[LOGO] LUNDGREN BROS.
PROSPECTUS
$3,000,000
LUNDGREN BROS. CONSTRUCTION, INC.
SENIOR SUBORDINATED DEBENTURES, SERIES 11%
DUE OCTOBER 1, 2004
MINIMUM PURCHASE: $2,000
Lundgren Bros. Construction, Inc. ("Lundgren" or the "Company") is offering
$3,000,000 aggregate principal amount of its Senior Subordinated Debentures,
Series 11%, due October 1, 2004 (the "Debentures"). The Debentures will bear
interest at the rate of 11% per annum and will mature on October 1, 2004.
Interest on each Debenture will be payable quarterly on January 1, April 1, July
1 and October 1 of each year, commencing as to each Debenture on the first of
such dates to occur after issuance of the Debentures. A minimum purchase of
$2,000 is required. The Debentures initially will be issued in minimum principal
amounts of $2,000 and integral multiples of $1,000. The Debentures will be sold
at par plus accrued interest. Interest on each Debenture will accrue from
October 18, 1996 or, with respect to Debentures sold after a quarterly interest
payment date, the most recent quarterly interest payment date.
Lundgren may redeem the Debentures, in whole or in part, upon at least 30 days'
notice, at any time beginning October 31, 1998 at a price equal to the principal
amount thereof plus a premium equal to 5%, such premium decreasing 1% each year
thereafter. In addition, the Debentures are subject to mandatory redemption in
certain circumstances, including a Change of Control, as defined in the
Indenture. See "Description of Debentures."
THE DEBENTURES ARE SUBORDINATED TO ALL OF LUNDGREN'S SENIOR INDEBTEDNESS, AS
DEFINED HEREIN (APPROXIMATELY $32.2 MILLION AS OF JUNE 30, 1996). SUBJECT TO A
MAXIMUM DEBT-TO-EQUITY RATIO COVENANT, LUNDGREN IS NOT PROHIBITED FROM
INCURRING, AND LIKELY WILL INCUR, ADDITIONAL SENIOR INDEBTEDNESS DURING THE TERM
OF THE DEBENTURES. THE DEBENTURES WILL BE SUBORDINATED TO ANY ADDITIONAL SENIOR
INDEBTEDNESS, EQUAL IN RIGHT OF PAYMENT TO ANY PARITY INDEBTEDNESS, AS DEFINED
HEREIN, AND SENIOR TO ANY SUBORDINATED INDEBTEDNESS, AS DEFINED HEREIN. SEE
"PROSPECTUS SUMMARY" AND "DESCRIPTION OF DEBENTURES."
AN INVESTMENT IN THE DEBENTURES INVOLVES A HIGH DEGREE OF RISK.
THERE IS NO EXISTING PUBLIC MARKET FOR THE DEBENTURES AND THERE
CAN BE NO ASSURANCE THAT A PUBLIC MARKET WILL DEVELOP.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PRICE TO UNDERWRITING DISCOUNT PROCEEDS TO
PUBLIC(1) AND COMMISSIONS(2) COMPANY(3)
Per Debenture 100% 6% 94%
Total $3,000,000 $180,000 $2,820,000
(1) Each Debenture will be offered at par with payment for interest accruing
from October 18, 1996 or, with respect to Debentures sold after a quarterly
interest payment date, the most recent quarterly interest payment date.
Lundgren is not required to sell any minimum aggregate principal amount of
Debentures. See "Underwriting."
(2) Lundgren has granted the Underwriters the exclusive right to sell the
Debentures on a "best efforts" basis for a period of six months, subject to
termination or extension in certain circumstances. In addition to the
Underwriting Discount and Commissions of 6%, the Underwriters will receive
an underwriting management fee equal to 3% of all Debentures sold. Lundgren
has also agreed to pay certain costs, fees and accountable expenses of the
Underwriters, estimated at $53,000, and has agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933. See "Underwriting."
(3) The amount of the proceeds to Lundgren is determined by assuming all of the
Debentures offered hereby are sold and by deducting the Underwriting
Discount and Commissions ($180,000). After deduction of expenses of this
offering payable by Lundgren, estimated at $299,000, which includes (i) the
3% management fee ($90,000), and (ii) the expenses of the Underwriters,
estimated at $53,000 (as referred to in Note 2 above), the net proceeds to
Lundgren will be approximately $2,521,000.
MILLER & SCHROEDER FINANCIAL, INC. OFFERMAN & COMPANY
The date of this Prospectus is October 18, 1996.
[PHOTO]
Stone accents this two-story at Bay Pointe
[PHOTO]
Traditionally-styled two-story at Churchill Farms
[PHOTO]
The charm of arched windows at Trappers Pass
[PHOTO]
A classic two-story design in Sweetwater at Near Mountain
[PHOTO]
Prairie-influences in this two-story at The Summit
[PHOTO]
An award-winning model home at Foxberry Farms
[PHOTO]
A mid-priced home at Dufferin Park
AVAILABLE INFORMATION
Lundgren intends to furnish recordholders of its Debentures with a copy of
the Company's annual report on Form 10-K. In addition, any of the Company's
filings on Form 10-Q and Form 8-K with the Securities and Exchange Commission
will be available upon written request.
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION
AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Lundgren Bros. Construction, Inc. ("Lundgren" or the "Company") is engaged in
the interrelated activities of land development and the design, construction and
sale of detached single family homes in the Minneapolis and St. Paul, Minnesota
(the "Twin Cities") metropolitan area. The Company maintains an inventory of
potential home lots by controlling undeveloped land through options, contingent
purchase agreements, joint ventures, partnerships and other contractual
relationships with the landowners (referred to herein collectively as "Land
Acquisition Agreements"). Upon obtaining the appropriate regulatory approvals
and zoning changes, and dependent on market conditions, the Company develops the
undeveloped land into finished lots for residential subdivisions, primarily for
its own use in the sale of single family homes. The Company also periodically
options or purchases finished lots from other developers.
Since its incorporation in 1970, the Company and its affiliates have developed
2,549 lots. On August 1, 1996, the Company controlled 16 parcels of land under
Land Acquisition Agreements for future development of an estimated 1,848 lots.
The Company's land development strategy is to control prime property for
residential development two to five years in advance of actual development,
using Land Acquisition Agreements structured to require limited initial
investment by the Company. Management believes that this strategy minimizes the
risk of the Company owning too much land at any one time, but allows the Company
to control key sites for future development. See "Business -- Land Acquisition."
Since inception, the Company has built and sold over 2,330 single family homes.
The Company sells its homes primarily through its own staff of sales personnel,
although it also utilizes local realtors. In 1995, the Company was the fourth
largest builder in the Twin Cities metropolitan area, based on total dollar
volume of building permits issued, and is the only one of the top five builders
in the Twin Cities metropolitan area whose stock is privately held.
The Company builds custom homes and homes from standard plans at prices
typically ranging from $190,000 to $700,000 for both the house and lot, with an
average selling price of approximately $336,000 for the first six months of
1996. The Company also designs and builds residential remodeling projects
through its remodeling division. Additionally, Lundgren's wholly-owned
subsidiary, Brush Masters, Inc. ("Brush Masters"), provides painting and
staining services to the Company, as well as to other residential building
contractors in the Twin Cities metropolitan area.
The Company closed the sales of 80 homes in the first six months of 1996 and as
of June 30, 1996, had purchase agreements for the sale of 86 homes, representing
approximately $29.8 million in sales. In the first six months of 1995, the
Company had closed the sales of 77 homes and as of June 30, 1995, had contracts
for the sale of 86 homes, representing approximately $26.4 million in sales. The
Company markets its homes to middle and upper income professionals and
executives. The Company's marketing efforts emphasize the community atmosphere
of its residential subdivisions and those characteristics it believes are
distinctive to Lundgren-built homes: desirable designs, quality construction,
competitive prices and special customer service, before, during and after the
sale of a home.
The Company was incorporated in Minnesota in October 1970. Its principal offices
are located at 935 East Wayzata Boulevard, Wayzata, Minnesota 55391, and its
telephone number is (612) 473-1231.
THE OFFERING
DEBENTURES $3,000,000 aggregate principal amount
of Senior Subordinated Debentures,
Series 11%, due October 1, 2004. The
Debentures will be issued pursuant to
an Indenture (the "Indenture")
between the Company and National City
Bank (the "Trustee"). The Debentures
will be issuable only in fully
registered form in denominations of
$1,000 each or any integral multiple
thereof. A minimum purchase of $2,000
is required. See "Description of
Debentures."
INTEREST RATE The Debentures will bear interest at
the rate of 11% per annum.
INTEREST PAYMENT DATES Interest will be payable quarterly on
January 1, April 1, July 1 and
October 1 of each year, commencing as
to each Debenture on the first of
such dates to occur after issuance of
such Debenture. Interest on the
Debentures will accrue from October
18, 1996 or, with respect to
Debentures sold after a quarterly
interest payment date, the most
recent quarterly interest payment
date.
REDEMPTION OF
DEBENTURES Lundgren, at its option, may redeem
all or a portion of the Debentures at
any time beginning October 31, 1998 upon at
least 30 days' written notice at the
redemption prices set forth herein. There is
no sinking fund requiring payments of
principal prior to maturity. In addition,
the Debentures are subject to mandatory
redemption in certain circumstances,
including a Change of Control, as defined in
the Indenture.
REPAYMENT UPON DEATH Under certain circumstances, Lundgren
will repay up to $25,000 in aggregate
principal amount of Debentures at par
upon the death of a Debentureholder.
The Company's obligation to make such
repayment will be limited to an
aggregate maximum of $200,000 per
calendar year. See "Description of
Debentures."
SUBORDINATION AND SENIORITY The Debentures are subordinated to
all of Lundgren's existing and future
Senior Indebtedness. Lundgren's
Senior Indebtedness aggregated
approximately $32.2 million at June
30, 1996. The Debentures will rank
PARI PASSU with all Parity
Indebtedness of the Company,
including its Senior Subordinated
Debentures, Series 10%, due 2003 (the
"1993 Subordinated Debentures"), and
will be senior in right of payment to
any Subordinated Indebtedness.
Subject to a maximum debt-to-equity
ratio covenant, Lundgren is not
prohibited from incurring, and will
likely incur, additional Senior
Indebtedness during the term of the
Debentures. Capitalized terms used in
this paragraph are defined in the
Indenture pursuant to which the
Debentures will be issued. See
"Description of Debentures."
USE OF PROCEEDS The Company intends to use the net
proceeds from the sale of the
Debentures, estimated to be
approximately $2,521,000 assuming all
of the Debentures are sold, for
general corporate purposes, including
land acquisition, land development,
construction of homes and working
capital. See "Use of Proceeds."
RISK FACTORS
An investment in the Debentures involves certain risks. See "Risk Factors" for a
discussion of factors that investors should carefully consider before purchasing
any of the Debentures offered hereby.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands)
The following summary of the Company's consolidated financial information should
be read in conjunction with the Consolidated Financial Statements, including the
Notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------
1993 1994 1995 1995 1996
------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA; RATIO OF
EARNINGS TO FIXED CHARGES:
Revenues $61,884 $78,992 $69,660 $27,209 $29,932
Gross profit 9,399 12,068 10,556 3,842 4,367
Operating income 2,834 3,306 2,358 438 1,045
Other income (expense), net (728) (716) (1,618) (864) (862)
Loss from discontinued operations -- (349) -- -- --
Net income 1,246 1,198 1,185 (1) 509 (1) 110
Ratio of earnings to fixed
charges(2) 2.3 1.9 1.2 .7 (3) 1.1
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
DECEMBER 31, -------------------------
1995 ACTUAL AS ADJUSTED(4)
------------ ------- --------------
<S> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Inventories $34,166 $38,798 $38,798
Total assets 47,763 52,307 55,307
Total liabilities (excluding
Debentures)(5) 41,378 45,812 45,812
Debentures -- -- 3,000
Stockholders' equity 6,385 6,495 6,495
</TABLE>
- -----------------------
(1) Includes a $763,000 increase due to the cumulative effect on prior years of
a change in accounting method, net of income taxes. See Note 3 to the
Consolidated Financial Statements.
(2) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes and fixed charges, less capitalized interest,
plus the interest component included in cost of sales. Fixed charges
consist of interest expensed and capitalized and amortization of debt
service costs. The interest factor implicit in rent expense is not
significant.
(3) The deficiency of earnings to fixed charges amounted to $496,000.
(4) Adjusted to give effect to the sale of all of the Debentures offered
hereby, and the application of the net proceeds as of June 30, 1996. See
"Use of Proceeds" and "Underwriting."
(5) Includes 1993 Subordinated Debentures.
RISK FACTORS
THE DEBENTURES INVOLVE A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CONSIDER
CAREFULLY THE FOLLOWING RISK FACTORS BEFORE PURCHASING THE DEBENTURES. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. ACTUAL RESULTS COULD DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT, IN PART, OF THE RISK FACTORS SET FORTH
BELOW. IN CONNECTION WITH THE FORWARD-LOOKING STATEMENTS WHICH APPEAR HEREIN,
PROSPECTIVE INVESTORS SHOULD BE AWARE OF THE FOLLOWING RISK FACTORS AND SHOULD
REVIEW CAREFULLY THE INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
CYCLICAL ECONOMIC CONDITIONS AND FLUCTUATIONS IN OPERATING RESULTS
The Company's operations have experienced substantial fluctuations from period
to period as a consequence of various factors not under the Company's control.
The Company expects that such factors will cause operating results to fluctuate
from period to period in the future. These factors include, among others,
general economic conditions, consumer confidence, housing demand, interest rates
and the availability of credit. The home building industry is cyclical in nature
and there is no guarantee that such factors will be favorable to the Company in
the future. Moreover, all of the Company's residential developments are within
the Twin Cities metropolitan area. Consequently, events such as adverse changes
in the local/regional residential real estate market or in regional economic
conditions, or acts of nature, could have an adverse affect on the Company's
business.
Fluctuations from period to period also result from the mix of lots and homes
sold. Profits on the sale of a home and lot will vary depending on the terms of
the lot acquisition, the location, the type of lot, the design of the home built
and market conditions at the time of the sale. In addition, home builders are
subject to various risks which may cause fluctuations in operating results such
as competitive over-building, shortage of desirable land with municipal
services, availability and cost of materials and labor, construction delays,
cost overruns, weather conditions, government regulation, availability of
adequate financing, increases in long-term mortgage interest rates and increases
in real estate taxes and other governmental fees. The Company anticipates that
such fluctuations will continue in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
CONTINUING NEED TO ACQUIRE LAND FOR FUTURE DEVELOPMENT
The Company believes that to be competitive it must control undeveloped land a
number of years before it actually intends to develop and market finished lots.
In pursuing this strategy, the Company may acquire excessive amounts of land.
Therefore, to reduce the risks associated with acquiring undeveloped land for
future development, the Company attempts to acquire land through Land
Acquisition Agreements structured to allow the Company to control undeveloped
land with a minimum investment while providing it time both to pursue
governmental approvals for land development and to complete marketing and
economic feasibility studies on the site prior to actual purchase. However,
competition for land continues to increase, and there can be no assurance that
the Company will be able to continue acquiring land through such favorable
arrangements in the future. If such favorable arrangements are not available,
the Company may be required to expend more cash and bear more risk in order to
gain and maintain control of undeveloped land. See "Business -- Land
Acquisition."
In pursuing its land development activities, the Company may expend significant
funds to acquire and maintain control of undeveloped land and to apply for
regulatory approvals prior to determining whether it will actually develop the
land. See "Business -- Operating Strategy" and "Business -- Land Development."
SUBSTANTIAL LEVERAGE, RELIANCE ON FINANCING AND NO ASSURANCE OF AVAILABILITY OF
CREDIT
The land development and home building industry is highly leveraged. The Company
incurs substantial indebtedness to finance its land development and home
building activities. The ratio of Funded Debt (defined in the Indenture to
include generally all indebtedness of the Company except certain unsecured
subordinated borrowings from the Company's shareholders) to Tangible Net Worth
at June 30, 1996 was 5.5 to 1 and would have been 6.5 to 1, at June 30, 1996 on
a pro forma basis, giving effect to the sale of all of the Debentures. The
Indenture contains a covenant limiting the Company's ratio of Funded Debt to
Tangible Net Worth to 7 to 1. See "Description of Debentures." At June 30, 1996,
the Company had approximately $35.1 million of aggregate Funded Debt, including
approximately $32.2 million in Senior Indebtedness. The Company is, and expects
to remain, dependent upon its continued ability to fund operations through
borrowings from institutional and specialized industry lenders and banks.
Although Lundgren has been able to obtain financing for its activities in the
past, there can be no assurance that continued financing for land acquisition
and development will be available to the Company or, if available, will be on
acceptable terms. Historically, the Company's principal shareholders have
personally guaranteed most of the Company's borrowings; they are not, however,
guaranteeing the Debentures. Additionally, the shareholders are not obligated to
guarantee any of the Company's future borrowings and there is no assurance that
they will do so. The absence of personal guarantees could adversely affect the
willingness of lenders to finance the operations of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SUBORDINATION
The Debentures are subordinated and junior in right of payment to Lundgren's
borrowings under its Demand Discretionary Revolving Credit Agreement with
Norwest Bank Minnesota, National Association (the "Norwest Credit Agreement"),
its Revolving Credit Line Agreement with Builders Development & Finance, Inc.
(the "BDF Credit Agreement") and its Letter Agreement with First Bank National
Association (the "First Bank Credit Agreement"), as well as to any other Senior
Indebtedness, as defined in the Indenture. The Norwest Credit Agreement, the BDF
Credit Agreement and the First Bank Credit Agreement are referred to
collectively herein as the "Credit Agreements." In addition, Lundgren incurs
other Senior Indebtedness, such as loans to finance the development of its
properties and loans to finance construction of its homes. Development loans are
generally collateralized by a particular development project only and are
generally personally guaranteed by the Company's shareholders. At June 30, 1996,
Lundgren had 14 such development loans outstanding in an aggregate principal
amount of approximately $6.5 million. Construction loans generally are secured
by a mortgage on the home and lot they are financing and generally are
personally guaranteed by the shareholders. Historically, the Company has had
approximately 60 to 100 construction loans outstanding at a given time. At June
30, 1996, the Company had 90 construction loans outstanding in an aggregate
principal amount of approximately $12.6 million. Lundgren's obligations under
its Senior Indebtedness are secured by substantially all of the Company's
assets. As of June 30, 1996, Lundgren and its subsidiaries, on a consolidated
basis, had Senior Indebtedness outstanding equal to approximately $32.2 million,
including the present value of capitalized lease obligations on Lundgren's
office lease. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
In the event of the dissolution, winding up, liquidation or reorganization of
Lundgren, the holders of the Debentures will not be entitled to receive any
payment until the holders of Senior Indebtedness are paid in full and will
thereafter share equally with holders of Parity Indebtedness. Upon the
occurrence of any payment default on Senior Indebtedness, no payment may be made
on the Debentures until such default has been cured or waived. Upon the
occurrence of any other default on Senior Indebtedness permitting the
acceleration of the maturity thereof, and after notice of such default to the
Trustee and Lundgren, no payment may be made on the Debentures until after the
time such Senior Indebtedness default is cured or waived. See "Description of
Debentures."
LACK OF COLLATERAL FOR THE DEBENTURES
Substantially all of the assets of the Company are pledged as collateral for the
Company's obligations under its Senior Indebtedness. Because the obligations of
the Company under the Debentures are not secured by any collateral, the holders
of the Debentures are dependent upon the successful operations of the Company to
service the interest and principal with respect to the Debentures. There can be
no assurance that the Company will continue to operate profitably or otherwise
continue to generate cash at a level which permits the Debentures to be serviced
and repaid as scheduled. See "Description of Debentures."
LACK OF SINKING FUND; SUBSTANTIAL PRINCIPAL PAYMENTS FOR THE DEBENTURES
The Debentures are not subject to any sinking fund payments and are redeemable
prior to stated maturity only at Lundgren's option, except for the holders'
limited right of repayment upon death and on other circumstances, such as a
Change of Control, pursuant to the terms of the Indenture. If Lundgren does not
have sufficient funds to pay the Debentures at maturity, it would have to
refinance the Debentures at that time. There can be no assurance that Lundgren
would be able to obtain such financing. See "Description of Debentures."
EXTENSIVE REGULATIONS AND ENVIRONMENTAL FACTORS
The home building industry is subject to extensive and complex regulations. The
Company and its unaffiliated subcontractors must comply with a variety of
federal, state and local laws and regulations which address zoning and density
requirements, design and building permits, building materials, environmental and
health issues, advertising and consumer credit, as well as other regulations in
connection with its development, home building and sales activities. Expansion
of regulations has increased the time required to obtain approvals necessary to
begin home construction and has prolonged the time between the initial control
of land, commencement of development and completion of construction.
Environmental laws, such as laws regulating the development of Minnesota
wetlands, may result in additional delays, may cause the Company to incur
substantial compliance and other costs, and may prohibit or severely restrict
home building activity in certain environmentally sensitive areas. See "Business
- -- Governmental Regulation."
In addition to regulatory matters, the Company is subject to potential
liabilities in connection with its construction activities and the materials
used in construction, including personal injury and worker's compensation
claims. While the Company currently insures against such risks and believes that
its insurance is currently adequate to protect against such risks, there can be
no assurance that such insurance will continue to be adequate in the future or
that the Company will be able to obtain such insurance in the future.
RELIANCE ON KEY PERSONNEL AND CLOSELY-HELD BUSINESS
The Company relies upon certain key management employees, including its
President, Peter Pflaum, the loss of whom could adversely affect the Company.
The Company has agreed to provide, for the benefit of the Debentureholders
during the term of the Debentures, a key person life insurance policy on the
life of Peter Pflaum in an amount equal to the lesser of $1,000,000 or the
maximum coverage available for an annual premium of $7,500. In addition, the
Company maintains a separate key person term life insurance policy on Mr. Pflaum
which has been assigned to a senior lender as collateral for the Company's
working capital line of credit under the Norwest Credit Agreement. The Company
believes that its future success will depend on its ability to retain key
members of management and to attract experienced management in the future. There
can be no assurance that it will be able to do so. See "Management."
Purchasers of the Debentures will not have a voice in the selection of
management of Lundgren nor in decisions affecting Lundgren's operations. By
investing in a closely-held business such as Lundgren, purchasers of the
Debentures will be relying on management to maintain a balance between the
interests of the shareholders and the interests of the Debentureholders.
Although management believes it has balanced these interests in the past, there
can be no assurance that management will be able to continue to balance these
competing interests to the Debentureholders' satisfaction.
COMPETITION
Lundgren operates in a highly competitive environment. Lundgren's competition in
land development principally consists of larger home builders, which develop
land for their own account, and land developers, which specialize in developing
for small builders. The home building business is highly fragmented and includes
numerous national, regional and local home builders. In recent years, several
national builders have entered the Twin Cities metropolitan area, thereby
increasing competition. Additionally, some of the Company's competitors have
substantially greater financial resources than the Company. See "Business --
Operating Strategy" and "Business -- Home Building and Home Sales."
NO PUBLIC MARKET FOR THE DEBENTURES
There is no existing public market for the Debentures. There are no market
makers for the Debentures. There can be no assurance that any market will
develop or, if a market does develop, that it will continue until maturity of
the Debentures. Any market that may develop is expected to be limited. There can
be no assurance as to the liquidity of any market that may develop for the
Debentures, the ability of the holders of the Debentures to sell their
Debentures or the prices at which holders of the Debentures would be able to
sell their Debentures. To the extent there is any market for the Debentures,
whether the Debentures will trade at prices that are higher or lower than their
initial market value depends on many factors, including, among other things,
prevailing interest rates in the market for similar securities. Assuming there
is a market for the Debentures, the holders of the Debentures would bear the
risk that a general increase in the level of interest rates could adversely
affect the level at which the Debentures would trade. Lundgren does not intend
to apply for listing of the Debentures on any securities exchange or to seek to
have the Debentures authorized for trading on Nasdaq.
USE OF PROCEEDS
Assuming that all $3,000,000 principal amount of Debentures offered hereby are
sold, the net cash proceeds available to Lundgren will be approximately
$2,521,000 after deducting all estimated offering expenses. The Company intends
to use the proceeds for general corporate purposes, including land acquisition
and land development, construction of houses and working capital.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company at
June 30, 1996, and as adjusted to reflect the issuance of $3,000,000 principal
amount of Debentures offered hereby.
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------
(DOLLARS IN THOUSANDS)
ACTUAL AS ADJUSTED(1)
------ --------------
<S> <C> <C>
Debt due within one year(2) $22,657 $22,657
======= =======
Debt due after one year (excluding
debentures)(2) $ 9,522 $ 9,522
1993 Subordinated Debentures 2,951 2,951
Debentures -- 3,000
Stockholders' equity:
Common stock, no par value;
authorized, 12,000 shares;
issued and outstanding, 594 shares
voting and 10,031 shares non-voting 99 99
Retained earnings 6,396 6,396
----- -----
Total stockholders' equity 6,495 6,495
----- -----
Total capitalization $18,968 $21,968
======= =======
</TABLE>
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(1) Assumes the sale of all $3.0 million principal amount of Debentures offered
hereby and reflects estimated offering expenses of $479,000 (including
underwriting commissions and underwriting management fees) which the
Company intends to capitalize and amortize over the term of the Debentures.
(2) See Notes 8 and 9 to the Consolidated Financial Statements for additional
information relating to the Company's debt obligations.
DIVIDEND POLICY
Historically, the Company has not paid dividends on its common stock. In
addition, the terms of the Indenture restrict the payment of dividends. See
"Description of Debentures."
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of and for
the years ended December 31, 1991, 1992, 1993, 1994 and 1995 are derived from
the audited consolidated financial statements of the Company, which have been
audited by Coopers & Lybrand L.L.P., independent accountants, whose report on
such financial statements as of December 31, 1994 and 1995 and for the years
1993, 1994 and 1995 is included herein. The selected consolidated financial data
for the six months ended June 30, 1995 and 1996 are unaudited but, in the
opinion of management, all adjustments necessary for a fair presentation have
been included and are of a normal recurring nature. The consolidated statement
of income data, as they relate to the three years ended December 31, 1995, and
the selected consolidated balance sheet data, as of December 31, 1994 and 1995,
should be read in conjunction with the Consolidated Financial Statements,
including the Notes thereto, set forth elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which follows. The results of operations for the six months ended
June 30, 1996 may not be indicative of the results to be expected for the year
ending December 31, 1996.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND RATIO AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF INCOME DATA:
Revenues(1) $23,117 $42,282 $61,884 $78,992 $69,660 $27,209 $29,932
Cost of revenues 19,116 35,069 52,485 66,924 59,104 23,367 25,565
------- ------- ------- ------- ------- ------- -------
Gross profit 4,001 7,213 9,399 12,068 10,556 3,842 4,367
Operating expenses 2,972 5,402 6,565 8,762 8,198 3,404 3,322
------- ------- ------- ------- ------- ------- -------
Operating income 1,029 1,811 2,834 3,306 2,358 438 1,045
Other income (expense), net (630) (401) (728) (716) (1,618) (864) (862)
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes 399 1,410 2,106 2,590 740 (426) 183
Income tax provision (benefit) for
continuing operations 142 555 860 1,043 318 (172) 73
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations 257 855 1,246 1,547 422 (254) 110
Cumulative effect on prior years of
change in accounting method(2) -- -- -- -- 763 763 --
Loss from discontinued operations -- -- -- (349) -- -- --
------- ------- ------- ------- ------- ------- -------
Net income $ 257 $ 855 $ 1,246 $ 1,198 $ 1,185 $ 509 $ 110
======= ======= ======= ======= ======= ======= =======
Income (loss) per share:
Continuing operations $ 24 $ 80 $ 117 $ 146 $ 40 $ (24) $ 10
Cumulative effect of change in
accounting method -- -- -- -- 72 72 --
Discontinued operations -- -- -- (33) -- -- --
------- ------- ------- ------- ------- ------- -------
Net income per Share $ 24 $ 80 $ 117 $ 113 $ 112 $ 48 $ 10
======= ======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges(3) 1.1 2.0 2.3 1.9 1.2 .7(4) 1.1
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, JUNE 30,
---------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Inventories $11,512 $14,126 $23,903 $30,246 $34,166 $31,598 $38,798
Total assets 15,647 20,712 35,825 42,619 47,763 47,259 52,307
Debt due after one year 1,849 1,356 7,219 10,664 10,766 11,578 12,473
Total liabilities 13,746 17,956 31,823 37,419 41,378 41,550 45,812
Stockholders' equity 1,901 2,756 4,002 5,200 6,385 5,709 6,495
</TABLE>
- -----------------------
(1) Revenues from lot and home sales are recognized on the closing date of the
property sale. See Note 1 of Notes to Consolidated Financial Statements.
(2) Net of income taxes of $527,000.
(3) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes and fixed charges, less capitalized interest,
plus the interest component included in cost of sales. Fixed charges
consist of interest expensed and capitalized and amortization of debt
service costs. The interest factor implicit in rent expense is not
significant.
(4) The deficiency of earnings to fixed charges amounted to $496,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the Company's consolidated financial condition and
results of operations as of December 31, 1994 and 1995 and June 30, 1996 and for
the years ended December 31, 1993, 1994, and 1995 and for the six months ended
June 30, 1995 and 1996 should be read in conjunction with the Company's
Consolidated Financial Statements, including the Notes thereto, and other
information presented elsewhere in this Prospectus.
GENERAL
During 1993 and 1995, the Company operated in two business segments: new homes
and remodeling. During 1994, the Company operated in three business segments:
new homes, remodeling and patio enclosures. The patio enclosure segment was
started and discontinued in 1994. The new homes segment includes land
acquisition and development, home building and home sales, inventory management
and painting and staining services. The remodeling segment consists of home
remodeling design and construction services.
The Company's revenues are derived from its interrelated activities of land
development and home building, providing painting and staining services and home
remodeling. When a home sale is closed, the revenues are allocated both to the
home (home construction revenues) and to the lot on which the home is
constructed (lot revenues). In the first six months of 1996, home construction
and lot revenues were $26.9 million or 90% of total revenues. Revenues from
painting and staining (excluding those to the Company's new home construction
operations) were $1.3 million or 4% of total revenues and revenues from
remodeling were $1.8 million or 6% of total revenues for the first six months of
1996. The 1996 percentages are consistent with the percentages for 1995. The
Company sells finished lots to other builders when the Company has excess
finished lot inventory and when a subdivision is nearly sold out. In the first
six months of 1996, sales of lots to other builders accounted for less than 1%
of total revenues. The Company does not anticipate that sales of lots to other
builders will be a significant portion of the Company's business in the future.
The Company's gross profit on home construction revenues and lot revenues for
the first six months of 1996 was $3.8 million or 87% of the total gross profit.
Of the $3.8 million gross profit, $2.5 million was derived from the sale of
homes and $1.3 million from the sale of lots on which such homes were built. The
gross profit margins experienced by the Company are historically higher on lot
revenues than on home construction revenues when the lot and house are sold
together. In the first six months of 1996, the gross profit margin on home
construction revenues was 12%, while the gross profit margin on lot revenues was
22%. The gross profit margin on homes varies significantly from development to
development. The Company's painting and staining business had gross profit
margins (excluding those to the Company's new home construction operations) of
22% in the first six months of 1996. The Company's remodeling division had gross
profit margins of 16% in the first six months of 1996.
The Company generally enters into a purchase agreement with a potential home
buyer prior to commencing construction of a home, except where the Company is
building a house to be held in inventory or to be used as a model home. The
Company does not recognize a sale for accounting purposes until construction is
completed and the sale is actually closed. The time period from execution of a
purchase agreement with a home buyer to the closing of the home sale generally
ranges from three to six months. This time period varies due to many factors,
including the purchaser's mortgage approval process, the status of the home's
construction when the purchase agreement is executed and the removal of the
contingencies, if any, contained in the purchase agreement. At June 30, 1996,
the Company had signed purchase agreements for the sale of 86 homes. The Company
considers these 86 homes to constitute its backlog. The Company's business is
significantly affected by local and national general economic conditions, in
particular by mortgage interest rates and the availability of mortgage
financing. The Company believes that trends in general economic conditions,
mortgage interest rates and consumer confidence levels in the Twin Cities
metropolitan area are comparable to the first six months of 1995. Any
substantial increase in mortgage interest rates or decrease in consumer
confidence levels could cause a decrease in future home sales. Such a decrease
in sales would be offset in part by decreased development and construction costs
and overhead.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The following is a summary of the financial information relating to the
Company's two continuing business segments:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------- -------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales
New homes $58,955 $75,814 $65,217 $25,094 $28,177
Remodeling 2,929 3,178 4,443 2,115 1,755
------- ------- ------- ------- -------
$61,884 $78,992 $69,660 $27,209 $29,932
======= ======= ======= ======= =======
Gross Profit
New Homes $ 8,722 $11,810 $ 9,626 $ 3,483 $ 4,091
Remodeling 677 258 930 359 276
------- ------- ------- ------- -------
$ 9,399 $12,068 $10,556 $ 3,842 $ 4,367
======= ======= ======= ======= =======
Operating Income (loss)
New homes $ 2,729 $ 4,013 $ 2,381 $ 577 $ 1,280
Remodeling 105 (707) (23) (139) (235)
------- ------- ------- ------- -------
$ 2,834 $ 3,306 $ 2,358 $ 438 $ 1,045
======= ======= ======= ======= =======
Gross Margin
New Homes 14.8% 15.6% 14.8% 13.9% 14.5%
Remodeling 23.1% 8.1% 20.9% 17.0% 15.7%
Operating Margin
New Homes 4.6% 5.3% 3.7% 2.3% 4.5%
Remodeling 3.6% (22.2)% .5% (6.6)% (13.4)%
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
NEW HOMES
Revenues increased $3.1 million or 12.3% for the six months ended June 30, 1996,
compared to the same period in 1995. The Company closed on sales of 80 homes in
the six months ended June 30, 1996, compared to 77 closings in the same period
in 1995. The average selling price of homes closed increased by 8.0% for the six
months ended June 30, 1996, from the average selling price of homes closed for
the same period in 1995. The Company believes that the increase in homes closed
was due to the timing of the removal of customer purchase contingencies and
subsequent house starts in 1996 compared to 1995. The increase in average
selling price is due to general price increases as a result of inflation and
changes in the mix of homes closed in 1996 compared to 1995.
Gross profit margin for the new homes segment increased to 14.5% for the six
months ended June 30, 1996, compared to 13.9% for the same period in 1995. The
Company believes that this increase in gross profit margin is due to changes in
the location of the home developments, improvements to the Company's cost
controls, and an increase in the mix of homes sold on land developed by the
Company versus lots purchased from other developers.
Operating expenses for the new homes segment (which include selling, general and
administrative expenses) decreased by $95,000 for the six months ended June 30,
1996, compared to the same period in 1995. As a percentage of total new home
revenues, these expenses decreased to 10.0% for the six months ended June 30,
1996, compared to 11.6% for the same period in 1995. The decrease is mainly due
to the write-off, in 1995, of costs incurred on abandoned land acquisition
projects. These reduced costs were partially offset with an increase in
personnel in 1996.
REMODELING
Operating loss for the remodeling segment increased to $235,000 in the six
months ended June 30, 1996, from $139,000 for the same period in 1995. This
increase is due to a smaller number of closings in 1996 compared to 1995 as a
result of an increased backlog in production.
OTHER INCOME (EXPENSE), NET
Interest expense for the six months ended June 30, 1996 increased $99,000 or
11.1% from the same period in 1995. This increase is mainly due to increased
borrowings for additional inventories in 1996. Other income (expense), net
increased $101,000 in the six months ended June 30, 1996 from the same period in
1995. The increase is mainly due to a gain on the sale of an investment in a
land development partnership.
NET INCOME (LOSS)
Net income for the six months ended June 30, 1996 was $110,000, a decrease of
$399,000 from $509,000 of net income for the same period in 1995. This decrease
is mainly due to the 1995 change in accounting for land acquisition and
development costs of $763,000, which is partially offset by a gain on the sale
of an investment in a land development partnership and improved operating income
from new home sales.
1995 COMPARED TO 1994
NEW HOMES
Revenues for 1995 decreased $10.6 million or 14.0% from 1994. The Company closed
on sales of 202 homes in 1995 as compared to 247 home closings in 1994. The
Company believes that the decrease in homes closed was due to decreased consumer
demand for new residential housing resulting from higher long-term mortgage
interest rates which increased throughout 1994 and early 1995. Although these
interest rates decreased slightly in the third and fourth quarters of 1995, the
Company had not yet realized the impact of the decrease because revenues are
generally the result of home sale purchase agreements written three to six
months earlier in the year. The average selling price of homes closed in 1995
increased by 4.7% compared to the average selling price of homes closed in the
same period in 1994. This increase is due to changes in the mix of homes closed
in 1995 as compared to the same period in 1994.
Gross profit decreased by $2.2 million or 18.5% from 1994. The Company's gross
profit margin in its New Homes segment in 1995 was 14.8% as compared to 15.6% in
1994. The decrease in gross profit is due to decreased sales volume and
increases in house construction costs that could not be passed on to the buyer.
Operating expenses for the new homes segment include selling, general and
administrative expenses. These expenses decreased $552,000 or 7.1% as compared
to 1994. As a percentage of total revenues, these expenses increased to 11.1% in
1995 compared to 10.3% in 1994. The dollar decrease in operating expenses in
1995 is mainly due to a decrease in land option fees and abandoned projects
expensed, a decrease in discretionary employee bonuses, and decreases in general
advertising costs. These expenses were partially offset by an increase in design
expenses as a result of the Company's efforts to further refine home plans, and
an increase in professional and consulting fees incurred in restructuring the
Company's divisions and management.
REMODELING
The remodeling segment recognized an operating loss of $23,000 in 1995 compared
to an operating loss of $707,000 in 1994. This improvement is attributed to an
aggressive effort by the Company to increase sales volume and improve cost
controls in 1995. The Company has focused its efforts to obtain higher profit
margin jobs, keep personnel levels at a minimum, and has reduced sales and
marketing costs as the Company gains experience in its local remodeling markets.
OTHER INCOME (EXPENSE), NET
Interest expense increased to $1.7 million or 80.5% compared to $942,000 in
1994. This increase is primarily due to an increase in borrowings for an
increase in developed land inventories and other operating activities combined
with an increase in the Company's average interest rates in 1995.
Other income (expense), net decreased $110,000 or 48.7% compared with $226,000
in 1994 due primarily to a gain on the sale in March 1994 of forward commitments
for mortgage funds which the Company had purchased in January 1994. The Company
purchases mortgage commitments in times of anticipated rising interest rates to
ensure affordable loans are available to its home buyers. The Company sometimes
sells excess portions of the commitments. Fees paid for these commitments are
charged to operations over the term of the commitments.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations decreased to $422,000 or 72.7% in 1995 from
$1.5 million in 1994. This decrease is primarily due to a decline in new home
sales volume and an increase in interest expense.
NET INCOME
Net income remained constant at $1.2 million in 1995 and 1994. However, included
in net income is the cumulative effect of a change in accounting for land
acquisition and development costs in 1995 and a $349,000 loss in 1994 from
discontinued operations of the Company's patio enclosure business.
1994 COMPARED TO 1993
NEW HOMES
Revenues for 1994 increased $16.9 million or 28.6% from 1993. The Company closed
on sales of 247 homes in 1994 as compared to 216 closings in 1993. The Company
believes that the increase in homes closed was due to a combination of increased
consumer demand for new residential housing resulting from favorable long-term
mortgage interest rates in 1993 and early 1994 and expansion of the Company's
available land developments in new subdivisions. The average selling price of
homes closed in 1994 increased by 12.1% compared to the average selling price of
homes closed in the same period in 1993. This increase is due to favorable
changes in the mix of homes closed in 1994 as compared to the same period in
1993.
Gross profit increased by $3.1 million or 35.4% from 1993. The Company's gross
profit margin in 1994 was 15.6% as compared to 14.8% in 1993. The increase in
gross profit is due to increased sales volume and favorable changes in the mix
of homes closed in 1994 as compared to the same period in 1993.
Operating expenses increased by $1.8 million or 30.1% from 1993. As a percentage
of total revenues, these expenses remained constant at 10.3% in 1994 as compared
to 10.2% in 1993. The dollar increase is due to model homes and advertising
costs associated with new subdivisions, increased personnel costs through the
hiring of additional personnel during 1994 and an increase in land option fees
and abandoned projects expensed in 1994, offset by a $418,000 decrease in
discretionary officer bonuses.
REMODELING
The remodeling segment recognized an operating loss of $707,000 in 1994 compared
with operating income of $105,000 in 1993. This decrease is due to a decrease is
gross profit margins as a result of the Company's change in mix of remodeling
jobs and an increase in production personnel. In addition, during 1994 the
Company incurred additional advertising and administrative costs relating to the
introduction of a new remodeling design center in Wayzata, Minnesota and a
marketing office in St. Paul, Minnesota.
OTHER INCOME (EXPENSE), NET
Interest expense increased $275,000 or 41.2% from 1993. This increase is
primarily due to interest incurred on the Company's 1993 Subordinated Debentures
sold in June and July of 1993, the increase in interest rates in 1994 and
overall increases in the Company's general borrowings during 1994.
Other income (expense), net increased $287,000 from 1993. The increase is mainly
due to a gain on the sale of forward commitments for mortgage funds which the
Company had purchased in 1994.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations increased to $1.5 million or 24.2% in 1994
from $1.2 million in 1993. This increase in income from continuing operations is
mainly due to increased sales volume in 1994.
NET INCOME
Net income remained constant at $1.2 million in 1994 and 1993. Increases in net
income due to increased sales volume in 1994 were offset by the $349,000 loss
from discontinued operations of the Company's patio enclosure business.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995
Cash flows used in operating activities were $6.3 million for the six months
ended June 30, 1996, a decrease of approximately $1.2 million from the $7.5
million used in the same period in 1995. During the six months ended June 30,
1996, cash was used for the seasonal and general increase in inventories of $3.4
million, the related increases in restricted cash of $861,000 and in receivables
of $733,000, reduction of accounts payable of $1.9 million and the decrease in
accrued expenses, principally payment of accrued bonuses of $552,000. These uses
of cash were partially offset in 1996 by an increase in customer deposits of
$1.2 million, with the balance of cash used in operations financed through
increased borrowings on the Company's lines of credit and other debt obligations
of $4.5 million and the reduction of cash and cash equivalents of $1.9 million.
Cash flows used in investing activities were $121,000 for the six months ended
June 30, 1996, a decrease of approximately $221,000 from $342,000 cash used for
the same period in 1995. The decrease was primarily due to proceeds from the
sale of an investment in a land development partnership and a reduction of
expenditures for property and equipment, which were partially offset by an
increase in the cash surrender value of life insurance.
Cash flows provided by financing activities were $4.5 million for the six months
ended June 30, 1996, a decrease of approximately $2.5 million from the $7.0
million for the same period in 1995. The decrease was primarily due to a
reduction in net borrowings on the Company's bank lines of credit as a result of
a decrease in cash used in operating activities and a reduction in cash and cash
equivalents as of June 30, 1996 compared to June 30, 1995.
1995 COMPARED TO 1994
Cash flows used by operating activities were $3.0 million in 1995, a decrease of
$2.4 million from 1994, during which operating activities used $612,000 of cash
flow. This decrease is due to the combination of a $1.1 million reduction of
cash provided by income from continuing operations, an increase of $1.1 million,
relative to 1994, in the amount of cash used to reduce accounts payable, a
$855,000 increase in restricted cash and a $919,000 increase in cash used for
land option and earnest money deposits. These increased cash uses are partially
offset by a reduction of $1.0 million, relative to 1994, of cash used for
prepaid expenses and a $838,000 increase in accrued costs to complete sold
homes.
Cash flows used in investing activities decreased $1.1 million to $551,000 in
1995 from $1.7 million in 1994. The decrease was primarily due to construction
costs incurred in 1994 of a new design center and showroom for the Company's
remodeling division.
Cash flows provided by financing activities increased $1.4 million to $3.2
million in 1995 from $1.8 million in 1994. The increase is primarily due to
increased borrowings on the Company's bank lines of credit to fund operations.
1994 COMPARED TO 1993
Cash flows used by operating activities were $612,000 in 1994, a decrease of
$832,000 from 1993, during which operating activities provided $220,000 of cash
flow. This decrease was primarily due to an increase of $5.2 million, relative
to 1993, in the amount of cash used to reduce accounts payable and cash used by
discontinued operations of $249,000 in 1994. These increased cash uses were
partially offset by a reduction of $4.4 million, relative to 1993, of cash used
for inventory, land options and earnest money deposits and prepaid expenses.
Cash flows used in investing activities increased $829,000 to $1.7 million in
1994 from $856,000 in 1993. The increase was primarily due to construction costs
of a new design center and showroom for the Company's remodeling division,
purchases of new vehicles, and an increase in cash surrender value of life
insurance in 1994.
Cash flows provided by financing activities decreased $1.5 million to $1.8
million in 1994 from $3.2 million in 1993. The decrease is primarily due to
proceeds from the sale of the Company's 1993 Subordinated Debentures, net of
debt issuance costs, of $2.5 million received in June and July 1993, partially
offset by increases in payments on the Company's construction and development
notes.
FINANCING
The Company believes that internally generated funds, amounts available under
its three lines of credit and borrowing arrangements, including the Debentures,
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 evolve with each stage
of the process from land acquisition, to development, to construction of a home,
and to the sale of the home and lot.
The Company also utilizes secured lines of credit to finance its operations. The
Company has approved aggregate credit of $9.1 million, subject to a borrowing
base. At June 30, 1996, the aggregate maximum credit available under the lines
of credit was $8.9 million, of which $5.4 million was utilized and $3.5 million
was available.
The Company's outstanding indebtedness as of June 30, 1996 included $22.7
million due within one year. The Company has historically operated with a
substantial amount of its outstanding indebtedness due within one year and has
historically paid such debt out of earnings or through refinancing, where
applicable. The Company believes that the amounts available under its lines of
credit, borrowing arrangements, 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.
INFLATION AND THE EFFECTS OF CHANGING PRICES
Real estate and residential housing prices are affected by inflation, which can
cause increases in the price of land, raw materials and subcontracted labor.
Historically, the Company has been able to pass most increased costs due to
inflation on to its customers and expects to be able to do so in the future.
Unless such costs are recovered through higher sales prices, gross profit
margins will decrease. Interest rate fluctuations also affect gross profit
margins by increasing or decreasing financing costs for land, construction and
operations. The Company believes that product demand and sales are impacted by
mortgage interest rates. The Company benefited from low mortgage interest rates
from 1993 through early 1994, and then again from mid-year 1995 through early
1996. When mortgage rates begin to increase, customers can respond by locking in
a mortgage rate. If rates continue to rise, customers may be discouraged from
purchasing a home, due to the increased cost, decrease in buying power and
possible difficulty in qualifying for a mortgage. Seasonality is generally not a
significant factor in the Company's operations, in part because homes can be
constructed year-round.
Forward-looking statements herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Certain
important factors, including the risk factors set forth in this Prospectus,
could cause actual results to differ materially from those anticipated by some
of the forward-looking statements. Prospective investors are cautioned that all
forward-looking statements involve risks and uncertainties, including, without
limitation, the risk factors set forth herein.
BUSINESS
GENERAL
Lundgren is engaged in the interrelated activities of land development and the
design, construction and sale of detached single family homes in the Twin Cities
metropolitan area. The Company maintains an inventory of potential home lots by
controlling undeveloped land through Land Acquisition Agreements. Upon obtaining
the appropriate regulatory approvals and zoning changes, and dependent on market
conditions, the Company develops the undeveloped land into finished lots for
residential subdivisions, primarily for its own use. The Company also
periodically options or purchases finished lots from other developers.
Since its incorporation in 1970, the Company and its affiliates have developed
2,549 lots. On August 1, 1996, the Company controlled 16 parcels of land under
Land Acquisition Agreements for future development of an estimated 1,848 lots.
The Company's land development strategy is to control prime property for
residential development two to five years in advance of actual development,
using Land Acquisition Agreements structured to require limited initial
investment by the Company. Management believes that this strategy minimizes the
risk of the Company owning too much land at any one time but allows the Company
to control key sites for future development. See "Business -- Land Acquisition."
Since inception, the Company has built and sold over 2,330 single family homes.
The Company sells its homes primarily through its own staff of sales personnel,
although it also utilizes local realtors. In 1995, the Company was the fourth
largest builder in the Twin Cities metropolitan area, based on total dollar
volume of building permits issued and is the only one of the top five builders
in the Twin Cities metropolitan area whose stock is privately held.
The Company builds custom homes and homes from standard plans at prices
typically ranging from $190,000 to $700,000 for both the home and lot, with an
average selling price of approximately $336,000 for the first six months of
1996. The Company also designs and builds residential remodeling projects
through its remodeling division. Lundgren's wholly-owned subsidiary, Brush
Masters, Inc. ("Brush Masters"), provides painting and staining services to the
Company, as well as to other residential building contractors in the Twin Cities
metropolitan area.
The Company closed the sales of 80 homes in the first six months of 1996 and as
of June 30, 1996, had purchase agreements for the sale of 86 homes, representing
approximately $29.8 million in sales. In the first six months of 1995, the
Company had closed the sales of 77 homes and as of June 30, 1995, had contracts
for the sale of 86 homes, representing approximately $26.4 million in sales. The
Company markets its homes to middle and upper income professionals and
executives. The Company's marketing efforts emphasize the community atmosphere
of its residential subdivisions and those characteristics it believes are
distinctive to the Lundgren-built homes: desirable designs, quality
construction, competitive prices and customer service, before, during and after
the sale of a home.
The Company was incorporated as a Minnesota corporation on October 29, 1970 when
the three Lundgren brothers, Edmund, Gerald and Allan, started the business of
building custom homes. In 1971, Patrick Wells joined the Company and has worked
with the Company in various capacities since that time. Peter Pflaum joined the
Company in 1972 as its President and at that time, assumed responsibility for
the Company's land acquisition and development activities. He currently also
serves as chief executive officer of the Company.
MARKET
The Company operates in the Twin Cities metropolitan area. The U.S. Census
Bureau currently defines the Twin Cities Metropolitan Statistical Area (the
"Twin Cities MSA") to include 11 counties in Minnesota and two counties in
Wisconsin. To date, the Company has built homes in Hennepin, Dakota, Carver,
Scott and Washington counties which, according to 1995 estimates, represented
61.6% of the total population of the Twin Cities MSA. Many local reporting
agencies, however, define the Twin Cities MSA to include only 7 counties (the
"7-County MSA"), of which Hennepin, Dakota, Carver, Scott and Washington
counties accounted for 68.7% of the population in 1995.
Minneapolis/St. Paul is the largest metropolitan area in Minnesota and is the
fifteenth largest metropolitan area in the U.S., with a 7-County MSA population
in 1995 of slightly over 2.4 million. Since 1990, the 7-County MSA population
has grown at an annual rate of 1.2%, with Washington, Scott, Carver and Dakota
Counties experiencing significant population growth in the 1990s. By the year
2,000, it is estimated that the 7-County MSA will have a population of
approximately 2.6 million.
Thirty-four of the companies listed on the 1995 Fortune 1000 and 14 companies
listed on the Fortune 500 are headquartered in Minnesota, and nearly all of them
are located in the Twin Cities MSA. The area has a significant number of
companies involved in manufacturing, super-computers, electronics, medical
devices, milling, food processing and graphic arts. The median household income
in the 7-County MSA for 1995 was estimated to be $40,711, representing a
compound annual growth of 4.6% since 1980. In addition, nonagricultural
employment in the Twin Cities MSA has grown at a rate of 2.1% annually since
1990; meanwhile, in late 1995, the unemployment rate in the Twin Cities MSA was
2.2%, compared to a rate of 5.6% for the entire U.S.
The total number of building permits in the 7-County MSA for 1995 was 13,956
(10,805 single-family and 3,151 multi-family). Additionally, in the last two
years, single-family housing has represented approximately 80% of the new
housing market in the 7-County MSA.
In 1995, the median sale price of a detached single family home in the 7-County
MSA was $145,000. In addition, through August 1995, the average price of closed
sales on single-family units in the 7-County MSA was 4% higher than in 1994,
while the median price was 2.8% higher.
The Company currently targets move-up and custom home buyers, including many
transferees to the Twin Cities MSA. The lower end of the Company's product line
targets dual income couples in their 30s and 40s, with young children and annual
household incomes of $70,000 to $90,000. The Company's standard product line is
targeted towards mature families, in their 30s to 50s, with older children and
combined annual incomes of $80,000 and up. The Company is currently designing a
new product line which would target first-time move-up buyers, including singles
and young couples in the mid 20s to 30s age bracket, with annual household
incomes of $50,000 to $80,000.
OPERATING STRATEGY
The Company's operating strategy is to attempt to achieve the following
inter-related goals:
* LAND ACQUISITION -- locate and control the best residential property in a
specific geographic area in its price range of homes, with minimum up-front
expenditure and financial exposure.
* LAND DEVELOPMENT -- enhance the existing features of the acquired land that
make it unique, as well as develop subdivisions in a manner that creates a
community feeling with superior attributes to those developed by
competitors.
* HOME BUILDING AND HOME SALES --
(a) Product Design -- design and periodically update home plans in order
to provide the best value in the Company's price range of homes.
(b) Customer Service -- provide outstanding customer service.
(c) Quality and Customization -- build homes of the highest possible
quality in a particular price range and offer home buyers an
opportunity to customize their homes to a degree superior to the
competition's products.
(d) Cost Control -- closely monitor the design of home plans and the
construction process, from the bidding of the homes through
construction in the field, to ensure that the Company is producing its
homes in a manner that best balances cost-effectiveness and quality.
(e) Design Center -- provide home buyers with ease and convenience in
making selections to personalize their homes.
* INVENTORY MANAGEMENT -- monitor its finished lot inventory and the number
of unsold homes in order to react to changing market conditions.
* PAINTING AND STAINING -- provide cost-effective and superior painting and
staining services.
* REMODELING -- leverage the Lundgren name to provide superior remodeling
design and construction services.
LAND ACQUISITION
The Company believes that its future success depends upon its continued ability
to acquire superior home sites at competitive prices. The Company has developed
procedures for, and employs management specialized in, site acquisition and
development. Before the Company enters into any acquisition arrangement, it
generally employs an independent marketing consultant to perform a market
analysis of the geographic area to assess the future desirability of that area
for single family homes, the current and future development competition, and the
history of demand for housing in the area. The Company's objective is to locate
areas where there will be great demand for homes in the future but with limited
competition. The Company has concentrated its efforts on the western and
southwestern suburbs of Minneapolis, in the communities of Eden Prairie,
Chanhassen, Chaska, Minnetonka, Medina, Minnetrista, Plymouth, Shorewood and
Maple Grove. The Company believes that these communities are and will be some of
the most desirable areas for housing in the Twin Cities MSA. See Table 1 --
"Future Lot Inventory."
Generally, land acquired by the Company for development in the next one to three
years is located within the Minneapolis-St. Paul Municipal Urban Service Area
("MUSA"). Land located within the MUSA is permitted to be serviced with
metropolitan sewer service and municipal water. A limited portion of the
Company's resources are used to control parcels of land outside the MUSA in
municipalities which the Company believes are willing to attempt to obtain
approval for the extension of the MUSA. Although the Company has been successful
in assisting municipalities in which it controls land to obtain extensions of
the MUSA, there can be no assurance that the Company will be able to
successfully assist municipalities to further extend the MUSA in the future.
The Company attempts to control parcels of undeveloped land with minimum capital
expenditure. The Company acquires control of undeveloped land in several ways.
Generally, the Company has been able to obtain long-term options to purchase
land for future development. The Company uses the option period to obtain
necessary development approvals from government units and to evaluate the
feasibility of development, including whether the development costs are within
cost parameters per lot for a particular type of standard home plan. The Company
also purchases land through contingent purchase agreements. Under such
agreements, the Company agrees to purchase the land, contingent upon the
Company's obtaining necessary zoning and government approvals, on terms
satisfactory to the Company, within a predetermined period. These arrangements
allow the Company to reduce the risk of purchasing a site it will not be able to
develop profitably. Under these arrangements, the Company attempts to acquire
the land with minimum cash investment and maximum amount of seller financing.
The Company attempts to obtain such purchase money financing on a nonrecourse
basis, thereby limiting both its exposure to the amount invested in the property
and its predevelopment costs on such site. While this policy may somewhat raise
the cost of the land the Company acquires, it significantly reduces the
Company's financial exposure. As competition for land increases, the Company may
not be able to acquire land through such favorable arrangements in the future
and may be required to expend more cash and bear more risk in order to gain and
maintain control of undeveloped land. See "Risk Factors -- Continuing Need to
Acquire Land for Future Development." During the due diligence periods provided
for in the Company's Land Acquisition Agreements, the Company employs a detailed
checklist to assist in its investigation of factors affecting the feasibility of
the project, including:
* topography
* geology, soils and grading
* traffic, transportation and access
* hazards, including noise and pollution
* environmental issues
* archeological site status
* regulatory processing and approval schedule
* financing alternatives
* market research
* economic feasibility
Occasionally, the Company acquires control of land through joint ventures and
other contractual relationships with third party landowners ("Joint Ventures").
Under these Joint Ventures, the Company generally is employed as an agent of the
Joint Venture to zone and develop the property and build and sell homes on it.
The Company must meet certain criteria as to cost control and absorption rates
for the sale of the finished lots. The landowner subordinates his or her
interest in the land to a mortgage securing the development financing. As lots
are sold, the landowner shares in the profits on the finished lots. This
approach allows the landowner to maximize the profit to be made on the sale of
the land. It also enables the Company to control a site which it might not have
been able to purchase through an option or contingent purchase agreement. The
Joint Venture also enables the Company to participate in the lot profit, while
retaining the profit from the construction of the homes on the site.
Periodically, the Company acquires lots through optioning and/or purchasing
finished lots from unaffiliated developers. This approach allows the Company to
control a large number of finished lots, including an entire subdivision, while
also enabling the Company to market a new subdivision with minimal capital
expenditure and limited development risk. Generally, under these agreements, the
Company can continue to control these finished lots as long as the Company
purchases a specified number of such lots within a predetermined time period.
This arrangement, however, provides the Company less profit on the sale of the
lot.
Historically, the Company has located its subdivisions in the western and
southwestern suburbs of Minneapolis. See Table 2 -- "Subdivisions Developed
by the Company."
TABLE 1
FUTURE LOT INVENTORY
The following is a summary of the land which the Company controls under Land
Acquisition Agreements with third parties as of August 1, 1996:
ESTIMATED
MAP NUMBER
KEY CITY AND SUBDIVISION OF LOTS(1)
--- -------------------- ----------
BUFFALO
a Mills Woods 150
CARVER
b Kensington Knolls 2-4(2)
(aka Carver Bluffs) 131
CHANHASSEN
c Longacres 80
d Springfield 134
e Gilbert 12
f Dolejsi South(3) 57
---
subtotal 283
ELKO
g Sienna(3)(4) 256
INVER GROVE HEIGHTS
h Southern Lakes 282
MEDINA
i Foxberry Farms 79
MAPLE GROVE
j Elm Creek Properties 270
k Rosemary Woods(4) 45
---
subtotal 315
PLYMOUTH
l LCMS(3) 44
l Plum Tree East(5) 172
l Plum Tree West 80
---
subtotal 296(5)
SHOREWOOD
m Marsh Pointe 31
VICTORIA
n Highlands Phase 3 25
---
TOTAL 1,848(5)
=====
- ----------------------
(1) These lots may vary in size depending upon the housing products developed
for the neighborhood.
(2) Phases 3 and 4 will need to be annexed into the city.
(3) These parcels of land are currently located outside the Metropolitan Urban
Service Area (MUSA).
(4) The Company controls these lots under contract with an unaffiliated
developer. All other lots in this table are lots the Company plans to
develop.
(5) Includes 40 lots to be developed for multi-family housing.
The map below indicates the location of the parcels of land which the Company
controls under Land Acquisition Agreements as of August 1, 1996 and is keyed to
Table 1 -"Future Lot Inventory" above.
[MAP DIAGRAM]
Key City Developments # Sites
a Buffalo Mills Woods 150
b Carver Kensington Knolls 2-4 131
c Chanhassen Longacres 80
d Chanhassen Springfield 134
e Chanhassen Gilbert 12
f Chanhassen Dolejsi South 57
g Elko Sienna 256
h Inver Grove Hts. Southern Lakes 282
i Medina Foxberry Farms 79
j Maple Grove Elm Creek Properties 270
k Maple Grove Rosemary Woods 45
l Plymouth LCMS 44
l Plymouth Plum Tree East 172
l Plymouth Plum Tree West 80
m Shorewood Marsh Pointe 31
n Victoria Highlands Phase 3 25
TOTAL 1848
The Company continuously searches for new sites to control which meet its
development criteria. The Company also attempts, whenever possible, to upgrade
the property it controls. If a better site becomes available, the Company will
try to acquire control of the new site and to determine whether it should hold,
sell or terminate its agreement for the less desirable parcel. Additionally, the
Company will also abandon attempts to zone and develop a parcel if significant
development problems arise. Accordingly, the land controlled by the Company for
future lot inventory is constantly changing. The Company has Land Acquisition
Agreements and finished lot inventory sufficient to satisfy its land
requirements for the next three to four years, and attempts to control land
sufficient for its needs approximately three to five years in advance.
LAND DEVELOPMENT
The Company's operations differ from the majority of home builders in the Twin
Cities MSA in that it is involved in both land development and home building.
Land development is historically the most profitable portion of the Company's
business and an essential element to the success of the Company's home building
business.
During 1995, approximately 77.2% of the homes delivered by Lundgren were built
on lots developed by Lundgren compared to 53.8% in 1994 and approximately 56.5%
in 1993. In the future, the Company's goal is to maintain this percentage in the
range of 70% to 85%. Since inception, the Company has developed 107 residential
subdivisions in the Twin Cities MSA, ranging in size from 3 to 94 lots. In 1995,
the Company commenced the development of eight new residential subdivisions and
in the first six months of 1996 commenced the development of 11 new
subdivisions. See Table 2 -- "Subdivisions Developed by the Company."
Once the Company acquires control of undeveloped land, it commences the process
of obtaining zoning and other government approvals necessary for the proposed
development. This process is generally completed in one to three years. The
Company estimates the cost of development of the entire parcel to determine
whether finished lots can be brought to market at a competitive, yet profitable,
price. Periodically during the approval process, the Company normally updates
its market studies to determine both the level of competition by other land
developers and builders which are, or will be, developing subdivisions in the
area, and projected lot absorption rates for that area. If at any time during
the zoning and approval process it appears that the cost of the lots will be too
great for the market, or that the approval process is not progressing
satisfactorily, the Company will cease the zoning and approval process and sell
or abandon its interest in the land. Therefore, because the Company's land
acquisition strategy is to acquire control of the land through Land Acquisition
Agreements structured to require limited initial investment by the Company and
to obtain the necessary zoning and governmental approvals prior to purchasing
the land, the Company minimizes the risk of substantial capital expenditures on
land which it ultimately cannot successfully develop. However, the Company may
spend between approximately $50,000 to $300,000 during the approval process
prior to determining whether it can, or will, develop the land. Nonetheless, the
Company believes that the outlay and potential loss of these pre-development
costs substantially reduces the risks of greater costs and capital expenditures
associated with owning undevelopable land. The Company generally has been
successful in obtaining the necessary zoning and governmental approvals for the
development of its land.
During the zoning and approval process, the Company determines the availability
of utilities, surveys and tests soil conditions on the site, and performs the
required environmental reviews. Upon receipt of final governmental approvals,
the Company will usually complete its purchase of the land and begin site
development.
Site development is the process whereby the undeveloped land is developed into
finished lots ready for home construction. During the initial development stage,
the land is graded and sanitary sewer, watermain, stormsewer, curbs, gutters and
streets are installed. Upon completion of the initial development stage, the
Company landscapes the subdivision and constructs various amenities. The Company
believes that to create a successful subdivision distinguishable from that of
its competitors, it is important to create a neighborhood and a sense of
community. A number of factors are involved in the creation of this sense of
community: a street and lot configuration that arrives at the best balance of
installation and construction costs and the esthetics of the subdivision; the
location, design, landscaping and creation of the entrance; and the creation of
common amenities in the subdivision, such as children's play areas, tennis
courts, swimming pools, basketball courts, gazebos and community open spaces
with trails for neighbors to enjoy the natural beauty of the land.
TABLE 2
SUBDIVISIONS DEVELOPED BY THE COMPANY AND ITS AFFILIATES
The following table summarizes the single family subdivisions in which
development has been completed or substantially completed as of August 1, 1996:
PROJECT # OF LOTS
- ------- ---------
Amberleaf 18
Autumn Hills 26
Autumn Hill 2nd Addition 24
Bay Pointe on Mooney Lake 36
Bent Tree 41
Bent Tree 2nd Addition 16
Burl Oaks 21
Burl Oaks 2nd Addition 29
Burl Oaks 3rd Addition 25
Chestnut Ridge 4
Chestnut Ridge 2nd Addition 19
Chestnut Ridge 3rd Addition 18
Chestnut Ridge 4th Addition 16
Chestnut Ridge 5th Addition 21
Chestnut Ridge 6th Addition 4
Chestnut Ridge 7th Addition 13
Chestnut Ridge 8th Addition 8
Chestnut Ridge 9th Addition 29
Chippewa Trails 17
Chippewa Trails 2nd Addition 28
Churchill Farms 30
Churchill Farms 2nd Addition 30
Churchill Farms 3rd Addition 10
Churchill Farms 4th Addition 18
Churchill Farms 5th Addition 15
Fairfield Estates 12
Ferndale North 72
Ferndale North 2nd Addition 24
Ferndale North 3rd Addition 55
Ferndale North 4th Addition 26
Fox Run 31
Fox Run 2nd Addition 18
Fox Run 3rd Addition 13
Fox Run 4th Addition 24
Fox Run 5th Addition 10
Foxberry Farms 38
Foxberry Farms 2nd Addition 21
Foxberry Farms 3rd Addition 2
Hadley Place 21
Harbor Woods 28
Heather Run 36
Heather Run 2nd Addition 40
Heather Run 3rd Addition 30
Heather Run 4th Addition 28
Highlands at Lake St. Joe 26
Highlands 2nd Addition 9
McKinley Place 2nd Addition 16
McKinley Place 3rd Addition 28
McKinley Place 4th Addition 10
McKinley Place 5th Addition 35
Meadows at Long Acres 38
Meadows at Long Acres 2nd Addition 26
Meadows at Long Acres 3rd Addition 5
Mill Run 9
Mission Ridge 50
Mission Ridge 2nd Addition 26
Mission Ridge 3rd Addition 23
Mission Trails 26
Near Mountain 44
Plum Tree 36
Quail Ridge 17
Savannah 30
Savannah 2nd Addition 16
Schmidt Lake Estates 39
Seven Ponds East 29
Shiloh 94
Shiloh 2nd 70
Shiloh 3rd 17
Steeplechase 40
Steeplechase 2nd Addition 20
Steeplechase 3rd Addition 31
Steeplechase 4th Addition 15
Steeplechase 5th Addition 12
Steeplechase 6th Addition 12
Steeplechase 7th Addition 12
Steeplechase 8th Addition 18
Summit at Near Mountain 23
Summit at Near Mountain 2nd Addition 19
Sweetwater 28
Sweetwater 2nd Addition 17
Sweetwater 3rd Addition 29
Sweetwater 4th Addition 12
Tamarack 25
Tamarack 2nd Addition 16
Tealwood 12
Trappers Pass 17
Trappers Pass 2nd Addition 18
Trappers Pass 3rd Addition 9
Trappers Pass 4th Addition 20
Willow Bend 15
Willow Ponds 22
Willowbrook 8
WillowRidge 23
WillowRidge 2nd Addition 12
Wind Ridge at Bass Lake 17
Wind Ridge at Bass Lake 2nd 3
Wind Ridge at Bass Lake 3rd 16
Wind Ridge at Bass Lake 4th 3
Wood Creek 59
Woods at Long Acres 30
Woods at Long Acres 2nd 22
Woods at Long Acres 3rd 20
Woodwinds 41
Woodwinds 2nd Addition 30
Woodwinds 3rd Addition 20
Woodwinds 4th Addition 14
Woodwinds 5th Addition 25
-----
TOTAL 2,549
=====
Of the 2,549 lots listed on Table 2, the sales of 2,149, or 84%, had been closed
as of June 30, 1996. The remaining lots are subject to purchase agreements or
are available for sale. The development of all but approximately 358 lots is
complete. The subdivisions in which such 358 lots are located require minor
finishing work, such as laying the final coat of blacktop on the subdivision
streets. The Company expects to complete such finishing work in 1996 and 1997.
HOME BUILDING AND HOME SALES
The Company closed on 80 home sales in the first six months of 1996. The
Company's homes are sold primarily through its own sales staff. The Company also
sells its homes through local realtors. The Company recognizes a sale for
accounting purposes on the closing date of the sale.
TABLE 3
HOME CLOSINGS
Below is a summary of the Company's closings for the periods specified.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ------ ------
(DOLLARS IN THOUSANDS, EXCEPT NUMBER OF HOMES CLOSED)
<S> <C> <C> <C> <C> <C> <C> <C>
Homes Closed 89 147 216 247 202 77 80
Average Selling Price
of Homes(1) $ 239 $ 268 $ 265 $ 297 $ 311 $ 311 $ 336
Total Volume of
Closed Homes $21,312 $39,388 $57,136 $73,471 $62,796 $23,942 $26,852
</TABLE>
- -----------------------
(1) The average selling price per home is affected by the mix of the type of
lots developed, the product line of homes sold and mortgage interest rates.
The Company estimates that the average selling price for its homes in the
year ended December 31, 1996 will be $334,000.
The Company markets its homes primarily to middle and upper income buyers in the
Twin Cities MSA. The Company's promotional efforts include advertisements in
newspapers and other printed media, radio and television, illustrated brochures,
billboards, on-site displays, realtor programs and furnished model homes. Based
upon its experience in the home building business and the comments it receives
from its customers, the Company believes that, in addition to the location and
design of its subdivisions, it has the competitive advantages in the areas of
(a) product design; (b) customer service; (c) quality and customization; (d)
cost control; and (e) its design center.
(A) PRODUCT DESIGN.
The Company designs, and builds from, a variety of standard home plans that can
be customized to some extent by the customer. The Company also designs and
builds true custom homes. The Company employs its own in-house designers, which
it supplements from time to time with national and local architectural firms.
The Company reviews its home designs on a regular basis in order to ensure that
the homes incorporate marketable floor plans that are both desirable and
practical. The Company also monitors local competition to determine whether its
product lines and home designs continue to maintain a competitive design
advantage. Additionally, the Company gets input on new home designs it is
developing from focus groups, which consist of individuals who have purchased
homes in the last six months in approximately the same price range as that of
the new designs. Frequently, this review by the focus groups results in changes
to the Company's new home designs. The Company also periodically examines the
single family home market to determine if certain housing needs within its
market range are not being satisfied and, if so, attempts to design and build
homes to meet such needs.
In addition to implementing its current product lines and having its new home
designs reviewed, the Company utilizes a number of marketing consultants in
cities across the United States having similar climate and housing construction
techniques. During the year, the Company periodically consults with these
marketing consultants to determine what type of houses within the price and
square footage ranges of the product lines offered by the Company are selling
well in other markets. Usually two or three times a year, the Company sends a
team of its employees to study these homes for new ideas that the Company can
use. In recent years, Company employees have traveled to Seattle, Denver,
Chicago, St. Louis, Kansas City, Indianapolis and Washington, D.C. This housing
market review allows the Company's design team to keep the Company's designs
current and to incorporate innovations from around the country.
(B) CUSTOMER SERVICE.
Providing a high level of customer service has always been a priority for the
Company and a part of its competitive strategy. The Company attempts to maintain
personal contact with its customers from their first meeting with the sales
representative, through the construction process and after the closing. This
relationship begins with the Company's sales representatives when the customer
first visits one of the Company's model homes and selects a home plan and lot.
These sales representatives are trained to provide customers with exceptional
service. The Company emphasizes customer service by making it a topic at every
weekly sales meeting with the Vice President -- Sales and Marketing, as well as
by making it an important part of the annual sales training program that all the
sales representatives are required to take. The Company's sales representatives
service the customers' needs until the customers' final plans have been approved
for construction. Once approval for construction has been obtained, a
construction coordinator is assigned to the customers. The construction
coordinators have offices at the Company's headquarters and report directly to
the Vice President -- Construction. The construction coordinators handle any of
the customers' concerns, changes, service and warranty work and are available to
talk with customers at any time during the Company's normal business hours.
Additionally, these construction coordinators are specially trained to
understand customers' needs and the importance of solving their problems quickly
and pleasantly.
Building a home is a very complicated process and one in which customers
probably have limited or no experience. Accordingly, the Company has developed a
system to educate its customers as to the Company's procedures and schedule for
everything that will happen from the time a customer signs a purchase agreement,
through the entire construction process and through any service and warranty
work. This system establishes, prior to a customer's signing a purchase
contract, the correct customer expectations and the sequences and timing of
events during the process of building and servicing their home. The system also
explains when customer input is required in order for construction to proceed as
scheduled. The system is summarized for the customer in a comprehensive book
entitled "Building a New Home with Lundgren Bros.," which is given to them after
they have executed a purchase agreement with the Company. Additionally, the
Company monitors on a weekly basis its own procedures and the time it takes to
accomplish the sequence of events outlined in the book to make certain it keeps
its schedule at all times. Moreover, at strategic points in the construction
process, customers are automatically sent letters informing them of the progress
and indicating what is required of them in order to keep on schedule. This
entire process is supplemented by the construction coordinators who are
available to assist customers with anything necessary to make the experience as
smooth as possible.
The Company also employs a system by which to evaluate the quality of its
service and the satisfaction level of its home buyers. The Company telephones
its home buyers at four different times during the term of its relationship with
the home buyers. These telephone calls are designed to get the home buyers'
feedback on how the Company is doing and how the Company is addressing their
problems, if any. The responses the Company receives from these telephone calls,
which are delivered weekly to the President of the Company and the Company's
department heads, are used to give management a qualitative measure as to how
the Company is doing at various critical points during the home building
process. In addition, the Company employs an outside firm to survey Company
customers who have recently closed on a home to determine both how such
customers feel about the treatment that they have received from the Company at
various stages during the home building process and whether they would recommend
the Company to another home buyer.
(C) QUALITY AND CUSTOMIZATION.
Since its inception, the Company has designed and built both custom homes and a
number of standard plan homes that can be customized to a customer's personal
taste. Through a series of meetings with the Company's sales consultants and, if
necessary, its designer, a customer's home plans evolve to a compromise that
balances the customer's wish list and budget. The design process ends in a
detailed final plan review with the customer.
In order to provide home customers the price advantage of a standardized product
line while still providing them with flexibility to customize their home before
and after the final plan review, the Company has integrated its construction
process with a schedule for the customer's required decision-making, contained
in the book "Building a New Home with Lundgren Bros." This book is presented as
soon as a customer has executed a purchase agreement with the Company. The book
coordinates the customer's required input (final plan review, change orders and
selections) with the separate stages of construction. To ensure proper
communication between the customer and the field superintendent, as well as to
provide an inspection process to assure the customer that the construction will
meet the Company's performance standards, four orientation meetings are
scheduled for the customer before the closing: an on-site preconstruction
meeting; a pre-drywall orientation; a preclosing orientation; and a new home
orientation (walk-through). The book also alerts the customer to construction
deadlines for needed customer selections. Additionally, the Company's customer
coordinator helps the customer schedule and complete all the necessary
paperwork, meetings, change orders and selections. Because the Company believes
that its home buyers will increasingly demand more customizing opportunities, it
has positioned itself to take advantage of such a trend.
The purchase price for standard house plans ranges from approximately $190,000
to $550,000 for house and lot. These houses provide between 1,300 and 3,600
square feet of finished space. The purchasers of the Company's standard houses
can select from various base floor plan and elevation combinations, as well as
customize their homes with a selection of changes, features and upgrades. Some
typical features of the Company's floor plans, depending on the subdivision,
are:
* vaulted or higher-than-average ceilings and large decorative windows to
admit natural light
* two story entries which offer a sight line through the house
* incorporation of columns, arches, bridges, niches and wall cutouts, formal
and informal stairways and other design features
* basements, most with windows or outside entries
* two and three car garages.
In addition, purchasers can choose, at additional cost, optional amenities such
as different front elevations for the house, bay windows, decks, cabinets,
upgraded carpets and floor coverings, fireplaces, lighting fixtures, appliances
and hardware.
Custom homes designed and built by the Company have ranged from approximately
$250,000 to $700,000 for house and lot, and have ranged from approximately 2,500
to 5,000 square feet.
(D) COST CONTROL.
In order for the Company to control construction costs, without sacrificing
quality, it must start with the efficient design of its homes. After completion
of the schematic plan of a home for the Company's standard product line, the
construction department, purchasing department and the estimating department
review the plan to ensure the home is designed to minimize the costs of labor
and materials. The sales department also reviews the plan at the same time to
ensure that amenities designed into the home will create value for the home
buyer. The plan is then sent to an outside structural engineer who reviews the
structural integrity of the plan and makes recommendations where necessary.
Additionally, the plan is sent to a truss manufacturer, electrical consultant
and a cabinet maker for additional input and recommendations. The Company then
reviews these recommendations and, if appropriate, incorporates them into the
final plans. Along with the design department, the construction and purchasing
departments also review the final plan and officially approve it for use by the
Company. The purchasing and construction department may seek the advice of
suppliers and subcontractors with respect to better or more cost efficient ways
to design and build the home so as to create more value for the home buyer.
Thereafter, the plan is revised based on all of the above reviews and input into
the Company's Auto Cad system. The Auto Cad computerized architectural design
program creates very detailed drawings of the home and allows the Company to
make changes to the plan rapidly. Once the plan is completed, the purchasing and
estimating departments seek to obtain competitive pricing from local
subcontractors and suppliers. The Company believes it is generally able to
negotiate satisfactory pricing due to both the high volume of work it offers to
its unaffiliated subcontractors and its ability to pay its bills promptly. The
Company has also arranged and is continually attempting to establish direct
purchase relationships with national vendors in order to provide certain items
at a lower price. The Company believes its design center is appealing to these
national vendors because it offers them a professional place to show their
products, while also giving the Company an opportunity to negotiate special
relationships with the national vendors.
The Company utilizes its management information system to monitor all
subcontractor expenditures for each home it builds. Once the home plans are
completed, they are sent to the estimating department, which, using a
computerized estimating system, determines the exact quantities of materials
needed to build the home and the estimated cost associated with using such
materials. This estimated cost is then verified with individual cost quotes or
bids from each subcontractor or supplier. A detailed budget for the home is then
input into the computerized purchase order system which enables the Company to
monitor all of its costs and variances from the original budget for the home.
The Company has one person who is responsible for recording and inputting into
the system variances from the original budget for the home as they occur. This
allows the Company to view on a daily basis any variance on every home under
construction. Management normally has weekly meetings to review all variances so
as to determine the cause and to establish procedures to eliminate such
variances in the future.
The Company also uses its management information system to pay its suppliers and
subcontractors for their completed work on the home. Unless there is an approved
variance purchase order or approved change order that has been entered into the
system, the only amount paid to the suppliers and subcontractors is the amount
which was originally budgeted on the system. With this system, the Company knows
at all times the current cost of each home. If there is a variance from the
original budget, the Company can study the variance when it occurs to determine
what went wrong and how to correct its plans and procedures so the variance will
not occur in the future. By using this system over a period of time, the Company
can determine the most cost efficient way for it to produce its homes. The
Company also monitors its gross margin on each home at four different points in
order to make certain how the actual margin compares to the budgeted one, i.e.,
when the purchase agreement is signed by the Company, after the budget is placed
in the computerized purchase order system, when the home closes and
approximately 45 days after the home closes and all outstanding invoices have
been reviewed and entered into the purchase order system.
(E) DESIGN CENTER.
All of the Company's home buyers can choose from the Company's various base
floor plans and elevation combinations or design a custom plan for themselves.
Home buyers can further customize their home by making a number of selections
and upgrades from the Company's newly completed, state-of-the-art Design Center.
The Design Center is located in a separate building and allows the buyers to
view a wide selection of items. The Design Center currently has seven complete
kitchens, six bathrooms and a screened porch on one level. The lower level of
the Design Center displays numerous items including selections of roofing,
siding, plumbing fixtures, cabinets, interior and exterior doors, carpeting,
floor coverings, counter tops and window treatments. The Company's home buyers
can visit this center as many times as they like. The Company employs interior
decorators who work full time for the Company and staff the Design Center to
assist customers. In addition, the Company's interior design staff will meet
with home buyers on an appointment basis when it is convenient for the home
buyer to make selections, or home buyers can visit the design center, which is
open during weekdays as well as during convenient evening and weekend hours. The
Company is not aware of any other housing company in the Twin Cities that has a
comparable facility. Normally, a home buyer purchasing a home from one of the
Company's competitors will be forced to travel to many different locations
scattered around the city to make their selections from several different
suppliers. This is not only time-consuming, but there is no way of controlling
the quality of service the home buyer will receive at each of these different
suppliers. The Company's home buyers will be able to make the vast majority of
all their selections at the Company's Design Center where they will be assisted
by the Company's trained staff.
INVENTORY MANAGEMENT
Much of the risk in the home building industry is related to excessive
inventory, including undeveloped land, finished lots and completed homes. The
Company attempts to reduce its exposure to excess capital committed to land by
continuously monitoring its undeveloped and finished lot inventory. The Company
tries to purchase land through options and non-recourse contingent purchase
agreements, which reduce the amount of committed capital and permit the Company
to terminate or postpone the ultimate purchase of land that it does not need.
The Company controls its finished lot inventory by developing finished lots in
increments of approximately 20 to 40 lots, which it believes can be sold and
closed in a normal market within one and one-half years from the completion of
lot development. The Company reviews its lot inventory on a weekly basis.
The Company attempts to limit its exposure to an excess inventory of completed
houses by (i) generally not starting construction of a home until execution of a
purchase agreement, receipt of satisfactory earnest money, receipt by the home
buyer of a preliminary mortgage commitment and removal of all contingencies, and
(ii) controlling the number of finished homes held in inventory on a
project-by-project basis and monitoring weekly the sales progress of each
subdivision.
TABLE 4
CURRENT INVENTORY
The following is a summary of the Company's current inventory as of August 1,
1996.
<TABLE>
<CAPTION>
MODEL HOUSE LOT LOTS
SUBDIVISION HOMES INVENTORY HOLDS AVAILABLE
----------- ----- --------- ----- ---------
<S> <C> <C> <C> <C>
Amberleaf -- -- -- 2
Bay Pointe -- -- -- 1
Foxberry Farms 1 2 -- 39
Heather Run 1 5 1 10
Highlands at Lake St. Joe 1 3 3 19
Kensington Knolls -- 1 1 36
Meadows at Long Acres 2 4 -- 13
Plum Tree -- 2 -- 34
Rosemary Woods 1 2 -- 31
Savannah 1 3 4 18
Summit 2nd -- -- -- 1
Tamarack 1 3 2 13
Tuckeweye -- -- -- 8
Woods at Long Acres 1 2 1 53
Woodwinds 1 3 5 56
Wynnfield Lake 1 1 -- 1
Wynnfield Meadows -- 1 -- 2
--- --- --- ---
GRAND TOTALS 11 32 17 337
=== === === ===
</TABLE>
MODEL HOMES. For sales and marketing purposes, the Company generally will build
one to three model homes in each of its subdivisions. These homes differ from
those in the House Inventory category in that the Company intends to complete
them, including interior furnishings and decorations, in order to market a
particular home plan to potential home buyers. These model homes are not
generally marketed for sale for at least a year or, if earlier, until the
subdivision in which they are located is nearly sold out.
HOUSE INVENTORY. As of August 1, 1996, the Company had 32 houses built or under
construction to be held as inventory. A house is put in this category as soon as
application is made for a building permit. Therefore, these 32 houses could be
at any stage in the construction process. In the Company's experience, these
houses often sell prior to completion. The Company rarely holds many houses in
inventory after completion of construction.
The 32 houses in inventory as of August 1, 1996 were located in 13 different
subdivisions. Houses in inventory are generally marketed to transferee home
buyers. Transferee home buyers have traditionally represented a significant
portion of the Company's sales. A transferee home buyer typically is relocating
for employment, needs a new house within 30 to 60 days and cannot buy a new home
which is not currently under construction because it would take too long to
complete. The Company has actively marketed to this type of buyer for most of
its history. The Company believes that these home buyers are primarily concerned
about the reputation of the builder, location and quality of the subdivision,
the competitive price of the home and the resale potential of the home. The
number of homes held in inventory will vary seasonally and with changes in the
local and national economy.
LOT HOLDS. The Lot Holds category in Table 4 above refers to a lot on which a
home buyer has placed a deposit to reserve the lot while finalizing the purchase
agreement. Lot holds are short-term, usually 30 days or less.
The total of "Model Homes," "Houses in Inventory," "Lot Holds" and "Lots
Available for Future Construction" represents the maximum number of homes the
Company could sell in the next year unless additional lots are developed or
purchased from another developer. As of August 1, 1996, there were 11 "Model
Homes," 32 "Houses in Inventory," 17 "Lot Holds" and 337 "Lots Available for
Future Construction," for a total of 397.
PAINTING AND STAINING SERVICES
Brush Masters provides painting and staining services to the Company and to
unaffiliated residential building contractors. Brush Masters offers value added
services to its contractors and their customers. Such services include blueprint
estimating, advising contractors on recent innovations in paint and stain
products and their application, daily visits from a superintendent to
construction sites, and providing professional stain and paint color selection
service.
Brush Masters currently services approximately 14 residential building
contractors, including three of the largest builders in the Twin Cities MSA.
Brush Masters also provides all of the Company's painting and staining services.
The Company's transactions with Brush Masters are conducted on terms of price,
quality and service that are comparable to terms available in arm's length
transactions. The Company represented 39% of Brush Masters' sales in the first
six months of 1996.
Brush Masters competes with numerous small painting and staining contractors,
generally on the basis of quality and service.
REMODELING
The Company designs and builds residential remodeling projects through its
remodeling division. These projects include complete house renovations, kitchen
remodeling, bathroom remodeling, second story additions, room additions,
finished basements, enclosed porches, decks, and patios. The remodeling division
provides a turn-key operation including design services, architectural plans,
general contracting and final clean-up. The Company maintains a design support
staff with computer aided drafting equipment to prepare the remodeling plans,
and a decorator and interior design center to help with product selection and
client decorating needs. Remodeling projects usually range from approximately
$15,000 to $150,000, with an average remodeling project price of $40,000.
The Company believes that remodeling is a fast growing sector of the home
construction industry. Future growth in remodeling is supported by high new
construction costs that have priced many families out of the new home market, by
families preferring remodeling rather than having to move out of their current
neighborhood, and by a housing stock which is aging, thereby increasing the need
for remodeling and repair. The Company competes with many smaller remodeling
companies and, at least with respect to its design services, with architects and
interior designers.
COMPETITION
The Company faces competition in its land acquisition, land development and home
building activities. While the Company's objective is to purchase and develop
land located in areas where there will be great demand for homes in the future
with limited competition, it, nonetheless, competes with many national builders,
including The Rottlund Companies, U.S. Homes (doing business as Orrin Thompson
Homes), Pulte Homes, Centex Homes, Ryland Homes, Town & Country and D.R. Horton
(doing business as Joe Miller Homes), as well as a number of large local
builders, who also seek to acquire land in the same types of areas. In addition,
the Company faces competition in its land development activities. This
competition principally consists of the larger home builders, mentioned above,
which develop land for their own account, as well as land developers who
specialize in developing for small builders. The Company's home building
activities are also subject to competition from national builders and large and
small local builders. The building and sale of residential properties is highly
competitive and fragmented, and it involves a number of interrelated factors,
including location, product design, perceived value, price and reputation in the
marketplace. With the entrance of the above-referenced national builders into
the Twin Cities market, the home building competition in the Twin Cities has
increased. Additionally, the Company competes with a large number of relatively
small local builders who generally purchase finished lots from unaffiliated
developers, build homes on these lots and then sell them to the public. These
small builders, however, are generally restricted to making a profit only on the
actual sale of the house, while the lot developer realizes the profit on the
sale of the lot. The Company also faces competition with respect to the sale of
the houses it builds with the resale of existing houses and rental homes. See
"Risk Factors -- Competition."
EMPLOYEES
At June 30, 1996, the Company employed 228 full-time employees, including
executive and office personnel, construction superintendents, painters and
general laborers. The Company's employees are not covered by a collective
bargaining agreement and the Company believes its relations with its employees
are good.
GOVERNMENTAL REGULATION
The Company's business is subject to regulation by a variety of state and
federal laws and regulations relating to, among other things, advertising,
collection of state sales and use taxes and product safety. The Company's
development activities are also affected by local zoning ordinances, building
codes and other municipal laws as well as federal, state and municipal
environmental and conservation laws, including, for example, a Minnesota law
regulating development of wetland areas. While the Company believes it is
presently in material compliance with such regulations, in the event that it
should be determined that the Company is not in compliance with all such laws
and regulations, the Company could become subject to cease and desist orders,
injunctive proceedings, civil fines and other penalties.
The Company generally acquires undeveloped land located within the MUSA. The
location and size of the MUSA is regulated by the Metropolitan Council. The MUSA
is the area within the metropolitan area where public services, including roads,
water and sanitary service are permitted by the Metropolitan Council to be made
available. The Metropolitan Waste Control Commission, a regional agency,
regulates the extension of sewer services within the MUSA. Access to public
water and sanitary sewer is necessary to enable the Company, as well as other
developers, to develop undeveloped land economically. There is a limited amount
of land within the MUSA available for development. Accordingly, competition for
prime land within the MUSA will likely increase. The Company has attempted to
acquire what it believes are some of the best undeveloped parcels of land within
the MUSA in the western suburbs of the Twin Cities metropolitan area.
Occasionally, the Company has acquired land outside the MUSA and successfully
assisted the municipalities in which such land was located in obtaining
extension of the MUSA line to include such land. The process of seeking an
extension can be costly and time-consuming, thus adding to the cost of such
land, and there can be no assurance that the extensions sought will be granted.
ENVIRONMENTAL AND LEGAL PROCEEDINGS
The Company currently is not subject to any environmental litigation or
administrative proceedings. The Company is not currently involved in any legal
proceedings other than those arising in the ordinary course of business.
The Company believes that its potential liability for environmental concerns can
arise in one of two contexts: (a) liability could arise with respect to
substances that are in, under or on land which the Company intends to acquire;
or (b) liability could arise in connection with how the Company intends to
develop the land. With respect to a substance in, under or on land for which the
Company could face environmental liability, the Company performs a Phase I
environmental audit prior to exercising an option. If the audit uncovers any
environmental hazards on the land, the Company would not exercise the option
unless the hazard could be corrected at a reasonable cost. With respect to
liabilities in connection with a planned development, the Company obtains the
federal and state permits necessary for building and development before it
exercises the options. If a planned development is not permissible under
environmental laws, the Company will not exercise the option. The Company's
operations are generally small enough (subdivisions typically are less than 100
acres in size) that no environmental impact statement is required prior to
development.
FACILITIES
The Company's corporate offices are located at 935 East Wayzata Boulevard,
Wayzata, Minnesota 55391 and consist of approximately 11,000 square feet. The
Company leases these offices from a related partnership. The lease expires March
31, 2009 and calls for monthly rental and tax escrow payments of approximately
$11,500, subject to annual adjustments. See "Certain Transactions." The Company
also owns property in Wayzata, Minnesota which it utilizes as its Design Center.
In addition, the Company leases the following properties in Minnesota:
<TABLE>
<CAPTION>
INDUSTRY SQUARE LEASE MONTHLY EXPIRATION
TYPE SEGMENT FEET LOCATION PAYMENT DATE
---- ------- ------ -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Warehouse New homes 1,120 Loretto $ 650 month to month
Office/Warehouse New homes 8,450 Medina $3,000(1) 4/30/98
Office Remodeling 4,500 Oakdale $2,062 2/28/97
</TABLE>
- ------------------------
(1) Does not include required additional payments for operating expenses.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The current executive officers, directors and managers of Lundgren are as
follows:
NAME AGE TITLE
- ---- --- -----
Peter Pflaum 53 President and Director, Executive Committee Member
Terrance M. Forbord 45 President -- Land Development Division, Executive
Committee Member
James L. Weaver 42 Vice President -- Construction, Executive
Committee Member
Allan D. Lundgren 54 Vice President -- Purchasing, Secretary/Treasurer
and Director, Executive Committee Member
Brian E. Gilgosch 48 Vice President -- Sales and Marketing, Executive
Committee Member
Peter T. Beucke 37 Director of Design, Executive Committee Member
Laurie A. Vercnocke 46 Controller, Executive Committee Member
Michael A. Pflaum 52 Vice President -- Land Development
Patrick C. Wells 53 Director and President -- Remodeling Division
Edmund M. Lundgren 58 Vice President and Director
Gerald T. Lundgren 56 Vice President
PETER PFLAUM has been President and a Director of the Company since October 1972
and serves as the chief executive officer. In addition to his executive duties,
Mr. Pflaum supervises the land acquisition and land development activities,
negotiates the Company's credit facilities, manages the Company's lot inventory,
and supervises sales, marketing and product development. He is the brother of
Michael A. Pflaum, a vice president of the Company.
TERRANCE M. FORBORD has served as President - Land Development Division since
August 1996 and Vice President - Land Development of the Company since April
1988. In this position, he supervises the land acquisition and land zoning
activities of the Company. Prior to joining the Company, he was Vice President
of Residential Development for the Scotland Company and a sales manager/broker
for Scott Realty and Coldwell Banker's Scott Real Estate.
JAMES L. WEAVER has been Vice President - Construction since August 1995 and was
a production manager from February 1994 to August 1995. In the position of Vice
President - Construction, he is responsible for daily construction activities,
coordination with project managers assigned to each community, training and
development of construction staff, and oversight of the service and estimating
departments. From October 1983 until March 1993 Mr. Weaver served in various
positions with Pulte Homes, most recently as a production manager. From March
1993 until February 1994, Mr. Weaver worked as an independent contractor and
consultant doing building, remodeling and consulting on building projects.
ALLAN D. LUNDGREN has been Vice President - Purchasing and
Secretary/Treasurer since February 1994 and October 1972, respectively, and
was previously Vice President - Construction. He has been a Director of the
Company since October 1972. He is the brother of Edmund M. Lundgren and
Gerald T. Lundgren.
BRIAN E. GILGOSCH joined the Company as Vice President - Sales and Marketing
in March 1994. In this position, he supervises all sales and marketing
activities of the Company. From April 1988 to March 1994, Mr. Gilgosch was
Vice President of Sales and Marketing for Henderson Homes, Inc. in Seattle,
Washington where his responsibilities were similar to his current
responsibilities.
PETER T. BEUCKE has been a Director of Design since July 1995. In this
position, he is responsible for product design and coordination of product
implementation. From 1989 until 1995, Mr. Beucke was Regional Architectural
Manager for Kaufman & Broad in California.
LAURIE A. VERCNOCKE has been Controller since May 1996. In this capacity, she
is responsible for supervising the financial management, accounting,
information systems and office management. From 1987 until 1996, Ms.
Vercnocke was Controller for Cambridge Homes, Inc. in Chicago, Illinois,
where she supervised the accounting and finance areas. From 1982 until 1987,
she was Controller-Treasurer of Westfield Development Co., another Chicago
area homebuilder.
MICHAEL A. PFLAUM has been Vice President - Land Development of the Company
since January 1988. In this position, he supervises all of the construction
activities related to land development and also aids in the approval process for
such development. He is the brother of Peter Pflaum.
PATRICK C. WELLS has served as President - Remodeling Division since May 1991
and has been a Director of the Company since October 1972. From 1971 to 1980, he
was employed by the Company as General Manager and from 1980 until May 1991, he
remained a Director of the Company and was employed as President of Patrick C.
Wells Associates Inc., a company specializing in film making. Mr. Wells also
served as Vice President - Finance and Administration from June 1992 until
September 1994.
EDMUND M. LUNDGREN has been Vice President and a Director of the Company
since October 1972. In this capacity, he currently is involved with the
Company's quality control process. He is the brother of Gerald T. Lundgren
and Allan D. Lundgren.
GERALD T. LUNDGREN has been Vice President of the Company since October 1972.
In this capacity, he currently is a construction project manager. He also
served as a Director of the Company from October 1972 to December 1989. He is
the brother of Allan D. Lundgren and Edmund M. Lundgren.
The Executive Committee is a group of the senior management of the Company that
meets weekly to solve problems, make major decisions, formulate goals and act on
plans for the Company. Each member of the group is responsible for a functional
area of the Company.
The officers of the Company are elected annually and serve at the discretion of
the Board of Directors. None of the Company's officers is employed pursuant to a
written employment contract.
COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company to its five
most highly compensated executive officers for the last three fiscal years.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) COMPENSATION ($)(1)
------------------ ---- ---------- --------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
Peter Pflaum 1995 191,848 380,000 0 1,875
President 1994 175,000 338,000 0 2,310
1993 177,174 494,000 0 2,249
Patrick C. Wells 1995 90,080 148,000 0 1,875
President Remodeling 1994 85,000 107,000 0 2,310
Division 1993 87,540 228,000 0 2,249
Allan D. Lundgren 1995 85,000 104,000 0 1,875
Vice President - 1994 85,000 105,000 0 2,310
Purchasing 1993 87,400 151,000 0 2,249
Terrance M. Forbord 1995 140,962 100,000 4,800 1,875
President - Land 1994 128,320 150,000 4,500 2,249
Development Division 1993 123,545 100,000 3,600 2,162
Gerald T. Lundgren 1995 60,000 92,000 0 1,875
Vice President 1994 59,420 92,000 0 2,310
1993 55,084 135,000 5,400 2,249
</TABLE>
- -------------------------
(1) Consists of a matching contribution by the Company to the Company's 401(k)
plan.
The Company traditionally pays bonuses to certain executive officers, as
specified in the Summary Compensation Table above. The amount of bonus paid an
officer is related to (a) the Company's performance and (b) that individual
officer's performance, for the fiscal year just ending. Therefore, the amount of
bonus paid to an individual officer, and the aggregate amount of bonuses paid,
will vary from year to year. The terms of the Indenture restrict aggregate
annual bonuses paid to executive officers who are also shareholders to 50
percent of the Company's income before provision for income taxes and such
bonuses for that year.
The Company does not have a Compensation or Audit Committee of the Board of
Directors. Peter Pflaum and Patrick C. Wells perform the functions equivalent to
a Compensation Committee in that they make decisions and recommendations
regarding compensation.
Directors of the Company are not compensated for their services as directors.
CERTAIN TRANSACTIONS
The Company leases its corporate office building from Glenbrook Office Building
Partnership ("Glenbrook") under a lease which expires March 31, 2009. The annual
rental payments made by the Company under this lease are approximately $138,000,
including property tax escrow payments. Peter Pflaum and Patrick C. Wells are
each general partners of Glenbrook, with partnership interests of 3.75% and
1.5%, respectively. The limited partners in Glenbrook are as follows: the
Company owns 15.23%; Allan D. Lundgren, a director and officer of the Company,
owns 3.75%; Edmund M. Lundgren, a director and officer of the Company, owns
3.75%; Gerald T. Lundgren, an officer of the Company, owns 3.75%; Rosalynd C.
Pflaum, the mother of Peter Pflaum, owns 47.26%; and Stuart Wells, the brother
of Patrick C. Wells, owns 21.01%.
The Company owns, as a limited partner, a 52.17% interest in Tealwood Limited
Partnership, a partnership of which Peter Pflaum and Patrick C. Wells are
general partners holding 10.16% and 6.78% interests, respectively. Gerald T.
Lundgren and Michael A. Pflaum, officers of the Company, each own 3.52%. The
balance is owned by unrelated third parties. This partnership currently holds
approximately $100,000 in cash and two parcels of land available for the
construction of four to six townhomes. This partnership has not been active
since 1987.
The shareholders of the Company have loaned money to the Company from time to
time. The Company has used the proceeds of such loans for working capital. Such
loans bear interest equal to the highest rate the Company is then paying under
its credit facilities with banks, institutional and specialized industry
lenders. The loans are generally repaid by the Company before the end of the
following fiscal year. In 1995, the shareholders loaned an aggregate of
$357,000, $329,000 of which was outstanding as of June 30, 1996, to the Company.
In 1994, the shareholders loaned an aggregate of $248,000 to the Company. The
shareholders are not obligated to make any such loans to the Company in the
future. The Company currently has sufficient capacity under its Credit
Agreements to fund its operations without utilizing these loans.
The Company and its shareholders have entered into a Contribution Agreement
whereby each shareholder has agreed to contribute funds to the Company in the
event of the Company's default under certain of its unsecured indebtedness,
including the 1993 Subordinated Debentures and any Parity Indebtedness (as
defined in the Indenture under which the 1993 Subordinated Debentures were
issued). The obligations of the shareholders under the Contribution Agreement
terminated when the audited consolidated tangible net worth, as defined, of the
Company exceeded $4.5 million. This occurred as of December 31, 1994 when the
audited consolidated tangible net worth of the Company was $4.7 million.
Thereafter, under the terms of the Contribution Agreement, during any period in
which the audited consolidated tangible net worth of the Company falls below
$4.5 million, the Company will defer payment of bonuses to executive officers
who are also shareholders of the Company.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership of
Lundgren's common stock as of June 30, 1996 by each person who is known by
Lundgren to beneficially own more than 5% of Lundgren's common stock, by each of
Lundgren's Directors, and by all Directors and executive officers as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS TITLE OF NUMBER OF SHARES PERCENT OF CLASS
OF BENEFICIAL OWNER CLASS BENEFICIALLY OWNED(1) OUTSTANDING(1)(2)
------------------- -------- --------------------- -----------------
<S> <C> <C> <C>
Peter Pflaum Voting Common 297 50.0%
935 East Wayzata Boulevard Non-voting Common 4,166 41.5%
Wayzata, MN 55391
Patrick C. Wells Non-voting Common 1,845 18.4%
935 East Wayzata Boulevard
Wayzata, MN 55391
Edmund M. Lundgren Voting Common 99 16.7%
935 East Wayzata Boulevard Non-voting Common 1,340 13.3%
Wayzata, MN 55391
Allan D. Lundgren Voting Common 99 16.7%
935 East Wayzata Boulevard Non-voting Common 1,340 13.4%
Wayzata, MN 55391
Gerald T. Lundgren Voting Common 99 16.6%
935 East Wayzata Boulevard Non-voting Common 1,340 13.4%
Wayzata, MN 55391
All officers and directors as a Voting Common 594 100.0%
group (8 persons) Non-voting Common 10,031 100.0%
</TABLE>
- ----------------------
(1) Each person named has sole voting and investment power with respect to all
of his outstanding shares.
(2) The percentage calculation is based upon 594 shares of voting common stock
and 10,031 shares of non-voting common stock outstanding on June 30, 1996.
STOCK PURCHASE AGREEMENT
The outstanding shares of common stock of the Company are subject to the terms
of the Amended and Restated Stock Purchase Agreement, dated February 1, 1993
(the "Agreement"), as amended on April 1, 1993 and January 1, 1994. The
Agreement provides that members of the "Lundgren Block" (Edmund M. Lundgren,
Gerald T. Lundgren and Allan D. Lundgren) have the first option to purchase
shares of other Lundgren Block members in the event of a voluntary sale,
involuntary transfer or termination of employment of other members of the
Lundgren Block, with the "Pflaum-Wells Block" and the Company having successive
options to purchase the shares if the previous option holders fail to do so.
Members of the "Pflaum-Wells Block" (Peter Pflaum and Patrick Wells) have a
similar first option to purchase shares of the other Pflaum-Wells Block member.
The Company must purchase the non-voting shares of any shareholder in the event
of a shareholder's disability or death. Members of that Block have the right to
purchase a disabled or deceased Block member's voting shares and, if the right
is not exercised, the Company must do so.
The purchase price for shares of stock under the Agreement is the lesser of
twice the book value per share or $282.35 per share, but shall not exceed
$658.82 per share in the event of death or $470.58 per share in the event of
disability. A purchase by the Company in the event of disability or death is
fully funded by disability or life insurance, respectively, payable entirely at
closing or, in the event of Peter Pflaum's disability, a portion being payable
at closing with the balance of insurance payments being payable in 60 equal
monthly installments. The price per share payable by the Company in the event of
a shareholder's disability or death may never exceed the amount of insurance
proceeds the Company is to receive divided by the number of shares that it is
required to purchase. In the event of a voluntary sale, involuntary transfer or
termination of employment, twenty-five percent of the purchase price shall be
paid at closing with the balance payable in 60 equal monthly installments.
An option held by any shareholder upon an occurrence giving rise to an option is
assignable with the consent of all shareholders.
DESCRIPTION OF DEBENTURES
GENERAL
The Debentures are to be issued under an Indenture (the "Indenture"), dated as
of October 18, 1996, between Lundgren and National City Bank of Minneapolis,
National Association, as trustee (the "Trustee"). The form of the Indenture was
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The following statements are summaries of certain provisions of the
Debentures and the Indenture and do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all of the provisions
of the Indenture, including the definitions therein of certain terms (generally
capitalized when used herein), which provisions and definitions are incorporated
herein by reference. The article and section numbers in parenthesis refer to
articles and sections of the Indenture, which are intended to be incorporated
herein by reference.
The Debentures to be issued under the Indenture will be limited to $3,000,000
aggregate principal amount. They will be unsecured obligations of Lundgren, will
not have the benefit of a sinking fund for the retirement of principal and will
be subordinate in right of payment to all existing and future Senior
Indebtedness as defined in the Indenture. The Debentures will mature on October
1, 2004.
Interest on each Debenture will accrue from October 18, 1996 or, with respect to
Debentures sold after a subsequent quarterly interest payment date, the most
recent quarterly interest payment date, at the rate per annum stated on the
front cover of this Prospectus (or the Prospectus Supplement, if applicable).
Interest is payable quarterly on the first day of each calendar quarter
("Interest Payment Dates") commencing on January 1, 1997, to the person in whose
name the Debenture is registered, at the close of business on the Regular Record
Date which is the 15th day of the calendar month next preceding such Interest
Payment Date. Principal and interest will be payable at the office or agency to
be maintained by Lundgren in Wayzata or Minneapolis, Minnesota (initially in
Minneapolis, the principal office of the Trustee), except that, at its option,
Lundgren may pay interest by check mailed directly to the address of the person
entitled thereto as it appears on the Debenture Register. (Section 3.1.)
Lundgren will issue the Debentures only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000.
(Section 3.2.) Lundgren will not assess a service charge for any transfer or
exchange of the Debentures, but it may require payment of a sum sufficient to
cover the tax or governmental charge payable in connection therewith. Holders
may transfer the Debentures by surrendering them for transfer at the office of
the Trustee. (Section 3.5.)
REDEMPTION AT THE OPTION OF LUNDGREN
The Debentures will be subject to redemption at the option of Lundgren, in whole
or in part, from time to time, commencing on October 31, 1998, upon not less
than 30 days' nor more than 60 days' notice mailed to the Holders thereof, at
the Redemption Prices established for the Debentures, together, in each case,
with interest accrued to the date fixed for redemption (subject to the right of
a Holder on the Regular Record Date for an interest payment to receive such
interest). (Section 11.1.) The Redemption Prices for the Debentures (expressed
as a percentage of the principal amount) shall be as follows for Debentures
redeemed in the 12-month periods beginning October 31 of each of the following
years:
YEAR PERCENTAGE
- ---- ----------
1998 105%
1999 104%
2000 103%
2001 102%
2002 101%
2003 100%
Lundgren may elect to redeem less than all of the Debentures. If Lundgren elects
to redeem less than all of the Debentures, the Trustee will select which
Debentures to redeem, using such method as it shall deem fair and appropriate,
which may include the selection for redemption of a portion of the principal
amount of any Debenture of any authorized denomination.
(Section 11.4.)
MANDATORY REDEMPTION
Upon the occurrence of a Change of Control, the Company shall immediately redeem
the Debentures in whole, at the principal amount thereof, premium, if any, and
accrued interest unless the Company obtains the consent of the holders of
two-thirds of the aggregate principal amount of Debentures outstanding. There is
no assurance that the Company will be able to fund this mandatory redemption
obligation if a Change of Control occurs. Under the Indenture a Change of
Control is defined as (i) any sale, transfer or other disposition of more than
twenty-five percent (25%) of the voting Equity Securities of the Company
outstanding in one transaction or in a series of transactions occurring within a
twelve-month period (except for the redemption or repurchase by the Company of
shares of voting Equity Securities owned by Allan D. Lundgren, Edmund M.
Lundgren, Gerald T. Lundgren or Patrick C. Wells, or a transfer of ownership as
a result of the death of a shareholder of the Company; or (ii) the issuance of
additional voting Equity Securities of the Company in one transaction or in a
series of transactions occurring within a twelve-month period which results in a
Person acquiring, directly or indirectly, more than forty percent (40%) of the
voting power of the Company.
LIMITED RIGHT OF REPAYMENT UPON DEATH
Lundgren, upon the death of any Holder* will repay the Debentures beneficially
owned by such Debentureholder, up to $25,000 principal amount, on request if (a)
the Debentures have been registered in the Debentureholder's name since the Date
of Issue or for a period of at least six months prior to the date of the
Debentureholder's death, whichever is less, (b) either Lundgren or the Trustee
has been notified in writing of the request for repayment within 180 days after
death, (c) Lundgren has not redeemed more than $200,000 principal amount of
Debentures within the preceding twelve-month period and (d) Lundgren is not in
default under the Debentures or under the Senior Indebtedness. The Debentures
for which repayment is made will be repaid at the principal amount thereof,
together with interest accrued to the repayment date, within 30 days following
receipt by Lundgren or the Trustee of the following: (i) a written request for
repayment signed by a duly authorized representative of the Debentureholder,
which shall indicate the name of the deceased Debentureholder, the date of his
death, and the principal amount of the Debentures to be repaid, (ii) the
certificates representing the Debentures to be repaid, and (iii) evidence
satisfactory to the Trustee and Lundgren of the death of such deceased Holder
and of the authority of the representative to the extent required by the
Trustee. The request for repayment may be withdrawn by the deceased
Debentureholder's authorized representative at any time prior to issuance of the
repayment check by Lundgren. Authorized representatives of a Debentureholder
shall include executors, administrators, or other legal representatives of an
estate, trustee of a trust, joint owners of the Debentures owned in joint
tenancy or in tenancy by the entirety, custodians, conservators, guardians,
attorneys-in-fact and other persons generally recognized as having legal
authority to act on behalf of another. (Section 13.1.)
- ------------------------
* For this purpose, the death of a tenant by the entirety, joint tenant, or
tenant in common (but only to the extent of such Holder's interest) will be
deemed the death of the Debentureholder. The death of a person who, during
his lifetime, was entitled to substantially all of the beneficial interest
or ownership of a Debenture, will be deemed the death of the
Debentureholder, regardless of the registered holder, if such beneficial
interest can be established to the satisfaction of the Trustee. Such
beneficial interest will be deemed to exist in typical cases of street name
or nominee ownership (including ownership of an individual retirement
account or other similar account), ownership under the Uniform Gifts to
Minors Act, community property or other joint ownership arrangements
between a husband and wife, and trust interest in a Debenture during his or
her lifetime. Beneficial interests shall include the power to sell,
transfer, or otherwise dispose of a Debenture and the right to receive the
proceeds therefrom, as well as interest and principal payments with respect
thereto.
SUBORDINATED, PARITY AND SENIOR INDEBTEDNESS
Upon liquidation or reorganization of Lundgren, the Debentures will be senior in
right of payment to any Subordinated Indebtedness that may be issued in the
future by Lundgren or payments with respect to common stock of Lundgren and any
preferred stock or other class of capital stock that Lundgren may authorize and
issue. The rights of Lundgren and its creditors to participate in the assets of
any Subsidiary upon liquidation or reorganization of a Subsidiary (as a result
of Lundgren's ownership of such Subsidiary) are subject to the prior claims of
the Subsidiary's creditors except to the extent Lundgren may itself be a
creditor with recognized claims against the Subsidiary.
The Debentures will be subordinated and junior in right of payment to Senior
Indebtedness of Lundgren to the extent set forth in the Indenture. (Section
12.1.) During the continuance of any default in payment of Senior Indebtedness,
no payment may be made by Lundgren on or in respect of the Debentures. (Section
12.3.) In the event of any dissolution, winding-up, liquidation, or
reorganization of Lundgren (whether in bankruptcy, insolvency, or receivership
proceedings or upon an assignment for the benefit of creditors or otherwise),
the holders of Senior Indebtedness then outstanding will be entitled to receive
payment in full of all such Senior Indebtedness before the holders of the
Debentures are entitled to receive any payment on account of the principal of,
premium, if any, or interest on the Debentures. Such subordination will not
prevent the occurrence of an Event of Default. (Section 12.2.)
"Senior Indebtedness" is defined in the Indenture as the principal of, premium
(if any) and interest on any and all Indebtedness of Lundgren (other than the
Debentures, Parity Indebtedness and Subordinated Indebtedness) incurred in
connection with (a) the borrowing of money (whether secured or unsecured) from
or guaranteed to banks, trust companies, insurance companies and other financial
institutions; (b) all Indebtedness to specialized industry lenders to the extent
it is secured by real estate and/or assets of Lundgren (including the cash value
of life insurance), evidenced by bonds, debentures, mortgages, notes or other
securities or other instruments; (c) obligations under capitalized leases as
determined by GAAP; and (d) other non-recourse obligations to third parties
(which are not options or contingent purchase agreements which Lundgren has the
right to terminate unilaterally) in connection with the acquisition of land;
created, incurred, assumed or guaranteed by Lundgren before, at or after the
date of execution of the Indenture, and all renewals, extensions and refundings
thereof, unless in the instrument creating or evidencing any such Indebtedness
or pursuant to which such Indebtedness is outstanding, it is provided that such
Indebtedness, or such renewal, extension or refunding thereof, is junior or is
not superior in right of payment to the Debentures. As of June 30, 1996, there
was approximately $32.2 million of Senior Indebtedness of Lundgren outstanding.
Subject to a maximum debt-to-equity ratio covenant, the Indenture contains no
other limitations on the amount of Senior Indebtedness.
"Parity Indebtedness" is defined in the Indenture as any and all Indebtedness of
Lundgren created, incurred, assumed, or guaranteed by Lundgren before, at, or
after the date of execution of the Indenture which (a) matures by its terms, or
is renewable at the option of Lundgren to a date, more than one year after the
date of the original creation, incurrence, assumption, or guaranty of such
Indebtedness by Lundgren and (b) contains covenants, conditions and restrictions
on the Company which are consistent with and do not violate any of the
covenants, conditions and restrictions contained in the Indenture, and (c) is
neither Senior Indebtedness nor Subordinated Indebtedness, including, without
limitation, the 1993 Subordinated Debentures. (Section 10.10.)
"Subordinated Indebtedness" is defined in the Indenture as any and all
Consolidated Indebtedness of Lundgren created, incurred, assumed, or guaranteed
by Lundgren before, at, or after the date of execution of the Indenture which,
by the terms of the instrument (or any supplemental instrument) creating or
evidencing such Consolidated Indebtedness or pursuant to which such Indebtedness
is outstanding, (a) it is provided that such Indebtedness, or any renewal,
extension, or refunding thereof, is expressly subordinate and junior in right of
payment to the Debentures (whether or not subordinated to any other Indebtedness
of Lundgren) or (b) it is not, by its terms, Senior Indebtedness or Parity
Indebtedness. The Indenture contains no limitation on the amount of Subordinated
Indebtedness.
"Consolidated Indebtedness" is defined in the Indenture as all Indebtedness of
the Company and its Consolidated Subsidiaries (excluding intercompany items and
all Shareholders Subordinated Debt), after making appropriate deductions for any
minority interests.
"Funded Debt" is defined in the Indenture as the sum of Senior Indebtedness, the
Debentures Outstanding, Parity Indebtedness and Subordinated Indebtedness
(except Shareholders Subordinated Debt) less Debt Restricted Cash.
"Shareholders Subordinated Debt" is defined in the Indenture as any borrowing by
the Company from its shareholders which is evidenced by a note or other
instrument and expressly made Subordinated Indebtedness as required by Section
10.11 of the Indenture and which has a stated maturity which is later than the
Stated Maturity of the Debentures.
"Stated Maturity" is defined in the Indenture to mean, when used with respect to
any Debenture or any installment of interest thereon, the date specified in such
Debenture as the fixed date on which the principal of such Debenture or such
installment of interest is due and payable.
"Consolidated Tangible Net Worth" means the dollar amount of: (a) the tangible
assets of the Company and its Consolidated Subsidiaries (excluding intercompany
items), as defined in the Indenture, after deducting for minority interests and
adequate reserves in each case where, in accordance with generally accepted
accounting principles, a reserve is proper, in excess of (b) the aggregate
amount of Consolidated Indebtedness and Shareholders Subordinated Debt;
provided, however, that (i) inventory shall be taken into account on the basis
of the cost or current market value, whichever is lower, (ii) in no event shall
there be included as such tangible assets (a) any assets typically classified as
intangible assets, including but not limited to patents, trademarks, trade
names, copyrights, licenses, goodwill and debt issuance costs, or (b) treasury
stock or any securities or Indebtedness of the Company or a Consolidated
Subsidiary, or any other equity, convertible or unsecured debt securities unless
the same are readily marketable in the United States of America or entitled to
be used as a credit against Federal income tax liabilities, and (iii) securities
included as such tangible assets shall be taken into account at their current
market price or cost, whichever is lower, and (iv) any write-up in the book
value of any assets subsequent to December 31, 1995, shall not be taken into
account. The Consolidated Tangible Net Worth as of December 31, 1995 was
$5,968,000.
"Debt Restricted Cash" means the unborrowed portion of any land development
loans to the Company held in restricted bank accounts under financing
arrangements substantially similar to such loans made to the Company in the
past.
There are no restrictions upon Lundgren regarding the creation of additional
Senior or Subordinated Indebtedness, except that Lundgren may not incur
additional Funded Debt which would exceed seven times the Consolidated Net Worth
of Lundgren, nor may it publicly offer to sell any of its long-term Indebtedness
in connection with the borrowing of money, if such Indebtedness would have a
stated maturity, (exclusive of sinking fund payments) earlier than the Stated
Maturity of Debentures unless such Indebtedness otherwise complies with the
covenants and restrictions otherwise imposed by the Indenture. See "Certain
Covenants" below. Lundgren has agreed to cause all Indebtedness to Affiliates of
Lundgren, except for an existing office lease with an affiliated partnership, to
be expressly subordinate and junior in right of payment to the Debentures.
(Section 10.11.)
The Indenture permits the Trustee to become a creditor of Lundgren and does not
preclude the Trustee from enforcing its rights as a creditor, including rights
as a holder of Senior Indebtedness.
CERTAIN COVENANTS
LIMITATION ON ADDITIONAL FUNDED DEBT; MINIMUM NET WORTH
Pursuant to the terms of the Indenture, Lundgren may not, nor may it permit its
Subsidiary to, create, incur, assume or issue other Indebtedness (i) of the
ratio of Funded Debt to Consolidated Tangible Net Worth plus Shareholder
Subordinated Debt of the Company would exceed 7 to 1 (Section 10.15). Compliance
with this covenant shall be measured on the last day of each calendar quarter.
Furthermore, the Indenture requires Lundgren to maintain at all times until
Maturity of all Debentures, a Consolidated Tangible Net Worth (as defined in
Section 10.16) determined as of December 31 of each year, with compliance
measured quarterly, of at least Five Million Dollars ($5,000,000) plus 50% of
the Consolidated Net Income earned after December 31, 1995, assuming solely for
purposes of this covenant that the maximum Management Bonuses which may be paid
pursuant to the covenant in Section 10.12 are paid and income taxes are paid on
such assumed net income level.
RESTRICTION ON DIVIDENDS AND OTHER MATTERS
Under the terms of the Indenture, Lundgren is prohibited from declaring or
paying any dividend, making any redemption (except as provided pursuant to an
insurance funded buy-sell agreement covering the disability or death of a
shareholder (the "Buy-Sell") or pursuant to a Buy-Sell during the lifetime of a
shareholder if purchased under a debt obligation which is Subordinated
Indebtedness with a minimum term of five years with equal annual payments), or
making any other distribution on any Equity Securities of Lundgren (except
dividends or distributions payable in Equity Securities of Lundgren), and
neither Lundgren nor any Subsidiary may acquire any such Equity Securities
except pursuant to the Buy-Sell if, after giving effect thereto, the aggregate
payments for all such purposes subsequent to December 31, 1995 would exceed the
sum of (a) 50% of the Consolidated Net Income accumulated subsequent to December
31, 1995, (b) the aggregate of the net proceeds received by Lundgren or a
Wholly-Owned Subsidiary from the issuance or sale after December 31, 1995 (other
than to a Subsidiary or upon conversion of Equity Securities or Indebtedness of
Lundgren or a Wholly-Owned Subsidiary) of Equity Securities of Lundgren for cash
or other property, (c) the aggregate of the net proceeds received by Lundgren or
a Wholly-Owned Subsidiary from the issuance or sale (other than to Lundgren or a
Subsidiary) for cash or other property, of any Indebtedness of Lundgren which is
converted into Equity Securities of Lundgren. (Section 10.9(a).) Lundgren will
not pay any dividend or make any other distribution (other than dividends paid
or distributions made in Equity Securities of Lundgren) on any Equity Securities
of Lundgren, and neither Lundgren nor any Subsidiary may acquire such Equity
Securities, if, after giving effect thereto, the Consolidated Tangible Net Worth
of the Company would be reduced to less than an amount equal to one hundred
fifty percent (150%) of the aggregate principal amount of the Debentures and
other Parity Indebtedness then outstanding. (Section 10.9(b).)
The foregoing restrictions would not prevent (a) the acquisition of Equity
Securities of Lundgren solely in exchange for, or upon conversion of, other
Equity Securities of Lundgren, or the acquisition of Equity Securities of
Lundgren due to the application of the net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary) of other Equity Securities
of Lundgren, (b) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date such declaration complies with the
provisions of the Indenture, or (c) the payment by Lundgren of a bonus each year
to key employees, executive officers and shareholder employees of Lundgren in an
aggregate amount up to, but not exceeding, 50% of the income, before provision
for income taxes and such bonuses, of Lundgren for the year then ending
("Management Bonuses"). (Section 10.9(c).) Such Management Bonuses are expressly
subordinate and junior in right of payment to the Debentures and Parity
Indebtedness (Section 10.14). Lundgren will not sell any Equity Securities of a
Subsidiary, or permit a Subsidiary to issue its own Equity Securities, other
than to Lundgren or a Subsidiary, except in certain limited circumstances.
(Section 10.14.)
RESTRICTIONS ON MERGER AND SALES OR ACQUISITION OF ASSETS
Under the terms of the Indenture, Lundgren may not consolidate with, merge into,
transfer or lease assets as, or substantially as, an entirety to, another
corporation unless such other corporation assumes Lundgren's obligations under
the Debentures and the Indenture and unless the resulting consolidated entity
meets a specified minimum Consolidated Tangible Net Worth test.
Lundgren may not consolidate with, merge with, transfer or lease assets as, or
substantially as, an entirety to another corporation or acquire another business
unless, after giving effect thereto, the resulting corporation shall have a
Consolidated Tangible Net Worth of not less than Five Million Dollars
($5,000,000) plus 50% of the Consolidated Net Income earned after December 31,
1995, or unless such transaction otherwise shall have been approved by the
Holders of 66-2/3% of the Debentures Outstanding. (Section 8.1.)
If the Consolidated Tangible Net Worth of the entity resulting from any merger,
reorganization or other acquisition will meet the standards listed above (as
evidenced by an officer's certificate and opinion of counsel), Lundgren will
have no obligation to seek the consent of the Debentureholders prior to
consummating the transaction, regardless of the size of the transaction or the
debt incurred by the Company in connection with the transaction.
With the exception of the net worth covenant described above, the Indenture does
not contain any provisions which afford the Debentureholders protection from a
highly leveraged transaction by the Company.
TRANSACTIONS WITH AFFILIATES
Under the terms of the Indenture, and subsequent to the date thereof, Lundgren
may not, and may not permit any Subsidiary to, engage in certain types of
transactions with any Affiliate of Lundgren (other than a Subsidiary) unless
such transaction, or, in the case of a course of related or similar
transactions, is or are upon terms which are fair to Lundgren or such
Subsidiary, as the case may be, and which are reasonably similar to, or more
beneficial to Lundgren or such Subsidiary than the terms deemed likely to occur
in similar transactions with unrelated persons under the same circumstances, as
determined by a resolution of the Board of Directors of Lundgren. Lundgren is
specifically permitted to continue leasing its corporate office space under the
terms of the existing lease with Glenbrook Office Building Partnership which
expires March 31, 2009. The Indenture limits the payment of Management Bonuses
to an amount which does not exceed 50% of the income of the Company, before
provision for income taxes and such bonuses, for the year then ending, and these
Management Bonuses are expressly subordinate and junior in right of payment to
the Debentures and Parity Indebtedness.
The Indenture also restricts percentage increases in the annual base salary of
those persons who are shareholders of Lundgren, and are eligible to receive
Management Bonuses from year to year, by the greater of (i) the percentage
increase from the previous calendar year in the Consumer Price Index for all
items for all United States urban areas as of January 1 of such year, or (ii)
the percentage increase in the Consolidated Tangible Net Worth of Lundgren for
the fiscal year just completed compared to the previous fiscal year. In
addition, advances or loans from Lundgren to executive officers who are also
shareholders are limited to $25,000 per individual per fiscal year. (Section
10.12.)
EVENTS OF DEFAULT
The Indenture defines the following as "Events of Default": (1) default in the
payment of interest and the continuance of such default for 30 days after
becoming due; (2) failure to pay principal (or premium, if any) when due at
Maturity, upon redemption, upon request for repayment under certain
circumstances and the continuance of such default for 30 days after becoming due
(see "Description of Debentures -- Limited Right of Repayment upon Death"), or
by declaration, as provided in the Indenture; (3) failure to perform any other
covenants for 60 days after written notice specifying the default and requiring
Lundgren to remedy such default; (4) the breach of certain financial covenants
concerning Additional Funded Debt and Minimum Net Worth after a 30-day cure
period; (5) certain events of bankruptcy, insolvency, or reorganization; (6) if
any Event of Default, as defined, shall result in an Indebtedness in excess of
the lesser of (i) $250,000 or (ii) the amount set forth in the Company's
principal credit facility for such default in other Indebtedness, becoming due
prior to the date on which it would otherwise become due and such acceleration
shall not be rescinded or annulled or discharged within a period of 60 days
after such indebtedness has been accelerated; and(7) the rendering of a final
judgment, decree or order in excess of the lesser of (i) $250,000 or (ii) the
amount set forth in the Company's principal credit facility for such default in
other Indebtedness and the continuance thereof unsatisfied for any period of 30
consecutive days. (Section 5.1.)
The Indenture provides that the Trustee shall, within 90 days after the
occurrence of a default, give the Holders written notice of all uncured defaults
known to it. The term "default" means the above specified events without grace
periods; provided that except in the case of default in the payment of principal
of (or premium, if any) or interest on any of the Debentures, the Trustee shall
be protected in withholding such notice if and so long as it in good faith
determines that the withholding of such notice is in the interest of the
Debentureholder. (Section 6.2.)
If an Event of Default shall occur and be continuing, the Trustee in its
discretion may, and at the written request of the Holders of 25% in aggregate
principal amount of Outstanding Debentures and upon being offered reasonable
indemnity from the Holders, shall proceed and enforce its rights and the rights
of Debentureholder. (Section 5.7.) If an Event of Default shall happen and be
continuing, either the Trustee or the Holders of at least 25% in aggregate
principal amount of Outstanding Debentures may accelerate the maturity of all
such Outstanding Debentures. After declaration of acceleration, Holders of 25%
or more in principal amount of Outstanding Debentures may institute judicial
proceedings with respect to such Event of Default. (Section 5.3.) The Holders of
at least a majority in aggregate principal amount of Outstanding Debentures may
waive an Event of Default resulting in acceleration, and annul the acceleration,
of such Debentures, but only if all the Events of Default have been remedied and
all payments (other than those due as a result of acceleration) have been made.
(Section 5.2.) The Holders of at least a 66-2/3% in aggregate principal amount
of Outstanding Debentures may waive any past defaults under the Indenture,
except for default in the payment of principal (or premium, if any) or interest
or certain covenants as provided in the Indenture. (Section 5.13.)
Lundgren must furnish the Trustee annually a statement of certain officers of
Lundgren as to their knowledge of defaults. (Section 10.6.)
MODIFICATION, WAIVER AND SATISFACTION OF INDENTURE
With certain exceptions that permit modifications of the Indenture by Lundgren
and the Trustee only, the Indenture, the rights and obligations of Lundgren and
the rights of Debentureholder may be modified by Lundgren with the consent of
Holders of not less than 66-2/3% in aggregate principal amount of Outstanding
Debentures affected thereby; provided that Lundgren may make no such
modification without the consent of the Holder of each Debenture affected
thereby if such modification would(1) change the Stated Maturity Date of the
principal of (or premium, if any) any such Debenture, (2) reduce the principal
of (or premium, if any) or interest on any such Debenture, (3) change the
occurrence in which, or place of payment where, principal of (or premium, if
any) or interest on any such Debenture is payable, (4) impair the right to
institute suit for the enforcement of any such payment on or with respect to any
such Debenture, (5) reduce the above-stated percentage of Holders of Outstanding
Debentures necessary to modify the Indenture, (6) modify the foregoing
requirements or reduce the percentage of any Debentures necessary to waive any
past default, (7) impair the right to request payment of any much Debenture upon
events described under "Description of Debentures -- Limited Right of Repayment
upon Death" above, or (8) subordinate the repayment of the Debentures to the
repayment of Lundgren Indebtedness other than Senior Indebtedness. (Section
9.2.) The Holders of not less than 80% in aggregate principal amount of
Outstanding Debentures may consent to a postponement of any interest payment for
a period not exceeding two years from its due date. (Section 5.13.) No
supplemental indenture shall affect adversely the rights of the holders of
Senior Indebtedness without the consent of such holders. (Section 9.6.) The
Holders of not less than 50% in aggregate principal amount of Outstanding
Debentures may consent to the Company's election to be taxed as an "S"
Corporation under the Internal Revenue Code of 1986, as amended from time to
time, and to make the necessary and appropriate changes to the restrictions on
dividends and distributions to provide sufficient funds to the Company's
shareholders to pay the state and federal income tax liabilities on the income
of the Company passed through to such shareholders as a result of the Company's
election to be treated as an "S" corporation.
The Holders of at least 66-2/3% in aggregate principal amount of Outstanding
Debentures may waive Lundgren's compliance with certain restrictive provisions
of the Indenture. (Section 5.13.)
Upon cancellation of all of the Debentures or, with certain limitations, upon
the Company's deposit with the Trustee of funds sufficient therefor, Lundgren
may satisfy and discharge the Indenture. (Section 4.1.)
KEY PERSON INSURANCE
The Indenture requires that, provided that the annual premium does not exceed
$7,500 per year, the Company will obtain and maintain a life insurance policy,
in the amount of the lesser of $1 million or the maximum amount of insurance
that a $7,500 per year premium can purchase, insuring the life of Peter Pflaum
on which the Debentureholders are beneficiaries and payees, and the Company is a
secondary beneficiary and payee. In the event of the death of Mr. Pflaum, the
proceeds of the policy will be held in a segregated, interest-bearing escrow
account. In the event payment of the Debentures is accelerated, the insurance
proceeds shall be paid by the Trustee to the Debentureholders on a pro rata
basis. Upon payment in full of the Debentures upon maturity or otherwise, the
Trustee will distribute the insurance proceeds, plus interest, to the Company.
UNDERWRITING
Miller & Schroeder Financial, Inc. and Offerman & Company (the "Underwriters")
have entered into an Underwriting Agreement with Lundgren pursuant to which the
Underwriters, subject to certain terms and conditions, have been appointed and
will act as the exclusive underwriter for the Debentures for a period of six
months from the commencement of this offering. The running of the six-month
exclusive period may be tolled in certain circumstances, including a
determination by the Underwriters that additional financial statements are
necessary under applicable securities laws. In the event of such determination,
the running of the exclusive period will resume when an amended Registration
Statement is declared effective by the Securities and Exchange Commission and
sufficient Prospectuses containing the amended financial statements are
available to the Underwriters or a Prospectus supplement containing the amended
financial statements is available to the Underwriters.
The Underwriting Agreement provides that the Underwriters will offer the
Debentures on a "best efforts" basis. The offering is not subject to the sale by
Lundgren of any minimum aggregate principal amount of Debentures. The
Underwriters initially propose to offer the Debentures to the public at The
Price to Public set forth on the cover page of this Prospectus, plus accrued
interest, and to certain selected dealers at such price less a concession on the
principal amount of the Debentures. The Price to Public, concession, and other
sales terms of the issue may change during the offering period.
In addition to the underwriting commissions equal to 6% of the Price to Public,
Lundgren has agreed to pay the Underwriters an underwriting management fee equal
to 3% of the principal amount of the Debentures. Lundgren has also agreed to pay
certain costs, fees and accountable expenses of the Underwriters, estimated at
$53,000. In connection with the key-man life insurance policy purchased by the
Company, Offerman & Company will receive a sales commission of approximately
$2,500 in 1996.
Lundgren has agreed to indemnify the Underwriters against, and to provide
contribution with respect to, certain civil liabilities, including liabilities
under the Securities Act of 1933, as amended.
Lundgren will pay interest on each Debenture accruing from October 18, 1996 or,
with respect to Debentures sold after a subsequent quarterly interest payment
date, the most recent quarterly interest payment date. For purposes of computing
interest, a Debenture will be deemed to have been sold on, and will be dated as
of, the date upon which confirmation of the purchase thereof is sent to Lundgren
by the Underwriters after payment in full of the purchase price is timely made.
The Underwriters expect to confirm to Lundgren purchases of Debentures upon
concurrent confirmation of the sale thereof to the public or to selected
dealers, or for its own account for the purpose of subsequent resale if
consented to by Lundgren, and will transmit to Lundgren, from time to time on a
regular basis, registration and delivery instructions and proceeds from the sale
of such Debentures, net of underwriting commissions and management fees, subject
to closing and delivery of the certificates.
The Debentures will be offered by the Underwriters on a "best efforts" basis,
when, as, and if issued by Lundgren, subject to the Underwriters' right to
reject orders in whole or in part, the approval by counsel of certain legal
matters and certain other conditions. Proceeds of the sale of Debentures by the
Underwriters pending delivery to Lundgren at each closing will be held in a
segregated account by each of Miller & Schroeder Financial, Inc. and Offerman &
Company. Sales of Debentures by selected dealers will be settled in the same
manner as sales by the Underwriters with proceeds held in a segregated account
by the clearing agent for each of the respective selected dealers. Closings will
be held on or about the fifteenth of each month with respect to securities sold
during the preceding month. If any closing should not occur on or about the time
agreed upon by Lundgren, the sales transactions shall be cancelled and the
proceeds held in the segregated accounts will be promptly remitted to the
purchasers with interest, if any, paid thereon.
The offering is not subject to the sale of any minimum aggregate principal
amount of Debentures. However, the obligations of the Underwriters to act as
underwriters in connection with the purchase and sale of the Debentures
contemplated by this Prospectus and to accept delivery of the Debentures against
payment therefor, are subject to certain typical conditions precedent within the
control of Lundgren contained in Underwriting Agreement, as of the date of this
Prospectus and as of each monthly closing, such as (i) the performance by
Lundgren of its obligations thereunder; (ii) the delivery by Lundgren of certain
certificates; (iii) the delivery to the Underwriters of an opinion of counsel to
Lundgren and related bring-down certificates; and (iv) the delivery to the
Underwriters of a letter of the independent accountants for Lundgren, and
related bring-down certificates. The form of the Underwriting Agreement was
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
LEGAL MATTERS
Certain legal matters in connection with the issuance and sale of the Debentures
will be passed upon for Lundgren by Leonard, Street and Deinard Professional
Association, 150 South Fifth Street, Minneapolis, Minnesota, 55402. Oppenheimer
Wolff & Donnelly, Plaza VII, Suite 3400, 45 South Seventh Street, Minneapolis,
Minnesota 55402, is acting as counsel for the Underwriters in connection with
certain legal matters relating to the securities offered hereby.
Stephen R. Pflaum, the brother of both Peter Pflaum, President and a Director of
the Company, and Michael Pflaum, Vice President of the Company, is an attorney
with, and shareholder of, Leonard, Street and Deinard Professional Association.
Leonard, Street and Deinard has provided, and expects to continue to provide,
legal services to the Company.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1994 and
1995, and for each of the three years in the period ended December 31, 1995,
included herein and elsewhere in the Registration Statement, have been included
herein and elsewhere in the Registration Statement in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
Lundgren is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and, in accordance therewith, files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549; and at the regional offices located
at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Company is an electronic filer, and as a result, reports
and other information regarding the Company are also available at the
Commission's Web site (http://www.sec.gov).
The Company has filed with the Commission a Registration Statement on Form S-1
with respect to the Debentures offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
pertaining to the Company and the Debentures offered hereby, reference is made
to the Registration Statement and the exhibits thereto, copies of which may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies thereof
may be obtained from the Commission upon payment of the prescribed fees.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Interim Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996 F-2
Interim Consolidated Statements of Income and Retained Earnings for the
Six Months Ended June 30, 1995 and 1996 F-3
Interim Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1995 and 1996 F-4
Condensed Notes to Interim Consolidated Financial Statements for the
Six Months Ended June 30, 1995 and 1996 F-5
Report of Independent Accountants F-8
Consolidated Balance Sheets as of December 31, 1994 and 1995 F-9
Consolidated Statements of Income and Retained Earnings for the Years Ended
December 31, 1993, 1994 and 1995 F-10
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1994, and 1995 F-11
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1993, 1994 and 1995 F-12
</TABLE>
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,984 $ 1,071
Restricted cash 816 1,677
Receivables 1,078 1,811
Deposits and prepaid expenses 2,861 3,235
Inventories 34,166 38,798
Land option and earnest money deposits 921 758
Property and equipment, net 1,682 1,528
Other assets 3,255 3,429
------- -------
Total assets $47,763 $52,307
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Obligations under bank lines of credit 3,650 5,446
Debt obligations 25,260 29,182
Obligations under capital leases 505 502
Accounts payable 7,303 5,425
Cost to complete sold homes 1,245 1,214
Customer deposits 1,846 3,053
Accrued expenses 1,484 932
Income taxes payable 85 58
------- -------
Total liabilities 41,378 45,812
------- -------
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 6,286 6,396
------- -------
6,385 6,495
------- -------
Total liabilities and stockholders' equity $47,763 $52,307
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
Revenues $27,209 $29,932
Cost of revenues 23,367 25,565
------- -------
Gross profit 3,842 4,367
Operating expenses:
Selling 1,372 1,310
General and administrative 2,032 2,012
------- -------
438 1,045
Other income (expense):
Interest expense (894) (993)
Other, net 30 131
------- -------
(Loss) income from operations before income taxes (426) 183
Income tax (benefit) provision (172) 73
------- -------
(Loss) income from operations before cumulative effect of
change in accounting method (254) 110
Cumulative effect on prior years of change in accounting method,
net of income taxes of $527 763 --
------- -------
Net income 509 110
Retained earnings, beginning of period 5,101 6,286
------- -------
Retained earnings, end of period $ 5,610 $ 6,396
======= =======
Net income (loss) per share:
(Loss) income from operations $ (24) $ 10
Cumulative effect of change in accounting method 72 --
------- -------
$ 48 $ 10
======= =======
</TABLE>
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)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 509 $ 110
Adjustments to reconcile net income to net cash
used in operating activities:
Cumulative effect of change in accounting method (763) --
Depreciation and amortization 263 224
Deferred income taxes 75 --
Gain on disposal of property and equipment (34) --
Gain on sale of investment -- (123)
Changes in operating assets and liabilities (7,520) (6,480)
-------- --------
Net cash used in operating activities (7,470) (6,269)
-------- --------
Cash flows from investing activities:
Expenditures for property and equipment (122) (34)
Proceeds from disposal of property and equipment 73 --
Proceeds from sale of investment -- 159
Increase in cash surrender value of life insurance (226) (260)
Other (67) 14
-------- --------
Net cash used in investing activities (342) (121)
-------- --------
Cash flows from financing activities:
Proceeds from bank lines of credit 10,022 18,115
Payment of principal on bank lines of credit (5,710) (16,319)
Proceeds from debt obligations 19,356 22,135
Payment of principal on debt obligations (16,644) (19,451)
Payment of principal on capital lease obligations (14) (3)
-------- --------
Net cash provided by financing activities 7,010 4,477
-------- --------
Decrease in cash and cash equivalents (802) (1,913)
Cash and cash equivalents, at the beginning of the
period 3,318 2,984
-------- --------
Cash and cash equivalents, at the end of the period $ 2,516 $ 1,071
======== ========
</TABLE>
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
SIGNIFICANT ACCOUNTING POLICIES
The audited 1995 annual report of Lundgren Bros. Construction, Inc. and
Subsidiaries (the Company), filed in its 1995 Form 10-K, contains a summary of
significant accounting policies in the Notes to the Consolidated Financial
Statements. The same accounting policies are followed in the preparation of the
interim financial statements.
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, 1995 and 1996 was 10,625.
BASIS OF PRESENTATION AND INTERIM PERIODS
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for fair presentation have been included. The
interim results are not necessarily indicative of the results for a fiscal year
as a whole.
NOTE 2. SELECTED FINANCIAL DATA
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
RECEIVABLES
Trade $ 768 $ 1,091
Escrows 319 708
Contracts and notes 26 23
Employees and officers 17 20
Other 3 24
------- -------
1,133 1,866
Less allowance for doubtful
accounts 55 55
------- -------
$ 1,078 $ 1,811
======= =======
INVENTORIES
Homes under construction $10,822 $15,870
Model homes 3,539 2,516
Lots held for sale 14,464 10,839
Land under development -- 4,322
Land held for future development 5,341 5,251
------- -------
$34,166 $38,798
======= =======
ACCRUED EXPENSES
Payroll, bonuses and payroll taxes $ 926 $ 299
Other, principally interest 558 633
------- -------
$ 1,484 $ 932
======= =======
NOTE 2. SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
DEBT OBLIGATIONS
Construction loans on single family homes $ 9,317 $12,606
Promissory notes 3,860 4,791
Development loans 6,415 6,500
Subordinate debenture series 2,962 2,951
Street, sewer and water assessments on land under
development and lots held for sale 1,598 1,150
Installment loans 736 840
Unsecured demand notes payable, stockholders 357 329
Noncompete obligation, officer 15 15
------- -------
$25,260 $29,182
======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1996
------- -------
<S> <C> <C>
INTEREST EXPENSE
Interest $ 1,506 $ 1,750
Less Capitalized interest (587) (732)
Amortization of debt issuance costs (25) (25)
--- ---
$ 894 $ 993
======= =======
CHANGES IN OPERATING ASSETS AND
LIABILITIES
Restricted cash $(1,557) $ (861)
Receivables (76) (733)
Deposits and prepaid expenses (1,301) (374)
Inventories (143) (3,394)
Land option and earnest money deposits (112) 163
Other assets 3 --
Accounts payable (3,275) (1,878)
Costs to complete sold (160) (31)
Customer deposits 613 1,207
Accrued expenses (765) (552)
Income taxes payable (747) (27)
---- ---
$(7,520) $(6,480)
======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
The Company acquired developed lots and land for future development under
promissory notes with the sellers aggregating $928 and $1,238 during the six
months ended June 30, 1995 and 1996, respectively.
NOTE 3. SEGMENT REPORTING
The Company operates principally in two business segments as follows:
* The new homes division, engaged in the interrelated activities of land
acquisition and development and the design, construction, painting,
staining and sale of detached single family homes.
* The remodeling division, engaged in the activities of designing and
constructing residential remodeling projects. These projects include
complete house renovations, kitchen remodelings, bathroom remodelings,
second story additions, finished basements, enclosed porches and patios and
other miscellaneous projects.
The following is a summary of the financial information relating to the
Company's two business segments. A substantial amount of cost allocations are
necessary to determine the operating income (loss) by segment. For this reason,
and because the Company is an integrated enterprise, management does not
represent that these segments, if operated as independent businesses, would
result in the operating income (loss) amounts shown. Intersegment sales are not
significant.
SIX MONTHS ENDED
JUNE 30,
-------------------
1995 1996
------- -------
Revenues:
New homes $25,094 $28,177
Remodeling 2,115 1,755
Operating income (loss):
New homes 577 1,280
Remodeling (139) (235)
NOTE 4. LAND OPTION AND EARNEST MONEY DEPOSITS
The Company has entered into option and purchase agreements to acquire lots in
residential housing developments and land for future development. On exercise of
an option, option payments are generally applied to the purchase price of land
acquired in accordance with the terms of the agreement. Earnest money deposits
are to be credited against future purchases. The Company had land purchase
commitments totaling approximately $3,069 and $5,054 at December 31, 1995 and
June 30, 1996, respectively, related to the earnest money deposits.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lundgren Bros. Construction, Inc.:
We have audited the accompanying consolidated balance sheets of Lundgren Bros.
Construction, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of income and retained earnings and cash flows
for each of the three years in the period ended December 31, 1995. 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
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
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 presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lundgren Bros.
Construction, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
January 27, 1996
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,318 $ 2,984
Restricted cash 137 816
Receivables 948 1,078
Deposits and prepaid expenses 2,120 2,861
Inventories 30,246 34,166
Land option and earnest money deposits 723 921
Property and equipment, net 1,948 1,682
Deferred income taxes 318 50
Other assets 2,861 3,205
------- -------
Total assets $42,619 $47,763
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Obligations under bank lines of credit $ 766 $ 3,650
Debt obligations 23,410 25,260
Obligations under capital leases 522 505
Accounts payable 8,860 7,303
Cost to complete sold homes 597 1,245
Customer deposits 1,435 1,846
Accrued expenses 1,531 1,484
Income taxes payable 298 85
------- -------
37,419 41,378
------- -------
Commitments
Stockholders' equity:
Common stock, no par value; authorized, 12,000 shares;
issued and outstanding, 594 voting shares and 10,031
nonvoting shares (all stock is redeemable) 99 99
Retained earnings 5,101 6,286
------- -------
5,200 6,385
------- -------
Total liabilities and stockholders' equity $42,619 $47,763
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenues $61,884 $78,992 $69,660
Cost of revenues 52,485 66,924 59,104
------- ------- -------
Gross profit 9,399 12,068 10,556
Operating expenses:
Selling 1,980 3,165 2,965
General and administrative 4,585 5,597 5,233
------- ------- -------
2,834 3,306 2,358
Other income (expense):
Interest (667) (942) (1,734)
Other, net (61) 226 116
------- ------- -------
Income from continuing operations before
income taxes 2,106 2,590 740
Income taxes 860 1,043 318
------- ------- -------
Income from continuing operations 1,246 1,547 422
------- ------- -------
Cumulative effect on prior years of change in
accounting method, net of income taxes of $527 -- -- 763
------- ------- -------
Discontinued operations, net of income
tax benefits of $241:
Loss from operations -- (251) --
Estimated loss on disposal -- (98) --
------- ------- -------
Loss from discontinued operations -- (349) --
------- ------- -------
Net income 1,246 1,198 1,185
Retained earnings, beginning of period 2,657 3,903 5,101
------- ------- -------
Retained earnings, end of period $ 3,903 $ 5,101 $ 6,286
======= ======= =======
Income (loss) per share:
Continuing operations $ 117 $ 146 $ 40
Cumulative effect of change in
accounting method -- -- 72
Discontinued operations -- (33) --
------- ------- -------
Net income $ 117 $ 113 $ 112
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,246 $ 1,198 $ 1,185
Cumulative effect of change in accounting method -- -- (763)
Loss from discontinued operations -- 349 --
-------- -------- --------
Income from continuing operations 1,246 1,547 422
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
continuing operating activities:
Depreciation and amortization 260 593 457
Amortization of debt issuance costs 30 51 51
Deferred income taxes (10) (168) 268
Gain on disposal of property and equipment -- -- (35)
Provision for losses on receivables -- 24 --
Changes in operating assets and liabilities (1,301) (2,400) (4,125)
Other (5) (10) --
-------- -------- --------
Net cash provided by (used in) continuing
operating activities 220 (363) (2,962)
Net cash used by discontinued operations -- (249) --
-------- -------- --------
Net cash provided by (used in)
operating activities 220 (612) (2,962)
-------- -------- --------
Cash flows from investing activities:
Expenditures for property and equipment (577) (1,331) (243)
Proceeds on disposal of property and equipment -- -- 104
Increase in cash surrender value of life
insurance (285) (402) (368)
Other 6 48 (44)
-------- -------- --------
Net cash used in investing activities (856) (1,685) (551)
-------- -------- --------
Cash flows from financing activities:
Proceeds from bank lines of credit 4,033 10,918 24,528
Payment of principal on bank lines of credit (4,333) (10,155) (21,644)
Proceeds from debt obligations 39,228 44,936 40,494
Payment of principal on debt obligations (35,188) (43,905) (40,182)
Payment of principal on capital lease obligations (10) (12) (17)
Payment of debt issuance costs (513) (26) --
-------- -------- --------
Net cash provided by financing activities 3,217 1,756 3,179
-------- -------- --------
Increase (decrease) in cash and cash equivalents 2,581 (541) (334)
Cash and cash equivalents, beginning of period 1,278 3,859 3,318
-------- -------- --------
Cash and cash equivalents, end of period $ 3,859 $ 3,318 $ 2,984
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION:
Lundgren Bros. Construction, Inc. and its wholly-owned subsidiaries (the
Company) are in the business of land acquisition and development, single
family home construction and residential remodeling in the Minneapolis,
Minnesota metropolitan area.
BASIS OF PRESENTATION:
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and general practices within the land development
and single family home construction industry.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Lundgren Bros.
Construction, Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
RESTRICTED CASH:
Restricted cash includes customer deposits maintained in a restricted trust
account and certain debt proceeds obtained for specific development purposes.
Customer deposits are held in a restricted trust account until all purchase
agreement contingencies are cleared, at which time the customer deposit is
transferred to the Company's unrestricted cash account. The debt proceeds are
maintained in a restricted cash account and disbursed as certain development
costs are incurred and project approvals are obtained.
CONCENTRATION OF ASSETS AND CREDIT RISK:
The Company holds substantially all of its cash, cash equivalents and restricted
cash in two financial institutions with approximately 76% and 93% of these funds
being held in the Company's principal banking institution at December 31, 1994
and 1995, respectively. At times, these balances may be in excess of the FDIC
insurance limit. In addition, substantially all of the cash surrender value of
life insurance policies is with one insurance company.
Credit risk related to the Company's primary business of constructing
residential homes and sale of lots is not significant because the Company
generally requires earnest money deposits and payment is received upon closing
the sale of the property. For other business activities, including remodeling
and painting, the Company retains a collateral interest in the property until
the receivable is collected in full.
The Company's business is impacted by local and national general economic
conditions and, in particular, by mortgage interest rates and the availability
of mortgage financing. Any substantial increase in mortgage interest rates or
decrease in consumer confidence levels could cause a decrease in future home
sales. Historically, the Company has been able to pass increased development and
construction costs onto its customers and expects to be able to do so in the
future; however, if costs increase substantially, and at an accelerated rate,
the Company may be unable to recover all of the increased costs through higher
sales prices.
INVENTORIES:
Inventories consist principally of homes under construction, lots held for sale
and land, including land acquisition and improvement costs, and are valued at
lower of cost or market, with cost determined on a specific identification
basis.
DEBT ISSUANCE COSTS:
Debt issuance costs associated with obtaining of subordinated debenture
financing are deferred and amortized to interest expense over the terms of the
related debt using the straight-line method, which approximates the effective
interest rate method.
FORWARD COMMITMENT COSTS:
Costs incurred in obtaining customer financing to facilitate more favorable
interest rates for home buyers have been capitalized and are being amortized on
the straight-line method, which approximates the effective interest rate method,
over the shorter of the term of the forward commitment or the commitment of the
available mortgage funds.
Upon the sale of the related forward commitments, the unamortized cost is
removed from the accounts and any gain or loss thereon is included in other
income (expense) in the year of the sale.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation and amortization are
provided by charges to operations, over the estimated useful lives of the assets
of three to ten years for equipment, and fifteen to thirty years for leasehold
improvements, using straight-line and accelerated methods.
The cost and related accumulated depreciation or amortization on asset disposals
are removed from the accounts and any gain or loss thereon is included in
operations in the year of disposal. Maintenance and repairs are charged to
expense as incurred.
REVENUES AND RELATED COSTS:
Revenues and related costs of lot and home sales are recognized on the closing
date of the property sale. Costs to complete sold homes, including costs of
estimated warranty work, are accrued and included in the cost of revenues at the
same time. Historically, warranty costs have not been significant. Revenues and
related costs of residential remodeling projects are recognized upon the
completion of the project. Remodeling projects are generally three to six months
in duration. Customer deposits received on home sales and remodeling projects
are reflected as liabilities until the closing or completion of the project.
CAPITALIZED ACQUISITION, DEVELOPMENT AND CONSTRUCTION COSTS:
Option, land acquisition and development costs, which include direct land
acquisition and development employee payroll, are capitalized as land project
costs. Interest and real estate taxes are also capitalized as inventory during
the development period for land under development and during the construction
period of homes under construction. These capitalized costs are included as cost
of revenues when the lots and homes are sold.
INCOME TAXES:
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of differences between the financial statement and tax
bases of assets and liabilities using currently enacted tax rates in effect for
the years in which the differences are expected to reverse. Income tax expense
is the tax payable for the year and the change during the year in deferred tax
assets and liabilities.
INCOME PER SHARE:
Income per share is computed by dividing net income by the weighted average
number of shares of voting and nonvoting common stock outstanding during each
period. Total outstanding shares of common stock for 1993, 1994 and 1995 are
10,625 shares.
USE OF ESTIMATES:
The preparation of the Company's 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,
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The most significant areas which require the use of
management estimates relate to the determination of the cost to complete sold
homes, land development projects, warranty reserve, accrued unbilled
construction costs, the allowance for uncollectible accounts receivable, and the
assessment of the need for a valuation allowance for deferred tax assets.
2. SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1994 1995
------- -------
<S> <C> <C>
Receivables:
Trade $ 690 $ 768
Escrows 177 319
Contracts and notes 88 26
Employees and officers 21 17
Other 27 3
------- -------
1,003 1,133
Less allowance for doubtful accounts 55 55
------- -------
$ 948 $ 1,078
======= =======
Approximate amount of receivables due within one year $ 873 $ 1,116
======= =======
Inventories:
Homes under construction 10,396 10,822
Model homes 2,515 3,539
Developed lots 11,281 14,464
Land held for future development 6,054 5,341
------- -------
$30,246 $34,166
======= =======
Property and equipment:
Land 193 193
Building and leasehold improvements 1,559 1,557
Furniture and fixtures 572 659
Equipment 767 776
------- -------
3,091 3,185
Less accumulated depreciation and amortization 1,143 1,503
------- -------
$ 1,948 $ 1,682
======= =======
Other assets:
Cash surrender value of life insurance 2,251 2,619
Debt issuance costs, net of accumulated amortization of $81
and $132 at December 31, 1994 and 1995, respectively 458 407
Other 152 179
------- -------
$ 2,861 $ 3,205
======= =======
Accrued expenses:
Payroll, bonuses and payroll taxes $ 1,074 $ 926
Other 457 558
------- -------
$ 1,531 $ 1,484
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Interest expense:
Interest $ 1,474 $ 2,207 $ 3,188
Less capitalized interest (837) (1,316) (1,505)
Amortization of debt issuance costs 30 51 51
------- ------- -------
$ 667 $ 942 $ 1,734
======= ======= =======
Other income (expense):
Net gain on sale of forward commitments -- 186 --
Other, net (61) 40 116
------- ------- -------
$ (61) $ 226 $ 116
======= ======= =======
Changes in operating assets and liabilities:
Restricted cash (9) 176 (679)
Receivables (324) (36) (130)
Deposits and prepaid expenses (920) (730) 268
Inventories (5,022) (2,628) (2,101)
Land option and earnest money deposits (409) 721 (198)
Other assets (1) -- --
Accounts payable 4,721 (430) (1,557)
Cost to complete sold homes 57 (190) 648
Customer deposits 349 268 411
Accrued expenses 361 480 (47)
Income taxes payable (104) (31) (740)
------- ------- -------
$(1,301) $(2,400) $ 4,125
======= ======= =======
Cash paid for:
Interest, net of amount capitalized $ 513 $ 854 $ 1,619
Income taxes 974 1,001 790
</TABLE>
The Company acquired land for development under promissory notes with the
sellers aggregating $4,754, $3,715 and $1,538 for the years ended December 31,
1993, 1994 and 1995, respectively.
3. CHANGE IN ACCOUNTING METHOD:
Effective January 1, 1995, the Company changed its method of accounting for
capitalized land acquisition and development costs to begin the capitalization
of interest and real estate taxes on land development projects when initial
activities to prepare the property for its intended use commence, and to
capitalize all option costs and land acquisition and development employee
payroll costs as land project costs. The Company previously capitalized interest
and real estate taxes on land development projects when physical land
development commenced, and option costs (that do not apply to the purchase price
of the land) and land acquisition and development employee payroll costs were
accounted for as general and administrative expenses. The Company believes that
the new method better matches these costs with related revenues. The adjustment
for the cumulative effect of this change as of January 1, 1995 of $763, net of
income taxes of $527, is included in 1995 income. The effect of applying the new
accounting method for the year ended December 31, 1995, was to increase net
income approximately $210, net of income taxes of $144.
The following unaudited 1993 and 1994 pro forma amounts reflect the effect of
the retroactive application of applying the new method, and related tax effects:
1993 1994
---- ----
Gross profit $9,206 $11,811
Income from continuing operations 1,343 2,120
Net income 1,343 1,770
Per share:
Income from continuing operations 126 200
Net income 126 167
4. SEGMENT REPORTING:
The Company operated in two business segments in 1995 and 1993 and three
business segments in 1994 as follows:
* The new homes division, engaged in the interrelated activities of land
development and the design, construction, painting, staining, mortgage
financing and sale of detached single family homes.
* The remodeling division, engaged in the activities of designing and
constructing residential remodeling projects. These projects include
complete house renovations, kitchen remodelings, bathroom remodelings,
second story additions, finished basements, enclosed porches and patios,
and other miscellaneous projects.
* The patio enclosure division, which began and ceased operations in 1994
(see Note 5), engaged in the activities of selling and installing
three-season aluminum patio rooms and porch enclosures that were built on
existing or new decks and cement patios.
A substantial amount of cost allocations are necessary to determine the
operating income (loss) by segment. For this reason, and because the Company is
an integrated enterprise, management does not represent that these segments, if
operated as independent businesses, would result in the operating income (loss)
amounts shown below. Intersegment sales are not significant. The following is a
summary of financial information relating to the Company's two continuing
business segments:
YEARS ENDED DECEMBER 31
-----------------------------
1993 1994 1995
---- ---- ----
Net sales:
New homes $58,955 $75,814 $65,217
Remodeling 2,929 3,178 4,443
------- ------- -------
$61,884 $78,992 $69,660
======= ======= =======
Operating income (loss):
New homes $ 2,729 $ 4,013 $ 2,381
Remodeling 105 (707) (23)
------- ------- -------
$ 2,834 $ 3,306 $ 2,358
======= ======= =======
Assets:
New homes $35,419 $41,205 $46,346
Remodeling 408 1,414 1,417
------- ------- -------
$35,827 $42,619 $47,763
======= ======= =======
Depreciation and amortization:
New homes $ 278 $ 547 $ 366
Remodeling 12 97 142
------- ------- -------
$ 290 $ 644 $ 508
======= ======= =======
Expenditures for property and equipment:
New homes $ 512 $ 248 $ 217
Remodeling 65 1,083 26
------- ------- -------
$ 577 $ 1,331 $ 243
======= ======= =======
5. DISCONTINUED OPERATIONS:
Effective September 30, 1994, the Company adopted a plan to discontinue
operations of its patio enclosure division (Betterliving). Accordingly, the
consolidated financial statements were reclassified to report separately the
operating results of the business.
In 1994, the Company recognized a loss on the disposal of $98, net of income
taxes of $67, consisting of an estimated loss on disposal of the business of
$93 and a provision of $5 for anticipated future operating losses until
disposal. The disposal of the discontinued operation was completed in early 1995
without incurring additional losses. The following is a summary of operating
results of the discontinued operation for the year ended December 31, 1994:
Sales $545
Loss before income taxes 425
Net loss 251
6. LUNDGREN BROS. MORTGAGE COMPANY:
In July 1994, the Company's wholly-owned subsidiary Lundgren Bros. Mortgage
Company (the Mortgage Company) entered into an agreement with a mortgage lending
industry consultant to set up a mortgage lending program that provides mortgage
financing services to the Company's home buyers. Under the agreement, the
Mortgage Company completed and processed loan applications for home buyers,
which were submitted to a wholesale mortgage lender. The Mortgage Company
received an origination fee and servicing release premium for each mortgage
closed. In February 1995, the Mortgage Company terminated the agreement with the
mortgage lending industry consultant.
7. EQUITY INVESTMENTS:
The Company has minority ownership interests in two land investment partnerships
and a partnership which owns the office building the Company leases (Note 9).
These investments are recorded on the equity method of accounting. The Company's
aggregate investment in these partnerships was approximately $125 and $167 at
December 31, 1994 and 1995, respectively. The Company's share of the
partnerships' operating results was approximately $5, $4 and $21 for the years
ended December 31, 1993, 1994 and 1995, respectively.
8. DEBT OBLIGATIONS AND LINES OF CREDIT:
The Company has an approved working capital line of credit of $3,500 expiring
May 31, 1996, with interest at .5% over the prime rate on borrowings up to the
aggregate net cash surrender value of life insurance policies pledged and 1.25%
over the prime rate on additional borrowings. At December 31, 1995, borrowings
under the line of credit are limited to $3,119, which is the sum of the current
amount of cash surrender value of assigned life insurance plus $500. The line is
due on demand, term life insurance on the major stockholder and the cash
surrender value of other life insurance are pledged as collateral, and the line
is personally guaranteed by the stockholders. The Company had an outstanding
balance on the line of credit of $766 and $2,775 at December 31, 1994 and 1995,
respectively. The agreement prohibits the payment of dividends and requires at
least 90% of the Company's cash and cash equivalents to be held in accounts of
the lending financial institution.
The Company also has an approved working capital line of credit, based on a
borrowing base formula of finished lots held in inventory not to exceed $3,000,
expiring March 31, 1996, with interest at 3% over the prime rate, due on demand.
At December 31, 1995, borrowings under the line of credit are limited to $2,676
based on the borrowing base formula. Lots held in inventory are pledged as
collateral and this line also is personally guaranteed by the stockholders. The
line of credit is subordinated to other debt on the lots held in inventory. The
Company had an outstanding balance on the line of credit of $800 at December 31,
1995. There were no outstanding borrowings on the line of credit at December 31,
1994.
In 1995, a subsidiary of the Company obtained an approved working capital line
of credit of $100 expiring February 28, 1996 with interest at 4.5% over the
three-month U.S. treasury bill interest rate (5.5% at December 31, 1995), due on
demand. The Company had an outstanding balance on the line of credit of $75 at
December 31, 1995.
Other debt obligations at December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1994 1995
---- ----
<S> <C> <C>
Construction loans on single family homes, with interest at 2% to 3%
above the prime rate $ 8,642 $ 9,317
Promissory notes, with interest at 6% to 10% 4,562 3,860
Development loans, with interest at 2% to 5% above the prime rate, but
not to be less than 8% or more than 18% 4,450 6,415
Subordinate debenture series, with interest at 10% 3,000 2,962
Street, sewer and water assessments on land under development and lots
held for sale, with interest at 7% to 11% 1,422 1,598
Installment loans, with interest from 5.9% to 12.75% 854 736
Unsecured demand notes payable, stockholders, with interest at 11.5% 450 357
Noncompete obligation, officer 30 15
------- -------
$23,410 $25,260
======= =======
</TABLE>
The construction loans, promissory notes and development loans are
collateralized by substantially all of the Company's inventories, in addition to
the personal guarantees of all stockholders on the development loans. The
installment loans are collateralized by transportation and computer equipment.
The subordinated debenture series is due in 2003 and includes terms for early
redemption by the Company after 1995. The indenture is subordinated to all of
the Company's senior indebtedness, as defined in the agreement. Under terms of
the indenture, the Company is prohibited from declaring or paying any dividend
on its stock or making any other distribution on any equity securities of the
Company. In addition, the indenture includes certain restrictions on business
mergers, sale or acquisition of assets and compensation of executive officers.
The prime rate was 8.5% at December 31, 1994 and 1995.
The weighted average interest rate on short-term borrowings was 10.32% and
10.60% at December 31, 1994 and 1995, respectively.
The approximate principal payments on obligations, based on the scheduled
maturity dates at December 31, 1995, are set forth by year below.
1996 $14,999
1997 2,183
1998 2,822
1999 644
2000 222
Thereafter 4,390
-------
$25,260
=======
9. LEASING ARRANGEMENTS:
The Company is obligated for the rental of its primary office building from an
affiliated partnership (Note 7), other office and warehouse buildings and
certain equipment and software under noncancellable capital and operating leases
which expire at various dates to 2009. The rent on the primary office building
is escalated based on changes in the local consumer price index.
CAPITAL LEASES:
Minimum future lease obligations under capital leases for the office building
and equipment as of December 31, 1995, are as follows:
Year Ending December 31:
1996 $ 120
1997 111
1998 111
1999 111
2000 111
2001 to 2009 980
---- ---- ------
Total minimum lease payments 1,544
Less amount representing interest and consumer
price index adjustment 1,039
------
Present value of minimum lease payments $ 505
======
Capital lease and real estate tax payments to the affiliated partnership were
$138, $135 and $135 for the years ended December 31, 1993, 1994 and 1995,
respectively.
The cost and accumulated amortization of a building and equipment under capital
leases were $633 and $330 for 1994 and $607 and $329 for 1995, respectively.
OPERATING LEASES:
The Company leases an office and warehouse building with annual base rentals of
approximately $36 through April 1998 and office space with annual base rentals
of $25 through February 1997. In addition, certain equipment and software are
leased under operating leases with terms of one year or less. Rental expense was
approximately $189, $419 and $291 for the years ended December 31, 1993, 1994
and 1995, respectively.
10. LAND OPTION AND EARNEST MONEY DEPOSITS:
The Company has entered into option and purchase agreements to acquire lots in
residential housing developments and land for future development. Payments and
deposits made under these agreements are as follows:
DECEMBER 31
-----------
1994 1995
---- ----
Option payments $567 $651
Earnest money deposits 156 270
--- ---
$723 $921
==== ====
On exercise of the option, option payments are generally applied to the purchase
price of land acquired in accordance with the terms of the agreement.
Earnest money deposits are to be credited against future purchases. The Company
has contingent land purchase commitments totaling approximately $2,408 and
$3,069 at December 31, 1994 and 1995, respectively, related to the earnest money
deposits.
11. BENEFIT PLANS:
DISCRETIONARY BONUS PLAN:
The Company has discretionary bonus programs for certain officers and key
management employees. The executive committee of the Board annually determines
the amounts of the bonuses to be paid. Bonuses paid under these programs were
$1,118, $700 and $800 for the years ended December 31, 1993, 1994 and 1995,
respectively.
RETIREMENT PLAN:
The Company has a qualified contributory retirement plan (the Plan) under
Section 401(k) of the Internal Revenue Code which covers all full-time employees
who meet certain eligibility requirements. Voluntary contributions are made to
the Plan by the employees and Company matching contributions are made at the
discretion of the Board of Directors. Company matching contributions of
approximately $49, $63 and $62 were made for the years ended December 31, 1993,
1994 and 1995, respectively.
In addition, the Plan allows the Company to make discretionary profit-sharing
contributions to the Plan up to the maximum amount deductible for income tax
purposes. No profit-sharing contributions were made for the years ended December
31, 1993, 1994 or 1995.
12. INCOME TAXES:
The components of the provision for income taxes for the years ended December
31, 1993, 1994 and 1995 are as follows:
YEARS ENDED DECEMBER 31
-----------------------
1993 1994 1995
---- ---- ----
Currently payable:
Federal $660 $ 918 $ 37
State 210 293 13
Deferred (10) (168) 268
---- ------ ----
Income tax provision for continuing
operations 860 1,043 318
Income tax provision for:
Change in accounting method -- -- 527
Discontinued operations -- (241) --
---- ------ ----
$860 $ 802 $845
==== ====== ====
Deferred income tax assets include the following:
DECEMBER 31
-----------------------
1993 1994 1995
---- ---- ----
Capitalization of option costs related to land
projects $ 21 $170 $ --
Depreciation 32 52 106
Interest expensed on land mortgages -- -- (204)
Estimated costs to complete lots sold 16 4 54
Accrued vacation pay 14 32 26
Inventory capitalization 24 23 19
Allowance for doubtful accounts receivable 16 22 22
Other 27 15 27
---- ---- -----
$150 $318 $ 50
==== ==== =====
The reconciliation of the statutory federal income tax rate with the effective
income tax rate is as follows:
YEARS ENDED DECEMBER 31
------------------------
1993 1994 1995
---- ---- ----
Statutory income tax rate 34.0% 34.0% 34.0%
Increase (reduction) in tax resulting from:
State taxes, net of federal benefits 6.5 6.0 6.9
Increase in cash surrender value of life
insurance policies in excess of policy
premiums paid (.1) (1.4) (2.7)
Other .4 1.7 4.8
---- ---- ----
40.8% 40.3% 43.0%
==== ==== ====
13. STOCK PURCHASE AGREEMENT:
Under the terms of a stock purchase agreement, in the event of the death or
total disability of any stockholder, the Company is obligated to purchase and
the stockholder is obligated to sell all nonvoting stock held by that
stockholder for an amount that, subject to the limitations described below, is
the lessor of twice the book value per share or $658.82 per share. Certain other
stockholders have the first option to purchase not less than all of the voting
stock held by a stockholder at the time of death or total disability, and the
Company is obligated to purchase such voting shares only if those other
stockholders fail to exercise their option. Under the agreement, the amount
payable by the Company for voting and nonvoting stock is limited to the amount
of insurance proceeds received (after reductions, if necessary, because the cash
surrender value is pledged as collateral on a bank line of credit) under
policies owned by the Company covering the lives and possible disability of each
stockholder.
At any other time, the stockholder may offer his stock for sale to the other
stockholders or the Company at a formula price in accordance with certain
provisions of the agreement.
LUNDGREN BROS. CONSTRUCTION, INC.
PAST & PRESENT SUBDIVISIONS
[MAP DIAGRAM]
PAST SUBDIVISIONS
1...Fairfield Estates
2...Wood Creek
3...Willow Ponds
4...Shiloh
5...Mission Ridge
6...Willowbrook
7...Schmidt Lake Estates
8...Seven Ponds East
9...Chippewa Trails
10..Ferndale North
11..Hadley Place
12..Wind Ridge at Bass Lake
13..Bent Tree
14..NearMountain*
15..Burl Oaks
16..Tealwood
17..Chestnut Ridge
18..Willow Bend
19..Quail Ridge
20..Mission Trails
21..Churchill Farms
22..Bay Pointe on Mooney Lake
23..Harbor Woods
24..Fox Run
25..Mill Run
26..Shorewood Oaks
27..Boulder Pointe
28..Woodlands at Dufferin Park
29..Park Place at Wedgewood
30..WillowRidge
31..The Summit at Near Mountain
32..Autumn Hills
CURRENT SUBDIVISIONS
A...Foxberry Farms
B...Plum Tree
C...Wynnfield**
D...Rosemary Woods
E...Heather Run
F...Kensington Knolls
G...Woodwinds
H...Longacres (Meadows and Woods)
I...Tamarack
J...Amber Leaf
K...Savannah
L...Highlands on Lake St. Joe
* THE NEAR MOUNTAIN (#14) PLANNED UNIT DEVELOPMENT INCLUDES THESE
SUBDIVISIONS: CHESTNUT RIDGE, MCKINLEY PLACE, SWEETWATER, TRAPPERS PASS,
AND THE SUMMIT
** WYNNFIELD INCLUDES THESE SUBDIVISIONS: WYNNFIELD NORTH, WYNNFIELD MEADOWS,
AND WYNNFIELD ON THE LAKE 6/96
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
Page
----
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 9
Capitalization 9
Dividend Policy 9
Selected Consolidated Financial Data 10
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Business 17
Management 33
Certain Transactions 36
Principal Shareholders 37
Description of Debentures 38
Underwriting 45
Legal Matters 46
Experts 46
Available Information 46
Index to Consolidated Financial
Statements F-1
UNTIL AT LEAST , 1996 (OR 90 DAYS AFTER THE EFFECTIVE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[LOGO] LUNDREN BROS.
$3,000,000
SENIOR SUBORDINATED DEBENTURES
SERIES 11%
MINIMUM PURCHASE: $2,000
PROSPECTUS
MILLER & SCHROEDER FINANCIAL, INC.
OFFERMAN & COMPANY
OCTOBER 18, 1996
