Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For The Quarter Year Ended September 30, 1998
---------------------------
Commission File Number 0-8585
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Dynamic Homes, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0960127
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(State of Other Jurisdiction of Incorporation (IRS Employer
of Organization) Identification No.)
525 Roosevelt Avenue, Detroit Lakes, MN 56501
---------------------------------------------
(Address of principal executive offices)
(218) 847-2611
--------------
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of September 30, 1998, 2,240,850 common shares, par value, $.10 per share,
were outstanding. On January 7, 1995, the Company implemented a plan to
repurchase up to 100,000 shares of its outstanding common stock. As of September
30, 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
unexercised options have been excluded from the common shares outstanding.
<PAGE>
PART I.
Item 1. Financial Statements
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months
------------
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 9/30/97
----------- ------------ ------------ -------
<S> <C> <C> <C> <C>
Revenues
Single-Family $ 3,109,000 $ -- $ 3,109,000 $ 3,750,000
Multi-Family / Commercial 864,000 -- 864,000 124,000
Other 121,000 -- 121,000 113,000
Transportation 260,000 -- 260,000 214,000
Shagawa Resort, Inc. -- 762,000 762,000 728,000
----------- ----------- ----------- -----------
Total Revenue - Net 4,354,000 762,000 5,116,000 4,929,000
Cost of Sales
Materials 2,255,000 348,000 2,603,000 2,559,000
Labor 383,000 -- 383,000 355,000
Overhead 466,000 -- 466,000 405,000
Transportation 267,000 -- 267,000 214,000
----------- ----------- ----------- -----------
Total Cost of Sales 3,371,000 348,000 3,719,000 3,533,000
Gross Profit 983,000 414,000 1,397,000 1,396,000
Operating Expenses
Marketing 129,000 29,000 158,000 173,000
Administration 215,000 223,000 438,000 418,000
Other 32,000 -- 32,000 17,000
----------- ----------- ----------- -----------
Total Operating Expenses 376,000 252,000 628,000 608,000
Operating Income (Loss) 607,000 162,000 769,000 788,000
Other (Income) Expense
Interest Expense 32,000 36,000 68,000 64,000
Other, Net (14,000) (1,000) (15,000) --
----------- ----------- ----------- -----------
Total Other (Income) Expense 18,000 35,000 53,000 64,000
Income (Loss) Before Taxes 589,000 127,000 716,000 724,000
Income Tax (Provision) Benefit (236,000) (51,000) (287,000) (290,000)
----------- ----------- ----------- -----------
Net Income (Loss) $ 353,000 $ 76,000 $ 429,000 $ 434,000
=========== =========== =========== ===========
Primary Earnings (Loss) Per Common Share $ 0.16 $ 0.03 $ 0.19 $ 0.19
=========== =========== =========== ===========
Fully Diluted Earnings (Loss) Per
Common Share $ 0.16 $ 0.03 $ 0.19 $ 0.19
=========== =========== =========== ===========
Weighted Primary Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,240,900
=========== =========== =========== ===========
Weighted Fully Diluted Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,241,700
=========== =========== =========== ===========
Dividends per Common Share None None None None
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
Page 2
<PAGE>
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
-----------
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 9/30/97
----------- ------------ ------------ -------
<S> <C> <C> <C> <C>
Revenues
Single-Family $ 6,970,000 $ -- $ 6,970,000 $ 6,593,000
Multi-Family / Commercial 936,000 -- 936,000 422,000
Other 274,000 -- 274,000 276,000
Transportation 469,000 -- 469,000 395,000
Shagawa Resort, Inc. -- 1,601,000 1,601,000 1,287,000
------------ ------------ ------------ ------------
Total Revenue - Net 8,649,000 1,601,000 10,250,000 8,973,000
Cost of Sales
Materials 4,615,000 880,000 5,495,000 4,761,000
Labor 769,000 -- 769,000 699,000
Overhead 938,000 -- 938,000 907,000
Transportation 621,000 -- 621,000 548,000
------------ ------------ ------------ ------------
Total Cost of Sales 6,943,000 880,000 7,823,000 6,915,000
Gross Profit 1,706,000 721,000 2,427,000 2,058,000
Operating Expenses
Marketing 358,000 72,000 430,000 365,000
Administration 626,000 629,000 1,255,000 1,079,000
Other 32,000 -- 32,000 19,000
------------ ------------ ------------ ------------
Total Operating Expenses 1,016,000 701,000 1,717,000 1,463,000
Operating Income (Loss) 690,000 20,000 710,000 595,000
Other (Income) Expense
Interest Expense 101,000 110,000 211,000 167,000
Other, Net (50,000) (2,000) (52,000) (2,000)
------------ ------------ ------------ ------------
Total Other (Income) Expense 51,000 108,000 159,000 165,000
Income (Loss) Before Taxes 639,000 (88,000) 551,000 430,000
Income Tax (Provision) Benefit (256,000) 35,000 (221,000) (172,000)
------------ ------------ ------------ ------------
Net Income (Loss) $ 383,000 $ (53,000) $ 330,000 $ 258,000
============ ============ ============ ============
Primary Earnings (Loss) Per Common Share $ 0.17 $ (0.02) $ 0.15 $ 0.12
============ ============ ============ ============
Fully Diluted Earnings (Loss) Per
Common Share $ 0.17 $ (0.02) $ 0.15 $ 0.12
============ ============ ============ ============
Weighted Primary Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,240,900
============ ============ ============ ============
Weighted Fully Diluted Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,241,700
============ ============ ============ ============
Dividends per Common Share None None None None
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
Page 3
<PAGE>
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998 AND DECEMBER 27, 1997
(Unaudited)
<TABLE>
<CAPTION>
Dynamic Shagawa
Homes, Inc. Resort, Inc. Eliminations Consolidated 12/27/97
----------- ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash & cash equivalents $ 488,000 $ 72,000 $ -- $ 560,000 $ 1,330,000
Accounts receivable, less allowance
for doubtful accounts, pledged 1,027,000 16,000 -- 1,043,000 784,000
Inventories pledged (Note 2) 2,904,000 31,000 -- 2,935,000 1,488,000
Prepaid expenses (Note 5) 75,000 16,000 -- 91,000 47,000
Deferred income taxes (Note 4) 99,000 -- -- 99,000 99,000
----------- ----------- ----------- ----------- -----------
Total Current Assets 4,593,000 135,000 -- 4,728,000 3,748,000
Other Assets:
Investment - Affiliates 1,614,000 -- (1,614,000) -- --
Other assets (Note 8) 32,000 499,000 -- 531,000 530,000
----------- ----------- ----------- ----------- -----------
Total Other Assets 1,646,000 499,000 (1,614,000) 531,000 530,000
Property, Plant, & Equipment, at:
Cost - pledged in part (Note 6) 3,765,000 3,160,000 -- 6,925,000 6,588,000
Less - accumulated depreciation (1,890,000) (353,000) -- (2,243,000) (1,984,000)
----------- ----------- ----------- ----------- -----------
Net Property, Plant & Equipment 1,875,000 2,807,000 -- 4,682,000 4,604,000
----------- ----------- ----------- ----------- -----------
Total Assets $ 8,114,000 $ 3,441,000 $(1,614,000) $ 9,941,000 $ 8,882,000
=========== =========== =========== =========== ===========
LIABILITIES
Current Liabilities:
Payables - Affiliates $ -- $ 1,120,000 $(1,120,000) $ -- $ --
Notes payable -- -- -- -- --
Current portion - long-tern debt 152,000 40,000 -- 192,000 154,000
Accounts payable 448,000 42,000 -- 490,000 261,000
Customer deposits 348,000 -- -- 348,000 177,000
Accrued expenses
Salaries, Wages and vacations 251,000 22,000 -- 273,000 221,000
Taxes, other than income 106,000 55,000 -- 161,000 96,000
Warranty 69,000 -- -- 69,000 74,000
Other 119,000 5,000 -- 124,000 135,000
Income taxes 272,000 (35,000) -- 237,000 --
----------- ----------- ----------- ----------- -----------
Total Current Liabilities 1,765,000 1,249,000 (1,120,000) 1,894,000 1,118,000
Long-Term Debt: (Note 7)
Less current portion included above 1,154,000 1,750,000 -- 2,904,000 2,952,000
----------- ----------- ----------- ----------- -----------
Deferred Income Taxes (Note 4) 80,000 -- -- 80,000 80,000
----------- ----------- ----------- ----------- -----------
Total Liabilities 2,999,000 2,999,000 (1,120,000) 4,878,000 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, 2,284,000 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 4,884,000 (264,000) 212,000 4,832,000 4,501,000
Less Treasury stock - (43,080) shares (144,000) -- -- (144,000) (144,000)
----------- ----------- ----------- ----------- -----------
Total Stockholders' Equity 5,115,000 442,000 (494,000) 5,063,000 4,732,000
----------- ----------- ----------- ----------- -----------
Total Liabilities & Stockholders' Equity $ 8,114,000 $ 3,441,000 $(1,614,000) $ 9,941,000 $ 8,882,000
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
Page 4
<PAGE>
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
09/30/98 09/30/97
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) $ 330,000 $ 258,000
Adjust to Reconcile Net Income or Loss
Provided by (Used In) Operating Activities:
Depreciation / Amortization 356,000 316,000
Provision for Doubtful Accounts 10,000 4,000
(Gain) Loss on Sales of Property & Equipment -- 9,000
Change in Assets & Liabilities:
(Increase) Decrease in Receivables (269,000) (283,000)
(Increase) Decrease in Inventories (1,447,000) (621,000)
(Increase) Decrease in Prepaid Expenses (44,000) (70,000)
(Increase) Decrease in Deferred Income Tax -- --
(Increase) Decrease in Other Assets (49,000) (126,000)
Increase (Decrease) in Accounts Payable 229,000 444,000
Increase (Decrease) in Customer Deposits 171,000 (31,000)
Increase (Decrease) in Accrued Expenses 101,000 87,000
Increase (Decrease) in Income Tax Payable 237,000 178,000
----------- -----------
Net Cash Provided by (Used in) Operating Activities (375,000) 165,000
Cash Flows From Investing Activities
Asset Purchase - Shagawa Resort -- (53,000)
Proceeds From Sale of Property & Equipment 2,000 13,000
Purchase of Property & Equipment (390,000) (662,000)
----------- -----------
Net Cash Provided by (Used in) Investing Activities (388,000) (702,000)
Cash Flows From Financing Activities
Net Borrowings (Payments) on Revolving Credit Agreements
And Other Short-Term Financing -- --
Principal Payments on Long-Term Borrowings Including
Shagawa Resort (125,000) (170,000)
Proceeds From Long-Term Borrowings / Leases 118,000 1,069,000
----------- -----------
Net Cash Provided (Used in) Financing Activities (7,000) 899,000
Increase (Decrease) in Cash and Equivalents $ (770,000) $ 362,000
=========== ===========
Cash and Equivalents
Beginning $ 1,330,000 $ 554,000
Ending $ 560,000 $ 916,000
Supplemental Disclosures of Cash Flow Information
Cash Payments for:
Income Taxes $ 5,000 $ 3,000
Interest $ 212,000 $ 168,000
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE>
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 September 30, 1998 and December 27, 1997
and the results of operations and cash flows for the nine months ended September
30, 1998 and September 30, 1997.
Note 2. INVENTORIES
During interim accounting periods, the Company used 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 third quarter of 1998. Shagawa
Resort, Inc. conducts a physical inventory at each month-end.
The breakdown of inventories is as follows:
9/30/98 9/30/97
--------------- ---------------
Finished Goods (Note 3) $ 1,798,000 $ 1,060,000
Work In Process 183,000 193,000
Raw Materials 923,000 931,000
Shagawa Resort, Inc. 31,000 32,000
--------------- ---------------
Total Inventories $ 2,935,000 $ 2,216,000
=============== ===============
Note 3. BACKLOG OF ORDERS
The Company's order backlog consists of completed unit orders awaiting delivery,
current production and orders scheduled for future production and delivery. As
of September 30, 1998 and September 30, 1997, the Company's backlog of open
orders was approximately $4,203,000 and $4,407,000 respectively. As of December
27, 1997, the Company's backlog of open orders was $2,285,000. The September 30,
1998 backlog consists of 46 completed single-family orders and nine completed
inventory or spec units. The September 30, 1997 backlog consisted of 24
completed single-family orders and seven inventory or spec units. Completed but
unsold inventory or spec units are excluded from each of the referenced backlog
values. Approximately 40% of the September 30, 1998 finished goods inventory
relates to a single customer. The customer remains committed to the unit orders
but has significantly slowed the unit delivery and setting schedule.
Consequently, a number of the finished units will be pushed into the 1999
revenue cycle. Likewise, seasonal weather conditions and dealer site
preparations may also curtail the Company's ability to meet anticipated delivery
and setting schedules during the fourth quarter of 1998.
Note 4. DEFERRED INCOME TAXES
Deferred income taxes relate primarily to differences between the basis of
receivables, property and equipment, accrued expenses and book / tax inventory
adjustments for financial and income tax reporting. The deferred tax assets and
liabilities represent future tax return consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered and settled.
Note 5. PREPAID EXPENSES
9/30/98 9/30/97
--------------- ---------------
Advertising $ 9,000 $ 14,000
Insurance 54,000 63,000
Equipment, Supplies Inventory - Shagawa 16,000 14,000
Resort, Inc.
Other 12,000 8,000
--------------- ---------------
$ 91,000 $ 99,000
=============== ===============
<PAGE>
Note 6. PROPERTY AND EQUIPMENT
9/30/98 9/30/97
--------------- ---------------
Dynamic Homes, Inc.
Land and Improvements $ 220,000 $ 191,000
Buildings 1,401,000 991,000
Machinery and Equipment 2,020,000 1,749,000
Construction in Process 124,000 428,000
Shagawa Resort, Inc.
Land and Improvements 343,000 341,000
Buildings 2,116,000 2,098,000
Machinery and Equipment 701,000 667,000
Construction in Process - -
--------------- ---------------
6,925,000 6,465,000
Less: Accumulated Depreciation - Dynamic
Homes, Inc. (1,890,000) (1,679,000)
Accumulated Depreciation -
Shagawa Resort, Inc. (353,000) (192,000)
--------------- ---------------
$ 4,682,000 $ 4,594,000
=============== ===============
Note 7. LONG-TERM DEBT
9/30/98 9/30/97
--------------- ---------------
Long-term debt (net of current maturity)
consists of:
Detroit Lakes - Plant Expansion $ 804,000 $ 910,000
Leasing - Capitalized Cranes, Forklifts,
& Trailers 304,000 239,000
Term Mortgage Agreement covering Shagawa
Resort Project (Note 9) 1,750,000 1,788,000
Other Notes and Contracts Payable 46,000 -
--------------- ---------------
$ 2,904,000 $ 2,937,000
=============== ===============
Note 8. OTHER ASSETS - NET
9/30/98 9/30/97
--------------- -------------
Dynamic Homes, Inc.
- Deferred Maintenance Expense $ 7,000 $ -
- Prepaid Debt Expense 18,000 23,000
- Deposits 7,000 6,000
Shagawa Resort, Inc.
- Goodwill 110,000 116,000
- Prepaid Advertising 3,000 7,000
- Prepaid Legal/Debt Expense 176,000 193,000
- Organization/Start-up 114,000 146,000
- Asset Replacement Escrow 81,000 32,000
- Other 15,000 5,000
--------------- -------------
$ 531,000 $ 528,000
=============== =============
The Other Assets for Shagawa Resort, Inc. listed above 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
<PAGE>
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.
(Balance of page left intentionally blank.)
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Three months ended September 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
September 30, 1998 was $4,354,000, up $153,000 from the $4,201,000 recorded
during the same period last year. Single-family revenues decreased from
$3,750,000 for 1997 to $3,109,000 for 1998. Multi-family and commercial
activities increased from $124,000 for 1997 to $864,000 during 1998. The
majority of the multi-family and commercial revenue is associated with the
completion of 20 multi-family housing units for a Native American community
located in northern Minnesota. During the fourth quarter of 1998, the Company
anticipates the completion of a 10 unit single-family housing project for a
Native American community located in South Dakota. Transportation and other
(retail) revenue increased by $54,000 from $327,000 for 1997 to $381,000 during
1998.
Unit activity for single-family housing is again showing signs of the
traditional seasonal slowdown. In response, the Company has implemented several
fall and winter discount programs promoting model homes, consumer rebates and
Dealer/Developer discounts.
Revenues associated with Shagawa Resort, Inc. during the third quarter of 1998
totaled $762,000 or an increase of $34,000 over the $728,000 reported during the
third quarter of 1997. Due to the location and seasonal nature of the resort
business, sales are traditionally soft during the winter and early spring
months. The availability of winter related recreational activity significantly
affects the revenue base of the resort facility. In contrast, the resort's
revenues strengthen considerably during the summer tourist season.
COST OF SALES:
Dynamic Homes, Inc. gross profit (including transportation revenues and
expenses) was $983,000 as compared with $1,028,000 for 1997. The gross profit
percentage for 1998 is 22.6% versus 24.5% for 1997. When transportation revenue
and expense are excluded, the gross profit percentage on product changes to
24.2% and 25.8% respectively. Even though the gross margin percentage was
negatively affected by several model and winter promotional discount programs
during the third quarter of 1998, the additional increase in new orders allowed
the manufacturing facility to operate at an accelerated production level. The
benefits realized are addressed in the nine month `Results of Operations'.
Overall material acquisition costs remained relatively stable for each of the
periods.
Shagawa Resort, Inc. recorded a gross profit of $414,000 or an increase of
$46,000 over the $368,000 reported during the third quarter of 1997. The gross
profit percentage increased from 50.5% for 1997 to 54.4% for 1998 and is
associated with improved daily room rates.
OPERATING EXPENSES:
Dynamic Homes, Inc. operating expenses, which include transportation, marketing,
and administration increased by $82,000 over the 1997 level of $561,000 to
$643,000 for 1998. Both 1998 delivery revenue and expense increased over the
corresponding 1997 level. The majority of the delivery expense increase of
$53,000 is related to expenses associated with the delivery and setting of the
20 unit multi-family housing project in northern Minnesota. Marketing related
expenses for 1998 decreased by $6,000 from $135,000 for 1997 to $129,000 for
1998. Administration and other expenses for the third quarter of 1998 total
$247,000 versus $212,000 for 1997. The increase is primarily related to the
Company's profit sharing plan and external engineering and design services.
Shagawa Resort, Inc. incurred operating expenses of $252,000 during the third
quarter of 1998, as compared to $261,000 for 1997 or a decrease of $9,000.
<PAGE>
OPERATING INCOME:
The operating cycle for the third quarter of 1998 resulted in a consolidated
operating income of $769,000. During the same period of 1997, the Company
reported consolidated operating income of $788,000. Dynamic Homes, Inc.
contributed an operating income of $607,000 while Shagawa Resort, Inc.
contributed an operating income of $162,000 in 1998. During the third quarter of
1997, Dynamic Homes, Inc. and Shagawa Resort, Inc. reported operating incomes of
$681,000 and $107,000 respectively. The decrease in Dynamic Homes, Inc.
operating income is primarily associated with a reduced gross margin reflecting
the completion of units ordered and set under the prior year's winter
promotional programs. The increase in the 1998 operating income for Shagawa
Resort, Inc. reflects the benefits associated with an increase in revenue and a
reduction in operating expenses.
NET NON-OPERATING INCOME AND EXPENSE:
Consolidated net non-operating expense for the third quarter of 1998 was $53,000
or $11,000 less than the $64,000 reported in 1997. Interest related expense for
1998 increased $4,000 from $64,000 to $68,000. Interest expense associated with
the financing of Shagawa Resort, Inc. property generated $36,000 of interest
expense for the third quarter of 1998. Dynamic Homes, Inc. incurred $32,000 of
interest costs mainly associated with the capital lease financing of
transportation and manufacturing equipment and a long-term financing package
supporting the 1997 expansion of the manufacturing facility. Other income for
1998 consists of interest income and insurance related refunds.
FEDERAL AND STATE INCOME TAXES:
During the third quarter of both 1998 and 1997, the Company recorded
consolidated estimated income taxes provisions of $287,000 and $290,000
respectively. Income tax obligations are estimated at the normal statutory rate.
NET INCOME:
The consolidated net income for the third quarter of 1998 was $429,000 or
virtually unchanged from the $434,000 reported during the third quarter of 1997.
Both basic and diluted earnings equaled $0.19 per common share for each of the
periods. During the third quarter of 1998, the ownership and operation of
Shagawa Resort, Inc. benefited the Company's net earnings by approximately $0.03
per share, while the manufacturing facility increased net earnings by
approximately $0.16 per share. During the 1997 period, Shagawa Resort, Inc.
increased net earnings by approximately $0.02 per share, while the manufacturing
facility contributed approximately $0.17 per share. Considerations for
unexercised stock options granted in 1996 were recognized as diluted common
shares outstanding for each of the periods.
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Nine Months ended September 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 nine-month
period ending September 30, 1998 was $8,649,000 or an increase of $963,000 over
the $7,686,000 reported for 1997. Single-family revenue for the first nine
months of 1998 increased by $377,000 while multi-family and commercial revenues
increased by $514,000. Likewise, transportation and other (retail) revenue also
increased by $72,000.
Single-family housing revenues for 1998 were generated almost entirely through
the Company's Builder/Dealer network. The majority of the 1998 multi-family and
commercial revenues are associated with the completion of a 20-unit housing
project for a Native American community in northern Minnesota. The Company also
has a contract for a 10-unit single-family housing project for a Native American
community in South Dakota. This project is scheduled for completion during the
fourth quarter of 1998. The Company does not have any other firm housing or
commercial project contracts at this time (reference Note 3).
Revenues associated with the operation of Shagawa Resort, Inc. totaled
$1,601,000 for 1998 versus $1,287,000 for 1997. Dynamic Homes, Inc. assumed
operational responsibilities for the resort facility on March 17, 1997
(reference Note 9). Operational and lease revenues for the first nine months of
1997 were $1,231,000 and $56,000 respectively. The revenue base for the first
nine months of 1998 includes the seasonally strong summer months or tourist
season. 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 revenues and expense) was
$1,706,000 for 1998 and $1,447,000 for 1997. Gross profit percentage for 1998 is
19.7% as compared with 18.8% for 1997. When transportation revenue and expense
are excluded, the gross profit percentage on product sales increases to 22.7%
and 21.9% respectively. Even though the 1998 gross margin percentage was
negatively affected by several promotional discount programs, the increase in
new orders allowed the manufacturing facility to operate at a higher rate of
production. During the first nine months of 1998, production is approximately
25.0% higher than the same period one year ago. The increased plant utilization
benefited the Company's gross margin through more favorable production
variances. Overall material acquisition costs remained relatively stable for
both nine-month periods.
Shagawa Resort, Inc. recorded a gross profit of $721,000 for the nine-month
period ending September 30, 1998. Prior year gross profit was $611,000 and
included both operational and lease activities (reference Note 9).
OPERATING EXPENSES:
Operating expenses associated with the manufacturing facility, which includes
transportation, marketing, and administrative related costs, increased by
$194,000 from $1,443,000 during 1997 to $1,637,000 for 1998. Volume related
transportation expenses increased by $73,000 from $548,000 during 1997 to
$621,000 for 1998. Marketing expenses increased from $299,000 in 1997 to
$358,000 for 1998. The increase of $59,000 is attributed to the addition of a
commercial sales position at mid-year 1997, dealer volume incentive programs,
and company-related advertising and model home expenses. Administration and
other expenses increased by $62,000 from $596,000 for 1997 to $658,000 for 1998.
The majority of the increase in 1998 expenses relates to staff compensation
adjustments, stockholder activities, external engineering and design services
and the Company's profit sharing plan.
Shagawa Resort, Inc. incurred operational and ownership expenses of $701,000 for
the 1998 period and $568,000 for 1997. However, during the first quarter of
1997, Shagawa Resort, Inc. operated under a management agreement and
subsequently incurred only depreciation and amortization expenses associated
with the ownership of the property.
<PAGE>
OPERATING INCOME:
The operating cycle for the first nine months of 1998 resulted in a consolidated
operating income of $710,000. During the same period of 1997, the Company
reported consolidated operating income of $595,000. During 1998, the
manufacturing facility realized operating income of $690,000 while Shagawa
Resort, Inc. realized $20,000 of operating income. During 1997, Dynamic Homes,
Inc. and Shagawa Resort, Inc. reported operating incomes of $552,000 and $43,000
respectively. The improved operating income for Dynamic Homes, Inc. reflects the
higher revenue and production levels attained during the fist nine months of
1998. The reduction in 1998 operating income for Shagawa Resort, Inc. reflects
the March 17, 1997 change in the operational status of the facility.
NET NON-OPERATING INCOME AND EXPENSE
Consolidated net non-operating expenses for 1998 were $159,000 or very similar
to the $165,000 reported for the 1997 period. Interest related expense increased
by $44,000 from $167,000 in 1997 to $211,000 in 1998, while non-operating income
increased by $50,000. Interest costs associated with the long-term financing of
Shagawa Resort, Inc. increased by $3,000 from $107,000 in 1997 to $110,000 in
1998. Dynamic Homes, Inc. incurred interest expense of $101,000 during the first
nine months of 1998 or an increase of $41,000 over the 1997 period. Interest
expense associated with long-term financing and lease packages increased by
$30,000. The increase relates to the financing of the Detroit Lakes plant
expansion project that was finalized during the second quarter of 1997, and the
more recent acquisition of transportation and manufacturing equipment with
capital lease financing arrangements. Interest expense associated with
borrowings under the Company's line of credit during 1998 increased by $11,000.
Non-operating income for 1998 primarily consist of investment income realized
from the Company's cash and cash equivalent position, customer service charges,
and several insurance related dividends and refunds.
FEDERAL AND STATE INCOME TAXES:
Due to the consolidated net income realized during the first nine months of both
1998 and 1997, the Company recognized consolidated estimated tax provisions of
$221,000 and $172,000 respectively. Income tax obligations and benefits are
estimated at the normal statutory rate.
NET INCOME (LOSS):
The consolidated net income for the 1998 period is $330,000 or an improvement of
$72,000 over the $258,000 reported during 1997. Both basic and diluted earnings
per common share for 1998 were a positive $0.15 per share. Basic and diluted
earnings per common share for 1997 were a positive $0.12 per share. During the
first nine months of both 1998 and 1997, the operation of Shagawa Resort, Inc.
produced a net loss of $0.02 per share. Dynamic Homes, Inc. manufacturing sector
reported net earnings of $0.17 per share for the first nine months of 1998 or an
improvement of approximately $0.04 per share. Considerations for unexercised
stock options granted in 1996 were recognized in arriving at the basic and
diluted common shares and earnings per share computations.
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS
OF RESULTS OR OPERATIONS AND FINANCIAL CONDITION
Financial Condition
As of September 30, 1998
The Company's consolidated working capital at September 30, 1998 was a positive
$2,834,000 as compared to positive working capital positions of $2,510,000 at
September 30, 1997 and $2,630,000 at December 27, 1997. The current ratio for
September 30, 1998 is 2.5 to 1.0 as compared with 3.4 to 1.0 at December 27,
1997 and 2.4 to 1.0 at September 30, 1997.
The first three quarters of 1998 required cash outflows for the build-up of
inventory, renewal of the Company's insurance package, acquisition of
transportation, manufacturing and computer equipment, build-up of customer
receivables, and funding the replacement escrow for Shagawa Resort, Inc. Cash
flows to support the referenced activities were primarily provided by utilizing
the Company's year-end cash and cash equivalent position, customer deposits,
supplier payment terms, non-cash-related depreciation and amortization,
internally generated income and income tax deferral.
Long-term debt and capital leases, net of current maturities, decreased from
$2,952,000 at December 27, 1997 to $2,904,000 at September 30, 1998. In
contrast, the current portion of long-term debt increased by $38,000 from
$154,000 at December 27, 1997 to $192,000 on September 30, 1998. 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. On April 1, 1997, the Company retired
all outstanding debt associated with the Industrial Revenue Bonds that 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 the restructured long-term financing arrangement. 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
.63 to 1.0 at September 30, 1997, to .62 to 1.0 at December 27, 1997 and to .57
to 1.0 at September 30, 1998. The improved ratio reflects the Company's
additional consolidated net earnings for the first nine months of 1998.
Stockholders' equity, net of treasury stock, increased from $4,732,000 at
December 27, 1997 to $5,063,000 at September 30, 1998. Stockholders' equity on
September 30, 1997 was $4,661,000.
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 September 30, 1998, the Company had no outstanding balance against the
available credit 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.
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
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 the remainder of 1998 and the beginning stages of 1999.
<PAGE>
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 and its
operating system are both fully Year 2000 compliant. The Company will install
before the end of 1998, a new version of its business software that when
installed will also become Year 2000 compliant. Current year expenditures to
correct Year 2000 issues are approximately $5,000. 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.
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,
future escalating and volatile material costs and unfavorable weather conditions
could also affect the Company's profit levels.
(Balance of page left intentional blank.)
<PAGE>
PART II.
--------
Items 1, 2, 3, 4, 5, and 6 are omitted as each is either not applicable or the
answer to the item is negative.
Item 7. Exhibits and Reports on Form 8 - K:
No reports on Form 8 - K have been filed during the quarter ended September 30,
1998.
(Balance of page left intentional blank.)
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Dated: November 12, 1998 Dynamic Homes, Inc.
----------------- -------------------------------------------
(Registrant)
/s/ Eldon Matz
-------------------------------------------
Eldon Matz
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1998
FINANCIAL DATA SCHEDULE
EXHIBIT NO. 27
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> SEP-30-1998
<CASH> 560,000
<SECURITIES> 0
<RECEIVABLES> 1,097,000
<ALLOWANCES> (54,000)
<INVENTORY> 2,935,000
<CURRENT-ASSETS> 4,728,000
<PP&E> 6,925,000
<DEPRECIATION> (2,243,000)
<TOTAL-ASSETS> 9,941,000
<CURRENT-LIABILITIES> 1,894,000
<BONDS> 2,904,000
0
0
<COMMON> 228,000
<OTHER-SE> 4,835,000
<TOTAL-LIABILITY-AND-EQUITY> 9,941,000
<SALES> 8,180,000
<TOTAL-REVENUES> 10,250,000
<CGS> 6,322,000
<TOTAL-COSTS> 7,823,000
<OTHER-EXPENSES> 1,707,000
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 159,000
<INCOME-PRETAX> 551,000
<INCOME-TAX> 221,000
<INCOME-CONTINUING> 330,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 330,000
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
