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, 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 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, 1997, 2,224,850 common shares, par value, $.10 per share, were
outstanding. On January 7, 1995, the Company implemented a plan to repurchase
up to 100,000 shares of its outstanding common stock. As of June 30, 1997, a
total of 43,080 shares have been repurchased. During 1996, the Company ap-
proved a new stock option plan and granted 240,000 options to various offi-
cers, directors and employees. The treasury stock and 205,000 available unex-
ercised options have been excluded from the common shares outstanding.
PART I.
Item 1. Financial Statements
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1997 & 1996
(Unaudited)
<CAPTION>
Three Months
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 6/30/96
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<S> <C> <C> <C> <C>
Revenues
Single - Family 1,541,000 - 1,541,000 1,975,000
Multi - Family / Commercial 59,000 - 59,000 929,000
Other 104,000 - 104,000 95,000
Transportation 89,000 - 89,000 166,000
Shagawa Resort, Inc. - 503,000 503,000 44,000
Total Revenues - Net 1,793,000 503,000 2,296,000 3,209,000
Cost of Sales
Materials 985,000 316,000 1,301,000 1,525,000
Labor 173,000 - 173,000 290,000
Overhead 235,000 - 235,000 357,000
Transportation 150,000 - 150,000 198,000
Total Cost of Sales 1,543,000 316,000 1,859,000 2,370,000
Gross Profit 250,000 187,000 437,000 839,000
Operating Expenses
Marketing 79,000 - 79,000 125,000
Administration 196,000 - 196,000 194,000
Other - - - -
Shagawa Resort, Inc. - 251,000 251,000 23,000
Total Operating Expenses 275,000 251,000 526,000 342,000
Operating Income (Loss) (25,000) (64,000) (89,000) 497,000
Other (Income) Expense
Interest Expense 25,000 37,000 61,000 28,000
Other, Net 1,000 - 2,000 (1,000)
Total Other (Income) Expense 26,000 37,000 63,000 27,000
Income (Loss) Before Taxes (51,000) (101,000) (152,000) 470,000
Income Tax (Provision) Benefit 20,000 41,000 61,000 (188,000)
Net Income (Loss) (31,000) (60,000) (91,000) 282,000
Primary Earnings (Loss) Per Common Share (0.01) (0.03) (0.04) 0.13
Fully Diluted Earnings (Loss) Per
Common Share (0.01) (0.02) (0.04) 0.13
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 2,580,600 2,580,600 2,580,600 2,215,900
Dividends per Common Share None None None None
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1997 & 1996
(Unaudited)
<CAPTION>
Six Months
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 6/30/96
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<S> <C> <C> <C> <C>
Revenues
Single - Family 2,843,000 - 2,843,000 2,968,000
Multi - Family / Commercial 298,000 - 298,000 929,000
Other 163,000 - 163,000 144,000
Transportation 181,000 - 181,000 233,000
Shagawa Resort, Inc. - 559,000 559,000 44,000
Total Revenues - Net 3,485,000 559,000 4,044,000 4,318,000
Cost of Sales
Materials 1,886,000 316,000 2,202,000 2,082,000
Labor 344,000 - 344,000 383,000
Overhead 502,000 - 502,000 493,000
Transportation 334,000 - 334,000 343,000
Total Cost of Sales 3,066,000 316,000 3,382,000 3,301,000
Gross Profit 419,000 243,000 662,000 1,017,000
Operating Expenses
Marketing 164,000 - 164,000 218,000
Administration 382,000 - 382,000 368,000
Other 2,000 - 2,000 -
Shagawa Resort, Inc. - 307,000 307,000 23,000
Total Operating Expenses 548,000 307,000 855,000 23,000
Operating Income (Loss) (129,000) (64,000) (193,000) 408,000
Other (Income) Expense
Interest Expense 32,000 70,000 102,000 31,000
Other, Net - (1,000) (1,000) (5,000)
Total Other (Income) Expense 32,000 69,000 101,000 26,000
Income (Loss) Before Taxes (161,000) (133,000) (294,000) 382,000
Income Tax (Provision) Benefit 65,000 53,000 118,000 (153,000)
Net Income (Loss) (96,000) (80,000) (176,000) 229,000
Primary Earnings (Loss) Per Common Share (0.04) (0.04) (0.08) 0.10
Fully Diluted Earnings (Loss) Per
Common Share (0.04) (0.03) (0.03) 0.10
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 2,580,600 2,580,600 2,580,600 2,215,900
Dividends per Common Share None None None None
See notes to condensed consolidated
financial statements.
</TABLE>
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1997 & DECEMBER 28,1996
(Unaudited)
<CAPTION>
Dynamic Shagawa
Homes, Inc. Resort, Inc. Eliminations Consolidated 12/28/96
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<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & cash equivalents 51,000 61,000 - 112,000 554,000
Accounts receivable, less
allowance for doubtful
accounts, pledged 572,000 29,000 - 601,000 728,000
Inventories pledged (Note 2) 2,545,000 24,000 - 2,569,000 1,595,000
Prepaid expenses (Note 5) 117,000 23,000 - 140,000 29,000
Deferred income taxes (Note 4) 95,000 - - 95,000 95,000
Total Current Assets 3,380,000 137,000 - 3,517,000 3,001,000
OTHER ASSETS:
Investments - Affiliates 1,772,000 - (1,772,000) - -
Other assets (Note 8) 28,000 492,000 - 520,000 402,000
Total Other Assets 1,800,000 492,000 (1,772,000) 520,000 402,000
PROPERTY, PLANT & EQUIPMENT, at:
Cost - pledged in part (Note 6) 3,341,000 3,094,000 - 6,435,000 5,890,000
Less - accumulated depreciation (1,638,000) (152,000) - (1,790,000) (1,673,000)
Net Property, Plant & Equipment 1,703,000 2,942,000 - 4,645,000 4,217,000
Total Assets 6,883,000 3,571,000 (1,772,000) 8,682,000 7,620,000
LIABILITIES
CURRENT LIABILITIES:
Payables - Affiliates - 1,066,000 (1,066,000) - -
Notes payable - - - - -
Current portion - Long-term debt 97,000 43,000 - 140,000 107,000
Accounts payable 511,000 45,000 - 556,000 216,000
Customer deposits 422,000 - - 422,000 326,000
Accrued expenses
Salaries, wages and vacations 220,000 24,000 - 244,000 194,000
Taxes, other than income 89,000 13,000 - 102,000 78,000
Warranty 80,000 - - 80,000 77,000
Other 19,000 - - 19,000 108,000
Income Taxes (67,000) (53,000) - (120,000) -
Total Current Liabilities 1,371,000 1,138,000 (1,066,000) 1,443,000 1,106,000
LONG-TERM DEBT: (Note 7)
Less current portion
included above 1,180,000 1,799,000 - 2,979,000 2,077,000
DEFERRED INCOME TAXES (Note 4) 34,000 - - 34,000 34,000
Total Liabilities 2,585,000 2,937,000 (1,066,000) 4,456,000 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 4,067,000 (72,000) - 3,995,000 4,172,000
Treasury stock -
43,080 shares (144,000) - - (144,000) (144,000)
Total Stockholders' Equity 4,298,000 634,000 (706,000) 4,226,000 4,403,000
Total Liabilities &
Stockholders' Equity 6,883,000 3,571,000 (1,772,000) 8,682,000 7,620,000
See notes to consolidated
financial statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 & 1996
(Unaudited)
<CAPTION>
6/30/97 6/30/96
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<S> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) (176,000) 229,000
Adjust to Reconcile Net Income or Loss
Provided by (Used in) Operating Activities:
Depreciation 195,000 92,000
Provision for Doubtful Accounts 3,000 3,000
(Gain) Loss on Sale of Property & Equipment 8,000 -
Change in Assets & Liabilities:
(Increase) Decrease in Receivables 124,000 (88,000)
(Increase) Decrease in Inventories (974,000) (804,000)
(Increase) Decrease in Prepaid Expenses (111,000) (112,000)
(Increase) Decrease in Deferred Income Tax - -
(Increase) Decrease in Other Assets (118,000) (83,000)
Increase (Decrease) in Accounts Payable 340,000 483,000
Increase (Decrease) in Customer Deposit 96,000 683,000
Increase (Decrease) in Accrued Expenses (12,000) 105,000
Increase (Decrease) in Income Tax Payable (120,000) (107,000)
Net Cash Provided by (Used in)
Operating Activities (745,000) 401,000
Cash Flows From Investing Activities
Asset Purchase - Shagawa Resort (53,000) -
Proceeds From Sale of Property & Equipment 10,000 -
Purchase of Property & Equipment (613,000) (1,203,000)
Purchase of Treasury Stock - -
Net Cash Provided by (used in)
Investing Activities (656,000) (1,203,000)
Cash Flows From Financing Activities
Proceeds from Sale of Common Stock - -
Net Borrowings (Payments) on Revolving Credit
Agreements & Other Short-Term Financing - -
Principal Payments on Long-Term Borrowings
Including Industrial Revenue Bonds (110,000) (38,000)
Proceeds From Long-Term Borrowings 1,069,000 412,000
Net Cash Provided by (Used in)
Financing Activities 959,000 374,000
Increase (Decrease) in Cash and Equivalents (442,000) (428,000)
Cash and Equivalents
Beginning 554,000 543,000
Ending 112,000 115,000
Supplemental Disclosures of Cash Flow
Information
Cash Payments for:
Income Taxes 3,000 260,000
Interest 104,000 30,000
See notes to condensed consolidated
financial statements.
</TABLE>
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, 1997 and December 28, 1996,
and the results of operations and cash flows for the six months ended June 30,
1997 and June 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 inventories
are taken during the fiscal year to determine actual inventory and cost of
sales. A physical inventory was taken during the second quarter of 1997 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:
<TABLE>
<CAPTION>
6/30/97 6/30/96
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<S> <C> <C>
Finished Goods 1,551,000 1,499,000
Work In Process 162,000 190,000
Raw Materials 831,000 753,000
Shagawa Resort, Inc. 25,000 -
Total Inventories 2,569,000 2,442,000
</TABLE>
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,
1997, and June 30, 1996, the Company's backlog of unfilled orders was approxi-
mately $5,710,000 and $6,794,000, respectively. As of December 28, 1996, the
Company's backlog of unfilled orders was $2,593,000. The June 30, 1997, back-
log consists of 51 completed single-family units available for delivery and
setting as compared to 44 units on June 30, 1996. The winter weather condi-
tions, spring flooding and road restrictions curtailed the Company's delivery
and setting activities during the second quarter of 1997. The majority of the
finished units are anticipated to be delivered and set during the third 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
<TABLE>
<CAPTION>
6/30/97 6/30/96
----------- ----------
<S> <C> <C>
Advertising 4,000 17,000
Insurance 102,000 127,000
Equipment / Supplies Inventory -
Shagawa Resort, Inc. 23,000 -
Other 11,000 7,000
140,000 151,000
</TABLE>
Note 6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
6/30/97 6/30/96
----------- ----------
<S> <C> <C>
Dynamic Homes, Inc.
Land and Improvements 165,000 130,000
Buildings 971,000 978,000
Machinery and Equipment 1,601,000 1,364,000
Construction in Progress 605,000 50,000
Shagawa Resort, Inc.
Land and Improvements 329,000 160,000
Buildings 2,098,000 -
Machinery and Equipment 666,000 -
Construction in Progress - 2,777,000
6,435,000 5,459,000
Less: Accumulated Depreciation -
Dynamic Homes, Inc. (1,638,000) (1,540,000)
Accumulated Depreciation -
Shagawa Resort, Inc. (152,000) (22,000)
4,645,000 3,897,000
</TABLE>
Note 7. LONG-TERM DEBT
<TABLE>
<CAPTION>
6/30/97 6/30/96
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<S> <C> <C>
Long-term debt (net of current maturities)
consists of:
- Detroit Lakes - Plant Expansion 931,000 -
- Industrial Development Bonds of
Detroit Lakes, MN - 45,000
- M & I Leasing - Capitalized
Crane / Trailers 249,000 -
- Term Mortgage Agreement covering
Shagawa Resort Project (Note 9) 1,799,000 1,389,000
- Other Notes and Contracts Payable - 5,000
2,979,000 1,439,000
</TABLE>
Note 8. OTHER ASSETS - NET
<TABLE>
<CAPTION>
6/30/97 6/30/96
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<S> <C> <C>
Dynamic Homes, Inc.
- Deferred Bond & Maintenance Expense - 4,000
- Prepaid Debt Expense 22,000 -
- Deposits 6,000 12,000
Shagawa Resort, Inc.
- Goodwill 118,000 -
- Prepaid Advertising 8,000 -
- Prepaid Legal / Debt Expense 188,000 -
- Organization / Start-up 155,000 105,000
- Asset Replacement Escrow 23,000 -
520,000 121,000
</TABLE>
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 simul-
taneously 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. Operational results for the period March
17 - 31, 1997, were not recognized during the first quarter of 1997, but are
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, 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
June 30, 1997, was $1,793,000 as compared to $3,165,000 for the year earlier
period or a decrease of $1,372,000. Single-family revenues decreased by
$434,000 from $1,975,000 for 1996 to $1,541,000 for 1997. Likewise, revenue
generated from multi-family / commercial activities decreased from $929,000 in
1996 to $59,000 for 1997. As a result of lower unit revenue activities, trans-
portation and other revenues decreased from $261,000 in 1996 to $193,000 for
1997. The decrease in revenues during the second quarter of 1997 reflects the
1998. Company's reduced backlog at the end of the first quarter and the affects
of the unusually severe winter and spring flooding which occurred within the
Company's marketing territory. In addition, the Company was not able to secure
any large multi-family / commercial projects and experienced a decline in
Native American construction activities. Both of these areas contributed sig-
nificantly to the Company's revenues during the prior three years.
The Company's backlog at June 30, 1997, was $5,710,000 as compared to
$6,794,000 at June 30, 1996 (reference Note 3). The Company's backlog at the
end of July, 1997, totals $5,777,000 versus $6,782,000 for 1996. The Company
continues to actively pursue the housing needs of the flood victims by pro-
viding the area Builder / Dealers with display models for immediate sale and
have also assisted Builder / Dealers in presentation of housing proposals to
various governmental officials. Even though firm contracts have not been
signed, indications are promising that the Company will have the opportunity
to participate in fulfilling some of the area's housing needs during the
latter stages of 1997 and into 1998, but to what extent is still unknown.
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 period, March 17, 1997, through June 30,
1997, Shagawa Resort contributed revenues of $503,000. The Shagawa Resort
facility commenced operations on May 1, 1996, with the operational rights and
obligations leased to a managing agent. Consequently, during the second
quarter of 1996, the Company only realized lease revenues for the two-month
period of $44,000. Due to the location and seasonal nature of the industry,
revenues were soft during the first two months of the second quarter but have
strengthened during June with indications that revenues will remain stronger
for the duration of the third quarter. It is anticipated that seasonal fac-
tors will reduce the revenue base during the fourth quarter of 1997 and the
beginning months of 1998.
COST OF SALES:
Dynamic Home's gross profit (including transportation revenue and expense but
excluding Shagawa Resort, Inc.) was $250,000 for 1997 as compared to $795,000
for 1996. Gross profit percentage for 1997 is 13.9% versus 25.1% for 1996.
When transportation revenue and expense plus Shagawa Resort are excluded, the
gross profit on product changes to 18.3% and 27.6%, respectively. The 1997
gross margin percent was negatively affected by winter promotion pricing, model
home discounts and price reductions on inventory units. In addition, lower
production levels, during 1997, contributed to unfavorable production variances
for both labor and overhead which adversely impacted the gross margin percent.
In conjunction with the recent upswing in new orders, production levels have
likewise increased which should help alleviate the level of unfavorable pro-
duction variance. Material acquisition costs have remained relatively stable
throughout the second quarter of 1997.
Shagawa Resort, Inc. recorded a gross profit of $187,000 or 37.2% on operating
revenues of $503,000 for the second quarter of 1997. Due to the leasing
arrangement in effect during the second quarter of 1996, no cost of sales were
required.
OPERATING EXPENSES:
Dynamic Homes, Inc. operating expenses, which include transportation, marketing
and administration, decreased by $92,000 over the 1996 period. Due to the
decreased volume related to delivery and setting activity, 1997 transportation
expenses decreased by $48,000. Volume related marketing expenses decreased by
$46,000, while administration expenses increased by $2,000 during 1997.
Shagawa Resort, Inc. incurred operating expenses of $251,000 for the second
quarter of 1997. During the second quarter of 1996, Shagawa Resort began
operations in May, under a managing agreement, and consequently incurred only
depreciation and amortization expenses of $23,000 associated with the ownership
of the property.
OPERATING INCOME (LOSS):
The operating cycle for the second quarter of 1997 resulted in a consolidated
operating loss of $89,000. During the same period of 1996, the Company re-
ported operating income of $497,000. Dynamic Homes, Inc. incurred an opera-
ting loss of $25,000 while Shagawa Resort, Inc. incurred an operating loss of
$64,000 during the second quarter of 1997. In contrast, Dynamic Homes, Inc.
and Shagawa Resort, Inc. both reported 1996 operating incomes of $476,000 and
$21,000, respectively. The decrease in operating results reflects the reduced
sales volume during the second quarter of 1997, the impact of under-utilized
plant capacity which produced production generated unfavorable variances and
the holding and operational costs associated with ownership and operation of
the Shagawa Resort facility.
NET NON - OPERATING INCOME / EXPENSE:
Consolidated net non-operating expense for the second quarter of 1997 was
$63,000 as compared to net non-operating expense of $27,000 for the 1996
period. Interest related expense for 1997 increased by $33,000. Interest
expense associated with the financing of the Shagawa Resort property generated
$37,000 of interest expense during the second quarter of 1997. Dynamic Homes,
Inc. incurred an additional $25,000 of interest costs during the quarter pri-
marily 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:
Due to the consolidated loss incurred during the second quarter of 1997, the
Company recorded a tax benefit of $61,000. In contrast, the Company recorded
a tax liability of $188,000 during the 1996 period. Income tax obligations
and benefits are estimated at the normal statutory rate.
NET INCOME (LOSS):
The consolidated net loss for the second quarter of 1997 was $91,000 as com-
pared to a net income of $282,000 for 1996. Primary net loss per common share
out-standing for 1997 was a negative $0.04 per share versus a positive net
earnings of $0.13 per share for 1996. During the second quarter of 1997, the
ownership and operation of the Shagawa Resort property impacted the Company's
net loss by slightly less than $0.03 per share while the manufacturing facility
impacted the net loss by slightly more than $0.01 per share. After consider-
ation for unexercised stock options granted in 1996, weighted fully-diluted
earnings per common share for 1997 remained at a negative $0.04 per share
versus a positive $0.13 per share for 1996.
Results of Operations
Six Months Ended June 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 six-month
period ending June 30, 1997, was $3,485,000 or a decrease of $789,000 from the
$4,274,000 realized for 1996. During 1997, single-family revenue decreased by
$125,000 while multi-family / commercial revenue decreased $631,000. Due to
the lower revenue volume for the first six months of 1997, transportation and
other (retail) revenues also decreased by $33,000. 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, however, has increased during the past few months. The
Company is hopeful this trend will continue and that the Company will be
participating in addressing the housing needs associated with the spring
flooding.
Revenues associated with the ownership and operation of the Shagawa Resort,
Inc. totaled $559,000 for the first half of 1997. Shagawa Resort, Inc. opened
on May 1, 1996, under a management agreement with a managing agent. Lease
revenues under this arrangement for the months of May and June contributed
$44,000 to the 1996 revenue base. Revenues during the upcoming quarter will
benefit from the seasonally strong summer vacation 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, Inc.) was $419,000 for 1997 versus $973,000 for 1996.
Gross profit percentage for 1997 is 12.0% as compared to 22.8% for 1996. When
transportation revenue and expense plus Shagawa Resort are excluded, the gross
profit on product changes to 17.3% and 26.8%, 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 un-
favorable production variances negatively impacted the gross profit percent.
In addition, several sales discount programs also contributed to the reduced
gross margin percent. Overall material costs remained relatively stable
throughout the first half of 1997. In contrast, the first half of 1996 bene-
fited from higher production levels and favorable material costs.
Shagawa Resort, Inc. recorded a gross profit of $243,000 for the six-month
period ending June 30, 1997. Prior year gross profit of $44,000 represents
two months of lease revenue.
OPERATING EXPENSES:
Operating expenses associated with the manufacturing facility, which includes
transportation, marketing and administration, decreased by $47,000 from
$929,000 during 1996 to $882,000 for 1997. Volume related transportation and
marketing expenses decreased by $9,000 and $54,000, respectively, while admin-
istration related expenses increased by $16,000.
As a result of the March 17, 1997, asset purchase agreement with the prior
managing agent, Shagawa Resort, Inc. incurred operational and ownership ex-
penses of $307,000 for the 1997 period. During the first half of 1996, the
resort facility was under construction until the May 1st opening date. Sub-
sequent operational responsibilities were leased to a managing agent and con-
sequently the Company incurred only depreciation and amortization costs of
$23,000 associated with the property ownership.
OPERATING INCOME (LOSS):
The operating cycle for the first six months of 1997 resulted in a consolidated
operating loss of $193,000. During the same period of 1996, the Company re-
ported operating income of $408,000. Dynamic Homes, Inc. incurred an operating
loss of $129,000 while Shagawa Resort, Inc. incurred an operating loss of
$64,000. Dynamic Homes, Inc. and Shagawa Resort, Inc. both reported operating
incomes of $387,000 and $21,000, respectively during 1996. The reduction in
operating results for 1997 reflects the reduced sales volume, unfavorable pro-
duction variances and the change in the operational status of the Shagawa
Resort facility.
NET NON-OPERATING INCOME / EXPENSE:
Consolidated net non-operating expenses for 1997 were $101,000 or an increase
of $75,000 over the 1996 period. Net non-operating expenses for Dynamic Homes,
Inc. increased $27,000 from $5,000 in 1996 to $32,000 in 1997, while non-
operating expenses for Shagawa Resort, Inc. increased by $48,000 from $21,000
in 1996 to $69,000 for 1997. Interest related expense increased by $71,000
during 1997 while non-operating income decreased by $4,000. Interest costs
associated with the long-term mortgage financing of the Shagawa Resort in-
creased from $21,000 for 1996 to $70,000 for the 1997 period. Interest costs
associated with the financing of transportation equipment and the recently
completed plant expansion at Detroit Lakes, MN added an additional $22,000 of
interest expense for Dynamic Homes during the 1997 period.
FEDERAL AND STATE INCOME TAXES:
Due to the consolidated loss experienced during the first six months of 1997,
the Company recognized a combined tax benefit of $118,000. In contrast, the
Company recognized a tax liability of $153,000 for the same period of 1996.
Income tax benefits and obligations are estimated at the normal statutory rate.
NET INCOME (LOSS):
The consolidated net loss for the 1997 period was $176,000 as compared with a
net income of $229,000 for 1996. Primary net loss per common share outstanding
for 1997 was a negative $0.08 per share as compared with a positive net earn-
ings per share of $0.10 for 1996. During the first six months of 1997, both
Dynamic Homes, Inc. and Shagawa Resort, Inc. impacted the Company's net loss by
approximately $0.04 per share. During 1996, Shagawa Resort had no affect on
the earnings per common share. After consideration for unexercised stock
options granted in 1996, the weighted fully-diluted net loss per common share
for 1997 was $0.07 as compared to net earnings of $0.10 per common share for
1996.
Financial Condition
As of June 30, 1997
The Company's consolidated working capital at June 30, 1997, was a positive
$2,074,000 versus $1,155,000 at June 30, 1996. The working capital position at
December 28, 1996, was a positive $1,895,000. The current ratio for June 30,
1997, was 2.4 to 1.0 as compared to 2.7 to 1.0 at December 28, 1996, and 1.5 to
1.0 at June 20, 1996.
During the first two quarters of 1997, cash outflows were required for the
buildup of inventory (finished goods), renewal of the Company's insurance
package, the plant expansion project and the purchase of assets associated with
the management and operational responsibilities of Shagawa Resort, Inc. (Note
9). Cash funds were also utilized to sustain the Company's operating cycle.
Cash flows to support the referenced activities were primarily provided by
using the Company's year-end cash and cash equivalents position, customer
deposits, supplier payment terms and long-term financing arrangements.
Long-term debt, net of current maturities, increased by $1,540,000 from
$1,439,000 at June 30, 1996 to $2,979,000 at June 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 sub-
stantially 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 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 at the end of June 1997, and adds 17,000 square feet of additional
production space and has the potential of increasing the plant's single-shift
production capacity by approximately 15 percent. As of the end of June, 1997,
the Company has drawn 100% of the available funds.
The ratio of long-term debt to stockholders' equity changed from .40 to 1.0 at
June 30, 1996, to .47 to 1.0 at December 28, 1996, and .70 to 1.0 at June 30,
1997. The increase in the ratio reflects the accumulated debt acquired to fi-
nance transportation equipment, the Shagawa Resort project and the plant ex-
pansion. Due to the consolidated loss incurred during the first six months of
1997, stockholders' equity (net of treasury stock) decreased from $4,403,000
at December 28, 1996, to $4,226,000 at June 30, 1997.
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 June 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 oper-
ations and scheduled capital additions during the remainder of 1997.
Statements regarding the Company's operations, performance and financial condi-
tion 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. Likewise, future
escalating and volatile material costs and unfavorable weather conditions could
also affect the Company's profit margins.
PART II.
Items 1, 2, 3, and 5 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 23, 1997.
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 Charles
Bailly & Company P.L.L.P. as independent public accountants for
Dynamic Homes, Inc. for the fiscal year ending December 27, 1997.
The appointment was ratified.
Item 5. EXHIBITS AND REPORTS ON FORM 8-K:
On April 1, 1997, Form 8-K was filed regarding an Asset Purchase Agreement
whereby Dynamic Homes, Inc. acquired said assets to operate and manage the
Holiday Inn Sunspree Resort in Ely, Minnesota (Note 9).
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 there-
unto duly authorized.
Dated: August 12, 1997
Dynamic Homes, Inc. (Registrant)
ELDON MATZ Controller
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