UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OR THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
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.)
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 July 31, 1997
Common Stock, $ .01 par value 945,759
- 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, 1997
and January 31, 1997 (restated) 3 - 4
Consolidated statements of operations
for the six months ended July 31, 1997
and July 31, 1996 (restated) 5
Consolidated statements of operations
for the three months ended July 31, 1997
and July 31, 1996 (restated) 6
Consolidated statements of cash flows
for the six months ended July 31, 1997
and July 31, 1996 (restated) 7
Notes to consolidated financial statements 8 - 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 11 - 13
PART II. OTHER INFORMATION 14
SIGNATURES 15
- - 2 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
JULY 31, 1997 AND RESTATED JANUARY 31, 1997
ASSETS
Restated
July 31, January 31,
1 9 9 7 1 9 9 7
(Unaudited) (Audited)
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 4,618 $ 359,107
Trade accounts receivable, net of $9,000
allowance for doubtful accounts 183,643 274,910
Notes receivable 18,500 18,500
Inventories (principally raw materials) 814,617 623,075
Prepaid expenses and other current assets 453,532 426,131
Income taxes receivable and prepaid 800 ---
Due from related party 1,779 1,779
------------ --------
TOTAL CURRENT ASSETS 1,887,489 1,703,502
PROPERTY, PLANT AND EQUIPMENT:
Land 784,800 784,800
Buildings and improvements 2,125,626 2,125,626
Machinery and equipment 623,777 623,777
Furniture and fixtures 1,277,306 1,252,156
Transportation equipment 146,218 146,218
----------- ---------
4,957,727 4,932,577
Less: accumulated depreciation 3,218,499 3,154,499
---------- ---------
TOTAL PROPERTY, PLANT AND
EQUIPMENT - net 1,739,228 1,778,078
OTHER ASSETS:
Due from related party 72,975 74,425
Assets held for resale 38,189 38,189
Cash surrender value of life insurance,
net of loan of $80,000 9,321 9,321
Deposits and other assets 988 988
Intangible assets, net of amortization 22,483 27,345
----------- ---------
TOTAL OTHER ASSETS 143,956 150,268
---------- ---------
TOTAL ASSETS $ 3,770,673 $ 3,631,848
============ ============
See notes to consolidated financial statements.
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
JULY 31, 1997 AND RESTATED JANUARY 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Restated
July 31, January 31,
1 9 9 7 1 9 9 7
(Unaudited) (Audited)
--------- -----------
CURRENT LIABILITIES:
Current installments of long-term debt:
Related parties $ 500,000 $ ---
Others 218,084 18,084
Notes payable (note 5):
Related parties 335,000 335,000
Others 175,000 175,000
Trade accounts payable 1,312,087 940,598
Customer deposits 1,178,852 1,151,439
Accrued payroll, related taxes and
withholdings 15,834 43,428
Accrued income taxes -- 769
Due to related parties 124,182 108,820
Accrued expenses 487,942 366,395
---------- ----------
TOTAL CURRENT LIABILITIES 4,346,981 3,139,533
LONG-TERM DEBT, net of current installments:
Convertible subordinated debentures:
Related parties --- 500,000
Others --- 200,000
Other 15,248 25,283
Other long-term liability 89,321 89,321
----------- ----------
TOTAL LIABILITIES 4,451,550 3,954,137
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $ .01 pare value;
Authorized 1,000,000 shares; issued
and outstanding - 0 - shares --- ---
Common stock, $ .01 par value; authorized
5,000,000 shares; issued 1,449,999 share 14,500 14,500
Additional paid-in capital 3,894,286 3,894,286
Accumulated deficit (3,705,228) (3,346,640)
----------- ----------
203,558 562,146
Less: cost of 504,240 shares of common
stock in treasury at July 31,1997
and January 31, 1997 ( 884,435) ( 884,435)
----------- ------------
TOTAL STOCKHOLDERS' DEFICIENCY ( 680,877) ( 322,289)
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $ 3,770,673 $ 3,631,848
============= ============
See notes to consolidated financial statements.
- - 4 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX
MONTHS ENDED JULY 31, 1997 AND RESTATED 1996
(UNAUDITED)
Six Months Ended
July 31,
1 9 9 7 1996 - Restated
SALES, net of commissions of $541,802
and $584,900, respectively $ 3,872,702 $ 3,848,693
COST OF SALES 2,806,893 2,567,287
--------- ---------
GROSS PROFIT 1,065,809 1,281,406
OPERATING EXPENSES:
Selling, general and administrative 1,335,654 1,348,588
----------- ---------
(LOSS) FROM OPERATIONS ( 269,845) ( 67,182)
OTHER INCOME (EXPENSE):
Interest income 20,490 21,500
Interest expense ( 114,326) ( 116,792)
Other 5,093 11,127
--------- ---------
Total other income (expense) - net ( 88,743) ( 84,165)
------------ --------------
(LOSS) BEFORE INCOME TAXES ( 358,588) ( 151,347)
INCOME TAXES -- ---
------------- ---------------
NET (LOSS) $ ( 358,588) $ ( 151,347)
============= ================
PER SHARE DATA (note 3):
Primary (loss) per common shar $ ( .38) $ ( .16)
================== ===============
See notes to consolidated financial statements.
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JULY 31, 1997 AND RESTATED 1996
(UNAUDITED)
Three Months Ended
July 31,
1 9 9 7 1996 - Restated
SALES, net of commissions of $332,882
and $415,058, respectively $ 2,480,124 $ 2,984,189
COST OF SALES 1,774,150 1,954,480
---------- ---------
GROSS PROFIT 705,974 1,029,709
OPERATING EXPENSES:
Selling, general and administrative 741,501 715,929
----------- ----------
(LOSS) INCOME FROM OPERATIONS ( 35,527) 313,780
OTHER INCOME (EXPENSE):
Interest income 7,000 14,007
Interest expense ( 59,343) ( 69,826)
Other 2,529 2,695
------------ ----------
Total other income (expense) - net ( 49,814) ( 53,124)
------------ ---------
(LOSS) INCOME BEFORE INCOME TAXES ( 85,341) 260,656
INCOME TAXES --- --
------------- ----------
NET (LOSS) INCOME $ ( 85,341) $ 260,656
========= ===========
PER SHARE DATA (note 3):
Primary (loss) earnings per common share $ ( .09) $ .28
========= ==========
Fully diluted (loss) earnings per common
and common equivalent share $ ( .09) $ .06
========== ============
See notes to consolidated financial statements.
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JULY 31, 1997 AND RESTATED 1996
(UNAUDITED)
Six Months Ended
July 31,
1 9 9 7 1996 - Restated
OPERATING ACTIVITIES:
Net income $ ( 358,588) $ ( 151,347)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 68,862 75,002
Changes in operating assets and liabilities:
Trade accounts receivable 91,267 ( 283,352)
Inventories ( 191,542) 83,715
Prepaid expenses and other current assets ( 27,401) ( 49,983)
Trade accounts payable 371,489 243,255
Customer deposits 27,413 141,521
Accrued expenses and other current liabilities 93,953 100,648
Due to related parties 15,362 ---
Accrued and prepaid income taxes (1,569) (1,606)
---------- -------
Net cash provided by operating activities 89,246 157,853
INVESTING ACTIVITIES:
Additions to property, plant and equipment ( 25,150) ( 25,078)
Increase in deposits and other assets --- ( 299)
Decrease in due from related parties 1,450 633
------------ --------------
Net cash (used) by investing activities ( 23,700) ( 24,744)
----------- --------------
FINANCING ACTIVITIES:
Proceeds from notes payable, net --- 70,000
Reduction of other credit - redeemable
common stock --- ( 94,305)
Reductions in long-term debt ( 10,035) ( 130,328)
------------ ----------
Net cash (used) by financing activities ( 10,035) ( 154,633)
------------ --------------
Net increase (decrease) in cash and cash
equivalents 55,511 ( 21,524)
Cash and cash equivalents at beginning of period 359,107 373,636
--------- --------------
Cash and cash equivalents at end of period $ 414,618 $ 352,112
============ =============
See notes to consolidated financial statements.
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LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
(1) BASIS OF PRESENTATION
The financial statements as of and for the year ended January 31, 1997 ("the
fiscal 1997 financial statements") and the interim financial information as of
and for the three-month and six-month periods ended July 31, 1996 ("the fiscal
1997 second quarter financial information") have been restated to reflect the
correction of errors that have been detected in the fiscal 1997 financial
statements included in the 1997 Annual Report on Form 10-KSB and the fiscal
1997 second quarter financial information included in the July 31, 1996
Form 10-QSB filed with the Securities and Exchange Commission. The
effect of the correction of these errors on information previously reported
on the fiscal 1997 Form 10-KSB can be obtained from the Amended Annual Report
on Form 10-KSB-A filed by the Company.
The results of operations for the six-month periods ended July 31, 1997 and
1996 are not indicative of the results to be expected for the full year due to
the seasonal nature of the business.
The interim 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 financial statements
and Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Company's financial
statements as of and for the year ended January 31, 1997 included in
Form 10-KSB-A filed on May 1, 1998.
(2) RESTATEMENT OF PRIOR PERIOD RESULTS
The Company has restated previously issued financial results for the year
ended January 31, 1997 and the three-month and six-month periods ended July 31,
1996. The restated financial results reflect the correction of errors in the
Company's accounting procedures related to sales cut-off, commission expense,
recording of certain accruals and inventory reconciliation. The following
summarizes the impact of the restatement on the financial information included
herein:
Six Months Ended Three Months Ended
---- July 31, 1996 ---- ---- July 31, 1996 ----
As Reported Restated As Reported Restated
Cost of sales $ 2,432,555 $ 2,567,287 $ 1,819,748 $ 1,954,480
Gross profit $ 1,416,138 $ 1,281,406 $ 1,164,441 $ 1,029,709
Selling, general and
administrative expenses $ 1,300,588 $ 1,348,588 $ 667,929 $ 715,929
Net (loss) earnings $ 31,385 $ ( 151,347) $ 443,388 $ 260,656
Primary (loss)earnings per share $ .03 $ (.16) $ .47 $ .28
Fully diluted (loss) earnings per share $ .02 $ ( .16) $ .10 $ .06
January 31, 1997
As Reported Restated
Trade accounts receivable $ 318,846 $ 274,910
Inventories $ 618,248 $ 623,075
Prepaid expenses and other
current assets $ 431,824 $ 426,131
Customer deposits $ 987,268 $ 1,151,439
Accrued salaries and wages $ 36,426 $ 43,428
Accrued expenses $ 314,391 $ 366,395
Accumulated deficit $(3,077,661) $(3,346,640)
(3) EARNINGS (LOSS) PER SHARE
Primary earnings per common 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 primary
earnings per share was 945,759 for each of the six-month periods and three-month
periods ended July 31, 1997 and 1996.
Fully diluted earnings per common and common equivalent share is computed
based on the weighted average number of common and common equivalent shares
outstanding during the respective periods, assuming the convertible subordinated
debentures were 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. The fully
diluted weighted average number of common and common equivalent shares was
945,759 and 4,445,759 for the three-month periods ended July 31, 1997 and
July 31, 1996, respectively.
(4) INCOME TAXES
The Company accrues income tax expense on an inter-period basis as necessary,
and accrues income tax benefits only when it is more likely than not that such
tax benefits will be realized. Neither an income tax benefit nor expense was
accrued in the six months ended July 31, 1997 and 1996.
- 9 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(5) NOTES PAYABLE
During fiscal years 1998 and 1997, the Company continued its Cant Financing
Program, which was initiated in 1994 to raise capital for the purchase of pine
and cedarcants (logs) to be held in inventory and then used by the Company
in the manufacture of its log home building packages. The notes are
generally collateralized by accounts receivable or the cant inventory thus
purchased. Notes issued in the current Cant Financing Program are for a
fixed term and amount and bear interest at an annual rate of
18% payable monthly. As of July 31, 1997, a total of $510,000 has been
loaned to the Company by various individuals, including directors and
shareholders, and is due on June 30, 1998.
(6) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the six months ended July 31, 1997, cash was paid in the amounts of
$114,326 for interest and $1,569 for income taxes. During the six months ended
July 31, 1996, cash was paid in the amounts of $119,475 for interest and
$1,606 for income taxes.
Non-cash investing and financing activity:
During the six-month period ended July 31, 1996 the following transactions
took place:
- The Company entered into a capital lease for a piece of office equipment
having a total cost of $5,282.
- 10 -
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Six months ended July 31, 1997 vs. July 31, 1996, restated:
The Company's revenues, net of sales commissions, for the six months ended July
31, 1997 were $3,872,702 as compared to $3,848,693 in the same six month period
in 1996, an increase of $24,009, or 1%. There was a 6% decrease in the number
of log home package units shipped during the current six month period as
compared to the previous year while the average sales value per home package
unit shipped was 2% higher than the previous year. The increase in sales value
per log home unit shipped resulted from price increases put into effect in the
prior fiscal year. For the six-month period ended July 31, 1997 the size of
the log home units shipped was approximately the same as those shipped in
the previous year. Additionally, there was a 78% increase in the number of
solarium units shipped as compared to the previous year. This increase is
primarily due to a broader base of distribution of this product line in the
Company's dealer/distributor network. Solarium revenues represent
approximately 5% of the Company's total net revenues in the current fiscal
period as compared with the previous fiscal period when revenues from
solarium sales represented approximately 2% of total net revenues.
Gross profits amounted to $1,065,809, or 28% of net sales for the six months
ended July 31, 1997 as compared to $1,281,406, or 33% for the same period in
1996. The decrease in gross profits is due to an increase in the amount of
discounts allowed, an increase in the cost of certain raw materials and
increased overhead. In certain instances the Company relied on increased
discounts to be price competitive. The increase in overhead costs was due
principally to the reallocation of certain personnel costs that are
more closely associated with the manufacturing and engineering process. The
increase in raw material costs was affected principally by a rise in the cost
of cants, both pine and cedar, by 10% and 25%, respectively.
Total operating expenses of $1,335,654, or 34% of net sales, have decreased
$12,934 from the previous year's amount of $1,348,588, or 35% of net sales.
The decrease in total operating expenses amounted to less than 1% and is
partially attributable to the reallocation of certain overhead costs as
discussed in the preceding paragraph. There was no significant change in
any other expense category from one year to another.
Three months ended July 31, 1997 vs. July 31, 1996, restated:
Sales, net of commissions, amounted to $2,480,124 for the three months ended
July 31, 1997 as compared to $2,984,189 in the same period in 1996, a decrease
of $504,065, or 17%. When compared with the previous year, there was a 20%
decrease in the number of log home package units shipped while there was a 44%
increase in the number of solarium units shipped. The decrease in home package
units shipped was principally due to restrictive credit policies of lending
institutions during 1997 and, to a lesser extent, the difficulty of obtaining
contractors to build customers' homes. The delays caused by the difficulty
in obtaining appraisals, securing financing and submitting
required documentation to lenders resulted in many shipments being postponed to
later dates in the current fiscal year and into the next fiscal year. While
small in actual numbers the increase in solarium units shipped is due to a
broader base of distribution of the product line in the Company's
dealer/distributor network.
Gross profits were $705,974, or 29% of net sales, for the three months ended
July 31, 1997 as compared to $1,029,709, or 34%, for the same period in 1996.
The decrease in gross profits is related to an increased reliance on
discounting, an increase in material costs and an increase in overhead costs.
Overhead costs increased due principally to a reallocation of certain
personnel costs that are more closely associated with the
manufacturing and engineering process. The raw material costs increase is
mostly due to a 10% increase in the cost of pine cants and a 25% increase in
the cost of cedar cants.
Total operating expenses of $724,247, or 29% of net sales, have increased
$8,318, from the previous year's amount of $715,929, or 24% of net sales.
The increase in total operating expenses represented a 1% increase over the
previous year. There were no significant changes in any expense category
from one year to the next.
LIQUIDITY AND CAPITAL RESOURCES
The Company was in a negative working capital position at both July 31, 1997
and July 31, 1996 of $2,459,492 and $1,496,102, respectively. For the three
months ended July 31, 1997 working capital decreased $777,419 as compared
to an increase of $280,892 in the same period in 1996. As of the Company's
fiscal year end at January 31, 1997 current liabilities exceeded current
assets by $1,436,031. The decrease in working capital at July
31, 1997 is principally the result of reclassifying $700,000 of long-term debt
that will become due on July 1, 1998. Without considering this reclassification
working capital decreased by $77,419. During the six-month period ended
July 31, 1997 cash provided by operations was used to purchase equipment and
to retire certain long-term debt. In the comparable period of the previous
year cash provided by operations was used to reduce
long-term debt, including obligations related to the retirement of the Company's
founder, and the purchase of equipment.
For the six months ended July 31, 1997 the Company's operations were a net
provider of cash in the amount of $89,246, while in the comparable period of
the previous year it was a net provider of cash in the amount of $157,853.
Overall, the Company experienced a net increase in its cash position of $55,511
during the six months ended July 31, 1997 as compared with a decrease in its
cash position of $21,524 during the six months ended
July 31, 1996. During the six months ended July 31, 1997 and 1996 cash
provided by operations and, in 1996, proceeds from notes payable, was consumed
by the repayment of long-term debt obligations, including in 1996 obligations
related to the retirement of the Company's Founder, and additions to property,
plant and equipment. As shown in the consolidated financial statements,
the Company incurred a net loss during the six months ended July 31, 1997
of $358,588. As of July 31, 1997 current liabilities exceeded current
assets by $2,459,492 and the Company had a net capital deficiency of $680,877.
The Company has not been successful in securing working capital through
commercial lenders or governmental agency sources. Funds generated by
operations and the renewal of the Cant Financing Program, together with the
assistance of major vendors who have provided extended payment terms to the
Company are expected to be sufficient for the remainder of the current year.
There is, however, no assurance that the Company will be able to generate
adequate financing from these sources. A reduction in the Company's
sales activity, the inability to renew borrowings under the Cant Financing
Program when the notes matured in June 1997 (and remain outstanding), or a
reduction in vendor assistance may further reduce its liquidity and,
eventually, force the Company to cease operations.
OTHER MATTERS
In January 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share", which is effective for the Company in fiscal
1998. This Statement, which modifies computation, presentation and
disclosure requirements for earnings per share, will not have a material
impact on the Company's calculation of earnings per share.
- 13 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults of 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
On July 11, 1997, Form 8-K was filed, incorporated herein by
reference, where the Company announced the resignation of Richard
C. Farr from his positions with the Company as Member of the Office
of the Chief Executive, Chairman of the Board of Directors, President
and Treasurer.
- 14 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully 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
April 30, 1998
/ s / William J. Thyne
William J. Thyne
Chief Financial Officer, Principal Financial
Officer and Secretary
April 30, 1998
- 15 -