SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from __________ to __________
Commission file number 33-58934
LUNDGREN BROS. CONSTRUCTION, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0970679
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
935 EAST WAYZATA BLVD., WAYZATA, MINNESOTA 55391
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (612) 473-1231
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.
The voting stock is privately held. None of the voting stock is held by
non-affiliates of the registrant.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the last practicable date.
On March 26, 1997, there were 594 voting and 10,031 non-voting shares
of the registrant's no par value common stock outstanding.
FORM 10-K INDEX
PART I
Item 1. BUSINESS....................................................1
Item 2. PROPERTIES.................................................14
Item 3. LEGAL PROCEEDINGS..........................................15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS DURING FOURTH QUARTER OF FISCAL YEAR...............15
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS................................15
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.......................16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................................17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................23
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT.............................................24
Item 11. EXECUTIVE COMPENSATION.....................................27
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT......................................28
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS...............................................30
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K....................................31
SIGNATURES...................................................................37
EXHIBIT INDEX................................................................39
PART I
ITEM 1. BUSINESS
GENERAL
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 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 contract relationships with 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. The Company also
periodically options or purchases finished lots from other developers.
Since its incorporation in 1970, the Company and its affiliates have
developed 2,563 lots. On December 31, 1996, the Company controlled 15 parcels of
land under Land Acquisition Agreements for future development of an estimated
1,552 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."
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 $339,000 in 1996. 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.
Since inception, the Company has built and sold over 2,448 single family
homes. The Company sells its homes primarily through its own staff of sales
personnel, although it also utilizes local realtors. The Company closed the
sales of 198 homes in 1996, and as of December 31, 1996, had purchase agreements
for the sale of 42 homes, representing approximately $14.1 million in sales. In
1995, the Company closed the sales of 202 homes, and as of December 31, 1995,
had contracts for the sale of 62 homes, representing approximately $21.0 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. The Company's offices are located in Wayzata, Minnesota.
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.
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
metropolitan area.
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. 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, environmental issues, archeological site status,
regulatory processing and approval schedule, financing alternatives, market
research, and 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.
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. 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
U.S. Census Bureau Twin Cities Metropolitan Statistical Area (The "Twin Cities
MSA"), which area includes 11 Minnesota counties and two counties in Wisconsin,
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 1996, 84.8% of the homes delivered by Lundgren were built on lots
developed by Lundgren, compared to 77.2% in 1995 and 53.8% in 1994. In the
future, the Company's goal is to maintain this percentage in the range of 50% to
70%. Since inception, the Company has developed 108 residential subdivisions,
ranging in size from 3 to 94 lots, in the Twin Cities MSA. In 1995, the Company
commenced the development of eight new residential subdivisions and, in 1996,
commenced the development of 11 new subdivisions.
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.
Since inception, the Company has developed 2,563 lots, for which the sales
of 2,249, or 87.7%, had been closed as of December 31, 1996. The remaining lots
are subject to purchase agreements or are available for sale. The development of
all but approximately 184 lots is complete. The subdivisions in which such 184
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 1997.
HOME BUILDING AND HOME SALES
The Company closed on 198 home sales in 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.
HOME CLOSINGS
Below is a summary of the Company's closings for the past five years.
YEARS ENDED DECEMBER 31,
------------------------
1992 1993 1994 1995 1996
(Dollars in thousands, except numbers of homes closed)
Homes Closed 147 216 247 202 198
Average Selling Price $ 268 $ 265 $ 297 $ 311 $ 339
of Homes(1)
Total Volume of Closed Homes $39,388 $57,136 $73,471 $62,796 $67,079
- ---------------------
(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 the types
of homes that it will be selling in the year ended December 31, 1997, will
be $317,000.
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 Company's new home 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
Company's 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."
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 from the Company's standard product line, the
construction department, purchasing department and 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 (computerized architectural design programs) system. The Auto Cad
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 an 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 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: 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 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 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 (a) 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 (b) controlling the number of finished homes held in
inventory on a project-by-project basis and monitoring weekly the sales progress
of each subdivision.
For sales and marketing purposes, the Company generally will build one to
three model homes in each of its subdivisions. These homes are completed,
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.
As of December 31, 1996, the Company had 38 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 38 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 38 houses in inventory as of December 31, 1996, were located in 19
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.
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 40.7% of Brush Masters' sales in 1996.
Brush Masters competes with numerous small painting and staining
contractors, generally on the basis of quality and service.
EMPLOYEES
At December 31, 1996, the Company employed 183 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.
ITEM 2. PROPERTIES
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
$12,500, 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:
SQUARE LEASE MONTHLY EXPIRATION
TYPE FEET LOCATION PAYMENT DATE
---- ---- -------- ------- ----
Warehouse 1,120 Loretto $ 650 month to
month
Office/Warehouse 8,450 Medina $3,000(1) 4/30/98
- --------------------
1) Does not include required additional payments for operating expenses.
ITEM 3. LEGAL PROCEEDINGS
The Company is not subject to any currently pending legal proceedings other than
those arising in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS DURING FOURTH
QUARTER OF FISCAL YEAR.
There were no matters submitted to a vote of the Company's shareholders during
the three-month period ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is held of record by five persons and is not actively
traded. The Company paid no dividends on its common stock during the three-year
period ended December 31, 1996. The terms of certain of the Company's debt
agreements restrict the payment by the Company of dividends on its common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of and for
the years ended December 31, 1992, 1993, 1994, 1995 and 1996 are derived from
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, 1995 and 1996, and for the years ended
December 31, 1994, 1995 and 1996 is included elsewhere in the Form 10-K. The
consolidated statement of income data, as they relate to each of the three years
in the period ended December 31, 1996, and the selected consolidated balance
sheet data, as of December 31, 1995 and 1996, should be read in conjunction with
the Consolidated Financial Statements, including the Notes thereto, set forth
elsewhere in this Form 10-K and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which follows.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
-------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF INCOME DATA(1):
Revenues(2) $ 41,043 $ 58,955 $ 75,814 $ 65,217 $ 69,798
Cost of revenues $ 34,138 50,233 64,004 55,591 59,052
-------- ------- -------- -------- --------
Gross profit 6,905 8,722 11,810 9,626 10,746
Operating expenses 5,071 5,994 7,858 7,429 7,306
-------- ------- -------- -------- --------
Operating income 1,834 2,728 3,952 2,197 3,440
Other income (expense), net (401) (727) (706) (1,608) (1,575)
-------- ------- -------- -------- --------
Income from continuing operations
before income taxes 1,433 2,001 3,246 589 1,865
Income tax provision for
continuing operations 564 817 1,308 253 709
-------- ------- -------- -------- --------
Income from continuing operations 869 1,184 1,938 336 1,156
Cumulative effect on prior years of
change in accounting method -- -- -- 763 --
Income (loss) from discontinued operations (14) 62 (740) 86 (145)
-------- ------- -------- -------- --------
Net income $ 855 $ 1,246 $ 1,198 $ 1,185 $ 1,011
======== ======== ======== ======== ========
Income (loss) per share:
Continuing operations $ 82 $ 111 $ 182 $ 32 $ 109
Cumulative effect of change in
accounting method -- -- -- 72 --
Discontinued operations (2) 6 (69) 8 (14)
-------- ------- -------- -------- --------
Net income $ 80 $ 117 $ 113 $ 112 $ 95
======== ======== ======== ======== ========
AS OF DECEMBER 31,
--------------------------------------------------------
SELECTED BALANCE SHEET DATA: 1992 1993 1994 1995 1996
-------- ------- -------- -------- --------
Inventories $ 14,126 $ 23,903 $ 30,246 $ 34,166 $ 37,828
Total assets 20,712 35,825 42,619 47,763 51,695
Long-term debt 1,356 7,219 10,664 10,766 15,739
Total liabilities 17,956 31,823 37,419 41,378 44,299
Stockholders' equity 2,756 4,002 5,200 6,385 7,396
- -------------------------
</TABLE>
(1) The selected statement of income data has been restated to reflect the
discontinuation of the remodeling business in November 1996.
(2) 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.
ITEM 7.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, 1995 and 1996, and for the years ended
December 31, 1994, 1995, and 1996 should be read in conjunction with the
Company's Consolidated Financial Statements, related Notes thereto, and other
information presented elsewhere in this Form 10-K.
GENERAL
During 1995 and 1996, 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, which was
discontinued in November 1996, consisted 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 1996, home construction and lot revenues were
$67.1 million or 96% of total revenues. Revenues from painting and staining
(excluding those to the Company's new home construction operations) were $2.7
million or 4% of total revenues. 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 1996, sales of lots to other builders accounted for less than 1% of
total revenues. Revenues from remodeling of $3.8 million are included in
discontinued operations.
The Company's gross profit on home construction revenues and lot revenues
for 1996 was $10.5 million or 97% of the total gross profit. Of the $10.5
million gross profit, $7.2 million was derived from the sale of homes and $3.3
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 1996
the gross profit margin on home construction revenues was 14%, 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 10% in 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 December 31,
1996, the Company had signed purchase agreements for the sale of 42 homes,
compared to 62 homes at December 31, 1995. The Company considers these signed
purchase agreements 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 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.
RESULTS OF OPERATIONS
1996 Compared to 1995
Revenues increased $4.6 million or 7.0% in 1996 compared to 1995. The
Company closed on sales of 198 homes in 1996, compared to 202 closings in 1995.
The average selling price of homes closed increased by 9.0% in 1996 from the
average selling price of homes closed in 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 increased to 15.4% in 1996, compared to 14.8% 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, changes in methods of construction, and an increase in the mix of
homes sold on land developed by the Company versus lots purchased from other
developers.
Operating expenses (which include selling, general and administrative
expenses) decreased by $123,000 in 1996 compared to 1995. As a percentage of
revenues, these expenses decreased to 10.5% in 1996 compared to 11.4% in 1995.
The decrease is mainly due to a $540,000 decrease in discretionary officer
bonuses and a decrease in fees paid for mortgage commitments in 1996. These
decreases are partially offset by an increase in advertising costs for special
promotions in 1996, and increases in real estate taxes as a result of increased
land and house inventories.
OTHER INCOME (EXPENSE), NET
Interest expense remained constant at $1.7 million in 1996 and 1995. Other
income (expense), net increased $51,000 in 1996 from 1995. The increase is
mainly due to a gain on the sale of an investment in a land development
partnership of $123,000 which is partially offset by a decrease in interest
income.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations was $1.2 million, an increase of 244.0%
in 1996 from $336,000 in 1995. This increase is primarily due to improved gross
profit margins and a decrease in operating expenses in 1996.
NET INCOME (LOSS)
Net income in 1996 was $1.0 million, a decrease of $174,000 from $1.2
million of net income in 1995. This decrease is mainly due to the increase in
1995 income for the 1995 change in accounting for land acquisition and
development costs of $763,000 and a loss in 1996 from the discontinued
operations of the Company's remodeling division of $145,000, which is partially
offset by an $820,000 increase in income from continuing operations.
1995 Compared to 1994
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 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 (which include selling, general and administrative
expenses) decreased $429,000 or 5.5% as compared to 1994. As a percentage of
total revenues, these expenses increased to 11.4% in 1995 compared to 10.4% 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.
OTHER INCOME (EXPENSE), NET
Interest expense increased $793,000 or 85.1% to $1.7 million in 1995
compared to $932,000 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 $109,000 or 48.2% to $117,000 in 1995
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 was $336,000 in 1995, a decrease of 82.7%
from $1.9 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 for 1995 is the $763,000 cumulative effect of a change in
accounting for land acquisition and development costs and income from
discontinued operations of $86,000 for the Company's remodeling business. Net
income for 1994 included a $740,000 loss from discontinued operations of the
Company's remodeling and patio enclosure businesses.
LIQUIDITY AND CAPITAL RESOURCES
1996 Compared to 1995
Cash flows used in operating activities were $1.0 million in 1996, a
decrease of approximately $2.0 million from the $3.0 million used in 1995. In
1996, cash was used for a $871,000 increase in deposits and prepaid expenses,
principally for expenses incurred in research of potential land projects, a
reduction of accounts payable of $1.3 million, and $374,000 for discontinued
operations. These uses of cash were partially offset in 1996 by $1.2 million in
cash provided by income from continuing operations, an increase in accrued
expenses, principally for bonuses to employees other than stockholders, of
$431,000, and other changes in operating assets and liabilities.
Cash flows used in investing activities were $652,000 in 1996, an increase
of approximately $78,000 from $574,000 cash used in 1995. The increase was
primarily due to an increase in cash surrender value of life insurance and
expenditures for property and equipment, which were partially offset by proceeds
from the sale of an investment in a land development partnership.
Cash flows used in financing activities were $50,000 in 1996, a decrease
of approximately $3.3 million from the $3.2 million provided by financing
activities 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
in 1996 compared to 1995. These decreases were partially offset in 1996 by $3
million of additional subordinated debenture debt.
1995 Compared to 1994
Cash flows used by operating activities were $3.0 million in 1995, an
increase of $2.2 million from 1994, during which operating activities used
$761,000 of cash flow. In 1995, cash was used for a $2.2 million increase in
inventories, a $1.7 million reduction in accounts payable and $1 million in
income tax payments. These uses of cash were partially offset in 1995 by
$336,000 in cash provided by income from continuing operations, reductions in
costs to complete sold homes of $676,000 and customer deposits of $444,000, and
other changes in operating assets and liabilities.
Cash flows used in investing activities decreased $906,000 to $574,000 in
1995 from approximately $1.5 million in 1994. The decrease was primarily due to
construction costs incurred in 1994 of a new design center and showroom.
Cash flows provided by financing activities increased $1.5 million to $3.2
million in 1995 from $1.7 million in 1994. The increase is primarily due to
increased borrowings on the Company's bank lines of credit to fund operations.
Financing
The Company believes that internally generated funds, amounts available
under its four lines of credit and borrowing arrangements, including the
Subordinated 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 December 31, 1996, the aggregate maximum credit
available under the lines of credit was $8.7 million, of which $3.0 million was
utilized and $5.7 million was available.
The Company's outstanding indebtedness as of December 31, 1996, included
$18.4 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. As interest rates increase, construction and financing costs, as well as
the cost of borrowed funds, also increase and can result in lower gross profits.
In addition, as interest 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.
The forward-looking statements contained in this annual report on Form 10-K,
including without limitation forward-looking statements contained in
Management's Discussion and Analysis, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Certain
important factors could cause results to differ materially from those
anticipated by some statements made herein. You are cautioned that all
forward-looking statements involve risks and uncertainties. Among the factors
that could cause results to differ materially are the following: cyclical
economic conditions; fluctuations in operating results; continuing need to
acquire land for future development; substantial leverage; reliance on financing
and no assurance of availability of credit; extensive government regulation; and
environmental factors. Reference is also made to the risk factors contained in
the Company's Registration Statement on Form S-1, as filed with the Securities
and Exchange Commission on October 18, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 beginning on page 40.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers and directors of Lundgren are as follows:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Peter Pflaum 54 President and Director, Executive Committee Member
Terrance M. Forbord 46 President - Land Development Division, Executive
Committee Member
William O. Burgess 32 Vice President - Purchasing, Executive Committee Member
James L. Weaver 43 Vice President - Construction, Executive Committee
Member
Allan D. Lundgren 54 Vice President, Secretary/Treasurer
and Director, Executive Committee Member
Brian E. Gilgosch 49 Vice President - Sales and Marketing, Executive
Committee Member
Peter T. Beucke 38 Director of Design, Executive Committee Member
Laurie A. Vercnocke 47 Controller, Executive Committee Member
Michael A. Pflaum 52 Vice President - Land Development
Edmund M. Lundgren 58 Vice President and Director
Gerald T. Lundgren 57 Vice President
- --------------------
</TABLE>
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.
WILLIAM O. BURGESS has been Vice President - Purchasing since February
1997. In this position, he is responsible for purchasing, estimating and
overseeing the Company's Design Center and related operations. Prior to joining
the Company, Mr. Burgess was Director of Purchasing for Cambridge Homes, Inc. in
Chicago, Illinois, where he supervised the Purchasing and Estimating functions.
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 and Secretary/Treasurer since
October 1972 and was previously Vice President - Purchasing and 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.
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.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company to its
six most highly compensated executive officers for the last three fiscal years.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND OTHER ANNUAL ALL OTHER (1)
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) COMPENSATION ($)
------------------ ---- ---------- --------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Peter Pflaum 1996 202,174 112,500 0 1,875
President 1995 191,848 380,000 0 1,875
1994 175,000 338,000 0 2,310
Patrick C. Wells(2) 1996 88,307 33,750 0 0
1995 90,080 148,000 0 1,875
1994 85,000 107,000 0 2,310
Terrance M. Forbord 1996 158,577 100,000 4,800 1,875
President - Land 1995 140,962 130,000 4,800 1,875
Development Division 1994 128,320 150,000 4,500 2,249
James L. Weaver 1996 110,000 50,000 629 825
Vice President - 1995 96,923 40,000 6,000 0
Construction 1994 73,269 25,000 0 0
Brian E. Gilgosch 1996 103,292 50,000 984 0
Vice President- 1995 97,845 70,315 1,130 0
Sales and Marketing 1994 69,923 81,760 0 0
Michael A. Pflaum 1996 91,000 50,000 1,593 1,783
Vice President- 1995 91,000 50,000 2,258 1,638
Land Development 1994 90,500 40,000 0 1,569
- -------------------------------------------
</TABLE>
(1) Consists of a matching contribution by the Company to the Company's 401(k)
plan.
(2) As of January 2, 1997, Patrick C. Wells is no longer an officer or
director of the Company.
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 1993 Indenture restrict aggregate
bonuses paid to executive officers who are also shareholders in a year 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 performs the functions equivalent to a Compensation
Committee in that he makes decisions and recommendations regarding compensation.
Directors of the Company are not compensated for their services as
directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of
Lundgren's common stock as of December 31, 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
Wayzata, MN 55391 Non-voting Common 4,166 41.5%
Patrick C. Wells
935 East Wayzata Boulevard Non-voting Common 1,845 18.4%
Wayzata, MN 55391
Edmund M. Lundgren Voting Common 99 16.7%
935 East Wayzata Boulevard
Wayzata, MN 55391 Non-voting Common 1,340 13.3%
Allan D. Lundgren Voting Common 99 16.7%
935 East Wayzata Boulevard
Wayzata, MN 55391 Non-voting Common 1,340 13.4%
Gerald T. Lundgren Voting Common 99 16.6%
935 East Wayzata Boulevard
Wayzata, MN 55391 Non-voting Common 1,340 13.4%
All officers and directors as a group Voting Common 594 100.0%
(8 persons) and total shares
outstanding Non-voting Common 10,031 100.0%
- ----------------------------------
(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 December 31,
1996.
</TABLE>
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 a disabled or deceased
person's Block have the right to purchase such 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 a 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 will 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 $150,000, 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 $120,000 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 1996, the shareholders loaned an aggregate of
$107,000. In 1995, the shareholders loaned an aggregate of $357,000 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 consolidated tangible net worth, as
defined, of the Company exceeded $4.5 million. This occurred as of December 31,
1994 when the 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 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.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated financial statements of the Company.
Report of Independent Accountants
Consolidated Balance Sheets, December 31, 1995 and
1996
Consolidated Statements of Income and Retained
Earnings for the Years Ended December 31, 1994, 1995
and 1996
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
2. The following consolidated financial statement schedules of
the Company required to be filed by Item 8 and Paragraph (d)
of this Item 14:
None.
3. The following exhibits are hereby incorporated by reference or filed
herewith as indicated.
(1)3.1 Articles of Incorporation of Lundgren in effect on the date
hereof.
(1)3.2 Bylaws of Lundgren on the date hereof.
(1)4.1 Form of Debenture (included as Sections 202(A) and (B) of
Indenture filed as Exhibit 4.2 hereto).
(1)4.2 Form of Indenture by and between Lundgren and National City
Bank Minnesota, as Trustee, including a Form of Debenture.
(7)4.3 Form of Debenture (included as Sections 2.2(A) and (B) of
Indenture filed as Exhibit 4.4 hereto).
(7)4.4 Form of Indenture by and between Lundgren and National City
Bank Minnesota, National Association, as Trustee, including a
Form of Debenture.
(1)10.1 Lease by and among Lundgren, as lessor, Glenbrook Office
Building Partnership, and Peter Pflaum and Patrick C. Wells,
general partners, dated September 28, 1978.
(1)10.2 Amended and Restated Stock Purchase Agreement, dated February
1, 1993, by and among Lundgren, Peter Pflaum, Patrick Wells,
Edmund M. Lundgren, Gerald T. Lundgren and Allan D. Lundgren.
(3)10.3 Revolving Credit Line Agreement between the Company and
Builders Development & Finance, Inc., dated March 18, 1994.
(3)10.4 Mortgage Note, dated March 18, 1994, of the Company payable to
Builders Development & Finance, Inc.
(3)10.5 Combination Mortgage, Security Agreement and Fixture Financing
Statement between the Company and Builders Development &
Finance, Inc., dated March 18, 1994, including all amendments
hereto.
(1)10.6 Guaranty by Peter Pflaum, Patrick C. Wells, Allan D. Lundgren,
Edmund M. Lundgren and Gerald T. Lundgren for the benefit of
Builders Development & Finance, Inc., dated July 27, 1990.
(1)10.7 Demand Discretionary Revolving Credit Agreement between the
Company and Norwest Bank Minnesota, National Association,
dated November 30, 1990.
(1)10.8 First Amended and Restated Revolving Note, dated May 1, 1992,
of the Company payable to Norwest Bank Minnesota, National
Association.
(1)10.9 Assignment of Life Insurance Policy as Collateral by the
Company in favor of Norwest Bank Minnesota, National
Association, dated November 30, 1990.
(1)10.10 Assignment of Life Insurance Policy as Collateral by the
Company in favor of Norwest Bank Minnesota, National
Association, dated May 1, 1992.
(1)10.11 Guaranty by Peter Pflaum, Patrick C. Wells, Allan D. Lundgren,
Edmund M. Lundgren and Gerald T. Lundgren for the benefit of
Norwest Bank Minnesota, National Association, dated November
5, 1990 and all extensions thereof.
(5)10.12 Commercial Lease, dated June 1, 1995, by and between Koecheler
& Olson Leasing and Lundgren Bros. Plumbing.
(5)10.13 Lease Agreement, dated April 10, 1995, by and between B.M.
Acquisitions Corporation (Brush Masters, Inc.) and John J.
Day.
(1)10.14 Loan Agreement, dated as of May 8, 1992, by and between the
Company and Builders Development & Finance, Inc.
(1)10.15 First Mortgage Note, dated May 8, 1992, of the Company payable
to Builders Development & Finance, Inc.
(1)10.16 Second Mortgage Note, dated May 8, 1992, of the Company
payable to Builders Development & Finance, Inc.
(1)10.17 First Mortgage, dated May 8, 1992, by the Company in favor of
Builders Development & Finance, Inc.
(1)10.18 Second Mortgage, dated May 8, 1992, by the Company in favor of
Builders Development & Finance, Inc.
(1)10.19 Guaranty, dated as of May 8, 1992, by Peter Pflaum, Edmund M.
Lundgren, Gerald T. Lundgren, Allan D. Lundgren and Patrick C.
Wells for the benefit of Builders Development & Finance, Inc.
(1)10.20 Construction Loan Agreement, dated as of July 22, 1992, by and
between the Company and Scherer Bros. Financial Services Co.
(1)10.21 Mortgage and Security Agreement, dated July 22, 1992, between
the Company and Scherer Bros. Financial Services Co.
(1)10.22 Promissory Note, dated July 22, 1992, of the Company payable
to Scherer Bros. Financial Services Co.
(1)10.23 Guaranty, dated as of July 22, 1992, by Allan Lundgren for the
benefit of Scherer Bros. Financial Services Co.
(1)10.24 Guaranty, dated as of July 22, 1992, by Patrick Wells for the
benefit of Scherer Bros. Financial Services Co.
(1)10.25 Guaranty, dated as of July 22, 1992, by Peter Pflaum for the
benefit of Scherer Bros. Financial Services Co.
(1)10.26 Guaranty, dated as of July 22, 1992, by Edmund Lundgren for
the benefit of Scherer Bros. Financial Services Co.
(1)10.27 Guaranty, dated as of July 22, 1992, by Gerald Lundgren for
the benefit of Scherer Bros. Financial Services Co.
(1)10.28 Development Loan Agreement, dated May 15, 1992, by and between
the Company and Construction Mortgage Investors Co.
(1)10.29 First Mortgage Note, dated May 15, 1992, of the Company
payable to Construction Mortgage Investors Co.
(1)10.30 First Mortgage, dated May 15, 1992, by the Company in favor of
Construction Mortgage Investors Co.
(1)10.31 Guaranty, dated May 15, 1992, by Peter Pflaum, Patrick C.
Wells, Allan D. Lundgren, Edmund M. Lundgren and Gerald T.
Lundgren for the benefit of Construction Mortgage Investors
Co.
(1)10.32 Contribution Agreement, dated as of February 17, 1993, by and
among the Company, Peter Pflaum, Patrick C. Wells, Allan D.
Lundgren, Edmund M. Lundgren and Gerald T. Lundgren.
(5)10.33 Shopping Center Lease, dated February 9, 1994, by and between
Oakdale Mall Associates and Lundgren Bros. Construction, Inc.
d/b/a Lundgren Bros. Remodeling.
(1)10.34 Form of Option to Purchase Land.
(1)10.35 Form of Contingent Purchase Agreement.
(5)10.36 Amendment No. 1 to Amended and Restated Stock Purchase
Agreement, dated April 1, 1993.
(2)10.37 Amended and Restated Demand Discretionary Revolving Credit
Agreement, dated March 18, 1994, by and between Norwest Bank
Minnesota, National Association and Lundgren Bros.
Construction, Inc.
(4)10.38 Fourth Amended and Restated Revolving Note (Demand), dated
March 14, 1995, of the Company payable to Norwest Bank
Minnesota, National Association.
(4)10.39 Consent and Reaffirmation of Guaranty, dated March 14, 1995,
by Peter Pflaum, Patrick C. Wells, Edmund M. Lundgren, Allan
D. Lundgren and Gerald T. Lundgren in favor of Norwest Bank
Minnesota, National Association.
(3)10.40 Satisfaction of Combination Mortgage, Security Agreement and
Fixture Financing Statement executed by Builders Development &
Finance, Inc. on March 29, 1994.
(3)10.41 Letter Agreement, dated February 17, 1994, between Builders
Funding Corporation and Lundgren Bros. Construction, Inc.
(4)10.42 Amendment, Extension and Reaffirmation Agreement, dated March
14, 1995, by and among Lundgren Bros. Construction, Inc.,
Patrick C. Wells, Peter Pflaum, Edmund M. Lundgren, Allan D.
Lundgren and Gerald T. Lundgren and Norwest Bank Minnesota,
National Association.
(4)10.43 Supplemental Assignment of Life Insurance Policies as
Collateral, dated March 14, 1995, by Lundgren Bros.
Construction, Inc. in favor of Norwest Bank Minnesota,
National Association.
(4)10.44 Second Supplemental Assignment of Life Insurance Policies as
Collateral, dated March 16, 1995, by Lundgren Bros.
Construction, Inc. in favor of Norwest Bank Minnesota,
National Association.
(5)10.45 Third Amendment to Combination Mortgage, Security Agreement
and Fixture Financing Statement and Amendment to Revolving
Credit Line Agreement, dated January 25, 1995, by Lundgren
Bros. Construction, Inc. and Builders Development & Finance,
Inc.
(6)10.46 Second Amended and Restated Mortgage Note, dated May 20, 1996,
of Lundgren Bros. Construction, Inc. payable to Builders
Development & Finance, Inc.
(6)10.47 Eighth Amendment to Combination Mortgage, Security Agreement
and Fixture Financing Statement and Second Amendment to
Revolving Credit Line Agreement and Reaffirmation Agreement,
dated May 20, 1996, by Lundgren Bros. Construction, Inc. and
Builders Development & Finance, Inc.
(6)10.48 Promissory Note, dated March 21, 1996, of Lundgren Bros.
Construction, Inc. payable to First Bank National Association.
(6)10.49 Letter Agreement, dated March 21, 1996, by Lundgren Bros.
Construction, Inc. and First Bank National Association.
(6)10.50 Pledge Agreement, dated March 21, 1996, by Lundgren Bros.
Construction, Inc. for the benefit of First Bank National
Association.
(6)10.51 Control Agreement (With Broker or other Securities
Intermediary), dated March 21, 1996, by Lundgren Bros.
Construction, Inc., First Bank National Association and FBS
Investment Services, Inc.
(6)10.52 Guaranty, dated March 12, 1996, by Edmund M. Lundgren for the
benefit of First Bank National Association.
(6)10.53 Guaranty, dated March 12, 1996, by Allan Lundgren for the
benefit of First Bank National Association.
(6)10.54 Guaranty, dated March 12, 1996, by Peter Pflaum for the
benefit of First Bank National Association.
(6)10.55 Guaranty, dated March 12, 1996, by Patrick C. Wells for the
benefit of First Bank National Association.
(6)10.56 Guaranty, dated March 12, 1996, by Gerald Lundgren for the
benefit of First Bank National Association.
10.57 Fifth Amended and Restated Revolving Note (Demand), dated
February 24, 1997, of the Company payable to Norwest Bank
Minnesota, National Association.
10.58 Consent and Reaffirmation of Guaranty, dated February 24,
1997, by Peter Pflaum, Patrick C. Wells, Edmund M. Lundgren,
Allan D. Lundgren and Gerald T. Lundgren in favor of Norwest
Bank Minnesota, National Association.
10.59 Second Amendment, Extension and Reaffirmation Agreement, dated
February 24, 1997, by and among Lungren, Patrick C. Wells,
Peter Pflaum, Edmund M. Lundgren, Allan D. Lundgren, Gerald T.
Lundgren and Norwest Bank Minnesota, National Association.
10.60 Ninth Amendment to Combination Mortgage, Security Agreement
and Fixture Financing Statement, dated November 25, 1996, by
Lundgren Bros. Construction, Inc. and Builders Development &
Finance, Inc.
(4)18.1 Letter on accounting change, Coopers & Lybrand, LLP, dated May
12, 1995.
(7)21 Subsidiaries of Registrant.
27 Financial Data Schedule.
(1) Incorporated by reference to the Exhibit of the same number to the
Company's Registration Statement on Form S-1, Registration No.
33-58934.
(2) Incorporated by reference to the Exhibit of the same number to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993.
(3) Incorporated by reference to the Exhibit of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994.
(4) Incorporated by reference to the Exhibit of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995.
(5) Incorporated by reference to the Exhibit of the same number to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995.
(6) Incorporated by reference to the Exhibit of the same number to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
(7) Incorporated by reference to the Exhibit of the same number to the
Company's Registration Statement on Form S-1, Registration No.
333-12137.
(b) Reports on Form 8-K.
None are required.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LUNDGREN BROS. CONSTRUCTION, INC.
By: /s/ Peter Pflaum
-----------------
Peter Pflaum
Its President
Date: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Peter Pflaum President and Director March 26, 1997
- ----------------------
Peter Pflaum (Principal Executive Officer)
(Principal Financial Officer)
/s/ Edmund M. Lundgren Vice President and Director March 26, 1997
- ----------------------
Edmund M. Lundgren
/s/ Allan D. Lundgren Vice President, Secretary/ March 26, 1997
- ---------------------- Treasurer and Director
Allan D. Lundgren
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
As of the date of this filing, no annual reports or proxy material has
been sent to the holders of Lundgren's securities. At such time as annual
reports are sent to Lundgren's security holders, Lundgren will also file copies
of such reports with the Securities and Exchange Commission.
LUNDGREN BROS. CONSTRUCTION, INC.
FORM 10-K
INDEX TO EXHIBITS
The following exhibits are hereby filed as part of this Annual Report
on Form 10-K:
Exhibit Page
10.57 Fifth Amended and Restated Revolving Note (Demand),
dated February 24, 1997, of the Company payable to
Norwest Bank Minnesota, National Association.
10.58 Consent and Reaffirmation of Guaranty, dated February
24, 1997, by Peter Pflaum, Patrick C. Wells, Edmund M.
Lundgren, Allan D. Lundgren and Gerald T. Lundgren in
favor of Norwest Bank Minnesota, National Association.
10.59 Second Amendment, Extension and Reaffirmation
Agreement, dated February 24, 1997, by and among
Lungren, Patrick C. Wells, Peter Pflaum, Edmund M.
Lundgren, Allan D. Lundgren, Gerald T. Lundgren and
Norwest Bank Minnesota, National Association.
10.60 Ninth Amendment to Combination Mortgage, Security
Agreement and Fixture Financing Statement, dated
November 25, 1996, by Lundgren Bros. Construction,
Inc. and Builders Development & Finance, Inc.
27.0 Financial Data Schedule
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S)
Report of Independent Accountants 41
Consolidated Financial Statements:
Balance Sheets at December 31, 1995 and 1996 42
Statements of Income and Retained Earnings for the years ended
December 31, 1994, 1995 and 1996 43
Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 44
Notes to Financial Statements 45-59
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, 1995 and 1996, 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, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
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, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand
Minneapolis, Minnesota
March 7, 1997
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31
-----------
1995 1996
<S> <C> <C>
Cash and cash equivalents $ 2,984 $ 1,253
Restricted cash 816 1,072
Receivables 1,078 1,276
Deposits and prepaid expenses 2,861 3,663
Inventories 34,166 37,828
Income taxes receivable -- 32
Land option and earnest money deposits 921 795
Property and equipment, net 1,682 1,564
Deferred income taxes 50 130
Other assets 3,205 4,082
------- -------
Total assets $47,763 $51,695
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Obligations under bank lines of credit 3,650 2,987
Debt obligations 25,260 30,673
Obligations under capital leases 505 499
Accounts payable 7,303 5,996
Cost to complete sold homes 1,245 995
Customer deposits 1,846 1,249
Accrued expenses 1,484 1,900
Income taxes payable 85 --
------- -------
41,378 44,299
======= =======
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 6,286 7,297
------- -------
6,385 7,396
------- -------
Total liabilities and stockholders' equity $47,763 $51,695
======= =======
</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
--------------------------------
1994 1995 1996
<S> <C> <C> <C>
Revenues $ 75,814 $ 65,217 $ 69,798
Cost of revenues 64,004 55,591 59,052
-------- -------- --------
Gross profit 11,810 9,626 10,746
Operating expenses:
Selling 2,569 2,442 2,728
General and administrative 5,289 4,987 4,578
-------- -------- --------
3,952 2,197 3,440
Other income (expense):
Interest (932) (1,725) (1,743)
Other, net 226 117 168
-------- -------- --------
Income from continuing operations before income taxes 3,246 589 1,865
Income taxes 1,308 253 709
-------- -------- --------
Income from continuing operations 1,938 336 1,156
-------- -------- --------
Cumulative effect on prior years of change in accounting method,
net of income taxes -- 763 --
-------- -------- --------
Discontinued operations, net of income taxes:
(Loss) income from operations (642) 86 (104)
Estimated loss on disposal (98) -- (41)
-------- -------- --------
(Loss) income from discontinued operations (740) 86 (145)
-------- -------- --------
Net income 1,198 1,185 1,011
Retained earnings, beginning of period 3,903 5,101 6,286
-------- -------- --------
Retained earnings, end of period $ 5,101 $ 6,286 $ 7,297
======== ======== ========
Income (loss) per share:
Continuing operations $ 182 $ 32 $ 109
Cumulative effect of change in accounting method -- 72 --
Discontinued operations (69) 8 (14)
-------- -------- --------
Net income $ 113 $ 112 $ 95
======== ======== ========
</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
--------------------------------
1994 1995 1996
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 1,198 $ 1,185 $ 1,011
Cumulative effect of change in accounting method -- (763) --
Loss (income) from discontinued operations 740 (86) 145
-------- -------- --------
Income from continuing operations 1,938 336 1,156
Adjustments to reconcile income from continuing operations to net cash
provided by (used in) continuing operating activities:
Depreciation and amortization 536 396 386
Amortization of debt issuance costs 51 51 68
Deferred income taxes (153) 253 (55)
Gain on disposal of property and equipment -- (35) (3)
Gain on sale of investment -- -- (123)
Changes in operating assets and liabilities (2,312) (4,542) (2,084)
Other 14 -- --
-------- -------- --------
Net cash provided by (used in) continuing operating activities 74 (3,541) (655)
Net cash (used in) provided by discontinued operations (835) 553 (374)
-------- -------- --------
Net cash used in operating activities (761) (2,988) (1,029)
-------- -------- --------
Cash flows from investing activities:
Expenditures for property and equipment (1,126) (257) (343)
Proceeds on disposal of property and equipment -- 95 4
Proceeds from sale of investment -- -- 159
Increase in cash surrender value of life insurance (402) (368) (486)
Other 48 (44) 14
-------- -------- --------
Net cash used in investing activities (1,480) (574) (652)
-------- -------- --------
Cash flows from financing activities:
Proceeds from bank lines of credit 10,918 24,528 34,616
Payment of principal on bank lines of credit (10,155) (21,644) (35,279)
Proceeds from debt obligations 44,854 40,494 45,914
Payment of principal on debt obligations (43,879) (40,133) (44,786)
Payment of principal on capital lease obligations (12) (17) (6)
Payment of debt issuance costs (26) -- (509)
-------- -------- --------
Net cash provided by (used in) financing activities 1,700 3,228 (50)
-------- -------- --------
Decrease in cash and cash equivalents (541) (334) (1,731)
Cash and cash equivalents, beginning of period 3,859 3,318 2,984
-------- -------- --------
Cash and cash equivalents, end of period $ 3,318 $ 2,984 $ 1,253
======== ======== ========
</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 and
single family home construction 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 93% and
88% of these funds being held in the Company's principal banking
institution at December 31, 1995 and 1996, 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 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 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. Customer deposits received on home sales 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 1994,
1995 and 1996 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 and accrued unbilled construction costs.
<TABLE>
<CAPTION>
2.SELECTED FINANCIAL DATA:
DECEMBER 31
-----------------
1995 1996
Receivables:
<S> <C> <C>
Trade $ 768 $ 961
Escrows 319 202
Contracts and notes 26 18
Employees and officers 17 11
Other 3 139
------- -------
1,133 1,331
Less allowance for doubtful accounts 55 55
------- -------
$ 1,078 $ 1,276
======= =======
Approximate amount of receivables due within one year $ 1,116 $ 1,313
======= =======
Inventories:
Homes under construction 10,822 11,939
Model homes 3,539 3,783
Developed lots 14,464 15,069
Land under development -- 337
Land held for future development 5,341 6,700
------- -------
$34,166 $37,828
======= =======
Property and equipment:
Land 193 193
Building and leasehold improvements 1,557 1,437
Furniture and fixtures 659 915
Equipment 776 807
------- -------
3,185 3,352
Less accumulated depreciation and amortization 1,503 1,788
------- -------
$ 1,682 $ 1,564
======= =======
Other assets:
Cash surrender value of life insurance 2,619 3,105
Debt issuance costs, net of accumulated amortization of $132 and $200
at December 31, 1995 and 1996, respectively 407 848
Other 179 129
------- -------
$ 3,205 $ 4,082
======= =======
Accrued expenses:
Payroll, bonuses and payroll taxes $ 926 $ 958
Other 558 942
------- -------
$ 1,484 $ 1,900
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1994 1995 1996
<S> <C> <C> <C>
Interest expense:
Interest $ 2,197 $ 3,179 $ 3,510
Less capitalized interest (1,316) (1,505) (1,835)
Amortization of debt issuance costs 51 51 68
------- ------- -------
$ 932 $ 1,725 $ 1,743
======= ======= =======
Other income:
Gain on sale of investment -- -- 123
Net gain on sale of forward commitments 186 -- --
Other, net 40 117 45
------- ------- -------
$ 226 $ 117 $ 168
======= ======= =======
Changes in operating assets and liabilities:
Restricted cash 176 (679) (256)
Receivables (77) (69) (229)
Deposits and prepaid expenses (701) 290 (871)
Inventories (2,381) (2,183) 420
Land option and earnest money deposits 721 (198) 126
Other assets -- -- (11)
Accounts payable (430) (1,741) (1,294)
Cost to complete sold homes (251) 676 (256)
Customer deposits (76) 444 (157)
Accrued expenses 445 (27) 431
Income taxes payable (receivable), net 262 (1,055) 13
------- ------- -------
$(2,312) $(4,542) $(2,084)
======= ======= =======
Cash paid for:
Interest, net of amount capitalized $ 854 $ 1,619 $ 1,408
Income taxes 1,001 790 816
</TABLE>
The Company acquired land for development under promissory notes with the
sellers aggregating $3,715, $1,538 and $4,318 for the years ended
December 31, 1994, 1995 and 1996, respectively.
3.DISCONTINUED OPERATIONS:
The Company operated in two business segments in 1996 and 1995 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, which was discontinued in November 1996, was
engaged in the activities of designing and constructing residential
remodeling projects. These projects included 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, 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.
Effective November 30, 1996, the Company adopted a plan to discontinue
operations of its remodeling division. Accordingly, the consolidated
financial statements were reclassified to report separately the operating
results of the division. The Company anticipates completing the disposal
of the division in the first quarter of 1997.
Net assets of the discontinued operation at December 31, 1996, consists
of current assets of approximately $96 and property and equipment of
approximately $29 after deducting an allowance for the estimated loss on
disposal, and liabilities of $218, including estimated operating losses
through the anticipated disposal date.
The estimated loss on the disposal is $41, net of income taxes of $25,
consisting of an estimated loss on disposal of business assets of $1 and
a provision of $40 for anticipated operating losses until disposal.
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 division.
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 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 years ended December 31:
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Sales:
Remodeling $ 3,179 $ 4,443 $ 3,772
Betterliving 545 -- --
------- ------- -------
$ 3,724 $ 4,443 $ 3,772
======= ======= =======
Income (loss) before income taxes:
Remodeling (656) 151 (169)
Betterliving (425) -- --
------- ------- -------
$(1,081) $ 151 $ (169)
======= ======= =======
Income (loss) from discontinued operations:
Remodeling (391) 86 (104)
Betterliving (251) -- --
------- ------- -------
$ (642) $ 86 $ (104)
======= ======= =======
</TABLE>
4.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.
5.EQUITY INVESTMENTS:
At December 31, 1996, the Company had a minority ownership interest in a
land investment partnership and a partnership which owns the office
building the Company leases (Note 7). During 1996, the Company sold its
minority interest in another land investment partnership and recognized a
gain of $123. These investments are recorded on the equity method of
accounting. The Company's aggregate investment in these partnerships was
approximately $167 and $128 at December 31, 1995 and 1996, respectively.
The Company's share of the partnerships' operating results was
approximately $4, $21 and $11 for the years ended December 31, 1994, 1995
and 1996, respectively.
6.DEBT OBLIGATIONS AND LINES OF CREDIT:
The Company has a working capital line of credit of $3,500 (increased to
$4,250 in February 1997) expiring May 31, 1997, with interest at 0.5%
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, 1996, borrowings under the line of
credit are limited to $3,500, 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 $2,775 and $1,907 at
December 31, 1995 and 1996, 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 a working capital line of credit, based on a
borrowing base formula of finished lots held in inventory not to exceed
$4,500, expiring December 31, 1997, with interest at 3% over the prime
rate, due on demand. At December 31, 1996, borrowings under the line of
credit are limited to $4,093 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 and $300 at December
31, 1995 and 1996, respectively.
In 1996, the Company obtained a working capital line of credit of $1,000,
due on demand, expiring March 21, 1997, with interest at 1% over the
prime rate. At December 31, 1996, borrowings under the line of credit are
limited to $1,000, which is the sum of the aggregate fair market value of
cash equivalents deposited at the financial institution plus $300. The
cash equivalents deposited at this financial institution are pledged as
collateral and this line is personally guaranteed by the stockholders.
The Company had an outstanding balance on the line of credit of $780 at
December 31, 1996.
A subsidiary of the Company has a working capital line of credit of $125
expiring April 15, 1997, with interest at 4.5% over the three-month U.S.
treasury bill interest rate (5.25% and 5.5% at December 31, 1996 and
1995, respectively), due on demand. The Company had an outstanding
balance on the line of credit of $75 at December 31, 1995. There were no
outstanding borrowings on the line of credit at December 31, 1996.
Other debt obligations at December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1995 1996
<S> <C> <C>
Construction loans on single family homes, with interest at 2% to 3% above
the prime rate $ 9,317 $10,692
Development loans, with interest at 2% to 5% above the prime rate, but not
to be less than 8% or more than 18% 6,415 6,243
Promissory notes, with interest at 6% to 10.25% 3,860 5,231
1996 subordinated debenture series, with interest at 11% -- 3,000
1993 subordinated debenture series, with interest at 10% 2,962 2,951
Street, sewer and water assessments on land under development and lots
held for sale, with interest at 7% to 11% 1,598 1,471
Installment loans, with interest from 5.9% to 11.5% 736 978
Other 372 107
------- -------
$25,260 $30,673
======= =======
</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 1996 subordinated debenture series is due in 2004 and includes terms
for early redemption by the Company after 1998. 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 covenants that require the Company to maintain a
minimum tangible net worth and a ratio of debt to tangible net worth as
defined in the indenture and certain restrictions on business mergers and
sale or acquisition of assets.
The 1993 subordinated debenture series is due in 2003 and includes terms
for early redemption by the Company. 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% and 8.25% at December 31, 1995 and 1996,
respectively.
The weighted average interest rate on short-term borrowings was 10.60%
and 10.48% at December 31, 1995 and 1996, respectively.
The approximate principal payments on obligations, based on the scheduled
maturity dates at December 31, 1996, are set forth by year below.
1997 $ 15,433
1998 4,223
1999 3,212
2000 223
2001 363
Thereafter 7,219
-----------
$ 30,673
===========
The fair value of the debt obligations approximate their carrying value
at December 31, 1996.
7.LEASING ARRANGEMENTS:
The Company is obligated for the rental of its primary office building
from an affiliated partnership (Note 5), 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, 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
<S> <C>
1997 $ 114
1998 114
1999 114
2000 114
2001 114
2002 to 2009 897
----------
Total minimum lease payments 1,467
Less amount representing interest and consumer price index adjustment 968
----------
Present value of minimum lease payments $ 499
==========
</TABLE>
Capital lease and real estate tax payments to the affiliated partnership
were $135, $135 and $141 for the years ended December 31, 1994, 1995 and
1996, respectively.
The cost and accumulated amortization of a building and equipment under
capital leases were $607 and $329 for 1995 and $607 and $349 for 1996,
respectively.
OPERATING LEASES:
The Company leases an office and warehouse building with annual base
rentals of approximately $36 through April 1998. In addition, certain
equipment and software are leased under operating leases with terms of
one year or less. Rental expense was approximately $350, $251 and $217
for the years ended December 31, 1994, 1995 and 1996, respectively.
8.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
-----------
1995 1996
Option payments $651 $665
Earnest money deposits 270 130
---- ----
$921 $795
==== ====
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
$3,069 and $1,486 at December 31, 1995 and 1996, respectively, related to
the earnest money deposits.
9.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 $700, $800 and $260 for the years ended December 31,
1994, 1995 and 1996, 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 $63, $62 and $54 were
made for the years ended December 31, 1994, 1995 and 1996, 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, 1994, 1995 or 1996.
10. INCOME TAXES:
The components of the provision for income taxes for the years ended
December 31, 1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1994 1995 1996
<S> <C> <C> <C>
Currently payable:
Federal $ 1,107 $ -- $ 579
State 354 -- 185
Deferred (153) 253 (55)
------- ------- -------
Income tax provision for continuing operations 1,308 253 709
Income tax provision for:
Change in accounting method -- 527 --
Discontinued operations (506) 65 (90)
------- ------- -------
$ 802 $ 845 $ 619
======= ======= =======
Net deferred income tax assets include the following:
DECEMBER 31
-----------------------------
1994 1995 1996
Capitalization of option costs related to land projects $ 170 $ -- $ --
Depreciation 52 106 95
Accrued bonus pay -- -- 38
Discontinued operations 15 -- 25
Interest expensed on land mortgages -- (204) (259)
Estimated costs to complete lots sold 4 54 90
Accrued vacation pay 32 26 44
Inventory capitalization 23 19 53
Allowance for doubtful accounts receivable 22 22 21
Accrued warranty -- 25 19
Other -- 2 4
------- ------- -------
$ 318 $ 50 $ 130
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
The reconciliation of the statutory federal income tax rate with the
effective income tax rate for continuing operation is as follows:
YEARS ENDED DECEMBER 31
---------------------------
1994 1995 1996
<S> <C> <C> <C>
Statutory income tax rate 34.0% 34.0% 34.0%
Increase (reduction) in tax resulting from:
State taxes, net of federal benefits 6.0 6.9 7.2
Increase in cash surrender value of life insurance policies in
excess of policy premiums paid (1.4) (2.7) (3.6)
Other 1.7 4.8 .4
------ ------ ------
40.3% 43.0% 38.0%
====== ====== ======
</TABLE>
11. 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 lesser 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.
12. 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 1994 pro forma amounts reflect the effect of the
retroactive application of applying the new method, and related tax
effects:
Gross profit $11,811
Income from continuing operations 2,120
Net income 1,770
Per share:
Income from continuing operations 200
Net income 167
FIFTH AMENDED AND RESTATED
REVOLVING NOTE
(DEMAND)
$4,250,000.00 Minneapolis, Minnesota
___________, 1997
1. FOR VALUE RECEIVED, LUNDGREN BROS. CONSTRUCTION, INC., a Minnesota
corporation ("Borrower"), hereby promises to pay to the order of NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, a national banking association ("Lender"), at
its banking house located at 425 East Hennepin Avenue, Minneapolis, Minnesota,
ON DEMAND the principal sum of FOUR MILLION TWO HUNDRED FIFTY THOUSAND AND
00/100 DOLLARS ($4,250,000.00), or so much thereof as may be advanced by the
Lender to or for the benefit of the Borrower pursuant to that certain Amended
and Restated Demand Discretionary Revolving Credit Agreement dated March 18,
1994 by and between the Borrower and the Lender ("Credit Agreement"), as amended
by that certain Amendment, Extension and Reaffirmation Agreement dated March 14,
1995 by and among the Lender, the Borrower and the Guarantors (the "First
Amendment") and as amended by that certain Second Amendment, Extension and
Reaffirmation Agreement of even date herewith by and among the Lender, the
Borrower and the Guarantors (the ASecond Amendment@), and which remains unpaid,
in lawful money of the United States and immediately available funds, together
with interest on the unpaid balance accruing as of the date hereof at the per
annum rates, subject to adjustment as hereinafter set forth, equal to (i) as to
all principal at any one time outstanding in an aggregate amount equal to or
less than the Aggregate Net Cash Surrender Value, one-half percent (0.50%) in
excess of the "Base Rate of Interest" (as that term is defined below) as the
same changes from time to time, and (ii) as to all principal at any one time
outstanding in excess of the Aggregate Net Cash Surrender Value, one and
one-quarter percent (1.25%) in excess of the Base Rate of Interest, as the same
changes from time to time, all such changes to be made and become effective on
the same day the Base Rate of Interest changes. Interest hereunder shall be
computed on the basis of a 360-day year but charged for actual days principal is
unpaid.
2. The principal balance hereof shall be due and payable ON DEMAND. The
principal balance hereof shall also be due and payable in full on the Expiration
Date.
3. Accrued interest shall be payable monthly on the first (1st) day of each
calendar month so long as all or any portion of the principal balance hereof
remains unpaid. Accrued interest shall also be payable at the time principal is
due hereunder.
4. The term "Base Rate of Interest" shall mean the rate of interest set and
publicly announced from time to time by the Lender as its "prime" or "base" rate
(or equivalent successor rate), whether or not the Lender makes loans to its
customers at rates at, above or below said Base Rate of Interest.
5. All payments and prepayments shall, at the option of the Lender, be applied
first to costs of collection, second to any late charges, third to accrued
interest and the remainder thereof to principal.
6. If any installment or payment of principal is not paid within ten (10) days
of the due date thereof, Borrower shall pay to Lender a late charge equal to
five percent (5%) of the amount of such installment or payment.
7. This Fifth Amended and Restated Revolving Note is issued pursuant to the
terms and conditions of the Credit Agreement, as amended pursuant to the First
Amendment and the Second Amendment, is secured by the First Life Insurance
Assignment, the Second Life Insurance Assignment, the Third Life Insurance
Assignment and the Guarantor Life Insurance Assignments, is guaranteed by the
Guarantors pursuant to the Guaranty and is entitled to all of the benefits
provided for in each of said agreements.
8. Upon demand for payment hereunder, the outstanding principal balance hereof
and accrued interest herein shall become immediately due and payable without
notice.
9. Upon demand for payment hereunder, the Lender shall have the immediate right
to set off any and all amounts due hereunder by the Borrower to the Lender
against any indebtedness or obligation of the Lender to the Borrower.
10. The outstanding principal balance of this Fifth Amended and Restated
Revolving Note may be prepaid at any time, in whole or in part, without premium
or penalty. This Fifth Amended and Restated Revolving Note is also subject to
mandatory partial prepayment at any time to the extent that the outstanding
principal balance hereunder exceeds the Maximum Loan Amount.
11. The Borrower promises to pay all costs of collection of this Fifth Amended
and Restated Revolving Note, including but not limited to attorneys' fees, paid
or incurred by the Lender on account of such collection, whether or not suit is
filed with respect thereto and whether or not such costs are paid or incurred,
or to be paid or incurred, prior to or after the entry of judgment.
12. Demand, presentment, protest and notice of nonpayment and dishonor of this
Fifth Amended and Restated Revolving Note are hereby waived.
13. THIS FIFTH AMENDED AND RESTATED REVOLVING NOTE IS PAYABLE ON DEMAND. THE
RIGHT OF THE LENDER TO MAKE SUCH DEMAND SHALL BE UNQUALIFIED AND ABSOLUTE AND,
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SUCH RIGHT MAY BE EXERCISED BY
THE LENDER EVEN IF THE BORROWER HAS COMPLIED AND IS THEN COMPLYING WITH THE
VARIOUS COVENANTS SET FORTH HEREIN, IN THE CREDIT AGREEMENT, THE FIRST
AMENDMENT, THE SECOND AMENDMENT AND IN THE OTHER BORROWER DOCUMENTS.
14. This Fifth Amended and Restated Revolving Note shall be governed by and
construed in accordance with the laws of the State of Minnesota.
15. This Fifth Amended and Restated Revolving Note constitutes a complete
amendment and restatement of, and supersedes in its entirety, that certain
$3,500,000 Fourth Amended and Restated Revolving Note dated March 14, 1995
executed by Borrower and made payable to the order of Lender, and does not
constitute payment or satisfaction of the indebtedness evidenced thereby.
16. As used herein, the terms Expiration Date, First Life Insurance Assignment,
Second Life Insurance Assignment, Third Life Insurance Assignment, Aggregate Net
Cash Surrender Value, Guaranty, Guarantor Life Insurance Assignments,
Guarantors, Maximum Loan Amount, and Borrower Documents shall have the meanings
assigned to such terms in the Credit Agreement, the First Amendment and/or the
Second Amendment, as the case may be.
LUNDGREN BROS. CONSTRUCTION,
INC.
By:_______________________________
Its President
STATE OF MINNESOTA )
) ss
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this _____ day of ________,
1997, by Peter Pflaum, the President of LUNDGREN BROS. CONSTRUCTION, INC., a
Minnesota corporation, for and on behalf of said corporation.
__________________
Notary Public
CONSENT AND REAFFIRMATION
OF GUARANTY
THIS CONSENT AND REAFFIRMATION, made and entered into as of the _____ day of
__________, 1997 by PETER PFLAUM, PATRICK C. WELLS, EDMUND M. LUNDGREN, ALLAN D.
LUNDGREN and GERALD T. LUNDGREN (collectively, the "Guarantors") in favor of
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association
(the "Lender").
WHEREAS, the Lender entered into a certain Amended and Restated Demand
Discretionary Revolving Credit Agreement dated as of March 18, 1994 (the "Credit
Agreement") with Lundgren Bros. Construction, Inc., a Minnesota corporation (the
"Borrower") concerning the extension by the Lender to the Borrower of a
$2,200,000 Revolving Line of Credit; and
WHEREAS, the Borrower subsequently requested that the Lender agree to an
increase in the "Maximum Loan Amount" as set forth in that certain Amendment,
Extension and Reaffirmation Agreement dated March 14, 1995, among the Lender,
the Borrower and the undersigned (the "First Amendment"); and
WHEREAS, the obligation of the Borrower to repay advances under the Credit
Agreement was evidenced by that certain Fourth Amended and Restated Revolving
Note dated March 14, 1995, executed by the Borrower in the original principal
amount of Three Million Five Hundred Thousand Dollars and payable to the order
of Lender (the "Fourth Amended Note"); and
WHEREAS, the Borrower has now requested that the Lender agree to an increase in
the Maximum Loan Amount as set forth in that certain Second Amendment, Extension
and Reaffirmation Agreement of even date herewith among the Lender, the Borrower
and the undersigned (the "Second Amendment"); and
WHEREAS, the Fourth Amended Note has now been superseded in its entirety by a
certain Fifth Amended and Restated Revolving Note of even date herewith executed
by the Borrower in the original principal amount of $4,250,000.00 and payable to
the order of the Lender (the "New Revolving Note"); and
WHEREAS, the obligations of the Borrower under and pursuant to the Credit
Agreement, the First Amendment, and Second Amendment and the New Revolving Note
are secured by, among other things, the First Life Insurance Assignment, the
Second Life Insurance Assignment, the Third Life Insurance Assignment and the
Guarantor Life Insurance Assignments (as those terms are defined in the First
Amendment); and
WHEREAS, the payment and performance of the obligations of the Borrower under
and pursuant to the Fourth Amended Note and the Credit Agreement, as amended,
among other things, have been jointly and severally guaranteed by the Guarantors
pursuant to that certain Guaranty dated as of November 5, 1990, executed by the
Guarantors and delivered to the Lender (the "Guaranty"); and
WHEREAS, the Lender is willing to execute the Second Amendment and to extend
advances to or for the benefit of the Borrower pursuant to the New Revolving
Note only upon receipt of this Consent and Reaffirmation from the Guarantors.
NOW, THEREFORE, in consideration of the foregoing Recitals, which are hereby
made a part hereof, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto, do hereby
agree as follow:
1. Each of the Guarantors hereby consents to the terms of the Second Amendment
and the New Revolving Note and all of the terms and provisions contained
therein.
2. Each of the Guarantors hereby repeats, reasserts, and reaffirms as of the
date hereof, all of the representations, warranties and covenants contained in
the Guaranty and the documents executed in connection therewith, as if said
representations, warranties and covenants were fully set forth herein.
3. Each of the Guarantors hereby acknowledges and agrees that any and all
references contained in the Guaranty to the term "Note" shall henceforth mean
and refer to the New Revolving Note and that all indebtedness of the Borrower to
the Lender pursuant to the New Revolving Note shall constitute "Obligations,"
the payment and performance of which are absolutely and unconditionally
guaranteed to the Lender by the Guarantors pursuant to the Guaranty.
4. The Guarantors further acknowledge and agree that the Guaranty shall be and
is hereby amended to provide that all references contained in the Guaranty to
the term "Credit Agreement" shall henceforth mean and refer to the Credit
Agreement, as amended by the First Amendment and the Second Amendment.
5. The Guarantors hereby further acknowledge and agree that the Guaranty remains
fully enforceable and in full force and effect in accordance with its original
terms, except as expressly amended hereby and as previously amended in writing,
and is not subject to any defense, counterclaim or right of setoff as of the
date hereof. The Guarantors further acknowledge that the liability of the
Guarantors under the Guaranty is and continues to be joint and several.
6. Each of the Guarantors hereby releases the Lender, and each of its officers,
directors, agents, employees, legal counsel and other representatives from any
and all claims, demands, causes of action, liability, damage, loss, cost and
expense which any of them have paid, incurred, or sustained, known or unknown,
absolute or contingent, as a result of or related to (a) the transactions
evidenced by or related to any of the Loan Documents (as that term is defined in
the Second Amendment) or (b) any acts or omissions of the Lender, or any of its
officers, directors, agents, employees, legal counsel or other representatives
in connection therewith or related thereto.
7. This Consent and Reaffirmation of Guaranty may be executed in counterparts,
each of which shall be deemed an original but all of which, taken together,
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Guarantors have executed and delivered this Consent and
Reaffirmation of Guaranty as of the day and year first above written.
_____________________________
PETER PFLAUM
_____________________________
PATRICK C. WELLS
_____________________________
EDMUND M. LUNDGREN
_____________________________
ALLAN D. LUNDGREN
_____________________________
GERALD T. LUNDGREN
SECOND AMENDMENT, EXTENSION
AND REAFFIRMATION AGREEMENT
This Agreement, is effective as of the _______ day of __________, 1997, by and
among Lundgren Bros. Construction, Inc., a Minnesota corporation ("Borrower"),
Patrick C. Wells, Peter Pflaum, Edmund M. Lundgren, Allan D. Lundgren, and
Gerald T. Lundgren (collectively, the "Guarantors") and Norwest Bank Minnesota,
National Association, a national banking association ("Lender").
RECITALS
WHEREAS, Borrower and Lender entered into that certain Amended and Restated
Demand Discretionary Revolving Credit Agreement dated as of March 18, 1994 (the
"Credit Agreement"), concerning the extension by the Lender to the Borrower of a
$2,200,000 Revolving Line of Credit (the "Revolving Credit Facility"); and
WHEREAS, Borrower and Lender subsequently entered into that certain Amendment,
Extension and Reaffirmation Agreement dated as of March 14, 1995 (the AFirst
Amendment@), pursuant to which the Lender increased the maximum amount available
at any one time under the Revolving Credit Facility from $2,200,000 to
$3,500,000. The Credit Agreement and the First Amendment shall hereinafter
collectively be referred to as the ACredit Agreement@.
WHEREAS, the obligation of the Borrower to repay advances under the Credit
Agreement is evidenced by a certain Fourth Amended and Restated Revolving Note
dated March 14, 1995, executed by the Borrower in the original principal amount
of $3,500,000 and payable to the order of the Lender (the "Fourth Amended
Note"); and
WHEREAS, in consideration of the increase in the Revolving Credit Facility
pursuant to the First Amendment, the Borrower granted the Lender additional
collateral pursuant to a Third Life Insurance Assignment and the Guarantor Life
Insurance Assignments (as those terms are defined in the First Amendment).
WHEREAS, the obligations of the Borrower under and pursuant to the Fourth
Amended Note and the Credit Agreement are secured by, among other things, the
First Life Insurance Assignment, the Second Life Insurance Assignment; the Third
Life Insurance Assignment and the Guarantor Life Insurance Assignments (all as
defined in the First Amendment).
WHEREAS, payment and performance of the obligations of the Borrower under and
pursuant to the Fourth Amended Note and the Credit Agreement have, among other
things, been jointly and severally guaranteed by the Guarantors pursuant to that
certain Guaranty dated as of November 5, 1990, executed by the Guarantors and
delivered to the Lender (the "Guaranty"); and
WHEREAS, the Borrower has requested that the Lender increase the maximum amount
available at any one time under the Revolving Credit Facility from $3,500,000.00
to $4,250,000.00.
WHEREAS, the Lender is willing to do so on the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing Recitals, which are hereby
made a part hereof, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto do hereby
agree as follows:
1. Revolving Credit Facility. Section 1 of the Credit Agreement is hereby
deleted in its entirety and the following should be substituted therefor:
Subject to and upon the terms, covenants and conditions hereinafter
set forth, the Lender hereby agrees to make loans to the Borrower
under this Section 1 from time to time until and including May 31,
1997 (and thereafter until and including May 31 of each succeeding
calendar year if the line of credit is extended in writing by the
Lender and the Borrower for an additional one (1) year period(s)
pursuant to Section 13.J. herein) (such date hereinafter referred
to as the "Expiration Date"), at such time and in such amount as to
each loan as the Borrower shall request, up to but not exceeding in
aggregate principal amount at any one time outstanding the lesser
of (i) the sum of Four Million Two Hundred Fifty Thousand and
00/100 Dollars ($4,250,000.00) or (ii) the sum of $500,000 plus the
"Aggregate Net Cash Surrender Value" ("Maximum Loan Amount"). For
purposes hereof, the term "Aggregate Net Cash Surrender Value"
shall mean the aggregate net cash surrender value of the "Assigned
Policies" (as defined in Section 6.A. of this Credit Agreement)
after payment of all policy loans, as confirmed in writing by the
respective issuers of the Assigned Policies in form acceptable to
the Lender in its discretion. Such advances shall be used for
working capital needs, including but not limited to work in
progress, payroll, general and administrative expenses and expenses
incurred in connection with land purchases. So long as no demand
for payment has been made, and so long as the Borrower has
otherwise complied with the terms and conditions hereof, the
Borrower may borrow, repay and reborrow within such limit under
this Section 1 from the date hereof to and including the Expiration
Date. The line of credit described above is hereinafter referred to
as the "Revolving Credit Facility."
2. New Revolving Note. The Borrower has executed and delivered to the Lender
that certain Fifth Amended and Restated Revolving Note of even date herewith in
the original principal amount of $4,250,000 made payable to the order of the
Lender (the "New Revolving Note"). The Borrower and Guarantors acknowledge and
agree that the New Revolving Note is a complete restatement and amendment of the
Fourth Amended Note and supersedes the Fourth Amended Note in its entirety.
Borrower acknowledges and agrees that any and all references contained in the
Credit Agreement, the First Life Insurance Assignment, the Second Life Insurance
Assignment, the Third Life Insurance Assignment or any other document or
agreement executed in connection therewith to the term "Note" or "Revolving
Note" shall henceforth mean and refer to the New Revolving Note. Borrower fully
acknowledges and agrees that any indebtedness of the Borrower to the Lender
pursuant to the New Revolving Note shall be secured by, among other things, the
First Life Insurance Assignment, the Second Life Insurance Assignment and the
Third Life Insurance Assignment. Upon execution of this Agreement and the New
Revolving Note, the Lender shall return the Fourth Amended Note to the Borrower.
3. Outstanding Balance. Borrower acknowledges that the unpaid principal balance
of the New Revolving Note as of the effective date hereof is $________________.
4. Representations. The Borrower and the Guarantors each hereby warrant and
represent to the Lender that each and all of the representations and warranties
set forth and contained in the Credit Agreement, the Guaranty, the First Life
Insurance Assignment, the Second Life Insurance Assignment, the Third Life
Insurance Assignment, the Guarantor Life Insurance Assignments, and the
documents and agreements related hereto or thereto are true, correct and
complete in all respects as of the date hereof. The Borrower hereby supplements
the representations set forth in Section 8.D. of the Credit Agreement as
described on EXHIBIT A attached hereto and incorporated herein.
5. No Waiver. The Borrower and the Guarantors each hereby acknowledge and agree
that by executing and delivering this Agreement the Lender is not waiving any
existing default, whether known or unknown, nor is the Lender waiving any of its
rights or remedies under the Credit Agreement, the New Revolving Note, the First
Life Insurance Assignment, the Second Life Insurance Assignment, the Third Life
Insurance Assignment, the Guarantor Life Insurance Assignments and the Guaranty,
or any of the documents related to or executed in connection with the Revolving
Credit Facility.
6. Costs and Expenses. In accordance with Section 13.B. of the Credit Agreement,
the Borrower shall pay all reasonable costs and expenses, including reasonable
attorneys' fees, incurred by the Lender in connection with the preparation of
this Agreement and the New Revolving Note and any documents relating thereto.
7. No Set-Off. The Borrower hereby acknowledges to and agrees with the Lender
that no events, conditions or circumstances have arisen or exist as of the date
hereof which would give the Borrower the right to assert a defense, counterclaim
and/or setoff to any claim by the Lender for payments of amounts owing under the
Fourth Amended Note, the New Revolving Note, the Credit Agreement, the First
Life Insurance Assignment, the Second Life Insurance Assignment, the Third Life
Insurance Assignment or any of the documents related thereto. Any defense, right
of set off or counterclaim which might otherwise be available to Borrower is
hereby fully and finally waived and released in all respects in consideration of
the Lender's agreement to increase the amount available to the Borrower pursuant
to the Revolving Credit Facility as set forth herein; provided, however, that
the release shall not apply to any possible errors by the Lender involving
strict mathematical calculation of principal and/or interest due from time to
time under the Fourth Amended Note or the New Revolving Note.
8. Consent of Guarantors. The Guarantors hereby consent to each and all of the
provisions of this Agreement. Guarantors further acknowledge and agree that the
Guaranty shall be and is hereby amended to provide that all references contained
in the Guaranty to the term "Note" shall henceforth refer to the New Revolving
Note.
9. Acknowledgment of Guarantors. Each of the Guarantors hereby acknowledges and
agrees that the Guaranty and the Guarantor Life Insurance Assignment executed by
him and delivered to the Lender remain fully enforceable and in full force and
effect in accordance with their original terms, except as expressly amended
hereby, and are not subject to any defense, counterclaim or right of set-off.
10. Demand Feature. The Borrower and the Guarantors each hereby acknowledge that
the New Revolving Note continues to be due and payable in full ON DEMAND, and
this Agreement shall not in any way constitute or be deemed to constitute an
amendment, modification or limitation of such provision.
11. No Other Amendments. Except as expressly amended hereby, the Credit
Agreement, the First Life Insurance Assignment, the Second Life Insurance
Assignment, the Third Life Insurance Assignment, the Guarantor Life Insurance
Assignments, the Guaranty and all documents and agreements executed in
connection therewith or otherwise related thereto shall remain in full force and
effect in accordance with their original terms, and no course of dealing or
other action or statement of the Lender or any of its officers, directors,
agents, employees, legal counsel or other representatives shall amend, or be
deemed an amendment of, this Agreement, the Credit Agreement, the Fourth Amended
Note, the New Revolving Note, the First Life Insurance Assignment, the Second
Life Insurance Assignment, the Third Life Insurance Assignment, the Guaranty,
the Guarantor Life Insurance Assignments or any of the documents or agreements
related thereto or hereto (collectively, the "Loan Documents").
12. Merger. All prior oral and written communications, commitments, alleged
commitments, promises, alleged promises, agreements and alleged agreements by or
among the Lender, the Borrower and/or the Guarantors are hereby merged into the
Loan Documents. All commitments, promises and agreements of the parties hereto
are set forth in the Loan Documents and no other commitments, promises or
agreements, oral or written, of any of the parties hereto shall be enforceable
against any such party.
13. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
14. Successors. This Agreement shall be binding upon and inure to the benefit of
the respective heirs, successors or assigns of the parties hereto; provided,
however, that any right the Borrower may have, as set forth in the Credit
Agreement, to obtain advances under the Revolving Credit Facility is not
assignable.
15. Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original but all of which, taken together, shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
LENDER:
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By_________________________
Its Vice President
BORROWER:
LUNDGREN BROS. CONSTRUCTION,
INC.
By_________________________
Its
GUARANTORS:
___________________________
Patrick C. Wells
___________________________
Peter Pflaum
___________________________
Edmund M. Lundgren
___________________________
Allan D. Lundgren
___________________________
Gerald T. Lundgren
STATE OF MINNESOTA )
) ss.
COUNTY OF )
The foregoing instrument was acknowledged before me this ______ day of
___________, 1997, by ________________________________, the Vice President of
Norwest Bank Minnesota, National Association, a national banking association,
for and on behalf of said association.
______________________________
Notary Public
STATE OF MINNESOTA )
) ss.
COUNTY OF )
The foregoing instrument was acknowledged before me this ______ day of
___________, 1997, by Peter Pflaum, the President of Lundgren Bros.
Construction, Inc., a Minnesota corporation, for and on behalf of said
corporation.
______________________________
Notary Public
STATE OF MINNESOTA )
) ss.
COUNTY OF )
The foregoing instrument was acknowledged before me this ______ day of
___________, 1997, by Patrick C. Wells.
______________________________
Notary Public
STATE OF MINNESOTA )
) ss.
COUNTY OF )
The foregoing instrument was acknowledged before me this ______ day of
______________, 1997, by Peter Pflaum.
______________________________
Notary Public
STATE OF MINNESOTA )
) ss.
COUNTY OF )
The foregoing instrument was acknowledged before me this ______ day of
__________, 1997, by Edmund M. Lundgren.
______________________________
Notary Public
STATE OF MINNESOTA )
) ss.
COUNTY OF )
The foregoing instrument was acknowledged before me this ______ day of
____________, 1997, by Allan D. Lundgren.
______________________________
Notary Public
STATE OF MINNESOTA )
) ss.
COUNTY OF )
The foregoing instrument was acknowledged before me this ______ day of
_____________, 1997, by Gerald T. Lundgren.
______________________________
Notary Public
THIS INSTRUMENT WAS DRAFTED BY:
Winthrop & Weinstine, P.A.
ATTN: Thomas M. Hart (Atty #41816)
3200 Minnesota World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101
STP1: 400369-1
EXHIBIT A
(Supplemental Disclosure of Pending Litigation)
MORTGAGE REGISTRATION TAX
DUE HEREON: NONE
NINTH AMENDMENT TO COMBINATION MORTGAGE,
SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT
THIS AMENDMENT is made as of November 25, 1996, by and between Lundgren
Bros. Construction, Inc., a Minnesota corporation (the "Mortgagor"), and
Builders Development & Finance, Inc., a Minnesota corporation (the "Mortgagee").
RECITALS
A. The Mortgagor has executed and delivered to the Mortgagee a
Combination Mortgage, Security Agreement and Fixture Financing Statement dated
March 18, 1994 (the "Original Mortgage"). The Original Mortgage was amended by
that certain First Amendment to Combination Mortgage, Security Agreement and
Fixture Financing Statement dated as of June 10, 1994 ("First Amendment"), by
that certain Second Amendment to Combination Mortgage, Security Agreement and
Fixture Financing Statement dated as of August 22, 1994 ("Second Amendment"), by
that certain Third Amendment to Combination Mortgage, Security Agreement and
Fixture Financing Statement and Amendment to Revolving Credit Line Agreement
dated as of January 25, 1995 ("Third Amendment"), by that certain Fourth
Amendment to Combination Mortgage, Security Agreement and Fixture Financing
Statement and Amendment to Revolving Credit Line Agreement dated as of February
13, 1995 ("Fourth Amendment"), by that certain Fifth Amendment to Combination
Mortgage, Security Agreement and Fixture Financing Statement and Amendment to
Revolving Credit Line Agreement dated as of May 11, 1995 ("Fifth Amendment"), by
that certain Sixth Amendment to Combination Mortgage, Security Agreement and
Fixture Financing Statement and Amendment to Revolving Credit Line Agreement
dated as of September 8, 1995 ("Sixth Amendment"), by that certain Seventh
Amendment to Combination Mortgage, Security Agreement and Fixture Financing
Statement and Amendment to Revolving Credit Line Agreement dated as of February
14, 1996 ("Seventh Amendment"), and by that certain Eighth Amendment to
Combination Mortgage, Security Agreement and Fixture Financing Statement and
Amendment to Revolving Credit Line Agreement dated as of May 20, 1996 ("Eighth
Amendment").
The Original Mortgage, the First Amendment, the Second Amendment, the Third
Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, the
Seventh Amendment and the Eighth Amendment are collectively referred to herein
as the "Mortgage." Certain lots described in the Mortgage have been released
from the Mortgage and are no longer subject to the Mortgage or this instrument.
B. The Original Mortgage was recorded as follows:
Office Filing Date Doc. No.
------ ----------- --------
Hennepin County Recorder's Office April 4, 1994 6264214
Hennepin County Registrar of Titles June 6, 1994 2521600
Hennepin County Registrar of Titles April 4, 1994 2499013
Dakota County Recorder's Office April 4, 1994 1206249
Carver County Recorder's Office April 4, 1994 165103
Carver County Registrar of Titles April 4, 1994 T83447
C. The First Amendment was recorded as follows:
Office Filing Date Doc. No.
------ ----------- --------
Hennepin County Recorder's Office July 15, 1994 6313171
Hennepin County Registrar of Titles July 28, 1994 2536818
Dakota County Recorder's Office July 14, 1994 1228848
Carver County Recorder's Office July 19, 1994 169673
Carver County Registrar of Titles July 19, 1994 T84926
D. The Second Amendment was recorded as follows:
Office Filing Date Doc. No.
------ ----------- --------
Hennepin County Recorder's Office September 29, 1994 6345918
Hennepin County Recorder's Office August 31, 1994 6333560
Dakota County Recorder's Office September 2, 1994 1239106
E. The Third Amendment was recorded as follows:
Office Filing Date Doc. No.
------ ----------- --------
Hennepin County Recorder's Office February 3, 1995 6395270
Hennepin County Registrar of Titles February 6, 1995 2587774
Dakota County Recorder's Office February 2, 1995 1263412
Carver County Recorder's Office February 3, 1995 A177001
Carver County Registrar of Titles February 3, 1995 T87056
F. The Fourth Amendment was recorded as follows:
Office Filing Date Doc. No.
------ ----------- --------
Hennepin County Recorder's Office February 16, 1995 6399195
G. The Fifth Amendment was recorded as follows:
Office Filing Date Doc. No.
------ ----------- --------
Dakota County Recorder's Office May 16, 1995 1278546
Dakota County Registrar of Titles May 16, 1995 319850
H. The Sixth Amendment was recorded as follows:
Office Filing Date Doc. No.
------ ----------- --------
Dakota County Recorder's Office September 21, 1995 1302270
Dakota County Registrar of Titles September 21, 1995 325600
Carver County Recorder's Office September 19, 1995 185012
Carver County Registrar of Titles September 19, 1995 T89065
I. The Seventh Amendment was recorded as follows:
Office Filing Date Doc. No.
------ ----------- --------
Hennepin County Registrar of Titles February 26, 1996 2680664
J. The Eighth Amendment was recorded as follows:
Office Filing Date Doc. No.
------ ----------- --------
Hennepin County Recorder's Office June 4, 1996 6583734
Hennepin County Registrar of Titles June 4, 1996 2707163
Dakota County Recorder's Office May 30, 1996 1351355
Dakota County Registrar of Titles May 30, 1996 337858
Carver County Recorder's Office June 4, 1996 195942
Carver County Registrar of Titles June 4, 1996 T92154
K. The purpose of this Amendment is to add additional Mortgaged
Property, as such term is defined in the Mortgage, but there will be no change
in the amount of the debt secured by the Mortgage.
AGREEMENT
NOW, THEREFORE, in consideration of the facts recited, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Mortgagor and the Mortgagee hereby agree as follows:
1. The terms "Land" and "Mortgaged Property" as used in the Mortgage
shall include the following land, as well as that land which has not been
released from the Mortgage heretofore:
PARCEL NO. 1:
In HIGHLANDS ON LAKE ST. JOE, Carver County, Minnesota:
Lots 6 through 8 and 10 through 12, Block 1; Lot 1,
Block 2; and Lots 3 through 6, Block 3
PARCEL NO. 2:
In HIGHLANDS ON LAKE ST. JOE 2ND ADDITION, Carver County,
Minnesota:
Lots 1 through 9, Block 1
PARCEL NO. 3:
In SAVANNAH , Hennepin County, Minnesota:
Lots 9 through 11, Block 1; and Lots 8 and 9, Block 3
2. The "Permitted Encumbrances" set forth on Exhibit B attached to the
Mortgage are hereby amended to include the following:
Mortgages held by Builders Development & Finance, Inc., a Minnesota
corporation, on Parcel Nos. 1 and 2;
Mortgage held by Enebak Construction Company, a Minnesota corporation,
on Parcel No. 1;
Mortgages held by Builders Development & Finance, Inc., a Minnesota
corporation, on Parcel No. 3;
3. All terms of the Mortgage shall remain in effect except as amended
hereby, and the Mortgagor restates and affirms all representations, warranties
and covenants of the Mortgagor as set forth in the Mortgage with respect to the
Land herein described and with respect to that Land which has not been released
of record from the lien of the Mortgage, and Mortgagor agrees to be bound by and
to perform all of the covenants and agreements in the Mortgage at the time and
in the manner therein provided.
4. The Mortgagor agrees to pay or reimburse the Mortgagee for any and
all fees payable to public officials in connection with this instrument and the
recording hereof, including any mortgage registration tax that may be due.
IN WITNESS WHEREOF, the Mortgagor and the Mortgagee have executed this
instrument as of the day and year first above written.
MORTGAGOR:
LUNDGREN BROS. CONSTRUCTION, INC.
By /s/ PETER PFLAUM
-------------------------------
Peter Pflaum, President
MORTGAGEE:
BUILDERS DEVELOPMENT & FINANCE, INC.
By /s/ DANE SWENSON
-------------------------------
Its Vice President
STATE OF MINNESOTA )
) ss
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 25th day of
November, 1996, by Peter Pflaum, the President of Lundgren Bros. Construction,
Inc., a Minnesota corporation, on behalf of the corporation.
/s/ LAVERN M. ROD
------------------
Notary Public
STATE OF MINNESOTA )
) ss
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this 25th day of
November, 1996, by Dane Swenson, the Vice President of Builders Development &
Finance, Inc., a Minnesota corporation, on behalf of the corporation.
/s/ LAVERN M. ROD
------------------
Notary Public
THIS INSTRUMENT WAS DRAFTED BY:
LEONARD, STREET AND DEINARD (NLW/JCK)
150 South Fifth Street, Suite 2300
Minneapolis, Minnesota 55402
(612) 335-1500
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