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 March 31, 1998 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
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LUNDGREN BROS. CONSTRUCTION, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0970679
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(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 May 13, 1998, 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)
MARCH 31, 1998 DECEMBER 31, 1997
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(UNAUDITED)
ASSETS
Cash and cash equivalents $ 2,121 $ 1,979
Restricted cash 2,015 1,947
Receivables 1,458 1,410
Notes receivable - affiliates 1,066 1,066
Deposits and prepaid expenses 3,341 3,042
Inventories 36,813 35,614
Income taxes receivable 600 334
Land option and earnest money deposits 1,386 1,138
Property and equipment, net 1,567 1,517
Deferred income taxes 206 206
Other assets 4,751 4,531
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Total assets $55,324 $52,784
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LIABILITIES AND STOCKHOLDERS' EQUITY
Obligations under bank lines of credit $ 8,246 $ 7,457
Debt obligations 29,326 27,730
Obligations under capital leases 443 447
Accounts payable 5,999 7,185
Cost to complete sold homes 1,233 469
Customer deposits 2,168 1,060
Accrued expenses 1,514 1,687
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Total liabilities 48,929 46,035
Commitments -- --
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 6,296 6,650
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6,395 7,749
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Total liabilities and stockholders' equity $55,324 $52,784
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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
MARCH 31,
--------------------
1998 1997
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Revenues $ 12,094 $ 12,096
Cost of revenues 10,879 10,595
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Gross profit 1,215 1,501
Operating expenses:
Selling 690 562
General and administrative 644 785
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(119) 154
Other income (expense):
Interest expense (545) (579)
Other, net 44 22
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Loss before income taxes (620) (403)
Income tax benefit (266) (161)
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Net loss (354) (242)
Retained earnings, beginning of period 6,650 7,297
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Retained earnings, end of period $ 6,296 $ 7,055
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Net loss per share - basic and diluted $ (33) $ (23)
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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)
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
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Cash flows from operating activities:
Net loss $ (354) $ (242)
Loss from discontinued operations -- --
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Loss from continuing operations (354) (242)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 110 113
Gain on disposal of property and equipment -- (4)
Changes in operating assets and liabilities (1,943) (1,712)
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Net cash used in continuing operating activities (2,187) (1,845)
Net cash used in discontinued operations -- (100)
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Net cash used in operating activities (2,187) (1,945)
Cash flows from investing activities:
Expenditures for property and equipment (130) (36)
Proceeds on disposal of property and equipment -- 12
Other -- 5
Increase in cash surrender value of
life insurance (227) (213)
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Net cash used in investing activities (357) (232)
Cash flows from financing activities:
Proceeds from bank lines of credit 7,409 8,378
Payment of principal on bank lines of credit (6,620) (5,000)
Proceeds from debt obligations 10,321 8,094
Payment of principal on debt obligations (8,420) (8,248)
Payment of principal on capital lease obligations (4) (31)
Payment of debt issuance costs -- (30)
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Net cash provided by financing activities 2,686 3,163
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Increase in cash and cash equivalents 142 986
Cash and cash equivalents, beginning of the period 1,979 1,253
-------- --------
Cash and cash equivalents, end of the period $ 2,121 $ 2,239
======== ========
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 1997 Annual Report on Form 10-K. During the first quarter of 1998, the
Company implemented SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of and
Enterprise and Related Information." The adoption these standards did not have a
material effect on the results of operations of the Company.
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 months ended March
31, 1998 and 1997 was 10,625. During 1997, the Company adopted SFAS No. 128,
EARNINGS PER SHARE. This statement establishes standards for computing and
presenting basic and diluted earnings per share (EPS). The adoption of this
statement did not effect the Company's reported EPS for all periods presented.
NOTE 2. SELECTED FINANCIAL DATA
March 31, 1998 December 31, 1997
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(UNAUDITED)
RECEIVABLES
Trade $1,013 $1,014
Escrows 401 336
Contracts and notes 13 6
Employees and officers 61 37
Other 25 72
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1,513 1,465
Less allowance for doubtful accounts 55 55
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$1,458 $1,410
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LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL DATA, CONTINUED
March 31, 1998 December 31, 1997
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(UNAUDITED)
INVENTORIES
Homes under construction $17,179 $13,808
Model homes 643 492
Lots held for sale 9,465 12,338
Land held for future development 9,526 8,976
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$36,813 $35,614
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ACCRUED EXPENSES
Payroll, bonuses and payroll taxes $ 177 $ 609
Other 1,337 1,078
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$ 1,514 $ 1,687
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DEBT OBLIGATIONS
Construction loans on single family homes $12,613 $ 9,253
Promissory notes 4,333 6,128
Development loans 4,812 4,658
Subordinate debenture series 5,945 5,945
Street, sewer and water assessments on land
under development and lots held for sale 951 1,047
Installment loans 604 622
Unsecured demand notes payable, stockholders 68 77
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$29,326 $27,730
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Supplemental disclosure of noncash transactions:
The Company acquired land for future development under promissory notes with the
sellers aggregating $305 in the three months ended March 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 1998 were approximately the same
as in the same period in 1997. The Company closed on sales of 37 homes in the
first three months of 1998, and as of March 31, 1998, had purchase agreements
for the sale of 167 homes, representing approximately $50.4 million in sales. In
first three months of 1997, the Company closed on sales of 34 homes, and as of
March 31, 1997, had purchase agreements for the sale of 101 homes, representing
approximately $33.5 million in sales. The average selling price of homes closed
in the first three months of 1998 decreased by 11.5% from the average selling
price of homes closed in the same period in 1997. The decrease in average
selling price is due to an increase in number of homes closed in the Company's
new standard product lines in the first three months of 1998 compared to the
same period in 1997.
Gross profit for the three months ended March 31, 1998 was $1.2 million, a
decrease from $1.5 million in the same period in 1997. The Company's gross
profit margin in the three months ended March 31, 1998 decreased to 10.1% as
compared to 12.4% in the same period in 1997. This decrease in gross profit
margin is primarily due to increases in the number of homes built on lots
purchased from other developers, which provides the Company less profit on the
sale of the lot. In addition, 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 had a
negative impact on the Company's gross profit. The Company expects the increased
costs of land purchased from other developers could continue to negatively
impact the gross margins in the future.
Operating expenses (which include selling, general and administrative expenses)
for the three months ended March 31, 1998 were approximately the same as in the
same period in 1997. The Company incurred more rental fees in 1998 as a result
of model home sale-leaseback transactions during 1997. These increases were
offset by decreases in personnel cost in 1998.
OTHER INCOME (EXPENSE), NET
Interest expense for the three months ended March 31, 1998 decreased $34,000 or
5.9% from the same period in 1997. This decrease is mainly due to decreased
interest costs for the Company's model homes sold as part of a sale-leaseback
program. This decrease is partially offset by increased borrowings on the
Company's lines of credit for working capital.
NET INCOME (LOSS)
Net loss in the three months ended March 31, 1998 was $354,000, compared to a
$242,000 net loss in the same period in 1997. The increased loss is primarily
due to a decrease in gross profit margins in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased $118,000 to $2.1 million in 1998 from $2.2 million in 1997.
Cash flows used in operating activities were $2.2 million for the three months
ended March 31, 1998, an increase of $242,000 from the same period in 1997,
during which operating activities used $1.9 million of cash. In 1998, cash was
used for a $1.5 million increase in houses under construction and developed land
inventories; a $1.2 million reduction in accounts payable; a $354,000 loss from
operations; a $299,000 increase in prepaid expenses and $711,000 related to
other changes in operating assets and liabilities. These cash uses were
partially offset by $1.1 million increase is customer deposits and $764,000
increase in accrued cost to complete sold homes.
Cash flows used in investing activities increased by $125,000 from $232,000 for
the three months ended March 31, 1997 to $357,000 for the same period in 1998.
The increase was primarily due to expenditures for drywall equipment and
construction of garage sales offices.
Cash flows provided by financing activities decreased approximately $477,000 to
$2.7 million for the three months ended March 31, 1998 from $3.2 million in the
same period in 1997. The decrease was primarily due to decreased net borrowings
on the Company's bank lines of credit, partially offset by an increase in the
net borrowings on the Company's construction notes for an increase in the homes
under construction inventories.
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. However, the Company may seek additional long-term financing.
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, and finally, to sale of the home and lot. In
addition, the Company has entered into arrangements involving the sale of raw
land to other entities for which the Company has an option to subsequently
purchase back as developed lots.
The Company also utilizes secured lines of credit to finance its operations. The
Company has an approved aggregate credit of $10.4 million, subject to a
borrowing base. At March 31, 1998, the aggregate maximum credit available under
the lines of credit was $9.9 million, of which $8.2 million was utilized and
$1.7 million was available.
The Company's outstanding indebtedness as of March 31, 1998 included $20.1
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 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.
The forward-looking statements contained in this quarterly report on Form 10-Q,
including without limitations forward-looking statements contained in
Management's Discussion and Analysis, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Certain
important factors could cause results to differ materially from those
anticipated by some statements made herein. You are cautioned that all
forward-looking statements involve risks and uncertainties. Among the factors
that could cause results to differ materially are the following: Cyclical
economic conditions; fluctuations in operating results; continuing need to
acquire land for future development; substantial leverage; reliance on financing
and no assurance of availability of credit; extensive government regulation; and
environmental factors. Reference is also made to the risk factors contained in
the Company's Registration Statement on Form S-1, as filed with the Securities
and Exchange Commission on October 18, 1996.
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
March 31, 1998.
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: May 13, 1998 By: /s/ Peter Pflaum
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Peter Pflaum
President, Chief Executive Officer and Principal
Financial Officer
LUNDGREN BROS. CONSTRUCTION, INC. EXHIBITS
10.1 Second Amendment and Extension of Promissory Note, dated March 21,
1998, of the Company and U.S. Bank National Association.
10.2 Second Amendment to Letter Agreement, dated March 21, 1998, between the
Company and U.S. Bank National Association.
10.3 Letter Agreement, dated March 26, 1998, between the Company and
Builders Development & Finance, Inc.
27 Financial Data Schedule