10-Q 1 v67184e10-q.txt FORM 10-Q FOR PERIOD ENDED OCTOBER 1, 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 October 1, 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 October 1, 2000: 4,136,622 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 October 1, 2000 and December 31, 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 October 1, 2000 and October 3, 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 nine-months ended October 1, 2000 and October 3, 1999 (Dollar 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 October 1, 2000 and December 31, 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 weather related 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 October 1, 2000 and December 31, 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 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. 8 9 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 1, 2000 and December 31, 1999 (Amounts in thousands, except per share amounts) (Unaudited) Information regarding the Company's reportable segments for the quarters and nine month periods ended October 1, 2000 and October 3, 1999 follows:

9 10 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 1, 2000 and December 31, 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 October 1, 2000 and December 31, 1999. (8) IMPAIRMENT OF ASSET HELD FOR SALE Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. In the third quarter, the Company decided to sell its rental property located in Renfrew, Ontario, Canada and accepted an offer on the property. The offer was subject to certain general contingencies, which were resolved during the quarter. The Company expects the sale of the Renfrew rental property to close in the fourth quarter. Based on the accepted offer price, the Company expects to incur a loss from the sale of the Renfrew facility. As a result, management recorded a $451,000 write down in the carrying value of the Renfrew rental property to its fair value less estimated cost to sell in the third quarter which is recorded as part of the net gain from the disposition and impairment of operating assets. (9) 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 10 11 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS October 1, 2000 and December 31, 1999 (Amounts in thousands, except per share amounts) (Unaudited) 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 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. Binding arbitration is currently scheduled for late in the first quarter of 2001. 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. In the third quarter, the Company decided to sell its Seattle business park property, as well as its rental property located in Renfrew , Ontario, Canada and accepted offers on both properties. Both offers were subject to certain general contingencies, which were resolved during the quarter. The sale of the Seattle Business park property closed on September 21, 2000. The Company expects the sale of the Renfrew rental property to close in the fourth quarter. The Company expects to incur a loss from the sale of the Renfrew rental property and a $451,000 write down in the value of the Renfrew rental property to its fair value less estimated cost to sell was recorded in the third quarter of 2000 as part of the Company's net gain from disposition and impairment of operating assets. The sale of the Seattle business park property does not affect the Company's corporate headquarters, which are located adjacent to the business park property. Additionally in the third quarter, the Company discontinued manufacturing of a non-significant product line in favor of manufacturing the solid cedar timbers utilized in the Company's Solid Cedar line of homes. Management believes that manufacturing these timbers internally will enhance the quality, provide better inventory control and improve margins on the Solid Cedar homes. The Company incurred a $150,000 charge in the third quarter related to the write down of the assets of the discontinued product line, which is recorded in cost of goods sold. The Company's business is seasonally weather related 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, as amended, 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. THIRD QUARTER NEW ORDERS The dollar value of new orders received decreased 8% in the third quarter of 2000 compared to the third quarter of 1999. The number of new order units decreased 21% in the same time period. Management believes the decrease in the number and value of new orders is primarily due to the first quarter sale promotion, which accelerated many new orders, which might otherwise have occurred in the third quarter, into the first and second quarters. 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 in the third quarter of the current and each of the preceding 2 years:

The Access and Select products (the base price of which is 25%-30% less than the traditional Cedar: Frame home) represented 62% of new order units in the third quarter of 2000 compared to 58% of new order units in the third quarter of 1999. The dollar value of the Access and Select product new orders was 51% of the total dollar value of new orders in the third quarter of 2000 compared to 53% in the third quarter of 1999. The Select product was introduced in January 1999. In the third quarter of this year, the Company modified the way it calculates order backlog. It is not possible to accurately determine the effect this change would have had on the backlog in prior periods other than the prior period backlogs would have been somewhat lower using the present method. Entering the fourth quarter of 2000, the total backlog, stated in dollars, was approximately $32 million (revised method) compared to approximately $33 million (prior method) entering the fourth quarter of 1999. Because the 13 14 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 Revenue increased $690,000 (7%) to $11.26 million in the third quarter of 2000 from $10.57 million in the third quarter of 1999, primarily due to an increase in home revenue. Revenue from homes increased $790,000 (9%) to $9.35 million in the third quarter of 2000 from $8.56 million in the third quarter of 1999. The number of homes shipped decreased 3% to 113 in the third quarter of 2000 from 116 in the third quarter of 1999. Management believes the increase in home revenue combined with the decrease in the number of units shipped is primarily related to an increase in the average size of the homes shipped and the effect of the second quarter 3.5% price increase, which was fully effective in the third quarter. Further, the decrease in the number of home units shipped in the third quarter primarily resulted from the acceleration of some home shipments, that would otherwise have occurred in the third quarter, into the second quarter to avoid the full impact of the price increase. The size and value of a home is a function of customer preference. The Access and Select products accounted for approximately 56% of home sales revenue and 68% of home units shipped in the third quarter of 2000 compared to 51% of home sales revenue and 60% of the home units shipped in the third quarter of 1999. Revenue from sunrooms decreased $10,000 (3%) to $370,000 in the third quarter of 2000 from $380,000 in the third quarter of 1999. Revenue from other sales decreased $100,000 (6%) to $1.53 million in third quarter of 2000 from $1.63 million in the third quarter of 1999. This was largely due to decreases in material and wood re-manufacturing sales, which were partially offset by increased window sales. MATERIAL COSTS In dollars, material costs increased $470,000 (9%) to $5.61 million in the third quarter of 2000 from $5.14 million in the third quarter of 1999 on 3 (3%) fewer home shipments. Management believes this is related to an increase in the average size of homes shipped in the third quarter of 2000 compared to the same period of 1999 and that the cost of certain materials contained in the Company's products have increased from the year ago period. As a percent of revenue, material costs were 49.8% in the third quarter of 2000 compared to 48.6% in the third 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, decreased margins on certain material orders and increases in the cost of certain materials contained in the Company's products. OTHER COST OF GOODS SOLD Non-material costs, included in the cost of goods sold, increased $510,000 (18%) to $3.31 million in the third quarter of 2000 from $2.8 million in the third quarter of 1999. This is primarily due to increased plant labor and related costs, increased catalog costs, increased expenditures related to the expansion of the Company's engineering capacity and the $150,000 charge for the write down of assets related to a discontinued product line. GROSS PROFIT In dollars, gross profit decreased $290,000 (11%) to $2.34 million in the third quarter of 2000 from $2.63 million in the third quarter of 1999. This was primarily due to the increased cost of certain materials contained in the Company's products, the change in the sales mix of homes shipped, decreased margins on certain material orders, the expansion of the Company's engineering capacity and the charge for the write down of assets related to the discontinued product line. 14 15 As a percentage of revenue, gross profit decreased to 20.8% of revenue in the third quarter of 2000 from 24.8% of revenue for the same period in 1999. Exclusive of the charge for the discontinued product line, gross profit was 22.1% of revenue in the third quarter of 2000. 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 generally the dollar and percentage gross margin is lower as well. The Access and Select products accounted for 56% of home revenue and 68% of home units shipped in the third quarter of 2000 compared with 51% of the home revenue and 60% of the home units shipped in the third quarter of 1999. For all of 1999, the Access and Select products accounted for 52% of the home revenue and 60% of home units shipped. OPERATING EXPENSES Total operating expenses, including display court expenses, increased $20,000 (1%) to $2.16 million in the third quarter of 2000 from $2.14 million in the third quarter of 1999. Operating expenses were 19.2% of revenue in the third quarter of 2000 compared to 20.3% of revenue in the third quarter of 1999. As a group, selling, and general and administrative expenses remained unchanged at $2.01 million in the third quarter of 2000 and in the year ago period. Selling, general and administrative costs were 17.9% of revenue in the third quarter of 2000 compared to 19% of revenue in the year ago period. Selling expenses decreased $70,000 (7%) to $1.01 million in the third quarter of 2000 from $1.08 million in the third quarter of 1999. This is largely due to reduced new dealer acquisition expenditures and decreased training costs. General and administrative expenses increased $60,000 (6%) to $1.0 million in the third quarter of 2000 from $940,000 in the third quarter of 1999. This increase is primarily due to increased professional fees. Display court expenses increased $20,000 (15%) to $150,000 in the third quarter of 2000 from $130,000 in the third quarter of 1999 primarily due to increased delivery of homes in the third quarter of 2000 compared to the same period of 1999. OTHER INCOME (EXPENSE), NET Other income (expense), net decreased $80,000 (50%) to $80,000 in the third quarter of 2000 from $160,000 in the third quarter of 1999. Interest income increased $40,000, which was offset by a $40,000 decrease in rental income, an unfavorable $70,000 change in loss from foreign currency transactions, and an unfavorable $10,000 change in loss from sale of other assets. INCOME TAX EXPENSE The Company recognized an income tax expense of $400,000 (31%) in the third quarter of 2000 compared to an income tax expense of $150,000 (24%) in the third quarter of 1999. The overall income tax expense recognized in the third quarter of 1999 was reduced due to the effect of Canadian tax rates that differ from U.S. tax rates. 15 16 YEAR-TO-DATE NEW ORDERS The dollar value of new orders received decreased 5% in the first nine months of 2000 compared to the first nine months of 1999. The number of new order units decreased 7% in the same time period. The following table illustrates the percentage change in the number and dollar value of new orders for the first nine months of the current and each of the preceding 2 years:

The Access and Select products represented 62% of new order units in the first nine months of 2000 compared to 60% of new order units in the first nine months of 1999. The dollar value of the Access product new orders was 53% of the total dollar value of new orders in the first nine months of 2000 compared to 52% in the first nine months of 1999. REVENUE Revenue increased $3.75 million (13%) to $32.56 million in the first nine months of 2000 from $28.81 million in the first nine months of 1999, primarily due to increased home revenue. Revenue from homes increased $4.89 million (22%) to $27.22 million in the first nine months of 2000 from $22.33 million in the first nine months of 1999. The number of houses shipped increased 19% to 339 in the first nine months of 2000 from 285 in the first nine months of 1999. Management believes the increase in home revenue is primarily related to the increased backlog at December 31, 1999 and strong new orders in the first six months of 2000, and to a lesser extent the price increase, which became fully effective in the third quarter of 2000. The average revenue per home increased slightly in the first nine months of 2000 compared to the same period of 1999. The Access and Select products accounted for approximately 61% of home sales revenue and 70% of home units shipped in the first nine months of 2000 compared to 48% of home sales revenue and 57% of the home units shipped in the first nine months of 1999. Revenue from sunrooms decreased $60,000 (6%) to $1.04 million in the first nine months of 2000 from $1.10 million in the first nine 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, primarily material sales, decreased $1.08 million (20%) to $4.3 million in the first nine months of 2000 from $5.38 million in the first nine 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 nine months 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 $2.37 million (17%) to $16.18 million in the first nine months of 2000 from $13.81 million in the first nine months of 1999 on 54 (19%) additional home shipments. This increase is primarily related to the additional homes shipped, the increased cost for certain materials contained in the Company's products, higher duty costs, and, to a lesser extent, the sales trend toward the Company's lower priced Access and Select product lines. The Company had larger than expected duty refunds in the first nine months of 1999. As a percent of revenue, material costs were 49.7% in the first nine months of 2000 compared to 47.9% in the first nine 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, increased duty costs, decreased margins on certain material orders and increased costs on certain materials contained in the Company's products. 16 17 OTHER COST OF GOODS SOLD Non-material costs, included in the cost of goods sold, increased $1.41 million (18%) to $9.27 million in the first nine months of 2000 from $7.86 million in the first nine months of 1999. This is primarily due to increased variable expenses related to the increased number of homes shipped in the first nine months of 2000, the expansion of the Company's engineering capacity, the $150,000 charge for the write down of assets related to the discontinued product line and increased catalog costs. GROSS PROFIT In dollars, gross profit decreased $30,000 (0%) to $7.11 million in the first nine months of 2000 from $7.14 million in the first nine months of 1999. This was primarily due to the increased sales volume, which was fully offset by the decreased gross profit from the change in the mix of homes shipped, increased cost of certain materials contained in the Company's products, increased variable expenses related to the increased sales volume, decreased margins on certain material orders, expansion of the Company's engineering capacity, increased catalog costs and the charge for the write down of assets related to a discontinued product line. As a percentage of revenue, gross profit decreased to 21.8% of revenue in the first nine months of 2000 from 24.8% of revenue for the same period in 1999. Exclusive of the write down of assets related to a discontinued product line, gross profit was 22.3% of revenue in the first nine months of 2000. The Access and Select products accounted for approximately 61% of home sales revenue and 70% of home units shipped in the first nine months of 2000 compared to 48% of home sales revenue and 57% of the home units shipped in the first nine months of 1999. OPERATING EXPENSES Total operating expenses, including display court expenses, increased $430,000 (7%) to $6.52 million in the first nine months of 2000 from $6.09 million in the first nine months of 1999. Operating expenses were 20% of revenue in the first nine months of 2000 compared to 21.1% of revenue in the same period of 1999. As a group, selling, and general and administrative expenses increased $380,000 (7%) to $6.11 million in the first nine months of 2000 from $5.73 million in the first six months of 1999. As a percentage of revenue, selling and general and administrative costs were 18.8% of revenue in the first nine months of 2000 compared to 19.9% for the same period of 1999. Selling expenses increased $150,000 (5%) to $3.11 million in the first nine months of 2000 from $2.96 million in the first nine months of 1999. This increase is primarily due to increased advertising and professional fees in the first nine months of 2000 compared to the same period of 1999. General and administrative expenses increased $250,000 (9%) to $3.01 million in the first nine months of 2000 from $2.76 million in the first nine months of 1999. This is primarily due to increased payroll and related expenses and professional fees in the first nine months of 2000 compared to the same period of 1999. Display court expenditures increased $50,000 (14%) to $410,000 in the first nine months of 2000 from $360,000 in the first nine months of 1999. This is primarily due to increased expenditures related to increased home deliveries in the first nine months of 2000 compared to same period of 1999. OTHER INCOME (EXPENSE), NET Other income (expense), net increased $180,000 (139%) to $310,000 in the first nine months of 2000 from $130,000 in same period of 1999. This was primarily due to the favorable changes in net interest income of $190,000 and gains from foreign currency transactions of $60,000 which were offset by a $60,000 decrease in rental income. INCOME TAX EXPENSE The Company recognized an income tax expense of $600,000 (31%) in the first nine months of 2000 compared to an income tax expense of $230,000 (19%) in the first nine months of 1999. The overall income tax expense recognized in the first nine months of 17 18 1999 was reduced due to the recognition of the income tax benefit from the available carryforward of prior year Canadian operating losses and the effect of Canadian tax rates that differ from U.S. tax rates. The Company did not recognize the income tax benefits in 1998 for 1998 and prior year Canadian operating losses due to the inability to carryback the Canadian net operating losses and the uncertainty of utilizing the Canadian net operating losses against future taxable Canadian income. LIQUIDITY The Company's policy is that all home and sunroom orders be accompanied by a cash deposit and that units be paid in full before shipment or be shipped on a C.O.D. basis. The majority of home and sunroom sales are prepaid. Lumber sales are made on terms common to the industry. The Company primarily pays its vendors within stated terms and takes advantage of discounts for early payments whenever available. Operations and 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 $1.78 million in cash in the first nine months of 2000 compared to providing $4.89 million in cash in the first nine months of 1999. In the first nine months of 2000, operating results provided $1.2 million in cash and changes in operating assets and liabilities provided an additional $580,000 in cash. Cash provided by changes in operating assets and liabilities was primarily from decreases in inventory and increases in current liabilities, which were offset by cash used to increase prepaid expenses and promotional materials, net trade and operating notes receivable and other operating assets. The increase in trade and operating notes receivable is primarily due to several homes being shipped COD near the end of the third quarter. The increase in current liabilities is primarily related to increases in customer deposits, which was partially offset by a decrease in accounts payable and accrued expenses. In the first nine months of 1999, operating results provided $1.74 million in cash while changes in operating assets and liabilities provided an additional $3.15 million in cash. Cash provided by changes in operating assets and liabilities was primarily from decreases in trade and operating notes receivable, reductions in prepaid expenses and promotional materials and increases in current liabilities, which were partially offset by increases in inventory and other operating assets. The reductions in trade and operating notes receivable was primarily related to increased seasonal collections as a result of the improved dealer cash flow from increased home deliveries and the receipt of a portion of refundable federal taxes relating to the 1997 and 1998 losses. The increase in current liabilities is primarily related to an increase in customer deposits, the increase in inventory and the timing of scheduled payments in relation to period end. The Company's current ratio was 2.54:1.0 at October 1, 2000 compared to 2.18:1.0 at December 31, 1999. INVESTING ACTIVITIES Cash used in investing activities in the first nine months of 2000 was $10,000 compared to $4.07 million in the first nine months of 1999. In the first nine months of 2000 proceeds from the sale of property, plant and equipment, principally the sales of the Seattle business park and land and display model in Highland Michigan, provided $4.67 million in cash and payments of non-operating notes receivable provided $120,000 in cash. These amounts were offset by $3.92 million of cash used to purchase additional short-term investments and $880,000 of cash used to purchase property, plant and equipment. 18 19 In the first nine months of 1999, cash expenditures for property, plant and equipment totaled $330,000 and net cash used to purchase short-term investments totaled $3.93 million. These expenditures were partially offset by cash received from the repayments of non-operating notes receivable of $150,000 and proceeds from the sale of property, plant and equipment of $30,000. 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 used in financing activities was $1.0 million in the first nine months of 2000 compared to $310,000 in the first nine months of 1999. In the first nine months of 2000 $1.06 million of cash was used to repay long-term debt, principally the debt on the Seattle business park, while long-term debt financing provided $60,000 of cash. In the first nine months of 1999, $80,000 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. Proceeds from long-term debt financing provided $40,000 in cash. EXCHANGE RATES In the first nine months of 2000, favorable changes in exchange rates had a $40,000 positive effect on cash and cash equivalents and in the first nine months of 1999 favorable changes in exchange rates had a $140,000 positive effect on cash and cash equivalents. 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 October 1, 2000, the Company had 41 futures contracts with broker-dealers of approximately $1.3 million maturing through September 2001 with a net deferred loss of $160,000. Such losses in fair value, if realized, would be offset by the lower costs of lumber purchased at market value. At October 3, 1999, the Company had 29 futures contracts with broker-dealers of approximately $990,000 maturing through July 2000 with a net deferred loss of $40,000. Such losses in fair value, if realized, would be offset by the lower 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 October 1, 2000, the Company's investment in fixed rate instruments was approximately $7.95 million. Of this amount approximately $7.88 million was invested in the United States and approximately $70,000 was invested in Canada. Interest rates on the U.S. investments range from 6.6% to 6.7% and mature from October 25, 2000 through January 12, 2001. Interest rates on the Canadian investments range from 4.2% to 4.7%, and mature from February 22, 2001 through March 26, 2001. Because of the relative short-term nature of these investments, the Company's exposure to interest rate fluctuation is greatly reduced. At October 3, 1999, the Company's investment in fixed rate instruments was approximately $4.0 million. Of this amount approximately $3.93 million was invested in the United States and approximately $70,000 was invested in Canada. Interest rates on the U.S. investments ranged from 5.5% to 5.9% and matured from October 28, 1999 through February 16, 2000. Interest rates on the Canadian investments ranged from 3.6% to 3.7% and matured from February 24, 2000 though March 23, 2000. 19 20 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 nine 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 and continued acceptance of products and services. PART II: OTHER INFORMATION Item 1. LEGAL PROCEEDINGS (See note 9 to the financial statements) Item 6(a). EXHIBITS The following exhibits are being filed: 27 Financial Data Schedule for period ended October 1, 2000 Item 6(b). REPORTS ON FORM 8-K There was one report on Form 8K filed on October 6, 2000 20 21 LINDAL CEDAR HOMES, INC. AND SUBSIDIARIES Signature: Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LINDAL CEDAR HOMES, INC. By: /s/ Robert W. Lindal ----------------------------------- Robert W. Lindal Chairman and Chief Executive Officer By: /s/ Dennis Gregg ----------------------------------- Dennis Gregg Chief Financial Officer DATE: November 15, 2000 21 22 Lindal Cedar Homes, Inc. Exhibit Index Exhibits are numbered in accordance with Item 601 of Regulation S-B

LINDAL CEDAR HOMES INC /DE/ 10-Q