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, 1998
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
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 June 30, 1998, 2,224,850 common shares, par value, $.10 per share, were
outstanding. On January 7, 1995, the Company implemented a six month plan to
repurchase up to 100,000 shares of its outstanding common stock. As of June
30, 1998, 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
but unexercised options have been excluded from the common shares outstanding.
PART I.
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1998 & 1997
(Unaudited)
Three Months
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 6/30/97
----------- ------------ ------------ ------------
Revenues
Single - Family $ 3,226,000 $ - $ 3,226,000 $ 1,541,000
Multi - Family / Commercial 72,000 - 72,000 59,000
Other 114,000 - 114,000 104,000
Transportation 169,000 - 169,000 89,000
Shagawa Resort, Inc. - 495,000 495,000 503,000
Total Revenues - Net 3,581,000 495,000 4,076,000 2,296,000
Cost of Sales
Materials 1,990,000 293,000 2,283,000 1,301,000
Labor 331,000 - 331,000 173,000
Overhead 379,000 - 379,000 235,000
Transportation 204,000 - 204,000 150,000
Total Cost of Sales 2,904,000 293,000 3,197,000 1,859,000
Gross Profit 677,000 202,000 879,000 437,000
Operating Expenses
Marketing 124,000 24,000 148,000 106,000
Administration 223,000 204,000 427,000 420,000
Other - - - -
Total Operating Expenses 347,000 228,000 575,000 526,000
Operating Income (Loss) 330,000 (26,000) 304,000 (89,000)
Other (Income) Expense
Interest Expense 37,000 38,000 75,000 61,000
Other, Net (13,000) (1,000) (14,000) 2,000
Total Other (Income) Expense 24,000 37,000 61,000 63,000
Income (Loss) Before Taxes 306,000 (63,000) 243,000 (152,000)
Income Tax (Provision) Benefit (122,000) 25,000 (97,000) 61,000
Net Income (Loss) $ 184,000 $ (38,000) $ 146,000 $ (91,000)
Basic Earnings (Loss) Per Common Share $ 0.08 $ (0.02) $ 0.07 $ (0.04)
Diluted Earnings (Loss) Per Common Share $ 0.08 $ (0.02) $ 0.07 $ (0.04)
Weighted Basic Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,240,900
Weighted Diluted Average Number of
Shares Outstanding 2,242,000 2,242,000 2,242,000 2,580,600
Dividends per Common Share None None None None
See notes to condensed consolidated financial
statements.
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998 & 1997
(Unaudited)
Six Months
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 6/30/97
----------- ------------ ------------ ------------
Revenues
Single - Family $ 3,861,000 $ - $ 3,861,000 $ 2,843,000
Multi - Family / Commercial 72,000 - 72,000 298,000
Other 153,000 - 153,000 163,000
Transportation 209,000 - 209,000 181,000
Shagawa Resort, Inc. - 839,000 839,000 559,000
Total Revenues - Net 4,295,000 839,000 5,134,000 4,044,000
Cost of Sales
Materials 2,360,000 532,000 2,892,000 2,202,000
Labor 386,000 - 386,000 344,000
Overhead 472,000 - 472,000 502,000
Transportation 354,000 - 354,000 334,000
Total Cost of Sales 3,572,000 532,000 4,104,000 3,382,000
Gross Profit 723,000 307,000 1,030,000 662,000
Operating Expenses
Marketing 229,000 43,000 272,000 192,000
Administration 411,000 406,000 817,000 661,000
Other - - - 2,000
Total Operating Expenses 640,000 449,000 1,089,000 855,000
Operating Income (Loss) 83,000 (142,000) (59,000) (193,000)
Other (Income) Expense
Interest Expense 69,000 74,000 143,000 102,000
Other, Net (36,000) (1,000) (37,000) (1,000)
Total Other (Income) Expense 33,000 73,000 106,000 101,000
Income (Loss) Before Taxes 50,000 (215,000) (165,000) (294,000)
Income Tax (Provision) Benefit (20,000) 86,000 66,000 118,000
Net Income (Loss) $ 30,000 $ (129,000) $ (99,000) $ (176,000)
Basic Earnings (Loss) Per Common Share $ .01 $ (0.06) $ (0.04) $ (0.08)
Diluted Earnings (Loss) Per Common Share $ .01 $ (0.06) $ (0.04) $ (0.07)
Weighted Basic Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,240,900
Weighted Diluted Average Number of
Shares Outstanding 2,242,000 2,242,000 2,242,000 2,580,600
Dividends per Common Share None None None None
See notes to condensed consolidated financial
statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 & DECEMBER 27,1997
(Unaudited)
Dynamic Shagawa
Homes, Inc. Resort, Inc. Eliminations Consolidated 12/27/97
------------ ------------ ------------ ------------ ------------
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ (14,000) $ 56,000 $ 15,000 $ 57,000 $ 1,330,000
Accounts receivable, less allowance for
doubtful accounts, pledged 1,065,000 34,000 - 1,099,000 784,000
Inventories pledged (Note 2) 3,400,000 32,000 - 3,432,000 1,488,000
Prepaid expenses (Note 5) 104,000 12,000 - 116,000 47,000
Deferred income taxes (Note 4) 99,000 - - 99,000 99,000
Total Current Assets 4,654,000 134,000 15,000 4,803,000 3,748,000
OTHER ASSETS:
Investments - Affiliates 1,798,000 - (1,798,000) - -
Other assets (Note 8) 25,000 485,000 - 510,000 530,000
Total Other Assets 1,823,000 485,000 (1,798,000) 510,000 530,000
PROPERTY, PLANT & EQUIPMENT, at:
Cost - pledged in part (Note 6) 3,577,000 3,154,000 - 6,731,000 6,588,000
Less - accumulated depreciation (1,860,000) (312,000) - (2,172,000) (1,984,000)
Net Property, Plant & Equipment 1,717,000 2,842,000 - 4,559,000 4,604,000
Total Assets $ 8,194,000 $ 3,461,000 $ (1,783,000) $ 9,872,000 $ 8,882,000
LIABILITIES
CURRENT LIABILITIES:
Payables - Affiliates $ - $ 1,289,000 $ (1,289,000) $ - $ -
Notes payable 435,000 - - 435,000 -
Current portion - long-term debt 123,000 39,000 - 162,000 154,000
Accounts payable 622,000 36,000 - 658,000 261,000
Customer deposits 514,000 - - 514,000 177,000
Accrued expenses
Salaries, wages and vacations 277,000 25,000 - 302,000 221,000
Taxes, other than income 103,000 26,000 - 129,000 96,000
Warranty 66,000 - - 66,000 74,000
Other 79,000 6,000 - 85,000 135,000
Income Taxes 19,000 (86,000) - (67,000) -
Total Current Liabilities 2,238,000 1,335,000 (1,289,000) 2,284,000 1,118,000
LONG-TERM DEBT: (Note 7)
Less current portion included above 1,114,000 1,761,000 - 2,875,000 2,952,000
DEFERRED INCOME TAXES (Note 4) 80,000 - - 80,000 80,000
Total Liabilities 3,432,000 3,096,000 (1,289,000) 5,239,000 4,150,000
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 1998
and 1997*228,000 - - 228,000 228,000
Paid-in capital in excess of par 147,000 - - 147,000 147,000
Retained earnings 4,531,000 (341,000) 212,000 4,402,000 4,501,000
Treasury stock - 43,080 shares (144,000) - - (144,000) (144,000)
Total Stockholders' Equity 4,762,000 365,000 (494,000) 4,633,000 4,732,000
Total Liabilities & Stockholders' Equity $ 8,194,000 $ 3,461,000 $ (1,783,000) $ 9,872,000 $ 8,882,000
See notes to consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 & 1997
(Unaudited)
6/30/98 6/30/97
------------ ------------
Cash Flows From Operating Activities
Net Income (Loss) $ (99,000) $ (176,000)
Adjust to Reconcile Net Income or Loss
Provided by (Used in) Operating Activities:
Depreciation and Amortization 234,000 195,000
Provision for Doubtful Accounts 4,000 3,000
(Gain) Loss on Sale of Property & Equipment - 8,000
Change in Assets & Liabilities:
(Increase) Decrease in Receivables (319,000) 124,000
(Increase) Decrease in Inventories (1,944,000) (974,000)
(Increase) Decrease in Prepaid Expenses (69,000) (111,000)
(Increase) Decrease in Deferred Income Tax - -
(Increase) Decrease in Other Assets (15,000) (118,000)
Increase (Decrease) in Accounts Payable 397,000 340,000
Increase (Decrease) in Customer Deposit 337,000 96,000
Increase (Decrease) in Accrued Expenses 56,000 (12,000)
Increase (Decrease) in Income Tax Payable (67,000) (120,000)
Net Cash Provided by (Used in)
Operating Activities (1,485,000) (745,000)
Cash Flows From Investing Activities
Asset Purchase - Shagawa Resort - (53,000)
Proceeds From Sale of Property & Equipment 1,000 10,000
Purchase of Property & Equipment (155,000) (613,000)
Net Cash Provided by (used in) Investing
Activities (154,000) (656,000)
Cash Flows From Financing Activities
Net Borrowings (Payments) on Revolving Credit
Agreements & Other Short-Term Financing 435,000 -
Principal Payments on Long-Term Borrowings
Including Shagawa Resort, Inc. (69,000) (110,000)
Proceeds From Long-Term Borrowings - 1,069,000
Net Cash Provided by (Used in) Financing
Activities 366,000 959,000
Increase (Decrease) in Cash and Equivalents (1,273,000) (442,000)
Cash and Equivalents
Beginning 1,330,000 554,000
Ending 57,000 112,000
Supplemental Disclosures of Cash Flow
Information
Cash Payments for:
Income Taxes $ 1,000 $ 3,000
Interest $ 139,000 $ 104,000
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, 1998 and December 27, 1997,
and the results of operations and cash flows for the six months ended June 30,
1998 and June 30, 1997.
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 inventories
are taken during the fiscal year to determine accuracy of reported inventory
values. A physical inventory was taken during the second quarter of 1998 and
the results are reflected in the cost of sales and inventory levels reported.
Shagawa Resort, Inc. conducts a physical inventory at each month-end.
The Breakdown of Inventories is as follows:
6/30/98 6/30/97
------------ ------------
Finished Goods $ 2,214,000 $ 1,551,000
Work In Process 190,000 162,000
Raw Materials 996,000 831,000
Shagawa Resort, Inc. 32,000 25,000
Total Inventories $ 3,432,000 $ 2,569,000
Note 3. BACKLOG OF ORDERS
The Company's order backlog consists of completed units awaiting delivery,
current production and orders scheduled for future production. As of June 30,
1998, and June 30, 1997, the Company's backlog of committed orders was approxi-
mately $6,907,000 and $5,710,000, respectively. As of December 27, 1997, the
Company's backlog of orders was $2,285,000. The higher 1998 order backlog
continues to reflect the favorable home mortgage rates and the results of
several marketing programs providing the customer with order incentives during
the traditional slower winter months. Approximately two-thirds of the winter
promotional unit orders have been delivered and set by the end of June 1998.
The remaining units are anticipated to be delivered and set during the third
quarter of 1998. Promotional discounts on these unit orders adversely impact
the gross margin at time of set. In contrast, the Company realized additional
benefits from increased plant utilization and more favorable overhead and labor
absorption during the production process.
The June 30, 1998, backlog of orders includes an order for 20 multi-family
housing units associated with a Native American community in Minnesota. The
Company anticipates that the entire project will be produced and delivered
during the third quarter of 1998. The Company also received an order from a
Native American community in South Dakota for 10 single-family homes. This
project, valued at approximately $450,000, is expected to be delivered during
the fourth quarter of 1998. In addition to the winter promotional programs,
the Company also completed the construction of 28 inventory units which were
available to the builder / dealer network for immediate sale. As of June 30,
1998, 12 inventory units remain available for sale and were excluded from the
referenced order backlog value.
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
6/30/98 6/30/97
------------ ------------
Advertising $ 3,000 $ 4,000
Insurance 89,000 102,000
Equipment/Supplies Inventory-Shagawa Resort, Inc. 12,000 23,000
Other 12,000 11,000
$ 116,000 $ 140,000
Note 6. PROPERTY AND EQUIPMENT
6/30/98 6/30/97
------------ ------------
Dynamic Homes, Inc.
Land and Improvements $ 220,000 $ 165,000
Buildings 1,401,000 971,000
Machinery and Equipment 1,868,000 1,601,000
Construction in Progress 88,000 605,000
Shagawa Resort, Inc.
Land and Improvements 343,000 329,000
Buildings 2,116,000 2,098,000
Machinery and Equipment 695,000 666,000
Construction in Progress - -
6,731,000 6,435,000
Less: Accumulated Depreciation-Dynamic Homes, Inc. (1,860,000) (1,638,000)
Accumulated Depreciation-Shagawa Resort, Inc. (312,000) (152,000)
$ 4,559,000 $ 4,645,000
Note 7. LONG-TERM DEBT
6/30/98 6/30/97
------------ ------------
Long-term debt (net of current maturities)
consists of:
- Detroit Lakes - Plant Expansion $ 860,000 $ 931,000
- M & I Leasing - Capitalized Crane/Trailers 207,000 249,000
- Term Mortgage Agreement covering Shagawa
Resort Project (Note 9) 1,761,000 1,799,000
- Other Notes and Contracts Payable 47,000 -
$ 2,875,000 $ 2,979,000
Note 8. OTHER ASSETS - NET
6/30/98 6/30/97
------------ ------------
Dynamic Homes, Inc.
- Prepaid Debt Expense $ 19,000 $ 22,000
- Deposits 6,000 6,000
Shagawa Resort, Inc.
- Goodwill 112,000 118,000
- Prepaid Advertising 4,000 8,000
- Prepaid Legal / Debt Expense 179,000 188,000
- Organization / Start-up 124,000 155,000
- Asset Replacement Escrow 65,000 23,000
- Other 1,000 -
$ 510,000 $ 520,000
The above referenced 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 install-
ments 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 simulta-
neously 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 assumed the management obligations and rights associated
with the Shagawa Resort, Inc. facility. Operational results for the period
March 17 - 31, 1997, were not recognized during the first quarter of 1997, but
were included in the second quarter results for 1997.
MANAGEMENT'S DISCUSSION & ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Three Months Ended June 30, 1998 and 1997
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
June 30, 1998, was $3,581,000, up $1,788,000 from the $1,793,000 recorded
during the same period last year. Single-family revenues increased from
$1,541,000 for 1997 to $3,226,000 during 1998. As a result of higher unit
revenue activities, transportation and other (retail) revenues also increased
by $90,000 from $193,000 for 1997 to $283,000 during 1998. Multi-family /
commercial activities were minimal during each of the periods with unit
revenues of $72,000 and $59,000 for 1998 and 1997, respectively. The increase
in revenues during the second quarter of 1998 reflects the Company's higher
order backlog at the end of the first quarter and the immediate availability
of winter production related inventory units (reference Note 3).
Revenues for Shagawa Resort, Inc. during the second quarter of 1998 totaled
$495,000 as compared with $503,000 for 1997. On March 17, 1997, the Company
assumed operational responsibilities for Shagawa Resort, Inc. dba: Holiday Inn
Sunspree Resort (reference Note 9). During 1997, the second quarter results
also included the revenues for the period March 17 - 31. Due to the location
and seasonal nature of the resort industry, revenues are again following the
anticipated cycle of gaining strength during the latter stages of the second
quarter, reaching maximum strength during the third quarter and softening
during the fall and winter time periods.
COST OF SALES:
Dynamic Homes' gross profit (including transportation revenue and expense but
excluding Shagawa Resort, Inc.) was $677,000 for the second quarter of 1998
versus $250,000 for 1997. The gross profit percentage for 1998 improved from
13.9 percent for 1997 to 18.9 percent for 1998. When transportation revenue
and expense plus Shagawa Resort, Inc. are excluded, the gross profit on product
changes from 18.3 percent for 1997 to 20.9 percent for 1998. Even though the
1998 gross margin was negatively affected by winter promotional and model dis-
counts, higher plant production levels contributed to increased plant utiliza-
tion which resulted in more favorable labor and overhead absorption rates. The
manufacturing plant produced an additional 22 units during the second quarter
of 1998 when compared with 1997. Material acquisition costs were relatively
stable throughout each of the time periods.
Shagawa Resort recorded a gross profit of $202,000 or 40.8 percent on revenues
of $495,000 for the second quarter of 1998. During the second quarter of 1997,
Shagawa Resort recorded a gross profit of $187,000 or 37.2 percent on operating
revenues of $503,000.
OPERATING EXPENSES:
Dynamic Homes, Inc. operating expenses, which include transportation, marketing
and administration increased by $126,000 over the 1997 level. Due to the in-
creased volume related to delivery and setting activity, 1998 transportation
expenses increased by $54,000. Marketing related expenses during 1998 in-
creased by $45,000, primarily related to builder / dealer volume related incen-
tives and the absence of the commercial sales position during the second
quarter of 1997. Administrative expenses for 1998 increased by $27,000 due to
increased costs for stockholder related activities and staff compensation
adjustments.
Shagawa Resort, Inc. incurred operating expenses of $228,000 during 1998 as
compared with $251,000 for 1997. The second quarter operating expenses for
1997 also included the March 17 - 31 operating period (reference Note 9).
OPERATING INCOME (LOSS):
The operating cycle for the second quarter of 1998 resulted in a consolidated
operating income of $304,000. During the same period of 1997, the Company
reported a consolidated operating loss of $89,000. Dynamic Homes, Inc. record-
ed an operating income of $330,000 for the second quarter of 1998 as compared
with an operating loss of $25,000 during 1997. Shagawa Resort incurred opera-
ting losses of $26,000 and $64,000 for 1998 and 1997, respectively. The im-
proved operating results primarily reflect the higher revenue and production
levels attained by the Dynamic Homes' manufacturing facility.
NET NON - OPERATING INCOME / EXPENSE:
Consolidated net non-operating expense for the second quarter of 1998 was
$61,000 and similar to the $63,000 reported for the 1997 period. Interest
related expense increased by $14,000 during 1998. Interest expense associated
with the financing of the Shagawa Resort property generated $38,000 of interest
related expense, while Dynamic Homes, Inc. incurred interest expenses of
$37,000 primarily associated with the capital lease financing of transportation
equipment, a long-term financing package supporting the expansion of the
Detroit Lakes, MN manufacturing facility and borrowings under the Company's
line of credit. Other income and expense for each of the periods was
insignificant.
FEDERAL AND STATE INCOME TAXES:
During the second quarter of 1998, the Company realized a consolidated income
before taxes of $243,000 and recorded an estimated income tax provision of
$97,000. In contrast, due to the consolidated loss of $152,000 incurred during
1997, the Company recorded a tax benefit of $61,000. Income tax obligations
and benefits are estimated at the normal statutory rate.
NET INCOME (LOSS):
The consolidated net income for the second quarter of 1998 was $146,000 as
compared with a net loss of $91,000 for 1997. Both basic and diluted earnings
per common share outstanding for 1998 resulted in a positive $0.07 per share,
an improvement of $0.11 per share over the $0.04 per share loss reported for
the same period of 1997. The ownership and operation of the Shagawa Resort
property reduced the Company's basic net earnings by $0.02 per common share
during 1998 and $0.03 per common share during 1997.
Results of Operations
Six Months Ended June 30, 1998 and 1997
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 six-month
period ending June 30, 1998, was $4,295,000; an increase of $810,000 or 23
percent from the $3,485,000 realized in 1997. Single-family housing revenues
increased by $1,018,000 from $2,843,000 in 1997 to $3,861,000 for 1998. How-
ever, the stronger single-family activity in 1998 was partially offset by a
reduction of $226,000 in multi-family / commercial revenues. Transportation
and other (retail) revenues for 1998 increased $18,000 from $344,000 in 1997 to
$362,000.
Based on the Company's order backlog on June 30, 1998 (reference Note 3), the
Company anticipates the third quarter to be a strong period. Production and
delivery on 20 multi-family housing units for a Native American community in
northern Minnesota is underway. Valued at nearly $800,000, this project is
scheduled for completion during the third quarter of 1998. In addition, the
Company has also received an order from a Native American community in South
Dakota for 10 single-family units. This project is anticipated to be completed
during the fourth quarter of 1998.
Revenues associated with the ownership and operation of the Shagawa Resort
totaled $839,000 for the first half of 1998. During the first half of 1997,
Shagawa Resort contributed revenues of $559,000. Dynamic Homes, Inc. assumed
operational responsibilities for the resort facility on March 17, 1997
(reference Note 9). Operational and lease revenues for the first half of 1997
were $503,000 and $56,000, respectively. The Company anticipates that the
Shagawa Resort facility should be profitable during the upcoming quarter as the
resort benefits from the seasonally strong summer vacation months. However, 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, Inc.) was $723,000 for 1998 versus $419,000 for 1997.
Gross profit percentage for 1998 is 16.8 percent compared with 12.0 percent for
1997. When transportation revenue and expense plus Shagawa Resort are
excluded, the gross profit on product changes to 21.2 percent and 17.3 percent,
respectively. Even though the gross margin percentage was negatively affected
by several model and winter promotional discount programs, the additional in-
crease in new orders allowed the manufacturing facility to operate at an
accelerated production level. During the first six months of 1998, production
is approximately 40 percent higher than during the first six months of 1997.
The improved plant utilization benefited the Company's gross margin through
more favorable production variances. Overall material acquisition costs re-
mained relatively stable for both six-month periods.
Shagawa Resort recorded a gross profit of $307,000 for the six-month period
ending June 30, 1998. Prior year gross profit for the period was $243,000 and
includes both operational and lease activities (reference Note 9). Due to the
leasing arrangement in affect during the first quarter of 1997, no cost of
sales was required.
OPERATING EXPENSES:
Operating expenses associated with the manufacturing facility, which includes
transportation, marketing and administration, increased by $112,000 from
$882,000 in 1997 to $994,000 in 1998. Volume-related transportation expenses
increased by $20,000 from $334,000 during 1997 to $354,000 for 1998.
Marketing expenses increased from $164,000 in 1997 to $229,000 for 1998. The
increase of $65,000 is attributed to the addition of a commercial sales
position at mid-year, 1997, builder / dealer volume incentive programs and
Company related model home expenses. Administration related expenses increased
by $27,000 from $384,000 during 1997 to $411,000 for 1998. The majority of the
expense increase occurred during the second quarter of 1998 and relates to
staff compensation adjustments and stockholder activities.
Shagawa Resort incurred operational and ownership expenses of $449,000 for the
1998 period and $307,000 during the corresponding period of 1997. However,
during the first quarter of 1997, Shagawa Resort operated under a management
agreement and subsequently incurred only depreciation and amortization related
expenses of $56,000 associated with the ownership of the property.
OPERATING INCOME (LOSS):
The operating cycle for the first six months of 1998 resulted in a consolidated
operating loss of $59,000. During the same period of 1997, the Company
reported a consolidated operating loss of $193,000. During 1998, the manufac-
turing facility realized operating income of $83,000 while Shagawa Resort
incurred an operating loss of $142,000. Dynamic Homes and Shagawa Resort both
reported 1997 operating losses of $129,000 and $64,000, respectively. The im-
proved operating income for Dynamic Homes reflects the larger revenue and
production levels attained during the first half of 1998 and in particular
during the second quarter. The additional operating loss sustained by Shagawa
Resort during 1998 reflects the March 17, 1997, change to the operational
status of the facility.
NET NON-OPERATING INCOME / EXPENSE:
Consolidated net non-operating expenses for 1998 were $106,000 or very similar
to the $101,000 reported for the 1997 period. Interest related expense in-
creased by $41,000 from $102,000 in 1997 to $143,000 in 1998, while non-
operating income increased by $36,000. Interest costs associated with the
long-term financing of Shagawa Resort increased by $4,000 from $70,000 in 1997
to $74,000 in 1998. Dynamic Homes incurred interest expenses of $69,000 during
the first half of 1998 which is an increase of $36,000 over 1997. Interest
expense associated with long-term financing packages increased by $27,000. The
increase relates to the financing of the Detroit Lakes plant expansion project
which was finalized during the second quarter of 1997. Interest expense on
borrowings under the Company's line of credit increased by $9,000. Non-
operating income for 1998 consists of investment income realized on the Com-
pany's first quarter cash and cash equivalents position and several insurance
related dividends and refunds.
FEDERAL AND STATE INCOME TAXES:
Due to the consolidated loss experienced during the first six months of both
periods, the Company recognized a combined tax benefit of $66,000 for 1998 and
$118,000 for 1997. Income tax benefits and obligations are estimated at the
normal statutory rate.
NET INCOME (LOSS):
The consolidated net loss for the 1998 period was $99,000 as compared to a
consolidated net loss of $176,000 during 1997. Both basic and diluted earnings
per common share outstanding for 1998 resulted in a negative $0.04 per share.
Basic and diluted earnings per common share outstanding for 1997 were a nega-
tive $0.08 and $0.07, respectively. During the first half of 1998, the owner-
ship and operation of the Shagawa Resort property impacted the Company's net
loss by approximately $0.06 per share. During the Company's abbreviated opera-
ting cycle for 1997, Shagawa Resort impacted the Company's net loss by approxi-
mately $0.04 per share. Dynamic Homes' manufacturing facility reported net
earnings of $0.01 per share for the first half of 1998 or an improvement of
$0.05 per share over the net loss of $0.04 per share reported during 1997.
Financial Condition
As of June 30, 1998
The Company's consolidated working capital at June 30, 1998, was a positive
$2,519,000 as compared to positive working capital positions of $2,074,000 at
June 30, 1997, and $2,630,000 at 1997 year-end. The current ratio for June 30,
1998, was 2.1 to 1.0 as compared to 3.4 to 1.0 at December 27, 1997, and 2.4
to 1.0 at June 30, 1997.
During the first two quarters of 1998, cash outflows were required for the
build-up of inventory (finished goods), renewal of the Company's insurance
package, acquisition of transportation and computer equipment, build-up of
customer receivables, pay down on long-term debt, and for support of the Com-
pany's daily operations. Cash flows to support the referenced activities were
primarily provided by utilizing the Company's year-end cash and cash equiva-
lents position, customer deposits, non-cash related depreciation and amortiza-
tion, supplier payment terms and borrowings under the Company's credit line.
Long-term debt and capital leases, net of current maturities, decreased from
$2,952,000 at year-end 1997 to $2,875,000 at June 30, 1998. On June 30, 1997,
long-term debt and capital leases, net of current maturities was $2,979,000.
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 obliga-
tions secured by transportation equipment, a restructured long-term financing
arrangement secured by a real estate mortgage related to the 1997 Detroit
Lakes plant expansion and a contract for deed covering the purchase of adjacent
land and warehouse. 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 financing arrangement. The new financing package is a composite of three
financing sources which provided the manufacturing facility with $1,000,000 of
proceeds. The loan package was used for financing the plant expansion, includ-
ing equipment and working capital for additional inventory requirements. Debt
retirement associated with the plant expansion and transportation equipment
varies in maturity from five to fifteen years, dependent on the funding source
(reference Note 7).
The consolidated ratio of long-term debt to stockholders' equity changed from
.70 to 1.0 at June 30, 1997, to .62 to 1.0 at both December 27, 1997, and June
30, 1998. Due to the consolidated net loss incurred during the first two
quarters of 1998, stockholders' equity, net of treasury stock, decreased from
$4,732,000 at December 27, 1997, to $4,633,000 at June 30, 1998. Stockholders'
equity on June 30, 1997, was $4,226,000.
Dynamic Homes, Inc. has available a line of credit which is collateralized by
inventories and receivables. The credit available is based upon specified
percentages of inventory and receivables. On May 4, 1998, the Company renewed
its credit line for a period of two years, subject to annual review, and with-
out any compensating balance requirements. The renewed credit line has a
maximum available borrowing of $1,500,000 at an interest rate equal to the
bank's prime rate. As of June 30, 1998, the Company had $435,000 outstanding
under the existing credit line.
Shagawa Resort, Inc. does not have any operating line of credit available.
Consequently, Shagawa Resort, Inc. is dependent on Dynamic Homes, Inc. (parent)
as its source of additional funds. Periodically, Dynamic Homes, Inc. is
required to advance funds, during the slower winter months, to support the
resort's ongoing operations. However, during the stronger summer months, the
resort generates adequate levels of funds to support its operational require-
ments and periodically reduces some of these outstanding advances until the
traditional fall slowdown of the tourist season, when Shagawa Resort's opera-
tional needs may again require the advancement of funds.
The Company continues to market Shagawa Resort, Inc. to prospective buyers with
the ultimate goal of transacting a sale in the short-term future. Although no
agreements have been finalized at this time, future opportunities may surface
which deem it to be in the Company's best interest to divest of the property.
Transactions of this type potentially could materially affect the Company's
short-term operating results and capital resources. However, management anti-
cipates that the normal operating cycle will generate sufficient cash, in con-
junction with short-term borrowings on its existing credit line and supple-
mented by long-term financing and capital leases to provide adequate funds to
support the Company's operations and scheduled capital requirements during the
remainder of 1998.
Statements regarding the Company's operations, performance and financial con-
dition are subject to certain risks and uncertainties. These risks and uncer-
tainties 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 and unfavorable weather condi-
tions could also affect the Company's profit levels.
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 29, 1998.
A. The meeting involved the election of Directors. Those elected were
D. Raymond Madison, 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 Eide Bailly,
L.L.P. as independent public accountants for Dynamic Homes, Inc. for the
fiscal year ending December 26, 1998. The appointment was ratified.
Item 7. EXHIBITS AND REPORTS ON FORM 8-K:
On May 12, 1998, Form 8-K was filed regarding a business combination and name
change in registrant's certifying public accountant.
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 12, 1998
Dynamic Homes, Inc.
(Registrant)
ELDON MATZ
Controller