FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For The Quarter Year Ended June 30, 1996
Commission File Number 0-8585
Dynamic Homes, Inc. (Exact name of registrant as specified in its charter)
Minnesota (State or Other Jurisdiction of Incorporation or Organization)
41-0960127 (IRS Employer Identification No.)
525 Roosevelt Avenue, Detroit Lakes, MN 56501 (Address of principal
executive offices)
(218) 847-2611 (Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports re-
quired 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 reg
istrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X
NO
As of June 30, 1996, 2,215,850 common shares, par value, $.10 per share, were
outstanding. On January 7, 1995 the Company implemented a plan to repurchase
up to 100,000 shares of its outstanding common stock. As of June 30, 1996, a
total of 43,080 shares have been repurchased and excluded from the common shares
outstanding.
PART I.
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1996 & 1995
(Unaudited)
Three Months Six Months
6/30/96 6/30/95 6/30/96 6/30/95
--------- --------- --------- ---------
Revenues
Single-Family 1,975,000 2,075,000 2,968,000 2,907,000
Multi-Family/Commercial 929,000 56,000 929,000 907,000
Other 95,000 121,000 144,000 153,000
Transportation 166,000 123,000 233,000 252,000
Shagawa Resort 44,000 - 44,000 -
Total Revenues - Net 3,209,000 2,375,000 4,318,000 4,219,000
Cost of Sales
Materials 1,525,000 1,263,000 2,082,000 2,172,000
Labor 290,000 205,000 383,000 400,000
Overhead 357,000 291,000 493,000 481,000
Transportation 198,000 149,000 343,000 316,000
Total Cost of Sales 2,370,000 1,908,000 3,301,000 3,369,000
Gross Profit 839,000 467,000 1,017,000 850,000
Operating Expenses
Marketing 125,000 89,000 218,000 167,000
Administration 194,000 183,000 368,000 340,000
Shagawa Resort 23,000 - 23,000 -
Total Operating Expenses 342,000 272,000 609,000 507,000
Operating Income 497,000 195,000 408,000 343,000
Other (Income) Expense
Interest Expense 28,000 7,000 31,000 10,000
Other, Net (1,000) (30,000) (5,000) (35,000)
Total Other (Income) Expense 27,000 (23,000) 26,000 (25,000)
Income Before Taxes 470,000 218,000 382,000 368,000
Income Tax (Provision) Benefit (188,000) (87,000) (153,000) (147,000)
Net Income 282,000 131,000 229,000 221,000
Earnings Per Common Share 0.13 0.06 0.10 0.10
Weighted Average Number of
Shares Outstanding per
Period 2,215,900 2,198,500 2,215,900 2,200,600
Dividends per Common Share None None None None
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996 & DECEMBER 30,1995
(Unaudited)
6/30/96 12/30/95
-------- --------
ASSETS
CURRENT ASSETS:
Cash & cash equivalents 115,000 543,000
Accounts receivable, less allowance for
doubtful accounts, pledged 785,000 699,000
Inventories pledged (Note 2) 2,442,000 1,638,000
Prepaid expenses (Note 5) 151,000 39,000
Deferred income taxes (Note 4) 90,000 90,000
Total Current Assets 3,583,000 3,009,000
OTHER ASSETS:
Other assets (Note 9) 121,000 38,000
Total Other Assets 121,000 38,000
PROPERTY, PLANT & EQUIPMENT, at:
Cost - pledged in part (Note 6) 5,459,000 4,256,000
Less - accumulated depreciation (1,562,000) (1,470,000)
Net Property, Plant & Equipment 3,897,000 2,786,000
Total Assets 7,601,000 5,833,000
LIABILITIES
CURRENT LIABILITIES:
Notes payable - -
Current portion - long-term debt 63,000 62,000
Accounts payable 699,000 216,000
Customer deposits 1,091,000 408,000
Accrued expenses
Salaries, wages and vacations 228,000 183,000
Taxes, other than income 52,000 50,000
Warranty 77,000 71,000
Other (Note 10) 144,000 89,000
Income Taxes 74,000 184,000
Total Current Liabilities 2,428,000 1,263,000
LONG-TERM DEBT: (Note 7)
Less current portion included above 1,439,000 1,066,000
DEFERRED INCOME TAXES (Note 4) 25,000 25,000
Total Liabilities 3,892,000 2,354,000
STOCKHOLDERS' EQUITY
Common stock, par value $.10 per share
Authorized, 5,000,000 shares; issued and out-
standing, 2,215,850 in 1996; 2,215,850 in 1995 226,000 226,000
Paid-in capital in excess of par 134,000 134,000
Retained earnings 3,493,000 3,263,000
Treasury stock - 43,080 shares (144,000) (144,000)
Total Stockholders' Equity 3,709,000 3,479,000
Total Liabilities & Stockholders' Equity 7,601,000 5,833,000
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 & 1995
(Unaudited)
6/30/96 6/30/95
--------- ---------
Cash Flows From Operating Activities
Net Income (Loss) 229,000 221,000
Adjust to Reconcile Net Income or Loss
Provided by (Used in) Operating Activities:
Depreciation 92,000 65,000
Provision for Doubtful Accounts 3,000 3,000
(Gain) Loss on Sale of Property & Equipment - (1,000)
Change in Assets & Liabilities:
(Increase) Decrease in Receivables (88,000) 41,000
(Increase) Decrease in Inventories (804,000) (764,000)
(Increase) Decrease in Prepaid Expenses (112,000) (53,000)
(Increase) Decrease in Deferred Income Tax - -
(Increase) Decrease in Other Assets (83,000) 7,000
Increase (Decrease) in Accounts Payable 483,000 81,000
Increase (Decrease) in Customer Deposit 683,000 (80,000)
Increase (Decrease) in Accrued Expenses 105,000 (87,000)
Increase (Decrease) in Income Tax Payable (107,000) 24,000
Net Cash Provided by (Used in) Operating Activities 401,000 (543,000)
Cash Flows From Investing Activities
Proceeds From Sale of Property & Equipment - 1,000
Purchase of Property & Equipment (1,203,000) (67,000)
Purchase of Treasury Stock - (144,000)
Net Cash Provided by (used in) Investing
Activities (1,203,000) (210,000)
Cash Flows From Financing Activities
Proceeds from Sale of Common Stock - 20,000
Net Borrowings (Payments) on Revolving Credit
Agreements & Other Short-Term Financing - 147,000
Principal Payments on Long-Term Borrowings
Including Industrial Revenue Bonds (38,000) (31,000)
Proceeds From Long-Term Borrowings 412,000 17,000
Net Cash Provided by (Used in) Financing
Activities 374,000 153,000
Increase (Decrease) in Cash and Equivalents (428,000) (600,000)
Cash and Equivalents
Beginning 543,000 607,000
Ending 115,000 7,000
Supplemental Disclosures of Cash Flow
Information
Cash Payments for:
Income Taxes 260,000 124,000
Interest 30,000 10,000
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. UNAUDITED STATEMENTS
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of June 30, 1996 and December 30, 1995,
and the results of operations and cash flows for the six months ended June 30,
1996 and June 30, 1995.
Note 2. INVENTORIES
During interim accounting periods, the Company uses the standard cost method of
determining cost of sales and inventory levels. Cost of sales values are de-
termined monthly based on standards for materials, labor and overhead by pro-
duct mix. Deviations from these standards result in adjustments of the monthly
cost of sales amount. Periodic physical inventories are taken during the fiscal
year to determine actual inventory and cost of sales. A physical inventory was
taken during the second quarter of 1996 and the results are reflected in the
cost of sales and inventory levels reported.
The Breakdown of Inventories is as follows:
6/30/95 6/30/96
--------- ---------
Finished Goods 1,499,000 1,474,000
Work In Process 190,000 88,000
Raw Materials 753,000 666,000
Total Inventories 2,442,000 2,228,000
Note 3. BACKLOG OF ORDERS
As of June 30, 1996 and June 30, 1995, the Company's backlog of unfilled orders
was approximately $6,794,000 and $3,069,000, respectively. As of December 30,
1995, the Company's backlog of unfilled orders was $2,595,000. On July 31,
1996, the Company's backlog was $6,373,000 as compared with $5,275,000 for the
same period last year. A significant portion of the backlog relates to a 46
unit single-family housing project, in the beginning stages of production and
18 finished single-family units for a second housing project. Both of the pro-
jects relate to housing units for Native American communities in northwestern
North Dakota. It is anticipated that each of the projects will be delivered
and set during the remainder of 1996. The Company recognizes revenue upon the
delivery and setting of the finished product.
Note 4. DEFERRED INCOME TAXES
Deferred income taxes relate primarily to differences between the basis of
receivables, property and equipment, accrued expenses and book / tax inventory
adjustments for financial and income tax reporting. The deferred tax assets
and liabilities represent future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered and settled.
Note 5. PREPAID EXPENSES
6/30/96 6/30/95
--------- ---------
Advertising 17,000 5,000
Insurance 127,000 67,000
Other 7,000 5,000
151,000 77,000
Note 6. PROPERTY AND EQUIPMENT
6/30/96 6/30/95
--------- ---------
Land and Improvements 130,000 117,000
Buildings 978,000 954,000
Machinery and Equipment 1,364,000 1,341,000
Construction in Progress - Shagawa
Resort, Inc. (Note 8) 2,987,000 -
5,459,000 2,412,000
Less: Accumulated Depreciation -
Dynamic Homes, Inc. (1,540,000) (1,451,000)
Accumulated Depreciation -
Shagawa Resort, Inc. (22,000) -
3,897,000 961,000
Note 7. LONG-TERM DEBT
6/30/96 6/30/95
--------- ---------
Long-term debt (net of current maturities)
consists of:
- Industrial Development Bonds of
Detroit Lakes, MN 45,000 80,000
- Other Notes and Contracts Payable 5,000 11,000
- Construction Loan Agreement covering
Shagawa Resort project (Note 8) 1,389,000 -
1,439,000 91,000
Note 8. SHAGAWA RESORT, INC.
During 1995, Dynamic Homes, Inc. purchased 100% of the common stock of Shagawa
Resort, Inc., a hotel/resort in northern Minnesota. The stock was exchanged for
an account receivable in the amount of $628,100. The hotel/resort remained
under construction until May 1, 1996, when the hotel/resort commenced with
normal business operations. The total cost of the project to Dynamic Homes,
Inc. approximates $3,450,000 which has been reduced by approximately $1,705,000
in existing equity and various economic incentives. As of June 30, 1996,
several minor items related to landscaping and interior modifications are still
being addressed.
The Company entered into a long-term debt agreement whereby the balance of the
construction loan, up to a maximum of $1,850,000 will be financed. The agree-
ment calls for an interest rate of 8.75% to be adjusted every three years, with
monthly principal and interest payments based upon a 20-year amortization and
a 10-year balloon payment. The debt is secured by the assets of Shagawa Resort,
Inc. and a partial guarantee of the Small Business Administration. The con-
struction mortgage loan is currently in the process of being converted to long-
term financing with a projected completion date of September 1, 1996.
In conjunction with the purchase of Shagawa Resort, Inc., the Company also
entered into a management agreement for the operation of the hotel/resort.
The management agreement calls for the managing agent to pay minimum monthly
payments of $22,100 to the Company plus a percentage of room and food/beverage
receipts when these exceed the minimum rentals on an annual basis. The mini-
mum monthly payments are structured to cover the monthly long-term loan mort-
gage payments. The Company also entered into an option agreement with the
managing agent which will allow the managing agent to purchase the stock of
Shagawa Resort, Inc. at a price determined by the agreement. The option agree-
ment expires in December, 1997. The managing agent has met its minimum monthly
payment obligations during the beginning months of operation. It is anticipated
that under the terms of the management agreement, the Company's ownership of
Shagawa Resort, Inc. will have a minimum impact on the Company's earnings
during 1996.
Note 9. OTHER ASSETS
6/30/96 6/30/95
--------- ---------
Deferred Bond & Maintenance Expense 4,000 7,000
Deposits 12,000 -
Organization Start-up - Shagawa Resort, Inc. 105,000 -
121,000 7,000
Note 10. OTHER LIABILITIES
6/30/96 6/30/95
--------- ---------
Interest & Other Accrued Expenses 21,000 3,000
Reserve - Insurance 25,000 6,000
Volume Rebates 10,000 2,000
Deferred Revenue - (Economic Incentive
Funds) - Shagawa Resort, Inc. Parking Lot 88,000 -
144,000 11,000
MANAGEMENT'S DISCUSSION & ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Three Months Ended June 30, 1996 and 1995
NET SALES:
The Company's revenue for the three months ended June 30, 1996 was $3,209,000
as compared to $2,375,000 for the year earlier period. Even though single-
family revenues decreased by $100,000, multi-family/commercial increased by
$873,000. The multi-family/commercial activity consisted of a duplex and an 80
unit motel project. The delivery and setting of the motel project precluded
the delivery and setting of additional finished single-family units. Due to
the increased sales activity during the quarter, transportation revenues in-
creased by $43,000 while retail related sales decreased by $26,000. The over-
all increase in second quarter revenue was $834,000 or 35 percent. As of June
30, 1996, the Company had an additional 44 finished single-family units avail-
able for delivery and set. Revenues are not recognized or recorded until a unit
has been delivered and set.
The Company's order backlog at June 30, 1996 was $6,794,000 as compared to
$3,069,000 at June 30, 1995 (reference Note 3.). Unit order activity for
single-family housing continues to remain relatively strong and should provide
additional impetus to the remainder of 1996. The Company's order backlog con-
sists of completed units awaiting delivery, current production and orders
scheduled for production.
COST OF SALES:
The Company's gross profit (including transportation revenue and expense) of
$839,000 for the second quarter of 1996 is up $372,000 from the same period of
1995. During the second quarter of 1996, the gross margin percent on product
(excluding transportation revenue and expense) was 27.6% as compared to 21.9%
for the 1995 period. The 1996 increase in gross margin benefited from the
relative stability of material prices during the first six months of 1996 and
the Company's ability to purchase significant quantities of materials at favor-
able pricing levels. Due to the relative stability in material prices, both the
1996 and 1995 periods did not require any surcharges to offset escalating
material costs. In contrast to the second quarter of 1995, plant production
also adequately absorbed manufacturing related overhead.
OPERATING EXPENSES:
The Company's operating expenses, which include transportation, marketing and
administrative costs, increased by $119,000. Due to additional delivery and
setting activity, transportation related expenses for 1996 increased $49,000.
Marketing related expenses increased by $36,000 due to additional media adver-
tising and Builder/Dealer incentive programs. Administration costs for 1996
increased by $11,000 while Shagawa Resort, Inc. expenses for depreciation and
amortization added an additional $23,000 of expense. Shagawa Resort, Inc. had
no effect on the second quarter of 1995.
OPERATING INCOME:
Operating income for 1996 increased to $497,000 from $195,000 for 1995. The
increased operating income reflects the higher revenue base for 1996 and the
gross margin benefits associated with better than anticipated material acquisi-
tions.
NET NON - OPERATING INCOME / EXPENSE:
Non-operating expense for the second quarter of 1996 was $27,000 as compared to
a non-operating income of $23,000 for the 1995 period. Interest related ex-
pense for 1996 increased by $21,000 which is directly related to interest costs
associated with the construction financing of the Shagawa Resort project.
Other income during 1996 also decreased by $29,000. During 1995, the Company
benefited from the interest earned under a delayed payment arrangement for a
commercial project and several insurance related refunds.
FEDERAL AND STATE INCOME TAXES:
During the second quarter of both 1996 and 1995, the Company recorded estimated
income tax provisions of $188,000 and $87,000, respectively. Since the Com-
pany utilized all available loss carryforwards during 1994, income tax obli-
gations and benefits are estimated at the normal statutory rate.
NET INCOME:
Net income for the second quarter of 1996 was $282,000 or $0.13 per share.
This compares favorably to the $131,000 or $0.06 per share earned during the
second quarter of 1995.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Six Months Ended June 30, 1996 and 1995
NET SALES:
The Company's revenue for the six month period ended June 30, 1996 was
$4,318,000 as compared with $4,219,000 for 1995 or an increase of $99,000. Both
single-family and multi-family/commercial revenues increased slightly during
1996. Transportation and retail revenues remained relatively stable for both
the 1996 and 1995 periods.
New order activity continues to remain quite strong and has not yet shown
indications of the traditional seasonal slowdown. With the 44 finished, but
undelivered, units in inventory at June 30, 1996, plus the recently signed 46
unit housing project for a Native American community, a solid basis for a
potentially strong second half of 1996 is taking shape.
COST OF SALES:
The Company's gross profit (including transportation revenue and expense) was
$1,017,000 for the first six months of 1996 as compared to $850,000 for 1995.
Gross profit percentage for the first six months of each period are 22.8% and
20.1%, respectively. When transportation revenue and expense are excluded, the
gross profit on products is 26.8% and 23.0%, respectively. The improvement in
the 1996 gross profit reflects the benefits associated with favorable material
costs. Production related output for each of the periods was relatively un-
changed.
OPERATING EXPENSES:
The Company's 1996 operating expenses, which includes transportation, marketing
and administration costs, increased to $952,000 from $823,000 for 1995. Trans-
portation expenses increased $27,000 primarily due to maintenance on existing
equipment and the acquisition of additional equipment. Marketing related ex-
penses increased by $51,000 as a result of increased media advertising and
Builder/Dealer incentive programs. Administrative related expenses increased
$28,000 due to changes in several compensation structures. In addition,
Shagawa Resort, Inc. incurred $23,000 of depreciation and amortization expenses
which were absent from the 1995 expense structure.
OPERATING INCOME:
The Company's operating income for the first six months of 1996 was $408,000 as
compared to $343,000 for 1995. The 1996 increases of $65,000 or 19% reflects
the improved gross margin realized during the second quarter of 1996.
NET NON-OPERATING INCOME/EXPENSE:
The Company's net non-operating activities resulted in additional expense of
$26,000 during the first six months of 1996 versus additional income of $25,000
for 1995. Interest expense on the Shagawa Resort, Inc. construction loan con-
tributed to an additional $21,000 of interest expense during 1996. In addition,
the Company also experienced a reduction in interest income and insurance re-
lated refunds during the first half of 1996.
FEDERAL AND STATE INCOME TAXES:
During the first six months of 1996 and 1995, the Company recorded estimated
income tax provisions of $153,000 and $147,000, respectively. Since all loss
carryforwards were completely utilized as of year-end 1994, the Company esti-
mated income taxes at the normal statutory rate for both 1996 and 1995.
NET INCOME:
Net income for the first two quarters were almost identical at $229,000 for 1996
and $221,000 for 1995. Earnings per share for the first six months totaled
$0.10 for both periods.
Financial Condition
As of June 30, 1996
The Company's working capital was a positive $1,155,000 at June 30, 1996 versus
$2,045,000 at June 30, 1995. The working capital at December 30, 1995 was a
positive $1,746,000. The current ratio for June 30, 1996 was 1.5 to 1.0 as
compared to 2.7 to 1.0 at June 30, 1995 and 2.4 to 1.0 at December 30, 1995.
The Company's 1996 cash flow from operations was a positive $401,000 as compared
to a negative cash flow of $543,000 for the 1995 period.
During the first two quarters of 1996, cash outflows were required for the
build-up of inventory (finished goods), renewal of the Company's insurance
package, payments on Federal and State income tax liabilities and the Company's
investment interests in completing the Shagawa Resort project (including con-
struction and start-up costs). Cash flows to support the above referenced acti-
vities were provided by utilizing the Company's 1995 year-end cash and cash
equivalents position in conjunction with the cash flows provided by customer
deposits and unit prepayments, supplier payment terms, internally generated
income and long-term borrowings associated with the construction activities at
the Shagawa Resort project.
Long-term debt, net of current maturities, increased from $91,000 at June 30,
1995 to $1,439,000 at June 30, 1996. Long-term debt consists primarily of
Industrial Revenue Bonds related to the Detroit Lakes facility and the Shagawa
Resort project (Notes 7 and 8). Since the Shagawa Resort opened on May 1, 1996
and with the majority of the construction completed, the existing construction
loan is in the process of being converted to long-term financing. It is antici-
pated that the conversion will be completed by approximately September 1, 1996.
The ratio of long-term debt to stockholders' equity changed from .03 to 1.0 at
June 30, 1995 to .30 to 1.0 at December 30, 1995 and .40 to 1.0 at June 30,
1996. Stockholders' equity (net of treasury stock) increased by approximately
$230,000 to $3,709,000 at June 30, 1996 from $3,479,000 at December 30, 1995 and
up $817,000 from the June 30, 1995 level of $2,892,000.
Dynamic Homes, Inc. has available a short-term line of credit which is
collateralized by inventories and receivables. The credit available is based
on specified percentages of inventories and receivables. On May 1, 1996, the
Company renewed its line of credit for a period of one year. The renewed credit
line increased the maximum available borrowings to $1,100,000 and exempts short-
term letters of credit from reducing the available line of credit. However, as
a condition of converting the Shagawa Resort, Inc. construction loan to perma-
nent long-term financing, the Company was required to issue a standby letter of
credit to a Title Insurance company in the amount of $425,000 for an initial
period of one year commencing July 10, 1996. The standby letter of credit will
automatically extend for additional one year periods until rescinded by the
beneficiary. The standby letter of credit has consequently reduced the Com-
pany's available line from $1,100,000 to $675,000.
The Company has continued to meet its obligations in a timely manner. Manage-
ment believes internally generated cash and short-term borrowings on its
existing credit line should provide adequate funds to support the Company
operations and scheduled capital additions during the remainder of 1996.
Statements regarding the Company's operations, performance and financial con-
dition for 1996 are subject to certain risks and uncertainties. These risks and
uncertainties include but are not limited to: rising mortgage interest rates
and/or weakness in regional and national economic conditions that could have an
adverse impact on new home and multi-family/commercial sales. Likewise,
future escalating and volatile material costs could also affect the Company's
profit margins.
PART II.
Items 1, 2, 3, 5, and 6 are omitted as each is either not applicable or the
answer to the item is negative.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The annual meeting of shareholders of Dynamic Homes, Inc. was duly
called and held on June 17, 1996.
A. The meeting involved the election of Directors. Those elected were
D. Raymond Madison, Gordon H. Lund, Laverne P. Muzik, Clyde R.
Lund Jr., Israel Mirviss, Ronald L. Gustafson, Peter K. Pichetti,
and Glenn R. Anderson. There are no other members of the Board of
Directors.
B. The meeting involved ratification of the appointment of Charles
Bailly & Company as independent public accountants for Dynamic
Homes, Inc. for the fiscal year ending December 28, 1996. The
appointment was ratified.
C. The meeting involved ratification of a proposed stock option plan
whereby 400,000 shares of common stock will be reserved for issu-
ance to select officers, directors and key employees as authorized
by the Board of Directors. The proposed stock option plan was
ratified.
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: August 14, 1996
Dynamic Homes, Inc. (Registrant)
VERN MUZIK President