UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OR THE SECURITIES ACT OF 1934
For the quarterly period ended October 31, 1998, as Amended
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 ________ No___X______
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 May 17, 1999
Common Stock, $ .01 par value 5,542,059
- 1 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
INTRODUCTORY NOTE
-----------------
THE INFORMATION CONTAINED HEREIN HAS BEEN AMENDED IN JUNE 1999
TO CORRECT TYPOGRAPHICAL ERRORS DISCOVERED IN THE COMPANY'S
FILING OF ITS THIRD QUARTER REPORT ON MAY 28, 1999. The
Corporation hereby amends the following items of its Quarterly
Report on Form 10-QSB for the quarter ended October 31, 1998
(the "Original Filing"). Each of the below referenced Items in
Part I are hereby amended by deleting specific lines within the
Items in their entirety and replacing them with the lines set
forth herein. Any Items in the original Filing not expressly
changed hereby shall be as set forth in the Original Filing.
PART I
Item I. Financial Statements (Unaudited):
CURRENT LIABILITIES
Accrued payroll, related taxes and withholdings 110,024 78,505
INDEX
Page number
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets as of October 31, 1998
and January 31, 1998 4 - 5
Consolidated statements of operations for tht nine
months ended October 31, 1998 and 1997 6
Consolidated statements of operations for tht three
months ended October 31, 1998 and 1997 7
Consolidated statements of changes in stockholders'
equity (deficiency) for the nine months ended
October 31, 1998 and twelve months ended
January 31, 1998 8
Consolidated statements of cash flows for the nine
months ended October 31, 1998 and 1997 9
Notes to consolidated financial statements 10 - 14
- 2 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 15 - 19
PART II. OTHER INFORMATION 20
SIGNATURES 21
- 3 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND JANUARY 31, 1998
ASSETS
October 31, January 31,
1 9 9 8 1 9 9 8
(Unaudited) (Audited)
---------- -----------
CURRENT ASSETS:
Cash and cash equivelants $ 249,529 $ 124,307
Trade accounts receivable, net of $17,700
allowance for doubtful accounts 156,461 103,910
Inventories (principally raw materials) 780,444 755,210
Prepaid expenses and other current assets 520,242 339,892
Prepaid income taxes 900 --
Mortgage receivable 1,838 1,779
---------- ----------
Total current assets 1,709,414 1,325,098
------------ -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 797,625 784,800
Buildings and improvements 2,168,288 2,162,883
Machinery and equipment 625,848 625,848
Furniture and fixtures 1,354,677 1,316,883
Transportation equipment 162,408 152,103
----------- ---------
5,108,846 5,042,517
Less: accumulated depreciation (3,358,431) (3,284,868)
---------- ---------
Total property, plant and
equipment - net 1,750,415 1,757,649
---------- ----------
OTHER ASSETS:
Mortgage receivable 71,448 72,148
Assets held for resale 38,189 38,189
Cash surrender value of life insurance,
net of loan of $86,400 at January 31, 1998
and $76,400 at October 31, 1998 15,456 5,456
Deposits and other assets 1,622 988
Intangibles assets, net of amortization 11,100 17,620
--------- ---------
Total other assets 137,815 134,401
--------- ---------
TOTAL ASSETS $3,597,644 $3,217,148
========== ==========
<FN>
( continued )
- 4 -
LINCOLN LOGS LYD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
OCTOBER 31, 1998 AND JANUARY 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
October 31, January 31,
1 9 9 8 1 9 9 8
(Unaudited) (Audited)
---------- -----------
CURRENT LIABILITIES:
Current installments of long-term debt:
Related parties $ 287,977 $ 25,000
Others 228,884 245,587
Note payable -- 430,500
Trade accounts payable 886,886 1,144,959
Customer deposits 1,485,578 1,287,212
Accrued payroll, related taxes and
withholdings 110,024 78,505
Accrued income taxes -- 525
Due to related parties 140,359 152,328
Accrued expenses 661,175 601,234
---------- ----------
Total current liabilities 3,800,883 3,965,850
LONG-TERM DEBT, net of current installments:
Convertible subordinated debentures:
Related parties -- 30,710
Others -- 930
Other 4,907 4,289
Other long-term liability 92,184 92,184
----------- ----------
Total liabilities 3,897,974 4,093,963
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $ .01 pare value;
authorized 1,000,000 shares; issued
and outstanding - 0 - shares -- --
Common stock, $ .01 par value; authorized
10,000,000 shares; issued
6,046,299 and 3,729,999 shares 60,463 37,300
Additional paid-in capital 5,418,104 4,641,705
Accumulated deficit (4,894,462) (4,671,385)
----------- ----------
584,105 7,620
Less: cost of 504,240 shares of common
stock in treasury at October 31, 1998
and January 31, 1998 (884,435) (884,435)
----------- ------------
Total stockholders' deficiency (300,330) (876,815)
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $3,597,644 $3,217,148
============= ============
<FN>
See accompanying notes to consolidated financial statements.
- 5 -
LINCOLN LOGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997
(UNAUDITED)
<CAPTION)
Nine Months Ended
October 31,
-------------------
1 9 9 8 1 9 9 7
--------- --------
NET SALES $7,817,414 $6,871,094
COST OF SALES 4,654,866 4,319,146
---------- ----------
GROSS PROFIT 3,162,548 2,551,948
---------- ----------
OPERATING EXPENSES:
Commissions 1,081,909 946,388
Selling, general and administrative 1,761,104 1,975,673
---------- ----------
Total operating expenses 2,843,013 2,922,061
---------- ----------
INCOME (LOSS) FROM OPERATIONS 319,535 (370,113)
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 21,627 29,931
---------- ----------
Interest expense:
Amortization attributable to
beneficial conversion feature
and warrants (note 5) (516,684) --
All other (80,378) (166,954)
---------- ----------
Total interest expense (597,062) (166,954)
---------- ----------
Other 32,823 16,485
---------- ----------
Total other income (expense) - net (542,612) (120,538)
---------- ----------
LOSS BEFORE INCOME TAXES (223,077) (490,651)
INCOME TAXES -- --
---------- ----------
NET LOSS $(223,077) $(490,651)
========== ==========
PER SHARE DATA (note 2):
Basic and diluted loss per share $(.05) $(.52)
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 6 -
LINCOLN LOGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1998 AND 1997
(UNAUDITED)
<CAPTION)
Three Months Ended
October 31,
-------------------
1 9 9 8 1 9 9 7
--------- --------
NET SALES $2,994,749 $2,456,590
COST OF SALES 1,702,016 1,512,253
---------- ----------
GROSS PROFIT 1,292,733 944,337
---------- ----------
OPERATING EXPENSES:
Commissions 400,759 404,586
Selling, general and administrative 619,286 640,019
---------- ----------
Total operating expenses 1,020,045 1,044,605
---------- ----------
INCOME (LOSS) FROM OPERATIONS 272,688 (100,268)
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 8,629 9,441
---------- ----------
Interest expense:
Amortization attributable to
warrants (note 5) ( 3,313) --
All other (14,975) (52,628)
---------- ----------
Total interest expense (18,288) (52,628)
---------- ----------
Other 15,172 11,392
---------- ----------
Total other income (expense) - net 5,513 (31,795)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 278,201 (132,063)
INCOME TAXES -- --
---------- ----------
NET INCOME (LOSS) $ 278,201 $(132,063)
========== ==========
PER SHARE DATA (note 3):
Basic earnings (loss) per share $.05 $(.14)
========== ==========
Diluted earnings (loss) per share $.04 $(.14)
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 7 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND
THE TWELVE MONTHS ENDED JANUARY 31, 1998
Total
Number Par Additional stockholders'
of value paid-in (Accumulated Treasury equity
shares amount capital deficit) stock (deficiency)
--------- --------- ---------- ------------ ------------ -------------
Balance at January 31, 1997 1,449,999 $ 14,500 $3,894,286 $(3,346,640) $( 884,435) $( 322,289)
Common stock issued upon exercise
of stock options 30,000 300 5,419 -- -- 5,719
Debt converted to commom stock 2,250,000 22,500 427,500 -- -- 450,000
Amount assigned to subordinated debenture
beneficial conversion and warrants -- -- 314,500 -- -- 314,500
Net loss - 1998 -- -- -- (1,324,745) -- (1,324,745)
---------- ---------- ---------- ---------- ------------- -------------
Balance at January 31, 1998 3,729,999 $ 37,300 $4,641,705 $(4,671,385) $( 884,435) $( 876,815)
Common stock issued upon exercise
of stock options 3,800 38 887 -- -- 925
Debt converted to common stock 1,625,000 16,250 293,325 -- -- 309,575
Common stock issued upon exercise of
stock purchase warrants 687,500 6,875 250,937 -- -- 257,812
Amount assigned to subordinated debenture
beneficial conversion and warrants -- -- 231,250 -- -- 231,250
Net loss - 9 months ended October 31, 1998 -- -- -- ( 223,077) -- ( 223,077)
---------- ----------- ---------- ------------ ---------- --------------
Balance at October 31, 1998 6,046,299 $ 60,463 $5,418,104 $(4,894,462) $( 884,435) $( 300,330)
=========== ============ ============ ============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
- 8 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997
(UNAUDITED)
Nine Months Ended
October 31,
----------------------------
1 9 9 8 1 9 9 7
---------- ---------
OPERATING ACTIVITIES:
Net loss $ (223,077) $ (490,651)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 114,520 103,295
Amortization of amounts assigned to
beneficial conversion feature
and warrants 516,684 --
Compensation related to exercise of
stock option 925 --
Changes in operating assets and liabilities:
(Increase) decrease in trade
accounts receivable (52,551) 234,575
(Increase) in inventories (25,234) (136,441)
(Increase) decrease in prepaid expenses
and other current assets (180,350) 78,540
(Decrease) increase in trade
accounts payable (258,073) 545,982
Increase (decrease) in customer deposits 198,366 (129,778)
Increase (decrease) in accrued expenses
and other current liabilities 91,460 (60,868)
(Decrease) increase in due to
related parties (11,969) 11,664
(Decrease) in accrued and prepaid
income taxes (1,425) (1,569)
---------- ----------
Net cash provided by
operating activities 169,276 154,749
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment ( 95,093) (60,547)
(Increase) in deposits and other assets (634) --
Decrease in due from related parties -- 1,860
Payments received on mortgage receivable 641 --
---------- ----------
Net cash (used) by investing activities ( 95,086) (58,687)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of Series B Convertible
Subordinated Debentures 240,000 --
Proceeds from issuance of common stock
upon exercise of stock
purchase warrants 257,812 --
Repayments of notes payable (420,500) (110,000)
Repayment of loan against cash surrender
value of life insurance policy (10,000) --
Repayments of long-term debt (16,280) (14,198)
---------- ----------
Net cash provided (used) by financing
activities 51,032 (124,198)
---------- ----------
Net increase (decrease) in cash
and cash equivalents 125,222 (28,136)
Cash and cash equivalents at
beginning of period 124,307 359,107
---------- ----------
Cash and cash equivalents at
end of period $249,529 $330,971
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 9 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND 1997
(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 periods and three-month periods
ended October 31, 1998 and 1997 are not indicative of the results to be expected
for the full year, due to the seasonal nature of the business.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Company's Annual Report on Form 10-KSB for the fiscal year ended
January 31, 1998.
(2) EARNINGS (LOSS) PER SHARE
Basic earnings 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 4,815,589 and 945,759 for the
nine-month periods ended October 31, 1998 and 1997, respectively, and
5,542,059 and 945,759 for the three-month periods ended October 31, 1998
and 1997, respectively.
Diluted earnings per share is computed based on the weighted average number
of common shares outstanding during the respective periods and includes the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. Convertible subordinated debentures
are auumed 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 using the treasury
stock method if the effect is dilutive. Diluted (loss) per share is the same
as basic (loss) per share for the nine-month periods ended Ovctober 31, 1998
and 1997 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 three-month periods ended OCtober 31, 1998 and 1997 was determined as
follows:
1998 1997
----- -----
Net income (loss) used to calculate earnings
per share $278,201 $(132,063)
Add back intereest expense related to convertible
debentures 18,763 --
-------- ---------
Numerator for calculation of diluted earnings
(loss) per share $296,964 $(132,063)
========= ==========
- 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The denominator in the calculation of diluted earnings (loss) per share for
the three-month periods ended october 31, 1998 and 1997 were determined as
follows:
1998 1997
----- -----
Weighted average outstanding shares used to calculate
basic earnings (loss) per share 5,542,059 945,759
Add shares issuable assuming conversion of
convertible debentures 2,575,000 --
Add shares issuable assuming exercise of
outstanding stock options 31,715 --
--------- -------
Denominator for calculation of diluted earnings
(loss) per share 8,148,774 945,759
========= ========
Basic earnings (loss) per share $ 0.05 $ (0.14)
========= ========
Diluted earnings (loss) per share $ 0.04 $ (0.14)
======== ========
There were 787,500 stock purchase warrants outstanding at October 31, 1998
that were not included in the computation of diluted earnings per share as
their effect was anti-dilutive. For the three-month period ended October 31,
1997, the assumed conversion of convertible debentures and exercise of stock
options were not used in the computation of diluted (loss) per share as their
effect would be 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 benefit nor expense was accrued
in the nine months ended October 31, 1998 and 1997.
(4) RECLASSIFICATIONS
Certain amounts in the October 31, 1997 financial statements have been
reclassified to conform with the presentation in the October 31, 1998
financial statements.
(5) INDEBTEDNESS
The Company has authorized and issued $700,000 of Series A Convertible
Subordinated Debentures (the "A Debentures") in July 1993, and authorized
$600,000 and issued $590,000 of Series B Convertible Subordinated Debentures
(the "B Debentures")(together collectively known as the "Debentures"). B
Debenturtes totaling $340,000 were outstanding at January 31, 1998 and an
additional $250,000 were issued during the nine-month period ended October
31, 1998. As discussed below, $275,000 of B Debentures were converted into
the Company's common stock during the nine-month period ended October 31, 1998.
- 11 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Debenutres bear interest, payable quarterly, at an annual rate of 12%.
The A Debentures are due on June 30, 1998, and the B Debentures are due on
May 15, 1999. The A Debentures may be redeemed by the Company at its option,
in whole or in part, at any time on or after May 1,1996. The B Debentures
may be redeemed by the Company at its option, in whole or in part, at any
time on or after January 30, 1998. The holders of the Debentures have the
right, upon appropriate notice, to convert the Debentures, in $10,000 units,
into shares of the Company's common stock at the rate of one (1) share for each
$.20 of principal amount. The B Debentures also have a detachable stock
purchase warrant, giving the holder the right, over a five year period, to
purchase shares of the Company's common stock at the quoted market price for the
Company's common stock, $.375, on the committment date. The number of shares
of common stock originally subject to warrants was 1,475,000, fifty (50%)
of the number subject to conversion. The B Debentures are considered to have
a beneficial conversion feature because the rate at which the B Debentures
may be converted into common stock ($.20 per share) is lower than the quoted
market value for the stock on the B Debentures committment date ($.375 per
share). The Debentures are secured by a security interest granted by the
Company in the assets of the Company and by mortgages on certain parcels of
real property owned by the Company which are located in Chestertown, New York
and Auburn, California.
Because of the stock purchase warrants and the beneficial conversion feature
of the B Debentures the Company engaged an independent investment banker to
evaluate the fair value of the components of the B Debentures. Based on the
report issued, the Company assigned a value of two ($.02) cents to each warrant
to purchase one share of common stock, or $29,500 in total. This amount has
been recorded as a debt discount and as an increase to additional paid-in
capital. This amount is being amortized to interest expense over the life of
the B Debentures. For the nine-month period and three-month period ended
October 31, 1998, $9,925 and $3,313, respectively, has been amortized to
interest expense related to the debt discount attributable to stock purchase
warrants.
The diference between the quoted market value for the Company's common stock
on the B Debentures committment date, $.375, and the $.20 beneficial
conversion rate multiplied by the number of shares into which the debt could
be converted has also been recorded as a debt discount and an increase to
additional paid-in capital. This amount, $516,250, is being amortized to
interest expense over the first thirty days subsequent to the issuance of the
B Debentures, the earliest date at which the debt could be converted into
common stock. For the nine-month period and three-month period ended
October 31, 1998, $506,759 and $0, respectively has been amortized to
interest expense related to the beneficial conversion feature.
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
On April 20, 1998 a certain shareholder who was an owner of B Debentures
exercised his right to convert his holdings into common stcok of the Company.
The total amount of B Debentures converted into common stock of the Company
was $275,000. Further, this same shareholder exercised his right to purchase
common stock of the Company pursuant to the stock purchase warrants issued as
a component of the B Debentures. The Company issued 1,375,000 shares of common
stock pursuant to the owner's election to convert the B Debentures, and paid
accrued interest to the shareholder to the date of conversion. The Company
issued 687,500 shares of common stock pursuant to the owner's exercise of his
stock purchase warrants. As of October 31, 1998, 787,500 warrants related to
the B Debentures were outstanding.
The holders of $200,000 of A Debentures did not accept payment from the
Company when the A Debentures matured on June 30, 1998. The $200,000 of A
Debentures were subsequently paid in full in February 1999. The debenture
holders are also part of a shareholders group and were involved in litigation
with the Company. See Part II, item 1 - Legal Proceedings.
(6) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the nine months ended October 31, 1998, cash was paid in the amounts
of $81,128 for interest and $1,425 for income taxes. During the nine months
ended October 31, 1997, cash was paid in the amounts of $166,954 for interest
and $1,236 for income taxes.
Non-cash investing and financing activity:
In April 1998 a holder of a Cant Note in the amount of $10,000 exchanged
that Note for a B Debenture in the amount of $10,000.
In April 1998, the Company recorded an increase of $13,750 in common stock
and an increase of $245,825 in additional paid in capital with a corresponding
reduction of debt of $259,575 as the result of the exercise of the right of
conversion of certain B Debentures.
During the nine months ended October 31, 1998, the Company recorded an
increase in B Debentures in the amount of $516,684, and a related charge to
interest expense in the same amount related to the amortization of the debt
discounts attributable to the beneficial conversion feature and warrants
associated with the B Debentures.
During June 1998, the Company recorded an increase of $2,500 in common
stock and an increase of $47,500 in additional paid in capital with a
corresponding reduction of debt of $50,000 as the result of the exercise of
the right of conversion of certain A Debenutres.
During the nine months ended October 31, 1998, the Company entered into
a capital lease for office equipment having a total cost of $5,673.
- 13 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
During the nine months ended October 31, 1997, the Company issued a
promissory note to a major supplier of building components in lieu of
cash payment of outstanding accounts payable in the total amount of
$128,127.
(7) NEWLY ADOPTED ACOUNTING STANDARDS
During the nine-month period ended october 31, 1998, the Company
adopted Statements of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", and No. 131, "Disclosure about
Segments of an Enterprise and Related Information". Neither statement
had an impact on the Company's financial statements as the Company has
no items of other comprehensive income and operates in only one business
segment.
-14-
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Nine months ended October 31, 1998 vs. October 31, 1997
Net sales were $7,817,414 for the nine months ended October 31, 1998 as
compared to $6,871,094 in the same period in 1997, an increase of $946,320,
or 14%. When compared with the previous year, there was a 2%
increase in the overall number of units shipped, and the average sales
value per home unit shipped increased 11%. The increase in sales value per
unit shipped resulted from the shipment of homes that were both larger
and more expensive than those shipped in the smae period of the previous year.
The increase in units shipped was principally due to favorable conditions
related to the Company's customers being in a position to accept their
respective delivery during this period, such as contractor availability,
construction financing in place, and building permits having been obtained,
which contributed to increased shipping activity.
Gross profit amounted to $3,162,548, or 40% of net sales for the nine months
ended October 31, 1998 as compared to $2,551,948, or 37% for the same period in
1997. The increase in gross profit percentage was principally due to lower
material costs and a lower amount of manufacturing overhead. The decrease
in material costs was related to the Company's effort of employing better
techniques for purchasing building materials. The manufacturing overhead
was lower due to a recuction in personnel costs.
Total operating expenses for the nine-month period ended October 31, 1998
of $2,843,013, or 36% of net sales, decreased $79,048 from the previous
year's amount for the comparable nine-month period of $2,922,061, or 43%
of net sales. The overall decrease in total operating expenses was to 3%.
Sales commissions were $1,081,909 for the nine months ended October 31, 1998
and $946,388 for the nine months ended October 31, 1997. Commissions were 14%
of net sales in both 1998 and 1997. Selling, general and administrative
expenses were $1,761,104 for the nine months ended October 31, 1998 compared
with $1,975,673 in the same period of the previous year, a decrease of $214,569,
or 11%. Selling, general and administrative expenses were 23% and 29% of net
sales for the nine months ended Octiber 31, 1998 and 1997, respectively.
The decrease in selling, general and administrative costs was the
result of a decrease in personnel costs and advertising, and a general cost
elimination program instituted by the Company in January 1998. Commissions were
higher during the same period due to higher sales volume.
-15-
The Company incurred a net loss for the nine-month period ended October 31,
1998 of $223,077. This loss included an unusual charge to interest expense of
$516,634. This amount is the amortization of debt discount attributable to
two components of the Series B Convertible Subordinated Debentures issued by
the Company in January 1998 and the quarter ended April 30, 1998 (see Note 5
of the cosolidated fincnial statements contained herein), the beneficial
conversion feature, $506,759, and stock purchase warrants, $9,925. Without
regard to these unusual items the Company would have shown net income for the
nine months ended October 31, 1998 of $293,607, an increase of $784,258 over
the loss incurred in the comparable period of the previous year of $490,651.
Three months ended October 31, 1998 vs. October 31, 1997
Net sales for the three month periods ended October 31, 1998 and 1997 were
$2,994,749 and $2,456,590, respectively. Net sales increased $538,159, or
22% in the three month period ended October 31, 1998 over the comparable period
of the previous year. There was an 8% increase in units delivered, and the
average value of units increased by 13%. The increase in sales during this
period was primarily caused by favorable building conditions for the Company's
customers that allowed them to accept delivery during this period. The
increase in sales value of home units shipped was due to larger, more expensive
homes delivered in this fiscal period than in the previous year's comparable
period.
Gross profit was $1,292,733, or 43% of net sales, for the three months
ended October 31, 1998 as compared to $944,337, or 38% for the same period in
1997. The increase in gross profit was the result of lower material costs,
which resulted from the Company using better purchasing techniques to procure
its raw materials, and lower overhead costs caused by a reduction in personnel
costs.
Total operating expenses of $1,020,045, or 34% of net sales, decreased
$24,560 from the previous year's amount of $1,044,605, or 43% of net sales.
The decrease in total operating expenses was 2%. Sales commissions were
$400,759 in the three-month period ended October 31, 1998 and $404,586 in the
three-month period ended October 31, 1997. Commissions were 13% and 16% of net
sales, respectively. Selling, general and administrative expenses were
$619,286 for the three months ended October 31, 1998 compared with $640,019 in
the same period of the previous year, a decrease of $20,733, or
3%. Selling, general and administrative expenses were 21% and 26% of
net sales for the three-month period ended October 31, 1998 and 1997,
respectively. The decrease in selling, general and admninistrative costs
as a percentage of net sales was the result of a decrease in personnel
costs and a general cost elimination program instituted by the Company in
January 1998. Although net sales for the third fiscal period were higher than
the previous year, commissions were lower during the same period due a
proportionately greater number of shipments being made to customers of the
Company's in-house salespersons. The Company's employee salespersons are
paid a lower commission rate than the Company's independent dealers.
-16-
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficiency at both October 31, 1998 and
1997 of $2,091,469 and $2,597,397, respectively. For the nine months
ended October 31, 1998 working capital deficiency improved by $549,283 as
compared to a worsening of $1,161,366 in the same period in 1997. As of the
Company's fiscal year end at January 31, 1998 current liabilities exceeded
current assets by $2,640,752.
For the nine months ended October 31, 1998 the Company's operations were
a net provider of cash in the amount of $169,276, while in the comparable
period of the previous year it was a net provider of cash in the amount of
$154,749. Overall, the Company experienced a net increase in its cash
position of $125,222 during the nine months ended October 31, 1998 as compared
with an net decrease in its cash position of $28,136 during the nine months
ended October 31, 1997. Other significant sources of cash included the
issuance of series B Convertible Subordinated Debentures and the exercise
of stock purchase warrants. Cash was primarily used for the repayment of
notes payable and additions to plant and equipment.
The Company has not been successful in securing a working capital credit
facility from commercial lenders or governmental agency sources. During
fiscal 1998 a commercial bank made a proposal to the Company to provide a
working capital line of credit on the condition that this line be secured by
assets of the Company and be considered senior debt to the Company's Series
A Convertible Subordinated Debentures. This condition could not be satisfied
by the Company because the Series A Convertible Subordinated Debentures are
secured by a mortgage on the assets of the Company. The Company, when
authorizing the issuance of Series B Convertible Subordinated Debentures,
provided for the consideration of commercial bank financing up to $750,000
to be senior to the Series B Convertible Subordinated Debentures in a mortgage
consolidation, modification and extension agreement. In July 1998, the Company
continued its dialogue with the commercial lender, however, there were no
substantive results and no further discussions with the bank have been held.
As shown in the consolidated financial statements, the Company incurred a
net loss during the nine-month period ended October 31, 1998 of $223,077.
As of October 31, 1998 current liabilities exceeded current assets by
$2,091,469 and the Company had a net stockholders' deficiency of $300,330.
The Company has not been successful in securing a working capital credit
facility from commercial lenders or governmental agency sources. Funds
generated by operations, and the assistance of major vendors who have
provided extended payment terms to the Company, have supported its
operations during fiscal 1998, and with the issuance of the Series B
Convertible Subordinated Debentures replacing the Cant Financing Program,
have done so in fiscal 1999 as well. 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, the inability to extend the
Series B Debentures when they mature in May 1999, or a reduction in vendor
assistance, could further reduce its liquidity and make it extremely difficult
for the Company to continue its operations.
-17-
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement ("FASB") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", issued in
June 1998 and effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, with earlier application permitted, requires companies
to recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. On
May 19, 1999, the FASB agreed to expose for comment a proposal to defer the
effective date of Statement No. 133 to fiscal years beginning after June 15,
2000. Management has evaluated the impact of the application of the new
rules on the Company's Consolidaed Financial Statements and concluded that
there will be no impact on its results of operations or its financial
position.
The Accounting Standards Executive Committee's Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", issued in March 1998 and effective for fiscal years beginning
after December 15, 1998 with earlier application permitted, provides guidance
on accounting for the costs of computer software developed of obtained for
internal use. The Company will adopt this statement for the fiscal year
beginning February 1, 1999. Management has evaluated the impact of the
new rules on the Company's Consolidated Financial Statements and concluded
that there will be no impact on its results of operations or its financial
position.
The Accounting Standards Executive Committee's Statement of Position
98-5, "Accounting for the Costs of Start-Up Activities", issued in April 1998
and effective for fiscal years beginning after December 15, 1998 with earlier
application permitted, provides guidance on the financial reporting of
start-ip and organization costs. The Company will adopt this statement for
the fiscal year beginning February 1, 1999. Management has evaluated the
impact of the application of the new rules on the Comapny's Consolidated
Financial Statements and concluded that there will be no impact on its
results of operations or its financial position.
- 18 -
OTHER MATTERS
YEAR 2000
The Year 2000 Issue is the result of computer programs having been written
using two digit, rather than four, to define the applicable year. Any of
the Company's computers, computer programs, manufacturing and administration
equipment of products that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. If any of the Company's
systems or equipment that have date-sensitive software use only two digits,
system failures or miscalculations may result causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or send and receive electronic data with third parties or engage
in similar normal business activities.
Unrelated to the Year 2000 Issue, the Company replaced its primary system of
computer hardware and software in 1997. Because of this acquisition, the
Company purchased and installed hardware and software that is Year 2000
compliant. However, management has assigned the task of testing all carryover
computer systems and software for Year 2000 compatability to an outside
consultant. This process includes an assessment of issues and development of
remediation plans, where necessary, as they relate to internally used
software and computer hardware. In addition, the Company is engaged in
assessing the Year 2000 Issue with suppliers. The Company plans to
initiate communications with its significant suppliers to determine
the extent to which the Company is vulnerable to those third parties' failure
to remediate their own Year 2000 issues. Finally, with regard to products
sold by the Company, the Company has determined that contingencies related
to the Year 2000 Issue will not have a material adverse effect on the Company.
Due to the nature of the Company's product, log home construction kits for
primarily residential use, there are no major customers for the Company's
product, i.e. the Comapny sells its product to the individual who will
build and occupy the Company's product as their residence. As such,
management believes that there is no practical purpose for assessment of the
Year 2000 Issue as it relates to its customers.
The Company intends to use external resources to test software it currently
uses for Year 2000 compliance. The Company plans to substantially complete
its Year 2000 assessment and remediation by August 31, 1999. The total
project cost has not yet been determined, but is believed to be minimal
because of the Company's replacement of its primary computer system with
Year 2000 compliant hardware and software in 1997. As of October 31,
1998, the Compnay has not incurred any material costs related to the
assessment of, and preliminary efforts in connection with, its Year 2000
issues.
With regard to its internal Year 2000 compliance progrm, the Company has
completed approximately 95% of its review and, where necessary, remediation.
With regard to equipment with embedded chips, the Company has reviewed its
telephone system, its security system, facsimile and similar equipment and
found them to be Year 2000 compliant. With regard to its Year 2000 compliance
program addressing the status of the Company's suppliers, the Company has not
yet begun its review. The Company currently does not have a contingency plan
and does not contemplate creating one.
-19-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 9, 1998, the Company was served with a Summons and Complaint
(the "Complaint") against it and three current members and one former member
of its Board of Directors by a shareholders group, which alleged mismanagement,
breach of fidicuary duties and other matters. The Company responded to the
Complaint on behalf of itseld and the current amd former Board members on
march 26, 1998, and also filed a counter-suit. On April 20, 1999, the Company
reached a compromise agreement with the shareholder group, neither party
admitted wrongdoing or liability. the settlement requires a cash payment of
$150,000 in exchange for the 201,500 shares of common stock held by the
shareholder group and a release from all other claims. Of the settlement
amount, $75,000 is being funded by the Company's insurance company, and
$33,248 (calculated as 201,500 shares multiplied by the fair market value
of the Company's common stock at the date on which the settlement was agreed
off $.165) will be funded by an officer, director or other shareholders of
the Company in exchange for the common stock. The remaining $41,752 has been
accrued by the Company in its financial statements for the year ended
January 31, 1998, which represents the deductible portion of the insurance
policy applicable to the settlement.
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
None
- 20 -
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
May 28, 1999
/ s / William J. Thyne
William J. Thyne
Chief Financial Officer, Principal Financial
Officer and Secretary
May 28, 1999
- 21 -