-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ISWc0ltyDiEvKsBVwjWLSlDqYkxbSvPy7mu243CRdKI2OyK816dBxra0qG2RnJP7 4Wsic/9v4zEq221N1LXxbw== 0000891020-98-000485.txt : 19980401 0000891020-98-000485.hdr.sgml : 19980401 ACCESSION NUMBER: 0000891020-98-000485 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINDAL CEDAR HOMES INC /DE/ CENTRAL INDEX KEY: 0000059591 STANDARD INDUSTRIAL CLASSIFICATION: PREFABRICATED WOOD BLDGS & COMPONENTS [2452] IRS NUMBER: 910508250 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-06087 FILM NUMBER: 98583559 BUSINESS ADDRESS: STREET 1: 4300 S 104TH PL CITY: SEATTLE STATE: WA ZIP: 98178 BUSINESS PHONE: 2067250900 MAIL ADDRESS: STREET 1: 4300 S 104TH PLACE CITY: SEATTLE STATE: WA ZIP: 98178 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [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 [ ] 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 charter) Delaware 91-0508250 - ---------------------------- ------------------------- (State or other jurisdiction (I.R.S. Employer of organization) Identification No.) 4300 South 104th Place, Seattle, Washington 98178 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (206) 725-0900 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.01 per share(Title of Class) Aggregate market price of shares held by nonaffiliates at March 18, 1998 was $5,796,843, consisting of 1,717,583 shares. The number of shares of common stock outstanding on March 18, 1998 was 4,118,446 shares. 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 twelve 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 the 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. [ ] The total number of pages in this Form 10-K is 48. See index to exhibits on page 47. 2 PART I ITEM 1. BUSINESS Lindal Cedar Homes, Inc. (the "Company") was incorporated under the laws of the State of Washington in 1966. In 1986, the Company was reincorporated under the laws of the State of Delaware. The Company is primarily engaged in the manufacture and distribution of custom cedar homes, windows and sunrooms. The Company manufactures standard dimensional cedar lumber. Cedar lumber, that meets the Company's quality standards, is combined with 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. Cedar lumber that is not of a grade suitable for use in homes, or is in excess of requirements for home sales, is sold on the commodity lumber market. The sale of homes accounted for 76% of consolidated revenue in 1997, 77% of consolidated revenue in 1996, and 73% of consolidated revenue in 1995. In 1997, 95% of the Company's home sales were made through approximately 180 independent dealers. The balance of the home sales were made from Company-operated sales courts. In 1997, the Company owned or leased 11 display courts, 10 of which were operated by independent dealers for all or a portion of 1997. One sales court, operated by the company, was sold to an independent dealer in February 1997. In 1996, 94% of the Company's home sales were made through approximately the same number of independent dealers. The balance of the home sales were made from Company-operated sales courts. In 1996, the Company owned or leased 12 display courts, 10 of which were operated by independent dealers for all or a portion of 1996. The Company's dealers are subject to the economic conditions, weather conditions, housing trends, and demographic influences existing in their locale. As such, individual dealer sales may vary from year to year. In addition, Company performance in meeting the service and product delivery needs of dealers may affect the dealers ability to compete in their local markets. In 1997, some of the Company's dealers experienced temporary disruptions in service and product deliveries related to the consolidation of the Company's operations. Management believes it has resolved these disruptions and has restored service and product delivery norms. As non-exclusive independent businesses, the dealers may sell products or services that complement the products and services sold by the Company. The Company continually recruits new dealers to expand sales into previously unserved locations and to replace dealers that have retired or otherwise discontinued their dealership operations. In 1993, the Company began expanding its regional sales management structure, staffed by its employees, to replace independent manufacturer's representative functions. The transition was completed in 1995. The Company believes this new organization structure allows better control of its sales activities, and moves support and sales services closer to dealers. Page 2 3 Traditionally, the Company has had three classes of dealers: Commercial, Storefront/Design Center and Live-in. A Commercial dealer constructs a model home in a commercial location and operates their business from the model. The Storefront/Design Center dealer displays and operates from a retail location. A Live-in dealer uses a Lindal home as their residence and place of business. The Company no longer recruits Live-in dealers. The Company has and continues to encourage commercial dealerships as this class of dealer has consistently proven to be superior in average sales volume. However, as the construction of a model home is economically unfeasible in some urban or sparsely populated areas, in 1994 the Company expanded the Storefront/Design Center concept. The Design Center, which is professionally designed, is located in a shopping center environment. It relies on in-store displays and point-of-sale materials, rather than a model home to promote and sell the Company's products. The Storefront dealer incorporates many of the features of the Design Center, but can be opened for a smaller investment. Of the Company's 180 dealers, approximately 45% were commercial dealers, and 5 % were Design Centers. The majority of the remaining dealers operate from a "Storefront." The Company has three home products: The Cedar Frame, Cedar: Solid, and Access. The Cedar Frame home utilizes 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. In 1997, the Access homes accounted for approximately 34% of home sales revenue and approximately 43% of the home units shipped. In 1996, Access homes accounted for approximately 20% of home sales revenue and approximately 29% of home units shipped. The Company sells homes both for year-round and vacation occupancy. Most of the purchasers of such homes are professional and business people with higher than average incomes. In recent years approximately 70% of the Company's homes have been purchased for use as primary residences. The Company's principal competitor in its home market is the local custom builder; however, in some circumstances it may also compete with other pre-cut, pre-fab and modular building firms. The primary basis for competition is design services, quality of materials, price and service. The Company's revenues tend to be seasonal. Most home shipments traditionally occur between April and October. It is the Company's policy to carry sufficient amounts of inventory to respond to the needs of its customers. In 1997, 1996 and 1995, no single customer or dealer accounted for 10% or more of consolidated revenue. Besides being seasonal, the housing industry is cyclical. The Company follows industry patterns, but believes that it is somewhat better positioned to weather industry downturns than other manufacturers or builders with lower cost products that appeal to a larger but less affluent market. This belief is based upon the Lindal products' traditional appeal to middle and upper income customers who historically have been less affected by economic downturns. Page 3 4 The dollar value of new orders taken decreased 11% from 1996 to 1997. The number of new order units decreased 12% from 1996 to 1997. The following table illustrates the percentage change in the number and dollar value of new orders for each of the last 5 years:
% CHANGE IN 1997 1996 1995 1994 1993 Units -12% 5% 2% -3% -12% Dollar Value -11% 12% 3% 7% -3%
The Access product represented 45% of new order units in 1997 compared to 35% of new order units in 1996 and 22% of new order units in 1995. Size and value of a home is a function of customer preference and may change somewhat from period to period. The Company recognizes revenue from orders when the home package is shipped. The total backlog, expressed in dollars, approximated $25 million at December 31, 1997, $25 million at December 31, 1996, and $22 million at December 31, 1995. 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. The backlog dollars, as of December 31, 1997, include an increased number of new orders received in advance of the January 1, 1998 effective date of a 3.5% price increase. Management believes that there are significant benefits to the maximum practical consolidation of manufacturing and distribution operations. The consolidation of sunroom and windows divisions into the newly created Lindal Building Products Division began in 1996 when sunroom personnel moved into the Kirkland, Washington facility, previously occupied exclusively by the window division. During 1996, all window manufacturing occurred at this facility, while all sunrooms were manufactured by a third party located in Tacoma, Washington. In the second quarter of 1997, the Company purchased a manufacturing facility in Burlington Washington and began an expansion of that facility to accommodate the Lindal Building Products Division. The expansion of the facility, which was completed in the fourth quarter of 1997, provided for the internal manufacturing of the Company's sunrooms and expanded production of windows. The Company invested approximately $3.2 million to acquire and expand the Burlington facility, approximately $154,000 to acquire manufacturing equipment and $336,000 to expand operations. Management expects that an additional investment of approximately $400,000 will be required in 1998 to purchase the remaining manufacturing equipment. The consolidation of Lindal Building Products Division's personnel was completed in June 1997 when the sunroom and windows personnel moved from the Kirkland, Washington facility into the new Lindal Building Products Division facility located in Burlington, Washington. Windows are now manufactured at the Burlington facility along with one line of sunrooms. The remaining sunroom lines continue to be manufactured by a third party in Tacoma, Washington. It is expected that Lindal Building Products Division will begin the manufacture of the remaining sunroom lines and introduce a new line of windows over the course of 1998. In 1996 and 1995, home shipments were made from Surrey, British Columbia and Kent, Washington. In 1997, all home shipments originated from Surrey, British Columbia. Page 4 5 RAW MATERIALS The primary raw material used by the Company in its 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. In 1997, the price of cedar logs escalated dramatically. Management believes that cedar log prices will generally continue at this elevated level. The Company is aware of the potential for shortages and/or fluctuations in the price of cedar logs. At December 31, 1997, the Company believes it can meet its cedar requirements, for its home packages, for a minimum of the next three years. The Company is working to secure its cedar raw material needs on a long term basis. The Province of British Columbia established a program which sets aside a portion of the allowable annual harvesting of timber for smaller companies. The harvesting rights are sold, through timber sales, to companies which can demonstrate the highest value being added to the raw lumber through efforts made in British Columbia. In 1994, the Company was first granted rights to harvest approximately 50,000 cubic meters of timber between 1994 and 1997. The Company entered into a joint venture agreement with a third party, who provided services related to the planning, management of timber harvesting, and marketing of the logs. As the majority of the timber was not western red cedar, or not suitable for processing in the Company's sawmill, the timber harvested was sold on the log market in Canada. By having these logs available for sale, the purchase of western red cedar for the Company's sawmill was greatly facilitated during the term of the timber sale. The sale of the harvested logs was essentially completed in the second quarter of 1995. Earnings, before income tax expense, from this venture were $25,000 in 1996 and $1.022 million in 1995. On September 30, 1996, the Company was granted a second timber sale. The grant is for 327,000 cubic meters of timber to be harvested within a five year period. As of December 31, 1997, it is expected that this timber sale will allow the Company to secure a cedar supply for a minimum of the next three years. As a condition of the grant of the second timber sale, the Company committed to consolidating its home shipment operations in, and transferring a considerable amount of its lumber remanufacturing to, Surrey, British Columbia. To satisfy this condition will require the Company to invest $5 to $6 million in new plant and equipment and to lease an additional seven to eight acres of land adjacent to the current Surrey, British Columbia facility. The Company has negotiated the required leases. The Company evaluated the timber sale and Surrey, British Columbia expansion project in light of the required capital investment, operational viability and other relevant factors. Management believes that the Canadian consolidation is in the best interest of the Company and its stockholders. In 1996, the Company began the process of consolidating its distribution operations when it notified the employees at the Kent, Washington distribution facility that home shipment operations would move to Surrey, British Columbia. Effective January 1, 1997, all home shipments originate from the Surrey facility. The Kent, Washington facility was sold in the first quarter of 1997. Page 5 6 Also, in response to receiving the second timber sale grant described above, a 10-year labor agreement was negotiated with the union for the Canadian plant employees in the second quarter of 1997. This agreement provides that new jobs created/moved to British Columbia will be at wage rates starting at 60% of the present British Columbia Coast Master Agreement and increasing, over the next 10 years, to a maximum of 80% of that agreement. Prior to being able to harvest any timber granted in the second timber sale, the Company is required to "substantially complete" the items it has committed to under the terms of the timber sale. The consolidation of the shipping operation has occurred, the ground lease commitments have been secured, and the ground/soil preparation for the construction of the new lumber remanufacturing plant and home distribution facility began in 1997. It is anticipated that construction of the new facilities will begin in the second quarter of 1998 and be completed in 1999. In recognition of the progress completed, the Province of British Columbia has given the Company limited authorization to begin harvesting timber. Management expects that timber harvesting will begin in the third quarter of 1998. Until construction of the new Surrey, British Columbia facility is complete, cedar lumber will continue to be remanufactured by the Company in Tacoma, Washington. When the remanufacturing of lumber is performed at the Surrey, British Columbia facility, the Tacoma, Washington facility will provide its services exclusively to third parties. The Company has reached agreement with MacMillan Bloedel for the management of the harvesting of timber and the sale of the resulting logs. The Company believes that this contract will be moderately profitable, however it is not expected that this contract will be as profitable, on a relative basis, as the previously awarded timber sale. However, management believes that the obtaining of this timber sale will greatly facilitate the procurement of cedar logs and/or lumber. The Surrey, British Columbia location currently includes a sawmill which has historically produced the majority of the Company's cedar lumber needs. Most of the sawmill's output that meets quality standards is remanufactured into the cedar components of homes. Preferably, the higher grades of lumber are used in home packages, where the margins are better. Sawmill production that is not of a grade suitable for use in homes, or is in excess of requirements for home sales is sold on the commodity lumber market. Material sales, primarily commodity lumber from all locations, approximated $6.0 million in 1997, $3.7 million in 1996, and $3.8 million in 1995. In the last half of 1997, the market value of green and finished cedar lumber did not keep pace with the escalating cost of cedar logs. The cost of the standard cedar log the Company purchases for it sawmill increased by approximately 100% over the December 1996 costs between January 1997 and June 1997 and then slowly declined through November 1997, to an approximate 70% cost increase. During 1997, the market value of the majority of the green lumber the sawmill produced from the cedar logs did not increase significantly, or in the case of certain lumber grades and dimensions, at all. In 1997, the Company experienced a loss from the sawmill operations. The operating loss, coupled with a shortage of cedar logs experienced in the fourth quarter of 1997, caused the Company to temporarily close the sawmill in November 1997. After resuming operations for a brief period of time in February 1998, the Company, in March 1998, again decided to temporarily close the sawmill until the market for cedar logs and green and finished cedar lumber improve and the sawmill can be operated on a profitable basis. Until the Page 6 7 sawmill resumes operations, the Company will fill its needs for cedar lumber from existing inventory, and purchase commodity cedar lumber on the open market at more favorable prices than it can produce internally. Management expects the market conditions, existing in the last half of 1997, will continue for some indefinite time period, and believes that the 1997 sawmill operating results are indicative of expected future operating results. Consequently, management concluded that the financial statement carrying value of the sawmill exceeded its fair value. As a result the Company recorded a $595,000 after tax write down in the carrying value of the sawmill and related equipment in the fourth quarter of 1997. Neither the write down in the financial statement carrying value nor the temporary closures of the sawmill affect the Company's ability to restart or operate the sawmill if market conditions become more favorable. Although cedar logs are 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. Since 1993, the Company has experienced the extreme volatility and record price levels that have been present throughout the forest products industry. 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 and that price volatility of cedar, lumber and other forest products may occur for some time. For this reason, the Company hedges a portion of its non-cedar lumber needs using options and futures contracts. The Company may also make 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. In 1996, the Canadian government implemented a lumber quota system. This quota system was part of a negotiated settlement related to the United States government's allegation that Canada was subsidizing the Canadian forest products industry. Under the quota system, each company can import to the United States a limited quantity of lumber. The Company believes that this constraint on the supply of lumber has been and continues to be a significant factor in the volatility experienced in the lumber market. With the consolidation of the Company's home shipments in Surrey, British Columbia, all home packages that are not sold in Canada or overseas are imported into the United States. U.S. Customs ruled that a Lindal home package is not a "home" as defined by the applicable customs regulations, rather it constitutes a shipment of assorted building and forest products. This forces the Company to use its assigned quota for the lumber component of each home package. The Company believes that when a home package is imported into the United States, it constitutes a "home" under the applicable custom regulations. As such, the lumber component of the home should not be applied against its allowable lumber quota. The Company has vigorously contested the matter through the appeal process with U.S. Customs and the Company's appeal has been denied. Despite the appeal ruling, the Company believes it has or will be able to obtain sufficient quota for the term of the United States/Canadian governments' agreement of five years. Page 7 8 FOREIGN OPERATIONS The Canadian operations have traditionally supplied wood products to the U.S. facilities and engaged in sales outside the United States. Sales to unaffiliated customers of the Canadian operation during 1997, 1996 and 1995 were as follows (in thousands of U.S. dollars)
1997 1996 1995 ------ ------ ------ Home Sales - Canadian $1,848 2,239 1,853 Other operating revenue 4,238 3,147 3,600 ------ ------ ------ Total foreign sales $6,086 5,386 5,453 ------ ------ ------
The U.S. parent company had export sales, primarily to Japan, totaling $4.4 million in 1997, $3.3 million in 1996, and $3.0 million in 1995. For additional information on the Company's foreign operations, refer to note 11 to the consolidated financial statements on page 43 of this report. EMPLOYEES At the end of February 1998, the Company had 208 employees. A significant number of the Company's Surrey, British Columbia employees are covered by a collective bargaining agreement with the IWA-Canada. In June 1997, a 10-year agreement was signed with this union. The agreement provides that the new jobs created through the consolidation of operations will be at wage rates starting at 60% of the present British Columbia Coast Master Agreement and increasing, over the next 10 years, to a maximum of 80% of that agreement. ITEM 2. PROPERTIES Information with respect to the location of the Company's principal locations, which are owned, unless otherwise stated, at December 31,1997 is as follows: o Seattle, Washington head office complex on two acres, with 13,000 square foot office building and two display models. o Seattle, Washington business park adjacent to the head office complex on five acres, with 86,000 square feet of concrete tilt-up warehouse. The Company is using approximately 12,000 square feet for storage and office space. The balance of the facility is leased to third parties. At December 31, 1997, all 86,000 square feet is either leased or used by the Company. o Surrey, British Columbia sawmill and warehouse on ten acres of leased land with 61,000 square feet under roof. Canadian and portions of some U.S. home shipments originated from this facility in 1996 and 1995. Effective January 1, 1997, all home shipments Page 8 9 originate from this facility. The leases for this land are currently on year-to-year basis, expiring in January 1999 and June 1999, and are expected to be renewed in the ordinary course of business. These leases have been renewed regularly since the early 1970's. In anticipation of beginning construction on the new remanufacturing facility, which will be located on land adjacent to this property, management expects, in 1998, to negotiate long term leases for this current property. o Renfrew, Ontario facility on 21 acres with 110,000 square feet under roof. The Company is using approximately 7,000 square feet for office and warehouse facilities. The rest of the facility is leased to third parties. o Tacoma, Washington remanufacturing operation (including dry kilns) on four acres with approximately 47,000 square feet under roof. Leases on the land and building expire in 2000, with annual renewal options through 2003. An additional 24,000 square feet of covered storage is currently being rented on a month-to-month basis. o Burlington, Washington 88,000 square foot tilt-up concrete facility, on approximately 5 acres of leased land, for the manufacture of windows and sunrooms. The lease on the land expires in July 2024 and is renewable by the Company for two consecutive ten-year periods. o Kirkland, Washington 43,000 square foot manufacturing facility, formerly occupied by the Lindal Building Products Division. The lease for this facility expired in January 1998. o Land for 8 sales locations, including the head office display court. Five parcels are owned (four in Washington, one in Michigan) and three parcels are leased (one each in Hawaii, Ontario and Japan). The Company also owns two parcels of undeveloped land (one each in Washington and Ontario) that it intends to use for future sales locations. o Office space, ranging from 240 square feet to 450 square feet per location, is leased in Michigan (one location) and Utah (one location) for use as regional sales offices, and in Washington (one location) for general office use. The leases are either month-to-month or expire in 1998. ITEM 3. LEGAL PROCEEDINGS The Company is presently involved in several lawsuits which are considered ordinary, routine litigation incidental to the business of the Company. Accruals provided are believed adequate to offset any known future liabilities that may arise from these legal actions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security shareholders during the fourth quarter of 1997. Page 9 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information: The Company's common stock is traded on the NASDAQ Stock Market under symbol LNDL. The following table sets forth the reported high and low activity for each quarter of 1997 and 1996 as reported by NASDAQ.
HIGH LOW ------------------------------------ 1997 First Quarter $4.625 3.375 Second quarter 4.375 3.250 Third quarter 4.500 3.625 Fourth quarter 4.750 3.500 1996 First quarter 4.625 3.750 Second quarter 4.375 3.250 Third quarter 4.250 3.750 Fourth quarter 4.375 3.250
(b) Approximate number of shareholders of record, including beneficial shareholders: TITLE OF CLASS DECEMBER 31, 1997 Common Stock of $.01 par value 330 (c) No cash dividends were paid in 1997, 1996 or 1995, and the Company does not expect to pay a cash dividend in 1998. ITEM 6. SELECTED FINANCIAL DATA (in thousands, except ratios and per share amounts)
1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Revenue $ 48,848 46,635 42,311 39,533 41,996 Operating income (loss) (3,860) 1,224 653 1,251 1,254 Earnings (loss) before cumulative effect of accounting change (2,447) 1,506 1,337 1,017 865 Net earnings (loss) (2,447) 1,506 1,337 1,017 708 Basic and diluted earnings (loss) per common share before effect of accounting change (.60) .37 .33 .25 .22
Page 10 11 Net basic and diluted earnings (loss) per common share (.60) .37 .33 .25 .18 Total assets 32,187 30,034 27,992 26,914 25,144 Working capital 9,972 10,814 8,840 8,399 8,084 Long-term debt 4,787 1,164 1,216 1,864 1,951 Current ratio 2.16:1 2.37:1 2.20:1 2.16:1 2.33:1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES 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 pays its vendors within terms and takes advantage of discounts for early payment. Customer deposits for home and sunroom orders and operations are the Company's primary source of cash. With the operating losses incurred in 1997, the escalating cost of cedar logs, lumber and other forest products, the Company foresees the potential need to increase its lines of credit. Traditionally, operations have been the primary source of funds for working capital as well as expansion and/or facilities acquisition. During 1997, the Company invested approximately $3.7 million to acquire, expand and equip its new Burlington, Washington manufacturing facility. In 1998, an additional investment of approximately $400,000 will be required to purchase the remaining manufacturing equipment. To partially finance the Burlington, Washington project, the Company, in November 1997, issued $3.3 million of tax-exempt Industrial Revenue Bonds and $425,000 of taxable Industrial Revenue Bonds through the Washington Economic Development Finance Authority. Interest paid on the tax-exempt Industrial Revenue Bonds is tax free to the bondholders and provides preferential interest rates to the Company. The principal of the taxable bonds matures in approximately equal amounts in years 1 through 5, with the principal of the tax-exempt bonds maturing in years 5 through 20. Bond principal (taxable and tax-exempt) matures on an annual basis in amounts which, when combined with interest payable on the outstanding bond principal, results in approximately equal annual cash payments of principal and interest. The tax-exempt bonds are redeemable at a decreasing premium in years 6 through 10 and redeemable at par after year 10. Under the terms of the Loan Agreement between the Company and the Washington Economic Development Finance Authority, the Company is required to obtain and maintain an irrevocable letter of credit, which the Company has obtained. To secure the letter of credit, the Company pledged property, with an aggregate book value of $3.8 million, as collateral. Under the terms of Page 11 12 the Reimbursement Agreement between the Company and the issuer of the irrevocable letter of credit, the Company is obligated to make monthly payments equal to scheduled principal maturities and interest plus financing fees into a sinking fund account, the proceeds of which will be used to reimburse draws on the letter of credit for the payment of principal and interest on the bonds. Under the terms of the Reimbursement Agreement the Company is obligated to meet certain financial and operational covenants. At December 31, 1997, the Company was not in compliance with two of the financial covenants, specifically the Debt Service Coverage Ratio and the Tangible Net Worth covenants. The Company has obtained compliance waivers from the financial institution and has re-negotiated the financial covenants. The Company resources required to finance the Surrey, British Columbia project are estimated to be $5 to $6 million over 1998 and 1999. Management is currently evaluating financing alternatives. Such alternatives may include sale of existing facilities, debt financing, equity financing, sale/leaseback or a combination of alternatives. Funding for this project is expected to begin in the second or third quarter of 1998. Cash and cash equivalents increased by $1.024 million from December 31, 1996 to December 31, 1997. This is largely due to the decrease of $2.7 million (97%) in short-term investments, proceeds from sales of property and equipment of $1.5 million, and proceeds from issuance of the Industrial Revenue Bonds of $3.7 million all of which were offset by expenditures for capital assets of $5 million and cash used by operations of $2.6 million. At December 31, 1997, short-term investments were composed of certificates of deposit, all of which mature before March 31, 1998. Cash and cash equivalents are traditionally at their lowest levels in the first quarter of the year. With the operating losses incurred in 1997, the escalating log and wood costs the company is experiencing, and the need to replenish inventory in advance of the heavy sales season, the Company anticipates that in 1998 it will borrow against its available operating lines of credit which total $2.8 million. The Company did not use the available lines of credit at any time during 1997, 1996 or 1995. Production inventory (raw materials, work-in-process and finished goods), stated in dollars, decreased $202,000 (2%) from December 31, 1996 to December 31, 1997. The temporary closure of the sawmill in November 1997 caused the Company to use some of its then existing inventory to meet its home shipment needs. Raw materials, work in process and finished goods inventories turned over 4.3 times in 1997, 4.2 times in 1996 and 4.5 times in 1995. The Company hedges a portion of the non-cedar lumber needs for its home packages. Futures contracts and options are being used. The program's objective is to manage well defined commodity price risks. These derivative financial instruments are not being used for trading purposes. Refer to note (1)(i) to the consolidated financial statements on page 29 of this report for additional information. Accounts receivable increased $1.2 million (54%) from 1996 to 1997, primarily due to refunds of prior year taxes ($1.2 million) attributable to the tax carry-back of losses from U.S. operations. The remainder of the increase in accounts receivable is primarily due to normal trade sales. Page 12 13 In 1997, the Company invested $3.6 million in buildings and improvements, primarily in the Burlington, WA facility, $751,000 in machinery and equipment primarily at the Burlington, WA and Surrey B.C. facilities, $596,000 in computer related equipment and software and $94,000 for all other capital expenditures. In addition, the Company expended $854,000 for a reprint of its current planbook, Originals. 1997 capital expenditures were primarily financed through issuance of Industrial Revenue Bonds. YEAR 2000 COMPUTER PROBLEMS The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and is developing an implementation plan to resolve the issue. The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in major system failure or miscalculations. The Company presently believes that with upgrades to existing software, the Year 2000 problem will not pose significant operational problems for the Company's computer systems as so upgraded. However, if such upgrades are not completed timely, the Year 2000 problem may have a material impact on the operations of the company. The Company expects to incur internal staff costs as well as the cost of the software upgrades. The internal staff costs will not be incremental, but rather will represent the redeployment of existing resources. The incremental costs of the software upgrades will be minimal and will not have a material adverse effect on the Company's financial position or results of operations. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 AND 1996 REVENUE Revenue increased $2.2 million (4.7%) from $46.6 million in 1996 to $48.8 million in 1997. Home and sunroom revenue increased $500,000 (1.3%) from $38.7 million in 1996 to $39.2 million in 1997. Home revenue increased $900,000 (2.5%) from $36 million in 1996 to $36.9 million in 1997, while sunroom revenue decreased $400,000 (14.8%) from $2.7 million in 1996 to $2.3 million in 1997. The number of home units shipped decreased slightly (.6%) from 512 in 1996 to 509 in 1997. The average revenue per home increased 3.4% from $70,200 in 1996 to $72,600 Page 13 14 in 1997. Size and value of a home is a function of customer preference and may change somewhat from period to period. The Access home (the base price of which is 25%-30% less than the traditional Cedar Frame Product) accounted for 34% of home sales revenue and 43% of home units shipped in 1997 compared to 20% of home sales revenue and 29% of the house units shipped in 1996. All other revenue sources, primarily material sales, increased $1.6 million (20%) from $8.0 million in 1996 to $9.6 million in 1997, primarily due to increased sales of lumber, chips and windows. During 1997, the Company announced two graduated price increases. The first was an increase of 4.5% which became fully effective in the third quarter of 1997, the second is a 3.5% price increase which will become fully effective in the first quarter of 1998. The Company anticipates that an additional price increase or house specification decrease will be required in 1998 to partially offset the effect of the increased material costs (see Material Costs). MATERIAL COSTS During 1997, the Company experienced escalating costs for many of the forest products included in its home packages, especially for cedar. Measured in Canadian dollars, the cost of the standard cedar log the Company purchases for its sawmill increased $50 per cubic meter (100%) from a low of $50 per cubic meter in January 1997 to a high of $100 per cubic meter in June 1997. The cost of the standard cedar log fell slightly to $85 per cubic meter by November 1997, an increase of $35 per cubic meter (70%) from the January 1997 low. While the Company experienced some softening in the cost of the premium grade framing lumber included in its home packages, it only partially offset the dramatic increases in the cost of cedar logs and lumber. Material costs increased $5 million (22%) from $22.8 million in 1996 to $27.8 million in 1997 with approximately the same number of home shipments in both years. As a percent of revenue, material costs increased from 48.9% in 1996 to 57% in 1997. The Company expects that these historically high material costs, especially for cedar logs and lumber, will continue for an indefinite period of time. OTHER COSTS OF GOODS SOLD Non material costs, included in the cost of goods sold, increased $1.4 million (10.9%) from $12.9 million in 1996 to $14.3 million in 1997. As a percent of revenue, non-material costs increased from 27.7% in 1996 to 29.3% in 1997. This increase is primarily due to customer service costs, which increased $644,000 (69.2%) from 1996 to 1997, and plant labor and related expenses which increased $532,000 (10%) from 1996 to 1997. The increase in customer service and plant labor and related expenses was largely due to the production disruptions caused by the consolidation of operations into the Burlington, WA and Surrey, B.C. facilities, and an increase in warranty claims. GROSS PROFIT Despite the 1997 price increase of 4.5%, which was fully effective in the third quarter of 1997, gross profit fell from 23.3% of revenue in 1996 to 13.8% of revenue in 1997, due primarily to increased material costs. Page 14 15 The mix of home units sold has also impacted dollar gross margins. As a percent of total units sold, home units sold for Cedar Frame, Access and Cedar: Solid is presented in the table below.
HOME PRODUCT 1997 1996 1995 Cedar Frame 45% 59% 74% Access 43% 29% 17% Cedar: Solid 12% 12% 9%
Although the Access home (the base price of which is 25% - 30% less than Cedar Frame home) has lower material costs than the Cedar Frame home, the dollar gross margin is lower as well. OPERATING EXPENSES In the fourth quarter of 1997, the Company recorded pre-tax restructuring and revaluation charges of $622,000. Of this amount, $595,000 related to the write-down of the financial statement value of its Surrey, B.C. sawmill, with the remainder due to the consolidation of operations into the Burlington, WA and Surrey B.C. facilities. Overall in 1997, the Company recorded total pre-tax restructuring and revaluation charges of $807,000. Including these restructuring and revaluation charges, selling, general and administrative expenses increased $960,000 (10.6%) from $9.03 million in 1996 to $9.99 million in 1997. Exclusive of the restructuring and revaluation charges, selling, general and administrative expenses increased $160,000 (1.8%) from $9.03 million in 1996 to 9.19 million in 1997. As a percent of revenue, selling, general and administrative expenses, including restructuring and revaluation charges, were 19.4% in 1996 compared to 20.5% in 1997. Exclusive of restructuring and revaluation charges, selling, general and administrative expenses, as a percent of revenue, were 19.4% in 1996 compared to 18.8% in 1997. Total operating expenses, including display court and restructuring charges, increased $950,000 (9.8%) from $9.66 million in 1996 to $10.61 million in 1997. Exclusive of restructuring and revaluation charges, total operating expenses increased $140,000 (1.4%) from $9.66 million in 1996 to $9.80 million in 1997. As a percent of revenue total operating expenses, including restructuring and revaluation charges, were 20.7% in 1996 compared to 21.7% in 1997. Exclusive of restructuring and revaluation charges, total operating expenses, as of percent of revenue, were 20.7% in 1996 compared to 20% in 1997. OTHER INCOME (EXPENSE) Other income (expense) decreased $225,000 (23.8%) from $944,000 in 1996 to $719,000 in 1997 primarily due to decreased rental income ($56,000), decreased interest income ($98,000), and increased interest expense ($19,000). Other income includes the pre-tax gain from the sale of the Kent, Washington facility ($466,000) in 1997 and, the pre-tax gain on the sale of the Marysville, Washington property ($297,000) in 1996. INCOME TAX EXPENSE (BENEFIT) In 1997, the Company incurred losses from operations in both the United States and its Canadian subsidiaries. Losses, before income tax benefit, from operations in the United States totaled $2.46 million, which provided a tax benefit of $760,000. Losses, before income tax benefit, from Canadian subsidiary operations totaled $686,000. In 1997, the Company recognized a net tax expense of $66,000, from Canadian operations, and did not recognize a tax benefit from the 1997 Canadian losses due to the inability to carryback the net operating losses and the Page 15 16 uncertainty of utilizing the net operating loss carryforward against future taxable Canadian income. In 1997, the income tax benefit was $694,000 compared to a income tax expense of $662,000 in 1996. YEARS ENDED DECEMBER 31, 1996 AND 1995 REVENUE Revenue increased $4.3 million (10%) from $42.3 million in 1995 to $46.6 million in 1996. Home and sunroom revenue increased $5.2 million (16%) from $33.5 million in 1995 to $38.7 million in 1996. The number of home units shipped increased 18% from 433 in 1995 to 512 in 1996. The average revenue per home unit shipped decreased 1% from $71,000 in 1995 to $70,200 in 1996 due to the Access Product. The Access Product accounted for 20% of home sales revenue and 29% of the home units shipped in 1996 compared to 12% of home sales revenue and 17% the home units shipped in 1995. Material sales decreased $300,000 (7%) from $4.4 million in 1995 to $4.1 million in 1996. All other revenue sources decreased $500,000 (11%) from 1995 to 1996 due primarily to the revenue recognized from the production of home plans and window sales. Due to the increase in material costs (see Material Costs) the Company announced a 4.5% general price increase for all home packages that was implemented in 1997. MATERIAL COSTS Material costs increased $3.0 million (15%) from $19.8 million in 1995 to $22.8 million in 1996. As a percentage of total revenue, material costs increased from 46.7% in 1995 to 48.9% in 1996, primarily due to a significant increase in lumber prices in the last half of 1996. OTHER COST OF GOODS SOLD In 1996, non-material cost of goods sold increased $1 million (8.4%) from $11.9 million in 1995 to $12.9 million in 1996. This was largely due to increased plant labor and related benefits of $269,000, increased drafting and engineering costs of $600,000 and increased customer service costs of $234,000. In 1996, the cost of goods sold included a $150,000 charge related to the closing of the Kent, Washington distribution facility. In 1995, the cost of goods sold was reduced $265,000 due to a duty refund. GROSS PROFIT The gross profit percentage was 24.9% in 1995 compared to 23.3% in 1996. With the cost of goods sold adjusted for the 1995 refund of duty and the 1996 charge relating to the closure of the Kent, Washington distribution facility, the gross profit percentage was 24.3% in 1995 compared to 23.7% in 1996. The decrease in gross profit percentage was primarily due to the significant increase in lumber prices. OPERATING EXPENSES Selling, general and administrative expenses decreased $180,000 (2%) from $9.21 million in 1995 to $9.03 million in 1996. Salaries and related benefits decreased $160,000 (4%) due to the second quarter reduction in the number of employees. Advertising expenses decreased $193,000 Page 16 17 (13%). Bad debt expense increased $95,000 (85%). As a percentage of revenue, selling, general and administrative expenses were 21.8% in 1995 compared to 19.4% in 1996. OTHER INCOME (EXPENSE) Other income (expense) increased from $5,000 in 1995 to $414,000 in 1996 primarily due to the gain on the sale of the Marysville, Washington property. Equity in earnings of affiliate decreased approximately $1 million (98%) in 1996. The joint venture that generated the earnings essentially completed its operation in 1995. INCOME TAX EXPENSE Income tax expense decreased $167,000 (20%) from $829,000 in 1995 to $662,000 in 1996 due primarily to losses in the Canadian operations and a higher effective tax rate in Canada. The Company's Canadian subsidiaries had earnings before income tax expense of $805,000 in 1995 compared to a loss before income tax expense of $444,000 in 1996. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. The financial statements are listed in the index to consolidated financial statements and schedule on page 19 of this report. 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. Information required under this item is contained in the Registrant's 1998 Proxy Statement, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information required under this item is contained in the Registrant's 1998 Proxy Statement, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required under this item is contained in the Registrant's 1998 Proxy Statement, and is incorporated herein by reference. Page 17 18 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required under this item is contained in the Registrant's 1998 Proxy Statement, and is incorporated herein by reference. See also notes 5(d) and 10 to the consolidated financial statements on pages 37 and 43 of this report for information regarding related party transactions. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedule: See page 19 for index to consolidated financial statements and schedule. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. (c) Exhibits: Page 18 19 LINDAL CEDAR HOMES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Consolidated Financial Statements
Pages ----- Independent Auditors' Report 20 Consolidated Balance Sheets as of December 31, 1997 and 1996 21-22 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1997 23 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 1997 24 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997 25-26 Notes to the Consolidated Financial Statements 27-44 Schedule Schedule II - Valuation and Qualifying Accounts 45
All other schedules are omitted because they are not required or because the information is presented in the consolidated financial statements or notes thereto. Page 19 20 INDEPENDENT AUDITORS' REPORT ================================================================================ The Board of Directors and Stockholders Lindal Cedar Homes, Inc.: We have audited the consolidated financial statements of Lindal Cedar Homes, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lindal Cedar Homes, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Seattle, Washington February 26, 1998 -20- 21 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (Dollar amounts in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------- Assets 1997 1996 - -------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents, including time deposits of $1,043 in 1997 and $963 in 1996 $ 2,286 1,262 Short-term investments 77 2,776 Receivables: Trade 2,536 2,102 Current installments of long-term notes receivable 229 203 Refundable income taxes 1,198 357 --------------------- 3,963 2,662 Less allowance for doubtful receivables 461 394 --------------------- Net receivables 3,502 2,268 Inventories 10,078 10,689 Prepaid expenses 2,294 1,423 Deferred income taxes 335 314 --------------------- Total current assets 18,572 18,732 Long-term notes receivable, excluding current installments 1,190 927 Property, plant and equipment, net 12,029 9,829 Other assets, at cost less accumulated amortization of $553 in 1997 and $386 in 1996 396 546 - -------------------------------------------------------------------------------------------- $32,187 30,034 ============================================================================================
See accompanying notes to consolidated financial statements. -21- 22 CONSOLIDATED BALANCE SHEETS, CONTINUED (Dollar amounts in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity 1997 1996 - ----------------------------------------------------------------------------------------------- Current liabilities: Current installments of long-term debt $ 180 52 Accounts payable - trade 2,841 1,467 Accrued salaries and wages 285 759 Other accrued expenses 864 983 Customer deposits 4,430 4,657 ------------------------ Total current liabilities 8,600 7,918 Long-term debt, excluding current installments 4,787 1,164 Deferred income taxes 352 210 Commitments and contingences Stockholders' equity: Common stock, $.01 par value. Authorized 10,000,000 shares; issued and outstanding 4,118,446 shares in 1997 and 4,081,830 shares in 1996 41 41 Additional paid-in capital 16,033 15,916 Cumulative translation adjustment (712) (748) Retained earnings 3,086 5,533 ------------------------ Total stockholders' equity 18,448 20,742 - ----------------------------------------------------------------------------------------------- $ 32,187 30,034 ===============================================================================================
See accompanying notes to consolidated financial statements. -22- 23
LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1997, 1996 and 1995 (Dollar amounts in thousands, except per share amounts) - ------------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Revenue $ 48,848 46,635 42,311 Cost of goods sold 42,097 35,755 31,758 ---------------------------------- Gross profit 6,751 10,880 10,553 Operating expenses: Selling, general and administrative expenses 9,186 9,032 9,209 Display court expenses 618 624 691 Restructuring and valuation charges 807 - - ---------------------------------- Total operating expenses 10,611 9,656 9,900 ---------------------------------- Operating income (loss) (3,860) 1,224 653 Other income (expense): Rental income 307 363 326 Interest income 177 275 383 Interest expense (152) (133) (223) Equity in earnings of affiliate - 25 1,022 Other, net 387 414 5 ---------------------------------- Other income, net 719 944 1,513 ---------------------------------- Earnings (loss) before income tax expense (3,141) 2,168 2,166 (benefit) Income tax expense (benefit) (694) 662 829 ---------------------------------- Net earnings (loss) $ (2,447) 1,506 1,337 ---------------------------------- Basic and diluted - net earnings (loss) per common share $ (.60) .37 .33 - -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. -23- 24
LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 1997, 1996 and 1995 (Dollar amounts in thousands) - --------------------------------------------------------------------------------------------------------------------------------- Number Additional Cumulative of shares Common paid-in translation Retained outstanding stock capital adjustment earnings - --------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1994 4,030,873 $ 40 15,778 (810) 2,690 Stock options exercised and shares issued through the Employee Stock Purchase Plan 24,266 1 57 - - Issuance of restricted stock 5,000 - 21 - - Current year translation adjustment - - - 166 - Net earnings 1995 - - - - 1,337 -------------------------------------------------------------------------- Balances at December 31, 1995 4,060,139 41 15,856 (644) 4,027 Stock options exercised and shares issued through the Employee Stock Purchase Plan 16,691 - 41 - - Issuance of restricted stock 5,000 - 19 - - Current year translation adjustment - - - (104) - Net earnings 1996 - - - - 1,506 -------------------------------------------------------------------------- Balances at December 31, 1996 4,081,830 41 15,916 (748) 5,533 Stock options exercised and shares issued through the Employee Stock Purchase Plan 32,616 - 102 - - Issuance of restricted stock 4,000 - 15 - - Current year translation adjustment - - - 36 - Net loss 1997 - - - - (2,447) - --------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 1997 4,118,446 $ 41 16,033 (712) 3,086 - ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. -24- 25 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1996 and 1995 (In thousands)
- ---------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings (loss) $(2,447) 1,506 1,337 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation, amortization and valuation of plant and equipment 1,685 949 798 Amortization of other assets 173 167 196 Amortization of display homes 165 227 245 Gain on disposal of property, plant and equipment (442) (407) (1) Deferred income tax benefit (expense) 121 (51) (55) Compensation expense related to restricted stock 15 19 21 Change in operating asset and liabilities: Decrease (increase) in net receivables (1,352) 73 (188) Decrease (increase) in inventories 116 (2,390) (196) Decrease (increase) in prepaid expenses (878) 507 (527) Increase in current liabilities other than current installments of long-term debt 652 522 182 Notes receivable increase related to operating activities (389) (331) (157) Decrease in other assets related to operating activities 5 -- 6 ------------------------------------- Net cash provided by (used in) operating activities (2,576) 791 1,661 Cash flows from investing activities: Purchase of short-term investments (139) (6,870) (4,218) Liquidation of short-term investments 2,838 5,806 2,982 Cash received for repayment of notes (not related to the sale of homes) 127 60 356 Cash received from sale of property, plant and equipment 1,499 1,543 2 Additions to property, plant and equipment (5,053) (1,625) (1,557) Disbursements for loans (not related to the sale of homes) (28) (50) (258) Additions to other assets (20) (25) (244) Investment in affiliate -- -- (365) Return of investment in affiliate -- 25 666 ------------------------------------- Net cash used in investing activities (776) (1,136) (2,636) ------------------------------------- Subtotal, carried forward (3,352) (345) (975) -------------------------------------
See accompanying notes to consolidated financial statements. -25- 26 CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (In thousands)
- ----------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- Subtotal, brought forward $(3,352) (345) (975) ------------------------------------- Cash flows from financing activities: Proceeds from exercise of stock options and stock purchased through the Employee Stock Purchase Plan 102 41 58 Repayment of long-term debt (59) (50) (53) Retirement of long-term debt -- -- (604) Additions to long-term debt 3,810 -- -- ------------------------------------- Net cash provided by (used in) financing activities 3,853 (9) (599) Effect of exchange rates on cash and cash equivalents 523 (45) 16 ------------------------------------- Net increase (decrease) in cash and cash equivalents 1,024 (399) (1,558) Cash and cash equivalents at beginning of year 1,262 1,661 3,219 ------------------------------------- Cash and cash equivalents at end of year $ 2,286 1,262 1,661 ------------------------------------- Supplemental disclosures of cash flow information - cash paid during the year for: Interest $ 121 133 229 Income taxes 30 1,229 630 - -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. -26- 27 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997, 1996 and 1995 (Dollar amounts in thousands, except per share amounts) ================================================================================ (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS Lindal Cedar Homes, Inc. and subsidiaries (collectively, the Company) manufactures and distributes high quality, custom cedar home packages and sunrooms to customers, domestically and internationally, through its network of approximately 180 independent dealers. In addition, the Company manufactures standard dimensional cedar lumber. A portion of the cedar lumber is combined with other purchased forest products and building materials into home packages. The remaining cedar lumber is sold to third parties. The Company generally requires cash deposits upon placement of an order and final payment upon shipment of the home package or sunroom. (b) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its Canadian and domestic wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (c) USE OF ESTIMATES The preparation of the 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (d) INVESTMENT IN AFFILIATE In 1994, the Company acquired a 50% interest in a corporate joint venture (JV) which was accounted for in accordance with the equity method. The remaining 50% interest was held by an unaffiliated company. Any contributions to the JV, which were made for working capital requirements, and asset or equity distributions from the JV were made in accordance with the respective ownership interests. The JV was formed to harvest timber in British Columbia, Canada. The harvesting of the timber began in the fourth quarter of 1994. The sale of the harvested logs was essentially completed in the second quarter of 1995 and the joint venture was discontinued in 1996. (Continued) -27- 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ (e) FOREIGN EXCHANGE Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates, stockholders' equity at historical rates, and revenue and expenses at weighted-average rates during the year. The resulting translation adjustment is reported as a component of stockholders' equity. (f) CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. (g) 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, and the Company records any unrealized holding gains and losses, net of income taxes, as a separate component of stockholders' equity. (h) INVENTORIES Inventories are stated at the lower of cost (principally first-in, first-out) or market (net realizable value). The Company has erected display homes in various metropolitan and recreational areas for display to the public and has adopted the policy of charging 20% of the original cost (net of estimated residual value) of such homes against income annually. It is also the Company's policy to offer for sale and to sell the display homes at prices below normal retail, but generally approximating recorded valuations plus a normal gross profit; therefore, the display homes are included in inventories at the lower of amortized cost or net realizable value. At the time of sale, any remaining unamortized amounts are charged to cost of goods sold. A summary of inventories at December 31 follows:
1997 1996 ---------------- Raw materials $ 2,992 3,491 Work-in-process 3,092 2,234 Finished goods 3,495 4,056 Display homes 499 908 ---------------- $ 10,078 10,689 ================
(Continued) -28- 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ (i) FINANCIAL INSTRUMENTS The fair value of the Company's financial instruments approximates their recorded value. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. Futures and option contracts are used to manage well-defined commodity price risks on noncedar lumber used in home packages. Deferred gains or losses under futures and option contracts are included on a net basis in the carrying amounts of inventories in the consolidated balance sheet. At December 31, 1997, the Company had 32 futures contracts with broker-dealers of approximately $105 maturing through September 1998 with a net deferred gain of $27. The Company is exposed to, but does not anticipate, credit loss in the event of nonperformance by the other parties to the contracts. The Company does not obtain or provide collateral or other security to support the contracts. (j) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is provided over the estimated useful lives of the respective assets on the straight-line basis. Leasehold improvements are amortized on the straight-line basis over the terms of the respective leases, if shorter than their estimated useful lives. Improvements and additions are capitalized; maintenance and repairs are charged to expense. The estimated useful lives for buildings and leasehold improvements range from 3 to 30 years; and for equipment, furniture and fixtures 3 to 10 years. (k) INCOME TAXES Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (Continued) -29- 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ No provision has been made for U.S. Federal income taxes on the undistributed earnings of the Company's foreign subsidiaries as it is management's intention to reinvest such earnings indefinitely or to distribute them in a manner which will not generate significant additional taxes. At December 31, 1997, the Company's cumulative undistributed earnings of the subsidiaries for which Federal income taxes have not been provided was $355. (l) EARNINGS PER COMMON SHARE In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. This statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. The Company adopted SFAS No. 128 in the fourth quarter, and there was no material impact on earnings per share from the adoption of this standard. (m) ADVERTISING The Company expenses advertising costs when the related advertising first takes place. The Company recognized advertising expense of $1,206 in 1997, $1,264 in 1996 and $1,480 in 1995. (n) STOCK OPTION PLANS Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (Continued) -30- 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ (2) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 consists of the following:
1997 1996 -------------------- Buildings and leasehold improvements $ 10,823 8,204 Equipment 5,195 4,834 Furniture and fixtures 4,091 3,463 -------------------- 20,109 16,501 Less accumulated depreciation and amortization 10,265 9,432 -------------------- 9,844 7,069 Land 2,185 2,760 -------------------- Property, plant and equipment, net $ 12,029 9,829 ====================
(3) IMPAIRMENT OF LONG-LIVED ASSETS The Company adopted the provisions of SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. SFAS 121 requires that long-lived assets and certain identifiable intangibles be reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be unrecoverable, the write-down to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Because of the unfavorable cedar market conditions that existed in 1997, management temporarily closed its Surrey, British Columbia, Canada sawmill operations in the fourth quarter of 1997 and after opening briefly in the first quarter of 1998, decided to temporarily close the sawmill until the market for cedar logs and green and finished cedar lumber improved. However, management expects these market conditions to continue for some indefinite time period and believes that 1997 sawmill operating losses are indicative of expected future operating results. Consequently, management concluded that the financial statements' carrying value of the sawmill and related equipment exceeded its fair value. As a result, the Company recorded, as a part of its restructuring and valuation charge, a $595 writedown in the carrying value of the sawmill and related equipment in the fourth quarter of 1997. (Continued) -31- 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ In the event that market conditions do not improve, management may decide to permanently close the sawmill operations. Such a decision could subject the Company to certain closure costs which could range from an immaterial amount to approximately $500. (4) LONG-TERM DEBT Long-term debt at December 31 consists of the following:
1997 1996 ------ ------ Industrial revenue bonds $3,725 -- First mortgage note payable, due in monthly installments of $13, including interest at 9.5%; final payment due 2009 1,131 1,183 Other 111 33 ------ ------ Total long-term debt 4,967 1,216 Less current installments 180 52 ------ ------ Long-term debt, excluding current installments $4,787 1,164 ====== ======
The Industrial Revenue Bonds (IRB) are divided into two tranches, Series A Bonds ($425,000) and Series B Bonds ($3,300,000), (collectively, the Bonds), with portions of the Series A bonds maturing annually through November 2001 and portions of the Series B bonds maturing annually through November 2017. The Series A bonds bear an interest rate of 6.45% and Series B bonds fixed rates from 4.65% to 5.80% on various principal amounts with an approximate effective interest rate of 5.7%. The bonds are redeemable at a premium in years 6 through 10 and at par thereafter. In connection with the issuance of the bonds, the Company has entered into a "Reimbursement Agreement" with a bank pursuant to which the bank issued to First Trust National Association (Trustee) an irrevocable letter of credit in an amount equal to the aggregate principal amount of the Bonds outstanding plus 210 days of interest. The letter of credit will be automatically reinstated following the drawing in the amount of the interest draws. The letter of credit expires on November 15, 2002. The Company has an option to replace or extend the letter of credit at that time; however, if it does not exercise that option, the Bonds become callable by the trustee. The Company pays annually a 1% fee of the stated amount of the letter of credit. At December 31, 1997, certain properties having an aggregate net book value of approximately $3,778 are pledged as collateral for the irrevocable letter of credit guaranteeing the bonds. (Continued) -32- 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ The Reimbursement Agreement provides for the Company to maintain certain financial and nonfinancial covenants. The more restrictive financial covenants are tangible net worth, capital expenditure limitations and debt service coverage ratio. The Company was not in compliance at December 31, 1997 with two of these covenants. Subsequent to December 31, 1997, the Company obtained compliance waivers for the December 31, 1997 covenants and renegotiated the financial covenants such that management expects to be in compliance with the renegotiated covenants in 1998 and beyond. Long-term debt matures as follows: 1998 $ 180 1999 188 2000 199 2001 204 2002 202 Thereafter 3,994 --------- $ 4,967 =========
The Company had $2,850 at December 31, 1997 of unsecured lines of credit with banks to be drawn upon as needed, bearing interest at the prime rate plus 1/2% (9% at December 31, 1997). A $2,500 line of credit expires in April 1998 with the remaining line of credit expiring in July 1998. (5) STOCKHOLDERS' EQUITY (a) EMPLOYEE STOCK OPTION PLANS The Company has provided for the granting of stock options to key employees under three plans: the 1984 Incentive Stock Option Plan (the 1984 Plan), the 1988 Combined Incentive Stock Option and Non-Qualified Stock Option Plan (the 1988 Plan) and the 1997 Stock Option Plan (the 1997 Plan). All three plans are administered by the Compensation Committee of the Board of Directors (Committee). Under the terms of the 1984 Plan, options to purchase shares of the Company's common stock were granted at a price equal to the fair market value of the stock at the date of grant. The 1984 Plan expired on December 21, 1994 and no future options will be granted under this plan. (Continued) -33- 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ Under the terms of the 1988 and 1997 plans, both incentive and nonqualified options to purchase shares of the Company's common stock may be granted. Options under these plans may be designated as incentive or nonqualified at the discretion of the Committee. The exercise price of the options granted under these plans are set at the time of grant, but may not be less than the fair market value of the Company's stock at the date of grant. There are 466,971 and 250,000 shares of common stock authorized for grants under the terms of the 1988 and 1997 Plans, respectively. At December 31, 1997, under the 1988 Plan, there were 117,844 options available for grant. The 1988 Plan will expire on May 26, 1998. There were no outstanding options under the 1997 Plan. Generally, options under these plans vest and may be exercised over either a five-year period in cumulative increments of 20% each year beginning one year from the date of grant, or as determined at the discretion of the Committee. Options granted, other than incentive options to 10% stockholders, expire ten years from the date of grant. Incentive options to 10% stockholders expire five years from the date of grant. A summary of the status of these plans as of December 31, 1997, 1996, and 1995 and changes during the years ended on those dates is presented below:
1997 1996 1995 ------------------------ ------------------------ ------------------------ WEIGHTED- Weighted- Weighted- AVERAGE average average EXERCISE exercise exercise SHARES PRICE Shares price Shares price ------------------------ ------------------------ ------------------------ Outstanding at beginning of year 466,971 $ 3.96 323,068 $ 4.12 340,995 $ 4.03 Granted 6,000 4.00 223,400 3.76 -- -- Exercised (26,219) 3.03 (12,843) 2.16 (16,033) 2.09 Relinquished (81,507) 4.47 (66,654) 4.44 (1,894) 4.95 -------- -------- ------- Outstanding at end of year 365,245 $ 3.91 466,971 $ 3.96 323,068 $ 4.12 ======================== ======================== ======================== Options exercisable at year-end 274,745 318,216 259,370 ========= ========= ========= Weighted-average fair value of options granted during the year $ 1.52 $ 2.05 ========= =========
(Continued) -34- 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ The following table summarizes information about these plans at December 31, 1997:
Options outstanding Options exercisable ------------------------------------- ----------------------- Weighted- average Weighted- Weighted- remaining average average Range of Number contractual exercise Number exercise exercise prices outstanding life price exercisable price ------------------------------------------------------ ---------------------- $3.16 to $4.36 316,245 7.4 years $ 3.70 228,045 $ 3.68 $4.80 to $5.38 49,000 5.6 years 5.25 46,700 5.25 ---------- ----------- $3.16 to $5.38 365,245 7.1 years $ 3.91 274,745 $ 3.95 ===================================== ======================
(b) DIRECTORS AND DISTRIBUTORS STOCK OPTION PLAN In 1994, 110,000 shares of common stock were reserved for issuance to nonemployee directors of the Company and distributors who serve on the Distributor Advisory Council (Council). In 1995, the shareholders approved an amendment to the Plan which, among other things, increased the number of shares reserved for issuance under the Directors and Distributors Stock Option Plan (Plan) from 110,000 shares to 210,000 shares. At December 31, 1997, there were 86,911 options available for grant. In 1995, the Plan was amended such that nonemployee directors, when first elected to the Board by the shareholders, would receive an initial grant of options to purchase 10,000 shares of the Company's common stock. Also, the nonemployee directors in office when this amendment was approved were granted, effective the day the amendment was approved, options to purchase 10,000 shares of the Company's common stock. This amendment further provided that options to purchase 5,000 shares of the Company's common stock would be granted to nonemployee directors each October 1, commencing in 1995. The exercise price of each option is the fair market value on the date of grant. The options granted to directors who are not a Lindal distributor vest and are exercisable six months after the grant. Options granted to a director, who is also a Lindal distributor, vest and become exercisable over a four-year period beginning with 20% after six months and in annual cumulative increments of 20% beginning from the date of grant. (Continued) -35- 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ On February 1 of each year, every distributor who serves on the Council is granted options to purchase 100 shares of common stock for each year of service on the Council. The options vest and are exercisable over a four-year period beginning with 20% after six months and in annual cumulative increments of 20% beginning from the date of grant. The exercise price of each option is the fair market value on the grant date. Options granted to nonemployee directors who are not Lindal distributors expire at the earliest of 10 years from the date of grant or one year after the option holder ceases to be a director. Options granted to distributors, including nonemployee directors who are Lindal distributors, expire at the earliest of 10 years from the date of grant, 90 days after the option holder ceases to be a distributor for any reason other than death or one year after death. A summary of the status of this fixed stock option plan as of December 31, 1997, 1996, and 1995 and changes during the years ended on those dates is presented below:
1997 1996 1995 ------------------------- ------------------------ ---------------------- WEIGHTED Weighted Weighted- -AVERAGE -average average EXERCISE exercise exercise SHARES PRICE Shares price Shares price ----------- ------------- ---------- ------------- ---------- ----------- Outstanding at beginning of year 117,509 $ 4.21 96,119 $ 4.23 18,444 $ 5.87 Exercised (4,000) 3.75 - - - - Granted 27,200 4.06 22,100 4.14 79,400 3.89 Relinquished (21,620) 4.38 (710) 5.38 (1,725) 6.15 --------- --------- --------- Outstanding at end of year 119,089 $ 4.16 117,509 $ 4.21 96,119 $ 4.23 --------- -------- --------- -------- --------- -------- Options exercisable at year-end 82,209 80,919 54,185 ---------- ---------- --------- Weighted-average fair value of options granted during the year $ 1.52 $ 2.36 $ 2.22 ======== ======== ========
(Continued) -36- 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ The following table summarizes information about this fixed stock option plan at December 31, 1997:
Options outstanding Options exercisable ---------------------------------------------------- ------------------------------- Weighted- average Weighted- Weighted- Range of exercise Number remaining average Number average prices outstanding contractual life exercise price exercisable exercise price - ----------------------- ---------------- ----------------- ----------------- ---------------- -------------- $3.50 to $5.00 111,700 8.2 years $ 4.03 74,820 $ 4.02 $6.00 to $6.36 7,389 6.1 years 6.21 7,389 6.21 ----------- --------- $3.50 to $6.36 119,089 8.1 years $ 4.16 82,209 $ 4.21 =========== ============== ============ ========== ========
(c) EMPLOYEE STOCK PURCHASE PLAN The Company's 1993 Employee Stock Purchase Plan provides for 110,000 shares of the Company's common stock to be reserved for issuance upon exercise of purchase rights granted to participating employees of the Company. The purchase rights are exercisable annually on October 1 of each year at a price equal to the lesser of 85% of the fair market value of the Company's stock at the beginning or end of the annual period. In 1997, 1996 and 1995, 2,397, 3,848 and 8,233 shares, respectively, for the amounts of $8, $13 and $24, respectively, were issued under the plan. (d) OTHER GRANTS OF OPTIONS On June 30, 1995, the Executive Committee of the Board of Directors granted options to purchase 10,000 shares to Robert McLennaghan, a related party, for consulting services performed for the Company. The per share exercise price of the options was the fair market value on the date of grant, $3.75. The options were immediately exercisable and expire at the earlier of 10 years from the date of grant or one year after death. The weighted-average fair value of these options was $2.12 per share. (e) ISSUANCE OF RESTRICTED STOCK Pursuant to a revised compensation program for nonemployee directors, a total of 3,000 and 4,000 shares of the Company's common stock was issued in 1997 and 1996, respectively. The stock issued to the nonemployee directors was valued at the fair market value at the date of grant. As the stock issued was not registered, all certificates bear the appropriate restrictive legend. Compensation expense of $11 and $15 was recorded in 1997 and 1996, respectively. (Continued) -37- 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ Pursuant to pre-employment negotiations, in January 1996, 1,000 shares of common stock were issued, and valued at the fair market value at the date of grant, to the person who became the manager of the Company's building products division. As the stock has not been registered, the certificate bears the appropriate restrictive legend. A charge of $4 was recorded as compensation expense in 1996. Pursuant to pre-employment negotiations, in June 1997, 1,000 shares of common stock were issued, and valued at the fair market value at the date of grant, to the person who became the chief financial officer of the Company. As the stock has not been registered, the certificate bears the appropriate restrictive legend. A charge of $4 was recorded as compensation expense in 1997. (f) OPTION COMPENSATION EXPENSE The Company applies APB Opinion No. 25 in accounting for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the date of grant for its stock options under SFAS No. 123, the Company's net earnings (loss) and basic and diluted earnings (loss) per common share would have been the pro forma amounts indicated below:
1997 1996 1995 --------------------------- Net earnings (loss): As reported $ (2,447) 1,506 1,337 Pro forma (2,499) 1,311 1,227 Basic and diluted earnings (loss) per common shares: As reported (.60) .37 .33 Pro forma (.61) .32 .30
The pro forma amounts reflect only options granted since December 31, 1994. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma amounts presented above because compensation cost is reflected over the options vesting period of five years and compensation cost for options granted prior to January 1, 1995 is not considered. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1997, 1996 and 1995:
1997 1996 1995 ----------------------------------------- Expected dividend yield -- -- -- Risk free interest rate range 5.9 - 6.3% 5.8 - 7.5% 5.8 - 7.5% Expected term (years) 4.6 8.4 8.4 Expected volatility 31.8% 37.5% 37.5%
(Continued) -38- 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ (g) EARNINGS PER SHARE SFAS No. 128, Earnings Per Share, establishes a new standard for reporting earnings per share and requires companies with complex capital structures that have publicly held common stock or potential common stock to present both basic and diluted earnings per share (EPS) on the face of the statement of operations. Both basic and diluted earnings per share are calculated based on net income (loss) of approximately $(2,447), $1,506, and $1,337 for the years ended December 31, 1997, 1996, and 1995 respectively. Basic EPS of $(0.60) for 1997 was based on weighted average shares outstanding of 4,103,491 and is the same as diluted EPS. Outstanding options to purchase 494,334 shares of common stock were not included in the computation of EPS in 1997 as they were antidilutive. The following is a reconciliation of the number of shares (denominator) used in the EPS calculations for 1996 and 1995.
Year ended -------------------------------------------------------------------- December 31, 1996 December 31, 1995 ------------------------- ------------------------------- Weighted Per Weighted Per average share average share shares amount shares amount -------------------------------------------------------------------- Basic EPS 4,070,384 $ 0.37 4,043,545 $ 0.33 Effect of dilutive securities - options 27,417 41,875 Diluted EPS 4,097,801 0.37 4,085,420 0.33
(6) INCOME TAXES The components of earnings (loss) before income tax expense (benefit) are as follows:
1997 1996 1995 ---------------------------- U.S. $ (2,455) 2,612 1,361 Canada (686) (444) 805 ---------------------------- $ (3,141) 2,168 2,166 ============================
(Continued) -39- 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ Total income tax expense (benefit) was allocated as follows:
1997 1996 1995 ------------------------ Current: U.S. Federal $ (881) 1,057 542 Canadian 66 (357) 339 State - 13 3 ------------------------ (815) 713 884 Deferred: U.S. Federal 121 (141) (53) Canadian - 90 (2) ------------------------ 121 (51) (55) ------------------------ Total $ (694) 662 829 ========================
The income tax expense (benefit) in the consolidated financial statements differs from the amount of income tax determined by applying the applicable U.S. Federal statutory income tax rate to pretax income as follows:
1997 1996 1995 ------------------------ Statutory tax rate (34) % 34 % 34 % Effect of Canadian taxes - (5) 3 Unrecognized net operating losses 9 - - Other, net 3 2 1 ------------------------ (22) % 31 % 38 % ========================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 are as follows:
1997 1996 -------------- Deferred income tax assets: Receivables, due to the allowance for doubtful receivables $ 184 128 Uniform inventory capitalization for tax purposes 10 34 Accrued expenses deductible in different years for tax 141 152 Net operating loss carryforwards 265 - -------------- Deferred income tax assets 600 314 Valuation allowance (265) - -------------- 335 314 Deferred income tax liabilities - property, plant and equipment, principally due to differences in basis of assets and depreciation 352 210 -------------- Net deferred income tax asset (liability) $ (17) 104 ==============
(Continued) -40- 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ The valuation allowance for deferred tax assets as of January 1, 1997 and 1996 was $265,000 and $0, respectively. The net change in the total valuation allowance for the year ended December 31, 1997 was an increase of $265. There was no change in the valuation allowance for 1996 and 1995. The Company's Canadian subsidiaries have net operating loss carryforwards of $1,050 which expire in 1998 through 2004. (7) LEASED ASSETS AND LEASE COMMITMENTS The Company controls certain properties under operating leases, some of which are subleased to dealers. In addition, the Company leases certain production facilities and equipment. A summary of rent expense under noncancelable operating leases follows:
1997 1996 1995 -------------------------- Gross rent expense $ 451 473 427 Less sublease rentals 46 42 5 ========================== Net rent expense $ 405 431 422 ==========================
Noncancelable long-term operating lease commitments are as follows:
Years ending December 31 Aggregate minimum rentals --------------------------------------------------------- 1998 $ 239 1999 165 2000 90 2001 13 2002 13 Thereafter 273 ====== $ 793 ======
(Continued) -41- 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ (8) YEAR 2000 In January 1997, the Company developed a plan to address the Year 2000 computer problem and began converting its computer systems to be Year 2000 compliant. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. The Company presently believes that with upgrades to existing software, the Year 2000 problem will not pose significant operation problems for the Company's computer systems. However, if such upgrades are not completed timely, the Year 2000 problem may have a material impact on the operations of the company. The Company expects to incur internal staff costs as well as the cost of the software upgrades. In the opinion of management, the internal staff costs will not be incremental, but rather will represent the redeployment of existing resources. The incremental costs of the software upgrades will be minimal and will not have a material effect on the Company's financial position or results of operations. (9) RETIREMENT PLANS (a) SALARY SAVINGS PROFIT SHARING PLAN The Company's Salary Savings Profit Sharing Plan under Section 401(k) of the Internal Revenue Code covers substantially all full-time nonunion employees. Plan participants may contribute up to 15% of their annual salary to the plan with the Company making a matching contribution in the amount of 25% of such employee contributions. Plan administration costs and the Company's costs of matching employees' contributions to the plan totaled $78 in 1997, $85 in 1996 and $78 in 1995. The Company may also contribute to the plan such additional amounts as the Board of Directors may determine in its sole discretion. The Board of Directors decided that $31 for both December 31, 1996 and 1995 should be contributed to this plan on behalf of the employees. (b) PENSION PLAN The Company contributes to various trusteed defined benefit pension plans under industry-wide agreements. These contributions are based on the hours worked by employees covered under collective bargaining agreements. Pension expense for these plans was $193 in 1997, $165 in 1996 and $185 in 1995. In 1994, a new collective bargaining agreement was negotiated for the woodworkers in the Province of British Columbia. The agreement required that employers make two "one time" contributions to the plan. One payment of $22 was made in November 1994. The second payment of $38 was made in June 1995. (Continued) -42- 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ (10) RELATED PARTY TRANSACTIONS In 1997, 1996 and 1995, the Company made payments to a private company controlled by Sir Walter Lindal and certain other members of the Lindal family who are officers and directors of the Company of $34 in each of the respective years as consideration for the use of various patents. Sales of homes to certain members of the Board of Directors who are also dealers totaled approximately $715 in 1997, $639 in 1996 and $949 in 1995. All sales were made under normal trade terms. (11) FOREIGN OPERATIONS The Company and its subsidiaries are primarily engaged in the manufacture and distribution of cedar homes and sunrooms. Company operations are conducted in the United States and in Canada.
1997 1996 1995 ----------------------------------------- Revenue: United States: Sales to unaffiliated customers $ 42,762 41,249 36,858 Transfers to Canadian operations 17,900 6,172 1,957 ----------------------------------------- 60,662 47,421 38,815 Canada: Sales to unaffiliated customers 6,086 5,386 5,453 Transfers to U.S. operations 38,457 11,440 7,053 ----------------------------------------- 44,543 16,826 12,506 ----------------------------------------- 105,205 64,247 51,321 Less interarea transfers 56,357 17,612 9,010 ----------------------------------------- Total $ 48,848 46,635 42,311 ----------------------------------------- Operating income (loss): United States (3,171) 1,869 1,134 Canada (689) (645) (481) ========================================= Total $ (3,860) 1,224 653 ========================================= Identifiable assets: United States 21,580 23,116 22,423 Canada 10,607 6,918 5,569 ========================================= Total $ 32,187 30,034 27,992 =========================================
Interarea transfers are made at amounts which approximate fair market values. The net identifiable assets located in Canada approximate total gross identifiable assets. (Continued) -43- 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except per share amounts) ================================================================================ (12) LITIGATION The Company is routinely involved in a number of legal proceedings and claims that cover a wide range of matters. In the opinion of management, the outcome of these matters is not expected to have any material adverse effect on the consolidated financial position or results of operations of the Company. -44- 45 Schedule II LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1997, 1996 and 1995 (In thousands)
================================================================================================ Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions --------- (1) (2) Charged Charged Balance at to costs to other Balance beginning and accounts - at end Description of year expenses describe Deductions of year - ------------------------------------------------------------------------------------------------ 1997 Allowance for doubtful 3 (a) receivables $ 394 123 - 53 (b) 461 =================================================================== 1996 Allowance for doubtful 1 (a) receivables $ 204 205 - 14 (b) 394 =================================================================== 1995 Allowance for doubtful (2)(a) receivables $ 203 111 - 112 (b) 204 ===================================================================
(a) Adjustments due to fluctuations in the Canadian dollar exchange rate. (b) Deductions represent the write-off of uncollectible accounts receivable. -45- 46 SIGNATURES Pursuant to the requirements of Section 13 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. March 31, 1998 /S/Robert W. Lindal, Chairman --------------------------------- Robert W. Lindal, Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date Date 3/31/98 /S/ Robert W. Lindal --------------- --------------------------------- -------------- ------------------------------------- Sir Walter Lindal Robert W. Lindal Director and Secretary Director, Chairman and Chief Executive Officer Date Date 3/31/98 /S/ Martin J. Lindal --------------- --------------------------------- --------------- ------------------------------------- Douglas F. Lindal Martin J. Lindal Director, President Director and and Chief Operating Officer Vice President Information Systems and Assistant Secretary Date 3/31/98 /s/ Dennis Gregg Date --------------- ---------------------------------- --------------- ------------------------------------- Dennis Gregg Everett G. Martin Chief Financial Officer Director and Vice (Principal Financial and President Midwest Accounting Officer) and Eastern Canada Date Date --------------- ---------------------------------- --------------- ------------------------------------- William R. Monkman William Lorenz Director Director Date Date --------------- ---------------------------------- --------------- ------------------------------------- William M. Weisfield Charles R. Widman Director Director Date --------------- ---------------------------------- Charles T. Collins Director
-46- 47 LINDAL CEDAR HOMES, INC. EXHIBIT INDEX Exhibits are numbered in accordance with Item 601 of Regulation S-K.
- -------------------------------------------------------------------------------- Exhibit numbers Description - -------------------------------------------------------------------------------- (3.1) Certificate of incorporation (a) (3.2) Bylaws (a) (3.3) 1993 Amendment to the Certificate of Incorporation (d) (10.1) 1984 Incentive Stock Option Plan (b) (10.3) 1988 Combined Incentive Stock Option Plan and Non-Qualified Stock Option Plan (c) (10.4) Directors and Distributors Stock Option Plan (d) (10.5) 1993 Employee Stock Purchase Plan (d) (10.6) Amendment to the Directors' and Distributors' Stock Option Plan (e) (21) Subsidiaries of the registrant (f) (23) Consent of Independent Certified Public Accountants (27) Financial Data Schedule (a) Incorporated herein by reference from the registration on Form 8B of Lindal Cedar Homes, Inc., a Delaware corporation, dated March 14, 1987. (b) Incorporated herein by reference from the Registrant's Form 10-K filed for the fiscal year ended December 31, 1986. (c) Incorporated herein by reference from the Registrant's Form 10-K filed for the fiscal year ended December 31, 1989. (d) Incorporated herein by reference from the Registrant's Form 10-K filed for the fiscal year ended December 31, 1993. (e) Incorporated herein by reference from the Registrant's Proxy Statement dated April 27, 1994 (f) Incorporated herein by reference from the Registrant's Form 10-K filed for the fiscal year ended December 31, 1996.
- -------------------------------------------------------------------------------- Copies of the above exhibits may be obtained from the Securities and Exchange Commission or the Registrant by request. -47- EX-23 2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT 1 Exhibit (23) CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Lindal Cedar Homes, Inc.: We consent to incorporation by reference in the registration statements (No. 33-64186 and 333-28509) on Form S-8 of Lindal Cedar Homes, Inc. of our report dated February 26, 1998 relating to the consolidated balance sheets of Lindal Cedar Homes, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997 and the related schedule, which report appears in the December 31, 1997 annual report on Form 10-K of Lindal Cedar Homes, Inc. KPMG Peat Marwick LLP Seattle, Washington March 30, 1998 -48- EX-27 3 FINANCIAL DATA SCHEDULE
5 0000059591 Lindal Cedar Homes, Inc. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 2,363 0 3,963 461 10,078 18,572 222,294 10,265 32,187 8,600 4,787 0 0 41 18,407 32,187 48,848 48,848 42,097 42,097 0 172 152 (3,141) (694) (2,447) 0 0 0 (2,447) (.60) (.60)
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