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, 1999
--------------------------
Commission File Number 0-8585
------------------------------
Dynamic Homes, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0960127
- --------------------------------------------- ---------------------------------
(State of Other Jurisdiction of Incorporation (IRS Employer Identification No.)
of Organization)
525 Roosevelt Avenue, Detroit Lakes, MN 56501
---------------------------------------------
(Address of principal executive offices)
(218) 847-2611
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(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 June 30, 1999, 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 June 30, 1999, 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 outstanding.
Page 1
PART I.
Item 1. Financial Statements
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
Three Months
------------
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 6/30/98
----------- ------------ ------------ -------
Sales (Note 10) $ 3,117,000 $ 485,000 $ 3,602,000 $ 4,076,000
Cost of Sales (Note 11) 2,689,000 284,000 2,973,000 3,197,000
----------- ----------- ----------- -----------
Gross Profit 428,000 201,000 629,000 879,000
Operating Expenses (Note 12) 350,000 228,000 578,000 575,000
----------- ----------- ----------- -----------
Operating Income (Loss) 78,000 (27,000) 51,000 304,000
Other (Income) Expense
Interest Expense 39,000 36,000 75,000 75,000
Other, Net (10,000) (1,000) (11,000) (14,000)
----------- ----------- ----------- -----------
Total Other (Income) Expense 29,000 35,000 64,000 61,000
Income (Loss) Before Taxes and Cumulative
Effect of Accounting Change 49,000 (62,000) (13,000) 243,000
Income Tax (Provision) Benefit (19,000) 25,000 6,000 (97,000)
----------- ----------- ----------- -----------
Income (Loss) Before Cumulative Effect
of Accounting Change 30,000 (37,000) (7,000) 146,000
Cumulative Effect of Accounting Change
(net of income tax of $56,000 in 1998) -- -- -- --
----------- ----------- ----------- -----------
Net Income (Loss) $ 30,000 $ (37,000) $ (7,000) $ 146,000
=========== =========== =========== ===========
Basic Income (Loss) Per Common Share
Income (Loss) before cumulative effect
of accounting change $ 0.01 $ (0.01) $ -- $ 0.07
Cumulative effect of accounting change -- -- -- --
----------- ----------- ----------- -----------
Net Income (Loss) $ 0.01 $ (0.01) $ -- $ 0.07
=========== =========== =========== ===========
Diluted Income (Loss) Per Common Share
Income (Loss) before cumulative effect
of accounting change $ 0.01 $ (0.01) $ -- $ 0.07
Cumulative effect of accounting change -- -- -- --
----------- ----------- ----------- -----------
Net Income (Loss) $ 0.01 $ (0.01) $ -- $ 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 2,240,900 2,240,900 2,240,900 2,242,000
=========== =========== =========== ===========
Dividends per Common Share None None None None
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
Page 2
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
Six Months
----------
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 6/30/98
----------- ------------ ------------ -------
Sales (Note 10) $ 4,565,000 $ 848,000 $ 5,413,000 $ 5,134,000
Cost of Sales (Note 11) 4,041,000 521,000 4,562,000 4,104,000
----------- ----------- ----------- -----------
Gross Profit 524,000 327,000 851,000 1,030,000
Operating Expenses (Note 12) 666,000 448,000 1,114,000 1,089,000
----------- ----------- ----------- -----------
Operating Income (Loss) (142,000) (121,000) (263,000) (59,000)
Other (Income) Expense
Interest Expense 70,000 71,000 141,000 143,000
Other, Net (24,000) (2,000) (26,000) (37,000)
----------- ----------- ----------- -----------
Total Other (Income) Expense 46,000 69,000 115,000 106,000
Income (Loss) Before Taxes and Cumulative
Effect of Accounting Change (188,000) (190,000) (378,000) (165,000)
Income Tax (Provision) Benefit 75,000 76,000 151,000 66,000
----------- ----------- ----------- -----------
Income (Loss) Before Cumulative Effect
of Accounting Change (113,000) (114,000) (227,000) (99,000)
Cumulative Effect of Accounting Change
(net of income tax of $56,000 in 1998) -- -- -- (94,000)
----------- ----------- ----------- -----------
Net Income (Loss) $ (113,000) $ (114,000) $ (227,000) $ (193,000)
=========== =========== =========== ===========
Basic Income (Loss) Per Common Share
Income (Loss) before cumulative effect
of accounting change $ (0.05) $ (0.05) $ (0.10) $ (0.04)
Cumulative effect of accounting change -- -- -- (0.04)
----------- ----------- ----------- -----------
Net Income (Loss) $ (0.05) $ (0.05) $ (0.10) $ (0.08)
=========== =========== =========== ===========
Diluted Income (Loss) Per Common Share
Income (Loss) before cumulative effect
of accounting change $ (0.05) $ (0.05) $ (0.10) $ (0.04)
Cumulative effect of accounting change -- -- -- (0.04)
----------- ----------- ----------- -----------
Net Income (Loss) $ (0.05) $ (0.05) $ (0.10) $ (0.08)
=========== =========== =========== ===========
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 2,240,900 2,240,900 2,240,900 2,242,000
=========== =========== =========== ===========
Dividends per Common Share None None None None
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
Page 3
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1999 AND DECEMBER 26, 1998
(Unaudited)
Dynamic Shagawa
Homes, Inc. Resort, Inc. Eliminations Consolidated 12/26/98
----------- ------------ ------------ ------------ ---------
ASSETS
Current Assets:
Cash & cash equivalents $ 6,000 $ 94,000 $ -- $ 100,000 $ 313,000
Accounts receivable, less allowance
for doubtful accounts, pledged 980,000 13,000 -- 993,000 1,525,000
Inventories pledged (Note 2) 3,786,000 33,000 -- 3,819,000 2,367,000
Prepaid expenses (Note 5) 121,000 9,000 -- 130,000 78,000
Deferred income taxes (Note 4) 143,000 -- -- 143,000 143,000
----------- ----------- ----------- ------------ -----------
Total Current Assets 5,036,000 149,000 -- 5,185,000 4,426,000
Other Assets:
Investment - Affiliates 1,578,000 -- (1,578,000) -- --
Other assets (Note 8) 27,000 386,000 -- 413,000 421,000
----------- ----------- ----------- ------------ -----------
Total Other Assets 1,605,000 386,000 (1,578,000) 413,000 421,000
Property, Plant, & Equipment, at:
Cost - pledged in part (Note 6) 3,833,000 3,178,000 -- 7,011,000 6,762,000
Less - accumulated depreciation (1,906,000) (478,000) -- (2,384,000) (2,184,000)
----------- ----------- ----------- ------------ -----------
Net Property, Plant & Equipment 1,927,000 2,700,000 -- 4,627,000 4,578,000
----------- ----------- ----------- ------------ -----------
Total Assets $ 8,568,000 $ 3,235,000 $(1,578,000) $ 10,225,000 $ 9,425,000
=========== =========== =========== ============ ===========
LIABILITIES
Current Liabilities:
Payables - Affiliates $ -- $ 1,425,000 $(1,425,000) $ -- $ --
Notes payable 690,000 -- -- 690,000 --
Current portion - long-tern debt 161,000 42,000 -- 203,000 197,000
Accounts payable 691,000 38,000 -- 729,000 350,000
Customer deposits 392,000 -- -- 392,000 200,000
Accrued expenses
Salaries, Wages and vacations 300,000 27,000 -- 327,000 260,000
Taxes, other than income 106,000 22,000 -- 128,000 97,000
Warranty 76,000 -- -- 76,000 72,000
Other 99,000 6,000 -- 105,000 209,000
Income taxes (79,000) (76,000) -- (155,000) 5,000
----------- ----------- ----------- ------------ -----------
Total Current Liabilities 2,436,000 1,484,000 (1,425,000) 2,495,000 1,390,000
Long-Term Debt: (Note 7)
Less current portion included above 1,062,000 1,713,000 -- 2,775,000 2,853,000
----------- ----------- ----------- ------------ -----------
Deferred Income Taxes (Note 4) 76,000 -- -- 76,000 76,000
----------- ----------- ----------- ------------ -----------
Total Liabilities 3,574,000 3,197,000 (1,425,000) 5,346,000 4,319,000
STOCKHOLDERS' EQUITY
Investment - Parent -- 706,000 (706,000) -- --
Common Stock, par value, $.10 per share
Authorized, 5,000,000 shares; issued
and outstanding, 2,284,000 in 1999
and 1998 228,000 -- -- 228,000 228,000
Paid-in capital in excess of par 147,000 -- -- 147,000 147,000
Retained earnings 4,763,000 (668,000) 553,000 4,648,000 4,875,000
Less Treasury stock - (43,080) shares (144,000) -- -- (144,000) (144,000)
----------- ----------- ----------- ------------ -----------
Total Stockholders' Equity 4,994,000 38,000 (153,000) 4,879,000 5,106,000
----------- ----------- ----------- ------------ -----------
Total Liabilities & Stockholders' Equity $ 8,568,000 $ 3,235,000 $(1,578,000) $ 10,225,000 $ 9,425,000
=========== =========== =========== ============ ===========
See notes to consolidated financial statements.
Page 4
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
06/30/99 06/30/98
----------- -----------
Cash Flows From Operating Activities
Net Income (Loss) $ (227,000) $ (193,000)
Adjust to Reconcile Net Income or Loss
Provided by (Used In) Operating Activities:
Depreciation / Amortization 235,000 234,000
Provision for Doubtful Accounts 18,000 4,000
(Gain) Loss on Sales of Property & Equipment (3,000) --
Cumulative Effect of Accounting Change -- 150,000
Change in Assets & Liabilities:
(Increase) Decrease in Receivables 516,000 (319,000)
(Increase) Decrease in Inventories (1,452,000) (1,944,000)
(Increase) Decrease in Prepaid Expenses (52,000) (69,000)
(Increase) Decrease in Deferred Income Tax -- --
(Increase) Decrease in Other Assets 8,000 (15,000)
Increase (Decrease) in Accounts Payable 379,000 397,000
Increase (Decrease) in Customer Deposits 192,000 337,000
Increase (Decrease) in Accrued Expenses (2,000) 56,000
Increase (Decrease) in Income Tax Payable (160,000) (123,000)
----------- -----------
Net Cash Provided by (Used in) Operating Activities (548,000) (1,485,000)
----------- -----------
Cash Flows From Investing Activities
Proceeds From Sale of Property & Equipment 3,000 1,000
Purchase of Property & Equipment (270,000) (155,000)
----------- -----------
Net Cash Provided by (Used in) Investing Activities (267,000) (154,000)
----------- -----------
Cash Flows From Financing Activities
Net Borrowings (Payments) on Revolving Credit Agreements
And Other Short-Term Financing 690,000 435,000
Principal Payments on Long-Term Borrowings Including
Shagawa Resort (88,000) (69,000)
Proceeds From Long-Term Borrowings / Leases -- --
----------- -----------
Net Cash Provided (Used in) Financing Activities 602,000 366,000
----------- -----------
Increase (Decrease) in Cash and Equivalents $ (213,000) $(1,273,000)
Cash and Equivalents
Beginning $ 313,000 $ 1,330,000
----------- -----------
Ending $ 100,000 $ 57,000
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Payments for:
Income Taxes $ 9,000 $ 1,000
Interest $ 141,000 $ 139,000
See notes to condensed consolidated financial statements.
Page 5
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
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, 1999 and December 26, 1998 and
the results of operations and cash flows for the six months ended June 30, 1999
and June 30, 1998.
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 value is 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 actual inventory and cost of
sales. No physical inventory was taken during the second quarter of 1999.
Shagawa Resort, Inc. conducts a physical inventory at each month-end.
The breakdown of inventories is as follows:
06/30/99 06/30/98
--------------- ---------------
Finished Goods (Note 3) $ 2,571,000 $ 2,214,000
Work In Process 190,000 190,000
Raw Materials 1,025,000 996,000
Shagawa Resort, Inc. 33,000 32,000
--------------- ---------------
Total Inventories $ 3,819,000 $ 3,432,000
=============== ===============
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,
1999 and June 30, 1998, the Company's backlog of committed orders was
approximately $5,204,000 and $6,907,000, respectively. As of December 26, 1998,
the Company's backlog of orders was $2,737,000. The backlog at June 30, 1998
included two projects consisting of 20 and 10 units each for Native American
communities. The Company does not currently have any similar projects or
contracts pending with any customer. During periods of excess plant capacity,
the Company supplements its production through the building of inventory units.
As of June 30, 1999, 20 inventory units are available for sale compared to 12
inventory units at June 30, 1998. The inventory units have been excluded from
all order backlog values.
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
06/30/99 06/30/98
--------- ---------
Advertising $ 3,000 $ 3,000
Insurance 83,000 89,000
Equipment, Supplies Inventory - Shagawa Resort, Inc. 9,000 12,000
Other 35,000 12,000
--------- ---------
$130,000 $116,000
========= =========
Page 6
Note 6. PROPERTY AND EQUIPMENT
06/30/99 06/30/98
------------- -------------
Dynamic Homes, Inc.
-------------------
Land and Improvements $ 260,000 $ 220,000
Buildings 1,401,000 1,401,000
Machinery and Equipment 1,994,000 1,868,000
Construction in Process 178,000 88,000
Shagawa Resort, Inc.
--------------------
Land and Improvements 343,000 343,000
Buildings 2,116,000 2,116,000
Machinery and Equipment 719,000 695,000
Construction in Process - -
------------- -------------
7,011,000 6,731,000
Less: Accumulated Depreciation - Dynamic Homes, Inc. (1,906,000) (1,860,000)
Accumulated Depreciation - Shagawa Resort, Inc. (478,000) (312,000)
------------- -------------
$ 4,627,000 $ 4,559,000
============= =============
Note 7. LONG-TERM DEBT
06/30/99 06/30/98
------------ ------------
Long-term debt (net of current maturity) consists of:
Detroit Lakes - Plant Expansion $ 784,000 $ 860,000
Leasing - Capitalized Cranes, Forklifts, & Trailers 228,000 207,000
Term Mortgage Agreement covering Shagawa
Resort Project (Note 9) 1,713,000 1,761,000
Other Notes and Contracts Payable 50,000 47,000
------------ ------------
$2,775,000 $2,875,000
============ ============
Note 8. OTHER ASSETS - NET
06/30/99 06/30/98
---------- ----------
Dynamic Homes, Inc.
- Deferred Maintenance Expense $ 6,000 -
- Prepaid Debt Expense 14,000 19,000
- Deposits 7,000 6,000
Shagawa Resort, Inc.
- Goodwill 104,000 111,000
- Prepaid Legal / Debt Expense 171,000 179,000
- Asset Replacement Escrow 102,000 65,000
- Other 9,000 2,000
---------- ----------
$413,000 $382,000
========== ==========
Included in other assets are costs associated with obtaining financing which are
being amortized on the straight-line basis over the life of the loans. Also
included are costs associated with goodwill and a mortgage asset replacement
convenant related to the acquisition of Shagawa Resort, Inc.
During 1998, the Company adopted the provisions of Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities", which requires companies to
expense the cost of start-up activities as incurred. In accordance with the
provisions of the statement, unamortized amounts of previously capitalized costs
have been charged to operations as of the beginning of the year in which the
statement was adopted. The provisions of the statement require implementation
for years beginning after December 15, 1998, however, the Company has elected to
adopt the statement early.
Page 7
Note 9. SHAGAWA RESORT, INC.
On September 7, 1995 Dynamic Homes, Inc. 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
and resort facility. The hotel and resort remained under construction until May
1, 1996, when the hotel and resort commenced with normal business operations.
During August 1996, the construction mortgage was finalized and converted to a
long-term mortgage loan that 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. by Dynamic Homes, Inc.,
Shagawa Resort, Inc. simultaneously entered into a Management Agreement with
Northland Adventures Minnesota, Ltd. to operate and manage the hotel and 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 Shagawa Resort, Inc., plus a percentage of room, food, and beverage receipts
when these amounts exceed the minimum rentals on an annual basis. During the
term 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, Shagawa Resort, Inc. and Northland Adventures Minnesota, Ltd. collectively
reached an Asset Purchase Agreement whereby Shagawa Resort, Inc. purchased
substantially all assets of Northland Adventures Minnesota, Ltd. as it related
to the operations of the hotel and resort. All prior agreements pertaining to
the management of the hotel and resort facility have been terminated.
Consequently, effective March 17, 1997, Dynamic Homes, Inc. assumed the
management obligations and rights associated with the Shagawa Resort, Inc.
facility.
Note 10. - Sales
1999 1998
--------------------------------------- ------------------------------------
3 Months 6 Months 3 Months 6 Months
----------------- ------------------ ---------------- ---------------
Single-family $ 2,646,000 $ 3,414,000 $ 3,226,000 $ 3,861,000
Multi-family 152,000 670,000 72,000 72,000
Transportation 176,000 264,000 169,000 209,000
Other 143,000 217,000 114,000 153,000
Resort 485,000 848,000 495,000 839,000
----------------- ------------------ ---------------- ---------------
$ 3,602,000 $ 5,413,000 $ 4,076,000 $ 5,134,000
================= ================== ================ ===============
Note 11 - Cost of Sales
1999 1998
--------------------------------------- ------------------------------------
3 Months 6 Months 3 Months 6 Months
----------------- ------------------ ---------------- ---------------
Materials $ 1,793,000 $ 2,552,000 $ 1,990,000 $ 2,360,000
Labor 285,000 421,000 331,000 386,000
Overhead 374,000 622,000 379,000 472,000
Transportation 237,000 446,000 204,000 354,000
Resort 284,000 521,000 293,000 532,000
----------------- ------------------ ---------------- ---------------
$ 2,973,000 $ 4,562,000 $ 3,197,000 $ 4,104,000
================= ================== ================ ===============
Note 12 - Operating Expenses
1999 1998
--------------------------------------- ------------------------------------
3 Months 6 Months 3 Months 6 Months
----------------- ------------------ ---------------- ---------------
Marketing $ 122,000 $ 217,000 $ 124,000 $ 229,000
Administration 228,000 449,000 223,000 411,000
Resort 228,000 448,000 228,000 449,000
----------------- ------------------ ---------------- ---------------
$ 578,000 $ 1,114,000 $ 575,000 $ 1,089,000
================= ================== ================ ===============
Page 8
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Three months ended June 30, 1999 and 1998
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, 1999 was $3,117,000 which is $464,000 less than the $3,581,000 recorded
during the same period last year. Single-family revenue decreased from
$3,226,000 during 1998 to $2,646,000 for 1999 while multi-family/commercial
revenue increased by $80,000 from $72,000 as reported during 1998 to $152,000
for 1999. Transportation and other (retail) revenue increased by $36,000 from
$283,000 for 1998 to $319,000 during 1999. The majority of the second quarter
unit deliveries were the result of order activity associated with the fall and
winter promotional marketing programs.
Revenue associated with Shagawa Resort, Inc. remained relatively constant at
$485,000 for 1999 and $495,000 during 1998. Due to the location and seasonal
nature of the resort business, sales are traditionally soft during the winter
and early spring months but strengthen considerably during the summer tourist
season. It is anticipated that Shagawa Resort will again contribute to the
Company's profitability during the third quarter of 1999.
COST OF SALES:
Dynamic Homes, Inc. 1999 gross profit (including transportation revenues and
expenses) was $428,000 as compared with $677,000 for the second quarter of 1998.
The gross profit percentage decreased from 18.9 percent in 1998 to 13.7 percent
for 1999. When transportation revenue and expense are excluded, the gross profit
percentage on product changes to 16.6 percent for 1999 and 20.9 percent for
1998. The gross margin for the second quarter of 1999 was reduced by unfavorable
labor and overhead variances associated with a lower level of manufacturing
productivity and increased costs for wood and drywall materials. In addition,
approximately 80 percent of the unit delivery and setting activities were
affected by the fall and winter promotional discount programs. It is anticipated
that the gross margin will improve during the third quarter of 1999 as the
promotional programs mature and pricing adjustments are implemented. The Company
has recently implemented a two-step level of surcharges on new orders to
minimize the erosion of its margin due to the increase in material purchase
costs.
Shagawa Resort, Inc. recorded a gross profit of $201,000 for 1999 and $202,000
during 1998. The corresponding gross margin percentages were 41.4 and 40.8,
respectively. The small improvement to the gross profit percentage for 1999
reflects a higher average daily room rate. Occupancy rates during the early
stages of the third quarter of 1999 have also shown improvement.
OPERATING EXPENSES:
Dynamic Homes, Inc. operating expenses, which include transportation, marketing,
and administration increased by $36,000 over the 1998 level of $551,000 to
$587,000 for 1999. Overall operating expenses increased from 15.4 percent of
sales in 1998 to 18.8 percent of sales for 1999. Marketing and administration
expenses remained similar for both periods. Marketing and administration
expenses were $350,000 for the 1999 period and $347,000 during 1998. Both
delivery revenue and expense increased over the corresponding 1998 level. The
increase in second quarter delivery expense of $33,000 is primarily related to
maintenance and repairs to transportation equipment, leasing of setting
equipment at distant site locations and additional time and travel costs
associated with delivery and setting activities approaching the outer boundaries
of the marketing territory.
Shagawa Resort, Inc. incurred operating expenses of $228,000 during each period.
Comparative ratios to net sales were 47.0 percent for 1999 and 46.0 percent for
1998.
Page 9
OPERATING INCOME (LOSS):
The operating cycle for the second quarter of 1999 resulted in a consolidated
operating income of $51,000. During the same period of 1998, the Company
reported a consolidated operating income of $304,000. Dynamic Homes, Inc.
reported operating income of $78,000 while Shagawa Resort, Inc. incurred an
operating loss of $27,000. In 1998, Dynamic Homes, Inc. reported second quarter
operating income of $330,000 while Shagawa Resort incurred an operating loss of
$26,000. As previously addressed, the reduction to the 1999 operating income
reflects the reduced gross margin realized by Dynamic Homes, Inc. due to
promotional discounts, unfavorable production variances and increased purchase
costs for materials.
NET NON-OPERATING INCOME AND EXPENSE:
Consolidated net non-operating expense for the second quarter of 1999 was
$64,000 or $3,000 more than the $61,000 reported in 1998. Interest related
expense remained at $75,000 for each of the periods. Interest expense associated
with the financing of the Shagawa Resort, Inc. property generated $36,000 of
interest expense for the second quarter of 1999. Dynamic Homes, Inc. incurred
$39,000 of interest costs mainly associated with the capital lease financing of
transportation and manufacturing equipment, a long-term financing package
supporting the 1997 expansion of the manufacturing facility and short-term
borrowings under the Company's line of credit. Other income for each period was
similar and consists primarily of interest related income, gains on the sale of
several capital assets and insurance related adjustments.
FEDERAL AND STATE INCOME TAXES:
Due to the consolidated net loss incurred during the second quarter of 1999, the
Company recorded a tax benefit of $6,000. During 1998, the Company recorded a
tax provision of $97,000. Income tax obligations and benefits are estimated at
the normal statutory rates.
NET INCOME:
The consolidated net loss for the second quarter of 1999 was $7,000. In
contrast, the second quarter of 1998 resulted in a consolidated net income of
$146,000. Both 1999 basic and diluted earnings per common share outstanding
resulted in a breakeven earnings per share computation. Basic and diluted
earnings per common share for 1998 was a positive $0.07 per common share.
Shagawa Resort, Inc. incurred net losses of approximately $0.01 per common share
during each of the quarters while the manufacturing facility reported net income
of $0.01 per common share for 1999 and $0.08 per share during 1998.
Considerations for unexercised stock options granted in 1996 were recognized as
diluted common shares outstanding for each of the periods.
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Page 10
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Six months ended June 30, 1999 and 1998
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, 1999 was $4,565,000, an increase of $270,000 from the
$4,295,000 reported in 1998. Single-family housing revenues decreased by
$447,000 from $3,861,000 for 1998 to $3,414,000. However, the lower
single-family activity was offset by an increase of $598,000 in
multi-family/commercial revenues. Transportation and other (retail) revenues for
1999 increased by $119,000 from $362,000 during 1998 to $481,000 for 1999.
Even though the Company's 1999 backlog is down from the June 30, 1998 total
(reference note 3), the Company anticipates that the third quarter of 1999 will
again be a strong performing quarter. In addition to the backlog values, the
Company also has completed 20 inventory units in various designs and floorplans
that are available to the dealer network for immediate possession.
Revenues associated with the ownership and operation of the Shagawa Resort
totaled $848,000 for the first half of 1999. During the first half of 1998,
Shagawa Resort reported revenues of $839,000. The Company anticipates that the
Shagawa Resort facility will be profitable during the third quarter as the
resort benefits from higher occupancy rates during the summer vacation months.
However, as summer passes, revenues are expected to decline with the onset of
the fall and winter months.
COST OF SALES:
Dynamic Homes 1999 gross profit (including transportation revenues and expenses)
was $524,000 for 1999 versus $723,000 for 1998. The gross profit percentage for
1999 is 11.5 percent compared with 16.8 percent for 1998. When transportation
revenue and expense are excluded, the gross profit percentage on product changes
to 16.4 percent and 21.2 percent, respectively. The gross profit percentage for
the first six months of 1999 was affected by customer discounts associated with
the fall and winter promotional marketing programs and unfavorable labor and
overhead variances resulting from the under utilization of plant production
capacity. In addition, Dynamic Homes experienced an ongoing escalation of
material purchase costs for drywall and several wood related products. Although
some vendors limited supply quantities, the Company's production was not
affected by any material shortages. In order to prevent additional reductions to
its gross margin, Dynamic Homes has implemented a two-step level of surcharges
on all new orders. The Company continues to monitor material costs and the
impact it may have on the Company's pricing structure.
Shagawa Resort, Inc. recorded a gross profit of $327,000 during the first
six-month period of 1999. The prior year gross profit was $307,000. The gross
profit percentage for 1999 is 38.6 percent or an increase of 2.0 percent from
the 36.6 percent reported during 1998. The improved gross profit reflects a
higher average daily room rate and an improvement in the occupancy rate.
OPERATING EXPENSES:
Operating expenses associated with the manufacturing facility, which includes
transportation, marketing and administrative expenses increased by $118,000 from
$994,000 in 1998 to $1,112,000 in 1999. Overall operating expenses during 1999
were 24.4 percent of net sales versus 23.1 percent for 1998. Both 1999 delivery
revenue and expense increased over the corresponding 1998 level. Transportation
expenses were $446,000 or 9.8 percent of net sales during 1999 and $354,000 or
8.2 percent in 1998. The increase of $92,000 reflects increased delivery and
setting activities, equipment rentals for distant unit sets and maintenance and
repairs to transportation equipment. Marketing related expenses for 1999
decreased by $12,000 from $229,000 during 1998 to $217,000. The decrease is
associated with the rescheduling of the annual spring dealer meeting to a fall
meeting date. Administrative expenses for the first six months of 1999 were
$449,000 or $38,000 greater than the $411,000 incurred during 1998. The majority
of the increase is related to wage related adjustments and an increase to the
bad debt reserve.
Page 11
Shagawa Resort, Inc. incurred operating expenses of $448,000 during 1999 and
$449,000 during 1998. Overall 1999 operating expenses decreased from 53.5
percent of net sales to 52.8 percent. The improvement in operating expenses is
primarily attributed to the Company's adoption of Statement of Position 98-5
"Reporting on the costs of Start-up Activities" (Note 8).
Operating Income (Loss)
The operating cycle for the first six months of 1999 resulted in a consolidated
operating loss of $263,000. During the same period of 1998, the company reported
a consolidated operating loss of $59,000. The manufacturing facility realized an
operating loss of $142,000 for 1999 while the same period of 1998 resulted in an
operating income of $83,000. Shagawa Resort, Inc. reported operating losses for
both 1999 and 1998 in the amounts of $121,000 and $142,000, respectively.
Even though the manufacturing facility improved its revenue base during 1999,
promotional discounts, unabsorbed labor and overhead variances, rising material
costs in conjunction with higher delivery and setting costs, reduced Dynamic
Homes' operating results. It is anticipated that the maturation of the
promotional discount programs, increased production levels and an adjusted
pricing structure will improve operating results during the third quarter of
1999. The reduction to the 1999 Shagawa Resort operating loss primarily reflects
a higher average daily room rate and a small improvement in occupancy.
Net Non-Operating Income and Expense
Consolidated net non-operating expenses for 1999 were $115,000 or slightly
higher than the $106,000 recognized during 1998. Interest expense decreased by
$2,000 from $143,000 for 1998 to $141,000 for 1999. Interest expense associated
with the financing of the Shagawa Resort property decreased from $74,000 during
1998 to $71,000 for 1999. Dynamic Homes incurred $70,000 of interest costs
associated with the capital lease financing of transportation and manufacturing
equipment, a long-term financing package supporting the 1997 expansion of the
manufacturing facility and short-term borrowings under the Company's line of
credit. Other income, which consists of interest related income, gains on sale
of capital assets and insurance adjustments decreased from $37,000 during 1998
to $26,000 for 1999.
Federal and State Income Taxes
Due to the consolidated losses experienced during the first six months of each
period, the company recognized consolidated tax benefits of $151,000 for 1999
and $66,000 for 1998. Income tax benefits and obligations are estimated at the
normal statutory rate.
Net Income (Loss)
The consolidated net loss, before cumulative effect of accounting change was
$227,000 for 1999 and $99,000 for 1998. Both basic and diluted earnings per
common share outstanding resulted in net losses of $0.10 for 1999 and $0.04 for
1998. Shagawa Resort, Inc. and Dynamic Homes, Inc. each incurred 1999 net losses
of approximately $0.05 per share. During 1998, Dynamic Homes, Inc. reported net
income of $0.01 per share while Shagawa Resort reported a net loss of
approximately $0.06 per share. Considerations for unexercised stock options
granted in 1996 were recognized as diluted common shares outstanding for each of
the periods. After adoption of Statement of Position 98-5 "Reporting on Costs of
Start-up Activities", (Note 8), the cumulative effect of accounting change
increased the 1998 consolidated basic and diluted net loss from $0.04 per share
to $0.08 per share.
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Page 12
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS
OF RESULTS OR OPERATIONS AND FINANCIAL CONDITION
Financial Condition
As of June 30, 1999
The Company's consolidated working capital at June 30, 1999 was a positive
$2,690,000 as compared to positive working capital positions of $2,519,000 at
June 30, 1998 and $3,036,000 at December 26, 1998. The current ratio for June
30, 1999 is 2.1 to 1.0 as compared with 3.2 to 1.0 at December 26, 1998 and 2.1
to 1.0 at June 30, 1998.
During the first two quarters of 1999, cash outflows were required for the
build-up of inventory (finished goods), renewal of the Company's insurance
package, replacements of transportation equipment, upgrades to computer hardware
and software and support of the Company's daily operations. Cash flows to
support the referenced activities were primarily provided by utilizing the
Company's year-end cash and cash equivalents position, receivable collections,
customer deposits, supplier payment terms, non-cash related depreciation and
amortization and borrowings under the Company's line of credit.
Long-term debt and capital leases, net of current maturities, decreased from
$2,853,000 at December 26, 1998 to $2,775,000 at June 30, 1999. On June 30,
1998, long-term debt and capital leases, net of current maturities, was
$2,875,000. Long-term debt consists primarily of a long-term mortgage loan,
which is secured by substantially all of the assets of Shagawa Resort, Inc.,
four capitalized lease obligations secured by transportation and material
handling equipment, a restructured long-term financing arrangement secured by a
real estate mortgage related to the 1997 plant expansion and a contract for deed
covering the purchase of adjacent land and warehouse. The new financing package
is a composite of three financing sources that provided the manufacturing
facility with $1,000,000 of proceeds. The loan package was used for financing
the plant expansion, including equipment and working capital for additional
inventory requirements. Debt retirement associated with the plant expansion and
equipment varies in maturity from three to fifteen years, dependent on the
funding source (reference Note 7).
The consolidated ratio of long-term debt to stockholders' equity changed from
.62 to 1.0 at June 30, 1998, to .56 to 1.0 at December 26, 1998 and to .57 to
1.0 at June 30, 1999. Due to the consolidated net loss incurred during the first
two quarters of 1999, stockholders' equity, net of treasury stock, decreased
from $5,106,000 at December 26, 1998 to $4,879,000 at June 30, 1999.
Stockholders' equity on June 30, 1998 was $4,633,000.
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 a two years, subject to annual review, and without
any compensating balance requirements. The 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, 1999, the Company had $690,000 outstanding against the available
credit line. On August 2, 1999, the Company paid-off all outstanding borrowings
under the line.
Shagawa Resort, Inc. does not have any operating line of credit. Consequently,
Shagawa Resort, Inc. is dependent on Dynamic Homes, Inc. 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 requirements and
periodically reduce some of the outstanding advances made by Dynamic Homes, Inc.
Although no agreements are pending at this time, future opportunities may
surface which deem it to be in the Company's best interest to divest itself of
the Shagawa Resort, Inc. property. Transactions of this type potentially could
materially affect the Company's short-term operating results and capital
resources. However, management anticipates that the normal operating cycle will
generate sufficient cash, in conjunction with short-term borrowings on its
existing credit line and supplemented by long-term financing and capital leases,
to provide adequate funds to support the Company's operations and scheduled
capital requirements during 1999.
The Company recognizes the implications of Year 2000 issues and has been
focusing on the nature and extent of these potential problems, both internally
and externally. Currently, the Company's mainframe computer system, its
operating system and business software are fully Year 2000 compliant. Other
corrective expenditures to be incurred during 1999 are not anticipated to exceed
$10,000, thus not materially impacting the Company's results of operations,
liquidity, or capital resources. The Company engages in limited electronic
commerce with its suppliers and has several sources of supply available.
Consequently, the Company believes it has minimal risk regarding supplier
compliance.
Page 13
Statements regarding the Company's operations, performance and financial
condition are subject to certain risks and uncertainties. Theses 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 and commercial sales. Likewise,
continued escalating and volatile material costs and unfavorable weather
conditions 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 28, 1999.
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. Lance G. Morgan, President of HCI
Investment Company and Ho-Chunk, Inc. was also elected to a Directors
position during the June, 1999 Board of Directors meeting. HCI is an
investment company that owns approximately 11 percent of the Company's
common stock.
B. The meeting involved ratification of the appointment of Eide Bailly, LLP as
independent public accountants for Dynamic Homes, Inc. for the fiscal year
ending December 25, 1999. The appointment was ratified.
Item 7. Exhibits and Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter ended June 30, 1999.
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Page 14
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 9, 1999 Dynamic Homes, Inc.
--------------------------- --------------------------------------
(Registrant)
--------------------------------------
Eldon Matz
Controller
Page 15