Item 1. Business
General
Dynamic Homes, Inc. (a Minnesota Corporation) was founded in 1970 and is head-quartered 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 mid- west region of the United States. Auxiliary products include garages, wood basements and retail sales. During 1995, the Company acquired the ownership of a hotel/resort located in Ely, Minnesota. The facility commenced operations in May 1996.
Products
The Company's principal product is single-family modular homes. Single- family homes currently produced by the Company are offered in 60 basic designs with various options and floor plan variations. Even though the Company has standardized plans, the majority of single-family homes are customized to indi- vidual preferences. Approximately 90-95 percent of single-family units sold for the years 1994 through 1996 were custom built.
Home models include split entry, rambler, split level, one and two story types ranging in size from approximately 864 square feet to approximately 2268 square feet of living space. Each living unit includes a living room, dining room, bathroom(s) and bedrooms and has complete electrical wiring and plumbing as standard features. Other standard features include interior sheetrocked walls, cabinets, finished interior doors and trim, shelving and windows. In addition, the customers may also choose from available options such as floor coverings, siding, lighting, roof pitches 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 1,300 square feet per living unit. During both 1996 and 1995, the Company's multi-family sales accounted for 2 percent of revenues. During 1994, multi-family units accounted for approximately 3 percent of total revenues.
The Company also produces light commercial products including small of- fices, motels and other buildings requiring special design. Commercial sales activity accounted for approximately 9 percent of the 1996 sales base. Corres- ponding sales volumes for 1995 and 1994 were approximately 15 and 20 percent, respectively.
The Company also produces and markets panelized garages and wood founda- tions to complement its modular homes. During both 1996 and 1995, these auxil- iary products accounted for approximately 2 percent of total sales revenue, as compared to 3 percent for 1994.
The Company manufactures its products in modular form on an assembly line basis. Each module is constructed of wood frame and sheathing into which comp- lete wiring and plumbing are installed. The module is insulated with fiber- glass 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 fac- tory 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.
Marketing
The Company markets its products within the states of Iowa, Minnesota, North Dakota, South Dakota, Wisconsin and Wyoming principally through a network of approximately 65 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 ulti- mate 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 1996, the Company derived approximately 12 percent of its revenues from one customer. During 1995, the Company real- ized approximately 14 percent of its revenues from one customer. In 1994, the Company de-rived approximately 11 percent of its revenues from one developer. Sales to builder/dealers accounting for more than 10 percent of revenues are usually non-recurring single project sales. As a result, the Company does not expect to be dependent upon the same builder/dealers or developers 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 con- tractual arrangements may vary from a single-phase project to a multi-phased project built and delivered over an extended time interval.
Competition
There is substantial competition within the Company's market area. The Company competes in the housing market with other modular and panelized manu- facturers, tract home developers, mobile home manufacturers and traditional on-site builders of single and multi-family/com-mercial units.
The Company has several direct competitors marketing modular and panel- ized units within its market area. Some of these competitors have substanti- ally 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 facil- ity. 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.
Materials 	 The principal materials used by the Company in the manufacture of its products are pro-cessed 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 ob- taining adequate supplies. During 1996, prices for wood building products ex- perienced some volatility with average price levels slightly higher than the corresponding periods of 1995, but less than the price fluctuations associated with fiscal 1994. The Company monitors its material costs on an on-going basis and during periods of escalating material costs, may impose a temporary sur- charge to prevent the erosion of its profit margin. The Company may periodic- ally adjust the surcharge level to correlate with the on-going fluctuations in material costs. Surcharges were imposed for the duration of 1994, however, the effective surcharge rates were not sufficient to cover the escalating material costs which resulted in a lower than anticipated gross margin percent. During both 1996 and 1995, pricing projections were adequate and no surcharges were implemented. However, future strong demand for wood and related building pro- ducts would not only again support higher price levels but may 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 continu- ous source of supply.
Backlog
At December 28, 1996, the Company's backlog of orders believed to be firm was $2,593,000 compared with $2,595,000 at December 30, 1995, and $3,238,000 at December 31, 1994. As of March 14, 1997, the Company's backlog was $2,895,000 as compared to $4,473,000 for the similar period in 1996.
Due to seasonal fluctuations in the housing market, the Company experi- ences 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. Accordingly, with the Company's production capabilities, the backlog of orders generally tends to be the lowest during the first fiscal quarter (January-March) and highest during the third quarter (July-September). In order to supplement the traditional periods of decreased order activity, the Company offers several single-family model and winter promotional programs and aggressively pursues multi-family/commercial projects utilizing winter promo- tions and discounts.
Patents and Trademarks
The Company neither owns nor is a licensee of any patents, trademarks, licenses, franchises or concessions that are material to its business.
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 ordi- nances regulate materials, equipment and design used in the construction of housing units. The Company is unaware of any law or ordinance which 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 trans- port 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 environ- mental control facilities.
Seasonal Aspect & Current Economic Conditions
Sales are subject to seasonal variations as described under the "Backlog" caption. During the winter months the Company employs sales stimulating methods such as additional dealer and homeowner incentives, model home and multi-family/commercial sales discounts to stimulate sales.
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. Due to seasonal fluctuations in or- ders, the Company has determined that it is advantageous to build some homes for inventory during the winter and early spring months. This process contri- butes to reductions in idle plant capacity overhead and also provides builder/ dealers with immediate product availability. During the first half of 1996, the Company produced 12 single-family inventory units. Based upon the past salability of these units combined with the economics associated with the re- duction of idle plant capacity, the Company has scheduled and started produc- tion of 20 single-family inventory units during the first months of 1997. The Company had two inventory units available for sale at December 28, 1996. The Company had three inventory units available for sale at year-end 1995 and two units at 1994 year-end. The Company continues to rotate model/display units on its premises which are used to illustrate construction and design capabil- ities for potential customers. As of December 28, 1996, the Company had one model/display unit. The Company's intent is to have two model/display units available and replace them as needed. As of this date, the Company has one model in place for display purposes, with a second unit scheduled for display as winter weather conditions permit.
Even though mortgage financing rates have been quite favorable during the past several years, availability and cost of mortgage financing to the ultimate purchasers of the Company's product affects the volume of sales. Historically, the Company's sales volume has been affected by the difficulty encountered by consumers obtaining mortgage funds, fluctuating mortgage interest rates, uncer- tainty in the energy and mining industries and a general weakness in the agri- cultural economy. Traditionally, these market segments have made strong con- tributions to the sales base. In response to these economic conditions, the Company continues to expand and modify the product line to meet the changing needs of both the rural and urban market. The expanded product availability, structural design and flexibility, an upgraded builder/dealer network and con- tinued emphasis on multi-family/commercial sales should contribute to the 1997 revenue base. However, any upward trends in mortgage rates and consumer uncer- tainty over the course of the economy and national budgeting policy may place limitations on potential consumers' willingness to commit to new home purchases which would adversely affect the revenue base.
In 1996, 100 percent of all production was completed at its only plant, located in Detroit Lakes, Minnesota. During 1996, the Company operated at ap- proximately 75% of its practical single-shift production capacity, as compared with 72% for 1995. During 1994, the Company operated at approximately 80% of its single-shift plant capacity. During the third quarter of 1993, order back- log increased to the extent that the lengthened production cycle contributed to lost and delayed sales. In order to alleviate this occurrence, the Company completed a plant expansion project in April 1994. The expansion project added an additional 15,000 square feet to the manufacturing facility. This expansion became operable during May 1994 and increased available plant capacity by ap- proximately 25%. However, during 1996, the Company again experienced a buildup of new orders. In order to alleviate the extended backlog and the potential for lost or deferred orders, the Company implemented another plant expansion during the fall of 1996. The project is scheduled for completion during May 1997 and will add an additional 17,000 square feet to the manufacturing facil- ity and increase available plant capacity by 15-20 percent.
Employees
At December 28, 1996, the number of full-time employees totaled 99 as com- pared with 94 for the year ending December 30, 1995. Of these, 5 were in man- agement positions, 12 in supervisory positions, 63 in manufacturing, 8 in transportation and erection, 3 in sales and 8 in drafting and clerical posi- tions. 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, 1995, and expires on February 28, 1998. The three-year contract provides for modest annual wage adjustments and increases in the benefit package.
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 con- sists of seven buildings comprising approximately 92,400 square feet utilized as follows: production 57,300, warehouse and storage 27,400 and offices 7,700. During 1993, the Company completed a plant renovation project which replaced an older section of the manufacturing facility and added approximately 5,000 square feet which provides for additional material storage capacity in closer proximity to the production line. In 1994, the Company expanded the manufac- turing facility by 15,000 square feet which increased additional available plant capacity by approximately 25%. During the latter stages of 1996, the Company commenced with a 17,000 square foot plant expansion project. When com- pleted in May of 1997, available single-shift plant capacity is projected to increase by 15-20 percent. The plant expansion will be funded by the restruc- turing and addition of long-term debt. The buildings are situated upon a 26-acre tract of land leased from the City of Detroit Lakes, Minnesota. The lease is coterminous with industrial revenue bonds issued in April 1973, by the City of Detroit Lakes in principal amount of $435,000, bearing interest at a rate of 8% per annum and maturing from 4 to 25 years from date of issuance. Pursuant to the terms of the Company's contract with the city and terms of the bond indenture, the city took title to the existing land and buildings and to the buildings subsequently constructed thereon and the Company leases same from the city paying a variable rent sufficient to convert the interest due on the bonds and principal amounts due in that rental period, plus property taxes and incidentals. The Company is given the option of purchasing this property at any time by paying to the city and the trustee an amount that is sufficient to dis- charge the then outstanding bonds. The lease has been capitalized for financial statement purposes and when all bonds have been paid at maturity, the Company has the option of then purchasing this property from the city for the sum of $1.00. The Company has taken action to retire all outstanding Industrial Development Revenue Bonds on April 1, 1997, and obtaining title to said prop- erty. This plant facility currently has the annual single-shift capacity to produce approximately 425,000 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 approx-imately 54,000 square feet of buildings consisting of 61 units and includes lounge, dining, recreational and meeting facilities on approximately 25 acres of land. The purchase price con- sisted 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 final- ized and converted to a long-term mortgage loan which is secured by the assets of Shagawa Resort, Inc. and a partial guarantee of the Small Business Admini- stration. Monthly installments of principal and interest approximate $16,000 with a blended interest rate of approximately 8 percent (Notes 6 and 16).
In conjunction with the purchase of Shagawa Resort, Inc., the Company simultaneously entered into a Management Agreement with Northland Adventures Minnesota, Ltd. to operate and manage the hotel/resort from the opening date (May 1, 1996) until December 15, 1997. The Management Agreement requires the Managing Agent to pay minimum monthly payments of $22,100 to the Company, plus a percentage of room and food/beverage receipts when these amounts exceed the minimum rentals on an annual basis. During the duration of the agreement, the Managing Agent absorbs or retains any operating profit or loss generated by the operation of the facility. During fiscal 1996, the Managing Agent met its minimum monthly payment obligations. On March 17, 1997, the Company and North- land Adventures Minnesota, Ltd. collectively reached an Asset Purchase Agree- ment whereby the Company purchased substantially all assets of the Business. All prior agreements pertaining to the management of the hotel/resort facility have been terminated. Consequently, effective March 17, 1997, the Company has assumed the management obligations and rights associated with the Shagawa Resort, Inc. facility.
Item 3.

Item 3. Legal Proceedings
Dynamic Homes, Inc. and its subsidiary, Shagawa Resort, Inc. are involved in pending litigation with the construction manager of the hotel owned by Shagawa Resort, Inc. The Company commenced the lawsuit to discharge a mech- anic's lien filed by the construction manager. The project manager commenced a counter-claim to this action. At the present stage of the proceedings, no opinion on the probable outcome can be formed, nor an estimate as to the amount or range of potential loss in the event of an outcome unfavorable to the Com- pany. The Company has provided a letter of credit of $425,000 to secure the Company's agreement to indemnify an insurance company and its agent in connec- tion with the mechanic's lien claim asserted by the construction manager. There are no other 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.
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 bid prices of the Com- pany's stock for the eight quarters of 1996 and 1995. Subsequent to the end of 1989, the Company's capital condition fell below the minimum requirements set by NASDAQ to remain trading on the national over-the-counter market. 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.
As of March 20, 1997, there were 430 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 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
Results of Operations
Net Sales
Net sales increased to $12,172,200 for 1996, which is an increase of 12 percent from $10,849,000 in 1995 and 2 percent higher than the $11,973,600 re- ported in 1994. Sales of single-family homes increased by $1,745,600 or 22 percent from $7,962,300 for 1995 to $9,707,900 for 1996. Single-family sales for 1994 were $8,327,500. The Company sold 219 single-family units in 1996, compared with 192 units for 1995 and 202 units in 1994. Single-family unit sales in 1996 reflect the impact of favorable long-term mortgage interest rates and strong business volumes with Native American communities in the Upper Mid- west. Native American related sales generated approximately 34 percent of the 1996 sales base compared with 24 percent in 1995 and 10 percent for 1994.
Sales of multi-family/commercial projects totaled $1,280,900 for 1996, down from $1,918,800 in 1995 and $2,668,300 in 1994. The Company sold 33 multi-family/commercial units in 1996, compared to 52 units in 1995 and 77 units in 1994. A significant portion of the 1996 multi-family/commercial sales consisted of a large motel project for the Leech Lake Indian Reservation located in northern Minnesota.
Transportation and other sales totaled $1,183,400 for 1996 compared with $967,900 for 1995 and $977,800 in 1994. During 1996, the other sales related sector benefited from lease revenues totaling $195,500 associated with the May 1, 1996, opening of the Shagawa Resort facility located in Ely, Minnesota.
The Company's construction backlog totaled $2,593,000 at the end of 1996 compared to $2,595,000 at the end of 1995. As of March 15, 1997, the Company's backlog was $2,895,000 compared with $4,473,000 for the same period of 1996. The corresponding backlog for March 1996, includes the previously referenced Leech Lake Motel project and 40 finished single-family units awaiting delivery due to unfavorable weather conditions which severely hampered delivery and set- ting activities during the first quarter of 1996. As of this date, the Company has 15 finished units available for delivery. However, spring road restric- tions will again restrict delivery and setting activities during the first and early stages of the second quarter.
On March 17, 1997, the Company reached an agreement with the current Managing Agent for Shagawa Resort, Inc. whereby the Company will assume the management rights and obligations associated with the daily operations of the hotel/resort facility located in Ely, Minnesota. Based upon limited historical data, the Company is not able to evaluate the final impact on the Company's financial; statements at this time. Due to the location and seasonal nature of the resort business, sales are anticipated to be soft during the winter months and strengthen during the late spring, summer and early months of the fall season.
Gross Profit
The Company's gross profit, including transportation revenue and expense, but excluding Shagawa Resort, Inc. totaled $2,768,800 in 1996, up 18% from $2,351,500 in 1995 and up 13% from $2,453,800 in 1994. As a percentage of net sales, the gross profit increased to 23.1% for 1996 compared with 21.7% for 1995 and 20.5% for 1994. Excluding transportation revenue and expense, the gross profit on products increased to 25.9% from 24.0% in 1995 and 22.7% in 1994. The 1996 margin increase benefited from the Company's ability to monitor and evaluate material costs on an on-going basis and from forward buying oppor- tunities during periods of rising material costs. Consequently, the Company did not need to impose any surcharges during 1996 to sustain acceptable gross margins.
Operating Expense
Operating expenses increased to 11.2% of net sales for 1996, compared with 9.6% in 1995 and 8.8% in 1994. Due to increased media advertising and customer discount programs, marketing expenses increased to 3.6% of net sales for 1996 versus 3.2% for 1995 and 3.4% for 1994. Administration expenses increased to 7.7% of net sales for 1996 compared with 6.4% for 1995 and 5.4% for 1994. Ad- ministration expenses associated with Shagawa Resort, Inc. during 1996 were 0.8% of net sales and an accounting change in classifying expenses associated with a Company incentive program contributed 0.7% to administration expenses.
Operating Income
Operating income for 1996 was $1,600,300 or 13.1% of net sales. Operating income for 1995 and 1994 was $1,310,400 or 12.1% of net sales and $1,402,700 and 11.7%, respectively. The improved 1996 operating income reflects the in- creased gross margin for the year.
Other Income (Expense)
The Other Income and Expense sector for 1996 generated additional expenses of $98,200 compared with additional income of $43,700 for 1995 and additional income of $2,400 during 1994. The additional expenses incurred during 1996 primarily relate to interest expense associated with the long-term financing of the Shagawa Resort facility. Other income during 1995 also benefited from the receipt of premium returns on insurance policies for the years 1993 and 1994.
Income Tax Benefit (Provision)
The Company's provision for income taxes was $594,000 in 1996. Income tax provisions for 1995 and 1994 were $545,000 and $500,000, respectively. Income tax obligations and benefits are estimated at the normal statutory rate throughout the year with a final adjustment at year-end related primarily to differences between the basis of receivables , property and equipment, accrued expenses, tax credit and net operating loss carryforwards.
Net Income
The Company reported net income of $908,100 for 1996, compared to net in- come of $809,100 for 1995 and $905,100 for 1994. Primary income per share was $0.41 for 1996, $0.37 per share for 1995 and $0.41 per share for 1994. During 1996, the Company approved a new stock option plan and granted 240,000 options to officers, directors and various employees. Since these options are assumed to be 100% vested in 1996, fully diluted income per common share was restated at $0.38 per share in recognition of the available but unexercised options. The Company's 1996 net income was not impacted by Shagawa Resort, Inc. During March 1997, the Company completed an agreement with the existing Managing Agent to assume the management responsibility for operating the resort facil- ity. The Company anticipates that the operational activities will not have a significant impact on the Company's earnings for 1997, but due to the limited time the facility was operational, the exact impact on the Company's financial statements is difficult to evaluate at this time. However, due to the seasonal nature of the resort, the Company's earnings may be adversely affected during the winter months and positively affected during the stronger summer months.
Financial Condition
Cash and cash equivalents for fiscal years ending 1996 and 1995 were rela- tively unchanged at $554,100 and $543,000, respectively. Net cash from opera- ting activities increased by $557,800 during 1996 from $442,600 during 1995 to $1,000,400 for 1996, reflecting the Company's net income and higher levels of depreciation, accrued expenses, and reductions to the Company's inventory and prepaid expenses. Net cash from operating activities was negatively impacted by reductions to the customer deposit base and payments of corporate income taxes. Net cash used for investing activities increased by $447,700 from $1,363,600 in 1995 to $1,811,300 for 1996 due primarily to start-up costs, pre- paid debt expense, and construction costs associated with the Shagawa Resort facility. The total construction costs for the project was approximately $4,740,000. This cost has been reduced by approximately $1,705,000 of existing equity and economic incentives for a final net construction cost of $3,035,000. In addition, the Company required cash for its investment in a recently started plant expansion and the acquisition of transportation equipment.
Working capital increased $149,100 to $1,895,800 from $1,746,700 at the end of 1995. The current ratio improved to 2.7 to 1 at December 28, 1996, from 2.4 to 1 at year-end 1995. Property and equipment, net of accumulated depreci- ation, increased $1,430,800 to $4,216,800 at December 28, 1996, primarily due to the completion of construction activities at Shagawa Resort, Inc., acquisi- tions of transportation equipment and the plant expansion at the Detroit Lakes manufacturing facility.
Long-term debt, net of current maturities, increased from $1,066,300 at year-end 1995 to $2,077,400 at 1996 year-end. Long-term debt consists primar- ily of a long-term construction mortgage loan, which is secured by substanti- ally all assets of Shagawa Resort, Inc. with a partial guarantee of the Small Business Administration, a capitalized lease obligation secured by leased transportation equipment, and Industrial Development Revenue Bonds which fi- nanced the purchase of property and equipment for the Company's manufacturing facility. The Company anticipates retiring the long-term debt associated with the Industrial Development Revenue Bonds on April 1, 1997. The debt retirement will provide additional collateral for completing a financing package support- ing the recently started plant expansion. The proposed financing package pro- vides for $1,000,000 of funding and consists of economic development funds and long-term debt from a financing institution. The proceeds from the financing package will be used for the plant expansion, including equipment and addi- tional working capital.
The ratio of long-term debt to stockholders' equity changed from .31 to 1 at year-end 1995 to .47 to 1 at year-end 1996, reflecting the increase in long- term debt acquired during 1996. Stockholders' equity (net of treasury stock) increased by $923,800 to $4,403,100 at December 28, 1996, from $3,479,300 at year-end 1995.
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, 1996, the Company re- newed its credit line for a period of one year. The renewed credit line in- creased the maximum available borrowings to $1,100,000 at an interest rate one- quarter over the bank's prime rate and exempts short-term letters of credit from reducing the available line of credit. However, as a condition of con- verting the Shagawa Resort, Inc. construction financing to permanent long-term financing, the Company was required to issue a standby letter of credit to a Title Insurance company in the amount of $425,000 for an initial period of one year commencing on July 10, 1996. The standby letter of credit will automatic- ally extend for additional one year periods until rescinded by the beneficiary. The standby letter of credit has consequently reduced the Company's available line from $1,100,000 to $675,000. As of December 28, 1996, the Company did not have any outstanding borrowings under the line of credit agreement. The Com- pany anticipates closing on a long-term debt financing package during April of 1997. The $1,000,000 loan will provide funding for the plant expansion includ- ing equipment and working capital. In addition, the outstanding letter of credit for $425,000 will be exempted from the short-term line of credit. After the long-term financing package is in place, the Company's maximum restructured line of credit will be $787,000 under the same terms and conditions as the existing line of credit with no compensating balance requirements.
Management believes internally generated cash, short-term borrowings on its existing credit line, supplemented by long-term financing and leases on major capital additions should provide adequate funds to support the Company's operations and scheduled capital acquisitions during 1997.
Statements regarding the Company's operations, performance and financial condition are subject to certain risks and uncertainties. These risks and un- certainties 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 could also affect the Company's profit margins.
Item 8.

Item 8. Financial Statements
Index to Consolidated Financial Statements and Supplementary Financial Data
Report of Independent Auditors
Financial Statements: - Consolidated Balance Sheet, December 28, 1996 and December 30, 1995
- Consolidated Statements of Operations, Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
- Consolidated Statements of Stockholders' Equity, Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
- Consolidated Statements of Cash Flows, Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
- Notes to Consolidated Financial Statements
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 28, 1996, and December 30, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 28, 1996. 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 stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of mater- ial misstatement. An audit includes examining, on a test basis, evidence sup- porting 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 pre- sentation. 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 28, 1996, and December 30, 1995, and the re- sults of their operations and their cash flows for each of the three years in the period ended December 28, 1996, in conformity with generally accepted ac- counting principles.
Charles Bailly and Company, P.L.L.P
Fargo, North Dakota February 7, 1997
DYNAMIC HOMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
1. PRINCIPAL ACTIVITY, SIGNIFICANT ACCOUNTING POLICIES AND USE OF ESTIMATES
Principles of Consolidation
The consolidated financial statements include the accounts of Dynamic Homes, Inc., and its wholly-owned subsidiaries, Shagawa Resort, Inc., and three wholly-owned subsidiaries which had no significant operations during 1996, 1995 and 1994. All significant intercompany accounts and transactions have been eliminated.
Principal Business Activity
The Company manufactures modular, preconstructed buildings for single-family, multiple-family and commercial use. Commercial operations include the manufac- ture 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 is managed by an unrelated party through a management agreement with the Company (Note 16).
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 expense during the reporting period. Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market. Cost of work in process and finished goods inventories includes mater- ials, labor and factory overhead.
Revenue Recognition
Sales are recognized and recorded upon delivery of the finished product.
Depreciation
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 ap- proximate fair market value because of the short maturity of these instruments.
The fair value of long-term debt is estimated based on borrowing rates cur- rently 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 28, 1996, and December 30, 1995.
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 are organization and start-up costs of Shagawa Resort, Inc. which are being amortized on the straight-line method over their estimated useful lives.
Income Taxes
Income taxes are provided for the tax effects on transactions reported in the financial statements and consist of taxes currently due plus deferred taxes re- lated primarily to differences between the basis of receivables, property and equipment, accrued expenses, tax credit carryforwards and net operating loss carryforwards 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 in- curred. The Company incurred advertising costs of $60,000 in 1996, $47,500 in 1995, and $31,400 in 1994.
Fiscal Year
The Company's fiscal year ends on the last Saturday of December each year. The year ended December 28, 1996, contained 52 weeks, with December 30, 1995, con- taining 52 weeks, and December 31, 1994, containing 53 weeks.
Income Per Common Share
Primary income per common share has been computed using weighted average out- standing common shares of 2,223,000 for 1996, 2,209,000 for 1995 and 2,191,000 for 1994. Common stock equivalents represented by stock options have not been included in the income per share computation for 1995 and 1994 since their effect was anti-dilutive.
Fully diluted income per common share, assuming full dilution, were computed as described in the preceding paragraph with an adjustment in 1996 for the options described in Note 9 since their effect was dilutive in 1996.
2. INVENTORIES
3. OTHER ASSETS
4. PROPERTY AND EQUIPMENT
5. LEASES
The Company leases equipment under a long-term capital lease agreement. The lease agreement provides for monthly payments of $4,200 through December 2001, with an additional payment of $61,900 due at the same date.
Minimum lease payments for the capital lease in future years are as follows:
6. LONG-TERM DEBT
The Company has available a line of credit which is collateralized by inven- tories and receivables. The credit available is based upon specified percen- tages of inventories and receivables to a maximum of $1,100,000 in 1996 and $1,000,000 in 1995. As of December 28, 1996, the Company had outstanding a letter of credit of $425,000 which, under the terms of the letter of credit agreement, the amount of the letter of credit was offset against amounts avail- able under the line of credit (Note 16). Accordingly, $675,000 is available to borrow under the line of credit as of December 28, 1996. Borrowings under the line of credit bear interest at one-quarter percent over the bank's prime rate (8.5% at December 28, 1996) and there are no compensating balance requirements.
Long-term debt consists of:
(A) In 1995, the Company entered into a construction mortgage loan agreement for the financing of construction costs of the Shagawa Resort, Inc. hotel/resort facility (Note 16). The Company refinanced the construction mortgage loan into a long-term debt agreement in August 1996. The orig- inal balance of this note was $925,000 with an interest rate of 8.75%, to be adjusted every three years, with monthly principal and interest pay- ments based upon a 20-year amortization with a 10-year balloon payment. Monthly payments of $8,200, including interest, are due until September 2006 when the remaining balance is due.
(B) The Company financed the purchase of property and equipment through the sale of 8% Industrial Development Revenue Bonds by the City of Detroit Lakes, Minnesota. The Company has leased the property from the city for rental equal to the sum of the annual principal payment and the semiannual interest payments on the bonds. The leased property is included with property and equipment and the bonds have been recorded as a direct obli- gation of the Company. Ownership of the project property and equipment will transfer to the Company when the bonds are repaid. There are no sig- nificant restrictive covenants with respect to this bond issue.
Long-term debt maturities are as follows:
7. CUSTOMER DEPOSITS
Customer deposits of $325,800 at December 28, 1996, and $407,400 at December 30, 1995 consisted of advance payments from customers for sales to be recog- nized in the following year. Sales to be recognized in 1997 related to cus- tomer deposits at December 28, 1996 are estimated to be $2,593,000.
8. ACCRUED EXPENSES
9. STOCK OPTION PLAN
The Company approved a new stock option plan in 1996, authorizing the use of 400,000 shares for use in 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.
The Company has adopted provisions of statement of Financial Accounting Stan- dards No. 123, "Accounting for Stock-Based Compensation." Compensation cost related to options granted in 1996 had no effect on net income or income per share.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assump- tions used for grants in 1996: a risk-free interest rate of 6.5%, expected volatility of 28.77%, and no dividend yield. The assumption regarding the stock options issued to officers, directors, and employees in 1996, was that 100% of such options vested in 1996.
In 1991, the Company's board of directors granted options to five members of the Board of Directors for 25,000 each at an option price of $ .625 per share. As of December 28, 1996, all of the options had been exercised.
In 1992, the Company's board of directors granted options to the president of the Company for 50,000 shares at an option price of $ .562 per share. As of December 28, 1996, all 50,000 shares have been exercised.
10. COST OF SALES
11. OPERATING EXPENSES
12. INCOME TAXES
Net deferred tax assets and liabilities consist of the following components as of December 28, 1996 and December 30, 1995:
The deferred tax amounts described above have been included in the accompanying balance sheets as of December 28, 1996 and December 30, 1995, as follows:
The provision for income taxes charged to operations for the years ended Decem- ber 28, 1996, December 30, 1995 and December 31, 1994 consists of the following:
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 28, 1996, December 30, 1995 and December 31, 1994 due to the following:
13. RELATED PARTY TRANSACTIONS
The Company had sales totaling approximately $221,900 in 1996, $399,400 in 1995, and $599,500 in 1994 to members of the board of directors and entities owned by Board members. At December 28, 1996 and December 30, 1995, the Com- pany had accounts receivable of $3,100 and $12,600, respectively, relating to these sales.
14. MAJOR CUSTOMERS
The Company derived approximately 12% of its revenue from one customer during the year ended December 28, 1996; 14% from one customer during the year ended December 30, 1995; and 11% from one developer during the year ended December 31, 1994.
15. EMPLOYEE BENEFIT PLANS
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% to 5% 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 discre- tionary but may not exceed 100% of the employees' contribution. The Company contributed $7,630 to the plan for the year ended December 28, 1996, $5,595 for the year ended December 30, 1995, and $5,625 for the year ended December 31, 1994.
16. COMMITMENTS AND CONTINGENCIES
Shagawa Resort, Inc. Purchase and Management Agreement
During 1995, Dynamic Homes, Inc. purchased 100% of the common stock of Shagawa Resort, Inc., a hotel/resort in northern Minnesota. The stock was exchanged for an account receivable in the amount of $628,100. The Company incurred costs to acquire the stock totaling $25,600. Push-down accounting was used to establish the cost basis of the assets acquired.
The total cost of the project was approximately $4,740,000. This cost has been reduced by $605,000 related to the push-down accounting adjustment and approx- imately $1,100,000 in economic incentives for a final net cost of $3,035,000.
In conjunction with the purchase, the Company has entered into a management agreement for the operation of the hotel/resort. The management agreement calls for the managing agent to pay minimum monthly payments of $22,100 to the Company, plus a percentage of room receipts and food/beverage receipts when these amounts exceed the minimum rentals on an annual basis. The agreement calls for the managing agent to retain or absorb any operating profit or loss generated by the facility.
The Company has also entered into an option agreement with the managing agent which will allow the managing agent to purchase the stock of Shagawa Resort, Inc. at a price determined by the agreement. The option agreement expires in December 1997.
Letters of Credit
At December 28, 1996, the Company had outstanding two standby letters of credit totaling $535,000. One letter of credit, for $110,000, is available to a cus- tomer to draw on in the event of default by the Company on contracts to deliver a pre-determined number of units. This letter of credit expires April 1997.
The second letter of credit is worth $425,000 and expires in July 1997. The Company obtained the letter of credit in connection with the pending litiga- tion, as disclosed below (Note 6).
Capital Lease
The Company has entered into a capital lease agreement for equipment to be de- livered in 1997. Monthly payments of $1,200 will begin in March 1997 and con- tinue for a term of 65 months, to July 2002, with a final payment of $17,000 in July 2002. The Company's total commitment under the agreement is $93,000, $24,000 of which represents interest.
Plant Expansion
In 1996, the Company began construction on a plant expansion. The estimated cost of completion is $281,000. Costs incurred through December 28, 1996, are included in construction in progress. The expansion is scheduled to be com- pleted in 1997. The expansion also includes the purchase of equipment and an increase in finished goods inventory of approximately $500,000. The total planned commitment will approximate $1,000,000, with financing to be obtained.
Land Purchase
The Company's board of directors has approved a purchase of property with an estimated purchase price of $62,500.
Litigation
Dynamic Homes, Inc. and its subsidiary, Shagawa Resort, Inc., are involved in pending litigation with the construction manager of the hotel owned by Shagawa Resort, Inc. The Company commenced the lawsuit to discharge a mechanic's lien filed by the construction manager. The project manager commenced a counter- claim to this action. At the present stage of the proceedings, no opinion on the probable outcome can be formed, nor an estimate as to the amount or range of potential loss in the event of an outcome unfavorable to the Company. The Company has provided a letter of credit of $425,000 to secure the Company's agreement to indemnify an insurance company and its agent in connection with the mechanic's lien claim asserted by the construction manager.
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 held on June 23, 1997.
Item 11.

Item 11. Executive Compensation
Executive compensation information is incorporated by reference to the Com- pany's definitive proxy statement proxy statement for the annual meeting of shareholders to be held on June 23, 1997.
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 20, 1997.
(1) Includes 78,199 shares outstanding in the name of Mr. Madison's wife and options to purchase 50,000 shares exercisable within 60 days of March 20, 1997.
(B) Security Ownership of Management:
The following table sets forth as of March 20, 1997, 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:
(1) Includes 78,199 shares outstanding in the name of Mr. Madison's wife and options to purchase 50,000 shares exerci- sable within 60 days of March 20, 1997.
(2) Includes options to purchase 25,000 shares exercisable within 60 days of March 20, 1997.
(3) Includes options to purchase 5,000 shares exercisable within 60 days of March 20, 1997.
(4) Includes options to purchase 205,000 shares exercisable with- in 60 days of March 20, 1997.
(C) Changes in Control:
The Company knows of no contractual arrangements which may at a subsequent date result in a change in control of the Company.
Item 13.

Item 13. Certain Relationships and Related Transactions:
Reference Notes to Consolidated Financial Statements, Note 13, page 29 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
- Independent Auditor's Report - Consolidated Balance Sheets at December 28, 1996 and December 30, 1995 - Consolidated Statements of Operations for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 - Consolidated Statements of Stockholders' Equity for the years ended December 28, 1996, December 30, 1995 and December 31, - Consolidated Statements of Cash Flows for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 - Notes to Consolidated Financial Statements
2. Financial Statement Schedule - Included in Part IV
- Schedule II - Valuation and Qualifying Accounts - Schedule IV - Related Party Debt - Schedule V - Property and Equipment - Schedule VI - Accumulated Depreciation of Property and Equipment - Schedule IX - Short-term Borrowings - Schedule X - Supplementary Income Statement Information
Other schedules are omitted because of the absence of condi- tions under which they are required or because the required in- formation is given in the financial statements or notes thereto.
3. Exhibits:
(3) Articles of Incorporation and Bylaws incorporated by reference to Form 10-K as filed for the year ended December 27, 1986. **
(10) Material Contract - Loan and Security Agreement between Dynamic Homes, Inc. and D. Raymond Madison incorporated by reference to Form 10-K as filed for the year ended December 29, 1990. **
Material Contract - Loan and Security Agreement between Dynamic Homes, Inc. and Detroit Lakes Development Authority incorporated by reference to Form 10-K as filed for the year ended December 29, 1990. **
(13) Annual Report to Security Holders. **
(21) Subsidiaries of Dynamic Homes, Inc.: 21.1 Dynamic Homes of Fargo/Moorhead, Inc. 21.2 Dynamic Homes of Dakota, Inc. 21.3 Rapid Building Systems, Inc. 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.
(1) Dynamic Homes, Inc. has available a line of credit which is collater- alized by inventories and receivables. The credit available is based on specified percentages of inventories and receivables. On May 1, 1996, the Company renewed its credit line for a period of one year. The renewed credit line increased the maximum available borrowings to $1,100,000 at an interest rate one-quarter over the bank's prime rate and exempts short-term letters of credit from reducing the available line of credit. However, as a condition of converting the Shagawa Resort, Inc. construction financing to permanent long-term financing, the Company was required to issue a standby letter of credit to a Title Insurance company in the amount of $425,000 for an initial per- iod of one year commencing on July 10, 1996. The standby letter of credit will automatically extend for additional one year periods un- til rescinded by the beneficiary. The standby letter of credit has consequently reduced the Company's available line from $1,100,000 to $675,000. As of December 28, 1996, the Company did not have any out- standing borrowings under the line of credit agreement. 	 (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 agree- ment in effect.
Royalties, amortization of intangible assets, preoperating costs and simi- lar deferrals are not set forth, as such items do not exceed one percent of net sales as shown in the consolidated statement of income.
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.
GLENN R. ANDERSON, President
D. RAYMOND MADISON, Chairman of the Board
RONALD L. GUSTAFSON, Director
ISRAEL MIRVISS, Director
CLYDE R. LUND JR., Secretary 	 PETER K. PICHETTI, Director
G. HOWARD LUND, Treasurer
ELDON R. MATZ, Controller & Ass't Treasurer
Dated: March 27, 1997