UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES ACT OF 1934
For the quarterly period ended October 31, 1999
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 December 10, 1999
Common Stock, $ .01 par value 7,255,059
- 1 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
INDEX
Page number
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets as of
October 31, 1999 and January 31, 1999 3 - 4
Consolidated statements of operations
for the nine months ended October 31, 1999 and 1998 5
Consolidated statements of operations
for the three months ended October 31, 1999 and 1998 6
Consolidated statement of changes in stockholders'
equity (deficiency) for the nine months ended
October 31, 1999 and the twelve months ended
January 31, 1999 7
Consolidated statements of cash flows
for the nine months ended October 31, 1999 and 1998 8
Notes to consolidated financial statements 9 - 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION 15 - 19
PART II. OTHER INFORMATION 20
SIGNATURES 21
- 2 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND JANUARY 31, 1999
ASSETS
October 31, January 31,
1 9 9 9 1 9 9 9
(Unaudited) (Audited)
---------- -----------
CURRENT ASSETS:
Cash and cash equivelants $ 604,129 $ 223,521
Trade accounts receivable, net of $17,700
allowance for doubtful accounts 149,719 261,209
Inventories (principally raw materials) 815,875 593,314
Prepaid expenses and other current assets 611,320 516,560
Prepaid income taxes 100 918
Mortgage receivable 2,397 2,302
---------- ----------
Total current assets 2,183,540 1,597,824
------------ -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 784,800 784,800
Buildings and improvements 2,300,657 2,177,600
Machinery and equipment 637,969 625,848
Furniture and fixtures 1,398,951 1,368,254
Transportation equipment 198,386 167,917
----------- ---------
5,320,763 5,124,419
Less: accumulated depreciation (3,500,150) (3,392,150)
---------- ---------
Total property, plant and
equipment - net 1,820,613 1,732,269
---------- ----------
OTHER ASSETS:
Mortgage receivable 69,388 70,688
Assets held for resale 27,561 27,561
Cash surrender value of life insurance,
net of loan of $83,574 at January 31, 1999
and $-0- at October 31, 1999 94,410 10,606
Deposits and other assets 933 1,622
Intangible assets, net of amortization 3,700 9,250
--------- ---------
Total other assets 195,992 119,727
--------- ---------
TOTAL ASSETS $4,200,145 $3,449,820
========== ==========
<FN>
( continued )
- 3 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
OCTOBER 31, 1999 AND JANUARY 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
October 31, January 31,
1 9 9 9 1 9 9 9
(Unaudited) (Audited)
---------- -----------
CURRENT LIABILITIES:
Current installments of long-term debt:
Related parties $ 125,000 $ 281,350
Others 6,004 34,644
Note payable -- 125,435
Trade accounts payable 510,084 830,879
Customer deposits 1,809,232 1,288,125
Accrued payroll, related taxes and
withholdings 71,956 69,874
Accrued income taxes -- 1,050
Due to related parties 201,272 154,122
Accrued expenses 588,196 621,321
---------- ----------
Total current liabilities 3,311,744 3,406,800
LONG-TERM DEBT, net of current installments:
Convertible subordinated debentures:
Related parties 200,000 --
Others 20,000 200.000
Other 17,000 3,577
Other long-term liability 94,410 93,876
----------- ----------
Total liabilities 3,643,154 3,704,253
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY):
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
and 6,046,299 shares 77,593 60,463
Additional paid-in capital 5,681,554 5,418,104
Accumulated deficit (4,317,721) (4,848,565)
----------- ----------
1,441,426 630,002
Less: cost of 504,240 shares of common
stock in treasury (884,435) (884,435)
----------- ------------
Total stockholders' equity
(deficiency) 556,991 (254,433)
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $4,200,145 $3,449,820
============== ============
<FN>
See accompanying notes to consolidated financial statements.
- 4 -
LINCOLN LOGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(UNAUDITED)
<CAPTION)
Nine Months Ended
October 31,
-------------------
1 9 9 9 1 9 9 8
--------- --------
NET SALES $9,041,956 $7,817,414
COST OF SALES 5,090,065 4,654,866
---------- ----------
GROSS PROFIT 3,951,891 3,162,548
---------- ----------
OPERATING EXPENSES:
Commissions 1,330,337 1,081,909
Selling, general and administrative 2,091,757 1,761,104
---------- ----------
Total operating expenses 3,422,094 2,843,013
---------- ----------
INCOME FROM OPERATIONS 529,797 319,535
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 23,404 21,627
---------- ----------
Interest expense:
Amortization attributable to
beneficial conversion feature
and warrants (note 4) ( 4,547) (516,684)
All other ( 54,700) ( 80,378)
---------- ----------
Total interest expense ( 59,247) (597,062)
---------- ----------
Other 37,126 32,823
---------- ----------
Total other income (expense) - net 1,283 (542,612)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 531,080 (223,077)
INCOME TAXES 236 --
---------- ----------
NET INCOME (LOSS) $ 530,844 $(223,077)
========== ==========
PER SHARE DATA (note 2):
Basic earnings and loss per share $.09 $(.05)
========== ==========
Diluted earnings and loss per share $.07 $(.05)
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 5 -
LINCOLN LOGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1999 AND 1998
(UNAUDITED)
<CAPTION)
Three Months Ended
October 31,
-------------------
1 9 9 9 1 9 9 8
--------- --------
NET SALES $3,499,708 $2,994,749
COST OF SALES 1,949,064 1,702,016
---------- ----------
GROSS PROFIT 1,550,644 1,292,733
---------- ----------
OPERATING EXPENSES:
Commissions 518,566 400,759
Selling, general and administrative 715,136 619,286
---------- ----------
Total operating expenses 1,233,702 1,020,045
---------- ----------
INCOME FROM OPERATIONS 316,942 272,688
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 7,611 8,629
---------- ----------
Interest expense:
Amortization attributable to
beneficial conversion feature
and warrants (note 4) ( -- ) ( 3,313)
All other ( 8,638) (14,975)
---------- ----------
Total interest expense ( 8,638) (18,288)
---------- ----------
Other 11,632 15,172
---------- ----------
Total other income (expense) - net 10,605 5,513
---------- ----------
INCOME BEFORE INCOME TAXES 327,547 278,201
INCOME TAXES 236 --
---------- ----------
NET INCOME $ 327,311 $ 278,201
========== ==========
PER SHARE DATA (note 2):
Basic earnings per share $.05 $.05
========== ==========
Diluted earnings per share $.04 $.04
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 6 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDRS' EQUITY (DEFICIENCY)
FOR THE NINE MONTHS ENDED OCTOBER 31, 1999 (UNAUDITED) AND
THE TWELVE MONTHS ENDED JANUARY 31, 1999
Total
Number Par Additional stockholders'
of value paid-in (Accumulated Treasury equity
shares amount capital deficit) stock (deficiency)
--------- --------- ---------- ------------ ------------ -------------
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
Common stock issued upon exercise
of stock purchase warrants 687,500 6,875 250,937 -- -- 257,812
Debt converted to commom stock 1,625,000 16,250 293,325 -- -- 309,575
Amount assigned to subordinated debenture
beneficial conversion feature
and warrants -- -- 231,250 -- -- 231,250
Net loss - 1999 -- -- -- (177,180) -- (177,180)
---------- ---------- ---------- ---------- ------------- ------------
Balance at January 31, 1999 6,046,299 $ 60,463 $5,418,104 $(4,848,565) $( 884,435) $ (254,433)
Amount assigned to subordinated debenture
warrants -- -- 500 -- -- 500
Debt converted to commom stock 1,712,500 17,125 262,875 -- -- 280,000
Common stock issued upon exercise
of stock options 500 5 75 -- -- 80
Net income-9 months ended
October 31, 1999 -- -- -- 530,844 -- 530,844
---------- ----------- ---------- ------------ ---------- -------------
Balance at October 31, 1999 7,759,299 $ 77,593 $5,681,554 $(4,317,721) $ (884,435) $ 556,991
========== ============ =========== ============ ============= =============
<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, 1999 AND 1998
(UNAUDITED)
Nine Months Ended
October 31,
----------------------------
1 9 9 9 1 9 9 8
---------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ 530,844 $ (223,077)
Adjustments to reconcile net income
(loss)to net cash provided by
operating activities:
Depreciation and amortization 113,550 114,520
Amortization of amounts assigned to
beneficial conversion feature
and warrants 4,547 516,684
Compensation related to exercise of
stock option -- 925
Changes in operating assets and liabilities:
Decrease (increase) in trade
accounts receivable 111,490 (52,551)
(Increase) in inventories (222,561) (25,234)
(Increase) in prepaid expenses
and other current assets (93,942) (180,350)
(Decrease)in trade accounts payable (320,795) (258,073)
Increase in customer deposits 521,107 198,366
(Decrease) increase in accrued
expenses and other current liabilities (31,043) 91,460
Increase (decrease) in due to
related parties 47,150 (11,969)
(Decrease) in accrued income taxes (1,050) (1,425)
---------- ----------
Net cash provided by
operating activities 659,297 169,276
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment (176,304) (95,093)
Decrease (increase) in deposits
and other assets 689 (634)
Payments received on mortgage receivable 1,205 641
---------- ----------
Net cash (used) by investing activities (174,410) (95,086)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of debentures 310,000 240,000
Proceeds from issuance of common stock
upon exercise of stock
purchase warrants -- 257,812
Proceeds from issuance of common stock
upon exercise of stock options 80 --
Repayments of notes payable (125,435) (420,500)
Net increase in cash surrender value of
insurance policy 304 --
Repayment of loan against cash surrender
value of life insurance policy and
accrued interest (83,574) (10,000)
Repayments of long-term debt (205,654) (16,280)
---------- ----------
Net cash (used) provided by financing
activities (104,279) 51,032
---------- ----------
Net increase in cash and cash equivalents 380,608 125,222
Cash and cash equivalents at
beginning of period 223,521 124,307
---------- ----------
Cash and cash equivalents at
end of period $604,129 $249,529
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 8 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999 AND 1998
(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, 1999 and 1998 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, 1999.
(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 6,131,836 and 4,815,589 for
the nine-month periods ended October 31, 1999 and 1998, respectively, and
7,254,929 and 5,542,059 for the three-month periods ended October 31, 1999
and 1998, 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 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 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
period ended October 31, 1998 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 nine-month periods ended October 31, 1999 and 1998 was determined as
follows:
1999 1998
----- -----
Net income (loss) used to calculate basic earnings
per share $530,844 $(223,077)
Add back interest expense related to convertible
debentures 24,347 -0-
--------- ---------
Numerator for calculation of diluted earnings (loss)
per share $555,191 $(223,077)
========= =========
- 9 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The denominator in the calculation of diluted earnings (loss) per share
for the nine-month periods ended October 31, 1999 and 1998 was determined as
follows:
1999 1998
----- -----
Weighted average outstanding shares used to calculate
basic earnings (loss) per share 6,131,836 4,815,589
Add shares issuable assuming conversion of
convertible debentures 1,162,500 -0-
Add shares issuable assuming exercise of outstanding
stock purchase warrants -0- -0-
Add shares issuable assuming exercise of outstanding
stock options 198,829 -0-
-------- --------
Denominator for calculation of diluted earnings
(loss) per share 7,493,165 4,815,589
========== =========
Basic earnings (loss) per share $ 0.09 $(0.05)
======== ========
Diluted earnings (loss) per share $ 0.07 $(0.05)
======= =======
There were 812,500 and 787,500 stock purchase warrants outstanding at
October 31, 1999 and October 31, 1998, respectively, that were not included
in the computation of diluted earnings per share for the nine-month period as
their effect would be anti-dilutive. Further, shares issuable assuming
conversion of convertible debentures and shares issuable assuming exercise
of outstanding stock options at October 31, 1998 were not included in the
computation of diluted earnings per share for the nine-month period as their
effect was anti-dilutive.
The numerator in the calculation of diluted earnings per share for
the three-month periods ended October 31, 1999 and 1998 was determined as
follows:
1999 1998
----- -----
Net income used to calculate basic earnings
per share $327,311 $278,201
Add back interest expense related to convertible
debentures 6,600 18,763
--------- ---------
Numerator for calculation of diluted earnings
per share $333,911 $296,964
========= =========
The denominator in the calculation of diluted earnings per share
for the three-month periods ended October 31, 1999 and 1998 was determined as
follows:
1999 1998
----- -----
Weighted average outstanding shares used to calculate
basic earnings per share 7,254,929 5,542,059
Add shares issuable assuming conversion of
convertible debentures 1,162,500 2,575,000
Add shares issuable assuming exercise of outstanding
stock purchase warrants 103,923 -0-
Add shares issuable assuming exercise of outstanding
stock options 235,419 31,715
-------- --------
Denominator for calculation of diluted earnings
per share 8,756,771 8,148,774
========== =========
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Basic earnings per share $ 0.05 $ 0.05
======== =======
Diluted earnings per share $ 0.04 $ 0.04
======= =======
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 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 expense or
benefit was accrued in the nine months ended October 31, 1999 and 1998 as the
result of the utilization of Net Operating Loss Carryforwards. The income tax
expense reflected for the nine month period ended October 31, 1999 is the
result of an under-accrual of state minimum taxes for the year ended
January 31, 1999 that was paid upon filing of the returns.
(4) INDEBTEDNESS
Through Janaury 31, 1999, the Company had authorized and issued $700,000
of Series A Convertible Subordinated Debentures (the "A Debentures"), and
authorized $600,000 and issued $590,000 of Series B Convertible Subordinated
Debentures (the "B Debentures"). An additional $10,000 of B Debentures were
issued during the first quarter ended April 30, 1999. In February 1999, the
Company authorized and issued $300,000 of Series C Convertible Subordinated
Debentures (the "C Debentures")(all of the aforementioned series of
convertible subordinated debentures are collectively known as the
"Debentures"). The Debentures bear interest, payable quarterly, at an annual
rate of 12%. The A Debentures were due on June 30, 1998, and the B Debentures
were originally due on May 15, 1999. A Debentures totaling $200,000 remained
outstanding at January 31, 1999 because they were held by a shareholder group
that had commenced litigation against the Company as discussed in Part II,
Item 1 of this Form 10-QSB. In February 1999, the $200,000 of A Debentures
outstanding were fully repaid, including interest through the date of
repayment, with the proceeds from the issuance of the C Debentures. The B
Debentures may be redeemed by the Company at its option, in whole or in part,
at any time on or after January 30, 1998. The C Debentures may be redeemed
by the Company at its option, in whole or in part, at any time on or after
April 25, 1999. The holders of the B Debentures have the right, upon
appropriate notice, to convert the B Debentures, in $10,000 units, into
shares of the Company's common stock at the rate of one (1) share for each
$.20 of principal amount. The holders of the C Debentures have the right,
upon appropriate notice, to convert the C Debentures, in $10,000 units, into
shares of the Company's common stock at the rate of one (1) share for each
$.16 of principal amount. The B Debentures also have a detachable stock
purchase warrant, giving the holder the right, over a five year period, to
purchase shares of the Company's common stock at the quoted market price of
the Company's common stock, $.375, on the commitment date. The total number
of shares of common stock subject to warrants was 1,500,000, fifty (50%) of
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
the number subject to conversion. As of January 31, 1999 and October 31, 1999,
there were 787,500 and 812,500 warrants outstanding, respectively. The B
Debentures are considered to have a beneficial conversion feature because
the rate at which the B Debentures may be converted into common stock
($.20 per share) is lower than the quoted market value for the stock at the
date the B Debentures commitment date. 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.
As disclosed in the above paragraph, the original maturity date of the B
Debentures was May 15, 1999. Prior to May 15, 1999, holders of B Debentures
with a face amount of $200,000 agreed to extend the maturity date to May 15,
2001. On May 15, 1999, the remaining $125,000 of B Debentures became due.
The holder of the remaining $125,000 of B Debentures elected not to convert
the Debenture into the common stock of the Company. Due to a dispute with
the holder of the remaining B Debentures, an individual who is a current
member of the Company's Board of Directors and its former Chairman of the
Board, the Company decided not to repay that debenture on the due date.
As a result, the Company is in default with respect to such B Debenture,
which is also an event of default under the C Debentures. The holders of the
C Debentures have waived their right to accelerate the maturity date of the
C Debentures, and the Company has begun negotiations with the holder of the
B Debenture in order to agree to a final settlement of all amounts due to,
and/or from the Board Menber.
Because of the stock purchase warrants and the beneficial conversion
feature of the B Debentures the Company engaged an independent investment
banker to evaluate the fair value of the components of the B Debentures.
Based on the report issued December 22, 1998, the Company assigned a value
of two ($.02) cents to each warrant to purchase one share of common stock,
or $30,000. This amount has been recorded as a debt discount and as an
increase to additional paid-in capital. This amount is amortized to interest
expense over the original life of the B Debentures. For the nine-month
period and three-month period ended October 31, 1999, $4,547 and $0.00 (zero),
respectively, has been amortized to interest expense related to the debt
discount attributable to stock purchase warrants. 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 difference between the quoted market value for the Company's common
stock on the commitment date of the B Debentures, $.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, totaling $516,250, was
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. The amounts of debt discount amortized to
interest expense related to the beneficial conversion feature were $0.00
(zero) and $0.00 (zero) in the three month periods ended October 31, 1999 and
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
October 31, 1998, respectively. The amounts of debt discount amortized to
interest expense related to the beneficial conversion feature were $0.00
(zero) and $506,759 in the nine month periods ended October 31, 1999 and
October 31, 1998, respectively.
On April 20, 1998 a shareholder, officer and director, who owned B
Debentures exercised his right to convert his holdings into common stock of
the Company. The face amount of B Debentures converted into common stock of
the Company was $275,000 (carrying amount of $259,575). This individual also
exercised the warrants he held related to the debentures. The Company issued
2,062,500 shares (1,375,000 shares related to the conversion and 687,500
shares related to the warrants) and paid accrued interest to the date of
conversion. Further, on June 30, 1998, the maturity date of the A Debentures,
holders of $50,000 of A Debentures exercised their right to convert their
holdings into common stock of the Company. The Company issued 250,000 shares
of common stock pursuant to the owners' election to convert, and paid accrued
interest to the date of conversion. Finally, on July 30, 1999, a shareholer,
officer and director, who owned B Debentures and C Debentures exercised his
right to convert his holdings into common stock of the Company. The face
amount of the B Debentures converted into common stock of the Company was
$30,000 (carrying amount of $30,000). The face amount of C Debentures
converted into common stock of the Company was $250,000. The Company
issued 1,712,500 shares (150,000 shares related to the conversion of the
B Debentures and 1,562,500 shares related to the conversion of the
C Debentures) and paid accrued interest to the date of conversion.
(5) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the nine months ended October 31, 1999, cash was paid in the amounts
of $65,100 for interest and $1,286 for income taxes. 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.
Non-cash investing and financing activity:
During the nine months ended October 31, 1999 and October 31, 1998, the
Company recorded an increase in the cash surrender value of an insurance
policy on the life of the Company's founder and also recorded an increase
in the related liability in the same amount.
During the nine months ended October 31, 1999, the Company recorded an
increase in transportation equipment of $20,040 and a related increase
in long-term debt in the same amount representing the financed portion
of the purchase of a new truck.
During the nine months ended October 31, 1999, the Company recorded an
increase in B Debentures in the amount of $4,047, an increase in additional
paid-in-capital of $500 and a charge to interest expense of $4,547 related
to the amortization of debt discount attributable to warrants associated
with the B Debentures.
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
During the nine months ended October 31, 1999, the Company recorded an
increase of $17,125 in common stock, an increase of $262,875 in additional
paid-in-capital and a corresponding reduction of debt of $280,000 as the
result of the exercise of the right of conversion of certain B Debentures
and C Debentures.
During April 1998 a holder of a Note in the amount of $10,000
exchanged that Note for a B Debenture in the amount of $10,000.
During 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 $513,371, 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 issued a
promissory note to a major supplier of building components in lieu of
cash payment of an outstanding note payable with a maturity date of May 30,
1998 in the amount of $72,373.
(6) NEWLY ADOPTED ACCOUNTING STANDARDS
During the nine-month period ended October 31, 1999, the Company
adopted Accounting Standards Executive Committee's Statemnt of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use." Management has evaluated the impact of the application
of the new rules on the Company's Consolidated Financial Statements and
concluded that there will be no impact on its results of operations or its
financial position.
During the nine-month period ended October 31, 1999, the Company adopted
Accounting Standards Executive Committee's Statemnt of Position 98-5,
"Accounting for the Costs of Start-Up Activities." Management has evaluated
the impact of the application of the new rules on the Company's Consolidated
Financial Statements and concluded that there will be no impact on its
results of operations or its financial position.
- 14 -
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
RESULTS OF OPERATIONS
Nine months ended October 31, 1999 vs. October 31, 1998
Net sales were $9,041,956 for the nine months ended October 31, 1999 as
compared to $7,817,414 in the same period in 1998, an increase of $1,224,542,
or 16%. When compared to the previous year, there was a 9% increase in the
number of housing units shipped, and the average sales value per unit
shipped increased 7%. The increase in sales value per housing unit shipped
resulted from the shipment of homes that were both larger and more expensive
than those shipped in the same period of the previous year and a sales price
increase put into effect in the spring of 1998, the effect of which is being
realized in the current fiscal year. The increase in units shipped is
attributable to a very positive home building market and 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.
All of these factors contributed to increased shipping activity.
Gross profit amounted to $3,951,891, or 44% of net sales for the nine
months ended October 31, 1999 as compared to $3,162,548, or 40% of net sales,
for the same period in 1998. The increase in gross profit percentage was
due to slightly lower material costs and the realized increase in average
sales value per unit shipped. The decrease in material costs was related to
the Company's effort of employing better techniques for purchasing building
materials. The Company has been able to take advantage of discounts offered
by suppliers because of its improved financial condition.
Total operating expenses of $3,422,094, or 38% of net sales, increased
$579,081 from the previous year's amount of $2,843,013, or 36% of net sales.
The overall increase in total operating expenses was 20%. Sales commissions
were $1,330,337 for the nine months ended October 31, 1999 and $1,081,909 for
the nine months ended October 31, 1998. Commissions were 15% and 14% of net
sales in 1999 and 1998, respectively. Selling, general and administrative
expenses were $2,091,757 for the nine months ended October 31, 1999 compared
with $1,761,104 in the same period in the previous year, an increase of
$330,653, or 19%. Selling, general and administrative expenses were 23% and
22% of net sales for the nine months ended October 31, 1999 and 1998,
respectively. The increase in expenses was the result of an increase in
personnel costs and an increase in advertising and promotion costs and
professional services fees. Commissions were higher during the same period
due to higher sales volume and a proportionately greater number of shipments
being made to customers of the Company's independent dealers, who are paid a
higher commission rate than the Company's employee-sales representatives,
than in the prior year's comparable period. Also, higher commission rates
were paid on incremental sales to independent dealers as they exceeded
certain delivery achievement criteria.
-15-
The Company realized a net profit of $530,844 for the nine-month period
ended October 31, 1999. For the nine-month period ended October 31, 1998,
the Company incurred a net loss of $223,077. This loss included an unusual
charge to interest expense of $516,684. 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 4 of the consolidated financial
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.
Three months ended October 31, 1999 vs. October 31, 1998
Net sales for the three month periods ended October 31, 1999 and 1998 were
$3,499,708 and $2,994,749, respectively. Net sales increased $504,959, or
17% in the three month period ended October 31, 1999 over the comparable period
of the previous year. When compared to the same period in the prior fiscal
year, there was a 12% increase in units delivered. The average value
per unit shipped increased by 3%. The increase in sales during this
period was caused by favorable building conditions for the Company's customers
that allowed them to accept delivery during this period, and units that were
not delivered during the second fiscal quarter were delivered during the
third fiscal quarter. The increase in value per unit shipped was
primarily the result of the shipment of units that were larger and more
expensive than those of the previous year and the effect of a sales price
increase put into effect in the spring of 1998.
Gross profit was $1,550,644, or 44% of net sales, for the three months
ended October 31, 1999 as compared to $1,292,733, or 43% of net sales, for
the same period in 1998. The increase in gross profit was the result of
slightly lower material costs, which resulted from the Company using better
purchasing techniques to procure its raw materials and taking advantage of
supplier offered discounts, and the realized increase in average sales value
per unit shipped.
Total operating expenses of $1,233,702, or 35% of net sales, increased
$213,657 from the previous year's amount of $1,020,045, or 34% of net sales.
The overall increase in total operating expenses was 21%. Sales commissions
were $518,566 in the three-month period ended October 31, 1999 and $400,759 in
the three-month period ended October 31, 1998. Commissions were 15% and 13%
of net sales, respectively. Selling, general and administrative expenses were
$715,136 for the three months ended October 31, 1999 compared with $619,286 in
the same period of the previous year, an increase of $95,850, or 15%. Selling,
general and administrative expenses were 20% and 21% of net sales for the
three-month periods ended October 31, 1999 and 1998, respectively. The increase
in costs was the result of an increase in personnel costs and an increase in
advertising and promotion costs. Commissions were higher during the same
period due higher sales volume, and a proportionately greater number of
shipments being made to customers of the Company's independent dealers, who are
paid a higher commission rate than the Company's employee-sales representatives,
than in the prior year's comparable period. Also, higher commission rates
were paid on incremental sales to independent dealers as they exceeded delivery
achievement criteria.
- 16 -
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficiency at both October 31, 1999 and
October 31, 1998 of $1,128,204 and $2,091,469, respectively. For the nine
months ended October 31, 1999 working capital deficiency improved by $680,772
as compared to an improvement of $549,283 in the same period in 1998. As of
the Company's fiscal year end at January 31, 1999 current liabilities exceeded
current assets by $1,808,976. During the nine-month period ended October 31,
1999, cash was primarily provided by the receipt of customer deposits, the
collection of outstanding accounts receivable and the issuance of convertible
debentures. Cash was primarily used to repay notes and long-term debt,
purchase inventory, acquire capital assets and reduce accounts payable.
For the nine months ended October 31, 1999 and October 31, 1998 the
Company's operations were a net provider of cash in the amounts of $659,297
and $169,276, respectively. Overall, the Company experienced a net increase
in its cash position of $380,608 during the nine months ended October 31, 1999
as compared with an increase in its cash position of $125,222 during the nine
months ended October 31, 1998.
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 then
outstanding Series A Convertible Subordinated Debentures. This condition
could not be satisfied by the Company because the Series A Convertible
Subordinated Debentures, now fully satisfied, were 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 that bank have been held. During
the recent quarter, the Company began conversations with several lending
sources. Some have been unsuccessful, and others have not yet concluded.
The Company is hopeful that, based on the improvement in its financial
condition, it will be able to secure outside financing to augment its
operationally generated working capital.
As shown in the consolidated financial statements, the Company realized a
net profit during the nine months ended October 31, 1999 of $530,844. As of
October 31, 1999 current liabilities exceeded current assets by $1,128,204 and
the Company had a net stockholders' equity of $556,991. The Company has
not been successful in securing a working capital credit facility from
commercial lenders or governmental agency sources. Funds generated by
operations, the assistance of major vendors who have provided extended payment
terms to the Company, and the issuance of the Series B Convertible
Subordinated Debentures to replace existing Notes have supported its
operations during fiscal 1999. In the first quarter of fiscal year 2000,
the Company issued Series C Convertible Subordinated Debentures from
which proceeds the remaining outstanding Series A Convertible Debentures
were repaid. Although the Company's results of operations improved
-17-
during the past year, there is, however, no assurance that the Company will
be able to generate adequate funds from these sources. A reduction in the
Company's sales activity, or a reduction in vendor assistance could further
reduce its liquidity and make it extremely difficult for the Company to
continue its operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement ("FASB") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", issued in
June 1998 and effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, with earlier application permitted, requires companies
to recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. In June
1999, FASB issued Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133-an amendemnt of FASB Statement No. 133"
which delayed the effective date of Statement No. 133 to fiscal years beginning
after June 15, 2000. Management has evaluated the impact of the application of
the new rules on the Company's Consolidated Financial Statements and concluded
that there will be no impact on its results of operations or its financial
position.
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 or 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
-18-
communicated 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 Company 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 used external resources to test software it currently uses for
Year 2000 compliance. The Company has substantially completed its Year 2000
assessment and remediation by December 10, 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, 1999, the Company 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 program, the Company has
completed substantially all 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
substantially completed its review and has communicated with most of its major
suppliers. To date, responses received have not indicated any substantial
Year 2000 difficulties. The Company currently does not have a contingency plan
and does not contemplate creating one.
-19-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company reported in its filing on Form 10-QSB for the quarter ended
April 30, 1999, filed with the Securities and Exchange Commission on June 14,
1999, that it was served with a Summons and Complaint against it and three
current members and one former member of its Board of Directors by a
shareholders group. On April 20, 1999, the Company reached a compromise
agreement with the shareholder group. The settlement requires, among other
things, a cash payment of $150,000 in exchange for the common stock held by the
shareholder group. On November 11, 1999, the compromise agreement was
concluded and accepted by the New York State Supreme Court.
Item 2. Changes in Securities and Use of proceeds
None
Item 3. Defaults Upon Senior Securities
On May 15, 1999, $125,000 of Series B Convertible Subordinated
Debentures (the "B Debentures") became due. The holder of the debenture elected
not to convert the debenture into common stock of the Company nor to extend its
maturity date as other holders of B Debentures had done. Due to a dispute with
the holder of the outstanding $125,000 B Debenture the Company decided not to
repay the debenture on the due date. As a result, the Company is in default
with respect to such B Debenture, which is also an event of default under the
Series C Convertible Subordinated Debentures (the "C Debentures"). The
holders of the C Debentures have given a written waiver of their right to
accelerate their maturity date of the C Debentures. See also Note 4 to
the Consolidated Financial Statements contained herein.
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
None
-20-
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINCOLN LOGS LTD.
/ s / John D. Shepherd
John D. Shepherd
Chairman of the Board, President, Chief
Executive Officer and Treasurer
December 14, 1999
/ s / William J. Thyne
William J. Thyne
Chief Financial Officer, Principal Financial
Officer and Secretary
December 14, 1999
- 21 -