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, 1997 Commission File
Number 0-12172
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. [ X ]
Issuer's revenues for its most recent fiscal year were $7,505,032.
The aggregate market value of voting stock held by non-affiliates of the
registrant as of April 15, 1997 was approximately $827,539. The number of shares
of Common Stock of the registrant outstanding on April 15, 1997 was 945,759.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's proxy
statement with respect to its 1997 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Report.
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; and 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 68 Chairman of the Board; President and Chief
Executive Officer; Treasurer
Barbara J. Durkish 36 Vice President, Communications and Sales
Support; Assistant
Secretary
Carole P. Hart 54 Secretary; Manager, Administrative Services
Peter M. Hart 57 Vice President, Finance, Administration and
Planning
John Naftzger 56 Vice President, Marketing and Sales
John F. Schumaker 50 Vice President, Design and Production
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 and Sales Support
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 Secretary and Manager of Administrative Services of
the Company since June, 1996. Prior to her promotion to her current position,
Ms. Hart was Assistant Secretary since June, 1995 and 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, Finance, Administration and
Planning.
Peter M. Hart, MBA, has been Vice President, Finance, Administration and
Planning since June 1996. Prior to his promotion to his current position, Mr.
Hart was Vice President, Planning, Customer Satisfaction and Quality Assurance
since March, 1995 and General Manager, Western Region, from April 1994 to
March 1995. 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, Secretary of the Company.
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 Production since June
1996. Prior to his promotion to his present position, Mr. Schumaker was Vice
President of Design and Engineering from August 1993 to June 1996 and Director
of Design and Engineering from May 1990 to August 1993.
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 sales are of log homes to be
occupied as primary residences by the buyers.
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, permits 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 8% of total sales in
fiscal year 1997.
The Company has introduced a product line for the solarium/sunspace market
utilizing architectural arches which, when assembled with other standard
building components, will permit the construction of room additions for log
and standard stick-built homes. The product line is referred to as Lincoln
Solarium (TM). Sales of this product line were approximately 2% of total
sales in fiscal year 1997.
The Company markets its products in the United States through a network of
approximately 60 independent sales representatives in approximately 20 states.
Fifty percent (50%) of the purchase price of the building package is usually
received prior to the Company manufacturing any of the solid timber
components. 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 of the Company's independent 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, Israel, Korea and Europe
(less than 6% 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 have not
been of material significance to the Company due to the limited sales by the
Company outside of the United States (less than 6% 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
Western United States have been milled by an unaffiliated company on a
subcontract basis. 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, Town and Country Cedar Homes, and, Lindal Cedar
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, 1997, the Company employed 41 persons, 40 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 the 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 words "THE ORIGINAL LINCOLN LOG" in the
following states: Alaska, Arkansas, Arizona, California, Connecticut,
Delaware, Idaho, Iowa, Illinois, Indiana, Kansas, Kentucky, Louisiana,
Maryland, Massachusetts, Mississippi, Missouri, Montana, Nebraska, New Jersey,
New Mexico, New York, Oklahoma, Oregon, Pennsylvania, South Carolina, South
Dakota, Tennessee, Utah, Vermont, Washington and Wyoming. 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." The Company also owns the federally registered trademark "Lincoln" in
the United States. 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.
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, 1997 or 1996.
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 which houses a movie theatre,
retail and apartment space, that is leased 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.
(7) In addition, the Company owns four parcels of undeveloped land in
Northeastern, New York totalling approximately 140 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 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 of the Company 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 and the parties exchanged general releases
in full settlement of the lawsuit. The settlement was made without prejudice
or admission of guilt in order to avoid further litigation expense.
(b) Other Matters. The Company is also defending certain claims in the
ordinary course of and incidental to the Company's business. In the opinion
of the Company's 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, 1995 through January 31, 1997. 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, 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
Quarter Ended April 30, 1996 Common Stock 7/16 5/32
Quarter Ended July 31, 1996 Common Stock 7/16 5/32
Quarter Ended October 31, 1996 Common Stock 7/16 1/8
Quarter Ended January 31, 1997 Common Stock 7/16 1/8
(b) The approximate number of holders of the Common Stock of the Company
as of April 15, 1997 was 2,322.
(c) No cash dividends were declared by the Company during the fiscal
years ended January 31, 1997 and 1996. 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 1997 VS. FISCAL 1996 VS. FISCAL 1995
RESULTS OF OPERATIONS
Revenues, net of sales commissions, for the fiscal year ended January 31, 1997
were $7,505,032 as compared with $7,120,152 for the fiscal year ended January
31, 1996 and $7,174,603 for the fiscal year ended January 31, 1995. Fiscal
1997 revenues represent an increase of $384,880, or approximately 5% more than
fiscal 1996. Fiscal 1996 revenues represented a decrease of $54,451, or
approximately 1% below fiscal 1995 results.
In fiscal 1997, as compared to fiscal 1996, units shipped decreased by 4%
while the average sales value per unit shipped increased by 9%. The increase
in sales value per 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.
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 resulted from 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.
Gross profits were 33% of net sales in fiscal 1997, or $2,484,494. In fiscal
1996, gross profits were 32% of sales, or $2,298,592, and were 28% of sales,
or $1,974,075, in fiscal 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 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 employees who are paid a
lower commission rate than dealer/distributors. 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.
Operating expenses of $2,367,040, or 32% of net sales, have increased $195,723
from the fiscal year 1996 amount of $2,171,317, 30% of net sales. Operating
expenses were 30% of sales in fiscal 1996, as compared to 32% in fiscal 1995.
The increase in total operating expenses from fiscal 1996 to fiscal 1997 was
9%, and was due to the Company's committment 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 expenses related to the settlement of litigation. 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 decrease in
operating expenses from fiscal 1995 to fiscal 1996 was primarily due to the
Company's efforts to reduce expenses wherever possible and to improve its
management systems.
Interest expense in fiscal years 1997, 1996 and 1995 totaled $221,270,
$195,383, and $172,953, respectively. The increase of $25,887 and $22,430 in
interest expense in fiscal 1997 and fiscal 1996, respectively, 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.
Other income in fiscal 1997, fiscal 1996 and fiscal 1995 of $81,477, $78,862
and $150,936, respectively, consisted primarily of forfeits of customer
deposits and cancellation charges on non-refundable contracts.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1997, the Company had negative working capital, as current
liabilities exceeded current assets by $1,167,052, compared with negative
working capital of $1,385,979 at January 31, 1996, a decrease of $218,927. At
January 31, 1997, the Company had stockholders' deficiency of $53,310, as
compared to a stockholders' deficiency of $68,508 at January 31, 1996, an
improvement of $15,198. As of January 31, 1996, working capital had increased
$83,905 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,
additions to property, plant and equipment, and in fiscal 1997, by the
settlement of litigation.
In fiscal 1997, the Company was a net provider of cash from operations in the
amount of $66,202 as compared to the previous year when operations was a net
provider of cash in the amount of $327,701. Overall, the Company experienced
a decrease in its cash position of $14,529 in fiscal 1997, compared with an
increase of $95,393 for fiscal 1996. Funds generated by operations in fiscal
1997, including decreases in inventories, increases in customer deposits, and
by new short-term borrowing from several individuals, including directors and
shareholders, were offset by the repayment of long-term debt, including
obligations related to the retirement of the Company's founder, capital
expenditures, and by the settlement of litigation.
During fiscal 1997, the Company obtained additional funds through its Cant
Financing Program. The Company has not, however, been successful in securing
a working capital credit facility 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
1997, and are expected to do so in fiscal 1998 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 1997, 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, 1997 amounted to $987,268, as compared
with deposits of $796,407 at January 31, 1996, an increase of $190,861.
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 1998, potential gross
revenues of approximately $9,280,452 as compared with potential gross
revenues for fiscal 1997 of $9,440,795 from deposits of $796,407. Actual
gross revenues realized in fiscal 1997 from the sale of home packages amounted
to $7,802,509. Actual gross revenues realized in fiscal 1997 were lower than
potential gross revenues based on deposits on hand at January 31, 1996, due to
cancellations and postponement of some deliveries by customers. The 1998
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 1997, as well as the Company's ability to
continue operations and to expand into new market areas.
Inventories at January 31, 1997 were $618,248 as compared with $827,814 at
January 31, 1996, a decrease of $209,566. 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 $319,846 at January 31, 1997, which represents
an increase of $61,139 or 24% from the amount of $258,707 as of January 31,
1996. 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 January 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share", which is effective for the Company in fiscal 1998.
This Statement, which modifies computation, presentation and disclosure
requirements for earnings per share, is not expected to have a material impact
on the Company's calculation of earnings per share.
ITEM 7. FINANCIAL STATEMENTS
Index to financial statements
Page
Independent Auditors' Report F-2
Consolidated balance sheets as of
January 31, 1997 and 1996 F-3
Consolidated statements of operations for the years
ended January 31, 1997, 1996 and 1995 F-5
Consolidated statements of changes in stockholders'
deficiency for the years ended January
31, 1997, 1996 and 1995 F-6
Consolidated statements of cash flows for the years
ended January 31, 1997, 1996 and 1995 F-7
Notes to consolidated financial statements
January 31, 1997, 1996 and 1995 F-8
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, 1997 and 1996, 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, 1997. 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 significant 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 1997, 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, 1997 and 1996, current
liabilities exceed current assets, and at January 31, 1997 and 1996, the Company
has a stockholders' deficiency. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management'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 11, 1997
F-2
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 2(i)) $ 359,107 $ 373,636
Trade accounts receivable, net of allowance
for doubtful accounts of $9,000 in 1997
and 1996(note 5) 319,846 258,707
Notes receivable 18,500 18,500
Inventories (note 5) 618,248 827,814
Prepaid expenses and other current assets (note 10) 431,824 264,133
Due from related parties (note 12) 1,779 1,543
--------- ---------
Total current assets 1,749,304 1,744,333
--------- ---------
Property, plant and equipment, at
cost (notes 3 and 4) 4,932,577 4,892,900
Less accumulated depreciation (3,154,499) (3,021,512)
--------- ---------
Net property, plant and equipment 1,778,078 1,871,388
--------- ---------
Other assets:
Due from related parties (note 12) 74,425 76,072
Assets held for resale (note 3) 38,189 71,825
Cash surrender value of life insurance, net of
loan of $80,000 in 1997 9,321 --
Deposits and other assets 988 689
Intangible assets, net of amortization 27,345 37,073
--------- ---------
150,268 185,659
---------- ----------
Total assets (note 4) $ 3,677,650 $3,801,380
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 1997 and 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
1997 1996
<S> <C> <C>
Current liabilities:
Current installments of long-term debt (note 4) $ 18,084 $ 137,873
Notes payable (notes 5 and 12):
Related parties 335,000 315,000
Others 175,000 115,000
Redeemable common stock, current (note 6) -- 94,305
Trade accounts payable 940,598 1,072,368
Customer deposits 987,268 796,407
Accrued salaries and wages 36,426 42,786
Accrued expenses (note 11) 314,391 515,542
Due to related parties (note 12) 108,820 40,225
Accrued income taxes 769 806
---------- ---------
Total current liabilities 2,916,356 3,130,312
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
Other 25,283 39,576
Other liabilities 89,321 --
---------- --------
Total liabilities 3,730,960 3,869,888
----------- ----------
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 0 and
93,935 shares subject to redemption agreement at
January 31, 1997 and 1996, respectively (note 6) 14,500 13,561
Additional paid-in capital 3,894,286 3,800,920
Accumulated deficit (3,077,661) (3,092,859)
--------- ---------
831,125 721,622
Less cost of 504,240 shares in 1997 and 410,305
shares in 1996 of common stock in treasury (884,435) (790,130)
----------- ----------
Total stockholders' deficiency (53,310) (68,508)
----------- ----------
Commitments and contingencies (notes 9, 14 and 18)
Total liabilities and stockholders'
deficiency $3,677,650 $3,801,380
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended January 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Sales, net of commissions of $1,027,914,
$1,119,253 and $1,110,069, respectively $7,505,032 7,120,152 7,174,603
Cost of sales 5,020,538 4,821,560 5,200,528
--------- --------- ----------
Gross profit 2,484,494 2,298,592 1,974,075
Selling, general and administrative
expenses 2,367,040 2,171,317 2,274,237
--------- --------- ---------
Operating income (loss) 117,454 127,275 (300,162)
Other income (expense):
Interest income 39,106 34,924 34,068
Interest expense (221,270) (195,383) (172,953)
Other 81,477 78,862 150,936
-------- -------- --------
(100,687) (81,597) 12,051
-------- ------- ---------
Earnings (loss) before income taxes 16,767 45,678 (288,111)
Provision for income taxes (note 7) 1,569 1,600 1,700
-------- -------- --------
Net earnings (loss) $ 15,198 44,078 (289,811)
======== ========= =========
Per share data (note 2(g)):
Primary earnings (loss) per
common share $ .02 .05 (.31)
======== ========= =========
Fully diluted earnings (loss) per
common and common equivalent share $ .02 .03 (.31)
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Years ended January 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock
---------------- Retained Total
Number Par Additional earnings stockholders'
of value paid-in (accumulated Treasury equity
shares amount capital deficit) stock (deficiency)
-- --------- --------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
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)
Common stock redeemed (note 6) -- 939 93,366 -- (94,305) --
Net earnings - 1997 -- -- -- 15,198 -- 15,198
--------- -------- --------- ----------- --------- ---------
Balance at January 31, 1997 1,449,999 $ 14,500 3,894,286 (3,077,661) (884,435) (53,310)
========= ======== ========= =========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 31, 1997, 1996 and 1995
1997 1996 1995
Operating activities:
Net earnings (loss) $ 15,198 44,078 (289,811)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization 148,846 175,892 219,519
Loss on sale of assets 1,284 -- --
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts
receivable (61,139) 109,489 ( 44,379)
Decrease (increase) in inventories 209,566 52,577 (183,040)
(Increase) decrease in prepaid expenses
and other current assets (167,691) (3,227) 78,469
Decrease (increase) in prepaid income taxes -- 883 (883)
(Decrease) increase in trade
accounts payable (131,770) 4,959 393,445
Increase (decrease) in customer deposits 190,861 (99,673) (23,530)
(Decrease) increase in accrued expenses
and other current liabilities (207,511) 74,612 (89,238)
Increase (decrease) in due to related
parties 68,595 (32,695) 40,506
(Decrease) increase in accrued income taxes (37) 806 (2,326)
-------- -------- ---------
Net cash provided by
operating activities 66,202 327,701 98,732
-------- --------- ----------
Investing activities (note 15):
Repayments of notes receivable -- 1,042 2,708
Additions to property, plant and equipment (40,526) (32,006) (13,101)
Proceeds from sale of assets 32,352 -- --
Decrease in due from related parties 1,411 1,454 1,369
(Increase) decrease in deposits and
other assets (299) 311 159
Increase in intangible assets -- (37,000) --
Net cash used by -------- ------- --------
investing activities (7,062) (66,199) (8,865)
--------- ------- --------
Financing activities (note 15):
Proceeds from notes payable 80,000 115,000 240,000
Redemption of common stock (94,305) (62,500) (62,500)
Proceeds from loan against cash
surrender value of life insurance 80,000 -- --
Reductions in long-term debt (139,364) (218,609) (281,583)
-------- --------- -------
Net cash used by
financing activities (73,669) (166,109) (104,083)
Net (decrease) increase in cash and -------- -------- --------
cash equivalents (14,529) 95,393 (14,216)
Cash and cash equivalents at beginning
of period 373,636 278,243 292,459
------- ------- ---------
Cash and cash equivalents at end
of period $ 359,107 373,636 278,243
======== ======== ========
See accompanying notes to consolidated financial statements.
F-7
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 1997, 1996 and 1995
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 and pre-bent wooden arch solariums. 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 55% of the materials necessary to assemble
the log home packages from four suppliers. These four suppliers provided 21%,
15%, 14% and 5% of 1997 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.
The Company's 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, 1997, 1996, and 1995 was $9,728, $7,877, and $2,327, 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 for each of the years ended January 31, 1997, 1996,
and 1995.
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. When the effects are dilutive, the
convertible subordinated debentures are assumed to have been converted into
common stock at the beginning of the period after giving retroactive effect to
the elimination of interest expense, net of income tax effect, applicable to
the convertible subordinated debentures. Stock options are included in the
computation of earnings per share under the treasury stock method if the effect
is dilutive. The weighted average number of fully diluted common and common
equivalent shares for 1997 and 1996 was 1,001,460 and 4,445,759 shares,
respectively. Fully diluted loss per share is the same as primary loss per
share in 1995 as the effect of stock options and the assumed conversion of
the subordinated debentures would be anti-dilutive.
(h) Reclassifications. Certain amounts in the 1996 and 1995 financial
statements have been reclassified to conform with the presentation in the 1997
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.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of.
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", on February 1, 1996. This
Statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment when events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows expected to be generated by an asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. Adoption of SFAS No.
121 in 1997 did not have a material impact on the Company's financial position,
results of operations or liquidity.
(l) Stock Option Plans. The Company accounts for its incentive stock option
plan and non-qualified stock option plan in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting
for Stock-Based Compensation", which was required to be adopted by the Company
as of February 1, 1996, permits entities to recognize expense over the vesting
period of the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for the employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied.
Note 3. Property, Plant and Equipment
A summary of property, plant and equipment at January 31, 1997 and 1996 is as
follows:
Estimated
Useful Lives 1997 1996
---- ----
Land $ 784,800 784,800
Buildings and improvements 15 - 31 years 2,125,626 2,118,426
Machinery and equipment 5 - 7 years 623,777 620,332
Furniture and fixtures 5 - 7 years 1,252,156 1,227,314
Transportation equipment 5 years 146,218 142,028
--------- ---------
$4,932,577 4,892,900
========= =========
Depreciation expense for the years ended January 31, 1997, 1996, and 1995 was
$139,118, $168,015, and $217,192, respectively.
Assets held for resale of $38,189 and $71,825 at January 31, 1997 and 1996,
respectively, consists primarily of non-operating real estate which is carried
at the lower of cost or estimated fair value, less costs to sell.
Note 4. Indebtedness
The Company has authorized and issued $700,000 of Series A Convertible
Subordinated Debentures (the 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 which are located in Chestertown, New York
and Auburn, California.
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
majority of this settlement was paid in equal weekly installments from May 1,
1993 through March 12, 1996. The remainder of the settlement of $106,802 was
paid in July, 1996.
Long-term debt at January 31, 1997 and 1996 consists of the following:
1997 1996
---- ----
Mortgage notes payable at 10%, payable in
monthly installments through January 1999,
secured by parcels of land $ 14,177 21,071
Notes payable at rates ranging from 8% to
18.4%, payable in varying installments
through February 2000, one note unsecured, all
others secured by various pieces of equipment 29,190 49,576
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
--------- ---------
Total 743,367 877,449
Less current installments (18,084) (137,873)
--------- ---------
$ 725,283 739,576
========= =========
The aggregate maturities of long-term debt by fiscal year are as follows:
Year ending January 31: Amount
1998 $ 18,084
1999 721,097
2000 4,039
2001 147
----------
$ 743,367
=========
Note 5. Notes Payable
During 1997 and 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, 1997 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, 1997.
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 called for the annual redemption by the
Company of 25% of the shares beginning July 1, 1993. The final redemption and
payment of $94,305 was made in July, 1996.
Note 7. Income Taxes
A summary of components of the provision for income taxes for the years ended
January 31, 1997, 1996 and 1995 is as follows:
Current Deferred Total
Year ended January 31, 1997:
Federal $ -- -- --
State 1,569 -- 1,569
------ ------ ------
$ 1,569 -- 1,569
====== ====== ======
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
====== ====== ======
The Company has Federal net operating loss carryforwards for income tax purposes
of approximately $3,558,700; $1,567,400 expire in 2007, $815,600 in 2008,
$609,200 in 2009, $372,700 in 2010, $73,800 in 2011 and $120,000 in 2012.
The effective income tax rates of 9.4%, 3.5% and 0.6% for 1997, 1996 and 1995,
respectively, differ from the statutory Federal income tax rate for the
following reasons:
1997 1996 1995
---- ---- ----
Statutory tax rate 34.0% 34.0% (34.0)%
Officers' life insurance 73.0 -- --
Non-deductible meals and
entertainment expenses 37.5 2.8 1.9
State income taxes, net of federal
tax benefit 6.2 2.3 --
Change in deferred tax asset
valuation allowance (138.8) (38.4) 31.2
Other non-deductible expenses (2.5) 2.8 1.5
----- ----- -----
9.4% 3.5% 0.6%
===== ===== =====
For the years ended January 31, 1997 and 1996, 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, 1997 and 1996 are
presented below:
1997 1996
---- ----
Deferred tax assets:
Vacation accrual $ 1,606 1,301
Inventories, principally due to additional
costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986 3,886 4,410
Allowance for doubtful accounts 3,060 3,060
Retirement agreement accrual -- 36,497
Other liabilities 10,327 22,628
Net operating loss carryforward 1,209,944 1,182,493
--------- ---------
Total gross deferred tax assets 1,228,823 1,250,389
Less valuation allowance (1,216,946) (1,240,222)
--------- ---------
Net deferred tax asset 11,877 10,167
Deferred tax liability:
Property, plant and equipment - principally
due to differences in depreciation methods (11,877) (10,167)
--------- ---------
Net deferred taxes $ -- --
========= =========
The valuation allowance for deferred tax assets as of February 1, 1996 and 1995
was $1,240,222 and $1,257,762, respectively. The net change in the total
valuation allowance was a decrease of $23,276 in fiscal 1997 and a decrease of
$17,540 in fiscal 1996.
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 1997,
1996 and 1995 amounted to $17,628, $16,561, and $13,760, respectively.
The Company's president has an employment agreement whereby the Company is to
purchase a life insurance policy upon his retirement. In 1997, the Company
accrued $36,000 of post retirement benefits for the purchase of this policy.
Note 9. Lease Commitments
The Company is party to several noncancelable operating leases for various
machinery and equipment. Total rent expense incurred by the Company during
1997, 1996 and 1995 was $50,618, $33,081, and $46,605, respectively. The
aggregate future minimum operating lease payments at January 31, 1997 are as
follows:
Year ending January 31:
1998 $ 16,257
1999 7,185
2000 5,156
2001 3,867
------
Total $ 32,465
=======
Note 10. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at January 31, 1997 and 1996 consist
of the following:
1997 1996
---- ----
Commission advances $178,279 66,649
Prepaid design work 86,875 51,232
Other 166,670 146,252
------- -------
Total $431,824 264,133
======= =======
Note 11. Accrued Expenses
Accrued expenses at January 31, 1997 and 1996 consist of the following:
1997 1996
---- ----
Accrued commissions $102,651 61,773
Deposits - cancelled contracts 24,875 166,935
Postretirement benefits 36,000 --
Other 150,865 286,834
------- -------
Total $314,391 515,542
======= =======
Note 12. Related Party Transactions
Due from related parties consists of a mortgage receivable from an officer of
the Company in the amount of $76,204 and $77,615 at January 31, 1997 and 1996,
respectively, bearing interest at 6%, due over a term of 35 years.
Due to related parties consists of amounts payable to the Company's President.
Such amounts totalling $108,820 and $40,225 at January 31, 1997 and 1996,
respectively, relate to unpaid salary and reimbursable business travel and
other expenses.
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
$510,000, of which $335,000 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 price (including 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:
Average Option
Number of shares Price Per Share
----------------------- -----------------------
Qualified Non-Qualified Qualified Non-Qualified
--------- ------------- --------- -------------
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
Granted during year 52,500 207,000 $ .19 $ .19
Cancelled during year (45,000) (167,000) ($ .89) ($ .62)
------ -------
Balance at January 31, 1997 52,500 207,000 $ .19 $ .19
====== ======= ==== ====
During 1997, the Company cancelled 45,000 incentive stock options having an
option price of $ .89. Such options were reissued at an option price per share
equal to the fair market value per common share of $ .19. Also during 1997,
the Company cancelled 167,000 non-qualified options having an option price of $
.62. Such options were reissued at an option price per share equal to the fair
market value per common share of $ .19.
All outstanding stock options are exercisable as of January 31, 1997. Stock
options expire 10 years from the date they are granted (except in the case of
an incentive stock option awarded to a person owning 10% or more of the
Company's stock, in which case the term is limited to five years) and vest upon
grant. The weighted average remaining contractual life of the outstanding
options as of January 31, 1997 is 8.8 years.
The pro forma disclosures required under SFAS No. 123 are not presented as such
information was not materially different than the reported net income and
earnings per share.
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. 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. In
connection with this matter, the Company incurred $41,846 and $82,771 in legal
expenses during fiscal year 1997 and 1996, respectively.
The Company is defending certain other claims incurred in the normal course of
business. In the opinion of the Company's 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
1997 1996 1995
---- ---- ----
Cash paid during the year for:
Interest $ 231,664 220,193 133,305
======== ======= =======
Income taxes $ 1,532 1,166 4,909
======== ======= =======
Noncash investing and financing activities:
The Company entered into a capital lease for a piece of office equipment having
a total cost of $5,282 during the year ended January 31, 1997. The Company
financed $37,988 of purchases of various assets having a total cost of $38,988
during the year ended January 31, 1996.
During fiscal 1997, the following other transactions occurred:
The Company disposed of various assets having a total cost of $39,767 and a
$33,636 net book value.
The Company recorded the $89,321 cash surrender value of an insurance policy on
the life of the Company's Founder and also recorded a liability in the same
amount.
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.
Note 16. Quarterly Financial Information (Unaudited)
(in thousands, except per share data)
April 30 July 31 October 31 January 31
-------- ------- ---------- ----------
1997:
Net sales $ 865 2,984 2,392 1,264
Gross profit 251 1,164 699* 370
Net earnings (loss) $ (412) 443 44** (60)
===== ===== ===== =====
Primary earnings (loss)
per common share $ (.44) .47 .05 (.06)
===== ===== ===== =====
Fully diluted earnings
(loss) per common and
common equivalent share $ (.44) .10 .01 (.06)
===== ===== ===== =====
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)
===== ===== ===== =====
* Third quarter gross profit, previously reported as $817,000, has been reduced
to $699,000 to reflect an adjustment related to revenue recognized for
engineering and drafting services.
** Third quarter net earnings, previously reported as $251,000, has been
reduced to reflect an $89,000 adjustment related to an insurance policy on the
life of the Company's Founder and a $118,000 adjustment related to revenue
recognized for engineering and drafting services.
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, Cash
Surrender Value of Life Insurance, Accounts Payable, Customer Deposits, Accrued
Expenses, Notes Payable and Redeemable Common Stock. The carrying amounts of
cash and cash equivalents, accounts receivable, cash surrender value of life
insurance, 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
$691,000 compared to its carrying amount of $743,367. (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, 1997, current liabilities of the Company exceeded current
assets by $1,167,052. During 1997, the Company obtained additional funds
through its 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 1997,
and are expected to do so in fiscal 1998 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 1997 or a
reduction in vendor assistance could further reduce its liquidity and,
eventually, force the Company to cease operations.
F-7
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
1997.
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 1997.
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 1997.
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 1997.
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, 1997.
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 28, 1997
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 28, 1997
(ii) Principal Financial Officer:
/s/ Peter M. Hart
-----------------------
Peter M. Hart,
Vice President, Finance, Administration and Planning
Dated: April 28, 1997
(iii) A Majority of the Board of Directors:
/s/ Leslie M. Apple April 28, 1997
------------------------
Leslie M. Apple
/s/ Susan M. Considine April 28, 1997
------------------------
Susan M. Considine
/s/ Richard C. Farr April 28, 1997
------------------------
Richard C. Farr
/s/ Samuel J. Padula April 28, 1997
------------------------
Samuel J. Padula
/s/ Reginald W. Ray, Jr. April 28, 1997
------------------------
Reginald W. Ray, Jr.
/s/ John D. Shepherd April 28, 1997
------------------------
John D. Shepherd
INDEX TO EXHIBITS TO
ANNUAL REPORT ON FORM 10-KSB OF
LINCOLN LOGS LTD.
FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
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 thefiscal year ended January 31, 1992, filed with the
Securities and Exchange Commissionon 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
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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.
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<NAME> LINCOLN LOGS LTD.
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