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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 1, 1995 Commission file number 0-15506
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SCHULT HOMES CORPORATION
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(Exact name of registrant as specified in its charter)
Indiana 35-1608892
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(State or other jurisdiction of I.R.S. Employer Identification No.)
Incorporation or Organization)
P.O. Box 151, Middlebury, IN 46540 (219)825-5881
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(Address of Principal Executive Offices) (Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Shares no par value per share AMERICAN
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
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As of September 1, 1995, the aggregate market value of the registrant's common
shares held by non-affiliates was $49,902,553 (3,731,032 shares at the closing
price on AMERICAN of $13 3/8). The number of shares of common shares outstanding
at that date was 3,731,032 shares.
Documents Incorporated by Reference:
PART ITEM
---- ----
1. Schult Homes Corporation 1995 Annual Report to Shareholders II 6,7,8
2. Schult Homes Corporation Proxy Statement with respect to its
October 19, 1995 Annual Meeting III 10,11,12
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CROSS-REFERENCE SHEET
ITEM PAGE
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . .10
5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . .10
6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . .11
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . .11
8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . .11
9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . .11
10. Directors and Executive Officers of the Registrant . . . . . . . . . . .11
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . .11
12. Security Ownership of Certain Beneficial Owners and Management . . . . .12
13. Certain Relationships and Related Transactions . . . . . . . . . . . . .12
14. Exhibits, Financial Statement Schedules, and Reports on Form 8K. . . . .12
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PART I
SCHULT HOMES CORPORATION AND SUBSIDIARIES
ITEM 1. BUSINESS
GENERAL
Schult Homes Corporation, founded in 1934, is the country's oldest and
seventh largest producer of factory built homes. The Company's factory-built
homes include both homes manufactured to meet the national building code
administered by the U.S. Department of Housing and Urban Development
("manufactured homes") and homes produced to meet building codes, similar to
building codes applicable to site-built homes, administered by state and local
authorities ("modular homes"). At July 1, 1995, the Company operated ten
manufacturing facilities located in seven states. These facilities produce
manufactured homes sold in 42 states. The Company's modular homes are currently
produced in all ten of the Company's facilities and are sold in 29 states. The
Company's manufactured homes are sold through 793 independent dealers, 197 of
which solely market the Company's modular homes. For the fiscal year ended June
1, 1995, modular homes accounted for 11.8% of the Company's net sales.
The Company focuses on the middle to higher price range of the
manufactured housing market and the lower to middle price range of the modular
housing market. Schult's factory-built homes range in size from approximately
560 to 4,400 square feet and sell at retail, excluding land, for prices ranging
from $20,000 to $200,000.
Schult concentrates its marketing efforts on maintaining and developing
consumer loyalty and dealer support by emphasizing design, quality and service.
In recent years the Company has focused its product development efforts on
multi-section manufactured homes and modular homes which meet regional consumer
preferences and match site-built home specifications and features. The Company
has developed engineering and operating systems which permit it to customize its
products to meet the desires of individual home buyers. Schult believes that
its ability to customize its products, along with its marketing assistance and
after-sale service, position it to appeal to the over-45 age segment, a growing
population with more discretionary financial resources than the typical first-
time home buyer.
Being in the right markets with the right products has produced strong
sales growth for the Company. To meet customer demand, the Company began a
major expansion program in 1993. Completed in fiscal 1995, this three-year,
$12 million investment added approximately $75 million of production capacity.
INDUSTRY
The factory-built housing industry has historically served as a more
affordable alternative to the home buyer. Because of the relatively lower cost
of construction as compared to site-built homes, manufactured homes
traditionally have been one of the means for first-time home buyers to overcome
the obstacles of large downpayments and higher monthly mortgage payments. The
Company believes that the cost advantages associated with the construction of
modular homes present a more affordable alternative to buyers seeking the
characteristics of site-built homes, and that modular homes offer better control
of costs for builders and developers with scattered lots or small subdivisions.
Factory-built homes also present an affordable alternative to site-built homes
for retirees and the over-45 age segment desiring a lifestyle in which home
ownership is less burdensome than is the case with site-built homes. The
Company believes that because of changing demographics, this market segment
should expand throughout the rest of the decade.
The factory-built housing industry is cyclical and affected by the
availability of alternative housing such as apartments, townhouses and
condominiums. In addition, interest rates, availability of financing, regional
population and employment trends and general and regional economic conditions
affect the sale of factory-built homes. The Manufactured Housing Institute
reported that calendar year 1991 recorded the lowest level of manufactured homes
shipments over the past 29 years. However, industry shipments during 1994 were
up by 20% following a 21% increase in 1993 and a 23%
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increase in 1992. The Manufactured Housing Institute also reported that industry
shipments during the first six months of 1995 were up by 12%. There are several
factors driving industry growth. Mortgage interest rates, which have remained
moderate over the past 3 years, are enabling more consumers to buy homes. The
glut of apartments that was caused by favorable tax laws prior to 1986 has
finally worked its way through the housing market. The relative scarcity of
apartment housing makes manufactured housing an attractive alternative.
Finally, more empty-nesters are choosing manufactured homes because they offer
the quality and features empty-nesters require at prices that are becoming
increasingly favorable as the cost of site-built homes escalates.
OPERATING STRATEGY
The Company believes its basic operating and competitive strategy is
best described as "product differentiation." Schult offers a broad range of
factory-built homes both in terms of price levels and in design and
specifications.
The Company's design and engineering personnel design homes in
consultation with divisional management, sales representatives and dealers, and
evaluate new materials and construction techniques in a continuing program of
development and enhancement. The Company uses computer-aided design technology
and has developed order-entry and engineering systems which permit customizing
of homes to meet the individual needs of prospective buyers. These systems
allow the Company to make modifications such as increasing the length of a
living room, moving a partition, changing the size and location of a window or
installing custom cabinets without excessive reductions in manufacturing
productivity. The Company believes that its ability to customize, along with
the Company's marketing assistance and after-sale service tailored to the needs
of individual consumers, position it to appeal to the over-45 age segment, a
growing population with more discretionary financial resources than the typical
first-time home buyer.
In recent years, the Company has developed and marketed products which
compete in quality and appearance with site-built homes and which match regional
customer tastes and preferences. In part, the Company has substantially
increased the proportion of its production devoted to multi-section manufactured
homes. As another part of its long-term strategy, the Company recently
developed a detailed plan to increase the production and sale of modular homes.
The following table sets forth information concerning the Company's
sales of multi-section homes as a percentage of the total number of factory-
built homes sold by the Company.
FISCAL YEAR ENDED
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JUNE 30, JUNE 29, JUNE 27, JUNE 26, JULY 2, JULY 1,
1990 1991 1992 1993 1994 1995
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58.3% 61.6% 61.4% 59.7% 64.1% 65.3%
PRODUCTS
Schult offers both manufactured homes and modular homes in a total of
846 different floorplans. Included in the Company's modular homes are a limited
number of commercial structures, primarily school rooms, produced under modular
building codes. For the fiscal year ended July 1, 1995, the percentages of the
Company's net sales attributable to the sale of manufactured homes and modular
homes were 88.2% and 11.8%, respectively.
The Company's factory-built homes typically include two or three
bedrooms, a family room, kitchen, dining room, living room, and two full
bathrooms, together with central heating, cooking range, refrigerator, hot water
heater, carpeting and draperies. Buyers may also choose optional items
including fireplaces; appliances such as dishwashers, washers, dryers, garbage
disposals, microwave ovens and stereo systems; energy conservation options such
as additional insulation and 2" x 6" wall systems; furniture, cabinets, built-in
millwork and specialty bay windows; extra baths and closets; and upgrades to
specified roofing, floor covering, sliding doors, trim moldings, appliances,
light fixtures and draperies.
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MANUFACTURED HOMES. The Company's manufactured homes are built in accordance
with the national building code administered by the U.S. Department of Housing
and Urban Development. This code is a performance-based code which allows any
material or construction process to be used as long as the performance criteria
of the code are met. This differs from most state and local building codes which
specify types of materials and construction methods that must be used in home
construction.
The Company designs and manufactures a variety of manufactured homes,
with a wide selection of materials, floor plans and decors, primarily for the
middle to higher price segment of the market. Manufactured homes are marketed
under the "Schult" and "Marlette" brands with a variety of model names,
including: Imperial, Presidential, New Congressional, Lynbrooke, American
Classic, Value Plus, Stanton, Dynasty, Elite, Homestead, Royal, Santa Fe,
Heritage Oak, Limited Edition, Ocean Crest and others. Many of the Company's
multi-section manufactured homes have exterior design features, including
asphalt shingle roofs and wood, vinyl or aluminum siding which, when
complemented by on-site customizing and landscaping, result in homes similar in
appearance to site-built homes.
The Company's single-section manufactured homes range in size from 560
square feet to 1,368 square feet and sell at retail, excluding land, from
$20,000 to $40,000. The Company's multi-section manufactured homes range in size
from 1,008 square feet to 2,331 square feet and sell at retail, excluding land,
from $29,000 to $100,000.
The Company's manufactured homes have some design limitations imposed by
the constraints of efficient production and over-the-road transit. Delivery
expense, borne by the dealer, limits the effective competitive shipping range of
the Company's manufactured homes to approximately 400 to 600 miles.
MODULAR HOMES. The Company's modular homes are built in accordance with
state or local building codes and therefore are similar in specifications and
design to site-built homes. The Company's "Crest" line of modular homes is
specifically designed to compete in design and appearance with site-built homes
and differs significantly from most manufactured homes. This line of modular
homes includes a variety of single-story ranch homes, story and one-half homes,
two-story homes, townhouses and duplex units, all of which can include attached
garages built at the site by others. A portion of the Company's modular homes
are sold under the "Schult" and "Marlette" brand names. These modular homes are
typically two-section, single-story ranch homes which are based on manufactured
home designs but are built to modular specifications.
The Company focuses on the lower to middle price segment of the modular
housing market. The Company's modular homes range in size from 800 square feet
to 4,400 square feet and sell at retail, excluding land, from $40,000 to
$200,000.
The Company's modular homes have design and transportation limitations
similar to manufactured homes.
MANUFACTURING OPERATIONS
The Company operates ten manufacturing facilities ranging in size from
72,500 square feet to 210,115 square feet. These facilities are located in
Middlebury, Indiana (2 facilities); Etna Green, Indiana; Plainville, Kansas;
Navasota, Texas; Buckeye, Arizona; Redwood Falls, Minnesota; Lewistown,
Pennsylvania; Milton, Pennsylvania; and Hermiston, Oregon. Each facility
produces models designed for its regional market area, but no single
manufacturing facility produces all of the 846 models offered by the Company.
The Company's products are manufactured in sections, which are
individually transported to their destination by truck. The finished products
may consist of one or more sections. Multi-section products, including one or
two-story homes, are joined at their destination.
The Company's manufacturing facilities generally operate one shift per
day for a five-day week, and on that basis have the capacity to produce an
aggregate of approximately 330 sections per week. During fiscal 1995, the
average
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production was 269 sections per week compared to 247 during fiscal 1994 and 221
during fiscal 1993. The following table sets forth the total number of sections
sold by the Company for the periods indicated.
FISCAL YEAR ENDED
----------------------------------------------------------
JUNE 30, JUNE 29, JUNE 27, JUNE 26, JULY 2, JULY 1,
1990 1991 1992 1993 1994 1995
----------------------------------------------------------
9,813 9,830 10,140 11,505 13,071 13,973
The principal materials used in the production of the Company's homes
include steel, vinyl siding, wood, wood products, shingles, gypsum wallboard,
fiberglass, carpet, vinyl floor covering, fasteners and hardware items,
appliances, furniture, electrical items, windows and doors. In general,
materials are ordered so that they are received five days prior to the time they
are incorporated into the homes. Some of the Company's facilities are in areas
where a number of manufactured housing producers and suppliers are located, and
these materials generally are readily available from a number of sources. Only
one supplier accounted for more than 5% of the Company's annual purchases in
fiscal 1995.
Since the cost of transporting a manufactured home is significant,
substantially all of the Company's homes are sold to independent dealers within
a 400 to 600 mile radius of the manufacturing facility. The Company arranges,
at the dealer's expense, for the transportation of finished homes to dealer
sales centers using independent trucking companies. Customary sales terms are
cash-on-delivery or guaranteed payment from a floor plan financing source.
Dealers or other independent installers are responsible for placing the home on
site, making utility hookups and providing and installing certain trim items.
The Company does not maintain any inventory of unsold completed homes.
All production is initiated against specific orders. The Company's backlog of
orders for manufactured homes was $28.7 million at July 1, 1995, compared to
$37.1 million at July 2, 1994. Dealer orders are subject to delays and
cancellation for a variety of reasons, and the Company does not consider the
order backlog to be firm orders.
SALES
As of July 1, 1995, the Company's manufactured homes were being sold
through 793 independent dealers of which 596 are authorized to sell the
Company's "Schult" and "Marlette" brands of HUD code and modular homes. An
additional 197 of the Company's independent manufactured home dealers are
actively marketing the Company's "Crest" line of modular homes.
The Company's largest dealer accounted for 4.8% of fiscal 1995 net sales
and the ten largest dealers accounted for 21.4% of such sales. Of the top 100
dealers, 43 have been with the Company for over 10 years and 77 for over five
years.
The Company believes the close working relationship between its regional
management and the dealers they service has been an important factor in the
Company's success. In light of its commitment to its dealers, the Company,
unlike some of its competitors, does not operate Company-owned retail sales
centers to compete with its independent dealers. In order to enable dealers to
obtain retail market penetration and provide customer service and to promote
dealer loyalty, only one dealer within a given local market area distributes the
Company's homes. However, the Company does not have formal marketing agreements
with its dealers and substantially all of the Company's dealers also sell homes
of other manufacturers.
The Company employs 43 sales persons who, through extensive road travel,
maintain personal contact with the Company's independent dealers. The Company
also markets its homes through product promotions tailored to specific dealer
needs. In addition, the Company advertises in various media, and participates
in regional manufactured housing shows. There are separate sales forces for
manufactured and modular homes.
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Independent dealers of manufactured homes sell from display centers,
rental developments, condominium developments and subdivisions. Some
independent manufactured housing dealers sell modular homes, but most modular
homes are sold by builder/dealers specializing in modular homes, who may
concentrate on scattered lot placements or small subdivision developments.
PRODUCT FINANCING
As is customary in the factory-built housing industry, substantially all
of the Company's dealers finance their purchases through floor plan
arrangements. A bank or finance company loans the dealer all of the purchase
price of the home (secured by the factory-built home) and requires the
manufacturer to agree to repurchase the home for the principal amount of the
floor plan loan outstanding, plus certain expenses, should the dealer default.
At July 1, 1995, the Company's contingent repurchase obligations under such
agreements approximated $41.0 million. No one dealer accounted for more than
5.0% of that contingent obligation. Generally, homes that have been repurchased
under such arrangements have been sold to other dealers and losses have been
nominal.
The Company's independent dealers make individual arrangements for the
retail financing of the homes they sell without assistance from the Company,
and the Company has no contingent liability for defaults on such consumer
financing.
WARRANTY, QUALITY CONTROL AND SERVICE
The Company believes the maintenance of quality in materials and
workmanship is an important factor in the market acceptance of its homes. The
Company maintains a rigorous quality control inspection program at each
production stage, and in addition, in accordance with government regulations
relating to construction and performance standards, an independent third party
performs compliance inspections. See "Regulation."
The Company provides the initial retail purchaser of its factory-built
homes with a one-year limited warranty covering manufacturing defects in
materials and workmanship. Manufacturers of appliances and other materials
installed in the Company's homes generally provide their own direct warranties
to the purchaser. The Company employs trained servicemen at each of its plants
who provide on-site warranty service to retail customers, as a backup to
warranty service provided by dealers.
COMPETITION
The manufactured housing industry is highly competitive at both the
manufacturing and retail levels, with competition based on price (including
freight costs), product features, quality, warranty repair service and the terms
of dealer and retail customer financing. According to industry data, as of July
1, 1995, there were 98 firms producing manufactured homes from 281 facilities.
A number of these companies are larger than the Company and possess greater
financial resources. Some of these companies are strengthened and partially
insulated from competitive conditions in the manufactured housing industry by
virtue of substantial operations in related industries. The capital
requirements of entry into the manufactured housing industry are relatively
small, and both start-ups and failures are common.
The product differentiation strategy used by the Company has also been
successfully employed by some private regional firms. Among the large,
publicly-owned manufacturers of manufactured homes, two other competitive
strategies have enjoyed success. One of these is the "low-cost producer"
approach, based on delivering a good value at the lower end of the price range
through high volume, low margins and limited product offerings. Another
strategy has been vertical integration, in which firms control not only the
production of manufactured homes, but own some or all of their retail
distribution points, do some land development and have captive mortgage banking
and insurance operations.
Competition in the modular housing industry is fragmented with no
dominant manufacturer. While there are a number of small regional modular home
manufacturers, the Company's principal competition for modular housing is the
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traditional site-builder. The Company believes it has a price advantage in
competing with builders in small subdivisions and on scattered lots and in
remote areas. Large tract-builders enjoy economies of scale which make their
products comparable in price to modular homes and large tract-builders therefore
have no incentive to buy modular homes.
Manufactured and modular homes compete with each other and also compete
directly with apartments, townhouses, condominiums, existing site-built homes
and existing manufactured homes.
REGULATION
Factory-built homes, like site-built homes, are subject to a number of
federal, state and local laws. The Company believes such regulations benefit
the industry and its customers by ensuring minimum quality standards, thereby
improving consumer trust and acceptance of manufactured and modular homes.
Construction of manufactured homes is governed by the National
Manufactured Housing Construction and Safety Standards Act of 1974. In 1975,
the Department of Housing and Urban Development ("HUD") issued regulations under
this act establishing comprehensive national construction standards preempting
conflicting state and local regulations. The HUD regulations cover all aspects
of manufactured home construction, including structural integrity, fire safety,
wind loads, thermal efficiency and ventilation. As required by the HUD
regulations, all plans and specifications for the Company's manufactured homes
are reviewed by a HUD-approved independent third party, and each home is
required to be inspected by a different HUD-approved third party prior to its
completion. These inspections are in addition to the Company's own rigorous
inspection program. Failure to comply with HUD regulations would expose the
Company to a wide variety of sanctions, ranging from repair or repurchase of any
home deemed defective or hazardous, to intensive inspection of manufacturing
facilities, or to closing the Company's plants. The Company believes its
manufactured homes meet or surpass all present HUD requirements. Modular homes
are subject to state or local building codes, similar to the codes applicable to
site-built homes, rather than the HUD regulations.
Legislation has been proposed, from time to time, which, if enacted,
would significantly affect the regulatory climate for manufactured and modular
homes. One proposal would turn regulation of manufactured homes back to state
authority, and another would impose preemptive federal legislation over modular
homes. The outcome or effect of legislative action cannot be predicted.
Certain components of manufactured and modular homes are subject to
regulation by the Consumer Product Safety Commission ("CPSC"), which is
empowered to ban the use of component materials believed to be hazardous to
health and to require the repair of defective components. The CPSC, the
Environmental Protection Agency and other governmental agencies are evaluating
the effects of formaldehyde. Manufactured, modular and site-built homes are all
built with particleboard, paneling and other products that contain formaldehyde
resins. Since February 1985, HUD has regulated the allowable concentration of
formaldehyde in certain products used in manufactured homes and required
manufacturers to warn purchasers concerning formaldehyde associated risks. The
Company currently uses materials in its manufactured homes that meet HUD
standards for formaldehyde emissions and otherwise comply with HUD regulations
in this regard. See "Legal Proceedings."
A number of states require manufactured and modular home producers to
post bonds to ensure the satisfaction of consumer warranty claims. A number of
states have adopted procedures governing the installation of manufactured homes.
The location of manufactured homes is sometimes subject to discriminatory local
zoning ordinances. Utility connections are subject to state and local
regulation, and must be complied with by the builder/dealer or other person
installing the home.
The Company does not provide retail financing and is indirectly affected
by regulations on consumer finance. In particular, the Company cooperates with
dealers in assisting retail customers in obtaining Veterans Administration and
Federal Housing Administration guaranteed loans. In connection with such
transactions, the Company must make
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representations regarding certain aspects of its wholesale pricing policies. If
the Company were to engage in consumer financing, the Company would be subject
to additional regulatory requirements.
The Company is subject to the Magnuson-Moss Warranty Federal Trade
Commission Improvement Act, which regulates the description of warranties. The
description and substance of the Company's warranties are also subject to
various state laws and regulations.
EMPLOYEES
On July 1, 1995, the Company had 2,317 full-time employees, of which 160
were in management, 181 were in administrative and clerical areas, 1,933 were in
production and 43 were in sales. The Company's personnel requirements are
primarily for semi-skilled production labor; these employees are typically
compensated on an incentive basis, based on the achievement of production goals.
There are no collective bargaining agreements covering any of the Company's
employees. The Company considers its employee relations to be good.
ITEM 2. PROPERTIES
The Company presently owns ten operating manufacturing facilities. In
addition, the Company owns a 112,000 square foot warehouse in Elkhart, Indiana,
and two idle manufacturing facilities. The Company's idle facility in
Ellaville, Georgia has been for sale. The Company's idle facility in Elkton,
Maryland is currently used only as a sales and service office, but production
could resume there if economic conditions and markets so warrant.
The Company's manufacturing facilities are as follows:
BUILDING
LOCATION ACRES SQUARE FEET
-------- ----- -----------
Middlebury, IN #1........... 62.5 174,400
Plainville, KS.............. 29.3 149,700
Navasota, TX................ 20.0 210,115
Buckeye, AZ................. 21.0 72,500
Redwood Falls, MN........... 19.2 119,320
Milton, PA.................. 13.0 86,800
Lewistown, PA............... 18.7 144,870
Hermiston, OR............... 40.3 206,464
Middlebury, IN #2........... 18.4 93,960
Etna Green, IN.............. 13.2 116,182
The Company's corporate headquarters are located at the Middlebury,
Indiana #1 facility.
All of the properties described above are well maintained, generally in
good repair, adequately insured and suitable for the purposes for which they are
being used.
ITEM 3. LEGAL PROCEEDINGS
Since 1978, many producers of manufactured homes, including the Company,
have experienced a number of product liability claims based on the presence of
formaldehyde in components purchased from independent suppliers and used in the
manufacture of homes. Although the Company has experienced a decrease in the
number of formaldehyde claims initiated in recent years, such claims are
expected to continue for the foreseeable future. Schult is currently named as a
defendant in five lawsuits involving formaldehyde. While Schult believes it has
meritorious defenses to all of these actions, no prediction can be made as to
the outcome of these cases.
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The Company carries product liability insurance but bears a substantial
portion of the cost of liability claims and settlements. The Company currently
has primary insurance coverage of $5.0 million per occurrence and in the
aggregate, after payment of $100,000 of damages or expenses per occurrence. The
Company has umbrella coverage of $10.0 million per occurrence and in the
aggregate, after payment by the Company of $10,000 per occurrence.
In late 1991, the Company was named by the Maryland Department of the
Environment, along with 50 other persons, as a potentially responsible person
for soil and water pollution at a site in which its Elkton, Maryland facility is
located. The affected site is 1,360 acres, and includes a former U. S. Navy
munitions factory. The U.S. Department of the Navy is one of the named
potentially responsible persons. Under the law, the Company and each of the
other persons named is potentially responsible for remediation of the site
without regard to determination of the source of pollution. The investigation
is in a preliminary stage, and the ultimate resolution cannot now be determined.
The Company has no reason to believe, however, that it has been a major
contributor to the pollution of soil or groundwater.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of fiscal 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In an initial public offering on February 26, 1987 Schult sold 833,334
units, each consisting of One Common Share and a Warrant for one-half Common
Share. Units, Shares, and Warrants began trading immediately, but most trading
activity was concentrated in Units. On May 17, 1990, the Company listed its
common shares on the American Stock Exchange (ticker symbol SHC). As a result,
shares, units and warrants were delisted by NASDAQ, and subsequently warrants
could only be traded over-the-counter through the "pink sheets". All of the
warrants expired or were exercised on March 1, 1991. On July 28, 1992, the
Company commenced a public offering of 1,437,500 shares of common stock
comprised of 1,145,383 shares offered by members of the Fulcrum Partnership and
292,117 newly issued shares. After expenses, sale of the new shares generated
approximately $2.5 million in new capital for the Company.
The following table sets forth the high and low closing sale price of
the Common Shares as reported on the American Stock Exchange.
<TABLE>
<CAPTION>
HIGH LOW
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<S> <C> <C>
Fiscal Year Ended June 26, 1993
First Quarter.................... $13 3/4 $ 9 3/8
Second Quarter................... 18 12 3/4
Third Quarter.................... 19 3/8 14 1/4
Fourth Quarter................... 16 11 7/8
Fiscal Year Ended July 2, 1994
First Quarter.................... $15 1/2 $11 1/2
Second Quarter................... 15 3/4 13 3/8
Third Quarter.................... 17 7/8 14 3/4
Fourth Quarter................... 15 3/8 13
Fiscal Year Ended July 1, 1995
First Quarter.................... $15 1/8 $12 3/8
Second Quarter................... 14 1/4 10 5/8
Third Quarter.................... 12 7/8 9 3/4
Fourth Quarter................... 11 3/4 10
</TABLE>
On July 1, 1995, there were more than 1,000 shareholders of record of the
Company's Common Shares.
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DIVIDEND POLICY
Historically, it has been the policy of the Company to reinvest earnings in
the Company's business. On June 10, 1992, the Company announced the inception
of a regular quarterly dividends. The first such dividend was paid on September
14, 1992. The Company intends to continue to pay a regular quarterly dividend.
However, the payment of future cash dividends will depend upon the Company's
financial condition, capital requirements, results of operations and other
factors deemed relevant by the Company.
ITEM 6. SELECTED FINANCIAL DATA
Schult Homes Corporation incorporates by reference page 3 of the Schult
Homes Corporation 1995 Annual Report to Shareholders under the heading,
"Financial Highlights."
The amounts of redeemable preferred shares outstanding was $4,496,800 in
both fiscal years 1990 and 1991.
Schult Homes Corporation incorporates by reference page 25 of the Schult
Homes Corporation 1995 Annual Report to Shareholders under the heading, "Summary
of Quarterly Results."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Schult Homes Corporation incorporates by reference pages 14 through 16
of the Schult Homes Corporation 1995 Annual Report to Shareholders under the
heading, "Management's Discussion and Analysis."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Schult Homes Corporation incorporates by reference "Consolidated
Financial Statements and Notes" on pages 17 through 24 of the Schult Homes
Corporation 1995 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Schult Homes Corporation incorporates by reference the information on
pages 4 and 5 of the Schult Homes Corporation Proxy Statement dated September
22, 1995, filed pursuant to Section 14(a) of the Securities Exchange Act of
1934, as amended, under the heading, "Election of Directors." Also, pages 14
and 15 of the above mentioned Proxy Statement, under the heading, "Executive
Officers."
ITEM 11. EXECUTIVE COMPENSATION
Schult Homes Corporation incorporates by reference the information on
pages 6 through 11, 13 and 14 of the Schult Homes Corporation Proxy Statement
dated September 22, 1995, filed pursuant to Section 14(a) of the Securities
Exchange Act of 1934, as amended, under the headings, "Report of the
Compensation Committee", "Adoption of the Schult Homes Corporation 1995 Share
Incentive Plan", "Executive Compensation" and "Employee Plans."
11
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Schult Homes Corporation incorporates by reference the information on
page 3 of the Schult Homes Corporation Proxy Statement dated September 22, 1995,
filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as
amended, under the heading, "Principal Shareholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(a) The following documents are filed as a part of this report:
1. Schult Homes Corporation incorporates by reference
"Consolidated Financial Statements and Notes" on pages 17
through 24 of the Schult Homes Corporation 1995 Annual
Report to Shareholders.
2. Schult Homes Corporation files herewith:
Incentive Bonus Plan;
Gain Sharing (401(k)) Plan;
Incentive Stock Option Plan;
Employee Share Purchase Plan;
(b) Through July 1, 1995, no reports on Form 8-K were filed
subsequent to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended April 1, 1995.
(c) Exhibits required by Item 601 of Regulation S-K:
Amended and Restated Articles of Incorporation of the
Company;
Bylaws of the Company;
Form of Common Share Certificate;
Revised Credit Facility with NBD Bank and NBD Bank, NA;
(d) There are no financial statements to be filed under Regulation
S-X which are excluded from the annual report to shareholders
pursuant to Rule 14a-3(b).
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SCHULT HOMES CORPORATION
Registrant
By
---------------------------------
Walter E. Wells
President, Chief Executive Officer
Date: September 22, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
President, Chief Executive September 22, 1995
------------------------- Officer and Director
Walter E. Wells
Senior Vice President of September 22, 1995
------------------------- Product Group and Director
Francis M. Kennard
President of Manufactured Housing September 22, 1995
------------------------- Group and Director
John P. Guequierre
Vice President of Finance September 22, 1995
------------------------- and Chief Accounting Officer
Frederick A. Greenawalt
Director September 22, 1995
-------------------------
Todd Goodwin
Director September 22, 1995
-------------------------
Robert J. Deputy
Director September 22, 1995
-------------------------
Donald R. Pletcher
Director September 22, 1995
-------------------------
Walter O. Wells
13
<PAGE>
SCHULT HOMES CORPORATION AND SUBSIDIARIES
FORM 10-K
FINANCIAL STATEMENTS SUBMITTED IN RESPONSE TO ITEM 14 (A)
Year ended July 1, 1995
The consolidated financial statements, together with the related notes and
the report thereon of KPMG Peat Marwick LLP, dated August 4, 1995, appearing on
pages 17 to 24 of the accompanying 1995 Annual Report to Shareholders, are
hereby incorporated by reference and made a part hereof. With the exception of
the aforementioned items incorporated by reference and specific references made
herein, the 1995 Annual Report to Shareholders is not deemed to be filed as part
of this filing.
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders of
Schult Homes Corporation:
We consent to incorporation by reference in Registration Statement No. 33-
42434 on Form S-8 of Schult Homes Corporation, of our report dated August 4,
1995, relating to the consolidated balance sheets of Schult Homes Corporation
and subsidiaries as of July 1, 1995 and July 2, 1994, and the related
consolidated statements of operations, cash flows and shareholders' equity for
each of the years in the three-year period ended July 1, 1995, as contained in
the Annual Report to Shareholders for the fiscal year 1995. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the fiscal year 1995.
KPMG Peat Marwick LLP
Chicago, Illinois
September 22, 1995
14
<PAGE>
ANNUAL REPORT 1995
WHERE HAVE WE BEEN?
HOW ARE WE DOING?
WHAT LIES AHEAD?
[PHOTOS]
[SCHULT LOGO]
<PAGE>
SCHULT HOMES: THE COMPANY
Schult Homes Corporation is the nation's oldest and seventh-largest producer of
manufactured housing. The Company focuses on meeting the housing needs of the
middle and top segments of the manufactured housing market by offering premium
customized homes. These products afford home owners an attractive and economical
housing choice equal in workmanship, convenience and lifestyle amenities to
those of site-built homes.
Schult's sales have grown at a 12.9% compound annual growth rate in the past
five years. The growth is being fueled by:
- A sharp rise in the retiree and empty-nester segment of the population, the
Company's primary markets.
- Emphasis on high-value, customized homes, which represent a growing proportion
of industry sales.
- Expanded capacity to support increased volume.
- An upturn in the manufactured housing industry.
With 10 manufacturing facilities throughout the United States, Schult has
adequate capacity to sustain significant growth rates for the next several
years. The Company has two separate operating units: manufactured housing and
modular housing. Schult markets its homes under the brand names Schult, Marlette
and Crest.
Founded in 1934, and headquartered in Middlebury, Indiana, Schult employs
approximately 2,300 people throughout the United States. More than 1,000
shareholders own Schult common shares, which trade on the American Stock
Exchange under the symbol: SHC.
1995 Highlights
- Sales climbed 10.9% to a record $287.9 million.
- Named "Manufacturer of the Year" by the Manufactured Housing Institute.
- Implemented key initiatives to improve profitability.
- Increased capacity by $50 million.
- Realigned operating structure to increase efficiency.
- Launched new line of moderately-priced homes.
WHO IS SCHULT HOMES CORPORATION?
[SCHULT LOGO]
[CREST LOGO]
[MARLETTE LOGO]
TABLE OF CONTENTS
Letter to Shareholders 2
-------------------------------------------------------------------------------
Questions and Answers 5
-------------------------------------------------------------------------------
Management Discussion & Analysis 14
-------------------------------------------------------------------------------
Balance Sheets 17
-------------------------------------------------------------------------------
Statements of Operations 18
-------------------------------------------------------------------------------
Statements of Cash Flows 19
-------------------------------------------------------------------------------
Statements of Shareholders' Equity 20
-------------------------------------------------------------------------------
Notes 21
-------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
(IN $000'S, EXCEPT PER SHARE DATA, NUMBER OF EMPLOYEES, FLOOR SECTIONS AND
RATIOS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
FIVE-YEAR
COMPOUND FISCAL YEAR
GROWTH RATE 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
----------------------------------------------------------------------------------------------------------------------------------
Net sales 12.9% $ 287,937 $ 259,616 $ 207,822 $ 172,037 $ 162,011 $ 157,198
----------------------------------------------------------------------------------------------------------------------------------
Gross profit 12.4 53,947 50,284 39,351 34,737 31,636 30,059
----------------------------------------------------------------------------------------------------------------------------------
Operating income 6.9 7,706 10,251 7,497 7,851 6,451 5,519
----------------------------------------------------------------------------------------------------------------------------------
Pre-tax income 10.8 7,581 10,373 7,576 7,508 5,822 4,532
----------------------------------------------------------------------------------------------------------------------------------
Net income 9.7 4,375 6,046 4,317 4,464 3,514 2,756
----------------------------------------------------------------------------------------------------------------------------------
Number of employees 10.3 2,317 2,149 1,825 1,487 1,446 1,420
----------------------------------------------------------------------------------------------------------------------------------
Floor sections 7.3 13,973 13,071 11,505 10,140 9,830 9,813
----------------------------------------------------------------------------------------------------------------------------------
Effective tax rate 1.5 42.3% 41.7% 43.0% 40.5% 39.7% 39.2%
----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
----------------------------------------------------------------------------------------------------------------------------------
Total assets 11.9% $ 75,333 $ 67,378 $ 56,499 $ 45,849 $ 43,656 $ 43,022
----------------------------------------------------------------------------------------------------------------------------------
Property, plant & equipment 11.2 34,235 32,204 25,039 20,052 21,118 20,178
----------------------------------------------------------------------------------------------------------------------------------
Long-term debt -10.2 3,695 2,390 3,385 3,927 4,575 6,320
----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 32.4 31,961 28,358 22,708 15,961 11,041 7,858
----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
----------------------------------------------------------------------------------------------------------------------------------
Net earnings per
common share 6.9% $ 1.16 $ 1.60 $ 1.16 $ 1.29 $ 0.95 $ 0.83
----------------------------------------------------------------------------------------------------------------------------------
Dividends paid N/A 0.16 0.14 0.12 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Book value 29.2 8.53 7.53 6.04 4.62 3.32 2.37
----------------------------------------------------------------------------------------------------------------------------------
Avg shares outstanding (000's) 2.5 3,746 3,768 3,712 3,399 3,314 3,310
----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS
----------------------------------------------------------------------------------------------------------------------------------
Gross margin N/A 18.7% 19.4% 18.9% 20.2% 19.5% 19.1%
----------------------------------------------------------------------------------------------------------------------------------
Operating margin N/A 2.7 3.9 3.6 4.6 4.0 3.5
----------------------------------------------------------------------------------------------------------------------------------
Net margin N/A 1.5 2.3 2.1 2.6 2.2 1.8
----------------------------------------------------------------------------------------------------------------------------------
Return on beginning
shareholders' equity N/A 15.4 26.6 27.0 40.4 44.7 54.2
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[GRAPH NET SALES]
[GRAPH NET INCOME]
[GRAPH DIVIDENDS PAID]
[GRAPH EARNINGS PER SHARE]
1
<PAGE>
TO OUR SHAREHOLDERS
Fiscal 1995 was another solid year of sales growth for Schult Homes. Sales
increased by 10.9% to a record $287.9 million. We shipped the largest number of
floor sections in Schult's history. By year-end, our manufacturing capacity had
increased by $50 million and we are now able to support annual sales well in
excess of $325 million. In the process, we also gained manufacturing flexibility
that allows us to compete profitably over a broader spectrum of manufactured
home types and price points. We completed the addition of capacity at our
Plainville, Kansas plant which set a new company standard for capacity
expansions. In addition, we successfully launched a new line of moderately-
priced manufactured homes. In recognition of our achievements, Schult Homes was
named "Manufacturer of the Year" for 1995 by the 50 State Association Board of
Goveners and the Manufactured Housing Institute.
It was also a successful year from an operational standpoint. Eight of our 10
plants performed exceptionally well, as evidenced by our record shipments. We
saw a resurgence of demand for both manufactured and modular homes in the
Northeast, where the market had been relatively soft for some time. The market
strength was reflected in the solid performance of our Pennsylvania plants. Our
Western plants -- Buckeye, Arizona; Plainville, Kansas; Hermiston, Oregon and
Redwood Falls, Minnesota -- performed well, benefiting from the migration of
people from California to Arizona, the Pacific Northwest, Colorado and Montana.
The Midwest remained a bulwark for us, as our two Middlebury, Indiana plants
performed well despite increased competition in the region and intense factory
wage pressure.
Our fiscal 1995 financial performance was also respectable. The $1.16 per share
we earned was the third best in our history, although it represented a decline
from the record results we posted in fiscal 1994. We ended the year with one of
the strongest balance sheets in the industry. Debt represented only 10.4% of
capitalization.
Although the company as a whole performed very well, that performance was masked
by difficulties we encountered at two start-up divisions. The most significant
of those difficulties was the start-up of expanded capacity at our Navasota,
Texas plant where we added an entire second production line during the second
half of fiscal 1994. In retrospect, we committed a major error by not
recognizing the vast differences between the most recent Navasota expansion and
the nine other expansion projects that we successfully brought on line over the
past four years, including the previous expansion at Navasota in fiscal 1993.
[MANUFACTURER OF THE YEAR SYMBOL]
At Navasota, we were confident we could replicate those successes but we were
simply wrong. We staffed the new production line with a supervisory team that
was insufficiently prepared to handle a start-up situation. On top of this, we
brought in a workforce that was entirely new and insufficiently trained. We
asked them to manufacture one of the industry's most complicated product
offerings. We simply pushed too hard too soon to get the plant on line. The
impact of this error was evident in the decline in our margins, loss of
productivity, excessive accident rates and higher warranty costs throughout the
year.
We also missed the mark in the start-up of our new Etna Green, Indiana plant,
although the impact of the difficulty we encountered at that location was
considerably less and of a somewhat different nature. At Etna Green, we found
that the mix of products we were producing required a higher level of expertise
and a broader set of skills than the training we provided our employees. The
effects were similar, although less significant, to those we experienced at
Navasota.
Although we consider the situations at Navasota and Etna Green serious, they are
both very manageable. We have taken steps to correct these situations and
implemented processes to ensure they do not recur. Those steps are part of a
broader program of initiatives aimed at achieving our company-wide goals over
the next several years.
Our primary goal is to improve our profitability, specifically, to achieve an
operating margin of 4.6% or better, which is the level we enjoyed before we
began our latest expansion program. We have expanded rapidly over the past five
years and we now need to make sure we can make the best possible use of these
expansions.
2
<PAGE>
As is often the case with growth, we have lost some efficiency as we've become a
larger and more complex organization. While we view that situation as a
temporary one, regaining the lost efficiency requires action. We have taken what
we believe to be the appropriate actions.
The program we have undertaken to improve margins is a comprehensive one, but
can be viewed as a series of initiatives that encompass all aspects of our
operations. While we view the recently completed expansion program as one of
those initiatives, our real focus is on those initiatives that will allow us to
make optimum use of that expansion, including:
NEW OPERATIONAL STRUCTURE -- We have recognized that the dynamics of the
manufactured home and modular home businesses are distinctly different. As we
grow, it becomes increasingly important that we maintain a clear focus on each
area. To make sure that focus is maintained, we decided to create two separate
operating units, each with its own President. The manufactured housing unit is
being headed by John Guequierre, formerly our Senior Vice President of
Operations. The modular housing unit is headed by Bill Reasor, who has been Vice
President of Marketing for our Crest Homes modular housing products.
Although we did not adopt this new structure until late in the fiscal year, we
have already seen tangible results. The product development process has become
more disciplined and efficient. Internal communications have improved, allowing
us to make better management decisions. We have a more precise concept of the
profitability of each unit and product and are therefore able to make better
strategic decisions. We expect the benefits of the new structure to become
increasingly evident in the coming year and beyond.
MANUFACTURING PROCESS PLANNING -- We have also embarked upon a program designed
to increase our efficiency at the shop floor level in recognition that systems
and methods we've used effectively in the past did not allow us to keep pace
with the demands of growth. This program includes a more formalized and
scientific approach to the organization to help employees be as productive as
possible. It includes the implementation of critical path manufacturing, a well-
proven process of completing large projects efficiently.
The overall program also involves decentralizing the drafting function. This
brings the design and manufacturing processes closer together, which facilitates
problem solving, communication and improves efficiency.
ENHANCED TRAINING PROGRAMS -- We are expanding our training programs, with an
emphasis on first line management -- production supervisors and shop floor team
leaders -- to ensure they have the skills necessary to deal with the greater
variety of situations a larger organization will inevitably encounter. Through
that training process, we are introducing standardized operating procedures that
will give employees greater flexibility and help them function more effectively.
STANDARDIZATION OF PRODUCT COMPONENTS -- Although our focus will continue to be
on homes that offer our customers the ability to customize, our program of
initiatives includes refinement of our product offerings in each geographical
market with a view toward use of more standard components and a reduction in the
amount of variation in the production process from unit to unit. This is
allowing us to standardize tasks to a greater degree and realize a higher level
of efficiency.
UPGRADED MANUFACTURING SYSTEMS -- Our initiatives are not limited to the shop
floor, however. We are upgrading all our internal manufacturing support systems
so they will be more user-friendly. This will help us reduce the number of
errors, improve our ability to identify and resolve problems before they become
serious and improve our ability to coordinate various functions such as
materials purchasing and scheduling.
[GRAPH NUMBER OF EMPLOYEES]
TOTAL QUALITY MANAGEMENT -- To ensure we have the ability to make full use of
the talent and experience of all our employees, we are strengthening our
participative management program by incorporating the Total Quality Management
concept. This gives all employees ownership of and responsibility for
maintaining the highest possible level of quality and provides the means to
implement changes that will improve our collective performance company-wide.
3
<PAGE>
SHAREHOLDERS' LETTER (CONTINUED)
EMPHASIS ON SAFETY -- We are placing an increased emphasis on safety. We have
experienced an increase in injuries as we brought in and trained new employees.
Our employees are our most valuable asset. We want them to be fully aware of the
normal hazards of the workplace and the means of avoiding injuries.
Realistically each injury also reduces our productivity and results in higher
workers' compensation costs. Avoiding injuries can be a significant factor in
improving our performance and reaching our goals.
LOWER WARRANTY COSTS -- Our fiscal 1995 results were negatively impacted by
increased warranty costs. The combination of increased production of all-drywall
units and more new employees last year caused some reduction in production
quality and a corresponding increase in warranty costs. Our backlog of warranty
work reached a high level during fiscal 1995, and we have made it a priority to
reduce that level. We are accomplishing this through our product quality
initiatives, which will minimize the need for warranty work in the future and
through an emphasis on completing the backlog of existing work.
As we look forward to 1996 and beyond, we believe the opportunities for growth
are as great as they have been at any time in our history. Schult Homes has
historically focused on mid- to high-priced manufactured homes that appeal
principally to the empty-nester and retiree. As we approach the turn of the
century, these two groups are the fastest growing segment of the population. The
proverbial "baby-boomers" born in the years immediately following World War II
are now reaching fifty years of age. We are well-positioned to take full
advantage of this phenomenon because our homes offer the quality and level of
features these individuals have become used to over the years and require in any
new home they choose. Our ability to produce all-drywall homes further enhances
our ability to deliver homes with the same look and feel of a site-built home.
While our goals for the next two years are focused on improving our performance
from internal sources, we are not ignoring the possibility of external growth.
We have entered into an agreement with a new manufactured housing venture
developed by a number of manufactured home dealers that will operate a
production facility in Texas. Schult Homes has agreed to make a secured loan to
help ensure this venture is successful. The loan does not represent a
significant commitment to Schult. As part of the arrangement we may, but are not
required to, take an equity position in the venture at some future date. We
believe this is an attractive arrangement because it preserves the opportunity
to participate in industry growth, should the venture succeed, while limiting
our risk and not diverting the attention of our management team from the pursuit
of our primary objective.
[GRAPH BOOK VALUE PER SHARE]
The future of Schult Homes remains as bright as ever. We are well on the road to
resolving the problems we encountered at Navasota and Etna Green. The program of
initiatives, which we expect to complete by the end of fiscal 1996, should be
increasingly evident in our financial results as the year progresses. The
manufactured housing markets nationwide are as healthy as they have ever been.
Our target customers are the fastest growing segments of the population.
With these factors in our favor, we believe our goals of resuming earnings
growth, reaching operating margins at least equal to those we enjoyed in fiscal
1992, and maintaining the pace of sales growth in the 10% range are within our
reach.
Shareholders, employees, dealers, vendors and our customers all played vital
roles in the gains we achieved last year and thanks are due to all of them for
the confidence they expressed throughout last year. Together, we expect to
realize still further and greater achievements in 1996 and beyond.
Sincerely,
/s/ Walter E. Wells
Walter E. Wells
President and
Chief Executive Officer
AUGUST 25, 1995
4
<PAGE>
QUESTIONS AND ANSWERS
The Schult Homes senior management team recently conducted a roundtable
discussion to review the company's fiscal 1995 performance and share their
perspectives on Schult's opportunities and plans for fiscal 1996 and beyond. The
roundtable participants included: Walter E. Wells, President and Chief Executive
Officer, John P. Guequierre, President -- Manufactured Housing, Francis M.
Kennard, Senior Vice President -- Product Group, Ervin L. Bontrager, Executive
Vice President -- Manufactured Housing, Frederick A. Greenawalt, Vice President
-- Finance, William S. Reasor, President -- Modular Housing, and James A. Jones,
Vice President of Operations -- Modular Housing. Following are highlights from
the discussion.
Q: WHAT EFFECT DID THE ECONOMY AND CHANGING INTEREST RATES HAVE ON YOUR SALES
PERFORMANCE IN FISCAL 1995?
A: GUEQUIERRE -- While the housing industry as a whole is affected by changes
in the economy, manufactured housing is not nearly as sensitive to interest
rate fluctuations as site-built housing. However, rising interest rates
tend to decrease sales of existing houses, which reduces the pool of
potential buyers of manufactured homes. Our sales actually improved
substantially in fiscal 1995 due to increased capacity from our new Etna
Green, Indiana plant and the expanded Plainville, Kansas and Navasota,
Texas facilities. Although sales were somewhat soft in the third quarter,
sales volume came back strong toward the end of the fiscal year.
WELLS -- Our two primary target customer groups were concerned about the
possibility of an economic decline. Empty nesters/retirees were concerned
about the future of Medicare, taxes and other factors that affect their
fixed incomes. And, blue collar workers worried about potential layoffs.
This uncertainty about the economy resulted in a shift in customer
preferences from our higher priced products to lower priced ones in the
second half of the year. Since we concentrate primarily on the high end of
the market, we had to make some product adjustments and introduce new
products to accommodate that shift. We think the shift in consumer
preferences is temporary, and will shift back once the economy shows signs
of strength. I think many people postponed their buying decisions because
of rising interest rates, which slow site-built housing resales.
[PICTURE WALTER WELLS, PRESIDENT AND CHIEF EXECUTIVE OFFICER]
5
<PAGE>
Q: WHAT TYPE OF FINANCING IS AVAILABLE FOR MANUFACTURED HOUSING?
[PICTURE FRANCIS M. KENNARD, SENIOR VICE PRESIDENT--PRODUCT GROUP]
A: KENNARD -- Financing for manufactured housing is the most available,
flexible and diverse that it has been in many years. There are more lenders
making land home financing available than ever before in the industry's
history. Land home financing gives the lender the additional security of
land, like a conventional mortgage, thereby increasing its attractiveness
to lenders.
Q: WHAT'S YOUR READ ON CONSUMER CONFIDENCE?
[JOHN P. GUEQUIERRE, PRESIDENT -- MANUFACTURED HOUSING]
A: GUEQUIERRE -- We stay abreast of consumer perceptions through our sales
zone managers who talk frequently with dealers and builders. I think it's
more difficult than ever to draw national generalizations about consumer
confidence. Instead, consumer trends are becoming much more of a local
issue and we have to move with those local trends. We see wide variations
in consumer confidence even among areas in close proximity, such as 50-75
miles apart. The building business is very regional. What sells in
Cleveland may not sell in Chicago and Cincinnati. We have to keep track of
the nuances in each market and provide products geared to the preferences
of each area.
6
<PAGE>
Q: WHAT TRENDS ARE FUELING THE GROWTH OF MANUFACTURED HOUSING?
A: KENNARD -- I think the manufactured housing industry still has significant
potential for growth in the years ahead because of the expansion of the
empty nester population. This segment controls approximately 70% of the
country's wealth and is expected to grow by nine million persons by the
year 2010. The empty nester segment is a solid base for continued improved
demand because they have money and are going to spend it.
[PICTURE]
A: WELLS -- Over the last few years, there have been some major structural
changes in the manufactured housing industry that I think will protect us
from a massive downturn like the industry experienced in the mid '80s and
early '90s. One key advantage is increased consumer acceptance of our
products. Manufactured homes have evolved tremendously in the last few
years. Today, more than 48% of manufactured homes look like conventional
housing, versus 9% 25 years ago. We now provide the kind of product that
consumers really want: a house that looks like a house located on land
whose value appreciates. In addition, it has become more expensive to rent
than to buy a manufactured house due to the 1986 tax act. Manufactured
housing's decline in the Southwest market a few years ago was primarily a
result of the downturn in the oil industry, on which the manufactured
housing industry was heavily dependent. It's highly unlikely that we'll see
that kind of a single industry impact again because we now have a much
broader customer base.
Q: WHAT IS THE STATUS OF INDUSTRY CAPACITY?
[PICTURE WILLIAMS S. REASOR, PRESIDENT -- MODUALAR HOUSING]
A: GUEQUIERRE -- In the manufactured housing segment, the growth in capacity
has come mainly from existing players. The exception is the Great Lakes
area where there have been a few new companies entering the market. The top
ten manufactured home companies continue to gain a larger share of the
market.
REASOR -- In the modular business, there are always new players that try to
enter the market during up cycles. However, as the business matures, we are
seeing more consolidation and the emergence of larger regional and national
firms.
WELLS -- The capacity that our company has added recently is different than
the capacity that had been added in previous years. In the late 1970s,
manufacturers built new plants that were clones of existing plants. All of
our recent expansions have added capacity at existing plants to better
serve a broader customer base. Therefore, in a down cycle, we don't have to
close plants like in the last downturn; we only have to reduce operations.
7
<PAGE>
QUESTIONS AND ANSWERS (CONTINUED)
Q: WHAT ROLE DO ACQUISITIONS PLAY IN YOUR GROWTH STRATEGY?
WELLS -- Our primary focus over the next two to three years is to make our
current operations more efficient and profitable. We've increased capacity
in our current markets, and believe that improving our operations is the
best way to achieve our objective of enhancing shareholder value. However,
we've grown the company through acquisitions in the past. The Marlette
acquisition in 1989 added $90 million in sales and a significant
contribution to the bottom line. So, we continue to look for strategic
acquisition opportunities.
A: KENNARD -- The ideal acquisition would either provide us a strong, low risk
entree into a geographic market we don't now serve, or would provide us a
product capability that we don't presently have. Our primary market void is
in the Southeast, and that certainly is one of the major growing markets.
Any acquisition would have to be non-dilutive and enhance shareholder
value.
Q: HAVE THERE BEEN ANY SIGNIFICANT CHANGES IN THE WAY COMPANIES ARE
APPROACHING THE MARKET?
A: GUEQUIERRE -- In the last several years, the manufactured housing market
has expanded from two basic segments to three. In the old structure, one
segment consisted of low-priced commodity products that were produced in
high volume with relatively few amenities. The other segment, the part that
Schult has specialized in for many years, was the higher priced market with
more amenities, durable materials and some degree of customization. Today,
the high-end segment can be broken down into two segments. First, the
package segment uses a fair number of amenities and a fairly high quality
of materials, but is produced like a commodity in high volume. Then, there
is still a very viable customized product market, which Schult continues to
dominate. We see substantial opportunities in the package and customized
segments and are targeting both segments.
Q: IS THE CUSTOMER PROFILE FOR MODULAR SIGNIFICANTLY DIFFERENT FROM THE
MANUFACTURED SIDE?
A: REASOR -- The market for modular housing is more diverse. We compete with
higher end manufactured housing as well as with high-middle income site-
built houses. So that's a broader and more diverse market than manufactured
housing has. Modular serves the family market to a greater extent than
manufactured housing, which focuses more on the starter house and empty
nester/retiree markets. Most modular housing is on individual scattered
sites as opposed to communities like manufactured housing.
8
<PAGE>
Q: ARE YOU SEEING ANY CHANGES IN THE DEMOGRAPHICS OF YOUR CUSTOMERS?
[PICTURE JAMES A. JONES, VICE PRESIDENT OF OPERATIONS -- MODULAR HOUSING]
A: KENNARD -- A significant portion of our multi-sectional homes on private
land are sold to middle income families who could afford a site-built
house, but instead chose a manufactured home to get more value for the
money. I think their expectations are a lot higher than the manufactured
home buyers who bought just because that was all they could afford. This
customer group has a much higher expectation for the quality, features and
durability of manufactured homes. We are penetrating the middle income
market more because we are building a product that addresses their needs
more like a traditional house.
JONES -- On the modular side of the business, we've just begun to
participate in the rebuilding of urban America, which may offer us some
significant potential in the years ahead. We recently completed a small
housing project in Cincinnati on an interest credit to a non-profit
organization. I think the inner city is an area that modular housing can
capitalize on because we can very quickly put modular housing into areas
that may have a shortage of tradespeople and access to quick building
methods.
[PICTURE]
Q: WHAT IS YOUR ANALYSIS OF YOUR MARKETS BY GEOGRAPHIC AREA, STARTING WITH THE
NORTHEAST?
A: GUEQUIERRE -- In general, manufactured housing sales have been rising in
the Northeast, particularly in high tech areas such as Western Pennsylvania
and New England. Our Lewistown, Pennsylvania plant produces two of our
product brands, Schult and Marlette. In fiscal 1995, we increased
production at our Milton, Pennsylvania plant to capitalize on higher demand
for our high-end manufactured homes.
REASOR -- The Northeast is the center of modular manufacturing in the
country. There's probably higher market penetration by modular in that area
than anywhere else in the country. However, the Northeast remains a very
competitive market. There's a lot of open capacity and many companies are
fighting for market share. It's still a difficult market, but I think it's
improving slowly but surely. We improved our market share in the modular
business in fiscal 1995 due to our improved, higher-quality product and
enhanced service.
9
<PAGE>
QUESTIONS AND ANSWERS (CONTINUED)
Q: WHAT ABOUT THE SOUTHEAST REGION?
A: KENNARD -- Although we do not currently have a presence in the Southeast,
there is substantial growth opportunity in this market. Except Florida, the
primary market in the Southeast is at the lower end of the manufactured
housing market and very price sensitive. In Florida, the primary market
there is the empty nester, high-end manufactured housing. Since the
distributor base is fairly mature and stable in the Southeast, perhaps it
would be most appropriate to expand to this area through the acquisition of
a local company with a solid reputation.
Q: WHAT'S THE MARKET OUTLOOK IN THE MIDWEST?
[PICTURE ERVIN L. BONTRAGER, EXECUTIVE VICE PRESIDENT -- MANUFACTURED HOUSING]
A: BONTRAGER -- On the manufactured housing side, we have four plants
servicing the Midwest, all of which have been expanded in recent years.
Although we're lagging our original projections on the development of the
market for our newest Indiana plant, the other three divisions are
operating at capacity, and we expect that should continue at least for the
near term.
REASOR -- In the modular business, the Midwest represents good future
opportunity. Modular continues to gain acceptance and market share as an
alternative to site-built housing.
Q: HOW WOULD YOU ASSESS THE TEXAS MARKET?
A: KENNARD -- Of all our markets, I think Texas provides the most substantial
growth potential because of the abundance of available land there and the
diversification of the Texas economy over the last five years. Although we
experienced operational problems at our Navasota, Texas facility last year,
the Texas market is still very strong. Within the last several months we've
done some product positioning and introduced new products to take advantage
of the increased demand for lower-priced housing in Texas. Our new capacity
at Navasota includes two separate assembly lines, allowing us to produce a
lower priced, high volume product on one line without interfering with our
traditional product manufacturing on another line.
10
<PAGE>
Q: WHAT ARE THE OPPORTUNITIES IN THE NORTHWEST?
A: BONTRAGER -- Montana has been a big growth opportunity for us. We have two
plants serving Montana, the Minnesota plant and the Hermiston, Oregon
plant. The Buckeye, Arizona and Hermiston divisions serve Nevada and Utah,
markets that have been growing steadily. Manufactured housing is benefiting
from the recent migration of middle class people from California to other
western states, especially Colorado, Arizona, Oregon and Washington. The
migration scenario has been very significant for us because the people
leaving California tend to find manufactured housing very acceptable and
they tend to be most interested in our highest end, most customized, higher
margin products.
Q: WHAT ARE THE BENEFITS OF THE COMPANY'S RECENT RESTRUCTURING?
A: WELLS -- We created two distinct operating units, one for manufactured
housing and one for modular housing. The new structure will enable us to
more effectively meet our long-term goals in improving the profitability of
the company. The restructuring is essentially complete, and we are
beginning to see results. A major benefit of the reorganization is the
improved product development process, which will better utilize our product
design and marketing efficiency. I'm personally very excited and optimistic
about what it appears we will be able to do with this refocusing, enabling
us to better coordinate the needs of the market with our operational
capabilities.
[PICTURE]
Q: WHAT IS YOUR PLAN FOR STREAMLINING YOUR PRODUCT LINE?
A: BONTRAGER -- At five divisions, we have reduced the number of floor plans
by 30-35%. We believe these reductions will strengthen our position in the
market in several ways. We are analyzing, modifying and strengthening the
floor plans that we are keeping. That will improve our position in the
marketplace with those models that we continue to sell.
GUEQUIERRE -- On the operations side, having fewer homes built more often
will increase production efficiency and enhance product quality. We are
reallocating our design, product engineering and process engineering
resources away from developing a large amount of new products. Instead, we
are refining the best products we have and being much more selective about
the new products. We expect to complete the product repositioning at all
divisions in fiscal 1996.
11
<PAGE>
QUESTIONS AND ANSWERS (CONTINUED)
Q: WHAT ARE YOUR KEY INITIATIVES FOR FISCAL 1996?
A: WELLS -- We started several operating initiatives in fiscal 1995 directed
at improving product quality and productivity while reducing warranty costs
and in-plant accident rates. The results of these initiatives will be to
improve the company's bottom line in fiscal 1996 and beyond. Late in fiscal
1994, it became obvious to us that our rapid growth over the previous five
years (increasing our capacity by more than 50%) had outstripped the
ability of our internal systems to function at an acceptable level of net
income. We have attacked this weakness, and are confident of the results we
can achieve. Briefly, the initiatives are: manufacturing process planning
(critical path method), production supervision and team leader training,
improved and more focused shop-floor information systems, standardization
of product components, enhancement of our participative management program
to a Total Quality Management (TQM) system based on the principles of
Joseph Juran, and installation of a total quality customer service system.
The payoff from these initiatives was already evident in the fourth quarter
of fiscal 1995.
JONES -- We've had exceptional increases in productivity at both modular
plants. Also, we've seen significant increases in the number of repeat
sales per dealer and increased penetration in our building base. We believe
these achievements are a direct result of improvements in productivity,
quality and customer-responsiveness.
Q: COULD YOU DESCRIBE YOUR TRAINING PROGRAM FOR SALES REPRESENTATIVES AND
DEALERS?
A: BONTRAGER -- We recently completed a two-day training session for all of
our new field sales representatives. The training program focuses on
product marketing and sales skills. We plan to conduct another training
session this fall in which sales managers will learn to train sales reps in
the field. The sales reps will in turn train retailers in areas such as
inventory control and product positioning, so retailers can more
effectively sell our homes to potential customers and increase the
retailers' profitability.
Q: HAVE THESE INITIATIVES LED TO A DECREASE IN WARRANTY COSTS?
A: WELLS -- We have not yet seen an actual decline in warranty costs. Our
first objective was to reduce the number of product defects going into the
field. That has been accomplished. Our current goal is to reduce the size
of service backlogs, and we have started our initiatives to achieve that
goal. As a result, we expect to see favorable year-to-year comparisons in
warranty expenses beginning in the second half of fiscal 1996.
12
<PAGE>
Q: WHAT PROGRESS HAS BEEN MADE AT YOUR NAVASOTA PLANT?
A: GUEQUIERRE -- We are making tremendous progress on the problems Navasota
had after the capacity expansion last year. Led by a new management team,
the plant has increased productivity and output and reduced service
backlogs and employee accidents, thus decreasing worker's compensation
costs. We have already reached record productivity levels at the division.
Now, we are poised to move forward to new highs in productivity. We are
fine-tuning our product offerings to take advantage of market developments,
such as increased demand for lower-priced products. Although the service
backlog remains high, we have implemented new service operating techniques
that were effective in our Oregon plant. In the second half of fiscal '96,
we should start seeing some favorable year to year comparisons on those
costs.
Q: CAN YOU PROVIDE AN UPDATE ON THE ETNA GREEN PLANT?
A: GUEQUIERRE -- We've made significant operational improvements at Etna
Green. Now, our main priority there is on the product and the marketing
side. We need to become more competitive in the evolving dry wall product
market to provide sufficient demand to make Etna Green profitable.
Q: WHAT'S YOUR OUTLOOK FOR THE MODULAR BUSINESS?
A: Reasor -- Our goals for modular in fiscal 1996 are to increase efficiency
and productivity and to make the operations more profitable. We are
focusing on improving our products and addressing service needs and
customer needs. Modular has come a long way, but we have set goals to
improve further.
Q: WHAT IS THE STATUS OF SCHULT'S SHARE REPURCHASE PROGRAM?
[PICTURE FREDRICK A. GREENAWALT, VICE PRESIDENT -- FINANCE]
A: GREENAWALT -- During the third quarter of fiscal 1995, we announced that
the company plans to repurchase up to 350,000 shares of its common stock.
At the end of fiscal 1995, 45,000 shares had been repurchased. We will
continue to repurchase shares when the opportunity presents itself.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
GENERAL
The Company's business is cyclical and seasonal and is influenced by many of the
same national and regional economic and demographic factors that affect the
United States housing market generally. During fiscal 1995, the Company
benefited from continued strength in the manufactured housing industry which
allowed us to produce record sales of $287.9 million for fiscal 1995, a 10.9%
increase from fiscal 1994. The driving force behind that increase was demand
from the fastest growing segment of the population, retirees and empty nesters.
The "baby boomers" born during the years following World War II are beginning to
reach 50 years of age, a time when people make major housing decisions. In
addition, multi-unit housing starts remained weak during 1995. Limited housing
options and our ability to offer superior quality and greater locational
flexibility helped maintain strong demand throughout 1995 and will continue to
do so in 1996.
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL SUMMARY
FISCAL 1995 VS. FISCAL 1994 FISCAL 1994 VS. FISCAL 1993
---------------------------------------------- -------------------------------------------------
$Amt %Sales $Chng %Chng $Amt %Sales $Chng %Chng
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $287.9 100.0% $28.3 10.9% $259.6 100.0% $51.8 24.9%
-----------------------------------------------------------------------------------------------------------------------------------
Cost of sales 234.0 81.3 24.7 11.8 209.3 80.6 40.9 24.3
-----------------------------------------------------------------------------------------------------------------------------------
Gross profit 53.9 18.7 3.7 7.3 50.3 19.4 10.9 27.8
-----------------------------------------------------------------------------------------------------------------------------------
SG&A 46.2 16.0 6.2 15.5 40.1 15.4 8.2 25.7
-----------------------------------------------------------------------------------------------------------------------------------
Operating income 7.7 2.7 (2.5) (24.8) 10.2 4.0 2.8 36.7
-----------------------------------------------------------------------------------------------------------------------------------
Pretax income 7.6 2.6 (2.8) (26.9) 10.3 4.0 2.8 36.9
-----------------------------------------------------------------------------------------------------------------------------------
Total taxes 3.2 1.1 (1.1) (25.9) 4.3 1.7 1.1 32.8
-----------------------------------------------------------------------------------------------------------------------------------
Net income 4.4 1.5 (1.7) (27.6) 6.0 2.3 1.7 40.1
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
RESULTS OF OPERATIONS AND THREE-YEAR REVIEW
Net sales for fiscal 1995 were the highest in the Company's history. Net sales
for fiscal 1995 were $287.9 million, which represented an increase of $28.3
million (10.9%) over fiscal 1994. This increase was due to two factors: 1) an
increase in total sections sold during fiscal 1995 to 13,973 sections, a 902
section (6.9%) increase, which contributed $17.9 million of the increase; and 2)
a 3.7% increase in the average selling price per section, which added $10.4
million to net sales. Fiscal 1994 net sales increased by $51.8 million (24.9%)
over fiscal 1993. This increase in sales was attributable to a 13.6% increase in
total sections sold and a 10.0% increase in the average selling price per
section. Modular home sales accounted for $34.1 million (11.8%) of fiscal 1995
net sales; this compares to $26.4 million (10.2%) of fiscal 1994 net sales and
$19.6 million (9.4%) of fiscal 1993 sales.
[GRAPH FLOOR SECTIONS]
The trend toward increased sales of multi-section homes continued, with these
units representing 65.3% of the homes sold during fiscal 1995. This compares to
64.1% of the homes sold during fiscal 1994 and to 59.7% in fiscal 1993. The
increases in multi-section homes are due to higher regional sales levels from
all three of our facilities which only produce multi-section homes. The Company
is uncertain whether the trend of multi-section homes will continue as it is
subject to regional preferences and economic conditions.
Cost of goods sold was $234.0 million in fiscal 1995, an 11.8% increase over
fiscal 1994. Cost of goods sold was $209.3 million in fiscal 1994, a 24.3%
increase over fiscal 1993. Gross profit as a percent of net sales decreased to
18.7% in fiscal 1995, compared to 19.4% in fiscal 1994 and 18.9% in fiscal 1993.
The decrease in gross profit percent of sales from 1994 to 1995 was directly
attributable to
14
<PAGE>
increased labor costs. The two main reasons for this increase in labor costs
were: 1) costs related to the additional capacity added in January 1994 to the
Navasota, Texas facility requiring the addition of 150 new employees, the
largest group of new employees ever hired at one time; and 2) labor costs
related to the new facility, in Etna Green, Indiana, added in March 1994.
Selling, general and administrative expenses for fiscal 1995 were $46.2 million,
as compared to $40.1 million in 1994, a 15.5% increase. Selling, general and
administrative expenses represented 16.0% of net sales in fiscal 1995, compared
to 15.4% in fiscal 1994 and 15.3% in fiscal 1993. The fiscal 1995 increase in
selling, general and administrative expenses was directly related to increased
warranty costs. The Company made a decision early in the year to decrease its
warranty lead times.
Operating income decreased $2.5 million to $7.7 million in fiscal 1995, compared
to $10.2 million in fiscal 1994 and $7.5 million in fiscal 1993. Operating
income as a percentage of net sales was 2.7% for fiscal 1995 compared to 4.0% in
fiscal 1994 and 3.6% in fiscal 1993.
Pre-tax income for fiscal 1995 was $7.6 million compared to $10.3 million in
fiscal 1994 and $7.6 million in fiscal 1993. Net income for fiscal 1995 was $4.4
million or $1.16 per common share, compared to $6.0 million or $1.60 per common
share for fiscal 1994, and $4.3 million or $1.16 per common share for fiscal
1993.
[GRAPH SHAREHOLDERS' EQUITY]
BALANCE SHEET REVIEW
At July 1, 1995, current assets increased to $38.4 million from $32.7 million a
year earlier, a 17.3% increase. This $5.7 million increase in current assets was
primarily due to increases in cash, inventories and deferred income taxes,
related to our sales growth. Current liabilities were up $2.8 million (8.2%) to
$36.7 million from $33.9 million a year earlier, primarily due to a $1.7 million
increase in accrued liabilities which is related to our sales growth.
Long-term debt at July 1, 1995 was $3.7 million, up $1.3 million from the prior
year, as a result of borrowings under the Company's line of credit.
Fiscal 1995 capital expenditures, net of retirements, totaled $5.1 million
compared to $9.8 million in fiscal 1994 and $7.0 million in fiscal 1993. Fiscal
1995 capital expenditures mainly related to our continued equipment replacement
and improvement program. Fiscal 1994 added a third manufacturing plant in
Indiana and expansions were made to our Navasota, Texas facility and our
Plainville, Kansas facility. Fiscal 1993 capital expenditures related to
expansions in three of our facilities in Hermiston, Oregon; Navasota, Texas and
Redwood Falls, Minnesota.
Shareholders' equity totaled $32.0 million, or $8.53 per common share, at the
end of fiscal 1995 compared to $28.4 million, or $7.53 per common share, at the
end of fiscal 1994.
OUTLOOK AND RISK FACTORS
The outlook for Schult Homes remains very positive. It is evident from industry
statistics that the upturn in the manufactured housing industry that began more
than three years ago has maintained its momentum. Industry shipments during 1994
were up by 20% following a 21% increase in 1993 and a 23% increase in 1992,
according to the Manufactured Housing Institute. The Manufactured Housing
Institute also reported that industry shipments during the first six months of
1995 were up by 12%. Management expects this trend of increased shipments to
continue at least through fiscal 1996.
To meet customer demand, we began a three-year major expansion program in 1993
which was completed in fiscal 1995. This $12 million investment added
approximately $75 million of production capability to reach sales capacity of
$340 million, which is more than twice the capacity existing in 1989 and more
than 18% greater than the $287.9 million sales level achieved in fiscal 1995.
Management's outlook assumes only modest
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
changes in interest rates and continued growth of the U.S. economy. Although
dealers' orders can be canceled before production begins without penalty, and
unfilled orders are not necessarily an indication of future business, the
Company's backlog of orders for manufactured homes was approximately $33.8
million as of August 12, 1995, compared to approximately $49.6 million, a 31.9%
decrease from one year earlier. This backlog represents approximately 6 weeks
production. A year ago backlogs were at an unacceptably high level, which lead
to long lead times.
In the long term, industry growth will be affected by, among other things, the
availability and cost of financing, the relative cost of manufactured housing
versus other forms of housing, including rental housing, general economic trends
and changes in demographics including new household formations and the number of
Americans on fixed incomes. While the Company believes that long-term demand for
affordable manufactured housing will continue to grow due to favorable
demographic trends and financing factors, changes in regional markets, and the
U.S. economy as a whole, will continue to affect overall housing industry
cycles.
Fiscal 1995 results were negatively impacted by increased warranty costs. The
combination of increased production of all-drywall units and more new employees
last year caused some reduction in production quality and a corresponding
increase in warranty costs. The backlog of warranty work reached
a high level during fiscal 1995. The Company made it a priority to reduce that
level. Progress was made during fiscal 1995 to reduce this level. We fully
expect our efforts to cause warranty costs to decline in the second half of
fiscal 1996.
[GRAPH PROPERTY, PLANT EQUIPMENT]
LIQUIDITY AND CAPITAL RESOURCES
As of July 1, 1995, the Company had working capital of $1.8 million as compared
to a negative $1.1 million and a positive $0.8 million at July 2, 1994 and June
26, 1993, respectively. Capital expenditures, net of retirements, amounted to
$5.1 million in fiscal 1995. The Company has a bank commitment for an unsecured
credit facility which provides for both revolving and term loans at the
Company's option. The facility permits borrowings of up to an aggregate of the
lower of $10.0 million or a borrowing base computed by applying certain factors
to the value of the Company's receivables and inventories. As of July 1, 1995,
the Company had net borrowings of $2.3 million under the bank commitment.
Management believes that cash flow from operations, combined with funds under
its unsecured credit facility, will be adequate to support its general
operations, capital expenditure needs, required debt amortization and the
payment of a regular quarterly dividend.
Management expects to continue to make regular quarterly dividend payments.
However, the payment of future cash dividends will depend upon the Company's
financial condition, capital requirements, results of operations and other
factors deemed relevant by the Company.
Schult's board of directors has approved a fairly modest preliminary fiscal 1996
capital budget of $4.5 million, comprised of $4.0 million in normal equipment
replacements and improvements, and $545,000 for a vehicle replacement program,
much of which would be leased. This compares with anticipated depreciation of
approximately $3.5 million.
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
SCHULT HOMES CORPORATION AND SUBSIDIARIES
(JULY 1, 1995 AND JULY 2, 1994)
<TABLE>
<CAPTION>
ASSETS 1995 1994
----------- -----------
<S> <C> <C>
Cash $ 4,566,000 $ 1,774,000
Accounts receivable, less allowance for doubtful accounts of
$67,000 and $64,000 in 1995 and 1994,respectively 14,154,000 13,717,000
Inventories 15,095,000 13,697,000
Deferred income taxes 4,603,000 3,553,000
----------- -----------
Total current assets 38,418,000 32,741,000
Property, plant and equipment 34,235,000 32,204,000
Other assets 2,680,000 2,433,000
----------- -----------
Total assets $75,333,000 $67,378,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable $14,664,000 $13,613,000
Accrued liabilities 20,977,000 19,257,000
Current portion of long-term debt 1,000,000 994,000
----------- -----------
Total current liabilities 36,641,000 33,864,000
Deferred income taxes 3,025,000 2,766,000
Long-term debt 3,695,000 2,390,000
----------- -----------
Total liabilities 43,361,000 39,020,000
Shareholders' equity:
Common shares, no par value 10,000,000 shares
authorized, 3,746,032 and 3,767,616 shares issued
and outstanding in 1995 and 1994, respectively 7,884,000 8,042,000
Retained earnings 24,088,000 20,316,000
----------- -----------
Total shareholders' equity 31,972,000 28,358,000
----------- -----------
Contingencies
Total liabilities and shareholders' equity $75,333,000 $67,378,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
SCHULT HOMES CORPORATION AND SUBSIDIARIES
(YEARS ENDED JULY 1, 1995, JULY 2, 1994 AND JUNE 26, 1993)
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $287,937,000 $259,616,000 $207,822,000
Cost of goods sold 233,990,000 209,332,000 168,471,000
------------ ------------ ------------
Gross profit 53,947,000 50,284,000 39,351,000
Selling, general and administrative expenses 46,241,000 40,033,000 31,854,000
------------ ------------ ------------
Operating income 7,706,000 10,251,000 7,497,000
Interest income 12,000 69,000 168,000
Other income 58,000 53,000 20,000
Interest expense (195,000) -- (109,000)
------------ ------------ ------------
Income before income taxes 7,581,000 10,373,000 7,576,000
Income taxes:
Federal 2,358,000 3,187,000 2,360,000
State 848,000 1,140,000 899,000
------------ ------------ ------------
3,206,000 4,327,000 3,259,000
------------ ------------ ------------
Net income $ 4,375,000 $ 6,046,000 $ 4,317,000
------------ ------------ ------------
------------ ------------ ------------
Net earnings per common share $ 1.16 $ 1.60 $ 1.16
------------ ------------ ------------
------------ ------------ ------------
Average shares outstanding 3,770,079 3,768,654 3,712,060
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
SCHULT HOMES CORPORATION AND SUBSIDIARIES
(YEARS ENDED JULY 1, 1995, JULY 2, 1994 AND JUNE 26, 1993)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,375,000 $ 6,046,000 $ 4,317,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of plant and equipment 3,037,000 2,626,000 1,998,000
Change in deferred income taxes (791,000) (761,000) (874,000)
Changes in assets and liabilities:
(Increase) in accounts receivable (437,000) (2,174,000) (840,000)
(Increase) in inventories (1,398,000) (2,447,000) (2,133,000)
(Increase) decrease in other assets (247,000) 199,000 (577,000)
Increase in trade accounts payable 1,051,000 1,409,000 1,200,000
Increase in accrued liabilities 1,720,000 4,069,000 3,448,000
----------- ----------- -----------
Total adjustments 2,935,000 2,921,000 2,222,000
----------- ----------- -----------
Net cash provided by operating activities 7,310,000 8,967,000 6,539,000
Cash flows from investing activities:
Capital expenditures, net of retirements (5,068,000) (9,791,000) (6,984,000)
----------- ----------- -----------
Net cash used in investing activities (5,068,000) (9,791,000) (6,984,000)
Cash flows from financing activities:
Net borrowings under line of credit 2,300,000 -- --
Proceeds from issuance of long-term debt -- 100,000 81,000
Repayment of long-term debt (989,000) (724,000) (648,000)
Dividends declared to common shareholders (603,000) (526,000) (338,000)
Payment for repurchased shares (485,000) -- --
Proceeds from issuance of common shares 327,000 130,000 2,768,000
----------- ----------- -----------
Net cash provided by (used in) financing activities 550,000 (1,020,000) 1,863,000
Net increase (decrease) in cash 2,792,000 (1,844,000) 1,418,000
Cash at beginning of year 1,774,000 3,618,000 2,200,000
----------- ----------- -----------
Cash at end of year $ 4,566,000 $ 1,774,000 $ 3,618,000
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 138,000 $ 20,000 $ 118,000
Income taxes (net of refunds) 4,468,000 5,109,000 3,670,000
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SCHULT HOMES CORPORATION AND SUBSIDIARIES
(YEARS ENDED JULY 1, 1995, JULY 2, 1994 AND JUNE 26, 1993)
<TABLE>
<CAPTION>
NUMBER OF RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, June 27, 1992 3,452,010 $5,144,000 $10,817,000 $15,961,000
Net proceeds from issuance
of common shares 306,665 2,768,000 -- 2,768,000
Cash dividends declared
($.09 per share) -- -- (338,000) (338,000)
Net income -- -- 4,317,000 4,317,000
--------- ---------- ------------ -----------
Balance, June 26, 1993 3,758,675 $7,912,000 $14,796,000 $22,708,000
Net proceeds from issuance
of common shares 8,941 130,000 -- 130,000
Cash dividends declared
($.14 per share) -- -- (526,000) (526,000)
Net income -- -- 6,046,000 6,046,000
--------- ---------- ------------ -----------
Balance, July 2, 1994 3,767,616 $8,042,000 $20,316,000 $28,358,000
Net proceeds from issuance
of common shares 23,416 327,000 -- 327,000
Payment for repurchased shares (45,000) (485,000) -- (485,000)
Cash dividends declared
($.16 per share) -- -- (603,000) (603,000)
Net income -- -- 4,375,000 4,375,000
--------- ---------- ------------ -----------
Balance, July 1, 1995 3,746,032 $7,884,000 $24,088,000 $31,972,000
--------- ---------- ------------ -----------
--------- ---------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHULT HOMES CORPORATION AND SUBSIDIARIES
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Schult Homes Corporation (the Company) is engaged in the production and sale of
manufactured and modular homes.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of Schult
Homes Corporation and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
(c) INVENTORIES
All components of inventory are valued at cost which is not in excess of net
realizable value. The cost of inventory is calculated using the first-in, first-
out (FIFO) method.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation of plant and
equipment is provided for over the estimated useful lives of the respective
assets on the straight-line basis for financial reporting purposes.
(e) 401(k) RETIREMENT PLAN
The Company has a defined contribution retirement plan for all eligible
employees. Company contributions are based on employee earnings and are funded
as accrued. Amounts contributed to the plan and charged to expense were
$1,181,000, $828,000 and $836,000 in fiscal 1995, 1994 and 1993, respectively.
Eligible employees can also make pre-tax 401(k) contributions to the plan.
(f) WARRANTY OBLIGATIONS
Estimated warranty obligations are provided at the time of sale.
(g) REVENUE RECOGNITION
Revenue is recognized when title is transferred upon shipment.
(h) NET EARNINGS PER COMMON SHARE
Net earnings per common share is calculated by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding during the year.
(i) INCOME TAXES
The Company accounts for income taxes under the asset and liability method of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (Statement 109). Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(j) INTEREST COSTS
The Company capitalizes interest incurred during periods of construction as a
component of the cost of the constructed asset. Interest costs capitalized
during fiscal years 1995, 1994 and 1993 amount to $130,000, $341,000 and
$152,000, respectively.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) INVENTORIES
The components of inventories at July 1, 1995 and July 2, 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Raw materials $11,165,000 $10,180,000
Work in process 2,352,000 2,120,000
Finished goods 1,578,000 1,397,000
----------- -----------
Total $15,095,000 $13,697,000
----------- -----------
----------- -----------
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at July 1, 1995 and July 2, 1994 are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Land $ 1,959,000 $ 1,959,000
Land improvements 3,687,000 3,155,000
Buildings 27,461,000 24,675,000
Machinery and equipment 15,293,000 13,016,000
Trucks and automobiles 2,888,000 2,303,000
Construction in process 130,000 1,244,000
----------- -----------
51,418,000 46,352,000
Less accumulated
depreciation 17,183,000 14,148,000
----------- -----------
$34,235,000 $32,204,000
----------- -----------
----------- -----------
</TABLE>
(4) ACCRUED LIABILITIES
Accrued liabilities at July 1, 1995 and July 2, 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Dealer incentives $ 5,241,000 $ 4,742,000
Accrued warranty 4,124,000 3,729,000
Accrued payroll 5,187,000 4,717,000
Workers' compensation 2,655,000 1,517,000
Accrued income taxes 792,000 1,389,000
Other 2,978,000 3,163,000
----------- -----------
$20,977,000 $19,257,000
----------- -----------
----------- -----------
</TABLE>
(5) LONG-TERM DEBT
Long-term debt at July 1, 1995 and July 2, 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Credit facility debt $ 2,300,000 $ --
Construction debt 943,000 1,061,000
Marlette mortgage debt 1,452,000 2,323,000
----------- -----------
4,695,000 3,384,000
Less current portion of
long-term debt 1,000,000 994,000
----------- -----------
$ 3,695,000 $ 2,390,000
----------- -----------
----------- -----------
</TABLE>
Aggregate principal payments on long-term debt are due as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AMOUNT
----------------- -----------
<S> <C>
1997 $ 3,009,000
1998 131,000
1999 119,000
2000 114,000
2001 116,000
Thereafter 206,000
-----------
$ 3,695,000
-----------
-----------
</TABLE>
The Company has a bank commitment for an unsecured credit facility expiring
January 1, 1997 which provides for both revolving and term loans at the
Company's option. The facility permits borrowings of up to an aggregate of the
lower of $10,000,000 or a borrowing base computed by applying certain factors to
the value of the Company's receivables and inventories. Revolving loans bear
interest at the bank's prime lending rate or, at the Company's option, certain
alternative rates. Interest on term loans is fixed at the time of borrowing at
the bank's posted rates then in effect. The Company pays a fee of 3/8 of one
percent per annum on the unused portion of the commitment. The commitment also
provides for the issuance of up to $4,000,000 in standby letters of credit for
the Company's account.
The Company arranged secured financing for the construction of the production
facility in Milton, Pennsylvania, approximately half of which is through
governmental authorities at interest rates of 3%. These loans are due in
monthly payments of principal plus interest through 2002. The majority of the
remaining construction debt bears interest at prime plus 1% and is due in
monthly payments of principal plus interest through 2002.
The Company's mortgage debt was incurred in connection with the purchase of
Marlette Homes, Inc. in February 1989. The debt is unsecured and bears interest
at the bank's prime lending rate. Principal is amortized on a four-year
schedule, with the unpaid principal due in full in February 1998. The weighted
average interest rates on non-construction debt at July 1, 1995 and July 2, 1994
were 8.34% and 6.51%, respectively.
22
<PAGE>
(6) INCOME TAXES
Income tax expense attributable to earnings for the years ended July 1, 1995,
July 2, 1994 and June 26, 1993 consists of:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
FEDERAL:
Current $ 2,911,000 $ 3,777,000 $ 3,116,000
Deferred (553,000) (590,000) (756,000)
----------- ----------- -----------
Total Federal
income taxes 2,358,000 3,187,000 2,360,000
STATE:
Current 1,085,000 1,311,000 1,017,000
Deferred (237,000) (171,000) (118,000)
----------- ----------- -----------
Total state
income taxes 848,000 1,140,000 899,000
----------- ----------- -----------
Total income
taxes $ 3,206,000 $ 4,327,000 $ 3,259,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The significant components of deferred income tax expense (benefit) for the
years ended July 1, 1995, July 2, 1994, and June 26, 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Depreciation $ (194,000) $ (27,000) $ (154,000)
Accrued
expenses 1,094,000 670,000 (512,000)
Inventory 12,000 154,000 (215,000)
Other, net (122,000) (36,000) 8,000
----------- ----------- -----------
$ 790,000 $ 761,000 $ (873,000)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The differences between the U.S. Federal statutory tax rate of 34% and the
effective tax rates of 42.3%, 41.7%, and 43.0% for the years ended July 1, 1995,
July 2, 1994, and June 26, 1993, respectively result from the following:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
U.S. Federal
statutory tax rate 34.0% 34.0% 34.0%
Increase in taxes
resulting from:
State income taxes,
net of Federal
benefit 7.1 7.3 7.8
Other, net 1.2 0.4 1.2
----------- ----------- -----------
42.3% 41.7% 43.0%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at July 1, 1995 and
July 2, 1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $ 4,392,000 $ 3,200,000
Inventories 343,000 324,000
Allowance for doubtful
accounts 31,000 29,000
Other 46,000 68,000
------------ ------------
Total gross deferred
tax assets 4,812,000 3,621,000
Less: Valuation
allowance -- --
------------ ------------
Subtotal 4,812,000 3,621,000
------------ ------------
Deferred tax liabilities:
Property, plant and equipment,
principally due to differences
in depreciation (3,047,000) (2,791,000)
Other (187,000) (43,000)
------------ ------------
Total gross deferred
tax liabilities (3,234,000) (2,834,000)
------------ ------------
Net deferred tax asset $ 1,578,000 $ 787,000
------------ ------------
------------ ------------
</TABLE>
Management has determined, based on the Company's history of operating earnings
and its expectations for the future, that operating income of the Company will
more likely than not be sufficient to realize fully these deferred tax assets.
(7) REPURCHASE AGREEMENTS AND CREDIT RISK
As is customary in the manufactured housing industry, the Company is
contingently liable under the terms of repurchase agreements with financial
institutions providing inventory financing for dealers of the Company's homes.
Although the total contingent liability approximates $41.0 million at July 1,
1995, the risk of loss is spread over numerous dealers and financial
institutions and is further reduced by the resale value of any homes that may be
repurchased. Losses under these agreements have not been significant in the
past.
The Company operates manufacturing facilities in Indiana, Pennsylvania,
Minnesota, Texas, Oregon, Kansas and Arizona. Most of the Company's customers
are located close to its production facilities. No single customer accounted for
more than 5% of the
23
<PAGE>
Company's sales in fiscal 1995, 1994 or 1993, and no account receivable from any
customer exceeds 5% of total common shareholders' equity at July 1, 1995.
(8) CONTINGENCIES
There are a number of claims and pending legal proceedings against the Company
with respect to certain matters including product liability, warranties,
workers' compensation, and other matters arising in the ordinary conduct of the
business. The ultimate outcome of these claims and proceedings is not presently
determinable. But, in the opinion of management, either adequate provision for
anticipated costs has been made by insurance or accruals, or the ultimate cost
of resolving them will not materially affect the financial position or results
of operations of the Company.
(9) EMPLOYEE STOCK PLANS
The Company has an employee stock option plan whereby certain management
personnel are granted options to purchase common shares. As of July 1, 1995, an
aggregate of 75,000 common shares had been reserved for the plan and options to
purchase 24,125 and 22,507 common shares had been granted at exercise prices of
$.40 and $3.00 per share, respectively. Options to purchase 27,364 common shares
have been exercised and options to purchase 14,141 shares are no longer
exercisable. Therefore, the remaining 5,127 options (375 at an option price of
$.40 per share and 4,752 at an option price of $3.00 per share) are currently
exercisable and expire September 1996 and 1997.
The Company has an employee share purchase plan under which anyone who has been
a full-time employee for at least 1 year, may purchase certain amounts of common
shares at current market price. As of July 1, 1995, 100,000 common shares had
been reserved of which 1,929 shares and 1,309 shares were issued in fiscal 1995
and fiscal 1994, respectively.
Report of Independent Auditors
The Board of Directors and Shareholders
Schult Homes Corporation:
We have audited the accompanying consolidated balance sheets of Schult Homes
Corporation and Subsidiaries as of July 1, 1995 and July 2, 1994, and the
related consolidated statements of operations, cash flows and shareholders'
equity for each of the years in the three-year period ending July 1, 1995. These
consolidated financial statements are the responsibility of Schult Homes
Corporation management. Our responsibility is to express an opinion on these
consolidated 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 Schult Homes
Corporation and Subsidiaries as of July 1, 1995 and July 2, 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended July 1, 1995 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
August 4, 1995
<PAGE>
ANNUAL MEETING
Our annual meeting of shareholders will be held at 1:30 p.m. (EST) on Thursday,
October 19, 1995 at the Das Dutchmen Essenhaus, 240 U.S. 20 West, Middlebury,
Indiana.
TRANSFER AGENT AND REGISTER
Society National Bank
P.O. Box 6477, Cleveland, OH 44101-1477
10-K OFFER
Shareholders who wish to obtain a free copy of our Annual Report to the
Securities and Exchange Commission on Form 10-K may do so by writing to:
Frederick A. Greenawalt, Vice President of Finance, P.O. Box 550, 1800 S. Main
Street, Elkhart, IN 46515, (219) 294-3574.
QUARTERLY CALENDAR
Schult Homes operates on a fiscal year ending on the Saturday closest to June
30th. Quarterly results are announced within 30 days after the end of each
quarter and audited results are announced within 60 days after year end.
FISCAL 1996 QUARTER-END DATES
-------------------------------------------------------
1st Quarter September 30, 1995
-------------------------------------------------------
2nd Quarter December 30, 1995
-------------------------------------------------------
3rd Quarter March 30, 1996
-------------------------------------------------------
4th Quarter June 29, 1996
-------------------------------------------------------
DIVIDENDS
Schult Homes Corporation initiated dividends on its common shares in the first
quarter of fiscal 1993 and intends, circumstances permitting, to pay regular
quarterly dividends in the future. Quarterly dividends are normally paid in
August, November, February and May of each fiscal year. Dividend payments are
considered by the board of directors at their quarterly meetings and
declarations of dividends are announced through the news media at the time of
declaration.
STOCK MARKET INFORMATION
Schult Homes Corporation common shares are traded on the American Stock Exchange
under the symbol SHC. The chart below shows the range of our common share prices
for the past two years:
FISCAL 1995 HIGH CLOSING LOW CLOSING
1st Quarter 15-1/8 12-3/8
----------------------------------------------------------------------
2nd Quarter 14-1/4 10-5/8
----------------------------------------------------------------------
3rd Quarter 12-7/8 9-3/4
----------------------------------------------------------------------
4th Quarter 11-3/4 10
----------------------------------------------------------------------
FISCAL 1994 HIGH CLOSING LOW CLOSING
1st Quarter 15-1/2 11-1/2
----------------------------------------------------------------------
2nd Quarter 15-3/4 13-3/8
----------------------------------------------------------------------
3rd Quarter 17-7/8 14-3/4
----------------------------------------------------------------------
4th Quarter 15-3/8 13
----------------------------------------------------------------------
OFFICERS AND DIRECTORS
WALTER O. WELLS
Co-Founder of Schult Homes
Director since 1992
WALTER E. WELLS
President -- Chief Executive Officer Director since 1984
FRANCIS M. KENNARD
Senior Vice President -- Product Group
Director since 1984
JOHN P. GUEQUIERRE
President -- Manufactured Housing
Director since 1984
ERVIN L. BONTRAGER
Executive Vice President -- Manufactured Housing
WILLIAM S. REASOR
President -- Modular Housing
JAMES A. JONES
Vice President -- Operations-Modular Housing
FREDERICK A. GREENAWALT
Vice President -- Finance
TODD GOODWIN
Director since 1984
General Partner of Gibbons,
Goodwin van Amerongen, a private
investment banking firm, New York
ROBERT J. DEPUTY
Director since 1989
President of Godfrey Conveyor
Company, Inc., a manufacturer of
recreational boats, Elkhart, Indiana
DONALD R. PLETCHER
Director since 1989
Chairman of the Board of Damon
Corporation, a manufacturer of
recreational vehicles, Elkhart, Indiana
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
303 East Wacker Drive
Chicago, Illinois 60601
GENERAL COUNSEL
Baker & Daniels
301 S. Main St. Suite 307
Elkhart, IN 46516
SCHULT HOMES CORPORATION [SCHULT LOGO]
P.O. BOX 151
221 U.S. HIGHWAY 20 W.
MIDDLEBURY, IN 46540
SUMMARY OF QUARTERLY RESULTS (UNAUDITED-- $000S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTERS FIRST SECOND THIRD FOURTH
------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
------------------------------------------------------------
Net sales $71,908 $70,526 $69,707 $75,796
------------------------------------------------------------
Gross profit 13,324 12,743 12,518 15,362
------------------------------------------------------------
Net income 1,515 747 387 1,726
------------------------------------------------------------
Net earnings per
------------------------------------------------------------
common share .40 .20 .10 .46
------------------------------------------------------------
<CAPTION>
QUARTERS FIRST SECOND THIRD FOURTH
------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
------------------------------------------------------------
Net sales $66,130 $60,333 $59,674 $73,479
------------------------------------------------------------
Gross profit 13,393 11,068 10,910 14,913
------------------------------------------------------------
Net income 1,840 1,128 646 2,432
------------------------------------------------------------
Net earnings per
------------------------------------------------------------
common share .49 .30 .17 .64
------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-01-1995
<PERIOD-START> JUL-03-1994
<PERIOD-END> JUL-01-1995
<CASH> 4,566
<SECURITIES> 0
<RECEIVABLES> 14,154
<ALLOWANCES> 0
<INVENTORY> 15,095
<CURRENT-ASSETS> 38,418
<PP&E> 34,235
<DEPRECIATION> 0
<TOTAL-ASSETS> 75,333
<CURRENT-LIABILITIES> 36,641
<BONDS> 0
<COMMON> 7,884
0
0
<OTHER-SE> 24,088
<TOTAL-LIABILITY-AND-EQUITY> 75,333
<SALES> 287,937
<TOTAL-REVENUES> 287,937
<CGS> 233,990
<TOTAL-COSTS> 233,990
<OTHER-EXPENSES> 46,241
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195
<INCOME-PRETAX> 7,581
<INCOME-TAX> 3,206
<INCOME-CONTINUING> 4,375
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,375
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
</TABLE>
<PAGE>
SCHULT HOMES CORPORATION
1995 SHARE INCENTIVE PLAN
SECTION 1
GENERAL
1.1 EFFECTIVE DATE AND PURPOSE. Schult Homes Corporation, an Indiana
corporation ("Schult Homes"), has established the SCHULT HOMES CORPORATION
1995 SHARE INCENTIVE PLAN (the "Plan") effective as of _______________,
1995 (the "Effective Date"), subject to approval of the Plan at the 1995
Annual Meeting of Schult Homes shareholders by the holders of a majority of
the shares of Schult Homes share entitled to vote at that meeting. The
purpose of the Plan is to promote the long-term financial performance of
Schult Homes by (a) attracting and retaining executive and other key
employees of Schult Homes and its Subsidiaries, as they may exist from time
to time (as defined in subsection 2.1) who possess outstanding abilities
with incentive compensation opportunities which are competitive with those
of other major corporations; (b) motivating such employees to further the
long-range goals of Schult Homes; and (c) furthering the identity of
interests of participating employees and Schult Homes shareholders through
opportunities for increased employee ownership of Schult Homes common
share.
1.2 PLAN ADMINISTRATION. The Plan shall be administered by the Committee (as
described below). In addition to those rights, duties and powers vested in
the Committee by other provisions of the Plan, the Committee shall have
sole authority to:
(a) interpret the provisions of the Plan;
(b) adopt, amend and rescind rules and regulations for the administration
of the Plan;
(c) impose such limitations, restrictions and conditions upon grants and
awards under the Plan as it shall deem appropriate; and
(d) make all other determinations deemed by it to be necessary or
advisable for the administration of the Plan;
provided that the Committee shall exercise its authority in accordance with
the provisions of the Plan. The Committee may not exercise its authority
at any time that it has fewer than two members. The Committee shall
exercise its authority only by a majority vote of its members at a meeting
or by a written consent without a meeting.
At any date, the members of the Committee shall be those members of
the Board of Directors of Schult Homes who are Disinterested Persons, that
is a director who is not, during the one (1) year preceding service on the
Committee,
<PAGE>
or during such service, granted or awarded equity securities pursuant to
the Plan or any other plan of Schult Homes or a Subsidiary or other
affiliate, except that:
(w) participation in a formula plan as defined by
Regulation Section 240.16b-3(c)(2)(ii) shall not disqualify
a director from being a Disinterested Person;
(x) participation in a securities acquisition plan
meeting the conditions set forth at Regulation
Section 240.16b-3(d)(1) shall not disqualify a director from
being a Disinterested Person;
(y) an election to receive a director's fee in either
cash or securities, or partly in cash or partly in
securities, shall not disqualify a director from being a
Disinterested Person; and
(z) participation in a plan shall not disqualify a
director from being a Disinterested Person for purposes of
administering another plan that does not permit
participation by directors.
From time to time the Board may increase the size of the Committee and
appoint additional members thereof, remove members, and appoint new members
in substitution, but in all events such new members shall be Disinterested
Persons.
1.3 SHARES AVAILABLE. The sum of the number of shares of Schult Homes common
share for which Non-Qualified Share Options ("Option" or "Options") may be
granted may not exceed 300,000. If all or a portion of an Option expires
or is terminated without having been exercised in full, then the number of
shares which are forfeited or not purchased shall again be available for
purposes of making grants under this Plan. The shares of Schult Homes
common share delivered pursuant to the Plan shall be authorized but
unissued shares or reacquired shares held by Schult Homes as treasury
shares (including shares purchased in the open market). In the event of a
merger, consolidation, reorganization, recapitalization, share dividend,
share split or other similar change in the corporate structure or
capitalization of Schult Homes which affects the Schult Homes common share,
appropriate adjustment, as determined by the Board of Directors of Schult
Homes (or its successor), shall be made with respect to the number and
kinds of shares (or other securities) which may thereafter be awarded or by
subject to Options under the Plan. Agreements evidencing grants and awards
under the Plan shall be subject to and shall provide for appropriate
adjustments, as determined by the Board of Directors of Schult Homes (or
its
-2-
<PAGE>
successor) in the event of such changes in the corporate structure or
capitalization of Schult Homes occurring after the date of grant or award.
1.4 TERM, AMENDMENT AND TERMINATION OF PLAN. Grants and awards may not be made
under the Plan after the earlier of October 19, 1995, or the termination
date of the Plan. The Board of Directors of Schult Homes may amend or
terminate the Plan at any time except that, without the approval of the
holders of a majority of Schult Homes share entitled to vote at a duly held
meeting of such shareholders, the Board may not:
(a) increase the number of shares of common share which may be issued
under the Plan, except as provided in subsection 1.3;
(b) reduce the minimum Option price under any share option, except as
provided in subsection 1.3;
(c) increase the maximum period during which Options may be exercised;
(d) extend the term of the Plan; or
(e) amend the standards for participation described in Section 2.
In addition, the Committee may amend or modify any outstanding Option
in any manner to the extent that the Committee would have had the authority
to initially grant such Option as so modified or amended, including without
limitation, to change the date or dates as of which an Option becomes
exercisable. Provided, no modification shall be permitted where such
modification would be considered as the granting of a new Option.
Amendment or termination of the Plan shall not affect the validity of
terms of any grant or award previously made to a Participant in any way
which is adverse to the Participant without the consent of the Participant.
1.5 COMPLIANCE WITH APPLICABLE LAW. The Committee may postpone any exercise of
an Option for such time as the Committee in its discretion may deem
necessary in order to permit Schult Homes (a) to effect or maintain
registration of the Plan or common share issuable pursuant to the Plan
under the Securities Act of 1933, as amended, or the securities laws of any
applicable jurisdiction; (b) to take any action necessary to comply with
restrictions or regulations incident to the maintenance of a public market
for Schult Homes common share; or (c) to determine that no action referred
to in (a) or (b) above needs to be taken. Schult Homes shall not be
obligated to issue shares upon exercise of an Option in violation of any
law or regulation. Any such postponement shall not extend the term of an
Option. Neither Schult Homes, nor its directors or officers, shall have
any obligation or liability to any Participant (or successor in interest)
because of
-3-
<PAGE>
the loss of rights under any grant or award under the Plan due to
postponements pursuant to this subsection.
1.6 WITHHOLDING TAXES. Schult Homes and its Subsidiaries shall have the right
to require payment, in cash or in equivalent value in Schult Homes common
share, from any person entitled to receive Schult Homes common share
pursuant to the Plan of the amount of any tax required by law to be
withheld with respect to that share.
SECTION 2
PLAN PARTICIPATION
2.1 PARTICIPATION DESIGNATIONS. The Committee may, at any time, designate any
officer or key employee of Schult Homes or of a Subsidiary to be a
Participant. For purposes of the Plan, the term "Subsidiary" means any
corporation of which, at any date, Schult Homes owns directly, or
indirectly through an unbroken chain of subsidiary corporations, share
possessing 50 percent or more of the total combined voting power of all
classes of share of that corporation.
2.2 PARTICIPATION IS NOT A CONTRACT OF EMPLOYMENT. The Plan does not
constitute a contract of employment. Participating in the Plan does not
give any employee the right to be retained in the employ of Schult Homes or
a Subsidiary and does not limit in any way the right of Schult Homes or a
Subsidiary to change the duties or responsibilities of any employee.
SECTION 3
SHARE OPTIONS
3.1 GRANTEES. The Committee may, at any time, designate a Participant to
receive an Option whether or not the Participant has previously received a
grant under the Plan. For purposes of the Plan, the term "Non-Qualified
Share Option" means an option to purchase Schult Homes common share which
is not an Incentive Share Option, as defined by Section 422 of the Internal
Revenue Code (the "Code"). Each Option granted under the Plan shall be
evidenced by an agreement between the Participant and Schult Homes. The
provisions of each agreement shall be determined by the Committee in
accordance with the provisions of the Plan. A Participant shall not have
any rights of a shareholder of Schult Homes common share with respect to
shares subject to an Option until such shares are purchased upon exercise
of the Option.
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3.2 NUMBER OF SHARES OPTIONED AND OPTION PRICE. The Committee shall, subject
to the limitations of subsection 1.3 and this Section 3, determine the
number of shares of Schult Homes common share which may be purchased and
the Option price of each share on exercise of each Option granted under the
Plan. The Option price of each share under an Option shall not be less
than 100 percent of the Fair Market Value of a share of Schult Homes common
share on the date the Option is granted. For purposes of the Plan, the
term "Fair Market Value" means the closing price of a share of Schult Homes
common share, as reported by the American Stock Exchange on the day
preceding the date of grant, or, in the event the share was not traded on
such date, on the first date that the share was so traded which next
precedes the date as of which the determination is being made.
3.3 EXERCISE OF OPTIONS AND PAYMENTS. Each Option shall become exercisable in
full at such time, or in such portions at such times, as the Committee
determines, subject to the following provisions of this subsection 3.3. No
Option granted to a Participant shall be exercisable prior to the first
yearly anniversary of the date upon which the Option was granted, and not
more than one-half (1/2) of each grant may be exercised after the first
anniversary, an additional one-fourth (1/4) after the second anniversary,
and any or all of the options may be exercised after the third anniversary
of the grant; except, in the discretion of the Committee, if the
Participant's employment with Schult Homes and all of its Subsidiaries
terminates by reason of death, Disability (as defined in Section 37(c)(3)
of the Code or retirement (as described in subsection 3.4(d)). During any
period that an Option is exercisable, it may be exercised by delivering a
written notice to Schult Homes at its principal office by registered or
certified mail stating the number of shares with respect to which the
Option is being exercised and specifying a date not less than five nor more
than 15 days after the receipt of such notice on which the shares will be
taken up and payment made therefore. Payment may be made in (a) cash, or
(b) in the event the Committee shall so authorize such an exchange, in
shares of Schult Homes common share with an aggregate Fair Market Value as
of the close of trading on the trading day immediately preceding the date
of exercise equal to the purchase price, or in any combination of cash and,
if authorized by the Committee, such shares.
3.4 TERMINATION OF OPTIONS. Each Option shall terminate and not be exercisable
after the date determined by the Committee, on the earlier of (a) the tenth
(10th) anniversary of the date that the Option was granted; (b) the
sixtieth (60th) day following the date upon which the Participant's
employment with Schult Homes and all Subsidiaries terminates for reasons
other than described in (c), (d) or (e) next following; (c) the date upon
which the Participant's employment with Schult Homes and all Subsidiaries
terminates as the result of discharge of the Participant for "Good Cause";
(d) the first anniversary of the date the Participant's employment with
Schult Homes and all Subsidiaries terminates on account of death or
Disability; or (e) the first anniversary of the Participant's
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retirement, or such later date as may be approved by the Committee, from
employment by Schult Homes or a Subsidiary. For purposes of the Plan,
"Good Cause" shall mean conviction of any felony, acts involving
dishonesty, moral turpitude, deliberate subordination or gross malfeasance.
3.5 TRANSFERABILITY. No Option granted to a Participant may be transferred
by the Participant except by will or the laws of descent and distribution,
and, except as respects exercise within the period described at
Section 3.4(d), above, may be exercisable during the Participant's lifetime
only by the Participant.
3.6 CHANGE IN CONTROL. Notwithstanding any to the contrary contained herein,
any share Option granted pursuant to the Plan shall, in the case of a
change in control ("Change in Control"), as hereinafter defined, become
fully exercisable as to all shares of share, irrespective of any
restrictions on vesting or staged exercisability of such Options, from and
after the date of such Change in Control and shall, subject to the
expiration provisions of Section 3.4(a), above, remain exercisable for a
period of three (3) months following the employee's termination of
employment with the Schult Homes or its Subsidiary, if said termination
occurs within one (1) year after the date of the Change in Control.
The term "Change in Control" shall mean a Change in Control of a nature
such that (1) it would be required to be reported by a person or entity
subject to the reporting requirements of Section 14(a) of the Securities
Exchange Act of 1934 in response to Schedule 14A of Regulation 14A, or
successor provisions thereto, as in effect on the date hereof, (2) a
"person" or "group" (as those terms are used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934), is or becomes the "beneficial owner"
(as defined in Rule 13(d)-3 issued under the Securities Exchange Act),
directly or indirectly, of securities of Schult Homes, representing in
excess of thirty percent (30%) of the voting securities of Schult Homes
then outstanding, followed by the election by said person or group of one
or more representatives to the Board of Directors of Schult Homes; (3) a
person or group, as hereinabove defined, is or becomes the beneficial
owner, directly or indirectly, of securities of Schult Homes, representing
in excess of fifty percent (50%) of the voting securities of Schult Homes
then outstanding, whether or not followed by the election by said person or
group of one or more representatives to the Board of Directors of Schult
Homes; or (4) any other event, including but not limited to those set forth
in paragraphs (1) through (3) above, which shall have the effect of placing
control of the business and affairs of Schult Homes in a person or group as
hereinabove defined, other than or different from the present shareholders
of Schult Homes.
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3.7 NONCOMPETITION AGREEMENT. Upon receipt and as a condition of the grant of
an option, each employee shall execute an agreement not to compete with
Schult Homes Corporation for a term of one (1) year from and after
termination of his employment, on such other terms and conditions as the
Board of Directors and applicable law shall determine.
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