UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
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 September 12, 2002
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, 2002 and January 31, 2002 3 - 4
Consolidated statements of operations
for the six months ended July 31, 2002 and 2001 5
Consolidated statements of operations
for the three months ended July 31, 2002 and 2001 6
Consolidated statements of changes in stockholders'
equity for the six months ended
July 31, 2002 and the twelve months ended
January 31, 2002 7
Consolidated statements of cash flows
for the six months ended July 31, 2002 and 2001 8
Notes to consolidated financial statements 9 - 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 13 - 16
PART II. OTHER INFORMATION 17
SIGNATURES 18
CERTIFICATIONS 19 - 20
- 2 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2002 AND JANUARY 31, 2002
ASSETS
July 31, January 31,
2 0 0 2 2 0 0 2
(Unaudited) (Audited)
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 386,759 $ 502,397
Trade accounts receivable, net of
allowance for doubtful accounts of
$20,199 526,194 122,654
Inventories (principally raw materials) 1,279,145 863,665
Prepaid expenses and other current assets 674,353 542,403
Prepaid income taxes 100 ---
Mortgage and note receivable 2,592 3,423
Due from related parties 62 ---
---------- ----------
Total current assets 2,869,205 2,034,542
------------ -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 835,241 835,241
Buildings and improvements 2,462,000 2,423,956
Machinery and equipment 881,674 880,761
Furniture and fixtures 1,651,157 1,573,002
Transportation equipment 262,216 200,097
----------- ---------
6,092,288 5,913,057
Less: accumulated depreciation (3,569,823) (3,487,139)
---------- ---------
Total property, plant and
equipment - net 2,522,465 2,425,918
---------- ----------
OTHER ASSETS:
Mortgage receivable 63,849 64,779
Assets held for resale 11,297 11,297
Deposits and other assets 15,121 5,924
Intangible assets, net of accumulated
amortization of $77,914 in 2003 and
$77,654 in 2002 4,419 4,679
--------- ---------
Total other assets 94,686 86,679
--------- ---------
TOTAL ASSETS $5,486,356 $4,547,139
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
( continued )
- 3 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
JULY 31, 2002 AND JANUARY 31, 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
July 31, January 31,
2 0 0 2 2 0 0 2
(Unaudited) (Audited)
---------- -----------
CURRENT LIABILITIES:
Current installments of long-term debt:
Related parties $ 210,000 $ ---
Other 124,386 110,471
Trade accounts payable 837,439 413,809
Customer deposits 2,348,151 1,979,323
Accrued payroll, related taxes and
withholdings 75,270 82,695
Accrued income taxes --- 3,490
Due to related parties --- 4,951
Accrued expenses 678,329 498,041
---------- ----------
Total current liabilities 4,273,575 3,092,780
LONG-TERM DEBT, net of current installments:
Convertible subordinated debentures:
Related parties --- 210,000
Others --- 10,000
Mortgage and notes payable 170,625 181,875
Other 106,793 146,339
---------- ----------
Total liabilities 4,550,993 3,640,994
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $ .01 par 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 shares 77,593 77,593
Additional paid-in capital 5,681,554 5,681,554
Accumulated deficit (3,939,349) (3,968,567)
----------- ----------
1,819,798 1,790,580
Less: cost of 504,240 shares of common
stock in treasury (884,435) (884,435)
----------- ----------
Total stockholders' equity 935,363 906,145
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $5,486,356 $4,547,139
=========== ===========
<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, 2002 AND 2001
(UNAUDITED)
<CAPTION)
Six Months Ended
July 31,
----------------------
2 0 0 2 2 0 0 1
--------- ---------
NET SALES $5,256,669 $4,716,371
COST OF SALES 2,895,577 2,832,580
---------- ----------
GROSS PROFIT 2,361,092 1,883,791
---------- ----------
OPERATING EXPENSES:
Commissions 571,890 597,352
Selling, general and administrative 1,761,930 1,603,639
---------- ----------
Total operating expenses 2,333,820 2,200,991
---------- ----------
INCOME (LOSS) FROM OPERATIONS 27,272 ( 317,200)
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 8,538 9,623
Interest expense ( 31,628) ( 47,632)
Other 25,036 45,623
---------- ----------
Total other income (expense) - net 1,946 7,614
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 29,218 ( 309,586)
INCOME TAXES --- ---
---------- ----------
NET INCOME (LOSS) $ 29,218 $( 309,586)
========== ==========
PER SHARE DATA:
Basic earnings (loss) per share $ .00 $ ( .04)
========== ==========
Diluted earnings (loss) per share $ .00 $ ( .04)
========== ==========
<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, 2002 AND 2001
(UNAUDITED)
<CAPTION)
Three Months Ended
July 31,
----------------------
2 0 0 2 2 0 0 1
--------- ---------
NET SALES $3,817,731 $3,534,702
COST OF SALES 1,984,311 2,007,996
---------- ----------
GROSS PROFIT 1,833,420 1,526,706
---------- ----------
OPERATING EXPENSES:
Commissions 408,400 444,016
Selling, general and administrative 854,785 734,810
---------- ----------
Total operating expenses 1,263,185 1,178,826
---------- ----------
INCOME FROM OPERATIONS 570,235 347,880
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 4,009 4,797
Interest expense ( 14,240) ( 22,862)
Other 7,247 25,703
---------- ----------
Total other income (expense) - net ( 2,984) 7,638
---------- ----------
INCOME BEFORE INCOME TAXES 567,251 355,518
INCOME TAXES --- ---
---------- ----------
NET INCOME $ 567,251 $ 355,518
========== ==========
PER SHARE DATA:
Basic earnings per share $ .08 $ .05
========== ==========
Diluted earnings per share $ .07 $ .04
========== ==========
<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, 2002 (UNAUDITED) AND
THE TWELVE MONTHS ENDED JANUARY 31, 2002
Number Par Additional Total
of value paid-in (Accumulated Treasury stockholders'
shares amount capital deficit) stock equity
--------- ---------- ---------- ----------- ------------ -------------
Balance at January 31, 2001 7,759,299 $ 77,593 $5,681,554 $(4,204,947) $ ( 884,435) $ 669,765
Net income - 2002 --- --- --- 236,380 --- 236,380
---------- ---------- ---------- ----------- ------------ ------------
Balance at January 31, 2002 7,759,299 $ 77,593 $5,681,554 $(3,968,567) $ ( 884,435) $ 906,145
Net income - 6 months
ended July 31, 2002 --- --- --- 29,218 --- 29,218
---------- ---------- ---------- ----------- ------------ ------------
Balance at July 31, 2002 7,759,299 $ 77,593 $5,681,554 $(3,939,349) $ ( 884,435) $ 935,363
========== ========== ========== =========== ============ ============
<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, 2002 AND 2001
(UNAUDITED)
Six Months Ended
July 31,
----------------------------
2 0 0 2 2 0 0 1
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 29,218 $ ( 309,586)
Adjustments to reconcile net gain (loss)
to net cash (used) provided by
operating activities:
Depreciation and amortization 82,944 74,660
Changes in operating assets and liabilities:
(Increase) Decrease in trade accounts
receivable ( 403,540) 26,793
(Increase) in inventories ( 415,480) ( 92,487)
(Increase) in prepaid expenses
and other current assets ( 132,012) ( 57,811)
(Increase) in prepaid income taxes ( 100) ( 1,035)
(Increase) Decrease in deposits
and other assets ( 9,197) 130,465
Increase (decrease) in trade accounts
payable 423,630 ( 112,990)
Increase in customer deposits 368,828 408,854
Increase in accrued expenses and
other liabilities 172,863 65,004
(Decrease) in due to related parties ( 4,951) ( 44,687)
(Decrease) in accrued income taxes ( 3,490) ( 1,374)
---------- ----------
Net cash provided by operating activities 108,713 85,806
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment ( 179,231) ( 163,662)
Repayments on note receivable --- 3,614
Payments received on mortgage receivable 1,761 831
---------- ----------
Net cash (used) by investing activities ( 177,470) ( 159,217)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt --- 225,000
Loan origination fees --- ( 5,199)
Repayments of long-term debt ( 46,881) ( 131,191)
---------- ----------
Net cash (used) provided by financing
activities ( 46,881) 88,610
---------- ----------
Net (decrease) increase in cash and cash
equivalents ( 115,638) 15,199
Cash and cash equivalents at
beginning of period 502,397 286,226
----------- ----------
Cash and cash equivalents at
end of period $ 386,759 $ 301,425
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 8 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2002 AND 2001
(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 and three-month periods ended
July 31, 2002 and 2001 are not necessarily 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, 2002.
(2) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net earnings (loss)
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 (loss) per share was 7,255,059 for the three and six
month periods ended July 31, 2002 and July 31, 2001.
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. Diluted loss per share is
the same as basic loss per share for the six-month period ended July 31, 2001
because the effect of including stock options, warrants and the assumed
conversion of the convertible subordinated debentures would be anti-dilutive.
The numerator in the calculation of diluted earnings (loss) per share for
the six-month periods ended July 31, 2002 and 2001 was determined as follows:
2002 2001
---------- ----------
Net income (loss) used to calculate basic earnings
(loss) per share $ 29,218 $ (309,586)
Add back interest expense related to convertible
debentures -0- -0-
---------- ----------
Numerator for calculation of diluted earnings
(loss) per share $ 29,218 $ (309,586)
========== ==========
The denominator in the calculation of diluted earnings (loss) per share for
the six-month periods ended July 31, 2002 and 2001 was determined as follows:
- 9 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2002 2001
---------- ----------
Weighted average outstanding shares used to
calculate basic earnings (loss) per share 7,255,059 7,255,059
Add shares issuable assuming conversion of
convertible debentures -0- -0-
Add shares issuable assuming exercise of
outstanding stock purchase warrants -0- -0-
Add shares issuable assuming exercise of
outstanding stock options 60,600 -0-
---------- ----------
Denominator for calculation of diluted earnings/
(loss) per share 7,315,659 7,255,059
========== ==========
Basic earnings (loss) per share $ 0.00 $ (0.04)
======= =======
Diluted earnings (loss) per share $ 0.00 $ (0.04)
======= =======
There were 812,500 stock purchase warrants outstanding at both July 31, 2002
and July 31, 2001 that were not included in the computation of diluted earnings
(loss) per share for the six-month periods as their effect was anti-dilutive.
Also, shares issuable assuming conversion of convertible debentures at July 31,
2002 were not included in the computation of diluted earnings per share as
their effect was anti-dilutive for the six-month period then ended. Further,
shares issuable assuming conversion of convertible debentures and shares
issuable assuming exercise of outstanding stock options at July 31, 2001 were
not included in the computation of diluted (loss) per share for the six-month
period as their effect was anti-dilutive.
The numerator in the calculation of diluted earnings per share for the
three-month periods ended July 31, 2002 and 2001 was determined as follows:
2002 2001
---------- ----------
Net income used to calculate basic earnings
per share $ 567,251 $ 355,518
Add back interest expense related to convertible
debentures 6,350 6,600
---------- ----------
Numerator for calculation of diluted earnings
per share $ 573,601 $ 362,118
========== ==========
The denominator in the calculation of diluted earnings per share for the
three-month periods ended July 31, 2002 and 2001 was determined as follows:
2002 2001
---------- ----------
Weighted average outstanding shares used to
calculate basic earnings per share 7,255,059 7,255,059
Add shares issuable assuming conversion of
convertible debentures 1,162,500 1,162,500
Add shares issuable assuming exercise of
outstanding stock purchase warrants -0- -0-
Add shares issuable assuming exercise of
outstanding stock options 71,552 108,442
---------- ----------
Denominator for calculation of diluted earnings
per share 8,489,111 8,526,001
========== ==========
Basic earnings per share $ 0.08 $ 0.05
======= =======
Diluted earnings per share $ 0.07 $ 0.04
======= =======
- 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
There were 812,500 stock purchase warrants outstanding at both July 31, 2002
and July 31, 2001 that were not included in the computation of diluted earnings
per share for the three-month periods as their effect was anti-dilutive.
(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, 2002 and 2001.
(4) INDEBTEDNESS
In February 2001 and in May 2001, holders of Series B Convertible
Subordinated Debentures in the amount of $170,000 with an extended maturity
date of May 15, 2001 agreed to extend the maturity date to May 15, 2003.
In February 2002 the holders of Series C Convertible Subordinated Debentures
in the amount of $50,000 with an original maturity date of February 28, 2002
agreed to extend the maturity date to May 15, 2003 and to reduce the interest
rate to 10% from 12%. All other terms of the Series B and Series C Convertible
Subordinated Debentures remain the same.
In February 2001, the Company secured a bank loan in the amount of $225,000
and granted a mortgage on its new sales model in Lake George, New York.
The debt has a term of ten years with principal repaid in 120 equal monthly
payments, and the interest rate is the prime lending rate as published in the
Wall Street Journal on the first day of each month plus 2%.
In January 2002, the Company purchased two pick-up trucks having a total
value of $58,880. The Company took advantage of special financing offered
by the truck manufacturer and financed the total amount of the purchase with
an interest rate of 0%. The borrowings have a maturity date of January 2005,
require equal monthly payments and are collateralized by the trucks purchased.
Additionally, the Company purchased a van in February 2002 having a value of
$15,704. The Company financed approximately $11,000 of the total purchase
price by means of conventional bank financing. The borrowing has a maturity
date of February 2005, requires equal monthly payments and is collateralized
by the van purchased. The Company also has certain assets under capital
leases representing copiers, facsimile machines, computers, blueprinting
equipment and milling equipment.
- 11 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(5) LIQUIDITY
As shown in the consolidated financial statements, the Company realized a net
profit during the quarter ended July 31, 2002 of $567,251, and a net profit for
the six-month period ended July 31, 2002 of $29,218. As of July 31, 2002,
current liabilities exceeded current assets by $1,404,370. However, the Company
had net stockholders' equity of $935,363 at July 31, 2002. Over the past
several years the Company has principally relied upon funds generated by
operations and the assistance of major vendors who have provided extended
payment terms to the Company to support the Company's operations. While the
Company's results from operations have shown some improvement over the past
several 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.
(6) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the six months ended July 31, 2002, cash was paid in the amounts
of $26,074 for interest and $3,590 for income taxes. During the six months
ended July 31, 2001, cash was paid in the amounts of $48,405 for interest and
$2,409 for income taxes.
Non-cash investing and financing activities:
During the six months ended July 31, 2002, the Company recorded an increase
in transportation equipment of $15,704 and a related increase in long-term debt
in the amount of $11,080, which represents the financed portion of the
purchase.
During the six months ended July 31, 2001, the Company recorded an
increase in machinery and equipment of $130,000 and a related increase in
long-term debt in the same amount representing a capital lease.
(7) RECLASSIFICATIONS
Certain amounts in the Consolidated Statement of Operations for the three
and six months ended July 31, 2001 have been reclassified to conform
to the presentation for the three and six months ended July 31, 2002.
- 12 -
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
RESULTS OF OPERATIONS
Six months ended July 31, 2002 vs. July 31, 2001
Net sales were $5,256,669 for the six months ended July 31, 2002, as
compared to $4,716,371 in the same period in 2001, an increase of $540,298, or
12%. When compared to the previous year, there was a 4% increase in the number
of housing units shipped, and the average sales value per housing unit shipped
increased 8%. The increase in sales value per unit shipped resulted from the
shipment of homes that were slightly larger than those shipped in the previous
year, combined with price increases instituted in the past two years. The
increase in units shipped resulted from greater demand than experienced in the
previous year and from favorable weather conditions that were prevalent during
the first fiscal quarter and continued through the second fiscal quarter.
Gross profit amounted to $2,361,092, or 45% of net sales for the six months
ended July 31, 2002 as compared to $1,883,791, or 40% for the same period in
2001. The increase in gross profit percentage was due to a combination of lower
material costs and lower manufacturing overhead. Material costs decreased 2%.
The commonly experienced spike in material costs as the building season
accelerates in spring did not happen as pronounced as it had in past years
resulting, compared to the previous year, in slightly lower material costs.
That, combined with the increase in average sales value per unit shipped
contributed to a lower cost of materials component of cost of goods sold.
Manufacturing overhead costs declined both in absolute dollars and as a
percentage of sales. The decreased was principally because of lower employment
costs and decreased shipping costs. Direct labor costs, while up slightly in
absolute dollars, principally due to annual wage adjustments, was virtually the
same as a percentage of net sales from one year to the next.
Total operating expenses of $2,333,820, or 44% of net sales, increased
$132,829 from the previous year's amount of $2,200,991, or 47% of net sales.
Although the operating expense dollars increased, operating expenses decreased
as a percentage of sales by 3%. Sales commissions were $571,890 for the six
months ended July 31, 2002 and $597,352 for the six months ended July 31, 2001.
Commissions were 11% for the six months ended July 31, 2002, a decrease of
2% from the previous year when commissions were 13% for the six months ended
July 31, 2001. Commissions decreased in absolute dollars and as a percentage
of net sales because of the increased number of houses sold by employee sales
representatives as opposed to the Company's independent dealers. Because the
Company's employee sales representatives are compensated at a lower commission
rate than the independent dealers a change in the mix of sales attributed to
employee sales representatives versus independent dealers can have the effect
of changing the amount of sales commissions earned that is contrary to the
- 13 -
direction of the change in sales (in the present situation, sales increased
while commissions earned decreased). Selling, general and administrative
expenses were $1,761,930 for the six months ended July 31, 2002 compared with
$1,603,639 in the same period of the previous year, an increase of $158,291, or
10%. As a percentage of net sales selling, general and administrative expenses
were 34% at July 31, 2002 and 2001. The increase in expenses was primarily the
result of increased spending on advertising, trade show expositions, an
additional sales office in Pennsylvania, and salaries and professional fees.
Three months ended July 31, 2002 and July 31, 2001:
Net sales for the three months ended July 31, 2002 and 2001 were $3,817,731
and $3,534,702, respectively. Net sales increased $283,029, or 8%. When
compared to the same period in the previous fiscal year, the same number of
housing units were delivered. The average sales value per unit shipped
increased by 8%. While similar difficulties in shipping product persist, among
them the continued lack of availability of construction personnel, the effects
of a slowing national economy, and the difficulty of getting construction plans
through the municipal permitting process (particularly in the western portion of
the United States), we managed to maintain the units shipped to the level
attained in the previous year's second fiscal quarter. The increase in average
sales value per unit shipped resulted from the shipment of homes that were
slightly larger than those shipped in the previous year combined with the price
increases instituted over the past two years.
Gross profit was $1,833,420, or 48% of net sales, for the three months
ended July 31, 2002 as compared to $1,526,706, or 43% for the same period in
2001. The increase in gross profit percentage was due to a combination of lower
material costs and lower overhead costs. Material decreased 3% as a percentage
of sales, from the previous year's second fiscal quarter. The commonly
experienced spike in material costs at the height of the building season was
much less pronounced this year than was experienced in previous years. This
factor, combined with the increased average sales value per unit shipped,
contributed to a lower cost of materials component of cost of goods sold.
Manufacturing overhead costs declined both in absolute dollars and as a
percentage of sales. The decrease was principally due to lower employment
costs and decreased shipping costs. Shipping costs were lower due to fewer
shipments being made to the west coast of the United States than the previous
year. Direct labor costs had increased slightly in absolute dollars and were
virtually the same from year to year as a percentage of sales.
Total operating expenses of $1,263,185, or 33% of net sales, increased
$84,359 from the previous year's amount of $1,178,826, which was also 33% of
net sales. Sales commissions were $408,400 in the three-month period ended
July 31, 2002, and $444,016 in the three-month period ended July 31, 2001.
Commissions were 11% of net sales in the three months ended July 31, 2002, a
decrease of 2% from the prior year when commissions were 13% of net sales. The
decrease is a result of the increased number of houses sold by the Company's
employee sales representatives, who receive a lower commission percentage
rate than the Company's independent dealers. Because of the difference in
- 14 -
method for compensating the Company's employee sales persons and the outside
independent dealers a change in the mix of who sells the houses can have an
effect on sales commissions earned that is different from the change in net
sales. Selling, general and administrative expenses were $854,785 for the
three months ended July 31, 2002 compared with $734,810 in the same period of
the previous year, an increase of $119,975, or 16%. The increase in spending
was primarily the result of increased spending on advertising, trade show
expositions, an additional sales office in Pennsylvania, and salaries and
professional fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficiency at both July 31, 2002 and
July 31, 2001 of $1,404,370 and $1,580,080, respectively. For the six months
ended July 31, 2002 working capital decreased by $346,132 as compared to
a decrease of $279,059 in the same period in 2001. As of the Company's fiscal
year end at January 31, 2002, current liabilities exceeded current assets by
$1,058,238. At July 31, 2002 the Company's backlog of undelivered contracts
was approximately $17,691,000. During the six-month period ended July 31, 2002,
cash was primarily provided by the receipt of customer deposits, and by
increases in trade payables and accrued expenses. Cash was primarily used to
purchase inventory, to acquire new equipment, for repayments of debt, and by
increases in prepaid assets and trade accounts receivables.
For the six months ended July 31, 2002 and July 31, 2001, the Company's
operations provided cash in the amounts of $108,713 and $85,806, respectively.
Overall, the Company experienced a net decrease in its cash position of
$115,638 during the six months ended July 31, 2002 as compared with a net
increase in its cash position of $15,199 during the six months ended July 31,
2001.
As shown in the consolidated financial statements, the Company realized a
net profit during the six months ended July 31, 2002 of $29,218. As of July 31,
2002, current liabilities exceeded current assets by $1,404,370. However, the
Company had net stockholders' equity of $935,363 as of July 31, 2002. Over
the past several years, the Company has principally relied 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 have shown improvement over the past several
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.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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It should be noted that in this Management's Discussion and Analysis or Plan
of Operations contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. The terms "believe", "anticipate", "intend", "goal", "expect"
and similar expressions may identify forward-looking statements. These
forward-looking statements represent the Company's current expectations or
beliefs concerning future events. The matters covered by these statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those set forth in the forward-looking statements,
including the Company's dependence on weather-related factors, introduction
and customer acceptance of new products, the impact of competition and price
erosion, as well as supply and manufacturing constraints and other risks and
uncertainties. The foregoing list should not be construed as exhaustive, and
the Company disclaims any obligation to subsequently revise any forward-looking
statements to reflect events or circumstances after the date of such statements,
or to reflect the occurrence of anticipated or unanticipated events. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." Statement No. 143 requires the fair value of a
liability for an asset retirement obligation to be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Statement No. 143 is effective for
fiscal years beginning after June 15, 2001. The adoption of this statement
did not have a material impact on its financial statements.
In August 2001, The FASB issued Statement No. 144, "Accounting for the
Impairment of Long-Lived Assets, " which supercedes Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of
Accounting Principles Board ("APB") No. 30. This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and was adopted February 1, 2002. This statement specifies how
impairment will be measured and how impaired assets will be classified in
the financial statements. The adoption of this statement did not have a
material impact on its financial statements.
In May 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB 13, and Technical Corrections
as of April 2002." This statement rescinds previously issued pronouncements
relating to reporting gains and losses from extinguishments of debt to satisfy
sinking-fund requirements, and accounting for intangible assets of motor
carriers, amends the pronouncement on accounting for leases, and also amends
various other pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
Company does not believe that this statement will have a material impact on
its financial statements.
In June 2002, the FASB issued Statement No 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses the
recognition, measurement and reporting costs that are associated with exit
or disposal activities that are initiated after December 31, 2002. The
Company does not expect the adoption of this statement to have a material
effect on its financial statements.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on July 23, 2002. At
the Annual Meeting of Shareholders, the shareholders elected all eight members
of the Board of Directors to serve until the 2003 Annual Meeting of
Shareholders. The following sets forth the number of votes cast for or withheld
from each of the eight directors.
Name For Withheld
- ----------------------- ----------- ----------
John D. Shepherd 6,307,064 1,009
Richard C. Farr 6,306,427 1,646
Samuel J. Padula 6,306,779 1,294
Steven Patlin 6,307,152 1,097
Reginald W. Ray, Jr. 6,306,823 1,250
William J. Thyne 6,307,152 1,097
Leslie M. Apple 6,307,108 1,141
Jeffrey J. LaPell 6,307,064 1,185
The only other item of business at the Company's Annual Meeting of
Shareholders was to ratify the appointment of PricewaterhouseCoopers LLP to
serve as the Company's independent auditors for the fiscal year ending January
31, 2003. The proposal was passed by the following vote: For - 6,307,386,
Against - 368, Abstain - 495.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit Index
None
b. Reports on Form 8-K
None
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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 and
Chief Executive Officer
September 12, 2002
/ s / William J. Thyne
William J. Thyne
Vice President, Treasurer, Secretary,
and Chief Financial Officer
September 12, 2002
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PERSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, John Shepherd, certify that:
1. I have reviewed this quarterly report of Form 10-QSB of Lincoln Logs
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Lincoln Logs Ltd. as of, and for, the periods presented
in this quarterly report.
Date: September 12, 2002
/ s / John D. Shepherd
Name: John D. Shepherd
Title: Chairman of the Board, President
and Chief Executive Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PERSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350),
the undersigned, John D. Shepherd, Chief Executive Officer of Lincoln Logs Ltd.
(the "Company") has executed this certification in connection with the filing
with the Securities and Exchange Commission of the Company's Quarterly Report
on Form 10-QSB for the quarter ended and six-month period ended July 31, 2002
(the "Report").
The undersigned certifies that: (1) the Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and (2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
IN WITNESS WHEREOF, the undersigned has executed this certification as of
the 12th day of September 2002.
/ s / John D. Shepherd
Name: John D. Shepherd
Title: Chairman of the Board, President
and Chief Executive Officer
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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PERSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, William J. Thyne, certify that:
1. I have reviewed this quarterly report of Form 10-QSB of Lincoln Logs
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statement made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Lincoln Logs Ltd. as of, and for, the periods presented
in this quarterly report.
Date: September 12, 2002
/ s / William J. Thyne
Name: William J. Thyne
Title: Vice President, Treasurer,
Secretary, and Chief Financial Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PERSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350),
the undersigned, William J. Thyne, Chief Financial Officer of Lincoln Logs Ltd.
(the "Company") has executed this certification in connection with the filing
with the Securities and Exchange Commission of the Company's Quarterly Report
on Form 10-QSB for the quarter ended and six-month period ended July 31, 2002
(the "Report").
The undersigned certifies that: (1) the Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and (2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
IN WITNESS WHEREOF, the undersigned has executed this certification as of
the 12th day of September 2002.
/ s / William J. Thyne
Name: William J. Thyne
Title: Vice President, Treasurer,
Secretary, and Chief Financial Officer
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