FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Attention: Filing Desk
STOP 1-4
450 Fifth Street NW
Washington, DC 20549-1004
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 28, 1996
Commission file number 0-8585
Dynamic Homes, Inc.
(Exact name of registrant as specified in its charter)
Minnesota
(State or other jurisdiction of incorporation or organization)
41-0960127
(IRS Employer Identification No.)
525 Roosevelt Avenue, Detroit Lakes, MN
(Address of principal executive offices)
56501
(Zip Code)
Registrant's telephone number including area code: (218) - 847-2611
Securities registered pursuant to Section 12(g) of the act:
Name of Exchange on
Title of Each Class Which Registered
------------------- -------------------
Common Stock, $.10 par value NASDAQ Small Cap Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the regi-
strant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X
NO
As of March 18, 1997, 2,240,850 common shares were outstanding, and the aggre-
gate market value of the common shares (based upon the average closing bid and
ask prices of these shares as compiled by the NASDAQ market) of Dynamic Homes,
Inc., held by non-affiliates was approximately $3,965,000. On January 7, 1995
the Company implemented a six month plan to repurchase up to 100,000 shares of
its outstanding common stock. As of March 18, 1997, a total of 43,080 have
been repurchased. During 1996, the Company approved a new stock option plan
and granted 240,000 options to various officers, directors and employees. The
treasury stock and 230,000 unexercised options are excluded from the common
shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Form 10-K
Dynamic Homes, Inc.
Table of Contents
Part I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
Part II
Item 5 Market for the Registrants' Common Stock and Related
Stockholder Matters
Item 6 Selected Financial Data
Item 7 Managements' Discussion and Analysis of Results of
Operations and Financial Condition
Item 8 Financial Statements and Supplementary Data
Part III
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and
Management
Item 13 Certain Relationships and Related Transactions
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K
Documents Incorporated by Reference
Part III
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive Compensation
PART I
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. 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. 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. 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. 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.
1996 1995
- -----------------------------------------------------------------------------
Quarter High Low High Low
- ------- ------ ------ ------ ------
First $ 2 3/8 $ 1 7/8 $ 3 7/16 $ 2 1/2
Second 2 11/16 1 3/4 3 1/8 2 3/8
Third 3 2 3/8 2 5/8 2 1/8
Fourth 2 7/8 2 1/4 2 3/8 1 7/8
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. Selected Financial Data
Dec. 28, Dec. 30, Dec. 31, Dec. 25, Dec. 26,
Years Ended 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
Net sales $12,172,200 $10,849,000 $11,973,600 $ 9,754,600 $ 7,742,000
Gross profit 2,965,300 2,351,500 2,453,800 2,049,600 1,415,600
Operating expenses 1,365,000 1,041,100 1,051,100 969,800 985,300
Operating income 1,600,300 1,310,400 1,402,700 1,079,800 430,300
Net income 908,100 809,100 905,100 1,447,600 271,800
Primary net income per
common share $ .41 $ .37 $ .41 $ .68 $ .13
Diluted net income per
common share $ .38 $ .37 $ .41 $ .68 $ .13
At Year End 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
Working capital $ 1,895,800 $ 1,746,700 $ 1,967,500 $ 1,029,700 $ 190,600
Total assets 7,619,900 5,833,200 4,080,900 2,830,600 1,945,100
Long-term debt 2,077,400 1,066,300 115,600 145,900 448,900
Stockholders' equity 4,403,100 3,479,300 2,794,200 1,832,700 371,000
Weighted average number
common shares out-
standing 2,223,200 2,209,000 2,191,000 2,113,000 2,109,000
Statistical Highlights 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------
Single-family unit
sales 219 192 202 165 148
Average square feet
per single-family
unit 1,277 1,225 1,245 1,255 1,236
Total square feet of
production 315,182 308,400 351,432 295,998 245,068
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. 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
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND DECEMBER 30, 1995
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 554,100 $ 543,000
Receivables
Trade, less allowance for doubtful accounts
1996 $40,000; 1995 $35,000 637,600 698,600
Refundable income taxes 41,800 -
Other 48,200 -
Inventories - Note 2 1,595,300 1,638,300
Prepaid expenses 29,200 39,400
Deferred income taxes - Note 12 95,000 90,000
Total Current Assets 3,001,200 3,009,300
OTHER ASSETS, net of accumulated amortization - Note 3 401,900 37,900
PROPERTY AND EQUIPMENT, net of accumulated
depreciation - Notes 4 and 16 4,216,800 2,786,000
$ 7,619,900 $ 5,833,200
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt - Note 6 $ 107,100 $ 62,300
Accounts payable 216,100 215,900
Customer deposits - Note 7 325,800 407,400
Accrued expenses - Note 8 456,400 393,000
Income taxes payable - 184,000
Total Current Liabilities 1,105,400 1,262,600
LONG-TERM DEBT, less current maturities - Note 6 2,077,400 1,066,300
DEFERRED INCOME TAXES - Note 12 34,000 25,000
COMMITMENTS AND CONTINGENCIES - Note 16
STOCKHOLDERS' EQUITY - Note 9
Common stock, par value $.10 per share
Authorized 5,000,000 shares
Issued, 2,284,000 in 1996; 2,259,000 in 1995 228,400 225,900
Additional paid-in capital 147,100 133,900
Retained earnings 4,171,700 3,263,600
4,547,200 3,623,400
Less treasury stock, at cost (43,080 shares) (144,100) (144,100)
4,403,100 3,479,300
$ 7,619,900 $ 5,833,200
See notes to consolidated financial statements.
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
1996 1995 1994
------------ ------------ ------------
SALES - Notes 13 and 14
Single-family $ 9,707,900 $ 7,962,300 $ 8,327,500
Multi-family/commercial 1,280,900 1,918,800 2,668,300
Transportation 646,100 621,300 663,200
Other 537,300 346,600 314,600
12,172,200 10,849,000 11,973,600
COST OF SALES - Note 10 9,206,900 8,497,500 9,519,800
GROSS PROFIT 2,965,300 2,351,500 2,453,800
OPERATING EXPENSES - Note 11 1,365,000 1,041,100 1,051,100
INCOME FROM OPERATIONS 1,600,300 1,310,400 1,402,700
OTHER INCOME (EXPENSES)
Interest expense (120,100) (20,700) (30,300)
Interest income and service charges 25,100 30,900 14,100
Gain (loss) on sale of property and
equipment (3,500) - 5,400
Other, net 300 33,500 13,200
INCOME BEFORE INCOME TAXES 1,502,100 1,354,100 1,405,100
INCOME TAXES - Note 12 594,000 545,000 500,000
NET INCOME $ 908,100 $ 809,100 $ 905,100
PRIMARY INCOME PER COMMON SHARE $ 0.41 $ 0.37 $ 0.41
FULLY DILUTED INCOME PER COMMON SHARE $ 0.38 $ 0.37 $ 0.41
See notes to consolidated financial statements.
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
Additional
Common Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- ---------- ---------- ------------ -------- ------------
BALANCE, DECEMBER 25 1993 2,134,000 $ 213,400 $ 69,900 $ 1,549,400 $ - $ 1,832,700
Common Stock Options
Exercised - Note 9 92,000 9,200 47,200 - - 56,400
Net Income - - - 905,100 - 905,100
BALANCE, DECEMBER 31, 1994 2,226,000 222,600 117,100 2,454,500 - 2,794,200
Common Stock Options
Exercised - Note 9 33,000 3,300 16,800 - - 20,100
Treasury Stock Purchased - - - - (144,100) (144,100)
Net Income - - - 809,100 - 809,100
BALANCE, DECEMBER 30, 1995 2,259,000 225,900 133,900 3,263,600 (144,100) 3,479,300
Common Stock Options
Exercised - Note 9 25,000 2,500 13,200 - - 15,700
Net Income - - - 908,100 - 908,100
BALANCE, DECEMBER 28, 1996 2,284,000 $ 228,400 $ 147,100 $ 4,171,700 $(144,100) $ 4,403,100
See notes to consolidated financial statements.
DYNAMIC HOMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 28, 1996,
DECEMBER 30, 1995 AND DECEMBER 31, 1994
1996 1995 1994
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 908,100 $ 809,100 $ 905,100
Charges and credits to net income not affecting cash
Deprecation and amortization 262,600 140,100 123,200
Provision for doubtful accounts 6,000 6,100 6,000
(Gain) loss on sale of property and equipment 3,500 - (5,400)
Deferred income taxes 4,000 (15,000) 350,000
Changes in assets and liabilities
Receivables 6,800 (399,400) (222,500)
Inventories 43,000 (173,700) (558,300)
Prepaid expenses 10,200 (15,600) (2,100)
Accounts payable 200 (191,100) 155,800
Customer deposits (81,600) 159,900 106,600
Accrued expenses 63,400 (47,700) 55,100
Income tax payable (225,800) 169,900 18,300
NET CASH FROM OPERATING ACTIVITIES 1,000,400 442,600 931,800
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 500 3,300 38,400
Payments for other assets (382,700) (26,000) (5,800)
Purchase of property and equipment (1,429,100) (1,340,900) (393,800)
NET CASH (USED FOR) INVESTING ACTIVITIES (1,811,300) (1,363,600) (361,200)
FINANCING ACTIVITIES
Net payments on revolving credit agreements and
other short-term financing - (1,600) (5,500)
Proceeds from construction mortgage loan - 999,300 -
Principal payments on long-term debt (145,700) (33,500) (67,300)
Proceeds from long-term debt borrowings 952,000 17,000 -
Proceeds from issuance of common stock 15,700 20,100 56,400
Payments for purchase of treasury stock - (144,100) -
NET CASH FROM (USED FOR) FINANCING ACTIVITIES 822,000 857,200 (16,400)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,100 (63,800) 554,200
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 543,000 606,800 52,600
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 554,100 $ 543,000 $ 606,800
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for
Income taxes paid $ 815,700 $ 390,100 $ 136,680
Interest, less capitalized interest of $49,000
and $17,600 in 1996 and 1995, respectively 107,400 16,100 30,600
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Purchase of stock of Shagawa Resort, Inc. - (Note 16):
Fair Value of assets acquired $ 653,700
Satisfaction of accounts receivable (628,100)
Cash paid $ 25,600
Capital lease obligations incurred for use of new equipment $ 249,600
Refinancing of long-term debt $ 925,000
See notes to consolidated financial statements.
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
1996 1995
------------ ------------
Raw Materials $ 687,400 $ 660,200
Work in Process 144,300 112,800
Finished Goods 763,600 865,300
$ 1,595,300 $ 1,638,300
3. OTHER ASSETS
1996 1995
------------ ------------
Deferred bond expense $ 2,200 $ 4,000
Capitalized debt expense 194,600 -
Organization and start-up costs 183,800 33,000
Other 21,300 900
$ 401,900 $ 37,900
4. PROPERTY AND EQUIPMENT
1996 1995
------------ ------------
Land and improvements $ 494,500 $ 289,700
Buildings 3,059,700 961,900
Machinery and equipment 1,982,500 1,305,100
Construction in progress - Note 16 103,900 1,699,000
Capitalized lease - Note 5 249,600 -
5,890,200 4,255,700
Less accumulated depreciation and amortization (1,673,400) (1,469,700)
$ 4,216,800 $ 2,786,000
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.
1996
------------
Capitalized lease assets consist of:
Equipment $ 249,600
Less accumulated depreciation (17,800)
$ 231,800
Minimum lease payments for the capital lease in future years are as follows:
Capital
Years Ending December Lease
--------------------- ------------
1997 $ 51,000
1998 51,000
1999 51,000
2000 51,000
2001 112,900
Total minimum lease payments 316,900
Less interest (82,600)
Present value of minimum lease payments - Note 6 $ 234,300
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:
1996 1995
------------ ------------
8.75% construction mortgage loan (A) $ 919,500 $ 999,300
7.32% note payable, due in monthly installments of $7,556,
including interest, until August 2016, secured by sub-
stantially all assets and a partial guarantee of the
Small Business Administration 942,200 -
8% Industrial Development Revenue Bonds of Detroit Lakes,
Minnesota, due in varying annual installments, including
interest, through April 1998, secured by property and
equipment (B) 80,000 115,000
9.95% note payable, due in monthly installments of $ 550,
including interest, to April, 1998, secured by vehicle 8,100 13,600
Capitalized lease obligations, secured by leased assets - Note 5 234,300 -
Other 400 700
2,184,500 1,128,600
Less current maturities (107,100) (62,300)
$ 2,077,400 $ 1,066,300
(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:
Years Ending December
---------------------
1997 $ 107,100
1998 123,000
1999 82,700
2000 90,300
2001 156,800
Thereafter 1,624,600
$ 2,184,500
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
1996 1995
------------ ------------
Salaries, wages and vacations $ 194,000 $ 183,000
Taxes, other than income taxes 77,800 49,600
Warranty 76,900 70,900
Other 107,700 89,500
$ 456,400 $ 393,000
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
1996 1995 1994
------------ ------------ ------------
Materials $ 6,074,900 $ 5,526,700 $ 6,553,600
Labor 1,024,200 946,600 966,400
Overhead 1,293,800 1,300,300 1,225,800
Transportation 814,000 723,900 774,000
$ 9,206,900 $ 8,497,500 $ 9,519,800
11. OPERATING EXPENSES
1996 1995 1994
------------ ------------ ------------
Marketing $ 433,300 $ 351,000 $ 402,900
Administration 931,700 690,000 648,200
$ 1,365,000 $ 1,041,000 $ 1,051,100
12. INCOME TAXES
Net deferred tax assets and liabilities consist of the following components as
of December 28, 1996 and December 30, 1995:
1996 1995
------------ ------------
Deferred tax assets:
Receivable allowances $ 16,000 $ 15,000
Accrued expenses 63,000 70,000
Book/tax inventory adjustment 16,000 5,000
$ 95,000 $ 90,000
Deferred tax liabilities:
Property and equipment $ 34,000 $ 25,000
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:
1996 1995
------------ ------------
Current assets $ 95,000 $ 90,000
Noncurrent liabilities (34,000) (25,000)
$ 61,000 $ 65,000
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:
1996 1995 1994
------------ ------------ ------------
Current expense $ 590,000 $ 560,000 $ 575,000
Benefit of operating loss and tax credit
carryforwards - - (425,000)
Deferred taxes 4,000 (15,000) 350,000
$ 594,000 $ 545,000 $ 500,000
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 28, 1996, December 30, 1995 and December 31, 1994 due to the
following:
1996 1995 1994
------------ ------------ ------------
Income tax computed at federal statutory rates $ 511,000 $ 460,000 $ 480,000
State taxes - net of federal tax benefit 77,000 86,000 85,000
Change in income taxes resulting from:
Non-deductible expenses 8,000 7,000 -
Book/tax inventory adjustment (11,000) (3,000) -
Book/tax property and equipment adjustment 9,000 (5,000) -
Tax rate deduction on reversing timing differences - - (65,000)
$ 594,000 $ 545,000 $ 500,000
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. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 10. Directors and Executive Officers of the Registrant
Information concerning directors and officers of the Registrant is incorporated
by reference to the Company's definitive proxy statement for the annual meeting
of shareholders to be held on June 23, 1997.
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. 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.
Title Name & Address of Number of Percent
of Class Beneficial Owner Shares Owned of Class
-------- ----------------- ------------ --------
Common D. Raymond Madison 592,794 (1) 23.99
PO Box 612
Brainard, MN 56401
(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:
Name of Percent
Beneficial Owner Common Shares of Class
---------------- ------------- --------
D. Raymond Madison 592,794 (1) 23.99
Gordon H. Lund 93,380 (2) 3.78
Clyde R. Lund, Jr. 64,774 (2) 2.62
Israel Mirviss 54,986 (2) 2.23
Ronald L. Gustafson 50,300 (2) 2.04
Peter K. Pichetti 30,000 (2) 1.21
Glenn R. Anderson 30,000 (2) 1.21
Eldon R. Matz 7,000 (3) .28
All directors and officers
as a group 923,234 (4) 37.36
(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. Certain Relationships and Related Transactions:
Reference Notes to Consolidated Financial Statements, Note 13, page 29 of this
Form 10-K.
PART IV
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,
1994
- 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.
DYNAMIC HOMES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
Transactions in the allowance for doubtful accounts during the years ended
December 28, 1996, December 30, 1995 and December 31, 1994 were as follows:
Balance Provision Accounts Balance
Beginning Charged to Chgd. Off Net End
of Year Operations of Recoveries of Year
----------- ---------- ------------- ----------
Year Ended December 31, 1994 $ 30,000 $ 6,000 $ (5,300) $ 30,700
Year Ended December 30, 1995 $ 30,700 $ 6,100 $ (1,800) $ 35,000
Year Ended December 28, 1996 $ 35,000 $ 6,000 $ (800) $ 40,200
DYNAMIC HOMES, INC.
SCHEDULE IV - INDEBTEDNESS TO RELATED PARTIES - NON-CURRENT
Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
Balance Balance
Beginning End
of Year Additions Deductions of Year
----------- ----------- ------------ ----------
Year Ended December 31, 1994
D. Raymond Madison $ 35,700 $ -0- $ 35,700 $ -0-
Year Ended December 30, 1995
D. Raymond Madison $ -0- $ -0- $ -0- $ -0-
Year Ended December 28, 1996
D. Raymond Madison $ -0- $ -0- $ -0- $ -0-
DYNAMIC HOMES, INC.
SCHEDULE V - PROPERTY AND EQUIPMENT
Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
Balance Balance
Beginning Additions Retirements End
of Year at Cost and Transfers of Year
------------ ----------- ------------- ------------
Year Ended December 31, 1994:
Land and Improvements $ 108,900 $ 7,700 $ - $ 116,600
Buildings 730,700 223,200 - 953,900
Machinery and Equipment 1,332,700 162,900 (217,100) 1,278,500
$ 2,172,300 $ 393,800 $ (217,100) $ 2,349,000
Year Ended December 30, 1995:
Dynamic Homes, Inc.
Land and Improvements $ 116,600 $ 13,300 $ - $ 129,900
Buildings 953,900 8,000 - 961,900
Machinery and Equipment 1,278,500 88,800 (62,200) 1,305,100
Construction in Progress - 4,800 - 4,800
Shagawa Resort, Inc.
Land and Improvements - 159,800 - 159,800
Construction in Progress - 1,694,200 - 1,694,200
$ 2,349,000 $ 1,968,900 $ (62,200) $ 4,255,700
Year Ended December 28, 1996:
Dynamic Homes, Inc.
Land and Improvements $ 129,900 $ 36,600 $ (1,200) $ 165,300
Buildings 961,900 17,100 (11,700) 967,300
Machinery and Equipment 1,305,100 347,900 (33,700) 1,619,300
Const. in Progress - Note 16 4,800 204,500 (105,400) 103,900
Shagawa Resort, Inc.
Land and Improvements 159,800 169,400 - 329,200
Buildings - 2,092,400 - 2,092,400
Furniture, Fixtures & Equip. - 612,800 - 612,800
Construction in Progress 1,694,200 - (1,694,200) -
$ 4,255,700 $ 3,480,700 $(1,846,200) $ 5,890,200
DYNAMIC HOMES, INC.
SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT
Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
Balance Balance
Beginning Additions Retirements End
of Year at Cost and Transfers of Year
------------ ----------- ------------- ------------
Year Ended December 31, 1994:
Land and Improvements $ 41,600 $ 1,800 $ - $ 43,400
Buildings 402,200 24,300 - 426,500
Machinery and Equipment 1,015,200 89,600 (184,300) 920,500
$ 1,459,000 $ 115,700 $ (184,300) $ 1,390,400
Year Ended December 30, 1995:
Land and Improvements $ 43,400 $ 2,500 $ - $ 45,900
Buildings 426,500 31,500 - 458,000
Machinery and Equipment 920,500 104,200 (58,900) 965,800
$ 1,390,400 $ 138,200 $ (58,900) $ 1,469,700
Year Ended December 28, 1996:
Dynamic Homes, Inc.
Land and Improvements $ 45,900 $ 4,900 $ (1,200) $ 49,600
Buildings 458,000 32,200 (7,800) 482,400
Machinery and Equipment 965,800 131,300 (31,300) 1,065,800
Shagawa Resort, Inc.
Land and Improvements - 5,600 - 5,600
Buildings - 26,200 - 26,200
Furniture, Fixtures & Equip. - 43,800 - 43,800
$ 1,469,700 $ 244,000 $ (40,300) $ 1,673,400
DYNAMIC HOMES, INC.
SCHEDULE IX - SHORT TERM BORROWINGS
Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
The amounts reported represent amounts owed under a line of credit.
Average Weighted
Weighted Maximum Month End Average
Average Borrowing Borrowing Interest
Balance Interest Outstanding Outstanding Rate
End Rate at During the During the During the
of Year (1) Year End Year Year (2) Year (3)
----------- --------- ----------- ----------- ----------
Year Ended December 31, 1994 $ -0- 9.50% $ 831,548 $ 185,800 8.40%
Year Ended December 30, 1995 $ -0- 9.00% $ 446,767 $ 69,659 9.50%
Year Ended December 28, 1996 $ -0- 8.50% $ 285,000 $ 35,000 8.60%
(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.
DYNAMIC HOMES, INC.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Years Ended December 28, 1996, December 30, 1995 and December 31, 1994
Maintenance Taxes, Other Than Advertising
and Repairs Payroll and Income Cost
------------- ------------------ ------------
Year Ended December 31, 1994 $ 184,515 $ 111,603 $ 133,156
Year Ended December 30, 1995 $ 208,210 $ 94,823 $ 105,733
Year Ended December 28, 1996 $ 243,411 $ 111,373 $ 190,752
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