UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1996
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 Dec. 11, 1996
Common Stock, $ .01 par value 945,759
- 1 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
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I N D E X
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Page Number
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets as of
October 31, 1996 and January 31, 1996 3 - 4
Consolidated statements of operations
for the nine months ended
October 31, 1996 and 1995 5
Consolidated statements of operations
for the three months ended
October 31, 1996 and 1995 6
Consolidated statements of cash flows
for the nine months ended October 31,
1996 and 1995 7
Notes to consolidated financial statements 8 - 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 10 - 12
PART II. OTHER INFORMATION 13
SIGNATURES 14
- 2 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1996 AND
JANUARY 31, 1996
ASSETS
October 31, January 31,
1 9 9 6 1 9 9 6
(Unaudited) (Audited)
----------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 182,184 $ 373,636
Trade accounts receivable, net of
$9,000 allowance for doubtful
accounts 584,293 258,707
Notes receivable 18,500 18,500
Inventories (principally raw materials) 790,026 827,814
Prepaid expenses and
other current assets 350,411 264,133
Due from related party 1,779 1,543
Income taxes receivable and prepaid 115 --
----------- ------------
TOTAL CURRENT ASSETS 1,927,308 1,744,333
---------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 784,800 784,800
Buildings and improvements 2,118,426 2,118,426
Machinery and equipment 620,967 620,332
Furniture and fixtures 1,258,195 1,227,314
Transportation equipment 142,028 142,028
--------- ---------
4,924,416 4,892,900
Less: accumulated depreciation (3,126,726) (3,021,512)
----------- -----------
TOTAL PROPERTY, PLANT AND
EQUIPMENT - net 1,797,690 1,871,388
--------- ---------
OTHER ASSETS:
Cash surrender value of life insurance 89,321 --
Due from related party 74,817 76,072
Assets held for resale 71,825 71,825
Deposits and other assets 988 689
Intangible assets, net of amortization 29,778 37,073
------- -------
TOTAL OTHER ASSETS 266,729 185,869
------- -------
TOTAL ASSETS $3,991,727 $3,801,380
---------- ----------
See notes to consolidated financial statements.
- 3 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 1996 AND
JANUARY 31, 1996
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
October 31, January 31,
1 9 9 6 1 9 9 6
(Unaudited) (Audited)
----------- -----------
CURRENT LIABILITIES:
Current installments of long-term debt $ 18,294 $ 137,873
Notes payable (note 4)
Related parties 315,000 315,000
Others 185,000 115,000
Other credit - redeemable
common stock, current -- 94,305
Trade accounts payable 1,310,568 1,072,368
Customer deposits 772,240 796,407
Accrued payroll and related taxes
and withholdings 57,925 42,786
Accrued income taxes -- 806
Accrued expenses 389,554 555,767
--------- ---------
TOTAL CURRENT LIABILITIES 3,048,581 3,130,312
LONG-TERM DEBT, net of current
installments:
Convertible subordinated debentures
Related parties 500,000 500,000
Others 200,000 200,000
Other 29,701 39,576
--------- ---------
TOTAL LIABILITIES 3,778,282 3,869,888
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $.01 par value;
authorized 1,000,000 shares; issued
and outstanding -0- shares -- --
Common stock, $.01 par value;
authorized 5,000,000 shares; issued
and outstanding 1,449,999 shares, less
93,935 shares subject to redemption
agreement at January 31, 1996 14,500 13,561
Additional paid-in capital 3,894,286 3,800,920
Accumulated deficit (2,810,906) (3,092,859)
----------- -----------
1,097,880 721,622
Less: cost of 504,240 shares and
410,305 shares of common stock
in treasury at October 31, 1996 and
January 31, 1996, respectively ( 884,435) ( 790,130)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 213,445 ( 68,508)
----------- -----------
COMMITMENTS AND CONTINGENCIES
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $3,991,727 $3,801,380
----------- -----------
See notes to consolidated financial statements.
- 4 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1996 AND 1995
(UNAUDITED)
Nine Months Ended
October 31,
-----------------------
1 9 9 6 1 9 9 5
---------- ---------
SALES, net of commissions of
$796,311 and $923,199, respectively $ 6,240,429 $ 5,851,611
COST OF SALES 4,006,978 3,949,026
--------- ---------
GROSS PROFIT 2,233,451 1,902,585
OPERATING EXPENSES:
Selling, general and administrative 1,832,165 1,715,336
--------- ---------
INCOME FROM OPERATIONS 401,286 187,249
OTHER INCOME (EXPENSE):
Interest income 34,060 25,972
Interest expense ( 173,983) ( 144,190)
Other 20,590 45,671
--------- ---------
Total other income (expense) - net ( 119,333) ( 72,547)
--------- ---------
INCOME BEFORE INCOME TAXES 281,953 114,702
INCOME TAXES -- --
--------- ----------
NET INCOME $ 281,953 $ 114,702
--------- ----------
PER SHARE DATA (note 2):
Primary earnings per common share $ .30 $ .12
---------- ----------
Fully diluted earnings per common
and common equivalent share $ .08 $ .04
----------- ----------
See notes to consolidated financial statements.
- 5 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 1996 AND 1995
(UNAUDITED)
Three Months Ended
October 31,
---------------------
1 9 9 6 1 9 9 5
------- -------
SALES, net of commissions of
$211,411 and $343,537, respectively $ 2,391,736 $ 2,255,178
COST OF SALES 1,574,423 1,571,967
--------- ----------
GROSS PROFIT 817,313 683,211
OPERATING EXPENSES:
Selling, general and administrative 531,577 581,442
--------- ---------
INCOME FROM OPERATIONS 285,736 101,769
OTHER INCOME (EXPENSE):
Interest income 12,560 7,384
Interest expense ( 57,191) ( 50,038)
Other 9,463 31,845
--------- ---------
Total other income (expense) - net ( 35,168) ( 10,809)
---------- ---------
INCOME BEFORE INCOME TAXES 250,568 90,960
INCOME TAXES -- --
--------- -----------
NET INCOME $ 250,568 $ 90,960
---------- ----------
PER SHARE DATA (note 2):
Primary earnings per common share $ .26 $ .10
---------- ----------
Fully diluted earnings per common
and common equivalent share $ .06 $ .03
---------- ----------
See notes to consolidated financial statements.
- 6 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1996 and 1995
(UNAUDITED)
Nine Months Ended
October 31,
---------------------
1 9 9 6 1 9 9 5
------- -------
OPERATING ACTIVITIES:
Net income $ 281,953 $ 114,702
Adjustments to reconcile net income
to net cash used by operating activities:
Depreciation and amortization 112,509 128,668
Changes in operating assets and
liabilities:
Cash surrender value of life insurance ( 89,321) --
Trade accounts receivable ( 325,586) 161,026
Inventories 37,788 ( 27,136)
Prepaid expenses and other current
assets ( 86,278) ( 34,045)
Trade accounts payable 238,199 ( 237,370)
Customer deposits ( 24,167) 101,242
Accrued expenses and other operating
activities ( 151,074) ( 63,366)
Accrued and prepaid income taxes ( 921) ( 1,166)
--------- ---------
Net cash (used by) provided by
operating activities ( 6,898) 142,555
--------- ----------
INVESTING ACTIVITIES:
Repayments of notes receivable -- 1,042
Additions to property, plant and equipment ( 26,234) ( 25,541)
Decrease in due from related parties 1,020 1,083
(Increase) Decrease in deposits and
other assets ( 299) 452
Increase in intangible assets -- ( 37,000)
--------- ---------
Net cash used by
investing activities ( 25,513) ( 59,964)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable, net 70,000 155,000
Reduction of other credit - redeemable
common stock ( 94,305) ( 62,500)
Reductions in long-term debt ( 134,736) ( 174,140)
--------- ---------
Net cash used by
financing activities ( 159,041) ( 81,640)
--------- ---------
Net (decrease)increase in cash and cash
equivalents ( 191,452) 951
Cash and cash equivalents at beginning of
period 373,636 278,243
--------- ----------
Cash and cash equivalents at end of period $ 182,184 $ 279,194
--------- ----------
See notes to consolidated financial statements.
- 7 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 31, 1996 AND 1995
(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 statement of results for the interim periods.
The results of operations for the nine month periods ended October 31,
1996 and 1995 are not indicative of the results to be expected for the
full year, due to the seasonal nature of the business.
(2) EARNINGS 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 nine month
periods and three month periods ended October 31, 1996 and 1995,
respectively.
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 4,445,759 for
each of the nine month and three month periods ended October 31, 1996 and
1995.
(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.
(4) NOTES PAYABLE
During fiscal years 1996 and 1997 the Company continued its Cant
Financing Program, which was initiated in 1994 to raise capital for the
purchase of pine and cedar cants (logs) to be held in inventory and then
used by the Company in the manufacture of its log home building packages.
- 8 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The notes are generally collateralized by accounts receivable or the cant
inventory thus purchased. Notes issued in the Cant Financing Program are
for a fixed term and amount and bear interest at an annual rate of 18%
payable monthly. As of October 31, 1996, a total of $500,000 has been
loaned to the Company by various individuals, including directors and
shareholders and is due on June 30, 1997.
(5) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the nine months ended October 31, 1996, cash was paid in the
amounts of $177,370 for interest and $921 for income taxes. During the
nine months ended October 31, 1995, cash was paid in the amounts of
$130,420 for interest and $1,166 for income taxes.
Noncash investing and financing activity:
During the nine month period ended October 31, 1996, the following
transaction took place:
- The Company entered into a capital lease for a piece of office
equipment having a total cost of $5,282.
During the nine month period ended October 31, 1995, the following
transactions took place:
- The Company financed $37,988 of the purchase of assets having a
total cost of $38,988.
- The Company reclassified $75,000 of accrued liabilities due to
various individuals, including an officer and a director, to notes bearing
the terms of the Cant Financing Program.
(6) COMMITMENTS AND CONTINGENCIES
In October 1996, the Company made a payment of $85,000 in full settlement
of a lawsuit claiming breach of contract, fraudulent misrepresentation,
detrimental reliance and violation of the Connecticut Unfair Trade
Practices Act in connection with a contemplated acquisition. This
settlement was made without prejudice or admission of guilt in order to
avoid further litigation expense and did not materially exceed the amount
previously provided for in the January 31, 1996 consolidated financial
statements.
- 9 -
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Nine months ended October 31, 1996 vs. October 31, 1995:
The Company's revenues, net of sales commissions, for the nine months
ended October 31, 1996 were $6,240,429 as compared to $5,851,611 for the
nine months ended October 31, 1995, an increase of $388,818 or 7%. There
was a 6% decrease in the number of home units shipped during the current
nine month period as compared to the previous year while the average sales
value per home unit shipped was 10% higher than in the previous year. The
increase in sales value per home unit shipped is the result of an increase
in the number of larger and custom home packages shipped in the current
period and the impact of price increases put into effect at the beginning
of the fiscal year.
Gross profits amounted to $2,233,451 or 36% of net sales for the nine
months ended October 31, 1996 as compared to $1,902,585 or 33% for the
same period in 1995. In realizing an increase in gross profit, the Company
has benefited from higher catalog prices put into place at the start of
the current fiscal year, a larger average sales value per home shipped
during the current period, and lower average commission rates. Average
commission rates have declined due to a change in the dealer/distributor
commission plan implemented at the beginning of the current fiscal year
and a greater percentage of unit sales by company sales representatives
who earn a lower commission rate than dealer/distributors.
Total operating expenses of $1,832,165, or 29% of net sales, have
increased $116,829 from the previous year's amount of $1,715,336, also 29%
of net sales. The increase in total operating expenses was 7%, and was
due to the Company's commitment to increase its market share through an
additional sales office, increased national advertising, conducting a
national dealer conference to introduce product improvements and
innovations, and, a portion of the costs related to the settlement of
litigation. This increase was offset by the realization of $89,321 in
cash surrender value of a split dollar life insurance policy owned by the
Company which was purchased as part of the retirement agreement for the
founder of the Company.
Interest expense of $173,983 for the nine months ended October 31,
1996 increased $29,793 or 21% as compared to $144,190 for the nine months
ended October 31, 1995. This increase is primarily the result of
increased interest owed to trade vendors on open accounts payable, as well
as that paid on the increased balance of notes payable outstanding.
Three months ended October 31, 1996 vs. October 31, 1995:
Sales, net of commissions, amounted to $2,391,736 for the three months
ended October 31, 1996 as compared to $2,255,178 in the same period in
1995, an increase of $136,558, or 6%. When compared with the previous
year, there was no change in the number of home units shipped while the
average sales value per home unit shipped increased 2%. The increase in
net sales and sales value per home unit shipped is the result of an
- 10 -
RESULTS OF OPERATIONS - continued
increase in the number of larger and custom home packages shipped in the
current period.
Gross profits amounted to $817,313 or 34% of net sales for the three
months ended October 31, 1996 as compared to $683,211 or 30% for the same
period in 1995. In realizing an increase in gross profit, the Company has
benefited from higher catalog prices put into place at the start of the
current fiscal year and lower average commission rates. Average
commission rates have declined due to a change in the dealer/distributor
commission plan implemented at the beginning of the current fiscal year
and a greater percentage of unit sales by company sales representatives
who earn a lower commission rate than dealer/distributors.
Total operating expenses of $531,577, or 22% of net sales, have
decreased $49,865 from the previous year's amount of $581,442, or 26% of
net sales. The decrease in total operating expenses amounted to 9%, and
was due to the Company's realizing $89,321 in cash surrender value of a
split dollar life insurance policy owned by the Company which was
purchased as part of the retirement agreement of the Company's founder
reduced by a portion of the costs related to the settlement of litigation.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a negative working capital position at both October
31, 1996 and October 31, 1995 of $1,121,273 and $1,354,401, respectively.
For the nine month period ended October 31, 1996, working capital
increased $264,706 as compared to a decrease of $52,327 in the same period
in 1995. As of the Company's fiscal year end at January 31, 1996, current
liabilities exceeded current assets by $1,385,979. For the nine months
ended October 31, 1996 the Company's operations were a net user of $6,898
of cash, while in the comparable period of the previous year it was a net
provider of cash in the amount of $142,555. Overall, the Company
experienced a net decrease in its cash position of $191,452 at October 31,
1996 as compared with an increase in its cash position of $951 at October
31, 1995. During the nine months ended October 31, 1996 and 1995, cash
and working capital were primarily consumed by the repayment of long-term
debt obligations, including obligations related to the retirement of the
Company's founder, and, additions to property plant and equipment, in
1996, by the settlement of litigation, and, in 1995, payment for a
trademark agreement.
Although the Company realized a profit of $281,953 for the nine months
ended October 31, 1996, current liabilities exceeded current assets by
$1,121,273 as of that date, and the Company had a net capital surplus
of only $213,445. The Company has obtained additional funds during the
period through its Cant Financing Program. It has not, however, been
successful in securing working capital through commercial lenders or
governmental agency sources. Funds generated by operations and 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 fiscal 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 extend borrowing under the Cant Financing
Program when the notes mature in June 1997, or a reduction in vendor
- 11 -
RESULTS OF OPERATIONS - continued
assistance may further reduce its liquidity and, eventually, force the
Company to cease operations.
OTHER MATTERS
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." This statement has no impact on
the Company's financial statements because the carrying value of the
Company's long-lived assets are considered by management to be recoverable
based upon estimated cash flows in future periods.
In October 1995, the Financial Accounting Standards Board issued
Statement No, 123, "Accounting for Stock-Based Compensation," (SFAS No.
123) which is effective for the Company in fiscal 1997. As permitted
under SFAS No. 123, the Company intends to elect not to adopt the fair
value based method of accounting for any stock-based compensation plan it
may implement, but will account for such compensation under the provisions
of APB Opinion No. 25. The Company will comply with the disclosure
requirements of SFAS No. 123 in 1997.
- 12 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 22, 1994 the Company was named in a lawsuit by Kevin J.
Wise, the majority owner of New England Log Homes, Inc. ("NELHI"), in
Superior Court, Judicial District of New Haven, Connecticut. Richard C.
Farr, President and Chief Executive Officer of the Company, and John
Naftzger, Vice President, Marketing and Sales of the Company, were also
named as defendants in the action. On August 17, 1994, Mr. Wise filed a
Notice of Voluntary Dismissal of the Action dismissing his action against
Mr. Naftzger.
NELHI is a defunct competitor in the log home business, having ceased
operations while the Company was exploring purchasing certain NELHI
assets. The lawsuit alleged indeterminable damages resulting from the
Company's decision to terminate acquisition negotiations. In October 1996,
the Company made a payment of $85,000 to Mr. Wise in full settlement of
this lawsuit. This settlement was made without prejudice or admission of
guilt in order to avoid further litigation expense.
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. Exhibits
Exhibit 27. Financial Data Schedule
b. Reports on Form 8-K
None
- 13 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
LINCOLN LOGS LTD.
/s/Richard C. Farr _
Richard C. Farr,
Chairman of the Board, President,
Chief Executive Officer and
Treasurer
Date: December 11, 1996
/s/Peter M. Hart _
Peter M. Hart
Vice President, Finance, Planning
and Administration
Date: December 11, 1996
- 14 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS DATA EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS
AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> OCT-31-1996
<CASH> 182,184
<SECURITIES> 0
<RECEIVABLES> 593,293
<ALLOWANCES> 9,000
<INVENTORY> 790,026
<CURRENT-ASSETS> 1,927,308
<PP&E> 4,924,416
<DEPRECIATION> 3,126,726
<TOTAL-ASSETS> 3,991,727
<CURRENT-LIABILITIES> 3,048,581
<BONDS> 729,701
0
0
<COMMON> 14,500
<OTHER-SE> 198,945
<TOTAL-LIABILITY-AND-EQUITY> 3,991,727
<SALES> 6,240,429
<TOTAL-REVENUES> 6,240,429
<CGS> 4,006,978
<TOTAL-COSTS> 4,006,978
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 173,983
<INCOME-PRETAX> 281,953
<INCOME-TAX> 0
<INCOME-CONTINUING> 281,953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 281,843
<EPS-PRIMARY> .30
<EPS-DILUTED> .08
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