U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ______________
Commission file number 0 - 7 0 9 3
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MOD-U-KRAF HOMES, INC.
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(Exact name of small business issuer as
specified in its charter)
VIRGINIA 54-0893908
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
P. O. BOX 573, ROCKY MOUNT, VIRGINIA 24151
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(Address of principal executive offices)
(540) 483-0291
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes __X__ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 825,649
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1
MOD-U-KRAF HOMES, INC.
INDEX
PART I - FINANCIAL INFORMATION
Balance Sheets 2
Statements of Income 3
Statements of Cash Flows 4
Management's Discussion and Analysis 5
Notes to Financial Information 6
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 7
2
MOD-U-KRAF HOMES, INC.
Consolidated Balance Sheets
March 31, 1999 and 1998
ASSETS 1999 1998
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CURRENT ASSETS
Cash and cash equivalents $1,641,056 $ 293,774
Receivables 366,744 420,312
Cost and estimated earnings in excess
of billings on uncompleted contracts 94,878 438,488
Inventories (Note 2) 2,602,592 2,280,149
Notes receivable, current portion (Note 3) 444,068 614,172
Prepaid expenses 33,106 42,492
Income taxes receivable 76,980 37,469
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Total current assets 5,259,424 4,126,856
LONG-TERM NOTES RECEIVABLE (Note 3) 157,052 175,118
PROPERTY AND EQUIPMENT, at cost less
accumulated depreciation
1999 $3,025,216; 1998 $2,625,677. (Note 4) 3,508,109 3,867,511
OTHER ASSETS
Deferred income taxes 416,381 460,788
Cash surrender value of life insurance 160,504 139,966
Reimbursement Account (Note 6) 206,700 199,786
Earnings on unused Bond proceeds 732 115,730
Bond Issue Costs (Note 6) 64,400 68,360
Model homes 471,881 280,352
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$10,245,182 $9,434,467
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of post-retirement (Note 5) 79,788 73,714
Current maturities of long-term debt(Note 6) 150,000 150,000
Line of credit - 400,000
Accounts payable and other liabilities 941,231 258,922
Accrued compensation 315,501 243,661
Customer deposits 158,522 163,953
Income Taxes Payable 218,391 -
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Total current liabilities 1,863,433 1,290,250
LONG-TERM POST RETIREMENT BENEFITS (Note 5) 904,389 984,177
LONG-TERM DEBT (Note 6) 2,400,000 2,489,755
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Total liabilities 5,167,822 4,764,182
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STOCKHOLDERS' EQUITY
Common stock, $1 par value, 2,000,000
shares authorized: shares issued and
outstanding 1999 825,649, 1998 825,649 825,649 825,649
Additional Paid in Capital 459,671 459,671
Retained earnings 3,792,040 3,384,965
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5,077,360 4,670,285
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$10,245,182 $9,434,467
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Accompanying notes are an important part of these financial statements.
3
MOD-U-KRAF HOMES, INC.
Consolidated Statement of Income
Quarters Ended March 31, 1999 and March 31, 1998
1999 1998
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Net Sales $4,790,258 $2,341,651
Cost of Sales 3,475,871 1,824,607
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1,314,387 517,044
Selling, General and Administrative Expenses 728,330 577,515
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Income/<Loss> from Operations 586,058 (60,471)
Deferred Compensation Expense 18,298 19,909
Post Retirement Benefits Expense 2,619 2,817
Non-operating Income/<Expenses> (2,520) 4,257
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Income/<Loss> Before Income Taxes 562,619 (78,940)
Federal and State Income Taxes 219,422 (31,411)
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Net Income / <Loss> 343,198 (47,529)
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Earnings per share:
Net Income / <Loss> 0.42 (0.06)
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Depreciation Included in Above Cost 117,021 125,260
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Accompanying notes are an important part of these financial statements.
4
MOD-U-KRAF HOMES, INC.
Consolidated Statement of Cash Flows
Quarters Ended March 31, 1999 and 1998
1999 1998
OPERATING ACTIVITIES ---------- ----------
Net Income/<Loss> $ 343,198 $ (47,529)
Noncash <income> expenses included
in income or <loss>:
Depreciation and amortization 117,021 125,260
Deferred income taxes - 3,486
Loss (gain) on sale of equipment (5,000) -
Increase in cash value of life insurance (2,772) (2,088)
Adjustments to post retirement benefits (19,225) (17,416)
<Increase> decrease in:
Trade receivables (90,976) (274,868)
Cost and estimated earnings in excess
of billings on uncompleted contracts (18,674) (392,480)
Inventories (984,576) (27,086)
Prepaid Expenses 1,551 2,394
Model placement costs 5,376 (44,335)
Income taxes receivable (80) (37,469)
<Decrease> increase in:
Accounts payable and other Liabilities 395,853 (107,388)
Accrued compensation 95,094 82,149
Customer deposits 1,322 80,266
Income taxes payable 218,391 (5,847)
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Net cash provided by (used in)
operations 56,503 (662,952)
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INVESTING ACTIVITIES
Proceeds from sale of equipment 5,000 -
Purchase of property & equipment net of
debt incurred 1999 $0 ;1998 $0. (50,642) (16,465)
<Increase> decrease in notes receivable
arising from sales 52,505 48,640
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Net cash provided by (used in)
investing activities 6,863 32,175
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FINANCING ACTIVITIES
Short-term borrowings - 400,000
Cash dividends paid (24,769) (24,769)
Debt issue costs, net of debt incurred
1999 $0 : 1998 $0. 990 990
Funding of reimbursement account (52,265) (39,544)
Earnings on unused bond proceeds (8) (2,118)
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Net cash provided by (used in)
financing activities (76,052) 334,559
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Net increase (decrease) in cash (12,686) (296,218)
CASH
Beginning 1,653,742 589,992
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Ending $1,641,056 $ 293,774
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 19,027 $ 26,253
Income taxes $ - $ -
Accompanying notes are an important part of these financial statements.
5
MOD-U-KRAF HOMES, INC
Management's Discussion and Analysis
of the First Quarter Statements
Net sales for the first quarter of 1999 were $4,790,258 as compared
to $2,341,350 for the first quarter of 1998, a 104.57% increase. The
Company ended the quarter with 25.5 units in inventory; a retail value of
$1,159,027. These results are attributable to the excellent weather
conditions and a strong demand for housing the first quarter of the year.
Management believes that the market for its modular housing is likely
to remain strong for the foreseeable future. Because of, the continued
strength of the economy and the low interest rates available to home buyers.
The Company intends to capitalize on this anticipated demand by improving
its production capacities 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.
Cost of Sales was 72.56% of net sales for the first quarter of 1999
and 77.92% for the first quarter of 1998. Gross profit margin was
27.44% for the first quarter of 1999 and 22.08% for the first quarter
of 1998.
Selling, General and Administrative expenses was 15.20% of net sales
for the first quarter of 1999 and 24.66% for the first quarter of 1998.
This drop is the result of holding Selling, General and Administrative
expenses relatively constant while our sales volume increased.
We had a net income for the first quarter 1999 of $343,198 compared to
a net loss of $47,529 for the first quarter of 1998. This is $0.42
per share for the first quarter of 1999 and <$0.06> per share for the
same period in 1998.
There was no significant changes in liquidity and capital resources
during the first quarter of the year. Production resumed in the Highway
40 facility on January 4, 1999 and is expected to remain operating for
the foreseeable future. Production at this facility had been suspended
December 18, 1997 because of the adverse weather conditions. It remained
idle through all of 1998. By December 1998, demand for our houses had
reached a level necessitating starting preparations to re-open the facility.
The Company started a turnkey division a few years ago, which would
give individual Mod-U-Kraf Homes customers the option to have the Company
finish the entire project at the job site. In the past, individual
customers would have to hire a contractor to dig out the basement, pour
the foundation, dig the well, put in a driveway, install the siding and
finish "zipping up" the house once it is set on the foundation.
Initially, this was an immaterial part of our business and did not require
any special accounting procedures. Over the past three months, the Company's
Turnkey division has become a material source of revenue because of the
increased number of turnkey contracts in progress at the end of the quarter.
As a result, management has elected to recognize revenue from fixed-price
and modified fixed-price construction contracts on the percentage-of-
completion method, measured by the cost-to-cost method. This is reflected
on the Balance Sheet in "Costs and estimated earnings in excess of
billings on uncompleted contracts", which represents revenues recognized
in excess of amounts billed.
The year 2000 assessment of our internal computer systems has been
completed. We believe 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 remaining key vendors by mid-year 1999. Our telephone system
is not year 2000 compliant and will be upgraded or replaced by year-end
for an approximate cost of $25,000. We do not foresee a significant impact
on our financial position as a result of this issue.
6
MOD-U-KRAF HOMES, INC.
NOTES TO FINANCIAL INFORMATION
1. The financial information furnished herein is not certified, but re-
flects all adjustments, consisting only of normal recurring adjust-
ments which are, in the opinion of management, necessary to a fair
statement of the results for the quarter ended March 31, 1999. The
results for the quarter ended March 31, 1999 are not necessarily in-
dicative of results to be expected for the entire year. The housing
industry is seasonal in nature and revenues to the Company during
the period April 1 to September 30 are normally greater than revenues
during the balance of the year.
Both primary & fully diluted net income per common share are based
on the weighted average number of shares of common stock outstanding
during each year and common stock equivalents of dilutive stock
options.
2. Revenue and cost recognition
Revenues from fixed-price and modified fixed-price construction
contracts are recognized on the percentage-of-completion method,
measured by the cost-to-cost method. Revenues from cost-plus
contracts are recognized on the basis of costs incurred during the
period plus the fee earned.
Contract costs include all direct material and labor costs. General,
administrative, and indirect costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability are
recognized in the period in which the revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess
of amounts billed.
3. Cost and estimated earnings on uncompleted contracts
1999 1998
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Costs incurred on uncompleted contracts $ 713,502 $ 750,858
Estimated earnings 276,309 332,574
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989,811 1,083,432
Less billings to date 894,933 644,944
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Costs and estimated earnings in excess
of billings on uncompleted contracts $ 94,878 $ 438,488
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4. Inventories
The components of inventories are as follows 1999 1998
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Raw Materials $1,120,300 $ 680,736
Work-In-Progress 267,772 148,434
Finished Goods 922,104 1,035,121
Land and Units held for sale 292,416 415,858
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$2,602,592 $2,280,149
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5. Notes Receivable 1999 1998
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Various mortgage notes receivable secured by
deeds of trust $ 155,860 $ 164,172
Various construction loans(all current) 429,747 599,780
Demand note receivable with interest payable
quarterly at 9%, unsecured 2,225 6,425
Life insurance note receivable from an
officer of the Company(non-interest bearing) 2,038 2,038
Note receivable from the President, payable
in annual principal installments of$5,625
interest at 5.03% 11,250 16,875
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601,120 789,290
Less current portion 444,068 614,172
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$ 157,052 $ 175,118
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6. Property and Equipment 1999 1998
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Land and improvements $ 775,724 $ 775,724
Buildings 2,926,755 2,883,912
Manufacturing equipment 2,279,180 2,199,272
Other furniture, fixtures and equipment 551,666 634,280
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6,533,325 6,493,188
Less accumulated depreciation (3,025,216) (2,625,677)
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$3,508,109 $3,867,511
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7. Deferred Compensation, Related Parties 1999 1998
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Present Value of deferred compensation
benefits payable to the widow of O.Z. Oliver
at $6,311 monthly until the earlier of her
death or Sept. 2006, discounted at 8.50% in
1995 and 1994. $ 418,803 $ 457,229
Present Value of deferred compensation
benefits payable to Robert K. Fitts at $5,560
monthly until his death after which the
benefits are payable to his spouse until the
earlier of her death or July 2007, discounted
at 8.50% in 1995 and 1994. 441,160 469,176
Present value of estimated post-retirement
benefits other than pensions discounted at
8.50% 124,214 131,486
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984,177 1,057,891
Less Current Maturities 79,788 73,714
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$ 904,389 $ 984,177
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8. 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 facility. The bonds are payable in
annual principal amounts of $150,000 through 2015. The interest rate
was 3.25% at March 31, 1999.
The Company has entered an agreement to purchase the facility
from the IDA. The Company's obligation under the agreement 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% on the bonds. As of March 31, 1999, the
Reimbursement Account balance was as follows:
Required prepaid interest deposit $ 67,810
Unused monthly principal deposits 112,500
Earnings 26,390
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$206,700
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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 March 31, 1999, $3,000,000 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.
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
cululative 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 life of the bonds.
9. The Board Of Directors of Mod-U-Kraf Homes, Inc. on May 5, 1999 de-
clared a $.03 per share cash dividend on all shares outstanding on
May 21, 1999 and to be paid on June 11, 1999.
10. The Company uses the annualized method in its computation of Federal
Income Taxes.
11. Revenues are recorded when the houses are delivered for sales made
on account. Cash sales paid in advance are recorded when produced.
7
MOD-U-KRAF HOMES, INC.
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
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Mod-U-Kraf Homes, Inc. held its annual meeting of shareholders
on March 24, 1999 The following were elected to the Board of
Directors: Dale H. Powell, Edwin J. Campbell, W. Curtis Carter,
Bobbie L. Oliver and Mary L. Fitts. Following the meeting the
following were elected officers: Dale H Powell, President,
Edwin J Campbell, Executive Vice President, Jeffrey D Powell,
Vice President of Operations, George Scott, Vice President of
Administration and Steven T. Montgomery, Controller.
The votes cast in the election of directors were as follows:
Name For Against/Withheld
--------- --------- ----------------
W. Curtis Carter 641,606 9,888
Mary L. Fitts 641,606 9,888
Dale H. Powell 641,606 9,888
Bobbie L. Oliver 641,606 9,888
Edwin J. Campbell 641,606 9,888
8
MOD-U-KRAF HOMES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOD-U-KRAF HOMES, INC.
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(Registrant)
Date: May 13, 1999
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Dale H. Powell
President and Chairman of the Board
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Steven T. Montgomery
Controller