UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES ACT OF 1934
For the quarterly period ended July 31, 2000
Commission file number 0-12172
Lincoln Logs Ltd.
(Exact name of small business issuer as specified in its charter)
New York 14-1589242
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Riverside Drive, Chestertown, New York 12817
(Address of principal executive offices)
(518) 494 - 5500
(issuer's telephone number)
Neither name, address nor fiscal year has changed since last report
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes ___X_____ No_________
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at November 8, 2000
Common Stock, $ .01 par value 7,255,059
- 1 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
INDEX
Page number
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets as of
July 31, 2000 and January 31, 2000 3 - 4
Consolidated statements of operations
for the six months ended July 31, 2000 and 1999 5
Consolidated statements of operations
for the three months ended July 31, 2000 and 1999 6
Consolidated statements of changes in stockholders'
equity for the six months ended July 31, 2000
and the twelve months ended January 31, 2000 7
Consolidated statements of cash flows
for the six months ended July 31, 2000 and 1999 8
Notes to consolidated financial statements 9 - 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 14 - 16
PART II. OTHER INFORMATION 17
SIGNATURES 18
- 2 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2000 AND JANUARY 31, 2000
ASSETS
July 31, January 31,
2 0 0 0 2 0 0 0
(Unaudited) (Audited)
---------- -----------
CURRENT ASSETS:
Cash and cash equivelants $ 683,915 $ 356,306
Trade accounts receivable, net of $1,963
allowance for doubtful accounts 226,618 150,398
Inventories (principally raw materials) 963,321 845,174
Prepaid expenses and other current assets 500,732 428,350
Prepaid income taxes 885 ---
Note receivable 7,338 ---
Mortgage receivable 2,334 1,922
---------- ----------
Total current assets 2,385,143 1,782,150
------------ -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 784,800 784,800
Buildings and improvements 2,461,686 2,357,822
Machinery and equipment 689,024 637,970
Furniture and fixtures 1,447,747 1,420,446
Transportation equipment 149,277 154,602
----------- ---------
5,532,534 5,355,640
Less: accumulated depreciation (3,541,138) (3,491,173)
---------- ---------
Total property, plant and
equipment - net 1,991,396 1,864,467
---------- ----------
OTHER ASSETS:
Mortgage receivable 68,030 69,553
Assets held for resale 27,314 27,314
Cash surrender value of life insurance 96,390 96,390
Deposits and other assets 44,619 933
Intangible assets, net of amortization --- 1,850
--------- ---------
Total other assets 236,353 196,040
--------- ---------
TOTAL ASSETS $4,612,892 $3,842,657
========== ==========
<FN>
( continued )
- 3 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
JULY 31, 2000 AND JANUARY 31, 2000
LIABILITIES AND STOCKHOLDERS' EQUITY
July 31, January 31,
2 0 0 0 2 0 0 0
(Unaudited) (Audited)
---------- -----------
CURRENT LIABILITIES:
Current installments of long-term debt:
Related parties $ 150,000 $ ---
Others 32,568 5,706
Trade accounts payable 631,233 558,800
Customer deposits 1,659,371 1,276,963
Accrued payroll, related taxes and
withholdings 63,380 64,508
Accrued income taxes 10,844 7,700
Due to related parties 144,689 221,449
Accrued expenses 798,439 538,266
---------- ----------
Total current liabilities 3,490,524 2,673,392
LONG-TERM DEBT, net of current installments:
Convertible subordinated debentures:
Related parties 50,000 200,000
Others --- 20.000
Other 48,012 15,559
Other long-term liability 96,390 96,390
----------- ----------
Total liabilities 3,684,926 3,005,341
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $ .01 pare value;
authorized 1,000,000 shares; issued
and outstanding - 0 - shares -- --
Common stock, $ .01 par value; authorized
10,000,000 shares; issued 7,759,299 77,593 77,593
Additional paid-in capital 5,681,554 5,681,554
Accumulated deficit (3,946,746) (4,037,396)
----------- ----------
1,812,401 1,721,751
Less: cost of 504,240 shares of common
stock in treasury (884,435) (884,435)
----------- ------------
Total stockholders' equity 927,966 837,316
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,612,892 $3,842,657
============ ============
<FN>
See accompanying notes to consolidated financial statements.
- 4 -
LINCOLN LOGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31, 2000 AND 1999
(UNAUDITED)
<CAPTION)
Six Months Ended
July 31,
-------------------
2 0 0 0 1 9 9 9
--------- --------
NET SALES $5,606,947 $5,542,248
COST OF SALES 3,274,069 3,141,001
---------- ----------
GROSS PROFIT 2,332,878 2,401,247
---------- ----------
OPERATING EXPENSES:
Commissions 751,488 811,771
Selling, general and administrative 1,504,441 1,376,621
---------- ----------
Total operating expenses 2,255,929 2,188,392
---------- ----------
INCOME FROM OPERATIONS 76,949 212,855
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 13,711 15,793
---------- ----------
Interest expense:
Amortization attributable to
beneficial conversion feature
and warrants --- ( 4,547)
All other ( 27,636) ( 46,062)
---------- ----------
Total interest expense ( 27,636) ( 50,609)
---------- ----------
Other 38,054 25,494
---------- ----------
Total other income (expense) - net 24,129 ( 9,322)
---------- ----------
INCOME BEFORE INCOME TAXES 101,078 203,533
INCOME TAXES 10,428 ---
---------- ----------
NET INCOME $ 90,650 $ 203,533
========== ==========
PER SHARE DATA:
Basic earnings per share $.01 $.04
========== ==========
Diluted earnings per shsre $.01 $.03
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 5 -
LINCOLN LOGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2000 AND 1999
(UNAUDITED)
<CAPTION)
Three Months Ended
July 31,
-------------------
2 0 0 0 1 9 9 9
--------- --------
NET SALES $3,934,256 $4,491,759
COST OF SALES 2,246,931 2,438,333
---------- ----------
GROSS PROFIT 1,687,325 2,053,426
---------- ----------
OPERATING EXPENSES:
Commissions 518,090 647,276
Selling, general and administrative 743,990 764,372
---------- ----------
Total operating expenses 1,262,080 1,411,648
---------- ----------
INCOME FROM OPERATIONS 425,245 641,778
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 7,694 8,646
---------- ----------
Interest expense:
Amortization attributable to
beneficial conversion feature
and warrants --- ( 814)
All other (12,793) (25,496)
---------- ----------
Total interest expense (12,793) (26,310)
---------- ----------
Other 20,206 8,125
---------- ----------
Total other income (expense) - net 15,107 ( 9,539)
---------- ----------
INCOME BEFORE INCOME TAXES 440,352 632,239
INCOME TAXES 10,428 ---
---------- ----------
NET INCOME $ 429,924 $ 632,239
========== ==========
PER SHARE DATA:
Basic earnings per share $.06 $.11
========== ==========
Diluted earnings per share $.05 $.09
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 6 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 31, 2000 (UNAUDITED) AND
THE TWELVE MONTHS ENDED JANUARY 31, 2000
Total
Number Par Additional stockholders'
of value paid-in (Accumulated Treasury equity
shares amount capital deficit) stock (deficiency)
--------- --------- ---------- ------------ ------------ -------------
Balance at January 31, 1999 6,046,299 $ 60,463 $5,418,104 $(4,848,565) $( 884,435) $( 254,433)
Common stock issued upon exercise
of stock options 500 5 75 --- --- 80
Debt converted to commom stock 1,712,500 17,125 262,875 --- --- 280,000
Amount assigned to subordinated debenture
warrants --- --- 500 --- --- 500
Net income - 2000 --- --- --- 811,169 --- 811,169
---------- ---------- ---------- ---------- ------------- ------------
Balance at January 31, 2000 7,759,299 $ 77,593 $5,681,554 $(4,037,396) $( 884,435) $ 837,316
Net income-6 months ended July 31, 2000 --- --- --- 90,650 --- 90,650
---------- ----------- ---------- ------------ ---------- -------------
Balance at July 31, 2000 7,759,299 $ 77,593 $5,681,554 $(3,946,746) $( 884,435) $ 927,966
========== ============ =========== ============ ============= ==============
<FN>
See accompanying notes to consolidated financial statements.
- 7 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 2000 AND 1999
(UNAUDITED)
Six Months Ended
July 31,
----------------------------
2 0 0 0 1 9 9 9
---------- ---------
OPERATING ACTIVITIES:
Net income $ 90,650 $ 203,533
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 58,140 75,700
Amortization of amounts assigned to
beneficial conversion feature
and warrants --- 4,547
Changes in operating assets and liabilities:
(Increase) decrease in trade
accounts receivable ( 76,220) 101,770
(Increase) in inventories (118,147) ( 78,549)
(Increase) in prepaid expenses
and other current assets ( 72,382) ( 83,377)
(Increase) in prepaid income taxes ( 885) ---
(Increase) decrease in deposits
and other assets ( 43,686) 547
Increase (decrease)in trade
accounts payable 72,433 (207,320)
Increase in customer deposits 382,408 667,507
Increase in accrued expenses
and other current liabilities 259,045 17,487
(Decrease) increase in due to
related parties ( 76,760) 55,914
Increase (decrease) in accrued
income taxes 3,144 ( 1,050)
---------- ----------
Net cash provided by
operating activities 477,740 756,709
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment (140,519) ( 86,152)
Issuance of note receivable ( 50,000) ---
Repayments on note receivable 42,662 ---
Payments received on mortgage receivable 1,111 747
---------- ----------
Net cash (used) by investing activities (146,746) ( 85,405)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of debentures --- 310,000
Repayments of notes payable --- (125,435)
Net increase in cash surrender value of
insurance policy --- 304
Repayment of loan against cash surrender
value of life insurance policy and
accrued interest --- ( 83,574)
Repayments of long-term debt ( 3,385) (203,964)
---------- ----------
Net cash (used) by financing
activities ( 3,385) (102,669)
---------- ----------
Net increase in cash and cash equivalents 327,609 568,635
Cash and cash equivalents at
beginning of period 356,306 223,521
---------- ----------
Cash and cash equivalents at
end of period $683,915 $792,156
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 8 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(1) BASIS OF PRESENTATION
The financial information included herein is unaudited; however,
such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for
a fair presentation of results for the interim periods.
The results of operations for the six-month periods and three-month periods
ended July 31, 2000 and 1999 are not indicative of the results to be expected
for the full year, due to the seasonal nature of the business.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included
in the Company's Annual Report on Form 10-KSB for the fiscal year ended
January 31, 2000.
(2) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the respective
periods. The weighted average number of common shares used to compute basic
earnings per share was 7,255,059 and 5,560,982 for the six-month periods
ended July 31, 2000 and 1999, respectively, and 7,255,059 and 5,579,287 for
the three-month periods ended July 31, 2000 and 1999, respectively.
Diluted earnings per share is computed based on the weighted average number
of common shares outstanding during the respective periods. When the effects
are dilutive, the convertible subordinated debentures are assumed to have been
converted into common stock at the beginning of the period after giving
retroactive effect to the elimination of interest expense, net of income tax
effect, applicable to the convertible subordinated debentures. Stock options
and warrants are included in the computation of earnings per share under the
treasury stock method if the effect is dilutive.
The numerator in the calculation of diluted earnings per share for
the six-month periods ended July 31, 2000 and 1999 was determined as
follows:
2000 1999
----- -----
Net income used to calculate basic earnings
per share $ 90,650 $203,533
Add back interest expense related to convertible
debentures 13,200 17,747
--------- ---------
Numerator for calculation of diluted earnings
per share $103,850 $221,280
========= ========
- 9 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The denominator in the calculation of diluted earnings per share
for the six-month periods ended July 31, 2000 and 1999 was determined as
follows:
2000 1999
----- -----
Weighted average outstanding shares used to calculate
basic earnings per share 7,255,059 5,560,982
Add shares issuable assuming conversion of
convertible debentures 1,162,500 1,162,500
Add shares issuable assuming exercise of outstanding
stock purchase warrants 215,073 -0-
Add shares issuable assuming exercise of outstanding
stock options 226,215 174,642
-------- --------
Denominator for calculation of diluted earnings
per share 8,858,847 6,898,124
========== =========
Basic earnings per share $ 0.01 $ 0.04
======== ========
Diluted earnings per share $ 0.01 $ 0.03
======== ========
There were 812,500 stock purchase warrants outstanding at July 31, 2000 that
were not included in the computation of diluted earnings per share for the
six-month period ended July 31, 1999 as their effect was anti-dilutive.
The numerator in the calculation of diluted earnings per share for
the three-month periods ended July 31, 2000 and 1999 was determined as
follows:
2000 1999
----- -----
Net income used to calculate basic earnings
per share $429,924 $632,239
Add back interest expense related to convertible
debentures 6,600 7,414
--------- ---------
Numerator for calculation of diluted earnings
per share $436,524 $639,653
========= =========
The denominator in the calculation of diluted earnings per share
for the three-month periods ended July 31, 2000 and 1999 was determined as
follows:
2000 1999
----- -----
Weighted average outstanding shares used to calculate
basic eranings per share 7,255,059 5,579,287
Add shares issuable assuming conversion of
convertible debentures 1,162,500 1,162,500
Add shares issuable assuming exercise of outstanding
stock purchase warrants 164,228 135,417
Add shares issuable assuming exercise of outstanding
stock options 216,064 295,600
-------- --------
Denominator for calculation of diluted earnings
per share 8,797,851 7,172,804
========== =========
Basic earnings per share $ 0.06 $ 0.11
======== =======
Diluted earnings per share $ 0.05 $ 0.09
======= =======
- 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(3) INCOME TAXES
The Company accrues income tax expense on an interperiod basis as
necessary, and accrues income tax benefits only when it is more likely than
not that such tax benefits will be realized. No income tax expense or
benefit was accrued in the six months ended July 31, 1999 as the Company
had sufficient Net Operating Losses to offset taxable income. During the
six months ended July 31, 2000 the Company accrued income tax expense related
to federal Alternative Minimum Tax and state income tax in one state. The
Company recently began doing business in a new state and does not have any
Net Operating Losses attributable to that state to offset apportioned taxable
income.
(4) INDEBTEDNESS
Through Janaury 31, 1998, the Company had authorized and issued $700,000
of Series A Convertible Subordinated Debentures (the "A Debentures"), and
authorized $600,000 and issued $340,000 of Series B Convertible Subordinated
Debentures (the "B Debentures"). An additional $250,000 of B Debentures were
issued during the first quarter of fiscal 1999. The remaining $10,000 of B
Debentures were issued during the first quarter of fiscal 2000. In February
1999, the Company authorized and issued $300,000 of Series C Convertible
Subordinated Debentures (the "C Debentures")(all of the aforementioned series
of convertible debentures are collectively known as the "Debentures"). The
Debentures bear interest, payable quarterly, at an annual rate of 12%. The
A Debentures were due on June 30, 1998, the B Debentures were originally due
on May 15, 1999, and the C Debentures are due on February 25, 2002. In
February 1999, $200,000 of A Debentures outstanding were repaid, including
interest through the date of repayment, with the proceeds of the C Debentures.
The B Debentures may be redeemed by the Company at its option, in whole or in
part, at any time on or after January 30, 1998. The C Debentures may be
redeemed by the Company at its option, in whole or in part, at any time on or
after April 25, 1999. The holders of the B Debentures have the right, upon
appropriate notice, to convert the B Debentures, in $10,000 units, into
shares of the Company's common stock at the rate of one (1) share for each
$.20 of principal amount. The holders of the C Debentures have the right,
upon appropriate notice, to convert the C Debentures, in $10,000 units, into
shares of the Company's common stock at the rate of one (1) share for each
$.16 of principal amount. The B Debentures also have a detachable stock
purchase warrant, giving the holder the right, over a five year period, to
purchase shares of the Company's common stock at the quoted market price of
the Company's common stock, $.375, on the commitment date. The total number
of shares of common stock subject to warrants was 1,500,000, fifty (50%) of
the number subject to conversion. As of July 31, 2000 and January 31, 2000,
there were 812,500 warrants outstanding, respectively. The Debentures are
collateralized by a security interest granted by the Company in the assets
of the Company and by mortgages on certain parcels of real estate owned by
the Company, which are located in Chestertown, New York and Auburn,
California.
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
As disclosed in the above paragraph, the original maturity date of the B
Debentures was May 15, 1999. Prior to May 15, 1999, holders of B Debentures
with a face amount of $200,000 agreed to extend the maturity date to May 15,
2001. $125,000 of B Debentures were repaid during fiscal year 2000.
During fiscal 1999 the Company engaged an independent investment
banker to evaluate the fair value of the components of the B Debentures.
Based on the report issued, the Company assigned a value of two ($.02) cents
to each warrant to purchase one share of common stock, or a total of $30,000.
This amount has been recorded as a debt discount and as an increase to
additional paid-in capital. This amount was amortized to interest
expense over the original life of the B Debentures. Total amortization
related to the warrants was $-0- and $814 for the three month periods ended
July 31, 2000 and July 31, 1999, respectively. Total amortization related
to the warrants was $-0- ans $4,547 for the six month periods ended July 31,
2000 and July 31, 1999, respectively.
On January 16, 1998, certain shareholdrs who were owners of the A
Deventures exercised their right to convert their holdings into common
stock of the Company. The total amount of the A Debentures converted
into the common stock of the Company was $450,000. The Company issued
2,250,000 shares of common stock pursuant to the owners election to
convert, and paid accrued interest to the shareholders to the date of
conversion. On April 20, 1998 a shareholder, officer and director, who
owned B Debentures exercised his right to convert his holdings into common
stock of the Company. The face amount of B Debentures converted into common
stock of the Company was $275,000. This individual also exercised the warrants
he held related to the debentures. The Company issued 2,062,500 shares
(1,375,000 shares related to the conversion and 687,500 shares related to the
warrants) and paid accrued interest to the date of conversion. Further, on
June 30, 1998, the maturity date of the A Debentures, holders of $50,000 of A
Debentures exercised their right to convert their holdings into common stock of
the Company. The Company issued 250,000 shares of common stock pursuant to the
owners' election to convert, and paid accrued interest to the date of
conversion. Finally, on July 29, 1999, a shareholer, officer and director, who
owned B Debentures and C Debentures exercised his right to convert his holdings
into common stock of the Company. The face amount of the B Debentures converted
into common stock of the Company was $30,000 (carrying amount of $30,000). The
face amount of C Debentures converted into common stock of the Company was
$250,000. The Company issued 1,712,500 shares (150,000 shares related to the
conversion of the B Debentures and 1,562,500 shares related to the conversion
of the C Debentures) and paid accrued interest to the date of conversion.
(5) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the six months ended July 31, 2000, cash was paid in the amounts
of $28,759 for interest and $8,169 for income taxes. During the six months
ended July 31, 1999, cash was paid in the amounts of $49,515 for interest
and $1,050 for income taxes.
- 12 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Non-cash investing and financing activity:
During the six months ended July 31, 2000, the Company entered into a
capital lease for certain machinery and equipment in the amount of $42,700.
During the six months ended July 31, 1999, the Company recorded an
increase in the cash surrender value of an insurance policy on the life of
the Company's founder and also recorded an increase in the related liability
in the same amount.
During the six months ended July 31, 1999, the Company recorded an
increase in transportation equipment of $20,040 and a related increase
in long-term debt in the same amount representing the financed portion
of the purchase of a new truck.
During the six months ended July 31, 1999, the Company recorded an
increase in B Debentures in the amount of $4,047, an increase in additional
paid-in-capital of $500 and a charge to interest expense of $4,547 related
to the amortization of debt discount attributable to warrants associated
with the B Debentures.
During the six months ended July 31, 1999, the Company recorded an
increase of $17,125 in common stock, an increase of $262,875 in additional
paid-in-capital and a corresponding reduction of debt of $280,000 as the
result of the exercise of the right of conversion of certain B Debentures
and C Debentures.
-13-
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
RESULTS OF OPERATIONS
Six months ended July 31, 2000 vs. July 31, 1999
Net sales were $5,606,947 for the six months ended July 31, 2000 as
compared to $5,542,248 in the same period in 1999, an increase of $64,699,
or 1%. When compared to the previous year, there was a 19% decrease in the
number of housing units shipped, and the average sales value per housing unit
shipped increased 27%. The increase in sales value per housing unit shipped
resulted from the shipment of homes that were both larger and more expensive
than those shipped in the same period of the previous year. The decrease in
housing units shipped was primarily due to unfavorable weather conditions caused
by persistent heavy rain in the eastern United States during the second quarter
that precluded many customers from acceptin scheduled deliveries.
Gross profit amounted to $2,332,878, or 42% of net sales for the six months
ended July 31, 2000 as compared to $2,401,247, or 43% for the same period in
1999. The decrease in gross profit percentage was due to higher material costs,
labor costs and indirect manufacturing costs. THe increase in material costs
was related to rising prices of certain raw materials. The increase in labor
and indirect manufacturing costs was due to increased employment, increased
design and engineering expenses related to the larger homes being sold and a
re-alignment of certain costs, more closely associated with the manufacturing
process, to the manufacturing process that previously were designated as
administrative expenses.
Total operating expenses of $2,255,929, or 40% of net sales, increased
$67,537 from the previous year's amount of $2,188,392, or 39% of net sales.
The overall increase in total operating expenses was 3%. Sales commissions
were $751,488 for the six months ended July 31, 2000 and $811,771 for the six
months ended July 31, 1999. Commissions were 13% and 15% of sales in 2000 and
1999, respectively. Selling, general and administrative expenses were
$1,504,441 for the six months ended July 31, 2000 compared with $1,376,621 in
the same period of the previous year, an increase of $127,820, or 9%. Selling,
general and administrative expenses were 27% and 25% of net sales for the six
months ended July 31, 2000 and 1999, respectively. The increase in expenses
was primarily the result of increased spending on advertising, trade show
expositions and marketing salaries. The Company also incurred expenses for a
national dealer convention during the six months ended July 31, 2000 that did
not occur during the same period of the previous year. Offsetting the
aforesaid increases was a decrease in professional service fees and the
re-alignment of certain administrative costs to the manufacturing process.
Commissions were lower during the same period due to decreased sales volume
and a proportionately fewer number of shipments being made to customers of the
Company's independent dealers, who are paid a higher commission rate than the
Company's employee-sales representatives, than in the prior year's comparable
period.
- 14 -
Three months ended July 31, 2000 vs. July 31, 1999
Net sales for the three month periods ended July 31, 2000 and 1999 were
$3,934,256 and $4,491,759, respectively. Net sales decreased $557,503, or
12% in the three month period ended July 31, 2000 compared to the same period
of the previous year. When compared to the same period in the prior fiscal
year, there was a 28% decrease in housing units delivered. The average value
per housing unit shipped increased by 20%. The decrease in sales during this
period was caused by unfavorable weather conditions in the eastern United
States that precluded many customers from accepting scheduled deliveries.
The increase in value per housing unit shipped was primarily the result of the
shipment of units that were larger and more expensive than those shipped in the
same period of the previous year.
Gross profit was $1,687,325, or 43% of net sales, for the three months
ended July 31, 2000 as compared to $2,053,426, or 46% for the same period in
1999. The decrease in gross profit was the result of higher material costs,
labor costs and indirect manufacturing costs. The increase in material costs
was related to rising prices of certain raw materials. The increase in labor
and indirect manufactuirng costs was due to increased employment, increased
design and engineering expenses related to the larger homes being sold and a
re-alignment of certain costs, more closely associated with the manufacturing
process, to the manufacturing process that previously were designated as
administrative expenses.
Total operating expenses of $1,262,080, or 32% of net sales, decreased
$149,568 from the previous year's amount of $1,411,648, or 31% of net sales.
The overall decrease in total operating expenses was 11%. Sales commissions
were $518,090 in the three-month period ended July 31, 2000 and $647,276 in
the three-month period ended July 31, 1999. Commissions were 13% and 14% of
net sales, respectively. Selling, general and administrative expenses were
$743,990 for the three months ended July 31, 2000 compared with $764,372 in
the same period of the previous year, a decrease of $20,382, or 3%.
Selling, general and administrative expenses were 19% and 17% of net sales
for the three-month period ended July 31, 2000 and 1999, respectively. The
decrease in selling, general and administrative costs was the result of a
decrease in professional service fees and the re-alignment of certain
administrative costs to the manufacturing process. Commissions were lower
during the same period due to decreased sales volume and a proportionately
fewer number of shipments being made to customers of the Company's
independent dealers, who are paid a higher commission rate than the
Company's employee-sales representatives, than in the prior year's
comparable period.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficiency at both July 31, 2000 and
July 31, 1999 of $1,105,381 and $1,402,523, respectively. For the six months
ended July 31, 2000 working capital deficiency worsened by $214,139 as
compared to an improvement of $406,453 in the same period in 1999. As of the
Company's fiscal year end at January 31, 2000 current liabilities exceeded
current assets by $891,242. At July 31, 2000 the Company's backlog of
undelivered contracts was approximately $13,450,500. During the six-month
period ended July 31, 2000, cash was primarily provided by the receipt of
customer deposits, repayment of a note receivable and increases in accrued
expenses and other current liabilities. Cash was primarily used to purchase
inventory, to pay for prepaid expenses, to increase trade accounts receivable,
to repay amounts due to related parties, to continue to construct a new sales
model, acquire equipment and to issue a note receivable.
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For the six months ended July 31, 2000 and July 31, 1999 the Company's
operations were a net provider of cash in the amounts of $477,740 and
$756,709, respectively. Overall, the Company experienced a net increase in
its cash position of $327,609 during the six months ended July 31, 2000 as
compared with an increase in its cash position of $568,635 during the six
months ended July 31, 1999.
As shown in the consolidated financial statements, the Company realized
a net profit during the six months ended July 31, 2000 of $90,650. As of
July 31, 2000, current liabilities exceeded current assets by $1,105,381.
However, the company has net stockholders' equity of $927,966, and in August
2000 the Company accepted a term loan commitment from a commercial bank for
financing of the construction of its new sales model home. For the past
nine year, the Company has principally rellied upon funds generated by
operations and the assistance of major vendors who have provided extended
payments terms to the Company to support the Company's operations.
While the Company's results from operations improved during the past two
years, there is, however, no assurance that the Company will be able to
generate adequate funds from these sources. A reduction in the Company's
sales activity or a reduction in vendor assistance could further reduce its
liquidity and make it difficult for the Company to continue its operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement ("FASB") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", issued in
June 1998 and effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, with earlier application permitted, requires companies
to recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. In June
1999, FASB issued Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133-an amendemnt of FASB Statement No. 133"
which delayed the effective date of Statement No. 133 to fiscal years beginning
after June 15, 2000. Management has evaluated the impact of the application of
the new rules on the Company's Consolidated Financial Statements and concluded
that there will be no impact on its results of operations or its financial
position.
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Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements", issued in December 1999 by the Securities and Exchange
Commission summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB No. 101A , issued in March 2000, and SAB No. 101B, issues in June 2000, both
delay the implementation of SAB No. 101. The Company is required to implement
SAB No. 101 no later than the fourth fiscal quarter of the current fiscal year.
Management haas evaluated the impact of the application of the new rules on
the Company's Consolidated Financial Statements and concluded that there will
be no impact on its results of operations or its financial position.
Financial Accounting Standards Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB Opinion No. 25", issued in March 2000 and effective
July 1, 2000, but certain conclusions in FIN 44 cover specific events that
occurred after either December 15, 1998 or January 12,2000, clarifies the
application of APB Opinion No. 25. and, among other issues, clarifies the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory
plan; the accounting consequences of various modifications to the terms
of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. The
Company has applied applicable provisions of FIN 44, which did not have
a material effect on the Company's Consolidated Financial Statements.
OTHER MATTERS
YEAR 2000
The Company's information technology systems successfully completed the
"roll over" to the year 2000. The transition resulted in no adverse or
negative impact on operations. The Company believes that the risk
associated with the Year 2000 problem has been identified and, to the extent
present, eliminated. The Company will continue to evaluate the Year 2000
readiness of its business systems and significant vendors to ensure a
complete transition throughout the year 2000. The estimated total cost
of the Year 2000 assessment and remediation plan has been less than $10,000.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit Index
Exhibit 27, Financial Data Schedule
b. Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINCOLN LOGS LTD.
/ s / John D. Shepherd
John D. Shepherd
Chairman of the Board, President, Chief
Executive Officer and Treasurer
November 8, 2000
/ s / William J. Thyne
William J. Thyne
Executive Vice President
Chief Financial Officer, Principal Financial
Officer and Secretary
November 8, 2000
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