FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from _____________ to _____________
Commission File Number: 33-58934
---------
LUNDGREN BROS. CONSTRUCTION, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0970679
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
935 East Wayzata Boulevard
Wayzata, Minnesota 55391
(Address of principal executive offices) (Zip Code)
(612)473-1231
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
On September 30, 1998, there were 594 voting shares and 10,031 nonvoting shares
of the registrant's no par value common stock outstanding.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
(UNAUDITED)
Cash and cash equivalents $ 2,549 $ 1,979
Restricted cash 3,098 1,947
Receivables 1,481 1,410
Notes receivable - affiliates 1,296 1,066
Deposits and prepaid expenses 2,684 3,042
Inventories 43,266 35,614
Income taxes receivable -- 334
Land option and earnest money deposits 1,952 1,138
Property and equipment, net 1,567 1,517
Deferred income taxes 206 206
Other assets 4,623 4,531
----------- -----------
Total assets $ 62,722 $ 52,784
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Obligations under bank lines of credit $ 6,654 $ 7,457
Debt obligations 35,115 27,730
Obligations under capital leases 428 447
Accounts payable 8,638 7,185
Cost to complete sold homes 1,390 469
Customer deposits 2,573 1,060
Accrued expenses 1,496 1,687
----------- -----------
Total liabilities 56,294 46,035
Commitments and contingencies -- --
Stockholders' equity:
Common stock, no par value; authorized,
12,000 shares; 594 shares voting and 10,031
shares nonvoting issued and outstanding 99 99
Retained earnings 6,329 6,650
----------- -----------
Total stockholders' equity 6,428 6,749
----------- -----------
Total liabilities and stockholders' equity $ 62,722 $ 52,784
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 24,825 $ 22,154 $ 56,513 $ 49,646
Cost of Revenues 21,722 19,173 49,880 43,584
---------- ---------- ---------- ----------
Gross profit 3,103 2,981 6,633 6,062
Operating expenses:
Selling 911 945 2,383 2,083
General and administrative 1,154 1,012 2,809 2,797
---------- ---------- ---------- ----------
1,038 1,024 1,441 1,182
Other income (expense):
Interest expense (548) (595) (1,734) (1,933)
Other, net 14 (6) 85 29
---------- ---------- ---------- ----------
Income (loss) before income taxes 504 423 (208) (722)
Income tax provision (benefit) 218 171 (89) (289
---------- ---------- ---------- ----------
Net income (loss) 286 252 (119) (433)
========== ========== ========== ==========
Net income (loss) per share - basic
and diluted $ 27 $ 24 $ (11) $ (41)
========== ========== ========== ==========
Common shares outstanding 10,625 10,625 10,625 10,625
</TABLE>
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The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (119) $ (433)
Loss from discontinued operations --
---------- ----------
Loss from continuing operations (119) (433)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 357 364
Gain on disposal of property and equipment -- (7)
Changes in operating assets and liabilities (5,963) 1,705
---------- ----------
Net cash (used in) provided by continuing operating activities (5,725) 1,629
Net cash (used in) provided by discontinued operations -- (115)
---------- ----------
Net cash used in operating activities (5,725) 1,514
Cash flows from investing activities:
Expenditures for property and equipment (324) (188)
Proceeds on disposal of property and equipment 7 37
Other 4 5
Increase in cash surrender value of life insurance (260) (241)
---------- ----------
Net cash used in investing activities (573) (387)
Cash flows from financing activities:
Proceeds from bank lines of credit 26,783 24,504
Payment of principal on bank lines of credit (27,587) (20,704)
Proceeds from debt obligations 47,517 31,414
Payment of principal on debt obligations (39,827) (35,220)
Payment of principal on capital lease obligations (18) (47)
Payment of debt issuance costs -- (30)
---------- ----------
Net cash provided by (used in) financing activities 6,868 (83)
---------- ----------
Increase in cash and cash equivalents 570 1,044
Cash and cash equivalents, beginning of the period 1,979 1,253
---------- ----------
Cash and cash equivalents, end of the period $ 2,549 $ 2,297
========== ==========
</TABLE>
- -----------------
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 1. GENERAL
INTERIM FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the periods
presented. These adjustments consist of normal, recurring items. The results of
operations for any interim period are not necessarily indicative of results for
the full year. The financial statements and notes are presented as permitted by
the requirements for Form 10-Q and do not contain certain information included
in the Company's annual financial statements and Notes. This Form 10-Q should be
read in conjunction with the Company's financial statements and notes included
in its 1997 Annual Report on Form 10-K. During the first quarter of 1998, the
Company implemented SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of and
Enterprise and Related Information." The adoption of these standards did not
have a material effect on the results of operations of the Company. For the
periods presented comprehensive income (loss) is the same as net income (loss).
PER SHARE AMOUNTS
Per share amounts are computed by dividing by the weighted average number of
shares of voting and nonvoting common stock outstanding during each period. The
number of outstanding shares of common stock for the three and nine months ended
September 30, 1998 and 1997 was 10,625. During 1997, the Company adopted SFAS
No. 128, EARNINGS PER SHARE. This statement establishes standards for computing
and presenting basic and diluted earnings per share (EPS). The adoption of this
statement did not effect the Company's reported EPS for all periods presented.
NOTE 2. SELECTED FINANCIAL DATA
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
RECEIVABLES
Trade $ 822 $ 1,014
Escrows 499 336
Contracts and notes 12 6
Employees and officers 175 37
Other 28 72
-------- --------
1,536 1,465
Less allowance for doubtful accounts 55 55
-------- --------
$ 1,481 $ 1,410
======== ========
5
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA, CONTINUED
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
INVENTORIES
Homes under construction $ 24,141 $ 13,808
Model homes 1,722 492
Lots held for sale 5,917 12,338
Land under development 5,316 --
Land held for future development 6,170 8,976
----------- -----------
$ 43,266 $ 35,614
=========== ===========
ACCRUED EXPENSES
Payroll, bonuses and payroll taxes $ 424 $ 609
Other 1,072 1,078
----------- -----------
$ 1,496 $ 1,687
=========== ===========
DEBT OBLIGATIONS
Construction loans on single family homes $ 18,785 $ 9,253
Promissory notes 2,216 6,128
Development loans 7,093 4,658
Subordinate debenture series 5,945 5,945
Street, sewer and water assessments on land
under development and lots held for sale 467 1,047
Installment loans 609 622
Unsecured demand notes payable, stockholders -- 77
----------- -----------
$ 35,115 $ 27,730
=========== ===========
</TABLE>
Supplemental disclosure of noncash transactions:
The Company acquired land for future development under promissory notes with the
sellers aggregating $305 and $1,773 in the nine months ended September 30, 1998
and 1997, respectively. In addition, the Company sold $230 of land and related
research costs in exchange for a note receivable in the nine months ended
September 30, 1998 and $1,330 of land and related planning costs along with
related debt of $182 in exchange for a $1,145 notes receivable in the nine
months ended September 30, 1997.
6
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE 3. RELATED PARTY TRANSACTIONS:
In May 1998, the Company sold $230 of undeveloped land and related planning
costs to a Limited Liability Company ("LLC") related to the Company through
common ownership, in exchange for a note receivable. The note receivable is due
on demand and matures on December 31, 2000, with interest payable at 1% above
the prime rate. In May and September 1997, the Company sold $1,330 of
undeveloped land and related planning costs to two LLC's, in exchange for $1,145
notes receivable and one LLC assumed two land mortgages totaling $182. The notes
receivable are due on demand and mature in December 31, 1999 with interest
payable at 1% above the prime rate. The LLC's will develop the land and the
Company has option agreements with the LLC's that gives the Company exclusive
rights, but no obligation, to purchase the developed lots under terms similar to
other agreements with non-related parties.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the three and nine months ended September 30, 1998 increased $2.7
million and $6.9 million or 12.1% and 13.8%, respectively, from the same periods
in 1997. The Company closed on sales of 76 and 174 homes in the three and nine
months ended September 30, 1998, respectively, as compared to 67 and 148
closings, respectively, in the same periods in 1997. The average selling price
of homes closed in the three and nine months ended September 30, 1998 decreased
by 1.2% and 3.0%, respectively, as compared to the average selling price of
homes closed in the same periods in 1997. The decrease in average selling price
is due to an increase in the number of homes closed in the Company's new
standard product lines in the three and nine months ended September 30, 1998
compared to the same period in 1997.
The Company's gross profit margin in the three months ended September 30, 1998
decreased to 12.5% as compared to 13.5% for the three months ended September 30,
1997. Gross profit margins decreased to 11.7% for the nine months ended
September 30, 1998 as compared to 12.2% for the same period in 1997. This
decrease in gross profit margin for the three months and nine months ended
September 30, 1998 is primarily due to fluctuations in the mix of homes sold and
increases in the cost of land developed by the Company due to competition for,
and reductions in the availability of, raw land within the Twin Cities
metropolitan area. The Company expects that the increased costs of land will
continue to negatively impact the gross margins in the future.
Operating expenses for the three and nine months ended September 30, 1998
increased $108,000 and $312,000, respectively as compared to the same periods in
1997. As a percentage of total revenues, these expenses decreased to 8.3% and
9.2%, respectively, for the three and nine months ended September 30, 1998 as
compared to 8.8% and 9.8%, respectively, in 1997, as most are fixed in nature.
The operating expenses increased in 1998 due to rental fees incurred in 1998 as
a result of model home sale-leaseback transactions during 1997 and increased
advertising costs for special promotions during 1998. These increases were
offset by a decrease in the Company's personnel costs in 1998 and a decrease in
selling expenses in the nine months ended September 30, 1998, due to an
aggressive cooperative advertising program.
OTHER INCOME (EXPENSE), NET
Interest expense for the three months and nine months ended September 30, 1998
decreased $47,000 and $199,000, respectively, or 7.9% and 10.3%, respectively,
from the same periods in 1997. This decrease is due to decreased interest costs
for the Company's model homes sold as part of a sale-leaseback program, in
addition to decreased borrowings on the Company's lines of credit for working
capital.
NET INCOME(LOSS)
Net income in the three months ended September 30, 1998 was $286,000 compared to
$252,000 in the same period in 1997. Net loss in the nine months ended September
30, 1998 was $119,000, compared to $433,000 in the same period in 1997. Results
are primarily due to an increase in revenues and decrease in interest expense in
1998.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash increased $570,000 to $2.5 million in 1998 from $2.3 million in 1997.
Cash flows used in operating activities were $5.7 million for the nine months
ended September 30, 1998; an increase of $7.3 million from the same period in
1997, during which operating activities provided $1.6 million of cash. During
the nine months ended September 30, 1998, cash was used for a $7.7 million
seasonal increase in homes under construction; a $1.1 million increase in
restricted cash; and $236,000 decrease in accrued expenses. These cash uses were
partially offset by $1.5 million of cash provided by increases in customer
deposits and $1.5 million increase in accounts payable.
Cash flows used in investing activities increased by $186,000 from $387,000 for
the nine months ended September 30, 1997 to $573,000 for the same period in
1998. The increase was primarily due to purchases of vehicles and other
construction equipment.
Cash flows provided by financing activities increased $7.0 million to $6.9
million for the nine months ended September 30, 1998 from $83,000 cash used by
financing activities in the same period in 1997. The cash provided by financing
activities for the nine months ended September 30, 1998 was primarily due to
increased net borrowings on the Company's debt obligations as a result of cash
used for the seasonal increase in homes under construction.
FINANCING
The Company believes that internally generated funds, amounts available under
its four lines of credit and borrowing arrangements entered into in the ordinary
course of business will continue to be the primary sources of capital for
liquidity.
The Company's financing needs depend primarily upon sales volume, asset
turnover, land acquisition and inventory balances. The Company presently
finances substantially all of its land acquisition and development and home
construction activities through borrowing arrangements for individual projects
or homes under construction. The borrowing arrangements for each individual
project evolve as the project matures from land acquisition, to development, to
construction of a home and, and finally, to sale of the home and lot. In
addition, the Company has entered into arrangements involving the sale of raw
land to other entities for which the Company has an option to subsequently
purchase back as developed lots.
The Company also utilizes secured lines of credit to finance its operations. The
Company has an approved aggregate line of credit of $11.7 million, subject to a
borrowing base. At September 30, 1998, the aggregate maximum credit available
under the lines of credit was $8.5 million, of which $6.7 million was utilized
and $1.8 million was available.
9
<PAGE>
The Company's outstanding indebtedness as of September 30, 1998 included $21.4
million due within one year. The Company has historically operated with a
substantial amount of its outstanding indebtedness due within one year,
historically paying such debt out of earnings or through refinancing, where
applicable. The Company believes that the amounts available under its lines of
credit and amounts generated from operations will be sufficient to satisfy its
debt obligations due in the next year. However, there can be no assurance that
the Company will be able to continue to obtain adequate short-term financing,
including bank financing, in the future.
The forward-looking statements contained in this quarterly report on Form 10-Q,
including without limitations forward-looking statements contained in
Management's Discussion and Analysis, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Certain
important factors could cause results to differ materially from those
anticipated by some statements made herein. You are cautioned that all
forward-looking statements involve risks and uncertainties. Among the factors
that could cause results to differ materially are the following: Cyclical
economic conditions; fluctuations in operating results; continuing need to
acquire land for future development; substantial leverage; reliance on financing
and no assurance of availability of credit; extensive government regulation; and
environmental factors. Reference is also made to the risk factors contained in
the Company's Registration Statement on Form S-1, as filed with the Securities
and Exchange Commission on October 18, 1996.
YEAR 2000 COMPLIANCE
The Company's IS department has assessed the Y2K compliance of its internal
computer hardware and software applications. The Company is approximately 90%
finished with upgrading non-compliant PCs and expects to have all PCs upgraded
by March 31, 1999. The Company has completed the replacement of non-compliant
software applications with software applications, which the developers have
indicated are Year 2000 compliant except that, with respect to its accounting
software, the developer has indicated that a Year 2000 compliant upgrade will be
available. The Company intends to install the upgrade as soon as it is
available. Expenditures to date on such items have not been material, and the
Company does not anticipate that future expenditures will be material; however,
there can be no assurance that that will be the case.
The Company is in the process of identifying and assessing third party
relationships that could have an impact on the Company's operations. The Company
has identified certain relationships, such as with title companies and lumber
suppliers, that if they were unable to perform in January 2000, could have a
material impact on the Company. Delays in recording and providing title work on
properties and delivery of construction materials could delay the Company's
construction efforts and could have an impact on revenues, particularly in the
second quarter of 2000. The Company is seeking assurances from these parties,
and if assurances are not available, will attempt to develop contingency plans.
ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This Statement
requires companies to record derivatives on the balance sheet as assets and
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. This Statement is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. The Company has not yet determined the effects SFAS No. 133 will
have on its financial position or the results of its operations.
10
<PAGE>
PART II. OTHER INFORMATION
Items 1 through 5.
Not applicable
Item 6. Exhibits and Reports on Form 8-K.
(a) See exhibit index attached.
(b) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K during the quarter ended
September 30, 1998.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LUNDGREN BROS. CONSTRUCTION, INC.
Date: November 13, 1998 By /s/Peter Pflaum
--------------------------------
Peter Pflaum
(Principal Executive Officer)
(Principal Financial Officer)
12
<PAGE>
LUNDGREN BROS. CONSTRUCTION, INC. EXHIBITS
27 Financial Data Schedule
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,549
<SECURITIES> 0
<RECEIVABLES> 1,536
<ALLOWANCES> 55
<INVENTORY> 43,266
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 99
<OTHER-SE> 6,329
<TOTAL-LIABILITY-AND-EQUITY> 62,722
<SALES> 56,513
<TOTAL-REVENUES> 56,513
<CGS> 49,880
<TOTAL-COSTS> 49,880
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,734
<INCOME-PRETAX> (208)
<INCOME-TAX> (89)
<INCOME-CONTINUING> (119)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (119)
<EPS-PRIMARY> (11)
<EPS-DILUTED> (11)
</TABLE>
