UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1996 Commission File
Number 2-82833
LINCOLN LOGS LTD.
(Name of small business issuer 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) (Zip Code)
Issuer's telephone number: (518) 494-5500
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
Share Purchase Rights
(Title of Class)
Check whether the issuer (1) 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $7,120,152.
The aggregate market value of voting stock held by non-affiliates of the
registrant as of April 19, 1996 was approximately $124,075. The number
of shares of Common Stock of the registrant outstanding on April 19,
1996 was 1,039,694.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's proxy
statement with respect to its 1996 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Report.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Lincoln Logs Ltd. is primarily engaged in the business of designing,
manufacturing and marketing a broad line of log and panel homes to be
erected by custom builders and "do-it-yourself" buyers. The Company
mills logs at its own manufacturing facilities in Chestertown, New York
and delivers to its customers by truck trailer a weather-tight log home
shell package which includes logs, prefabricated roof trusses, oriented
strand board, dimensional lumber, windows, doors, roof shingles, nails,
caulking, between-log sealant system and blueprints and construction
notes. The Company also provides its customers with services related to
the sale of its housing packages, such as the preparation of customized
blueprints.
The Company was incorporated in New York in 1977 and has the following
wholly-owned subsidiaries: Thermo-Home Inc., a New York corporation
through which the Company's panel homes were previously manufactured and
marketed (the manufacture and marketing operations of the Company's
panel homes were integrated into the operation of Lincoln Logs Ltd.
during the fiscal year ended January 31, 1988); and Lincoln Logs
International Ltd., a New York corporation which was created to act as a
domestic international sales corporation but is inactive. In addition,
the Company has a controlling interest in Lincoln Holding Corp., a
Delaware corporation, which was formed to hold the registered trademark
"Lincoln" pursuant to the settlement of a proceeding instituted by the
Trustee in the Chapter 7 Bankruptcy Proceeding of Lincoln Pre-Cut Log
Homes, Inc., a Washington corporation. The Company, previously a fifty
percent (50%) shareholder, acquired a controlling interest in Lincoln
Holding Corp. after the owner of the other fifty percent (50%) interest
in Lincoln Holding Corp. defaulted under the terms of an agreement with
the Trustee and the Company. Unless the context otherwise requires, the
term "Company" refers to Lincoln Logs Ltd. and its subsidiaries.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Lincoln Logs Ltd., each of whom serves in such
capacity at the pleasure of the Board of Directors, are as follows:
Name Age Office(s)
---- --- ---------
Richard C. Farr 67 Chairman of the Board; President and Chief
Executive Officer; Treasurer
Barbara J. Durkish 35 Vice President, Communications; Assistant
Secretary
Carole P. Hart 54 Assistant Secretary
Peter M. Hart 56 Vice President, Planning, Customer
Satisfaction and Quality Assurance
Marjory B. Moeller 54 Vice President, Finance
John Naftzger 55 Vice President, Marketing and Sales
John F. Schumaker 49 Vice President, Design and Engineering
Richard C. Farr has been Chairman of the Board of the Company since
January 1990 and President and Chief Executive Officer and Treasurer of
the Company since December 1991. Mr. Farr has also been Chairman and
Chief Executive Officer of Farr Investment Company, a private investment
firm in West Hartford, Connecticut, since September 1980.
Barbara J. Durkish has been Vice President, Communications of the
Company since July 1987 and Assistant Secretary since June 1992. Ms.
Durkish has served in several capacities since she joined the Company in
1979, including Vice President, Consumer Affairs from February 1983 to
July 1987, and Secretary of the Company from February 1983 to June 1992.
Ms. Durkish is the daughter of Richard Considine, formerly a Director of
the Company until his resignation from the Board in May 1993 and
formerly the President and Chief Executive Officer of the Company, from
which positions he resigned in December 1991. Barbara J. Durkish is the
sister of Susan M. Considine, a Director of the Company.
Carole P. Hart has been Assistant Secretary of the Company since June,
1995. Prior to her promotion to her current position, Ms. Hart was
Senior Staff Administrator, a position she held since joining the
Company in April 1994. Prior to joining the Company, Ms. Hart was
employed by New England Log Homes, Inc. as the Senior Staff
Administrator from January 1981 to January 1994. Ms. Hart is the wife
of Peter M. Hart, Vice President, Planning, Customer Satisfaction and
Quality Assurance of the Company.
Peter M. Hart, has been Vice President, Planning, Customer Satisfaction
and Quality Assurance since March, 1995. Prior to his promotion to his
current position, Mr. Hart was General Manager, Western Region, a
position he held since joining the Company in April 1994. Prior to
joining the Company, Mr. Hart was employed by New England Log Homes,
Inc. from August 1980 to January 1994, where he had served as Senior
Vice President and Director of Marketing since 1986. Mr. Hart is the
husband of Carole P. Hart, Assistant Secretary of the Company.
Marjory B. Moeller, CPA, has been Vice President, Finance since October
1994. Prior to being elected Vice President, Finance, Ms. Moeller was
the Company's Corporate Controller from November 1993 until October 1994
and served as Assistant Controller of the Company upon joining the
Company in May 1988 until November 1993. Ms. Moeller is retiring from
her position at the Company effective as of May 3, 1996.
John Naftzger has been Vice President, Marketing and Sales since August
1993. Prior to his promotion to his present position, Mr. Naftzger was
Director of Marketing and Sales, a position he held from May 1992, when
he joined the Company, until his promotion in August 1993. Prior to
joining the Company, Mr. Naftzger was President of J. Naftzger
Communications, a consulting firm, from January 1989 to May 1992.
John F. Schumaker has been Vice President, Design and Engineering since
August 1993. Prior to his promotion to his present position, Mr.
Schumaker was Director of Design and Engineering for the Company from
May 1990 to August 1993. Mr. Schumaker began his career with the Company
in November 1983 as a drafter.
PRODUCTS
The Company's products include 100 standard models of log homes ranging
in size from 560 square feet to 4,000 square feet and in price from
approximately $14,785 to $113,315. A majority of the Company's log home
sales are intended to be the primary residence of the buyer.
The Company also has a product line for the panelized housing market
utilizing a pre-engineered structural wall panel system which when
assembled with other standard building components will permit the
construction of a non-log, standard stick-built type home. This product
line is referred to as the Thermo-Home(R) system. Sales of this product
line were approximately 13% of total sales in fiscal year 1996.
The Company markets its products in the United States through a network
of approximately 60 sales representatives in approximately 20 states.
Fifty percent (50%) of the purchase price of the package is usually
received prior to any cutting by the Company. The complete log home
shell package is shipped via truck trailers and delivered to a customer
upon payment of the balance of the purchase price.
Each sales representative has a written agreement with the Company that
specifies the representative's sales territory and provides for the
payment of a commission ranging from 10% to 17-1/2% of the purchase
price for the log home shell package. A majority of the Company's sales
representatives have purchased and erected one of the Company's log
homes for use as a sales model. The Company maintains a cooperative
advertising program for sales representatives pursuant to which the
Company shares up to fifty percent (50%) of advertising undertaken by
qualified sales representatives against a minimum required sales volume.
Substantially all of the Company's sales have been to customers in the
United States, with the remainder to customers in Japan and Europe (less
than 5% in each fiscal year).
In 1978, the Company established a domestic international sales
corporation ("DISC") for use in connection with sales outside of the
continental United States. To date, the activities and income of the
Company's DISC has not been of material significance to the Company due
to the limited sales by the Company outside of the United States (less
than 5% per year).
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company purchases rough-sawn eastern white pine logs and western
cedar logs, in random lengths from 8 to 16 feet, which have been milled
to dimensions of 8-1/2 inches high and 7 inches thick and 8 inches high
and 7 inches thick, respectively. The rough-sawn eastern white pine logs
are purchased from several mills in the region of the Company's
facilities in Chestertown, New York. Rough-sawn western cedar logs are
purchased from several mills in Northern California and Oregon. At the
Company's Chestertown, New York production facilities the logs are
planed in both rounded log and clapboard exteriors, with a flat V-joint
interior and double-tongue and groove top and bottom. In addition,
D-shaped logs for delivery to some of the Company's customers in the
West have been milled by an unaffiliated company. Logs constitute
approximately 24% of the dollar value of a typical log home shell
package.
Other components of the Company's log home shell package are purchased
from several suppliers. These components include prefabricated roof
trusses, windows, doors, nails, oriented strand board, dimensional
lumber, shingles, caulking, and between-log sealant system. Alternative
sources of raw materials are readily available to the Company.
COMPETITION
The Company believes that there are approximately 450 firms engaged in
the sale of log home materials, of which approximately 125 firms sell
log home packages or kits and are in direct competition with the
Company.
The Company's principal competitors are: Real Log Homes, Northeastern
Log Homes, AmerLink, Rocky Mountain Log Homes, Precision Craft,
Lok-N-Logs, Kuhns Bros. and Asperline Log Homes. The Company believes
that its competitive position with respect to those firms is favorable,
especially in the areas of quality of product, price, appearance, and
energy efficiency.
EMPLOYEES
As of January 31, 1996, the Company employed 44 persons, 43 of whom are
full time employees.
The Company has never had a work stoppage and regards its employee
relations as satisfactory. Employees are not covered by collective
bargaining agreements.
PATENTS
The Company does not possess any patents covering the system utilized to
erect a Lincoln Logs solid timber home or any of the components thereof.
On June 27, 1989, the Company was granted two patents related to its
Thermo-Home(R) panelized wall system. The first of these patents covers
the construction of the wall panel and the method by which the panels
interlock with one another. The second patent relates to the process for
manufacturing prefabricated wall panel sections.
TRADEMARKS
The Company has registered the trademarks LINCOLN LOGS LTD.(R)(and
design), THERMO LOG(R), CASHCO(R), THERMO-HOME(R), CHECKMATE(R),
LINCOLN-SEAL(R), and WEATHERBLOC(R) (and design) in the United States
Patent and Trademark Office. The Company has registered the trademark
"THE ORIGINAL LINCOLN LOG LTD." in the following states: California,
Connecticut, Kentucky, Massachusetts, Montana, New Jersey, New York,
Pennsylvania, South Dakota, Tennessee, Vermont and Washington. Canadian
trademarks issued to the Company are "LINCOLN LOGS LTD." (and design),
"EARLY AMERICAN LOG HOMES" (and design), "THERMO-HOME," "LINCOLN-SEAL"
and "STACK 'N BUILD." Although these trademarks are believed by the
Company to have commercial value, it is the Company's opinion that the
invalidation of any of these trademarks would not have a material
adverse effect on the Company.
Through its ownership of Lincoln Holding Corp., the Company also owns
the federally registered trademark "Lincoln" in the United States.
The Company has agreed pursuant to the settlement of 1982 litigation
alleging trademark infringement and unfair competition not to use the
phrase "Lincoln Log Homes" either as a trademark or in any manner other
than in a purely textual sense (e.g., "Lincoln Log" homes).
RESEARCH AND DEVELOPMENT
No expenditures were made by the Company for research and development
during the fiscal years ended January 31, 1996 or 1995.
GOVERNMENT REGULATIONS
Compliance with federal, state and local provisions that have been
enacted or adopted to regulate the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
has not had in the past, and the Company believes will not have in the
future, a material effect upon the capital expenditures, earnings or
competitive position of the Company.
State and local regulations have been adopted with respect to the
materials utilized in the construction and various other aspects of
residential housing. The Company believes that its products comply with
all material regulations relating thereto.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns several parcels of real estate located in New York and
California, respectively, as follows:
(a) New York
(1) An approximately 8.5 acre parcel of land on Riverside Drive,
Chestertown, New York, on which are located the Company's executive
offices, consisting of a 6,000 square foot building, a 2,000 square foot
log building, and the Company's production facilities, consisting of two
milling machines located in a 10,200 square foot metal building, a
10,440 square foot metal-framed, open storage structure, a 4,800 square
foot, log-sided pole shed, and a 14,000 square foot wooden building
containing corporate offices and fabricating facilities. The remainder
of the 8.5 acre parcel is utilized by the Company for outside storage of
logs and building materials used in the Company's log home shell
packages.
(2) An approximately one-half acre parcel of land on Riverside
Drive, Chestertown, New York, on which is located a brick commercial
building consisting of approximately 13,000 square feet of warehouse,
retail and apartment space, which the company utilizes as dry storage
space and leases, in part, to third parties.
(3) An approximately 19 acre parcel of undeveloped land on Route
8, Chestertown, New York, which is utilized by the Company for outside
storage of logs.
(4) An approximately one acre parcel of land on Pine Street,
Chestertown, New York, on which is located a 7,680 square foot building
which is used as a manufacturing facility for the Company's
Thermo-Home(R) product line.
(5) An approximately .75 acre parcel of land in Wevertown, New
York, on which is located the Company's Northern Regional Sales Office
in a 3,150 square foot log home erected by the Company.
(6) An approximately 1.4 acre parcel of undeveloped land in Lake
George, New York on which the Company is considering erecting a new
sales model home.
In addition, the Company owns six parcels of undeveloped land in
Northeastern, New York totalling approximately 200 acres which the
Company has determined are unnecessary for its business and which it
intends to sell.
(b) California
The Company owns an approximately one acre parcel of land in Auburn,
California, on which are located the Company's Western Regional Sales
Offices in a 4,000 square foot incense cedar log home and a 2,500 square
foot incense cedar log home planed in the Weatherbloc(R) clapboard
style.
As security for the obligations to the Company's founder, Richard
Considine, in connection with the Stock Purchase, Deferred Compensation,
Retirement and Loan Agreement dated May 21, 1993, and as security for
its Series A Convertible Subordinated Debentures dated July 1, 1993, the
Company has granted mortgages on the parcels specified in Paragraphs
(a)(1)-(5) and (b) of this Item 2.
ITEM 3. LEGAL PROCEEDINGS
(a) Kevin J. Wise v. Lincoln Logs Ltd., et al.
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 Action dismissing his action against Mr.
Naftzer.
NELHI is a defunct competitor in the log home business, having ceased
operations while the Company was exploring purchasing certain NELHI
assets. The lawsuit alleges indeterminable damages resulting from the
Company's decision to terminate acquisition negotiations. The Company
denies any liability and is vigorously defending the suit.
(b) Other Matters. The Company is also a party to certain
litigation and is defending certain claims in the ordinary course of and
incidental to the Company's business. In the opinion of the Company's
attorneys and management, the ultimate settlement of these claims will
not exceed amounts provided for in the consolidated financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock is traded over-the-counter. The
following sets forth the range of the closing bid prices for the
Company's Common Stock for the period February 1, 1994 through January
31, 1996. Such prices represent dealer quotations, do not represent
actual transactions, and do not include retail mark-ups, mark-downs or
commissions. Such prices were determined from information provided by a
majority of the market makers for the Company's Common Stock, including
the underwriter for such securities of the Company.
High Bid Low Bid
Quarter Ended April 30, 1994 Common Stock 3/16 1/16
Quarter Ended July 31, 1994 Common Stock 1/8 1/16
Quarter Ended October 31, 1994 Common Stock 1/8 1/16
Quarter Ended January 31, 1995 Common Stock 3/16 1/16
Quarter Ended April 30, 1995 Common Stock 1/8 1/20
Quarter Ended July 31, 1995 Common Stock 1/8 1/20
Quarter Ended October 31, 1995 Common Stock 1/8 1/16
Quarter Ended January 31, 1996 Common Stock 3/16 1/16
(b) The approximate number of holders of the Common Stock of the
Company as of April 19, 1996 was 1,917.
(c) No cash dividends were declared by the Company during the
fiscal years ended January 31, 1996 and 1995. While the payment of
dividends rests within the discretion of the Board of Directors, it is
not anticipated that cash dividends will be paid in the foreseeable
future, as the Company proposes to retain earnings, if any, for use in
the development of its business. The payment of dividends is contingent
upon the Company's future earnings, if any, the Company's financial
condition and its capital requirements, general business conditions and
other factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FISCAL 1996 VS. FISCAL 1995 VS. FISCAL 1994
RESULTS OF OPERATIONS
Revenues, net of sales commissions, for the fiscal year ended January 31,
1996 were $7,120,152 as compared with $7,174,603 for the fiscal year ended
January 31, 1995 and $6,063,139 for the fiscal year ended January 31, 1994.
Fiscal 1996 revenues represent a decrease of $54,451, or approximately 1%
below fiscal 1995 results. Fiscal 1995 revenues represented an increase of
$1,111,464, or 18% more than fiscal 1994.
In fiscal 1996, as compared to fiscal 1995, the Company realized a 6%
increase in units shipped and a 1% increase in total home sales revenues.
Average sales value per unit decreased 5%, however, due to an increase in
the number of smaller home packages shipped during the 1996 fiscal year.
The increase in units shipped is a result of the Company's continuing
improvements in its sales efforts and its expansion into additional market
areas. Total net sales revenues were affected by a decrease in the dollar
volume of other materials sold independent of home packages.
The increase in revenues from fiscal 1994 to fiscal 1995 was due to an
increase both in units shipped of 8% and in average sales value per unit of
8%. The increase in log home selling prices was the result both of
increases in the Company's retail prices and of an increase in the size of
the home packages shipped. The increase in units shipped was due to the
Company's sales efforts and its expansion into additional markets.
Gross profits were 32% of net sales in fiscal 1996, or $2,298,592. In
fiscal 1995 gross profits were 28% of sales, or $1,974,075, and were 30% of
sales, or $1,824,233, in fiscal 1994. The increase in gross profit
percentage from fiscal 1995 to fiscal 1996 was the result of two catalog
price increases put into place during the prior fall and winter, and from
the substantial decrease in market prices for lumber and plywood products
since the start of the 1996 fiscal year. The decrease in gross profit
percentage from fiscal 1994 to fiscal 1995 primarily resulted from cost
increases in the material components of the home packages, as well as some
increase in the discounting of sales to meet competitive pressures.
Operating expenses were 30% of sales in fiscal 1996, as compared to 32% in
fiscal 1995. Fiscal 1996 operating expenses of $2,171,317 represent a
decrease of $102,920 or 5% from operating expenses in fiscal 1995 of
$2,274,237. The Company's operating expenses in fiscal 1994 were 42% of
sales, or $2,572,016. A significant portion of fiscal 1994 operating
expenses, $369,122, related to the retirement of the Company's founder and
the accrual of post-retirement benefits and costs related thereto. Without
those accrued costs, operating expenses would have been $2,202,894, or 36%
of that period's sales. The continued decrease in operating expenses from
fiscal 1995 to fiscal 1996 is primarily due to the Company's ongoing efforts
to reduce expenses wherever possible and to improve its management systems.
Interest expense in fiscal years 1996, 1995 and 1994 amounted to $195,383,
$172,953, and $88,358, respectively. The increase of $22,430 in interest
expense in fiscal 1996 over fiscal 1995 is primarily the result of increased
interest earned by trade vendors on open accounts payable, as well as that
paid on the increased balance of notes payable outstanding. The increase of
$84,595 in interest expense in fiscal 1995 over fiscal 1994 is primarily due
to the interest and commitment fees on new borrowing incurred in fiscal
1995.
Other income in fiscal 1996 and fiscal 1995 of $78,862 and $150,936,
respectively, consisted primarily of forfeits of customer deposits and
cancellation charges on non-refundable contracts. Other expense of $102,411
in fiscal 1994 resulted primarily from the write-off of an uncollectible
note and costs associated with an unsuccessful outside milling project.
Other income from contract cancellations was minimal in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1996 the Company had negative working capital, as current
liabilities exceeded current assets by $1,385,979, compared with negative
working capital of $1,302,074 at January 31, 1995, a decrease of $83,905.
At January 31, 1996 the Company had a stockholders' deficiency of $68,508,
as compared to a stockholders' deficiency of $112,586 at January 31, 1995,
an improvement of $44,078. As of January 31, 1995 working capital had
decreased $323,004 from the end of the previous fiscal year. Working
capital was primarily consumed during both years by the repayment of
long-term debt, including obligations related to the retirement of the
Company's founder, and in fiscal 1996 by payment for a trademark agreement.
In fiscal 1996, the Company was a net provider of cash from operations in
the amount of $327,701 as compared to the previous year when operations was
a net provider of cash in the amount of $98,732. Overall, the Company
experienced an increase in its cash position of $95,393 in fiscal 1996,
compared with a decrease of $14,216 for fiscal 1995. Funds generated by
operations, including decreases in trade accounts receivable and
inventories, and by new short-term borrowing from several individuals,
including directors and shareholders, were partially offset by the repayment
of long-term debt, including obligations related to the retirement of the
Company's founder, capital expenditures, and payment for a trademark
agreement.
During fiscal 1996, the Company obtained additional funds through a second
Cant Financing Program. The Company has not, however, been successful in
securing working capital from 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, have supported its operations during fiscal
1996, and are expected to do so in fiscal 1997 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 borrowings under the Cant Financing Program when they mature in
June 1996, or a reduction in vendor assistance could further reduce its
liquidity and, eventually, force the Company to cease operations.
Customer deposits as of January 31, 1996 amounted to $796,407, as compared
with deposits of $896,080 at January 31, 1995, a decrease of $99,673.
Customer deposits as a percent of gross backlog values can vary
significantly from year to year, depending on the number of customers who
have paid only their initial deposits versus those who have paid 50% of the
contract value as of the balance sheet date.
Customer contracts with respect to which there were deposits on hand at
year-end represent, if all were to be delivered in fiscal 1997, potential
gross revenues of approximately $9,440,795 as compared with potential gross
revenues for fiscal 1996 of $8,836,016 from deposits of $896,080. Actual
gross revenues realized in fiscal 1996 from the sale of home packages
amounted to $7,817,475. Actual gross revenues realized in fiscal 1996 were
lower than potential gross revenues based on deposits on hand at January 31,
1995 due to cancellations and postponement of some deliveries by customers.
Because the Company experienced an increase in the value of new contracts
written in fiscal 1996 over those written in fiscal 1995, it is expected
that the realized revenues for fiscal 1997 will be greater than those
realized for fiscal 1996. This estimate is a projection only and is
contingent on various factors, including general economic conditions,
interest rates and the climate for new housing construction during calendar
1996, as well as the Company's ability to continue operations and to expand
into new market areas.
Inventories at January 31, 1996 were $827,814 as compared with $880,391 at
January 31, 1995, a decrease of $52,577. This decrease in inventory is the
result of the Company's efforts to reduce inventory levels, with the
exception of log cants, for the slower winter shipping season.
Trade accounts receivable were $258,707 at January 31, 1996, which
represents a decrease of $109,489 or 30% from the amount of $368,196 as of
January 31, 1995. These receivables are primarily generated by customers
who elect to use the Company's short-term bridge financing plan known as
Cashco (R). The balance due at year-end can vary significantly from year to
year, depending upon the number of customers choosing to use the program for
shipments in the last few months of the fiscal year.
OTHER MATTERS
In November 1992, the Financial Accounting Standards Board issued Statement
No. 112, "Employers' Accounting for Postemployment Benefits." The Statement
has no impact on the Company's financial statements, as there are presently
no postemployment benefits provided.
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." The Company has not yet determined the impact of
this Statement on its financial statements. The Statement is effective for
the Company in fiscal 1997, and therefore does not affect the Company's
fiscal 1996 financial statements.
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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Index to financial statements
Page
Independent Auditors' Report F-2
Consolidated balance sheets as of
January 31, 1996 and 1995 F-3
Consolidated statements of operations for the years
ended January 31, 1996, 1995 and 1994 F-4
Consolidated statements of changes in stockholders'
equity (deficiency) for the years ended January
31, 1996, 1995 and 1994 F-5
Consolidated statements of cash flows for the years
ended January 31, 1996, 1995 and 1994 F-6
Notes to consolidated financial statements
January 31, 1996, 1995 and 1994 F-7
<PAGE>
Independent Auditors' Report
To the Board of Directors and
Stockholders of Lincoln Logs Ltd.:
We have audited the accompanying consolidated balance sheets of Lincoln Logs
Ltd. and subsidiaries ("Company") as of January 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders'
equity (deficiency), and cash flows for each of the years in the three-year
period ended January 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and signifi-
cant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lincoln
Logs Ltd. and subsidiaries as of January 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the
three-year period ended January 31, 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 18 to the
consolidated financial statements, at January 31, 1996 and 1995, current
liabilities exceed current assets, and at January 31, 1996 and 1995, the
Company has a stockholders' deficiency. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Manage-
ment's plans in regard to these matters are also described in note 18. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Albany, New York
April 12, 1996
F-2
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 1996 and 1995
[CAPTION]
1996 1995
---- ----
ASSETS
[S] [C] [C]
Current assets:
Cash and cash equivalents (note 2(i)) $ 373,636 278,243
Trade accounts receivable, net of allowance
for doubtful accounts of $9,000 in 1996
and 1995 (note 5) 258,707 368,196
Notes receivable 18,500 19,542
Inventories (note 5) 827,814 880,391
Prepaid expenses and other current assets (note 10) 264,133 260,906
Due from related parties (note 12) 1,543 1,454
Prepaid income taxes -- 883
--------- ---------
Total current assets 1,744,333 1,809,615
Property, plant and equipment, at cost (note 3) 4,892,900 4,822,906
Less accumulated depreciation (3,021,512) (2,853,497)
--------- ---------
Net property, plant and equipment 1,871,388 1,969,409
Other assets:
Due from related parties (note 12) 76,072 77,615
Assets held for resale (note 3) 71,825 71,825
Deposits and other assets 689 1,000
Intangible assets, net of amortization 37,073 7,950
--------- ---------
185,659 158,390
--------- ---------
Total assets (note 4) $ 3,801,380 3,937,414
========= =========
[CAPTION]
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
1996 1995
---- ----
Current liabilities:
[S] [C] [C]
Current installments of long-term debt (note 4) $ 137,873 214,064
Notes payable (notes 5 and 12):
Related parties 315,000 190,000
Others 115,000 50,000
Redeemable common stock, current (note 6) 94,305 62,500
Trade accounts payable 1,072,368 1,067,409
Customer deposits 796,407 896,080
Accrued salaries and wages 42,786 49,780
Accrued expenses (note 11) 555,767 581,856
Accrued income taxes 806 --
--------- ---------
Total current liabilities 3,130,312 3,111,689
Long-term debt, net of current installments (note 4):
Convertible subordinated debentures (note 12):
Related parties 500,000 500,000
Others 200,000 200,000
Retirement agreement -- 107,345
Other 39,576 36,661
--------- ---------
Total liabilities 3,869,888 3,955,695
Redeemable common stock (note 6) -- 94,305
Stockholders' equity (deficiency) (note 13):
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 1,449,999 shares, less 93,935 and
187,870 shares subject to redemption agreement at
January 31, 1996 and 1995 (note 6) 13,561 12,621
Additional paid-in capital 3,800,920 3,739,360
Accumulated deficit (3,092,859) (3,136,937)
--------- ---------
721,622 615,044
Less cost of 410,305 shares in 1996 and 316,370
shares in 1995 of common stock in treasury (790,130) (727,630)
--------- ---------
Total stockholders' deficiency (68,508) (112,586)
Commitments and contingencies (notes 9, 14 and 18)
Total liabilities and stockholders' deficiency $3,801,380 3,937,414
========= =========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended January 31, 1996, 1995 and 1994
[CAPTION]
1996 1995 1994
---- ---- ----
[S] [C] [C] [C]
Sales, net of commissions of $1,119,253,
$1,110,069 and $955,956, respectively $7,120,152 7,174,603 6,063,139
Cost of sales 4,821,560 5,200,528 4,238,906
--------- --------- ---------
Gross profit 2,298,592 1,974,075 1,824,233
Selling, general and administrative
expenses 2,171,317 2,274,237 2,202,894
Retirement agreement (note 4) -- -- 369,122
--------- --------- ---------
Total operating expenses 2,171,317 2,274,237 2,572,016
--------- --------- ---------
Operating income (loss) 127,275 (300,162) (747,783)
Other income (expense):
Interest income 34,924 34,068 33,308
Interest expense (195,383) (172,953) (88,358)
Other 78,862 150,936 (102,411)
--------- --------- ---------
(81,597) 12,051 (157,461)
--------- --------- ---------
Earnings (loss) before income taxes 45,678 (288,111) (905,244)
Provision for income taxes (note 7) 1,600 1,700 4,800
--------- --------- ---------
Net earnings (loss) $ 44,078 (289,811) (910,044)
======== ========= =========
Per share data (note 2(g)):
Primary earnings (loss) per
common share $ .05 (.31) (.88)
======== ========= =========
Fully diluted earnings (loss) per
common and common equivalent share $ .03 (.31) (.88)
======== ========= =========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended January 31, 1996, 1995 and 1994
<CAPTION>
Common Stock
---------------- Retained
Number Par Additional earnings Total
of value paid-in (accumulated Treasury stockholders'
shares amount capital deficit) stock (deficiency)
--------- -------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1993 1,449,999 $ 14,500 3,894,286 (1,937,082) (602,630) 1,369,074
Redeemable common stock (note 6) -- (3,757) (278,048) -- -- (281,805)
Common stock redeemed (note 6) -- 939 61,561 -- (62,500) --
Net loss - 1994 -- -- -- (910,044) -- (910,044)
--------- -------- --------- ----------- --------- ---------
Balance at January 31, 1994 1,449,999 11,682 3,677,799 (2,847,126) (665,130) 177,225
Common stock redeemed (note 6) -- 939 61,561 -- (62,500) --
Net loss - 1995 -- -- -- (289,811) -- (289,811)
--------- -------- --------- ----------- --------- ---------
Balance at January 31, 1995 1,449,999 12,621 3,739,360 (3,136,937) (727,630) (112,586)
Common stock redeemed (note 6) -- 940 61,560 -- (62,500) --
Net earnings - 1996 -- -- -- 44,078 -- 44,078
--------- -------- --------- ----------- --------- ---------
Balance at January 31, 1996 1,449,999 $ 13,561 3,800,920 (3,092,859) (790,130) (68,508)
========= ======== ========= =========== ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 31, 1996, 1995 and 1994
[CAPTION]
1996 1995 1994
---- ---- ----
[S] [C] [C] [C]
Operating activities:
Net earnings (loss) $ 44,078 (289,811) (910,044)
Adjustments to reconcile net earnings
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 175,892 219,519 269,773
Write-off of uncollectible note -- -- 40,169
Retirement agreement -- -- 369,122
Loss on disposal of assets -- -- 2,420
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable 109,489 (44,379) (114,186)
Decrease (increase) in inventories 52,577 (183,040) (171,427)
Decrease (increase) in prepaid expenses
and other current assets (3,227) 78,469 (32,527)
Decrease (increase) in prepaid income taxes 883 (883) --
Increase in trade accounts payable 4,959 393,445 132,169
Decrease in customer deposits (99,673) (23,530) (239,367)
Increase (decrease) in accrued expenses and
other operating activities 41,917 (48,732) 167,388
Increase (decrease) in accrued income taxes 806 (2,326) 1,007
-------- -------- --------
Net cash provided (used) by
operating activities 327,701 98,732 (485,503)
-------- -------- --------
Investing activities (note 15):
Repayments of notes receivable 1,042 2,708 202,194
Additions to property, plant and equipment (32,006) (13,101) (72,446)
Proceeds from sale of assets -- -- 6,500
Decrease in due from related parties 1,454 1,369 1,290
Decrease in deposits and other assets 311 159 --
Increase in intangible assets (37,000) -- (11,943)
-------- -------- --------
Net cash provided (used) by
investing activities (66,199) (8,865) 125,595
-------- -------- --------
Financing activities (note 15):
Proceeds from sale of debentures -- -- 700,000
Proceeds from notes payable 115,000 240,000 --
Redemption of common stock (62,500) (62,500) (62,500)
Reductions in long-term debt (218,609) (281,583) (272,667)
-------- -------- --------
Net cash provided (used) by
financing activities (166,109) (104,083) 364,833
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 95,393 (14,216) 4,925
Cash and cash equivalents at beginning
of period 278,243 292,459 287,534
-------- -------- --------
Cash and cash equivalents at end
of period $ 373,636 278,243 292,459
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1996, 1995 and 1994
Note 1. Business Description
Lincoln Logs, Ltd. and subsidiaries (the Company), headquartered in
Chestertown, N.Y., is a leading supplier of high quality solid wall home
building packages. The Company's main products are log home packages and
insulated, panelized-wall home building systems. Products are represented,
sold and serviced through a 60 member National Dealer Network and two
Company owned and operated sales centers in northern New York and northern
California. The Company's principal markets are in the northeastern and
northwestern regions of the United States.
The Company purchases approximately 54% of the materials necessary to
assemble the log home packages from five suppliers. These five suppliers
provided 16%, 14%, 9%, 9% and 6% of 1996 purchases, respectively.
Note 2. Summary of Significant Accounting Policies
(a) Principles of Consolidation. The consolidated financial statements
include the accounts of Lincoln Logs Ltd. and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated
in consolidation.
Effective January 31, 1995, the Company dissolved three of its subsidiaries,
Riverside Building Management Corp., Paul Bunyan Land and Timber Co., Inc.
and Paul Bunyan Land and Timber Company of California, Inc. The Company's
remaining subsidiaries, Thermo-Home, Inc., Lincoln Holding Corp., and
Lincoln Logs International Ltd. are currently inactive.
(b) Inventories. Inventories are valued at the lower of cost (on a
first-in, first-out basis) or market. The majority of inventory represents
raw materials.
(c) Revenue Recognition. Revenue from the sale of log home packages is
recognized when the home is shipped. Customers are normally required to pay
a 10% deposit upon contract signing, and a second payment of 40% at the
pre-cut stage, which is 45-60 days before delivery. The balance of 50% is
due on delivery. The foregoing percentages may change when one of the
Company's financing plans is utilized.
(d) Depreciation. Depreciation of plant and equipment is computed on a
straight-line basis over the estimated useful lives of the assets, which
range from five to 31 years.
(e) Income Taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the enactment date.
(f) Intangible Assets. Intangible assets represent the values assigned to
debt issuance costs, trademarks, and non-competition covenants which are
being amortized over five year periods. Amortization expense for the years
ended January 31, 1996, 1995, and 1994 was $7,877, $2,327, and $4,832,
respectively.
(g) 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 was 945,759, 945,759, and 1,037,378 for the years ended
January 31, 1996, 1995, and 1994, 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 weighted average number of fully diluted
common and common equivalent shares for 1996 is 4,445,759 shares. Fully
diluted loss per share is the same as primary earnings per share in 1995 and
1994 as the effect of assumed conversion of the subordinated debentures
would be anti-dilutive.
Stock options are not included in the computation of earnings per share
under the treasury stock method as the effect would be anti-dilutive.
(h) Reclassifications. Certain amounts in the 1995 and 1994 financial
statements have been reclassified to conform with the presentation in the
1996 financial statements.
(i) Cash and Cash Equivalents. Cash and cash equivalents is composed of
cash in bank accounts and certificates of deposit with maturities of three
months or less. For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of
three months or less to be cash equivalents.
The Company is required to maintain a balance of $150,000 in a bank account
under an arrangement with a bank.
(j) Use of Estimates in the Preparation of Financial Statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 3. Property, Plant and Equipment
A summary of property, plant and equipment at January 31, 1996 and 1995 is
as follows:
[CAPTION]
Estimated
Useful Lives 1996 1995
---- ----
[S] [C] [C]
Land $ 784,800 775,992
Buildings and improvements 15 - 31 years 2,118,426 2,117,619
Machinery and equipment 5 - 7 years 620,332 611,671
Furniture and fixtures 5 - 7 years 1,227,314 1,203,889
Transportation equipment 5 years 142,028 113,735
--------- ---------
$4,892,900 4,822,906
========= =========
Depreciation expense for the years ended January 31, 1996, 1995, and 1994
was $168,015, $217,192, and $264,941, respectively.
Assets held for resale of $71,825 at January 31, 1996 and 1995 consists
primarily of non-operating real estate which is carried at the lower of cost
or estimated net realizable value.
Note 4. Indebtedness
The Company has authorized and issued $700,000 of Series A Convertible
Subordinated Debentures. The Debentures bear interest payable quarterly at
an annual rate of 12% and are due on June 30, 1998. The 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 holders 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 owed.
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.
By mutual agreement between the Company's Founder and the Company, the
Founder retired from all positions held with the Company, including his
directorship, effective May 1, 1993. In settlement of their mutual
obligations to one another, the Company and the Founder entered into a Stock
Purchase, Deferred Compensation, Retirement and Loan Agreement dated as of
May 21, 1993 (the Retirement Agreement). The Company accrued the expense
associated with the Retirement Agreement at that time. Under the terms of
the Retirement Agreement, the Company agreed, among other things, to pay him
certain deferred compensation and to provide certain life and health
insurance benefits. The expense recorded during the fiscal year ended
January 31, 1994 in connection with the Retirement Agreement was $369,122.
The Retirement Agreement provides that the majority of this amount will be
paid in equal weekly installments from May 1, 1993 through March 12, 1996,
with the remainder payable July 1, 1996. The total liability remaining as
of January 31, 1996 is $106,802, which is included in current installments
of long-term debt in the accompanying consolidated balance sheet.
As security for the obligations to the Company's Founder, in connection with
the Retirement Agreement, and as security for its Series A Convertible
Subordinated Debentures dated July 1, 1993, the Company has granted
mortgages on certain parcels of real property owned by it which are located
in Chestertown, New York and Auburn, California.
Long-term debt at January 31, 1996 and 1995 consists of the following:
[CAPTION]
1996 1995
---- ----
[S] [C] [C]
Mortgage notes payable at 10%, payable in
monthly installments through January 1999,
secured by parcels of land $ 21,071 38,033
Notes payable at rates ranging from 8% to
18.4%, payable in varying installments
through July 1999, one note unsecured, all
others secured by various pieces of equipment 49,576 82,072
Convertible subordinated debentures due in
June 1998, with annual interest at 12% payable
quarterly 700,000 700,000
Retirement agreement, payable in varying
installments through July 1996 106,802 237,965
--------- ---------
Total 877,449 1,058,070
Less current installments (137,873) (214,064)
--------- ---------
$ 739,576 844,006
========= =========
The aggregate maturities of long-term debt by fiscal year are as follows:
[CAPTION]
Year ending January 31: Amount
[S] [C]
1997 $ 137,873
1998 17,456
1999 719,708
2000 2,412
2001 --
----------
$ 877,449
=========
Note 5. Notes Payable
During 1996, the Company expanded its Cant Financing Program, which was
initiated in 1995 to raise funds 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. The notes are generally
collateralized by accounts receivable or the cant inventory thus purchased.
Notes outstanding as of January 31, 1996, are for a fixed term and amount,
and bear interest at an annual rate of 18% payable monthly. The notes are
due on June 30, 1996. Notes outstanding as of January 31, 1995 bore
interest at 15% per annum and required the payment of a 10% commitment fee
at maturity.
Note 6. Agreement to Redeem Common Stock
Effective May 1, 1993, the Company and its Founder entered into the
Retirement Agreement whereby the Company agreed to purchase 375,740 shares
of its common stock owned by the Founder and his family for the total
redemption price of $281,805. The Retirement Agreement calls for the annual
redemption by the Company of 25% of the shares beginning July 1, 1993, with
the final redemption and payment of $94,305 on July 1, 1996.
Note 7. Income Taxes
A summary of components of the provision for income taxes for the years
ended January 31, 1996, 1995 and 1994 is as follows:
[CAPTION]
Current Deferred Total
[S] [C] [C] [C]
Year ended January 31, 1996:
Federal $ -- -- --
State 1,600 -- 1,600
------ ------ ------
$ 1,600 -- 1,600
====== ====== ======
Year ended January 31, 1995:
Federal $ -- -- --
State 1,700 -- 1,700
------ ------ ------
$ 1,700 -- 1,700
====== ====== ======
Year ended January 31, 1994:
Federal $ -- -- --
State 4,800 -- 4,800
------ ------ ------
$ 4,800 -- 4,800
====== ====== ======
As a result of the losses incurred in 1995 and prior years, the Company has
Federal net operating loss carryforwards for financial reporting purposes of
approximately $3,127,100. Such carryforwards for income tax purposes are
approximately $3,399,300; $1,567,400 expire in 2007, $815,600 in 2008,
$609,200 in 2009, $372,700 in 2010 and $34,400 in 2011.
The effective income tax rates of 3.5%, 0.6% and 0.5% for 1996, 1995 and
1994, respectively, differ from the statutory Federal income tax rate for
the following reasons:
[CAPTION]
1996 1995 1994
---- ---- ----
[S] [C] [C] [C]
Statutory tax rate 34.0% (34.0)% (34.0)%
Officers life insurance -- -- (2.5)
Non-deductible meals and
entertainment expenses 2.8 1.9 0.2
State income taxes, net of federal
tax benefit 2.3 -- --
Change in deferred tax asset
valuation allowance (38.4) 31.2 36.2
Other non-deductible expenses 2.8 1.5 0.6
----- ----- -----
3.5% 0.6% 0.5%
===== ===== =====
For the years ended January 31, 1996 and 1995, the Company has no deferred
income tax expense as a result of the changes in temporary differences for
the year. The tax effects of temporary differences that give rise to
deferred tax assets and deferred tax liabilities as of January 31, 1996 and
1995 are presented below:
[CAPTION]
1996 1995
---- ----
[S] [C] [C]
Deferred tax assets:
Vacation accrual $ 1,301 1,628
Inventories, principally due to additional
costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986 4,410 3,710
Allowance for doubtful accounts 3,060 3,060
Retirement agreement accrual 37,497 80,908
Other liabilities 22,628 36,162
Net operating loss carryforward 1,182,493 1,144,066
--------- ---------
Total gross deferred tax assets 1,250,389 1,269,534
Less valuation allowance (1,240,222) (1,257,762)
--------- ---------
Net deferred tax asset 10,167 11,772
Deferred tax liability:
Property, plant and equipment - principally
due to differences in depreciation methods (10,167) (11,772)
--------- ---------
Net deferred taxes $ -- --
========= =========
The valuation allowance for deferred tax assets as of February 1, 1995 and
1994 was $1,257,762 and $1,162,127, respectively. The net change in the
total valuation allowance was a decrease of $17,540 in fiscal 1996 and an
increase of $95,635 in fiscal 1995.
Note 8. Employee Benefit Plans
The Company has a contributory defined contribution 401(k) savings plan
covering all eligible employees who elect to participate. The Company
matches 100% of each $1 contributed to the plan from pre-tax earnings of the
employee up to a maximum of 3% of compensation. Contributions by the Company
for 1996, 1995 and 1994 amounted to $16,561, $13,760, and $17,299,
respectively.
Except as described above and in note 4, there are no postemployment or
postretirement benefits currently provided.
Note 9. Lease Commitments
The Company is party to several non-cancelable operating leases for various
machinery and equipment. Total rent expense incurred by the Company during
1996, 1995 and 1994 was $33,081, $46,605, and $64,632, respectively. The
aggregate future minimum operating lease payments at January 31, 1996 are as
follows:
[CAPTION]
Year ending January 31:
[S] [C]
1997 $ 43,868
1998 7,048
1999 6,417
2000 5,156
2001 3,867
------
Total $ 66,356
=======
Note 10. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at January 31, 1996 and 1995
consist of the following:
[CAPTION]
1996 1995
---- ----
[S] [C] [C]
Commission advances $ 66,649 87,287
Prepaid design work 51,232 52,499
Other 146,252 121,120
------- -------
Total $264,133 260,906
======= =======
Note 11. Accrued Expenses
Accrued expenses at January 31, 1996 and 1995 consist of the following:
[CAPTION]
1996 1995
---- ----
[S] [C] [C]
Accrued commissions $ 61,773 80,915
Deposits - cancelled contracts 166,935 114,708
Other 327,059 386,233
------- -------
Total $555,767 581,856
======= =======
Note 12. Related Party Transactions
Due from related parties consists of a mortgage receivable from an officer
of the Company in the amount of $77,615 and $79,069 at January 31, 1996 and
1995, respectively, bearing interest at 6%, due over a term of 35 years.
As described in notes 4 and 5, the Company has issued $700,000 of
convertible subordinated debentures in a private placement, of which
$500,000 was purchased by certain officers and directors of the Company and
also has notes payable of $430,000, of which $315,000 was loaned by certain
officers and directors of the Company.
In response to an unsolicited offer, the Company purchased 46,409 shares of
treasury stock at a price of $.20 per share during fiscal year 1996. The
Company immediately sold the 46,409 shares to four directors at a price of
$.20 per share.
Note 13. Stock Options
Under the terms of the Company's Stock Option Plan, Incentive Stock Options
may be granted to purchase shares of common stock at a price not less than
the fair market value at the date of grant, and non-qualified stock options
may be granted at a below-market price determined by the Company's Board of
Directors or the Committee which administers the plan. Stock option
activity during the last three years is summarized as follows:
[CAPTION]
Average Option
Number of shares Price Per Share
----------------------- -----------------------
Qualified Non-Qualified Qualified Non-Qualified
--------- ------------- --------- -------------
[S] [C] [C] [C] [C]
Balance at January 31, 1993 45,000 167,000 $ .89 .62
Granted during year -- -- -- --
Cancelled during year -- -- -- --
------ -------
Balance at January 31, 1994 45,000 167,000 .89 .62
Granted during year -- -- -- --
Cancelled during year -- -- -- --
------ -------
Balance at January 31, 1995 45,000 167,000 .89 .62
Granted during year -- -- -- --
Cancelled during year -- -- -- --
------ -------
Balance at January 31, 1996 45,000 167,000 $ .89 .62
====== ======= ==== ====
All outstanding stock options are exercisable as of January 31, 1996.
Note 14. Commitments and Contingencies
(a) Warranty Claims. The Company issues a one hundred year warranty on all
log components sold when a complete log home package is purchased. In the
opinion of management, based upon historical experience, no reserve for
potential warranty claims is required.
(b) Litigation. The Company is defendant in 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. In the opinion of the Company's attorneys and
management, the range of possible loss related to this matter is $50,000 to
$175,000 and it is expected that the amount of actual loss will not
materially exceed the amount provided for in the consolidated financial
statements.
The Company is defending certain other claims incurred in the normal course
of business. In the opinion of the Company's attorneys and management, the
ultimate settlement of these claims will not have a material effect on the
consolidated financial statements.
Note 15. Supplementary Disclosure of Cash Flow Information
[CAPTION]
1996 1995 1994
---- ---- ----
[S] [C] [C] [C]
Cash paid during the year for:
Interest $ 220,193 133,305 78,274
======== ======= =======
Income taxes $ 1,166 4,909 4,150
======== ======= =======
Noncash investing and financing activities:
The Company financed $37,988 and $32,000 of purchases of various assets
having a total cost of $38,988 and $82,904 during the years ended January
31, 1996 and 1994, respectively.
During fiscal 1996, the following other transactions occurred:
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 1996 Cant Financing Program (see note 5).
During fiscal 1995, the following other transactions occurred:
The Company disposed of various assets having a total cost of $36,561 and a
net book value of $4,955.
During fiscal 1994, the following other transactions occurred:
The Company disposed of various assets having a total cost of $58,273 and a
net book value of $10,716;
The Company provided for the costs of its retirement agreement with its
Founder with a current year expense of $369,122 and the reclassification of
$142,694 of deferred wages liability to long-term debt.
Note 16. Quarterly Financial Information (Unaudited)
(in thousands, except per share data)
[CAPTION]
April 30 July 31 October 31 January 31
-------- ------- ---------- ----------
[S] [C] [C] [C] [C]
1996:
Net sales $ 871 2,726 2,255 1,268
Gross profit 219 1,001 683 396
Net earnings (loss) $ (413) 437 91 (71)
===== ===== ===== =====
Primary earnings (loss)
per common share $ (.44) .46 .10 (.07)
===== ===== ===== =====
Fully diluted earnings
(loss) per common and
common equivalent share $ (.44) .10 .03 (.07)
===== ===== ===== =====
1995:
Net sales $1,022 2,656 2,128 1,369
Gross profit 223 825 646 280
Net earnings (loss) $ (432) 261 115 (234)
===== ===== ===== =====
Primary earnings (loss)
per common share $ (.46) .28 .12 (.25)
===== ===== ===== =====
Fully diluted earnings
(loss) per common and
common equivalent share $ (.46) .06 .03 (.25)
===== ===== ===== =====
Note 17. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value.
(a) Cash and Cash Equivalents, Accounts Receivable, Notes Receivable,
Accounts Payable, Customer Deposits, Accrued Expenses, Notes Payable and
Redeemable Common Stock. The carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable, customer deposits, accrued expenses,
notes payable and redeemable common stock approximate fair value because of
the short maturity of these instruments. The carrying amount of the notes
receivable approximates fair value because the notes bear interest that
approximates the market rate.
(b) Long-term Debt. Based on the borrowing rates currently available to the
Company for bank loans with similar terms and average maturities, the fair
value of total long-term debt (including current installments) is
approximately $795,000 compared to its carrying amount of $877,449. (see
note 4).
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Note 18. Liquidity
As of January 31, 1996, current liabilities of the Company exceeded current
assets by $1,385,979, and stockholders deficiency was $68,508. During 1996,
the Company obtained additional funds through a second Cant Financing
Program. The Company has not, however, been successful in securing working
capital from 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, have supported its operations during fiscal 1996, and are expected
to do so in fiscal 1997 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
borrowings under the Cant Financing Program when they mature in June 1996 or
a reduction in vendor assistance could further reduce its liquidity and,
eventually, force the Company to cease operations.
F-7
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information called for by Item 9 of this Report is incorporated
herein by reference to the information contained under the captions
"Election of Directors", "Executive Officers" and "Security Ownership
of Certain Beneficial Owners and Management" in the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A with respect to the Annual Meeting of
Shareholders of the Company to be held in June 1996.
ITEM 10. EXECUTIVE COMPENSATION
The information called for by Item 10 of this Report is incorporated
herein by reference to the information contained under the caption
"Executive Compensation" in the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A with respect to the Annual Meeting of Shareholders of the
Company to be held in June 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 11 of this Report is incorporated
herein by reference to the information contained under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A with respect to the
Annual Meeting of Shareholders of the Company to be held in June 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 12 of this Report is incorporated
herein by reference to the information contained under the caption
"Certain Relationships and Related Transactions" in the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A with respect to the Annual Meeting
of Shareholders of the Company to be held in June 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Reference is made to the Exhibit Index.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company during
the quarter ended January 31, 1996.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINCOLN LOGS LTD.
By: /s/ Richard C. Farr
--------------------
Richard C. Farr,
Chairman of the Board, President
and Chief Executive Officer
and Treasurer
Dated: April 22, 1996
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
(i) Principal Executive Officer:
/s/ Richard C. Farr
--------------------
Richard C. Farr,
Chairman of the Board, President
and Chief Executive Officer
and Treasurer
Dated: April 22, 1996
(ii) Principal Financial Officer:
/s/ Marjory B. Moeller
-----------------------
Marjory B. Moeller,
Vice President, Finance
Dated: April 22, 1996
(iii) A Majority of the Board of Directors:
/s/ Leslie M. Apple April 22, 1996
------------------------
Leslie M. Apple
/s/ Susan M. Considine April 22, 1996
------------------------
Susan M. Considine
/s/ Richard C. Farr April 22, 1996
------------------------
Richard C. Farr
/s/ Samuel J. Padula April 22, 1996
------------------------
Samuel J. Padula
/s/ Reginald W. Ray, Jr. April 22, 1996
------------------------
Reginald W. Ray, Jr.
/s/ John D. Shepherd April 22, 1996
------------------------
John D. Shepherd
INDEX TO EXHIBITS TO
ANNUAL REPORT ON FORM 10-KSB OF
LINCOLN LOGS LTD.
FOR THE FISCAL YEAR ENDED JANUARY 31, 1996
Exhibit
Number Exhibit Description
3.1 Restated Certificate of Incorporation of the Registrant, as
amended, filed as Exhibit 3.1 for the Registrant's Annual Report
on Form 10-K for the fiscal year ended January 31, 1990, filed
with the Securities and Exchange Commission on May 1, 1990, and
incorporated herein by this reference.
3.2 By-Laws of the Registrant, as amended, filed as Exhibit 3.2 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 31, 1988, filed with the Securities and Exchange
Commission on May 2, 1988, and incorporated herein by this
reference.
4.1 Rights Agreement dated as of February 17, 1989 between Lincoln Logs
Ltd. and Continental Stock Transfer & Trust Company, filed as
Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
February 17, 1989, filed with the Securities and Exchange
Commission on February 24, 1989 and incorporated herein by this
reference.
10.1 Employment Agreement with Richard Considine dated as of March 12,
1986, as amended, filed as Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 31, 1992,
filed with the Securities and Exchange Commission on April 30,
1992, and incorporated herein by this reference.
10.2 Purchase Agreement dated as of March 11, 1987 by and among Cedar 1,
Inc., B&C Lumber Company d/b/a Construction Suppliers, Inc.,
Leonard Chapdelaine and Juanita Chapdelaine and Lincoln Logs Ltd.,
as amended by an Addendum to Purchase Agreement dated March 11,
1987, a 2nd Addendum to Purchase Agreement (undated) and a Third
Addendum to Purchase Agreement dated April 3, 1987, filed as
Exhibit 2.1 to the Registrant's Form 8-K Current Report, Date of
Report: April 6, 1987, and incorporated herein by this reference.
10.3 Non-Competition Agreement dated as of April 3, 1987 by and among
Lincoln Logs Ltd., Paul Bunyan Land & Timber Company of California,
Inc., Blue Ox Land & Timber Company, Inc. d/b/a Construction
Suppliers and Leonard Chapdelaine and Juanita Chapdelaine, filed as
Exhibit 2.2 to the Registrant's Form 8-K Current Report, Date of
Report: April 6, 1987, and incorporated herein by this reference.
10.4 Stock Purchase, Deferred Compensation, Retirement and Loan
Agreement dated as of May 21, 1993 between Lincoln Logs Ltd. and
Richard Considine, filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-QSB for the quarter ended April 30,
1993, and incorporated herein by this reference.
10.5 Noncompetition Agreement dated as of May 21, 1993 between Lincoln
Logs Ltd. and Richard Considine, filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-QSB for the quarter ended
April 30, 1993, and incorporated herein by this reference.
10.6 Shareholder Voting Agreement dated as of May 21, 1993 between
Lincoln Logs Ltd. and Richard Considine, filed as Exhibit 10.3 to
the Registrant's Quarterly Report on Form 10-QSB for the quarter
ended April 30, 1993, and incorporated herein by this reference.
* 21. List of Subsidiaries.
27. Financial Data Schedule
(For electronic filing purposes only)
- -----------------------
* Filed herewith.
EXHIBIT 21
LIST OF SUBSIDIARIES
The registrant has the following subsidiaries:
1. Thermo-Home, Inc., a New York corporation
2. Lincoln Logs International Ltd., a New York corporation
3. Lincoln Holding Corp., a Delaware corporation
<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>
<NAME> LINCOLN LOGS LTD.
<CIK> 0000717422
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JAN-31-1996
<CASH> 373,636
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<RECEIVABLES> 267,707
<ALLOWANCES> 9,000
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