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 June 30, 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
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 August 12, 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)
(UNAUDITED)
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
ASSETS
Cash and cash equivalents $ 2,076 $ 1,979
Restricted cash 3,484 1,947
Receivables 1,438 1,410
Notes receivable - affiliates 1,296 1,066
Deposits and prepaid expenses 3,353 3,042
Inventories 39,097 35,614
Income taxes receivable 173 334
Land option and earnest money deposits 1,656 1,138
Property and equipment, net 1,551 1,517
Deferred income taxes 206 206
Other assets 4,775 4,531
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Total assets $59,105 $52,784
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Obligations under bank lines of credit $ 8,139 $ 7,457
Debt obligations 32,146 27,730
Obligations under capital leases 435 447
Accounts payable 7,501 7,185
Cost to complete sold homes 986 469
Customer deposits 2,470 1,060
Accrued expenses 1,084 1,687
------- -------
Total liabilities 52,761 46,035
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 6,245 6,650
------- -------
6,344 6,749
------- -------
Total liabilities and stockholders' equity $59,105 $52,784
======= =======
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues $ 19,594 $ 15,396 $ 31,688 $ 27,492
Cost of revenues 17,279 13,816 28,158 24,411
-------- -------- -------- --------
Gross profit 2,315 1,580 3,530 3,081
Operating expenses:
Selling 782 576 1,472 1,138
General and administrative 1,011 1,000 1,655 1,785
-------- -------- -------- --------
522 4 403 158
Other income (expense):
Interest expense (641) (759) (1,186) (1,338)
Other, net 27 13 71 35
-------- -------- -------- --------
Loss before income taxes (92) (742) (712) (1,145)
Income tax benefit (41) (299) (307) (460)
-------- -------- -------- --------
Net loss (51) (443) (405) (685)
Retained earnings, beginning of period 6,296 7,055 6,650 7,297
-------- -------- -------- --------
Retained earnings, end of period $ 6,245 $ 6,612 $ 6,245 $ 6,612
======== ======== ======== ========
Net loss per share - basic and diluted $ (5) $ (42) $ (38) $ (64)
======== ======== ======== ========
Common shares outstanding 10,625 10,625 10,625 10,625
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)
SIX MONTHS ENDED
JUNE 30,
--------
1998 1997
-------- --------
Cash flows from operating activities:
Net loss $ (405) $ (685)
Loss from discontinued operations -- --
-------- --------
Loss from continuing operations (405) (685)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 238 225
Gain on disposal of property and equipment -- (7)
Changes in operating assets and liabilities (4,676) (2,809)
-------- --------
Net cash used in continuing operating activities (4,843) (3,276)
Net cash used in discontinued operations -- (115)
-------- --------
Net cash used in operating activities (4,843) (3,391)
Cash flows from investing activities:
Expenditures for property and equipment (219) (68)
Proceeds on disposal of property and equipment 7 37
Other 4 5
Increase in cash surrender value of
life insurance (243) (224)
-------- --------
Net cash used in investing activities (451) (250)
Cash flows from financing activities:
Proceeds from bank lines of credit 16,138 16,234
Payment of principal on bank lines of credit (15,456) (11,908)
Proceeds from debt obligations 26,969 22,620
Payment of principal on debt obligations (22,248) (22,624)
Payment of principal on capital lease obligations (12 (43)
Payment of debt issuance costs -- (30)
-------- --------
Net cash provided by financing activities 5,391 4,249
-------- --------
Increase in cash and cash equivalents 97 608
Cash and cash equivalents, beginning of the period 1,979 1,253
-------- --------
Cash and cash equivalents, end of the period $ 2,076 $ 1,861
======== ========
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 of these standards did not
have a material effect on the results of operations of the Company. For the
periods presented comprehensive income (loss) is the same as net income (loss).
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 six months ended
June 30, 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
June 30, 1998 December 31, 1997
------------- -----------------
(UNAUDITED)
RECEIVABLES
Trade $ 900 $1,014
Escrows 489 336
Contracts and notes 12 6
Employees and officers 56 37
Other 36 72
------ ------
1,493 1,465
Less allowance for doubtful accounts 55 55
------ ------
$1,438 $1,410
====== ======
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL DATA, CONTINUED
June 30, 1998 December 31, 1997
------------- -----------------
(UNAUDITED)
INVENTORIES
Homes under construction $19,729 $13,808
Model homes 971 492
Lots held for sale 8,520 12,338
Land under development 3,930 --
Land held for future development 5,947 8,976
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$39,097 $35,614
======= =======
ACCRUED EXPENSES
Payroll, bonuses and payroll taxes $ 186 $ 609
Other 898 1,078
------- -------
$ 1,084 $ 1,687
======= =======
DEBT OBLIGATIONS
Construction loans on single family homes $15,572 $ 9,253
Promissory notes 2,671 6,128
Development loans 6,712 4,658
Subordinate debenture series 5,945 5,945
Street, sewer and water assessments on land
under development and lots held for sale 565 1,047
Installment loans 632 622
Unsecured demand notes payable, stockholders 49 77
------- -------
$32,146 $27,730
======= =======
Supplemental disclosure of noncash transactions:
The Company acquired land for future development under promissory notes with the
sellers aggregating $305 and $1,773 in the six months ended June 30, 1998 and
1997, respectively. In addition, the Company sold $230 of land and related
research costs in exchange for a note receivable in the six months ended June
30, 1998 and $954 of land and related research costs along with related debt of
$182 in exchange for a $768 note receivable in the six months ended June 30,
1997.
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 3. RELATED PARTY TRANSACTIONS:
In May 1998, the Company sold $230 of undeveloped land and related research
costs to a Limited Liability Corporation ("LLC") related through common
ownership, in exchange for a note receivable. The note receivable is due on
demand and matures on December 31, 2000, with interest payable at 1% above the
prime rate. In May and September 1997, the Company sold $1,330 of undeveloped
land and related research costs to two LLC's, 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 and six months ended June 30, 1998 increased $4.2 million
or 27.3% and 15.3%, respectively, from the same periods in 1997. The Company
closed on sales of 61 and 98 homes in the three and six months ended June 30,
1998, respectively, as compared to 47 and 81 closings, respectively, in the same
periods in 1997. The average selling price of homes closed in the three and six
months ended June 30, 1998 decreased by 1.3% and 5.6%, respectively, as compared
to the average selling price of homes closed in the same periods in 1997. The
decrease in average selling price is due to an increase in the number of homes
closed in the Company's new standard product lines in the three and six months
ended June 30, 1998 compared to the same period in 1997.
The Company's gross profit margin in the three months ended June 30, 1998
increased to 11.8% as compared to 10.3% for the three months ended June 30,
1997. Gross profit margins remained constant at 11.1% for the six months ended
June 30, 1998 as compared to the same period in 1997. This increase in gross
profit margin for the three months ended June 30, 1998 is primarily due to the
sale and leaseback, in 1997, of seven model homes at no profit. This increase in
gross profit margins was partially offset by fluctuations 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 six months ended June 30, 1998 increased
$217,000 and $204,000, respectively as compared to the same periods in 1996. As
a percentage of total revenues, these expenses decreased to 9.2% and 9.9%,
respectively, for the three and six months ended June 30, 1998 as compared to
10.2% and 10.6%, respectively, in 1997, as most are fixed in nature. The
operating expenses increased in 1998 due to rental fees incurred in 1998 as a
result of model home sale-leaseback transactions during 1997 and increased
advertising costs for special promotions during 1998. These increased costs were
offset by a decrease in the Company's personnel costs in 1998.
OTHER INCOME (EXPENSE), NET
Interest expense for the three months and six months ended June 30, 1998
decreased $118,000 and $152,000, respectively, or 20.0% and 11.4%, respectively,
from the same periods 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 and six months ended June 30, 1998 was $51,000 and
$405,000, respectively, compared to $443,000 and $685,000, respectively, in the
same periods in 1997. The decreased loss is primarily due to an increase in
revenues and decrease in interest expense in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased $97,000 to $2.1 million in 1998 from $1.9 million in 1997.
Cash flows used in operating activities were $4.8 million for the six months
ended June 30, 1998, an increase of $1.4 million from the same period in 1997,
during which operating activities used $3.4 million of cash. During the six
months ended June 30, 1998, cash was used for a $3.9 million seasonal increase
in homes under construction; a $1.5 million increase in restricted cash; a
$603,000 decrease in accrued expenses and $197,000 related to other changes in
operating assets and liabilities. These cash uses were partially offset by $1.4
million of cash provided by increases in customer deposits.
Cash flows used in investing activities increased by $201,000 from $250,000 for
the six months ended June 30, 1997 to $451,000 for the same period in 1998. The
increase was primarily due purchases of vehicles and other construction
equipment.
Cash flows provided by financing activities increased $1.1 million to $5.4
million for the six months ended June 30, 1998 from $4.3 million in the same
period in 1997. The cash provided by financing activities for the six months
ended June 30, 1998 was primarily due to increased net borrowings on the
Company's debt obligations as a result of cash used for the seasonal increase in
homes under construction.
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, 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 $11.7 million, subject to a
borrowing base. At June 30, 1998, the aggregate maximum credit available under
the lines of credit was $10.1 million, of which $8.1 million was utilized and
$2.0 million was available.
The Company's outstanding indebtedness as of June 30, 1998 included $18.8
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.
YEAR 2000 COMPLIANCE
The Company has and will continue to make certain investments in its software
systems and applications to ensure the Company is year 2000 compliant. Also, the
Company has and will continue to review and make changes to its facilities,
equipment and computer hardware to ensure the Company is year 2000 compliant.
The financial impact has not been and is not anticipated to be material to its
financial position or results of operations in any given year.
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
June 30, 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: August 12, 1998 By /s/Peter Pflaum
-----------------------------
Peter Pflaum
(Principal Executive Officer)
(Principal Financial Officer)
LUNDGREN BROS. CONSTRUCTION, INC. EXHIBITS
10.1 Partial Assignment of Option, dated May 29, 1998, between the Company
and Plum Tree 4th LLC.
10.2 Form of Option Agreement between the Company and Plum Tree 4th LLC.
10.3 Third Amendment to Letter Agreement, dated April 29, 1998, between the
Company and U.S. Bank National Association.
10.4 Third Amendment, Extension and Reaffirmation Agreement, dated as of May
31, 1998, by and between the Company and Norwest Bank Minnesota,
National Association.
10.5 Sixth Amended and Restated Revolving Note, dated as of May 31, 1998, by
and between the Company and Norwest Bank Minnesota, National
Association
10.6 Consent and Reaffirmation of Guaranty, dated as of May 31, 1998, by
Peter Pflaum, Edmund M. Lundgren, Allan D. Lundgren, and Gerald T.
Lundgren in favor of Norwest Bank Minnesota, National Association.
10.7 Acquisition and Closing Agreement, dated as of June 9, 1998, by and
between the Company and BF Holding Company.
10.8 Form of Option Agreement between the Company and BF Holding Company.
10.9 Revolving Construction and Development Loan Agreement, dated as of July
13, 1998, by and between the Company and U.S. Bank National
Association.
10.10 Development Note, dated as of July 13, 1998, by and between the Company
and U.S. Bank National Association.
10.11 Revolving Note, dated as of July 13, 1998, by and between the Company
and U.S. Bank National Association.
27 Financial Data Schedule