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, 1999
------------------------------------
Commission File Number 0-8585
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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 September 30, 1999, 2,240,850 common shares, par value, $.10 per share,
were outstanding. On January 7, 1995, the Company implemented a plan to
repurchase up to 100,000 shares of its outstanding common stock. As September
30, 1999, a total of 43,080 shares have been repurchased. During 1996, the
Company approved a new stock option plan and granted 240,000 options to various
officers, directors and employees. The treasury stock and 205,000 available
unexercised options have been excluded from the common shares outstanding.
Page 1
<PAGE>
PART I
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Three Months
------------
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 9/30/98
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales (Note 10) $ 4,635,000 $ 798,000 $ 5,433,000 $ 5,116,000
Cost of Sales (Note 11) 3,606,000 358,000 3,964,000 3,719,000
------------ ------------ ------------ ------------
Gross Profit 1,029,000 440,000 1,469,000 1,397,000
Operating Expenses (Note 12) 419,000 258,000 677,000 628,000
------------ ------------ ------------ ------------
Operating Income (Loss) 610,000 182,000 792,000 769,000
Other (Income) Expense
Interest Expense 33,000 36,000 69,000 68,000
Other, Net (17,000) (1,000) (18,000) (15,000)
------------ ------------ ------------ ------------
Total Other (Income) Expense 16,000 35,000 51,000 53,000
Income (Loss) Before Taxes and Cumulative
Effect of Accounting Change 594,000 147,000 741,000 716,000
Income Tax (Provision) Benefit (237,000) (59,000) (296,000) (287,000)
------------ ------------ ------------ ------------
Income (Loss) Before Cumulative Effect
of Accounting Change 357,000 88,000 445,000 429,000
Cumulative Effect of Accounting Change
(net of income tax of $56,000 in 1998) -- -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ 357,000 $ 88,000 $ 445,000 $ 429,000
============ ============ ============ ============
Basic Income (Loss) Per Common Share
Income (Loss) before cumulative effect
of accounting change $ 0.16 $ 0.04 $ 0.20 $ 0.19
Cumulative effect of accounting change -- -- $ -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ 0.16 $ 0.04 $ 0.20 $ 0.19
============ ============ ============ ============
Diluted Income (Loss) Per Common Share
Income (Loss) before cumulative effect
of accounting change $ 0.16 $ 0.04 $ 0.20 $ 0.19
Cumulative effect of accounting change -- -- $ -- --
------------ ------------ ------------ ------------
Net Income (Loss) $ 0.16 $ 0.04 $ 0.20 $ 0.19
============ ============ ============ ============
Weighted Basic Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,240,900
============ ============ ============ ============
Weighted Diluted Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,240,900
============ ============ ============ ============
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, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
-----------
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 9/30/98
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales (Note 10) $ 9,200,000 $ 1,646,000 $ 10,846,000 $ 10,250,000
Cost of Sales (Note 11) 7,647,000 879,000 8,526,000 7,823,000
------------ ------------ ------------ ------------
Gross Profit 1,553,000 767,000 2,320,000 2,427,000
Operating Expenses (Note 12) 1,085,000 706,000 1,791,000 1,717,000
------------ ------------ ------------ ------------
Operating Income (Loss) 468,000 61,000 529,000 710,000
Other (Income) Expense
Interest Expense 104,000 107,000 211,000 211,000
Other, Net (42,000) (3,000) (45,000) (52,000)
------------ ------------ ------------ ------------
Total Other (Income) Expense 62,000 104,000 166,000 159,000
Income (Loss) Before Taxes and Cumulative
Effect of Accounting Change 406,000 (43,000) 363,000 551,000
Income Tax (Provision) Benefit (162,000) 17,000 (145,000) (221,000)
------------ ------------ ------------ ------------
Income (Loss) Before Cumulative Effect
of Accounting Change 244,000 (26,000) 218,000 330,000
Cumulative Effect of Accounting Change
(net of income tax of $56,000 in 1998) -- -- -- (94,000)
------------ ------------ ------------ ------------
Net Income (Loss) $ 244,000 $ (26,000) $ 218,000 $ 236,000
============ ============ ============ ============
Basic Income (Loss) Per Common Share
Income (Loss) before cumulative effect
of accounting change $ 0.11 $ (0.01) $ 0.10 $ 0.15
Cumulative effect of accounting change -- -- -- (0.04)
------------ ------------ ------------ ------------
Net Income (Loss) $ 0.11 $ (0.01) $ 0.10 $ 0.11
============ ============ ============ ============
Diluted Income (Loss) Per Common Share
Income (Loss) before cumulative effect
of accounting change $ 0.11 $ (0.01) $ 0.10 $ 0.15
Cumulative effect of accounting change -- -- -- (0.04)
------------ ------------ ------------ ------------
Net Income (Loss) $ 0.11 $ (0.01) $ 0.10 $ 0.11
============ ============ ============ ============
Weighted Basic Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,240,900
============ ============ ============ ============
Weighted Diluted Average Number of
Shares Outstanding 2,240,900 2,240,900 2,240,900 2,240,900
============ ============ ============ ============
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, 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 $ 384,000 $ 69,000 $ -- $ 453,000 $ 313,000
Accounts receivable, less allowance
for doubtful accounts, pledged 1,286,000 15,000 -- 1,301,000 1,525,000
Inventories pledged (Note 2) 3,176,000 36,000 -- 3,212,000 2,367,000
Prepaid expenses (Note 5) 112,000 12,000 -- 124,000 78,000
Deferred income taxes (Note 4) 143,000 -- -- 143,000 143,000
------------ ------------ ------------ ------------ ------------
Total Current Assets 5,101,000 132,000 -- 5,233,000 4,426,000
Other Assets:
Investment - Affiliates 1,354,000 -- (1,354,000) -- --
Other assets (Note 8) 38,000 380,000 -- 418,000 421,000
------------ ------------ ------------ ------------ ------------
Total Other Assets 1,392,000 380,000 (1,354,000) 418,000 421,000
Property, Plant, & Equipment, at:
Cost - pledged in part (Note 6) 3,800,000 3,190,000 -- 6,990,000 6,762,000
Less - accumulated depreciation (1,910,000) (520,000) -- (2,430,000) (2,184,000)
------------ ------------ ------------ ------------ ------------
Net Property, Plant & Equipment 1,890,000 2,670,000 -- 4,560,000 4,578,000
------------ ------------ ------------ ------------ ------------
Total Assets $ 8,383,000 $ 3,182,000 $ (1,354,000) $ 10,211,000 $ 9,425,000
============ ============ ============ ============ ============
LIABILITIES
Current Liabilities:
Payables - Affiliates $ -- $ 1,201,000 $ (1,201,000) $ -- $ --
Notes payable -- -- -- -- --
Current portion - long-term debt 214,000 43,000 -- 257,000 197,000
Accounts payable 544,000 45,000 -- 589,000 350,000
Customer deposits 282,000 -- -- 282,000 200,000
Accrued expenses
Salaries, Wages and vacations 268,000 23,000 -- 291,000 260,000
Taxes, other than income 135,000 54,000 -- 189,000 97,000
Warranty 77,000 -- -- 77,000 72,000
Other 150,000 6,000 -- 156,000 209,000
Income taxes 165,000 (17,000) -- 148,000 5,000
------------ ------------ ------------ ------------ ------------
Total Current Liabilities 1,835,000 1,355,000 (1,201,000) 1,989,000 1,390,000
Long-Term Debt: (Note 7)
Less current portion included above 1,122,000 1,700,000 -- 2,822,000 2,853,000
------------ ------------ ------------ ------------ ------------
Deferred Income Taxes (Note 4) 76,000 -- -- 76,000 76,000
------------ ------------ ------------ ------------ ------------
Total Liabilities 3,033,000 3,055,000 (1,201,000) 4,887,000 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 5,119,000 (579,000) 553,000 5,093,000 4,875,000
Less Treasury stock - (43,080) shares (144,000) -- -- (144,000) (144,000)
------------ ------------ ------------ ------------ ------------
Total Stockholders' Equity 5,350,000 127,000 (153,000) 5,324,000 5,106,000
------------ ------------ ------------ ------------ ------------
Total Liabilities & Stockholders' Equity $ 8,383,000 $ 3,182,000 $ (1,354,000) $ 10,211,000 $ 9,425,000
============ ============ ============ ============ ============
</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, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
09/30/99 09/30/98
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities
- ------------------------------------
Net Income (Loss) $ 218,000 $ 236,000
Adjust to Reconcile Net Income or Loss
Provided by (Used In) Operating Activities:
Depreciation / Amortization 355,000 356,000
Provision for Doubtful Accounts 41,000 10,000
(Gain) Loss on Sales of Property & Equipment (8,000) --
Cumulative Effect of Accounting Change -- 150,000
Change in Assets & Liabilities:
(Increase) Decrease in Receivables 180,000 (269,000)
(Increase) Decrease in Inventories (845,000) (1,447,000)
(Increase) Decrease in Prepaid Expenses (46,000) (44,000)
(Increase) Decrease in Deferred Income Tax -- --
(Increase) Decrease in Other Assets 3,000 (49,000)
Increase (Decrease) in Accounts Payable 239,000 229,000
Increase (Decrease) in Customer Deposits 82,000 171,000
Increase (Decrease) in Accrued Expenses 75,000 101,000
Increase (Decrease) in Income Tax Payable 143,000 181,000
------------ ------------
Net Cash Provided by (Used in) Operating Activities 437,000 (375,000)
------------ ------------
Cash Flows From Investing Activities
- ------------------------------------
Proceeds From Sale of Property & Equipment 8,000 2,000
Purchase of Property & Equipment (321,000) (390,000)
------------ ------------
Net Cash Provided by (Used in) Investing Activities (313,000) (388,000)
------------ ------------
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 (160,000) (125,000)
Proceeds From Long-Term Borrowings / Leases 176,000 118,000
------------ ------------
Net Cash Provided (Used in) Financing Activities 16,000 (7,000)
------------ ------------
Increase (Decrease) in Cash and Equivalents $ 140,000 $ (770,000)
Cash and Equivalents
- --------------------
Beginning $ 313,000 $ 1,330,000
------------ ------------
Ending $ 453,000 $ 560,000
============ ============
Supplemental Disclosures of Cash Flow Information
Cash Payments for:
Income Taxes $ 10,000 $ 5,000
Interest $ 211,000 $ 212,000
</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, 1999 and December 26,
1998, and the results of operations and cash flows for the nine months ended
September 30, 1999 and September 30, 1998.
Note 2. INVENTORIES
During interim accounting periods, the Company uses the standard cost method of
determining cost of sales and inventory levels at its manufacturing facility.
Cost of sales value is determined monthly based on standards for materials,
labor and overhead by product mix. Deviations from these standards result in
adjustments of the monthly cost of sales amount. Periodic physical inventories
are taken during the fiscal year to determine actual inventory and cost of
sales. No physical inventory was taken during the third quarter of 1999. Shagawa
Resort, Inc. conducts a physical inventory at each month-end.
The breakdown of inventories is as follows:
09/30/99 09/30/98
----------- -----------
Finished Goods (Note 3) $ 1,890,000 $ 1,798,000
Work In Process 171,000 183,000
Raw Materials 1,115,000 923,000
Shagawa Resort, Inc. 36,000 31,000
----------- -----------
Total Inventories $ 3,212,000 $ 2,935,000
=========== ===========
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 September
30, 1999 and September 30, 1998, the Company's backlog of committed orders was
approximately $3,529,000 and $4,203,000, respectively. As of December 26, 1998,
the Company's backlog of orders was $2,737,000. The September 30, 1998 backlog
included approximately $370,000, representing the undelivered portion of a 10
unit single-family housing project for a Native American Community in South
Dakota and 17 housing units, approximating $735,000, for a single customer who
delayed the unit delivery and setting activities. As of September 30, 1999, only
one unit from this customer remains as unsold. Included in the September 30,
1999 backlog is a recent order for 17 single-family housing units for a Native
American Community in central Minnesota. This project is anticipated to by
completed during the fourth quarter of 1999. During periods of excess plant
capacity, the Company supplements its production through the building of
inventory units. As of September 30, 1999, 16 inventory units are available for
sale compared to 9 inventory units at September 30, 1998. The inventory units
have been excluded from the 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
09/30/99 09/30/98
---------- ----------
Advertising $ 2,000 $ 9,000
Insurance 52,000 54,000
Equipment, Supplies Inventory - Shagawa Resort, Inc. 12,000 16,000
Other 58,000 12,000
---------- ----------
$124,000 $ 91,000
========== ==========
Page 6
<PAGE>
Note 6. PROPERTY AND EQUIPMENT
09/30/99 09/30/98
----------- -----------
Dynamic Homes, Inc.
- -------------------
Land and Improvements $ 266,000 $ 220,000
Buildings 1,444,000 1,401,000
Machinery and Equipment 1,987,000 2,020,000
Construction in Process 103,000 124,000
Shagawa Resort, Inc.
- --------------------
Land and Improvements 343,000 343,000
Buildings 2,127,000 2,116,000
Machinery and Equipment 720,000 701,000
Construction in Process -- --
----------- -----------
6,990,000 6,925,000
Less: Accumulated Depreciation - Dynamic Homes, Inc. (1,910,000) (1,890,000)
Accumulated Depreciation - Shagawa Resort, Inc. (520,000) (353,000)
----------- -----------
$ 4,560,000 $ 4,682,000
=========== ===========
Note 7. LONG-TERM DEBT
09/30/99 09/30/98
----------- -----------
Long-term debt (net of current maturity) consists of:
Detroit Lakes - Plant Expansion $ 759,000 $ 804,000
Leasing - Capitalized Vehicles & Equipment 323,000 304,000
Term Mortgage Agreement covering Shagawa
Resort Project (Note 9) 1,700,000 1,750,000
Other Notes and Contracts Payable 40,000 46,000
----------- -----------
$ 2,822,000 $ 2,904,000
=========== ===========
Note 8. OTHER ASSETS - NET
09/30/99 09/30/98
----------- -----------
Dynamic Homes, Inc.
-------------------
- Deferred Maintenance Expense $ 5,000 7,000
- Prepaid Debt Expense 13,000 18,000
- Deposits 19,000 7,000
Shagawa Resort, Inc.
--------------------
- Goodwill 102,000 110,000
- Prepaid Legal / Debt Expense 168,000 176,000
- Asset Replacement Escrow 103,000 81,000
- Other 8,000 15,000
----------- -----------
$ 418,000 $ 414,000
=========== ===========
Included in other assets are costs associated with obtaining financing which are
being amortized on the straight-line basis over the life of the loans. Also
included are costs associated with goodwill and a mortgage asset replacement
convenant related to the acquisition of Shagawa Resort, Inc.
During 1998, the Company adopted the provisions of Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities", which requires companies to
expense the cost of start-up activities as incurred. In accordance with the
provisions of the statement, unamortized amounts of previously capitalized costs
have been charged to operations as of the beginning of the year in which the
statement was adopted. The provisions of the statement require implementation
for years beginning after December 15, 1998, however, the Company has elected to
adopt the statement early.
Page 7
<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
------------------------- -------------------------
3 Months 9 Months 3 Months 9 Months
----------- ----------- ----------- -----------
Single-family $ 4,283,000 $ 7,697,000 $ 3,109,000 $ 6,970,000
Multi-family -- 670,000 864,000 936,000
Transportation 237,000 501,000 260,000 469,000
Other 115,000 332,000 121,000 274,000
Resort 798,000 1,646,000 762,000 1,601,000
----------- ----------- ----------- -----------
$ 5,433,000 $10,846,000 $ 5,116,000 $10,250,000
=========== =========== =========== ===========
Note 11. Cost of Sales
1999 1998
------------------------- -------------------------
3 Months 9 Months 3 Months 9 Months
----------- ----------- ----------- -----------
Materials $ 2,446,000 $ 4,998,000 $ 2,255,000 $ 4,615,000
Labor 387,000 808,000 383,000 769,000
Overhead 512,000 1,134,000 466,000 938,000
Transportation 261,000 707,000 267,000 621,000
Resort 358,000 879,000 348,000 880,000
----------- ----------- ----------- -----------
$ 3,964,000 $ 8,526,000 $ 3,719,000 $ 7,823,000
=========== =========== =========== ===========
Note 12. Operating Expenses
1999 1998
------------------------- -------------------------
3 Months 9 Months 3 Months 9 Months
----------- ----------- ----------- -----------
Marketing $ 168,000 $ 385,000 $ 129,000 $ 358,000
Administration 251,000 700,000 247,000 658,000
Resort 258,000 706,000 252,000 701,000
----------- ----------- ----------- -----------
$ 677,000 $ 1,791,000 $ 628,000 $ 1,717,000
=========== =========== =========== ===========
Page 8
<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, 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
September 30, 1999 was $4,635,000 or $281,000 more than the $4,354,000 recorded
during the same period last year. Single-family revenue increased by $1,174,000
from $3,109,000 to $4,283,000 for 1999. However, the increase in single-family
housing was offset by the absence of any multi-family/commercial revenue during
1999. The third quarter of 1998 benefited from the setting of a 20 unit
multi-family housing project located in northern Minnesota. Transportation and
other (retail) revenue decreased from $381,000 during 1998 to $352,000 for 1999.
Although overall revenue increased during 1999, the number of delivered units
was less than the corresponding period for 1998 which contributed to a $23,000
reduction in transportation revenue.
Unit activity for single-family housing is again showing signs of the
traditional seasonal slowdown. In response, the Company has implemented a fall
and winter discount program to stimulate winter production.
Revenue associated with Shagawa Resort, Inc. increased from $762,000 for 1998 to
$798,000 during 1999 as a result of increases in both room and occupancy rates.
Due to the location and seasonal nature of the resort business, sales are
traditionally soft during the winter and early spring months. The seasonal
availability of winter recreational activities also affects the revenue base of
the resort facility. In contrast, the resort's revenue base strengthens
considerably during the summer tourist season.
COST OF SALES:
Dynamic Homes, Inc. 1999 gross profit (including transportation revenues and
expenses) was $1,029,000 as compared with $983,000 for the third quarter of
1998. The gross profit percent for 1999 was 22.2 percent versus 22.6 percent for
1998. When transportation revenue and expense are excluded, the gross profit
percentage on product changes to 23.9 percent for 1999 and 24.2 percent for
1998. Both periods experienced similar levels of plant production however,
during the third quarter of 1999, the Company encountered rising material costs
for several major building components. Recognition of these increased material
costs resulted in unfavorable purchases variance and a lowered gross margin. In
response, the Company implemented several levels of surcharges on new orders to
minimize any additional erosion to the gross margin percent.
Shagawa Resort, Inc. recorded a gross profit of $440,000 for 1999 and $414,000
during 1998. The corresponding gross margin percentages were 55.1 and 54.3,
respectively. The small improvement to the gross profit percentage for 1999
reflects a higher average daily room rate and a gradual improvement in the
resorts occupancy rate.
OPERATING EXPENSES:
Dynamic Homes, Inc. operating expenses, which include transportation, marketing,
and administration increased by $37,000 from $643,000 during 1998 to $680,000
for 1999. Transportation expenses were $261,000 for 1999 and $267,000 for 1998.
Even though overall unit revenue increased during 1999, the number of delivered
units was less than the corresponding 1998 period. Marketing expenses increased
by $39,000 from $129,000 during 1998 to $168,000 during 1999. The majority of
the increase in 1999 marketing expense relates to the rescheduling of the annual
spring dealer meeting to a fall meeting date and increased customer incentive
expenses associated with a concentration of unit sets for several high volume
customer accounts. Administrative expenses remained similar for each of the
periods with incurred expenses of $251,000 for 1999 and $247,000 for 1998.
Shagawa Resort, Inc. incurred comparable operating expenses of $258,000 during
1999 and $252,000 for 1998. Comparative expense ratios to net sales were 32.3
percent for 1999 and 33.1 percent for 1998.
Page 9
<PAGE>
OPERATING INCOME (LOSS):
The operating cycle for the third quarter of 1999 resulted in a consolidated
income from operations of $792,000. During the same period of 1998, the Company
reported consolidated income from operations of $769,000. Dynamic Homes, Inc.
reported 1999 operating income of $610,000 while Shagawa Resort, Inc.
contributed $182,000 of operating income. During 1998, Dynamic Homes, Inc.
reported consolidated income from operations of $607,000 while Shagawa Resort,
Inc. contributed operating income of $162,000. The majority of the $20,000
increase to the 1999 operations is attributed to Shagawa Resorts increased
revenue base and a slightly lowered expense ratio.
NET NON-OPERATING INCOME AND EXPENSE:
Consolidated net non-operating expense for the third quarter of 1999 was $51,000
or $2,000 less than the $53,000 reported in 1998. Interest related expense was
$69,000 for 1999 and $68,000 for 1998. Interest expense associated with the
financing of the Shagawa Resort, Inc. generated $36,000 of interest costs during
the quarter. Dynamic Homes, Inc. incurred $33,000 of interest expense associated
with the capital lease financing of transportation and manufacturing equipment,
a long-term financing package supporting the 1997 expansion of the manufacturing
facility and short-term borrowings under the Company's line of credit. Other
income for each period was similar and consists primarily of interest related
income, gains on the sale of capital assets and insurance related adjustments.
FEDERAL AND STATE INCOME TAXES:
Due to the consolidated net income realized during the third quarter of each
period, the Company recorded tax provisions of $296,000 for 1999 and $287,000
for 1998. Income tax obligations and benefits are estimated at the normal
statutory rates.
NET INCOME:
The consolidated net income for the third quarter of 1999 was $445,000, or
$16,000 greater than the $429,000 reported for the third quarter of 1998. Both
basic and diluted 1999 earnings equaled $0.20 per common share versus $0.19 for
1998. During the third quarter of 1999, ownership and operation of Shagawa
Resort, Inc. benefited the Company's net earnings by approximately $0.04 per
share, while the manufacturing facility increased net earnings by approximately
$0.16 per share. Third quarter results for 1998 were similar for both sectors.
Shagawa Resort, Inc. reported 1998 third quarter earnings of $0.03 per share
while the manufacturing facility reported earnings of $0.16 per share.
Considerations for unexercised stock options granted in 1996 were recognized as
diluted common shares outstanding for each of the periods.
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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, 1999 and 1998
NET SALES:
The Company's revenue and operating results encompass both the manufacturing
sector (Dynamic Homes, Inc.) and hospitality sector (Shagawa Resort, Inc.).
The Company's revenue generated from the manufacturing sector for the nine-month
period ending September 30, 1999 was $9,200,000. This was an increase of
$551,000 or 6.4 percent from the $8,649,000 reported during 1998. Single-family
housing revenues increased by $727,000 from $6,970,000 during 1998 to $7,697,000
for 1999. However, the higher 1999 single-family activity was somewhat offset by
a decrease of $266,000 in the multi-family/commercial market. Transportation and
other (retail) volume sensitive revenues also increased by $90,000 from $743,000
for 1998 to $833,000 for 1999.
The Company recently received an order for a 17 unit single-family housing
project in central Minnesota with an anticipated fourth quarter completion date
(reference Note 3). The Company is also pursuing several smaller low-income
housing developments and implemented a fall discount program to encourage new
orders for construction during the slower winter months.
Revenues associated with the ownership and operation of the Shagawa Resort, Inc.
totaled $1,646,000 for 1999, which is $45,000 greater than the $1,601,000
reported for 1998. The revenue base for the first nine months of each year
includes the seasonally strong summer tourist season. However, as summer passes,
revenues are expected to decline with the onset of the fall and winter months.
COST OF SALES:
Dynamic Homes 1999 gross profit (including transportation revenues and expenses)
was $1,553,000 as compared with $1,706,000 for 1998. The gross profit percentage
for 1999 is 16.9 versus 19.7 percent for 1998. When transportation revenue and
expense are excluded, the gross profit percentage on product increases to 20.2
and 22.7, respectively. The gross profit percentage for the first nine months of
1999 was impacted by customer discounts associated with the fall and winter
promotional marketing programs and unfavorable labor and overhead variances
resulting from the under utilization of plant production capacity. In addition,
escalating material costs required the recognition of unfavorable purchases
variance. In order to avoid additional reductions to gross margin, Dynamic Homes
has implemented surcharges on future unit orders. The Company continues to
monitor material costs and the affect it has on the gross margin and pricing
structure.
Shagawa Resort, Inc. recorded a gross profit of $767,000 during the first
nine-months of 1999. The prior year gross profit was $721,000. The gross profit
percentage for 1999 is 46.6 or an increase of 1.6 from the 45.0 percent reported
during 1998. The improvement to the gross profit reflects a higher average daily
room rate and better occupancy rates.
OPERATING EXPENSES:
Operating expenses associated with the manufacturing facility, which includes
transportation, marketing and administrative expenses increased by $155,000 from
$1,637,000 in 1998 to $1,792,000 in 1999. Overall 1999 operating expenses were
19.5 percent of net sales versus 18.9 percent for 1998. Both 1999 delivery
revenue and expense increased over the corresponding 1998 level. Transportation
expenses were $707,000 or 7.7 percent of net sales during 1999 and $621,000 or
7.2 percent in 1998. The increase of $86,000 primarily reflects equipment
rentals required for larger and more distant unit sets, maintenance and repairs
to transportation equipment and depreciation expense associated with equipment
replacement. Marketing related expenses for 1999 increased by $27,000 from
$358,000 during 1998 to $385,000 during 1999. The 1999 increase reflects a
higher level of earned incentives by several high volume customers.
Administrative expenses for the first nine months of 1999 were $700,000 or
Page 11
<PAGE>
$42,000 greater than the $658,000 incurred in 1998. The majority of the change
is related to wage adjustments and an increase to the bad debt reserve.
Shagawa Resort, Inc. incurred operating expenses of $706,000 during 1999 and
$701,000 for the 1998 period. Overall the current year operating expense ratio
decreased from 43.8 percent of net sales to 42.9 percent.
Operating Income (Loss):
The operating cycle for the first nine months of 1999 resulted in a consolidated
operating income of $529,000. During the same period of 1998, the company
reported a consolidated operating income of $710,000. The manufacturing facility
realized operating incomes of $468,000 during 1999 and $690,000 in 1998. Shagawa
Resort, Inc. reported operating incomes of $61,000 for 1999 and $20,000 for
1998.
Even though the manufacturing facility improved its revenue base during 1999,
promotional discounts, unfavorable variances and increased operational expenses
affected the operating results. During the remainder of 1999, Dynamic Homes
gross margin should benefit from the previously implemented surcharges on new
orders received during the second half of the year. However, a recent noticeable
slowdown in new order activity will again contribute to excess plant capacity
and potentially higher levels of unabsorbed manufacturing overhead.
The improvement of $41,000 to Shagawa Resorts 1999 operating income is
associated with a higher revenue base. Both the average daily room rate and the
number of rooms rented have shown improvement. However, the resort facility will
again be experiencing the seasonal decline of the tourist season.
Net Non-Operating Income and Expense:
Consolidated net non-operating expenses for 1999 were $166,000 or slightly
higher than the $159,000 recognized during 1998. Interest expense remained
constant at $211,000 for each period. Interest expense associated with the
financing of the Shagawa Resort property decreased from $110,000 for 1998 to
$107,000 for 1999. Dynamic Homes, Inc. incurred $104,000 of interest costs
associated with several capital leases, long-term financing of the 1997 plant
expansion and short-term borrowings under the credit line. Other income
consisting of interest related income, gains on sales of capital assets and
insurance adjustments decreased by $7,000 from $52,000 during 1998 to $45,000
for 1999.
Federal and State Income Taxes:
Due to the consolidated net income realized during the first nine months of both
1999 and 1998, the Company recognized consolidated tax provisions of $145,000
and $221,000 respectively. Income tax benefits and obligations are estimated at
the normal statutory rates.
Net Income (Loss):
The consolidated net income, before cumulative effect of accounting change was
$218,000 for 1999 and $330,000 for 1998. Both basic and diluted earnings
resulted in net earnings per common share outstanding of $0.10 for 1999 and
$0.15 for 1998. For the first nine months of 1999, Dynamic Homes, Inc. reported
net income of $0.11 per common share while Shagawa resort reported a net loss of
$0.01 per common share. During 1998, Dynamic Homes reported net income of $0.17
per share while Shagawa Resort reported a net loss of $0.02 per share.
Considerations for unexercised stock options granted in 1996 were recognized as
diluted common shares outstanding for each of the periods. After adoption of
Statement of Position 98-5 "Reporting on Costs of Startup Activities" (Note 8)'
the cumulative effect of accounting change decreased the 1998 consolidated basic
and diluted net income by $0.04 per share from $0.15 to $0.11 per share.
(Balance of page left intentionally blank.)
Page 12
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financial Condition
As of September 30, 1999
The Company's consolidated working capital at September 30, 1999 was a positive
$3,244,000 as compared to positive working capital positions of $2,834,000 at
September 30, 1998 and $3,036,000 at December 26, 1998. The current ratio for
September 30, 1999 is 2.6 to 1.0 as compared with 3.2 to 1.0 at December 26,
1998 and 2.5 to 1.0 at September 30, 1998.
During the first three quarters of 1999, cash outflows were required for the
build-up of inventory (finished goods), replacements of manufacturing and
transportation equipment and upgrades to computer hardware and software. Cash
flows to support the referenced activities were primarily provided by utilizing
the Company's year-end cash and cash equivalents position, customer deposits,
supplier payment terms, non-cash related depreciation and amortization,
internally generated income and income tax deferrals.
Long-term debt and capital leases, net of current maturities, decreased from
$2,853,000 at December 26, 1998 to $2,822,000 at September 30, 1999. On
September 30, 1998, long-term debt and capital leases, net of current
maturities, was $2,904,000. In contrast, the current portion of long-term debt
increased by $60,000 from $197,000 at December 26, 1998 to $257,000 at September
30, 1999. Long-term debt consists primarily of a long-term mortgage loan, which
is secured by substantially all of the assets of Shagawa Resort, Inc., six
capitalized lease obligations secured by transportation, material handling, and
computer 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
.57 to 1.0 at September 30, 1998, to .56 to 1.0 at December 26, 1998 and to .53
to 1.0 at September 30, 1999. The improved ratio reflects the Company's
consolidated net earnings for the first nine months of 1999. Stockholders'
equity, net of treasury stock, increased from $5,106,000 at December 26, 1998 to
$5,324,000 at September 30, 1999. Stockholders' equity on September 30, 1998 was
$5,063,000.
Dynamic Homes, Inc. has available a line of credit which is collateralized by
inventories and receivables. The credit available is based upon specified
percentages of inventory and receivables. On May 4, 1998, the Company renewed
its credit line for a period of two years, subject to annual review, and 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, 1999, 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.
During the nine month period ending September 30, 1999, Shagawa Resorts
operating cycle supported the resorts activities with a positive cash flow
position.
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 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 1999 and the beginning stages of
the year 2000.
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<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, 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.
On October 25, 1999, the Board of Directors named Scott D. Lindemann to the
position of interim president. Prior to the announcement, President Glenn R.
Anderson was on a leave of absence due to health considerations. Mr. Anderson
passed away on November 1, 1999. The Board of Directors will name a permanent
successor at a future monthly board meeting.
Statements regarding the Company's operations, performance and financial
condition 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 and commercial sales. Likewise,
continued escalating and volatile material costs and unfavorable weather
conditions could also affect the Company's profit levels.
PART II.
Items 1, 2, 3, 5, and 6 are omitted as each is either not applicable or the
answer to the item is negative.
Item 7. Exhibits and Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter ended September 30,
1999.
(Balance of page left intentionally blank.)
Page 14
<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 9, 1999 Dynamic Homes, Inc.
------------------------ -----------------------------------------
(Registrant)
Eldon Matz
Controller
Page 15
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