RESTATED - SEE "INTRODUCTORY NOTE"
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB-A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1997 - As Amended
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 $7,270,228.
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.
RESTATED - SEE "INTRODUCTORY NOTE"
INTRODUCTORY NOTE
THE INFORMATION CONTAINED HEREIN HAS BEEN RESTATED IN APRIL 1998
TO REFLECT ADJUSTMENTS RESULTING FROM THE DISCOVERY OF ERRORS IN
THE COMPANY'S ACCOUNTING PROCEDURES (SEE NOTE 2 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS). The Corporation hereby
amends the following items of its Annual Report on Form 10-KSB
for the fiscal year ended January 31, 1997 (the Original Filing).
Each of the below referenced Items in Part II are hereby amended
by deleting the Items in their entirety and replacing them with
the Items set forth herein. Any Items in the original Filing not
Expressly changed hereby shall be as set forth in the Original
Filing.
PART II
Item 6. Management's Discussion and Analysis or Plan of
Operations
Item 7. Financial Statements
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
RESTATED - SEE "INTRODUCTORY NOTE"
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
RESTATED - SEE "INTRODUCTORY NOTE"
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,
RESTATED - SEE "INTRODUCTORY NOTE"
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 ALincoln@ 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 totaling approximately 140
RESTATED - SEE "INTRODUCTORY NOTE"
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.
Naftzger.
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.
RESTATED - SEE "INTRODUCTORY NOTE"
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
RESTATED - SEE "INTRODUCTORY NOTE"
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,restated, VS. FISCAL 1996 VS. FISCAL 1995
RESULTS OF OPERATIONS
Revenues, net of sales commissions, for the fiscal year ended
January 31, 1997, restated, were $7,270,228 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 $150,076, or approximately
2% more than fiscal 1996. Fiscal 1996 revenues represented a
decrease of $54,451, or approximately 1% below fiscal 1995
results.
RESTATED - SEE "INTRODUCTORY NOTE"
In fiscal 1997, as compared to fiscal 1996, units shipped
decreased by 7% 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 31% of net sales in fiscal 1997, or
$2,254,517. 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.
While the Company experienced an increase in the average sales
value per unit shipped and lower average commission rates these
factors were offset by increased material costs which resulted in
an overall net decrease in gross profits. 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
independent dealer/distributors. The increase in average sales
value per unit shipped resulted from higher catalog prices put
into place at the start of the current fiscal year. 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 $2,406,042, or 33% of net sales, have
increased $234,725 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 11%, and was due to the Company=s commitment to increase
its market share through an additional sales office, increased
national advertising, conducting a national dealer conference to
introduce product improvements and innovations, and 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
refundable contracts.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1997, the Company had negative working capital,
as current liabilities exceeded current assets by $1,436,031,
compared with negative working capital of $1,385,979 at January
31, 1996, a increase of $50,052. At January 31, 1997, the
Company had stockholders' deficiency of $322,289, as compared to
stockholders' deficiency of $68,508 at January 31, 1996, a
worsening of $253,781. 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
RESTATED - SEE "INTRODUCTORY NOTE"
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 $1,151,439,
as compared with deposits of $796,407 at January 31, 1996, an
increase of $355,032. 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 a greater percentage 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 $10,280,845 as
compared with potential gross revenues for fiscal 1997 of
$11,051,602. Actual gross revenues realized in fiscal 1997 from
the sale of log home packages and solariums amounted to
$8,318,803. 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 $623,075 as compared with
$827,814 at January 31, 1996, a decrease of $204,739. 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 $274,910 at January 31, 1997,
which represents an increase of $16,203 or 6% 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, AEarnings 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.
RESTATED - SEE "INTRODUCTORY NOTE"
ITEM 7. FINANCIAL STATEMENTS
Index to financial statements
Page
Independent Auditors' Report F-2
Consolidated balance sheets as of
January 31, 1997 (restated) and 1996 F-3
Consolidated statements of operations for the years
ended January 31, 1997 (restated), 1996 and 1995 F-5
Consolidated statements of changes in stockholders'
deficiency for the years ended January
31, 1997 (restated), 1996 and 1995 F-6
Consolidated statements of cash flows for the years
ended January 31, 1997 (restated), 1996 and 1995 F-7
Notes to consolidated financial statements
January 31, 1997, 1996 and 1995 F-8
RESTATED - SEE "INTRODUCTORY NOTE"
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 (as restated, see Note 2) 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 (1997, restated, see Note
2). 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 19 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 19.
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, except as to
Note 2, which is as of April 17, 1998
F-2
RESTATED - SEE "INTRODUCTORY STATEMENT"
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 1997 (Restated) and 1996
Restated
1997 1996
Current assets:
Cash and cash equivalents (note 3(i)) $ 359,107 $ 373,636
Trade accounts receivable, net of allowance
for doubtful accounts of $9,000 in 1997
and 1996(note 6) 274,910 258,707
Notes receivable 18,500 18,500
Inventories (note 6) 623,075 827,814
Prepaid expenses and other current assets (note 11) 426,131 264,133
Due from related parties (note 13) 1,779 1,543
--------- ---------
Total current assets 1,703,502 1,744,333
========= =========
Property, plant and equipment, at
cost (notes 4 and 5) 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 13) 74,425 76,072
Assets held for resale (note 4) 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 5) $ 3,631,848 $3,801,380
========= =========
See accompanying notes to consolidated financial statements.
F-3
RESTATED - SEE "INTRODUCTORY NOTE"
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31, 1997 (Restated) and 1996
Restated
1997 1996
------- -----
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current installments of long-term debt (note 5) 18,084 $137,873
Notes payable (notes 6 and 13):
Related parties 335,000 315,000
Others 175,000 115,000
Redeemable common stock, current (note 7) -- 94,305
Trade accounts payable 940,598 1,072,368
Customer deposits 1,151,439 796,407
Accrued salaries and wages 43,428 42,786
Accrued expenses (note 12) 366,395 515,542
Due to related parties (note 13) 108,820 40,225
Accrued income taxes 769 806
--------- ---------
Total current liabilities 3,139,533 3,130,312
Long-term debt, net of current installments (note 5):
Convertible subordinated debentures (note 13):
Related parties 500,000 500,000
Others 200,000 200,000
Other 25,283 39,576
Other liabilities 89,321 --
--------- ---------
Total liabilities 3,954,137 3,869,888
--------- ---------
Stockholders' equity (deficiency) (note 14):
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 7) 14,500 13,561
Additional paid-in capital 3,894,286 3,800,920
Accumulated deficit (3,346,640)(3,092,859)
----------- ----------
562,146 721,622
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 (322,289) (68,508)
---------- ---------
Commitments and contingencies (notes 10, 15 and 19)
Total liabilities and stockholders'
deficiency $3,631,848 $3,801,380
========= =========
See accompanying notes to consolidated financial statements.
F-4
RESTATED - SEE "INTRODUCTORY NOTE"
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended January 31, 1997 (Restated), 1996 and 1995
Restated
1997 1996 1995
Sales, net of commissions of $1,053,611,
$1,119,253 and $1,110,069, respectively $7,270,228 7,120,152 7,174,603
Cost of sales 5,015,711 4,821,560 5,200,528
--------- --------- --------
Gross profit 2,254,517 2,298,592 1,974,075
Selling, general and administrative
expenses 2,406,042 2,171,317 2,274,237
--------- --------- ---------
Operating income (loss) (151,525) 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 (252,212) 45,678 (288,111)
Provision for income taxes (note 1,569 1,600 1,700
---------- -------- --------
Net earnings (loss) $(253,781) 44,078 (289,811)
======== ==================
Per share data (note 3(g)):
Primary earnings (loss) per
common share $ ( .27) .05 ( .31)
======== ==================
Fully diluted earnings (loss) per
common and common equivalent share $ ( .27) .03 ( .31)
======== ==================
See accompanying notes to consolidated financial statements.
F-5
RESTATED - SEE "INTRODUCTORY NOTE"
<TABLE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY)
Years ended January 31, 1997 (Restated), 1996 and 1995
Common Stock
<S> <S> <S> <S> <S> <S>
Retained Total
Number Par Additional earnings stockholders'
of value paid-in (accumulated Treasury equity
shares amount capital deficit) stock (deficiency)
<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 7) -- 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 7) -- 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 7) -- 939 93,366 -- (94,305) --
Net earnings - 1997 (restated)
(note 2) -- -- -- (253,781) -- (253,781)
--------- -------- --------- ----------- --------- ---------
Balance at January 31, 1997 1,449,999 $ 14,500 3,894,286 (3,346,640) (884,435) (322,289)
========= ======== ========= =========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
RESTATED - SEE "INTRODUCTORY NOTE"
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 31, 1997 (Restated), 1996 and 1995
1997 1996 1995
Operating activities:
Net earnings (loss) $ (253,781) 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 (16,203) 109,489 (44,379)
Decrease (increase) in inventories 204,739 52,577 (183,040)
(Increase) decrease in prepaid expenses
and other current assets (161,998) (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 355,032 (99,673) (23,530)
(Decrease) increase in accrued expenses
and other current liabilities (148,505) 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 16):
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 16):
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
RESTATED - SEE "INTRODUCTORY NOTE"
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. Restatement of Prior Period Results
The Company has restated previously issued financial results for
the year ended January 31, 1997. The restated financial results
reflect the correction of errors in the Company's accounting
procedures related to sales cut-off, commission expense, recording
of certain accruals and inventory reconciliation. The following
summarizes the impact of the restatement.
As Reported Restated
Sales, net of commissions $ 7,505,032 $ 7,270,228
Cost of sales $ 5,020,538 $ 5,015,711
Gross profit $ 2,484,494 $ 2,254,517
Selling, general and
administrative expenses $ 2,367,040 $ 2,406,042
Net earnings (loss) $ 15,198 $ (253,781)
Net earnings (loss) per share $ .02 $ ( .27)
Trade accounts receivable $ 319,846 $ 274,910
Inventories $ 618,248 $ 623,075
Prepaid expenses and
other current assets $ 431,824 $ 426,131
Customer deposits $ 987,268 $ 1,151,439
Accrued salaries and wages $ 36,426 $ 43,428
Accrued expenses $ 314,391 $ 366,395
Accumulated deficit $ ( 3,077,661) $ ( 3,346,640)
Note 3. 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 inter-company 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
RESTATED - SEE "INTRODUCTORY NOTE"
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 that 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
F-8
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
January 31, 1997, 1996 and 1995
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 1996 was and 4,445,759 shares.
Fully diluted loss per share is the same as primary loss per
share in 1997 and 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 to 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, AAccounting 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.
F-9
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
January 31, 1997, 1996 and 1995
(l) Stock Option Plans. The Company accounts for its incentive
stock option plan and non-qualified stock option plan in
RESTATED - SEE "INTRODUCTORY NOTE"
accordance with the provisions of Accounting Principles Board
(AAPB@) 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 4. 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 5. 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.
F-10
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
January 31, 1997, 1996 and 1995
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.
RESTATED - SEE "INTRODUCTORY NOTE"
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
=========
F-11
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
January 31, 1997, 1996 and 1995
Note 6. 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.
RESTATED - SEE "INTRODUCTORY NOTE"
The notes are due on June 30, 1997.
Note 7. 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 8. 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 carry-forwards for
income tax purposes of approximately $3,825,800; $1,567,400
expire in 2007, $815,600 in 2008, $609,200 in 2009, $372,700 in
2010, $73,800 in 2011 and $387,100 in 2012.
F-12
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
January 31, 1997, 1996 and 1995
The effective income tax rates of 0.6%, 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 4.9 -- --
Non-deductible meals and
entertainment expenses 2.5 2.8 1.9
State income taxes, net of federal
RESTATED - SEE "INTRODUCTORY NOTE"
tax benefit -- 2.3 --
Change in deferred tax asset
valuation allowance 26.8 (38.4) 31.2
Other non-deductible expenses .4 2.8 1.5
----- ----- -----
.6% 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 3,900 4,410
Allowance for doubtful accounts 3,060 3,060
Retirement agreement accrual -- 36,497
Other liabilities 10,327 22,628
Net operating loss carry-forward 1,300,786 1,182,493
--------- ---------
Total gross deferred tax assets 1,319,679 1,250,389
Less valuation allowance (1,307,802)(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 increase of
$67,580 in fiscal 1997 and a decrease of $17,540 in fiscal 1996.
F-13
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
January 31, 1997, 1996 and 1995
Note 9. 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 10. Lease Commitments
RESTATED - SEE "INTRODUCTORY NOTE"
The Company is party to several non-cancelable 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 11. 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 $172,586 66,649
Prepaid design work 86,875 51,232
Other 166,670 146,252
Total $426,131 264,133
======= =======
Note 12. Accrued Expenses
Accrued expenses at January 31, 1997 and 1996 consist of the
following:
1997 1996
Accrued commissions $122,655 61,773
Deposits - cancelled contracts 24,875 166,935
Post-retirement benefits 36,000 --
Other 182,865 286,834
Total $366,395 515,542
======= =======
F-14
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
January 31, 1997, 1996 and 1995
Note 13. 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 totaling $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.
RESTATED - SEE "INTRODUCTORY NOTE"
Note 14. 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:
AverageOption
Number of shares Price PerShare
----------------------- -----------------------
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
F-15
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
January 31, 1997, 1996 and 1995
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 15. 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.
RESTATED - SEE "INTRODUCTORY NOTE"
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 16. 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
======== ======= =======
Non-cash 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.
F-16
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
January 31, 1997, 1996 and 1995
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 17. Quarterly Financial Information (Unaudited)
(in thousands, except per share data)
Restated Restated Restated
April 30 July 31 October 31 January 31
-------- ------- ---------- ----------
1997:
Net sales $ 865 2,984 2,291* 1,130*
Gross profit 251 1,030* 629* 344*
Net earnings (loss) $ (412) 261* 21* (124)*
===== ===== ===== =====
Primary earnings (loss)
per common share $ (.44) .28* .02* (.13)*
===== ===== ===== =====
Fully diluted earnings
(loss) per common and
common equivalent share $ (.44) .06* .01* (.13)*
===== ===== ===== =====
RESTATED - SEE "INTRODUCTORY NOTE"
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)
===== ===== ===== =====
F-17
LINCOLN LOGS LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(continued)
January 31, 1997, 1996 and 1995
* The Company has restated previously issued financial results
for the quarters ended July 31, 1996 and October 31, 1996, and
the fiscal year ended January 31, 1997 (see "Introductory Note"
and Note 2 herein). The restated financial results, some of
which only affect interim results, reflect the correction of
errors in the Company's accounting procedures related to sale cut-
off, commission expense, recording of certain accruals and
inventory reconciliation.
Note 18. 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 19. Liquidity
As of January 31, 1997, current liabilities of the Company
exceeded current assets by $1,436,031. 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-18
RESTATED - SEE "INTRODUCTORY NOTE"
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.
RESTATED - SEE "INTRODUCTORY NOTE"
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/ John D. Shepherd
--------------------
John D. Shepherd,
Chairman of the Board, President
and Chief Executive Officer
and Treasurer
Dated: April 30, 1998
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/ John D. Shepherd
--------------------
John D. Shepherd,
Chairman of the Board, President
and Chief Executive Officer
and Treasurer
Dated: April 30, 1998
(ii) Principal Financial Officer:
/s/ William J. Thyne
-----------------------
William J. Thyne,
Chief Financial Officer, Secretary
Dated: April 30, 1998
(iii) A Majority of the Board of Directors:
------------------------
Richard C. Farr
/s/ Samuel J. Padula April 30, 1998
------------------------
Samuel J. Padula
/s/ Reginald W. Ray, Jr. April 30, 1998
------------------------
Reginald W. Ray, Jr.
/s/ John D. Shepherd April 30, 1998
------------------------
John D. Shepherd
RESTATED - SEE "INTRODUCTORY NOTE"
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 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 Non-competition 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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