FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ____________ to ____________
Commission File Number: 33-58934
LUNDGREN BROS. CONSTRUCTION, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0970679
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
935 East Wayzata Boulevard
Wayzata, Minnesota 55391
(Address of principal executive offices) (Zip Code)
(612)473-1231
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
On November 13, 1997, there were 594 voting shares and 10,031 nonvoting shares
of the registrant's no par value common stock outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 2,297 $ 1,253
Restricted cash 2,597 1,072
Receivables 1,202 1,276
Notes receivable - affiliate 1,066 --
Deposits and prepaid expenses 4,565 3,663
Inventories 34,139 37,828
Income taxes receivable 210 32
Land option and earnest money deposits 1,245 795
Property and equipment, net 1,457 1,564
Deferred income taxes 130 130
Other assets 4,328 4,082
------- -------
Total assets $53,236 $51,695
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Obligations under bank lines of credit $ 6,787 $ 2,987
Debt obligations 28,437 30,673
Obligations under capital leases 452 499
Accounts payable 6,655 5,996
Cost to complete sold homes 1,150 995
Customer deposits 1,249 1,249
Accrued expenses 1,543 1,900
------- -------
Total liabilities 46,273 44,299
Commitments and contingencies -- --
Stockholders' equity:
Common stock, no par value; authorized, 12,000
shares; 594 shares voting and 10,031
shares nonvoting issued and outstanding 99 99
Retained earnings 6,864 7,297
------- -------
6,963 7,396
------- -------
Total liabilities and stockholders' equity $53,236 $51,695
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenues $ 22,154 $ 22,002 $ 49,646 $ 50,179
Cost of revenues 19,173 18,626 43,584 42,715
-------- -------- -------- --------
Gross profit 2,981 3,376 6,062 7,464
Operating expenses:
Selling 945 962 2,083 2,000
General and administrative 1,012 1,054 2,797 2,827
-------- -------- -------- --------
1,024 1,360 1,182 2,637
Other income (expense):
Interest expense (595) (349) (1,933) (1,402)
Other, net (6) 7 29 150
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes 423 1,018 (722) 1,385
Income tax provision (benefit) 171 421 (289) 568
-------- -------- -------- --------
Income (loss) from continuing operations 252 597 (433) 817
Income (loss) from discontinued operations, net of
income taxes -- 23 -- (87)
-------- -------- -------- --------
Net income (loss) 252 620 (433) 730
Retained earnings, beginning of period 6,612 6,396 7,297 6,286
-------- -------- -------- --------
Retained earnings, end of period $ 6,864 $ 7,016 $ 6,864 $ 7,016
======== ======== ======== ========
Net income (loss) per share:
Continuing operations $ 24 $ 56 $ (41) $ 77
Discontinued operations -- 2 -- (8)
-------- -------- -------- --------
$ 24 $ 58 $ (41) $ 69
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income (loss) $ (433) $ 730
Loss from discontinued operations -- 87
-------- --------
Income (loss) from continuing operations (433) 817
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 364 285
Gain on disposal of property and equipment (7) --
Gain on sale of investment -- (123)
Changes in operating assets and liabilities 1,705 (2,937)
-------- --------
Net cash provided by (used in) continuing operating activities 1,629 (1,958)
Net cash used in discontinued operations (115) (297)
-------- --------
Net cash provided by (used in) operating activities 1,514 (2,255)
Cash flows from investing activities:
Expenditures for property and equipment (188) (104)
Proceeds on disposal of property and equipment 37 --
Proceeds on sale of investment -- 159
Other 5 14
Increase in cash surrender value of
life insurance (241) (275)
-------- --------
Net cash used in investing activities (387) (206)
Cash flows from financing activities:
Proceeds from bank lines of credit 24,504 25,759
Payment of principal on bank lines of credit (20,704) (24,644)
Proceeds from debt obligations 31,414 32,463
Payment of principal on debt obligations (35,220) (33,292)
Payment of principal on capital lease obligations (47) (4)
Payment of debt issuance costs (30) (57)
-------- --------
Net cash provided by (used in) financing activities (83) 225
-------- --------
Increase (decrease) in cash and cash equivalents 1,044 (2,236)
Cash and cash equivalents, beginning of the period 1,253 2,984
-------- --------
Cash and cash equivalents, end of the period $ 2,297 $ 748
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. GENERAL
INTERIM FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the periods
presented. These adjustments consist of normal, recurring items. The results of
operations for any interim period are not necessarily indicative of results for
the full year. The financial statements and notes are presented as permitted by
the requirements for Form 10-Q and do not contain certain information included
in the Company's annual financial statements and Notes. This Form 10-Q should be
read in conjunction with the Company's financial statements and notes included
in its 1996 Annual Report on Form 10-K.
PER SHARE AMOUNTS
Per share amounts are computed by dividing by the weighted average number of
shares of voting and nonvoting common stock outstanding during each period. The
number of outstanding shares of common stock for the three and nine months ended
September, 1997 and 1996 was 10,625. In February 1997, the Financial Accounting
Standards Board issued statement No. 128, "Earnings Per Share." This statement
establishes standards for computing and presenting basic and diluted earnings
per share (EPS) for financial statements issued for periods ending after
December 15, 1997. The adoption of this statement will not effect the Company's
reported EPS.
NOTE 2. SELECTED FINANCIAL DATA
September 30, 1997 December 31, 1996
------------------ ----------------
(UNAUDITED)
RECEIVABLES
Trade $ 908 $ 961
Escrows 257 202
Contracts and notes 5 18
Employees and officers 56 11
Other 19 139
------ ------
1,245 1,331
Less allowance for doubtful accounts 43 55
------ ------
$1,202 $1,276
====== ======
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL DATA, CONTINUED
September 30, 1997 December 31, 1996
------------------ -----------------
(UNAUDITED)
INVENTORIES
Homes under construction $15,029 $11,939
Model homes 1,283 3,783
Lots held for sale 8,290 15,069
Land under development 3,807 337
Land held for future development 5,730 6,700
------- -------
$34,139 $37,828
======= =======
ACCRUED EXPENSES
Payroll, bonuses and payroll taxes $ 526 $ 958
Other 1,017 942
------- -------
$ 1,543 $ 1,900
======= =======
DEBT OBLIGATIONS
Construction loans on single family homes $10,184 $10,692
Promissory notes 4,763 5,231
Development loans 6,032 6,243
Subordinate debenture series 5,945 5,951
Street, sewer and water assessments on land
under development and lots held for sale 792 1,471
Installment loans 632 978
Unsecured demand notes payable, stockholders 89 107
------- -------
$28,437 $30,673
======= =======
Supplemental disclosure of noncash transactions:
The Company acquired land for future development under promissory notes with the
sellers aggregating $1,773 and $4,240 in the nine months ended September 30,
1997 and 1996, respectively. In addition, the Company sold $1,330 of land and
related research costs along with related debt of $182 in exchange for $1,145
notes receivable in the nine months ended September 30, 1997, see Note 4.
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 3. DISCONTINUED OPERATIONS:
In November 1996, the Company discontinued operations of its remodeling
division. An estimated loss on disposal of $41 was accrued in the fourth quarter
of 1996. The consolidated statements of operations and retained earnings and
consolidated statement of cash flows for the periods ended September 30, 1996
have been restated to report separately the net assets and operating results of
this discontinued business. This discontinued business had revenues of $1,379
and $3,134, respectively, during the three and nine months ended September 30,
1996. There were no revenues related to the discontinued business in the three
and nine months ended September 30, 1997.
NOTE 4. RELATED PARTY TRANSACTIONS:
In May and September 1997, the Company sold $1,330 of undeveloped land and
related research costs to two Limited Liability Corporations ("LLC") related
through common ownership, in exchange for $1,145 notes receivable and one LLC
assumed two land mortgages totaling $182. The notes receivable are due on demand
and mature in December 31, 1999 with interest payable at 1% above the prime
rate. The outstanding balance as of September 30, 1997 was $1,066. The LLC's
will develop the land and the Company has option agreements with the LLC's that
gives the Company exclusive rights, but no obligation, to purchase the developed
lots under terms similar to other agreements with non-related parties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 1997 increased $152,000 or .7%
and for the nine months ended September 30, 1997 decreased $533,000 or 1.1% from
the same periods in 1996. The Company closed on sales of 67 and 148 homes in the
three and nine months ended September 30, 1997, respectively, as compared to 63
and 143 closings, respectively, in the same periods in 1996. The average selling
price of homes closed in the three and nine months ended September 30, 1997
decreased by 5.1% and 4.5%, respectively, as compared to the average selling
price of homes closed in the same periods in 1996. The decrease in average
selling price is due to a change in the mix of homes closed in the three and
nine months ended September 30, 1997 compared to the same period in 1996, the
sale of seven model homes at 83% of appraised value under a sales-leaseback
agreement in May 1997 and the effect of a special promotion on pricing offered
in late 1996 through the first quarter of 1997.
The Company's gross profit margin in the three and nine months ended September
30, 1997 decreased to 13.5% and 12.2%, respectively, as compared to 15.3% and
14.9%, respectively, in the same periods in 1996. This decrease in gross profit
margin is primarily due to the sale and leaseback of seven model homes at no
profit, and to a lower average sales price as a result of the special promotion
in late 1996 through the first quarter of 1997 on sales of the Company's
completed house inventories. The decrease in gross profit margins were also due
to changes in the mix of homes sold and increases in the cost of land developed
by the Company due to competition for, and reductions in the availability of,
raw land within the Twin Cities metropolitan area. The Company expects that the
increased costs of land will continue to negatively impact the gross margins in
the future.
Operating expenses for the three and nine months ended September 30, 1997 were
approximately the same as in 1996.
OTHER INCOME (EXPENSE), NET
Interest expense for the three months and nine months ended September 30, 1997
increased $246,000 and $531,000, respectively, or 70.5% and 37.9%, respectively,
from the same periods in 1996. This increase is mainly due to higher interest
rates and increased borrowings on the Company's lines of credit to finance
increased working capital needs.
Other income (expense), net decreased $121,000 in the nine months ended
September 30, 1997 from the same period in 1996. The decrease is mainly due to a
$123,000 gain in 1996 on the sale of an investment in a land development
partnership.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
Income from continuing operations in the three months ended September 30, 1997
was $252,000 compared to $597,000 in the same period in 1996. Loss from
continuing operations in the nine months ended September 30, 1997 was $433,000
compared to income from continuing operations of $817,000 in the same period in
1996. The decrease in 1997 is primarily due to a decrease in revenues, decrease
in gross profit margins and increase in interest expense in 1997, and a gain in
1996 on the sale of an investment in a land development partnership.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $1.5 million for the nine
months ended September 30, 1997, an increase of $3.8 million from the same
period in 1996, during which operating activities used $2.3 million of cash.
During the nine months ended September 30, 1997, cash was provided by a decrease
in cash used for land inventories of $5.2 million and a $659,000 increase in
accounts payable. These cash provisions were partially offset by cash used for
an increase in restricted cash of $1.5 million; a $1.9 million increase in
prepaid expenses, principally for costs incurred in research of potential land
projects; a $357,000 decrease in accrued expenses, principally for payment of
bonuses to employees other than stockholders; a $433,000 loss from continuing
operations and $169,000 related to other changes in operating assets and
liabilities.
Cash flows used in investing activities increased by $181,000 from $206,000 for
the nine months ended September 30, 1996 to $387,000 for the same period in
1997. The increase was primarily due to the effect of proceeds from the sale of
an investment in a land development partnership in 1996.
Cash flows used in financing activities increased $308,000 to $83,000 for the
nine months ended September 30, 1997 compared to cash provided by financing
activities of $225,000 in the same period in 1996. The cash provided by
financing activities for the nine months ended September 30, 1997 was primarily
due to increased net borrowings on the Company's bank lines of credit as a
result of cash used for the seasonal increase in house inventories and an
increase in costs incurred in research of potential land projects in 1997
compared to 1996.
Financing
- ---------
The Company believes that internally-generated funds, amounts available under
its four lines of credit and borrowing arrangements entered into in the ordinary
course of business will continue to be the primary sources of capital for
liquidity.
The Company's financing needs depend primarily upon sales volume, asset
turnover, land acquisition and inventory balances. The Company presently
finances substantially all of its land acquisition and development and home
construction activities through borrowing arrangements for individual projects
or homes under construction. The borrowing arrangements for each individual
project evolve as the project matures from land acquisition, to development, to
construction of a home, and finally, to sale of the home and lot. During 1997,
the Company entered into two new borrowing arrangements. The first involves the
sale of raw land to other entities, that is subsequently purchased back by the
Company as developed lots. The second involves a sale and leaseback program for
its model homes. As of September 30, 1997, there are seven model homes under
this program.
The Company also utilizes secured lines of credit to finance its operations. The
Company has approved aggregate credit of $10.4 million, subject to a borrowing
base. At September 30, 1997, the aggregate maximum credit available under the
lines of credit was $9.8 million, of which $6.8 million was utilized and $3.0
million was available.
The Company's outstanding indebtedness as of September 30, 1997 included $13.3
million due within one year. The Company has historically operated with a
substantial amount of its outstanding indebtedness due within one year,
historically paying such debt out of earnings or through refinancing, where
applicable. The Company believes that the amounts available under its lines of
credit and amounts generated from operations will be sufficient to satisfy its
debt obligations due in the next year. However, there can be no assurance that
the Company will be able to continue to obtain adequate short-term financing,
including bank financing, in the future.
PART II. OTHER INFORMATION
Items 1 through 5.
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) See exhibit index attached.
(b) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K during the quarter ended
September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LUNDGREN BROS. CONSTRUCTION, INC.
Date: November 13, 1997 By: /s/ Peter Pflaum
Peter Pflaum
(Principal Executive Officer)
(Principal Financial Officer)
LUNDGREN BROS. CONSTRUCTION, INC. EXHIBITS
27 Financial Data Schedule