1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended October 3, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to_________.
Commission File Number 0-6087
LINDAL CEDAR HOMES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-0508250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4300 South 104th Place, Seattle, Washington 98178
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(206) 725-0900
- --------------------------------------------------------------------------------
(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
requirement for the past 90 days.
Yes [X] No [ ]
Common stock outstanding at October 3, 1999: 4,131,277 shares at $.01 par value.
2
LINDAL CEDAR HOMES, INC.
AND SUBSIDIARIES
INDEX
PAGE
NUMBER
------
Part I Financial Information
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Operations 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk 19
Part II Other Information 21
Item 1 Legal Proceedings 21
Item 6(a) Exhibits 21
Item 6(b) Reports on Form 8-K 21
Signatures 22
2
3
LINDAL CEDAR HOMES, INC.
AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
3
4
LINDAL CEDAR HOMES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 3, 1999, December 31, 1998 and September 27, 1998
(Dollar amounts in thousands, except per share amounts)
OCTOBER 3, SEPTEMBER 27,
1999 DECEMBER 31, 1998
(UNAUDITED) 1998 (UNAUDITED)
----------- ------------ -------------
Assets
Current assets
Cash and cash equivalents $ 4,098 3,457 2,701
Short-term investments 3,999 72 73
Receivables:
Trade 1,550 2,043 1,424
Refundable federal taxes 1,056 1,420 1,813
-------- -------- --------
2,606 3,463 3,237
Less allowance for doubtful receivables 335 320 340
-------- -------- --------
Net receivables 2,271 3,143 2,897
Inventories 7,645 7,120 9,253
Promotional material 536 854 939
Other current assets 844 713 667
-------- -------- --------
Total current assets 19,393 15,359 16,530
Other assets 1,506 1,357 1,297
Property, plant and equipment, net 11,046 11,426 11,733
-------- -------- --------
$ 31,945 28,142 29,560
======== ======== ========
Liabilities and Stockholders' Equity
Current liabilities
Current installments of long-term debt $ 200 190 184
Notes payable -- 266 --
Accounts payable and accrued expenses 3,225 2,027 2,657
Income taxes payable 177 -- 77
Customer deposits 5,339 3,940 4,324
-------- -------- --------
Total current liabilities 8,941 6,423 7,242
Long-term debt, excluding current
installments 4,556 4,604 5,066
Deferred income taxes 296 325 343
Stockholders' equity:
Common stock 41 41 41
Additional paid-in capital 16,059 16,049 16,033
Accumulated other comprehensive loss (1,051) (1,450) (1,285)
Retained earnings 3,103 2,150 2,120
-------- -------- --------
Total stockholders' equity 18,152 16,790 16,909
-------- -------- --------
$ 31,945 28,142 29,560
======== ======== ========
See accompanying notes to the condensed consolidated financial statements
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5
LINDAL CEDAR HOMES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the periods ended October 3, 1999 and September 27, 1998
(Dollar amounts in thousands, except per share amounts)
(Unaudited)
NINE MONTHS ENDED QUARTERS ENDED
------------------------------- ------------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1999 1998 1999 1998
---------- ------------- ---------- -------------
Revenue $ 28,812 27,914 10,570 10,793
Cost of goods sold 21,668 23,259 7,945 8,644
-------- -------- -------- --------
Gross profit 7,144 4,655 2,625 2,149
Operating expenses:
Selling, general and administrative expenses 5,725 6,103 2,014 1,868
Display court expenses 363 353 130 123
-------- -------- -------- --------
Total operating expenses 6,088 6,456 2,144 1,991
-------- -------- -------- --------
Operating income (loss) 1,056 (1,801) 481 158
Other income (expense):
Rental income 170 193 59 66
Interest income, net (16) (154) 36 (59)
Other income, net (27) 277 60 111
-------- -------- -------- --------
Other income, net 127 316 155 118
-------- -------- -------- --------
Earnings (loss) before income taxes 1,183 (1,485) 636 276
Income tax expense (benefit) 230 (520) 149 81
-------- -------- -------- --------
Net earnings (loss) $ 953 (965) 487 195
======== ======== ======== ========
Basic and diluted - earnings (loss) per
common share $ .23 (.23) .12 .05
======== ======== ======== ========
See accompanying notes to the condensed consolidated financial statements
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LINDAL CEDAR HOMES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine-months ended October 3, 1999 and September 27, 1998
(Dollar amounts in thousands)
(Unaudited)
OCTOBER 3, SEPTEMBER 27,
1999 1998
---------- -------------
Cash flows from operating activities:
Net earnings (loss) $ 953 (965)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,018 999
Deferred income tax expense (benefit) (213) 65
Loss on disposal of assets (26) --
Compensation expense related to restricted stock 9 --
Change in operating assets and liabilities:
Net trade and operating notes receivable 1,145 (186)
Inventories (432) 820
Prepaid expenses and promotional materials 250 (295)
Current liabilities other than current
installments of long-term debt 2,511 662
Other (326) (7)
------- -------
Net cash provided by operating activities 4,889 1,093
Cash flows from investing activities:
Purchase of investments (5,899) (75)
Maturity of investments 1,974 75
Repayment of non-operating notes receivable 152 154
Purchase of property, plant and equipment (332) (589)
Proceeds from sale of property, plant and equipment 31 --
Disbursements for non-operating notes receivable -- (58)
------- -------
Net cash used in investing activities (4,074) (493)
Cash flows from financing activities:
Repayment of long-term debt (83) (58)
Proceeds from long-term debt 35 10
Proceeds from notes payable -- 2,132
Repayment of current notes payable (266) (1,800)
------- -------
Net cash provided by (used in) financing
activities (314) 284
Effect of exchange rate changes on cash and cash equivalents 140 (469)
------- -------
Net increase in cash and cash equivalents 641 415
Cash and cash equivalents at beginning of period 3,457 2,286
------- -------
Cash and cash equivalents at end of period 4,098 2,701
======= =======
Supplemental disclosures of cash flow information - cash paid
(received)
during period for:
Interest $ 191 201
Income taxes (99) 89
======= =======
See accompanying notes to the condensed consolidated financial statements
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LINDAL CEDAR HOMES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1999, December 31, 1998, and September 27, 1998
(Amounts in thousands,except per share amounts)
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles,
except as noted below, and include all recurring adjustments that are
considered necessary by management to fairly state the results of the interim
periods. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and certain disclosures. Actual results could differ from those
estimates. These consolidated financial statements and related notes have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote
disclosures normally included in the consolidated financial statements
prepared in accordance with generally accepted accounting principles have
been omitted. Due to the seasonality of the Company's business, the
accompanying financial statements may not necessarily be indicative of the
results to be obtained for the full year. This report should be read in
conjunction with the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1998.
The financial results presented herein for the quarter and nine-month periods
ended September 27, 1998 contain a pre-tax loss of $30 and $265,
respectively, associated with the Company's sawmill, which was sold in the
fourth quarter of 1998.
(2) EARNINGS (LOSS) PER COMMON SHARE
The following tables present basic and diluted earnings (loss) per share and
reconciles the numerator and denominator of the basic and diluted per share
computations:
NET EARNINGS WEIGHTED NET EARNINGS
(LOSS) AVERAGE SHARES (LOSS)
(NUMERATOR) (DENOMINATOR) PER SHARE
------------ -------------- -------------
Quarter ended October 3, 1999:
Basic earnings per share $ 487 4,126 $.12
Effect of dilutive options -- 25 --
------------ -------------- -------------
Diluted earnings per share $ 487 4,151 $.12
============ ============== =============
Quarter ended September 27, 1998:
Basic earnings per share $ 195 4,118 $.05
Effect of dilutive options -- -- --
------------ -------------- -------------
Diluted earnings per share $ 195 4,118 $.05
============ ============== =============
Nine-months ended October 3, 1999:
Basic earnings per share $ 953 4,126 $.23
Effect of dilutive options -- 19 --
------------ -------------- -------------
Diluted earnings per share $ 953 4,145 $.23
============ ============== =============
Nine-months ended September 27, 1998:
Basic loss per share $(965) 4,118 $(.23)
Effect of dilutive options -- -- --
------------ -------------- -------------
Diluted loss per share $(965) 4,118 $(.23)
============ ============== =============
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LINDAL CEDAR HOMES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1999, December 31, 1998, and September 27, 1998
(Amounts in thousands,except per share amounts)
(Unaudited)
Options to purchase shares of common stock where the exercise price exceeds the
average market price were excluded from the computations for 1999 and 1998
because they would be anti-dilutive. All options are considered to be
anti-dilutive in periods where there is a net loss. Anti-dilutive options
excluded from the computations are as follows:
ANTI-DILUTIVE
OPTIONS
--------------
Quarter ended October 3, 1999 404
Quarter ended September 27, 1998 486
Nine-months ended October 3, 1999 404
Nine-months ended September 27, 1998 486
(3) INVENTORIES
A summary of inventories follows:
OCTOBER 3, DECEMBER 31, SEPTEMBER 27,
1999 1998 1998
----------------- ----------------- -----------------
Raw materials $ 1,740 1,639 2,706
Work-in-process 2,666 2,474 2,851
Finished goods 2,528 2,226 2,783
Display models 711 781 913
----------------- ----------------- -----------------
$ 7,645 7,120 9,253
================= ================= =================
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
OCTOBER 3, DECEMBER 31, SEPTEMBER 27,
1999 1998 1998
------------ ------------ ------------
Building and leasehold improvements $ $10,388 10,286 10,654
Equipment 3,472 3,349 5,411
Furniture and fixtures 4,543 4,372 4,252
------------ ------- -------
18,403 18,007 20,317
Less accumulated depreciation and
amortization 9,532 8,745 10,815
------------ ------- -------
8,871 9,262 9,502
Land 2,175 2,164 2,231
------------ ------- -------
Net property, plant and equipment $ 11,046 11,426 11,733
============ ======= =======
(5) SEGMENT INFORMATION
The Company has two reportable segments: Homes -- United States and Homes --
Canada. Homes -- United States performs functions associated with
engineering, custom design, drafting, customer service, logistics, special
order materials and distribution planning for home sales worldwide. Homes --
Canada performs functions associated with inventory management of stock
materials, materials staging, and home shipping for home sales worldwide.
Homes -- United States primarily sells homes, at wholesale, to independent
dealers while Homes -- Canada primarily sells homes, at wholesale, to Homes
-- United States for resale to independent dealers. Prior to 1998, Homes --
Canada also operated the Company's sawmill, which
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LINDAL CEDAR HOMES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1999, December 31, 1998, and September 27, 1998
(Amounts in thousands,except per share amounts)
(Unaudited)
produced a majority of the cedar used in houses. During 1998, the Company's
sawmill operated only for a brief period of time in February and was sold in
December 1998.
Information regarding the Company's reportable segments for the quarters and
nine month periods ended October 3, 1999 and September 27, 1998 follows:
OTHER
U.S. CANADIAN INTERSEGMENT RECONCILING
HOMES HOMES ALL OTHER ELIMINATIONS ITEMS CONSOLIDATED
------- --------- --------- ------------ ----------- ------------
QUARTER ENDED OCTOBER 3, 1999
Revenues from external
customers $ 8,586 885 1,099 -- -- 10,570
Intersegment revenues 3,583 8,146 1,575 (13,304) -- --
Gross profit 2,487 2,946 447 (3,251) (4) 2,625
Interest income 102 5 -- (73) 73 107
Interest expense 18 73 53 (73) -- 71
Depreciation and
amortization 262 37 125 -- (35) 389
QUARTER ENDED SEPTEMBER 27, 1998
Revenues from external
customers $ 8,703 982 1,104 -- 4 10,793
Intersegment revenues 3,079 8,210 1,562 (12,846) (5) --
Gross profit 1,954 2,649 147 (2,598) (3) 2,149
Interest income 20 9 -- (72) 72 29
Interest expense 30 76 54 (72) -- 88
Depreciation and
amortization 218 28 121 -- 11 378
NINE-MONTHS ENDED OCTOBER 3 1999
Revenues from external
customers $24,133 1,574 3,083 -- 22 28,812
Intersegment revenues 8,664 22,643 4,224 (35,531) -- --
Gross profit 5,727 8,280 1,142 (8,006) 1 7,144
Interest income 200 25 -- (219) 219 225
Interest expense 79 222 156 (219) 3 241
Depreciation and
amortization 552 97 304 -- 65 1,018
NINE-MONTHS ENDED SEPTEMBER 27, 1998
Revenues from external
customers $22,320 2,711 2,923 -- (40) 27,914
Intersegment revenues 7,404 22,160 4,016 (33,941) 361 --
Gross profit 3,570 7,280 466 (6,655) (6) 4,655
Interest income 74 29 1 (224) 224 104
Interest expense 87 234 161 (224) -- 258
Depreciation and
amortization 563 91 314 -- 31 999
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LINDAL CEDAR HOMES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 3, 1999, December 31, 1998, and September 27, 1998
(Amounts in thousands,except per share amounts)
(Unaudited)
(6) COMPREHENSIVE EARNINGS (LOSS):
Comprehensive earnings (loss) are as follows:
NINE-MONTHS ENDED QUARTER ENDED
---------------------------- -----------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1999 1998 1999 1998
---------- ------------- ---------- -------------
Net earnings (loss) $ 953 (965) 487 195
Other comprehensive earnings (loss) -
foreign currency translation 399 (574) (70) (346)
---------- ------------- ---------- -------------
Comprehensive earnings (loss) $1,352 (1,539) 417 (151)
========== ============= ========== =============
(7) SHORT-TERM INVESTMENTS:
Short-term investments consist of securities maturing within one year, and
are classified as available-for-sale. Accordingly, these investments are
carried at fair value. Any unrealized holding gains and losses, net of
income taxes, are immaterial at October 3, 1999.
(8) CONTINGENCIES:
In November, the Company was involved in an unsuccessful mediation with six
former and current dealers relating to alleged damages arising from the
Company's termination or threatened termination of their dealership
agreements and the Company's alleged damages resulting from the dealers'
breach of contract. The Company's dealer agreement provides that, following
unsuccessful mediation, a dealer may pursue claims under the agreement only
through an arbitration proceeding binding on the dealer and the Company. The
Company believes that the dealers' claims are without merit and will defend
itself vigorously. At this time the Company is unable to assess the
potential amount of actual damages, if any. At the end of the third quarter
the Company had not accrued any amounts relating to these claims.
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LINDAL CEDAR HOMES, INC.
AND SUBSIDIARIES
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Lindal Cedar Homes, Inc. (the "Company") is primarily engaged in the manufacture
and distribution of custom cedar homes, windows and sunrooms. The Company also
re-manufactures standard dimensional cedar lumber. Cedar lumber that meets the
Company's quality standards is combined with manufactured and/or purchased
windows, sunrooms, and other purchased forest products and building materials
into home packages which can be shipped nationally and internationally to the
home buyer's construction site. Re-manufactured cedar lumber that is not of a
grade suitable for use in homes is sold on the open lumber market.
The Company has four home products: Cedar: Frame, Cedar: Solid, Access and
Select. The Cedar: Frame, Cedar: Solid and Access products predominantly utilize
post and beam design and construction. The Cedar: Frame and Access products
utilize a cavity wall. The Cedar: Solid utilizes, predominantly, a solid cedar
wall. The Access home retains many of the features of the Cedar: Frame home,
including a cavity wall. However, the base price of the Access product is
approximately 25% to 30% less than the traditional Cedar: Frame home due to a
less extensive package of materials and less expensive package components. The
Select product utilizes a combination of post and beam and conventional design
and construction including a cavity wall. The Select product combines the
materials savings of the Access product with the economy of a conventionally
framed home while using quality Lindal building materials.
The Company recognizes revenue from orders when the home package is shipped.
Entering the fourth quarter of 1999, the total backlog, stated in dollars,
increased $6 million (22%) to approximately $33 million from approximately $27
million in 1998. The backlog was approximately $31 million entering the third
quarter of 1999. This increase is primarily attributable to the increased number
of new orders received in the second quarter of 1999 as a result of a sales
contest and continued strong new orders in the third quarter of 1999. Because
the Company's business is seasonal, the backlog data does not necessarily
reflect the level of the Company's business on an annual basis. While the
Company expects the majority of the current backlog will ship within the next 12
months, factors beyond the control of the Company such as weather conditions,
customer financing, building permits or customer requested delays, may affect
the actual delivery date of some portion of backlog orders beyond the twelve
month period.
The primary raw material used by the Company in its re-manufacturing is western
red cedar, available in quantity only in British Columbia, Canada, Alaska and
the Pacific Northwest United States. Pressures continue to be placed on the log
market in general by harvesting restrictions in the United States and Canada,
and the Company is aware of the potential for shortages and/or fluctuations in
the price of cedar logs and cedar lumber.
The Company is working to secure its cedar raw material needs on a long-term
basis. As discussed in the Company's 1998 Annual Report on Form 10-K, the
Company continues to seek approval of its proposed modifications to the terms
and conditions of the 327,000 cubic meter timber sale awarded to the Company in
1996 by the Province of British Columbia. If approval is received, management
believes that this timber sale will allow the Company to secure a supply of
cedar for a minimum of the next five years. If such approval is received,
management expects that timber harvesting will begin sometime in the second
quarter of 2000. Based on recent information the Company has received,
management believes that approval of its proposed modifications to the terms and
conditions of the timber sale is likely to be received.
Although green cedar lumber is the primary raw material used in manufacturing,
the Company purchases substantial quantities of forest products on the commodity
market to ship in its home packages. Presently, the Company does not anticipate
any serious long-term problems in securing the needed forest products in the
foreseeable future. The Company does expect that there may be occasional,
temporary shortages of cedar logs or cedar lumber and that price volatility of
cedar logs, green cedar lumber, other species of lumber and other forest
products may occur from time to time. For this reason, the Company hedges a
portion of its non-cedar lumber needs using options and futures contracts. The
Company sometimes makes selected strategic purchases, when relatively favorable
prices exist in the market, of larger quantities than it has historically. These
purchases are not expected to be in excess of anticipated needs.
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The Company's business is seasonal in that most deliveries have historically
been made during the period from April to October. To illustrate this, revenue
by quarter is presented below:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
1999 8,105 10,136 10,570
1998 5,645 11,477 10,793 9,804
1997 7,540 14,913 14,298 12,097
1996 6,587 14,173 14,632 11,243
1995 6,630 13,947 11,536 10,198
As discussed in the Company's 1998 Annual Report on Form 10-K, the Central Puget
Sound Regional Transit Authority, a governmental agency, has notified the
Company that the site occupied by the Company's head office, display court and
adjacent business park, in Seattle, Washington, has been identified as the
preferred site for the location of a light rail maintenance base. Management
believes that the designation as the "preferred" site will have a negative
impact on the Company's ability to renew business park leases as they expire.
The Central Puget Sound Regional Transit Authority is expected to make its final
site selection in November 1999. In the event that the Central Puget Sound
Regional Transit Authority chooses the Company's property as its final site
selection for the maintenance base, management believes that the Company will
receive fair market value for the property surrendered. Although the Company has
not received official notification, recent public and private statements by
officials of the Central Puget Sound Regional Transit Authority indicate that
the Company's site will not be chosen as the final site selection.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments embedded in other contracts and
for hedging activities. The Statement requires that entities recognize all
derivatives as either assets or liabilities on the balance sheet and measure
these derivatives at fair value. SFAS No. 133 also specifies a new method of
accounting for hedging transactions, prescribes the type of items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting. This Statement is effective for financial
statements for years beginning after June 15, 2000. The Company does not expect
the adoption of this Statement to have a material impact on the consolidated
financial statements.
YEAR 2000
The Year 2000 problem is the result of computer programs and hardware being
developed that utilizes two digits rather than four to define the applicable
year. The consequences of this issue may include failure of information
technology systems and interruption of business processes.
The problem exists for many kinds of hardware and software. Any system, used by
the Company, its dealers or vendors, that have time-sensitive software or
hardware may recognize a date using "00" as 1900 rather than the year 2000.
The Year 2000 issue affects the Company's internal systems, including
information technology (IT) and non-IT systems such as its integrated
manufacturing and accounting system, computer operating systems, voice and
electronic communication systems, server and PC software and hardware, drafting
systems, database systems and other software and hardware based systems.
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13
The Company has completed an assessment of the readiness of its core internal
systems for handling the Year 2000. The Company's integrated manufacturing and
accounting system, its core business system, has been upgraded to a Year 2000
certified compliant version. Internal testing of the upgraded software was
completed in the second quarter of 1999 and it was determined that the software
is Year 2000 compliant.
The Company's assessment of other, less vital internal systems has been
completed. Those remaining IT and non-IT systems that were not Year 2000 ready
have either been upgraded to Year 2000 compliant versions of the same software
or hardware, or new Year 2000 compliant software and/or hardware has been
acquired and implemented. Final testing of these less vital internal systems has
been completed.
Management believes all material internal systems will be compliant by the Year
2000 and that the cost to address the issue will not be material. Nevertheless,
the Company will create contingency plans for certain internal systems, as Year
2000 compliance cannot be definitively determined.
All organizations must assess the effect the Year 2000 issue will have on their
third party supply chain. The Company has identified its key vendors and is
continuing to survey these key vendors to understand their ability to continue
providing services and products through the change to Year 2000. The Company
will create contingency plans for these key vendors. The Company is not
dependent on any one vendor as a source for its materials and alternate vendors
are available for all materials it uses in the manufacture and shipment of its
homes.
The Company is continuing its assessment of other third party vendors and will
develop contingency plans that include the identification of alternate
suppliers. Management currently expects that its contingency plans will be
completed in the fourth quarter of 1999.
The Company is also working with its dealers to determine their ability to sell
the Company's products through the Year 2000. The Company will partner with them
if necessary, to avoid any business interruptions in 2000. The Company's dealers
are not dependent on computerized systems for the acceptance of new orders or
transmission of new orders to the Company.
Any software or hardware costs involved with Year 2000 remediation will either
be charged to expense as incurred or capitalized, depending on the circumstances
of each case. Internal staff costs involved in Year 2000 issues will not be
incremental, but rather represent the re-deployment of existing resources. Such
internal staff costs will be expensed as incurred. Unamortized capital costs of
previously acquired software and hardware will be accelerated over the estimated
period of utility and any remaining unamortized capital costs at the date the
hardware or software is abandoned due to Year 2000 issues will be written off.
Management believes that the costs related to the Year 2000 issue will not be
material.
THIRD QUARTER
NEW ORDERS
The dollar value of new orders received increased 12% in the third quarter of
1999 compared to the third quarter of 1998. The number of new order units
increased 16% in the same time period. The increase in the number and value of
new orders in the third quarter of 1999 is primarily due to the new order
activity generated from the second quarter sales contest, which ended in early
July and other, more recent sales promotions.
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The following table illustrates the percentage change in the number and dollar
value of new orders for the third quarter of the current and each of the
preceding 2 years:
% CHANGE IN 1999 1998 1997
----------------- -------- -------- --------
Units 16% 7% 19%
Dollar Value 12% 7% 29%
The Access product represented 38% of new order units in the third quarter of
1999 compared to 53% of new order units in the third quarter of 1998. The dollar
value of the Access product new orders was 39% of the total dollar value of new
orders in the third quarter of 1999 compared to 43% in the third quarter of
1998. The new Select product represented 19% of the new order units and 13% of
the total dollar value of new orders in the third quarter of 1999. The Select
product was not available in 1998. Size and value of a home is a function of
customer preference and may change somewhat from period to period.
REVENUE
Revenue decreased $220,000 (2%) to $10.57 million in the third quarter of 1999
from $10.79 million in the third quarter of 1998, primarily due to the decrease
in home revenue.
Revenue from homes decreased $240,000 (3%) to $8.56 million in the third quarter
of 1999 from $8.8 million in the third quarter of 1998. The number of houses
shipped increased 6% to 116 in the third quarter of 1999 from 109 in the third
quarter of 1998. Management believes the decrease in home revenue combined with
the increase in the number of units shipped is primarily related to the increase
in combined sales of the Company's lower priced Access and Select products. The
size and value of a home is also a function of customer preference.
The Access product accounted for approximately 39% of home sales revenue and 43%
of home units shipped in the third quarter of 1999 compared to 43% of home sales
revenue and 51% of the house units shipped in the third quarter of 1998. The
Select product accounted for approximately 12% of home sales revenue and 17% of
home units shipped in the third quarter of 1999. The Select product was not
available in 1998.
Revenue from sunrooms decreased $50,000 (12%) to $380,000 in the third quarter
of 1999 from $430,000 in the third quarter of 1998.
Revenue from other sales, primarily material sales, increased $70,000 (4%) to
$1.63 million in third quarter of 1999 from $1.56 million in the third quarter
of 1998.
MATERIAL COSTS
Beginning in late 1996 and continuing through the end of 1997, the Company
experienced escalating costs for lumber and wood products especially for cedar,
the primary material used in the Company's homes, over historic levels. Material
costs reached their peak in the fourth quarter of 1997 when material costs were
61% of revenue. Beginning in the first quarter of 1998 and continuing through
the second quarter of 1999, the Company generally experienced softening of costs
for lumber and wood products. In general, the Company continues to experience
lower costs for lumber and wood products from the year ago period. The price for
cedar has declined slightly from year ago levels and has become more
predictable. As a result, the Company has not announced a price increase on its
homes and related products in 1999. However, certain framing lumber and panel
prices increased significantly during the second and early third quarters.
Prices for these items have retreated from their recent highs. Though the costs
for framing lumber are largely protected by futures hedging, management
anticipates these products will continue their downward trend into the fourth
quarter.
Management continues to evaluate all aspects of the cost of its products,
including materials, design and construction, in order to develop alternatives
or options that would lower the overall price of its products to the end
consumer, without sacrificing the quality of it products.
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In dollars, material costs decreased $690,000 (12%) to $5.14 million in the
third quarter of 1999 from $5.83 million in the third quarter of 1998 on 7 (6%)
additional home shipments.
As a percent of revenue, material costs were 49% in the third quarter of 1999
compared to 46% in the second quarter of 1999 and 54% in the third quarter of
1998. The increase in material costs as a percentage of revenue over the second
quarter of 1999 is largely due to the increased costs of framing lumber and wood
panels and increased sales of the lower priced Select product. The decrease in
material costs as a percentage of revenue from year ago levels is due to
generally lower lumber and wood costs, the effect of the price increase
implemented in 1998, specification changes to product lines, and the improved
purchasing practices of the Company. The overall reduction in material costs as
a percentage of revenue from year ago levels was partially mitigated by the
increased sales of the lower priced Access and Select products to produce the
net change above.
OTHER COST OF GOODS SOLD
In the third quarter of 1999, non-material costs included in the cost of goods
sold approximated the levels incurred in the third quarter of 1998 despite the
increase in the number of houses shipped.
GROSS PROFIT
The cumulative effect of price increases and lower material costs increased
gross profit to 24.8% of revenue in the third quarter of 1999 compared to 19.9%
of revenue in the third quarter of 1998. Gross profit was 28.1% of revenue in
the second quarter of 1999.
The mix of home units sold also impacts gross profit. The Access and Select
products represent 60% of the total home units shipped in the third quarter of
1999 compared to 51% in the third quarter of 1998. Although the Access and
Select homes have lower material costs than the Cedar Frame home, the gross
margin is lower as well.
OPERATING EXPENSES
Total operating expenses, including display court expenses, increased $150,000
(8%) to $2.14 million in the third quarter of 1999 from $1.99 million in the
third quarter of 1998.
Selling, and general and administrative expenses increased $140,000 (7%) to
$2.01 million in the third quarter of 1999 from $1.87 million in the third
quarter of 1998. Selling expenses increased $100,000 (10%) to $1.08 million in
the third quarter of 1999 from $980,000 in the third quarter of 1998. This is
largely due to increased advertising, new dealer acquisition and training costs,
and accrued employee profit sharing expenses. General and administrative
expenses increased $60,000 (7%) to $940,000 in the third quarter of 1999 from
$880,000 in the third quarter of 1998. This increase is primarily due to accrued
employee profit sharing expenses. There was no selling, or general and
administrative employee profit sharing amounts accrued in the third quarter of
1998.
OTHER INCOME (EXPENSE), NET
Other income (expense), net increased $40,000 (33%) to $160,000 in the third
quarter of 1999 from $120,000 in the third quarter of 1998. Interest income
increased $80,000, which was offset by a $80,000 decrease in the gain from
foreign currency translation. Sale of assets produced a gain of $30,000 in the
third quarter of 1999.
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INCOME TAX EXPENSE
The Company recognized an income tax expense of $150,000 (23%) in the third
quarter of 1999 compared to an income tax expense of $80,000 (29%) in the third
quarter of 1998. The overall income tax expense recognized in the third quarter
of 1999 was reduced due to the effect of Canadian tax rates that differ from
U.S. tax rates. The overall income tax expense recognized in the third quarter
of 1998 was reduced due to recognition of an income tax benefit from Canadian
operations not previously recognized.
YEAR-TO-DATE
NEW ORDERS
The dollar value of new orders received increased 12% in the first nine months
of 1999 compared to the first nine months of 1998. The number of new order units
increased 10% in the same time period. The following table illustrates the
percentage change in the number and dollar value of new orders for the first
nine months of the current and each of the preceding 2 years:
% CHANGE IN 1999 1998 1997
------------- -------- -------- --------
Units 10% -14% -5%
Dollar Value 12% -6% -3%
The Access product represented 43% of new order units in the first nine months
of 1999 compared to 52% of new order units in the first nine months of 1998. The
dollar value of the Access product new orders was 41% of the total dollar value
of new orders in the first nine months of 1999 compared to 44% in the first nine
months of 1998. The new Select product represented 17% of the new order units
and 12% of the total dollar value of new orders in the first nine months of
1999. The Select product was not available in 1998. Size and value of a home is
a function of customer preference and may change somewhat from period to period.
REVENUE
Revenue increased $900,000 (3%) to $28.81 million in the first nine months of
1999 from $27.91 million in the first nine months of 1998, primarily due to
increased home revenue.
Revenue from homes increased $660,000 (3%) to $22.33 million in the first nine
months of 1999 from $21.67 million in the first nine months of 1998. The number
of houses shipped increased 3% to 285 in the first nine months of 1999 from 277
in the first nine months of 1998. The average revenue per home increased
slightly in the first nine months of 1999 compared to the average revenue per
home in the first nine months of 1998.
The Access home accounted for approximately 42% of home sales revenue and 49% of
home units shipped in the first nine months of 1999 compared to 45% of home
sales revenue and 52% of the home units shipped in the first nine months of
1998. The Select product accounted for approximately 6% of home sales revenue
and 8% of home units shipped in the first nine months of 1999. The Select
product was not available in 1998. The first substantial shipments of the Select
product occurred in the second quarter of 1999.
Revenue from sunrooms decreased $180,000 (14%) to $1.1 million in the first nine
months of 1999 from $1.28 million in the first nine months of 1998.
Revenue from other sales, primarily material sales, increased $420,000 (8%) to
$5.38 million in the first nine months of 1999 from $4.96 million in the first
nine months of 1998.
MATERIAL COSTS
In dollars, material costs decreased $1.02 million (7%) to $13.81 million in the
first nine months of 1999 from $14.83 million in the first nine months of 1998
on 8 (3%) additional home shipments.
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As a percent of revenue, material costs were 48% in the first nine months of
1999 compared to 53% in the first nine months of 1998. The decrease in material
costs as a percentage of revenue is due to lower lumber and wood costs, the
cumulative effect of the price increase implemented in 1998, higher than
anticipated duty refunds and the improved purchasing practices of the Company.
Duty refunds totaled approximately $160,000 in the second quarter of 1999. The
overall reductions in material costs as a percentage of revenue was partially
mitigated by the increase in combined sales of the Access and Select products to
produce the net change above.
OTHER COST OF GOODS SOLD
Non-material costs, included in the cost of goods sold, decreased $570,000 (7%)
to $7.86 million in the first nine months of 1999 from $8.43 million in the
first nine months of 1998. This is primarily due to decreases in manufacturing
labor and labor related costs of $340,000 (11%), customer service costs of
$110,000 (16%) and net decreases in other manufacturing costs of $120,000 (3%).
The reduction in manufacturing labor and related expenses is primarily due to
increased productivity in manufacturing and shipping operations and the absence
of sawmill labor in the first nine months of 1999. The sawmill operated for only
a brief period of time in the first nine months of 1998. The remainder of the
decrease was primarily due to aggressive containment of other manufacturing
costs.
GROSS PROFIT
The cumulative effect of price increases, lower non-material costs of goods
sold, and lower material costs increased gross profit to 24.8% of revenue in the
first nine months of 1999 compared to 16.7% of revenue in the first nine months
of 1998.
The mix of home units sold also impacts gross profit. The Access and Select
products represent 57% of the home units shipped in the first nine months of
1999 compared to 52% in the first nine months of 1998. Although the Access and
Select homes have lower material costs than the Cedar Frame home, the gross
margin is lower as well.
OPERATING EXPENSES
Total operating expenses, including display court expenses, decreased $370,000
(6%) to $6.09 million in the first nine months of 1999 from $6.46 million in the
first nine months of 1998.
Selling, and general and administrative expenses decreased $380,000 (6%) to
$5.72 million in the first nine months of 1999 from $6.10 million in the first
nine months of 1998. Selling expenses decreased $210,000 (7%) to $2.96 million
in the first nine months of 1999 from $3.17 million in the first nine months of
1998. General and administrative expenses decreased $180,000 (6%) to $2.76
million in the first nine months of 1999 from $2.94 million in the first nine
months of 1998. The reductions in selling, and general and administrative costs
are primarily due to general cost cutting measures implemented by management.
Total operating expenses (selling, general and administrative and display court)
for the first nine months of 1999 reflect the accrual of employee profit sharing
expenses. There were no employee profit sharing amounts accrued in the nine
months ended September 27, 1998.
OTHER INCOME (EXPENSE), NET
Other income (expense), net decreased $190,000 (59%) to $130,000 in the first
nine months of 1999 from $320,000 in the first nine months of 1998. This is
primarily due to reduced gains from foreign currency transactions, which
decreased by $330,000 (119%) from the first nine months of 1998 which was
partially offset by an increase of $120,000 (115%) in interest income.
INCOME TAX EXPENSE (BENEFIT)
The Company recognized an income tax expense of $230,000 (19%) in the first nine
months of 1999 compared to an income tax benefit of $520,000 (35%) in the first
nine months of 1998. The overall income tax expense recognized in the first nine
months of 1999 was reduced due to the recognition of the income tax benefit from
the available carryforward of prior year Canadian operating losses and the
effect of Canadian tax rates that differ from U.S. tax rates. The Company did
not recognize the income tax benefits in
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1998 for 1998 and prior year Canadian operating losses due to the inability to
carryback the Canadian net operating losses and the uncertainty of utilizing the
Canadian net operating losses against future taxable Canadian income.
LIQUIDITY
The Company's policy is that all home and sunroom orders be accompanied by a
cash deposit and that units be paid in full before shipment or be shipped on a
C.O.D. basis. The majority of home and sunroom sales are prepaid. Lumber sales
are made on terms common to the industry.
The Company primarily pays its vendors within stated terms and takes advantage
of discounts for early payments whenever available. Operations and home and
sunroom orders are the Company's primary source of cash.
The Company maintains a $1.5 million operating line of credit with a financial
institution. The line of credit bears interest at the rate of prime plus 1% and
is secured by a pledge of specific assets. The line of credit expires on
December 31, 1999. The Company does not foresee the need to borrow on its
operating line of credit during 1999.
CASH FLOW
In the first nine-months of 1999 cash and cash equivalents increased by
$640,000. Operations generated cash of $4.89 million while additional cash of
$220,000 was provided primarily by the repayment of notes receivable and
proceeds from long-term debt. Of the available cash, $3.93 million was used to
purchase short-term investments net of maturities, $350,000 was used to re-pay
debt and $330,000 was used to purchase fixed assets. Exchange rates positively
affected cash by $140,000.
In the first nine months of 1998 cash and cash equivalents increased by
$420,000. Operations generated cash of $1.09 million while net additional cash
of $500,000 was provided by the repayment of notes receivable, proceeds from
long-term debt and the net change in notes payable. Of the available cash,
$590,000 was used to purchase fixed assets and net cash of $110,000 was used to
repay debt. Exchange rates had a negative effect of $470,000 on cash.
ACCOUNTS RECEIVABLE
Net receivables decreased $870,000 (28%) to $2.27 million at October 3, 1999
from $3.14 million at December 31, 1998. This is primarily due to a decrease in
trade receivables of $490,000 (24%) and a decrease in refundable federal taxes
of $360,000 (25%). The decrease in trade receivables is largely due to improved
payments from dealers and other third parties due to seasonal factors. The
decrease in refundable federal taxes is primarily due to the receipt of the
refund claim of $400,000 from the 1998 loss. Net receivables decreased $630,000
(22%) from September 27, 1998, primarily due to reductions in refundable federal
taxes of $750,000 (41%) which was offset by an increase in trade receivables of
$130,000 (9%).
INVENTORY
Production inventories (raw materials, work-in-process, and finished goods)
increased $590,000 (9%) to $6.93 million at October 3, 1999 from $6.34 million
at December 31, 1998. This reflects an increase in the value and quantity of
certain lumber and wood products, which was partially offset by a decrease in
the inventory quantity of cedar.
Production inventories decreased $1.41 million (17%) to $6.93 million at October
3, 1999 from $8.34 million at September 27, 1998. This is largely due to
improved inventory management, reduced log inventory due to the sale of the
sawmill, reduced inventory of cedar and other lumber and wood products and the
general softening of costs in the lumber and forest products markets experienced
from the year ago period. Improved management of the Company's inventory has
decreased the physical inventory levels necessary to meet the requirements of
the usually busier summer and fall shipping schedules.
The Company continues to hedge a portion of its expected non-cedar lumber needs
for its home packages using options and futures contracts. The program's
objective is to manage well-defined commodity risks. These derivative financial
instruments are not being used for trading purposes.
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SHORT-TERM INVESTMENTS
Short-term investments increased $3.93 million to $4.0 million at October 3,
1999 from $70,000 at December 31, 1998 largely due to cash generated from
operations and from the increase in new home orders received in the second and
third quarters of 1999.
LIABILITIES
Accounts payable and accrued expenses increased $1.20 million (59%) to $3.23
million at October 3, 1999 from $2.03 million at December 31, 1998. This
increase is primarily due to the increase in non-cedar inventory costs and
quantities, accrued employee profit sharing, the timing of regularly scheduled
payment dates in relation to the end of the quarter and other seasonal factors.
Accounts payable and accrued expenses increased $570,000 (21%) from $2.66
million at September 27, 1998. This increase reflects the accrued employee
profit sharing and the timing of regularly scheduled payment dates in relation
to the end of the quarter.
Notes payable decreased $270,000 (100%) to $0 at October 3, 1999 from $270,000
at December 31, 1998. In March 1999, the Company paid off the mortgage note on a
Company owned display court.
Customer deposits increased $1.40 million (36%) to $5.34 million at October 3,
1999 from $3.94 million at December 31, 1998 and increased $1.02 (24%) million
from the September 27, 1998 level. These increases are largely due to the
increased new orders received in the second and third quarter of 1999 and, in
general, the increase in the average value of new orders.
CAPITAL EXPENDITURE FINANCING
As discussed earlier, the Company continues to seek approval of its proposed
modification to the terms and conditions of the 327,000 cubic meter timber sale
awarded to the Company in 1996 by the Province of British Columbia. Should the
Company not receive approval of its proposed modifications to the terms of the
second timber sale from Canadian regulatory authorities, the Company, in order
to preserve the timber sale, would consider alternative financing methods for
the expansion of its operations in British Columbia. Such alternatives would
include, but not be limited to, debt financing, lease financing, other joint
venture agreements or combinations of the aforementioned. The Company is also
considering other available operational options, including further consolidation
of its operations, in the event that approval of the modifications to the timber
sale is not received.
Other capital expenditures in 1999 will be financed from cash flow generated
from operations, leasing or debt.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates,
foreign currency exchange rates, commodity prices and equity prices. The primary
market risks to which the Company is exposed are commodity lumber prices and
foreign currency exchange rates.
The Company, from time to time, enters into futures contracts to hedge future
purchases of specific types and grades of non-cedar lumber with the objective of
reducing risk due to market fluctuations. The aggregate commitment underlying
the Company's futures contracts and deferred losses from hedged lumber was not
material at October 3, 1999. Such losses in fair value, if realized, would be
reduced by lower costs of the lumber purchased at market value.
The Company is subject to foreign currency exchange rate exposure, primarily
related to Canadian operations and the sale of homes to Canadian customers. Home
sales into countries other than Canada are made in U.S. dollars. At the present
time, the Company does not hedge foreign currency risk, but may hedge known
transaction exposure in the future.
The Company's exposure to changes in interest rates is minimal. Interest on
short-term investments of less than 90 days is primarily based on market
interest rates. On October 3, 1999, the Company's investment in fixed rate
instruments was approximately $4.0
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million. All of the Company's long-term debt is fixed rate. The Company's line
of credit is based on the prime rate. On October 3, 1999, the Company had no
amounts owing on the line of credit.
OTHER MATTERS
Statements contained in this report that are not based on historical facts are
forward looking statements subject to uncertainties and risks including but not
limited to: the consolidation of operations, trade and government actions,
changing economic conditions, trends in the housing industry, raw material and
labor costs, availability of raw materials, the ability to obtain orders and
recruit dealers, demographic influences and continued acceptance of products and
services.
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PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In November, the Company was involved in an unsuccessful mediation with six
former and current dealers relating to alleged damages arising from the
Company's termination or threatened termination of their dealership
agreements, and the Company's alleged damages resulting from the dealers'
breach of contract. In late 1998 and early 1999, the Company terminated or
threatened to terminate these dealership agreements on the grounds that the
dealers had breached the agreements by selling competitive products. These
dealers are seeking damages under the Washington Franchise Investment
Protection Act and the Federal Sherman Act. The aggregate of the individual
claims asserted by the dealers in the mediation was approximately $10
million. The Company's dealer agreement provides that, following unsuccessful
mediation, a dealer may pursue claims under the agreement only through an
arbitration proceeding binding on the dealer and the Company. The Company
believes that neither the Washington Franchise Investment Protection Act nor
the Federal Sherman Act is applicable nor were there any violations of either
act. Further, the Company believes that the claims are without merit and will
defend itself vigorously. At the end of the third quarter the Company had not
accrued any amounts relating to these claims.
Item 6(a). EXHIBITS
The following exhibits are being filed:
27 Financial Data Schedule for period ended October 3, 1999
Item 6(b). REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the third quarter of 1999.
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LINDAL CEDAR HOMES, INC.
AND SUBSIDIARIES
Signature:
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.
LINDAL CEDAR HOMES, INC.
By: /s/ Robert W. Lindal
-----------------------------------------
Robert W. Lindal
Chairman and Chief Executive Officer
By: /s/ Dennis Gregg
-----------------------------------------
Dennis Gregg
Chief Financial Officer
DATE:
November 17, 1999
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Lindal Cedar Homes, Inc.
Exhibit Index
Exhibits are numbered in accordance with Item 601 of Regulation S-B
EXHIBIT
NUMBERS DESCRIPTION
- ------- --------------------------------------------------------
27 Financial Data Schedule for period ended October 3,
1999