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 March 31, 1999
----------------------------
Commission File Number 0-8585
-----------------------------------
Dynamic Homes, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0960127
- -------------------------------- -----------------------------------
(State of Other Jurisdiction of (IRS Employer Identification No.)
Incorporation of Organization)
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 March 31, 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 of March 31, 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
<PAGE>
PART I.
Item 1. Financial Statements
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months
------------
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 3/31/98
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales (Note 10) $ 1,448,000 $ 363,000 $ 1,811,000 $ 1,058,000
Cost of Sales (Note 11) 1,353,000 237,000 1,590,000 907,000
------------ ------------ ------------ ------------
Gross Profit 95,000 126,000 221,000 151,000
Operating Expenses (Note 12) 316,000 219,000 535,000 513,000
------------ ------------ ------------ ------------
Operating Income (Loss) (221,000) (93,000) (314,000) (362,000)
Other (Income) Expense
Interest Expense 31,000 36,000 67,000 69,000
Other, Net (14,000) (1,000) (15,000) (23,000)
------------ ------------ ------------ ------------
Total Other (Income) Expense 17,000 35,000 52,000 46,000
Income (Loss) Before Taxes and Cumulative
Effect of Accounting Change (238,000) (128,000) (366,000) (408,000)
Income Tax (Provision) Benefit 95,000 51,000 146,000 163,000
------------ ------------ ------------ ------------
Income (Loss) Before Cumulative Effect
of Accounting Change (143,000) (77,000) (220,000) (245,000)
Cumulative Effect of Accounting Change
(net of income tax of $56,000 in 1998) -- -- -- (94,000)
------------ ------------ ------------ ------------
Net Income (Loss) $ (143,000) $ (77,000) $ (220,000) $ (339,000)
============ ============ ============ ============
Basic Income (Loss) Per Common Share
Income (Loss) before cumulative effect
of accounting change $ (0.06) $ (0.03) $ (0.10) $ (0.11)
Cumulative effect of accounting change -- -- -- (0.04)
------------ ------------ ------------ ------------
Net Income (Loss) $ (0.06) $ (0.03) $ (0.10) $ (0.15)
============ ============ ============ ============
Diluted Income (Loss) Per Common Share
Income (Loss) before cumulative effect
of accounting change $ (0.06) $ (0.03) $ (0.10) $ (0.11)
Cumulative effect of accounting change -- -- -- (0.04)
------------ ------------ ------------ ------------
Net Income (Loss) $ (0.06) $ (0.03) $ (0.10) $ (0.15)
============ ============ ============ ============
Weighted Basic Average Number of
Shares Outstanding 2,240,850 2,240,850 2,240,850 2,240,850
============ ============ ============ ============
Weighted Diluted Average Number of
Shares Outstanding 2,240,850 2,240,850 2,240,850 2,242,000
============ ============ ============ ============
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
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999 AND DECEMBER 26, 1998
(Unaudited)
<TABLE>
<CAPTION>
Dynamic Shagawa
Homes, Inc. Resort, Inc. Eliminations Consolidated 12/26/98
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash & cash equivalents $ (120,000) $ 48,000 $ -- $ (72,000) $ 313,000
Accounts receivable, less allowance
for doubtful accounts, pledged 718,000 -- -- 718,000 1,525,000
Inventories pledged (Note 2) 3,502,000 33,000 -- 3,535,000 2,367,000
Prepaid expenses (Note 5) 130,000 12,000 -- 142,000 78,000
Deferred income taxes (Note 4) 143,000 -- -- 143,000 143,000
------------ ------------ ------------ ------------ ------------
Total Current Assets 4,373,000 93,000 -- 4,466,000 4,426,000
Other Assets:
Investment - Affiliates 1,469,000 -- (1,469,000) -- --
Other assets (Note 8) 29,000 391,000 -- 420,000 421,000
------------ ------------ ------------ ------------ ------------
Total Other Assets 1,498,000 391,000 (1,469,000) 420,000 421,000
Property, Plant, & Equipment, at:
Cost - pledged in part (Note 6) 3,655,000 3,166,000 -- 6,821,000 6,762,000
Less - accumulated depreciation (1,855,000) (436,000) -- (2,291,000) (2,184,000)
------------ ------------ ------------ ------------ ------------
Net Property, Plant & Equipment 1,800,000 2,730,000 -- 4,530,000 4,578,000
------------ ------------ ------------ ------------ ------------
Total Assets $ 7,671,000 $ 3,214,000 $ (1,469,000) $ 9,416,000 $ 9,425,000
============ ============ ============ ============ ============
LIABILITIES
Current Liabilities:
Payables - Affiliates $ -- $ 1,316,000 $ (1,316,000) $ -- $ --
Notes payable 125,000 -- -- 125,000 --
Current portion - long-tern debt 156,000 41,000 -- 197,000 197,000
Accounts payable 577,000 35,000 -- 612,000 350,000
Customer deposits 296,000 -- -- 296,000 200,000
Accrued expenses
Salaries, Wages and vacations 222,000 21,000 -- 243,000 260,000
Taxes, other than income 127,000 46,000 -- 173,000 97,000
Warranty 74,000 -- -- 74,000 72,000
Other 67,000 5,000 -- 72,000 209,000
Income taxes (99,000) (51,000) -- (150,000) 5,000
------------ ------------ ------------ ------------ ------------
Total Current Liabilities 1,545,000 1,413,000 (1,316,000) 1,642,000 1,390,000
Long-Term Debt: (Note 7)
Less current portion included above 1,086,000 1,725,000 -- 2,811,000 2,853,000
------------ ------------ ------------ ------------ ------------
Deferred Income Taxes (Note 4) 76,000 -- -- 76,000 76,000
------------ ------------ ------------ ------------ ------------
Total Liabilities 2,707,000 3,138,000 (1,316,000) 4,529,000 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 4,733,000 (630,000) 553,000 4,656,000 4,875,000
Less Treasury stock - (43,080) shares (144,000) -- -- (144,000) (144,000)
------------ ------------ ------------ ------------ ------------
Total Stockholders' Equity 4,964,000 76,000 (153,000) 4,887,000 5,106,000
------------ ------------ ------------ ------------ ------------
Total Liabilities & Stockholders' Equity $ 7,671,000 $ 3,214,000 $ (1,469,000) $ 9,416,000 $ 9,425,000
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE>
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
03/31/99 03/31/98
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) $ (220,000) $ (245,000)
Adjust to Reconcile Net Income or Loss
Provided by (Used In) Operating Activities:
Depreciation / Amortization 114,000 117,000
Provision for Doubtful Accounts 6,000 2,000
(Gain) Loss on Sales of Property & Equipment -- --
Change in Assets & Liabilities:
(Increase) Decrease in Receivables 795,000 565,000
(Increase) Decrease in Inventories (1,168,000) (1,929,000)
(Increase) Decrease in Prepaid Expenses (64,000) (69,000)
(Increase) Decrease in Deferred Income Tax -- --
(Increase) Decrease in Other Assets 1,000 (8,000)
Increase (Decrease) in Accounts Payable 262,000 483,000
Increase (Decrease) in Customer Deposits 96,000 157,000
Increase (Decrease) in Accrued Expenses (76,000) (18,000)
Increase (Decrease) in Income Tax Payable (155,000) (163,000)
------------ ------------
Net Cash Provided by (Used in) Operating Activities (409,000) (1,108,000)
Cash Flows From Investing Activities
Proceeds From Sale of Property & Equipment -- --
Purchase of Property & Equipment (59,000) (102,000)
------------ ------------
Net Cash Provided by (Used in) Investing Activities (59,000) (102,000)
Cash Flows From Financing Activities
Net Borrowings (Payments) on Revolving Credit Agreements
And Other Short-Term Financing 125,000 75,000
Principal Payments on Long-Term Borrowings Including
Shagawa Resort (42,000) (32,000)
Proceeds From Long-Term Borrowings / Leases -- --
------------ ------------
Net Cash Provided (Used in) Financing Activities 83,000 43,000
Increase (Decrease) in Cash and Equivalents $ (385,000) $ (1,167,000)
============ ============
Cash and Equivalents
Beginning $ 313,000 $ 1,330,000
Ending $ (72,000) $ 163,000
Supplemental Disclosures of Cash Flow Information
Cash Payments for:
Income Taxes $ 9,000 $ 1,000
Interest $ 67,000 $ 68,000
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<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 March 31, 1999 and December 26, 1998 and
the results of operations and cash flows for the three months ended March 31,
1999 and March 31, 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 first quarter of 1999. Shagawa
Resort, Inc. conducts a physical inventory at each month-end.
The breakdown of inventories is as follows:
3/31/99 3/31/98
------------ ------------
Finished Goods (Note 3) $ 2,379,000 $ 2,245,000
Work In Process 185,000 185,000
Raw Materials 938,000 956,000
Shagawa Resort, Inc. 33,000 32,000
------------ ------------
Total Inventories $ 3,535,000 $ 3,418,000
============ ============
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 March 31,
1999 and March 31, 1998, the Company's backlog of committed orders was
approximately $5,014,000 and $6,513,000, respectively. As of December 26, 1998,
the Company's backlog of orders was $2,737,000. The Company's order backlog at
April 30, 1999 totals $4,965,000 compared to $7,419,000 on April 30, 1998. The
backlog at April 30, 1998 included two projects consisting of 20 and 10 units
each for Native American communities. The Company does not currently have any
contracts pending with Native American communities. During periods of excess
plant capacity, the Company supplements its production through the building of
inventory units. As of April 30, 1999, 15 inventory units are available for sale
compared to 20 inventory units at April 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
3/31/99 3/31/98
--------- ---------
Advertising $ 4,000 $ 7,000
Insurance 90,000 92,000
Equipment, Supplies Inventory - Shagawa Resort, Inc. 9,000 10,000
Other 39,000 7,000
--------- ---------
$ 142,000 $ 116,000
========= =========
Page 5
<PAGE>
Note 6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
3/31/99 3/31/98
------------ ------------
<S> <C> <C>
Dynamic Homes, Inc.
Land and Improvements $ 241,000 $ 220,000
Buildings 1,401,000 1,401,000
Machinery and Equipment 1,971,000 1,870,000
Construction in Process 42,000 78,000
Shagawa Resort, Inc.
Land and Improvements 343,000 341,000
Buildings 2,116,000 2,105,000
Machinery and Equipment 707,000 673,000
Construction in Process -- --
------------ ------------
6,821,000 6,688,000
Less: Accumulated Depreciation - Dynamic Homes, Inc. (1,855,000) (1,808,000)
Accumulated Depreciation - Shagawa Resort, Inc. (436,000) (272,000)
------------ ------------
$ 4,530,000 $ 4,608,000
============ ============
</TABLE>
Note 7. LONG-TERM DEBT
<TABLE>
<CAPTION>
3/31/99 3/31/98
------------ ------------
<S> <C> <C>
Long-term debt (net of current maturity) consists of:
Detroit Lakes - Plant Expansion $ 803,000 $ 878,000
Leasing - Capitalized Cranes, Forklifts, & Trailers 246,000 218,000
Term Mortgage Agreement covering Shagawa
Resort Project (Note 9) 1,725,000 1,773,000
Other Notes and Contracts Payable 37,000 47,000
------------ ------------
$ 2,811,000 $ 2,916,000
============ ============
</TABLE>
Note 8. OTHER ASSETS - NET
<TABLE>
<CAPTION>
3/31/99 3/31/98
------------ ------------
<S> <C> <C>
Dynamic Homes, Inc.
- Deferred Maintenance Expense $ 6,000 $ --
- Prepaid Debt Expense 16,000 20,000
- Deposits 7,000 6,000
Shagawa Resort, Inc.
- Goodwill 105,000 113,000
- Prepaid Legal / Debt Expense 173,000 181,000
- Asset Replacement Escrow 102,000 55,000
- Other 11,000 3,000
------------ ------------
$ 420,000 $ 378,000
============ ============
</TABLE>
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 6
<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.
Note 10. - Sales
1999 1998
------------ ------------
Single-family $ 768,000 $ 635,000
Multi-family 518,000 --
Transportation 88,000 40,000
Other 74,000 39,000
Resort 363,000 344,000
------------ ------------
$ 1,811,000 $ 1,058,000
============ ============
Note 11 - Cost of Sales
1999 1998
------------ ------------
Materials $ 759,000 $ 370,000
Labor 136,000 55,000
Overhead 248,000 93,000
Transportation 210,000 150,000
Resort 237,000 239,000
------------ ------------
$ 1,590,000 $ 907,000
============ ============
Note 12 - Operating Expenses
1999 1998
------------ ------------
Marketing $ 115,000 $ 124,000
Administration 420,000 389,000
------------ ------------
$ 535,000 $ 513,000
============ ============
Page 7
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Three months ended March 31, 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
March 31, 1999 was $1,448,000, up $734,000 from the $714,000 recorded during the
same period last year. Single-family revenues increased from $635,000 in 1998 to
$768,000 for 1999. Multi-family and commercial activities during the first
quarter of 1999 totaled $518,000. The first quarter of 1998 did not have any
multi-family or commercial sales activity. Transportation and other (retail)
revenue increased by $83,000 from $79,000 during 1998 to $162,000 for 1999. The
increased revenue base during the first quarter of 1999 reflects new order
activity associated with the conclusion of fall and winter promotional marketing
programs.
Revenue associated with Shagawa Resorts, Inc. was $363,000 for 1999 versus
$344,000 for 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.
COST OF SALES:
Dynamic Homes, Inc. 1999 gross profit (including transportation revenues and
expenses) was $95,000 as compared with $46,000 for the first quarter of 1998.
The gross profit percentage for 1999 is 6.6% versus 6.4% for 1998. When
transportation revenue and expense are excluded, the gross profit percentage on
product changes to 16.0% for 1999 and 23.1% for 1998. Even though the Company
received good response from its fall and winter promotions, many of the new unit
orders were not available for immediate production. Consequently, the Company
experienced excess plant capacity during the early stages of 1999. This
condition resulted in a significant level of unabsorbed plant overhead being
charged to cost of sales. Material prices remained relatively stable during the
first quarter of 1999. However, recent supply and demand pressure on several
critical building components have begun to exert an upward trend in prices and
reduced product availability. The Company is monitoring the situation and the
impact these prices have on the Company's gross margin percentage.
Shagawa Resort, Inc. recorded a gross profit of $126,000 or an increase of
$21,000 over the $105,000 reported during the first quarter of 1998. The
improved gross margin reflects a higher average daily room rate and an
improvement in the first quarter's occupancy rate.
OPERATING EXPENSES:
Dynamic Homes, Inc. operating expenses, which include transportation, marketing,
and administration increased by $83,000 over the 1998 level of $443,000 to
$526,000 for 1999. However, due to the increased level of sales, overall
operating expenses decreased from approximately 62.0% of sales in 1998 to
approximately 36.3% of sales during 1999. Both 1999 delivery revenue and expense
increased over the corresponding 1998 level. The increase of $60,000 in 1999
delivery expense reflects increased delivery and setting activities and
maintenance and repairs to transportation equipment. Due to the rescheduling of
the spring dealer meeting, marketing related expenses for 1999 decreased by
$10,000 from $105,000 for 1998 to $95,000 for 1999. Administration and other
expenses for the first quarter of 1999 total $221,000 versus $188,000 for 1998.
The increase is primarily related to wage adjustments and an increase to the bad
debt reserve.
Shagawa Resort, Inc. incurred operating expenses of $219,000 during 1999 and
$220,000 during 1998. Overall, operating expenses decreased from 64.0% of sales
during 1998 to 60.3% for 1999. The reduction 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:
Page 8
<PAGE>
The operating cycle for the first quarter of 1999 resulted in a consolidated
operating loss of $314,000. During the same period of 1998, the Company reported
a consolidated operating loss of $362,000. Dynamic Homes, Inc. incurred an
operating loss of $221,000 while Shagawa Resort, Inc. incurred an operating loss
of $93,000. The small improvement to the 1999 operating loss reflects the
benefits associated with the increased revenue base.
NET NON-OPERATING INCOME AND EXPENSE:
Consolidated net non-operating expense for the first quarter of 1999 was $52,000
or $6,000 more than the $46,000 reported in 1998. Interest related expense for
1999 decreased $2,000 from $69,000 to $67,000. Interest expense associated with
the financing of the Shagawa Resort, Inc. property generated $36,000 of interest
expense for the first quarter of 1999. Dynamic Homes, Inc. incurred $31,000 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
1999 and 1998 consists mainly of interest income generated from the Company's
year-end cash and cash equivalents positions.
FEDERAL AND STATE INCOME TAXES:
During the first quarter of both 1999 and 1998, the Company recorded
consolidated estimated income taxes benefits, before the cumulative effect of
accounting change, of $146,000 and $163,000 respectively. Income tax obligations
are estimated at the normal statutory rate.
NET INCOME:
The consolidated net loss, before the cumulative effect of accounting change was
$220,000 for 1999 and $245,000 during 1998. Both basic and diluted earnings per
common share outstanding resulted in net losses of $0.10 per share for 1999 and
$0.11 per share for 1998. Shagawa Resort, Inc. incurred net losses of
approximately $0.04 per common share during each of the quarters, while the
manufacturing facility incurred a net loss of approximately $0.06 per common
share during 1999 and $0.07 during 1998. 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
the Costs of Start-up Activities", (Note 8) the cumulative effect of accounting
change increased the 1998 basic and diluted consolidated net loss from $0.11 per
common share to $0.15 per share. No additional impact is anticipated from the
1998 adoption of the accounting change.
(Balance of page left intentionally blank.)
Page 9
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS
OF RESULTS OR OPERATIONS AND FINANCIAL CONDITION
Financial Condition
As of March 31, 1999
The Company's consolidated working capital at March 31, 1999 was a positive
$2,824,000 as compared to positive working capital positions of $2,358,000 at
March 31, 1998 and $3,036,000 at December 26, 1998. The current ratio for March
31, 1999 is 2.7 to 1.0 as compared with 3.2 to 1.0 at December 26, 1998 and 2.4
to 1.0 at March 31, 1998.
During the first quarter of 1999, cash outflows were required for the build-up
of inventory (finished goods), renewal of the Company's insurance package,
acquisition of computer equipment and software and for 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 equivalent position,
receivable collections, customer deposits, supplier payment terms,
non-cash-related depreciation and amortization, and borrowings under the
Company's credit line.
Long-term debt and capital leases, net of current maturities, decreased from
$2,853,000 at December 26, 1998 to $2,811,000 at March 31, 1999. On March 31,
1998, long-term debt and capital leases, net of current maturities, was
$2,916,000. 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
.65 to 1.0 at March 31, 1998, to .56 to 1.0 at December 26, 1998 and to .58 to
1.0 at March 31, 1999. Due to the consolidated net loss incurred during the
first quarter of 1999, stockholders' equity, net of treasury stock, decreased
from $5,106,000 at December 26, 1998 to $4,887,000 at March 31, 1999.
Stockholders' equity on March 31, 1998 was $4,487,000.
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 March 31, 1999, the Company had $125,000 outstanding 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.
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 10
<PAGE>
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.
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 March 31, 1999.
(Balance of page left intentional blank.)
Page 11
<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: May 10, 1999 Dynamic Homes, Inc.
----------------------------- ---------------------------------------
(Registrant)
---------------------------------------
Eldon Matz
Controller
Page 12
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<PERIOD-END> MAR-31-1999
<CASH> (72,000)
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