10-Q 1 e10-q.txt FORM 10-Q FOR PERIOD ENDED JULY 2, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended July 2, 2000. [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to_________. Commission File Number 0-6087 LINDAL CEDAR HOMES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 91-0508250 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4300 South 104th Place, Seattle, Washington 98178 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (206) 725-0900 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [ ] Common stock outstanding at July 2, 2000: 4,131,327 shares at $.01 par value. 2 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES INDEX

2 3 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES PART I: FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS 3 4 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS July 2, 2000, December 31, 1999 and July 4, 1999 (Amounts in thousands, except per share amounts)

See accompanying notes to the condensed consolidated financial statements 4 5 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the periods ended July 2, 2000 and July 4, 1999 (Amounts in thousands, except per share amounts) (Unaudited)

See accompanying notes to the condensed consolidated financial statements 5 6 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended July 2, 2000 and July 4, 1999 (Amounts in thousands) (Unaudited)

See accompanying notes to the condensed consolidated financial statements 6 7 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 2, 2000, December 31, 1999 and July 4, 1999 (Amounts in thousands, except per share amounts) (Unaudited) (1) BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles, except as noted below, and include all recurring adjustments that are considered necessary by management to fairly state the results of the interim periods. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and certain disclosures. Actual results could differ from those estimates. These consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted. Due to the seasonality of the Company's business, the accompanying financial statements may not necessarily be indicative of the results to be obtained for the full year. This report should be read in conjunction with the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1999. Certain reclassifications have been made to the prior period financial statements to conform with the current year presentation. (2) EARNINGS PER COMMON SHARE The following tables present basic and diluted earnings per share and reconciles the numerator and denominator of the basic and diluted per share computations:

7 8 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 2, 2000, December 31, 1999 and July 4, 1999 (Amounts in thousands, except per share amounts) (Unaudited) Options to purchase shares of common stock where the exercise price exceeds the average market price were excluded from the computations for 2000 and 1999 because they would be anti-dilutive. Anti-dilutive options excluded from the computations are as follows:

(3) INVENTORIES A summary of inventories follows:

(4) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:

(5) SEGMENT INFORMATION The Company has two reportable segments: Homes -- United States and Homes -- Canada. Homes -- United States performs functions associated with engineering, custom design, drafting, customer service, logistics, special order materials and distribution planning for home sales worldwide. Homes -- Canada performs functions associated with inventory management 8 9 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 2, 2000, December 31, 1999 and July 4, 1999 (Amounts in thousands, except per share amounts) (Unaudited) of stock materials, materials staging, and home shipping for home sales worldwide. Homes -- United States primarily sells homes, at wholesale, to independent dealers while Homes -- Canada primarily sells homes, at wholesale, to Homes -- United States for resale to independent dealers. Information regarding the Company's reportable segments for the quarters and six month periods ended July 2, 2000 and July 4, 1999 follows:

9 10 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 2, 2000, December 31, 1999 and July 4, 1999 (Amounts in thousands, except per share amounts) (Unaudited) (6) COMPREHENSIVE EARNINGS: Comprehensive earnings are as follows:

(7) SHORT-TERM INVESTMENTS: Short-term investments consist of securities maturing within one year, and are classified as available-for-sale. Accordingly, these investments are carried at fair value. Any unrealized holding gains and losses, net of income taxes, are immaterial at July 2, 2000, December 31, 1999 and July 4, 1999. (8) CONTINGENCIES: 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. On February 1, 2000, six current and former dealers brought suit against Lindal Cedar Homes and two of its officers and directors in the U.S. District Court for the Western District of Washington for damages arising from the Company's termination or threatened termination of their dealership agreements. In late 1998 and early 1999, the Company terminated or threatened to terminate the dealership agreements of these individuals on the grounds that the dealers had breached their agreements by selling competitive products. The dealership contract, signed by each of these claimants, strictly prohibits a dealer from selling competitive products. The complaint alleges: (a) the failure of the Company to register as a franchise in certain states, including Washington, (b) numerous violations of the Washington Franchise Investment Protection Act, and (c) illegal tie-in requirements in violation of the Sherman Act and Washington Consumer Protection Act, including treble damages. The complaint does not specify the damages sought. However, in a mediation which preceded the filing of the lawsuit, the plaintiffs claimed damages, including trebling, of approximately $10 million (prior to attorneys fees). The Company's dealer agreement provides that, following unsuccessful mediation, a dealer may pursue claims under the agreement only through an arbitration proceeding binding on the dealer and the Company. The Company believes that neither the Washington Franchise Investment Protection Act nor the Federal Sherman Act is applicable, nor were there any violations of either act. The Company will vigorously defend the lawsuit. Any amount owing as a result of this lawsuit is currently not estimable and as such, the Company has not accrued any amounts relating to these claims. In the second quarter of 2000, the parties to lawsuit agreed to pursue the claims through binding arbitration before a panel of 10 11 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS July 2, 2000, December 31, 1999 and July 4, 1999 (Amounts in thousands, except per share amounts) (Unaudited) three arbitrators. The three arbitrators have been selected. The U.S. District Court for the Western District of Washington has issued an order staying the lawsuit pending the outcome of the arbitration. 11 12 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Lindal Cedar Homes, Inc. (the "Company") is primarily engaged in the manufacture and distribution of custom cedar homes, windows and sunrooms. The Company also re-manufactures standard dimensional cedar lumber. Cedar lumber, that meets the Company's quality standards, is combined with manufactured and/or purchased windows, sunrooms, and other purchased forest products and building materials into home packages which can be shipped nationally and internationally to the home buyer's construction site. Re-manufactured cedar lumber that is not of a grade suitable for use in homes is sold on the open lumber market. The primary raw material used by the Company in its re-manufacturing is western red cedar, available in quantity only in British Columbia, Canada, Alaska and the Pacific Northwest United States. Pressures continue to be placed on the log market in general by harvesting restrictions in the United States and Canada, and the Company is aware of the potential for shortages and/or fluctuations in the price of cedar logs and cedar lumber. Although green cedar lumber is the primary raw material used in manufacturing, the Company purchases substantial quantities of forest products on the commodity market to ship in its home packages. Presently, the Company does not anticipate any serious long-term problems in securing the needed forest products in the foreseeable future. The Company does expect that there may be occasional, temporary shortages of cedar logs or cedar lumber and that price volatility of cedar logs, green cedar lumber, other species of lumber and other forest products may occur 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. On June 1, 2000, the Company's Surrey, British Columbia shipping facility was closed for 1.5 working days by a work stoppage that was not sanctioned by the IWA-Canada. Work resumed mid-day on June 2, 2000. The Company and the IWA-Canada agreed to submit the matters giving rise to the work stoppage to mediation. All matters relating to the work stoppage have been resolved through mediation. The Company does not expect the agreements reached in mediation will have a material adverse effect on the results of operations. In July 2000, the Company accepted offers to sell the Seattle business park property, as well as its rental property located in Renfrew, Ontario, Canada, for a combined total of approximately $5.5 million cash (US$). Both of these offers are subject to certain general contingencies. Subject to the resolution of the contingencies, the company expects to report a net, pre-tax gain of approximately $1.2 million from the combined transactions in the third quarter of 2000. Net proceeds from the two sales are expected to be approximately $4.2 million (pre-tax) after the payment of encumbrances. Currently, both sales are expected to close late in the third quarter. The combined tax consequences are not completely known at this time. The Seattle business park sale does not affect the company's adjacent corporate headquarters. The Company's business is seasonal in that most deliveries have historically been made during the period from April to October. To illustrate this, revenue by quarter is presented below:

12 13 NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, as amended, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments embedded in other contracts and for hedging activities. The Statement requires that entities recognize all derivatives as either assets or liabilities on the balance sheet and measure these derivatives at fair value. SFAS No. 133 also specifies a new method of accounting for hedging transactions, prescribes the type of items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. This Statement is effective for financial statements for years beginning after June 15, 2000. The Company does not expect the adoption of this Statement to have a material impact on the consolidated financial statements. In June 2000, the SEC updated Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." The most recent update (SAB 101B) delays the effective date of SAB 101 to the fourth quarter of 2000. SAB 101 provides guidance on revenue recognition and the SEC staff's views on the application of accounting principles to selected revenue recognition issues. The Company will adopt the provisions of SAB 101 in the fourth quarter of 2000. While we believe that SAB 101 will not have a material impact on the Company's consolidated financial statements, there continue to be implementation questions and supplemental issuances of interpretive guidance from the staff of the Securities and Exchange Commission which may have future impact YEAR 2000 The Company has not experienced any significant disruptions to its computerized financial or operating activities resulting from Year 2000 issues. Furthermore, the Company has no information that indicates a significant vendor or service provider has experienced any significant disruptions to their financial or operating activities such that they would be unable to provide goods or services to the Company. SECOND QUARTER NEW ORDERS The number of new home orders decreased 23% in the second quarter of 2000 compared to the second quarter of 1999. The dollar value of new home orders decreased 22% in the same time period. The timing of new order sales promotions and price increases can have a significant impact on the number and value of new home orders. Year-to-date new orders units increased 2% over the same period of the prior year. In the second quarter of 1999, the Company sponsored a dealer sales promotion to increase second quarter 1999 new orders. The Company did not sponsor such a promotion in the second quarter of 2000. Instead, to increase first quarter 2000 new orders and second quarter 2000 deliveries, the Company sponsored a new order sales promotion in the first quarter of 2000. Combined with the effect of a previously announced second quarter graduated 3.5% price increase, which became fully effective on July 1, 2000, the number of new order units increased 43% and the value of those orders increased 27% in the first quarter of 2000 over the first quarter of 1999. Homes shipped increased 53% in units and 52% in value in the second quarter of 2000 over the second quarter of 1999. Management anticipated that the first quarter 2000 new order sales promotion, combined with the second quarter price increase, would decrease the number of new home orders in the second and third quarters of 2000 as some percentage of the new orders, that would have otherwise been received in those quarters, would be accelerated into the first quarter of 2000. 13 14 The following table illustrates the percentage change in the number and dollar value of new orders in the second quarter of the current and each of the preceding 2 years:

The Access and Select products represented 58% of new order units in the second quarter of 2000 compared to 65% of new order units in the second quarter of 1999. The dollar value of the Access and Select product new orders was 46% of the total dollar value of new orders in the second quarter of 2000 compared to 58% in the second quarter of 1999. The Select product was introduced in January 1999. Size and value of a home is a function of customer preference and may change somewhat from period to period. Entering the third quarter of 2000, the total backlog, stated in dollars, was approximately $32 million and approximately equal to the backlog entering the third quarter of 1999. Because the Company's business is seasonal, the backlog data does not necessarily reflect the level of the Company's business on an annual basis. While the Company expects the majority of the current backlog will ship within the next 12 months, factors beyond the control of the Company, such as weather conditions, customer financing, building permits, order cancellations or customer requested delays, may affect the actual delivery date of an unknown portion of backlog orders beyond the twelve month period. REVENUE The Company recognizes revenue from orders when the home package is shipped. Revenue increased $2.71 million (27%) to $12.85 million in the second quarter of 2000 from $10.14 million in the second quarter of 1999, primarily due to the increase in home revenue. Revenue from homes increased $3.43 million (45%) to $11.11 million in the second quarter of 2000 from $7.68 million in the second quarter of 1999. The number of homes shipped increased 53% to 142 in the second quarter of 2000 from 93 in the second quarter of 1999. Management believes the increase in home revenue is primarily related to the increased backlog at December 31, 1999, the increase in new orders in the first quarter of 2000 and the acceleration of some home shipments into the second quarter of 2000 to avoid the full impact of the previously announced price increase. Management believes that the acceleration of some home shipments, which might have otherwise occurred in the third quarter of 2000, may reduce third quarter home shipments. The Access and Select products (the base price of which is 25%-30% less than the traditional Cedar: Frame home) accounted for approximately 64% of home sales revenue and 72% of home units shipped in the second quarter of 2000 compared to 51% of home sales revenue and 60% of the home units shipped in the second quarter of 1999. Revenue from sunrooms increased $50,000 (11%) to $500,000 in the second quarter of 2000 from $450,000 in the second quarter of 1999. Revenue from other sales decreased $770,000 (38%) to $1.24 million in the second quarter of 2000 from $2.01 million in the second quarter of 1999. The decrease is primarily related to the discontinuance of certain custom products previously available for sale, a one-time material supply agreement in the second quarter of 1999, an increase in dealer discounts applicable to certain material sales and a decrease in service fees from canceled orders. MATERIAL COSTS In dollars, material costs increased $1.67 million (35%) to $6.38 million in the second quarter of 2000 from $4.71 million in the 14 15 second quarter of 1999 on 49 (53%) additional home shipments. In general, the price of cedar and other lumber and forest products utilized by the Company remained fairly constant and in some cases decreased during the second quarter of 2000. As a percent of revenue, material costs were 49.6% in the second quarter of 2000 compared to 46.4% in the second quarter of 1999. The increase in material costs as a percentage of revenue reflects the sales trend toward the Company's lower priced Access and Select products, higher than anticipated duty refunds in the second quarter of 1999, and decreased margins on certain material orders. Duty refunds totaled approximately $160,000 in the second quarter of 1999. OTHER COST OF GOODS SOLD Non-material costs, included in the cost of goods sold, increased $530,000 (21%) to $3.11 million in the second quarter of 2000 from $2.58 million in the second quarter of 1999. This is primarily due to increased variable expenses related to the increased number of homes shipped in the second quarter of 2000 compared to the same period in 1999, increased catalog costs and to increased expenditures related to the expansion of the Company's engineering capacity. GROSS PROFIT In dollars, gross profit increased $510,000 (18%) to $3.36 million in the second quarter of 2000 from $2.85 million in the second quarter of 1999. This was primarily due to the increased sales volume, which was partially offset by the change in the sales mix of homes shipped, decreased margins on certain material orders and the expansion of the Company's engineering capacity. As a percentage of revenue, gross profit decreased to 26.2% of revenue in the second quarter of 2000 from 28.1% of revenue for the same period in 1999. The mix of home units shipped also impacts the dollar amount of gross profit and gross profit as a percentage of revenue. The Access and Select products have lower material costs than the Cedar Frame, but the dollar and percentage gross margin is lower as well. The Access and Select products accounted for 64% of the home revenue and 72% of home units shipped in the second quarter of 2000 compared with 51% of the home revenue and 60% of the home units shipped in the second quarter of 1999. For all of 1999, the Access and Select products accounted for 60% of the home units shipped and 52% of home revenue, while the Access product accounted for 54% of the home units shipped and 46% of home revenue in 1998. The Select product was introduced in January 1999. OPERATING EXPENSES Total operating expenses, including display court expenses, increased $430,000 (22%) to $2.39 million in the second quarter of 2000 from $1.96 million in the second quarter of 1999. Operating expenses were 18.6% of revenue in the second quarter of 2000 compared to 19.3% of revenue in the second quarter of 1999. As a group, selling, and general and administrative expenses increased $360,000 (19%) to $2.21 million in the second quarter of 2000 from $1.85 million in the second quarter of 1999. As a percentage of revenue, selling, and general and administrative expenses were 17.2% in the second quarter of 2000 compared to 18.2% in the same period of 1999. Selling expenses increased $180,000 (19%) to $1.12 million in the second quarter of 2000 from $940,000 in the second quarter of 1999. This is primarily due to expanded dealer recruitment and development efforts, increased advertising levels, increased commissions and increased travel expenditures in the second quarter of 2000 compared to the second quarter of 1999. General and administrative expenses increased $180,000 (20%) to $1.09 million in the second quarter of 2000 from $910,000 in the second quarter of 1999. This is primarily due to increased payroll and related expenses, increased professional fees, and increased supply expenditures in the second quarter of 2000 compared to the same period of 1999. Display court expenses increased $70,000 (64%) to $180,000 in the second quarter of 2000 from $110,000 in the second quarter of 15 16 1999 primarily due to increased delivery of homes in the second quarter of 2000 compared to the same period of 1999. OTHER INCOME (EXPENSE), NET Other income (expense), net increased $190,000 (100%) to $190,000 in the second quarter of 2000 from $0 in the second quarter of 1999. This is primarily due to increased interest income ($60,000) and gains from foreign currency transactions ($130,000) from the second quarter of 1999. INCOME TAX EXPENSE The Company recognized an income tax expense of $360,000 (31%) in the second quarter of 2000 compared to an income tax expense of $150,000 (16%) in the second quarter of 1999. The overall income tax expense recognized in the second quarter of 1999 was reduced due to the recognition of the income tax benefit from Canadian operations not recognized in the first quarter of 1999 and the recognition of the income tax benefit from the available carryforward of prior year Canadian operating losses which were not previously recognized. YEAR-TO-DATE NEW ORDERS The number of new home orders increased 2% in the first six months of 2000 compared to the first six months of 1999. The dollar value of these new home orders decreased 2% in the same time period. Size and value of a home is a function of customer preference and may change somewhat from period to period. The following table illustrates the percentage change in the number and dollar value of new orders for the first six months of the current and each of the preceding 2 years:

The Access and Select products represented 61% of new order units in the first six months of 2000 and in the first six months of 1999. The dollar value of the Access and Select products new orders was 53% of the total dollar value of new orders in the first six months of 2000 and in the first six months of 1999. REVENUE Revenue increased $3.06 million (17%) to $21.3 million in the first six months of 2000 from $18.24 million in the first six months of 1999, primarily due to increases in home revenue. Revenue from homes increased $4.09 million (30%) to $17.86 million in the first six months of 2000 from $13.77 million in the first six months of 1999. The number of houses shipped increased 34% to 226 in the first six months of 2000 from 169 in the first six months of 1999. Management believes the increase in home revenue is primarily related to the increased backlog at December 31, 1999, the increase in new orders in the first quarter of 2000 and the acceleration of some home shipments into the second quarter of 2000 to avoid the full impact of the previously announced price increase. The average revenue per home decreased in the first six months of 2000 compared to the first six months of 1999. 16 17 The Access and Select products accounted for approximately 65% of home sales revenue and 71% of home units shipped in the first six months of 2000 compared to 46% of home sales revenue and 55% of the home units shipped in the first six months of 1999. Revenue from sunrooms decreased $50,000 (7%) to $670,000 in the first six months of 2000 from $720,000 in the first six months of 1999. In early 2000, the Company introduced its new PatioRoom, an updated sunroom product with less glass and all the versatility of the traditional sunroom products at about two-thirds the price of the traditional sunroom products. Revenue from other sales decreased $980,000 (26%) to $2.77 million in the first six months of 2000 from $3.75 million in the first six months of 1999. The decrease is primarily related to the discontinuance in 2000 of certain custom products previously available for sale, a one-time material supply agreement in the first half of 1999, an increase in dealer discounts available on certain material sales and decreases in service fees from canceled orders. MATERIAL COSTS In dollars, material costs increased $1.82 million (21%) to $10.49 million in the first six months of 2000 from $8.67 million in the first six months of 1999 on 57 (34%) additional home shipments. In general, the price of cedar and other lumber and forest products utilized by the Company have remained fairly constant and in some cases decreased during the first six months of 2000. As a percent of revenue, material costs were 49.3% in the first six months of 2000 compared to 47.5% in the first six months of 1999. The increase in material costs as a percentage of revenue reflects the sales trend toward the Company's lower priced Access and Select products, higher than anticipated duty refunds in the second quarter of 1999 and decreased margins on certain material orders. OTHER COST OF GOODS SOLD Non-material costs, included in the cost of goods sold, increased $990,000 (20%) to $6.04 million in the first six months of 2000 from $5.05 million in the first six months of 1999. This is primarily due to increased variable expenses related to the increased number of homes shipped in the first half of 2000 compared to the same period in 1999 and to the expansion of the Company's engineering capacity. GROSS PROFIT In dollars, gross profit increased $250,000 (6%) to $4.77 million in the first six months of 2000 from $4.52 million in the first six months of 1999. This was primarily due to the increased sales volume, which was partially offset by the change in the sales mix of homes shipped, decreased margins on certain material orders and the expansion of the Company's engineering capacity. As a percentage of revenue, gross profit decreased to 22.4% of revenue in the first six months of 2000 from 24.8% of revenue for the same period in 1999. The Access and Select products accounted for 65% of the home revenue and 71% of home units shipped in the first six months of 2000 compared with 46% of the home revenue and 55% of the home units shipped in the same period of 1999. OPERATING EXPENSES Total operating expenses, including display court expenses, increased $430,000 (11%) to $4.37 million in the first six months of 2000 from $3.94 million in the first six months of 1999. As a group, selling, and general and administrative expenses increased $390,000 (11%) to $4.10 million in the first six months of 2000 from $3.71 million in the first six months of 1999. As a percentage of revenue, selling and general and administrative costs were 19.3% of revenue in the first six months of 2000 compared to 20.3% for the same period of 1999. 17 18 Selling expenses increased $210,000 (11%) to $2.1 million in the first six months of 2000 from $1.89 million in the first six months of 1999. This increase is primarily due to increased advertising, travel and dealer recruitment expenditures in the first six months of 2000 compared to the same period of 1999. General and administrative expenses increased $180,000 (10%) to $2 million in the first six months of 2000 from $1.82 million in the first six months of 1999. This is primarily due to increased payroll and related expenses, professional fees, and supply expenditures in the first six months of 2000 compared to the same period of 1999. Display court expenditures increased $40,000 (17%) to $270,000 in the first six months of 2000 from $230,000 in the first six months of 1999. This is primarily due to increased expenditures related to increased home deliveries in the first six months of 2000 compared to same period of 1999. OTHER INCOME (EXPENSE), NET Other income (expense), net changed $270,000 to $240,000 in the first six months of 2000 from $(30,000) in the first six months of 1999. This is primarily due to increased interest income and increased gains from foreign currency transactions from the first six months of 1999. INCOME TAX EXPENSE The Company recognized an income tax expense of $200,000 (31%) in the first six months of 2000 compared to an income tax expense of $80,000 (15%) in the first six months of 1999. The overall income tax expense recognized in the first six months of 1999 was reduced due to the recognition of the income tax benefit from the available carryforward of prior year Canadian operating losses. The Company did not recognize the income tax benefits in 1998 for prior year Canadian operating losses due to the inability to carryback the Canadian net operating losses and the uncertainty of utilizing the Canadian net operating losses against future taxable Canadian income. LIQUIDITY The Company's policy is that all home and sunroom orders be accompanied by a cash deposit and that units be paid in full before shipment or be shipped on a C.O.D. basis. The majority of home and sunroom sales are prepaid. Lumber sales are made on terms common to the industry. The Company primarily pays its vendors within stated terms and takes advantage of discounts for early payments whenever available. Operations and customer deposits for home and sunroom orders are the Company's primary source of cash. The Company maintains a $1.5 million operating line of credit with a financial institution. The line of credit bears interest at the rate of prime plus 1% and is secured by a pledge of specific assets. The operating line of credit expires on March 30, 2001. The Company also maintains a letter of credit with a financial institution securing payment of the Industrial Revenue Bonds issued in November 1997. The letter of credit expires on November 15, 2002. The Company does not foresee the need to borrow on its operating line of credit during 2000. The Company continues to hedge a portion of its expected non-cedar lumber needs for its home packages using options and futures contracts. The program's objective is to manage well-defined commodity risks. These derivative financial instruments are not being used for trading purposes. CASH FLOW OPERATING ACTIVITIES Operations provided $830,000 in cash in the first six months of 2000 compared to providing $3.4 million in cash in the first six months of 1999. In the first six months of 2000, operating results provided $1.17 million in cash while changes in operating assets used $340,000 in cash. Cash provided by operating assets was primarily from decreases in trade and operating notes receivable and increases in current liabilities, which were offset by cash used to increase inventory and prepaid expenses and promotional materials. The decrease in trade and operating notes receivable is primarily due to seasonal collections as a result of improved dealer cash flow from increased home deliveries. The increase in current liabilities is primarily related to the increase in inventory levels, expenditures related to increased home shipments, increases in customer deposits, expenditures related to the Company's new planbook and the timing of scheduled payments in relation to period end. In the first six months of 1999, operating results provided $1.09 in cash while changes in operating assets provided an additional $2.31 million in cash. Cash provided by changes in operating assets was primarily from decreases in trade and operating notes receivable, reductions in prepaid expenses and promotional materials and increases in current liabilities. The reductions in trade and 18 19 operating notes receivable was primarily related to increased seasonal collections as a result of the improved dealer cash flow from increased home deliveries. The increase in current liabilities is primarily related to the increase in customer deposits and the timing of scheduled payments in relation to period end. The Company's current ratio was 2.17:1.0 at July 2, 2000 compared to 2.18:1.0 at December 31, 1999. INVESTMENT ACTIVITIES Cash used for investment activities in the first six months of 2000 was $470,000 compared to $3.16 million in the first six months of 1999. In the first six months of 2000, cash expenditures for property, plant and equipment totaled $590,000 which were partially offset by cash received from the repayment of non-operating notes receivable. In the first six months of 1999, cash expenditures for property, plant and equipment totaled $250,000 and net cash used to purchase short-term investments totaled $2.96 million. These expenditures were partially offset by cash received from the repayments of non-operating notes receivable. In the first quarter of 2000, the Company took title to a dealer's display court (land and model) located in British Columbia, Canada in exchange for forgiving the mortgage it held on the property and other debt owing to the Company by the dealer. FINANCING ACTIVITIES Cash provided by financing activities was $0 in the first six months of 2000 compared to using $280,000 in the first six months of 1999. In the first six months of 2000, $60,000 of cash was used to repay long-term debt, while long-term debt financing provided $60,000 of cash. In the first six months of 1999, $50,000 of cash was used to repay long-term debt. An additional $270,000 of cash was used to retire a note payable relating to the Company's assumption of debt in a transaction where the Company took title to a dealer's display court (land and model) located in Highland, Michigan. EXCHANGE RATES In the first six months of 2000, unfavorable changes in exchange rates had a $60,000 negative effect on cash and cash equivalents while in the first six months of 1999 favorable changes in exchange rates had a $120,000 positive effect on cash and cash equivalents. COMPARISON OF JULY 2, 2000 BALANCE SHEET TO PRIOR YEAR CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash, cash equivalents and short-term investments increased $1.98 million (30%) to $8.54 million at July 2, 2000 from $6.56 million at July 4, 1999. This increase is primarily due to the favorable operating results, the refund of prior years federal taxes, and increases in customer deposits and other current liabilities, which were partially offset by the new planbook development costs, increases in inventory and capital expenditures. RECEIVABLES Net accounts receivable decreased $1.36 million (51%) to $1.33 million at July 2, 2000 from $2.69 million at July 4, 1999. This decrease is primarily due to the reduction in refundable federal taxes reflecting the receipt of the federal tax refunds relating to the 1997 and 1998 operating losses. INVENTORY Production inventories (raw materials, work-in-process and finished goods) increased $850,000 (13%) to $7.4 million at July 2, 2000 from $6.55 million at July 4, 1999. This increase is due to the advance purchase of selected cedar raw material inventory. PROMOTIONAL MATERIALS Promotional materials increased $340,000 (52%) to $990,000 at July 2, 2000 from $650,000 at July 4, 1999. This increase reflects the classification of a portion of the on-hand inventory of the Company's completed new planbooks as a current asset. 19 20 OTHER ASSETS Other assets increased $170,000 (12%) to $1.61 million at July 2, 2000 from $1.44 million at July 4, 1999. This increase is primarily related to the final development costs of the Company's new planbook, which was offset by the reduction in long-term notes receivable related to the note receivable exchanged for the display court located in British Columbia, Canada, payments received on other notes, and the reclassification of a portion of the on-hand inventory of the Company's completed new planbooks as a current asset. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses increased $770,000 (29%) to $3.39 million at July 2, 2000 from $2.62 million at July 4, 1999. This increase is primarily due to the increase in inventory levels, increased home deliveries and the timing of scheduled payments in relation to period end. CUSTOMER DEPOSITS Customer deposits increased $350,000 (7%) to $5.53 million at July 2, 2000 from $5.18 million at July 4, 1999. CAPITAL EXPENDITURE FINANCING Capital expenditures in 2000 will be financed from cash flow generated from operations, leasing or debt. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risks to which the Company is exposed are commodity lumber prices, interest rates and foreign currency exchange rates. The Company, from time to time, enters into futures contracts to hedge future purchases of specific types and grades of non-cedar lumber with the objective of reducing risk due to market fluctuations. At July 2, 2000, the Company had 35 futures contracts with broker-dealers of approximately $1.02 million maturing through March 2001 with a net deferred loss of $180,000. Such losses in fair value, if realized, would be offset by the lower costs of lumber purchased at market value. At July 4, 1999, the Company had 29 futures contracts with broker-dealers of approximately $810,000 maturing through November 1999 with a net deferred gain of $140,000. Such gains in fair value, if realized, would be offset by the higher costs of lumber purchased at market value. The Company is subject to foreign currency exchange rate exposure, primarily related to Canadian operations and the sale of homes to Canadian customers. Historically, this exposure has had a minimal impact on the Company. Home sales into countries other than Canada are made in U.S. dollars. At the present time, the Company does not hedge foreign currency risk, but may hedge known transaction exposures in the future. The Company's exposure to changes in interest rates is minimal. Interest on short-term investments of less than 90 days is based on market interest rates. At July 2, 2000, the Company's investment in fixed rate instruments was approximately $4.03 million. Of this amount approximately $3.95 million was invested in the United States and approximately $80,000 was invested in Canada. Interest rates on the U.S. investments range from 6.1% to 6.7% and mature from July 26, 2000 through October 25, 2000. Interest rates on the Canadian investments range from 4.1% to 4.2%, and mature from September 22, 2000 through February 22, 2001. Because of the relative short-term nature of these investments, the Company's exposure to interest rate fluctuation is greatly reduced. At July 4, 1999, the Company's investment in fixed rate instruments was approximately $3.03 million. Of this amount approximately $2.96 was invested in the United States and approximately $70,000 was invested in Canada. Interest rates on the U.S. investments ranged from 5.2% to 5.5% and matured from August 16, 1999 through October 28, 1999. Interest rates on the Canadian investments ranged from 3.6% to 3.7% and matured from September 22, 1999 though February 24, 2000. 20 21 All of the Company's long-term debt is fixed rate. The Company's line of credit is based on the prime rate. During the first six months of 2000 and throughout all of 1999, the Company had no amounts owing on its line of credit. OTHER MATTERS Statements contained in this report that are not based on historical facts are forward-looking statements subject to uncertainties and risks including but not limited to: the consolidation of operations, trade and government actions, changing economic conditions, trends in the housing industry, raw material and labor costs, availability of raw materials, the ability to obtain orders and recruit dealers, demographic influences, results of litigation and continued acceptance of products and services. 21 22 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES ITEM 4 - RESULTS OF VOTES OF SECURITIES HOLDERS The following matters were approved by the shareholders at the Company's Annual Meeting of Shareholders held on May 25, 2000:

PART II: OTHER INFORMATION Item 1. LEGAL PROCEEDINGS (See note 8 to the financial statements) Item 6(a) Exhibits The following exhibits are being filed: 27 Financial Data Schedule for period ended July 2, 2000 Item 6(b) - REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the second quarter of 2000. 22 23 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES Signature: Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LINDAL CEDAR HOMES, INC. By: /s/ Robert W. Lindal ---------------------------------------- Robert W. Lindal Chairman and Chief Executive Officer By: /s/ Dennis Gregg ---------------------------------------- Dennis Gregg Chief Financial Officer DATE: August 16, 2000 23 24 Lindal Cedar Homes, Inc. Exhibit Index Exhibits are numbered in accordance with Item 601 of Regulation S-B EXHIBIT NUMBERS DESCRIPTION ------- ----------- 27 Financial Data Schedule for period ended July 2, 2000 24

LINDAL CEDAR HOMES INC /DE/ 10-Q