EXHIBIT 13 - 1998 Annual Report to Shareholders
* * *
"FRONT COVER"
"schematic of a Mod-U-Kraf house"
Mod-U-Kraf Homes, Inc. 1998 ANNUAL REPORT
* * *
"INSIDE FRONT COVER"
"picture of Mod-U-Kraf home in Roanoke, Virginia"
(Front Cover)
The uniquely beautiful 4,218 sq. ft. "Wellington" luxury model home located
on Route 220 South of Roanoke, Virginia (1/4 mile south of the Blue Ridge
Parkway) is the fisrt in Mod-U-Kraf's new Designer Series.
* * *
To Our Shareholders
Your management and board of directors report continued
profitability for the year 1998 for your company.
Finished goods inventory has been reduced to normal operating levels as
of the end of the year. This is in contrast to the unusually high
inventory we were carrying at the end of 1997 due to the wet weather.
The first quarter of 1998 was also affected by the extreme weather
conditions. Inventory remained unusually high while depressing sales
volume. It was not until the middle of the second quarter that we were
able to resume a normal delivery schedule. These factors in addition to
some unfavorable manufacturing variances we experienced during the year
reduced sales revenue and net income to levels below those of 1997.
Net sales for the year ending, December 31, 1998, were $15,586,511
which compares to net sales in 1997 of $16,072,448. Net income, after
taxes, for the year ending, December 31, 1998, was $115,397 which compares
to net income, after taxes, for the year 1997 of $180.685. The net income
for 1998 amounts to $0.14 per common share, which compares to net income,
after taxes, of $0.22 per share during fiscal year 1997.
We have continued to make modifications and improvements in our new
manufacturing facility during the year. The OSHA required fall protection
installation, which was started in 1997 in the new plant, was completed.
The old plant remained idle throughout the year, except for material
receiving and storage. The new production facility was sufficient to meet
our production needs up until the fourth quarter of the year. Demand was
approaching a level necessitating either re-opening the old plant or risk
losing sales due to the production backlog of houses waiting to go into
the plant. Preparations were begun in December to retool and restock the
old plant.
The first house in our new Designer Series, The Wellington, was introduced
in 1998 to help set us further apart from other sectional home
manufacturers. The Wellington was constructed and fully furnished at
our Roanoke, VA model site as part of our sales and marketing program for
the new series. This model will help to increase the awareness of the
possibilities available with sectionalized housing.
Mod-U-Kraf's management and Board of Directors appreciate the
continued support of our shareholders and employees.
Dale H. Powell
President and Chairman of the Board
* * *
LEGAL COUNSEL EXECUTIVE OFFICES
- --------------------------------- -------------------------------------
Hunton & Williams 201 Old Franklin Tkpe. (P.O. Box 573)
Richmond, Virginia Rocky Mount, Virginia
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, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash
flows for the years ended December 31, 1998, 1997, and 1996. 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 consolidated 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, 1998 and 1997, and the results
of their operations and their cash flows for the years ended December 31,
1998, 1997 and 1996 in conformity with generally accepted accounting
principles.
Brown, Edwards & Company, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
Roanoke, Virginia
January 25, 1999
* * *
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 custom-built, code complying
sectionalized homes of its own design. The Company has built over
7,500 homes in 27 years of business at its corporate headquarters in
Rocky Mount, Virginia.
The Company markets its homes in Virginia, West Virginia,
North Carolina, South Carolina, Maryland, Tennessee, and parts of
Pennsylvania and Kentucky. Mod-U-Kraf employs territory sales
representatives to market its homes regionally and offers its homes
primarily to builders, land developers, and Realtors who act as
"turnkey" contractors.
These homes are available in over 65 standard models ranging in
size from 705 square feet to 4,300 square feet. There are over 100
options to allow for custom choices in exterior and interior designs.
Styles of homes offered include cape cod, country homes, and vacation
homes. These homes allow for great rooms, spacious kitchen-dining-
living areas, ample closets and fireplaces. In addition to single
family homes, the Company also builds duplexes, townhouses, motel
units, medical centers and office buildings.
All Mod-U-Kraf products are constructed in either one of two
production facilities. All homes are built inside a production
facility out of weather and harms way by a work force of approximately
170 skilled craft people and technicians specially trained in their
areas and take great pride in their work.
The units are transported to the construction site after being
loaded on specially designed transporters. At the site, the units are
off-loaded by crane to a permanent foundation. They are then secured
together by a "zip-up" procedure and completed by the contractor, who makes
plumbing and electrical connections, does final grading and
landscaping, and adds exterior finish.
Mod-U-Kraf's motto "After 27 years our reputation is still
building" emphasizes the years of philosophical commitment to quality
craftsmanship and new product development. Hi-tech production
facilities, name brand materials, and skilled workmanship insure
increased productivity, high quality, and ultimate customer
satisfaction. Utilizing proven sales techniques, keeping sales
exhibits current, and providing in-house sales consultation
strengthens our ability to remain competitive in the marketplace.
Management takes great pride in the fact that offering quality
products and service has enabled us to maintain the same builders for
many years. Mod-U-Kraf looks forward to a future of increased
profitability and its commitment to provide premier sectionalized
homes to 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 12, 1999 was 384. The
range of bid and ask quotations and dividends declared for the last two
calendar years are listed below.
QUOTATIONS ON COMMON STOCK
1998 1997 Dividends
BID ASK BID ASK Declared
High Low High Low High Low High Low 1998 1997
First 6 -- 7 1/2 -- 7 4 7/8 10 5 3/4 $0.03 $0.03
Second 5 7/8 -- 7 1/2 -- 7 1/2 7 10 9 $0.03 $0.03
Third 5 7/8 -- 7 1/2 -- 7 1/2 7 1/2 9 1/2 8 1/2 $0.03 $0.03
Fourth 5 7/8 5 3/4 8 7 1/2 7 1/2 5 7/8 9 1/2 7 1/2 $0.03 $0.03
Source: Wheat First Union & Koonce 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,
1998 1997 1996 1995 1994
Net Sales $15,586,511 $16,072,448 $11,372,471 $9,083,419 $9,288,807
0perating Inc(Loss) 348,365 376,446 323,643 542,434 476,888
Net Earnings(Loss) 115,397 180,685 177,663 378,824 308,204
Earnings(Loss) Per Share
Primary & Fully Diluted(1)0.14 0.22 0.22 0.46 0.38
Cash Dividends Per Sh (1)0.12 0.12 0.12 0.12 0.12
Total Assets 9,235,319 9,075,041 9,617,921 7,845,504 6,329,477
Current Ratio 3.67 to 1 4.40 to 1 3.72 to 1 5.17 to 1 5.32 to 1
Deferred comp. 1,003,402 1,075,307 1,147,186 1,206,188 1,253,491
Book Value Per Share (1)5.76 5.74 5.65 5.55 5.25
(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.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Net Sales for 1998 of $15,586,511 decreased 3.08% over 1997 net sales of
$16,072,448. This decrease in revenues is the result of a 10% decrease in
the number of modular units sold due to the wet weather and sluggish demand
the first part of the year and a lack of production capacity the last part
of the year with only one plant running.
Gross Profit percentage increased in 1998 to 22.52% in 1997. The
manufacturing process in our new facility is beginning to show improvement
after the initial decline its first full year of operation. Additional
improvement is planned for the upcoming year to return the process to past
operating levels.
Our Selling, General and Administrative Expense has remained stable with
prior year. Actual dollars spent increased only 0.60% for the year. The
percentage to net sales increased only slightly for 1998 to 19.90% from
19.18% in 1997.
We are reporting a Non-operating expense for the year as opposed to
Non-operating income in prior years due to a increase in bond expense and
a reduction of interest income. Our cash flow the first quarter of 1998
was negative requiring us to utilize a line of credit temporarily until
the weather broke. This reduced the cash available for investment to zero
until the middle of the third quarter.
Management believes that the market for its modular housing is likely to
remain strong for the foreseeable future. The Company intends to capitalize
on this anticipated demand by improving its production capaciities and
efficiency, resulting in improved revenues and gross profit margins. The
Company's success in realizing these goals will be affected by weather
conditions in its market and its ability to effectively control
manufacturing costs, both of which may negatively impact performance.
Demand for the Company's products also is sensitive to general economic
conditions in its market and would be negatively affected by any economic
downturn.
The year 2000 assessment of our internal computer systems has been
completed. Our computer systems and software are year 2000 compliant.
Certain key vendors have informed us that they do not expect disruptions of
services relating to the year 2000 problem, but plans have been made to
survey our remaing key vendors by mid-year 1999. We do not foresee a
significant impact on our financial position as a result of this issue.
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 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, 1998 and 1997
ASSETS 1998 1997
CURRENT ASSETS
Cash and cash equivalents $ 1,653,742 589,992
Trade and other receivables 351,972 145,444
Inventories (Note 2) 1,618,016 2,253,063
Notes receivable(Note 3) 645,962 661,762
Income taxes receivable (Note 7) 76,900 -
Prepaid expenses 34,627 44,886
--------- ---------
Total current assets 4,381,219 3,695,147
NOTES RECEIVABLE (Note 3) 7,663 176,168
PROPERTY AND EQUIPMENT(Note 4) 3,574,488 4,022,354
OTHER ASSETS
Deferred taxes (Note 7) 416,381 464,273
Cash surrender value of officers' life
insurance 157,732 137,878
Reimbursement account (Note 6) 155,160 160,242
Earnings on unused bond proceeds (Note 6) - 113,612
Debt issue costs 65,390 69,350
Model Homes 477,257 236,017
--------- ---------
$9,235,290 $9,075,041
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt
(Note 6) $ 150,000 $ 150,000
Postretirement benefits (Note 5) 78,279 71,933
Accounts payable, trade and other
liabilities 545,378 366,310
Accrued compensation 220,408 161,512
Customer deposits 157,200 83,727
Income taxes payable (Note 7) - 5,847
--------- ---------
Total current liabilities 1,151,265 839,329
POSTRETIREMENT BENEFITS(Note 5) 925,123 1,003,374
LONG-TERM DEBT (Note 6) 2,400,000 2,489,755
COMMITMENTS AND CONTINGENCIES (Notes 6
and 11) - -
--------- ---------
Total liabilities 4,476,388 4,332,458
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, $1 par value,
2,000,000 shares authorized; 825,649
shares issued and outstanding $ 825,649 $ 825,649
Additional paid-in capital 459,671 459,671
Retained earnings 3,473,582 3,457,263
--------- ---------
4,758,902 4,742,583
--------- ---------
$ 9,235,290 $9,075,041
========= =========
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, 1998, 1997, and 1996
1998 1997 1996
---------- --------- ---------
Net sales $15,586,511 $16,072,448 $11,372,471
Cost of goods sold (Note 12) 12,137,023 12,613,342 8,625,822
---------- --------- ---------
Gross profit 3,449,488 3,459,106 2,746,649
Selling, general and
administrative expenses 3,101,123 3,082,660 2,423,006
---------- --------- ---------
Operating income 348,365 376,446 323,643
Postretirements benefits
expense (Note 5) 88,666 89,132 101,877
Non-operating income(expense),
net (Note 10) (83,863) 346 68,365
---------- --------- ---------
Income before income taxes 175,836 287,663 290,131
Federal and state income tax
expense (Note 7) 60,439 106,978 112,468
---------- --------- ---------
Net income $ 115,397 $ 180,685 $ 177,663
========== ========= =========
Earnings per share $ .14 $ .22 $ .22
======== ========= ========
The Notes to Consolidated Financial Statements
are an integral part of these statements.
MOD-U-KRAF HOMES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
---------- ---------- -----------
Balance, beginning 3,457,263 3,375,656 3,297,071
Net income 115,397 180,685 177,663
Dividends paid
($.12 per share) (99,078) (99,078) (99,078)
------- --------- ---------
Balance, ending $ 3,473,582 $3,457,263 $3,375,656
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, 1998, 1997, and 1996
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 115,397 180,685 $ 177,663
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 517,421 487,496 286,333
Deferred taxes 47,892 21,866 22,100
Loss (gain) on sale
of equipment 21,807 ( 4,706) 170
Increase in cash value of
life insurance ( 19,854) ( 21,651) ( 20,787)
Adjustment to post-
retirement benefits ( 71,905) ( 71,879) ( 59,002)
Change in certain current
assets and liabilities:
(Increase) decrease in:
Trade and other
receivables ( 206,528) ( 92,516) 10,938
Inventories 635,047 36,633 ( 989,580)
Income tax receivable ( 76,900) 46,123 ( 46,123)
Prepaid expenses 10,259 ( 1,496) 1,566
Model homes ( 264,755) ( 158,067) -
(Decrease) increase in:
Accounts payable,
trade and other
liabilities 179,068 ( 158,918) 168,522
Accrued compensation 58,896 ( 39,609) ( 30,905)
Customer deposits 73,473 ( 209,928) 270,340
Income taxes payable ( 5,847) 5,847 ( 60,364)
--------- --------- ---------
Net cash provided
by operating
activities 1,013,471 19,880 ( 269,129)
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sale of
equipment 45,003 8,200 -
Purchase of property and
equipment, net of debt
incurred 1998 $60,245:
1997 $-0-; 1996 $1,554,961 ( 48,645) ( 602,303) ( 379,746)
Principal received on notes
receivable 299,486 852,984 820,271
Notes receivable arising
from sales ( 115,181) ( 701,287) ( 706,246)
Decrease (increase) in
certificates of deposit - 200,000 489,000
---------- --------- ---------
Net cash provided by
(used in) investing
activities 180,663 ( 242,406) 223,279
---------- --------- ---------
FINANCING ACTIVITIES
Payments on long-term debt ( 150,000) ( 150,000) ( 150,000)
Cash dividends paid ( 99,078) ( 99,078) ( 99,078)
Funding of reimbursement
account 5,082 ( 7,536) ( 7,190)
Earnings on unused
bond proceeds 113,612 ( 8,138) ( 47,350)
---------- --------- ---------
Net cash used in
financing activities ( 130,384) ( 264,752) ( 303,618)
---------- --------- ---------
Increase in cash and
cash equivalents 1,063,750 ( 487,278) ( 349,468)
CASH AND CASH EQUIVALENTS
Beginning 589,992 1,077,270 1,426,738
--------- --------- ---------
Ending $1,653,742 $ 589,992 $1,077,270
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments for:
Income taxes, net of
refunds received $ 95,294 $ 3,142 $ 218,955
========= ========= =========
Interest $ 101,521 $ 104,746 $ 54,707
========= ========= =========
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, 1998
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.
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.
Concentrations of credit risk:
-------------------------------
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 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 previous
sales of repossessed collateral.
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 and notes receivable 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.
Model Homes:
-----------
Model homes consist of manufactured units at cost plus site
preparation and completion costs. All costs except the
manufactured unit are amortized over the estimated useful
life of the model, typically five years. The manufactured
units are transferred to inventory and sold at the conclusion
of their useful life.
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 825,649 for 1998, 1997 and 1996.
Advertising costs:
-----------------
Advertising costs, which consist primarily of newspaper and
yellow page advertisements, brochures and signage are
expensed as incurred
Reclassification:
----------------
The amounts presented for 1997 and 1996 have been
reclassified, where appropriate, to conform to
the presentation used for 1998.
Note 2. Inventories
The components of inventories are as follows:
1998 1997
----------- -----------
Raw materials $ 761,513 $ 779,048
Work-in-process 203,636 227,072
Finished goods 360,451 847,411
Land and units held
for sale 292,416 399,532
----------- -----------
$ 1,618,016 $ 2,253,063
=========== ===========
Total general and administrative costs incurred and the
portion of those costs remaining in inventory are as
follows:
1998 1997 1996
-------- -------- --------
Incurred $ 975,754 $ 983,821 $ 865,408
======== ======== ========
Remaining in
inventory $ 43,401 $ 60,997 $ 49,853
======== ======== ========
Note 3. Notes Receivable
Notes receivable consist of the following:
1998 1997
-------- --------
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. $ 157,718 $ 164,172
Credit line deed of trust notes
receivable, interest ranging from
0% to 10.5%, payable at various
dates through 1999. Secured by
deeds of trust on certain real estate. 478,862 647,370
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. 11,250 16,875
Other notes 5,795 9,513
--------- ---------
653,625 837,930
Less current portion (645,962) (661,762)
--------- ---------
$ 7,663 $ 176,168
========== ==========
* * *
Note 4. Property and Equipment
Major classes of property and equipment are as follows:
1998 1997
--------- --------
Land and improvements $ 775,724 $ 774,774
Buildings 2,918,912 2,948,351
Manufacturing equipment 2,150,733 2,055,831
Other furniture, fixtures
and equipment 660,203 716,198
--------- ---------
6,505,572 6,495,154
Less accumulated depreciation (2,931,084) (2,518,808)
--------- ---------
3,574,488 3,976,346
Construction in process - 46,008
--------- ---------
$3,574,488 $4,022,354
========= =========
Maintenance and repairs expense incurred amounted to
$169,324, $219,212 and $173,605 for 1998, 1997, and
1996, respectively.
Note 5. Postretirement Benefits
The Company is obligated under postretirement benefits
agreements with two former officers. The present value of
these obligations, discounted at 8.5% are as follows:
1998 1997
--------- ----------
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. $ 428,786 $ 466,315
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. 475,793 500,903
Postretirement benefits other than
pensions. Details are presented below. 126,125 133,199
--------- ---------
1,003,402 1,075,307
Less current portion (78,279) (71,933)
--------- ---------
$ 925,123 $1,003,374
========= =========
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.
The Company accounts for these obligations in a manner
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 that 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.
* * *
Note 6. 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 4.15,
4.25 and 4.10 percent at December 31, 1998, 1997 and 1996,
respectively.
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 $22,000. 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. The Reimbursement Account balance
was follows:
1998 1997
---- ----
Required prepaid interest deposit $ 67,811 $ 67,811
Unused monthly principal deposits 75,000 75,000
Earnings 12,349 17,431
-------- --------
$155,160 $ 160,242
======== ========
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.
In July 1998, all of the remaining bond proceeds were 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 less cumulative payments of $450,000.
The unused proceeds and related earnings at July 1998 were
used to complete additions to the new manufacturing facility
and for bond related expenses.
Debt issue costs will be amortized over the term of the
debt, or 20 years.
Lines of Credit
---------------
The Company has a $500,000 line of credit with Crestar Bank
bearing interest at LIBOR plus .75%. The line is secured
by a first lien and security interest on the new facility,
is payable on demand, and expires January 31, 2003.
The Company also has an unsecured $500,000 line of credit
with Bank of Ferrum bearing interest at LIBOR plus 2.00%,
payable on demand, with no extablished expiration.
Note 7. Income Taxes
The provision for income taxes consists of the following
components:
1998 1997 1996
--------- -------- --------
Current $ 12,547 $ 85,112 $ 90,368
Deferred 47,892 21,866 22,100
------- ------- -------
$ 60,439 $106,978 $112,468
======== ======== ========
Deferred taxes results from temporary differences 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:
1998 1997 1996
-------- -------- ---------
Differing cost basis of
property and equipment $ 15,278 $ 4,394 $ 8,067
Amounts expensed when
incurred, deducted when paid:
Deferred Compensation 26,782 27,314 21,959
Warranty & accrued vacation 1,058 ( 8,675) ( 4,658)
Other, net 4,774 ( 1,167) ( 3,268)
-------- ------- --------
$ 47,892 $ 21,866 $ 22,100
======== ======= ========
* * *
The provision for income taxes differs from amounts computed by
applying the statutory Federal income tax rate to income before taxes
for the following reasons:
1998 1997 1996
--------------- --------------- --------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
-------- ------ -------- ------ -------- ------
Tax expense at
federal rate $ 59,784 34.0% $ 97,805 34.0% $ 98,645 34.0%
Increase (decrease)
in taxes from:
State taxes, net
of federal tax
effect 7,033 4.0% 11,507 4.0% 11,605 4.0%
Other, net ( 6,378) (3.6%) (2,334) (0.8%) 2,218 1.0%
-------- ----- -------- ----- -------- ----
$ 60,439 34.4% $106,978 37.2% $112,468 39.0%
======== ===== ======== ===== ======== =====
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 and cash equivalents, trade receivables and payables
and customer deposits:
---------------------------------------------------
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. 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. 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 $27,815, $46,134, and
$40,142 for 1998, 1997 and 1996, respectively.
* * *
Note 10. Non-operating Income(Expense)
Non-operating income(expense)consists of the following:
1998 1997 1996
-------- -------- --------
Interest income $ 79,063 $ 108,421 $ 130,119
Interest expense ( 101,668) (102,290) (64,603)
Bond service fees 7,877 (13,260) -
Other, net (69,135) 7,478 2,849
-------- -------- --------
$ (83,863) $ 349 $ 68,365
======== ======== ========
Note 11. Commitments and Contingencies
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.
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
$18,223, 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 has undergone 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 related interest. The
Company's attorneys have filed a Petition for Reassessment
with the State. In 1998, West Virginia passed a law
exempting modular home sales from these additional taxes
but the law is not explicitly retroactive. 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 $643,094,
$760,598 and $662,539 for 1998, 1997 and 1996,
respectively.
The Company has a note receivable from the President (Note 3)
and is obligated under deferred compensation agreements to
two former employees (Note 5).
* * *
NOTES
* * *
OFFICERS
Dale H. Powell, President & Chairman of the Board
Edwin J. Campbell, Vice President & Corporate Secretary
Steven T. Montgomery, Controller
Jeffrey D. Powell, Treasurer
DIRECTORS
Dale H. Powell, Board Chairman
Edwin J. Campbell
W. Curtis Carter
Bobbie L. Oliver
Mary L. Fitts
* * *
"INSIDE BACK COVER"
Visit our Web Site
www.mod-u-kraf.com
* * *
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MOD-U-KRAF HOMES, INC. P.O.BOX 573 ROCKY MOUNT, VIRGINIA
AND SUBSIDIARY
<end of report>
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