UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB-A
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 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 February 13, 2003
Common Stock, $ .01 par value 7,255,059
- 1 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
Introductory Note: The Company filed its financial statements for the third
quarter ended October 31, 2002 on Form 10-QSB on December 16, 2002 without
those financial statements having been reviewed by outside independent
accountants. Those financial statements, contained herein, have now been
reviewed by the Company's newly engaged outside independent accountants whose
Limited Review Report is contained herein.
INDEX
Page number
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets as of
October 31, 2002 and January 31, 2002 3 - 4
Consolidated statements of operations
for the nine months ended October 31, 2002 and 2001 5
Consolidated statements of operations
for the three months ended October 31, 2002 and 2001 6
Consolidated statements of changes in stockholders'
equity for the nine months ended
October 31, 2002 and the twelve months ended
January 31, 2002 7
Consolidated statements of cash flows
for the nine months ended October 31, 2002 and 2001 8
Notes to consolidated financial statements 9 - 12
Limited Review Report of Independent Accountants 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14 - 18
ITEM 3. CONTROLS AND PROCEDURES 18
PART II. OTHER INFORMATION 19
SIGNATURES 19
CERTIFICATIONS 20 - 23
- 2 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2002 AND JANUARY 31, 2002
ASSETS
October 31, January 31,
2 0 0 2 2 0 0 2
(Unaudited) (Audited)
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $1,242,078 $ 502,397
Trade accounts receivable, net of
allowance for doubtful accounts of
$20,199 733,143 122,654
Inventories (principally raw materials) 1,193,044 863,665
Prepaid expenses and other current assets 491,042 542,403
Prepaid income taxes --- ---
Mortgage and note receivable 2,592 3,423
Due from related parties 14,482 ---
---------- ----------
Total current assets 3,676,381 2,034,542
------------ -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 835,241 835,241
Buildings and improvements 2,479,521 2,423,956
Machinery and equipment 881,674 880,761
Furniture and fixtures 1,659,131 1,573,002
Transportation equipment 262,216 200,097
----------- ---------
6,117,783 5,913,057
Less: accumulated depreciation (3,612,300) (3,487,139)
---------- ---------
Total property, plant and
equipment - net 2,505,483 2,425,918
---------- ----------
OTHER ASSETS:
Mortgage receivable 63,487 64,779
Assets held for resale 12,062 11,297
Deposits and other assets 17,471 5,924
Intangible assets, net of accumulated
amortization of $78,044 in 2003 and
$77,654 in 2002 4,289 4,679
--------- ---------
Total other assets 97,309 86,679
--------- ---------
TOTAL ASSETS $6,279,173 $4,547,139
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
( continued )
- 3 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
OCTOBER 31, 2002 AND JANUARY 31, 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
October 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 122,383 110,471
Trade accounts payable 682,755 413,809
Customer deposits 1,915,697 1,979,323
Accrued payroll, related taxes and
withholdings 94,561 82,695
Accrued income taxes 14,100 3,490
Due to related parties --- 4,951
Accrued expenses 984,870 498,041
---------- ----------
Total current liabilities 4,024,366 3,092,780
LONG-TERM DEBT, net of current installments:
Convertible subordinated debentures:
Related parties --- 210,000
Others --- 10,000
Mortgage and notes payable 165,000 181,875
Other 86,302 146,339
---------- ----------
Total liabilities 4,275,668 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 (2,871,207) (3,968,567)
----------- ----------
2,887,940 1,790,580
Less: cost of 504,240 shares of common
stock in treasury (884,435) (884,435)
----------- ----------
Total stockholders' equity 2,003,505 906,145
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $6,279,173 $4,547,139
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
- 4 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 2002 AND 2001
(UNAUDITED)
<CAPTION)
Nine Months Ended
October 31,
----------------------
2 0 0 2 2 0 0 1
--------- ---------
NET SALES $10,811,840 $ 8,235,559
COST OF SALES 5,638,009 4,783,543
---------- ----------
GROSS PROFIT 5,173,831 3,452,016
---------- ----------
OPERATING EXPENSES:
Commissions 1,320,062 1,027,285
Selling, general and administrative 2,750,790 2,422,360
---------- ----------
Total operating expenses 4,070,852 3,449,645
---------- ----------
INCOME FROM OPERATIONS 1,102,979 2,371
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 12,197 13,441
Interest expense ( 44,603) ( 80,222)
Other 41,787 123,712
---------- ----------
Total other income (expense) - net 9,381 56,931
---------- ----------
INCOME BEFORE INCOME TAXES 1,112,360 59,302
INCOME TAXES 15,000 ---
---------- ----------
NET INCOME $ 1,097,360 $ 59,302
========== ==========
PER SHARE DATA:
Basic earnings per share $ .15 $ .01
========== ==========
Diluted earnings per share $ .13 $ .01
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 5 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2002 AND 2001
(UNAUDITED)
<CAPTION)
Three Months Ended
October 31,
----------------------
2 0 0 2 2 0 0 1
--------- ---------
NET SALES $5,555,171 $3,519,188
COST OF SALES 2,742,432 1,950,963
---------- ----------
GROSS PROFIT 2,812,739 1,568,225
---------- ----------
OPERATING EXPENSES:
Commissions 748,172 429,933
Selling, general and administrative 988,860 818,721
---------- ----------
Total operating expenses 1,737,032 1,248,654
---------- ----------
INCOME FROM OPERATIONS 1,075,707 319,571
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 3,659 3,818
Interest expense ( 12,975) ( 32,590)
Other 16,751 78,089
---------- ----------
Total other income (expense) - net 7,435 49,317
---------- ----------
INCOME BEFORE INCOME TAXES 1,083,142 368,888
INCOME TAXES 15,000 ---
---------- ----------
NET INCOME $ 1,068,142 $ 368,888
========== ==========
PER SHARE DATA:
Basic earnings per share $ .15 $ .05
========== ==========
Diluted earnings per share $ .13 $ .04
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 6 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED OCTOBER 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 - 9 months
ended October 31, 2002 --- --- --- 1,097,360 --- 1,097,360
---------- ---------- ---------- ----------- ------------ ------------
Balance at October 31, 2002 7,759,299 $ 77,593 $5,681,554 $(2,871,207) $ ( 884,435) $ 2,003,505
========== ========== ========== =========== ============ ============
<FN>
See accompanying notes to consolidated financial statements.
- 7 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 2002 AND 2001
(UNAUDITED)
Nine Months Ended
October 31,
----------------------------
2 0 0 2 2 0 0 1
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ 1,097,360 $ 59,302
Adjustments to reconcile net gain (loss)
to net cash (used) provided by
operating activities:
Depreciation and amortization 125,551 111,990
Changes in operating assets and liabilities:
(Gain) on sale of assets held for resale ( 7,740) ( 46,698)
(Increase) decrease in trade accounts
receivable ( 610,489) 47,439
(Increase) decrease in inventories ( 329,379) 89,393
(Increase) decrease in prepaid expenses
and other current assets 51,361 ( 53,689)
(Increase) in due from related parties ( 19,433) ( 86,741)
(Increase) in prepaid income taxes --- ( 1,035)
(Increase) decrease in deposits
and other assets ( 12,312) 120,761
Increase (decrease) in trade accounts
payable 268,946 ( 300,656)
Increase (decrease) in customer deposits ( 63,626) 516,933
Increase (decrease) in accrued expenses
and other liabilities 498,695 ( 3,312)
Increase (decrease) in accrued
income taxes 10,610 ( 1,374)
---------- ----------
Net cash provided by operating activities 1,009,544 452,313
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment ( 196,986) ( 209,422)
Repayments on note receivable --- 5,501
Payments received on mortgage receivable 2,123 1,000
---------- ----------
Net cash (used) by investing activities ( 194,863) ( 202,921)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt --- 225,000
Loan origination fees --- ( 5,199)
Repayments of long-term debt ( 75,000) ( 198,277)
---------- ----------
Net cash (used) provided by financing
activities ( 75,000) 21,524
---------- ----------
Net increase in cash and cash equivalents 739,681 270,916
Cash and cash equivalents at
beginning of period 502,397 286,226
----------- ----------
Cash and cash equivalents at
end of period $ 1,242,078 $ 557,142
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 8 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 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 nine-month and three-month periods ended
October 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 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 for the three and nine month periods ended
October 31, 2002 and October 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.
The numerator in the calculation of diluted earnings per share for the
nine-month periods ended October 31, 2002 and 2001 was determined as follows:
2002 2001
---------- ----------
Net income used to calculate basic earnings
per share $1,097,360 $ 59,302
Add back interest expense related to convertible
debentures 19,133 19,800
---------- ----------
Numerator for calculation of diluted earnings
per share $1,116,493 $ 79,102
========== ==========
The denominator in the calculation of diluted earnings per share for the
nine-month periods ended October 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 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 70,334 63,522
---------- ----------
Denominator for calculation of diluted earnings
per share 8,487,893 8,481,081
========== ==========
Basic earnings per share $ 0.15 $ 0.01
======= =======
Diluted earnings per share $ 0.13 $ 0.01
======= =======
There were 812,500 stock purchase warrants outstanding at both October 31,
2002 and October 31, 2001 that were not included in the computation of diluted
earnings per share for the nine-month periods as their effect was anti-dilutive.
The numerator in the calculation of diluted earnings per share for the
three-month periods ended October 31, 2002 and 2001 was determined as follows:
2002 2001
---------- ----------
Net income used to calculate basic earnings
per share $1,068,142 $ 368,888
Add back interest expense related to convertible
debentures 6,350 6,600
---------- ----------
Numerator for calculation of diluted earnings
per share $1,074,492 $ 375,488
========== ==========
The denominator in the calculation of diluted earnings per share for the
three-month periods ended October 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 89,388 -0-
---------- ----------
Denominator for calculation of diluted earnings
per share 8,506,947 8,417,559
========== ==========
Basic earnings per share $ 0.15 $ 0.05
======= =======
Diluted earnings per share $ 0.13 $ 0.04
======= =======
- 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
There were 812,500 stock purchase warrants outstanding at both October 31,
2002 and October 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. Further, shares issuable assuming exercise of outstanding stock
options at October 31, 2001 were not included in the computation of diluted
earnings per share for the three month period ended October 31, 2001 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. An income tax accrual of $15,000
was provided for estimated state income taxes in the three-month and nine-month
period ended October 31, 2002. No income tax expense or benefit was accrued in
the nine-months ended October 31, 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) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the nine months ended October 31, 2002, cash was paid in the amounts
of $39,800 for interest and $4,403 for income taxes. During the nine months
ended October 31, 2001, cash was paid in the amounts of $84,030 for interest
and $2,409 for income taxes.
Non-cash investing and financing activities:
During the nine months ended October 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 nine months ended October 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.
During the nine months ended October 31, 2001, the Company recorded an
increase in data processing equipment of $44,824 and a related increase in
long-term debt in the same amount representing a capital lease.
During the nine months ended October 31, 2001, the Company sold its former
Northeast Regional Sales Model located in Wevertown, New York. As part of this
transaction the Company recorded a decrease in Assets Held for Resale in the
amount of $86,270 representing the net book value of the property, an increase
in Other Receivables in the amount of $132,969 representing the balance due
upon sale, and a corresponding Gain on Sale in the amount of $46,698
representing the net gain after related expenses on this transaction.
(7) RECLASSIFICATIONS
Certain amounts in the Consolidated Statement of Operations for the three
and nine months ended October 31, 2001 have been reclassified to conform to the
presentation for the three and nine months ended October 31, 2002.
- 12 -
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and
Stockholders of Lincoln Logs Ltd.
We have reviewed the accompanying condensed consolidated balance sheet of
Lincoln Logs Ltd. and subsidiaries as of October 31, 2002, and the related
condensed consolidated statements of operations for the three-month and
nine-month periods ended October 31, 2002, and the condensed consolidated
statements of stockholders' equity and cash flows for the nine-month period
ended October 31, 2002. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States
of America.
The Company's consolidated balance sheet as of January 31, 2002 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended (not presented herein) were audited by other
auditors whose report thereon, dated March 27, 2002, expressed an unqualified
opinion on those financial statements. However, that report did include an
explanatory paragraph expressing substantial doubt about the Company's ability
to continue as a going concern, as discussed in a related note to the
financial statements. The accompanying condensed consolidated balance sheet as
of January 31, 2002 has been derived from the aforementioned consolidated
balance sheet as of January 31, 2002.
URBACH KAHN & WERLIN LLP
Albany, New York
January 16, 2003
- 13 -
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
Nine months ended October 31, 2002 vs. October 31, 2001
Net sales were $10,811,840 for the nine months ended October 31, 2002, as
compared to $8,235,559 in the same period in 2001, an increase of $2,576,281,
or 31%. When compared to the previous year, there was a 10% increase in the
number of housing units shipped, and the average sales value per housing unit
shipped increased 21%. The increase in average sales value per unit shipped
resulted from the shipment of homes that were 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 and second fiscal quarters and continued through the third
fiscal quarter. Low interest rates for residential mortgages has also
contributed to an environment that has been favorable for an increased demand
for deliveries.
Gross profit amounted to $5,173,831, or 48% of net sales for the nine months
ended October 31, 2002 as compared to $3,452,016, or 42% 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 3%.
The commonly experienced spike in material costs, which usually happens in the
spring and continues into the summer, was not as pronounced as it had been in
past years resulting in lower material costs during the current fiscal year.
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 increased 3% in absolute dollars, but decreased
as a percentage of sales. The increase was principally attributed to increased
shipping costs, which relate to the increase in the number of units shipped.
Direct labor costs increased in absolute dollars, principally due to annual
wage adjustments and increased benefit costs, and were virtually the same as
a percentage of net sales from one year to the next.
Total operating expenses of $4,070,852, or 38% of net sales, increased
$621,207 from the previous year's amount of $3,449,645, or 42% of net sales.
Although the overall dollars increased, operating expenses decreased as a
percentage of sales by 4%. Sales commissions were $1,320,062 for the nine
months ended October 31, 2002 and $1,027,285 for the nine months ended October
31, 2001. Commissions were 12% of net sales for the nine months ended October
31, 2002 and October 31, 2001. Commissions increased 29% in absolute dollars
from one year to the next and is commensurate with the 31% increase in net
sales. Selling, general and administrative expenses were $2,750,790 for the
nine months ended October 31, 2002 compared with $2,422,360 in the same period
of the previous year, an increase of $328,430, or 14%. As a percentage of net
sales selling, general and administrative expenses were 25% at October 31, 2002
- 14 -
and 29% at October 31, 2001. The increase in expenses was primarily the
result of increased spending on advertising, trade show expositions, an
additional sales office in Pennsylvania, salaries and professional fees.
Three months ended October 31, 2002 and October 31, 2001:
Net sales for the three months ended October 31, 2002 and 2001 were
$5,555,171 and $3,519,188, respectively. Net sales increased $2,035,983, or
58%. When compared to the same period in the previous fiscal year, there was
a 19% increase in the number of housing units shipped and a 35% increase in the
average sales value per unit shipped. The increase in units shipped is
principally attributed to the favorable climate for financing residential
construction created by low interest rates and continued favorable weather
conditions during the building season throughout the United States. The
increase in average sales value per unit shipped resulted from the shipment of
homes that were larger than those shipped in the previous year combined with
price increases instituted over the past two years.
Gross profit was $2,812,739, or 51% of net sales, for the three months
ended October 31, 2002 as compared to $1,568,225, or 45% 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 third 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.
Although manufacturing overhead costs increased in absolute dollars, as a
percentage of sales these costs decreased by 3%. The increase in absolute
dollars was directly related to the increased shipping volume as delivery
and design and engineering costs attributed to 94% of the increased spending.
Direct labor costs had increased slightly in absolute dollars and were
virtually the same from year to year as a percentage of net sales. The
increase in direct labor spending is attributable to annual wage adjustments
and increased benefit costs.
Total operating expenses of $1,737,032, or 31% of net sales, increased
$488,378 from the previous year's amount of $1,248,654, or 35% of net sales.
Sales commissions were $748,172 in the three-month period ended October 31,
2002, and $429,933 in the three-month period ended October 31, 2001.
Commissions were 14% of net sales in the three months ended October 31, 2002,
an increase of 2% from the prior year when commissions were 12% of net sales.
The increase is a result of the increased number of houses sold by the
Company's independent dealer representatives, who receive a higher commission
percentage than the Company's employee sales persons. Because of the
difference in method used for compensating the Company's outside dealer
- 15 -
representatives from the method used for the Company's employee sales persons
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 $988,860 for the three months ended
October 31, 2002 compared with $818,721 in the same period of the previous
year, an increase of $170,139, or 21%. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficiency at both October 31, 2002 and
October 31, 2001 of $347,985 and $1,204,328, respectively. For the nine months
ended October 31, 2002 working capital increased by $710,253 as compared to an
increase of $82,526 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 October 31, 2002 the Company's backlog of undelivered contracts
was approximately $14,996,000. During the nine-month period ended October 31,
2002, cash was primarily provided by net income, and by increases in trade
payables and accrued expenses. Cash was primarily used to purchase inventory,
acquire new equipment, for repayment of debt, and by increases in prepaid
assets and trade accounts receivables.
For the nine months ended October 31, 2002 and October 31, 2001, the
Company's operations provided cash in the amounts of $1,009,544 and $452,313,
respectively. Overall, the Company experienced a net increase in its cash
position of $739,681 and $270,916 during the nine months ended October 31,
2002 and October 31, 2001, respectively.
As shown in the consolidated financial statements, the Company realized a
net profit for the nine months ended October 31, 2002 of $1,097,360 and
generated positive cash flow of $739,681. Although current liabilities
exceeded current assets by $347,985 at October 31, 2002, the Company had net
stockholders' equity of $2,003,505 and a backlog of undelivered contracts of
approximately $15,000,000, for which deposits of $1,915,697 have been received.
Over the past decade the Company has principally relied upon customer deposits
as well as funds generated by operations and assistance from major vendors, who
have occasionally provided extended payments terms to the Company, to fund
operations. While past financial results are not an indication of future
performance, the Company's results from operations have improved over the past
several years and management believes that there are indications that the
Company's improvements will continue. It must be stressed that the Company
operates in the housing industry which tends to be cyclical in nature and is
prone to economic downturns as well as upswings based on the general economic
conditions in the United States. Any combination of slower economic growth,
increased unemployment, or rising interest rates for residential mortgages
could have an adverse effect on the U.S. economy and, by consequence, on the
Company's ability to generate adequate funds to support its operations, which
could contribute to a reduction of its liquidity.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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.
- 17 -
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.
ITEM 3
CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an
evaluation was conducted under the supervision of and with the participation
of the Company's management, including the Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based on that evaluation,
the Chief Executive Officer and the Chief Financial Officer have concluded that
our disclosure controls and procedures are effective to ensure that all
material information related to the Company and its consolidated subsidiaries
is made known to them, particularly during the period when our periodic reports
are being prepared. Subsequent to the date the Chief Executive Officer and
Chief Financial Officer completed their evaluation, there have been no
significant changes in the Company's internal controls, or in other factors that
could significantly affect the internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
- 18 -
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit Index
Exhibit 16.2 - Letter from PricewaterhouseCoopers LLP
b. Reports on Form 8-K
On October 4, 2002 the Company filed a report under Item 4
on Form 8-K, Changes in Registrant's Certifying Accountants,
declaring that its certifying accountants had resigned.
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
February 14, 2003
/ s / William J. Thyne
William J. Thyne
Vice President, Treasurer, Secretary,
and Chief Financial Officer
February 14, 2003
- 19 -
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;
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;
4. The issuer's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the issuer and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the issuer's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The issuer's other certifying officers and I have disclosed, based on
our most recent evaluation, to the issuer's auditors and the audit
committee of the issuer's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's ability
to record, process, summarize and report financial data and have
identified for the issuer's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's internal
controls; and
- 20 -
6. The issuer's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003
/ 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 nine-month period ended October 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 14th day of February 2003.
/ s / John D. Shepherd
Name: John D. Shepherd
Title: Chairman of the Board, President
and Chief Executive Officer
- 21 -
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;
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;
4. The issuer's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the issuer and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the issuer, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the issuer's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The issuer's other certifying officers and I have disclosed, based on
our most recent evaluation, to the issuer's auditors and the audit
committee of the issuer's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's ability
to record, process, summarize and report financial data and have
identified for the issuer's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's internal
controls; and
- 22 -
6. The issuer's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003
/ 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 nine-month period ended October 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 14th day of February 2003.
/ s / William J. Thyne
Name: William J. Thyne
Title: Vice President, Treasurer,
Secretary, and Chief Financial Officer
- 23 -