SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
[ ] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to
Section 240.14a-11(c) or
Section240.14a-12
DYNAMIC HOMES, INC.
---------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
---------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies: Common
Stock, par value $.10 per share, of Dynamic Homes, Inc.
2) Aggregate number of securities to which transaction applies: 2,240,850
outstanding shares, plus stock option settlements with respect to 155,000
shares.
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined): The filing fee of $1,151.20
was calculated based upon the product of 2,240,850 shares of Common Stock
at $2.55 per share and 155,000 options at an average option spread of $.27
per share.
4) Proposed maximum aggregate value of transaction: $5,756,018
5) Total fee paid: $1,151.20
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $1,151.20
2) Form, Schedule or Registration Statement No.: N/A
3) Filing Party: N/A
4) Date Filed: N/A
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DYNAMIC HOMES, INC.
525 Roosevelt Avenue
Detroit Lakes, Minnesota 56501
November __, 2000
Dear Stockholder:
You are cordially invited to attend our Special Meeting of stockholders
of Dynamic Homes, Inc. to be held on December 28, 2000, at 9:00 a.m., Central
Standard Time, at the Holiday Inn Motel, Detroit Lakes, Minnesota.
At the Special Meeting you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger, dated September
25, 2000, pursuant to which Dynamic Acquisitions, Inc., a newly formed Minnesota
corporation and a wholly owned subsidiary of Dynamic Homes, LLC, a Minnesota
limited liability company, will be merged with and into Dynamic Homes, Inc. and
Dynamic Homes, Inc. will become a wholly owned subsidiary of Dynamic Homes, LLC.
If the merger agreement is approved and the merger is subsequently consummated,
each outstanding share of common stock of Dynamic Homes, Inc. will be cancelled
and converted automatically into the right to receive cash of $2.55 per share,
without interest thereon.
Dynamic Homes, Inc.'s Board of Directors formed a Special Committee to
mitigate any possible conflict of interest in evaluating this merger proposal,
and to oversee the negotiation of the Agreement and Plan of Merger with Dynamic
Homes, LLC.
The Special Committee has unanimously approved the Agreement and Plan
of Merger and has determined that its terms are fair and in the best interests
of Dynamic Homes, Inc. and its stockholders.
THE SPECIAL COMMITTEE RECOMMENDS THAT YOU VOTE IN FAVOR OF APPROVAL AND
ADOPTION OF AGREEMENT AND PLAN OF MERGER AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
Approval and adoption of the Agreement and Plan of Merger requires the
affirmative vote of the holders of a majority of the issued and outstanding
shares of common stock. Each share of Dynamic Homes, Inc. common stock is
entitled to one vote on all matters to come before the Special Meeting. Dynamic
Homes, Inc.'s common stock constitutes its only outstanding class of capital
stock.
Attached to this letter you will find a formal Notice of Special
Meeting, a proxy statement, related information about Dynamic Homes, Inc. and a
proxy card. The accompanying proxy statement provides you with detailed
information about the Special Meeting and the proposed merger. If the Agreement
and Plan of Merger is approved by the requisite holders of Dynamic Homes, Inc.'s
common stock, the closing of the merger will occur soon after the Special
Meeting
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and after all of the other conditions to closing the merger are satisfied.
Please give this material your careful attention. You may also obtain more
information from documents that Dynamic Homes, Inc. has filed with the
Securities and Exchange Commission.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF DYNAMIC
HOMES, INC. COMMON STOCK YOU OWN. A FAILURE TO VOTE WILL COUNT AS A VOTE AGAINST
THE MERGER. ACCORDINGLY, YOU ARE REQUESTED PROMPTLY TO COMPLETE, SIGN AND DATE
THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENVELOPE PROVIDED, WHETHER OR NOT
YOU PLAN TO ATTEND. THIS WILL NOT PREVENT YOU FROM VOTING YOUR SHARES IN PERSON
IF YOU SUBSEQUENTLY CHOOSE TO ATTEND THE SPECIAL MEETING.
Thank you for your cooperation.
Very truly yours,
Scott D. Lindemann
Chief Executive Officer
<PAGE>
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
DYNAMIC HOMES, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 28, 2000
TO THE STOCKHOLDERS OF DYNAMIC HOMES, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of stockholders of
Dynamic Homes, Inc., a Minnesota corporation ("Dynamic Homes"), will be held at
the Holiday Inn Motel, Detroit Lakes, Minnesota at 9:00 a.m., Central Standard
Time, on December 28, 2000, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated September 25, 2000, pursuant to which
Dynamic Acquisitions, Inc., a newly formed Minnesota corporation and a wholly
owned subsidiary of Dynamic Homes, LLC, a Minnesota limited liability company,
will be merged with and into Dynamic Homes and Dynamic Homes will become a
wholly owned subsidiary of Dynamic Homes, LLC. If the agreement is approved and
the merger is subsequently consummated, each outstanding share of common stock
of Dynamic Homes will be cancelled and converted automatically into the right to
receive cash of $2.55 per share, without interest thereon.
2. To transact such other business as may properly come before the
meeting or any adjournment or postponement.
Only stockholders of record at the close of business on November 20,
2000, will be entitled to notice of and to vote at the Special Meeting and at
any adjournment or postponement of the Special Meeting.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
HOWEVER, TO ASSURE YOUR REPRESENTATION AT THE MEETING, YOU ARE URGED TO MARK,
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE
POSTAGE PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING
THE MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE HAS RETURNED A PROXY CARD.
<PAGE>
Dynamic Homes stockholders have the right to dissent from the merger
and obtain payment in cash of the fair value of their shares of common stock
under applicable provisions of Minnesota law. In order to perfect appraisal
rights, stockholders must give written demand for appraisal of their shares
before the taking of the vote on the merger at the Special Meeting and must not
vote in favor of the merger. A copy of the applicable Minnesota statutory
provisions is included as APPENDIX B to the accompanying proxy statement and a
summary of these provisions can be found under "You Have Appraisal Rights in the
Merger" in the accompanying proxy statement. In the event that there are not
sufficient votes to approve the proposed merger at the time of the Special
Meeting, the Special Meeting may be adjourned in order to permit further
solicitation by Dynamic Homes.
By order of the Board of Directors
--------------------------------
Chief Executive Officer
Detroit Lakes, Minnesota
November __, 2000
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME. IF THE MERGER AGREEMENT
IS APPROVED, YOU WILL BE SENT INSTRUCTIONS REGARDING THE SURRENDER OF YOUR STOCK
CERTIFICATES.
<PAGE>
DYNAMIC HOMES, INC.
525 Roosevelt Avenue
Detroit Lakes, Minnesota 56501
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PROXY STATEMENT
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INTRODUCTION
This proxy statement is being furnished to the stockholders of Dynamic
Homes, Inc., a Minnesota corporation ("Dynamic Homes" or the "Company"), in
connection with the solicitation by the Board of Directors of proxies to be used
at a Special Meeting of Stockholders, as it may be adjourned or postponed from
time to time, to be held on December 28, 2000, at 9:00 a.m., Central Standard
Time, at the Holiday Inn Motel, Detroit Lakes, Minnesota. The purpose of the
Special Meeting is for Dynamic Homes, Inc.'s stockholders to consider and vote
upon a proposal to approve an Agreement and Plan of Merger, dated September 25,
2000, by and among Dynamic Homes, Dynamic Homes, LLC, a Minnesota limited
liability company (" Dynamic LLC"), and Dynamic Acquisition, Inc., a Minnesota
corporation and newly formed subsidiary of Dynamic LLC ("Merger Sub") and the
transactions contemplated thereby. The Agreement and Plan of Merger provides,
among other things, that:
- Merger Sub will merge with and into Dynamic Homes;
- Dynamic Homes will continue as the surviving corporation and
will be a wholly owned subsidiary of Dynamic LLC;
- each share of Dynamic Homes common stock issued and
outstanding at the effective time of the merger (other than
shares held by stockholders, if any, who properly exercise
their appraisal rights under Minnesota law) will convert into
the right to receive cash of $2.55 per share, without interest
thereon; and
- each option to purchase Dynamic Homes common stock outstanding
at the effective time of the merger will be deemed to have
been exercised by the holder thereof and will convert into the
right to receive cash in an amount equal to the difference
between $2.55 and the exercise price of such option.
Dynamic LLC will pay a total purchase price of approximately $5,756,018
for the Dynamic Homes shares and options outstanding at the effective time of
the merger.
<PAGE>
This proxy statement is accompanied by copies of the Company's Annual
Report on Form 10-K (as amended) for the year ended December 31, 1999, and its
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, as
Appendix C.
This proxy statement and the accompanying notice, related information,
proxy card and letter are being mailed first on or about November __, 2000, to
Dynamic Homes stockholders entitled to receive notice of, and to vote at, the
Special Meeting.
Stockholders who do not vote in favor of the Agreement and Plan of
Merger and who otherwise comply with the applicable procedures described in
Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act will be
entitled to appraisal rights. The provisions of Sections 302A.471 and 302A.473
of the Minnesota Business Corporation Act are summarized in the section of this
Proxy Statement called "You Have Appraisal Rights in the Merger." That summary
includes a description of the procedure that dissenting stockholders must follow
to assert appraisal rights. The entire text of Sections 302A.471 and 302A.473 of
the Minnesota Business Corporation Act is attached as APPENDIX B to this Proxy
Statement.
A Special Committee appointed by the Board of Directors of Dynamic
Homes unanimously approved the Agreement and Plan of Merger and has determined
that its terms are fair and in the best interests of Dynamic Homes and its
stockholders. THE SPECIAL COMMITTEE RECOMMENDS THAT YOU VOTE IN FAVOR OF
APPROVAL AND ADOPTION OF AGREEMENT AND PLAN OF MERGER AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
<PAGE>
TABLE OF CONTENTS
INTRODUCTION
TABLE OF CONTENTS ........................................................... i
SUMMARY TERM SHEET .......................................................... 1
Proposed Acquisition ...........................................1
Reasons for the Merger .........................................1
Dynamic Homes Stock Price ......................................1
The Special Committee ..........................................2
Recommendation of the Special Committee.........................2
Recommendation of Peter K. Pichetti and Ronald L. Gustafson ....2
The Special Meeting of Stockholders ............................3
No Special Approval ............................................3
Appraisal Rights ...............................................3
Federal Income Tax Consequences ................................3
When the Merger Will Be Completed ..............................4
Conditions to Completing the Merger ............................4
Interests of Directors and Officers in the Merger that
Differ From Your Interests .....................................4
The Merger .....................................................5
Selected Historical Consolidated Financial Data.................6
Contact Information ............................................8
QUESTIONS AND ANSWERS ABOUT THE MERGER ...................................... 8
THE PARTIES TO THE MERGER .................................................. 10
Dynamic Homes, Inc.............................................10
Dynamic Homes, LLC ............................................10
Dynamic Acquisitions, Inc. ....................................10
THE SPECIAL MEETING OF DYNAMIC HOMES STOCKHOLDERS .......................... 11
Place, Date, Time and Purpose .................................11
Who Can Vote at the Special Meeting ...........................11
Attending the Meeting .........................................11
Vote Required .................................................11
Voting by Proxy ...............................................12
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SPECIAL FACTORS.............................................................. 13
Background of the Merger ......................................13
Reasons for the Merger ........................................15
Source and Amount of Funds ....................................16
Interests of Dynamic Homes Directors and Officers in the
Merger that Differ from Your Interests ........................17
Plan For the Company After the Merger .........................17
Purposes and Effects of the Merger ............................18
Fairness of the Merger ........................................20
General .......................................................21
THE MERGER AGREEMENT ...................................................21
Generally .....................................................21
Conversion of Dynamic Homes Shares ............................21
Stock Options .................................................22
Payment for Dynamic Homes Shares...............................22
Regulatory Approvals ..........................................22
When the Merger Will Be Completed .............................22
Procedures for Exchanging Your Stock Certificates .............22
Federal Income Tax Consequences ...............................23
Anticipated Accounting Treatment ..............................24
Representations and Warranties of Dynamic Homes................24
Representations and Warranties of Merger Sub and
Dynamic LLC....................................................26
Conduct of Business Prior to the Closing ......................26
No Solicitation Provision .....................................27
Additional Covenants of Dynamic Homes..........................27
Conditions to Closing .........................................29
Termination ...................................................30
Fees and Expenses .............................................31
YOU HAVE APPRAISAL RIGHTS IN THE MERGER ..................................... 33
MARKET PRICE OF DYNAMIC HOMES COMMON STOCK .................................. 38
BENEFICIAL OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS .................................................. 39
INTEREST IN SECURITIES OF DYNAMIC HOMES ..................................... 40
INDEPENDENT PUBLIC ACCOUNTANTS .............................................. 40
AVAILABLE INFORMATION ....................................................... 41
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ADDITIONAL INFORMATION ...................................................... 41
OTHER MATTERS ............................................................... 42
APPENDIX A -- Agreement and Plan of Merger ............................. A-1
APPENDIX B -- Sections 302A.471 and 302A.473 of the
Minnesota Business Corporation Act ............................ B-1
APPENDIX C -- Form 10-K (as amended) for the year ended December 31,
1999 and Form 10-Q for the quarter ended September 30, 2000 ... C-1
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SUMMARY TERM SHEET
This summary term sheet does not contain all of the information that is
important to you. You should carefully read the entire proxy statement to fully
understand the merger. The Agreement and Plan of Merger ("Merger Agreement") is
attached as APPENDIX A to this proxy statement. We encourage you to read the
Merger Agreement, as it is the legal document that governs the merger.
PROPOSED MERGER
- Stockholder Vote. You are being asked to vote to approve a
merger transaction whereby Dynamic Acquisitions, Inc., a newly
formed Minnesota corporation ("Merger Sub") and a wholly owned
subsidiary of Dynamic Homes, LLC, a Minnesota limited
liability company ("Dynamic LLC"), will be merged with and
into Dynamic Homes, Inc., a Minnesota corporation
("Dynamic"Homes") and Dynamic Homes will become a wholly owned
subsidiary of Dynamic LLC.
- Price for Your Stock. As a result of the merger, you will
receive cash for each of your shares of Dynamic Homes common
stock. Dynamic LLC will pay $2.55 in cash for all Dynamic
Homes shares outstanding as of the closing. In addition, each
option to purchase Dynamic Homes common stock outstanding as
of the closing will be deemed to have been exercised and will
convert into the right to receive cash in an amount equal to
the difference between $2.55 and the exercise price of the
option. See "The Merger Agreement - Conversion of Securities."
- The Acquiror. Dynamic LLC was formed to engage in the proposed
merger by Peter K. Pichetti, Ronald L. Gustafson and Native
American Housing Co., LLC, a Nebraska limited liability
company. Mr. Pichetti and Mr. Gustafson are directors of
Dynamic Homes. Merger Sub is a wholly owned subsidiary of
Dynamic LLC and was formed for the purpose of acquiring
Dynamic Homes. See "The Parties to the Merger."
REASONS FOR THE MERGER
The merger presents an opportunity for Dynamic Homes stockholders to
realize a premium over recent market prices for their shares. See "Special
Factors - Background of the Merger," "Special Factors - Reasons for the Merger"
and "Market Price of Dynamic Homes Common Stock."
DYNAMIC HOMES STOCK PRICE
Shares of Dynamic Homes are quoted on the Nasdaq Small-Cap System under
the symbol "DYHM." On June 20, 2000, which was the last trading day before
Dynamic Homes announced the
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merger, Dynamic Homes common stock closed at $1.94 per share. See "Market Price
for Dynamic Homes Common Stock."
THE SPECIAL COMMITTEE
Peter K. Pichetti and Ronald L. Gustafson, the founders of Dynamic LLC,
are members of the Dynamic Homes Board of Directors and they have a conflict of
interest in recommending approval of the Merger Agreement because they have a
beneficial interest in Dynamic LLC. If the merger occurs, these individuals
will, by reason of their combined 100% governance interest and combined 25%
financial interest in Dynamic LLC, receive a substantial benefit from the future
earnings, growth and increased value of the business of Dynamic Homes. To
counteract this conflict of interest, the Board of Directors formed a Special
Committee consisting of three disinterested persons to evaluate the various
proposals for the acquisition of Dynamic Homes and negotiate the terms of the
Merger Agreement with Dynamic LLC. The three members of the Special Committee
are Gerald E. Magnuson, a retired partner of the Lindquist & Vennum law firm in
Minneapolis, Minnesota, Patrick McGuire, former President of Woodland Container
Corporation in Aitken, Minnesota, and Michael Bochert, an independent investment
banker in Edina, Minnesota, none of whom has any present or prior business
relationship with Dynamic Homes, any of the directors of Dynamic Homes or the
founders or members of Dynamic LLC or Merger Sub.
RECOMMENDATION OF SPECIAL COMMITTEE
The Special Committee appointed by the Board of Directors of Dynamic
Homes unanimously approved the Merger Agreement and has determined that its
terms are fair and in the best interests of Dynamic Homes and its unaffiliated
stockholders. The Special Committee has recommended that the Merger Agreement
and the transactions contemplated thereby be approved by the stockholders of
Dynamic Homes.
The Special Committee was formed pursuant to the Minnesota Business
Corporation Act on May 16, 2000. The Special Committee consists of three
disinterested persons, who are not directors of the Company, because Peter K.
Pichetti, Ronald L. Gustafson and Clyde R. Lund, Jr., three of the six directors
of the Company, had formed a group that was bidding for the acquisition of the
Company, and the other three directors, D. Raymond Madison, Israel Mirviss and
Lance G. Morgan, believed that they too may have or be deemed to have a conflict
of interest. The Minnesota Business Corporation Act allows the Board of
Directors to appoint such a Special Committee, and to grant to the Special
Committee all of the authority of the Board of Directors to render a decision in
connection with matters where such conflicts exist or are deemed to exist.
Accordingly, the decision on behalf of the Board of Directors with respect to
the merger, and the determination that the merger is in the best interests of
the stockholders, were made by the Special Committee, and the Board of Directors
did not render its own independent decision.
RECOMMENDATION OF PETER K. PICHETTI AND RONALD L. GUSTAFSON
Peter K. Pichetti and Ronald L. Gustafson, as controlling owners of
Dynamic LLC and Merger Sub, hope to receive a substantial benefit from possible
future earnings and increases in the value of the business of Dynamic Homes.
Nevertheless, Messrs. Pichetti and Gustafson believe that the terms of the
Merger Agreement are in the best interests of Dynamic Homes and its stockholders
who are not affiliated with Messrs. Pichetti and Gustafson, primarily because
the $2.55 per share cash price to be paid if the merger is completed is
substantially in excess of the average price per share of the Dynamic Homes
stock in the public market over the past three years, and because the $2.55 per
share price is unaffected by the costs and expenses associated with completing
the merger.
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THE SPECIAL MEETING OF STOCKHOLDERS
- Place, Date and Time. The Special Meeting will be held at the
Holiday Inn Motel, Detroit Lakes, Minnesota, at 9:00 a.m.,
Central Standard Time, on December 28, 2000.
- What Vote is Required for Approval of the Merger. The merger
requires the approval of the holders of a majority of the
outstanding shares of Dynamic Homes common stock. The failure
to vote has the same effect as a vote against the merger.
- Who Can Vote at the Meeting. You can vote at the Special
Meeting all of the shares of Dynamic Homes common stock you
own of record as of November 20, 2000, which is the record
date for the Special Meeting. If you own shares which are
registered in someone else's name, for example, a broker, you
need to direct that person to vote those shares or obtain an
authorization from them and vote the shares yourself at the
meeting. As of the close of business on November 20, 2000,
there were 2,240,850 shares of Dynamic Homes common stock
outstanding, held by approximately 367 stockholders of record.
- Procedure for Voting. You can vote your shares by attending
the Special Meeting and voting in person or by mailing the
enclosed proxy card. You may revoke your proxy at any time
before the vote is taken at the meeting. To revoke your proxy,
you must either advise the Secretary of Dynamic Homes in
writing, deliver a later dated proxy, before your common stock
has been voted at the Special Meeting, or attend the meeting
and vote your shares in person. Merely attending the Special
Meeting will not constitute revocation of your proxy. See "The
Special Meeting of Dynamic Homes Stockholders - Voting by
Proxy."
NO SPECIAL APPROVAL
No special vote of the stockholders, excluding Peter K. Pichetti and Ronald L.
Gustafson, is being sought to approve the merger. See "BENEFICIAL OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS."
APPRAISAL RIGHTS
Minnesota law provides you with appraisal rights in the merger. This
means that if you are not satisfied with the amount you are entitled to receive
in the merger, you may have the value of your shares independently determined
and receive payment based on that valuation. The ultimate amount received by a
dissenting stockholder in an appraisal proceeding may be more or less than, or
the same as, the amount the dissenting stockholder would have received in the
merger. To exercise your appraisal rights, you must deliver a written objection
to the merger to Dynamic Homes at or before the Special Meeting and you must not
vote in favor of the merger. Your failure to follow exactly the procedures
specified under Minnesota law will result in the loss of your appraisal rights.
See "You Have Appraisal Rights in the Merger."
FEDERAL INCOME TAX CONSEQUENCES
The merger will be a taxable transaction to you. For United States
federal income tax purposes, your receipt of cash in exchange for your shares of
Dynamic Homes common stock generally will cause you to recognize a gain or loss
measured by the difference between the cash you receive in the merger and your
tax basis in your shares of Dynamic Homes common stock. YOU SHOULD CONSULT YOUR
OWN TAX ADVISOR FOR A FULL UNDERSTANDING OF THE MERGER'S TAX CONSEQUENCES THAT
ARE PARTICULAR TO YOU. See "The Merger Agreement - Certain Federal Income Tax
Consequences."
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WHEN THE MERGER WILL BE COMPLETED
We are working to complete the merger as soon as possible. We
anticipate completing the merger by approximately December 28, 2000, subject to
receipt of stockholder approval and satisfaction of other requirements,
including the conditions described immediately below. See "The Merger Agreement
- When the Merger Will be Completed."
CONDITIONS TO COMPLETING THE MERGER
The completion of the merger depends on a number of conditions being
met. In addition to the parties complying with the Merger Agreement, these
conditions, unless waived, include:
- approval of the merger and the Merger Agreement by Dynamic
Homes' stockholders;
- no action or proceeding having been instituted by any
governmental entity seeking to prevent consummation of the
merger, and the receipt of any governmental approvals which
may be required;
- holders of no more than 10% of Dynamic Homes' outstanding
shares of common stock having exercised appraisal rights;
- the resignation of certain directors and officers of Dynamic
Homes;
- the absence of a material adverse change in Dynamic Homes'
business from the date of the Merger Agreement to the
effective date of the merger;
- specified Dynamic Homes employees having signed employment
agreements with Dynamic LLC and not having indicated any
intention not to comply with the terms of those agreements;
and
- renewal of the union contract to which Dynamic Homes is
currently subject.
See "The Merger Agreement - Conditions to Closing."
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT DIFFER FROM YOUR
INTERESTS
Some of Dynamic Homes' directors and officers have interests in the
merger that are different from, or are in addition to, their interests as
stockholders in Dynamic Homes. The Dynamic Homes' Board of Directors knew about
these additional interests and considered them when the
4
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directors appointed the Special Committee, and the Special Committee knew about
these additional interests when the Special Committee approved the Merger
Agreement. These interests include the following:
- Peter K. Pichetti and Ronald L. Gustafson, directors of
Dynamic Homes, are the founders of Dynamic LLC and have a
substantial interest in Dynamic LLC which will own Dynamic
Homes following the closing of the merger. Clyde R. Lund, Jr.,
a director of Dynamic Homes, was originally a member of the
group of individuals that proposed to form Dynamic LLC; he
removed himself from participation with the group on July 20,
2000; and
- some of the executive officers will continue as employees of
Dynamic Homes, in some cases pursuant to written employment
agreements.
See "Special Factors - Interests of Dynamic Homes' Directors and
Officers in the Merger that Differ from Your Interests."
THE MERGER
- Procedure for Receiving Merger Consideration. Dynamic LLC has
appointed Wells Fargo Bank, Minnesota N.A., as paying agent,
to coordinate the payment of the cash merger consideration
following the merger. The paying agent will send you written
instructions for surrendering your certificates and obtaining
the cash merger consideration after we have completed the
merger. See "The Merger Agreement - Payment for Dynamic Homes
Shares."
- Terminating the Merger Agreement. Dynamic Homes and Dynamic
LLC can mutually agree at any time to terminate the Merger
Agreement without completing the merger, even if the
stockholders of Dynamic Homes have approved it. Also, under
certain circumstances, either Dynamic Homes or Dynamic LLC can
decide, without the consent of the other, to terminate the
agreement prior to the closing of the merger, even if the
stockholders of Dynamic Homes have approved the Merger
Agreement. See "The Merger Agreement - Termination."
- Fees and Expenses. Generally, whether or not the merger is
consummated, Dynamic Homes and Dynamic LLC are each
responsible for their respective expenses incurred in
connection with the merger. Dynamic Homes, however, is
required to reimburse
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Dynamic LLC for reasonable out-of-pocket fees and expenses,
not to exceed $25,000, incurred by Dynamic LLC in connection
with the Merger Agreement, if the Merger Agreement is
terminated under certain circumstances. Dynamic Homes is also
required to pay a termination fee of $200,000 if the Merger
Agreement is terminated under certain circumstances. Dynamic
LLC, however, is also required to reimburse Dynamic Homes for
reasonable out-of-pocket fees and expenses, not to exceed
$25,000, incurred by Dynamic Homes in connection with the
Merger Agreement, if the Merger Agreement is terminated due to
Dynamic LLC breaching, subject to materiality thresholds and
cure periods, any of its representations, warranties,
covenants or agreements contained in the Merger Agreement. See
"The Merger Agreement - Fees and Expenses."
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below is a summary of selected consolidated financial data
with respect to the Company excerpted or derived from the information contained
in the Company's Annual Reports on Form 10-K for the years ended December 31,
1999 and 1998 and its Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000. More comprehensive financial information is included
in such reports and other documents filed by the Company with the Securities and
Exchange Commission (the "Commission"), and the following summary is qualified
in its entirety by reference to such reports and other documents and all of the
financial information (including any related notes) contained therein. Such
reports and other documents may be inspected and copies may be obtained from the
offices of the Commission. See "Where You Can Find More Information." In
addition, copies of the Company's Annual Report on Form 10-K (as amended) for
the year ended December 31, 1999 and its Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000, accompany this proxy statement being
provided to stockholders.
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<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- -----------------
2000 1999 1999 1998
<S> <C> <C> <C> <C>
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CONSOLIDATED STATEMENT OF OPERATIONS
DATA
----------------------------------------------------------------------------------------------------------------------------
Revenues $ 8,977,000 $ 9,200,000 $ 13,159,000 $ 11,969,000
----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 445,000 468,000 744,000 954,000
----------------------------------------------------------------------------------------------------------------------------
Interest expense, net 84,000 104,000 125,000 122,000
----------------------------------------------------------------------------------------------------------------------------
Income (Loss) before income taxes and equity in earnings
of unconsolidated subsidiary 425,000 406,000 730,000 928,000
----------------------------------------------------------------------------------------------------------------------------
Income (loss) from:
----------------------------------------------------------------------------------------------------------------------------
Continuing operations 255,000 244,000 438,000 593,000
----------------------------------------------------------------------------------------------------------------------------
Discontinued operations (123,000) (26,000) (90,000) (219,000)
----------------------------------------------------------------------------------------------------------------------------
Loss on Disposal of Subsidiary (516,000)
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (384,000) $ 218,000 $ 348,000 $ 374,000
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share $ (0.18) $ 0.10 $ 0.16 $ 0.17
----------------------------------------------------------------------------------------------------------------------------
Basic and diluted weighted average common and common 2,240,850 2,240,850 2,240,850 2,240,850
equivalent shares outstanding(2)
----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA (1) (END
OF PERIOD)
----------------------------------------------------------------------------------------------------------------------------
Total assets $ 7,408,000 $ 10,211,000 $ 9,784,000 $ 9,425,000
----------------------------------------------------------------------------------------------------------------------------
Long-term debt, including current maturities 1,121,000 3,079,000 3,020,000 3,049,000
----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 5,070,000 5,324,000 5,454,000 5,107,000
----------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
----------------------------------------------------------------------------------------------------------------------------
Period end book value per share $ 2.26 $ 2.38 $ 2.43 $ 2.28
----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has not provided any pro forma data giving effect to the
proposed merger as it does not believe such information is material to its
stockholders in evaluating the Merger Agreement since the proposed merger
consideration is all cash and if the proposed merger is completed, the Company's
common stock would cease to be publicly traded.
The Company has also not provided any separate financial information
for Dynamic LLC or Merger Sub since they are special purpose entities formed in
connection with the proposed merger and have no independent operations.
7
<PAGE>
CONTACT INFORMATION
If you have any questions regarding the merger or any other matters
discussed in this proxy statement, please contact:
Scott D. Lindemann
Dynamic Homes, Inc.
525 Roosevelt Avenue
Detroit Lakes, Minnesota 56501
(218) 847-2611 (telephone)
Email Address: [email protected]
QUESTIONS AND ANSWERS ABOUT THE MERGER
The following questions and answers are intended to address briefly
some commonly asked questions regarding the merger. These questions and answers
may not address all questions that may be important to you as a stockholder of
Dynamic Homes. Please refer to the more detailed information contained elsewhere
in this proxy statement and its appendices.
1. IF THE MERGER IS COMPLETED, WHAT WILL I RECEIVE FOR MY DYNAMIC HOMES
COMMON STOCK AND/OR OPTIONS?
You will receive cash. Dynamic LLC will pay cash for all Dynamic Homes
shares outstanding as of the closing.
Each option to purchase Dynamic Homes common stock outstanding as of
the closing will be deemed to have been exercised and will convert into the
right to receive cash in an amount equal to the difference between $2.55 and the
exercise price of such option.
2. WHEN AND WHERE WILL THE SPECIAL MEETING TAKE PLACE?
The Special Meeting is scheduled to take place at 9:00 a.m., Central
Standard Time, on December 28, 2000, at the Holiday Inn Motel, Detroit Lakes,
Minnesota.
3. WHO IS ENTITLED TO VOTE AT THE SPECIAL MEETING?
Holders of record of Dynamic Homes common stock as of the close of
business on November 20, 2000, are entitled to vote at the Special Meeting. Each
stockholder has one vote for each share of Dynamic Homes common stock he or she
owns.
4. WHAT VOTE IS REQUIRED FOR DYNAMIC HOMES STOCKHOLDERS TO APPROVE THE
MERGER?
In order for the merger to be approved, holders of a majority of the
outstanding shares of Dynamic Homes common stock must vote "FOR" the merger. If
your shares are not voted, it has the same effect as a vote "AGAINST" the
merger.
5. WHAT DO I NEED TO DO NOW?
After carefully reading and considering the information contained in
this proxy statement, please vote your shares as soon as possible by filling
out, signing and returning the enclosed proxy card. Your voting materials
include detailed information on how to vote.
8
<PAGE>
6. IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
No. Your broker can only vote your shares if you provide instructions
on how to vote. You should instruct your broker on how to vote your shares using
the instructions provided by your broker. If your shares are not voted, it has
the same effect as a vote "AGAINST" the merger.
7. CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY PROXY CARD?
Yes. You can change your vote at any time before your proxy is voted at
the Special Meeting. You may revoke your proxy by notifying the Secretary of
Dynamic Homes in writing or by submitting a new proxy dated after the date of
the proxy being revoked. In addition, your proxy will be revoked by you if you
attend the Special Meeting and vote in person. However, simply attending the
Special Meeting will not revoke your proxy. If you have instructed a broker to
vote your shares, you must follow the instructions received from your broker to
change your vote.
8. DO I NEED TO ATTEND THE DYNAMIC HOMES SPECIAL MEETING IN PERSON?
No. It is not necessary for you to attend the Special Meeting to vote
your shares if Dynamic Homes has previously received your proxy, although you
are welcome to attend.
9. WILL I HAVE APPRAISAL RIGHTS AS A RESULT OF THE MERGER?
Yes. If you wish to exercise your appraisal rights, you must follow the
requirements of Minnesota law. A summary of the requirements you must follow to
exercise your appraisal rights is included in "You Have Appraisal Rights in the
Merger" in this proxy statement.
10. WHEN WILL HOLDERS OF DYNAMIC HOMES COMMON STOCK RECEIVE THE MERGER
CONSIDERATION?
The merger is expected to be completed promptly following the Special
Meeting of the Dynamic Homes stockholders. However, it is possible that delays
could require that the merger be completed at a later time. Following the
merger, you will receive instructions on how to receive your cash payment in
exchange for each share of Dynamic Homes common stock. You must return your
Dynamic Homes stock certificates as described in the instructions, and you will
receive your cash payment as soon as practicable after Wells Fargo Bank,
Minnesota N.A., the paying agent, receives your Dynamic Homes stock certificate.
If you hold shares through a brokerage account, your broker will handle the
surrender of stock certificates to Wells Fargo Bank, Minnesota N.A.
11. WHO WILL OWN DYNAMIC HOMES AFTER THE MERGER?
After the merger, Dynamic Homes will be a wholly owned subsidiary of
Dynamic LLC, a Minnesota limited liability company.
9
<PAGE>
12. SHOULD I SEND IN MY DYNAMIC HOMES STOCK CERTIFICATES NOW?
No. After the merger is completed, Wells Fargo Bank, Minnesota N.A., as
paying agent, will send you written instructions for exchanging your Dynamic
Homes stock certificates.
13. WILL I OWE TAXES AS A RESULT OF THE MERGER?
The cash you receive in the merger in exchange for your shares of
Dynamic Homes common stock and any cash you may receive from exercising your
appraisal rights will be subject to United States federal income tax and also
may be taxed under applicable state, local and foreign tax laws. In general, you
will recognize gain or loss equal to the difference between the amount of cash
you receive and your adjusted tax basis in your shares of Dynamic Homes common
stock. We recommend that you read the section entitled "The Merger
Agreement--Certain Federal Income Tax Consequences" in this proxy statement for
a more detailed explanation of the tax consequences of the merger. You should
consult your tax advisor regarding the specific tax consequences of the merger
applicable to you.
14. WHO CAN HELP ANSWER MY QUESTIONS?
If you have additional questions about the merger after reading this
proxy statement, you should contact:
Scott D. Lindemann
Dynamic Homes, Inc.
525 Roosevelt Avenue
Detroit Lakes, Minnesota 56501
(218) 847-2611 (telephone)
Email Address: [email protected]
THE PARTIES TO THE MERGER
DYNAMIC HOMES, INC. Dynamic Homes, Inc. ("Dynamic Homes") is a
Minnesota corporation that manufactures modular, preconstructed buildings for
single-family, multiple-family and commercial use. Commercial operations include
the manufacture of preconstructed office buildings, motels and apartments.
Dynamic Homes common stock is quoted on the Nasdaq Small-Cap System under the
symbol "DYHM." Dynamic Homes' principal executive offices are located at 525
Roosevelt Avenue, Detroit Lakes, Minnesota 56501, and its telephone number is
(218) 847-2611.
DYNAMIC HOMES, LLC. Dynamic Homes, LLC ("Dynamic LLC") is a Minnesota
limited liability company which was organized in Minnesota on September 25,
2000, by Peter K. Pichetti and Ronald L. Gustafson in connection with the
proposed merger. Dynamic LLC has not been engaged in any business activities
other than those in connection with the merger. Dynamic LLC's principal office
is located at 8039 Spirit Cove Drive, Duluth, Minnesota 55807, and its telephone
number is (218)624-0695.
DYNAMIC ACQUISITION, INC. Dynamic Acquisition, Inc. ("Merger Sub") is a
Minnesota corporation and wholly owned subsidiary of Dynamic LLC formed solely
for the purpose of engaging in the merger. Pursuant to the terms of the Merger
Agreement, at the effective time of the merger, Merger Sub will be merged with
and into Dynamic Homes, with Dynamic Homes being the surviving corporation.
10
<PAGE>
THE SPECIAL MEETING OF DYNAMIC HOMES STOCKHOLDERS
PLACE, DATE, TIME AND PURPOSE
The Special Meeting will be held at the Holiday Inn Motel, Detroit
Lakes, Minnesota, on December 28, 2000, at 9:00 a.m., Central Standard Time. The
purpose of the Special Meeting is to consider and vote on the proposal to
approve and adopt the Merger Agreement.
A SPECIAL COMMITTEE APPOINTED BY THE DYNAMIC HOMES BOARD OF DIRECTORS
HAS DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF DYNAMIC HOMES AND ITS
STOCKHOLDERS, HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT
DYNAMIC HOMES STOCKHOLDERS VOTE IN FAVOR OF THE APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
WHO CAN VOTE AT THE SPECIAL MEETING
The holders of record of Dynamic Homes common stock as of the close of
business on November 20, 2000, which is the record date for the Special Meeting,
are entitled to receive notice of and to vote at the Special Meeting. On the
record date, there were 2,240,850 shares of Dynamic Homes common stock
outstanding held by approximately 367 stockholders of record.
ATTENDING THE MEETING
If you are a beneficial owner of Dynamic Homes common stock held by a
broker, bank or other nominee (i.e., in "street name"), you will need proof of
ownership to be admitted to the meeting. A recent brokerage statement or letter
from a bank or broker are examples of proof of ownership. If you want to vote
your shares of Dynamic Homes common stock held in street name in person at the
meeting, you will have to obtain a written proxy or authorization in your name
from the broker, bank or other nominee who holds your shares.
VOTE REQUIRED
The approval and adoption of the Merger Agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of
common stock entitled to vote. Each share of common stock is entitled to one
vote. Failure to return a properly executed proxy card or to vote in person will
have the same effect as a vote "AGAINST" the merger. Abstentions and broker non-
votes also will have the same effect as a vote against the merger. Your broker
or nominee does not have the right to vote your shares of Dynamic Homes common
stock without your instruction. It is
11
<PAGE>
important that you instruct your broker or nominee on how to vote your shares of
Dynamic Homes common stock for your shares to be represented at the Special
Meeting.
The holders of a majority of the outstanding shares of Dynamic Homes
common stock as of the record date, represented in person or by proxy, will
constitute a quorum for purposes of the Special Meeting. A quorum is necessary
to hold the Special Meeting. Once a share is represented at the Special Meeting,
it will be counted for the purpose of determining a quorum and any adjournment
of the Special Meeting, unless the holder is present solely to object to the
Special Meeting. However, if a new record date is set for an adjourned meeting,
then a new quorum will have to be established.
VOTING BY PROXY
This proxy statement is being sent to you on behalf of the Board of
Directors of Dynamic Homes for the purpose of requesting that you allow your
shares of Dynamic Homes common stock to be represented at the Special Meeting by
the persons named in the enclosed proxy card. All shares of Dynamic Homes common
stock represented at the meeting by properly executed proxies will be voted in
accordance with the instructions indicated on the proxy card. If you sign and
return a proxy card without giving voting instructions, your shares will be
voted as recommended by the Special Committee appointed by the Board of
Directors. The Special Committee recommends a vote in favor of ("FOR") approval
of the Merger Agreement.
If any matters not described in this proxy statement are properly
presented at the Special Meeting, the persons named in the proxy card will use
their own judgment to determine how to vote your shares. This includes a motion
to adjourn or postpone the meeting to solicit additional proxies. However, no
proxy voted against the proposal to approve the merger will be voted in favor of
an adjournment or postponement to solicit additional votes in favor of the
merger. Dynamic Homes does not know of any other matters to be presented at the
meeting.
You may revoke your proxy at any time before the vote is taken at the
meeting. To revoke your proxy, you must either advise the Secretary of Dynamic
Homes in writing, deliver a later dated proxy before your shares have been voted
at the Special Meeting or attend the meeting and vote your shares in person.
Merely attending the Special Meeting will not constitute revocation of your
proxy.
If your Dynamic Homes common stock is held in street name, you will
receive instructions from your broker, bank or other nominee that you must
follow to have your shares voted. Your broker or bank may allow you to deliver
your voting instructions via telephone or the Internet.
Dynamic Homes will pay the cost of this proxy solicitation. In addition
to soliciting proxies by mail, directors, officers and employees of Dynamic
Homes may solicit proxies personally and by telephone. None of these persons
will receive additional or special compensation for soliciting proxies. Dynamic
Homes will, upon request, reimburse brokers, banks and other nominees for their
expenses in sending proxy materials to their customers who are beneficial owners
and obtaining their
12
<PAGE>
voting instructions. Dynamic Homes may engage a proxy solicitation firm to
assist in the solicitation.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
As part of its ongoing business planning process, the Board of
Directors of Dynamic Homes and senior management regularly have considered
strategic alternatives in light of existing conditions and developments in the
housing industry. In addition, the Board of Directors and senior management have
been of the opinion that the market value of the Dynamic Homes stock on the
public market has frequently not properly reflected the value of the
corporation.
In 1998, Ray Madison, holder of approximately 28% of the outstanding
stock of Dynamic Homes, began urging the directors to consider selling the
Company or otherwise assisting him in liquidating all or a substantial part of
his shareholdings in Dynamic Homes as a part of his estate planning process. Mr.
Madison, then age 87, sought the advice of Fredrikson & Byron, P.A., a law firm
in Minneapolis, Minnesota, to assist him with his business and estate planning
matters.
At its meetings on July 27, August 24 and September 28, 1998, the Board
of Directors discussed the possibility of entering into a transaction for the
sale or merger of the Company. Following the September 28, 1998 meeting of the
Board of Directors, Dougherty Summit Securities LLC was engaged to provide a
valuation report on the Company.
On October 7, 1998, Fredrikson & Byron, P.A., acting on behalf of Ray
Madison, wrote to the President of the Company, urging the Board of Directors to
engage Dougherty Summit to assist the Company in evaluating unsolicited offers
that had been received from third parties relating to the possible acquisition
of the Company.
On October 29, 1998, Dougherty Summit Securities LLC rendered its
opinion to the Board of Directors stating that the common stock of the Company
had an estimated value of approximately $2.75 per share. Dougherty Summit
Securities LLC disclosed in its opinion that it had reviewed information
concerning Dynamic Homes, financial information and forecasts, historical stock
prices and volume data for trading in the stock of Dynamic Homes, publicly
available information with respect to companies believed to be comparable to
Dynamic Homes and prices and premiums paid in connection with certain comparable
sale or merger transactions.
From late-1998 through mid-1999, senior management discussed possible
sale or merger transactions with several companies, most of which were engaged
in the housing industry, and most of which had submitted unsolicited letters of
interest to the Company. Senior management reported regularly to the Board of
Directors. The unsolicited letters of interest generally expressed the desire of
the party submitting the letter to enter into discussions with management of
Dynamic Homes regarding a possible sale or merger transaction. Few, if any, of
the letters contained the price or terms of any payments to be made in
connection with any such transaction. The names of the companies submitting
letters of interest were disclosed to Dougherty Summit Securities LLC in
connection with its subsequent engagement letter with Dynamic Homes and
Dougherty Summit Securities LLC contacted each of the companies in its work as
financial advisor to the Company.
At its meeting on August 23, 1999, the Board of Directors authorized
management to engage Dougherty Summit Securities LLC as the Company's exclusive
agent for purposes of the sale of the assets or a merger transaction involving
the Company.
13
<PAGE>
On September 27, 1999, an engagement letter was entered into by the
Company with Dougherty Summit Securities LLC, pursuant to which Dougherty Summit
Securities LLC was engaged as financial advisor to the Company for a period of
six months.
In a November 12, 1999 letter to the Board of Directors, Dougherty
Summit Securities LLC recommended that the Company sell its subsidiary Shagawa
Resort, Inc., which operated the Shagawa Holiday Inn Sun Spree Motel in Ely,
Minnesota. Dougherty Summit Securities LLC was not involved in the sale of
Shagawa Resort, Inc., but its November 12, 1999 letter stated: "Pursuant to
maximizing value, the Shagawa Resort is producing an operating loss and negative
cash flow.... We believe selling Shagawa is a necessary step toward maximizing
value for the Company's shareholders." On November 17, 1999, the Company issued
a press release announcing that it was exploring various strategic alternatives
for enhancing stockholder value, and that Dougherty Summit Securities LLC had
been retained to assist in that process.
At its meeting on January 24, 2000, the Board of Directors reviewed
offers received by the Company for the purchase of Shagawa Resort, Inc. The
directors concluded that Shagawa Resort, Inc. should be sold and requested legal
counsel to assist the Company in selecting the offer which would be in the best
interest of the stockholders. Following that meeting, management solicited final
offers for the sale of Shagawa Resort, Inc.
At its meeting on February 28, 2000, the Board of Directors approved
the sale of substantially all of the assets of Shagawa Resorts, Inc. Two offers
were received and reviewed at the meeting, both in the amount of approximately
$2,400,000; the offer selected was deemed by the directors to be preferable,
because the offeror agreed to assume the Company's franchise agreement with
Holiday Inn and to indemnify the Company against substantial cancellation
obligations to which it was exposed under the franchise agreement. The officers
of the Company were directed to work with legal counsel to negotiate the terms
of an appropriate sale agreement and to execute the same on behalf of the
Company and proceed to close the transaction. At the February 28, 2000 meeting,
the directors accepted the resignation of Ray Madison as Chief Executive Officer
of the Company.
On April 10, 2000, Fredrikson & Byron, P.A., acting on behalf of Ray
Madison, wrote to the Board of Directors stating that the law firm was
recommending to Mr. Madison that he should vote as a director in favor of any
transaction recommended by Dougherty & Company LLC and if no such transaction is
approved by the directors, then he should individually pursue a sale of his
stock in the Company.
On May 1, 2000, the sale of substantially all of the assets of Shagawa
Resorts, Inc. was completed.
At its meeting on May 16, 2000, the Board of Directors heard a report
from representatives of Dougherty & Company LLC (formerly Dougherty Summit
Securities LLC) that seven parties were interested in acquiring the Company, and
that acceptable offers had been received from two of the seven. Both offers were
in the amount of $2.51 per share, but were contingent on a number of issues, and
neither had a firm commitment for financing. Following the presentation by the
representatives of Dougherty & Company LLC, and discussion, the representatives
of Dougherty & Company LLC left the meeting. Before the meeting adjourned, Peter
K. Pichetti, one of the directors of the Company, advised the Board of Directors
that he and directors Clyde R. Lund, Jr. and Ronald Gustafson were submitting a
letter of intent for acquisition of the Company. After a brief review of the
letter of intent, which contained an offer of $2.60 per share (contingent on
outside financing), and upon advice of legal counsel, the directors determined
that in accordance with the relevant provisions of the Minnesota Business
Corporation Act, a special committee of non-directors should be appointed to
consider the
14
<PAGE>
various offers then available and which may thereafter be forthcoming. The
directors appointed Gerald E. Magnuson, a retired partner of the Lindquist &
Vennum law firm in Minneapolis, Minnesota, Patrick McGuire, former President of
Woodland Container Corporation in Aitkin, Minnesota, and Michael Bochert, an
independent investment banker in Edina, Minnesota, as members of the Special
Committee. The Board of Directors directed the Special Committee to recommend
one acquisition proposal to the President of the Company for signature on or
before June 21, 2000.
On May 16, 2000, pursuant to action by the Board of Directors at its
meeting on May 16, 2000, the September 27, 1999 agreement with Dougherty &
Company LLC was amended to extend the term of the agreement from six months to
nine months.
On June 7, 2000, the Special Committee met and conferred with the
President of the Company, a representative from Dougherty & Company LLC and the
Company's legal counsel. After discussion, the Special Committee concluded that
the two parties that had submitted bids at the May 16, 2000 meeting, in addition
to the Mille Lacs Band of Chippewa Indians (which had on May 16 indicated its
interest in bidding) and the group consisting of Messrs. Pichetti, Lund and
Gustafson, should be invited to submit final sealed bids directly to the Special
Committee, to be opened by the Special Committee on June 20, 2000.
Representatives of Dougherty & Company LLC notified the Mille Lacs Band of
Chippewa Indians and the two bidders, and advised the two bidders that a bid
somewhat higher than theirs had been submitted on September 16. The bidding
process between June 7 and June 20 was also open to other parties interested in
submitting a sealed bid; no other such party submitted a bid.
On June 20, 2000, the Special Committee met and opened the four sealed
bids that had been timely submitted to the Special Committee. Representatives of
Dougherty & Company LLC and legal counsel to the Company participated in the
meeting. The four sealed bids provided for prices of $2.00, $2.10, $2.51 and
$2.55 per share, respectively. The terms of the letters of intent were similar,
except that the bid providing for a price of $2.00 per share and the bid
providing for a price of $2.10 per share were not subject to a specific
financing contingency. The bid providing for a price of $2.51 per share
indicated that the transaction would take the form of a tender offer by the
bidding entity, rather than a merger. At the conclusion of the meeting, the
Special Committee unanimously approved the letter of intent submitted by the law
firm of Johnson, Killen & Seiler, P.A., on behalf of Messrs. Pichetti, Lund and
Gustafson, which contained the $2.55 per share price, as being in the best
interests of the stockholders. The $2.55 per share is payable to the
stockholders in cash at the closing of the merger transaction.
On June 26, 2000, the directors accepted the resignation of Ray Madison
as a director and Chairman of the Board of the Company.
On July 20, 2000, the law firm of Johnson, Killen & Seiler, P.A.
notified the Company that Clyde R. Lund, Jr. was no longer part of the group
represented by that law firm. The group represented by said law firm
subsequently formed Dynamic Homes, LLC.
REASONS FOR THE MERGER
The Special Committee, appointed by the Dynamic Homes' Board of
Directors to act in the place of the Board of Directors, has determined by
unanimous vote that the merger is in the best interests of Dynamic Homes'
stockholders. The Board of Directors has not rendered a separate opinion.
ACCORDINGLY, THE SPECIAL COMMITTEE HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND UNANIMOUSLY RECOMMENDS THAT DYNAMIC HOMES' STOCKHOLDERS VOTE IN FAVOR OF
APPROVAL AND
15
<PAGE>
ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
In reaching its determination to approve the Merger Agreement, the
Special Committee considered a number of matters affecting the value of Dynamic
Homes to its stockholders, including the matters described above in "Special
Factors -- Background of the Merger" and the following factors:
- the price being offered by Dynamic LLC, which, when compared
with the $1.94 closing price of Dynamic Homes common stock
immediately prior to the announcement of the merger,
represented a premium of 31% at a $2.55 per share purchase
price;
-- the price of $2.55 per share also compared favorably with all
recent market prices for the stock of the Company, which
showed a high of $2.44 during the first quarter of 1998, a low
of $1.06 during the fourth quarter of 1999, a high price of
$2.13 during the first quarter of 2000 and prices during the
second quarter of 2000 ranging from a high of $2.19 to a low
of $1.31 (see "MARKET PRICE OF DYNAMIC HOMES' COMMON STOCK");
- the $2.55 per share price, to be paid in cash, appeared to be
in the best interests of the stockholders;
- the decision of the Board of Directors in 1999 that
stockholder value would be enhanced by the sale of the
Company, and the retention of Dougherty & Company LLC to
solicit offers from interested prospective purchasers;
- the substantial efforts undertaken by Dougherty & Company LLC
to locate prospective purchasers, the seven parties that
expressed an interest in acquiring the Company and the four
written offers received in the final submission of sealed bids
on June 20, 2000;
- the terms of the Merger Agreement, including the parties'
representations, warranties, covenants and conditions; and
- the potential impact of the merger on customers, employees and
other constituencies of Dynamic Homes.
In addition to the foregoing reasons that supported the Special
Committee's approval of the $2.55 per share offer, the Special Committee
considered the possibilities that (i) a higher price could be achieved by
continuing the process of searching for a higher bid and (ii) the stockholders
may be better served by retaining their shares in the issuer. Dougherty &
Company LLC's report to the Special Committee that it had contacted all
potential bidders within the industry and many potential bidders outside of the
industry during its nine-month effort convinced the Special Committee that
additional efforts to find another interested party were not likely to be
fruitful. The earnings history of Company over the past three years, the
response of the marketplace to the modest earnings per share results, and the
results achieved during the quarter ended March 31, 2000, caused the Special
Committee to conclude that it was unlikely that the operating results of the
Company would generate a substantial near-term increase in the price of the
issuer's shares in the public market.
SOURCE AND AMOUNT OF FUNDS
The total amount of funds required by Dynamic LLC to acquire all the
outstanding shares of Dynamic Homes common stock and to pay its fees and
expenses associated with the merger is estimated to be approximately $5,800,000.
On September 30, 2000, Dynamic LLC had a net worth of $2,000,000, consisting of
subscriptions payable. The subscriptions will be paid in cash prior to the
closing of the merger. The remaining amount will be borrowed from Bremer Bank,
Detroit Lakes, Minnesota, supplemented by additional funds from Messrs. Pichetti
and Gustafson.
Bremer Bank has agreed to provide a permanent loan of up to $3,530,700,
to be amortized over a period of 10 years with interest fixed at the rate of
9.5% per annum for 60 months on a 5-year term note. It is anticipated that the
balance owing after 5 years will be repaid pursuant to a new note with a
renegotiated interest rate. The collateral for this loan will be provided by
Dynamic Homes following the closing, and will consist of a first real estate
mortgage and assignment of rents and a security interest covering inventory,
chattel paper, accounts receivable, equipment, general intangibles, furniture
and fixtures. It is the plan and intent of Dynamic LLC to repay the financing
through cash flow generated by the operations of Dynamic Homes.
Dynamic LLC has no alternative financing plans.
16
<PAGE>
INTERESTS OF DYNAMIC HOMES' DIRECTORS AND OFFICERS IN THE MERGER THAT MAY DIFFER
FROM YOUR INTERESTS
As discussed above, certain members of the Board of Directors of
Dynamic Homes have interests that may present actual, potential, or the
appearance of potential, conflicts of interest in connection with the merger.
The Special Committee and the Board of Directors were aware of these potential
or actual conflicts of interest and considered them along with other matters
described under "Background of the Merger." No member of the Special Committee
had any actual, potential or apparent conflicts of interest.
PLANS FOR THE COMPANY AFTER THE MERGER
After the merger, Dynamic LLC anticipates that it will continue to
operate the Company in Detroit Lakes, Minnesota, without any significant
near-term changes in its operations or management. In this regard, it is
anticipated that current management personnel will remain with the Company, and
that Scott D. Lindemann will retain his position as President of the Company.
Peter K. Pichetti will become Chairman of the Board and Chief Executive Officer.
Mr. Pichetti and Ronald L. Gustafson, the founders and governors of Dynamic LLC,
will continue to serve as directors of Dynamic Homes after the merger. Lance G.
Morgan resigned as a director of the Company on November 15, 2000. It is
anticipated that Clyde R. Lund, Jr. and Israel Mirviss will resign as directors
of Dynamic Homes, effective upon the closing of the merger.
The following contains the age and principal occupation or position
with respect to Messrs. Pichetti and Gustafson:
Peter K. Pichetti, age 55, from February 1993 to April 1998, was
President, Chief Executive Officer and Director of State Bank of Tower and Tower
Bancshares, Inc. (a bank holding company) in Tower, Minnesota. From and after
April 1998, he served as an independent consultant to various banks in the
Duluth, Minnesota and Superior, Wisconsin area and served as Vice President of
National Bank of Commerce of Superior, Wisconsin, resigning on October 31, 2000.
He was Chief Financial Officer of Zenith Disposal, Inc., in Duluth, Minnesota,
from November, 1991, to February, 1993. From 1990 to November, 1991, he was
President of Northland Business Credit. From October, 1989, to September, 1990,
he was President and Chief Executive Officer of the St. Louis Bank of Savings in
Duluth, Minnesota. He has served as a Director of the Company since 1991.
Ronald L. Gustafson, age 52, has been owner and operator of Heritage
Homes, Inc. (a residential and commercial construction company) since 1974 and
part owner of Don Beam Homes, Inc. (a residential and commercial construction
company), since March 1997. He has been a builder/dealer for the Company since
1976. He has served as a Director of the Company since 1989.
Following the merger, Dynamic Homes will cease to be a public reporting
company.
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PURPOSES AND EFFECTS OF THE MERGER
Dynamic LLC and Merger Sub were formed by Peter K. Pichetti and Ronald
L. Gustafson for the sole purpose of acquiring the stock of Dynamic Homes.
Accordingly, neither Dynamic LLC nor Merger Sub has any purpose in engaging in
the merger that is different from Messrs. Pichetti and Gustafson.
Messrs. Pichetti and Gustafson were directors of Dynamic Homes at the
time when D. Raymond Madison expressed his interest in selling his stock in
Dynamic Homes. As directors of Dynamic Homes, they considered the effects that
the sale of his stock would have on the unaffiliated stockholders of Dynamic
Homes. A sale of Mr. Madison's stock in a block could result in a premium being
paid for that block of stock that would not be shared with non-selling
unaffiliated stockholders. Further, since the stock of Dynamic Homes was not
widely held and was thinly traded, the sale of Mr. Madison's stock on the open
market could depress the market price of Dynamic Homes stock for a significant
period of time.
At the time Mr. Madison expressed his interest in selling his stock,
and for over a year and a half afterwards, neither Mr. Pichetti nor Mr.
Gustafson had any interest in acquiring Dynamic Homes. Their sole intent and
purpose during this period was obtaining the best possible price of the stock
for all stockholders of Dynamic Homes.
In March, 2000, after Dougherty Summit Securities had been working for
seven months on locating a purchaser for Dynamic Homes, it became apparent to
Messrs. Pichetti and Gustafson that there was only limited interest on the part
of potential purchasers in acquiring a company such as Dynamic Homes. Messrs.
Pichetti and Gustafson believed that Dynamic Homes, as a privately held company,
could be more profitable than as a public company. The reason for this belief
was the cost savings to be realized by eliminating governmental filings and
proxy solicitations. Further, as a privately held company, with only a few
equity owners, Dynamic Homes could, as an S corporation or as a limited
liability company, take advantage of the tax benefits available to such business
organization forms. The principal tax benefit for an S corporation or a limited
liability company is the avoidance of the double taxation of corporate
distributions.
Finally there was a concern by Messrs. Pichetti and Gustafson that an
acquisition of Dynamic Homes by an outside party could lead to the closing of
the plant in Detroit Lakes and the removal of the jobs from rural Minnesota.
Accordingly, Messrs. Pichetti and Gustafson decided to prepare a
proposal to acquire all of the stock of Dynamic Homes.
Recognizing that their position as directors required them to act in
the best interests of all of the stockholders of Dynamic Homes, they decided to
only submit their proposal if the terms they proposed were at least equivalent
to the best terms offered by an outside party, and the price they proposed was
higher than that offered by any outside party. They then prepared a proposed
letter of intent and brought it to the May 16, 2000 meeting of the Board of
Directors.
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The purposes of Messrs. Pichetti and Gustafson in engaging in the
merger accordingly are: (1) to acquire the stock of Dynamic Homes at a price
higher than that offered by any outside party and on terms acceptable to Dynamic
Homes; (2) to assist in maintaining Dynamic Homes as a viable and financially
stable business in the Detroit Lakes area; and (3) to operate Dynamic Homes
after the merger, and after the merger debt has been substantially reduced, to
receive income distributions (dividends) from Dynamic Homes without having to
pay corporate level taxes.
If the merger is completed, it is anticipated that Dynamic Homes will
continue as a Minnesota corporation holding substantially the same assets and
with substantially the same employees and suppliers. Any warranties or similar
obligations of Dynamic Homes to its customers will remain in place. Accordingly,
it is anticipated that the employees, suppliers and customers of Dynamic Homes
will not be detrimentally affected by the merger and will receive the benefit of
a continuation of the relationships that they have established.
As discussed above, Dynamic LLC and Merger Sub were formed by Messrs.
Pichetti and Gustafson solely for the purpose of engaging in the merger.
Accordingly, the benefits and detriments of the merger to them are the same as
the benefits and detriments to Messrs. Pichetti and Gustafson.
Messrs. Pichetti and Gustafson have incurred legal and financing
expenses (including due diligence expenses) in preparing their letter of intent
and bid, negotiating the Merger Agreement and in obtaining the commitment for
financing. They will invest their own funds as equity capital in Dynamic LLC and
have spent a substantial amount of uncompensated time during the past six months
on the pending merger.
In the event that the merger is not completed, or if completed and
Dynamic Homes does not achieve the hoped for financial results, it is possible
that their investments of time and money may be lost. Further, a major portion
of the acquisition cost is being financed by debt. If interest rates rise, and
as a result the hoped for financial results are not achieved, Messrs. Pichetti
and Gustafson may be required to invest additional amounts. If Dynamic Homes is
able to improve its financial performance by being a privately held company,
then after the repayment of acquisition debt, Messrs. Pichetti and Gustafson
hope to receive distributions from the continued operations of Dynamic Homes.
The unaffiliated stockholders will be receiving a price for their stock
that is 13% higher than the highest stock price during the two year period
preceding the announcement of the merger and is 13% higher than the book value
on September 30, 2000. The unaffiliated stockholders will be receiving the $2.55
price in cash without having to pay any costs associated with the sale.
The unaffiliated stockholders will be giving up their right to
participate in the future earnings of Dynamic Homes and any future increase in
its stock price. However, they will, by receiving cash now, avoid the risk of
possible losses from earnings disappointments, and will avoid the potential of
an extended depressed market for the stock in light of Mr. Madison's expressed
intent to liquidate or reduce his stock position in Dynamic Homes.
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The decisions of the Special Committee with respect to the purposes and
effects of the merger are set forth in "SPECIAL FACTORS --- Background of the
Merger, and Adoption of the Merger Agreement and the Transactions Contemplated
Thereby."
FAIRNESS OF THE MERGER
Peter K. Pichetti and Ronald L. Gustafson believe that the transaction
is both procedurally and substantively fair to the unaffiliated stockholders of
Dynamic Homes. Because they were formed for the sole purpose of carrying out the
merger, the beliefs of Dynamic LLC and Merger Sub regarding the fairness of the
merger to the unaffiliated stockholders are the same as the beliefs of Messrs.
Pichetti and Gustafson.
Messrs. Pichetti and Gustafson believe that the process has been
procedurally fair, because they initially had no interest in acquiring the stock
of Dynamic Homes and were not involved in the process that Dougherty Summit
Securities used to identify and solicit interested bidders. When Messrs.
Pichetti and Gustafson decided to make a bid, they did so under circumstances
and in a manner that their bid was only presented with terms that were at least
equivalent to those offered by other parties and at a higher price. Thereafter,
they removed themselves from a position of decision making regarding the merger
and supported the establishment of the Special Committee, comprised of persons
with whom they had no affiliation, to review and act on the merger. When the
Special Committee determined to call for sealed bids, Messrs. Pichetti and
Gustafson submitted their sealed bid to the Special Committee without any
knowledge of who the other bidders were, or the amounts contained in the other
bids.
The merger will continue to be procedurally fair to the unaffiliated
stockholders because the provisions of Minnesota law governing appraisal rights
provide a simple, fast and non-adversarial means to determine fair value for
those stockholders who dissent.
Messrs. Pichetti and Gustafson believe that the merger process has been
substantively fair to the unaffiliated stockholders. Dynamic Homes retained an
outside firm, Dougherty Summit Securities, to advise it of the steps to be taken
to maximize shareholder value for all stockholders. Bids were initially
solicited by Dougherty Summit Securities, and final bids were submitted in a
sealed bid process. While the final price of $2.55 a share is less than the
originally contemplated price of $2.75 a share, based upon the October 1998
estimate by Dougherty Summit Securities, it should be noted that Dougherty
Summit Securities has been advising Dynamic Homes for over two years regarding
sale and merger possibilities and it actively marketed Dynamic Homes for 9
months before the Special Committee accepted the bid of Messrs. Pichetti and
Gustafson. The final price of $2.55 per share is also less than the price of
$2.60 a share contained in the original proposed letter of intent of Messrs.
Pichetti and Gustafson (which was not accepted by the Company) on May 16, 2000;
this reduction was the result of further study by Messrs. Pichetti and Gustafson
and their advisors between May 16 and June 20 with respect to the availability
of equity and debt financing and the substantial costs of negotiating and
drafting the Merger Agreement, preparation of proxy materials and attending to
the transmittal of the cash proceeds to the stockholders of Dynamic Homes, all
of which expenses were, in effect, to be paid by Messrs. Pichetti and Gustafson
because the price of $2.55 to be received by the stockholders of Dynamic Homes
was unaffected by the costs of completing the merger. The terms of the Merger
Agreement were thereafter negotiated by Dynamic Homes' independent counsel and
were reviewed and approved by the Special Committee.
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The merger will continue to be substantively fair to the unaffiliated
stockholders because the Merger Agreement provides that Dynamic Homes can,
during the merger process, and until the shareholder vote, entertain higher
bids. Further, the appraisal rights provision of Minnesota law provides that the
fair value of the stock for those stockholders who properly exercise their
dissenters rights will be determined by independent court appointed experts.
The decisions of the Special Committee with respect to the fairness of
the merger are set forth in "SPECIAL FACTORS --- Background of the Merger, and
Adoption of the Merger Agreement and the Transactions Contemplated Thereby."
GENERAL
The foregoing discussion of the special factors considered by the
Dynamic Homes Special Committee is not intended to be exhaustive, but identifies
material factors considered by the Special Committee. In view of the wide
variety of factors considered in connection with the evaluation and
determination to approve and recommend the Merger Agreement with Dynamic LLC,
the Special Committee found it impracticable and did not quantify or otherwise
attempt to assign any relative or specific weights to the factors considered.
The substantial efforts undertaken by Dougherty & Company LLC to locate
prospective purchasers, and the competitive nature of the bidding process
initiated by Dougherty & Company LLC and overseen initially by the Board of
Directors and after May 16, 2000, by the Special Committee, led the Special
Committee to conclude that a fair value had been offered by the successful
bidding party and that, accordingly, there was no need for Dynamic Homes to
incur the cost of a fairness opinion.
Pursuant to the September 27, 1999 engagement letter, Dynamic Homes
will pay Dougherty & Company LLC a fee of approximately $173,000 at the closing,
less $50,000 in fees previously paid to Dougherty & Company LLC.
THE MERGER AGREEMENT
The Merger Agreement is attached to this proxy statement as Appendix A.
GENERALLY
The Merger Agreement provides for a business combination in which
Dynamic Homes will merge with Merger Sub, a wholly owned subsidiary of Dynamic
LLC. Upon the merger being completed, Merger Sub will cease to exist and Dynamic
Homes, as the surviving corporation, will become a wholly owned subsidiary of
Dynamic LLC. The current directors and officers of Dynamic Homes will cease to
be directors and officers of Dynamic Homes upon completion of the merger,
although most Dynamic Homes employees, including certain officers, will continue
as employees of Dynamic Homes after the merger.
CONVERSION OF DYNAMIC HOMES SHARES
At the effective time of the merger, each share of Dynamic Homes common
stock issued and outstanding immediately prior to the effective time of the
merger (other than those shares held by the stockholders, if any, who properly
exercise their appraisal rights under Minnesota law) will be automatically
converted into the right to receive $2.55 in cash.
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STOCK OPTIONS
At the effective time of the merger, all outstanding Dynamic Homes
stock options, whether vested or unvested, exercisable or not exercisable, will
be deemed to have been exercised by the holder, whereupon all such holders of
options will be entitled to a cash payment in an amount equal to the difference
between $2.55 and the exercise price of each such option.
PAYMENT FOR DYNAMIC HOMES SHARES
As soon as practicable after the closing of the merger (but in any
event, within five business days), Wells Fargo Bank, Minnesota N.A. or another
bank or trust company designated by Dynamic LLC, in its capacity as paying
agent, will send a transmittal letter to each former Dynamic Homes stockholder.
The transmittal letter will contain instructions on how to surrender your shares
of Dynamic Homes common stock in order to receive the cash merger consideration.
Dynamic Homes stockholders should not send in their stock certificates until
they receive the transmittal materials from Wells Fargo Minnesota N.A..
REGULATORY APPROVALS
The closing of the merger is conditioned upon all material governmental
consents, approvals and authorizations legally required for the closing of the
merger having been obtained and being in effect. However, no assurance can be
given that the required consents, approvals or authorizations will be obtained.
Dynamic Homes and Dynamic LLC are not currently aware of any governmental
approvals or actions that may be required to close the merger.
WHEN THE MERGER WILL BE COMPLETED
The Company expects to complete the merger on or about December 28,
2000. However, either Dynamic Homes or Dynamic LLC may terminate the Merger
Agreement if, among other reasons, the merger has not been completed on or
before January 2, 2001, unless failure to complete the merger by that time is
due to the terminating party's failure to perform its obligations under the
Merger Agreement.
If the Merger Agreement is amended in any material manner following the
mailing of this proxy statement to the stockholders, Dynamic Homes will
resolicit proxies from the stockholders.
The closing of the merger will take place on a date within seven
business days after satisfaction or waiver of all of the conditions to
consummation of the merger or on a date to which Dynamic Homes and Dynamic LLC
mutually agree. On the date of the closing, the parties will file articles of
merger with the Minnesota Secretary of State. The merger will become effective
upon the filing of the articles of merger or at a later time if specified in the
articles of merger.
PROCEDURES FOR EXCHANGING YOUR STOCK CERTIFICATES
Within five business days after the completion of the merger, Wells
Fargo Bank, Minnesota N.A., as paying agent, will mail to each former holder of
record of Dynamic Homes common stock
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a letter with instructions on how to exchange Dynamic Homes stock certificates
for the cash merger consideration.
Please do not send in your Dynamic Homes stock certificates until you
receive the letter of transmittal and instructions from Wells Fargo Bank,
Minnesota N.A. Do not return your stock certificates with the enclosed proxy
card. If your shares of Dynamic Homes stock are held through a broker, your
broker will surrender your shares for cancellation.
After you mail the letter of transmittal and your stock certificates to
Wells Fargo Bank, Minnesota N.A., your check will be mailed to you. The Dynamic
Homes stock certificates you surrender will be canceled.
After the completion of the merger, there will be no further transfers
of Dynamic Homes common stock. Dynamic Homes stock certificates presented for
transfer after the completion of the merger will be canceled and exchanged for
the merger consideration.
If your Dynamic Homes stock certificates have been lost, stolen or
destroyed, you will have to prove your ownership of those certificates and that
they were lost, stolen or destroyed before you receive any consideration for
your shares. Wells Fargo Bank, Minnesota N.A. will send you instructions on how
to provide such evidence.
FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of certain federal income tax
consequences of the merger to holders of Dynamic Homes common stock. The
discussion is based upon the Internal Revenue Code, Treasury regulations, IRS
rulings and judicial and administrative decisions in effect as of the date of
this proxy statement. This discussion assumes that the Dynamic Homes common
stock is generally held for investment. In addition, this discussion does not
address all of the tax consequences that may be relevant to you in light of your
particular circumstances or to Dynamic Homes stockholders subject to special
rules, such as stockholders who acquired their Dynamic Homes stock pursuant to
the exercise of stock options or otherwise as compensation, non-United States
persons, financial institutions, tax-exempt organizations, dealers in securities
or foreign currencies or insurance companies.
The receipt of cash for Dynamic Homes common stock pursuant to the
merger will be a taxable transaction for federal income tax purposes and may be
a taxable transaction for state, local and foreign tax purposes as well. You
will recognize gain or loss measured by the difference between your adjusted tax
basis for the Dynamic Homes common stock owned by you at the time of the merger
and the amount of cash you receive for your Dynamic Homes shares. Your gain or
loss will be a capital gain or loss if your Dynamic Homes stock is a capital
asset in your hands, and will
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be long-term capital gain or loss if you have held your Dynamic Homes stock for
more than one year on the date of the merger.
The cash payments due to the holders of Dynamic Homes common stock upon
the exchange of Dynamic Homes common stock pursuant to the merger generally will
be subject to "backup withholding" at a 31% rate unless certain requirements are
met. Backup withholding will not apply if you (i) furnish a correct taxpayer
identification number on IRS Form W-9 or an appropriate substitute form and
certify on such form that you are not subject to backup withholding, (ii)
provide a certificate of foreign status on IRS Form W-8 or an appropriate
substitute form or (iii) are a corporation or are otherwise exempt from backup
withholding. Any amount paid as backup withholding will be credited against your
federal income tax liability.
The federal income tax consequences of the merger to Peter K. Pichetti
and Ronald L. Gustafson, and all other officers and directors, will be the same
as the consequences to other holders of Dynamic Homes common stock, because they
will all receive cash for their shares of Dynamic Homes common stock. The cost
of the merger to Dynamic LLC will become its tax basis in the stock of Dynamic
Homes following the merger closing. Merger Sub, which was recently created, will
no longer exist following completion of the merger, and will have no tax
consequences resulting from the merger.
Neither Dynamic LLC nor Dynamic Homes has requested or will request a
ruling from the IRS as to any of the tax effects to Dynamic Homes stockholders
of the transactions discussed in this proxy statement, and no opinion of counsel
has been or will be rendered to Dynamic Homes stockholders with respect to any
of the tax effects of the merger to stockholders.
The tax consequences of the merger to you may vary depending upon your
particular circumstances. Therefore, you should consult your tax advisor to
determine the particular tax consequences of the merger to you, including those
relating to state, local and/or foreign taxes.
ANTICIPATED ACCOUNTING TREATMENT
Dynamic Homes anticipates that the merger will be accounted for by
Dynamic LLC using the purchase method of accounting in accordance with generally
accepted accounting principles.
REPRESENTATIONS AND WARRANTIES OF DYNAMIC HOMES
Dynamic Homes made representations and warranties in the Merger
Agreement regarding the following:
- corporate organization and qualification to do business of
Dynamic Homes and each of its subsidiaries;
- validity and effectiveness of Articles of Incorporation and
Bylaws;
- capitalization of Dynamic Homes and each of its subsidiaries;
- authority to enter into the Merger Agreement and to consummate
the merger;
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- absence of conflicts between the Merger Agreement and the
merger, on the one hand, and other contractual and legal
obligations of Dynamic Homes and each of its subsidiaries, on
the other hand;
- requirement of consents, approvals, filings or other
authorizations to enter into the Merger Agreement and
consummate the merger;
- compliance with all applicable SEC filing requirements and
accuracy and completeness of SEC filings since January 1,
1999;
- accuracy of financial statements contained in SEC filings
filed since January 1, 1999;
- material liabilities and obligations;
- material changes or events since June 30, 2000;
- material litigation;
- validity and effectiveness of all leasehold interests;
- possession, effectiveness and compliance with permits and
licenses necessary to carry on the business as currently
conducted;
- validity and enforceability of material contracts and
commitments;
- ownership of intellectual property rights and non-infringement
of the rights of others;
- compliance with applicable law;
- tax matters;
- labor matters;
- employee benefits matters;
- environmental matters;
- insurance matters;
- use of brokers or finders;
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- approval of the merger by the Special Committee appointed by
the Board of Directors; and
- stockholder vote required to adopt the Merger Agreement.
None of the representations and warranties made by Dynamic Homes in the
Merger Agreement survive the closing of the merger.
REPRESENTATIONS AND WARRANTIES OF MERGER SUB AND DYNAMIC LLC
Merger Sub and Dynamic LLC each made representations and warranties in
the Merger Agreement regarding the following:
- organization and qualification to do business;
- authority to enter into the Merger Agreement;
- absence of conflicts between the Merger Agreement and the
merger, on the one hand, and other contractual and legal
obligations of Merger Sub and Dynamic LLC, on the other hand;
and
- Dynamic LLC's ability to fund the merger consideration.
None of the representations and warranties made by Merger Sub and
Dynamic LLC in the Merger Agreement survive the closing of the merger.
CONDUCT OF BUSINESS PRIOR TO THE CLOSING
Dynamic Homes has agreed that, subject to certain exceptions, between
the execution of the Merger Agreement and the earlier to occur of the
termination of the Merger Agreement or the consummation of the merger, Dynamic
Homes and its subsidiaries will:
- conduct their businesses in the ordinary course and in a
manner consistent with past practice; and
- use commercially reasonable efforts to preserve substantially
intact their business organizations and to keep available the
services of their current officers, employees and consultants
and to preserve their current relationships with customers,
suppliers, distributors and other persons that have
significant business relations with Dynamic Homes.
In the event of the termination of the Merger Agreement, management of
Dynamic Homes will continue business operations. Management believes that, in
such event, the Board of Directors may continue to explore strategic
alternatives for sale of the Company.
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Dynamic Homes has also agreed that, subject to certain exceptions,
prior to the effective time of the merger, Dynamic Homes and its subsidiaries
will not amend their charter documents, issue new shares of stock or enter into
other enumerated non-ordinary course transactions.
NO SOLICITATION PROVISION
Dynamic Homes has agreed not to seek a buyer for Dynamic Homes, other
than Dynamic LLC, and has agreed to terminate all existing discussions or
negotiations with respect to an acquisition. In particular, Dynamic Homes has
agreed, subject to fiduciary obligations discussed below, not to, or permit any
of its subsidiaries to:
- initiate, solicit or encourage any inquires or the making of
any proposal that constitutes an acquisition proposal;
- except as discussed below, engage or participate in
negotiations or discussions or provide information to any
person in connection with any proposal that constitutes or
could reasonably be expected to lead to an acquisition
proposal; or;
- enter into any agreement with respect to an acquisition
proposal or approve an acquisition proposal.
ADDITIONAL COVENANTS OF DYNAMIC HOMES AND DYNAMIC LLC
Dynamic Homes and Dynamic LLC have agreed as follows:
- each company will cooperate to file the SEC documents
necessary to complete the merger;
- each company will use its best efforts to make all
governmental filings necessary to consummate the merger, and
to obtain all required consents, licenses, permits, waivers,
approvals, authorizations or orders;
- Dynamic Homes will call a stockholders' meeting as promptly as
practicable for the purpose of voting on the merger and use
its commercially reasonable efforts to solicit votes in favor
of the merger;
- each company will consult with the other regarding any public
announcements it makes concerning the merger;
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- each company will give notices to third parties and use its
best efforts to obtain any third party consents required to
effect the merger; and
- Dynamic Homes will deliver to Merger Sub the resignations of
specified officers and directors.
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CONDITIONS TO CLOSING
The obligations of Dynamic Homes and Dynamic LLC to consummate the
merger are subject to satisfaction or waiver of the following conditions:
- Dynamic Homes stockholders approve and adopt the Merger
Agreement and the merger;
- Completion of the merger by January 2, 2001;
- no governmental authority or court having entered an order
making the merger illegal or otherwise prohibiting its
consummation, or taken any legal action which seeks to prevent
or delay consummation of the merger; and
- the receipt of all necessary governmental consents, approvals
or other authorizations legally required to consummate the
merger from all governmental authorities.
The obligation of Dynamic LLC to consummate the merger is also subject
to the satisfaction or waiver of the following additional conditions:
- the continued truthfulness and accuracy of the representations
and warranties made by Dynamic Homes in the Merger Agreement;
- the performance or compliance in all material respects by
Dynamic Homes with all agreements and covenants required by
the Merger Agreement;
- the lack of a material adverse change in Dynamic Homes'
business;
- no judgment, order, decree or law imposing material
limitations on Dynamic LLC's ability to acquire the stock of
Dynamic Homes, imposing limitations on the ability of Dynamic
LLC or its affiliates to operate the business of Dynamic
Homes, imposing other material sanctions against Dynamic LLC
or any of its officers or directors for consummating the
merger, or requiring divestiture by Dynamic LLC of any
significant portion of the business, assets or property of
Dynamic Homes or of Dynamic LLC due to the consummation of the
merger;
- Dynamic Homes having delivered certain closing documents
contemporaneously with the consummation of the merger;
- the resignations of certain of Dynamic Homes' directors and
officers;
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- specified Dynamic Homes employees having entered into
employment agreements with Dynamic LLC; and
- holders of no more than 10% of all shares of Dynamic Homes
common stock outstanding as of the date of the Special Meeting
having demanded appraisal rights under Minnesota law.
The obligation of Dynamic Homes to consummate the merger is also
subject to the satisfaction or waiver of the following additional conditions:
- the continued truthfulness and accuracy of the representations
and warranties made by Dynamic LLC and Merger Sub in the
Merger Agreement;
- the performance or compliance in all material respects by
Dynamic LLC with all agreements and covenants required by the
Merger Agreement; and
- Dynamic LLC having delivered certain closing documents
contemporaneously with the consummation of the merger.
TERMINATION
The Merger Agreement may be terminated and the merger abandoned at any
time prior to the effective time:
- by mutual consent of Dynamic Homes and Dynamic LLC (on behalf
of Dynamic LLC and Merger Sub);
- by either Dynamic Homes or Dynamic LLC (on behalf of Dynamic
LLC and Merger Sub) if:
- - the transaction is not completed by January 2, 2001,
unless failure to complete the merger by that time is
due to the failure to perform obligations by the
party seeking to terminate;
- - Dynamic Homes stockholder approval is not obtained
at the Dynamic Homes stockholders meeting, or a
final and nonappealable governmental restraint
adversely affecting the merger is in effect;
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- by either Dynamic Homes or Dynamic LLC (on behalf of Dynamic
LLC and Merger Sub) upon the other's breach, subject to
materiality thresholds and cure periods, of a representation,
warranty, covenant or agreement;
- by Dynamic LLC (on behalf of Dynamic LLC and Merger Sub) if
the Dynamic Homes Special Committee:
- - withdraws or modifies its approval of the merger in a
manner adverse to Dynamic LLC;
- - recommends a third-party acquisition proposal to the
stockholders of Dynamic Homes; or
- - resolves to take any of the foregoing actions.
The Merger Agreement generally prevents Dynamic Homes from seeking
acquisition proposals from third parties. Nevertheless, the Merger Agreement
allows Dynamic Homes, consistent with its obligation to its stockholders, to
receive and consider unsolicited third-party acquisition proposals. If a
superior unsolicited third-party acquisition proposal is received, and deemed by
the Special Committee to be in the best interests of the stockholders, the
Merger Agreement may be terminated. Upon such termination of the Merger
Agreement, Dynamic Homes would be required to pay termination fees to Dynamic
LLC, as described in "Fees and Expenses" below.
FEES AND EXPENSES
Except as discussed below, whether or not the merger is consummated,
Dynamic Homes and Dynamic LLC are each responsible for their respective expenses
incurred in connection with the merger, including the preparation of the Merger
Agreement and all fees and expenses of investment bankers, legal counsel and
accountants. Pursuant to the engagement letter, dated September 27, 1999,
Dynamic Homes will pay a fee of approximately $172,600 (less $50,000 previously
paid) to Dougherty & Company LLC upon the closing of the merger.
The following is an estimate of the costs and expenses incurred by
Dynamic Homes in connection with the merger:
TITLE DOLLAR AMOUNT
----- -------------
SEC Filing Fee $ 1,151.20
Printing Expenses and Mailing Expenses *$ 6,500.00
Accounting Fees and Expenses *$ 2,500.00
Transfer Agent Fees and Expenses *$ 9,000.00
Legal Fees and Expenses *$100,000.00
Investment Banker Fee *$172,600.00
Special Committee *$ 18,000.00
Miscellaneous *$ 10,000.00
===========
Total *$319,751.20
*Estimated
Dynamic Homes is required to reimburse Dynamic LLC for all reasonable
out-of-pocket fees and expenses, not to exceed $25,000, incurred by Dynamic LLC
in connection with the Merger Agreement, if the Merger Agreement is terminated:
- by either Dynamic Homes or Dynamic LLC because the
stockholders of Dynamic Homes do not approve the merger at the
stockholders meeting;
- by Dynamic LLC, due to Dynamic Homes breaching, subject to
materiality thresholds and cure periods, any of Dynamic Homes'
representations, warranties, covenants or agreements; or
- by Dynamic LLC, due to Dynamic Homes' Special Committee
withdrawing or modifying its approval of the merger in a
manner adverse to Dynamic LLC, recommending a third-party
acquisition proposal to the stockholders of Dynamic Homes, or
resolving to take any of the foregoing actions.
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In addition to Dynamic Homes' requirement to pay fees and expenses of
$25,000 described above, Dynamic Homes is also required to pay a termination fee
of $200,000 if the Merger Agreement is terminated:
- by Dynamic LLC or Dynamic Homes, at a time when Dynamic LLC is
entitled to terminate the Merger Agreement due to:
- - Dynamic Homes stockholder approval not being
obtained at the Dynamic Homes stockholder meeting,
or
- - Dynamic Homes breaching, subject to materiality
thresholds and cure periods, any of Dynamic Homes'
representations, warranties, covenants or agreements,
and within nine months of such termination Dynamic Homes
enters into an agreement with a third party with respect to an
acquisition proposal;
- by Dynamic LLC, due to a breach by Dynamic Homes of its
obligations not to initiate, solicit or encourage the making
of any acquisition proposal by a third party, or to engage or
participate in negotiations or discussions which facilitate
the making of an acquisition proposal by a third party, or
enter into an agreement with respect to an acquisition
proposal; or
- by Dynamic LLC, due to Dynamic Homes' Special Committee
withdrawing or modifying its approval of the merger in a
manner adverse to Dynamic LLC, recommending a third-party
acquisition proposal to the stockholders of Dynamic Homes, or
resolving to take any of the foregoing actions.
Dynamic LLC is required to reimburse Dynamic Homes for all reasonable
out-of-pocket fees and expenses, not to exceed $25,000, incurred by Dynamic
Homes in connection with the Merger Agreement, if the Merger Agreement is
terminated due to Dynamic LLC breaching, subject to materiality thresholds and
cure periods, any of Dynamic LLC's representations, warranties, covenants or
agreements.
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YOU HAVE APPRAISAL RIGHTS IN THE MERGER
If the merger is completed, holders of Dynamic Homes common stock on
October 15, 2000, who exercised their dissenter's rights and who did not vote in
favor of the Merger Agreement, will have the right to obtain payment for the
"fair value" of their shares, plus interest, in accordance with Sections
302A.471 and 302A.473 of the Minnesota Business Corporation Act ("MBCA"). The
term "fair value" means the value of the shares of common stock immediately
before the effective time of the merger and the term "interest" means interest
commencing five days after the effective time of the merger up to and including
the date of payment at the rate provided by Minnesota law for interest on
verdicts and judgments.
Any Dynamic Homes stockholder contemplating the exercise of dissenters'
rights is urged to review carefully the provisions of Sections 302A.471 and
302A.473 of the MBCA, particularly with respect to the procedural steps required
to perfect dissenters rights. Failure to comply with the statutory requirements
will result in the loss of the stockholder's dissenters' rights. The following
is a summary of the material provisions of the dissenters' rights statute but it
is not a complete statement of the relevant provisions of Minnesota Law. This
summary should be read in conjunction with the full text of Sections 302A.471
and 302A.473, which is attached to this proxy statement as APPENDIX B, and any
amendments to such Sections as may be adopted after the date of this proxy
statement.
FILING WRITTEN OBJECTION
Stockholders of record who desire to exercise their dissenters' rights
must satisfy all of the following conditions. A written notice of intent to
demand fair value for shares must be delivered to the executive offices of
Dynamic Homes before the taking of the stockholder vote to approve the Merger
Agreement at the Special Meeting on November 21, 2000. This written demand must
be in addition to and separate from any proxy or vote against approval of the
Merger Agreement. Voting against, abstaining from voting or failing to vote to
approve the Merger Agreement does not constitute a demand for fair value of the
shares within the meaning of the MBCA.
The written demand should be delivered to the Corporate Secretary of
Dynamic Homes at 525 Roosevelt Avenue, Detroit Lakes, Minnesota 56501. The
written demand should specify the stockholder's name and mailing address, the
number of shares owned and that the stockholder intends to demand the "fair
value," plus interest, of his or her shares.
NO VOTING IN FAVOR OF THE MERGER AGREEMENT
Stockholders electing to exercise their dissenters' rights under the
MBCA must not vote for approval of the Merger Agreement. A stockholder's failure
to vote against approval of the Merger Agreement will not constitute a waiver of
dissenters' rights. However, if a stockholder returns a signed proxy but does
not specify a vote against approval of the Merger Agreement or direction to
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abstain, the proxy will be voted for approval of the Merger Agreement, and the
stockholder's dissenters' rights will be waived.
A stockholder may not assert dissenters' rights as to less than all of
the shares registered in such holder's name except where certain shares are
beneficially owned by another person but registered in such holder's name. If a
record owner, such as a broker, nominee, trustee or custodian, wishes to dissent
with respect to shares beneficially owned by another person, the stockholder
must dissent with respect to all of such shares and must disclose the name and
address of the beneficial owner on whose behalf the dissent is made. A
beneficial owner of shares of Dynamic Homes common stock who is not the record
owner of those shares may assert dissenters' rights as to shares held on such
person's behalf, provided that the beneficial owner submits a written consent of
the record owner to Dynamic Homes at or before the time such rights are
asserted.
NOTICE BY DYNAMIC HOMES
After approval of the Merger Agreement by the stockholders at the
Special Meeting, Dynamic Homes will send a written notice to each stockholder
who filed a written demand for dissenters' rights. The notice will contain
- the address to which the stockholder must send a demand for
payment and the stock certificates in order to obtain payment;
- the date by which they must be received;
- any restrictions on transfer of uncertificated shares that
will apply after the demand for payment is received;
- a form to be used to certify the date on which such
stockholder, or the beneficial owner on whose behalf the
stockholder dissents, acquired the shares, or an interest in
them, and to demand payment; and
- a copy of Sections 302A.471 and 302A.473 of the MBCA and a
brief description of the procedures to be followed under these
Sections.
REMITTANCE OF CERTIFICATES
In order to receive the fair value for his or her shares under Section
302A.473, a dissenting stockholder must, within 30 days after the date Dynamic
Homes gives the notice described in the preceding paragraph, demand payment and
deposit his or her stock certificates, at the address specified in the notice.
Under Minnesota law, notice by mail is given by Dynamic Homes when deposited in
the U.S. mail. A dissenting stockholder will retain all rights as a stockholder
until the effective time of the merger. After a valid demand for payment and the
related stock certificates are timely received, or after the effective time of
the merger, whichever is later, Dynamic Homes will
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remit to each dissenting stockholder who has complied with the statutory
requirements the amount that Dynamic Homes estimates to be the fair value of the
dissenting stockholder's shares, with interest commencing five days after the
effective time of the merger at a rate prescribed by statute.
Dynamic Homes has no current intention of offering to pay more than
$2.55 per share as its estimate of fair value of a dissenting stockholder's
shares and reserves the right to offer less. Dynamic Homes will also send its
closing balance sheet and statement of income for a fiscal year ending not more
than 16 months before the effective time of the merger, together with
- the latest available interim financial statements,
- an estimate of the fair value of the stockholder's shares and
a brief description of the method used to reach the estimate,
- a brief description of the procedure to be followed if the
dissenting stockholder decides to make a demand for a
supplemental payment and
- copies of Sections 302A.471 and 302A.473 of the MBCA.
As described below, Dynamic Homes is not required at that time to send
its estimated payment to any person who was not a stockholder and who is not
dissenting on behalf of a person who was the beneficial owner of shares of
common stock, of Dynamic Homes on October 15, 2000. If, however, the merger is
not completed or Dynamic Homes disputes a stockholder's right to dissent,
Dynamic Homes will not send to the stockholder the fair value of such
stockholder's share or the additional information listed above.
ACCEPTANCE OR SETTLEMENT OF DEMAND
If the dissenting stockholder believes that the amount remitted by
Dynamic Homes is less than the fair value of the holder's shares, plus interest,
if any, the stockholder must give written notice to Dynamic Homes of such
holder's own estimate of the fair value of the shares, plus interest, if any,
within 30 days after the mailing date of the remittance and demand payment of
the difference. The notice must be given at the executive offices of Dynamic
Homes at the address set forth above. A stockholder who fails to give written
notice within this time period is entitled only to the amount remitted by
Dynamic Homes.
Within 60 days after receipt of a demand for supplemental payment,
Dynamic Homes must either (1) pay the stockholder the amount demanded or agreed
to by the stockholder after discussion with Dynamic Homes, or (2) petition a
court in Becker County, Minnesota for the determination of the fair value of the
shares, plus interest, if any. Upon payment of the agreed value, the dissenting
stockholder will cease to have any interest in Dynamic Homes. Dynamic Homes has
no current intention of offering to pay more than $2.55 per share in respect of
any dissenting stockholder's shares.
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COURT DETERMINATION
If, within the 60 days after the receipt of demand for supplemental
payment, any one or more of the dissenting stockholders and Dynamic Homes do not
agree on the fair value of the shares, then Dynamic Homes must file a petition
with the court to obtain a judicial finding and determination of the fair value
of the dissenting stockholder's shares of Dynamic Homes common stock. The
petition must name as parties all stockholders who have demanded supplemental
payment and have not reached an agreement with Dynamic Homes.
The court, after determining that the stockholder or stockholders in
question have complied with all statutory requirements, may use any valuation
method or combination of methods it deems appropriate to use, whether or not
used by Dynamic Homes or a dissenting stockholder, and may appoint appraisers to
recommend the amount of the fair value of the shares. The court's determination
will be binding on all stockholders of Dynamic Homes who properly exercised
dissenters' rights and did not agree with Dynamic Homes as to the fair value of
the shares and may be less than, equal to or more than the merger consideration.
Dissenting stockholders are entitled to judgment in cash for the amount by which
the court-determined fair value per share, plus interest, exceeds the amount per
share, plus interest, remitted to the stockholders by Dynamic Homes. The
stockholders shall not be liable to Dynamic Homes for any amounts paid by
Dynamic Homes which exceed the fair value of the shares as determined by the
court, plus interest.
The costs and expenses of such a proceeding, including the expenses and
compensation of any appraisers, will be determined by the court and assessed
against Dynamic Homes, except that the court may, in its discretion, assess part
or all of those costs and expenses against any stockholder whose action in
demanding supplemental payment is found to be arbitrary, vexatious or not in
good faith. The court may award fees and expenses to an attorney for the
dissenting stockholders out of the amount, if any, awarded to such stockholders.
The court may assess fees and expenses of experts or attorneys against any
person who acted arbitrarily, vexatiously or not in good faith in bringing the
proceeding and also may award fees and expenses of experts or attorneys against
Dynamic Homes if Dynamic Homes fails to comply substantially with Section
302A.473.
Stockholders considering exercising dissenters' rights should bear in
mind that the fair value of their shares determined under Sections 302A.471 and
302A.473 of the MBCA could be more than, the same as or, in certain
circumstances, less than the consideration they would receive pursuant to the
Merger Agreement if they did not seek appraisal of their shares.
Under Section 302A.471 a stockholder of Dynamic Homes has no right at
law or equity to set aside the adoption of the Merger Agreement or the
consummation of the merger, unless such stockholder can establish that adoption
or consummation was fraudulent with respect to such stockholder or Dynamic
Homes.
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Any holder who fails to comply fully with the statutory procedures
summarized above within the time periods specified above will forfeit his or her
rights of dissent and will receive the cash and/or stock consideration payable
in the merger for his or her shares, which may be more or less than or equal to
the fair value of the shares determined under section 302A.473.
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MARKET PRICE OF DYNAMIC HOMES COMMON STOCK
Dynamic Homes common stock is quoted on the NASDAQ Small-Cap System
under the symbol "DYHM." The following table sets forth, for the periods
indicated, the high and low sales prices per share for Dynamic Homes common
stock as reported on the NASDAQ Small-Cap System.
High Low
-------- -------
1998
First Quarter $ 2 7/16 $ 1 3/4
Second Quarter 2 1/16 1 3/4
Third Quarter 2 1/4 1 9/16
Fourth Quarter 1 7/8 1 7/16
1999
First Quarter $ 1 7/8 $ 1 3/8
Second Quarter 1 11/16 1 1/4
Third Quarter 1 11/16 1 5/16
Fourth Quarter 1 5/8 1 1/16
2000
First Quarter $ 2 1/8 $ 1 5/32
Second Quarter 2 3/16 1 5/16
Third Quarter 2 11/32 2 3/16
The closing market price per share of Dynamic Homes common stock on
June 20, 2000, which was the last full trading day immediately preceding the
public announcement of the proposed merger, was $1.94. On November 20, 2000,
which is the latest practicable date prior to the printing of this proxy
statement, the closing price for Dynamic Homes common stock was $2.41.
As of November 20, 2000, there were 2,240,850 shares of Dynamic Homes
common stock outstanding, held by approximately 367 stockholders of record of
Dynamic Homes common stock. This number does not reflect the number of persons
or entities who may hold their stock in nominee or "street" name through
brokerage firms.
Dynamic Homes has never paid any cash dividends on its common stock,
nor does it have any intention of doing so in the near future.
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BENEFICIAL OWNERSHIP OF MANAGEMENT AND
PRINCIPAL STOCKHOLDERS
The following table sets forth as of November 20, 2000, information
relating to the beneficial ownership of Dynamic Homes' common stock by (a) each
person known by Dynamic Homes to be the beneficial owner of more than five
percent (5%) of the outstanding shares of Dynamic Homes common stock, (b) each
executive officer, (c) each director, and (d) all executive officers and
directors as a group. As of November 20, 2000, 2,240,850 shares of the Dynamic
Homes' common stock were outstanding. Unless otherwise indicated, all persons
named as beneficial owners of common stock have sole voting power and sole
investment power with respect to the shares indicated as beneficially owned.
Name and No. of Approximate
Address Shares Owned(1) Percentage Owned(1)
------- --------------- -------------------
D. Raymond Madison 507,560(2) 22.65
2116 Spruce Drive
Brainerd, MN 56401
Clyde R. Lund, Jr. 64,774 2.86
31338 Cty. Hwy. 64
Frazee, MN 56544
Israel Mirviss 50,000 2.21
7300 Metro Blvd.
Suite #500
Minneapolis, MN 55439
Ronald L. Gustafson 50,300 2.22
4 White Birch Drive
Superior, WI 54880
Peter K. Pichetti 30,000 1.32
8039 East Spirit Cove Dr.
Duluth, MN 55807
39
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All directors and 206,074 8.78
executive officers
as a group (7 persons)
HCI Investment 241,750(3) 10.79
Company
One St. Augustine Dr.
Hwy. 77
Winnebago, NE 68071
(1) Under the rules of the SEC, a person is deemed to be the beneficial
owner of securities that can be acquired by such person within 60 days
from the date beneficial ownership is determined, upon the exercise of
warrants or options. Each beneficial owner's percentage ownership is
based upon 2,240,850 shares of Dynamic Homes Common Stock issued and
outstanding as of November 20, 2000, and is determined by assuming
options that are held by such person (but not those held by any other
person) and which are exercisable within 60 days of November 20, 2000,
have been exercised. Amounts include shares of Common Stock subject to
presently exercisable stock options held by the following: 25,000 each
by Clyde R. Lund, Jr., Israel Mirviss, Ronald L. Gustafson, and Peter
K. Pichetti, and 105,000 by all directors and officers as a group.
(2) Mr. Madison and his wife share voting and investment power with respect
to 83,890 shares of those shown on the table.
(3) Information as identified in Schedule 13D as filed by HCI Investment
Company with SEC on December 15, 1997 and 13D/A filed on March 3, 1999.
INTEREST IN SECURITIES OF DYNAMIC HOMES
Peter K. Pichetti owns 5,000 shares of the common stock of Dynamic
Homes and has an option to purchase an additional 25,000 shares at a price of
$2.31 per share. Ronald L. Gustafson owns 25,300 shares of the common stock of
Dynamic Homes and has an option to purchase an additional 25,000 shares at a
price of $2.31 per share. The shares of Messrs. Pichetti and Gustafson, and the
shares of all other directors and officers of the Company, will convert into the
right to receive cash of $2.55 per share upon the closing of the merger.
Neither Dynamic LLC nor Merger Sub owns any shares of the common stock
of Dynamic Homes, and will own no such stock prior to the closing of the merger.
Following the closing, Dynamic LLC will own 100% of the outstanding common stock
of Dynamic Homes and Merger Sub will no longer exist.
Neither Peter K. Pichetti nor Ronald L. Gustafson, nor Dynamic LLC nor
Merger Sub, acquired or sold any shares of the common stock of Dynamic Homes
during the past 60 days.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of the Company as of December 31,
1999, and December 31, 1998, and for each of the years in the two-year period
ended December 31, 1999, attached as Appendix C to this proxy statement, have
been audited by Eide Bailly LLP, independent public accountants. The Board of
Directors of the Company has appointed Eide Bailly LLP as independent auditors
for the Company for the year ending December 31, 2000.
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AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of
the Exchange Act and, in accordance therewith, files reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copies made at the public reference
facilities of the Commission at Room 1024, 450 Fifth Street NW, Washington, D.C.
20549 (phone 202-942-8090) and the Commission's regional offices at Seven World
Trade Center, Suite 1300, New York, NY 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661. Copies of such material can also
be obtained from the Public Reference Section of Commission at its Washington,
D.C. address at prescribed rates. The Commission also maintains a web site
address, http://www.sec.gov. The Company's common stock is quoted and traded on
the NASDAQ Small-Cap System and such reports, proxy statements and other
information may be inspected at the offices of NASDAQ Operations, 1735 K Street
N.W., Washington, D.C. 20006.
ADDITIONAL INFORMATION
This proxy statement contains information disclosed pursuant to Rule
13e-3 under the Exchange Act, which governs so-called "going private"
transactions by certain issuers and their affiliates. Dynamic LLC, merger Sub,
Messrs Pichetti and Gustafson, and the Company are filing a Rule 13e-3
Transaction Statement ("Schedule 13E-3") with the Commission to furnish
information with respect to the transactions described herein. This proxy
statement does not contain all of the information set forth in the Schedule
13E-3, parts of which are omitted in accordance with the regulations of the
Commission. The Schedule 13E-3, and any amendments thereto, including exhibits
filed as part thereof, will be available for inspection and copying at the
offices of the Commission as set forth above.
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OTHER MATTERS
You should rely only on the information contained in this proxy
statement to vote your shares at the meeting. Dynamic Homes has not authorized
anyone to provide you with information that is different from what is contained
in this proxy statement. This proxy statement is dated November ___, 2000. You
should not assume that the information contained in this proxy statement is
accurate as of any date other than that date, and the mailing of this document
to stockholders is not intended to create any implication to the contrary.
In order to be considered for inclusion in the proxy statement for the
next annual meeting, if any, of stockholders of Dynamic Homes, any stockholder
proposal intended to be presented at the meeting must be received by Dynamic
Homes on or before December 15, 2000. The annual meeting will be held only if
the merger is not consummated.
The Board of Directors does not intend to bring before the meeting any
matters other than those set forth herein, and has no present knowledge that any
other matters will or may be brought before the meeting by others. If, however,
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed form of proxy to vote the proxies in accordance
with their judgment.
BY ORDER OF THE BOARD OF DIRECTORS
Detroit Lakes, Minnesota -------------------------
November ____, 2000 Chief Executive Officer
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APPENDIX A
AGREEMENT
AND PLAN OF MERGER
BY AND AMONG
DYNAMIC HOMES, LLC,
DYNAMIC ACQUISITIONS, INC.
AND
DYNAMIC HOMES, INC.
--------------
September 25, 2000
--------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
ARTICLE I
<S> <C>
THE MERGER...............................................................................................1
1.1. The Merger......................................................................................1
1.2. Effect of Merger................................................................................1
1.3. Effective Time..................................................................................2
1.4. Articles of Incorporation; Bylaws...............................................................2
1.5. Directors and Officers..........................................................................2
1.6. Taking of Necessary Action; Further Action......................................................2
1.7. The Closing.....................................................................................2
ARTICLE II
CONVERSION OF SECURITIES.................................................................................3
2.1. Conversion of Securities........................................................................3
2.2. Stock Options...................................................................................3
2.3. Intentionally omitted...........................................................................4
2.4. Dissenting Shares...............................................................................4
2.5. Exchange of Certificates........................................................................4
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................................6
3.1. Organization and Qualification..................................................................6
3.2. Capital Stock of Subsidiaries...................................................................6
3.3. Capitalization..................................................................................7
3.4. Authority Relative to this Agreement............................................................7
3.5. No Conflict; Required Filings and Consents......................................................8
3.6. SEC Filings; Financial Statements...............................................................8
3.7. Absence of Changes or Events....................................................................9
3.8. Absence of Certain Developments................................................................10
3.9. Litigation.....................................................................................10
3.10. Title to Properties............................................................................10
3.11. Certain Contracts..............................................................................10
3.12. Compliance with Law............................................................................11
3.13. Intellectual Property Rights; Year 2000........................................................12
3.14. Taxes..........................................................................................13
3.15. Employees......................................................................................15
3.16. Employee Benefit Plans.........................................................................15
3.17. Environmental Matters..........................................................................18
3.18. Insurance......................................................................................19
3.19. Anti-Bribery Compliance........................................................................19
3.20. Export Control Laws............................................................................19
3.21. Finders or Brokers..............................................................................19
3.22. Board Recommendation...........................................................................19
<PAGE>
3.23. Vote Required..................................................................................19
3.24. Intentionally omitted..........................................................................20
3.25. State Takeover Statutes........................................................................20
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MERGER SUB AND PARENT.................................................20
4.1. Organization and Qualification.................................................................20
4.2. Authority Relative to this Agreement...........................................................20
4.3. No Conflicts; Required Filings and Consents....................................................21
4.4. Funds..........................................................................................21
ARTICLE V
COVENANTS AND AGREEMENTS ...............................................................................21
5.1. Conduct of Business of the Company Pending the Merger..........................................21
5.2. Preparation of Proxy Statement.................................................................24
5.3 Meeting of Stockholders........................................................................25
5.4. Additional Agreements, Cooperation.............................................................25
5.5. Publicity......................................................................................25
5.6. No Solicitation................................................................................26
5.7. Access to Information..........................................................................27
5.8. Notification of Certain Matters................................................................27
5.9. Resignation of Officers and Directors..........................................................28
5.10 Intentionally omitted..........................................................................28
5.11. Stockholder Litigation.........................................................................28
5.12. Intentionally omitted..........................................................................28
5.13. Determination of Optionholders.................................................................28
5.14. Preparation of Tax Returns.....................................................................28
5.15. SEC Filings; Compliance........................................................................29
ARTICLE VI
CONDITIONS TO CLOSING...................................................................................29
6.1. Conditions to Each Party's Obligation to Effect the Merger.....................................29
6.2. Conditions to Obligations of Parent............................................................29
6.3. Conditions to Obligations of the Company.......................................................31
ARTICLE VII
TERMINATION.............................................................................................31
7.1. Termination....................................................................................31
7.2. Effect of Termination..........................................................................33
7.3. Fees and Expenses..............................................................................33
<PAGE>
ARTICLE VIII
MISCELLANEOUS...........................................................................................34
8.1. Nonsurvival of Representations and Warranties..................................................34
8.2. Waiver.........................................................................................34
8.3. Notices........................................................................................34
8.4. Counterparts...................................................................................35
8.5. Interpretation.................................................................................35
8.6. Amendment......................................................................................36
8.7. No Third Party Beneficiaries...................................................................36
8.8. Governing Law..................................................................................36
8.9. Entire Agreement...............................................................................36
8.10. Validity.......................................................................................36
</TABLE>
<PAGE>
EXHIBITS
EXHIBITS
A Articles and Plan of Merger
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated
September 25, 2000, is made and entered into by and among Dynamic Homes, LLC, a
Minnesota limited liability company ("Parent"), Dynamic Acquisitions, Inc., a
Minnesota corporation and wholly owned subsidiary of Parent ("Merger Sub"), and
Dynamic Homes Inc., a Minnesota corporation (the "Company"). Merger Sub and the
Company are sometimes collectively referred to as the "Constituent
Corporations."
WITNESSETH:
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and
the Company have determined that it is advisable and in the best interests of
the respective corporations and their stockholders that Merger Sub be merged
with and into the Company in accordance with the Minnesota Business Corporations
Act (the "MBCA") and the terms of this Agreement, pursuant to which the Company
will be the surviving corporation and will be a wholly owned subsidiary of
Parent (the "Merger"); and
WHEREAS, Parent, Merger Sub and the Company desire to make certain
representations, warranties, covenants, and agreements in connection with, and
establish various conditions precedent to, the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth in this Agreement, the parties hereto,
intending to be legally bound, agree as follows:
ARTICLE I
THE MERGER
1.1. The Merger. At the Effective Time (as defined in Section 1.3
hereof), subject to the terms and conditions of this Agreement and the Articles
and Plan of Merger (as defined in Section 1.3 hereof), Merger Sub shall be
merged with and into the Company, the separate existence of Merger Sub shall
cease, and the Company shall continue as the surviving corporation. The Company,
in its capacity as the corporation surviving the Merger, is hereinafter
sometimes referred to as the "Surviving Corporation."
1.2. Effect of Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Articles and Plan of Merger and the
applicable provisions of the MBCA. Without limiting the generality of the
foregoing, the Surviving Corporation shall succeed to and possess all the
properties, rights, privileges, immunities, powers, franchises and purposes, and
be subject to all the duties, liabilities, debts, obligations, restrictions and
disabilities, of the Constituent Corporations, all without further act or deed.
1
<PAGE>
1.3. Effective Time. Subject to the terms and conditions of this
Agreement, the parties hereto will cause a copy of the Articles and Plan of
Merger, substantially in the form attached hereto as EXHIBIT A (the "Articles
and Plan of Merger") to be executed, delivered and filed with the Secretary of
State of the State of Minnesota in accordance with the applicable provisions of
the MBCA at the time of the Closing (as defined in Section 1.7 hereof). The
Merger shall become effective upon filing of the Articles and Plan of Merger
with the Secretary of State of the State of Minnesota or at such later time as
may be agreed to by the parties and set forth in the Articles and Plan of
Merger. The time of effectiveness is herein referred to as the "Effective Time."
The day on which the Effective Time shall occur is herein referred to as the
"Effective Date."
1.4. Articles of Incorporation; Bylaws. From and after the Effective
Time and until further amended in accordance with applicable law, the Articles
of Incorporation of the Company, as in effect immediately prior to the Effective
Time, shall be the Articles of Incorporation of the Surviving Corporation, as
amended and as set forth in an exhibit to the Articles and Plan of Merger.
From and after the Effective Time and until further amended in
accordance with law, the Bylaws of Merger Sub as in effect immediately prior to
the Effective Time shall be the Bylaws of the Surviving Corporation.
1.5. Directors and Officers. From and after the Effective Time, the
directors of the Surviving Corporation shall be the persons who were the
directors of Merger Sub immediately prior to the Effective Time, and the
officers of the Surviving Corporation shall be the persons who were the officers
of Merger Sub immediately prior to the Effective Time . Said directors and
officers of the Surviving Corporation shall hold office for the term specified
in, and subject to the provisions contained in, the Articles of Incorporation
and the Bylaws of the Surviving Corporation and applicable law. If, at or after
the Effective Time, a vacancy shall exist on the Board of Directors or in any of
the offices of the Surviving Corporation, such vacancy shall be filled in the
manner provided in the Articles of Incorporation and the Bylaws of the Surviving
Corporation.
1.6. Taking of Necessary Action; Further Action. Parent, Merger Sub and
the Company, respectively, shall each use their best efforts to take all such
action as may be necessary or appropriate to effectuate the Merger under the
MBCA at the time specified in Section 1.3 hereof. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all properties, rights, privileges, immunities,
powers and franchises of either of the Constituent Corporations, the officers of
the Surviving Corporation are fully authorized in the name of each Constituent
Corporation or otherwise to take, and shall take, all such lawful and necessary
action.
1.7. The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of Johnson, Killen &
Seiler, P.A., 230 West Superior Street, Suite 811, Duluth, Minnesota, or Lommen,
Nelson , Cole & Stageberg, P.A., 1800 IDS
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Center, 80 South 8th Street, Minneapolis, Minnesota as the parties agree within
seven business days after the date on which the last of the conditions set forth
in Article VI shall have been satisfied or waived, or at such other place and on
such other date as is mutually agreeable to Parent and the Company (the "Closing
Date"). The Closing will be effective as of the Effective Time.
ARTICLE II
CONVERSION OF SECURITIES
2.1. Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of Parent, Merger Sub, the Company,
the holder of any shares of Company Common Stock (defined below) or the holder
of any options, warrants or other rights to acquire or receive shares of Company
Common Stock, the following shall occur:
(a) Conversion of Company Common Stock. At the Effective Time, each
share of common stock, par value $.10 per share, of the Company (the "Company
Common Stock") issued and outstanding immediately prior to the Effective Time
(other than any shares of Company Common Stock to be canceled pursuant to
Section 2.1(b) hereof or any Dissenting Shares (as defined in Section 2.4
hereof)) will be canceled and extinguished and be converted automatically into
the right to receive an amount of cash equal to the Per Share Amount (as defined
in Section 2.1(e)(i) hereof), without interest thereon, upon surrender of the
certificate formerly representing such share.
(b) Cancellation of Company Common Stock Owned by Parent or Company. At
the Effective Time, all shares of Company Common Stock that are owned by the
Company as treasury stock and each share of Company Common Stock owned by Parent
or any direct or indirect wholly owned subsidiary of Parent or of Company
immediately prior to the Effective Time shall be canceled and extinguished
without any conversion thereof.
(c) Capital Stock of Merger Sub. At the Effective Time, each share of
common stock, no par value, of Merger Sub ("Merger Sub Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into and
exchanged for one validly issued, fully paid and nonassessable share of common
stock, $.10 par value, of the Surviving Corporation, and the Surviving
Corporation shall be a wholly owned subsidiary of Parent. Each stock certificate
of Merger Sub evidencing ownership of any such shares shall continue to evidence
ownership of such shares of capital stock of the Surviving Corporation.
(d) Per Share Amount. The "Per Share Amount" shall be equal to $2.55.
2.2. Stock Options.
(a) On or before the Effective Time, each outstanding option to
purchase shares of Company Common Stock (each, a "Company Option"), whether
vested or unvested, exercisable or not exercisable, shall be deemed to have been
exercised by the holder thereof, whereupon all such holders of each Company
Option shall be entitled to a cash payment at the Effective Time
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in an amount equal to the difference between the Per Share Amount and the
exercise price of each such Company Option.
(b) At the Effective Time, each Company Option will be canceled and
extinguished and be converted automatically into the right to receive the amount
of cash provided for in Section 2.2(a) hereof, without interest thereon, upon
surrender of the Company Option to the Parent.
2.3. Intentionally omitted.
2.4. Dissenting Shares.
(a) Notwithstanding anything in this Agreement to the contrary, shares
of Company Common Stock that are issued and outstanding immediately prior to the
Effective Time and which are held by stockholders who have not voted such shares
in favor of the Merger, who shall have delivered, prior to any vote on the
Merger, a written demand for appraisal of such shares in the manner provided in
Sections 302A.471 and 302A.473 of the MBCA and who, as of the Effective Time,
shall not have effectively withdrawn or lost such right to dissenters' rights
("Dissenting Shares") shall not be converted into or represent a right to
receive the Per Share Amount pursuant to Section 2.1 hereof, but the holders
thereof shall be entitled only to such rights as are granted by Sections
302A.471 and 302A.473 of the MBCA. Each holder of Dissenting Shares who becomes
entitled to payment for such shares pursuant to Sections 302A.471 and 302A.473
of the MBCA shall receive payment therefor from the Surviving Corporation in
accordance with the MBCA; provided, however, that if any such holder of
Dissenting Shares shall have effectively withdrawn such holder's demand for
appraisal of such shares or lost such holder's right to appraisal and payment of
such shares under Sections 302A.471 and 302A.473 of the MBCA, such holder or
holders (as the case may be) shall forfeit the right to appraisal of such shares
and each such share shall thereupon be deemed to have been canceled,
extinguished and converted, as of the Effective Time, into and represent the
right to receive payment from the Surviving Corporation of the Per Share Amount
as provided in Section 2.1 hereof.
2.5. Exchange of Certificates.
(a) Prior to the Effective Time, Parent shall designate a commercial
bank, trust company or other financial institution, which may include Company's
stock transfer agent, to act as disbursement agent ("Disbursement Agent") in the
Merger.
(b) Promptly after the Effective Time, Parent shall make available to
the Disbursement Agent for exchange in accordance with this Article II, cash in
an amount sufficient to permit payment of the aggregate Per Share Amount
pursuant to Section 2.1 hereof (the "Exchange Fund").
(c) Promptly, and in any event no later than five business days after
the Effective Time, the Parent shall cause to be mailed to each holder of record
of a certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company
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Common Stock (the "Certificates") (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to the
Disbursement Agent, and shall be in such form and have such other provisions as
Parent may reasonably specify and which shall be reasonably acceptable to the
Company) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the Per Share Amount. Upon surrender of a
Certificate for cancellation to the Disbursement Agent, together with such
letter of transmittal, duly completed and validly executed, and such other
documents as may be reasonably required pursuant to such instructions, the
holder of such Certificate shall be entitled to receive in exchange a check
representing the Per Share Amount in accordance with Section 2.1, and the
Certificate so surrendered shall forthwith be canceled. Until surrendered as
contemplated by this Section 2.5, each Certificate that, prior to the Effective
Time, represented shares of Company Common Stock will be deemed from and after
the Effective Time, for all corporate purposes, to evidence the right to receive
the Per Share Amount, if any, multiplied by the number of shares of Company
Common Stock such certificate represented.
(d) None of Parent, the Surviving Corporation or the Disbursement Agent
shall be liable to any holder of shares of Company Common Stock for any amount
properly delivered to a public official in compliance with any abandoned
property, escheat or similar law.
(e) At the Effective Time, the stock transfer books of the Company
shall be closed and there shall be no further registration of transfers of
shares of Company Common Stock thereafter on the records of the Company, except
in favor of the Company. From and after the Effective Time, the holders of
certificates representing shares of Company Common Stock outstanding immediately
prior to the Effective Time shall cease to have any rights with respect to such
shares of Company Common Stock except as otherwise provided in this Agreement or
by law.
(f) Subject to any applicable escheat or similar laws, any portion of
the Exchange Fund that remains unclaimed by the former stockholders of the
Company for one year after the Effective Time shall be delivered by the
Disbursement Agent to Parent, upon demand of Parent, and any former stockholders
and optionholders of the Company shall thereafter look only to Parent for
satisfaction of their claim for cash in exchange for their shares of Company
Common Stock pursuant to the terms of Section 2.1 hereof and 2.2.
(g) If any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact, in form and substance acceptable to the
Disbursement Agent, by the person claiming such Certificate to be lost, stolen
or destroyed, and complying with such other conditions as the Disbursement Agent
may reasonably impose (including the execution of an indemnification undertaking
or the posting of an indemnity bond or other surety in favor of the Disbursement
Agent and Parent with respect to the Certificate alleged to be lost, stolen or
destroyed), the Disbursement Agent will deliver to such person the amount as may
be required pursuant to Section 2.1 hereof.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Merger Sub and Parent that the
statements contained in this Article III are true and correct, except as set
forth in the letter delivered by the Company to Merger Sub on the date hereof
(the "Company Disclosure Letter") (which Company Disclosure Letter sets forth
the exceptions to the representations and warranties contained in this Article
III under captions referencing the Sections to which such exceptions apply):
3.1. Organization and Qualification. Each of the Company and its
Subsidiaries (as defined below) is a company (or similar entity with corporate
characteristics including limited liability of stockholders or other owners)
duly organized, validly existing, duly registered and, if applicable, in good
standing under the laws of the jurisdiction of its organization and each such
entity has all requisite corporate (or similar) power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Each of the Company and its Subsidiaries is duly qualified or
licensed to carry on its business as it is now being conducted, and is qualified
to conduct business, in each jurisdiction where the character of its properties
owned or leased or the nature of its activities makes such qualification
necessary, except for failures to be so qualified that would not, individually
or in the aggregate, have, or would not reasonably be expected to have, a
Company Material Adverse Effect (as defined below). Neither the Company nor any
of its Subsidiaries is in violation of any of the provisions of its Articles of
Incorporation or other applicable charter document (any such document of any
business entity hereinafter referred to as its "Charter Document") or its
Bylaws, or other applicable governing document (any such documents of any
business entity hereinafter referred to as its "Governing Document"). The
Company has made available to Parent accurate and complete copies of the
respective Charter Documents and Governing Documents, as currently in effect, of
each of the Company and its Subsidiaries. As used in this Agreement, the term
"Company Material Adverse Effect" means any change, effect, event or condition
that (i) has a material adverse effect on the assets, business, results of
operations or financial condition of the Company and its Subsidiaries, taken as
a whole (other than any such change, effect, event or condition that arises from
changes in general economic conditions or conditions affecting the Company's
industry generally, or such changes, effects, events or conditions resulting
from the consummation of the transactions contemplated hereby); or (ii) would
prevent or materially delay the Company's ability to consummate the transactions
contemplated hereby. As used in this Agreement, the term "Subsidiary" when used
with respect to any party means any corporation or other organization, whether
incorporated or unincorporated, of which such party directly or indirectly owns
or controls at least a majority of the securities or other interests having by
their terms ordinary voting power to elect a majority of the board of directors
or others performing similar functions.
3.2. Capital Stock of Subsidiaries. Neither the Company nor any of its
Subsidiaries owns, controls or holds with the power to vote, directly or
indirectly, of record, beneficially or otherwise, any share capital, capital
stock or any equity or ownership interest in any company, corporation,
partnership, association, joint venture, business, trust or other entity, except
for the Subsidiaries described in the Company SEC Reports (as defined in Section
3.6(a) hereof) or listed in Section 3.2 of the Company Disclosure Letter, and
except for ownership of securities
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in any publicly traded company held for investment by the Company or any of its
Subsidiaries and comprising less than five percent of the outstanding stock of
such company. Except as set forth in Section 3.2 of the Company Disclosure
Letter, the Company is directly or indirectly the registered, record and
beneficial owner of all of the outstanding share capital or shares of capital
stock (or other ownership interests having by their terms ordinary voting power
to elect a majority of directors or others performing similar functions with
respect to such Subsidiary) of each of its Subsidiaries, there are no proxies
with respect to such shares, and no equity securities of any of such
Subsidiaries are or may be required to be issued by reason of any options,
warrants, scrip, rights to subscribe for, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, share capital or shares of any capital stock of any such Subsidiary, and
there are no contracts, commitments, understandings or arrangements by which the
Company or any such Subsidiary is bound to issue, transfer or sell any share
capital or shares of such capital stock or securities convertible into or
exchangeable for such shares. Other than as set forth in Section 3.2 of the
Company Disclosure Letter, all of such shares so owned by the Company are
validly issued, fully paid and nonassessable and are owned by it free and clear
of any claim, lien, pledge, security interest or other encumbrance of any kind
(collectively "Liens") with respect thereto.
3.3. Capitalization. The authorized capital stock of the Company
consists of 5,000,000 shares of Company Common Stock . As of the close of
business on June 30, 2000 (the "Company Measurement Date"), (a) 2,240,850 shares
of Company Common Stock were issued and outstanding, (c) the Company had 43,080
shares of Company Common Stock held in its treasury, (d) in excess of 205,000
shares of Company Common Stock were reserved for issuance under Company Options,
(e) Company Options to purchase 205,000 shares of Company Common Stock in the
aggregate had been granted and remained outstanding under Company Options, (f)
no warrants to purchase shares of Company Common Stock were outstanding and (g)
except for the Company Options, there were no outstanding Rights (defined
below). Since the Company Measurement Date, no additional shares in the Company
have been issued, except pursuant to the exercise of Company Options outstanding
at the Company Measurement Date, and no Rights have been granted. Except as
described in the preceding sentence or as set forth in Section 3.3 of the
Company Disclosure Letter, the Company has no outstanding bonds, debentures,
notes or other securities or obligations the holders of which have the right to
vote or which are convertible into or exercisable for securities having the
right to vote on any matter on which any stockholder of the Company has a right
to vote. All issued and outstanding shares of Company Common Stock are duly
authorized, validly issued, fully paid, nonassessable and free of preemptive
rights. Except as set forth in Section 3.3 of the Company Disclosure Letter,
there are not as of the date hereof any existing options, warrants, stock
appreciation rights, stock issuance rights, calls, subscriptions, convertible
securities or other rights which obligate the Company or any of its Subsidiaries
to issue, exchange, transfer or sell any shares in the capital of the Company or
any of its Subsidiaries (collectively, "Rights"). As of the date hereof, there
are no outstanding contractual obligations of the Company or any of its
Subsidiaries to repurchase, reprice, redeem or otherwise acquire any shares of
the capital of the Company or any of its Subsidiaries. As of the date hereof,
there are no outstanding contractual obligations of the Company to vote or to
dispose of any shares in the capital of any of its Subsidiaries.
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3.4. Authority Relative to this Agreement. The Company has the
requisite corporate power and authority to execute and deliver, and perform its
obligations under, this Agreement and, subject to obtaining the necessary
approval of its stockholders, to consummate the Merger and the other
transactions contemplated hereby under applicable law. The execution and
delivery of this Agreement and the consummation of the Merger and other
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of the Company by and through that certain Special Committee
appointed by the Board of Directors of the Company to act in its stead in
connection with the transactions contemplated herein (hereinafter the "Board of
Directors" or "Company Board" or "Special Committee") and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate the Merger or other transactions contemplated hereby (other
than approval by the Company's stockholders required by applicable law). This
Agreement has been duly and validly executed and delivered by the Company and,
assuming the due authorization, execution and delivery hereof by Parent and
Merger Sub, constitutes a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except to the
extent that its enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting the enforcement
of creditors rights generally or by general equitable principles.
3.5. No Conflict; Required Filings and Consents.
(a) Neither the execution and delivery of this Agreement by the Company
nor the consummation of the Merger or other transactions contemplated hereby nor
compliance by the Company with any of the provisions hereof will (i) violate,
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination or suspension of, or
accelerate the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any Lien upon any of the
properties or assets of the Company or any of its Subsidiaries under, any of the
terms, conditions or provisions of (x) their respective Charter Documents or
Governing Documents, (y) any note, bond, charge, lien, pledge, mortgage,
indenture or deed of trust to which the Company or any such Subsidiary is a
party or to which they or any of their respective properties or assets may be
subject, or (z) any license, lease, agreement or other instrument or obligation
to which the Company or any such Subsidiary is a party or to which they or any
of their respective properties or assets may be subject, or (ii) violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or regulation
applicable to the Company or any of its Subsidiaries or any of their respective
properties or assets, except, in the case of clauses (i) (y)and (z) and (ii)
above, for such violations, conflicts, breaches, defaults, terminations,
suspensions, accelerations, rights of termination or acceleration or creations
of liens, security interests, charges or encumbrances which would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect.
3.6. SEC Filings; Financial Statements.
(a) The Company has filed all forms, reports, schedules, statements
and other documents required to be filed by it since January 1, 1999 to the date
hereof (collectively, as
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supplemented and amended since the time of filing, the "Company SEC Reports")
with the SEC. The Company SEC Reports (i)were prepared in all material respects
with all applicable requirements of the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder (the "Securities Act"), and the
Exchange Act, as the case may be and (ii) did not at the time they were filed
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The representation in clause (ii) of the preceding sentence does not
apply to any misstatement or omission in any Company SEC Report filed prior to
the date of this Agreement which was superseded by a subsequent Company SEC
Report filed prior to the date of this Agreement. No Subsidiary of the Company
is required to file any report, form or other document with the SEC.
(b) The audited consolidated financial statements and unaudited
consolidated interim financial statements of the Company and its Subsidiaries
included or incorporated by reference in such Company SEC Reports (collectively,
the "Financial Statements")have been prepared in accordance with United States
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be otherwise indicated in the notes thereto)
and present fairly, in all material respects, the financial position and results
of operations and cash flows of the Company and its Subsidiaries on a
consolidated basis at the respective dates and for the respective periods
indicated (except, in the case of all such financial statements that are interim
financial statements, for footnotes and normal year-end adjustments).
(c) Neither the Company nor any of its Subsidiaries has any liabilities
or obligations of any nature, whether absolute, accrued, unmatured, contingent
or otherwise whether due or to become due, known or unknown, or any unsatisfied
judgments or any leases of personalty or realty or unusual or extraordinary
commitments that are required to be disclosed under United States generally
accepted accounting principles, except (i) as set forth in the Company SEC
Reports or in Section 3.6(c) of the Company Disclosure Letter, (ii) the
liabilities recorded on the Company's consolidated balance sheet at June 30,
2000 (the "Balance Sheet") included in the financial statements referred in
Section 3.6(a) hereof and the notes thereto, (iii) liabilities or obligations
incurred since June 30, 2000 (whether or not incurred in the ordinary course of
business and consistent with past practice) that would not, individually or in
the aggregate, reasonably be expected to have a Company Material Adverse Effect,
or (iv) liabilities that would not be required by United States generally
accepted accounting principles to be disclosed in financial statements or in the
notes thereto and that would not, individually or in the aggregate, reasonably
be expected to have a Company Material Adverse Effect.
3.7. Absence of Changes or Events. Except as set forth in Section 3.7
of the Company Disclosure Letter or in the Company SEC Reports, since June 30,
2000 through the date of this Agreement, the Company and its Subsidiaries have
not incurred any liability or obligation that has resulted or would reasonably
be expected to result in a Company Material Adverse Effect, and there has not
been any change in the business, financial condition or results of operations of
the Company or any of its Subsidiaries which has had, or would reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect, and the Company and its Subsidiaries have conducted their respective
businesses in the ordinary course consistent with their past practices.
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3.8. Absence of Certain Developments. Except as disclosed in the
Company SEC Reports or as set forth in Section 3.8 of the Company Disclosure
Letter, since June 30, 2000, the Company has not taken any of the actions set
forth in Section 5.1 hereof.
3.9. Litigation. Except as disclosed in the Company SEC Reports or as
set forth in Section 3.9 of the Company Disclosure Letter, there is no (a)
claim, action, suit or proceeding pending or, to the Knowledge of the Company or
any of its Subsidiaries, threatened against or relating to the Company or any of
its Subsidiaries before any Governmental Entity, or (b) outstanding judgment,
order, writ, injunction or decree (collectively, "Orders"), or application,
request or motion therefor, of any Governmental Entity in a proceeding to which
the Company, any Subsidiary of the Company or any of their respective assets was
or is a party except actions, suits, proceedings or Orders that, individually or
in the aggregate, has not had or would not reasonably be expected to have a
Company Material Adverse Effect, and neither the Company nor any Subsidiary is
in default in any material respect with respect to any such Order.
3.10. Title to Properties. Except as set forth in Section 3.10 of the
Company Disclosure Letter, neither the Company nor any of its Subsidiaries owns
any real property. The Company has heretofore made available to Parent correct
and complete copies of all leases, subleases and other agreements (collectively,
the "Real Property Leases") under which the Company or any of its Subsidiaries
uses or occupies or has the right to use or occupy, now or in the future, any
real property or facility (the "Leased Real Property"), including without
limitation all modifications, amendments and supplements thereto. Except in each
case where the failure would not, individually or in the aggregate, reasonably
be expected to have a Company Material Adverse Effect or except as otherwise set
forth in Section 3.10 of the Company Disclosure Letter, (i) the Company or one
of its Subsidiaries has a valid leasehold interest in each parcel of Leased Real
Property free and clear of all Liens except liens of record and each Real
Property Lease is in full force and effect, (ii) all rent and other sums and
charges due and payable by the Company or its Subsidiaries as tenants thereunder
are current in all material respects, (iii) no termination event or condition or
uncured default of a material nature on the part of the Company or any such
Subsidiary or, to the Knowledge of the Company or any such Subsidiary, the
landlord, exists under any Real Property Lease, (iv) the Company or one of its
Subsidiaries is in actual possession of each Leased Real Property and is
entitled to quiet enjoyment thereof in accordance with the terms of the
applicable Real Property Lease and applicable law, and (v) the Company and its
Subsidiaries own outright all of the property (except for leased property or
assets for which it has a valid and enforceable right to use) which is reflected
on the Balance Sheet, except for property since sold or otherwise disposed of in
the ordinary course of business and consistent with past practice and except for
liens of record. The plant, property and equipment of the Company and its
Subsidiaries that are used in the operations of their businesses are in good
operating condition and repair, subject to ordinary wear and tear, and, subject
to normal maintenance, are available for use.
3.11. Certain Contracts. Neither the Company nor any of its
Subsidiaries has breached, or received in writing any claim or notice that it
has breached, any of the terms or conditions of (i) any agreement, contract or
commitment required to be filed as an exhibit to the Company SEC Reports
(including any agreements, contracts or commitments entered into since June 30,
2000 that will be required to be filed by the Company with the SEC in any
report), (ii) any
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agreements, contracts or commitments with manufacturers, suppliers, sales
representatives, distributors, OEM strategic partners or customers of the
Company pursuant to which the Company recognized revenues or payments in excess
of $25,000 for the twelve-month period ended December 25, 1999, or (iii) any
agreements, contracts or commitments containing covenants that limit the ability
of the Company or any of its Subsidiaries to compete in any line of business or
with any Person (as defined in Section 8.5 hereof), or that include any
exclusivity provision or involve any restriction on the geographic area in which
the Company or any of its Subsidiaries may carry on its business (collectively,
"Company Material Contracts"), in such a manner as, individually or in the
aggregate, has had or would reasonably be expected to have a Company Material
Adverse Effect. Section 3.11 of the Company Disclosure Letter lists each Company
Material Contract described in clauses (ii) and (iii) of the preceding sentence.
Each Company Material Contract that has not expired by its terms is in full
force and effect and is the legal, valid and binding obligation of the Company
and/or its Subsidiaries, enforceable against them in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws affecting creditors rights and remedies generally and subject, as
to enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity), except where the
failure of such Company Material Contract to be in full force and effect or to
be legal, valid, binding or enforceable against the Company and/or its
Subsidiaries has not had and would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect. Except as set
forth in Section 3.11 of the Company Disclosure Letter, no consent, approval,
waiver or authorization of, or notice to any Person is needed in order that each
such Company Material Contract shall continue in full force and effect in
accordance with its terms without penalty, acceleration or rights of early
termination by reason of the consummation of the Merger and the other
transactions contemplated by this Agreement.
3.12. Compliance with Law. Except as disclosed in Section 3.12 of the
Company Disclosure Letter, all activities of the Company and its Subsidiaries
have been, and are currently being, conducted in compliance in all material
respects with all applicable United States federal, state, provincial and local
and other foreign laws, ordinances, regulations, interpretations, judgments,
decrees, injunctions, permits, licenses, certificates, governmental
requirements, Orders and other similar items of any court or other Governmental
Entity or any nongovernmental self- regulatory agency, and no notice has been
received by the Company or any Subsidiary of any claims filed against the
Company or any Subsidiary alleging a violation of any such laws, regulations or
other requirements which would be required to be disclosed in any Company SEC
Report or any New SEC Report (as defined in Section 5.15 hereof). The Company
Options have been duly authorized, approved and operated in compliance in all
material respects with all applicable securities, corporate and other laws of
each jurisdiction in which participants of such Company Options are located. The
Company and its Subsidiaries have all permits, licenses and franchises from
Governmental Entities required to conduct their businesses as now being
conducted (including, but not limited to, permits issued under or pursuant to
the Communications Act or the rules or regulations of the Federal Communications
Commission), except for such permits, licenses and franchises the absence of
which has not had and would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect.
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3.13. Intellectual Property Rights; Year 2000.
(a) The Company and its Subsidiaries own, or are validly licensed or
otherwise possess legally enforceable and, except for limitations arising under
a license or similar agreement governing the Company's or a Subsidiary's rights
therein, unencumbered rights to use, all patents, trademarks, trade names,
service marks, domain names and copyrights, any applications for and
registrations of such patents, trademarks, trade names, service marks, domain
names and copyrights, and all database rights, net lists, processes, formulae,
methods, schematics, technology, know-how, computer software programs or
applications and tangible or intangible proprietary information or material that
are necessary to conduct the business of the Company and its Subsidiaries as
currently conducted, or necessary with respect to the production, marketing
and/or sale of products currently under development by the Company, except for
such rights the absence of which would not be reasonably expected to have a
Company Material Adverse Effect (the "Company Intellectual Property Rights").
The Company and its Subsidiaries have taken all action reasonably necessary to
protect the Company Intellectual Property Rights which is customary in the
industry, including without limitation, use of reasonable secrecy measures to
protect the trade secrets included in the Company Intellectual Property Rights.
(b) The execution and delivery of this Agreement and consummation of
the transactions contemplated hereby will not result in the breach of, or create
on behalf of any third party the right to terminate or modify, any license,
sublicense or other agreement relating to the Company Intellectual Property
Rights, or any material licenses, sublicenses or other agreements as to which
the Company or any of its Subsidiaries is a party and pursuant to which the
Company or any of its Subsidiaries is authorized to use any third party patents,
trademarks, copyrights or trade secrets ("Company Third Party Intellectual
Property Rights"), including software that is used in the manufacture of,
incorporated in, or forms a part of any product sold by or expected to be sold
by the Company or any of its Subsidiaries, the breach of which would,
individually or in the aggregate, be reasonably likely to have a Company
Material Adverse Effect. The Company Disclosure Letter, under the caption
referencing this Section 3.13, lists all royalties, license fees, sublicense
fees or similar obligations involving aggregate annual payments by the Company
or any Subsidiary in excess of $5,000.00 for any Company Third Party
Intellectual Property Rights that are used in the manufacture of, incorporated
in, or forms a part of any product sold by or expected to be sold by the Company
or any of its Subsidiaries.
(c) All patents, registered trademarks, service marks, domain names and
copyrights which are held by the Company or any of its Subsidiaries, the loss or
invalidity of which would reasonably be expected to cause a Company Material
Adverse Effect, are valid and subsisting. The Company (i) has not, since January
1, 2000, been sued in any suit, action or proceeding, or received in writing any
claim or notice, which involves a claim of infringement or misappropriation of
any patents, trademarks, service marks, domain names, copyrights or violation of
any trade secret or other proprietary right of any third party (nor are there
any suits, actions or proceedings that arose prior to such date that remain
outstanding and unresolved); and (ii) has no Knowledge that the manufacturing,
marketing, licensing or sale of its products or services infringe upon,
misappropriate or otherwise come into conflict with any patent, trademark,
service mark, copyright, trade secret or other proprietary right of any third
party,
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which infringement, misappropriation or conflict in the cases of clause (i) and
(ii) would, individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect. To the Knowledge of the Company, no other
Person has interfered with, infringed upon, or otherwise come into conflict with
any Company Intellectual Property Rights or other proprietary information of the
Company or any of its Subsidiaries which has or would, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse Effect.
(d) No employee, agent, consultant or contractor who has materially
contributed to or participated in the creation or development of any
copyrightable, patentable or trade secret material on behalf of the Company, any
of its Subsidiaries or any predecessor in interest thereto either: (i) is a
party to an agreement under which the Company or such Subsidiary is deemed to be
the original owner/author of all property rights therein; or (ii) has executed
an assignment or an agreement to assign in favor of the Company, such Subsidiary
or such predecessor in interest, as applicable, all right, title and interest in
such material.
(e) The Company and its Subsidiaries have experienced no material
disruption or interruption of their business or operations as a result of or
related to any of their information systems, data processing and other hardware,
software and other systems, facilities, programs and procedures used or sold by
the Company or any of its Subsidiaries (collectively, "Information Systems")
failing to be Y2K Compliant. "Y2K Compliant" means, with respect to any
Information System, that such Information System (i) handles date information
involving any and all dates before, during and/or after January 1, 2000,
including accepting input, providing output and performing date calculations in
whole or in part; (ii) operates accurately without interruption on and in
respect of any and all dates before, during and/or after January 1, 2000 and
without any change in performance; (iii) responds to and processes two-digit
year input without creating any ambiguity as to the century; and (iv) stores and
provides date input information without creating any ambiguity as to the
century, in each case without utilizing bridges, gateways and the like while
still preserving the level of functionality, usability, reliability, efficiency,
performance and accessibility of such data and associated programs as existed
prior to any modification to such Information System and its constituent
elements to make the same Y2K Compliant.
3.14. Taxes.
(a) "Tax" or "Taxes" shall mean all United States federal, state,
provincial, local or foreign taxes and any other applicable duties, levies,
fees, charges and assessments that are in the nature of a tax, including income,
gross receipts, property, sales, use, license, excise, franchise, ad valorem,
value-added, transfer, social security payments, and health taxes and any
deductibles relating to wages, salaries and benefits and payments to
subcontractors for any jurisdiction in which the Company or any of its
Subsidiaries does business (to the extent required under applicable Tax law),
together with all interest, penalties and additions imposed with respect to such
amounts.
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(b) Except as set forth in Section 3.14 of the Company Disclosure
Letter or as could not, individually or in the aggregate, reasonably be expected
to have a Company Material Adverse Effect:
(i) the Company and its Subsidiaries have prepared and timely filed
with the appropriate governmental agencies all franchise, income and all other
material Tax returns and reports required to be filed on or before the Effective
Time (collectively "Returns"), taking into account any extension of time to file
granted to or obtained on behalf of the Company and/or its Subsidiaries; (ii)
all Taxes of the Company and its Subsidiaries shown on such Returns or otherwise
known by the Company to be due or payable for any period ending on, ending on
and including, or ending prior to the Effective Time, have been timely paid in
full to the proper authorities, other than such Taxes as are being contested in
good faith by appropriate proceedings or which are adequately reserved for in
accordance with generally accepted accounting principles and reflected, in a
manner consistent with past practice, on the Company's books as an accrued Tax
liability, either current or deferred; (iii) all deficiencies resulting from Tax
examinations of income, sales and franchise and all other material Returns filed
by the Company and its Subsidiaries in any jurisdiction in which such Returns
are required to be so filed have either been paid or are being contested in good
faith by appropriate proceedings; (iv) no deficiency has been asserted against
the Company or any of its Subsidiaries which has not been satisfied or otherwise
resolved, and no examination of the Company or any of its Subsidiaries is
pending or, to the Knowledge of the Company, threatened for any material amount
of Tax by any taxing authority; (v) no extension of the period for assessment or
collection of any material Tax is currently in effect and no extension of time
within which to file any material Return has been requested, which Return has
not since been filed; (vi) all Returns filed by the Company and its Subsidiaries
are correct and complete or adequate reserves have been established with respect
to any additional Taxes that may be due (or may become due) as a result of such
Returns not being correct or complete; (vii) to the Knowledge of the Company, no
Tax liens have been filed with respect to any Taxes; (viii) neither the Company
nor any of its Subsidiaries have made, and none will make, any voluntary
adjustment by reason of a change in their accounting methods for any pre-Merger
period; (ix) the Company and its Subsidiaries have made timely payments of the
Taxes required to be deducted and withheld from the wages paid to their
employees; (x) the Company and its Subsidiaries are not parties to any Tax
sharing or Tax matters agreement; (xi) to the Knowledge of the Company, neither
the Company nor any of its Subsidiaries is liable to suffer any recapture,
clawback or withdrawal of any relief or exemption from Tax howsoever arising
(including the entering into and the consummation of the Merger), and whether by
virtue of any act or omission by the Company or any of its Subsidiaries or by
any other person or persons; and (xii) to the Knowledge of the Company, neither
the Company nor any of its Subsidiaries is liable to be assessed for or made
accountable for any Tax for which any other person or persons may be liable to
be assessed or made accountable whether by virtue of the entering into or the
consummation of the Merger or by virtue of any act or acts done by or which may
be done by or any circumstance or circumstances involving or which may involve
any other person or persons.
(c) The Company and its Subsidiaries are not parties to any agreement,
contract, or arrangement that would, as a result of the transactions
contemplated hereby, result, separately or in the aggregate, in (i) the payment
of any "excess parachute payments" within the meaning of
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Section 280G of the Code by reason of the Merger or (ii) the payment of any form
of compensation or reimbursement for any Tax incurred by any Person arising
under Section 280G of the Code.
3.15. Employees. Except as set forth in Section 3.15 of the Company
Disclosure Letter, neither the Company nor any of its Subsidiaries is a party to
any collective bargaining agreement, arrangement or labor contract with a labor
union or labor organization, whether formal or otherwise. The Company Disclosure
Letter, under the caption referencing this Section 3.15, lists all employment,
severance and change of control agreements (or any other agreements that may
result in the acceleration of the exercisability of outstanding options) of the
Company or its Subsidiaries. Each of the Company and its Subsidiaries is in
compliance in all material respects with all applicable laws (including, without
limitation, all applicable extension orders) respecting employment and
employment practices, terms and conditions of employment, equal opportunity,
anti-discrimination laws, and wages and hours. There is no labor strike,
slowdown or stoppage pending (or, to the Knowledge of the Company or any of its
Subsidiaries, any unfair labor practice complaints, labor disturbances or other
controversies respecting employment which are pending or threatened which, if
they actually occurred, would materially disrupt the operations of the Company
or its Subsidiaries) against the Company or any of its Subsidiaries.
3.16. Employee Benefit Plans.
(a) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and "Plan" means every plan, fund, contract, program and arrangement
(whether written or not) which is maintained or contributed to by the Company
for the benefit of present or former United States employees or with respect to
which the Company otherwise has current or potential liability, including, but
not limited to, Plans which have been terminated but with respect to which the
Company has current or potential liability. "Plan" includes any arrangement
intended to provide: (i) medical, surgical, health care, hospitalization,
dental, vision, workers' compensation, life insurance, death, disability, legal
services, severance, sickness, accident, or cafeteria plan benefits (whether or
not defined in Section 3(1) of ERISA), (ii) pension, profit sharing, stock
bonus, retirement, supplemental retirement or deferred compensation benefits
(whether or not tax qualified and whether or not defined in Section 3(2) of
ERISA), (iii) bonus, incentive compensation, stock option, stock appreciation
right, phantom stock or stock purchase benefits, change in control benefits or
(iv) salary continuation, unemployment, supplemental unemployment, termination
pay, vacation or holiday benefits (whether or not defined in Section 3(3) of
ERISA). The Company Disclosure Letter, under the caption referencing this
Section 3.16(a), sets forth all Plans by name and brief description identifying:
(i) the type of Plan, including a specific reference to any Plan which provides
benefits (or increased benefits or vesting) as a result of a change in control
of the Company, (ii) the funding arrangements for the Plan, (iii) the
sponsorship of the Plan and (iv) the participating employers in the Plan.
(b) To the extent required (either as a matter of law or to obtain the
intended tax treatment and tax benefits), all Plans comply with all material
requirements of ERISA and the Code. With respect to the Plans, except as set
forth in Section 3.16 of the Company Disclosure Letter (i) all required
contributions which are due have been made and any accrual required by generally
accepted accounting principles has been made on the books and records of the
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Company for all future contribution obligations; (ii) there are no actions,
suits or claims pending, other than routine uncontested claims for benefits; and
(iii) there have been no prohibited transactions (as defined in Section 406 of
ERISA or Section 4975 of the Code) except for such items which have not or would
not, individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. Except as otherwise disclosed in the Company Disclosure
Letter under the caption referencing this Section 3.16(b), all benefits under
the Plans (other than Code Section 125 cafeteria plans) are payable either
through a fully-funded trust or an insurance contract and no welfare benefit
Plan (as defined in Section 3(1) of ERISA) is self-funded. Except as otherwise
disclosed in the Company Disclosure Letter under the caption referencing this
Section 3.16(b), no qualified retirement plans sponsored by the Company are
invested in stock of the Company.
(c) Parent has received true and complete copies of (i) all Plan
documents, including related trust agreements or funding arrangements; (ii) the
most recent determination letter, if any, received by the Company from the
Internal Revenue Service (the "IRS") regarding the Plans, the termination of any
Plan, and any amendment to any Plan made subsequent to any Plan amendments
covered by any such determination letter; (iii) the most recent financial
statements for the Plans, if any; (iv) the most recently prepared actuarial
valuation reports, if any; (v) current summary plan descriptions; (vi) annual
returns/reports on Form 5500 and summary annual reports for the most recent plan
year, and (vii) any filings (other than Forms 5500) with the IRS or the
Department of Labor ("DOL") within the last five years preceding the date of
this Agreement with respect to the Plans. To the Knowledge of the Company,
nothing has occurred that could materially adversely affect the qualification of
the Plans and their related trusts.
(d) Except as set forth in Section 3.16 of the Company Disclosure
Letter, the Company does not maintain or contribute to (and has never
contributed to) any multi-employer plan, as defined in Section 3(37) of ERISA.
The Company has no actual or potential liabilities under Title IV of ERISA,
including under Section 4201 of ERISA for any complete or partial withdrawal
from a multi-employer plan.
(e) The Company has no actual or potential liability for death, or
medical or dental benefits after separation from employment, other than (i)
death benefits under the Plans (whether or not subject to ERISA) set forth in
Section 3.16 of the Company Disclosure Letter and (ii) health care continuation
benefits described in Section 4980B of the Code.
(f) Neither the Company nor any of its directors, officers, employees
or other "fiduciaries", as such term is defined in Section 3(21) of ERISA, has
committed any breach of fiduciary responsibility imposed by ERISA or any other
applicable law with respect to the Plans which would subject the Company, Parent
or any of their respective directors, officers or employees to any liability
under ERISA or any applicable law except for such breaches which have not or
would not, individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect.
(g) Except as set forth in Section 3.16 of the Company Disclosure
Letter, there are no other trades or businesses, whether or not incorporated,
which, together with the Company,
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would be deemed to be a "single employer" within the meaning of Code Sections
414(b), (c) or (m).
(h) Except with respect to Taxes on benefits paid or provided, no Tax
has been waived or excused, has been paid or is owed by any person (including,
but not limited to, any Plan, any Plan fiduciary or the Company) with respect to
the operations of, or any transactions with respect to, any Plan. No action has
been taken by the Company, nor has there been any failure by the Company to take
any action, nor is any action or failure to take action contemplated by the
Company (including all actions contemplated under this Agreement), that would
subject the Company, Parent or any of their respective directors, officers or
employees to any liability or Tax imposed by the IRS or DOL in connection with
any Plan. No reserve for any Taxes has been established with respect to any Plan
by the Company nor has any advice been given to the Company with respect to the
need to establish such a reserve.
(i) There are no (i) legal, administrative or other proceedings or
governmental investigations or audits, or (ii) complaints to or by any
Governmental Entity, which are pending, anticipated or, to the Knowledge of the
Company, threatened, against any Plan or its assets, or against any Plan
fiduciary or administrator, or against the Company or its officers or employees
with respect to any Plan.
(j) There are no leased employees, as defined in Section 414(n) of the
Code, providing services to the Company, that must be taken into account with
respect to the requirements under Section 414(n)(3) of the Code.
(k) Except as set forth in Section 3.16 of the Company Disclosure
Letter, each Plan may be terminated directly or indirectly by the Company, in
its sole discretion, at any time before or after the Effective Date in
accordance with its terms, without causing the Parent or the Company to incur
any liability to any person, entity or government agency for any conduct,
practice or omission of the Company which occurred prior to the Effective Date,
except for liabilities to, and the rights of, the employees thereunder accrued
prior to the Effective Date, or if later, the time of termination, and except
for continuation rights required by the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, or other applicable law.
(l) "Foreign Plan" means every plan, fund, contract program and
arrangement (whether written or not) which is maintained or contributed to by
the Company or an affiliate for the benefit of present or former employees
working outside of the United States or with respect to which the Company or an
affiliate otherwise has current or potential liability for such current or
former employees that is not subject to the laws of the United States. Foreign
Plan may include plans that also benefit United States employees and include any
arrangement intended to provide: (i) medical, surgical, health care,
hospitalization, dental, vision, workers compensation, life insurance, death,
disability, legal services, severance, sickness, or accident benefits; (ii)
pension, profit sharing, retirement, supplemental retirement or deferred
compensation benefits; (iii) bonus, incentive compensation, stock option, stock
appreciation rights, phantom stock or stock purchase benefits, change in control
benefits; or (iv) salary continuation, unemployment, supplemental unemployment,
termination pay, vacation or holiday benefits. Section 3.16 of the Company
Disclosure Letter sets forth all Foreign Plans by name and provides a brief
description
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for each plan. Except as described in Section 3.16 of the Company Disclosure
Letter, no condition, agreement or plan provision limits the right of the
Company or an affiliate to amend, cut back or terminate any Foreign Plan, nor
will the transaction contemplated by this Agreement limit the right of the
Company or an affiliate or the Parent to amend, cut back or terminate any
Foreign Plan and none of the benefits under a Foreign Plan have been materially
augmented. Either as a matter of law or to obtain the intended tax treatment and
tax benefits, the Foreign Plans have at all times complied with and been duly
administered in accordance with all applicable laws and regulations and
requirements having force of law and in accordance with their terms except for
such matters which have not or would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect. There are not
in respect of any Foreign Plan or the benefits thereunder any actions, suits or
claims pending or, to the Knowledge of the Company, threatened other than
routine claims for benefits. Neither the Company nor any of its affiliates have
received any notice or directive that it has not complied with all material
provisions of the Foreign Plans applicable to it and has no Knowledge of any
reason why the tax exempt (or favored) status, if any of the Foreign Plans might
be withdrawn.
3.17. Environmental Matters.
(a) The Company and its Subsidiaries (i) have been in compliance and
are presently complying with all applicable health, safety and Environmental
Laws (defined below), and (ii) have obtained all material permits, licenses and
authorizations which are required under all applicable health, safety and
Environmental Laws and are in compliance in all material respects with such
permits, licenses and authorizations, except in each case for such failure to
comply or to obtain permits, licenses or authorizations that would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. To the Knowledge of the Company, (i) none of the Leased
Real Property (including without limitation soils and surface and ground waters)
are contaminated with any Hazardous Materials in quantities which require
investigation or remediation under Environmental Laws, (ii) neither the Company
nor any of its Subsidiaries is liable for any off-site contamination, and (iii)
there is no environmental matter which could reasonably be expected to expose
the Company or any of its Subsidiaries to a claim to clean-up any Hazardous
Materials or otherwise to remedy any pollution or damage at any of the
properties utilized in the Company's business under any Environmental Laws.
(b) For purposes of this Agreement, the term (i) "Environmental Laws"
means all applicable United States federal, state, provincial, local and other
foreign laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to pollution, contamination
or protection of the environment (including, without limitation, all applicable
United States federal, state, provincial, local and other foreign laws, rules,
regulations, codes, ordinances, orders, decrees, directives, permits, licenses
and judgments relating to Hazardous Materials in effect as of the date of this
Agreement), and (ii) "Hazardous Materials" means any dangerous, toxic or
hazardous pollutant, contaminant, chemical, waste, material or substance as
defined in or governed by any United States federal, state, provincial, local or
other foreign law, statute, code, ordinance, regulation, rule or other
requirement relating to such substance or otherwise relating to the environment
or human health or safety, including without limitation any waste, material,
substance, pollutant or contaminant that might cause any injury to
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human health or safety or to the environment or might subject the Company or any
of its Subsidiaries to any imposition of costs or liability under any
Environmental Law.
3.18. Insurance. The Company has made available to Parent copies of all
material policies of insurance and bonds in force on the date hereof covering
the businesses, properties and assets of the Company and its Subsidiaries, and
all such policies are currently in effect and all premiums with respect thereto
have been duly paid to date. Except as disclosed in Section 3.18 of the Company
Disclosure Letter, there are no claims outstanding under any insurance policy
which could, individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect and, to the Knowledge of the Company or any of
its Subsidiaries, neither the Company nor any of its Subsidiaries has failed to
give any notice or to present any such claim with respect to its business under
any such policy in due and timely fashion which could, individually or in the
aggregate, reasonably be expected to have a Company Material Adverse Effect.
3.19. Anti-Bribery Compliance. Neither the Company nor any of its
Subsidiaries (nor any person representing the Company or any of its
Subsidiaries) has at any time during the last five years (a) made any payment in
violation of the Foreign Corrupt Practices Act, the OECD Convention or similar
laws of other countries where the Company engages in business, or (b) made any
payment to any foreign, federal or state governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the OECD Convention, the laws of the United
States or any jurisdiction thereof or the laws of the countries in which such
payments were made and received.
3.20. Export Control Laws. The Company has conducted its export
transactions in accordance in all material respects with applicable provisions
of United States export control laws and regulations, including but not limited
to the Export Administration Act and implementing Export Administration
Regulations.
3.21. Finders or Brokers. Except for the Company's obligations to
Dougherty & Company, LLC, none of the Company, the Subsidiaries of the Company,
the Board of Directors of the Company (the "Company Board") or any member of the
Company Board has employed any agent, investment banker, broker, finder or
intermediary in connection with the transactions contemplated hereby who might
be entitled to a fee or any commission in connection with the Merger or the
other transactions contemplated hereby.
3.22. Board Recommendation. The Company Board has, at a meeting of such
Company Board duly held on September 7, 2000, approved and adopted this
Agreement, the Merger and the other transactions contemplated hereby, declared
the advisability of the Merger and recommended that the stockholders of the
Company approve the Merger and the other transactions contemplated hereby, and
has not as of the date hereof rescinded or modified in any respect any of such
actions.
3.23. Vote Required. The affirmative vote of the holders of a majority
of the shares of Company Common Stock outstanding on the record date set for the
Company Stockholders Meeting (as defined in Section 5.2 hereof) is the only vote
of the holders of any of the
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Company's capital stock necessary to approve this Agreement and the transactions
contemplated hereby.
3.24. Intentionally omitted.
3.25. State Takeover Statutes. The Company has taken all actions so
that the restrictions contained in Section 302A.673 of the MBCA applicable to a
"business combination" (as such term is defined in Section 302A.011(46) of the
MBCA) will not apply to the execution, delivery of performance of this Agreement
or the consummation of the Merger or the other transactions contemplated by this
Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MERGER SUB AND PARENT
Merger Sub and Parent represent and warrant to the Company that the
statements contained in this Article IV are true and correct:
4.1. Organization and Qualification. Parent is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Minnesota, with the corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
Merger Sub is a corporation validly existing and in good standing under the laws
of the State of Minnesota. Each of Merger Sub and Parent is duly qualified or
licensed to carry on its business as it is now being conducted, and is qualified
to conduct business, in each jurisdiction where the character of its properties
owned or leased or the nature of its activities makes such qualification
necessary, except for failures to be so qualified that would not, individually
or in the aggregate, have, or would not reasonably be expected to have, a Parent
Material Adverse Effect (as defined below). Neither Parent nor Merger Sub is in
violation of any of the provisions of its Charter Document or its Governing
Document. As used in this Agreement, the term "Parent Material Adverse Effect"
means any change, effect, event or condition that (i) has a material adverse
effect on the assets, business, results of operations or financial condition of
Parent and its Subsidiaries, taken as a whole (other than any such change,
effect, event or condition that arises from changes in general economic
conditions or conditions affecting Parent's industry generally, or such changes,
effects, events or conditions resulting from the consummation of the
transactions contemplated hereby; provided, however, that the termination of
contracts requiring third party consent or approval because of the consummation
of the transactions contemplated hereby the loss of which would otherwise have a
material adverse effect on the assets, business, results of operations or
financial condition of Parent shall not be excluded from this definition) or
(ii) would prevent or materially delay Merger Sub's or Parent's ability to
consummate the transactions contemplated hereby.
4.2. Authority Relative to this Agreement. Each of Parent and Merger
Sub has the requisite corporate power and authority to execute and deliver, and
to perform its obligations under, this Agreement under applicable law. The
execution and delivery by Parent and Merger Sub of this Agreement, and the
consummation of the Merger and the transactions contemplated
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hereby, have been duly and validly authorized by all necessary corporate action
on the part of Parent and Merger Sub. This Agreement has been duly and validly
executed and delivered by Parent and Merger Sub and, assuming the due
authorization, execution and delivery of this Agreement by the Company, is a
valid and binding obligation of Parent and Merger Sub, enforceable against them
in accordance with its terms, except to the extent that its enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting the enforcement of creditors rights generally or by general
equitable principles.
4.3. No Conflicts; Required Filings and Consents.
(a) Neither the execution, delivery or performance of this Agreement by
Merger Sub or Parent, nor the consummation of the transactions contemplated
hereby, nor compliance by Merger Sub or Parent with any provision hereof will
(i) conflict with or result in a breach of any provision of the Charter
Documents or Governing Documents of Merger Sub or Parent, (ii) cause a default
or give rise to any right of termination, cancellation or acceleration or loss
of a material benefit under, or result in the creation of any lien, charge or
other encumbrance upon any of the properties of Merger Sub or Parent under any
of the terms, conditions or provisions of any note, bond, mortgage or indenture,
or any other material instrument, obligation or agreement to which Merger Sub or
Parent is a party or by which its properties or assets may be bound or (iii)
violate any law applicable to Merger Sub or Parent or binding upon any of its
properties, except for, in the case of clauses (ii) and (iii), such defaults or
violations which would not, individually or in the aggregate, reasonably be
expected to have a Parent Material Adverse Effect.
(b) No filing or registration with or notification to and no permit,
authorization, consent or approval of any Governmental Entity is required to be
obtained, made or given by Merger Sub or Parent in connection with the execution
and delivery of this Agreement or the consummation by Merger Sub of the Merger
or other transactions contemplated hereby.
4.4. Funds. At the Closing, Parent will have the funds necessary to
consummate the Merger and pay the aggregate Per Share Amount in accordance with
the terms of this Agreement.
ARTICLE V
COVENANTS AND AGREEMENTS
5.1. Conduct of Business of the Company Pending the Merger. Except as
contemplated by this Agreement or as expressly agreed to in writing by Parent,
during the period from the date of this Agreement to the earlier of (i) the
termination of this Agreement or (ii) the Effective Time, each of the Company
and its Subsidiaries will conduct their respective operations according to its
ordinary course of business consistent with past practice, and will use
commercially reasonable efforts consistent with past practice and policies to
preserve intact its business organization, to keep available the services of its
officers and employees and to maintain satisfactory relationships with
suppliers, distributors, customers and others having business relationships with
it and will take no action which would adversely affect the ability of the
parties to consummate the transactions contemplated by this Agreement, or the
timing
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thereof. Without limiting the generality of the foregoing, and except as
otherwise expressly provided in this Agreement, prior to the Effective Time, the
Company will not nor will it permit any of its Subsidiaries to, without the
prior written consent of Parent:
(a) amend any of its Charter Documents or Governing Documents;
(b) authorize for issuance, issue, sell, deliver, grant any options,
warrants, stock appreciation rights, or stock issuance rights for, or otherwise
agree or commit to issue, sell, deliver, pledge, dispose of or otherwise
encumber any shares of any class of its share capital or any securities
convertible into shares of any class of its share capital, except (i) pursuant
to and in accordance with the terms of Company Options outstanding on the
Company Measurement Date or (ii) or pursuant to the grant of Company Options as
set forth in Section 5.1(b) of the Company Disclosure Letter or consistent with
past practices to new employees (or, subject to the prior written consent of
Parent, which consent shall not be unreasonably withheld, to existing employees
in connection with regularly scheduled performance reviews), which Company
Options will represent the right to acquire no more than 1,000 shares of Company
Common Stock per employee, and no more than 5,000 shares of Company Common Stock
in the aggregate;
(c) subdivide, cancel, consolidate or reclassify any shares of its
share capital, issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its share capital,
declare, set aside or pay any dividend or other distribution (whether in cash,
shares or property or any combination thereof) in respect of its share capital
or purchase, redeem or otherwise acquire any shares of its own share capital or
of any of its Subsidiaries, except as otherwise expressly provided in this
Agreement;
(d) (i) incur or assume any long-term or short-term debt or issue any
debt securities except for borrowings under existing lines of credit in the
ordinary course of business consistent with past practice; (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the material obligations of any other person
(other than Subsidiaries of the Company); or (iii) make any material loans,
advances or capital contributions to, or investments in, any other person (other
than to Subsidiaries of the Company);
(e) except as otherwise expressly contemplated by this Agreement or as
set forth in Section 5.1(e) of the Company Disclosure Letter, (i) increase in
any manner the compensation of (A) any employee who is not an officer of the
Company or any Subsidiary (a "NonExecutive Employee"), except in the ordinary
course of business consistent with past practice or (B) any of its directors or
officers, except in the ordinary course of business, consistent with past
practice, after consultation with and consent of Parent, (ii) pay or agree to
pay any pension, retirement allowance or other employee benefit not required, or
enter into, amend or agree to enter into or amend any agreement or arrangement
with any such director or officer or employee, whether past or present, relating
to any such pension, retirement allowance or other employee benefit, except as
required to comply with law or under currently existing agreements, plans or
arrangements or with respect to NonExecutive Employees, in the ordinary course
of business consistent with past practice; (iii) grant any rights to receive any
severance or termination pay to, or enter into or amend any employment or
severance agreement with, any employee or any of its directors or
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officers, except as required by applicable law or with respect to severance or
termination pay to NonExecutive Employees in the ordinary course of business,
consistent with past practices; or (iv) except as may be required to comply with
applicable law, become obligated (other than pursuant to any new or renewed
collective bargaining agreement) under any new pension plan, welfare plan,
multiemployer plan, employee benefit plan, benefit arrangement, or similar plan
or arrangement, which was not in existence on the date hereof, including any
bonus, incentive, deferred compensation, share purchase, share option, share
appreciation right, group insurance, severance pay, retirement or other benefit
plan, agreement or arrangement, or employment or consulting agreement with or
for the benefit of any person, or amend any of such plans or any of such
agreements in existence on the date hereof; provided, however, that this clause
(iv) shall not prohibit the Company from renewing any such plan, agreement or
arrangement already in existence on terms no more favorable to the parties to
such plan, agreement or arrangement;
(f) except as otherwise expressly contemplated by this Agreement, enter
into, amend in any material respect or terminate any Company Material Contracts
other than in the ordinary course of business consistent with past practice;
(g) sell, lease, license, mortgage or dispose of any of its properties
or assets, other than (i) transactions in the ordinary course of business
consistent with past practice, and (ii) sales of assets, for the fair market
value thereof, which sales do not individually or in the aggregate exceed
$25,000 and, in the case of both clauses (i) and (ii), except as may be required
or contemplated by this Agreement;
(h) except as otherwise contemplated by the Merger, acquire or agree to
acquire by merging or consolidating with, or by purchasing a substantial portion
of the assets of or equity in, or by any other manner, any business or any
corporation, limited liability company, partnership, association or other
business organization or division thereof or otherwise acquire or agree to
acquire any assets, other than the acquisition of assets that are in the
ordinary course of business consistent with past practice and not material to
the Company and its Subsidiaries taken as a whole;
(i) alter (through merger, liquidation, reorganization, restructuring
or in any fashion) the corporate structure or ownership of the Company or any
Subsidiary;
(j) authorize or commit to make any material capital expenditures in
the aggregate of $25,000 or more not reflected in the budget previously provided
in writing by the Company to Parent without the prior written consent of Parent,
which consent shall not be unreasonably withheld;
(k) make any change in the accounting methods or accounting practices
followed by the Company, except as required by generally accepted accounting
principles or applicable law;
(l) make any election under United States federal, state, provincial,
local or foreign Tax law which would, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect;
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(m) settle any action, suit, claim, investigation or proceeding (legal,
administrative or arbitrative) requiring a payment by the Company or its
Subsidiaries in excess of $25,000 without the consent of Parent, which consent
shall not be unreasonably withheld or delayed;
(n) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), or the
payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms, of claims,
liabilities or obligations reflected or reserved against in, or contemplated by,
the most recent financial statements (or the notes thereto) of the Company
included in the Company SEC Reports or incurred in the ordinary course of
business consistent with past practice; or
(o) authorize, recommend, propose, agree or announce an intention to do
any of the foregoing or enter into any contract, agreement, commitment or
arrangement to do any of the foregoing.
5.2. Preparation of Proxy Statement. As promptly as practicable and no
later than 15 days after the date hereof, the Company shall prepare and file
with the SEC the proxy statement to be sent to the stockholders of the Company
in connection with the meeting of the Company's stockholders to consider the
Merger (the "Company Stockholders Meeting") (such proxy statement as amended or
supplemented is referred to herein as the "Proxy Statement"). The Proxy
Statement will, when prepared pursuant to this Section 5.2 and mailed to the
Company's stockholders, comply in all material respects with the applicable
requirements of the Exchange Act. The information supplied by each of Parent and
the Company for inclusion in the Proxy Statement shall not, on the date the
Proxy Statement is first mailed to Company's stockholders, at the time of the
Company Stockholders Meeting and at the Effective Time, contain any statement
which, at such time, is false or misleading with respect to any material fact,
or omit to state any material fact necessary in order to make the statements
made therein, in light of the circumstances under which they are made, not false
or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Company Stockholders Meeting which has become false or
misleading. Each of Parent and the Company shall indemnify and hold harmless the
other from any obligations, claims or liabilities arising from any statement
supplied by such party for inclusion in the Proxy Statement which, at the time
such statement was made, is false or misleading with respect to any material
fact, or omits to state any material fact necessary in order to make the
statement, in light of the circumstances under which is was made, not false or
misleading. If at any time prior to the Effective Time any event or information
should be discovered by Parent, Merger Sub or the Company which should be set
forth in a supplement to the Proxy Statement, Parent, Merger Sub or the Company,
as the case may be, will promptly inform the other parties. The Proxy Statement
shall include the declaration of the Company Board of the advisability of the
Merger and its recommendation that the Company's stockholders approve the
Merger, unless the Company Board determines in good faith, after considering the
advice of its financial advisor and reputable outside legal counsel experienced
in such matters , that withdrawal or modification of its declaration and
recommendation is necessary because this Agreement or the Merger is no longer in
the best interests of the Company's stockholders. The Proxy Statement shall be
reviewed and approved by Parent and Parent's counsel prior to the mailing of
such Proxy Statement to the Company's stockholders.
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5.3 Meeting of Stockholders. The Company shall, promptly after the date
hereof, take all action necessary in accordance with the MBCA and its Articles
of Incorporation and Bylaws to convene the Company Stockholders Meeting within
45 days of the filing of a definitive Proxy Statement with the SEC, whether or
not the Company Board determines at any time after the date hereof that the
Merger is no longer advisable. The Company shall consult with Parent regarding
the date of the Company Stockholders Meeting. The Company shall use commercially
reasonable efforts to solicit from stockholders of the Company proxies in favor
of the Merger and shall take all other commercially reasonable action necessary
or advisable to secure the vote or consent of stockholders required to effect
the Merger, unless the Company Board determines in good faith, after considering
the advice of its financial advisor and reputable outside legal counsel
experienced in such matters that the Merger is no longer in the best interests
of the Company's stockholders.
5.4. Additional Agreements, Cooperation.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use its best efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or advisable
to consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement, and to cooperate, subject to compliance with
applicable law, with each other in connection with the foregoing, including
using its best efforts (i) to obtain all necessary waivers, consents and
approvals from other parties to loan agreements, material leases and other
material contracts, (ii) to obtain all necessary consents, approvals and
authorizations as are required to be obtained under any United States federal or
state, or other foreign law or regulations, (iii) to defend all lawsuits or
other legal proceedings challenging this Agreement or the consummation of the
transactions contemplated hereby, (iv) to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the parties
to consummate the transactions contemplated hereby, (v) to effect all necessary
registrations and filings and submissions of information requested by
Governmental Entities, and (vi) to fulfill all conditions to this Agreement.
(b) Each of the parties hereto agrees, subject to compliance with
applicable law, to furnish to each other party hereto such necessary information
and reasonable assistance as such other party may request in connection with its
preparation of necessary filings or submissions to any regulatory or
governmental agency or authority, including, without limitation, any filing
necessary under the provisions of the HSR Act, the Exchange Act, the Securities
Act or any other United States federal or state, or foreign statute or
regulation. Each party hereto shall promptly inform each other party of any
material communication from the U.S. Federal Trade Commission or any other
government or governmental authority regarding any of the transactions
contemplated thereby.
5.5. Publicity. Except as otherwise required by law or the rules of any
applicable securities exchange or the Nasdaq National Market, so long as this
Agreement is in effect, Parent and the Company will not, and will not permit any
of their respective affiliates or representatives to, issue or cause the
publication of any press release or make any other public announcement with
respect to the transactions contemplated by this Agreement without the consent
of the other party, which consent shall not be unreasonably withheld or delayed.
Parent and the Company
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will cooperate with each other in the development and distribution of all press
releases and other public announcements with respect to this Agreement and the
transactions contemplated hereby, and will furnish the other with drafts of any
such releases and announcements as far in advance as possible. Nothing in this
Section 5.5 shall prohibit or restrict the Company from at any time
communicating to the Company's stockholders if the Company Board has determined
in good faith, after considering the advice of reputable outside legal counsel
experienced in such matters that any such communication is required to fulfill
its fiduciary duties to the Company's stockholders.
5.6. No Solicitation.
(a) Immediately upon execution of this Agreement, the Company shall
(and shall cause its officers, directors, employees, investment bankers,
attorneys and other agents or representatives to) cease all discussions,
negotiations, responses to inquiries and other communications relating to any
potential business combination with all third parties who, prior to the date
hereof, may have expressed or otherwise indicated any interest in pursuing an
Acquisition Proposal (as hereinafter defined) with the Company.
(b) Prior to termination of this Agreement pursuant to Article VII
hereof, the Company and its Subsidiaries shall not, nor shall the Company
authorize or permit any officers, directors or employees of, or any investment
bankers, attorneys or other agents or representatives retained by or acting on
behalf of, the Company or any of its Subsidiaries to, (i) initiate, solicit or
encourage, directly or indirectly, any inquiries or the making of any proposal
that constitutes an Acquisition Proposal, (ii) except as permitted below, engage
or participate in negotiations or discussions with, or furnish any information
or data to, or take any other action to, facilitate any inquiries or making any
proposal by, any third party relating to an Acquisition Proposal, or (iii)
except as permitted below, enter into any agreement with respect to any
Acquisition Proposal or approve an Acquisition Proposal. Notwithstanding
anything to the contrary contained in this Section 5.6 or in any other provision
of this Agreement, prior to the Company Stockholders Meeting, the Company Board
may participate in discussions or negotiations with or furnish information to
any third party making an unsolicited Acquisition Proposal (a "Potential
Acquiror") or approve or recommend an unsolicited Acquisition Proposal if both
(A) a majority of the directors of the Company Board, without including
directors who may be considered Affiliates (as defined in Rule 405 under the
Securities Act) of any person making an Acquisition Proposal ("Disinterested
Directors") determines in good faith, after receiving advice from its
independent financial advisor, that a Potential Acquiror has submitted to the
Company an Acquisition Proposal that is a Superior Proposal (as hereinafter
defined), and (B) a majority of the Disinterested Directors of the Company Board
determines in good faith, after considering advice from reputable outside legal
counsel experienced in such matters that the failure to participate in such
discussions or negotiations or to furnish such information or to approve or
recommend such unsolicited Acquisition Proposal is inconsistent with the Company
Board's fiduciary duties under applicable law. In the event that the Company
shall receive any Acquisition Proposal, it shall promptly (and in no event later
than 24 hours after receipt thereof) furnish to Parent the identity of the
recipient of the Acquisition Proposal and of the Potential Acquiror, the terms
of such Acquisition Proposal and copies of all non-public information requested
by the Potential Acquiror not previously delivered to Parent, and shall further
promptly
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inform Parent in writing as to the fact such information is to be provided after
compliance with the terms of the preceding sentence. Nothing contained herein
shall prevent the Company from complying with Rules 14d-9 and 14e-2 promulgated
under the Exchange Act with regard to an Acquisition Proposal or making any
disclosure to the Company's stockholders if, in the good faith judgment of the
Company Board, after considering advice from reputable outside legal counsel
experienced in such matters such disclosure is required by applicable law.
Without limiting the foregoing, the Company understands and agrees that any
violation of the restrictions set forth in this Section 5.6(b) by the Company or
any of its Subsidiaries, or by any director or officer of the Company or any of
its Subsidiaries or any financial advisor, attorney or other advisor or
representative of the Company or any of its Subsidiaries, whether or not such
person is purporting to act on behalf of the Company or any of its Subsidiaries
or otherwise, shall be deemed to be a breach of this Section 5.6(b) sufficient
to enable Parent to terminate this Agreement pursuant to Section 7.1(d)(i)
hereof
(c) For the purposes of this Agreement, "Acquisition Proposal" shall
mean any proposal, whether in writing or otherwise, made by any person other
than Parent and its Subsidiaries to acquire "beneficial ownership" (as defined
under Rule 13(d) of the Exchange Act) of 20% or more of the assets of, or 20% or
more of the outstanding capital stock of any of the Company or its Subsidiaries
pursuant to a merger, consolidation, exchange of shares or other business
combination, sale of shares of capital stock, sales of assets, tender offer or
exchange offer or similar transaction involving the Company or its Subsidiaries.
(d) The term "Superior Proposal" means any bona fide Acquisition
Proposal to acquire, directly or indirectly, for consideration consisting of
cash and/or securities, more than 50% of the Company Common Stock then
outstanding or all or substantially all the assets of the Company, and otherwise
on terms that a majority of the Disinterested Directors determines, in good
faith, is reasonably likely to be more favorable to the Company and its
stockholders than the Merger (after considering advice from the Company's
independent financial advisor that the Acquisition Proposal is more favorable to
the Company's stockholders, from a financial point of view, than the Merger).
5.7. Access to Information. From the date of this Agreement until the
Effective Time, and upon reasonable notice, the Company will give Parent and its
authorized representatives (including counsel, other consultants, accountants
and auditors) reasonable access during normal business hours to all facilities,
personnel and operations and to all books and records of it and its
Subsidiaries, will permit Parent to make such inspections as it may reasonably
require, will cause its officers and those of its Subsidiaries to furnish Parent
with such financial and operating data and other information with respect to its
business and properties as Parent may from time to time reasonably request and
confer with Parent to keep it reasonably informed with respect to operational
and other business matters relating to the Company and its Subsidiaries and the
status of satisfaction of conditions to the Closing. All information obtained by
Parent pursuant to this Section 5.7 shall be kept confidential in accordance
with the confidentiality provisions of the Letter of Intent dated June 19, 2000,
between legal counsel for the Parent and the Company.
5.8. Notification of Certain Matters. The Company or Parent, as the
case may be, shall promptly notify the other of (a) its obtaining of Knowledge
as to the matters set forth in clauses
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(i), (ii) and (iii) below, or (b) the occurrence, or failure to occur, of any
event, which occurrence or failure to occur would be likely to cause (i) any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Effective Time, (ii) any material failure of the Company or Parent, as the case
may be, or of any officer, director, employee or agent thereof, to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by it under this Agreement or (iii) the institution of any claim, suit, action
or proceeding arising out of or related to the Merger or the transactions
contemplated hereby; provided, however, that no such notification shall affect
the representations or warranties of the parties or the conditions to the
obligations of the parties hereunder.
5.9. Resignation of Officers and Directors. Except as otherwise
provided in Section 5.18 hereof, at or prior to the Effective Time, the Company
shall deliver to Parent the resignations of such officers and directors of the
Company and its Subsidiaries (in each case, in their capacities as officers and
directors, but not as employees if any of such persons are employees of the
Company or any Subsidiary) as Parent shall specify, which resignations shall be
effective at the Effective Time and shall contain an acknowledgment that the
relevant individual has no outstanding claims for compensation for loss of
office, redundancy, unfair dismissal or otherwise.
5.10 Intentionally omitted
5.11. Stockholder Litigation. The Company shall give Parent the
reasonable opportunity to participate in the defense of any stockholder
litigation against or in the name of the Company and/or its respective directors
relating to the transactions contemplated by this Agreement.
5.12. Intentionally omitted.
5.13. Determination of Optionholders. At least ten business days before
the Effective Time, the Company shall provide Parent with a true and complete
list of (a) the holders of Company Options, (b) the number of shares of Company
Common Stock subject to Company Options held by each such optionholder, (c) the
exercise price of each option outstanding and (d) the address of each such
optionholder as set forth in the books and records of the Company or any
Subsidiary, which lists shall be true and correct based upon the Company's
records, following upon which there shall be no additional grants of Company
Options without Parent's prior consent.
5.14. Preparation of Tax Returns. The Company shall file (or cause to
be filed) at its own expense, on or prior to the due date thereof, all Returns
required to be filed on or before the Closing Date. The Company shall provide
Parent with a copy of appropriate workpapers, schedules, drafts and final copies
of each foreign and domestic, federal, provincial and state income Tax return or
election of the Company (including returns of all Employee Benefit Plans) at
least ten days before filing such return or election and shall consult with
Parent with respect thereto prior to such filing. Any Return filed after the
date hereof but prior to the Effective Date shall first be approved by Parent,
which approval shall not be unreasonably withheld.
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5.15. SEC Filings; Compliance. The Company shall cause the forms,
reports, schedules, statements and other documents required to be filed with the
SEC by the Company , between the date of this Agreement and the Effective Time
(the "New SEC Reports") to be prepared in all material respects with all
applicable requirements of the Securities Act and the Exchange Act, as the case
may be, and such New SEC Reports will not at the time they are filed contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
ARTICLE VI
CONDITIONS TO CLOSING
6.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Effective Date of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the requisite vote of the stockholders of the Company
under the MBCA and the Company's Charter Document and Governing Documents.
(b) Governmental Action; No Injunction or Restraints. No action or
proceeding shall be instituted by any Governmental Entity seeking to prevent
consummation of the Merger, asserting the illegality of the Merger or this
Agreement or seeking material damages directly arising out of the transactions
contemplated hereby which continues to be outstanding. No judgment, order,
decree, statute, law, ordinance, rule or regulation entered, enacted,
promulgated, enforced or issued by any court or other Governmental Entity of
competent jurisdiction or other legal restraint or prohibition shall be in
effect (i) imposing or seeking to impose material sanctions, damages, or
liabilities directly arising out of the Merger on the Company or any of its
officers or directors; or (ii) preventing the consummation of the Merger.
(c) Governmental Consents. All necessary authorizations, consents,
orders or approvals of, or declarations or filings with, or expiration or waiver
of waiting periods imposed by, any Governmental Entity of any applicable
jurisdiction required for the consummation of the transactions contemplated by
this Agreement shall have been filed, expired or obtained, as to which the
failure to obtain, make or occur would have the effect of making the Merger or
this Agreement or any of the transactions contemplated hereby illegal or which,
individually or in the aggregate, would have a Parent Material Adverse Effect
(assuming the Merger had taken place).
6.2. Conditions to Obligations of Parent. The obligation of Parent to
effect the Merger is further subject to satisfaction or waiver of the following
conditions:
(a) Representations and Warranties. The representations and warranties
of the Company set forth herein shall be true and correct both when made and at
and as of the Effective Date, as if made at and as of such time (except to the
extent expressly made as of an earlier date, in which case as of such date),
except where the failure of such representations and warranties to
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be so true and correct (without giving effect to any limitation as to
materiality or material adverse effect set forth therein) does not have, and
would not, individually or in the aggregate, reasonably be expected to have, a
Company Material Adverse Effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Date.
(c) No Material Adverse Effect. Since the date of this Agreement, there
has not been a Company Material Adverse Effect nor has there been any change,
event or condition that, with the passage of time, would reasonably be expected
to result in a Company Material Adverse Effect.
(d) No Injunctions or Restraints. No judgment, order, decree, statute,
law, ordinance, rule or regulation entered, enacted, promulgated, enforced or
issued by any court or other Governmental Entity of competent jurisdiction or
other legal restraint or prohibition shall be in effect (i) imposing or seeking
to impose material limitations on the ability of Parent to acquire or hold or to
exercise full rights of ownership of any securities of the Company; (ii)
imposing or seeking to impose material limitations on the ability of Parent or
its Affiliates to combine and operate the business and assets of the Company;
(iii) imposing or seeking to impose other material sanctions, damages, or
liabilities directly arising out of the Merger on Parent or any of its officers
or directors; or (iv) requiring or seeking to require divestiture by Parent of
any significant portion of the business, assets or property of the Company or of
Parent.
(e) Delivery of Closing Documents. At or prior to the Effective Time,
the Company shall have delivered to Parent all of the following: (i) a
certificate of the Chief Executive Officer of the Company (in his capacity as
such an officer), dated as of the Effective Date, stating that the conditions
precedent set forth in Sections 6.2(a), (b) and (c) hereof have been satisfied;
(ii) a copy of (A) the Articles of Incorporation of the Company, dated as of a
recent date, certified by the Secretary of State of the State of Minnesota and
(B) the Bylaws of the Company and the resolutions of the Company Board and
stockholders authorizing the Merger and the other transactions contemplated by
this Agreement, certified by the Secretary of the Company; and (iii) a list of
(A) all options that have been exercised after the date of this Agreement.
(f) Director and Officer Resignations. Merger Sub shall have received
the resignation of the directors and officers of the Company as are described in
Section 5.9 hereof.
(g) Key Employee Agreements. The persons identified in Section 6.2(g)
of the Company Disclosure Letter shall have entered into employment agreements
with Parent, and such agreements shall be in full force and effect, and none of
such employees shall have indicated any intention of not fulfilling his or her
obligations thereunder.
(h) Exercise of Appraisal Rights. The total shares of Company Common
Stock held by stockholders of the Company who have indicated in accordance with
the MBCA (and not withdrawn) their intent to elect to exercise their appraisal
rights under the MBCA shall not exceed 10% of the shares of Company Common Stock
outstanding as of the date of the
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Company Stockholders Meeting. Parent shall have received a certificate of the
Chief Executive Officer of the Company to that effect.
(i) Approval of Company's Shareholders. At least 51% of the total
shares of the Company Common Stock held by Stockholders of the Company have
voted in favor of the transactions contemplated herein.
(j) Renewal of Union Contract. The union contract to which the Company
is currently subject shall have been renewed for a term of at least one (1) year
upon terms and conditions acceptable to Parent, and written documentation of
same shall have been delivered to Parent.
6.3. Conditions to Obligations of the Company. The obligation of the
Company to effect the Merger is further subject to satisfaction or waiver of the
following conditions:
(a) Representations and Warranties. The representations and warranties
of Parent and Merger Sub set forth herein shall be true and correct both when
made and at and as of the Effective Date, as if made at and as of such time
(except to the extent expressly made as of an earlier date, in which case as of
such date), except where the failure of such representations and warranties to
be so true and correct (without giving effect to any limitation as to
materiality or material adverse effect set forth therein) does not have, and
would not, individually or in the aggregate, reasonably be expected to have a
Parent Material Adverse Effect.
(b) Performance of Obligations of Parent. Parent shall have performed
in all material respects all obligations required to be performed by it under
this Agreement at or prior to the Effective Date.
(c) Delivery of Closing Documents. At or prior to the Effective Time,
the Parent shall have delivered to the Company a certificate of the President
and the Chief Financial Officer of Parent (in their capacities as such
officers), dated as of the Effective Date, stating that the conditions precedent
set forth in Sections 6.3(a) and (b) hereof have been satisfied.
ARTICLE VII
TERMINATION
7.1. Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the Merger by the
Company's stockholders:
(a) by mutual written consent of the Company and Parent (on behalf of
Parent and Merger Sub);
(b) by either the Company or Parent (on behalf of Parent and Merger
Sub): (i) if the Merger shall not have been completed by January 2, 2001;
provided, however, that the right to terminate this Agreement pursuant to this
Section 7.1(b)(i) shall not be available to any party
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whose failure to perform any of its obligations under this Agreement results in
the failure of the Merger to be consummated by such time; (ii) if stockholder
approval shall not have been obtained at the Company Stockholders Meeting duly
convened therefor or at any adjournment or postponement thereof; (iii) if any
restraint having any of the effects set forth in Section 6.1(b) or Section
6.2(d) hereof shall be in effect and shall have become final and nonappealable;
or (iv) if the Company enters into a merger, acquisition or other agreement
(including an agreement in principle) or understanding to effect a Superior
Proposal or the Company Board or a committee thereof resolves to do so;
provided, however, that the Company may not terminate this Agreement pursuant to
this Section 7.1(b)(iv) unless (a) the Company has delivered to Parent and
Merger Sub a written notice of the Company's intent to enter into such an
agreement to effect such Acquisition Proposal, which notice shall include,
without limitation, the material terms and conditions of the Acquisition
Proposal and the identity of the Person making the Acquisition Proposal, (b)
three business days have elapsed following delivery to Parent and Merger Sub of
such written notice by the Company and (c) during such three-business-day
period, the Company has fully cooperated with Parent and Merger Sub to allow
Parent and Merger Sub within such three-business-day period to propose
amendments to the terms of this Agreement to be at least as favorable as the
Superior Proposal; provided, further, that the Company may not terminate this
Agreement pursuant to this Section 7.1(b)(iv) unless, at the end of such
three-business-day-period (and after due consideration by the Company Board of
any proposed amendment to this Agreement that has been submitted by Parent
during such three-day period), the Company Board continues reasonably to believe
that the Acquisition Proposal constitutes a Superior Proposal;
(c) by the Company, if Parent or Merger Sub shall have breached any of
its representations and warranties contained in Article IV hereof which breach
has or is reasonably likely to have a Parent Material Adverse Effect or Parent
or Merger Sub shall have breached or failed to perform in any material respect
any of its covenants or other agreements contained in this Agreement, in each
case, which breach or failure to perform has not been cured by Parent or Merger
Sub within ten days following receipt of notice thereof from the Company;
provided, however, that no cure period shall apply for a breach by Parent or
Merger Sub of the obligations to close pursuant to Section 1.7 hereof or make
cash available pursuant to Section 2.5(b) hereof; or
(d) by Parent (on behalf of Parent and Merger Sub): (i) if the Company
shall have breached any of its representations and warranties contained in
Article III hereof which breach has or is reasonably likely to have a Company
Material Adverse Effect or the Company shall have breached or failed to perform
in any material respect any of its covenants or other agreements contained in
this Agreement, in each case (other than a breach of Section 5.6(b) hereof, as
to which no cure period shall apply), which breach or failure to perform has not
been cured by the Company within ten days following receipt of notice thereof
from Parent; or ii) if (a) the Company Board or any committee thereof shall have
withdrawn or modified in a manner adverse to Parent its approval or
recommendation of the Merger or this Agreement, or approved or recommended an
Acquisition Proposal (including a Superior Proposal), or (b) the Company Board
or any committee thereof shall have resolved to take any of the foregoing
actions.
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7.2. Effect of Termination. The termination of this Agreement pursuant
to the terms of Section 7.1 hereof shall become effective upon delivery to the
other party of written notice thereof. In the event of the termination of this
Agreement pursuant to the foregoing provisions of this Article VII, there shall
be no obligation or liability on the part of any party hereto (except as
provided in Section 7.3 hereof) or its stockholders or directors or officers in
respect thereof, except for agreements in Sections 5.5, 5.7, 7.2, 7.3 and 8.8,
which survive the termination of this Agreement, and except for liability that
Parent or Merger Sub or the Company might have to the other party or parties
arising from the willful and material breach by a party of any of its
representations, warranties, covenants or agreements set forth in this
Agreement, which breach results in a termination of this Agreement pursuant to
Sections 7.1(c) or 7.1(d)(i), or otherwise due to the fraudulent or willful
misconduct of such party.
7.3. Fees and Expenses.
(a) Except as provided in this Section 7.3, whether or not the Merger
is consummated, the Company, on the one hand, and Parent and Merger Sub, on the
other, shall bear their respective expenses incurred in connection with the
Merger, including, without limitation, the preparation, execution and
performance of this Agreement and the transactions contemplated hereby, and all
fees and expenses of investment bankers, finders, brokers, agents,
representatives, counsel and accountants, provided, however, Parent and Merger
Sub acknowledge that the Company will pay all amounts owing to said parties at
closing and any unpaid amount will be disclosed to Parent and Merger Sub and
shall thereafter be paid by Surviving Corporation.
(b) Notwithstanding any provision in this Agreement to the contrary, if
this Agreement is terminated (x) by the Company or Parent pursuant to Section
7.1(b)(ii) and if, after the date hereof and prior to the termination date, an
Acquisition Proposal occurs, or (y) by Parent pursuant to Section 7.1(b)(iv),
7.1(d)(i) or 7.1(d)(ii) hereof, then, in each case, the Company shall (without
prejudice to any other rights Parent may have against the Company for breach of
this Agreement), reimburse Parent upon demand for all reasonable out-of-pocket
fees and expenses not to exceed $25,000 incurred or paid by or on behalf of
Parent or any Affiliate of Parent in connection with this Agreement, the Merger
and transactions contemplated herein, including all fees and expenses of
counsel, investment banking firms, accountants and consultants.
(c) Notwithstanding any other provision in this Agreement to the
contrary, if (x) this Agreement is terminated by the Company or Parent at a time
when Parent is entitled to terminate this Agreement pursuant to Section
7.1(b)(ii) or 7.1(d)(i) (other than due to a breach of Section 5.6(b) hereof)
and, concurrently with or within nine months after such a termination, the
Company shall enter into an agreement, arrangement or binding understanding with
respect to an Acquisition Proposal (which shall include, for this purpose, the
commencement by a third party of a tender offer or exchange offer or similar
transaction directly with the Company's stockholders) with a third party
(collectively, a "Third Party Deal") or (y) this Agreement is terminated
pursuant to Section 7.1(b)(iv), Section 7.1(d)(i) (only if such termination
results from a breach of Section 5.6(b) hereof) or 7.1(d)(ii), then, in each
case, the Company shall (in addition to any obligation under Section 7.3(b)
hereof and as liquidated damages and not as a penalty or forfeiture) pay to
Parent U.S.$200,000 (the "Termination Fee") in cash, such payment to be made
promptly, but in no event later than the second business day following, in the
case of clause (x),
33
<PAGE>
the later to occur of such termination and the entry into of such Third Party
Deal, or, in the case of clause (y), such termination.
(d) Notwithstanding any provision in this Agreement to the contrary, if
this Agreement is terminated by the Company pursuant to Section 7.1(c) hereof,
then Parent shall (without prejudice to any other rights the Company may have
against Parent for breach of this Agreement), reimburse the Company upon demand
for all reasonable out-of-pocket fees and expenses not to exceed $25,000
incurred or paid by or on behalf of the Company or any Affiliate of the Company
in connection with this Agreement, the Merger and the transactions contemplated
herein, including all fees and expenses of counsel, investment banking firm,
accountants and consultants.
(e) The parties acknowledge that the agreements contained in Sections
7.3(b), (c) and (d) hereof are an integral part of the transactions contemplated
by this Agreement, and that, without these agreements, Parent and Merger Sub on
the one hand, and the Company on the other, would not enter into this Agreement.
Accordingly, if the Company fails promptly to pay the amounts due pursuant to
Sections 7.3(b) and/or (c) hereof, or if Parent fails promptly to pay the
amounts due pursuant to Section 7.3(d) hereof, (i) the party failing to so pay
shall pay interest on such amounts at the prime rate announced by Wells Fargo
Minnesota N. A, Minneapolis office, in effect on the date the Termination Fee
(or fees and expenses) were required to be paid, and (ii) if, in order to obtain
such payment, a party commences a suit or takes other action which results in a
judgment or other binding determination against the nonpaying party for the fees
and expenses in Sections 7.3(b) or 7.3(d) hereof or the Termination Fee, the
nonpaying party shall also pay to the party entitled to receive payment its
reasonable costs and expenses (including reasonable attorneys' fees) incurred in
connection with such suit, together with interest payable under the preceding
clause (i).
ARTICLE VIII
MISCELLANEOUS
8.1. Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
8.2. Waiver. At any time prior to the Effective Time, any party hereto
may (a) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto, and (c) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations
contained herein. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
duly authorized by and signed on behalf of such party.
8.3. Notices.
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<PAGE>
(a) Any notice or communication to any party hereto shall be duly given
if in writing and delivered in person, by facsimile (with receipt electronically
acknowledged) or by overnight air courier guaranteeing next day delivery, to
such other party's address.
If to Parent: Dynamic Homes, LLC
230 West Superior St., Ste. 811
Duluth, Minnesota 55802
Attn: Robert C. Pearson and
John N. Nys
with a copy to: Johnson, Killen & Seiler, P.A.
Attn: Robert C. Pearson, Esq. and
John N. Nys, Esq.
230 West Superior St., Ste. 811
Duluth, Minnesota 55802
If to the Company: Dynamic Homes, Inc.
Attn: Scott Lindemann
P.O. Box 1137
525 Roosevelt Avenue
Detroit Lakes, Minnesota 55502
with copies to:
and to: Lommen, Nelson, Cole & Stageberg, P.A.
Attn: Roger V. Stageberg, Esq.
Sherri D. Ulland, Esq.
80 S. Eighth Street, Suite 1800
Minneapolis, Minnesota 55402
(b) All notices and communications will be deemed to have been duly
given: at the time delivered by hand, if personally delivered; when sent, if
sent by facsimile and receipt is electronically confirmed; and one business day
after timely delivery to the courier, if sent by overnight air courier
guaranteeing next day delivery.
8.4. Counterparts. This Agreement may be executed via facsimile in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
8.5. Interpretation. The language used in this Agreement and the other
agreements contemplated hereby shall be deemed to be the language chosen by the
parties to express their mutual intent, and no rule of strict construction shall
be applied against any party. The headings of articles and sections herein are
for convenience of reference, do not constitute a part of this Agreement, and
shall not be deemed to limit or affect any of the provisions hereof. As used in
this Agreement, "Person" means any individual, corporation, limited liability
company, limited
35
<PAGE>
or general partnership, joint venture, association, joint stock company, trust,
unincorporated organization or other entity; "Knowledge" means the actual
knowledge of a director or any executive officer of the applicable party or any
of its Subsidiaries, and with respect to the Company as such knowledge has been
obtained by such person in the normal conduct of the business; and all amounts
shall be deemed to be stated in U.S. dollars, unless specifically referenced
otherwise.
8.6. Amendment. This Agreement may be amended by the parties at any
time before or after any required approval of matters presented in connection
with the Merger by the stockholders of the Company; provided, however, that
after any such approval, there shall not be made any amendment that by law
requires further approval by such stockholders without obtaining such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties.
8.7. No Third Party Beneficiaries. Nothing in this Agreement shall
confer any rights upon any person or entity which is not a party or permitted
assignee of a party to this Agreement.
8.8. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Minnesota.
8.9. Entire Agreement. This Agreement (together with the Exhibits and
the Company Disclosure Letter, and the other documents delivered pursuant hereto
or contemplated hereby) constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all other prior
agreements and understandings, both written and oral, between the parties with
respect to the subject matter hereof, in each case other than the
Confidentiality Agreement.
8.10. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that transactions contemplated
hereby are fulfilled to the extent possible.
* * * * *
[BALANCE OF THIS PAGE LEFT BLANK INTENTIONALLY]
36
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and
Plan of Merger to be executed by their duly authorized officers all as of the
day and year first above written.
PARENT
Dynamic Homes, LLC Date: September 25, 2000
By: /s/ illegible signature
------------------------------------
Its Chief Manager
MERGER SUB
Dynamic Acquisitions, Inc. Date: September 25, 2000
By: /s/ illegible signature
------------------------------------
Its President
COMPANY
Dynamic Homes, Inc. Date: September 25, 2000
By: /s/ illegible signature
------------------------------------
Its Chief Executive Officer
37
<PAGE>
EXHIBIT A
38
<PAGE>
ARTICLES AND PLAN OF MERGER BY AND BETWEEN
DYNAMIC ACQUISITIONS, INC.
AND
DYNAMIC HOMES, INC.
The directors of Dynamic Acquisitions, Inc., a Minnesota corporation
("DAI"), and Dynamic Homes, Inc., a Minnesota corporation ("DHI"), having each
resolved by a majority vote of the members of each of the respective boards of
those corporations to approve these Articles and Plan of Merger pursuant to
Minnesota Statutes, Section 302A.613, Subdivision 1, and notice having been duly
given to the shareholders of each constituent corporation, and a majority of the
voting power of all shares entitled to vote having voted, pursuant to Minnesota
Statutes, Section 302A.613, subdivision 2, to approve these Articles and Plan of
Merger, do hereby file these Articles and Plan of Merger.
On the effective date of this merger, DAI shall merge into DHI. Each
share of DAI shall be canceled and DHI shall be the surviving corporation.
The terms and conditions on which this merger shall occur are contained
in that certain Agreement and Plan of Merger by and among Dynamic Homes, LLC, a
Minnesota limited liability company ("DHLLC"), DAI and DHI dated September 25,
2000, which is incorporated herein by reference.
<PAGE>
These Articles and Plan of Merger are effective on filing with the
Minnesota Secretary of State on _________________, 2000.
Dynamic Acquisitions, Inc.
By
-----------------------------------------------
Its President
Dated: , 2000
--------------------------------
Dynamic Homes, Inc.
By
-----------------------------------------------
Its President
Dated: , 2000
--------------------------------
STATE OF MINNESOTA )
)ss.
COUNTY OF ST. LOUIS )
On this __ day of _______________, 2000, before me,
___________________________, a notary public, personally appeared
_____________________________________, known to me to be the President of
Dynamic Acquisitions, Inc.
In Witness Whereof, I have hereunto set my hand and affixed by official
seal the day and year in this certificate first above written.
_________________________
Notary Public
STATE OF MINNESOTA )
)ss.
COUNTY OF ST. LOUIS )
On this __ day of _______________, 2000, before me,
___________________________, a notary public, personally appeared
_____________________________________, known to me to be the President of
Dynamic Homes, Inc.
In Witness Whereof, I have hereunto set my hand and affixed by official
seal the day and year in this certificate first above written.
_________________________
Notary Public
<PAGE>
APPENDIX B
MINNESOTA BUSINESS CORPORATION ACT
302A.471 RIGHTS OF DISSENTING STOCKHOLDERS
Subdivision 1. Actions creating rights. A stockholder of a corporation
may dissent from, and obtain payment for the fair value of the stockholder's
shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting stockholder in that
it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking fund for
the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of
the shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) excludes or limits the right of a stockholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing or new class
or series with similar or different voting rights; except that an amendment to
the articles of an issuing public corporation that provides that section
302A.671 does not apply to a control share acquisition does not give rise to the
right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without stockholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in section
302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the stockholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B,
to which the corporation is a constituent organization, except as provided in
subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares will
be acquired by the acquiring corporation, if the shares of the stockholder are
entitled to be voted on the plan; or
B-1
<PAGE>
(e) Any other corporate action taken pursuant to a stockholder vote
with respect to which the articles, the bylaws, or a resolution approved by the
board directs that dissenting stockholders may obtain payment for their shares.
Subd.2. Beneficial owners. (a) A stockholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the stockholder, unless the stockholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
stockholder and discloses the name and address of each beneficial owner on whose
behalf the stockholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the stockholder has dissented
and the other shares were registered in the names of different stockholders.
(b) The beneficial owner of shares who is not the stockholder may
assert dissenters' rights with respect to shares held on behalf of the
beneficial owner, and shall be treated as a dissenting stockholder under the
terms of this section and section 302A.473, if the beneficial owner submits to
the corporation at the time of or before the assertion of the rights a written
consent of the stockholder.
Subd. 3. Rights not to apply. (a) Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a stockholder of the surviving corporation
in a merger, if the shares of the stockholder are not entitled to be voted on
the merger.
(b) If a date is fixed according to section 302A.445, subdivision
1, for the determination of stockholders entitled to receive notice of and to
vote on an action described in subdivision 1, only stockholders as of the date
fixed, and beneficial owners as of the date fixed who hold through stockholders,
as provided in subdivision 2, may exercise dissenters' rights.
Subd. 4. Other rights. The stockholders of a corporation who have a
right under this section to obtain payment for their shares do not have a right
at law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining stockholder or the corporation.
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
Subdivision 1. Definitions. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
B-2
<PAGE>
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1, up
to and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a stockholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each stockholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the proposed action must be approved by
the stockholders, a stockholder who is entitled to dissent under section
302A.471 and who wishes to exercise dissenters' rights must file with the
corporation before the vote on the proposed action a written notice of intent to
demand the fair value of the shares owned by the stockholder and must not vote
the shares in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares. (a) After the proposed
action has been approved by the board and, if necessary, the stockholders, the
corporation shall send to all stockholders who have complied with subdivision 3
and to all stockholders entitled to dissent if no stockholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates
of certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that
will apply after the demand for payment is received;
(3) A form to be used to certify the date on which the
stockholder, or the beneficial owner on whose behalf the stockholder dissents,
acquired the shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
stockholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a stockholder until the proposed action takes effect.
B-3
<PAGE>
Subd. 5. Payment; return of shares. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting stockholder
who has complied with subdivisions 3 and 4 the amount the corporation estimates
to be the fair value of the shares, plus interest, accompanied by:
(1) the corporation's closing balance sheet and statement of
income for a fiscal year ending not more than 16 months before the effective
date of the corporate action, together with the latest available interim
financial statements;
(2) an estimate by the corporation of the fair value of the
shares and a brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph
(a) from a person who was not a stockholder on the date the action dissented
from was first announced to the public or who is dissenting on behalf of a
person who was not a beneficial owner on that date. If the dissenter has
complied with subdivisions 3 and 4, the corporation shall forward to the
dissenter the materials described in paragraph (a), a statement of the reason
for withholding the remittance, and an offer to pay to the dissenter the amount
listed in the materials if the dissenter agrees to accept the amount in full
satisfaction. The dissenter may decline the offer and demand payment under
subdivision 6. Failure to do so entitles the dissenter only to the amount
offered. If the dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and cancel all
transfer restrictions. However, the corporation may again give notice under
subdivision 4 and require deposit or restrict transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
mount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall
B-4
<PAGE>
file the petition in the county in this state in which the last registered
office of the constituent corporation was located. The petition shall name as
parties all dissenters who have demanded payment under subdivision 6 and who
have not reached agreement with the corporation. The corporation shall, after
filing the petition, serve all parties with a summons and copy of the petition
under the rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the stockholder or stockholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all stockholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
B-5
<PAGE>
REVOCABLE PROXY
DYNAMIC HOMES, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Dynamic Homes, Inc. ("Dynamic Homes")
hereby appoints Clyde R. Lund, Jr. and Eldon Matz, and each of them, with full
power of substitution in each, to act as proxies to cast all votes which the
undersigned stockholder is entitled to cast at the Special Meeting of
stockholders to be held at 9:00 a.m., Central Standard Time, on December 28,
2000 at the Holiday Inn Motel, Detroit Lakes, Minnesota, and at any adjournments
or postponements thereof, upon the following matters.
The undersigned stockholder hereby revokes any proxy or proxies
heretofore given.
When this proxy is properly executed, the shares represented hereby
will be voted as specified. If no specification is made, this proxy will be
voted for the approval of the Merger Agreement and, in the discretion of the
proxies, with respect to all other matters which may properly come before the
meeting and any and all adjournments thereof.
If you receive more than one proxy card, please sign and return all
cards in the accompanying envelope.
(continued and to be signed and dated on reverse side)
SEE REVERSE SIDE
<PAGE>
[X]
Please mark your
vote as this.
Proposal 1: To approve and adopt the Agreement and Plan of Merger, dated
September 25, 2000, between Dynamic Homes, LLC, Dynamic
Acquisitions, Inc. and Dynamic Homes, Inc., and the merger
contemplated thereby.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Other Matters: The proxies are authorized to vote upon such other business as
may properly come before the stockholders meeting, or any
adjournments or postponements of the meeting.
Please sign exactly as name or names appear on this
proxy. If stock is held jointly, each holder should
sign. If signing as attorney, trustee, executor,
administrator, custodian, guardian or corporate
officer, please give full title.
Dated: __________________________, 2000
---------------------------------------
Signature
---------------------------------------
Signature
Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope.
<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Attention: Filing Desk
STOP 1-4
450 Fifth Street NW
Washington, DC 20549-1004
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 25, 1999
Commission file number 0-8585
Dynamic Homes, Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-0960127
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
525 Roosevelt Avenue, Detroit Lakes, MN 56501
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code - (218) - 847-2611
Securities registered pursuant to Section 12(g) of the act:
Name of Exchange on
Title of Each Class Which Registered
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Common Stock, $.10 par value NASDAQ Small Cap Market
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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 14, 2000, 2,240,850 common shares were outstanding, and the
aggregate market value of the common shares (based upon the sales price
information of these shares as compiled by the NASDAQ market) of Dynamic Homes,
Inc., held by non-affiliates was approximately $2,333,000. On January 7, 1995
the Company implemented a six-month plan to repurchase up to 100,000 shares of
its outstanding common stock. As of March 14, 2000, a total of 43,080 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 but unexercised options are excluded from
the common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(See following page)
Total number pages, including cover page - 44
Page 1
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Form 10-K
Dynamic Homes, Inc.
Table of Contents
Page No.
Part I --------
Item 1 Business 3
Item 2 Properties 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of
Security Holders 9
Part II
Item 5 Market for the Registrants' Common
Stock and Related Stockholder Matters 10
Item 6 Selected Financial Data 10
Item 7 Management's Discussion and Analysis of
Results of Operations and Financial Condition 11
Item 8 Financial Statements and Supplementary Data 17
Part III
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 35
Item 10 Directors and Executive Officers of the
Registrant 35
Item 11 Executive Compensation 35
Item 12 Security Ownership of Certain Beneficial
Owners and Management 35
Item 13 Certain Relationships and Related
Transactions 36
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 37-38
Documents Incorporated by Reference
Page 2
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PART I
ITEM 1. BUSINESS
GENERAL
Dynamic Homes, Inc. (a Minnesota Corporation) was founded in 1970
and is headquartered in Detroit Lakes, Minnesota. Dynamic Homes, Inc.
(hereinafter together with its subsidiaries, unless the context requires
otherwise, referred to as the "Company") manufactures and markets modular,
preconstructed single-family and multi-family homes and light commercial
buildings in the upper Midwest region of the United States. Auxiliary products
include garages, wood basements and retail sales. During 1995, the Company
purchased all the stock of Shagawa Resort, Inc., a hotel/resort located in Ely,
Minnesota. In conjunction with the stock purchase, the Company also entered into
a management agreement for the operation of the hotel/resort which commenced
operations in May 1996. During March 1997, the management agreement was
terminated and the Company assumed both ownership and operational activities for
the facility.
PRODUCTS
The Company's principal product at its manufacturing facility is
single-family modular homes. Single-family homes currently produced by the
Company are offered in a number of standard designs with various options and
floor plan variations. Even though the Company has standardized plans, the
majority of single-family homes are customized to individual preferences.
Approximately 90-95 percent of single-family units sold are custom built.
Standard models include split entry, rambler, split level, one and
two story homes ranging in size from approximately 864 square feet to
approximately 2,268 square feet of living space. Standard features include 2x6
inch (R-19 insulated) exterior walls, R-44 roof insulation, eight foot ceiling
height, sheetrocked, taped and textured, primed interior walls, cabinets,
finished interior doors and trim, plumbing fixtures, 200 amp electrical service
with all upper level wiring completed, shelving and windows. In addition, the
customers may also choose from available options such as floor coverings,
siding, lighting, roof pitches, vaulted ceilings, dormers and appliances.
As well as its principal single-family modular homes, the Company
produces and markets modular multi-family units ranging in size from
approximately 600 square feet to 1,700 square feet per living unit. During 1999,
the Company's multi-family sales accounted for approximately 6 percent of unit
revenues. During 1998 and 1997, the Company's multi-family segment accounted for
approximately 8 percent and 4 percent of revenues, respectively.
The Company also produces light commercial products including small
offices, motels and other buildings requiring special design. Commercial sales
activity accounted for 2 percent of unit revenues during 1999 and less than 1
percent of 1997 and 1998 unit revenues.
The Company also produces and markets panelized garages and wood
foundations to complement its modular homes. During 1999, these auxiliary
products accounted for approximately 4 percent of total unit revenues, as
compared to 4 percent for 1998 and 3 percent for 1997. In addition, the Company
provides its customers with the opportunity to purchase materials at retail.
Revenues associated with retail sales approximate 3 to 4 percent annually.
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The Company manufactures its products in modular form on an assembly
line basis. Each module is constructed of wood frame and sheathing into which
complete wiring and plumbing are installed. The module is insulated with
fiberglass and blown cellulose insulation and finished with interior sheetrock,
wall covering, windows and shingled roof. Electrical fixtures, kitchen cabinets,
interior doors and trim and appliances are installed during the final phases of
the assembly process.
The modules are transported to the building site and set by the
Company's employees and equipment upon foundations prepared by
factory-authorized builder/dealers and/or contractors. In some cases, distance,
site conditions, and module configurations may require the leasing of equipment
to assist in the setting process.
Shagawa Resort, Inc. d.b.a.: Holiday Sunspree Resort is associated
with the hospitality industry. The resort/motel consists of 61 units on
approximately 12.2 acres of land located in Ely, Minnesota and adjacent to
Shagawa Lake. The facility offers its services to the general public but
specializes as a leisure/vacation destination. The facility offers a wide range
of amenities and services such as restaurants, lounge, meeting rooms, easy
access to local attractions and a diversity of winter and summer recreational
activities.
MARKETING
The Company markets its products within the states of Iowa,
Minnesota, Nebraska, North Dakota, South Dakota and Wisconsin principally
through a network of approximately 53 independent factory authorized
builder/dealers.
The builder/dealers operate in nonexclusive territories and purchase
the Company's products based on dealer price lists for a nominal down payment
with the balance due within 5 working days after setting upon the foundation.
The builder/dealers sell to the ultimate purchaser and may, in
addition, contract with the purchaser for site preparation including foundation
work and for finishing work which must be performed after delivery and erection
of the Company's products. These additional functions are performed
independently of the builder/dealers' relationship with the Company.
The Company has no suggested retail prices for its products to the
ultimate consumer. The builder/dealer realizes as profit the difference between
what is paid the Company, other suppliers and contractors and the payment(s)
received from the purchaser. During 1999, the Company derived approximately 10
percent of its revenues from one customer. During 1998, the Company derived
approximately 15 percent of its revenues from one customer and in 1997, the
Company realized approximately 12 percent of its revenues from one customer.
Sales to customers accounting for more than 10 percent of revenues usually are
of a non-repetitive nature. As a result, the Company does not expect to be
dependent upon the same customers on a year-to-year basis for a significant
portion of future revenues.
In addition to the builder/dealer network, the Company may also
market its products through contractors or developers. Developers operate in
nonexclusive territories and purchase products based on contractual
arrangements. These contractual arrangements may vary from a single-phase
project to a multi-phased project built and delivered over an extended time
interval.
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Shagawa Resort, Inc. markets its services through various
recreational/vacation related shows and publications primarily targeting the
population centers of Minnesota, Wisconsin and Iowa. In addition, the facility
is a member of the Holiday Inns - Holidex Reservation System that administers a
computerized reservation network service.
COMPETITION
There is substantial competition within the Company's market area.
The Company competes in the housing market with other modular and panelized
manufacturers, tract home developers, mobile home manufacturers and traditional
on-site builders of single and multi-family/commercial units.
The Company has several direct competitors marketing modular and
panelized units within its market area. Some of these competitors have
substantially greater assets and gross annual sales than the Company.
Transportation costs significantly increase the cost of housing
units sold by the Company beyond a four hundred-mile radius from its
manufacturing facility. General pricing in the housing market throughout the
United States is sufficiently competitive to somewhat limit the Company's
ability to compete in some areas outside this radius. While this may provide the
Company with some competitive advantage within its immediate market area, it
makes competition outside its market more difficult. The majority of the
Company's sales are concentrated within a two hundred fifty-mile radius of its
manufacturing facility.
The Company competes principally on the basis of quality and design
of product, material, craftsmanship, delivery and service.
Shagawa Resort, Inc. has several competitors within its immediate
market location. The hotel/resort facility competes principally on the basis of
service, amenities and location.
MATERIALS
The principal materials used by the Company in the manufacture of
its products are processed lumber, finished cabinets, floor coverings, windows
and doors, sheetrock, insulation and shingles. Currently, the Company is not
experiencing any difficulty in obtaining adequate supplies of raw materials from
current suppliers and does not anticipate any immediate difficulty in obtaining
adequate supplies. During 1999 and 1997 prices for wood building products
experienced some volatility with average price levels slightly higher than
anticipated. However, during 1998 prices for wood building products remained
relatively stable. The Company monitors its material costs on an on-going basis
and during periods of escalating material costs may impose a temporary surcharge
to prevent the erosion of its profit margin. The Company may periodically adjust
the surcharge level to correlate with the on-going fluctuations in material
costs. While no surcharges were implemented during 1998 or 1997, the volatility
of material costs in 1999 required the company to impose surcharges three times
during the year. Future strong demand for wood and related building products may
not only again support higher price levels but could also decrease availability
through longer lead times and product allocations.
Major raw components are available to the Company from several
vendors, and the Company is not dependent upon any one of these vendors for a
continuous source of supply.
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PATENTS AND TRADEMARKS
The Company's manufacturing facility neither owns nor is a licensee
of any patents, trademarks, licenses, franchises or concessions that are
material to its business. Shagawa Resort, Inc. operates under a franchise
agreement with Bass Hotels & Resorts and markets under the Holiday Inn Sunspree
Resort designation.
RESEARCH AND DEVELOPMENT
The Company has not incurred any research and development cost as
defined by generally accepted accounting principles.
GOVERNMENT REGULATIONS
Throughout the Company's market area, various state laws or local
ordinances regulate materials, equipment and design used in the construction of
housing units. The Company is unaware of any law or ordinance that precludes the
sale and erection of its homes within any governmental unit in its market area
and the Company believes its homes comply with the requirements of such laws and
ordinances. Highway regulations limit the Company's ability to transport and
deliver homes during the annual spring thaw.
No significant amount of any material is discharged by the Company
into the environment and applicable laws and regulations relating to
environmental protection do not require any capital expenditures by the Company
for environmental control facilities at either its manufacturing or hotel/resort
facility.
SEASONAL ASPECT & CURRENT ECONOMIC CONDITIONS
Due to seasonal fluctuations in the housing market, the Company
experiences fluctuations in orders. Orders tend to begin increasing during the
month of March, peak during the months of April through June, gradually diminish
through the early summer, rise again in late summer and fall and diminish again
in the winter months. In order to supplement the traditional periods of
decreased order activity, the Company offers several single-family model and
winter promotional programs and pursues multi-family/commercial projects
utilizing winter promotions and discounts.
The Company experiences seasonal increases in inventory of finished
units in the spring of each year for a period of approximately six to eight
weeks. Local regulations and road conditions restrict usage of roadways during
this season for the delivery of homes and the passage of heavy equipment
necessary for the erection of the Company's units. During the last three years,
because of seasonal fluctuations in orders, the Company determined that it was
advantageous to build some homes for inventory during the winter and early
spring months. This process reduced idle plant capacity overhead and also
provides builder/dealers with immediate product availability. The Company
produced 26 units for inventory in 1999, 28 units in 1998 and 31 units in 1997.
At the end of the year in 1999, the Company had 12 units in ending inventory
compared with 6 units at the end of both 1998 and 1997. Because of the number of
units in inventory at the end of 1999, and because of the strength of winter
program orders, the Company has limited its production of inventory units during
2000. The Company continues to rotate model/display units on its premises that
are used to illustrate construction and design capabilities for potential
customers. As of December 25, 1999, the Company had two model/display units. The
Company's intent is to have two model/display units available and replace them
as needed.
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Historically, the Company's sales volume has been affected by the
difficulty encountered by consumers obtaining mortgage funds and by fluctuating
mortgage interest rates. The Company remains alert to the potential impact of
rising home mortgage rates on home construction if the Federal Reserve Board
continues to raise short-term interest rates to combat inflationary pressures.
Uncertainty in the energy and mining industries and a general weakness in the
agricultural economy also affect the Company's sales volume as these market
segments have made strong contributions to the sales base in past years. To
combat these potential economic conditions, the Company continues to diversify
and modify the product line to meet the changing needs of both the rural and
urban market. The diversity of product availability, structural design and
flexibility, an upgraded builder/dealer network and continued emphasis on
multi-family/commercial sales should contribute to the 2000 revenue base.
However, any additional upward trends in mortgage rates and consumer uncertainty
over the course of the economy and national budgeting policy may place
limitations on potential consumers' willingness to commit to new home purchases
that would adversely affect the revenue base.
In 1999, 100 percent of all production was completed at its only
plant, located in Detroit Lakes, Minnesota. During 1999, the Company operated at
approximately 67% of its practical single-shift production capacity, as compared
with 73% for 1998 and 62% in 1997. Historically, the Company tends to realize a
significant portion of new orders during the spring and early summer months,
lengthening the production cycle and contributing to lost and delayed unit
orders. In order to alleviate this condition, the Company completed two plant
expansion projects, the last project being completed in June 1997. Annual
single-shift plant capacity is now estimated at 450,000 square feet.
Shagawa Resort, Inc. is affected by the seasonal nature of the
tourist industry and to a lesser degree by location. Revenues usually increase
beginning mid-May and continue through the Labor Day weekend when the tourist
season begins to decline. The unusually mild weather and less than ideal snow
conditions during the 1997 - 99 winter seasons, adversely impacted the resort's
performance by curtailing many of the winter sports activities that would
normally bring visitors to Northern Minnesota.
EMPLOYEES
At December 25, 1999, the number of full-time employees at the
Detroit Lakes facility totaled 88 as compared with 95 for the year ending
December 26, 1998. Of these, 5 were in management positions, 9 in supervisory
positions, 54 in manufacturing, 9 in transportation and erection, 2 in sales and
9 in drafting and clerical positions. The Company's manufacturing,
transportation and installation employees located in Detroit Lakes, Minnesota,
are represented by a labor union. The present labor union contract for Detroit
Lakes union employees became effective on March 1, 1998, and expires on February
28, 2001. The three-year contract provides for modest annual wage adjustments
and increases in the benefit package.
Shagawa Resort, Inc. has a full-time staff of 29 employees. The
classification of employees consists of 5 management positions, 5 supervisory
employees, 7 clerical and front-desk positions and 12 service employees. In
addition, the hotel/resort facility may employ upwards to 12 seasonal employees
during the summer tourist season.
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ITEM 2. PROPERTIES
(A) DETROIT LAKES, MINNESOTA
The Company's general business office and main manufacturing
facility is located at 525 Roosevelt Avenue, Detroit Lakes, Minnesota. This
facility consists of eight buildings comprising approximately 119,900 square
feet utilized as follows: production 72,300, warehouse storage and shop 39,900
and offices 7,700. In 1994, the Company expanded the manufacturing facility by
15,000 square feet that increased additional available plant capacity by
approximately 20 - 25%. During the latter stages of 1996, the Company commenced
with an additional 17,000 square foot plant expansion project which was
completed in June, 1997, and increased available single-shift plant capacity by
approximately15 percent. The restructuring and addition of long-term debt funded
the plant expansion. The buildings are situated upon a 27-acre tract of land
that was leased from the City of Detroit Lakes, Minnesota. The lease was
coterminous with industrial revenue bonds issued in April 1973, by the City of
Detroit Lakes in principal amount of $435,000. The Company was given the option
of purchasing this property at any time by paying to the city and the trustee an
amount that is sufficient to discharge the then outstanding bonds. The Company
exercised its option to retire all outstanding Industrial Development Revenue
Bonds on April 1, 1997, obtaining title to said property which was used to
provide collateral for the restructured long-term debt in support of the plant
expansion project. This plant facility currently has the annual single-shift
capacity to produce approximately 450,000 square feet of product. Land not
occupied by buildings is used for storing raw and finished materials.
(B) SHAGAWA RESORT, INC. - ELY, MINNESOTA
On September 7, 1995, the Company purchased all of the outstanding
shares of Shagawa Resort, Inc., which was 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 12.2 acres of land. The purchase price
consisted of cash and a construction mortgage assumption to Norwest Bank
Minnesota for the financing of the construction costs associated with completing
the Shagawa Resort, Inc. hotel/resort facility. The hotel/resort remained under
construction until May 1, 1996, when the hotel/resort commenced with normal
business operations. During August 1996, the construction mortgage was finalized
and converted to a long-term mortgage loan 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 6).
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 March 20, 2000, the Company announced that it has signed a
purchase agreement for the sale of the assets of Shagawa Resort, Inc. The
purchase agreement calls for a purchase price of $2,300,000 plus the assumption
of various obligations of the resort. The sale is expected to close by May 1,
2000, subject to certain contingencies.
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ITEM 3. LEGAL PROCEEDINGS
There are no known legal proceedings pending by or against the Company that may
have a material effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year being reported on.
(Balance of page left intentionally blank)
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices of the
Company's stock for the eight quarters of 1999 and 1998. As of March 13, 1995,
the Company's common stock began trading on the NASDAQ Small-Cap Market tier of
the NASDAQ Stock Market under the symbol DYHM.
1999 1998
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Quarter High Low High Low
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First $ 1 7/8 $ 1 3/8 $ 2 7/16 $ 1 3/4
Second 1 11/16 1 1/4 2 1/16 1 3/4
Third 1 11/16 1 5/16 2 1/4 1 9/16
Fourth 1 5/8 1 1/16 1 7/8 1 7/16
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As of March 14, 2000, there were approximately 377 shareholders of
record of common stock, the Company's only outstanding class of stock. The
Company does not pay cash dividends and future dividends would be paid at the
discretion of the Board of Directors and the Company's lenders.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Dec 25, Dec 26, Dec. 27, Dec. 28, Dec. 30,
YEARS ENDED 1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Net sales $15,209,600 $13,905,300 $12,859,000 $12,172,200 $10,849,000
Gross profit 3,311,300 3,250,700 2,854,500 2,965,300 2,351,500
Operating expenses 2,568,200 2,344,000 2,140,000 1,365,000 1,041,100
Operating income 743,100 906,700 714,500 1,600,300 1,310,400
Net income (See page 14) 347,900 374,300 329,100 908,100 809,100
Basic net income per
common share $ .16 $ .17 $ .15 $ .41 $ .37
Diluted net income per
common share $ .16 $ .17 $ .15 $ .41 $ .37
AT YEAR END
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Working capital $3,344,700 $3,035,400 $2,630,200 $1,895,800 $1,746,700
Total assets 9,784,000 9,425,200 8,881,500 7,619,900 5,833,200
Long-term debt, Net 2,752,300 2,852,500 2,951,400 2,077,400 1,066,300
Stockholders' equity 5,454,400 5,106,500 4,732,200 4,403,100 3,479,300
Weighted average number
common shares outstanding 2,241,000 2,241,000 2,241,000 2,223,000 2,209,000
STATISTICAL HIGHLIGHTS
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Single-family unit sales 224 206 201 219 192
Average square feet per
single-family unit 1,310 1,332 1,330 1,277 1,225
Total sq. feet of production 302,381 331,882 279,878 315,182 308,400
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
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 realized revenues of $13,158,900 from the manufacturing
sector for 1999, an increase of $1,189,900 or 10 percent from the $11,969,000
reported for 1998. Revenues for the 1997 period were $11,236,600. Sales of
single-family homes increased by $979,500 from $9,924,800 during 1998 to
$10,904,300 for the current year. Sales of single-family homes during 1997
totaled $9,681,600. The Company sold 224 single-family units during 1999, 206
units during 1998 and 201 units during 1997. Housing units associated with
Native American Communities approached 6 percent of total revenue for both 1999
and 1997. During 1998, Native American projects accounted for 12 percent of the
revenue base. Currently, Dynamic Homes has one contract with a Native American
Community consisting of an assisted living complex.
Sales of multi-family/commercial projects totaled $1,109,000 for
1999, up $119,700 from the 1998 total of $989,300 Multi-family/commercial
projects for 1997 were $617,300. The Company sold 21 multi-family/commercial
units in 1999, 27 units during 1998 and 18 units in l997. New construction sales
through the Company's builder/dealer network increased nearly 14% in 1999 while
single and multi-family/commercial projects associated with non-dealers
(developers) declined. As of March 10, 2000, the Company has two
multi-family/commercial projects under contract consisting of an assisted living
complex and a small resort addition.
Transportation and other (retail) sales totaled $1,145,600 for 1999
compared with $1,054,900 for 1998 and $937,700 for 1997. Transportation revenue
increased each year as did the number of units set. Other or retail sales also
improved over the last three years from $369,300 in 1997 to $409,900 in 1998 and
$442,400 for 1999.
The Company's order backlog consisting of completed units awaiting
delivery, current production and orders scheduled for future production totaled
$1,645,000 at the end of 1999 compared with $2,737,000 for 1998. As of March 1,
2000, the Company's backlog increased to $5,307,000 versus $4,964,000 at March
1, 1999. Approximately 38 percent of the 12/26/98 backlog and 20 percent of the
March 1, 1999, backlog resulted from the failure of a developer to take delivery
of completed units. However, as of 1999 year-end, only one unit remains as
unsold. The order backlog totals for each March 1 period reflect the responses
associated with the completion of winter promotional programs. The recently
completed winter promotion resulted in a 27% increase in new single-family
orders over the 1998 period. Production activities for the new orders should
benefit the Company through better utilization of available plant capacity and
improved manufacturing overhead absorption . As these units are delivered and
set, promotional related discounts will however, reduce the gross margin
percent. During the slower winter months, the Company traditionally constructs
inventory units that are available to the builder/dealer network for immediate
purchase. The Company constructed 3 inventory units during the first two months
of 2000 and 10 units during the same period of 1999. As of March 1, 2000, the
Company's finished goods inventory consisted of 41 units including 14 unsold
inventory units. As of March 1, 1999, the Company's finished goods inventory
consisted of 55 units including 16 unsold inventory units. In addition, a
significant
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portion of the March 1, 1999, finished goods inventory related to a single
customer who delayed the delivery and setting of ordered and completed units.
The Company is again beginning to encounter seasonal road restrictions that
affect the Company's ability to deliver and set units during the first two
quarters of each year.
On March 17, 1997, the Company through an asset purchase agreement,
assumed the management rights and obligations associated with the daily
operations of a hotel/resort facility d.b.a.: Holiday Inn Sunspree Resort,
located in Ely, Minnesota. Revenues associated with the hotel/resort facility
totaled $2,050,700 for 1999 versus $1,936,300 for 1998 and $1,622,400 for the
period March 17, 1997, through December 31, 1997. The increased revenue realized
during 1999 is associated with 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 but strengthen
considerably during the summer tourist season. During the past three years of
operation, mild weather conditions and the absence of sufficient snow cover
discouraged some of the winter recreational guests from using the facility.
GROSS PROFIT
Gross profit from the Company's manufacturing sector totaled
$2,389,000 in 1999 as compared with $2,412,500 for 1998 and $2,183,900 for 1997.
As a percentage of net sales, the gross profit percent decreased by 2.0% from
20.2% during 1998 to 18.2% for 1999. Gross profit percent for 1997 was 19.4%.
The 1999 gross profit percentage was adversely affected by the 1998 year-end
carry-over of inventory units and the failure of a developer to accept delivery
of completed units. The carryover units have been successfully marketed through
the builder/dealer network utilizing discount pricing. However, the availability
of these units resulted in a reduced level of single-family production during
1999 which resulted in an increased level of idle plant capacity and unfavorable
manufacturing variances. In addition, the Company also encountered escalating
material costs on several essential building components. Consequently, the
Company implemented a series of temporary surcharges to avoid additional erosion
of the gross margin percentage.
Shagawa Resort, Inc. recorded a gross profit of $922,300 or 45.0%
for the period ended December 31, 1999. During 1998 and 1997, the resort
recorded gross profits of $838,200 or 43.3% and $670,600 or 41.3%, respectively.
The increase to the gross margin percent reflects the improved occupancy rate
and an increase in the average daily room rate.
OPERATING EXPENSE
Marketing and administrative operating expenses associated with the
manufacturing facility increased from 12.2 percent of net sales for 1998 to 12.5
percent during 1999. Similar expenses in 1997 were 11.9 percent of net sales.
Marketing expenses for 1999 were 4.7 percent of net sales compared with 4.5
percent for 1998 and 4.1 percent for 1997. The 1999 increase in marketing
expenses reflects a higher level of earned incentives by several high volume
customers. Administration expenses remained constant over the three-year
period. Administration expenses were 7.8% of net sales for 1999 and 1997 and
7.7% for 1998.
Shagawa Resort, Inc. incurred 1999 operating expenses of $923,600.
Operating expenses for 1998 were $885,700 and $799,100 for the shorter 1997
period. As a percent of net sales, operating expenses have decreased each year
from 49.3% for 1997, 45.7% for 1998 and 45.0% during 1999.
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OPERATING INCOME (LOSS)
The manufacturing facility realized 1999 income from operations of
$744,300 or 5.7 percent of net sales. Income from operations in 1998 totaled
$954,200 or 8.0 percent of net sales. During 1997, the Company realized income
from operations of $843,000 or 7.5 percent of net sales. Even though the
manufacturing facility improved the revenue base during 1999, unfavorable
variances associated with a lower level of production, higher material costs and
an increase in builder/dealer incentives affected the operating results. At the
conclusion of 1999, the Company had reduced the inventory of unsold carry-over
units that contributed to a reduced level of new order production for 1999.
Shagawa Resort, Inc. almost attained operational break-even status
during 1999 with an operating loss of $1,200. Operating losses for fiscal years
1998 and 1997 were $47,500 and $128,500, respectively. The 1999 and 1998
operating results reflect the Company's adoption of the provisions of Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities", as described
in the Other Income (Expense) section.
OTHER INCOME (EXPENSE)
Net non-operating expense for the manufacturing facility during 1999
totaled $14,500, compared with $26,100 in 1997 and $67,100 in 1997. Interest
expense, primarily related to a 1997 plant expansion, equipment acquisitions and
short-term borrowings increased interest expense from $89,400 in 1997 to
$121,900 for 1998 and $125,500 during 1999. Non-operating income of $111,000
during 1999 primarily consists of investment income realized from the Company's
cash and cash equivalents position, customer service charges and deposit
forfeitures.
Shagawa Resort, Inc. incurred mortgage related interest expense of
$141,900 during 1999, $147,200 during 1998 and $147,900 during 1997. Other
income of $58,700 realized during 1997 primarily relates to lease revenues of
$55,600 recognized prior to the March 17, 1997, asset purchase agreement.
During the fourth quarter of 1998, the Company adopted Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities," which requires
the expensing of start-up activities as incurred and the expensing of previously
capitalized start-up costs. The provisions of the statement required
implementation for years beginning after December 15, 1998, but early adoption
was encouraged. As a result, the Company expensed the remaining unamortized
start-up costs associated with Shagawa Resort, Inc. that were initially
capitalized during the 1995 - 1996 construction and pre-operating period.
Adoption of the accounting change in 1998 resulted in cumulative expenses
totaling $150,000 or $94,000 net of taxes charged to operations as of the
beginning of the year. No further impact is anticipated from the adoption of
this accounting change.
INCOME TAX BENEFIT (PROVISION)
The Company's consolidated provision for income taxes was $242,000
in 1999, $268,000 in 1998 and $227,000 in 1997. Federal and state income tax
obligations and benefits are estimated at the normal statutory rate throughout
the year with a final adjustment at year-end relating to differences between the
basis of receivables, property and equipment, other assets and accrued expenses.
Page 13
<PAGE>
NET INCOME
The Company reported a consolidated 1999 net income of $347,900. The
Company reported a consolidated 1998 net income of $467,900 before the
cumulative effect of the provisions of Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities". and $374,300 after the cumulative effect of
Statement of Position 98-5. Consolidated net income for 1997 was $329,100.
Basic and diluted earnings per common share are $0.16 for 1999, $0.21 for 1998
and $0.15 for 1997. After the adoption of Statement of Position 98-5, the
cumulative effect of the accounting change reduced 1998 net income to $374,300
or $0.17 for both basic and diluted earnings per common share. Considerations
for unexercised stock options granted in 1996 were recognized in arriving at the
diluted shares and earnings per share computations.
Shagawa Resort incurred a net loss of $0.04 per common share for
fiscal 1999. During fiscal years 1998 and 1997, Shagawa Resort, Inc. incurred
net losses of $0.06 per common share. After the adoption of the accounting
change, Shagawa Resort, Inc. recorded a net loss of $0.10 per common share for
1998.
FINANCIAL CONDITION
The Company's consolidated 1999 year-end cash and cash equivalents
position totals $931,600 or $619,300 greater than the $312,300 at 1998 year-end
and $397,900 less than the 1997 year-end total of $1,329,500. Net cash from 1999
operating activities increased by $1,614,800 from 1998 and $289,700 from 1997.
During 1999, cash outflows were required for the purchase of capital assets,
reductions to outstanding customer deposits and a temporary year-end build-up of
customer receivables. Cash flows to support the referenced activities were
provided by utilizing the Company's prior year cash and cash equivalents
position, non-cash related depreciation and amortization, inventory reduction,
long-term financing and internally generated income.
The Company's consolidated working capital increased by $309,300
from $3,035,400 at the end of 1998 to $3,344,700 at 1999 year-end. The current
ratio for December 25, 1999 is 3.3 to 1.0 compared to 3.2 to 1.0 at December 26,
1998. Other assets and property and equipment, net of amortization and
depreciation, decreased by $33,600 during 1998. Current year acquisitions of
capital assets primarily consist of replacement vehicles, computer hardware and
software and plant and office renovations.
Long-term debt and capital leases, net of current maturities,
decreased by $100,200 from $2,852,500 at December 26, 1998 to $2,752,300 at
December 25, 1999. In contrast, the current portion of long-term debt increased
by $71,200 from $196,900 at December 26, 1998 to $268,100 at December 25, 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., 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, a contract for deed covering the purchase
of adjacent land and warehouse and two notes secured by transportation and
computer equipment. Debt retirement associated with the various financing
arrangements varies in maturity from three to fifteen years, dependent on the
funding source.
The consolidated ratio of long-term debt to stockholders' equity
changed from .56 to 1.0 at December 26, 1998 to .50 to 1.0 at December 25, 1999.
The improved ratio reflects the Company's additional consolidated net earnings
for 1999 and the fiscal year payments on the long-term debt. Stockholders'
equity, net of treasury stock, increased from $5,106,500 at December 26, 1998 to
$5,454,500 at December 25, 1999.
Page 14
<PAGE>
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 December 25, 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 reduces the outstanding advances made by Dynamic Homes, Inc. During
1999, net cash advances to Shagawa Resort, Inc. were approximately $12,000.
The Company continues to pursue the sale of the Shagawa Resort
property since it does not strategically fit with the Company's niche of
residential and commercial construction. The Company has received offers for the
assets of Shagawa Resort. However, as of this date, no final agreement has been
finalized and there is no assurance if or when a sale may be completed. The
Company has also engaged the services of a securities investment firm to explore
alternatives for enhancing shareholder value which may include the sale or
merger of the Company. Again, there is no assurance this exploration will result
in any acceptable proposals or that any type of transaction will be consummated.
The Company is cognizant of the need to accelerate future sales and
earnings. Consequently, the Company has initiated the following potential growth
initiatives:
* Strengthening of the Company's network of builder/dealers,
particularly within the more heavily populated markets. Two
new builder/dealers meeting the criteria have recently been
added to the network.
* Implementation of new and aggressive marketing programs to
heighten the Company's recognition as a builder of affordable
quality homes.
* Pursue additional business with the regions Native American
community by building on past business associations with these
communities.
The Company's management anticipates that the normal operating cycle will
generate sufficient cash, in conjunction with short-term borrowings on the
existing credit line and supplemented by long-term financing will provide
adequate funds to support the Company's operations and scheduled capital asset
requirements during year 2000.
On November 15, 1999, the Company's Board of Directors elected Scott
D. Lindemann to the position of President. Mr. Lindemann was previously named
interim President following a Board of Directors meeting on October 25, 1999.
The Board of Directors accepted the resignation of D. Raymond Madison as Chief
Executive Officer at the February 28, 2000 Board of Directors meeting and
elected Mr. Lindemann to succeed Mr. Madison as Chief Executive Officer.
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
Page 15
<PAGE>
interest rates and/or weakness in regional and national economic conditions that
could have an adverse impact on new home and multi-family/commercial sales.
Likewise, future escalating and volatile material costs and unfavorable weather
conditions could also affect the Company's profit levels.
(Balance of page left intentionally blank)
Page 16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements and Supplementary Financial Data
Page
----
Independent Auditor's Report 18
Consolidated Balance Sheets at December 25, 1999 and
December 26, 1998 19
Consolidated Statements of Operations for the years ended
December 25, 1999, December 26, 1998
and December 27, 1997 20
Consolidated Statements of Stockholders' Equity for the years
ended December 25, 1999, December 26, 1998 and
December 27, 1997 21
Consolidated Statements of Cash Flows for the years ended
December 25, 1999, December 26, 1998
and December 27, 1997 22 - 23
Notes to Consolidated Financial Statements 24
Page 17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
The Stockholders and Board of Directors
DYNAMIC HOMES, INC. AND SUBSIDIARIES
Detroit Lakes, Minnesota
We have audited the accompanying consolidated balance sheets of DYNAMIC HOMES,
INC. AND SUBSIDIARIES as of December 25, 1999 and December 26, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 25, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DYNAMIC HOMES, INC.
AND SUBSIDIARIES as of December 25, 1999 and December 26, 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 25, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its accounting for amortization of start-up activities in 1998.
Fargo, North Dakota
February 11, 2000
Page 18
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 25, 1999 AND DECEMBER 26, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 931,600 $ 312,300
Receivables
Trade, less allowance for doubtful
accounts 1999 $12,300; 1998 $60,000 1,796,900 1,491,500
Refundable income taxes 14,400 --
Other 3,600 33,500
Inventories 1,875,200 2,367,200
Prepaid expenses 69,300 78,100
Deferred income taxes 127,000 143,000
------------ ------------
Total current assets 4,818,000 4,425,600
OTHER ASSETS, net of accumulated amortization 408,600 421,300
PROPERTY AND EQUIPMENT, net of accumulated
depreciation 4,557,400 4,578,300
------------ ------------
$ 9,784,000 $ 9,425,200
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 268,100 $ 196,900
Accounts payable 346,800 350,000
Customer deposits 127,000 199,500
Accrued expenses 731,400 638,900
Income taxes payable -- 4,900
------------ ------------
Total current liabilities 1,473,300 1,390,200
------------ ------------
LONG-TERM DEBT, less current maturities 2,752,300 2,852,500
------------ ------------
DEFERRED INCOME TAXES 104,000 76,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $.10 per share
Authorized, 5,000,000 shares
Issued, 2,284,000 shares in 1999 and 1998 228,400 228,400
Additional paid-in capital 147,100 147,100
Retained earnings 5,223,000 4,875,100
------------ ------------
5,598,500 5,250,600
Less treasury stock, at cost (43,080 shares) (144,100) (144,100)
------------ ------------
5,454,400 5,106,500
------------ ------------
$ 9,784,000 $ 9,425,200
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
Page 19
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
SALES $ 15,209,600 $ 13,905,300 $ 12,859,000
COST OF SALES 11,898,300 10,654,600 10,004,500
------------ ------------ ------------
GROSS PROFIT 3,311,300 3,250,700 2,854,500
OPERATING EXPENSES 2,568,200 2,344,000 2,140,000
------------ ------------ ------------
INCOME FROM OPERATIONS 743,100 906,700 714,500
OTHER INCOME (EXPENSES)
Interest expense (267,400) (269,100) (237,300)
Interest income and service charges 42,900 47,100 28,900
Gain (loss) on sale of equipment 8,000 19,400 (8,700)
Other, net 63,300 31,800 58,700
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 589,900 735,900 556,100
INCOME TAXES 242,000 268,000 227,000
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 347,900 467,900 329,100
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (net of income tax of $56,000) -- (93,600) --
------------ ------------ ------------
NET INCOME $ 347,900 $ 374,300 $ 329,100
============ ============ ============
BASIC INCOME PER COMMON SHARE
Income before cumulative effect of
accounting change $ 0.16 $ 0.21 $ 0.15
Cumulative effect of accounting change -- (0.04) --
------------ ------------ ------------
Net income $ 0.16 $ 0.17 $ 0.15
============ ============ ============
DILUTED INCOME PER COMMON SHARE
Income before cumulative effect of accounting change $ 0.16 $ 0.21 $ 0.15
Cumulative effect of accounting change -- (0.04) --
------------ ------------ ------------
Net income $ 0.16 $ 0.17 $ 0.15
============ ============ ============
PRO FORMA AMOUNTS ASSUMING RETROACTIVE
APPLICATION OF ACCOUNTING CHANGE
Net income $ 523,900 $ 370,100
Basic income per common share 0.23 0.17
Diluted income per common share 0.23 0.17
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
Page 20
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
---------------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 28, 1996 2,284,000 $ 228,400 $ 147,100 $ 4,171,700 $ (144,100) $ 4,403,100
Net income -- -- -- 329,100 -- 329,100
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 27, 1997 2,284,000 228,400 147,100 4,500,800 (144,100) 4,732,200
Net income -- -- -- 374,300 -- 374,300
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 26, 1998 2,284,000 228,400 147,100 4,875,100 (144,100) 5,106,500
Net income -- -- -- 347,900 -- 347,900
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 25, 1999 2,284,000 $ 228,400 $ 147,100 $ 5,223,000 $ (144,100) $ 5,454,400
============ ============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
Page 21
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 347,900 $ 374,300 $ 329,100
Charges and credits to net income
not affecting cash
Depreciation 466,200 430,100 376,400
Amortization 30,300 22,900 59,400
(Gain) loss on sale of equipment (8,000) (19,400) 8,700
Deferred income taxes 44,000 (48,000) 42,000
Cumulative effect of accounting change -- 149,600 --
Changes in assets and liabilities
Receivables (275,500) (778,700) (60,500)
Inventories 492,000 (878,900) 107,000
Prepaid expenses 8,800 (30,700) (18,200)
Accounts payable (3,200) 89,000 44,900
Customer deposits (72,500) 22,400 (148,700)
Accrued expenses 92,500 113,300 69,200
Income taxes (19,300) 42,500 4,200
------------ ------------ ------------
NET CASH FROM (USED FOR) OPERATING
ACTIVITIES 1,103,200 (511,600) 813,500
------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from sale of equipment 8,000 34,100 13,000
Payments for other assets (17,600) (64,100) (187,200)
Purchase of property and equipment (445,300) (353,500) (653,500)
------------ ------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES (454,900) (383,500) (827,700)
------------ ------------ ------------
FINANCING ACTIVITIES
Principal payments on long-term debt (222,000) (171,700) (210,400)
Proceeds from long-term debt borrowings 193,000 49,600 1,000,000
------------ ------------ ------------
NET CASH FROM (USED FOR) FINANCING
ACTIVITIES (29,000) (122,100) 789,600
------------ ------------ ------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 619,300 (1,017,200) 775,400
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 312,300 1,329,500 554,100
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 931,600 $ 312,300 $ 1,329,500
============ ============ ============
</TABLE>
(continued on next page)
Page 22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS -- PAGE - 2
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for
Income taxes, net of refunds $ 217,300 $ 217,500 $ 180,800
Interest 267,800 254,700 232,000
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Capital lease obligation incurred
for use of new equipment $ 65,900 $ 69,000
============ ============
Contract for deed incurred for purchase of land $ 62,500
============
Purchase of assets, net of liabilities assumed, of
Holiday Inn Sunspree Resort:
Fair value of assets acquired $ 156,900
Liabilities assumed (104,300)
------------
Cash paid $ 52,600
============
</TABLE>
See Notes to Consolidated Financial Statements
Page 23
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997
--------------------------------------------------------------------------------
NOTE 1 - PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Dynamic Homes,
Inc., its wholly-owned subsidiary, Shagawa Resort, Inc., and three additional
wholly-owned subsidiaries which had no significant operations during 1999, 1998,
and 1997. All significant intercompany accounts and transactions have been
eliminated.
PRINCIPAL BUSINESS ACTIVITY
Dynamic Homes, Inc. manufactures modular, preconstructed buildings for
single-family, multiple-family and commercial use. Commercial operations include
the manufacture of preconstructed office buildings, motels and apartments.
Shagawa Resort, Inc. (a wholly-owned subsidiary) owns a hotel/resort which
opened in May 1996. The resort was managed by an unrelated party through a
management agreement with the Company through March 1997, at which time
management of the resort was assumed by the Company.
CONCENTRATIONS OF CREDIT RISK
In the normal course of business the Company extends credit to its customers.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Accounts receivable are
primarily due from customers in the Upper Midwest and are not concentrated in a
particular industry.
The Company's cash balances are maintained in several bank deposit accounts.
Periodically, balances in these accounts are in excess of federally insured
limits.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost (standard cost method) or market.
Cost of work in process and finished goods inventories includes materials, labor
and factory overhead.
REVENUE RECOGNITION
Sales of Dynamic Homes, Inc. are recognized and recorded upon delivery of the
finished product. Sales of Shagawa Resort, Inc. are recognized and recorded upon
delivery of service.
(continued on next page)
Page 24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including the cost of capitalized
leased assets. Depreciation of property and equipment is computed using the
straight-line method over the following estimated useful lives:
Land improvements 7-20 years
Buildings 15-39 years
Machinery and equipment 3-10 years
Capitalized leases 7-10 years
Amortization of the capitalized leased assets is included with depreciation.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents and accounts receivable
approximate fair value because of the short maturity of these instruments.
The fair value of long-term debt is estimated based on borrowing rates currently
available to the Company for bank loans with similar items and average
maturities. The carrying amount of long-term debt approximates the estimated
fair value at December 25, 1999 and December 26, 1998.
AMORTIZATION
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 in other assets is goodwill related to the acquisition of Shagawa
Resort, Inc., which is being amortized on the straight-line method over its
estimated useful life.
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 required implementation
for years beginning after December 15, 1998, however, the Company elected to
adopt the statement early.
Page 25
<PAGE>
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of receivables, property and
equipment, other assets, and accrued expenses, 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 or settled.
ADVERTISING COSTS
Costs incurred for producing and distributing advertising are expensed as
incurred. The Company incurred advertising costs of $157,100 in 1999, $188,300
in 1998, and $148,000 in 1997.
FISCAL YEAR
The reporting period for the Company ends on the last Saturday of December each
year, with the exception of Shagawa Resort, Inc. which has a reporting year
ending on December 31. The year ended December 25, 1999 contained 52 weeks, the
year ended December 26, 1998 contained 52 weeks, and the year ended December 27,
1997 contained 52 weeks.
INCOME PER COMMON SHARE
Basic income per common share is computed by dividing net income by the weighted
average number of common shares outstanding during each year. Weighted average
outstanding common shares were 2,241,000 in 1999, 1998, and 1997.
Diluted income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the year plus the
incremental shares that are outstanding upon the exercise of dilutive stock
options.
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share", which requires companies to
present basic earnings per share and diluted earnings per share, instead of
primary earnings per share and fully diluted earnings per share as previously
required.
NOTE 2 - INVENTORIES
1999 1998
---------- ----------
Raw materials $ 853,500 $ 832,000
Work in process 135,100 155,600
Finished goods 886,600 1,379,600
---------- ----------
$1,875,200 $2,367,200
========== ==========
(continued on next page)
Page 26
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - OTHER ASSETS
1999 1998
----------- -----------
Capitalized debt expense $ 221,700 $ 218,900
Goodwill 119,400 119,400
Replacement reserve account 104,000 100,800
Other 43,700 22,400
----------- -----------
488,800 461,500
Less accumulated amortization (80,200) (40,200)
----------- -----------
$ 408,600 $ 421,300
=========== ===========
NOTE 4 - PROPERTY AND EQUIPMENT
1999 1998
----------- -----------
Land and improvements $ 426,100 $ 401,500
Buildings 3,756,800 3,700,100
Machinery and equipment 2,932,900 2,660,200
----------- -----------
7,115,800 6,761,800
Less accumulated depreciation (2,558,400) (2,183,500)
----------- -----------
$ 4,557,400 $ 4,578,300
=========== ===========
NOTE 5 - LEASES
The Company leases equipment under long-term capital lease agreements. The lease
agreements provide for varying monthly payments through July 2003.
1999 1998
----------- -----------
Capitalized leased assets consist of:
Equipment $ 393,100 $ 393,100
Less accumulated amortization (165,800) (109,700)
----------- -----------
$ 227,300 $ 283,400
=========== ===========
(continued on next page)
Page 27
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Minimum lease payments for the capital leases in future years are as follows:
Years Ending December
---------------------
2000 $ 80,500
2001 142,300
2002 41,900
2003 22,700
-----------
Total minimum lease payments 287,400
Less interest (48,600)
-----------
Present value of minimum lease
payments - Note 6 $ 238,800
===========
NOTE 6 - NOTE PAYABLE AND LONG-TERM DEBT
The Company has available a line of credit which is secured by inventories and
receivables. The credit available is based on specified percentages of
inventories and receivables to a maximum of $1,500,000. As of December 25, 1999
and December 26, 1998, there were no borrowings outstanding under the line of
credit. Borrowings under the line of credit bear interest at a variable rate
(8.5% at December 25, 1999) and there are no compensating balance requirements.
Long-term debt consists of:
1999 1998
----------- -----------
Variable rate note payable (8.75% at December
25, 1999), due in monthly installments of
$8,200, including interest, to September
2006, when the remaining balance is due,
secured by substantially all assets of
Shagawa Resort, Inc. $ 861,900 $ 882,900
7.32% note payable, due in monthly
installments of $7,556, including
interest, until August 2016, secured by
substantially all assets of Shagawa
Resort, Inc., and a partial guarantee of
the Small Business Administration 869,500 895,500
8.25% note payable, due in monthly
installments of $6,000, including
interest, to March 2002, at which time the
balance is due, secured by real estate and
equipment 551,100 576,500
Capitalized lease obligations, secured by
leased assets - Note 5 238,800 291,800
(continued on next page)
Page 28
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8.25% note payable, due in monthly
installments of $1,819, including
interest, to April 2002, when the
remaining balance is due, secured by
second mortgage on building 169,200 176,800
8.5% note payable, due in monthly installments
of $3,302, including interest, to June
2003, secured by transportation equipment 122,000 --
8% note payable, due in varying monthly
installments, including interest, to March
2002, secured by equipment 96,700 136,900
6.5% contract for deed, due in annual
installments of $10,500, plus interest, to
August 2001, with a final payment of
$15,500, plus interest, due August 2002,
secured by land 36,500 47,000
8.25% note payable, due in monthly
installments of $1,892, including
interest, to June 2001, secured by
computer equipment 33,600 --
4.9% note payable, due in monthly installments
of $1,479, including interest, to June
2001, secured by equipment 25,700 41,800
Other 15,400 200
----------- -----------
3,020,400 3,049,400
Less current maturities (268,100) (196,900)
----------- -----------
$ 2,752,300 $ 2,852,500
=========== ===========
Long-term debt maturities are as follows:
Years Ending December
---------------------
2000 $ 268,100
2001 332,100
2002 802,200
2003 110,200
2004 72,800
Thereafter 1,435,000
-----------
$ 3,020,400
===========
(continued on next page)
Page 29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - CUSTOMER DEPOSITS
Customer deposits of $127,000 at December 25, 1999 and $199,500 at December 26,
1998 consisted of advance payments from customers for sales to be recognized in
the following year. Sales to be recognized in 2000 related to customer deposits
at December 25, 1999 are estimated to be $1,645,000.
NOTE 8 - ACCRUED EXPENSES
1999 1998
----------- -----------
Salaries, wages and vacations $ 259,700 $ 259,500
Taxes, other than income taxes 125,300 97,300
Warranty 75,700 72,300
Other 270,700 209,800
----------- -----------
$ 731,400 $ 638,900
=========== ===========
NOTE 9 - STOCK OPTION PLAN
The Company approved a stock option plan in 1996, authorizing the use of 400,000
shares for the plan. During 1996, 240,000 options were granted; 200,000 to
officers and directors at $2.3125 per share and 40,000 shares to various
employees at $2.1562 per share. No options were exercised during 1999, 1998, or
1997, however during 1997, 25,000 of options to officers and 10,000 of options
to employees were forfeited as a result of the respective individuals'
separation from the Company. Compensation cost related to the options granted in
1996 had no effect on net income or income per share.
The fair value of each option grant was estimated on the date of grant in 1996
using the Black-Scholes option pricing model with the following weighted-average
options: a risk-free interest rate of 6.5 percent, expected volatility of 28.77
percent, and no dividend yield. The assumption regarding the stock options
issued to officers, directors, and employees in 1996 was that 100 percent of
such options vested in 1996.
NOTE 10 - SALES
1999 1998 1997
------------- ------------- -------------
Single-family $ 10,904,300 $ 9,924,800 $ 9,681,600
Multi-family/commercial 1,109,000 989,300 617,300
Transportation 703,200 645,000 568,400
Other 442,400 409,900 369,300
Resort 2,050,700 1,936,300 1,622,400
------------- ------------- -------------
$ 15,209,600 $ 13,905,300 $ 12,859,000
============= ============= =============
(continued on next page)
Page 30
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - COST OF SALES
1999 1998 1997
------------- ------------- -------------
Materials $ 7,076,000 $ 6,261,600 $ 5,964,900
Labor 1,088,100 1,073,300 1,001,600
Overhead 1,643,400 1,358,500 1,336,200
Transportation 962,400 863,100 749,900
Resort 1,128,400 1,098,100 951,900
------------- ------------- -------------
$ 11,898,300 $ 10,654,600 $ 10,004,500
============= ============= =============
NOTE 12 - OPERATING EXPENSES
1999 1998 1997
------------- ------------- -------------
Marketing $ 696,700 $ 602,900 $ 537,400
Administration 1,871,500 1,741,100 1,602,600
------------- ------------- -------------
$ 2,568,200 $ 2,344,000 $ 2,140,000
============= ============= =============
NOTE 13 - INCOME TAXES
Net deferred tax assets and liabilities consist of the following components as
of December 25, 1999 and December 26, 1998:
1999 1998
------------- -------------
Deferred tax assets
Receivable allowances $ 5,000 $ 24,000
Book/tax inventory adjustment 26,000 30,000
Intangible and other assets 32,000 53,000
Accrued expenses 96,000 89,000
------------- -------------
$ 159,000 $ 196,000
============= =============
Deferred tax liabilities
Property and equipment $ 136,000 $ 129,000
============= =============
The deferred tax amounts described above have been included in the accompanying
balance sheets as of December 25, 1999 and December 26, 1998:
1999 1998
------------- -------------
Current assets $ 127,000 $ 143,000
Noncurrent liabilities (104,000) (76,000)
------------- -------------
$ 23,000 $ 67,000
============= =============
(continued on next page)
Page 31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The provision for income taxes charged to operations for the years ended
December 25, 1999, December 26, 1998, and December 27, 1997, consists of the
following:
1999 1998 1997
-------- --------- --------
Current expense
Continuing operations $198,000 $ 316,000 $185,000
Cumulative effect of accounting
change -- (56,000) --
Deferred tax expense (benefit) 44,000 (48,000) 42,000
-------- --------- --------
$242,000 $ 212,000 $227,000
======== ========= ========
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
December 25, 1999, December 26, 1998, and December 27, 1997 due to the
following:
1999 1998 1997
-------- --------- --------
Income tax computed at federal
statutory rates $201,000 $ 199,000 $189,000
State taxes, net of federal
tax benefit 35,000 35,000 33,000
Change in income taxes resulting
from non-deductible expenses 6,000 (22,000) 5,000
-------- --------- --------
$242,000 $ 212,000 $227,000
======== ========= ========
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company had sales totaling approximately $2,001,300 in 1999, $868,000 in
1998, and $633,900 in 1997 to members of the board of directors and entities
owned by Board members. At December 25, 1999 and December 26, 1998, the Company
had accounts receivable of $229,000 and $115,100, respectively, relating to
these sales.
NOTE 15 - MAJOR CUSTOMER
Dynamic Homes, Inc. and Subsidiaries derived approximately 10 percent of its
revenue from one customer during the year ended December 25, 1999, 15 percent of
its revenue from one customer during the year ended December 26, 1998; and 12
percent of its revenue from one customer during the year ended December 27,
1997.
(continued on next page)
Page 32
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 16 - EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) plan which covers all employees who meet
eligibility requirements of being actively employed at year end. Under the terms
of the plan, employees may contribute 1 percent to 5 percent of their annual
salary, up to the maximum allowed by Internal Revenue Service regulations. The
Company's contribution to the plan, as determined by the board of directors, is
discretionary but may not exceed 100 percent of the employees' contribution. The
Company contributed $9,700 to the plan for the year ended December 25, 1999,
$8,100 to the plan for the year ended December 26, 1998, and $7,000 for the year
ended December 27, 1997.
NOTE 17 - BUSINESS SEGMENTS
The Company operates in two business segments: Dynamic Homes, Inc, which
manufactures modular, pre-constructed buildings; and Shagawa Resort, Inc., which
owns and operates a hotel/resort in northern Minnesota.
Information concerning the operations, net of eliminations, in these business
segments as of December 25, 1999, December 26, 1998, and December 27, 1997 are
as follows:
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated
----------- ------------ ------------
Year ended December 25, 1999:
Sales $13,158,900 $ 2,050,700 $15,209,600
Gross profit 2,389,000 922,300 3,311,300
Income (loss) from operations 744,300 (1,200) 743,100
Interest expense 125,500 141,900 267,400
Net income (loss) 487,900 (140,000) 347,900
Depreciation 298,900 167,300 466,200
Amortization 5,000 25,300 30,300
Total assets 6,644,500 3,139,500 9,784,000
Capital expenditures, including
capital lease obligations 417,600 27,700 445,300
(continued on next page)
Page 33
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated
----------- ------------ ------------
Year ended December 26, 1998:
Sales $11,969,000 $ 1,936,300 $13,905,300
Gross profit 2,412,500 838,200 3,250,700
Income (loss) from operations 954,200 (47,500) 906,700
Interest expense 121,900 147,200 269,100
Net income (loss) before
cumulative effect of
accounting change 928,100 (192,200) 735,900
Depreciation 266,900 163,200 430,100
Amortization 5,100 17,800 22,900
Total assets 6,124,100 3,301,100 9,425,200
Capital expenditures,
including capital lease
obligations 365,500 53,900 419,400
Year ended December 27, 1997:
Sales $11,236,600 $ 1,622,400 $12,859,000
Gross profit 2,183,900 670,600 2,854,500
Income (loss) from operations 843,000 (128,500) 714,500
Interest expense 89,400 147,900 237,300
Net income (loss) 548,900 (219,800) 329,100
Depreciation 220,600 155,800 376,400
Amortization 5,300 54,100 59,400
Total assets 5,363,400 3,518,100 8,881,500
Capital expenditures, including
capital lease obligations 646,300 76,200 722,500
Page 34
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and officers of the Registrant is
incorporated by reference to the Company's definitive proxy statement
for the annual meeting of shareholders to be tentatively held on June
26, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Executive compensation information is incorporated by reference to the
Company's definitive proxy statement for the annual meeting of
shareholders to be tentatively held on June 26, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Set forth below is certain information concerning persons who are known by the
Company to own beneficially more than 5% of the Company's voting shares on March
14, 2000.
Title Name & Address of Number of Percent
of Class Beneficial Owner Shares Owned of Class(3)
-------- ---------------- ------------ -----------
Common D. Raymond Madison 684,692(1) 27.99
PO Box 6120
Brainerd, Minnesota 56401
Common HCI Investment Company 241,750(2) 9.89
One St. Augustine Drive
Highway 77
Winnebago, Nebraska 68071
(1) Includes 86,309 shares outstanding in the name of Mr.
Madison's wife and options to purchase 50,000 shares
exercisable within 60 days of March 14, 2000.
(2) Information as identified in Schedule 13D as filed by HCI
Investment Company with the Securities and Exchange Commission
on December 15, 1997 and 13D/A filed on March 3, 1999.
(3) Includes 205,000 available but unexercised options available
to officers, directors and various employees.
Page 35
<PAGE>
(B) SECURITY OWNERSHIP OF MANAGEMENT:
The following table sets forth as of March 14, 2000, information
concerning the beneficial ownership of common stock held by all
directors and officers and all directors and officers of the Company as
a group:
Name of Percent
Beneficial Owner Common Shares of Class
---------------- ------------- --------
D. Raymond Madison 684,692 (1) 27.99
Clyde R. Lund, Jr. 64,774 (2) 2.65
Israel Mirviss 49,500 (2) 2.02
Ronald L. Gustafson 50,300 (2) 2.05
Peter K. Pichetti 30,000 (2) 1.23
Eldon R. Matz 9,000 (3) .37
Scott D. Lindemann 2,000 .08
All directors and officers
as a group (7 persons) 890,266 (4) 36.39
(1) Includes 86,309 shares outstanding in the name of Mr.
Madison's wife and options to purchase 50,000 shares
exercisable within 60 days of March 14, 2000.
(2) Includes options to purchase 25,000 shares exercisable within
60 days of March 14, 2000.
(3) Includes options to purchase 5,000 shares exercisable within
60 days of March 14, 2000.
(4) Includes options to purchase 155,000 shares exercisable within
60 days of March 14, 2000.
(C) CHANGES IN CONTROL:
The Company knows of no contractual arrangements that may at a
subsequent date result in a change in control of the Company.
(Reference MD&A Financial Condition.)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference Notes to Consolidated Financial Statements, Note 14 page 32
of this Form 10-K.
Page 36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS - Included in Part II, Item 8
Page
----
Independent Auditor's Report 18
Consolidated Balance Sheets at December 25, 1999 and
December 26, 1998 19
Consolidated Statements of Operations for the years ended
December 25, 1999, December 26, 1998
and December 27, 1997 20
Consolidated Statements of Stockholders' Equity for the
years ended December 25, 1999, December 26, 1998
and December 27, 1997 21
Consolidated Statements of Cash Flows for the years ended
December 25, 1999, December 26, 1998
and December 27, 1997 22-23
Notes to Consolidated Financial Statements 24
2. FINANCIAL STATEMENT SCHEDULE - Included in Part IV
Schedule V - Property and Equipment 39
Schedule VI - Accumulated Depreciation of Property and
Equipment 40
Schedule VIII - Valuation and Qualifying Accounts 41
Schedule IX - Short-term Borrowings 42
Schedule X - Supplementary Income Statement Information 43
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in
the financial statements or notes thereto.
(Balance of page left intentionally blank)
Page 37
<PAGE>
3. EXHIBITS:
(3) Articles of Incorporation and Bylaws incorporated by
reference to Form 10-K as filed for the year ended
December 27, 1986. **
(13) Annual Report to Security Holders. **
(21) Subsidiaries of Dynamic Homes, Inc.:
21.1 Dynamic Homes of Fargo/Moorhead, Inc. - Inactive
21.2 Dynamic Homes of Dakota, Inc. - Inactive
21.3 Rapid Building Systems, Inc. - Inactive
21.4 Shagawa Resort, Inc.
(27) Financial Data Schedule
** - Omitted
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K have been filed by the registrant
during the last quarter of the period covered by this report.
(Balance of page left intentionally blank)
Page 38
<PAGE>
DYNAMIC HOMES, INC.
SCHEDULE V - PROPERTY AND EQUIPMENT
YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998 AND DECEMBER 27, 1997
<TABLE>
<CAPTION>
Balance Balance
Beginning Additions Retirements End
of Year at Cost and Transfers of Year
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 27, 1997:
Dynamic Homes, Inc.
-------------------
Land and Improvements $ 165,300 $ 54,700 $ -- $ 220,000
Buildings 967,300 438,900 (5,400) 1,400,800
Machinery and Equipment 1,619,300 319,200 (82,300) 1,856,200
Construction in Progress 103,900 (103,900) --
Shagawa Resort, Inc.
--------------------
Land and Improvements 329,200 11,900 (181,300) 159,800
Buildings 2,092,400 187,200 -- 2,279,600
Furniture, Fixtures & Equip 612,800 58,800 (300) 671,300
------------ ------------ ------------ ------------
$ 5,890,200 $ 1,070,700 $ (373,200) $ 6,587,700
============ ============ ============ ============
Year Ended December 26, 1998:
Dynamic Homes, Inc.
-------------------
Land and Improvements $ 220,000 $ 21,700 $ -- $ 241,700
Buildings 1,400,800 2,200 (2,300) 1,400,700
Machinery and Equipment 1,856,200 328,400 (243,100) 1,941,500
Construction in Progress -- 13,100 13,100
Shagawa Resort, Inc.
--------------------
Land and Improvements 159,800 -- -- 159,800
Buildings 2,279,600 19,800 -- 2,299,400
Furniture, Fixtures & Equip 671,300 34,400 (100) 705,600
------------ ------------ ------------ ------------
$ 6,587,700 $ 419,600 $ (245,500) $ 6,761,800
============ ============ ============ ============
Year Ended December 25, 1999
Dynamic Homes, Inc.
-------------------
Land and Improvements $ 241,700 $ 24,600 -- $ 266,300
Buildings 1,400,700 45,900 -- 1,446,600
Machinery and Equipment 1,941,500 240,200 (91,400) 2,090,300
Construction in Progress 13,100 344,500 (237,600) 120,000
Shagawa Resort, Inc.
--------------------
Land and Improvements 159,800 -- -- 159,800
Buildings 2,299,400 10,800 -- 2,310,200
Furniture, Fixtures & Equip 705,600 17,000 -- 722,600
------------ ------------ ------------ ------------
$ 6,761,800 $ 683,000 $ (329,000) $ 7,115,800
============ ============ ============ ============
</TABLE>
Page 39
<PAGE>
DYNAMIC HOMES, INC.
SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT
YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998 AND DECEMBER 27, 1997
<TABLE>
<CAPTION>
Balance Balance
Beginning Additions Retirements End
of Year at Cost and Transfers of Year
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 27, 1997:
Dynamic Homes, Inc.
-------------------
Land and Improvements $ 49,600 $ 8,100 $ -- $ 57,700
Buildings 482,400 39,700 (5,400) 516,700
Machinery and Equipment 1,065,800 172,900 (60,400) 1,178,300
Shagawa Resort, Inc.
--------------------
Land and Improvements 5,600 11,700 -- 17,300
Buildings 26,200 52,300 -- 78,500
Furniture, Fixtures & Equip 43,800 91,700 -- 135,500
------------ ------------ ------------ ------------
$ 1,673,400 $ 376,400 $ (65,800) $ 1,984,000
============ ============ ============ ============
Year Ended December 26, 1998:
Dynamic Homes, Inc.
-------------------
Land and Improvements $ 57,700 $ 10,600 $ -- $ 68,300
Buildings 516,700 45,800 (2,300) 560,200
Machinery and Equipment 1,178,300 210,400 (228,300) 1,160,400
Shagawa Resort, Inc.
--------------------
Land and Improvements 17,300 12,200 -- 29,500
Buildings 78,500 52,700 -- 131,200
Furniture, Fixtures & Equip 135,500 98,400 -- 233,900
------------ ------------ ------------ ------------
$ 1,984,000 $ 430,100 $ (230,600) $ 2,183,500
============ ============ ============ ============
Year End December 25, 1999:
Dynamic Homes, Inc.
-------------------
Land and Improvements $ 68,300 $ 13,000 $ -- $ 81,300
Buildings 560,200 46,700 -- 606,900
Machinery and Equipment 1,160,400 239,200 (91,300) 1,308,300
Shagawa Resort, Inc.
--------------------
Land and Improvements 29,500 12,200 -- 41,700
Buildings 131,200 53,200 -- 184,400
Furniture, Fixtures & Equip 233,900 101,900 -- 335,800
------------ ------------ ------------ ------------
$ 2,183,500 $ 466,200 $ (91,300) $ 2,558,400
============ ============ ============ ============
</TABLE>
Page 40
<PAGE>
DYNAMIC HOMES, INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998 AND DECEMBER 27, 1997
Transactions in the allowance for doubtful accounts during the years ended
December 25, 1999 December 26, 1998 and December 27, 1997 were as follows:
<TABLE>
<CAPTION>
Balance Provision Accounts Balance
Beginning Charged to Chgd. Off Net End
of Year Operations of Recoveries of Year
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year Ended December 27, 1997 $ 40,000 $ 5,000 $ 0 $ 45,000
Year Ended December 26, 1998 $ 45,000 $ 16,000 $ (1,000) $ 60,000
Year Ended December 25, 1999 $ 60,000 $ 73,500 $ (121,200) $ 12,300
</TABLE>
(Balance of page left intentionally blank)
Page 41
<PAGE>
DYNAMIC HOMES, INC.
SCHEDULE IX - SHORT TERM BORROWINGS
YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998 AND DECEMBER 27, 1997
The amounts reported represent amounts owed under a line of credit.
<TABLE>
<CAPTION>
Average Weighted
Weighted Maximum Month End Average
Average Borrowing Borrowing Interest
Balance Interest Outstanding Outstanding Rate
End Rate at During the During the During the
of Year(1) Year End Year Year(2) Year(3)
---------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended
December 27, 1997 $ -0- 8.50% $360,000 $ 57,000 8.50%
Year Ended
December 26, 1998 $ -0- 7.75% $820,000 $ 153,000 8.50%
Year Ended
December 25, 1999 $ -0- 8.50% $1,070,000 $ 222,900 7.80%
</TABLE>
(1) Dynamic Homes, Inc. has available a line of credit which is
collateralized by inventories and receivables. The credit available is
based on specified percentages of inventories and receivables. On May
1, 1998, the Company renewed its credit line for a period of two years.
The renewed credit line has maximum available borrowings to $1,500,000
at the bank's prime rate (8.50% at December 25, 1999). As of December
25, 1999, the Company did not have any outstanding borrowings under the
line of credit agreement and there are no compensating balance
requirements.
(2) Average amounts outstanding during the period are computed as an
average of the month-end balances.
(3) For the periods presented the interest on the Company's short-term debt
fluctuated with the prime rate. The weighted average interest rate was
computed based upon the effective rate under the loan agreement in
affect.
Page 42
<PAGE>
DYNAMIC HOMES, INC.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998 AND DECEMBER 27, 1997
<TABLE>
<CAPTION>
Maintenance Taxes, Other Than Advertising/
and Repairs Payroll and Income Promotion Expense
----------- ------------------ -----------------
<S> <C> <C> <C>
Year Ended December 27, 1997 $ 290,700 (1) $ 212,500 (1) $ 353,600
Year Ended December 26, 1998 $ 293,900 (2) $ 250,600 (2) $ 405,900 (2)
Year Ended December 25, 1999 $ 344,400 (3) $ 240,100 (3) $ 470,000 (3)
</TABLE>
Amounts include the following Shagawa Resort, Inc. valuations:
(1) (2) (3)
--- --- ---
Maintenance and Repairs $ 75,900 $ 90,200 $ 100,000
Real Estate Taxes 99,900 123,800 110,600
Advertising and Promotion Expense 90,600 91,900 101,300
Royalties, amortization of intangible assets, pre-operating costs and similar
deferrals are not set forth, as such items do not exceed one percent of net
sales as shown in the consolidated statement of operations (Note 3).
(Balance of page left intentionally blank)
Page 43
<PAGE>
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
----------------------------------- -----------------------------------
SCOTT D. LINDEMANN ISRAEL MIRVISS,
PRESIDENT, CEO DIRECTOR
----------------------------------- -----------------------------------
D. RAYMOND MADISON, RONALD L. GUSTAFSON,
CHAIRMAN OF THE BOARD DIRECTOR
----------------------------------- -----------------------------------
CLYDE R. LUND JR., PETER K. PICHETTI,
SECRETARY DIRECTOR
----------------------------------- -----------------------------------
ELDON R. MATZ, LANCE G. MORGAN
CONTROLLER & TREASURER DIRECTOR
DATED: MARCH 14, 2000
Page 44
<PAGE>
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Attention: Filing Desk
STOP 1-4
450 Fifth Street NW
Washington, DC 20549-1004
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 25, 1999
Commission file number 0-8585
Dynamic Homes, Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0960127
--------------------------------------- ---------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
525 Roosevelt Avenue, Detroit Lakes, MN 56501
--------------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code - (218) - 847-2611
Securities registered pursuant to Section 12(g) of the act:
Name of Exchange on
Title of Each Class Which Registered
------------------- ----------------
Common Stock, $.10 par value NASDAQ Small Cap Market
---------------------------- -----------------------
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 14, 2000, 2,240,850 common shares were outstanding, and the
aggregate market value of the common shares (based upon the sales price
information of these shares as compiled by the NASDAQ market) of Dynamic Homes,
Inc., held by non-affiliates was approximately $2,333,000. On January 7, 1995
the Company implemented a six-month plan to repurchase up to 100,000 shares of
its outstanding common stock. As of March 14, 2000, a total of 43,080 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 but unexercised options are excluded from
the common shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(See following page)
Total number pages, including cover page - __
<PAGE>
Documents Incorporated by Reference
-----------------------------------
Parts I, II, III, and IV of the Company's Annual Report to Shareholders for the
year ended December 25, 1999, except as amended herein.
EXPLANATORY NOTE
The Company filed a preliminary proxy statement (the "Proxy") pursuant to
Section 14(a) of the Securities Exchange Act of 1934 with the Securities and
Exchange Commission on October 6, 2000. The Proxy incorporated the Company's
Annual Report on Form 10-K for the fiscal year ended December 25, 1999 by
reference. In connection with the SEC's review of the Proxy, several comments
were raised by the Staff relative to certain financial disclosures in the
Company's Form 10-K. In response to the SEC's comments, the Company, in
consultation with the Company's accountants, has determined to restate its
financial statements for the fiscal year ended December 25, 1999. This Amendment
includes these restated financial statements, together with the report thereon
of EideBailly LLP dated November 16, 2000.
The restatements relate solely to the SEC's accounting comments regarding
restatement of financial statements for all periods presented prior to the
measurement date in accordance with APB 30. The restatements are necessary due
to the sale of the Company's wholly-owned subsidiary, Shagawa Resort, Inc. and
accordingly, to restate Shagawa Resort, Inc.'s operations as discontinued
operations.
The item(s) amended are as follows:
Part II, Item 6 Selected Financial Data
Part II, Item 8 Financial Statements and Supplementary Data
Part IV, Item 14 Exhibits, Financial Statement Schedules and Reports on
Form 8-K
PART II
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Dec 25, Dec 26, Dec. 27, Dec. 28, Dec. 30,
YEARS ENDED 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 13,158,900 $ 11,969,000 $ 11,236,600 $ 12,172,200 $ 10,849,000
Gross profit 2,389,000 2,412,500 2,183,900 2,965,300 2,351,500
Operating expenses 1,644,700 1,458,300 1,340,900 1,365,000 1,041,100
Operating income 744,300 954,200 843,000 1,600,300 1,310,400
Net loss from operations of
discontinued subsidiary (84,100) (115,300) (131,900) -- --
Net income (See page 14) 347,900 374,300 329,100 908,100 809,100
Basic net income per
common share $ .16 $ .17 $ .15 $ .41 $ .37
Diluted net income per
common share $ .16 $ .17 $ .15 $ .41 $ .37
AT YEAR END
----------------------------------------------------------------------------------------------------------------
Working capital $ 3,344,700 $ 3,035,400 $ 2,630,200 $ 1,895,800 $ 1,746,700
Total assets 9,784,000 9,425,200 8,881,500 7,619,900 5,833,200
Long-term debt, Net 2,752,300 2,852,500 2,951,400 2,077,400 1,066,300
Stockholders' equity 5,454,400 5,106,500 4,732,200 4,403,100 3,479,300
Weighted average number
common shares outstanding 2,241,000 2,241,000 2,241,000 2,223,000 2,209,000
STATISTICAL HIGHLIGHTS
----------------------------------------------------------------------------------------------------------------
Single-family unit sales 224 206 201 219 192
Average square feet per
single-family unit 1,310 1,332 1,330 1,277 1,225
Total sq. feet of production 302,381 331,882 279,878 315,182 308,400
</TABLE>
1
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated Financial Statements of the Company, and its
subsidiaries, together with the reports of the independent auditors thereon,
are presented on pages: 3 through 20 hereof as set forth below:
Page No.
INDEPENDENT AUDITOR'S REPORT 3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Financial Statements 9
2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
--------------------------------------------------------------------------------
The Stockholders and Board of Directors
DYNAMIC HOMES, INC. AND SUBSIDIARIES
Detroit Lakes, Minnesota
We have audited the accompanying consolidated balance sheets of DYNAMIC HOMES,
INC. AND SUBSIDIARIES as of December 25, 1999 and December 26, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 25, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DYNAMIC HOMES, INC.
AND SUBSIDIARIES as of December 25, 1999 and December 26, 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 25, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its accounting for amortization of start-up activities in 1998.
Fargo, North Dakota
February 11, 2000, except for Note 18
as to which the date is November 16, 2000
3
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 25, 1999 AND DECEMBER 26, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 931,600 $ 312,300
Receivables
Trade, less allowance for doubtful
accounts 1999 $12,300; 1998 $60,000 1,796,900 1,491,500
Refundable income taxes 14,400 --
Other 3,600 33,500
Inventories 1,875,200 2,367,200
Prepaid expenses 69,300 78,100
Deferred income taxes 127,000 143,000
------------ ------------
Total current assets 4,818,000 4,425,600
OTHER ASSETS, net of accumulated amortization 408,600 421,300
PROPERTY AND EQUIPMENT, net of accumulated
depreciation 4,557,400 4,578,300
------------ ------------
$ 9,784,000 $ 9,425,200
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 268,100 $ 196,900
Accounts payable 346,800 350,000
Customer deposits 127,000 199,500
Accrued expenses 731,400 638,900
Income taxes payable -- 4,900
------------ ------------
Total current liabilities 1,473,300 1,390,200
------------ ------------
LONG-TERM DEBT, less current maturities 2,752,300 2,852,500
------------ ------------
DEFERRED INCOME TAXES 104,000 76,000
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value $.10 per share
Authorized, 5,000,000 shares
Issued, 2,284,000 shares in 1999 and 1998 228,400 228,400
Additional paid-in capital 147,100 147,100
Retained earnings 5,223,000 4,875,100
------------ ------------
5,598,500 5,250,600
Less treasury stock, at cost (43,080 shares) (144,100) (144,100)
------------ ------------
5,454,400 5,106,500
------------ ------------
$ 9,784,000 $ 9,425,200
============ ============
</TABLE>
See Notes to Consolidated Financial Statements 4
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
SALES $ 13,158,900 $ 11,969,000 $ 11,236,600
COST OF SALES 10,769,900 9,556,500 9,052,700
------------ ------------ ------------
GROSS PROFIT 2,389,000 2,412,500 2,183,900
OPERATING EXPENSES 1,644,700 1,458,300 1,340,900
------------ ------------ ------------
INCOME FROM OPERATIONS 744,300 954,200 843,000
OTHER INCOME (EXPENSES)
Interest expense (125,500) (121,900) (89,400)
Interest income and service charges 39,700 47,100 28,900
Gain (loss) on sale of equipment 8,000 19,400 (8,700)
Other, net 63,500 29,300 2,200
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 730,000 928,100 776,000
INCOME TAXES 298,000 344,900 315,000
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 432,000 583,200 461,000
DISCONTINUED OPERATIONS
Loss from operations of discontinued subsidiary,
Shagawa Resort, Inc., net of income tax benefit (84,100) (115,300) (131,900)
Cumulative effect of accounting change, net of
income tax -- (93,600) --
------------ ------------ ------------
NET INCOME $ 347,900 $ 374,300 $ 329,100
============ ============ ============
BASIC INCOME PER COMMON SHARE
Income from continuing operations $ 0.19 $ 0.26 $ 0.21
Discontinued operations:
Loss from operations of discontinued subsidiary (0.03) (0.05) (0.06)
Cumulative effect of accounting change -- (0.04) --
------------ ------------ ------------
Net income $ 0.16 $ 0.17 $ 0.15
============ ============ ============
DILUTED INCOME PER COMMON SHARE
Income from continuing operations $ 0.19 $ 0.26 $ 0.21
Discontinued operations:
Loss from operations of discontinued subsidiary (0.03) (0.05) (0.06)
Cumulative effect of accounting change -- (0.04) --
------------ ------------ ------------
Net income $ 0.16 $ 0.17 $ 0.15
============ ============ ============
PRO FORMA AMOUNTS ASSUMING RETROACTIVE
APPLICATION OF ACCOUNTING CHANGE
Net income $ 523,900 $ 370,100
Basic income per common share 0.23 0.17
Diluted income per common share 0.23 0.17
============ ============
</TABLE>
See Notes to Consolidated Financial Statements 5
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
---------------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 28, 1996 2,284,000 $ 228,400 $ 147,100 $ 4,171,700 $ (144,100) $ 4,403,100
Net income -- -- -- 329,100 -- 329,100
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 27, 1997 2,284,000 228,400 147,100 4,500,800 (144,100) 4,732,200
Net income -- -- -- 374,300 -- 374,300
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 26, 1998 2,284,000 228,400 147,100 4,875,100 (144,100) 5,106,500
Net income -- -- -- 347,900 -- 347,900
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 25, 1999 2,284,000 $ 228,400 $ 147,100 $ 5,223,000 $ (144,100) $ 5,454,400
============ ============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements 6
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 347,900 $ 374,300 $ 329,100
Charges and credits to net income
not affecting cash
Depreciation 466,200 430,100 376,400
Amortization 30,300 22,900 59,400
(Gain) loss on sale of equipment (8,000) (19,400) 8,700
Deferred income taxes 44,000 (48,000) 42,000
Cumulative effect of accounting change -- 149,600 --
Changes in assets and liabilities
Receivables (275,500) (778,700) (60,500)
Inventories 492,000 (878,900) 107,000
Prepaid expenses 8,800 (30,700) (18,200)
Accounts payable (3,200) 89,000 44,900
Customer deposits (72,500) 22,400 (148,700)
Accrued expenses 92,500 113,300 69,200
Income taxes (19,300) 42,500 4,200
------------ ------------ ------------
NET CASH FROM (USED FOR) OPERATING
ACTIVITIES 1,103,200 (511,600) 813,500
------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from sale of equipment 8,000 34,100 13,000
Payments for other assets (17,600) (64,100) (187,200)
Purchase of property and equipment (445,300) (353,500) (653,500)
------------ ------------ ------------
NET CASH USED FOR INVESTING ACTIVITIES (454,900) (383,500) (827,700)
------------ ------------ ------------
FINANCING ACTIVITIES
Principal payments on long-term debt (222,000) (171,700) (210,400)
Proceeds from long-term debt borrowings 193,000 49,600 1,000,000
------------ ------------ ------------
NET CASH FROM (USED FOR) FINANCING
ACTIVITIES (29,000) (122,100) 789,600
------------ ------------ ------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 619,300 (1,017,200) 775,400
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 312,300 1,329,500 554,100
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 931,600 $ 312,300 $ 1,329,500
============ ============ ============
</TABLE>
(continued on next page) 7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS- PAGE - 2
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for
Income taxes, net of refunds $ 217,300 $ 217,500 $ 180,800
Interest 267,800 254,700 232,000
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Capital lease obligation incurred
for use of new equipment $ 65,900 $ 69,000
============ ============
Contract for deed incurred for purchase of land $ 62,500
============
Purchase of assets, net of liabilities assumed, of
Holiday Inn Sunspree Resort:
Fair value of assets acquired $ 156,900
Liabilities assumed (104,300)
------------
Cash paid $ 52,600
============
</TABLE>
See Notes to Consolidated Financial Statements 8
<PAGE>
DYNAMIC HOMES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997
--------------------------------------------------------------------------------
NOTE 1 - PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Dynamic Homes,
Inc., its wholly-owned subsidiary, Shagawa Resort, Inc., and three additional
wholly-owned subsidiaries which had no significant operations during 1999, 1998,
and 1997. All significant intercompany accounts and transactions have been
eliminated.
PRINCIPAL BUSINESS ACTIVITY
Dynamic Homes, Inc. manufactures modular, preconstructed buildings for
single-family, multiple-family and commercial use. Commercial operations include
the manufacture of preconstructed office buildings, motels and apartments.
Shagawa Resort, Inc. (a wholly-owned subsidiary) owns a hotel/resort which
opened in May 1996. The resort was managed by an unrelated party through a
management agreement with the Company through March 1997, at which time
management of the resort was assumed by the Company.
CONCENTRATIONS OF CREDIT RISK
In the normal course of business the Company extends credit to its customers.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Accounts receivable are
primarily due from customers in the Upper Midwest and are not concentrated in a
particular industry.
The Company's cash balances are maintained in several bank deposit accounts.
Periodically, balances in these accounts are in excess of federally insured
limits.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost (standard cost, which approximates
average cost) or market. Cost of work in process and finished goods inventories
includes materials, labor and factory overhead.
REVENUE RECOGNITION
Sales of Dynamic Homes, Inc. are recognized and recorded upon delivery of the
finished product. Sales of Shagawa Resort, Inc. are recognized and recorded upon
delivery of service.
(continued on next page) 9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including the cost of capitalized
leased assets. Depreciation of property and equipment is computed using the
straight-line method over the following estimated useful lives:
Land improvements 7-20 years
Buildings 15-39 years
Machinery and equipment 3-10 years
Capitalized leases 7-10 years
Amortization of the capitalized leased assets is included with depreciation.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents and accounts receivable
approximate fair value because of the short maturity of these instruments.
The fair value of long-term debt is estimated based on borrowing rates currently
available to the Company for bank loans with similar items and average
maturities. The carrying amount of long-term debt approximates the estimated
fair value at December 25, 1999 and December 26, 1998.
AMORTIZATION
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 in other assets is goodwill related to the acquisition of Shagawa
Resort, Inc., which is being amortized on the straight-line method over its
estimated useful life.
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 required implementation
for years beginning after December 15, 1998, however, the Company elected to
adopt the statement early.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of receivables, property and
equipment, other assets, and accrued expenses, 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 or settled.
(continued on next page) 10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
ADVERTISING COSTS
Costs incurred for producing and distributing advertising are expensed as
incurred. The Company incurred advertising costs of $157,100 in 1999, $188,300
in 1998, and $148,000 in 1997.
FISCAL YEAR
The reporting period for the Company ends on the last Saturday of December each
year, with the exception of Shagawa Resort, Inc. which has a reporting year
ending on December 31. The year ended December 25, 1999 contained 52 weeks, the
year ended December 26, 1998 contained 52 weeks, and the year ended December 27,
1997 contained 52 weeks.
INCOME PER COMMON SHARE
Basic income per common share is computed by dividing net income by the weighted
average number of common shares outstanding during each year. Weighted average
outstanding common shares were 2,241,000 in 1999, 1998, and 1997.
Diluted income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the year plus the
incremental shares that are outstanding upon the exercise of dilutive stock
options.
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share", which requires companies to
present basic earnings per share and diluted earnings per share, instead of
primary earnings per share and fully diluted earnings per share as previously
required.
NOTE 2 - INVENTORIES
1999 1998
------------ ------------
Raw materials $ 853,500 $ 832,000
Work in process 135,100 155,600
Finished goods 886,600 1,379,600
------------ ------------
$ 1,875,200 $ 2,367,200
============ ============
(continued on next page) 11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - OTHER ASSETS
1999 1998
------------ ------------
Capitalized debt expense $ 221,700 $ 218,900
Goodwill 119,400 119,400
Replacement reserve account 104,000 100,800
Other 43,700 22,400
------------ ------------
488,800 461,500
Less accumulated amortization (80,200) (40,200)
------------ ------------
$ 408,600 $ 421,300
============ ============
NOTE 4 - PROPERTY AND EQUIPMENT
1999 1998
------------ ------------
Land and improvements $ 426,100 $ 401,500
Buildings 3,756,800 3,700,100
Machinery and equipment 2,932,900 2,660,200
------------ ------------
7,115,800 6,761,800
Less accumulated depreciation (2,558,400) (2,183,500)
------------ ------------
$ 4,557,400 $ 4,578,300
============ ============
NOTE 5 - LEASES
The Company leases equipment under long-term capital lease agreements. The lease
agreements provide for varying monthly payments through July 2003.
1999 1998
------------ ------------
Capitalized leased assets consist of:
Equipment $ 393,100 $ 393,100
Less accumulated amortization (165,800) (109,700)
------------ ------------
$ 227,300 $ 283,400
============ ============
(continued on next page) 12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Minimum lease payments for the capital leases in future years are as follows:
Years Ending December
-----------------------
2000 $ 80,500
2001 142,300
2002 41,900
2003 22,700
------------
Total minimum lease payments 287,400
Less interest (48,600)
------------
Present value of minimum lease
payments - Note 6 $ 238,800
============
NOTE 6 - NOTE PAYABLE AND LONG-TERM DEBT
The Company has available a line of credit which is secured by inventories and
receivables. The credit available is based on specified percentages of
inventories and receivables to a maximum of $1,500,000. As of December 25, 1999
and December 26, 1998, there were no borrowings outstanding under the line of
credit. Borrowings under the line of credit bear interest at a variable rate
(8.5% at December 25, 1999) and there are no compensating balance requirements.
Long-term debt consists of:
1999 1998
----------- -----------
Variable rate note payable (8.75% at December
25, 1999), due in monthly installments of
$8,200, including interest, to September
2006, when the remaining balance is due,
secured by substantially all assets of
Shagawa Resort, Inc. $ 861,900 $ 882,900
7.32% note payable, due in monthly installments
of $7,556, including interest, until August
2016, secured by substantially all assets of
Shagawa Resort, Inc., and a partial guarantee
of the Small Business Administration 869,500 895,500
8.25% note payable, due in monthly installments
of $6,000, including interest, to March 2002,
at which time the balance is due, secured by
real estate and equipment 551,100 576,500
Capitalized lease obligations, secured by leased
assets - Note 5 238,800 291,800
(continued on next page) 13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8.25% note payable, due in monthly installments
of $1,819, including interest, to April 2002,
when the remaining balance is due, secured
by second mortgage on building 169,200 176,800
8.5% note payable, due in monthly installments
of $3,302, including interest, to June 2003,
secured by transportation equipment 122,000 --
8% note payable, due in varying monthly
installments, including interest, to March
2002, secured by equipment 96,700 136,900
6.5% contract for deed, due in annual installments
of $10,500, plus interest, to August 2001,
with a final payment of $15,500, plus interest,
due August 2002, secured by land 36,500 47,000
8.25% note payable, due in monthly installments
of $1,892, including interest, to June 2001,
secured by computer equipment 33,600 --
4.9% note payable, due in monthly installments of
$1,479, including interest, to June 2001,
secured by equipment 25,700 41,800
Other 15,400 200
----------- -----------
3,020,400 3,049,400
Less current maturities (268,100) (196,900)
----------- -----------
$ 2,752,300 $ 2,852,500
=========== ===========
Long-term debt maturities are as follows:
Years Ending December
-----------------------
2000 $ 268,100
2001 332,100
2002 802,200
2003 110,200
2004 72,800
Thereafter 1,435,000
-----------
$ 3,020,400
===========
(continued on next page) 14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - CUSTOMER DEPOSITS
Customer deposits of $127,000 at December 25, 1999 and $199,500 at December 26,
1998 consisted of advance payments from customers for sales to be recognized in
the following year. Sales to be recognized in 2000 related to customer deposits
at December 25, 1999 are estimated to be $1,645,000.
NOTE 8 - ACCRUED EXPENSES
1999 1998
------------ ------------
Salaries, wages and vacations $ 259,700 $ 259,500
Taxes, other than income taxes 125,300 97,300
Warranty 75,700 72,300
Other 270,700 209,800
------------ ------------
$ 731,400 $ 638,900
============ ============
NOTE 9 - STOCK OPTION PLAN
The Company approved a stock option plan in 1996, authorizing the use of 400,000
shares for the plan. During 1996, 240,000 options were granted; 200,000 to
officers and directors at $2.3125 per share and 40,000 shares to various
employees at $2.1562 per share. No options were exercised during 1999, 1998, or
1997, however during 1997, 25,000 of options to officers and 10,000 of options
to employees were forfeited as a result of the respective individuals'
separation from the Company. Compensation cost related to the options granted in
1996 had no effect on net income or income per share.
The fair value of each option grant was estimated on the date of grant in 1996
using the Black-Scholes option pricing model with the following weighted-average
options: a risk-free interest rate of 6.5 percent, expected volatility of 28.77
percent, and no dividend yield. The assumption regarding the stock options
issued to officers, directors, and employees in 1996 was that 100 percent of
such options vested in 1996.
NOTE 10 - SALES
1999 1998 1997
------------ ------------ ------------
Dynamic Homes, Inc.
Single-family $ 10,904,300 $ 9,924,800 $ 9,681,600
Multi-family/commercial 1,109,000 989,300 617,300
Transportation 703,200 645,000 568,400
Other 442,400 409,900 369,300
------------ ------------ ------------
13,158,900 11,969,000 11,236,600
Shagawa Resort, Inc.,
discontinued subsidiary 2,050,700 1,936,300 1,622,400
------------ ------------ ------------
$ 15,209,600 $ 13,905,300 $ 12,859,000
============ ============ ============
(continued on next page) 15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - COST OF SALES
1999 1998 1997
------------ ------------ ------------
Dynamic Homes, Inc.
Single-family $ 7,076,000 $ 6,261,600 $ 5,965,000
Multi-family/commercial 1,088,100 1,073,300 1,001,600
Transportation 1,643,400 1,358,500 1,336,200
Other 962,400 863,100 749,900
------------ ------------ ------------
10,769,900 9,556,500 9,052,700
Shagawa Resort, Inc.,
discontinued subsidiary 1,128,400 1,098,100 951,900
------------ ------------ ------------
$ 11,898,300 $ 10,654,600 $ 10,004,600
============ ============ ============
NOTE 12 - OPERATING EXPENSES
1999 1998 1997
------------ ------------ ------------
Dynamic Homes, Inc.
Marketing $ 619,300 $ 534,900 $ 462,300
Administration 1,025,400 923,400 878,600
------------ ------------ ------------
1,644,700 1,458,300 1,340,900
------------ ------------ ------------
Shagawa Resort, Inc.
Marketing 77,400 68,000 75,100
Administration 846,200 817,700 724,000
------------ ------------ ------------
923,600 885,700 799,100
------------ ------------ ------------
$ 2,568,300 $ 2,344,000 $ 2,140,000
============ ============ ============
NOTE 13 - INCOME TAXES
Net deferred tax assets and liabilities consist of the following components as
of December 25, 1999 and December 26, 1998:
1999 1998
------------ ------------
Deferred tax assets
Receivable allowances $ 5,000 $ 24,000
Book/tax inventory adjustment 26,000 30,000
Intangible and other assets 32,000 53,000
Accrued expenses 96,000 89,000
------------ ------------
$ 159,000 $ 196,000
============ ============
Deferred tax liabilities
Property and equipment $ 136,000 $ 129,000
============ ============
(continued on next page) 16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The deferred tax amounts described above have been included in the accompanying
balance sheets as of December 25, 1999 and December 26, 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Current assets $ 127,000 $ 143,000
Noncurrent liabilities (104,000) (76,000)
------------ ------------
$ 23,000 $ 67,000
============ ============
</TABLE>
The provision for income taxes charged to operations for the years ended
December 25, 1999, December 26, 1998, and December 27, 1997, consists of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current expense
Continuing operations $ 254,000 $ 392,900 $ 273,000
Discontinued operations (56,000) (76,900) (88,000)
Cumulative effect of accounting change -- (56,000) --
Deferred tax expense (benefit) 44,000 (48,000) 42,000
------------ ------------ ------------
$ 242,000 $ 212,000 $ 227,000
============ ============ ============
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
December 25, 1999, December 26, 1998, and December 27, 1997 due to the
following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income tax computed at federal
statutory rates $ 201,000 $ 199,000 $ 189,000
State taxes, net of federal
tax benefit 35,000 35,000 33,000
Change in income taxes resulting
from non-deductible expenses 6,000 (22,000) 5,000
------------ ------------ ------------
$ 242,000 $ 212,000 $ 227,000
============ ============ ============
</TABLE>
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company had sales totaling approximately $2,001,300 in 1999, $868,000 in
1998, and $633,900 in 1997 to members of the board of directors and entities
owned by Board members. At December 25, 1999 and December 26, 1998, the Company
had accounts receivable of $229,000 and $115,100, respectively, relating to
these sales.
(continued on next page) 17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 15 - MAJOR CUSTOMER
Dynamic Homes, Inc. and Subsidiaries derived approximately 10 percent of its
revenue from one customer during the year ended December 25, 1999, 15 percent of
its revenue from one customer during the year ended December 26, 1998; and 12
percent of its revenue from one customer during the year ended December 27,
1997.
NOTE 16 - EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) plan which covers all employees who meet
eligibility requirements of being actively employed at year end. Under the terms
of the plan, employees may contribute 1 percent to 5 percent of their annual
salary, up to the maximum allowed by Internal Revenue Service regulations. The
Company's contribution to the plan, as determined by the board of directors, is
discretionary but may not exceed 100 percent of the employees' contribution. The
Company contributed $9,700 to the plan for the year ended December 25, 1999,
$8,100 to the plan for the year ended December 26, 1998, and $7,000 for the year
ended December 27, 1997.
NOTE 17 - BUSINESS SEGMENTS
The Company operates in two business segments: Dynamic Homes, Inc, which
manufactures modular, pre-constructed buildings; and Shagawa Resort, Inc., which
owns and operates a hotel/resort in northern Minnesota.
Information concerning the operations, net of eliminations, in these business
segments as of December 25, 1999, December 26, 1998, and December 27, 1997 are
as follows:
<TABLE>
<CAPTION>
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated
------------ ------------ ------------
<S> <C> <C> <C>
Year ended December 25, 1999:
Sales $ 13,158,900 $ 2,050,700 $ 15,209,600
Gross profit 2,389,000 922,300 3,311,300
Income (loss) from operations 744,300 (1,200) 743,100
Interest expense 125,500 141,900 267,400
Net income (loss) 432,000 (84,100) 347,900
Depreciation 298,900 167,300 466,200
Amortization 5,000 25,300 30,300
Total assets 6,644,500 3,139,500 9,784,000
Capital expenditures, including
capital lease obligations 417,600 27,700 445,300
</TABLE>
(continued on next page) 18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated
------------ ------------ ------------
<S> <C> <C> <C>
Year ended December 26, 1998:
Sales $ 11,969,000 $ 1,936,300 $ 13,905,300
Gross profit 2,412,500 838,200 3,250,700
Income (loss) from operations 954,200 (47,500) 906,700
Interest expense 121,900 147,200 269,100
Net income (loss) before cumulative
effect of accounting change 583,200 (115,300) 467,900
Depreciation 266,900 163,200 430,100
Amortization 5,100 17,800 22,900
Total assets 6,124,100 3,301,100 9,425,200
Capital expenditures, including
capital lease obligations 365,500 53,900 419,400
Year ended December 27, 1997:
Sales $ 11,236,600 $ 1,622,400 $ 12,859,000
Gross profit 2,183,900 670,600 2,854,500
Income (loss) from operations 843,000 (128,500) 714,500
Interest expense 89,400 147,900 237,300
Net income (loss) 461,000 (131,900) 329,100
Depreciation 220,600 155,800 376,400
Amortization 5,300 54,100 59,400
Total assets 5,363,400 3,518,100 8,881,500
Capital expenditures, including
capital lease obligations 646,300 76,200 722,500
</TABLE>
(continued on next page) 19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 18 - DISCONTINUED OPERATIONS
In May 2000, the Company completed the sale of its wholly-owned subsidiary,
Shagawa Resort, Inc., for which the Company has recorded a loss of approximately
$516,000. As a result of this transaction, the results of operations of Shagawa
Resort, Inc. have been classified as discontinued operations and operating
results for the years ended December 25, 1999, December 26, 1998 and December
27, 1997 have been restated.
Condensed operating results and balance sheets for the discontinued operation
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATIONS
Sales $ 2,050,700 $ 1,936,300 $ 1,622,400
Cost of sales and expenses 2,052,000 1,983,800 1,751,000
------------ ------------ ------------
Operating loss (1,300) (47,500) (128,600)
Other income (expense) (138,800) (144,700) (91,300)
------------ ------------ ------------
Loss before income taxes (140,100) (192,200) (219,900)
Income tax benefit 56,000 76,900 88,000
------------ ------------ ------------
Net loss $ (84,100) $ (115,300) $ (131,900)
============ ============ ============
BALANCE SHEETS
Current assets $ 135,600 $ 135,600
Noncurrent assets 3,003,900 3,165,600
------------ ------------
$ 3,139,500 $ 3,301,200
============ ============
Current liabilities $ 1,444,900 $ 1,413,900
Noncurrent liabilities 1,681,600 1,734,400
Stockholders' equity 13,000 152,900
------------ ------------
$ 3,139,500 $ 3,301,200
============ ============
</TABLE>
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS - Included in Part II, Item 8
Page
----
Independent Auditor's Report 18
Consolidated Balance Sheets at December 25, 1999
and December 26, 1998 19
Consolidated Statements of Operations for the years
ended December 25, 1999, December 26, 1998
and December 27, 1997 20
Consolidated Statements of Stockholders' Equity for
the years ended December 25, 1999, December
26, 1998 and December 27, 1997 21
Consolidated Statements of Cash flows for the years
ended December 25, 1999, December 26, 1998
and December 27, 1997 22-23
Notes to Consolidated Financial Statements 24
2. FINANCIAL STATEMENT SCHEDULE - Included in Part IV
Schedule V - Property and Equipment(1) 39
Schedule VI - Accumulated Depreciation of Property
and Equipment(1) 40
Schedule VIII - Valuation and Qualifying Accounts(1) 41
Schedule IX - Short-term Borrowings(1) 42
Schedule X - Supplementary Income Statement
Information(1) 43
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in
the financial statements or notes thereto.
(1) Documents incorporated by reference to Form 10-K as filed for the year
ended 1999.
(Balance of page left intentionally blank)
21
<PAGE>
3. EXHIBITS:
(3) Articles of Incorporation and Bylaws incorporated by reference
to Form 10-K as filed for the year ended December 27, 1986.**
(13) Annual Report to Security Holders.**
(21) Subsidiaries of Dynamic Homes, Inc.:
21.1 Dynamic Homes of Fargo/Moorhead, Inc. - Inactive
21.2 Dynamic Homes of Dakota, Inc. - Inactive
21.3 Rapid Building Systems, Inc. - Inactive
21.4 Shagawa Resort, Inc.
** - Omitted
(B) REPORTS ON FORM 8-K:
No reports on Form 8-K have been filed by the registrant
during the last quarter of the period covered by this report.
(Balance of page left intentionally blank)
22
<PAGE>
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
/s/ Scott D. Lindemann /s/ Israel Mirviss
----------------------------------- -----------------------------------
SCOTT D. LINDEMANN ISRAEL MIRVISS,
PRESIDENT, CEO CHAIRMAN OF THE BOARD
11/20/00 11/20/00
/s/ Ronald L. Gustafson /s/ Clyde R. Lund, Jr.
----------------------------------- -----------------------------------
RONALD L. GUSTAFSON, CLYDE R. LUND, JR.,
DIRECTOR SECRETARY
11/20/00 11/20/00
/s/ Peter K. Pichetti Eldon R. Matz
----------------------------------- -----------------------------------
PETER K. PICHETTI, ELDON R. MATZ,
DIRECTOR CONTROLLER & TREASURER
11/20/00 11/20/00
DATED: NOVEMBER 20, 2000
23
<PAGE>
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, 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 September 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 of September
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 155,000 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 SEPTEMBER 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 9/30/1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales (Note 11) $ 4,244,000 $ -- $ 4,244,000 $ 4,635,000
Cost of Sales (Note 12) 3,393,000 -- 3,393,000 3,606,000
----------- ----------- ----------- -----------
Gross Profit 851,000 -- 851,000 1,029,000
Operating Expenses (Note 13) 430,000 -- 430,000 419,000
----------- ----------- ----------- -----------
Operating Income (Loss) 421,000 -- 421,000 610,000
Other (Income) Expense
Interest Expense 26,000 -- 26,000 34,000
Other, Net (27,000) -- (27,000) (18,000)
----------- ----------- ----------- -----------
Total Other (Income) Expense (1,000) -- (1,000) 16,000
Income (Loss) Before Taxes 422,000 -- 422,000 594,000
Income Tax (Provision) Benefit (169,000) -- (169,000) (237,000)
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations 253,000 -- 253,000 357,000
Discontinued Operations (Note 2)
Income(Loss)from operations of discontinued
subsidiary, Shagawa Resort, Inc., net of
of income tax provision of $59,000 for 1999 -- 2,000 2,000 88,000
Income(Loss)on disposal of Shagawa
Resort, Inc. (111,000) 111,000 -- --
----------- ----------- ----------- -----------
Net Income (Loss) $ 142,000 $ 113,000 $ 255,000 $ 445,000
----------- ----------- ----------- -----------
Basic Income (Loss) Per Common Share
Income (Loss) from continuing operations $ 0.11 -- $ 0.11 $ 0.16
Income(Loss)from discontinued operations:
Income(Loss)from operations of discontinued
subsidiary -- -- -- 0.04
Income(Loss)on disposal of subsidiary (0.05) 0.05 -- --
----------- ----------- ----------- -----------
Basic net income (loss) $ 0.06 $ 0.05 $ 0.11 $ 0.20
----------- ----------- ----------- -----------
Diluted Income (Loss) Per Common Share
Income (Loss) from continuing operations $ 0.11 $ -- $ 0.11 $ 0.16
Income(Loss)from discontinued operations:
Income(Loss)from operations of discontinued
subsidiary -- -- -- 0.04
Income(Loss)on disposal of subsidiary -- -- -- --
----------- ----------- ----------- -----------
Basic net income (loss) $ 0.11 $ -- $ 0.11 $ 0.20
----------- ----------- ----------- -----------
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
----------- ----------- ----------- -----------
See notes to condensed consolidated financial statements.
</TABLE>
Page 2
<PAGE>
PART I.
Item 1. Financial Statements
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
-----------
Dynamic Shagawa
Homes, Inc. Resort, Inc. Consolidated 9/30/1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales (Note 11) $ 8,977,000 $ -- $ 8,977,000 $ 9,200,000
Cost of Sales (Note 12) 7,468,000 -- 7,468,000 7,647,000
----------- ----------- ----------- -----------
Gross Profit 1,509,000 -- 1,509,000 1,553,000
Operating Expenses (Note 13) 1,064,000 -- 1,064,000 1,085,000
----------- ----------- ----------- -----------
Operating Income (Loss) 445,000 -- 445,000 468,000
Other (Income) Expense
Interest Expense 84,000 -- 84,000 104,000
Other, Net (64,000) -- (64,000) (42,000)
----------- ----------- ----------- -----------
Total Other (Income) Expense 20,000 -- 20,000 62,000
Income (Loss) Before Taxes 425,000 -- 425,000 406,000
Income Tax (Provision) Benefit (170,000) -- (170,000) (162,000)
----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations 255,000 -- 255,000 244,000
Discontinued Operations (Note 2)
Loss from operations of discontinued
subsidiary, Shagawa Resort, Inc., net of
of income tax benefit of $83,000 and $17,000 -- (123,000) (123,000) (26,000)
Income(Loss)on disposal of Shagawa Resort,
Inc., net of income taxes of $11,000 (715,000) 199,000 (516,000) --
----------- ----------- ----------- -----------
Net Income (Loss) $ (460,000) $ 76,000 $ (384,000) $ 218,000
----------- ----------- ----------- -----------
Basic Income (Loss) Per Common Share
Income (Loss) from continuing operations $ 0.11 $ -- $ 0.11 $ 0.11
Loss from discontinued operations:
Loss from operations of discontinued
subsidiary -- (0.06) (0.06) (0.01)
Income(Loss)on disposal of subsidiary (0.32) 0.09 (0.23) --
----------- ----------- ----------- -----------
Basic net income (loss) $ (0.21) $ 0.03 $ (0.18) $ 0.10
----------- ----------- ----------- -----------
Diluted Income (Loss) Per Common Share
Income (Loss) from continuing operations $ 0.11 $ -- $ 0.11 $ 0.11
Loss from discontinued operations:
Loss from operations of discontinued
subsidiary -- (0.06) (0.06) (0.01)
Income(Loss)on disposal of subsidiary (0.32) 0.09 (0.23) --
----------- ----------- ----------- -----------
Basic net income (loss) $ (0.21) $ 0.03 $ (0.18) $ 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
----------- ----------- ----------- -----------
See notes to condensed consolidated financial statements.
</TABLE>
Page 3
<PAGE>
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 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 $ 2,139,000 $ -- $ -- $ 2,139,000 $ 932,000
Accounts receivable, less allowance
for doubtful accounts, pledged 774,000 -- -- 774,000 1,815,000
Inventories pledged (Note 3) 2,389,000 -- -- 2,389,000 1,875,000
Prepaid expenses (Note 6) 80,000 -- -- 80,000 69,000
Deferred income taxes (Note 5) 127,000 -- -- 127,000 127,000
----------- ----------- ------------ ----------- -----------
Total Current Assets 5,509,000 -- -- 5,509,000 4,818,000
Other Assets:
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) 4,084,000 -- -- 4,084,000 7,116,000
Less - accumulated depreciation (2,204,000) -- -- (2,204,000) (2,559,000)
----------- ----------- ------------ ----------- -----------
Net Property, Plant & Equipment 1,880,000 -- -- 1,880,000 4,557,000
----------- ----------- ------------ ----------- -----------
Total Assets $ 7,408,000 $ -- $ -- $ 7,408,000 $ 9,784,000
=========== =========== ============ =========== ===========
LIABILITIES
Current Liabilities:
Notes payable -- -- -- -- --
Current portion - long-tern debt 222,000 -- -- 222,000 268,000
Accounts payable 183,000 -- -- 183,000 347,000
Customer deposits 157,000 -- -- 157,000 127,000
Accrued expenses
Salaries, Wages and vacations 339,000 -- -- 339,000 260,000
Taxes, other than income 115,000 -- -- 115,000 125,000
Warranty 80,000 -- -- 80,000 76,000
Other 147,000 -- -- 147,000 271,000
Income taxes 92,000 -- -- 92,000 --
----------- ----------- ----------- ----------- -----------
Total Current Liabilities 1,335,000 -- -- 1,335,000 1,474,000
Long-Term Debt: (Note 8)
Less current portion included above 899,000 -- -- 899,000 2,752,000
----------- ----------- ----------- ----------- -----------
Deferred Income Taxes (Note 5) 104,000 -- -- 104,000 104,000
----------- ----------- ----------- ----------- -----------
Total Liabilities 2,338,000 -- -- 2,338,000 4,330,000
STOCKHOLDERS' EQUITY
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 4,839,000 -- -- 4,839,000 5,223,000
Less Treasury stock - (43,080) shares (144,000) -- -- (144,000) (144,000)
----------- ----------- ------------ ----------- -----------
Total Stockholders' Equity 5,070,000 -- -- 5,070,000 5,454,000
----------- ----------- ------------ ----------- -----------
Total Liabilities & Stockholders' Equity $ 7,408,000 $ -- $ -- $ 7,408,000 $ 9,784,000
=========== =========== ============ =========== ===========
See notes to consolidated financial statements.
</TABLE>
Page 4
<PAGE>
FORM 10-Q
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
09/30/00 09/30/99
------------ -----------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) $ (384,000) $ 218,000
Adjust to Reconcile Net Income or Loss
Provided by (Used In) Operating Activities:
Depreciation / Amortization 306,000 355,000
Provision for Doubtful Accounts 20,000 41,000
(Gain) Loss on Sales of Property & Equipment (5,000) (8,000)
(Gain) Loss on Sale of Assets of Shagawa Resort, Inc. 516,000 --
Change in Assets & Liabilities:
(Increase) Decrease in Receivables 996,000 180,000
(Increase) Decrease in Inventories (514,000) (845,000)
(Increase) Decrease in Prepaid Expenses (11,000) (46,000)
(Increase) Decrease in Deferred Income Tax -- --
(Increase) Decrease in Other Assets 123,000 3,000
Increase (Decrease) in Accounts Payable (164,000) 239,000
Increase (Decrease) in Customer Deposits 54,000 82,000
Increase (Decrease) in Accrued Expenses (52,000) 75,000
Increase (Decrease) in Income Tax Payable 92,000 143,000
------------ -----------
Net Cash Provided by (Used in) Operating Activities 977,000 437,000
Cash Flows From Investing Activities
Proceeds From Sale of Property & Equipment 15,000 8,000
Proceeds From Sale of Shagawa Resort, Inc. 2,300,000 --
Purchase of Property & Equipment (186,000) (321,000)
------------ -----------
Net Cash Provided by (Used in) Investing Activities 2,129,000 (313,000)
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 (1,899,000) (160,000)
Proceeds From Long-Term Borrowings / Leases -- 176,000
------------ -----------
Net Cash Provided (Used in) Financing Activities (1,899,000) 16,000
Increase (Decrease) in Cash and Equivalents $ 1,207,000 $ 140,000
------------ -----------
Cash and Equivalents
Beginning $ 932,000 $ 313,000
Ending $ 2,139,000 $ 453,000
Supplemental Disclosures of Cash Flow Information
Cash Payments for:
Income Taxes $ 2,000 $ 10,000
Interest $ 131,000 $ 211,000
See notes to condensed consolidated financial statements.
</TABLE>
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, 2000 and December 25, 1999
and the results of operations and cash flows for the three and nine months ended
September 30, 2000 and September 30, 1999.
Note 2. DISCONTINUED OPERATIONS
In May, 2000, the Company completed the sale of its Shagawa Resort, Inc.
subsidiary. The Company has recorded an 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:
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
2000 1999 2000 1999
------- ---------- ---------- ----------
Sales $ - $ 798,000 $ 530,000 $1,646,000
Cost of sales and expenses (2,000) 616,000 690,000 1,585,000
------ ---------- ---------- ----------
Operating income (loss) 2,000 182,000 (160,000) 61,000
Other income (expense) - 0- (35,000) (46,000) (104,000)
------ ---------- ---------- ----------
Income(loss)before income taxes 2,000 147,000 (206,000) (43,000)
Income tax benefit -0- 59,000 83,000 17,000
------ ---------- ---------- ----------
Net Income (loss) $2,000 $ 88,000 $ (123,000) $ (26,000)
====== ========== ========== ==========
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
may be taken during the fiscal year to determine actual inventory and cost of
sales. No physical inventory was taken during the first nine months of 2000.
Shagawa Resort, Inc. conducted a final physical inventory on April 30, 2000.
The breakdown of inventories is as follows:
9/30/00 9/30/99
----------- -----------
Finished Goods (Note 4) $ 1,029,000 $ 1,890,000
Work In Process 153,000 171,000
Raw Materials 1,207,000 1,115,000
Shagawa Resort, Inc. - 36,000
----------- -----------
Total Inventories $ 2,389,000 $ 3,212,000
=========== ===========
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 September
30, 2000 and September 30, 1999, the Company's backlog of committed orders was
approximately $3,577,000 and $3,529,000 respectively. As of December 25, 1999,
the Company's backlog of orders was $1,645,000. The September 30, 1999 backlog
included an order for 17 single-family units for a Native American Community in
Central Minnesota which was delivered and set 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, 2000, the Company
had 8 inventory and 17 finished units available
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for immediate sale as compared with 16 inventory and 37 finished units at
September 30, 1999. All inventory units have been excluded from the backlog
values. The Company does not have any multi-family/commercial projects under
contract as of September 30, 2000. The Company has recently introduced several
marketing programs to assist Builder/Dealers in securing new orders during the
remainder of 2000.
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
9/30/00 9/30/99
----------- -----------
Advertising $ 21,000 $ 2,000
Insurance 55,000 52,000
Equipment, Supplies Inventory-Shagawa Resort, Inc. - 12,000
Other 4,000 58,000
$ 80,000 $ 124,000
=========== ===========
Note 7. PROPERTY AND EQUIPMENT
9/30/00 9/30/99
------------- ------------
Dynamic Homes, Inc.
Land and Improvements $ 266,000 $ 266,000
Buildings 1,456,000 1,444,000
Machinery and Equipment 2,223,000 1,987,000
Construction in Process 139,000 103,000
Shagawa Resort, Inc.
Land and Improvements - 343,000
Buildings - 2,127,000
Machinery and Equipment - 720,000
Construction in Process - -
------------- ------------
4,084,000 6,990,000
Less: Accumulated Depreciation-Dynamic Homes, Inc. (2,204,000) (1,910,000)
Accumulated Depreciation-Shagawa Resort, Inc. - (520,000)
------------- ------------
$ 1,880,000 $ 4,560,000
============= ===========
Note 8. LONG-TERM DEBT
9/30/00 9/30/99
------------- ------------
Long-term debt consists of:
Detroit Lakes-Plant Expansion $ 759,000 $ 837,000
Leasing-Capitalized Cranes, Trailers & Equipment 322,000 446,000
Term Mortgage Agreement covering Shagawa
Resort Project (Note 10) - 1,743,000
Other Notes and Contracts Payable 40,000 53,000
------------- ------------
1,121,000 3,079,000
Less: Current Maturities (222,000) (257,000)
------------- ------------
$ 899,000 $ 2,822,000
============= ===========
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Note 9. OTHER ASSETS - NET
9/30/00 9/30/99
------------- ------------
Dynamic Homes, Inc.
-Deferred Maintenance Expense $ 4,000 $ 5,000
-Prepaid Debt Expense 8,000 13,000
-Deposits 7,000 19,000
Shagawa Resort, Inc.
-Goodwill - 102,000
-Prepaid Legal/Debt Expense - 168,000
-Asset Replacement Escrow - 103,000
-Other - 8,000
------------- ------------
$ 19,000 $ 418,000
============= ============
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 September 30, 1999 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). 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 9 months 3 months 9 months
------------ ------------ ------------ ------------
Single-family $ 3,418,000 $ 7,480,000 $ 4,283,000 $ 7,697,000
Multi-family 488,000 706,000 -0- 670,000
Transportation 223,000 475,000 237,000 501,000
Other 115,000 316,000 115,000 332,000
------------ ------------ ------------ ------------
$ 4,244,000 $ 8,977,000 $ 4,635,000 $ 9,200,000
============ ============ ============ ============
Note 12 - Cost of Sales
2000 1999
---- ----
3 months 9 months 3 months 9 months
------------ ------------ ------------ ------------
Materials $ 2,166,000 $ 4,706,000 $ 2,446,000 $ 4,998,000
Labor 379,000 825,000 387,000 808,000
Overhead 561,000 1,203,000 512,000 1,134,000
Transportation 287,000 734,000 261,000 707,000
------------ ------------ ------------ ------------
$ 3,393,000 $ 7,468,000 $ 3,606,000 $ 7,647,000
============ ============ ============ ============
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Note 13- Operating Expenses
2000 1999
---- ----
3 months 9 months 3 months 9 months
------------ ------------ ------------ ------------
Marketing $ 137,000 $ 293,000 $ 168,000 $ 385,000
Administration 293,000 771,000 251,000 700,000
------------ ------------ ------------ ------------
$ 430,000 $ 1,064,000 $ 419,000 $ 1,085,000
============ ============ ============ ============
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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, 2000
-------------------------------------
NET SALES:
As a result of the sale of the assets of the hospitality sector (Shagawa Resort,
Inc.) on May 1, 2000, 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
September 30, 2000 was $4,244,000. This represents a decrease of $391,000 or 8
percent from the $4,635,000 reported during the same period of 1999.
Single-family revenue decreased $865,000 from $4,283,000 during 1999 to
$3,418,000. In contrast, multi-family revenue was $488,000 during fiscal 2000
versus the absence of any multi-family revenue during 1999. The majority of the
third quarter multi-family revenue relates to the completion of a 10 unit family
living center. Transportation and other (retail) revenue was similar for each
period at $338,000 for year 2000 and $352,000 during 1999. Unit activity for
single-family housing is again showing signs of the traditional seasonal
slowdown. In response, the Company implemented several promotional marketing
programs to stimulate winter production.
COST OF SALES:
Dynamic Homes realized a gross profit of $851,000 during the third quarter of
2000. The same period of 1999 produced a gross profit of $1,029,000 or $178,000
higher than the current year. The gross profit percentage for 2000 is 20.0
percent versus 22.2 percent for 1999. Promotional discounts affected each of the
quarters, however promotional discounts realized during the third quarter of
2000 were 1.2 percent of net sales greater than the prior year period. The
Company also experienced a higher level of unfavorable production variances
during the third quarter of 2000 due to the under utilization of available
production capacity. However, better than anticipated material acquisition costs
helped offset the affects of discounts and production variances. Transportation
related expenses increased by $26,000 from $261,000 during 1999 to $287,000 for
the current year. The increase during 2000 is a combination of increased
depreciation on equipment additions and crane services associated with the
setting of larger units and travel distance.
OPERATING EXPENSES:
Dynamic Homes, Inc. operating expenses, which include marketing and
administration, increased by $11,000 from $419,000 during 1999 to $430,000 for
2000. Overall, operating expenses for years 2000 and 1999 approximated 10 and 9
percent of net sales, respectively. Marketing related expenses for year 2000
decreased by $31,000, while administration expenses increased $42,000. The
reduction in marketing expenses reflects a decrease in the placement of media
advertising, rescheduling of the Builder/Dealer meeting and the consolidation of
several marketing activities. Administration expense for the third quarter of
2000 totaled $293,000 or $42,000 more than the $251,000 reported during 1999.
The increase in current year administration expenses is associated with
technical consulting services supporting the implementation of a new management
information system and legal and consulting services associated with the
exploration of various merger/acquisition alternatives surrounding an
acquisition letter of intent and the eventual agreement and Plan of Merger which
was finalized on September 25, 2000. It is anticipated that similar expense
levels for these professional services will continue during the fourth quarter
of 2000.
OPERATING INCOME (LOSS):
The operating cycle for the third quarter of 2000 resulted in operating income
of $421,000. During 1999, the higher revenue base produced an operating income
of $610,000. Corresponding operating income levels are 9.9 percent for year 2000
and 13.2 percent for 1999. The lower operating income percentage during 2000
reflects the combination of a lower gross profit and higher operating expenses.
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<PAGE>
NET NON-OPERATING INCOME AND EXPENSE:
The net non-operating cycle for the third quarter of 2000 resulted in an
operating income of $1,000 versus operating expense of $16,000 for 1999.
Interest expense, primarily related to long-term financing, decreased from
$34,000 during 1999 to $26,000 for fiscal 2000. Other income increased from
$18,000 during 1999 to $27,000 for the current year. The majority of the current
year income is attributed to the Company's improved cash position.
FEDERAL AND STATE INCOME TAXES:
During the third quarters of both 2000 and 1999, the Company recorded estimated
income tax obligations of $169,000 and $237,000, respectively. Income tax
obligations and benefits are estimated at the normal statutory rates.
NET INCOME:
The net income from continuing operations (manufacturing facility) for the third
quarter of 2000 was $253,000. Net income from continuing operations for 1999
totaled $357,000. Both basic and diluted earnings per common share outstanding
from continuing operations resulted in net income levels of $0.11 per share
during 2000 and $0.16 per share for 1999. Considerations for unexercised stock
options were recognized as diluted shares outstanding for each of the periods.
DISCONTINUED OPERATIONS:
Shagawa Resort, Inc. did not recognize any revenue during the third quarter of
2000. During the 1999 period, third quarter revenue was $798,000 and resulted in
a gross profit of $440,000. During the 1999 period, Shagawa Resort incurred
operating expenses of $258,000, net interest expense of $35,000 and a before tax
income of $147,000. Net income after taxes was $88,000 or $0.04 per share.
During the third quarter of 2000, Shagawa Resort reported a $2,000 reduction in
operating expenses associated with an insurance refund.
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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
Nine months ended September 30, 2000 and 1999
---------------------------------------------
NET SALES:
As a result of the sale of the assets of the hospitality sector (Shagawa Resort,
Inc.) on May 1, 2000, 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 nine-month period
ending September 30, 2000 was $8,977,000. During the nine-month period ending
September 30, 1999, the Company reported revenues of $9,200,000 or $233,000 more
than the 2000 total. Single-family revenue decreased by $217,000 from $7,697,000
during 1999 to $7,480,000 for year 2000. However, the decrease in single-family
activity was partially offset by a $36,000 increase in multi-family/commercial
activity. Multi-family/Commercial revenue for the current year totaled $706,000
versus $670,000 for 1999. Volume based transportation and other (retail) revenue
for year 2000 was $791,000 or $42,000 less than the $833,000 reported during
1999. Due to the reduction in available inventory units and the uneven receipt
of new orders during year 2000, both the number of units produced and set
decreased from the prior year level.
COST OF SALES:
Dynamic Homes, Inc. gross profit for the nine-month period ending September 30,
2000 was $1,509,000. During 1999, the gross profit for the period was
$1,553,000. The gross profit percentage for the first nine months of each year
were similar at 16.8 percent for year 2000 and 16.9 percent for 1999. The
Company benefited from favorable raw material costs throughout the latter stages
of 2000 which neutralized a higher level of unfavorable variances resulting from
the under utilization of plant production capacity.
OPERATING EXPENSES:
Dynamic Homes, Inc. operating expenses, which include marketing and
administration, decreased by $21,000 from the 1999 level of $1,085,000 to
$1,064,000 for the current year. Overall operating expenses remained constant at
approximately 11.8 percent of net sales for each period. During the first nine
months of 2000, marketing related expenses decreased by $92,000 from $385,000
for 1999 to $293,000 for 2000. The expense reduction is primarily attributed to
a reduction in media placement costs, the consolidation of marketing activities
and rescheduling of the Builder/Dealer meeting. In contrast, administration
related expenses for the first nine-months of 2000 total $771,000 or $71,000
greater than the $700,000 incurred during 1999. The major expense increases
relate to professional services associated with the implementation and updating
of the Company's administrative technology and 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 nine months of 2000 resulted in an operating
income of $445,000 or $23,000 less than the $468,000 reported during 1999.
Operating income as a percent of net sales was 5.0 percent for year 2000 and 5.1
percent for 1999.
NET NON-OPERATING INCOME AND EXPENSE:
Net non-operating expense was $20,000 or $42,000 less than the $62,000 reported
during 1999. Interest costs associated with capital leases and long and short
term financing totaled $84,000 during year 2000 and $104,000 for the 1999
period. Other income of $64,000 during the current year and $42,000 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 $170,000 for the first nine
months of year 2000. During the corresponding period of 1999, the Company
recorded an income tax provision of $162,000. 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
$255,000, which represents a modest increase from the $244,000 reported during
1999. Basic and diluted earnings per common share outstanding were $0.11 per
share for each of the periods. Considerations for unexercised stock options were
recognized as diluted common shares outstanding for each of the periods.
DISCONTINUED OPERATIONS:
The Shagawa Resort facility was sold on May 1, 2000. Consequently, the
activities reported represent the operational results for only the first four
months of year 2000. Shagawa Resort realized revenues of $530,000 during the
shortened 2000 year period as compared with $1,646,000 during the nine month
operating cycle for 1999.
Shagawa Resort, Inc. recorded a gross profit of $188,000 during the current
period and $767,000 for 1999. The resort incurred operating expenses of $348,000
for year 2000 and $706,000 during 1999. Interest expenses totaled $46,000 for
the current year and $104,000 during 1999. Shagawa Resort incurred a net after
tax loss of $26,000 or $0.01 per share during 1999 and a net after tax loss of
$123,000 or $0.06 per share for the current period (reference 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 September 30, 2000
------------------------
The Company's working capital at September 30, 2000 was a positive $4,174,000 as
compared to positive working capital positions of $3,244,000 at September 30,
1999 and $3,344,000 at December 25, 1999. The current ratio for September 30,
2000 is 4.1 to 1.0 as compared with 2.6 to1.0 at September 30, 1999 and 3.3 to
1.0 at December 25, 1999. The working capital position at September 30, 2000
recognizes the sale of the assets of Shagawa Resort, Inc. on May 1, 2000.
During the first nine months of 2000, cash outflows were required for the
build-up of inventory, acquisition of capital assets, reductions to current
payables and pay-downs on long-term debt. Cash flows to support the referenced
activities were primarily provided by utilizing the Company's year-end cash
position, receivable collections, non-cash related depreciation and
amortization, proceeds from the sale of Shagawa Resort, Inc., internally
generated income and tax deferrals.
Long-term debt and capital leases, net of current maturities, decreased from
$2,752,000 at December 25, 1999 to $899,000 at September 30, 2000. On September
30, 1999, long-term debt and capital leases, net of current maturities was
$2,822,000. The major component contributing to 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 .53 to 1.0 at
September 30, 1999, to .50 to 1.0 at December 25, 1999. Due to the retirement of
debt associated with the May 1 sale of Shagawa Resort, Inc. and current year
earnings, the ratio of long-term debt to stockholders' equity improved to .18 to
1.0 at September 30, 2000. Stockholders' equity, net of treasury stock,
increased from $5,324,000 at September 30, 1999 to $5,454,000 at December 25,
1999. Due to the loss associated with the disposal of Shagawa Resort, Inc.,
stockholders' equity decreased to $5,070,000 at September 30, 2000.
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.
Dynamic Homes, Inc. recorded a loss on the sale of the 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.
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 September 30, 2000, the
Company did not have any borrowings outstanding against the available credit
line.
On September 25, 2000, Dynamic Homes announced that it had entered into an
Agreement and Plan of Merger with Dynamic Homes, LLC and its wholly-owned
subsidiary. Dynamic Acquisition, Inc. The merger is pursuant to a letter of
intent dated June 21, 2000 and announced in a press release on that date.
Dynamic Homes, LLC will pay $2.55 in cash for each share of Dynamic Homes, Inc.
stock outstanding as of the closing date. Consummation of the merger is subject
to a number of conditions, including the approval of the Agreement and Plan of
Merger by the stockholders of Dynamic Homes, Inc. and certain other customary
conditions. Dynamic Homes, Inc. anticipates that
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<PAGE>
a special meeting of its stockholders to consider and approve the Agreement and
Plan of Merger will be held during the first weeks of December with the closing
to be held shortly thereafter. Dynamic Homes, Inc. has submitted to the
Securities and Exchange Commission a proxy statement relating to the special
meeting of stockholders.
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 and early stages of
2001.
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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PART II.
Items 1, 2, 3, 4 and 5 are omitted as each is not applicable or the answer to
the item is negative.
Item 6. Exhibits and Reports on Form 8 - K:
On September 26, 2000, a report on Form 8-K was filed announcing the Company had
entered into an Agreement and Plan of Merger with Dynamic Homes, LLC and its
wholly-owned subsidiary, Dynamic Acquisition, Inc. The merger is pursuant to a
letter of intent dated June 21, 2000 and reported on Form 8-K dated June 22,
2000.
(Balance of page left intentionally blank.)
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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: November 10, 2000 Dynamic Homes, Inc.
----------------- -----------------------------
(Registrant)
-----------------------------
Eldon Matz
Controller
Page 17
