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 September 30, 1997
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
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
As of September 30, 1997, 2,240,850 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
September 30, 1997, a total of 43,080 shares have been repurchased. During
1996, the Company approved a new stock option plan and granted 240,000 options
to various officers, directors and employees. The treasury stock and 205,000
available unexercised options have been excluded from the common shares out-
standing.
PART I.
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1997 & 1996
(Unaudited)
Three Months
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 9/30/96
----------- ------------ ------------ -----------
Revenues
Single - Family $ 3,750,000 $ - $ 3,750,000 $ 4,159,000
Multi - Family / Commercial 124,000 - 124,000 193,000
Other 113,000 - 113,000 126,000
Transportation 214,000 - 214,000 259,000
Shagawa Resort, Inc. - 728,000 728,000 66,000
Total Revenues - Net 4,201,000 728,000 4,929,000 4,803,000
Cost of Sales
Materials 2,199,000 360,000 2,559,000 2,496,000
Labor 355,000 - 355,000 397,000
Overhead 405,000 - 405,000 460,000
Transportation 214,000 - 214,000 266,000
Total Cost of Sales 3,173,000 360,000 3,533,000 3,619,000
Gross Profit 1,028,000 368,000 1,396,000 1,184,000
Operating Expenses
Marketing 135,000 - 135,000 100,000
Administration 195,000 - 195,000 182,000
Other 17,000 - 17,000 37,000
Shagawa Resort, Inc. - 261,000 261,000 33,000
Total Operating Expenses 347,000 261,000 608,000 352,000
Operating Income (Loss) 681,000 107,000 788,000 832,000
Other (Income) Expense
Interest Expense 27,000 37,000 64,000 34,000
Other, Net - - - (6,000)
Total Other (Income) Expense 27,000 37,000 64,000 28,000
Income (Loss) Before Taxes 654,000 70,000 724,000 804,000
Income Tax (Provision) Benefit (262,000) (28,000) (290,000) (320,000)
Net Income (Loss) $ 392,000 $ 42,000 $ 434,000 $ 484,000
Primary Earnings (Loss) Per Common
Share $ 0.17 $ 0.02 $ 0.19 $ 0.22
Fully Diluted Earnings (Loss) Per
Common Share $ 0.17 $ 0.02 $ 0.19 $ 0.22
Weighted Primary Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,215,900
Weighted Fully Diluted Average
Number of Shares Outstanding 2,241,700 2,241,700 2,241,700 2,215,900
Dividends per Common Share None None None None
See notes to condensed consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997 & 1996
(Unaudited)
Nine Months
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 9/30/96
----------- ------------ ------------ -----------
Revenues
Single - Family $ 6,593,000 $ - $ 6,593,000 $ 7,127,000
Multi - Family / Commercial 422,000 - 422,000 1,122,000
Other 276,000 - 276,000 270,000
Transportation 395,000 - 395,000 492,000
Shagawa Resort, Inc. - 1,287,000 1,287,000 110,000
Total Revenues - Net 7,686,000 1,287,000 8,973,000 9,121,000
Cost of Sales
Materials 4,085,000 676,000 4,761,000 4,578,000
Labor 699,000 - 699,000 780,000
Overhead 907,000 - 907,000 953,000
Transportation 548,000 - 548,000 609,000
Total Cost of Sales 6,239,000 676,000 6,915,000 6,920,000
Gross Profit 1,447,000 611,000 2,058,000 2,201,000
Operating Expenses
Marketing 299,000 - 299,000 318,000
Administration 577,000 - 577,000 550,000
Other 19,000 - 19,000 37,000
Shagawa Resort, Inc. - 568,000 568,000 56,000
Total Operating Expenses 895,000 568,000 1,463,000 961,000
Operating Income (Loss) 552,000 43,000 595,000 1,240,000
Other (Income) Expense
Interest Expense 60,000 107,000 167,000 65,000
Other, Net (1,000) (1,000) (2,000) (11,000)
Total Other (Income) Expense 59,000 106,000 165,000 54,000
Income (Loss) Before Taxes 493,000 (63,000) 430,000 1,186,000
Income Tax (Provision) Benefit (197,000) 25,000 (172,000) (473,000)
Net Income (Loss) $ 296,000 $ (38,000) $ 258,000 $ 713,000
Primary Earnings (Loss) Per Common
Share $ 0.13 $ (0.02) $ 0.12 $ 0.32
Fully Diluted Earnings (Loss) Per
Common Share $ 0.13 $ (0.02) $ 0.12 $ 0.32
Weighted Primary Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,217,100
Weighted Fully Diluted Average
Number of Shares Outstanding 2,241,700 2,241,700 2,241,700 2,217,100
Dividends per Common Share None None None None
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 & DECEMBER 28,1996
(Unaudited)
Dynamic Shagawa
Homes, Inc. Resort, Inc. Eliminations Consolidated 12/28/96
------------ ------------ ------------ ------------ -----------
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 875,000 $ 41,000 $ - $ 916,000 $ 554,000
Accounts receivable, less
allowance for doubtful
accounts, pledged 987,000 20,000 - 1,007,000 728,000
Inventories pledged (Note 2) 2,184,000 32,000 - 2,216,000 1,595,000
Prepaid expenses (Note 5) 85,000 14,000 - 99,000 29,000
Deferred income taxes (Note 4) 95,000 - - 95,000 95,000
Total Current Assets 4,226,000 107,000 - 4,333,000 3,001,000
OTHER ASSETS:
Investments - Affiliates 1,641,000 - (1,641,000) - -
Other assets (Note 8) 29,000 499,000 - 528,000 402,000
Total Other Assets 1,670,000 499,000 (1,641,000) 528,000 402,000
PROPERTY, PLANT & EQUIPMENT, at:
Cost - pledged in part (Note 6) 3,359,000 3,106,000 - 6,465,000 5,890,000
Less - accumulated depreciation (1,679,000) (192,000) - (1,871,000) (1,673,000)
Net Property, Plant & Equipment 1,680,000 2,914,000 - 4,594,000 4,217,000
Total Assets $ 7,576,000 $ 3,520,000 $ (1,641,000) $ 9,455,000 $ 7,620,000
LIABILITIES
CURRENT LIABILITIES:
Payables - Affiliates $ - $ 935,000 $ (935,000) $ - $ -
Notes payable - - - - -
Current portion - long-term debt 102,000 44,000 - 146,000 107,000
Accounts payable 623,000 37,000 - 660,000 216,000
Customer deposits 295,000 - - 295,000 326,000
Accrued expenses
Salaries, wages and vacations 199,000 22,000 - 221,000 194,000
Taxes, other than income 143,000 42,000 - 185,000 78,000
Warranty 73,000 - - 73,000 77,000
Other 65,000 - - 65,000 108,000
Income Taxes 203,000 (25,000) - 178,000 -
Total Current Liabilities 1,703,000 1,055,000 (935,000) 1,823,000 1,106,000
LONG-TERM DEBT: (Note 7)
Less current portion included
above 1,149,000 1,788,000 - 2,937,000 2,077,000
DEFERRED INCOME TAXES (Note 4) 34,000 - - 34,000 34,000
Total Liabilities 2,886,000 2,843,000 (935,000) 4,794,000 3,217,000
STOCKHOLDERS' EQUITY
Investment - Parent - 706,000 (706,000) - -
Common stock, par value $.10 per
share Authorized, 5,000,000
shares; issued and outstanding,
2,240,000 in 1997 and 1996 228,000 - - 228,000 228,000
Paid-in capital in excess of par 147,000 - - 147,000 147,000
Retained earnings 4,459,000 (29,000) - 4,430,000 4,172,000
Treasury stock - 43,080 shares (144,000) - - (144,000) (144,000)
Total Stockholders' Equity 4,690,000 677,000 (706,000) 4,661,000 4,403,000
Total Liabilities & Stock-
holders' Equity $ 7,576,000 $ 3,520,000 $(1,641,000) $ 9,455,000 $ 7,620,000
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 & 1996
(Unaudited)
9/30/97 9/30/96
----------- -----------
Cash Flows From Operating Activities
Net Income (Loss) $ 258,000 $ 713,000
Adjust to Reconcile Net Income or Loss Pro-
vided by (Used in) Operating Activities:
Depreciation / Amortization 316,000 156,000
Provision for Doubtful Accounts 4,000 4,000
(Gain) Loss on Sale of Property &
Equipment 9,000 -
Change in Assets & Liabilities:
(Increase) Decrease in Receivables (283,000) (204,000)
(Increase) Decrease in Inventories (621,000) 8,000
(Increase) Decrease in Prepaid
Expenses (70,000) (52,000)
(Increase) Decrease in Deferred
Income Tax - -
(Increase) Decrease in Other Assets (126,000) (361,000)
Increase (Decrease) in Accounts
Payable 444,000 452,000
Increase (Decrease) in Customer
Deposit (31,000) (153,000)
Increase (Decrease) in Accrued
Expenses 87,000 87,000
Increase (Decrease) in Income
Tax Payable 178,000 46,000
Net Cash Provided by (Used in) Operating
Activities 165,000 696,000
Cash Flows From Investing Activities
Asset Purchase - Shagawa Resort (53,000) -
Proceeds From Sale of Property &
Equipment 13,000 -
Purchase of Property & Equipment (662,000) (1,274,000)
Purchase of Treasury Stock - -
Net Cash Provided by (used in)
Investing Activities (702,000) (1,274,000)
Cash Flows From Financing Activities
Proceeds from Sale of Common Stock - 16,000
Net Borrowings (Payments) on Revolving
Credit Agreements & Other Short-Term
Financing - -
Principal Payments on Long-Term
Borrowings Including Industrial
Revenue Bonds (170,000) (45,000)
Proceeds From Long-Term Borrowings 1,069,000 878,000
Net Cash Provided by (Used in) Financing
Activities 899,000 849,000
Increase (Decrease) in Cash and
Equivalents 362,000 271,000
Cash and Equivalents
Beginning 554,000 543,000
Ending $ 916,000 $ 814,000
Supplemental Disclosures of Cash Flow
Information
Cash Payments for:
Income Taxes $ 3,000 $ 427,000
Interest $ 168,000 $ 62,000
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 September 30, 1997 and December 28,
1996, and the results of operations and cash flows for the nine months ended
September 30, 1997 and September 30, 1996.
Note 2. INVENTORIES
During interim accounting periods, the Company uses the standard cost method of
determining cost of sales and inventory levels at its manufacturing facility.
Cost of sales values are determined monthly based on standards for materials,
labor and overhead by product mix. Deviations from these standards result in
adjustments of the monthly cost of sales amount. Periodic physical inven-
tories are taken during the fiscal year to determine actual inventory and cost
of sales. No physical inventory was taken during the third quarter of 1997.
Shagawa Resort, Inc. conducts a physical inventory at each month-end.
The Breakdown of Inventories is as follows:
9/30/97 9/30/96
----------- -----------
Finished Goods $ 1,060,000 $ 745,000
Work In Process 193,000 155,000
Raw Materials 931,000 730,000
Shagawa Resort, Inc. 32,000 -
Total Inventories $ 2,216,000 $ 1,630,000
Note 3. BACKLOG OF ORDERS
The Company's order backlog consists of completed units awaiting delivery,
current production and orders scheduled for future delivery. As of September
30, 1997 and September 30, 1996, the Company's backlog of open orders was
approximately $4,407,000 and $4,252,000, respectively. As of December 28,
1996, the Company's backlog of open orders was $2,593,000. The September 30,
1997 backlog consists of 31 completed single-family units available for deli-
very and setting as compared to 24 units at September 30, 1996. The majority
of the third quarter backlog is scheduled to be delivered and set during the
fourth quarter of 1997. However, weather conditions and dealer site pre-
parations may curtail the Company's ability to meet all anticipated delivery
schedules during the fourth quarter of 1997.
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
9/30/97 9/30/96
----------- -----------
Advertising $ 14,000 $ 8,000
Insurance 63,000 76,000
Equipment/ Supplies Inventory
- Shagawa Resort, Inc. 14,000 -
Other 8,000 7,000
$ 99,000 $ 91,000
Note 6. PROPERTY AND EQUIPMENT
9/30/97 9/30/96
----------- -----------
Dynamic Homes, Inc.
Land and Improvements $ 191,000 $ 130,000
Buildings 991,000 978,000
Machinery and Equipment 1,749,000 1,368,000
Construction in Progress 428,000 38,000
Shagawa Resort, Inc.
Land and Improvements 341,000 329,000
Buildings 2,098,000 2,033,000
Machinery and Equipment 667,000 603,000
Construction in Progress - 51,000
Less: Accumulated Depreciation
- Dynamic Homes, Inc. (1,679,000) (1,577,000)
Accumulated Depreciation
- Shagawa Resort, Inc. (192,000) (49,000)
$ 4,594,000 $ 3,904,000
Note 7. LONG-TERM DEBT
9/30/97 9/30/96
----------- -----------
Long-term debt (net of current
maturities) consists of:
- Detroit Lakes - Plant Expansion $ 910,000 $ -
- Industrial Development Bonds of
Detroit Lakes, MN - 45,000
- M & I Leasing - Capitalized
Crane / Trailers 239,000 -
- Term Mortgage Agreement covering
Shagawa Resort Project (Note 9) 1,788,000 1,826,000
- Other Notes and Contracts Payable - 4,000
$ 2,937,000 $ 1,875,000
Note 8. OTHER ASSETS - NET
9/30/97 9/30/96
----------- -----------
Dynamic Homes, Inc.
- Deferred Bond & Maintenance Expense $ - $ 3,000
- Prepaid Debt Expense 23,000 -
- Deposits 6,000 13,000
Shagawa Resort, Inc.
- Goodwill 116,000 -
- Prepaid Advertising 7,000 11,000
- Prepaid Legal / Debt Expense 193,000 191,000
- Organization / Start-up 146,000 181,000
- Asset Replacement Escrow 32,000 -
- Other 5,000 -
$ 528,000 $ 399,000
The above referenced corresponding Other Assets for Shagawa Resort, Inc. are
being amortized on a straight-line basis over the estimated useful lives of the
asset as follows:
Advertising 3 years
Organization / Start-up 5 years
Legal / Debt Expense 20 years
Goodwill 15 years
Note 9. SHAGAWA RESORT, INC.
On September 7, 1995, the Company purchased all of the outstanding shares of
Shagawa Resort, Inc., the sole owner of a Holiday Inn Sunspree Motel which was
under construction and located at 400 North Pioneer Road in Ely, Minnesota.
The motel consists of approximately 54,000 square feet of buildings consisting
of 61 units and includes lounge, dining, recreational and meeting facilities on
approximately 25 acres of land. The purchase price consisted of cash and a
construction mortgage assumption to NorWest Bank Minnesota for the financing of
the construction costs associated with completing the Shagawa Resort, Inc.
hotel / resort facility. The hotel / resort remained under construction until
May 1, 1996, when the hotel / resort commenced with normal business operations.
During August 1996, the construction mortgage was finalized and converted to a
long-term mortgage loan which is secured by the assets of Shagawa Resort, Inc.
and a partial guarantee of the Small Business Administration. Monthly
installments of principal and interest approximate $16,000 with a blended
interest rate of approximately 8 percent (Note 7).
In conjunction with the purchase of Shagawa Resort, Inc., the Company
simultaneously entered into a Management Agreement with Northland Adventures
Minnesota, Ltd. to operate and manage the hotel / resort from the opening date
(May 1, 1996) until December 15, 1997. The Management Agreement required 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 amounts exceed the
minimum rentals on an annual basis. During the duration of the agreement, the
Managing Agent absorbs or retains any operating profit or loss generated by the
operation of the facility. During fiscal 1996, the Managing Agent met its
minimum monthly payment obligations. On March 17, 1997, the Company and
Northland Adventures Minnesota, Ltd. collectively reached an Asset Purchase
Agreement whereby the Company purchased substantially all assets of the
Business. All prior agreements pertaining to the management of the hotel /
resort facility have been terminated. Consequently, effective March 17, 1997,
the Company has assumed the management obligations and rights associated with
the Shagawa Resort, Inc. facility.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Three Months Ended September 30, 1997 and 1996
NET SALES:
The Company's revenue and operating results encompass both the manufacturing
sector (Dynamic Homes, Inc.) and the hospitality sector (Shagawa Resort, Inc.).
The Company's revenue from the manufacturing sector for the three months ended
September 30, 1997, was $4,201,000 as compared to $4,737,000 for the year
earlier period which represents a decrease of $536,000 or approximately 11%.
Single-family revenues decreased by $409,000 from $4,159,000 for 1996 to
$3,750,000 for 1997. Likewise, revenue generated from multi-family / commer-
cial activities decreased from $193,000 in 1996 to $124,000 for 1997. As a
result of lower unit revenue activities, transportation and other (retail)
revenue decreased from $385,000 in 1996 to $327,000 for 1997. The decrease in
revenue during the third quarter of 1997 reflects the Company's lower backlog
at the beginning of the quarter and the absence of any significant Native
American and multi-family / commercial projects. In contrast, the third quar-
ter of 1996 benefited from the production and revenues associated with several
Native American single-family housing projects located in the Upper Midwest.
The Company's backlog at September 30, 1997, was $4,407,000 as compared to
$4,252,000 at September 30, 1996 (reference Note 3). Unit order activity for
single-family housing is again showing signs of the traditional late fall
slowdown. In response, the Company has implemented several aggressive fall and
winter discount programs promoting model homes, consumer rebates and Dealer /
Developer discounts. In addition, the Company continues to explore
opportunities in fulfilling some of the flood-stricken area's housing needs.
Even though the Company has participated in a limited number of units for this
area, future order activity remains uncertain.
On March 17, 1997, the Company assumed the management obligations and rights
associated with the Shagawa Resort facility - DBA: Holiday Inn Sunspree Resort
(reference Note 9). During the third quarter of 1997, Shagawa Resort, Inc.
contributed operating revenues of $728,000 as compared to lease revenues of
$66,000 for the third quarter of 1996. Due to the location and seasonal nature
of the industry, revenues strengthened during the third quarter of 1997, but it
is anticipated that seasonal factors will reduce the revenue base during the
fourth quarter of 1997 and early stages of 1998.
COST OF SALES:
Dynamic Home's gross profit (including transportation revenue and expense but
excluding Shagawa Resort, Inc.) was $1,028,000 for 1997 as compared to
$1,118,000 for 1996. Gross profit percentage for 1997 is 24.5% versus 23.6%
for 1996. When transportation revenue and expense plus Shagawa Resort are
excluded, the gross profit percentage on product changes to 25.8% and 25.1%,
respectively. The improved gross margin percent for the third quarter of 1997,
reflects the benefits associated with increased production, favorable material
acquisition costs and reduced levels of promotional discounts.
Shagawa Resort, Inc. recorded a gross profit of $368,000 on operating revenues
of $728,000 for the third quarter of 1997. Due to the leasing arrangement in
effect during the third quarter of 1996, no cost of sales were required.
OPERATING EXPENSES:
Dynamic Homes, Inc. operating expenses, which include transportation, marketing
and administration, decreased by $24,000 over the 1996 period. Due to de-
creased unit volume and distance factors, 1997 delivery and setting expense
decreased by $52,000. Marketing related expenses for 1997 increased by
$35,000, primarily associated with Dealer incentives. During 1996, similar
Dealer incentives were recognized during the second quarter. Administration
expense for 1997 increased by $13,000, while Other expense, associated with the
Company's 1997 profit incentive plan, decreased by $20,000.
Shagawa Resort, Inc. incurred operating expenses of $261,000 for the third
quarter of 1997. During the third quarter of 1996, Shagawa Resort operated
under a management agreement and consequently, incurred only depreciation and
amortization expenses of $33,000 associated with the ownership of the property.
OPERATING INCOME:
The operating cycle for the third quarter of 1997 resulted in a consolidated
operating income of $788,000. During the same period of 1996, the Company
reported operating income of $832,000. Dynamic Homes contributed an operating
income of $681,000 while Shagawa Resort contributed $107,000 of operating
income. During the third quarter of 1996, Dynamic Homes and Shagawa Resort,
reported operating incomes of $799,000 and $33,000, respectively. The decrease
in Dynamic Homes' operating income reflects the reduced sales volume during the
third quarter of 1997, while the increase in operating income for Shagawa
Resort is associated with the resort's change in status. During the third
quarter of 1997, the Company owned and operated the facility, in contrast to
the lease and management agreement in affect during the third quarter of 1996.
NET NON - OPERATING INCOME / EXPENSE:
Consolidated net, non-operating expense for the third quarter of 1997 was
$64,000 as compared to $28,000 for the same period of 1996. Interest related
expense for 1997 increased by $30,000. Interest expense associated with the
financing of the Shagawa Resort property generated $37,000 of interest expense
for the third quarter of 1997. Dynamic Homes incurred an additional $27,000 of
interest costs associated with the capital lease financing of transportation
equipment and a long-term financing package supporting the expansion of the
Detroit Lakes, MN manufacturing facility. Other income and expenses for each
of the periods was insignificant.
FEDERAL AND STATE INCOME TAXES:
During the third quarter of both 1997 and 1996, the Company recorded estimated
income tax provisions of $290,000 and $320,000, respectively. Income tax
obligations are estimated at the normal statutory rate.
NET INCOME (LOSS):
The consolidated net income for the third quarter of 1997 was $434,000 as
compared to a net income of $484,000 for 1996. Both primary and fully-diluted
earnings per common share outstanding for 1997 were $0.19 per share versus
$0.22 per share for 1996. During the third quarter of 1997, the ownership and
operation of the Shagawa Resort property benefited the Company's net earnings
by approximately $.02 per share, while the manufacturing facility increased net
earnings by approximately $0.17 per share. During the 1996 period, Shagawa
Resort had no affect on the earnings per common share. Consideration for
unexercised stock options granted in 1996, were recognized in arriving at
fully-diluted common shares outstanding for the periods.
Results of Operations
Nine Months Ended September 30, 1997 and 1996
NET SALES:
The Company's revenue and operating results encompass both the manufacturing
sector (Dynamic Homes, Inc.) and hospitality sector (Shagawa Resort, Inc.).
The Company's revenue generated from the manufacturing sector for the nine-
month period ending September 30, 1997, was $7,686,000 or a decrease of
$1,325,000 from the $9,011,000 realized for 1996. During 1997, single-family
revenue decreased by $534,000 while multi-family / commercial revenue decreased
$700,000. Due to the lower revenue volume for the first nine months of 1997,
transportation and other (retail) revenues also decreased by $91,000. During
the first half of 1997, order activity and unit delivery and setting activities
were curtailed by winter weather conditions and the spring flooding. In
addition, new orders from the multi-family / commercial line continued to be
soft throughout the period. The Company also did not benefit from any new
orders associated with Native American housing which has had a significant
impact on revenues during the past several years.
Unit order activity has again shown indications of the traditional seasonal
slowdown in construction activity. Consequently, the Company has implemented
several marketing programs aimed at providing Dealer / Developers with various
incentives to encourage unit orders for winter production. In addition, the
Company proposes to supplement winter production orders with inventory or
speculation units. These units will be available to the Dealer / Developer
network and can be ordered to fulfill immediate housing needs.
Revenues associated with the ownership and operation of the Shagawa Resort
totaled $1,287,000 for the first nine months of 1997. Shagawa Resort opened on
May 1, 1996, under a management agreement with a managing agent. Lease
revenues under this arrangement for the months of May through September, 1996,
contributed $110,000 to the revenue base. The revenue base for 1997 benefited
from the seasonally strong summer months but as summer passes, revenues are
expected to decline with the onset of the fall and winter months.
COST OF SALES:
The Company's gross profit (including transportation revenue and expense but
excluding Shagawa Resort) was $1,447,000 for 1997 versus $2,091,000 for 1996.
Gross profit percentage for 1997 was 18.8% as compared to 23.2% for 1996. When
transportation revenue and expense plus Shagawa Resort are excluded, the gross
profit on product changes to 21.9% and 25.9%, respectively. During the first
six months of 1997, the reduced level of new orders required the manufacturing
facility to operate at reduced production levels. Consequently, resulting
unfavorable production variances negatively impacted the gross profit percent.
Overall material acquisition costs remained relatively stable throughout the
first nine months of 1997. In contrast, the first nine months of 1996
benefited from higher production levels and more favorable material ac-
quisition costs.
Shagawa Resort recorded a gross profit of $611,000 for the nine-month period
ending September 30, 1997. Prior year gross profit of $110,000 represents only
lease revenues for the five-month period of May - September.
OPERATING EXPENSES:
Operating expenses associated with the manufacturing facility, which includes
transportation, marketing and administration, decreased by $71,000 from
$1,514,000 during 1996 to $1,443,000 for 1997. Volume related transportation
and marketing expenses decreased by $61,000 and $19,000 respectively.
Administration expenses for 1997 increased $27,000 and other expense associated
with a company profit incentive plan decreased by $18,000.
As a result of the March 17, 1997, asset purchase agreement with the prior
managing agent, Shagawa Resort incurred operational and ownership expenses of
$568,000 for the 1997 period. During 1996, the resort facility was under
construction until the May 1st opening date. Subsequent operational
responsibilities were leased to a managing agent and consequently the Company
incurred only depreciation and amortization costs of $56,000 associated with
the property ownership.
OPERATING INCOME:
The operating cycle for the first nine months of 1997 resulted in a consol-
idated operating income of $595,000. During the same period of 1996, the
Company reported consolidated operating income of $1,240,000. Dynamic Homes
realized operating income of $552,000 while Shagawa Resort contributed $43,000
to operating income. Dynamic Homes and Shagawa Resort reported operating
incomes of $1,186,000 and $54,000, respectively, for the 1996 period. The
reduction in operating results reflects the reduced sales volume, unfavorable
production variances during the first two quarters of 1997 and the management
change to the operational status of the Shagawa Resort facility.
NET NON-OPERATING INCOME / EXPENSE:
Consolidated net non-operating expenses for 1997 were $165,000 or an increase
of $111,000 over the 1996 period. Net non-operating expenses for Dynamic Homes
increased $56,000 from $3,000 in 1996 to $59,000 in 1997, while non-operating
expenses for Shagawa Resort increased by $55,000 from $51,000 in 1996 to
$106,000 for 1997. Interest related expense increased by $102,000 during 1997
while non-operating income decreased by $9,000. Interest costs associated with
the long-term mortgage financing of the Shagawa Resort increased from $53,000
for 1996 to $107,000 for the 1997 period. Interest costs associated with the
long-term financing of transportation equipment and plant expansion at Detroit
Lakes, MN added an additional $51,000 of interest expense for Dynamic Homes
during the 1997 period.
FEDERAL AND STATE INCOME TAXES:
During the first nine months of 1997 and 1996, the Company recorded a
consolidated estimated tax provision of $172,000 and $473,000, respectively.
Income tax obligations and benefits are estimated at the normal statutory rate.
NET INCOME (LOSS):
The consolidated net income for the 1997 period was $258,000 as compared with a
net income of $713,000 for 1996. Both primary and fully-diluted earnings per
common share outstanding for 1997 were $0.12 per share versus $0.32 per share
for 1996. During the nine month period of 1997, Shagawa Resort incurred a net
loss of $38,000 or approximately $0.02 per share while the manufacturing
facility realized a net income of $296,000 or approximately $0.13 per share.
During 1996, Shagawa Resort had no affect on the reported earnings per common
share. Consideration for unexercised stock options granted in 1996 were
recognized in arriving at the fully-diluted common shares outstanding and
earnings per share computations.
Financial Condition
As of September 30, 1997
The Company's consolidated working capital at September 30, 1997, was a posi-
tive $2,510,000 versus $1,805,000 at September 30, 1996. The working capital
position at December 28, 1996, was a positive $1,895,000. The current ratio
for September 30, 1997, was 2.4 to 1.0 as compared to 2.7 to 1.0 at December
28, 1996, and 2.0 to 1.0 at September 30, 1996.
During the first three quarters of 1997, cash outflows were required for the
build-up of inventory, the plant expansion project, the purchase of assets
associated with the management and operational responsibilities of Shagawa
Resort (Notes 8 and 9) and the increase in customer receivables. Cash flows to
support the referenced activities were primarily provided by utilizing the
Company's year-end cash and cash equivalents position, supplier payment terms,
internally generated income, income tax deferral and long-term financing
arrangements.
Long-term debt, net of current maturities, increased by $1,062,000 from
$1,875,000 at September 30, 1996 to $2,937,000 at September 30, 1997. Long-
term debt, net of current maturities, was $2,077,000 at December 28, 1996.
Long-term debt consists primarily of a long-term mortgage loan, which is
secured by substantially all assets of Shagawa Resort, Inc., with a partial
guarantee of the Small Business Administration, two capitalized lease
obligations secured by transportation equipment and a financing package secured
by a mortgage in support of the plant expansion (Note 7). On April 1, 1997,
the Company retired all outstanding debt associated with the Industrial Revenue
Bonds which initially financed a major portion of the property and equipment
for the Company's manufacturing facility. The debt retirement was required to
provide collateral for a restructured long-term debt financing package. The
financing package is a composite of three funding sources which provided the
Company with $1,000,000 of proceeds which were used for financing the plant
expansion, including equipment and working capital for additional inventory
requirements. The plant expansion was operational by the end of June, 1997,
and added an additional 17,000 square feet of production space with the
potential of increasing the plant's single-shift production capacity by
approximately 15 percent. Debt retirement, associated with the plant expan-
sion, varies from five to fifteen years dependent on the funding source.
The ratio of long-term debt to stockholders' equity changed from .45 to 1.0 at
September 30, 1996, to .47 to 1.0 at December 28, 1996, and .63 to 1.0 at
September 30, 1997. The increase in the ratio reflects the accumulated debt
acquired to finance transportation equipment, the Shagawa Resort facility and
the plant expansion. Stockholders' equity, net of treasury stock, increased by
$258,000 to $4,661,000 at September 30, 1997, from $4,403,000 at December 28,
1996 and up $453,000 from the September 30, 1996 level of $4,208,000.
On May 1, 1997, Dynamic Homes, Inc. renewed its available credit line for an
additional one-year period. The available credit line is $1,100,000 and
exempts all existing letters of credit from reducing the available credit line.
The available credit line is discretionary and is based upon specified
percentages of inventory and receivables. As of September 30, 1997, the
Company had no outstanding borrowings against the available credit line.
Management 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 1997 and
beginning stages of 1998.
Statements regarding the Company's operations, performance and financial
condition for 1997 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. Like-
wise, future escalating and volatile material costs and unfavorable weather
conditions could also affect the Company's profit margins.
PART II.
Items 1, 2, 3, 4, 5 are omitted as each is either not applicable or the answer
to the item is negative.
Item 6. Exhibits and Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter ended September 30,
1997.
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: November 14, 1997
Dynamic Homes, Inc. (Registrant)
ELDON MATZ Controller