Lindal Cedar Homes, Inc. Annual R 1977

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Lindal Cedar Homes, Inc.
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1977
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"For the second
consecutive year,
Lindal announces
record profits."
BUS
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UNIVERSITY OF WASH NGTON
Lindal.
From Logs to Quality Cedar Homes
Lindal Cedar Homes is the
largest manufacturer of precut
cedar homes in the world.
Headquartered in Seattle,
Washington, we have a major
manufacturing plant in Tacoma,
Washington and a modern
sawmill and adjoining
manufacturing plant in Surrey
(Vancouver), British Columbia.
From these two factories — located
in the heartland of the finest
cedar-growing country — we ship
all over North America and to
such distant markets as Australia.
Distribution is achieved primarily
through our network of
independent, franchised
distributors.
The Formula: Precutting
Where the Trees Grow
The basic ingredient of a Lindal
Cedar home and the reason for its
enduring beauty is cedar, Western
red cedar, found only in the
coastal regions of British Columbia
and Washington.
Since Lindal uses only Western
red cedar, it made sense to locate
the factories where the trees grow.
Access to the raw material is
convenient. More important, why
transport moisture-heavy, uncut
lumber all the way from the
Pacific Northwest to scattered and
usually distant markets? Instead,
we located the factories where the
raw material is and eliminated the
unnecessary freight costs and
wasted raw materials.
Precutting where the trees grow
enables Lindal to market all over
North America and overseas. To
reiterate, the Lindal cedar home is
competitive with a cedar home
built anywhere in North America
simply because all Western red
cedar comes from the coastal
regions of British Columbia and
Washington. If a home buyer
located in, for example,
Connecticut buys Western red
cedar, the cost of freight on the
cedar is added into the price he
pays. Therefore, if a buyer wants a
cedar home, it makes sense for
him to order it from Lindal, dried
and precut, rather than from a
local lumber supplier.
Furthermore, this savings can be
achieved not only on a stock
Lindal home but also on a custom
home of the customer's own
design.
Leading the Industry with a
Warranty
A Lindal cedar home comes
with a Warranty. Our clear-cut
limited Warranty gives the
customer five months to make
sure his Lindal home is everything
we promised it would be. One
important reason we are able to
guarantee our product is that we
enforce our standards right from
the time our raw materials are
harvested. Instead of starting with
someone else's rough cut lumber
and standards, we start with the
logs themselves — cutting, sorting
(and discarding) to our
specification in our own sawmill.
And this quality control is
maintained every step through the
house manufacturing process.
Sawmill Provides
Competitive Edge
*The map on the cover shows the location of
Lindal's distributors in North America.
1. Sawmill and plant in Surrey, B.C.
2. Log going through the scragg.
3. Lumber from our sawmill.
The basic ingredient of a Lindal
cedar home is cedar, but cedar is
often difficult to obtain. In fact,
historically, the cedar industry has
been plagued by unreliability of
supply and ever-increasing prices.
Our customers, by and large, are
willing to pay the price for the
quality, but they want the best
price possible and naturally they
are not willing to wait for their
houses. These dual reasons
prompted us to build our own
cedar sawmill on seven acres on
the Fraser River in British
Columbia — a floating highway
for the rafts of cedar logs coming
downstream from the forests.
The sawmill, therefore, gives
Lindal a strong competitive edge.
For example, in 1975 and 1977,
when strikes closed normal lines
of supply, our sawmill remained
open and, over the busy summer
months, no Lindal customer
waited for his house. In addition,
the sawmill enables us to start
quality control at the log itself.
Another benefit is that our
sawmill consistently produces the
grades of lumber we require at
below market prices.
F*SSB&&
In 1977, running one shift, the
sawmill provided 90% of our
cedar requirements; material not
used in the Lindal product,
amounting to $782,842 in
revenues, was sold on the open
market; and custom sawing,
generating $142,825 in revenues,
was undertaken in less busy
periods. In March 1978, a second
shift was started up. The second
shift will allow us to produce
lumber for inventory for a
projected increase in shipments
during the busy summer months.
We expect to sell material not used
in the Lindal product at a profit
on the open market.
H
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•
Lindal.
A Constantly Improving Product
Emphasis on
Design Flexibility
The Lindal house has been
popular for over thirty years, but
we never stand still. In recent
years we have emphasized the
design flexibility that has always
been inherent in the building
system. It is easy to modify any of
our fifty-three stock plans; doors,
windows, walls — all can be
moved easily. Simple
modifications such as these are
routinely made by most of our
customers. But the Lindal building
system is so flexible that virtually
any plan the customer wishes can
be adapted to the system. The
trend towards custom design is
increasing; sixteen percent of our
house orders are now custom
designs. This design flexibility
gives Lindal another competitive
advantage. Custom design from a
housing manufacturer implies a
savings. And certainly from the
point of view of plans, a dramatic
savings can be achieved by having
Lindal's Design Department do
the plans; a complete set of
construction plans for a 2,500 sq.
ft. home from Lindal costs $500
and yet from an architect would
probably cost several thousand
dollars. Also important, very few
competitors have the versatility or
"know-how" to offer this service.
Knowing the market and
keeping ahead of it was one
reason Lindal survived the
1974-1975 housing recession.
Lindal aggressively concentrated
its advertising and promotions on
getting Lindal out of the second
home market and into the
year-round market. The emphasis
on custom design reinforced the
trend toward the year-round
image. Now, we are firmly in the
year-round market and are
becoming increasingly recognized
as a major manufacturer of quality
custom designed homes.
Knowing the Market
Knowing the market is essential.
Since 1970 our market has
reversed itself from three quarters
second homes/one quarter
year-round homes to 75%
year-round homes/25% vacation
homes. Why? Probably because
the same characteristics that made
Lindal homes enjoyable for
vacation homes make them ideal
as year-round homes: Lindal
homes are natural, warm and
inviting, solid and enduring, and
maintenance-easy. More and more
people want these qualities, not
just at vacation time, but every
day of the year. With Lindal, they
are "bringing Nature home."
The Universal Home
The same basic Lindal home fits
a wide variety of climates. Simply
by adding or subtracting options,
the same Lindal home can be just
as "at home" in Alaska as in
Hawaii.
Responding to
Energy Consciousness
The Lindal home has always
been energy-conscious. First of all,
wood is far superior to brick,
concrete, or steel in insulating
ability. Moreover, Lindal homes
have been built in most of the
i. Poster promoting Lindal's energy
brochure.
2. Custom designed home-front.
3. Custom designed home - back.
coldest regions of North America
— meeting code requirements and
customer needs — for over thirty
years. However, in recent years
the public has become more aware
of the necessity of energy
conservation.
In 1977, responding to this
interest, we introduced a brochure
entitled, "Facts About Insulating
Your New Home." We believe it
to be a straight-forward
presentation of energy and
insulation facts. In it we urge the
reader to know his own climatic
and building code requirements
and buy only the insulation he
really needs. Also, we urge him to
learn about R values and use them
as a guide in house shopping. For
example, in planning a home
today, it is particularly important
to have adequate roof and wall
insulation. Lindal's standard roof
offers an R value of 23.01 and
extra insulation can be added, if
needed, to raise the R value to
42.01. Similarly, the standard wall
with an R value of 21.31 meets or
exceeds building code
requirements anywhere.
This attention to energy
conservation is one example of
how Lindal is continuously
watching the market to keep the
product ahead of the market.
Lindal.
Committed to Aggressive Marketing
In 1977, Lindal sold $13.8
million wholesale (approximately
$30 million turnkey) and delivered
these homes all over North
America (26% to Canada, 22% to
the Northeastern U.S., 14% to the
Midwest, 6% to Alaska, etc.) —
How do we do it? First, as
pointed out earlier, by knowing
the market and keeping ahead of
it. Then, of course, pursuing that
carefully identified market through
consistent advertising and
promotions. The third essential
part of this trio is our distributor
network — our "partners in profit."
Consistent Advertising
Our buyer profile, compiled
from questionnaires received from
We've created
plans for 60
perfect cedar homes,
But there's always it
A lot of people think our homes are
perfect. But you may have your own
ideas. That's why all the homes we
""•.'f have the design flexibility that
'. -syou modify them any ,.iviy yyj
Rte And using out Design Guide you
•i- even design your now home from
Jntii for our Pirinlxiok of 60 home
eaigns. Or comae; your nearest
ldept'iidt'ril Lindal distributor. And
art work roday on y.v.ui uuUj i.vLfect
indal home.
^LinoflucEDBR Homes
Lindal customers, tells us that
65% have incomes over $20,000
and a whopping 17% have
incomes over $50,000. It also
indicates that 38 % are professional
and 28% managerial. This upper
income, professional and
managerial profile helps us make
our advertising decisions. We
select magazines that have
readership profiles close to the
Lindal buyer profile; magazines
such as Management Time &
Leisure, Diversion and Dental
Products Reports. Naturally, we
also advertise consistently in
shelter magazines such as Better
Homes & Gardens and House
Beautiful and their special
publications. These latter ads
produce leads from people who
are obviously interested in
homebuilding.
In addition to our National
advertising schedule, we offer a
cooperative advertising program to
our distributors in which the
Company co-ops up to 50% of the
local advertising dollars spent by
participating distributors. Almost
half of our total advertising budget
is now spent in supporting local
advertising.
customers an incentive to make a
decision. Equally important as
promotions encouraging new sales
are promotions geared to force
deliveries in the normally slow
fourth quarter and first quarter.
An energy rebate for orders that
delivered before December 31st
helped make the fourth quarter of
1977 the best fourth quarter in our
history.
Distribution Network
Lindal homes are sold chiefly
through independent franchised
distributors (101 in the U.S., 27 in
Canada and 5 in foreign countries,
totalling 133). These distributors
accounted for 84 % of sales in
1977. To broaden this base we
conducted our first campaign for
new distributors since the housing
recession of 1974-1975. In 1977 we
added thirty-five new distributors
and in 1978 we expect to add at
least that number.
Company-owned and operated
display villages in Seattle,
Washington and Schererville,
Indiana accounted for 6% of sales
in 1977. The remaining 10% of
sales were sold by our WATS Line
Direct Sales Department, which
sold over $2,000,000 retail in 1977 in
areas not served by independent
distributors.
Supporting Our Distributors
Inducing Sales & Deliveries
with Promotions
1. A current advertisement.
2. Top Distributor Meeting.
3. 1978 Planbook.
One of the best tools we have
discovered to encourage sales is to
hold promotions — usually five to
six a year. A promotion offering
"free thermal pane windows if
you buy before April 1st" works
because it gives potential
As these independent
distributors are the backbone of
our sales and distribution
network, we support them
heavily. Initially, each new
distributor attends a three-day
training seminar in Seattle. Then,
to maintain contact, we conduct
Regional Meetings every Spring
and Fall in key markets, such as
Boston, Chicago, San Francisco
and Vancouver, B.C. Also, every
January, we hold a meeting of top
distributors in Seattle tcv-help
management chart the course for
the coming year. Field assistance
is also provided by our Regional
Sales Managers. Lindal now has
six representatives serving the U.S.
and Canada who visit the distributors
in their areas at least four times a year.
Financial
Highlights
1976
1977
Total R e v e n u e
Cost of G o o d s &
Services Sold
1975
$14,640,975
$12,675,461
$9,827,901
_ 11,068,154
9,383,250
7,260,692
3,572,821
2,625,024
3,292,211
2,286,335
2,567,209
2,470,455
Gross Profit
O p e r a t i n g Expenses . . .
O p e r a t i n g Income
$
947,797
$ 1,005,876
O t h e r Income
(Expense)
$
(264,479)
(424,895)
(592,937)
Net Earnings
(Loss)
$
681,918
579,500
$ (496,183)
$
$
96,754
TO OUR SHAREHOLDERS
1977 w a s a b a n n e r year for
Lindal Cedar H o m e s , Inc. For the
second consecutive year, your
C o m p a n y has earned record
profits. In 1977 the profit of
$681,918 or $1.13 per share w a s u p
1 6 % over last year's record profit
of $579,500. Revenues of
$14,640,975 w e r e u p 1 5 % from the
1976 level of $12,675,461.
C o n s i d e r i n g the seasonal n a t u r e of
the h o u s i n g industry, fourth
quarter results w e r e also very
gratifying: the profit of $70,757 or
$.12 per share on revenues of
$4,010,667 compares most
favorably with the loss of $103,840
on revenues of $2,242,423 in 1976;
this profit in the fourth quarter
was the first since 1972.
The accompanying financial
highlights s h o w the solid progress
that has b e e n m a d e in the
financial health of the C o m p a n y
since the loss years of the h o u s i n g
recession.
Goals
W h e n I became C o m p a n y
President in March 1975,1 h a d
three principal goals: to make a
profit; to dispose of excess assets;
a n d to lower our long-term debt
substantially. I am pleased to
report that these goals have n o w
b e e n accomplished. In 1976 a n d
1977 w e m a d e record profits.
D u r i n g the same period
m a n a g e m e n t has m a d e a concerted
effort to dispose of excess assets
held for resale. By the e n d of 1977
w e h a d disposed of plants in
Tacoma, W a s h i n g t o n , Schererville,
Indiana, Scranton, Pennsylvania,
Burnaby, British Columbia a n d
our sawmill a n d plant in
Renfrew,Ontario, as well as other
m i n o r assets. These sales reduced
the C o m p a n y ' s long-term d e b t b y
over $1,600,000 (and b y $j780,340
in 1977 alone) a n d will save the
C o m p a n y in the n e i g h b o r h o o d of
$200,000 in reduced expense a n d
interest each year. Believe m e , the
disposal of the most costly of these
assets, the Renfrew sawmill, was a
h i g h p o i n t of 1977 for all of us.
President's
Report
Progress has also been excellent on
the third goal of reducing
long-term debt. Since March 1975
our debt has been reduced from
over $6,000,000 to below
$3,000,000 — a more comfortable
level for a Company of our size.
The achievement of these goals is
even more satisfying because it
demonstrates that we can perform
to plan and shows what your
management team can accomplish.
Another highlight of 1977 was
the announcement in December of
a dividend of $. 10 per share — the
first dividend in Company
history. I was pleased that the
Board of Directors concurred with
my recommendation because I
firmly believe that our
shareholders — like our
distributors and employees — are
our "partners in profit" and
should share in those profits.
Also in 1977 we made a change
in banking relations from
Seattle-First National Bank of
Seattle, to Rainier National Bank
of Seattle. Seattle-First remains
associated in a short-term role
with our long-term lender, Teachers
Insurance and Annuity Association
of America of New York City.
Our new goals for 1978 and
beyond are to increase revenues
and to improve profit margins.
To Increase Revenues
Revenues, of course, depend to
a large degree on market
conditions. Our five year goal in
marketing calls for an increase of
20% per year. In 1976 we
surpassed it with a 29% increase,
and came close to it with a 15 %
increase in 1977. The increases
have been due in large part to a
generally improving housing
market in the United States.
However, in 1977, the economy
and housing market declined
significantly in Canada. Our
Canadian deliveries dropped 3 %
to $3.8 million while U.S.
deliveries climbed 26% to $9.4
million. Although the decline in
the Candian market is a matter of
some concern, I am optimistic —
given the professionalism of our
distributors in Canada (for
example, Lindal's top distributor
over the past three years has been
a Canadian distributor) — that our
distributors will survive the
recession and catch up quickly
when economic conditions revive.
Our overseas markets, principally
Australia, were up 25% in 1977.
This Australian business is
particularly attractive because their
busy season is our slow season,
when we most welcome
deliveries.
In order to increase revenues
and achieve a 20% average
increase per year for five years, it
will be necessary to add new
distributors. So, in 1977 for the
first time since the housing
recession, we conducted a
campaign to attract qualified new
franchised distributors. In 1977 we
added thirty-five and our goal for
1978 is the addition of an equal
number or more carefully screened
distributors in selected areas.
To Improve Profit Margins
Naturally, as we increase
revenues, we intend to increase
the profits correspondingly, but
management is committed to
improving profit margins as well.
Budget and control systems are
essential in order to monitor costs.
Barring extraordinary conditions,
management is striving to keep
the cost of goods sold at or below
the 76% level and maintain
operating expenses at the 18%
level. In these inflationary times,
this means that we must be
super-careful to pass on material
price increases to customers as
quickly as possible. I should point
out, however, that a cost-oriented
management decision to increase
prices sometimes conflicts with
the marketing necessity to hold
prices, so management sometimes
walks a tightrope in this regard.
Your management team works
continuously to improve profit
margins.
In almost every report I find it
necessary to point out that the
housing industry is seasonal. The
exceptionally severe winter this
year confounded our best efforts
to force deliveries in the first
quarter of 1978. So, although we
are giving it everything we've got,
once again we cannot predict a
profit in the first quarter.
My outlook for 1978 with two
reservations — the decline in the
Canadian economy and the
customary caution about the first
and fourth quarters — is
optimistic. I expect 1978 to
continue the trend established in
the past three years. My overall
goal remains financial stability and
controlled growth.
Yours very truly,
LINDAL CEDAR HOMES, INC.
Z = ^
Robert M. McLennaghan
President & Chairman of the Board
» CJ
Consolidated Balance Sheets
December 31, 1977 a n d 1976
1977
1976
Assets
Current assets:
Cash
Time deposits a n d repurchase agreements
$
Total cash
Receivables:
H o m e sales
Current installments of long-term notes
Material sales a n d other
Less allowance for doubtful receivables
Net receivables
Inventories:
Raw materials and pre-cut h o u s e parts
Display h o m e s
Total inventories
Prepaid expenses
Total current assets
8 % - 1 1 % long-term notes a n d mortgage notes receivable
excluding current installments
196,160
695,892
$
89,082
200,000
892,052
289,082
676,882
44,968
262,022
195,258
32,000
194,607
983,872
9,569
421,865
46,569
974,303
375,296
1,321,401
134,525
767,953
243,356
1,455,926
178,325
1,011,309
213,306
3,500,606
1,888,993
457,727
103,115
948,477
Facilities held for sale
Property, plant a n d e q u i p m e n t , at cost:
Buildings a n d i m p r o v e m e n t s
Equipment
Furniture a n d fixtures
1,738,659
2,463,638
202,511
1,832,514
2,430,900
240,800
Less accumulated depreciation a n d amortization
4,404,808
1,818,759
4,504,214
1,521,627
Land
2,586,049
641,090
2,982,587
662,677
3,227,139
3,645,264
240,586
300,792
$7,426,058
$6,886,641
Net property, plant a n d e q u i p m e n t
O t h e r assets, at cost less accumulated amortization
of $272,367 in 1977 a n d $202,878 in 1976
See accompanying
notes to consolidated financial
statements.
December 31,1977 a n d 1976
1977
1976
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt
Accounts payable - trade
D i v i d e n d s payable
Accrued taxes, other than income
Accrued salaries a n d wages
Accrued interest
Other accrued expenses
Customer deposits
$
124,548
860,912
60,500
241,226
129,114
37,994
381,589
691,830
$
218,900
477,307
—
287,722
72,350
44,614
193,786
351,614
2,527,713
1,646,293
76,970
90,182
2,991,790
3,941,999
605,000
2,740,349
(1,515,764)
605,000
2,740,349
(2,137,182)
1,829,585
1,208,167
$7,426,058
$6,886,641
Total current liabilities
Deferred revenue
Long-term debt, excluding current installments
Stockholders' equity:
C o m m o n stock of $1 par value. A u t h o r i z e d 1,000,000
shares; issued 605,000 shares
Additional p a i d - i n capital
Retained earnings (deficit)
Total stockholders' equity
C o m m i t m e n t s a n d contingent liabilities (notes 2 a n d 6)
Lindal Cedar Hoi
, Inc. and
-.tries
Consolidated Statements of Earnings
and Retained Earnings (Deficit)
Years ended December 31, 1977 and 1976
Gross revenue:
Home sales
Engineering, catalog, plan sales and other
operating revenue
Distributorship fees
Total revenue
Cost of goods and services sold:
Home sales
Engineering
Other
Total cost of goods and services sold
Gross profit
Operating expenses:
Display court expenses
Selling expenses
General and administrative expenses
Total operating expenses
Operating income
Other income (expense):
Rental income
Interest income
Interest expense
Foreign exchange loss
Expense of nonoperating properties
Miscellaneous expense
Net other expense
Earnings before income taxes and
extraordinary item
Income taxes:
State income taxes - current
Federal and Canadian income taxes
Total income taxes
Earnings before extraordinary item
Extraordinary item - income tax benefit arising from
utilization of net operating loss carryforward
Net earnings
Retained earnings (deficit):
Amount at beginning of year
Dividends declared - $.10 per share
Amount at end of year
Net earnings per common share:
Earnings before extraordinary item
Extraordinary item
Net earnings
70
See accompanying notes to consolidated financial statements.
1977
1976
$13,882,540
$12,294,203
680,435
78,000
14,640,975
359,258
22,000
12,675,461
10,777,684
166,182
124,288
11,068,154
3,572,821
9,151,866
123,510
107,874
9,383,250
3,292,211
478,975
1,033,844
1,112,205
2,625,024
947,797
529,583
673,669
1,083,083
2,286,335
1,005,876
213,717
37,164
(395,406)
(40,863)
(62,224)
(16,867)
(264,479)
202,641
19,698
(482,280)
—
(94,600)
(70,354)
(424,895)
683,318
580,981
1,400
373,000
374,400
308,918
1,481
255,000
256,481
324,500
373,000
681,918
255,000
579,500
(2,137,182)
(60,500)
$(1,515,764)
(2,716,682)
—
$(2,137,182)
$ -51
-62
$1-13
$ .54
A1
$ -96
Lindal Cedar Hoi
, Inc. and S
aries
Consolidated Statements of Changes
in Financial Position
1977
Years e n d e d December 31, 1977 a n d 1976
Sources of w o r k i n g capital:
Net earnings
Items w h i c h do not use (provide) w o r k i n g capital:
Depreciation a n d amortization of plant a n d e q u i p m e n t
(Gains) losses on sale of facilities held for sale
(Gains) losses on sale of property, plant a n d e q u i p m e n t
Amortization of debt discount
Amortization of deferred revenue
O t h e r amortization
$
Working capital p r o v i d e d b y operations
Proceeds from the sale of facilities held for sale
Proceeds from the sale of property, plant and e q u i p m e n t
Increase in additional p a i d - i n capital
Proceeds from long-term b o r r o w i n g s
Decrease in long-term notes receivable
Transfers of facilities held for sale to e q u i p m e n t , at cost net of
accumulated depreciation of $14,205 in 1976
Uses of w o r k i n g capital:
D i v i d e n d s declared
A d d i t i o n s to property, plant a n d e q u i p m e n t , including transfers
from facilities held for sale in 1976
R e p a y m e n t s a n d current installments of long-term debt
Additions to facilities held for sale
Increase in long-term notes receivable
Increase in other assets
Decrease in other deferred credits
Increase in w o r k i n g capital
C h a n g e s in c o m p o n e n t s of w o r k i n g capital:
Increase (decrease) in current assets:
Cash
Net receivables
Inventories
Prepaid expenses
1976
681,918
579,500
409,962
84,851
(67,984)
30,133
(13,212)
69,489
420,421
(10,854)
81,052
30,133
(12,118)
75,139
1,195,157
863,626
167,887
61,531
1,163,273
172,954
272,109
24,544
13,258
20,123
$2,288,201
$1,687,566
$
$
—
—
21,305
60,500
91,741
980,340
142,097
656,374
7,380
—
416,143
9,284
—
—
730,193
24,544
856,962
$2,288,201
$1,687,566
$
$
602,970
599,007
444,617
(34,981)
209
1,611,613
Increase (decrease) in current liabilities:
Notes payable to b a n k s
Current installments of long-term debt
Accounts payable - trade
D i v i d e n d s payable
Accrued taxes, other than income . . . .
Accrued salaries a n d wages
Accrued interest
O t h e r accrued expenses
C u s t o m e r deposits
(421,884)
(2,100)
201,996
(94,352)
383,605
60,500
(46,496)
56,764
(6,620)
187,803
340,216
—
(155,383)
27,379
(54,873)
(2,092)
(357,294)
(764,251)
881,420
Increase in w o r k i n g capital
See accompanying
notes to consolidated financial
$
statements.
730,193
(8,542)
26,741
51,516
22,996
92,711
$
856,962
11
Lindal Cedar Hoi
, Inc. aec^
aries
Notes to Consolidated Financial Statements
December 31,1977 and 1976
(1) Summary of Significant
Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and its Canadian and
domestic subsidiaries, all wholly-owned. All significant intercompany balances and transactions
have been eliminated in consolidation.
(b) Foreign Exchange
The Canadian accounts are translated into U.S.
dollars in accordance with Statement of Financial
Accounting Standards No. 8 for the years ended
December 31, 1977 and 1976. In 1976 exchange
losses were insignificant.
(c) Inventories
Inventories of raw materials and pre-cut house
parts are stated at the lower of cost (principally
first-in, first-out) or market (net realizable value).
The Company has erected pre-cut homes in various metropolitan and recreational areas for display
to the public and has adopted the policy of charging twenty percent 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 inventory at the lower of unamortized cost or net
realizable value and any remaining amount is
charged to cost of goods sold at the time of sale.
(d) Depreciation and Amortization
Depreciation of plant and equipment is provided
over the estimated useful lives of the respective
assets on the straight-line basis. Site improvements are amortized on a straight-line basis over
the terms of the respective leases. Improvements
and betterments are capitalized; maintenance and
repairs are charged to expense.
(e) Other Assets
During 1973 the Company deferred certain startup costs relative to a new sawmill in British Columbia, Canada. These costs are being amortized
to expense over a five-year period on a straightline basis.
(f) Income Taxes
Investment tax credits, insignificant in amount,
are recorded as a reduction of the provision for
Federal income taxes in the year realized.
(g) Deferred Revenue
Gains from properties sold and leased back are
deferred and amortized over the lives of the related
leases on a straight-line basis as a reduction of
rental expense.
(h) Loan Discount
Loan discount and related loan costs are being
amortized over the life of the loan using the declining balance method.
(2) Facilities Held for Sale
Facilities held for sale at December 31, 1976 consisted of property, plant and equipment considered excess to foreseeable production and distribution needs of the Company, and were stated
at the lower of depreciated cost or net realizable
value which was generally less than depreciated
cost. Net realizable value was based upon independent appraisals of the properties held for sale
reduced by estimated costs of disposal, which included possible repayment of a Canadian government incentive grant of $230,328, received on
the condition that specified capital expenditures
would be made and minimum new jobs created.
These conditions were only partially met.
22
All such facilities held for sale were sold during
1977; the $230,328 possible repayment of the
Canadian government incentive grant is included
in other accrued expenses at December 31, 1977.
The Company is contingently liable for approximately $360,000 on a mortgage note assumed by
the purchaser of certain facilities.
(3) Long-Term Debt and Notes Payable
to Banks
Long-term debt, less current installments, at December 31, 1977 a n d 1976 is s u m m a r i z e d as follows:
1977
1976
$3,300,907
184,569
$3,970,583
214,702
O t h e r long-term debt
9y2% mortgage note payable
12% e q u i p m e n t purchase contract
3,116,338
—
—
—
3,755,881
13,258
372,250
19,510
Less current installments of long-term debt
3,116,338
124,548
4,160,899
218,900
$2,991,790
$3,941,999
Notes payable to b a n k s u n d e r restructured loan agreement, d u e in
installments of $124,548 in A u g u s t 1978 and a n n u a l installments of $400,000
c o m m e n c i n g A u g u s t 1979; interest payable quarterly at a stated rate of
8y2% p e r a n n u m , proceeds discounted to yield an effective rate of 9V2%
per a n n u m ; secured b y substantially all property, plant a n d e q u i p m e n t ,
inventory, receivables a n d U.S. display h o m e s
Less u n a m o r t i z e d discount
The current loan agreement represents restructuring of the previous loan agreements dated August
15, 1973 a n d July 24, 1974. The C o m p a n y has
issued warrants to the lenders to purchase 45,000
shares of the C o m p a n y ' s c o m m o n stock at a price
of $3 per share. The warrants were exercisable July,
1974 a n d expire July, 1985 a n d August, 1988 for
15,000 a n d 30,000 snares, respectively. As part of
the restructure of the C o m p a n y loans, the Lindal
family has granted an irrevocable proxy to an outside director to vote its shares, representing a p proximately 64% of the shares issued a n d outs t a n d i n g , until the expiration of the family voting
trust in July 1981.
As part of the restructure agreement with the lenders, the C o m p a n y executed employment
agreements, effective January 1, 1976 t h r o u g h December 31,1982, w i t h certain m e m b e r s of the Lindal family a n d the President a n d Director. A part
of the agreement defines c o m p e n s a t i o n a n d other
benefits including a b o n u s as a percent of net
(pretax) profits to b e p a i d to the President. At
D e c e m b e r 31, 1977, $51,500 is accrued for the 1977
bonus.
Some of the more restrictive covenants of the loan
agreement, as modified, for the C o m p a n y a n d its
subsidiaries are as follows:
(1) The C o m p a n y m u s t m a i n t a i n a current ratio of
at least 1.35 to 1.00 from D e c e m b e r 31, 1977 to
D e c e m b e r 30, 1978 a n d 1.50 to 1.00 on D e c e m b e r
31, 1978 a n d thereafter.
(2) The C o m p a n y m u s t m a i n t a i n a long-term d e b t
(including guarantees)-to-tangible net worth ratio
of not greater t h a n 3.0 to 1.0 from D e c e m b e r 3 1 ,
1977 to December 30, 1978, 2.5 to 1.0 from December 31, 1978 to December 30, 1979, 2.0 to 1.0
from December 31, 1979 to D e c e m b e r 30,1980 a n d
1.5 to 1.0 on D e c e m b e r 31,1980 a n d thereafter.
(3) T a n g i b l e n e t w o r t h shall not b e less t h a n
$1,300,000 from D e c e m b e r 31, 1977 to D e c e m b e r
30, 1978, $1,600,000 from D e c e m b e r 31, 1978 to
D e c e m b e r 30, 1979, a n d $2,000,000 o n D e c e m b e r
31,1979 a n d thereafter.
(4) Capital expenditures m a y not exceed $50,000
in any one year, except w i t h lenders' prior written
approval.
(5) A cash d i v i d e n d m a y not b e declared or p a i d
(lenders approved 1977 dividend).
(6) Additional shares of stock m a y not b e issued,
except for those issued u n d e r the employee stock
option plan.
At D e c e m b e r 31, 1977, the C o m p a n y w a s in compliance with all restrictive covenants of the loan
agreement, as modified.
13
(4) Income Taxes
C o m p o n e n t s of income tax expense are as follows:
Federal . .
Canadian
State
1977
1976
$345,000
28,000
1,400
$191,000
64,000
1,481
$256,481
$374,400
At D e c e m b e r 31, 1977, the C o m p a n y h a d a financial statement net operating loss carryforward of
$890,000 for the U.S. companies a n d $313,000 for a
C a n a d i a n c o m p a n y available to offset respective
future taxable incomes. Investment tax credits expiring $10,000 in 1980, $16,000 in 1983 a n d $2,600
in various other years t h r o u g h 1984 are available
for carryforward to future years as a direct reduction of U.S. Federal income taxes. Approximate
net operating loss carryforwards are:
Canada:
Financial statement net
operating loss
carryforward
$313,000
U.S.:
Expires in 1979
Expires in 1980
$622,000
408,000
Tax net operating
loss carryforward
Excess of tax over financial
statement depreciation
Provision for state excise taxes . . .
Provision for legal settlements . . .
1,030,000
(226,000)
51,000
35,000
Financial statement
net operating loss
carryforward
$890,000
The C a n a d i a n c o m p a n y has n o net operating loss
carryover for tax p u r p o s e s primarily d u e to Canadian tax depreciation m e t h o d s a n d rates that have
enabled the C o m p a n y to adjust depreciation so
there is n o taxable income or loss. As the C a n a d i a n
c o m p a n y generates taxable income, sufficient depreciation can be taken to currently have an excess
of tax over book depreciation of $313,000, thereby
assuring the i m m e d i a t e tax benefit of the financial
statement net operating loss carryover.
A reconciliation b e t w e e n the U.S. Federal statutory rate a n d the C o m p a n y ' s effective tax rate for
1977 a n d 1976 is as follows:
1977
Amount
Tax at statutory rate
U.S. Federal surtax exemption
Unrealized exchange losses . . .
Other
(5) Additional Paid-in Capital
Stock options w e r e granted to two employees in
1971 by the Lindal Family Voting Trust a n d w e r e
exercisable in 1976 after five years of e m p l o y m e n t
w i t h the C o m p a n y . U p o n exercise, $24,544 previously deferred w a s transferred to additional paidin capital. The deferred charge arising in 1971 w a s
amortized ratably to periodic income over the five
years' services p r o v i d e d b y the employees.
14
1976
Percent
Amount
Percent
$327,320
(13,500)
59,571
1,009
48%
(2)
9
$278,870
(13,500)
48%
(2)
(8,889)
$374,400
55%
$256,481
(2)
44%
(6) Leased Assets and
Lease Commitments
The C o m p a n y a n d its subsidiaries conduct a significant part of their selling operations on property
u n d e r leases expiring d u r i n g the next 10 years. In
addition, the C o m p a n y leases certain production
a n d office e q u i p m e n t . M a n a g e m e n t expects that in
the normal course of b u s i n e s s , leases that expire will
be replaced b y other leases. H o w e v e r , a convenant
of a loan agreement referenced in footnote 3 prohibits the C o m p a n y from h a v i n g aggregate a n n u a l
rentals, net of subleases, or fees exceeding $150,000.
A s u m m a r y of rent expense u n d e r all noncancellable
operating leases follows:
Years e n d e d
December 31
Gross rent
expense...
Less sublease
rentals . . . .
Net rent
expense .
1977
1976
$203,562
$212,666
128,036
81,696
$ 75,526
$130,970
Noncancellable long-term lease c o m m i t m e n t s are as
follows:
Years e n d i n g
December 31
1978
1979
1980
1981
1982
1983-1987 (last year)
Aggregate
minimum
rentals
Aggregate
minimum
sublease
rentals
Net
$186,000
144,000
105,000
105,000
101,000
109,000
$ 97,000
64,000
64,000
64,000
64,000
69,000
$ 89,000
80,000
41,000
41,000
37,000
40,000
$750,000
$422,000
$328,000
Real property aggregate net lease c o m m i t m e n t s
included above were $132,000 with the r e m a i n d e r
relating principally to office e q u i p m e n t .
(7) Sale and Leaseback Transactions
D u r i n g 1974 the C o m p a n y entered into sale a n d
leaseback a g r e e m e n t s involving several of the
C a n a d i a n subsidiary's display courts. The display
courts w e r e sold for $585,000 a n d leased back for
ten years at $58,500 annually. The sale resulted in a
gain of $124,517 w h i c h h a s b e e n deferred a n d is
b e i n g a m o r t i z e d to o p e r a t i o n s over the term of
the leases on a straight-line basis.
15
(8) Stock Options
The C o m p a n y has a d o p t e d a stock option plan
p u r s u a n t to w h i c h options to purchase c o m m o n
stock of the C o m p a n y m a y be granted to key
employees, at an option price of not less t h a n
100% of the fair market value of such stock on the
date of grant. 25,000 shares of c o m m o n stock are
reserved for issuance u n d e r this plan; 7,000 shares
were available for granting at December 31, 1977
a n d 8,900 at D e c e m b e r 31, 1976. N o options have
b e e n exercised to date.
The options are nontransferable a n d are exercisable in five equal annual installments c o m m e n c i n g
one year after the date of grant. The o p t i o n s expire
at the earlier of five years after t h e date of grant or
three m o n t h s after termination of e m p l o y m e n t for
any reason other than death, in w h i c h case they
are exercisable one year after death.
The following is a s u m m a r y of o p t i o n s outstanding at December 31,1977 a n d 1976:
Date
of
Option
grant
price
1977
1976
1972
1972
1972
1975
1976
1977
$15.00
16.00
7.50
2.25
1.50
2.00
—
—
11,000
3,000
4,000
500
500
1,000
11,100
3,000
—
—
—
4,400
600
—
400
400
800
2,300
—
—
18,000
16,100
5,000
3,900
Under option
Exercisable
1977
1976
(9) Pending Litigation
T h e C o m p a n y is defendant in several lawsuits
relating principally to d i s t r i b u t o r s h i p arrangem e n t s a n d deliveries on h o m e sales. Based u p o n
estimates of C o m p a n y m a n a g e m e n t a n d counsel,
a m o u n t s of $30,000 a n d $30,843 have b e e n charged
to expense in the consolidated financial statements
for the years December 31, 1977 a n d 1976, respectively, for p e n d i n g lawsuits. D u r i n g 1977 a m o u n t s
previously accrued for litigation w e r e reduced by
$48,242 relating to claims settled.
(10) Segment and Foreign
Operations Information
The C o m p a n y o p e r a t e s p r e d o m i n a t e l y in t h e
manufacture and distribution of pre-cut h o m e s .
Gross revenues:
Sales to unaffiliated
customers
Transfers b e t w e e n
countries
O p e r a t i n g income
Identifiable assets
16
United
States
Canada
$10,080,086
$ 4,560,889
751,785
2,448,880
i (3,200,665)
$10,831,871
$ 7,009,769
i (3,200,665)
$
$
929,175
$ 3,894,823
Gross revenues include revenues from unaffiliated
customers, as reported in the consolidated statem e n t of earnings, and intercompany transfers between countries; such intercompany transfers are
18,622
$ 3,531,235
Eliminations
Consolidated
$14,640,975
$14,640,975
$-"
947,797
$ 7,426,058
m a d e at approximately cost.
Identifiable assets are those assets of the C o m p a n y
that are identified with the operations in each
country.
Accountants'
Report
The Board of Directors and Stockholders
Lindal Cedar Homes, Inc.:
We have examined the consolidated balance sheets of Lindal Cedar Homes, Inc. and subsidiaries as of December
31,1977 and 1976, and the related consolidated statements of earnings and retained earnings (deficit) and changes in
financial position for the years then ended. Our examinations were made in accordance with generally accepted
auditing standards, and accordingly included such tests of the accounting records and such other auditing
procedures as we considered necessary in the circumstances.
In our opinion, the aforementioned consolidated financial statements present fairly the consolidated financial
position of Lindal Cedar Homes, Inc. and subsidiaries at December 31, 1977 and 1976 and the results of their
operations and the changes in their financial position for the years then ended, in conformity with generally
accepted accounting principles applied on a consistent basis.
March 3,1978
{UCb, ^
AAA^CJ^^
JU^Ajlt f £
Price Range of
Lindal Cedar Homes, Inc.
Common Stock
The following table sets forth the reported high and low prices, both bid and ask, of the Common Stock of Lindal
Cedar Homes, Inc. on the Over-the-Counter Markets from January 1, 1976 through December 31, 1977 (NASDAQ
QUOTES):
1977
High
Bid & Ask
1st Quarter .
2nd Quarter
3rd Quarter
4th Quarter
31/4 —
1976
Low
Bid & Ask
4
— 41/2
— 3V2
— 3%
—
3
— 3%
23/4
— 31/2
1%
— 2V2
2%
3
1%
~
21/2
31/4
3V2
3
3
33/4
21/4
21/4
2% —
—
—
High
Bid & Ask
4
Low
Bid & Ask
IV2 — 2
iy 4 — 2
1% — 2V2
l3/4 — 2V2
17
Summary of
Consolidated Operations
1977
Total r e v e n u e
Cost of goods a n d services sold
$12,675,461
9,383,250
$9,827,901
7,260,692
3,572,821
2,625,024
3,292,211
2,286,335
2,567,209
2,470,455
947,797
1,005,876
96,754
O p e r a t i n g income (loss)
O t h e r income (expense):
Rental income
Interest income
Interest expense
Foreign exchange loss
Provision for estimated loss on
facilities held for sale
Expense of n o n o p e r a t i n g
properties
Miscellaneous income (expense) . . .
Net other i n c o m e (expense) . . . .
202,641
19,698
(482,280)
213,717
37,164
(395,406)
(40,863)
—
Earnings (loss) before
income taxes a n d
extraordinary item
Income taxes (benefit):
State income taxes current
Federal a n d C a n a d i a n taxes - current
Deferred income taxes:
Federal
Canadian
..
1974
$12,021,462
10,384,967
1973
$18,088,024
14,565,505
3,522,519
4,188,011
1,636,495
3,834,216
(2,197,721)
197,025
34,838
(589,621)
257,859
52,283
(658,251)
(139,472)
(240,000)
(665,492)
266,450
36,493
(504,845)
(62,224)
(16,867)
(94,600)
(70,354)
(122,861)
27,154
32,817
19,037
(264,479)
(424,895)
(592,937)
(555,292)
(182,865)
683,318
580,981
(496,183)
(2,753,013)
(848,357)
1,400
373,000
1,481
255,000
—
6,195
(217,131)
8,327
(469,843)
—
—
—
42,630
(67,404)
11,004
39,126
374,400
256,481
—
(411,386)
(235,710)
Net earnings (loss) before
extraordinary item
Extraordinary item - income tax
benefit arising from utilization
of net operating loss
carryforward
Net earnings (loss)
1975
$14,640,975
11,068,154
Gross profit
O p e r a t i n g expenses
Total i n c o m e taxes (benefit)
1976
308,918
(436,971)
(496,183)
324,500
(2,517,303)
373,000
$
681,918
$
255,000
579,500
$
(496,183)
$(2,517,303)
$
(436,971)
Net earnings (loss) per c o m m o n
share (note 1):
Earnings (loss) before
extraordinary item
Extraordinary item
$ .51
.62
$.54
.42
$(.82)
$(4.16)
$(.72)
Net earnings (loss)
$1.13
$.96
$(•82)
$(4.16)
$(.72)
Note:
(1) Earnings (loss) per c o m m o n share have b e e n based on the average n u m b e r of shares o u t s t a n d i n g d u r i n g each
period. N o cash d i v i d e n d s w e r e paid during the years 1973 t h r o u g h 1976. A d i v i d e n d of $60,500 was declared in
December, 1977. Earnings (loss) per share data w o u l d not be significantly affected if all options to be granted u n d e r
the stock option plan are exercised a n d if all warrants to purchase stock are exercised.
18
Management's Discussion and Analysis
of the Summary of Consolidated Operations
Revenue
Other Income (Expense)
From a high of $18,088,024 in 1973, revenue declined to
$9,827,901 in 1975, from which it has moved up to
$14,640,975 for 1977. Between 1976 and 1977, revenue
increased $1,965,514 or 16%. Had the Canadian market
shown the same growth as the United States market,
revenue growth could have been better. Canadian home
sales actually declined $701,715 from 1976 levels. Canadian domestic units delivered declined from 244 to 193,
a decrease of 51 units or 21 %. This decline is representative of the state of the Canadian economy.
This account grew from $(182,865) in 1973 to a high of
$(592,937) for 1975, from which it has declined to
$(264,479) for 1977. The significant factors involved in
the high level of these expenses have been interest
expense, expense of nonoperating properties, provision for estimated loss on facilities held for sale and
losses on sale of excess properties.
The Company commenced obtaining distributors on an
active basis in 1977 which has resulted in covering attrition of old distributors and has provided a modest gain
in new sales outlets. The Company's plan is to aggressively pursue new distributors in 1978 which should
result in a positive gain in total distributors.
The Company declared its first dividend during December 1977, amounting to $.10 per share for a total
distribution to shareholders of $60,500.
By completing the disposal of its nonoperating properties, the Company will benefit by annual expense reductions from carrying these properties of approximately $200,000. Expense reductions include taxes, insurance, travel, interest, and other expenses.
Costs of Goods and Services Sold
Earnings
The cost of goods and services sold reached a high of
86% of revenue in 1974 and then declined significantly
to 74% of revenue in 1975 as the Company closed its
excess facilities and consolidated its operations to its
two major plants. The costs remained at 74% of revenue
for 1976 and rose to 76% of revenue in 1977.
The Company has again experienced record net earnings from its operations. Earnings before the extraordinary item (tax benefit of net operating loss carryforward) were $308,918 or $.51 per share; the extraordinary item provided an additional $373,000 or $.62 per
share, making net earnings $681,918 or $1.13 per share.
A quarter-by-quarter analysis reveals that the Company
got caught in a squeeze between rapidly escalating raw
material costs on the one hand and guaranteed sixty-day
price protection to its customers on the other hand. The
following table presents a quarter-by-quarter comparison of cost of goods and services sold as a percentage of
revenue:
First
quarter
Second
quarter
Third
quarter
Fourth
quarter
Yearend
92
75
81
70
73
75
69
72
71
77
80
76
74
74
76
1975
1976
1977
Operating Expenses
Operating expenses have declined for four of the five
years under review to a low of $2,286,335 for 1976. In
1977 these expenses rose to $2,625,024, an increase of
$338,689 or 15%. A modest increase occurred in general and administrative expenses while the significant
change occurred in selling expenses in both commission expense and advertising expense. These latter
expenses reflect increased activity through Company
sales outlets and heavier expenditures for the Company's regional directed cooperative advertising program to produce house orders as well as heavier advertising activity to develop new distributors.
19
The Management
Team
Robert M. McLennaghan, Age 47
President & Chairman of the Board
Twenty-two years with the Company
and predecessor companies. Principally
involved in marketing before becoming
President in March 1975.
Duane E. Anderson, Age 35
Vice President Finance
Joined the Company in December 1974.
Previously an auditor with Ernst &
Ernst, Seattle, Washington.
3. Fred D. Sampson, Age 50
Vice President Production
Joined the Company in March 1976.
Previously General Manager, Cascade
Locks Lumber Co., Portland, Oregon.
4. Milo D. Smith, Age 41
Vice President Administration
Joined the Company in November
1972. Previously in branch management
with Seattle-First National Bank,
Seattle, Washington.
Todd P. Cromwell, Age 43
Vice President Marketing
Joined the Company in September
1975. Previously owner and President
of Cromwell Enterprises, Inc., an
advertising agency in New Orleans,
Louisiana.
6. Jack C. Burnett, Age 45
Market Development Manager
Joined the Company in December 1977.
Previously Account Manager with
several leading advertising agencies in
the Pacific Northwest specializing in
building and wood products.
20
3 =1352 0M3b02fl0 M
Corporate
Information
Board of Directors:
Robert M. McLennaghan, Chairman of the Board, President & Chief Executive Officer
Duane E. Anderson, Vice President Finance
Fred D. Sampson, Vice President Production
Bonnie G. McLennaghan, Secretary & Treasurer
Robert W. Lindal, Canadian Production Facilities Manager
Emil Veltri, General Manager, Columbia Corridor Division, Louisiana Pacific Corp.
Archie E. Iverson, President, Iverson Construction, Inc.
Officer?:
Robert M. McLennaghan, President & Chief Executive Officer
Duane E. Anderson, Vice President Finance
Milo D. Smith, Vice President Administration
Fred D. Sampson, Vice President Production
Todd P. Cromwell, Vice President Marketing
Bonnie G. McLennaghan, Secretary & Treasurer
Head Office:
10411 Empire Way South, Seattle, Washington
Registrar & Transfer Agent:
Seattle-First National Bank, Seattle, Washington
General Counsel:
Foster, Pepper & Riviera, Seattle, Washington
Auditors:
Peat, Marwick, Mitchell & Co., Seattle, Washington
Stock:
National Over-the-Counter
NASDAQ Symbol:
LNDL
Annual Meeting:
9:00 A.M., May 26,1978
10411 Empire Way South
Seattle, Washington 98178
For a copy of the Annual Report to
the Securities & Exchange
Commission on Form 10-K, please
write:
Bonnie G. McLennaghan
Secretary
10411 Empire Way South
Seattle, Washington 98178
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