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.
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.
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.
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.
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.
ITEM 2.
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.
ITEM 3.
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.
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.
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PART II
ITEM 5.
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 - -------------------------------------------------------------------------------- Quarter High Low High Low - ------- ---- --- ---- --- 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 - --------------------------------------------------------------------------------
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.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
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
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.
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.
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.
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
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.
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ITEM 8.
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
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
DYNAMIC HOMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 25, 1999 AND DECEMBER 26, 1998 - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
DYNAMIC HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997 - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
DYNAMIC HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997 - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
DYNAMIC HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997 - --------------------------------------------------------------------------------
(continued on next page)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- PAGE - 2 - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
DYNAMIC HOMES, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 25, 1999, DECEMBER 26, 1998, AND DECEMBER 27, 1997
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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)
NOTES TO FINANCIAL STATEMENTS
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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.
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 ========== ==========
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NOTES TO FINANCIAL STATEMENTS
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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)
NOTES TO FINANCIAL STATEMENTS
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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
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NOTES TO FINANCIAL STATEMENTS
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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)
NOTES TO FINANCIAL STATEMENTS
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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)
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)
NOTES TO FINANCIAL STATEMENTS
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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.
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NOTES TO FINANCIAL STATEMENTS
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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)
NOTES TO FINANCIAL STATEMENTS
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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
PART III
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
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.
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.
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.
(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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference Notes to Consolidated Financial Statements, Note 14 page 32 of this Form 10-K.
PART IV
ITEM 14.
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.
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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.
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DYNAMIC HOMES, INC. SCHEDULE V - PROPERTY AND EQUIPMENT YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998 AND DECEMBER 27, 1997
DYNAMIC HOMES, INC. SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998 AND DECEMBER 27, 1997
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:
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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.
(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.
DYNAMIC HOMES, INC. SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION YEARS ENDED DECEMBER 25, 1999, DECEMBER 26, 1998 AND DECEMBER 27, 1997
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).
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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