EXHIBIT 13 - 1995 Annual Report to Shareholders
* * *
"FRONT COVER"
"picture of Mod-U-Kraf's new production facility
under construction in the Franklin County/Town
of Rocky Mount Industrial Park"
MOD-U-KRAF HOMES, INC.
and Subsidiary
1995 ANNUAL REPORT
* * *
"INSIDE FRONT COVER"
"picture of Mod-U-Kraf's Board of Directors
in the Company board room"
MOD-U-KRAF'S BOARD OF DIRECTORS
FROM LEFT TO RIGHT: W. Curtis Carter; J. Dillard Powell; Edwin J.
Campbell; Dale H. Powell, Board Chairman; Mary L. Fitts; and Bobbie
L. Oliver.
Front Cover:
Mod-U-Kraf's new 104,000 sq. ft. production facility (nearing
completion) following the early January winter blizzard which
dumped 2 1/2 feet of snow in the Franklin County, Virginia area.
The facility is located in the Franklin County-Rocky Mount
Industrial Plant.
* * *
TO OUR SHAREHOLDERS
Your management and Board of Directors report continued
profitability for the year 1995 for your Company.
Net sales for the year ending December 31, 1995 were
$9,083,419 which compares to sales in 1994 of $9,288,807.
Net income after taxes for the year ending December 31, l995
was $378,824 which compares to a net income after taxes for the
year 1994 of $308,204. The net income for 1995 amounts to $0.46
per common share which compares to net income after taxes of $0.38
per share during the fiscal year 1994.
Interest rates remained stable throughout the year and the
plant operated at the maximum production that could be achieved
while producing a quality product.
Management feels that interest rates will remain relatively
stable through the year and projects a sound increase in sales and
production when our new plant goes into production.
In lieu of contracting the total construction of our new
manufacturing facility to one construction company, management
elected to act as the general contractor and let contracts to the
various trades based on bids from reputable companies. All bids
have been let and the costs are within the guidelines established,
based on the estimates made to determine the total cost of the
project.
Management has secured a $3,000,000 loan amortized over 20
years through the Franklin County Industrial Development authority
with a very favorable interest rate with no penalty for early
payoff to finance the expansion.
On February 7, l996 the Board of Directors declared a cash
dividend of $0.03 per share of common stock for the fourth quarter
of 1995. This represented the 73rd consecutive quarterly dividend
since dividends were begun in 1978.
The management and Board of Directors of your Company wish to
express our sincere appreciation to each of our shareholders and
employees for your continued support.
Dale H. Powell
President and Chairman of the Board
LEGAL COUNSEL EXECUTIVE OFFICES
- ---------------------------------- ----------------------------------------
Hunton & Williams 201 Old Franklin Turnpike (P.O. Box 573)
Richmond, Virginia Rocky Mount, Viginia
INDEPENDENT ACCOUNTANT TRANSFER AGENT
- ---------------------------------- ----------------------------------------
Brown, Edwards & Company, L.L.P. First Union Bank
Roanoke, Virginia Charlotte, North Carolina
A COPY OF THE FORM 10-KSB AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS AVAILABLE THROUGH THE COMPANY AT NO COST TO A SHAREHOLDER UPON
WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY AT P.O. BOX 573, ROCKY MOUNT,
VIRGINIA 24151.
* * *
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Mod-U-Kraf Homes, Inc. and Subsidiary
Rocky Mount, Virginia
We have audited the accompanying consolidated balance sheets
of Mod-U-Kraf Homes, Inc. and Subsidiary as of December 31, 1995
and 1994 and the related consolidated statements of income,
stockholders' equity and cash flows for the years ended December
31, 1995, 1994 and 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Mod-U-Kraf Homes, Inc. and Subsidiary as of December 31, 1995 and
1994 and the results of their operations and their cash flows for
the years ended December 31, 1995, 1994 and 1993 in conformity with
generally accepted accounting principles.
CERTIFIED PUBLIC ACCOUNTANTS
Roanoke, Virginia
January 20, 1996
* * *
BUSINESS INFORMATION
Mod-U-Kraf Homes, Inc. (the Company), was incorporated as a
Virginia Corporation on August 19, 1971. It is engaged in the
business of manufacturing and selling sectionalized units of its
own design.
The sectionalized units, available in 70 standard models,
ranging in size from 658 square feet to 2,970 square feet for one
and two family dwellings, consist of two or more virtually complete
sections which are manufactured side by side on an assembly line.
There are over 100 options to allow for custom choices in exterior
and interior designs such as Cape Cod, Victorian, Country homes,
vacation homes, great rooms, spacious kitchen-dining-living area,
ample closets, and fireplaces. Multi-family projects are custom
designed to meet the needs of the builder and building site
conditions.
The units are loaded on specially designed transporters for
delivery to the building site where they are transferred to a
foundation previously prepared by the purchaser. After the
sections are off-loaded, they are secured together by a brief "zip
up" procedure. The purchaser may then complete the sections by
making plumbing and electrical connections, carrying out final
grading and landscaping, and adding exterior finishes as desired.
Prices on our products vary depending upon the area into which they
are to be shipped.
The Company units are sold primarily in Virginia, Maryland,
West Virginia, and North Carolina, although some sales have been
made in the past in South Carolina, Kentucky, Delaware, Tennessee,
Pennsylvania and New Jersey. The Company offers its products
primarily to home builders, land developers, realtors, and acts as
"turnkey" contractor in some instances. Your Company takes great
pride in the fact that producing quality products and service has
enabled us to maintain the same builders over many years.
Mod-U-Kraf's motto emphasizes "engineering excellence through
innovation", its philosophical commitment to the intricate
development of new product designs based on consumer demand and
changing market requirements. Modern production facilities, name
brand materials, and skilled workmanship insure increased
productivity, high quality, and ultimate customer satisfaction.
Utilizing modern sales techniques, keeping sales exhibits current,
and providing in-house sales consultation strengthens our ability
to remain competitive in the marketplace.
The Company's business cannot be characterized as comprising
more than one industry segment.
MARKET AND DIVIDEND INFORMATION
The Corporation's common stock is traded in the over-the-counter market.
The number of shareholders as of February 21, 1996 was 438. The range of bid
and ask quotations and dividends declared for the last two calendar years are
listed below.
QUOTATIONS ON COMMON STOCK
1995 1994
---------------------------- ---------------------------- Dividends
BID ASK BID ASK Declared
------------- ------------- ------------- ------------- ------------
High Low High Low High Low High Low 1995 1994
------ ----- ------ ----- ------ ----- ------ ----- ----- -----
First 4 3 1/2 4 1/2 -- 5 3 3/4 6 4 3/4 $0.03 $0.03
Second 4 3 3/4 4 1/2 4 1/8 5 4 1/2 6 5 1/4 $0.03 $0.03
Third 3 3/4 3 1/2 4 1/2 -- 4 1/2 -- 5 1/4 -- $0.03 $0.03
Fourth 3 1/2 -- 4 1/2 -- 4 1/2 -- 5 1/4 -- $0.03 $0.03
Source: Wheat, First Securities, Inc.
The Corporation presently expects to pay dividends in the future as earnings
permit.
* * *
OTHER BUSINESS DATA
SELECTED FINANCIAL DATA
Year Ended December 31,
-----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net Sales $9,083,419 $9,288,807 $7,893,216 $6,898,726 $4,823,475
Operating Income (Loss) 542,434 476,888 371,050 347,623 (157,996)
Net Earnings (Loss) 378,824 308,204 537,301 252,814 (47,827)
Earnings(Loss) Per Share
Primary & Fully Diluted (1) 0.46 0.38 0.66 0.31 (0.06)
Cash Dividends Per Share (1) 0.12 0.12 0.10 0.10 0.10
Total Assets 7,816,964 6,329,477 5,883,150 5,241,378 4,837,450
Current Ratio 5.17 to 1 5.32 to 1 7.26 to 1 7.13 to 1 12.15 to 1
Postretirement benefits 1,206,188 1,253,491 1,307,380 1,110,067 1,142,223
Book Value Per Share (1) 5.55 5.25 4.99 4.42 4.21
(1) Primary and fully diluted earnings per common share are based on the
weighted average number of shares of common stock outstanding and common
stock equivalents of dilutive stock options. Per share amounts for the
years ended December 31, 1991 through 1993 have been restated to reflect
the 20% stock dividend issued on March 2, 1994.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Because the housing industry is seasonal, 1995 Net Sales of
$9,083,419 were 2.21% below 1994 Net Sales of $9288,807 due to the
inclement weather during the last few weeks of the year. Otherwise
we feel that we would have exceeded 1994 sales. The trend in sales
for the past five years have shown a steady increase in volume. We
believe that this trend will continue for the modular industry. By
increasing our production capacity with our new manufacturing
facility we will be able to satisfy the demand.
Gross Profit percentages were 29.17% in 1995 as compared to
27.27% in 1994 and 28.85% in 1993. With stable lumber prices and
producing to capacity we are able to minimize and control our
production costs. The new facility will enable us to exercise more
control over our process by using the latest production techniques.
We have been generating some savings in the Selling, general
and administrative expenses. Their percentages were 23.20%, 22.14%
and 24.72% for the years 1995, 1994 and 1993, respectively. We
have been carefully increasing our staffing in engineering and
selling in anticipation of our expansion and increased volume.
Interest income continues to comprise a significant portion of
non-operating income. For the years 1995, 1994 and 1993, interest
income was 91.61%, 82.75%, and 90.73%, respectively, of non-
operating income. We keep a large cash balance to eliminate any
short term borrowing that may be needed for operations if we have
a temporary market shift due to weather or interest rate factors.
There were no other significant variances.
Capital Resources and Liquidity
Total funds generated were sufficient to meet the requirements
for plant and equipment, debt retirement and dividends. By virtue
of the cash and accounts receivable levels, the company feels that
it has adequate liquidity for continued successful operations.
The Company is in the process of constructing a new
manufacturing facility to be completed in the second quarter of
1996 at a cost of approximately $2,250,000. The plant is being
financed by an Industrial Development Bond Issue. The debt
associated with this issue will be payable over a 20 year period.
The Company believes that the effect of inflation on the
results for the periods presented is not material.
To the extent permitted by competition, the Company passes
increased cost on to its customers by increasing sales prices from
time to time.
* * *
MOD-U-KRAF HOMES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
CURRENT ASSETS ---- ----
Cash and cash equivalents $ 1,426,738 $1,226,736
Certificates of deposit 689,000 300,000
U.S. Treasury note - 204,935
Trade and other receivables 63,866 156,161
Inventories (Note 2) 1,368,766 1,206,955
Notes receivable, current portion
(Note 3) 882,234 1,425,390
Prepaid expenses 67,506 71,314
--------- ---------
Total current assets 4,498,110 4,591,491
LONG-TERM NOTES RECEIVABLE (Note 3) 221,418 261,657
PROPERTY AND EQUIPMENT, at cost less
accumulated depreciation 1995
$1,802,732; 1994 $1,652,419
(Notes 4 and 6) 2,245,627 897,798
OTHER ASSETS
Deferred taxes (Note 7) 508,239 498,608
Cash surrender value of officers' life
insurance 95,440 79,923
Reimbursement account (Note 6) 145,516 -
Earnings on unused bond proceeds (Note 6) 58,124 -
Debt issue costs (Note 6) 73,030 -
--------- ---------
$7,845,504 $6,329,477
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt
(Note 6) $ 150,000 $ -
Current portion of post-retirement
benefits (Note 5) 75,366 58,234
Accounts payable, trade and other
liabilities 356,706 384,565
Accrued compensation 232,026 234,795
Customer deposits 23,315 148,549
Income taxes payable (Note 7) 60,364 37,042
--------- ---------
Total current liabilities 897,777 863,185
LONG-TERM POSTRETIREMENT BENEFITS
(Note 5) 1,130,822 1,195,257
LONG-TERM DEBT (Note 6) 1,234,514 -
COMMITMENTS AND CONTINGENCIES (Notes 6
and 12) - -
--------- ---------
Total liabilities 3,263,113 2,058,442
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $1 par value,
2,000,000 shares authorized; shares
issued and outstanding 825,649 in
1995; 813,649 in 1994 (Note 9) $ 825,649 $ 813,649
Additional paid-in capital 459,671 440,421
Retained earnings 3,297,071 3,016,965
--------- ---------
4,582,391 4,271,035
--------- ---------
$ 7,845,504 $6,329,477
========= =========
The Notes to Consolidated Financial Statements
are an integral part of these statements.
* * *
MOD-U-KRAF HOMES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994, and 1993
1995 1994 1993
--------- --------- ---------
Net sales $9,083,419 $9,288,807 $7,893,216
Cost of goods sold (Note 13) 6,433,361 6,755,710 5,616,247
--------- --------- ---------
Gross profit 2,650,058 2,533,097 2,276,969
Selling, general and
administrative expenses 2,107,624 2,056,209 1,905,919
--------- --------- ---------
Operating income 542,434 476,888 371,050
Postretirements benefits
expense (Note 5) 127,010 114,749 185,359
Non-operating income, net
(Note 11) 192,085 192,845 157,121
--------- --------- ---------
Income before income taxes
and cumulative effect
adjustments 607,509 554,984 342,812
Federal and state income tax
expense (Note 7) 228,685 246,780 147,672
--------- --------- ---------
Income before cumulative
effect of changes in
accounting principles 378,824 308,204 195,140
Cumulative effect on prior
years of:
Accounting change, net of
related income tax effect
(Note 5) - - (95,730)
Accounting change (Note 7) - - 437,891
--------- --------- ---------
Net income $ 378,824 $ 308,204 $ 537,301
========= ========= =========
Earnings per share (Note 14):
Income before cumulative
effect of accounting
changes and 20 percent
stock dividend $ .46 $ .38 $ .29
Combined cumulative effect
of accounting changes - - .50
--------- --------- ---------
Net income before 20
percent stock dividend .46 .38 .79
Effect of 20 percent
stock dividend $ - $ - $ (.13)
-------- --------- --------
Net income $ .46 $ .38 $ .66
======== ========= ========
The Notes to Consolidated Financial Statements
are an integral part of these statements.
* * *
MOD-U-KRAF HOMES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994, and 1993
Common Additional Total Total
Stock Paid-in Retained Stockholders
($1 Par) Capital Earnings Equity
--------- ---------- ---------- -----------
Balance, December 31,
1992 $681,982 $ - $2,934,441 $3,616,423
Net income - - 537,301 537,301
Dividends paid
($.12 per share) - - ( 81,216) ( 81,216)
20 percent stock
dividend (Note 14) 135,520 440,440 (575,960) -
Retirement of 3,847
shares of common
stock ( 3,847) - ( 7,695) ( 11,542)
------- ------- --------- ---------
Balance, December 31,
1993 813,655 440,440 2,806,871 4,060,966
Net income - - 308,204 308,204
Dividends paid
($.12 per share) - - ( 98,135) ( 98,135)
Other ( 6) ( 19) 25 -
------- ------- --------- ---------
Balance, December 31,
1994 813,649 440,421 3,016,965 4,271,035
Net income - - 378,824 378,824
Dividends paid
($.12 per share) - - ( 98,718) ( 98,718)
Issuance of 12,000
shares of
common stock 12,000 19,250 - 31,250
------- ------- --------- ---------
Balance, December 31,
1995 $825,649 $459,671 $3,297,071 $4,582,391
======= ======= ========= =========
The Notes to Consolidated Financial Statements
are an integral part of these statements.
* * *
MOD-U-KRAF HOMES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994, and 1993
1995 1994 1993
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 378,824 $ 308,204 $ 537,301
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 163,912 151,701 141,589
Deferred taxes ( 9,631) 52,408 ( 14,115)
Loss (gain) on sale
of equipment 993 ( 11,553) ( 8,300)
Increase in cash value of
life insurance ( 15,517) ( 22,561) ( 21,991)
Adjustment to post-
retirement benefits ( 47,303) ( 53,889) 42,909
Cumulative effect of
accounting changes - - ( 342,161)
Change in certain current
assets and liabilities:
(Increase) decrease in:
Trade and other
receivables 92,295 ( 71,717) 16,582
Inventories ( 161,811) 266,473 ( 186,317)
Prepaid expenses 3,808 ( 26,200) 1,169
(Decrease) increase in:
Accounts payable,
trade and other
liabilities ( 27,859) 88,818 70,107
Accrued compensation ( 2,769) 70,537 ( 3,626)
Customer deposits ( 125,234) 99,601 ( 24,681)
Income taxes payable 23,322 31,191 ( 41,884)
--------- --------- ---------
Net cash provided
by operating
activities 273,030 883,013 166,582
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sale of
equipment - 13,900 8,300
Purchase of property and
equipment, net of debt
incurred 1995 $1,311,484 ( 201,250) ( 140,481) ( 261,452)
Principal received on notes
receivable 1,675,875 1,324,245 1,611,848
Notes receivable arising
from sales (1,092,480) (1,961,384) (1,308,645)
Decrease (increase) in
certificates of deposit ( 389,000) 300,000 -
Sale (purchase) of U.S.
Treasury Note $ 204,935 $( 204,935) -
---------- --------- ---------
Net cash provided by
(used in) investing
activities 198,080 ( 668,655) 50,051
---------- --------- ---------
FINANCING ACTIVITIES
Proceeds from sale of
common stock 31,250 - -
Purchase of common stock
for retirement - - ( 11,542)
Cash dividends paid ( 98,718) ( 98,135) ( 81,216)
Debt issue costs, net of
debt incurred
1995 $73,030 - - -
Funding of reimbursement
account ( 145,516) - -
Earnings on unused
bond proceeds ( 58,124) - -
---------- --------- ---------
Net cash used in
financing activities ( 271,108) ( 98,135) ( 92,758)
---------- --------- ---------
Increase in cash and
cash equivalents 200,002 116,223 123,875
CASH AND CASH EQUIVALENTS
Beginning 1,226,736 1,110,513 986,638
--------- --------- ---------
Ending $1,426,738 $1,226,736 $1,110,513
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments for:
Income taxes, net of
refunds received $ 214,783 $ 163,181 $ 203,705
========= ========= =========
The Notes to Consolidated Financial Statements
are an integral part of these statements.
* * *
MOD-U-KRAF HOMES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
Note 1. Nature of Business and Significant Accounting Policies
Nature of Business:
------------------
The Company is engaged in the business of manufacturing
and selling sectionalized building units of its own
design. The Company also customizes a commercial line of
products consisting of multi-family and diversified
specialty structures. The units are sold primarily to
home builders, land developers and realtors in Virginia,
Maryland, West Virginia and North Carolina.
In some cases, the Company provides short-term
construction financing which is generally limited to 75 to
80 percent of the estimated fair market value of the
completed property. The Company retains a security
interest in the property until the contract is paid. The
Company's wholly-owned subsidiary developed a small
condominium complex in the ski resort area of Gatlinburg,
Tennessee and holds mortgage notes for certain units sold.
The mortgages were limited to 90 percent of the fair
market value of the properties at the time of sale,
however, due to market declines, the mortgage balances may
exceed 90 percent of the current fair market value of the
related property. The Company's exposure to loss on these
contracts is limited to the difference between the
receivable and the value of the collateral. The Company
has not experienced any significant loss on the subsequent
sale of repossessed collateral.
Principles of Consolidation:
---------------------------
The consolidated financial statements include the accounts
of the Company's wholly-owned subsidiary, Mountain Resort
Building Systems, Inc. All significant intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents:
-------------------------
For purposes of reporting cash flows, the Company
considers most highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Certificates of deposit, regardless of maturity, are not
considered cash equivalents.
The Company maintains its cash accounts in commercial
banks located in Virginia. Accounts in each bank are
guaranteed by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000 per bank. A portion of the
Company's cash balance is uninsured at year end.
Valuation of Trade Receivables:
------------------------------
Trade receivables are stated at face amount with no
allowance for doubtful accounts because probable
uncollectible accounts are immaterial.
Inventories:
-----------
Raw materials are stated at the lower of cost (determined
on a first-in, first-out basis) or market. Work in
progress and finished goods are stated at the lower of
average cost determined on a standard cost basis) or
market. Land and units held for sale are stated at the
lower of cost (determined on a specific property basis) or
market.
Depreciation:
------------
Depreciation is provided principally on the straight-line
method over the estimated useful lives of the depreciable
assets for financial reporting purposes. Statutory methods
and lives are used for income tax purposes.
Income Taxes:
------------
Income taxes are provided for the tax effects of
transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related
primarily to differences from current recognition of
deferred compensation for financial reporting purposes and
deferred recognition for income tax purposes. The
deferred taxes represent the future tax return
consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are
recovered or settled.
Recognition of Income:
---------------------
Revenue is recognized for cash-in-advance sales when
production of the unit is complete. Revenue is recognized
for sales on account when the unit is delivered.
Estimates:
---------
Management uses estimates and assumptions in preparing
financial statements. Those estimates and assumptions
affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities and the reported
revenues and expenses.
Earnings Per Share:
------------------
Primary and fully diluted earnings per common share are
based on the weighted average number of shares of common
stock outstanding and common stock equivalents of dilutive
stock options. The weighted average number of actual
shares outstanding was 821,649, 813,652 and 678,456 for
1995, 1994 and 1993, respectively. Earnings per share have
been adjusted to give retroactive effect to the 20 percent
stock dividend declared January 19, 1994. The weighted
average number of shares as retroactively adjusted were
813,970 for 1994 and 1993 (Note 14).
Reclassification:
----------------
For comparability, the amounts presented for 1994 and 1993
have been reclassified, where appropriate, to conform to
the presentation used for 1995.
Note 2. Inventories
The components of inventories are as follows:
1995 1994
----------- -----------
Raw materials $ 556,194 $ 503,735
Work-in-process 46,421 101,021
Finished goods 372,584 311,724
Land and units held
for sale 393,567 290,475
----------- -----------
$ 1,368,766 $ 1,206,955
=========== ===========
Total general and administrative costs incurred and the
portion of those costs remaining in inventory are as
follows:
1995 1994 1993
-------- -------- --------
General and
administrative
costs:
Incurred $ 740,046 $ 715,350 $ 747,920
======== ======== ========
Remaining in
inventory $ 22,432 $ 22,251 $ 21,775
======== ======== ========
Note 3. Notes Receivable
Notes receivable consist of the following:
1995 1994
-------- --------
Various mortgage notes receivable,
interest ranging from 8% to 10%,
payable in various monthly install-
ments and balloon payments due at
various dates through August 1999.
Secured by deeds of trust on
certain real estate. $ 134,888 $ 235,172
Credit line deed of trust notes
receivable, interest ranging from
0% to 10.5%, payable at various
dates through 1996. Secured by
deeds of trust on certain real estate. 921,314 1,429,102
Demand note receivable with interest
payable quarterly at 9%, unsecured. 12,975 15,675
Premium demand loan receivable from the
President, no stated interest, secured
by cash surrender value of the related
life insurance policy. 6,350 7,098
Note receivable from the President, pay-
able in annual principal installments of
$5,625 plus interest at 5.03%, secured
by common stock of the Company. 28,125 -
--------- ---------
1,103,652 1,687,047
Less current portion 882,234 1,425,390
--------- ---------
$ 221,418 $ 261,657
========= =========
Note 4. Property and Equipment
Major classes of property and equipment are as follows:
1995 1994
--------- --------
Land and improvements $ 275,590 $ 275,590
Buildings 1,076,311 1,073,836
Manufacturing equipment 1,020,645 882,741
Other furniture, fixtures
and equipment 349,592 318,050
--------- ---------
2,722,138 2,550,217
Less accumulated depreciation $1,802,732 $1,652,419
--------- ---------
919,406 897,798
Construction in process
(see Note 6) 1,326,221 -
--------- ---------
$2,245,627 $ 897,798
========= =========
Maintenance and repairs expense incurred amounted to
$134,405, $132,178 and $113,679 for 1995, 1994, and
1993, respectively.
Note 5. Postretirement Benefits
The Company is obligated under postretirement benefits
agreements with two former officers as follows:
1995 1994
--------- ----------
Present value of deferred
compensation benefits payable to
the widow of O.Z. Oliver, former
Treasurer and Chairman of the Board,
at $6,311 monthly until the earlier
of her death or September 2006,
discounted at 8.50%. $ 532,477 $ 561,585
Present value of deferred
compensation benefits payable to
Robert K. Fitts, former President
and Chairman of the Board, at
$5,560 monthly until his death
after which the benefits are payable
to his spouse, Mary L. Fitts until
the earlier of her death or July
2007, discounted at 8.50%. 532,974 545,171
Present value of estimated
postretirement benefits other than
pensions discounted at 8.50%.
Details are presented below. 149,737 146,735
--------- ---------
1,206,188 1,253,491
Less current portion 75,366 58,234
--------- ---------
$1,130,822 $1,195,257
========= =========
The Company is obligated to pay a fixed monthly amount
for health care coverage to the above payees. The
Company is also obligated to pay up to $10,000 annually
in premiums for a life insurance policy assigned to the
former President.
Effective January 1, 1993, the Company elected to adopt
an accounting treatment for these obligations similar to
that described in Statement of Financial Accounting
Standards No. 106, Employer's Accounting for
Postretirement Benefits Other than Pensions under which
such costs are recognized as incurred rather than when
paid. The statement is not required to be applied to
benefits payable to selected employees under terms of
individual contracts. However, it is management's
opinion that adoption of the standard is preferable for
financial reporting purposes. The cumulative effect of
this change in accounting principle amounted to $95,730,
net of related deferred tax benefit of $58,674 and is
included in determining net income for 1993.
The effect of a change in the discount rate from 9.78
percent to 8.50 percent is included in determining
deferred compensation expense for 1993. This change
resulted in a decrease in net income of approximately
$78,000 and a decrease in earnings per share of $.11.
Note 6. Long-Term Debt
On July 12, 1995, the IDA of Franklin County, VA issued
bonds in the amount of $3,000,000 to finance the
construction of a manufacturing facility. The Series 1995
Variable Rate Demand Industrial Revenue Bonds are secured
by the Company's Irrevocable Letter of Credit with Crestar
Bank. The letter of credit agreement subjects the Company
to certain financial and operating covenants, all of which
the Company was in compliance with at year end. Crestar
Bank holds a first lien and security interest on the new
facility. The bonds are payable in equal annual principal
amounts of $150,000 through 2015. The interest rate was
4.95 percent at December 31, 1995. Interest of
approximately $58,000 was incurred and capitalized during
1995.
The Company has entered an agreement of sale to purchase
the facility from the IDA. The Company's obligation under
the Agreement of Sale is equal to the required principal
and interest payments on the bonds and is payable in
monthly installments currently estimated at $22,750. The
monthly payments are deposited into a Reimbursement
Account with Crestar Bank and used to pay all principal,
interest and fees related to the Bonds. The Company also
agreed to maintain an additional required deposit in the
reimbursement account equal to 55 days of interest at 15.0
percent on the bonds. As of December 31, 1995, the
Reimbursement Account balance was as follows:
Required prepaid interest deposit $ 67,811
Unused monthly principal deposits 75,000
Earnings 2,705
--------
$ 145,516
========
The Company's policy is to reflect the balance of the
reimbursement account as an asset until the funds are used
by the trustee for payment of bond obligations, at which
time the Company reduces its obligations under the asset
sale agreement.
As of December 31, 1995, $1,384,514 of the bond proceeds
have been drawn from the trustee. The Company's
obligation under the asset sale agreement is reflected at
the amount of bond proceeds that have been drawn. Any
unused proceeds will be used for early retirement of
bonds.
Amounts earned on bond proceeds prior to their being drawn
from the trustee are to be applied to principal reduction
in the future. These earnings amounted to $58,124 at
December 31, 1995.
Debt issue costs will be amortized over the term of the
debt.
Note 7. Income Taxes
Effective January 1, 1993, the Company adopted Statement
of Financial Accounting Standards No. 109, Accounting for
Income Taxes. The cumulative effect of the change in
accounting principle is included in determining net income
for 1993.
The provision for income taxes consists of the following
components:
1995 1994
--------------------------- -------------------------
Federal State Total Federal State Total
--------- -------- -------- -------- -------- -------
Current tax
expense $194,664 $ 43,652 $238,316 $156,446 $ 37,926 $194,372
Deferred tax
expense
(benefit) (12,973) 3,342 ( 9,631) 48,598 3,810 52,408
--------- -------- ------- -------- ------ -------
$181,691 $ 46,994 $228,685 $205,044 $ 41,736 $246,780
========= ======== ======== ======== ======= =======
1993
---------------------------
Federal State Total
--------- -------- --------
Current tax
Expense $130,833 $30,854 $161,787
Deferred tax
expense
(benefit) (12,630) (1,485) (14,115)
--------- ------- --------
$118,203 $29,469 $147,672
========= ======= ========
Deferred tax expense (benefit) results from temporary
difference in the recognition of revenue and expense for
tax and financial reporting purposes. The sources of the
differences and the tax effect of each are as follows:
1995 1994 1993
-------- -------- ---------
Differing cost basis of
property and equipment
for tax and financial
reporting purposes $( 24,248) $ 34,884 $( 4,992)
Deferred compensation
expensed when incurred,
deductible when paid 18,285 17,970 ( 4,595)
Warranty & accrued vacation
expensed when incurred,
deductible when paid ( 1,437) ( 2,114) ( 3,341)
Other, net ( 2,231) 1,668 ( 1,187)
-------- ------- --------
$( 9,631) $ 52,408 $( 14,115)
======== ======= ========
Total tax provisions differ from amounts computed by
applying the statutory Federal income tax rate to income
before income taxes for the following reasons:
1995 1994 1993
--------------- --------------- --------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------- ------ -------- ------ -------- ------
Income tax expense
at statutory
federal rate $206,553 34.0% $188,695 34.0% $116,556 34.0%
Increase in income
taxes from:
State income taxes,
net of federal
tax effect 24,300 4.0% 22,199 4.0% 13,712 4.0%
Other, net ( 2,168) (0.4%) 35,886 6.5% 17,404 5.1%
-------- ----- -------- ----- -------- ----
$228,685 37.6% $246,780 44.5% $147,672 43.1%
======== ===== ======== ===== ======== =====
Note 8. Fair Value of Financial Instruments
The methods used to estimate the fair value of each
material class of financial instruments are as follows:
Cash, Short-term Investments, Trade Receivables and
Payable's:
---------------------------------------------------
The carrying amount is a reasonable estimate of the fair
value because of the short maturity of these instruments.
Notes Receivable:
----------------
Fair values are estimated by discounting the future cash
flows using the current rates at which similar loans would
be made with similar credit ratings and for the same
remaining maturities. At December 31, 1995 and 1994,
carrying values approximate fair values.
Debt:
----
The interest rate on the long-term debt is reset weekly to
reflect current market rates. Consequently, the carrying
value of debt approximates fair value.
Note 9. Stock Option Plan
The Company previously had 150,000 shares of common stock
reserved for issuance to key employees under an incentive
stock option plan, which terminated February 24, 1993.
Options were granted at prices equal to the fair market
value on the dates of grant except for 10 percent
stockholders for which the price was not less than 110
percent of fair market value. Options are exercisable in
cumulative installments over a 5-year period commencing at
the date of grant and expiring at the end of the fifth
year. The only activity in the plan for 1991 through 1993
was the granting of 10,000 options in 1992 (increased to
12,000 due to stock dividend, see Note 14), which were
exercised at $3.125 per share in 1995.
All other options granted were previously exercised or
expired unexercised.
Note 10. Profit Sharing Plan and Trust
The Company has a contributory profit-sharing plan
complying under Section 401(k) and certain other
provisions of the Internal Revenue Code. The plan covers
a majority of all employees meeting minimum eligibility
requirements. Participants may elect to have before-tax
(salary reduction) contributions to be made to the plan on
their behalf. The Company matches such before-tax
contributions in the proportion determined by the Board of
Directors at its discretion on an annual basis.
Additionally, the Company may at the Board's
discretion make an additional contribution based on the
Company's pre-tax earnings. The Company's total
contributions to the plan were $53,010, $52,401, and
$38,219 for 1995, 1994 and 1993, respectively.
Note 11. Non-operating Income
Non-operating income is composed of the following:
1995 1994 1993
-------- -------- --------
Interest income $ 175,971 $ 159,586 $ 142,563
Interest expense,
net of earnings
on debt proceeds ( 4,867) ( 445) ( 1,146)
Rental and other
income 22,091 22,250 7,860
Rental and other
expenses ( 117) ( 99) ( 456)
Gain (loss) on sale
of equipment ( 993) 11,553 8,300
-------- -------- --------
$ 192,085 $ 192,845 $ 157,121
======== ======== ========
Note 12. Commitments and Contingencies
Self-Insurance:
--------------
The Company has a professionally administered
self-insurance program which is used to account for health
insurance coverage for employees on a cost-reimbursement
basis. Under the program, the Company is obligated for
claims payments. A stop loss insurance contract executed
with an insurance carrier covers claims in excess of
$15,000 per covered individual and approximately $110,000
in the aggregate, subject to a maximum limit of
$1,000,000. Total claims expense and administrative
fees of $240,184, $160,878 and $172,149, which did not
exceed the stop loss provisions, were incurred for 1995,
1994 and 1993, respectively. These amounts include actual
claims processed and an estimate for claims incurred but
not reported as of each year end.
Employment Contracts:
--------------------
The Company is obligated under employment contracts with
the President and Vice President. Combined base annual
compensation under the contracts is approximately
$140,000. The contracts provide for payment of incentive
compensation based on certain percentages of pretax income
of the Company, exclusive of any extraordinary items. The
President's contract also provided for granting options
for 10,000 shares of stock under the terms and
conditions of the Company's stock option plan. Such
options were granted during 1992.
Death Benefit:
-------------
The Company is obligated to provide a death benefit to the
estate of the Vice President in the amount of $35,000. The
Company has recognized a liability in the amount of
$14,267, the estimated present value of this obligation
discounted at 8.50 percent. The Company is carrying a
term life insurance policy in the amount of $35,000, the
purpose of which is to fund the death benefit.
Sales and Service Tax Audit:
---------------------------
The Company is undergoing an audit of its West Virginia
sales and service tax returns. The West Virginia
Department of Revenue has assessed the Company an
additional tax of $117,999 and interest of $14,544. The
Company's attorneys have filed a Petition for Reassessment
with the State. In the opinion of the Company's legal
counsel, the Company's chances of success on the current
assessments are favorable.
Note 13. Related Party Transactions
In the normal course of business, the Company makes
purchases from a supplier owned by a director of the
Company. Purchases from this supplier totaled $462,654,
$484,701 and $381,442 for 1995, 1994 and 1993,
respectively.
The Company has notes receivable from various shareholders
(Note 3) and is obligated under deferred compensation
agreements to two former employees (Note 5).
Note 14. Stock Dividend
On January 19, 1994, the Board of Directors declared a 20
percent stock dividend on the Company's common stock. On
March 2, 1994, shareholders of record as of February
9, 1994 received one additional share of stock for each
five shares held. A total of 135,514 shares of common
stock were issued. Earnings per share and weighted
average shares outstanding were restated for 1993 and 1992
to reflect the 20 percent stock dividend. This
transaction was recorded retroactively in the accompanying
balance sheet as if it occurred on December 31, 1993,
resulting in a reduction of retained earnings equal to the
fair market value of the stock which was $4.25 per share
at December 31, 1993.
* * *
OFFICERS
Dale H. Powell
President & Board Chairman
Edwin J. Campbell
Vice President & Corporate Secretary
Jeffrey L. Boudreaux
Controller
M. Jan Oliver
Treasurer & Safety Officer
DIRECTORS
Dale H. Powell, Board Chairman
Edwin J. Campbell
W. Curtis Carter
J. Dillard Powell
Bobbie L. Oliver
Mary L. Fitts
* * *
"INSIDE BACK COVER"
LOOK WHAT'S COMING IN 1996!
NOT ONLY IS MOD-I-KRAF OPENING ITS BEAUTIFUL NEW PRODUCTION
FACILITY, THE COMPANY WILL CELEBRATE ITS 25TH ANNIVERSARY IN AUGUST
"picture of 25th Anniversary Seal"
"OUR REPUTATION IS STILL BUILDING"
* * *
"BACK COVER"
"company LOGO"
MOD-U-KRAF HOMES, INC. P.O. BOX 573 ROCKY MOUNT, VIRGINIA
AND SUBSIDIARY
<end of report>