserve for a potential settlement amount.  On those claims for which a settlement seemslikely, a reserve is set after review with legal counsel and a review of theoutcome of similar claims.

 

Deferred Taxes – The Company calculates thedifference between the amounts of income and expense items determined accordingto GAAP and the amounts determined by the various tax laws and regulationseffective for the areas in which the Company operates. The predominantincidence of these differences result from differences in the timing of therecognition of income or expense. An estimate of the value of these items ismade using the prevailing tax rates. These rates may change at the time the differences are actually realizedfor tax purposes and may therefore be different than management’s originalestimates.  Management also estimatesthe time at which these timing differences will cease and the time at whichfuture operations will be affected by the deferred taxes.  Additional information about deferred taxesis included in the appropriate section of Note One, Accounting Policies, and inNote Three, Income Taxes, of the Notes to Consolidated Financial Statements.

 

Property Held For Sale – Management hasestimated the market value of properties held for sale to be in excess of thenet book value plus disposal cost of the properties.  They have analyzed appraisals and reports by realtors toestablish the market valuations in making this estimate.  The Liquidity and Capital Resources sectionof Management’s Discussion and Analysis and the appropriate section of Note Oneof the Notes to Consolidated Financial Statements include additional discussionabout the Company’s property held for sale.

 

**Forward Looking Information** – The discussion abovecontains forward looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. These statements include statements regarding industry and companyoutlooks and risk factors.  The Companymay make other forward looking statements orally or in writing from time totime.  All such forward lookingstatements are not guaranties of future events or 

 

5

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performance and involve risks anduncertainties. Actual results may differ materially from those in the forwardlooking statements as the result of a number of material factors.  These factors include without limitation,the availability of financing credit at both the wholesale and retail level,the availability of a competent workforce, the regulation of the industry atthe federal, state and local levels, changes in interest rates, the stabilityof dealer distribution networks, unanticipated results in pending legalproceedings and the condition of the economy and its effect on consumerconfidence.

 

6

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**CAPITALSTOCK**

** **

The Company’s Class A and Class B CommonStock are traded on the NASDAQ Stock Market. As of February 20, 2003, therewere approximately 225 holders of record of the Company’s Class A Common Stockand approximately 150 holders of record of the Company’s Class B Common Stock.The following table shows the high and low closing bid price per share for theCompany’s Class A and Class B Common Stock for each of the quarters in 2002 and2001 as well as cash dividends paid in each quarter in 2002 and 2001.  During 2002, the Board of Directors deferredtheir quarterly meeting, normally held in late December, to early January2003.  As a result, the quarterlydividend, normally declared each year at the December meeting to be paid in thefirst quarter of the following year, was not declared until the first month of2003.  Accordingly, although the date ofthe Company’s dividend declaration changed during 2002, the dividend paymentpolicy has not changed.

 

 
|            |   | **Price per  Share ($)** |       | **Cash  Dividends  Paid  per Share** |       |
|-----------------|--------|--------------------------|------------|--------------------------------------|------------|
|            |   | **2002**                 |       | **2001**                             |       |   |
|            |   | **High**                 | ** ** | **Low**                              | ** ** | **High** | ** ** | **Low** | ** ** | **2002** | ** ** | **2001** |   |
| First Quarter:  |   |                     |       |                                 |       |   |   |   |   |   |   |   |   |
| Class A Common  |   | 7.10                     |       | 4.50                                 |       | 5.19 |   | 4.69 |   | $ | .07 |   | $ | .07 |   |
| Class B Common  |   | 7.90                     |       | 4.85                                 |       | 5.06 |   | 4.88 |   | $ | .07 |   | $ | .07 |   |
| Second Quarter: |   |                     |       |                                 |       |   |   |   |   |   |   |   |   |
| Class A Common  |   | 7.70                     |       | 5.35                                 |       | 6.30 |   | 5.06 |   | $ | .07 |   | $ | .07 |   |
| Class B Common  |   | 7.51                     |       | 6.50                                 |       | 5.90 |   | 5.00 |   | $ | .07 |   | $ | .07 |   |
| Third Quarter:  |   |                     |       |                                 |       |   |   |   |   |   |   |   |   |
| Class A Common  |   | 6.00                     |       | 4.50                                 |       | 7.20 |   | 4.90 |   | $ | .07 |   | $ | .07 |   |
| Class B Common  |   | 6.95                     |       | 4.70                                 |       | 7.00 |   | 5.05 |   | $ | .07 |   | $ | .07 |   |
| Fourth Quarter: |   |                     |       |                                 |       |   |   |   |   |   |   |   |   |
| Class A Common  |   | 5.90                     |       | 4.02                                 |       | 5.99 |   | 4.85 |   | $ | .07 |   | $ | .07 |   |
| Class B Common  |   | 6.55                     |       | 5.20                                 |       | 5.90 |   | 5.75 |   | $ | .07 |   | $ | .07 |   |

 

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March 14, 2003

 

 

To Our Shareholders:

 

As mentioned in Management’s Discussion andAnalysis, the year 2002 provided another year of substantial challenges to themanufactured housing industry and to Liberty Homes, Inc.  Industry over-capacity, excess inventory,tightened credit standards, fewer financial institutions servicing the industryand dealer failures continued to fuel the poor environment in which the Companyoperated.

 

The Company responded by focusing on new andinnovative products, exploring new avenues into the homebuyers’ market and bycontrolling costs.  At the end of 2002,production was halted at the Company’s Ocala, Florida facility.  The plant is currently held for sale.

 

During the year 2002, the Company generatednet sales of $91,861,000.  This amount representsa decrease of $20,405,000 from the prior year. The Company sustained a net loss of $4,551,000 during the year comparedto net loss of $1,574,000 in 2001.

 

Once again, we want to take this opportunityto thank our shareholders, employees and suppliers for their efforts andcontinuing support.

 

Very truly yours,

 

LIBERTY HOMES, INC.

 

 
| /s/Edward J, Hussey |   |
|---------------------|--------|
| Edward J. Hussey    |
| President           |
|                |
| pkm                 |

 

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**CONSOLIDATEDBALANCE SHEET**

** **

December 31, 2002 and 2001 (Amounts inThousands)

 
|                                |   | **2002** | ** ** | **2001** | ** ** |
|-------------------------------------|--------|----------|------------|----------|------------|
| **ASSETS**                          |   |     |       |     |       |
| **Current  Assets:**                |   |     |       |     |       |
|                                |   |     |       |     |       |
| Cash and cash equivalents           |   | $        | 4,308      |     | $          | 7,223 |   |
|                                |   |     |       |     |       |
| Short term investments              |   | 300      |       | 300      |       |
|                                |   |     |       |     |       |
| Receivables                         |   | 5,815    |       | 10,506   |       |
|                                |   |     |       |     |       |
| Inventories                         |   | 10,644   |       | 12,567   |       |
|                                |   |     |       |     |       |
| Deferred tax asset                  |   | 3,441    |       | 2,820    |       |
|                                |   |     |       |     |       |
| Income taxes refundable             |   | 1,912    |       | 362      |       |
|                                |   |     |       |     |       |
| Prepayments and other               |   | 2,148    |       | 2,248    |       |
|                                |   |     |       |     |       |
| Total current assets                |   | 28,568   |       | 36,026   |       |
|                                |   |     |       |     |       |
| **Property,  Plant and Equipment:** |   |     |       |     |       |
|                                |   |     |       |     |       |
| Land                                |   | 2,014    |       | 2,176    |       |
|                                |   |     |       |     |       |
| Buildings and improvements          |   | 23,580   |       | 25,726   |       |
|                                |   |     |       |     |       |
| Machinery and equipment             |   | 20,735   |       | 21,720   |       |
|                                |   |     |       |     |       |
|                                |   | 46,329   |       | 49,622   |       |
|                                |   |     |       |     |       |
| Less accumulated depreciation       |   | 26,458   |       | 27,067   |       |
|                                |   |     |       |     |       |
|                                |   | 19,871   |       | 22,555   |       |
|                                |   |     |       |     |       |
| Property held for sale              |   | 4,581    |       | 2,918    |       |
|                                |   |     |       |     |       |
|                                |   | $        | 53,020     |     | $          | 61,499 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

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**LIBERTYHOMES, INC.**

 
|                                                                                                                                                      |   | **2002** | ** ** | **2001** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
| **LIABILITIES**                                                                                                                                           |   |     |       |     |       |
|                                                                                                                                                      |   |     |       |     |       |
| **Current  Liabilities:**                                                                                                                                 |   |     |       |     |       |
|                                                                                                                                                      |   |     |       |     |       |
| Accounts payable                                                                                                                                          |   | $        | 1,779      |     | $          | 2,651 |   |
|                                                                                                                                                      |   |     |       |     |       |
| Floorplan notes payable                                                                                                                                   |   | 895      |       | 2,383    |       |
|                                                                                                                                                      |   |     |       |     |       |
| Accrued compensation & payroll taxes                                                                                                                  |   | 1,150    |       | 1,055    |       |
|                                                                                                                                                      |   |     |       |     |       |
| Other accrued liabilities                                                                                                                                 |   | 6,439    |       | 6,906    |       |
|                                                                                                                                                      |   |     |       |     |       |
| Total current liabilities                                                                                                                                 |   | 10,263   |       | 12,995   |       |
|                                                                                                                                                      |   |     |       |     |       |
| **Deferred  Income Taxes**                                                                                                                                |   | 2,732    |       | 2,450    |       |
|                                                                                                                                                      |   |     |       |     |       |
| **Minority  Interest in Consolidated Subsidiaries**                                                                                                       |   | 929      |       | 1,097    |       |
|                                                                                                                                                      |   |     |       |     |       |
| Contingent Liabilities                                                                                                                                    |   | —   |       | —   |       |
|                                                                                                                                                      |   |     |       |     |       |
| **SHAREHOLDERS’  EQUITY**                                                                                                                            |   |     |       |     |       |
| **Capital  Stock:**                                                                                                                                       |   |     |       |     |       |
| Class A, $1 par value, Authorized - 7,500,000 shares; Issued and  outstanding – 1,995,000 in 2002 and 2,088,000 in 2001                              |   | 1,995    |       | 2,088    |       |
|                                                                                                                                                      |   |     |       |     |       |
| Class B, $1 par value, convertible to Class A, Authorized – 3,500,000  shares; Issued and outstanding – 1,659,000 in 2002 and 1,665,000 in 2001 |   | 1,659    |       | 1,665    |       |
|                                                                                                                                                      |   |     |       |     |       |
| **Other  Capital**                                                                                                                                        |   | 83       |       | 83       |       |
|                                                                                                                                                      |   |     |       |     |       |
| **Retained  Earnings**                                                                                                                                    |   | 35,359   |       | 41,121   |       |
|                                                                                                                                                      |   |     |       |     |       |
|                                                                                                                                                      |   | 39,096   |       | 44,957   |       |
|                                                                                                                                                      |   |     |       |     |       |
|                                                                                                                                                      |   | $        | 53,020     |     | $          | 61,499 |   |

** **

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**CONSOLIDATEDSTATEMENT OF INCOME**

 

For the Years Ended December 31, 2002, 2001and 2000

(Amounts in Thousands, Except per Share Data)

 
|                                                    |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                    |   |     |   |     |   |     |   |
| Net sales                                               |   | $        | 91,861 |     | $      | 112,266  |   | $ | 128,165 |   |
| Cost of sales                                           |   | 80,986   |   | 95,701   |   | 116,386  |   |
|                                                    |   |     |   |     |   |     |   |
| Gross profit                                            |   | 10,875   |   | 16,565   |   | 11,779   |   |
|                                                    |   |     |   |     |   |     |   |
| Selling, delivery, general  and administrative expenses |   | 18,239   |   | 18,976   |   | 22,189   |   |
|                                                    |   |     |   |     |   |     |   |
| Operating loss                                          |   | (7,364   | )      | (2,411   | )      | (10,410  | )      |
|                                                    |   |     |   |     |   |     |   |
| Interest and other income                               |   | 55       |   | 562      |   | 813      |   |
| Interest expense                                        |   | (152     | )      | (340     | )      | (402     | )      |
|                                                    |   |     |   |     |   |     |   |
| Loss before minority interest and income taxes          |   | (7,461   | )      | (2,189   | )      | (9,999   | )      |
| Minority interest in consolidated subsidiaries          |   | 168      |   | (77      | )      | 321      |   |
| Income tax benefit                                      |   | 2,742    |   | 692      |   | 3,762    |   |
|                                                    |   |     |   |     |   |     |   |
| Net loss                                                |   | $        | (4,551 | )        | $      | (1,574   | )      | $ | (5,916 | ) |
|                                                    |   |     |   |     |   |     |   |
| Net loss per outstanding common share                   |   |     |   |     |   |     |   |
| Class A — basic and fully diluted                  |   | $(1.22   | )      | $(.42    | )      | $(1.53   | )      |
| Class B — basic and fully diluted                  |   | $(1.22   | )      | $(.42    | )      | $(1.53   | )      |

 

**CONSOLIDATEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**

** **

For the Years Ended December 31, 2002, 2001and 2000

(Amounts in Thousands)

 
|                                                        |   | **Class A  Common  Stock** |       | **Class B  Common  Stock** |       |                   |       |   |       |   |   |
|-------------------------------------------------------------|--------|----------------------------|------------|----------------------------|------------|------------------------|------------|--------|------------|--------|--------|
|                                                        |   | ** **                 | ** ** | **Other  Capital**         | ** ** | **Retained  Earnings** | ** ** |   | ** ** |
|                                                        |   | ** **                 | ** ** | ** **                 | ** ** | **Total**              | ** ** |
|                                                        |   |                       |       |                       |       |                   |       |   |       |   |   |
| Balance, January 1, 2000                                    |   | $                          | 2,198      |                       | $          | 1,706                  |       | $      | 83         |   | $      | 51,535 |   | $ | 55,522 |   |
| Repurchase and cancellation of Class A & Class B Shares |   | (115                       | )          | (36                        | )          | (806                   | )          | (957   | )          |   |   |
| Net loss for the year                                       |   |                       |       |                       |       |                   |       | (5,916 | )          | (5,916 | )      |
| Cash dividends declared                                     |   |                       |       |                       |       |                   |       | (1,067 | )          | (1,067 | )      |
| Balance December 31, 2000                                   |   | 2,083                      |       | 1,670                      |       | 83                     |       | 43,746 |       | 47,582 |   |
| Conversion from Class B to Class A Shares                   |   | 5                          |       | (5                         | )          | —                 |       |   |       |   |   |
| Net loss for the year                                       |   |                       |       |                       |       |                   |       | (1,574 | )          | (1,574 | )      |
| Cash dividends declared                                     |   |                       |       |                       |       |                   |       | (1,051 | )          | (1,051 | )      |
| Balance December 31, 2001                                   |   | $                          | 2,088      |                       | $          | 1,665                  |       | $      | 83         |   | $      | 41,121 |   | $ | 44,957 |   |
| Conversion from Class B to Class A Shares                   |   | 6                          |       | (6                         | )          | —                 |       |   |       |   |   |
| Repurchase and cancellation of   Class A Shares             |   | (99                        | )          |                       |       |                   |       | (431   | )          | (530   | )      |
| Net loss for the year                                       |   |                       |       |                       |       |                   |       | (4,551 | )          | (4,551 | )      |
| Cash dividends declared                                     |   |                       |       |                       |       |                   |       | (780   | )          | (780   | )      |
| Balance December 31, 2002                                   |   | $                          | 1,995      |                       | $          | 1,659                  |       | $      | 83         |   | $      | 35,359 |   | $ | 39,096 |   |

 

The accompanying notes are an integral partof the consolidated financial statements.

 

11

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CONSOLIDATED STATEMENT OFCASH FLOWS

For the Years Ended December 31, 2002, 2001and 2000

(Amounts in Thousands)

 
|                                                                             |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Cash flows from (used in) operating activities:                                  |   |     |   |     |   |     |   |
| Net loss                                                                         |   | $        | (4,551 | )        | $      | (1,574   | )      | $ | (5,916 | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities: |   |     |   |     |   |     |   |
| Depreciation                                                                     |   | 2,039    |   | 2,465    |   | 2,548    |   |
| Deferred income taxes                                                            |   | (339     | )      | (420     | )      | (130     | )      |
| Minority interest                                                                |   | (168     | )      | 77       |   | (321     | )      |
| Gain on sale of property, plant & equipment                                  |   | (37      | )      | —   |   | —   |   |
| Net value of retail center assets written off                                    |   | —   |   | 151      |   | —   |   |
| Changes in assets and liabilities:                                               |   |     |   |     |   |     |   |
| Receivables                                                                      |   | 4,691    |   | 753      |   | (1,011   | )      |
| Inventories                                                                      |   | 1,923    |   | 4,855    |   | (2,095   | )      |
| Prepayments and other                                                            |   | 100      |   | (222     | )      | (38      | )      |
| Accounts payable                                                                 |   | (872     | )      | (1,008   | )      | 1,443    |   |
| Accrued liabilities                                                              |   | (109     | )      | (1,808   | )      | (3,820   | )      |
| Income taxes payable/receivable                                                  |   | (1,550   | )      | 3,281    |   | (2,928   | )      |
| Total adjustments                                                                |   | 5,678    |   | 8,124    |   | (6,352   | )      |
|                                                                             |   |     |   |     |   |     |   |
| Net cash from (used in) operating activities                                     |   | 1,127    |   | 6,550    |   | (12,268  | )      |
|                                                                             |   |     |   |     |   |     |   |
| Cash flows from (used in) investing activities:                                  |   |     |   |     |   |     |   |
| Additions to property, plant & equipment                                     |   | (1,349   | )      | (396     | )      | (2,761   | )      |
| Proceeds from sale of property, plant & equipment                            |   | 368      |   | —   |   | —   |   |
| Disposal of short term investments                                               |   | —   |   | 50       |   | 6,185    |   |
| Net cash from (used in) investing activities                                     |   | (981     | )      | (346     | )      | 3,424    |   |
|                                                                             |   |     |   |     |   |     |   |
| Cash flows from (used in) financing activities:                                  |   |     |   |     |   |     |   |
| Proceeds from floorplan notes payable                                            |   | 1,152    |   | 3,751    |   | 7,928    |   |
| Repayments of floorplan notes payable                                            |   | (2,640   | )      | (6,577   | )      | (2,719   | )      |
| Cash dividends paid                                                              |   | (1,043   | )      | (1,051   | )      | (1,067   | )      |
| Retirement of common stock                                                       |   | (530     | )      | —   |   | (957     | )      |
| Net cash from (used in) financing activities                                     |   | (3,061   | )      | (3,877   | )      | 3,185    |   |
|                                                                             |   |     |   |     |   |     |   |
| Net increase (decrease) in cash and cash equivalents                             |   | (2,915   | )      | 2,327    |   | (5,659   | )      |
| Cash and cash equivalents, beginning of year                                     |   | 7,223    |   | 4,896    |   | 10,555   |   |
|                                                                             |   |     |   |     |   |     |   |
| Cash and cash equivalents, end of year                                           |   | $        | 4,308  |     | $      | 7,223    |   | $ | 4,896 |   |
|                                                                             |   |     |   |     |   |     |   |
| Supplemental disclosures of cash flow information -                              |   |     |   |     |   |     |   |
| Cash received for income taxes                                                   |   | $        | 811    |     | $      | 3,403    |   | $ | 706 |   |
| Cash paid for interest expense                                                   |   | $        | 152    |     | $      | 373      |   | $ | 348 |   |

 

The accompanying notes arean integral part of the consolidated financial statements.

 

12

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.     ACCOUNTINGPOLICIES:**

**Principles of Consolidation**

** **

The consolidated financial statements includethe accounts of the Company and all its wholly owned and its majority ownedsubsidiaries.  Upon consolidation, allinter-company accounts, transactions and profits have been eliminated.

** **

**Cash and Cash Equivalents**

 

Cash and cash equivalents include highlyliquid investments which are converted to known amounts of cash on a dailybasis.  These investments are carried atcost which approximates market value.

 

**Short-Term Investments**

** **

At December 31, 2002 and 2001, short terminvestments consisted primarily of certificates of deposit with originalmaturities of 90 days to 12 months and readily convertible to cash. Theseinvestments are carried at cost, which approximates fair market value.  The Company intends to hold the certificatesof deposit until maturity.  The Company’sinvestments were maintained in two financial institutions at December 31, 2002.

 

**Accounts Receivable**

** **

The Company accounts for trade receivablesusing the amounts billed to its customers. Past due receivables are determinedbased on the contractual terms of the transactions billed.  The Company does not accrue interest on any ofits trade receivables.  From time totime the Company reviews accounts receivable for amounts that may seemuncollectable.  Based on the currentcircumstances of customers, specific transactions and economic conditions, theCompany establishes an allowance for doubtful collection of receivables.  When collection attempts are deemed to havefailed, the receivable is charged against the allowance.  The Company’s allowances are immaterial.

 

**Inventories**

** **

Inventories are stated at the lower of costor market, with cost determined on a first-in, first-outbasis.  A recap of inventories is asfollows:

 
| **(Amounts in Thousands)** |   | **2002** |   | **2001** |   |
|----------------------------|--------|----------|--------|----------|--------|
| Raw material inventory     |   | $        | 5,344  |     | $      | 5,434 |   |
| Work in process inventory  |   | 1,927    |   | 1,702    |   |
| Inventory held for sale    |   | 3,373    |   | 5,431    |   |
|                       |   | $        | 10,644 |     | $      | 12,567 |   |

 

**Property, Plant and Equipment**

** **

Property, plant and equipment is recorded atcost.  Depreciation is taken over theestimated useful life of the asset and is provided principally on thestraight-line method.

 

13

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When assets are retired or disposed, therelated cost and accumulated depreciation is removed from the accounts and anyresulting gain or loss is included in operations.  Operations are charged with all maintenance, repairs andrearrangement expenses, while betterments and renewals which increase theproductive capacity of assets are capitalized and depreciated. The propertiesare reviewed for impairment when events indicate the value may not be fullyrecoverable.

 

**Property Held for Sale**

** **

The Company currently has for sale three ofits former production facilities, one each in Ocala, Florida, Dorchester,Wisconsin and Tuscumbia, Alabama.  TheWisconsin and Alabama facilities ceased operation in 2000.  Production from the Dorchester, Wisconsinplant was consolidated into the Company’s other Dorchester plant, while theTuscumbia business was moved 50 miles to the Hamilton, Alabama plant.  At the end of 2002, production ceased at theFlorida plant. The Company is preparing this facility for sale and will servethis market area from its other facilities. These closings were done as part ofthe Company’s response to the current industry downturn.

 

The Wisconsin and Alabama properties arelisted for sale and each facility includes land, land improvements andbuildings.  Appraisal values and askingprice for each of these two properties exceeds the net book value of each.  The Florida property has neither been listedfor sale nor formally appraised.  Basedon discussions with a realtor, the Company believes the fair market value ofthe Florida property exceeds net book value.

 

All three facilities can fit a wide varietyof utilization.  The Company anticipatesselling all of these properties for amounts that exceed their net book valueplus disposal costs.  Accordingly, thestatements reflect the aggregate net book value of $4,581,000 for all theseproperties and no adjustments for impairment have been made.

 

**Product Warranty Costs**

** **

Estimated warranty obligations are providedat the time of sale.  This estimate ismade from an analysis of the Company’s historical warranty cost.

 

**Income Taxes**

** **

The Company accounts for income taxes usingthe asset and liability method.  Underthis method, deferred income taxes are recognized for the tax consequences oftemporary differences by applying enacted statutory tax rates applicable tofuture years to differences between the financial statement carrying amountsand the tax bases of ending assets and liabilities.  The effect on deferred taxes of a change in tax rates isrecognized in income in the period that includes the tax change enactment date.

 

**Recently Enacted Accounting Standards**

** **

New accounting standards on asset retirementobligations, restructuring activities and exit costs, operating leases andearly extinguishment of debt were issued in 2002.  Management determined that when the new accounting standards areadopted in 2003 they will not have a material impact on the Company’s financialcondition or results of operations.

 

14

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In October 2001, the FASB issued SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  Effective 2002, the Company adopted SFAS No.144, which supercedes SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to Be Disposed Of.”  The standard retains the previously existingaccounting requirements related to the recognition and measurement of theimpairment of long-lived assets to be held and used while expanding themeasurement requirements of long-lived assets to be disposed of by sale toinclude discontinued operations.  Anylong-lived assets to be disposed of by sale are to be measured at the lower ofbook value or fair value less cost to sell. SFAS No. 144 also expands on the previously existing reportingrequirements for discontinued operations to include a component of an entitythat either has been disposed of or is classified as held for sale. Theadoption of SFAS No. 144 did not have a material effect on the Company’sfinancial statements.

 

**Earnings Per Share**

** **

Basic and diluted earnings per share arecomputed based on weighted average Class A and Class B shares outstanding.  There are no options or warrants outstandingto create a dilutive effect.

 

**Revenue Recognition**

** **

Revenue is recognized when title istransferred upon shipment.

 

**Delivery Revenues and Costs**

** **

The Company includes in net sales the amountsbilled to its customers for delivery services. The costs of these services are included in the Company’s selling,delivery, general and administrative expenses.

 

**Nature of Business, Risks and Uncertainties**

** **

The Company designs, manufactures and sellsat wholesale a broad line of single and multi-section manufactured homes andmulti-section modular homes to numerous independent dealers in the UnitedStates who may utilize floorplan financing arrangements with lendinginstitutions.  Continued availability ofcredit to these dealers is vital to the Company’s business.  The Company considers itself to be in theindustry segment of manufacturing homes as other operations are immaterial.

 

The process of preparing financial statementsin conformity with generally accepted accounting principles requires the use ofestimates and assumptions regarding certain assets, liabilities, revenues andexpenses.  Such estimates primarilyrelate to unsettled transactions and events as of the date of the financialstatements.  Accordingly, upon settlement,actual amounts may differ from estimated amounts.  The most notable assumptions included in the financial statementsinvolve product warranty costs, potential repurchase obligations on dealerfloorplan financing arrangements, lawsuits, deferred taxes and property heldfor sale.  More discussion on theseassumptions is included in the 

 

15

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Critical Accounting Policies and Estimatesportion of the Management’s Discussion and Analysis section of this report.

 

**2.  CAPITAL STOCK:**

** **

The shares of Class A Common Stock have novoting rights and are not convertible. The shares of Class B Common Stock have voting rights of one vote pershare and are convertible into Class A Common Stock on a one for onebasis.  The Class A Shares may carry apreferential dividend rate.  However, inno event will the dividend rate be less than the Class B shares.  The weighted average of all sharesoutstanding in 2002, 2001 and 2000 was 3,727,000 shares, 3,753,000 shares and3,854,000 shares, respectively.  TheBoard of Directors has approved a stock repurchase program authorizing theCompany to repurchase up to 1,100,000 outstanding shares of its Class A andClass B Common Shares on the open market or in negotiated transactions atmanagement’s discretion.  At December31, 2002, 856,000 shares of Class A Common Stock and 61,000 shares of Class BCommon Stock had been repurchased and canceled under this program. During 2002,the Board of Directors deferred their quarterly meeting, normally held in lateDecember, to early January 2003.  As aresult, the quarterly dividend, normally declared each year at the Decemberquarterly meeting to be paid in the first quarter of the following year, wasnot declared until the first of 2003. Accordingly, although the date of the Company’s dividend declarationchanged during 2002, the dividend payment policy has not changed.

 

 

16

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**3.  INCOME TAXES:**

** **

The deferred taxes in the accompanyingbalance sheet include the following amounts of deferred tax assets andliabilities:

 
| **(Amounts in Thousands)**         |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Deferred tax asset                 |   | $        | 3,441  |     | $      | 2,820    |   | $ | 2,480 |   |
| Deferred tax liability             |   | (2,732   | )      | (2,450   | )      | (2,530   | )      |
| Net deferred tax asset (liability) |   | $        | 709    |     | $      | 370      |   | $ | (50 | ) |

 

The tax effects of principal temporarydifferences and carry forwards are as follows:

 
| **(Amounts in Thousands)**            |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Nondeductible accruals & reserves |   | $        | 3,097  |     | $      | 2,663    |   | $ | 2,279 |   |
| Accelerated tax depreciation          |   | (2,388   | )      | (2,293   | )      | (2,329   | )      |
|                                  |   | $        | 709    |     | $      | 370      |   | $ | (50 | ) |

 

The components of income tax benefit are asfollows:

 
| **(Amounts in Thousands)** |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current:                   |   |     |   |     |   |     |   |
| Federal                    |   | $        | 2,431  |     | $      | 240      |   | $ | 3,533 |   |
| State                      |   | (28      | )      | 32       |   | 99       |   |
| Deferred:                  |   |     |   |     |   |     |   |
| Federal                    |   | (135     | )      | 393      |   | (321     | )      |
| State                      |   | 474      |   | 27       |   | 451      |   |
|                       |   | $        | 2,742  |     | $      | 692      |   | $ | 3,762 |   |

 

The income tax benefit is based onconsolidated loss before taxes adjusted for non-taxable income andnon-deductible expense.  The tax benefitreconciles with the statutory United States federal income tax rate in 2002,2001 and 2000 as follows:

 
|                                           |   | **Income Tax  Expense** |   |
|------------------------------------------------|--------|-------------------------|--------|
| **(Amounts in Thousands)**                     |   | **2002**                |   | **2001** |   | **2000** |   |
| Income taxes at statutory  federal rate 34%    |   | $                       | 2,537  |   | $ | 744 |   | $ | 3,400 |   |
| State income taxes, net of  federal tax effect |   | 294                     |   | 39 |   | 362 |   |
| Other                                          |   | (89                     | )      | (91 | ) | — |   |
|                                           |   | $                       | 2,742  |   | $ | 692 |   | $ | 3,762 |   |
|                                           |   |                    |   |   |   |   |   |
| Effective Tax Rate                             |   | 37                      | %      | 32 | % | 38 | % |

 

**4.  NOTES PAYABLE:**

 

The Company has agreements through some ofits subsidiaries for certain inventory financing for a total loan commitment of$2,790,000 under master loan agreements. The agreements are secured by virtually all of the assets of thesubsidiary companies and the guarantee of the 

 

17

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parent company and bear interest at 1/2% overprime at December 31, 2002.  Payment isdue when the related home is sold.  Theloan agreements contain covenants restricting the subsidiaries from certaintransfers of assets and business mergers and consolidation.  Total interest expense related to theseobligations was $152,000 for 2002 and $340,000 for 2001.  The balance outstanding at December 31, 2002was $895,000 and $2,383,000 at December 31, 2001.

 

The Company has also entered into a$5,000,000 unsecured revolving line of credit with 1st Source Bankwith interest payable monthly at the rate of .25% to .50% below the prime ratedepending on the Company’s leverage ratio. The line is subject to renewal on June 30, 2003 and contains covenantprovisions related to financial ratios and certain other matters, with whichthe Company was in compliance at December 31, 2002.  There was no balance outstanding at December 31, 2002.

 

**5.  OTHER ACCRUEDLIABILITIES:**

** **

Other accrued liabilities at December 31,2002 and 2001 are as follows:

 
| **(Amounts in Thousands)** |   | **2002** |   | **2001** |   |
|----------------------------|--------|----------|--------|----------|--------|
| Marketing Programs         |   | $        | 1,774  |     | $      | 2,734 |   |
| Product Warranty           |   | 2,081    |   | 1,764    |   |
| Dividends                  |   | —   |   | 263      |   |
| Other                      |   | 2,584    |   | 2,145    |   |
|                       |   | $        | 6,439  |     | $      | 6,906 |   |

 

**6.  CONTINGENTLIABILITIES:**

**Repurchase Obligations**

** **

The Company is contingently liable underterms of repurchase agreements with various financial institutions, which providefor the repurchase of its homes sold to dealers under floor plan financingarrangements upon dealer default.  TheCompany believes, as of December 31, 2002, the value of all homes subject torepurchase is approximately $14,000,000. The risk of loss under these agreements is spread over many dealers andis further reduced by the resale value of the homes. The Company has, as ofDecember 31, 2002, provided for losses on homes for which it has received orexpects notification of repurchase.

 

**Other Contingencies**

** **

The Company is party to various legalproceedings from the normal course of operations.

 

18

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The Company has provided for anticipatedlosses resulting from the litigation. In management’s opinion, the Company has adequate legal defenses anddoes not believe these suits will materially affect the Company’s operations orfinancial position.

 

**7.  RETIREMENT PLAN:**

** **

The Company has a 401(k) retirement planwhich covers substantially all employees. The Company has agreed to match a portion of the employee contributionsmade to the plan.  The expense for thisplan for the year ended December 31, 2002, 2001 and 2000 was $132,000, $147,000and $187,000, respectively.

 

**8.  QUARTERLY RESULTSOF OPERATIONS (UNAUDITED):**

** **

The Company’s results of operations in 2002and 2001 by quarter are as follows:

 

(Amounts in Thousands except per share data)

 
|                        |   |               |   | **Year  Ended  Dec. 31** |   |
|-----------------------------|--------|--------------------|--------|--------------------------|--------|
|                        |   | **Quarter  Ended** |   |                     |
|                        |   | **Mar 31**         |   | **Jun 30**               |   | **Sep 30** |   | **Dec 31** |   |   |
| 2002:                       |   |               |   |                     |   |   |   |   |   |   |   |
| Net sales                   |   | $                  | 21,899 |                     | $      | 24,668 |   | $ | 23,959 |   | $ | 21,335 |   | $ | 91,861 |   |
| Gross profit                |   | 2,607              |   | 3,667                    |   | 2,736 |   | 1,865 |   | 10,875 |   |
| Net loss                    |   | (981               | )      | (462                     | )      | (1,241 | ) | (1,867 | ) | (4,551 | ) |
| Net loss per                |   |               |   |                     |   |   |   |   |   |   |   |
| Class A Share               |   |               |   |                     |   |   |   |   |   |   |   |
| Basic and Fully Diluted     |   | (.26               | )      | (.12                     | )      | (.33 | ) | (.51 | ) | (1.22 | ) |
| Net loss per                |   |               |   |                     |   |   |   |   |   |   |   |
| Class B Share               |   |               |   |                     |   |   |   |   |   |   |   |
| Basic and Fully Diluted     |   | (.26               | )      | (.12                     | )      | (.33 | ) | (.51 | ) | (1.22 | ) |
|                        |   |               |   |                     |   |   |   |   |   |   |   |
|                        |   |               |   |                     |   |   |   |   |   |   |   |
| 2001:                       |   |               |   |                     |   |   |   |   |   |   |   |
| Net sales                   |   | $                  | 24,761 |                     | $      | 31,577 |   | $ | 29,992 |   | $ | 25,936 |   | $ | 112,266 |   |
| Gross profit                |   | 3,088              |   | 4,839                    |   | 4,642 |   | 3,996 |   | 16,565 |   |
| Net income (loss)           |   | (1,114             | )      | 107                      |   | 84 |   | (651 | ) | (1,574 | ) |
| Net Income (loss) per Class |   |               |   |                     |   |   |   |   |   |   |   |
| A Share                     |   |               |   |                     |   |   |   |   |   |   |   |
| Basic and Fully Diluted     |   | (.30               | )      | .03                      |   | .02 |   | (.17 | ) | (.42 | ) |
| Net Income (loss) per Class |   |               |   |                     |   |   |   |   |   |   |   |
| B Share                     |   |               |   |                     |   |   |   |   |   |   |   |
| Basic and Fully Diluted     |   | (.30               | )      | .03                      |   | .02 |   | (.17 | ) | (.42 | ) |

 

19

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**REPORT OF INDEPENDENT AUDITORS**

 

Board of Directors and Shareholders

Liberty Homes, Inc.

Goshen, Indiana

 

We have audited the accompanying consolidatedbalance sheets of Liberty Homes, Inc. and Subsidiaries as of December 31, 2002and 2001 and the related consolidated statements of income, changes inshareholders’ equity and cash flows for each of the three years in the periodended December 31, 2002.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Liberty Homes, Inc. and Subsidiaries as of December 31,2002 and 2001, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2002 in conformity withaccounting principles generally accepted in the United States of America.

 

 
| /s/Crowe, Chizek and  Company LLP |   |
|-----------------------------------|--------|
| Crowe, Chizek and Company LLP     |

 

Elkhart, IndianaFebruary 18, 2003

 

20

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**BOARD OF DIRECTORS**

** **

**NAME PRINCIPAL OCCUPATION AND EMPLOYER**

** **
| Edward J. Hussey     |   | Chairman of the Board and  President of Liberty Homes, Inc.               |
|----------------------|--------|---------------------------------------------------------------------------|
|                 |   |                                                                      |
| Edward Joseph Hussey |   | Vice President, Secretary  and Assistant Treasurer of Liberty Homes, Inc. |
|                 |   |                                                                      |
| Michael F. Hussey    |   | Vice President - Finance  and Assistant Secretary of Liberty Homes, Inc.  |
|                 |   |                                                                      |
| David M. Huffine     |   | President, David M.  Huffine & Associates, Crown Point, Indiana       |
|                 |   |                                                                      |
| Mitchell Day         |   | President of Day Equipment  Corporation, Goshen, Indiana                  |
|                 |   |                                                                      |
| Lester M. Molnar     |   | Retired, Former Vice  President of Liberty Homes, Inc.                    |

 

| **OFFICERS**                                                         |
|----------------------------------------------------------------------|
| Edward J. Hussey,  President                                         |
| Edward Joseph Hussey, Vice  President and Secretary                  |
| Michael F. Hussey, Vice  President - Finance and Assistant Secretary |
| Marc A. Dosmann, Vice  President and Chief Financial Officer         |
| Bruce A. McMillan, Vice  President - Sales                           |
| Ron Atkins, Vice President  – Purchasing                        |
| Nader Tomasbi, Vice  President – Engineering and Design         |
| Brian L. Christner,  Treasurer                                       |
| Gregory T. Shank,  Controller                                        |
| Dorothy L. Peterson,  Assistant Treasurer                            |

 

| **REGISTRAR & TRANSFER AGENT** |
|------------------------------------|
| Computershare Investor  Services   |
| Chicago, Illinois                  |
| 312.588.4194                       |
|                               |
| **AUDITORS**                       |
| Crowe, Chizek and Company  LLP     |
| Elkhart, Indiana                   |
|                               |
| **LEGAL COUNSEL**                  |
| Hodges & Davis PC              |
| Merrillville, Indiana              |
|                               |
| Barrett & McNagny              |
| Fort Wayne, Indiana                |

 

21

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**ANNUAL REPORT ON FORM 10-K**

** **

The Liberty Homes, Inc. Annual Report on Form10-K filed with the Securities and Exchange Commission is available toshareholders at no charge upon written request to Liberty Homes, Inc., PO Box35, Goshen, Indiana 46527-0035, attention Marc A. Dosmann.

 

 

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