Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-1004
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For The Quarter Year Ended June 30, 2000
---------------------------
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 June 30, 2000, 2,240,850 common shares, par value, $.10 per share, were
outstanding. On January 7, 1995, the Company implemented a plan to repurchase up
to 100,000 shares of its outstanding common stock. As June 30, 2000, 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 JUNE 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months
------------
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 6/30/99
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales (Note 11) $ 3,357,000 $ -- $ 3,357,000 $ 3,117,000
Cost of Sales (Note 12) 2,753,000 -- 2,753,000 2,689,000
----------- ----------- ----------- -----------
Gross Profit 604,000 -- 604,000 428,000
Operating Expenses (Note 13) 375,000 -- 375,000 350,000
----------- ----------- ----------- -----------
Operating Income (Loss) 229,000 -- 229,000 78,000
Other (Income) Expense
Interest Expense 26,000 -- 26,000 39,000
Other, Net (15,000) -- (15,000) (10,000)
----------- ----------- ----------- -----------
Total Other (Income) Expense 11,000 -- 11,000 29,000
Income (Loss) Before Taxes 218,000 -- 218,000 49,000
Income Tax (Provision) Benefit (87,000) -- (87,000) (19,000)
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations 131,000 -- 131,000 30,000
Discontinued Operations (Note 2)
Loss from operations of discontinued
subsidiary, Shagawa Resort, Inc., net of
of income tax benefit of $39,000 and $25,000 -- (59,000) (59,000) (37,000)
Loss on disposal of Shagawa Resort, Inc.,
net of income taxes of $11,000 -- 71,000 71,000 --
----------- ----------- ----------- -----------
Net Income (Loss) $ 131,000 $ 12,000 $ 143,000 $ (7,000)
=========== =========== =========== ===========
Basic Income (Loss) Per Common Share
Income (Loss) from continuing operations $ 0.06 $ -- $ 0.06 $ 0.01
Loss from discontinued operations:
Loss from operations of discontinued
subsidiary -- (0.03) (0.03) (0.01)
Loss on disposal of subsidiary -- 0.03 0.03 --
----------- ----------- ----------- -----------
Basic net income (loss) $ 0.06 $ -- $ 0.06 $ --
=========== =========== =========== ===========
Diluted Income (Loss) Per Common Share
Income (Loss) from continuing operations $ 0.06 $ -- $ 0.06 $ 0.01
Loss from discontinued operations:
Loss from operations of discontinued
subsidiary -- (0.03) (0.03) (0.01)
Loss on disposal of subsidiary -- 0.03 0.03 --
----------- ----------- ----------- -----------
Basic net income (loss) $ 0.06 $ -- $ 0.06 $ --
=========== =========== =========== ===========
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>
PART I.
Item 1. Financial Statements
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Six Months
----------
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 6/30/99
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sales (Note 11) $ 4,733,000 $ -- $ 4,733,000 $ 4,565,000
Cost of Sales (Note 12) 4,075,000 -- 4,075,000 4,041,000
----------- ----------- ----------- -----------
Gross Profit 658,000 -- 658,000 524,000
Operating Expenses (Note 13) 634,000 -- 634,000 666,000
----------- ----------- ----------- -----------
Operating Income (Loss) 24,000 -- 24,000 (142,000)
Other (Income) Expense
Interest Expense 58,000 -- 58,000 70,000
Other, Net (37,000) -- (37,000) (24,000)
----------- ----------- ----------- -----------
Total Other (Income) Expense 21,000 -- 21,000 46,000
Income (Loss) Before Taxes 3,000 -- 3,000 (188,000)
Income Tax (Provision) Benefit (1,000) -- (1,000) 75,000
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations 2,000 -- 2,000 (113,000)
Discontinued Operations (Note 2)
Loss from operations of discontinued
subsidiary, Shagawa Resort, Inc., net of
of income tax benefit of $83,000 and $76,000 -- (125,000) (125,000) (114,000)
Loss on disposal of Shagawa Resort, Inc.,
net of income taxes of $11,000 (604,000) 88,000 (516,000) --
----------- ----------- ----------- -----------
Net Income (Loss) $ (602,000) $ (37,000) $ (639,000) $ (227,000)
=========== =========== =========== ===========
Basic Income (Loss) Per Common Share
Income (Loss) from continuing operations $ -- $ -- $ -- $ (0.05)
Loss from discontinued operations:
Loss from operations of discontinued
subsidiary -- (0.06) (0.06) (0.05)
Loss on disposal of subsidiary (0.27) 0.04 (0.23) --
----------- ----------- ----------- -----------
Basic net income (loss) $ (0.27) $ (0.02) $ (0.29) $ (0.10)
=========== =========== =========== ===========
Diluted Income (Loss) Per Common Share
Income (Loss) from continuing operations $ -- $ -- $ -- $ (0.05)
Loss from discontinued operations:
Loss from operations of discontinued
subsidiary -- (0.06) (0.06) (0.05)
Loss on disposal of subsidiary (0.27) 0.04 (0.23) --
----------- ----------- ----------- -----------
Basic net income (loss) $ (0.27) $ (0.02) $ (0.29) $ (0.10)
=========== =========== =========== ===========
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 JUNE 30, 2000 AND DECEMBER 25, 1999
(Unaudited)
<TABLE>
<CAPTION>
Dynamic Shagawa
Homes, Inc. Resort, Inc. Eliminations Consolidated 12/25/99
----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash & cash equivalents $ 659,000 $ 1,000 $ -- $ 660,000 $ 932,000
Accounts receivable, less allowance
for doubtful accounts, pledged 1,173,000 -- -- 1,173,000 1,815,000
Inventories pledged (Note 3) 3,427,000 -- -- 3,427,000 1,875,000
Prepaid expenses (Note 6) 119,000 3,000 -- 122,000 69,000
Deferred income taxes (Note 5) 127,000 -- -- 127,000 127,000
----------- ----------- ----------- ----------- -----------
Total Current Assets 5,505,000 4,000 -- 5,509,000 4,818,000
Other Assets:
Investment - Affiliates -- -- -- -- --
Other assets (Note 9) 19,000 -- -- 19,000 409,000
----------- ----------- ----------- ----------- -----------
Total Other Assets 19,000 -- -- 19,000 409,000
Property, Plant, & Equipment, at:
Cost - pledged in part (Note 7) 4,040,000 -- -- 4,040,000 7,116,000
Less - accumulated depreciation (2,127,000) -- -- (2,127,000) (2,559,000)
----------- ----------- ----------- ----------- -----------
Net Property, Plant & Equipment 1,913,000 -- -- 1,913,000 4,557,000
----------- ----------- ----------- ----------- -----------
Total Assets $ 7,437,000 $ 4,000 $ -- $ 7,441,000 $ 9,784,000
=========== =========== =========== =========== ===========
LIABILITIES
Current Liabilities:
Payables - Affiliates $ -- $ -- $ -- $ -- $ --
Notes payable -- -- -- -- --
Current portion - long-tern debt 228,000 -- -- 228,000 268,000
Accounts payable 401,000 -- -- 401,000 347,000
Customer deposits 443,000 -- -- 443,000 127,000
Accrued expenses
Salaries, Wages and vacations 273,000 -- -- 273,000 260,000
Taxes, other than income 134,000 -- -- 134,000 125,000
Warranty 78,000 -- -- 78,000 76,000
Other 89,000 -- -- 89,000 271,000
Estimated loss on disposal of
subsidiary -- -- -- --
Income taxes (84,000) -- -- (84,000) --
----------- ----------- ----------- ----------- -----------
Total Current Liabilities 1,562,000 -- -- 1,562,000 1,474,000
Long-Term Debt: (Note 8)
Less current portion included above 960,000 -- -- 960,000 2,752,000
----------- ----------- ----------- ----------- -----------
Deferred Income Taxes (Note 5) 104,000 -- -- 104,000 104,000
----------- ----------- ----------- ----------- -----------
Total Liabilities 2,626,000 -- -- 2,626,000 4,330,000
STOCKHOLDERS' EQUITY
Investment - Parent -- 4,000 -- 4,000 --
Common Stock, par value, $.10 per share
Authorized, 5,000,000 shares; issued
and outstanding, 2,284,000 in 2000
and 1999 228,000 -- -- 228,000 228,000
Paid-in capital in excess of par 147,000 -- -- 147,000 147,000
Retained earnings 4,580,000 -- -- 4,580,000 5,223,000
Less Treasury stock - (43,080) shares (144,000) -- -- (144,000) (144,000)
----------- ----------- ----------- ----------- -----------
Total Stockholders' Equity 4,811,000 4,000 -- 4,815,000 5,454,000
----------- ----------- ----------- ----------- -----------
Total Liabilities & Stockholders' Equity $ 7,437,000 $ 4,000 $ -- $ 7,441,000 $ 9,784,000
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE>
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
06/30/00 06/30/99
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities
------------------------------------
Net Income (Loss) $ (639,000) $ (227,000)
Adjust to Reconcile Net Income or Loss
Provided by (Used In) Operating Activities:
Depreciation / Amortization 229,000 235,000
Provision for Doubtful Accounts 11,000 18,000
(Gain) Loss on Sales of Property & Equipment (4,000) (3,000)
(Gain) Loss on Sale of Assets of Shagawa Resort, Inc. 516,000 --
Change in Assets & Liabilities:
(Increase) Decrease in Receivables 607,000 516,000
(Increase) Decrease in Inventories (1,552,000) (1,452,000)
(Increase) Decrease in Prepaid Expenses (58,000) (52,000)
(Increase) Decrease in Deferred Income Tax -- --
(Increase) Decrease in Other Assets 125,000 8,000
Increase (Decrease) in Accounts Payable 54,000 379,000
Increase (Decrease) in Customer Deposits 341,000 192,000
Increase (Decrease) in Accrued Expenses (160,000) (2,000)
Increase (Decrease) in Income Tax Payable (84,000) (160,000)
----------- -----------
Net Cash Provided by (Used in) Operating Activities (614,000) (548,000)
Cash Flows From Investing Activities
------------------------------------
Proceeds From Sale of Property & Equipment 15,000 3,000
Proceeds From Sale of Shagawa Resort, Inc. 2,300,000 --
Purchase of Property & Equipment (141,000) (270,000)
----------- -----------
Net Cash Provided by (Used in) Investing Activities 2,174,000 (267,000)
Cash Flows From Financing Activities
------------------------------------
Net Borrowings (Payments) on Revolving Credit Agreements
And Other Short-Term Financing -- 690,000
Principal Payments on Long-Term Borrowings Including
Shagawa Resort (1,832,000) (88,000)
Proceeds From Long-Term Borrowings / Leases -- --
----------- -----------
Net Cash Provided (Used in) Financing Activities (1,832,000) 602,000
Increase (Decrease) in Cash and Equivalents $ (272,000) $ (213,000)
=========== ===========
Cash and Equivalents
--------------------
Beginning $ 932,000 $ 313,000
Ending $ 660,000 $ 100,000
Supplemental Disclosures of Cash Flow Information
Cash Payments for:
Income Taxes $ 2,000 $ 9,000
Interest $ 104,000 $ 141,000
</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 June 30, 2000 and December 25, 1999 and
the results of operations and cash flows for the three months and six months
ended June 30, 2000 and June 30, 1999.
Note 2. DISCONTINUED OPERATIONS
In May, 2000, the Company completed the sale of its Shagawa Resort, Inc.
subsidiary. The Company has recorded a consolidated after-tax loss of $516,000
on the sale. Dynamic Homes, Inc. recorded a loss on the sale of subsidiary due
to a write off of an inter-company receivable and Shagawa Resort, Inc. recorded
a gain on the sale of its assets due to the forgiveness of inter-company debt.
Shagawa Resort, Inc.'s results of operations have been classified as
discontinued operations and prior periods have been restated.
Operating results from discontinued operations are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 136,000 $ 485,000 $ 530,000 $ 848,000
Cost of sales and expenses 223,000 512,000 692,000 969,000
---------- ---------- ---------- ----------
Operating income (loss) (87,000) (27,000) (162,000) (121,000)
Other income (expense) (11,000) (35,000) (46,000) (69,000)
---------- ---------- ---------- ----------
Loss before income taxes (98,000) (62,000) (208,000) (190,000)
Income tax benefit 39,000 25,000 83,000 76,000
---------- ---------- ---------- ----------
Net loss $ (59,000) $ (37,000) $ (125,000) $ (114,000)
========== ========== ========== ==========
</TABLE>
Note 3. 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 half of 2000. Shagawa
Resort, Inc. conducted a final physical inventory on April 30, 2000.
The breakdown of inventories is as follows:
<TABLE>
<CAPTION>
6/30/00 6/30/99
----------- -----------
<S> <C> <C>
Finished Goods (Note 4) $ 2,002,000 $ 2,571,000
Work In Process 215,000 190,000
Raw Materials 1,210,000 1,025,000
Shagawa Resort, Inc. -- 33,000
----------- -----------
Total Inventories $ 3,427,000 $ 3,819,000
=========== ===========
</TABLE>
Note 4. BACKLOG OF ORDERS
The Company's order backlog consists of completed units awaiting delivery,
current production and orders scheduled for future production. As of June 30,
2000 and June 30, 1999, the Company's backlog of committed orders was
approximately $5,218,000 and $4,843,000 respectively. The 1999 backlog excludes
8 developer units in carryover inventory from 1998. If the 8 units, which were
eventually sold to other Builder/Dealers are included, the June 30, 1999 backlog
total is $5,204,000. As of December 25, 1999, the Company's backlog of orders
was $1,645,000. During periods of excess plant capacity, the Company supplements
its production through the building of inventory units. As of June 30, 2000, 7
inventory units remain and are available for immediate sale. As of June 30,
1999, the Company had 20 inventory units available for sale. The inventory units
have been excluded from all order backlog values. As of June 30, 2000, the
Company has one multi-family/commercial project in finished goods
Page 6
<PAGE>
for delivery during the third quarter of 2000. No other multi-family/commercial
projects are under contract. Recently, the Company introduced several marketing
programs to assist Builder/Dealers in securing new orders.
Note 5. 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 6. PREPAID EXPENSES
<TABLE>
<CAPTION>
6/30/00 6/30/99
----------- -----------
<S> <C> <C>
Advertising $ 10,000 $ 3,000
Insurance 93,000 83,000
Equipment, Supplies Inventory - Shagawa Resort, Inc. -- 9,000
Other 19,000 35,000
----------- -----------
$ 122,000 $ 130,000
=========== ===========
</TABLE>
Note 7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
6/30/00 6/30/99
----------- -----------
<S> <C> <C>
Dynamic Homes, Inc.
-------------------
Land and Improvements $ 266,000 $ 260,000
Buildings 1,453,000 1,401,000
Machinery and Equipment 2,192,000 1,994,000
Construction in Process 129,000 178,000
Shagawa Resort, Inc.
--------------------
Land and Improvements -- 343,000
Buildings -- 2,116,000
Machinery and Equipment -- 719,000
Construction in Process -- --
----------- -----------
4,040,000 7,011,000
Less: Accumulated Depreciation - Dynamic Homes, Inc. (2,127,000) (1,906,000)
Accumulated Depreciation - Shagawa Resort, Inc. -- (478,000)
----------- -----------
$ 1,913,000 $ 4,627,000
=========== ===========
</TABLE>
Note 8. LONG-TERM DEBT
<TABLE>
<CAPTION>
6/30/00 6/30/99
----------- -----------
<S> <C> <C>
Long-term debt (net of current maturity) consists of:
Detroit Lakes - Plant Expansion $ 701,000 $ 784,000
Leasing - Capitalized Cranes, Forklifts, & Trailers 220,000 228,000
Term Mortgage Agreement covering Shagawa
Resort Project (Note 10) -- 1,713,000
Other Notes and Contracts Payable 39,000 50,000
----------- -----------
$ 960,000 $ 2,775,000
=========== ===========
</TABLE>
Page 7
<PAGE>
Note 9. OTHER ASSETS - NET
<TABLE>
<CAPTION>
6/30/00 6/30/99
----------- -----------
<S> <C> <C>
Dynamic Homes, Inc.
-------------------
- Deferred Maintenance Expense $ 4,000 $ 6,000
- Prepaid Debt Expense 9,000 14,000
- Deposits 6,000 7,000
Shagawa Resort, Inc.
--------------------
- Goodwill -- 104,000
- Prepaid Legal / Debt Expense -- 171,000
- Asset Replacement Escrow -- 102,000
- Other -- 9,000
----------- -----------
$ 19,000 $ 413,000
=========== ===========
</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 ownership of Shagawa Resort, Inc.
Note 10. SHAGAWA RESORT, INC.
On September 7, 1995 Dynamic Homes, Inc. purchased all of the outstanding shares
of Shagawa Resort, Inc. 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 8).
In conjunction with the purchase of Shagawa Resort, Inc., the Company
simultaneously entered into a management agreement with a managing agent to
operate and manage the hotel/resort. On March 17, 1997, the Company and the
managing agent collectively reached an Asset Purchase Agreement whereby the
Company purchased substantially all assets of the business. Consequently,
effective March 17, 1997, the Company has assumed the management obligations and
rights associated with the Shagawa Resort, Inc. facility.
On May 1, 2000, the Company completed the sale of the assets of Shagawa Resort,
Inc. (Note 2).
Note 11. SALES
2000 1999
---- ----
3 months 6 months 3 months 6 months
-------- -------- -------- --------
Single-family $ 3,057,000 $ 4,062,000 $ 2,646,000 $ 3,414,000
Multi-family -- 218,000 152,000 670,000
Transportation 179,000 252,000 176,000 264,000
Other 121,000 201,000 143,000 217,000
----------- ----------- ----------- -----------
$ 3,357,000 $ 4,733,000 $ 3,117,000 $ 4,565,000
=========== =========== =========== ===========
Note 12. COST OF SALES
2000 1999
---- ----
3 months 6 months 3 months 6 months
-------- -------- -------- --------
Materials $ 1,787,000 $ 2,540,000 $ 1,793,000 $ 2,552,000
Labor 312,000 446,000 285,000 421,000
Overhead 406,000 641,000 374,000 622,000
Transportation 248,000 448,000 237,000 446,000
----------- ----------- ----------- -----------
$ 2,753,000 $ 4,075,000 $ 2,689,000 $ 4,041,000
=========== =========== =========== ===========
Page 8
<PAGE>
Note 13. OPERATING EXPENSES
2000 1999
---- ----
3 months 6 months 3 months 6 months
-------- -------- -------- --------
Marketing $ 104,000 $ 156,000 $ 122,000 $ 217,000
Administration 271,000 478,000 228,000 449,000
----------- ----------- ----------- -----------
$ 375,000 $ 634,000 $ 350,000 $ 666,000
=========== =========== =========== ===========
(Balance of page left intentionally blank.)
Page 9
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Three months ended June 30, 2000 and 1999
NET SALES:
As a result of the sale of the assets of the hospitality sector (Shagawa Resort,
Inc.), the Company's revenue and operating results encompass only the
manufacturing sector (Dynamic Homes, Inc.).
The Company's revenue from the manufacturing sector for the three months ended
June 30, 2000 was $3,357,000. This represents an increase of $240,000 or 8
percent from the $3,117,000 reported during the same period of 1999.
Single-family revenue increased $411,000 from $2,646,000 in 1999 to $3,057,000
during the second quarter of 2000. In contrast, multi-family/commercial revenue
decreased from $152,000 during 1999 to none during the second quarter of 2000.
One 10-unit multi-family living center however, is anticipated to be delivered
and set during the third quarter. Transportation and other (retail) revenue were
similar for each period at $300,000 for 2000 and $319,000 for 1999.
COST OF SALES:
Dynamic Homes, Inc. 2000 gross profit was $604,000, an increase of $176,000 from
the $428,000 reported during 1999. The gross profit percentage for 2000 is 18.0
percent versus 13.7 percent for 1999. The improvement in year 2000 gross margin
is attributed to lower than anticipated material acquisition costs and a
reduction in promotional related discounts. Promotional discounts affected each
of the quarters, however promotional related discounts recognized during the
second quarter of 2000 were approximately 2 percent less than the corresponding
1999 quarter. In addition, the Company benefited from relatively stable raw
material costs. Transportation related expenses were similar for each of the
periods at $179,000 for year 2000 and $176,000 during 1999.
OPERATING EXPENSES:
Dynamic Homes, Inc. operating expenses, which include marketing and
administration increased by $25,000 from $350,000 during 1999 to $375,000 for
2000. Overall, operating expenses for each of the periods approximated 11.2
percent of net sales. Marketing related expenses for year 2000 decreased by
$18,000, while administration expenses increased $43,000. The reduction in
marketing expenses reflects a decrease in the placement of media advertising.
Administration expense for the second quarter of 2000 totaled $271,000 or
$43,000 more than the $228,000 reported during 1999. The increase in current
year administration expenses is the result of an increase in shareholder
reporting activities and higher levels of legal and consulting services
associated with the exploration of various merger/acquisition alternatives and
the eventual approval of an acquisition letter of intent. It is anticipated that
the third quarter of 2000 will also be impacted by similar expenses for ongoing
professional services.
OPERATING INCOME (loss):
The operating cycle for the second quarter of 2000 resulted in an operating
income of $229,000. This represents an improvement of $151,000 over the $78,000
reported for 1999. Operating income during the second quarter of 2000 benefited
from a reduced level of available promotional discounts and the recognition of
favorable purchase variances. Corresponding operating income levels are 6.8
percent of net sales for 2000 and 2.5 percent for 1999.
NET NON-OPERATING INCOME AND EXPENSE:
Net non-operating expense totaled $11,000 during the current period versus
$29,000 for the prior year. Interest expense, primarily related to the absence
of short-term borrowings, decreased from $39,000 during 1999 to $26,000 for the
current period. Other income was similar for each of the periods and consists
mainly of interest income and gains from the sale of capital assets.
Page 10
<PAGE>
FEDERAL AND STATE INCOME TAXES:
During the second quarter of both 2000 and 1999, the Company recorded
consolidated operational estimated income tax obligations of $87,000 and
$19,000, respectively. Income tax obligations and benefits are estimated at the
normal statutory rate.
NET INCOME:
The net income from continuing operations (manufacturing facility) for the
second quarter of 2000 was $131,000 or an improvement of $101,000 from the
$30,000 net income level attained during 1999. Both basic and diluted earnings
per common share outstanding from continuing operations resulted in net income
levels of $0.06 per share during 2000 and $0.01 per share for 1999.
Considerations for unexercised stock options were recognized as diluted common
shares outstanding for each of the periods.
DISCONTINUED OPERATIONS:
Second quarter revenue associated with the operation of Shagawa Resort, Inc.
totaled $136,000. During the 1999 period, second quarter revenue was $485,000.
However, the current period recognizes Shagawa Resort, Inc. revenue for the
month of April only as the sale of resort facility was completed on May 1, 2000.
Shagawa Resort, Inc. recorded a gross profit of $201,000 for the second quarter
of 1999 versus a gross profit of $49,000 for the one-month period of 2000.
Shagawa Resort, Inc. incurred operating expenses of $228,000 during the 1999
period and $136,000 for the current period. The resort facility reported
operating losses of $27,000 for the three-month period of 1999 and $87,000 for
the one-month period of 2000. Interest related expenses totaled $35,000 for 1999
and $11,000 for the shortened period of 2000. The resort reported a net after
tax loss of $37,000 or $0.02 per share for 1999 and a net after tax loss of
$59,000 or $0.03 per share for the current period. (Note 2).
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<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Six months ended June 30, 2000 and 1999
NET SALES:
As a result of the sale of the assets of the hospitality sector (Shagawa Resort,
Inc.), the Company's revenue and operating results encompass only the
manufacturing sector (Dynamic Homes, Inc.).
The Company's revenue from the manufacturing sector for the six-month period
ending June 30, 2000 was $4,733,000, an increase of $168,000 from the $4,565,000
reported in 1999. Single-family revenue for year 2000 increased by $648,000 from
$3,414,000 during 1999 to $4,062,000 or an increase of approximately 19 percent.
However, the higher single-family activity was offset by a decrease of $452,000
in current year revenue from multi-family/commercial activity. One 10-unit
multi-family living center however, is anticipated to be delivered and set
during the third quarter. Transportation and other (retail) revenue were similar
for each period totaling $453,000 for the current year and $481,000 during 1999.
Based upon the comparative similarity in June 30 backlog totals (reference Note
4), the Company anticipates that the third quarter of 2000 will be a stronger
performing quarter.
COST OF SALES:
Dynamic Homes, Inc. gross profit for the six-month period ending June 30, 2000
was $658,000. During 1999, the gross profit for the period was $524,000. The
gross profit percentage for the current year is 13.9 percent compared with 11.5
percent for 1999. The gross profit percentage for the first half of 2000
benefited form a reduced level of promotional discounts and stability in raw
material purchases. During the prior year, the Company experienced an escalation
of material costs for drywall and several wood related products. The Company
continues to monitor material costs and the impact changes have on the Company's
pricing structure.
OPERATING EXPENSES:
Dynamic Homes, Inc. operating expenses, which include marketing and
administration, decreased by $32,000 from the 1999 level of $666,000 to $634,000
for the current year. Overall operating expenses decreased from approximately
14.6 percent of net sales during 1999 to 13.4 percent of net sales for year
2000. During the first half of 2000, marketing related expenses decreased by
$61,000 from $217,000 for 1999 to $156,000 for 2000. The expense reduction is
primarily attributed to a reduction in media advertising and the consolidation
of marketing activities. In contrast, administration related expenses for the
first six-months of 2000 total $478,000 or $29,000 greater than the $449,000
incurred during 1999. The major expense increases were in the areas of investor
relations and professional services associated with the solicitation, evaluation
and acceptance of a letter of intent by a group of investors in acquiring
ownership of the Company.
OPERATING INCOME:
The operating cycle for the first six months of 2000 resulted in a modest
operating income of $24,000. During the same period of 1999, the Company
reported an operating loss of $142,000. The current year's performance is
associated with an improved gross margin return and cost reductions in marketing
related expenses.
NET NON-OPERATING INCOME AND EXPENSE:
Net non-operating expense was $21,000 or $25,000 less than the $46,000 reported
during 1999. Interest costs associated with capital leases and long and short
term financing totaled $58,000 during year 2000 and $70,000 for the 1999 period.
Other income of $37,000 during the current year and $24,000 for 1999 consists
mainly of interest income and gains from the sale of capital assets.
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FEDERAL AND STATE INCOME TAXES:
The Company recorded an income tax provision of $1,000 for the first six months
of year 2000. During the corresponding period of 1999, the Company recorded a
tax benefit of $75,000. Income tax benefits and obligations are estimated at the
normal statutory rate.
NET INCOME (LOSS):
The current year's continuing operations resulted in a reportable income of
$2,000, a significant change from the $113,000 net loss experienced during the
first half of 1999. Basic and diluted earnings per common share outstanding were
$0.00 for the current period and a loss of $0.05 per common share for 1999.
Considerations for unexercised stock options were recognized as diluted common
shares outstanding for each of the periods.
DISCONTINUED OPERATIONS:
Revenue associated with the Shagawa Resort facility for the first four months of
2000 was $530,000. During the six-month period of 1999, reported revenue was
$848,000. As previously referenced, the resort facility was sold on May 1, 2000.
Shagawa Resort, Inc. recorded a gross profit of $188,000 for the shortened
current period and $327,000 during 1999. The gross profit percentage for 2000 is
35.5 percent or 3.1 percent less than the 38.6 realized during 1999.
Shagawa Resort, Inc. incurred operating expenses of $350,000 for 2000 and
$448,000 during 1999. Overall, operating expenses increased from 52.8 percent of
sales during 1999 to 66.0 percent for the first four months of 2000. Interest
related expenses totaled $46,000 for year 2000 and $70,000 during 1999. The
resort facility incurred a net after tax loss of $114,000 or $0.05 per share for
1999 and a net after tax loss of $125,000 or $0.06 per share for the current
period. (Note 2).
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<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Financial Condition
As of June 30, 2000
The Company's working capital at June 30, 2000 was a positive $3,947,000 as
compared to positive working capital positions of $2,690,000 at June 30, 1999
and $3,344,000 at December 25, 1999. The current ratio for June 30, 2000 is 3.5
to 1.0 as compared with 2.1 to1.0 at June 30, 1999 and 3.3 to 1.0 at December
25, 1999. The working capital position at June 30, 2000 recognizes the sale of
the assets of Shagawa Resort, Inc. on May 1, 2000.
During the first half of 2000, cash outflows were required for the build-up of
inventory (finished goods), acquisition of capital assets, reduction of accrued
expenses, pay-downs on long-term debt and support of the Company's daily
operations. Cash flows to support the referenced activities were primarily
provided by utilizing the Company's year-end cash and cash equivalent position,
receivable collections, customer deposits, non-cash related depreciation and
amortization and proceeds related to the sale of Shagawa Resort, Inc.
Long-term debt and capital leases, net of current maturities, decreased from
$2,752,000 at December 25, 1999 to $960,000 at June 30, 2000. On June 30, 1999,
long-term debt and capital leases, net of current maturities was $2,775,000. The
major component of the decrease in long-term debt relates to the pay-off of a
long-term mortgage loan associated with the May 1, 2000 sale of the Shagawa
Resort property. The remaining long-term debt consists of six capitalized lease
obligations secured by transportation vehicles, material handling and computer
equipment, a restructured long-term financing arrangement secured by a real
estate mortgage related to a prior year plant expansion and a contract for deed
covering the purchases of adjacent land and warehouse. Debt retirement
associated with the plant expansion and equipment leases varies in maturity from
three to fifteen years, dependent on the funding source (reference Note 8).
The ratio of long-term debt to stockholders' equity changed from .57 to 1.0 at
June 30, 1999, to .50 to 1.0 at December 25, 1999. Due to the debt retirement
associated with the May 1 sale of Shagawa Resort, Inc., the ratio of long-term
debt to stockholders' equity improved to .20 to 1.0 at June 30, 2000.
Stockholders equity, net of treasury stock, increased from $4,879,000 at June
30, 1999 to $5,454,000 at December 25, 1999. However, due to the operational
loss and loss associated with the sale of Shagawa Resort, Inc., stockholders'
equity decreased to $4,815,000 at June 30, 2000.
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 2, 2000, the Company renewed
its credit line for a period of one year and without any compensating balance
requirements. The credit line has a maximum available borrowing of $1,500,000 at
an interest rate equal to the bank's prime rate. As of June 30, 2000, the
Company did not have any borrowings outstanding against the available credit
line.
On May 1, 2000, Dynamic Homes, Inc. closed on the sale of assets of Shagawa
Resort, Inc. to Grand Ely Lodge, LLC. The selling price was $2,300,000 plus the
assumption of various obligations of the resort which operated and will continue
to operate under the license of a Holiday Inn Sunspree Resort. The disposal of
the assets of Shagawa Resort, Inc. resulted in a net after tax loss of $516,000.
On June 21, 2000, the Company announced the signing of a letter of intent dated
June 20, 2000 to be acquired by an entity formed by three directors of Dynamic
Homes, Inc. The letter of intent was approved by a special committee of three
persons independent of Dynamic Homes, Inc. and its directors. The pending all
cash transaction, which is subject to a definitive agreement is valued at $2.55
per share. The pending transaction is anticipated to reach completion during
October, 2000.
The Company's management anticipates that the normal operating cycle and cash
position will be sufficient to provide adequate funds to support the Company's
ongoing operations during the remainder of fiscal year 2000. The Company
continues to evaluate and implement new marketing programs and the solicitation
of additional builder/dealers. During the first half of 2000, six
builder/dealers have been added to the marketing network.
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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,
future escalating and volatile material costs and unfavorable weather conditions
could also affect the Company's profit levels.
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<PAGE>
PART II.
Items 1, 2, 3, and 5 are omitted as each is not applicable or the answer to the
item is negative.
Item 4. Submission of Matters to a Vote of Security Holders;
The annual meeting of shareholders of Dynamic Homes, Inc. was duly called and
held on June 26, 2000.
A. The meeting involved the election of Directors. Those elected
were Clyde R. Lund Jr., Israel Mirviss, Ronald L. Gustafson,
Peter K. Pichetti and Lance G. Morgan. There are no other
members of the Board of Directors.
B. The meeting involved the ratification of the appointment of
Eide Bailly LLP as independent public accountants for Dynamic
Homes, Inc. for the fiscal year ending December 30, 2000.
Item 6. Exhibits and Reports on Form 8-K:
On June 22, 2000, a report on Form 8-K was filed regarding a letter of intent
dated June 20, 2000, announcing the Company's acquisition by an entity to be
formed by three directors of Dynamic Homes, Inc.
On June 27, 2000, a report on Form 8-K was filed regarding the resignation of D.
Raymond Madison as a director of Dynamic Homes, Inc.
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SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Dated: August 10, 2000 Dynamic Homes, Inc.
---------------------------- ------------------------------------
(Registrant)
/s/ Eldon Matz
------------------------------------
Eldon Matz
Controller
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