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, 1999, as Amended
Commission File Number 000-12172
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 [ ] NO [X]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for the fiscal year ended January 31, 1999
were $9,691,513.
The aggregate market value of voting stock held by non-affiliates
of the registrant as of May 17, 1999 was approximately $344,600.
The number of shares of Common Stock of the registrant outstanding
on May 17, 1999 was 5,542,059.
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PART I
INTRODUCTORY NOTE
THE INFORMATION CONTAINED HEREIN HAS BEEN AMENDED IN JUNE 1999 TO
CORRECT TYPOGRAPHICAL ERRORS IN THE COMPANY'S FILING OF ITS ANNUAL
REPORT ON MAY 28, 1999. The Corporation hereby amends the following
item of its Annual Report on Form 10-KSB for the fiscal year ended
January 31, 1999 (the "Original Filing"). Each of the below
referenced Items in Part II are hereby amended by deleting specific
lines within the Items in their entirety and replacing them with the
lines 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 7. Financial Statements:
OTHER ASSETS:
Cash surrender value of life insurance, net of loan
of $83,574 in 1999 and $86,400 in 1998
NOTE 10. Accrued Expenses
1999 1998
----- -----
Accrued severance -- 11,280
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, blueprints and construction notes. The Company also provides its
customers with services related to the sale of its housing packages, such as
the preparation of customized blueprints.
The Company was incorporated in New York in 1977 and has the following
wholly-owned subsidiaries: Thermo-Home Inc., a New York corporation through
which the Company's panel homes were previously manufactured and marketed
(the manufacture and marketing operations of the Company's panel homes were
integrated into the operation of Lincoln Logs Ltd. during the fiscal year
ended January 31, 1988); and Lincoln Logs International Ltd., a New York
corporation which was created to act as a domestic international sales
corporation, but is inactive. In addition, the Company has a controlling
interest in Lincoln Holding Corp., a Delaware corporation, which was formed to
hold the registered trademark "Lincoln" pursuant to the settlement of a
proceeding instituted by the Trustee in the Chapter 7 Bankruptcy Proceeding
of Lincoln Pre-Cut Log Homes, Inc., an unaffiliated 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.
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 $18,300 to $104,400. 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, allows for 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
5% of total sales in fiscal year 1999.
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 5% of total
sales in fiscal year 1999.
The Company markets its products in the United States through a network of
approximately 60 independent sales representatives in approximately 25 states,
and three independent representatives in foreign countries. 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. International sales are against
letters of credit, or receipt of full payment prior to shipment.
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 7.5% to
17.5% 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 the cost of advertising
undertaken by qualified sales representatives to a maximum of 2.5% of their
respective sales volume.
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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 5% in each fiscal 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 400 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, Beaver Mountain Log Homes, Kuhns Bros. and Asperline Log Homes.
The Company believes that its competitive position with respect to those
firms is favorable, especially in the areas of quality of product, price,
appearance, and energy efficiency.
EMPLOYEES
As of January 31, 1999, the Company employed 43 persons, all 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.
<PAGE>
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, 1999 or 1998.
GOVERNMENT REGULATIONS
Compliance with federal, state and local regulations 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.
<PAGE>
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 log 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 Thermp-Home(R) and log building containing corporate offices,
storage 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,
in part,to a third party.
(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 partially developed land in
Lake George, New York on which the Company is considering erecting
a new sales model home. The Company has installed the
infrastructure for such a future building.
(7) In addition, the Company owns three parcels of undeveloped
land in Northeastern, New York totaling approximately 113
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, and its Series B Convertible Subordinated Debentures dated
January 30, 1998, the Company has granted mortgages on the parcels specified
in Paragraphs (a)(1)-(5) and (b) of this Item 2.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
(a) Special Situations Fund III, L.P., Special Situations Cayman
Fund, L.P., MGP Advisors Limited Partnership, and AWM Investment
Company, Inc., individually and on behalf of Lincoln Logs, Ltd.
v. Lincoln Logs,Ltd., John D. Shepherd, Samuel J. Padula, Richard
Farr and Leslie M. Apple.
On February 9, 1998, the Company was served with a Summons and
Complaint (the "Complaint") against it and three current members and
one former member of its Board of Directors by a shareholder group
which alleges mismanagement, breach of fidicuary duties and other
matters. The Company responded to the Complaint on behalf of itself
and the current and former Board members on March 26, 1998, and also
filed a counter-suit. On April 20, 1999, the Company reached a
compromise agreement with the shareholder group; neither party
admitted any wrongdoing or liability. The settlement requires a
cash payment of $150,000 in exchange for the 201,500 shares of common
stock held by the shareholder group and a release from all other
claims. Of the settlement amount, $75,000 is being funded by the
Company's insurance company, and $33,248 (calculated as 201,500
shares multiplied by the fair market value of the Company's common
stock at the date on which the settlement was agreed of $.165) will
be funded by an officer, director or other shareholders of the Company
in exchange for the common stock. The remaining $41,752 has been
accrued by the Company in its financial statements for the year ended
January 31, 1998. The Company also accrued $50,000 of legal costs
related to the settlement at January 31, 1998, which represents the
deductible portion of the incurance policy applicable to the
settlement.
(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.
<PAGE>
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, 1997
through April 30, 1999. 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, 1997 Common Stock 5/32 7/8
Quarter Ended July 31, 1997 Common Stock 15/16 11/16
Quarter Ended October 31, 1997 Common Stock 13/16 5/8
Quarter Ended January 31, 1998 Common Stock 3/4 3/8
Quarter Ended April 30, 1998 Common Stock 7/16 7/16
Quarter Ended July 31, 1998 Common Stock 7/16 1/4
Quarter Ended October 31, 1998 Common Stock 3/16 1/4
Quarter Ended January 31, 1999 Common Stock 3/16 .07
Quarter Ended April 30, 1999 Common Stock .22 3/16
(b) The approximate number of holders of the Common Stock
of the Company as of May 17, 1999 was 2,205.
(c) No cash dividends were declared by the Company during
the fiscal years ended January 31, 1999 and 1998. 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.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net sales for the fiscal year ended January 31, 1999 ("fiscal 1999") were
$9,691,513 compared to $7,810,614 in the fiscal year ended January 31, 1998
("fiscal 1998"). Fiscal 1999 total revenues represent an increase of
$1,880,899, or approximately 24% more than fiscal 1998.
In fiscal 1999, as compared to fiscal 1998, total units shipped increased by 19%
while the average sales value per unit shipped increased by 4%. The increase
in units shipped was the result of several factors that were positive for the
Company; a.) customers who had experienced delays in the previous fiscal year in
completing their financing did so in fiscal 1999, b.) the availability of
contractors improved and c.) favorable weather conditions throughout the
building season, particularly in November and December 1998, allowed for a
longer than usual shipping season. The increase in sales value per unit shipped
was the result of an increase in size of the home building packages purchased
in the current period, and the impact of a price increase put into effect during
fiscal year 1999.
Gross profit was 42% of net sales in fiscal 1999, or $4,027,353. In fiscal
1998, gross profit was 35% of net sales, or $2,696,884. Gross profit
increased from fiscal 1998 due to a reduction in material costs and a decrease
in manufacturing overhead costs. Material costs were affected principally due
to improved purchasing techniques put into effect during fiscal 1999. Overhead
decreased due principally to a reduction in personnel.
Total operating expenses of $3,626,795, or 37% of net sales, have decreased
$204,105 from the fiscal year 1998 amount of $3,830,900, or 49% of net sales.
Sales commissions consist of amounts paid to both the Company's employee sales
persons and its independent dealers throughout the country. While total sales
commissions increased 24% in fiscal 1999 over fiscal 1998 the increase was
commensurate with the increase in net sales. Sales commissions remianed the
same as a percentage of net sales, 14% in both fiscal years. The decrease in
selling, general and administrative expenses from fiscal 1998 of $464,994 was
aproximately 17% and was due to a reduction in personnel costs, advertising
costs, professional fees, a general company-wide program of cost elimination,
and the accrual of the settlement of litigation and certain legal costs
associated with that settlement in fiscal 1998.
Interest expense in fiscal year 1999 and 1998 totalled $633,453 and $231,922,
respectively. In both fiscal years, interest expense included a non-cash
charge related to the amortization of debt discount attributable to a
beneficial conversion feature of the Series B Convertible Subordinated
Debentures (the "Series B Debentures") issued by the Company in Januray 1998,
and during the first quarter of fiscal 1999, and the amortization of debt
discount attributable to warrants issued in connection with the same Series B
Debentures (see Note 4 to the Consolidated Financial Statements for more
information related to the Series B Debentures). The amount amortized related
to the debt discount attributable to the beneficial conversion feature of the
Series B Debentures was $506,759 and $6,075 in fiscal years 1999 and 1998,
respectively. The amount attributable to the beneficial conversion feature
is amortized over the first thirty days subsequent to the issuance of the
debenture, the earliest date at which the debt could be converted to common
stock. The amount amortized related to the debt discount attributable to
warrants of the Series B Debentures was $13,379 and $65 in fiscal years 1999
and 1998, respectively. The amount assigned to warrants was determined by an
independent valuation of the Series B Debentures by an investment banker
selected by the Company. This valuation amount is amortized over the term of
the Series B Debentures, or 15 months, using the effective yield method.
Cash paid for interest during fiscal 1999 was $90,741 compared to $228,032
in fiscal 1998. This decrease was primarily related to the reduction in
long-term debt due to conversion of both Series A and the Series B Debentures
during fiscal 1999. Also, because of improved operating results, the Company
has relied less on the assistance of major suppliers to extend payment terms,
and has been better able to meet its obligations on a more timely basis.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1999, the Company had negative working capital, as current
liabilities exceeded current assets by $1,808,976, compared with negative
working capital of $2,640,752 at January 31, 1998, an improvement of $831,776.
At January 31, 1999, the Company had stockholders' deficiency of $254,433,
as compared to stockholders' deficiency of $876,815 at January 31, 1998, an
improvement of $622,382. As of January 31, 1998, the Company's working capital
deficiency had increased $1,204,721 from the end of the previous fiscal year.
CAsh was provided primarily by the issuance of log-term debt, the exercise of
stock purchase warrants and operations duirng fiscal 1999. In fiscal 1998, cash
was consumed primarily by the repayment of notes payable and additions to plant
and equipment.
In fiscal 1999, the Company's operations were a net provider of cash in the
amount of $141,049 as compared to the previous year, when operations were a
net provider of cash in the amount of $40,046. Overall, the Company
experienced an increase in its cash position of $99,214 in fiscal 1999,
compared with an increase of $234,800 in fiscal 1998. In fiscal 1999, funds
were generated from the Company's operations, particularly its operating income
of $400,560, the issuance of Series B Debentures and the exercise of stock
purchase warrants. These funds were used principally to reduce notes payable,
reduce trade accounts payable and for additions to plant and equipment. Funds
generated in fiscal 1998, including a decrease in trade accounts receivable
and increases in accounts payable, customer deposits and other accrued expenses
were offset by the repayment of notes payable and long-term debt, additions to
plant and equipment and an increase in inventory.
Toward the end of fiscal 1998, certain individuals, all of whom are
shareholders and directors, converted $450,000 of Series A Convertible
Subordinated Debentures ( the "Series A Debentures") to common stock. This
converted long-term debt with a maturity date of June 30, 1998 into equity at
January 31, 1998. Also, on January 15, 1998, the Company authorized $600,000
of Series B Debentures, and issued $340,000 at January 30, 1998 and $250,000
during fiscal 1999. In April 1998, a certain shareholder/officer/director
converted $275,000 of the Series B Debentures into common stock. Concurrent
with this conversion, this same shareholder/officer/director exercised his
stock purchase warrants and purchased additional shares of the Company's common
stock. The amount realized by the Company as a result of the exercise of the
stock purchase warrants was $257,812.
The Company has not been successful in securing a working capital credit
facility from commercial lenders or governmental agency sources. During
fiscal 1998, a commercial bank made a proposal to the Company to provide a
working capital line of credit on the condition that this line is secured
by assets of the Company and be considered senior debt to the Company's
Series A Debentures. This condition could not be satisfied by the Company
because the Series A Debentures are secured by a mortgage on the assets of
the Company. The Company, when authorizing the issuance of Series B Debentures,
provided for the consideration of commercial bank financing up to $750,000 to be
senior to the Series B Debentures in a mortgage consolidation, modification and
extension agreement. In July 1998, the Company continued its dialogue with the
commercial lender, however, there were no substantive results and no furhter
discussions with the bank have been held.
<PAGE>
In February 1999, the Company authorized the issuance of $300,000 of Series
C Convertible Subordinated Debentures (the "Series C Debentures') as a source
of funds for the repayment of $200,000 of Series A Debentures, including
accrued interest from April 1, 1998, and other debts because the Company has
not been successful in securing a working capital credit facility from
commercial lenders or government agency sources. Funds generated by operations,
the issuance of the Series B and the Series C Debentures, and together with
assistance from major vendors who have extended payment terms to the Company,
have supported its operations during fiscal 1999, and are expected to do in
fiscal 2000 as well. Even though the Company has operated under these same
conditions for the past eight years, there is, however, no assurance that the
Company will be able to continually generate adequate funds from these sources.
A reduction in the Company's sales activity, or a reduction in vendor assistance
could further reduce its liquidity and make it extremely difficult for the
Company to continue operations.
Customer contracts with respect to which there were deposits on hand at the
end of fiscal 1999 represent, if all were to be delivered in fiscal 2000,
potential revenues of approximately $11,598,000 as compared with
potential revenues at the end of fiscal 1998 of $11,581,000. Actual
revenues realized in fiscal 1999 from the sale of home building packages
and solariums amounted to $9,691,513. Actual revenues realized in
fiscal 1999 were lower than potential revenues based on deposits on hand
at January 31, 1998, due to cancellations and postponement of some deliveries
by customers. Fiscal 2000 potential revenues are contingent on various factors,
including general economic conditions, interest rates and the climate for new
housing construction during calendar 1999, as well as the Company's ability to
continue operations and to expand into new market areas.
Inventories at January 31, 1999 were $593,314 as compared with $755,210 at
January 31, 1998, a decrease of $161,896. This decrease in inventory is the
result of the Company's attempt to better coordinate the arrival of the stock
needed to meet the demands of its delivery schedule with its deliver schedule.
Trade accounts receivable were $261,209 at January 31, 1999, which represents
an increase of $157,299, or 151%, from the amount of $103,910 as of January 31,
1998. 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.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," issued in June 1998 and
effective for all fiscal quarters of fiscal years beginning after June 15, 1998,
with earlier applicaion permitted, requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. On May 19, 1999, FASB
agreed to expose for comment a proposal to defer the effective date of
Statement No. 133 to fiscal years beginning after June 15, 2000. Management
has evaluated the impact of the application of the new rules on the Company's
Consolidated Financial Statements and concluded that there will be no impact
on its results of operations or its financial position.
The Accounting Standards Executive Committee's Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed for Internal Use,"
issued in March 1998 and effective for fiscal years beginning after December
15, 1998 with earlier application permitted, provides guidance on accounting
for the costs of computer software developed or obtained for internal use.
The Company will adopt this statement for for the fiscal year beginning
February 1, 1999. Management has evaluated the impact of the application
of the new rules on the Company's Consolidated Financial Statements and
concluded that there will be no impact on its results of operations or its
financial position.
The Accounting Standards Executive Committee's Statement of Position 98-5,
"Accounting for the Costs of Start-Up Activities," issued in april 1998 and
effective for fiscal years beginning after December 15, 1998 with earlier
application permitted, provides guidance on the financial reporting of start-up
and organization costs. The Company will adopt this statement for the fiscal
year beginning February 1, 1999. Management has evaluated the impact of the
application of the new rules on the Company's Consolidated Financial Statements
and concluded that there will be no impact on its results of operations or its
financial position.
<PAGE>
YEAR 2000
The Year 2000 Issue is the result of computer programs having been written
using two digit, rather than four, to define the applicable year. Any of
the Company's computers, computer programs, manufacturing and administration
equipment of products that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. If any of the Company's
systems or equipment that have date-sensitive software use only two digits,
system failures or miscalculations may result causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or send and receive electronic data with third parties or engage
in similar normal business activities.
Unrelated to the Year 2000 Issue, the Company replaced its primary system of
computer hardware and software in 1997. Because of this acquisition, the
Company purchased and installed hardware and software that is Year 2000
compliant. However, management has assigned the task of testing all carryover
computer systems and software for Year 2000 compatability to an outside
consultant. This process includes an assessment of issues and development of
remediation plans, where necessary, as they relate to internally used
software and computer hardware. In addition, the Company is engaged in
assessing the Year 2000 Issue with suppliers. The Company plans to
initiate communications with its significant suppliers in May 1999 to determine
the extent to which the Company is vulnerable to those third parties' failure
to remediate their own Year 2000 issues. Finally, with regard to products
sold by the Company, the Company has determined that contingencies related
to the Year 2000 Issue will not have a material adverse effect on the Company.
Due to the nature of the Company's product, log home construction kits for
primarily residential use, there are no major customers for the Company's
product, i.e. the Comapny sells its product to the individual who will
build and occupy the Company's product as his or her residence. As such,
management believes that there is no practical purpose for assessment of the
Year 2000 Issue as it relates to its customers.
The Company intends to use external resources to test software it currently
uses for Year 2000 compliance. The Company plans to substantially complete
its Year 2000 assessment and remediation by August 31, 1999. The total
project cost has not yet been determined, but is believed to be minimal
because of the Company's replacement of its primary computer system with
Year 2000 compliant hardware and software in 1997. To date, the Compnay has
not incurred any material costs related to the assessment of, and
preliminary efforts in connection with, its Year 2000 issues.
With regard to its internal Year 2000 compliance progrm, the Company has
completed approximately 95% of its review and, where necessary, remediation.
With regard to equipment with embedded chips, the Company has reviewed its
telephone system, facsimiles, security system and similar equipment and found
them to be Year 2000 compliant. With regard to its Year 2000 compliance program
addressing the status of the Company's suppliers, the Company has not yet begun
its review. The Company currently does not have a contingency plan and does not
contemplate creating one.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements
Page
Independent Auditors' Report F-2
Consolidated balance sheets as of
January 31, 1999 and 1998 F-3
Consolidated statements of operations for the years
ended January 31, 1999 and 1998 F-5
Consolidated statements of changes in stockholders'
equity (deficiency) for the years ended January
31, 1999 and 1998 F-6
Consolidated statements of cash flows for the years
ended January 31, 1999 and 1998 F-7
Notes to consolidated financial statements
January 31, 1999 and 1998 F-8
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors and
Stockholders of Lincoln Logs Ltd.
We have audited the accompanying consolidated balance sheets of
Lincoln Logs Ltd. and subsidiaries (the "Company") as of January 31,
1999 and 1998, and the related consolidated statements of operations,
changes in stockholders' equity (deficiency), and cash flows for the
years then ended. 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,
1999 and 1998, and the results of their operations and their cash
flows for the years then ended, 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,
1999 and 1998, current liabilities exceed current assets, and at
January 31, 1999 and 1998, 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 LLP
Albany, New York
April 16, 1999, except as
to note 14(b), which is
as of April 20, 1999,
and Note 19(b), which is
as of May 15, 1999
F-2
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1999 and 1998
ASSETS
1999 1998
CURRENT ASSETS:
Cash and cash equivalents (note 2(k)) $ 223,521 $ 124,307
Trade accounts receivable, net of allowance
for doubtful accounts of $17,700 261,209 103,910
Inventories (note 5) 593,314 755,210
Prepaid expenses and other current assets (note 9) 516,560 339,892
Preapid income taxes 918 --
Mortgage receivable (note 12) 2,302 1,779
--------- ---------
Total current assets 1,597,824 1,325,098
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at
cost (notes 3 and 4) 5,124,419 5,042,517
Less accumulated depreciation (3,392,150) (3,284,868)
--------- ---------
Property, plant and equipment- net 1,732,269 1,757,649
--------- ---------
OTHER ASSETS:
Mortgage receivable (note 12) 70,688 72,148
Assets held for resale (note 3) 27,561 38,189
Cash surrender value of life insurance, net of
loan of $83,574 in 1999
and $86,400 in 1998 10,606 5,456
Deposits and other assets 1,622 988
Intangible assets, net of accumulated
amortization of $67,884 in 1999 and $59,514
in 1998 9,250 17,620
-------- --------
Total other assets 119,727 134,401
-------- --------
TOTAL ASSETS (note 4) $ 3,449,820 $ 3,217,148
========== ==========
( continued )
F-3
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS,(continued)
JANUARY 31, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
1999 1998
CURRENT LIABILITIES:
Current installments of long-term debt (note 4)
Related parties $ 281,350 $ 25,000
Others 34,644 245,587
Notes payable (note 5) 125,435 430,800
Trade accounts payable 830,879 1,144,959
Customer deposits 1,288,125 1,287,212
Accrued salaries and wages 69,874 78,505
Accrued income taxes 1,050 525
Due to related parties (note 11) 154,122 152,328
Accrued expenses (note 10) 621,321 601,234
--------- ---------
Total current liabilities 3,406,800 3,965,850
LONG-TERM DEBT, net of current installments (note 4):
Convertible subordinated debentures:
Related parties (note 11) -- 30,710
Others 200,000 930
Other 3,577 4,289
Other long-term liability 93,876 92,184
--------- ---------
Total liabilities 3,704,253 4,093,963
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY) (notes 13 and 18):
Preferred stock, $.01 par value;
authorized 1,000,000 shares; issued
and outstanding -0- shares -- --
Common stock, $.01 par value; authorized 10,000,000
shares in 1999 and 10,000,000 share in 1998;
issued 6,046,299 shares in 1999 and 3,729,999
shares in 1998 60,463 37,300
Additional paid-in capital 5,418,104 4,641,705
Accumulated deficit (4,848,565)(4,671,385)
----------- ----------
630,002 7,620
Less cost of 504,240 shares common
stock in treasury (884,435) (884,435)
---------- ---------
Total stockholders' deficiency (254,433) (876,815)
---------- ---------
Commitments and contingencies (notes 7,8,14 and 18)
TOTAL LIABILITIES AND
STOCKHOLDERS' (DEFICIENCY) $ 3,449,820 $3,217,148
========= =========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 1999 and 1998
1999 1998
NET SALES $9,691,513 $7,810,614
COST OF SALES 5,664,160 5,113,730
--------- ---------
GROSS PROFIT 4,027,353 2,696,884
--------- ---------
OPERATING EXPENSES:
Commissions 1,343,919 1,083,032
Selling, general and administrative 2,282,874 2,747,868
--------- ---------
Total operating expenses 3,626,795 3,830,900
--------- ---------
INCOME (LOSS) FROM OPERATIONS 400,560 (1,134,016)
--------- ----------
OTHER INCOME (EXPENSE):
Interest income 23,698 32,157
--------- ----------
Interest expense:
Amount attributable to beneficial
conversion feature and warrants (note 4) (520,138) ( 6,140)
All other (113,315) (225,782)
---------- ----------
Total interest expense (633,453) (231,922)
---------- ----------
Other 33,147 11,011
----------- ----------
Total other income (expense) - net (576,608) (188,754)
--------- ---------
LOSS BEFORE INCOME TAXES (176,048) (1,322,770)
INCOME TAXES (note 6) 1,132 1,975
---------- ----------
NET LOSS $ ( 177,180) $(1,324,745)
============= ============
PER SHARE DATA (note 23(h)):
Basic and diluted loss per share $ (.04) $ (1.27)
=========== ==========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED JANUARY 31, 1999 and 1998
Common Stock
<S> <S> <S> <S> <S> <S>
Total
Number Par Additional stockholders'
of value paid-in (Accumulated Treasury equity
shares amount capital deficit) stock (deficiency)
------- ------- ---------- ---------- --------- -------------
<C> <C> <C> <C> <C> <C>
Balance at January 31, 1997 1,449,999 14,500 3,894,286 (3,346,640) (884,435) (322,289)
Common stock issued upon exercise
of stock options (note 13) 30,000 300 5,419 -0- -0- 5,719
Debt converted to common
stock (note 4) 2,250,000 22,500 427,500 -0- -0- 450,000
Amount assigned to subordinated
debenture beneficial
conversion feature and
warrants (note 4) -0- -0- 314,500 -0- -0- 314,500
Net loss - 1998 -0- -0- -0- (1,324,745) -0- (1,324,745)
---------- --------- --------- ------------ --------- ----------
Balance at January 31, 1998 3,729,999 $ 37,300 $ 4,641,705 $ (4,671,385) $ (884,435) $ (876,815)
Common stock issued upon exercise
of stock options (note 13) 3,800 38 887 -0- -0- 925
Common stock issued upon exercise
of stock purchase
warrants (note 4) 687,500 6,875 250,937 -0- -0- 257,812
Debt converted to common
stock (note 4) 1,625,000 16,250 293,325 -0- -0- 309,575
Amount assigned to subordinated
debenture beneficial
conversion feature and
warrants (note 4) -0- -0- 231,250 -0- -0- 231,250
Net loss- 1999 -0- -0- -0- (177,180) -0- (177,180)
----------- ------- ---------- ----------- ------- ------------
Balance at January 31, 1999 6,046,299 $ 60,463 $ 5,418,104 $(4,848,565) $(884,435) $(254,433)
========== ======== ============ ============ ========= =========
See accompanying notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 1999 and 1998
1999 1998
OPERATING ACTIVITIES:
Net loss $ ( 177,180) $ (1,324,745)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization 150,089 141,560
Write-off of note receivable -- 18,500
Amortization of amount assigned to
beneficial conversion feature and
debt discounts attributable to warrants 520,138 6,140
Compensation related to exercise of
stock option 925 --
(Gain) on sale of assets (5,977) (325)
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts
receivable (157,299) 171,000
Decrease (Increase) in inventories 161,896 (132,135)
(Increase) decrease in prepaid expenses
and other current assets (177,586) 86,239
(Decrease) increase in trade
accounts payable (188,645) 651,111
Increase in customer deposits 913 135,773
Increase in accrued expenses
and other current liabilities 11,456 269,916
Increase in due to related
parties 1,794 17,256
Inecrease (decrease)in accrued income taxes 525 (244)
-------- --------
Net cash provided by operating activities 141,049 40,046
--------- --------
INVESTING ACTIVITIES (note 15):
Additions to property, plant and equipment (110,667) (111,403)
Proceeds from sale of assets 16,605 325
Payments received on mortgage receivable 937 2,277
(Increase) in deposits and other assets (634) --
-------- --------
Net cash used by investing activities ( 93,759) (108,801)
--------- ---------
FINANCING ACTIVITIES (note 15):
Proceeds from issuance of common stock upon
exercise of stock options -- 5,719
Proceeds from issuance of common stock upon
exercise of stock warrants 257,812 --
Proceds from issuance of debentures 240,000 --
Repayments of notes payable (420,500) (160,000)
Proceeds from loan against cash
surrender value of life insurance 6,542 6,727
Repayments on loan against cash
surrender value of life insurance (10,000) --
Repayments of long-term debt (21,930) (18,491)
---------- ---------
Net cash provided/(used) by financing activities 51,924 (166,045)
---------- ---------
Net increase (decrease) in cash
and cash equivalents 99,214 (234,800)
Cash and cash equivalents at beginning
of period 124,307 359,107
--------- ---------
Cash and cash equivalents at end
of period $ 223,521 $ 124,307
========= ==========
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1999 and 1998
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 (log) home building packages. The Company's main products are log
home packages and insulated, panelized-wall home building systems.
Products are represented, sold and serviced through a 60 member National
Dealer Network and two Company owned and operated sales centers in northern
New York and northern California. The Company's principal markets are in
the northeastern and northwestern regions of the United States.
The Company purchases approximately 36% of the materials necessary
to assemble the log home packages from four suppliers. These four
suppliers provided 13%, 10%, 8%, and 5% of purchases for the year ended
January 31, 1999, respectively.
The company's fiscal year ends on January 31. As used hereafter, 19998
refers to the fiscal year ended January 31, 1999, and 1998 refers to the
fiscal year ended January 31, 1998.
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 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. Substantially all 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 thirty-one 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.
<PAGE>
(f) Comprehensive Income. On February 1, 1998, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and presentation
of comprehensive income and its components in a full set of financial
statements. The Company does not presently have any elements of other
comprehensive income as outlined in SFAS No. 130, and consequently, there is
no difference between net income (loss) and comprehensive income (loss).
(g) Intangible Assets. Intangible assets represents primarily trademarks
that are being amortized over five year periods. Amortization expense for
the years ended January 31, 1999 and 1998 was $8,370 and $9,725, respectively.
(h) Earnings Per Share. Basic loss per share is computed by dividing net loss
by the weighted average number of common shares outstanding during the
respective periods. The weighted average number of common shares outstanding
was 4,998,699 for the year ended January 31, 1999 and 1,045,704 for the year
ended January 31, 1998.
F-8
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JANUARY 31, 1999 and 1998
Note 2. Summary of Significant Accounting Policies (Continued)
(h) Earnings Per Share (Continued)
Diluted loss per share is computed based on the weighted average number of
common 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 and warrants are included in the computation of
earnings per share under the treasury stock method if the effect
is dilutive. Diluted loss per share is the same as basic loss per
share in 1999 and 1998 as the effect of stock options and warranrs and the
assumed conversion of the subordinated debentures would be anti-dilutive.
(i) Advertising Costs. Advertising costs are expensed when the advertisement
is first run and amounted to $170,145 and $266,747 in 1999 and 1998,
respectively.
(j) Reclassifications. Certain amounts in the 1998 financial statements
have been reclassified to conform to the presentation in the 1999
financial statements.
(k) Cash and Cash Equivalents. Cash and cash equivalents are
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.
(l) 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.
(m) Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of. Long-lived assets and certain identifiable intangibles are
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.
F-9
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JANUARY 31, 1999 and 1998
Note 2. Summary of Significant Accounting Policies (Continued)
(n) 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. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation",
which was adopted by the Company as of February 1, 1996, permits entities
to recognize the fair value of all stock-based awards on the date of grant
as an expense over the vesting period. 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, 1999
and 1998 is as follows:
Estimated
Useful Lives 1999 1998
---- ----
Land $ 784,800 784,800
Buildings and improvements 15 - 31 years 2,177,600 2,162,883
Machinery and equipment 5 - 7 years 625,848 625,848
Furniture and fixtures 5 - 7 years 1,368,254 1,316,883
Transportation equipment 5 years 167,917 152,103
--------- ---------
$5,124,419 $5,042,517
========= =========
Depreciation expense for the years ended January 31, 1999
and 1998 was $141,719 and $131,835, respectively.
Assets held for resale of $27,561 and $38,189 at January 31, 1999
and 1998, 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
Through January 31, 1998, the Company has authorized and issued $700,000 of
Series A Convertible Subordinated Debentures (the "A" Debentures), and
authorized $600,000 and isued $340,000 of Series B Convertible Subordinated
Debentures (the "B" Debentures) (together collectively known as the
"Debentures"). An additional $250,000 of B Debentures were issued during
the first quarter of fiscal 1999. The Debentures bear interest, payable
quarterly, at an annual rate of 12%. The A Debentures were due on June 30,
1998, and the B Debentures are due on May 15, 1999. A Debentures totalling
$200,000 remained outstanding at January 31, 1999 because they were held by
a shareholder group that had commenced litigation against the Company as
discussed in note 14(b). In February 1999, the $200,000 of A Debentures
outstanding were fully repaid, including interest through the date of repayment,
with the proceeds of the Series C Convertible Subordinated Debentures discussed
in note 19. The B Debentures may be redeemed by the Company at its option, in
whole or in part, at any time on or after January 30, 1998. The holders of the
Debentures 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 amount. The B Debentures also have
detachable stock purchase warrants, giving the holder the right, over a
five-year period, to purchase shares of the Company's common stock at the quoted
market price of the company's common stock, $.375 on the commitment date. The
total number of shares of common stock originally subject to warrants was
1,475,000, fifty (50%) percent of the number of shares subject to conversion.
As of January 31, 1999 and 1998, there were 787,500 and 850,000 warrants
outstanding, respectively. The B Debentures are considered to have a beneficial
conversion feature because the rate at which the B Debentures may be converted
into common stock ($.20 per share) is lower than the quoted market value for
the stock at the commitment date. The Debentures are secured by a security
nterest 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, 1999 and 1998
Note 4. Indebtedness (Continued)
Because of the stock purchase warrants and the beneficial conversion feature
of the B Debentures, the Company engaged an independent investment banker
to evaluate the total fair value of the components of the B Debentures. Based
on the report issued, the Company has assigned a value of two cents ($.02) to
each warrant to purchase one share of common stock, or $12,500 and $17,000,
for the 1999 and 1998 issuances, respectively. These amounts have been
recorded as a debt discount and as an increase to additional paid-in capital.
These amounts are amortized to interest expense over the life of the B
Debentures, and total amortization related to the warrants was $13,379 and
$65 in 1999 and 1998, respectively.
The difference between the quoted market value for the Company's common stock
on the date of issuance of the B Debentures, $.375, and the $.20 beneficial
conversion rate multiplied by the number of shares into which the debt could
be converted has also been recorded as a debt discount and as an increase to
additional paid-in capital. These amounts, $218,750 for the 1999 issuance and
$297,500 for the 1998 issuance, are amortized to interest expense over the first
thirty days subsequent to such issuances, the earliest date at which the debt
could be converted to common stock. The amounts of debt discount amortized to
interest expense related to the beneficial conversion feature were $506,759
and $6,075 in 1999 and 1998, respectively.
On January 16, 1998, certain shareholders who were owners of the A Debentures
exercised their right to convert their holdings into common stock of the
Company. The total amount of A Debentures converted into the common stock
of the Company was $450,000. The Company issued 2,250,000 shares of
common stock pursuant to the owners' election to convert, and paid accrued
interest to the shareholders to the date of conversion. On April 20, 1998, a
shareholder, director and officer, who owned B Debentures exercised his right
to convert his holdings into common stock of the Company. The face amount of
B Debentures converted into common stock of the Company was $275,000 (carrrying
amount of $259,575). This individual also exercied the warrants he held related
to these debentures. The Company issued 2,062,500 shares (1,375,000 shares
related to the conversion and 687,500 shares related to the warrants) and paid
accrued interest to the date of conversion. Further, on June 30, 1998, the
maturity date of the A Debentures, holders of $50,000 of A Debentures exercised
their right to convert their holdings into common stock of the Company. The
Company issued 250,000 shares of common stock pursuant to the owners' election
to convert, and paid accrued interest to the date of conversion.
Long-term debt at January 31, 1999 and 1998 consists of the
following:
1999 1998
---- ----
Mortgage notes payable at 10%, payable in
monthly installments through January 1999,
secured by parcels of land $ -- $ 7,734
Notes payable at 13% payable in monthly
installments through January 1999, secured
by a vehicle -- 7,768
Series A Convertible Subordinated Debentures
due June 1998, with annual interest at 12%
payable quarterly (see note 19) 200,000 250,000
Series B Convertible Subordinated Debentures
due May 15, 1999, net of discount attributable to
warrants of $4,047 in 1999 and $16,935 in 1998,
and discount attributable to beneficial conversion
feature of $0 in 1999 and $291,425 in 1998, with
nominal annual interest at 12% payable quarterly 310,953 31,640
Obligations under capital leases, net of interest
payable through October 2001 8,618 9,374
------------ ----------
Total long-term debt 519,571 306,516
Less current installments (315,994) (270,587)
------------ -----------
Long-term debt, net of current installaments $ 203,577 $ 35,929
============ ===========
The original principal amount of future maturities of long-term debt
(exlcuding discounts for the warrants and beneficial conversion feature)
by fiscal year are as follows:
Year ending January 31: Amount
2000 $ 320,041
2001 1,943
2002 1,634
2003 200,000
----------
$ 523,618
==========
F-11
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JANUARY 31, 1999 and 1998
Note 5. Notes Payable
During 1998 and 1997, 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. The notes
were for a fixed term and amount, and bore interest at an annual rate of
18% payable monthly. The notes had a due date of July 31, 1997, and at
that date there was $485,000 outstanding.
The Company renewed the Cant Financing Program on August 27, 1997. The
Company repaid $135,000 of the total amount outstanding at July 31, 1997
between August 1, 1997 and December 31, 1997. In an effort to retire the
remainder of the outstanding cant notes, to reduce interest expense and to
raise additional working capital, the Compnay authorized the issuance of B
Debentures on January 15, 1998. All holders of outstanding cant notes were
offered a B Debenture in the exact amount of their respective cant notes, or
cash, in payment of the cant notes. As of January 31, 1998, all but one holder
of the cant notes had converted cant notes into B Debentures, and on January 30,
1998, the Company issued $340,000 of B Debentures, as more fully discussed
in Note 4. The principal balance of cant notes outstanding under this program
at January 31, 1998 was $10,000. During the first quarter ended April 30, 1998,
the remaining cant note was converted into B Debentures.
During the years ended January 31, 1999 and 1998, the Company issued
promissory notes to certain major suppliers of building components in lieu of
cash payment of outstanding trade accounts payable. These notes are unsecured
and have interest rates ranging from 1% to 2% above the prime rate. At
January 31, 1999 and 1998, the interest rates on these notes were 9.75% and
between 9.5% and 10.5%, respectively. The outstanding balances totalled
$125,435 and $420,500 at January 31, 1999 and 1998, respectively. The note
outstanding at January 31, 1999 has a maturity date of June 30, 1999, and
interest is payable monthly.
Note 6. Income Taxes
A summary of components of the provision for income taxes for the
years ended January 31, 1999 and 1998 is as follows:
Current Deferred Total
Year ended January 31, 1999:
Federal $ -- $ -- $ --
State 1,132 -- 1,132
------ ------ ------
$ 1,132 $ -- $ 1,132
====== ====== ======
Year ended January 31, 1998:
Federal $ -- $ -- $ --
State 1,975 -- 1,975
------ ------ ------
$ 1,975 $ -- $ 1,975
====== ====== ======
The Company realized a tax benefit of $114,801 in 1999 through
the use of net operating loss carryforwards. The Company has
Federal net operating loss carry-forwards for income tax purposes
of approximately $4,206,600; $1,229,700 expire in 2007, $815,600
in 2008, $609,200 in 2009, $372,700 in 2010, $73,800 in 2011,
$40,600 in 2012 and $1,065,000 in 2013.
F-12
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JANUARY 31, 1999 and 1998
Note 6. Income Taxes (Continued)
The effective income tax rates of 0.6% and 0.2% for 1999
and 1998, respectively, differ from the statutory Federal
income tax rate for the following reasons:
1999 1998
---- ----
Statutory tax rate (34.0)% (34.0)%
Nondeductible amortization 98.2 0.5
Officer's life insurance -- 2.0
Non-deductible meals and
entertainment expenses 1.2 .2
State income taxes, net of federal
tax benefit .4 .1
Change in deferred tax asset
valuation allowance (64.7) 31.4
Other non-deductible expenses (.5) --
----- -----
0.6% 0.2%
===== =====
For the years ended January 31, 1999 and 1998, 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, 1999 and 1998 are presented
below:
1999 1998
---- ----
Deferred tax assets:
Vacation accrual $ 735 $ 8,797
Inventories, principally due to additional
costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986 16,393 16,806
Allowance for doubtful accounts 6,018 6,052
Other liabilities 24,641 17,399
Net operating loss carryforward 1,430,229 1,545,030
--------- ---------
Total gross deferred tax assets 1,478,016 1,594,084
Less valuation allowance (1,462,232)(1,578,780)
---------- ----------
Net deferred tax asset 15,784 15,304
Deferred tax liability:
Property, plant and equipment - principally
due to differences in depreciation methods (15,784) (15,304)
--------- ---------
Net deferred taxes $ -- --
========= =========
The valuation allowance for deferred tax assets as of February 1,
1998 and 1997 was $1,578,780 and $1,307,802, respectively. The
net change in the total valuation allowance was a decrease of
$116,548 in fiscal 1999 and an increase of $270,978 in fiscal 1998.
F-13
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JANUARY 31, 1999 and 1998
Note 6. Income Taxes (Continued)
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods in which deferred
tax assets are deductible, management has established a valuation allowance
to reflect the estimated amount of deferred tax assets that, more likely
than not, will not be realized.
Note 7. Employee Benefit Plan
The Company has a contributory defined contribution 401(k)
savings plan covering all eligible employees who elect to
participate. The Company matches 100% of employee contributions
up to a maximum of 3% of compensation. Contributions by the Company for
1999 and 1998 amounted to $22,479 and $22,135, respectively.
Note 8. Lease Commitments
The Company is party to several non-cancelable operating leases
for various machinery and equipment. Total rent expense incurred
by the Company during 1999 and 1998 was $28,951 and $42,179, respectively.
The aggregate future minimum operating lease payments at January 31, 1999
are as follows:
Year ending January 31:
2000 $ 25,514
2001 24,225
2002 13,147
2003 3,050
------
Total $ 65,936
=======
Note 9. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at January 31, 1999 and
1998 consist of the following:
1999 1998
-------- --------
Commission advances $ 119,192 $ 145,109
Prepaid design work 112,644 80,873
Prepaid insurance 37,718 15,720
Prepaid advertising and shows 69,549 24,890
Miscellaneous receivables 55,397 32,381
Costs related to deferred sales 45,881 --
Prepaid property taxes 27,453 11,433
Other 48,726 29,486
-------- --------
Total $ 516,560 $ 339,892
======== =========
Note 10. Accrued Expenses
Accrued expenses at January 31, 1999 and 1998 consist of the
following:
1999 1998
-------- --------
Accrued legal and related costs $ 87,442 $118,616
Accrued commissions 55,966 99,722
Accrued severance -- 11,280
Accrued backorders 67,815 13,944
Accrued interest 24,500 4,750
Accrued sales awards 26,500 --
Deposits - cancelled contracts 43,373 85,267
Post-retirement benefits 72,000 72,000
Accrued Warranty 72,474 51,174
Other 171,251 144,481
-------- --------
Total $ 621,321 $ 601,234
========= =========
F-14
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JANUARY 31, 1999 and 1998
Note 11. Related Party Transactions
Due to related parties consists of amounts payable to the Company's officers
and directors. Such amounts totaling $154,122 and $152,328 at January 31,
1999 and 1998, respectively, relate to unpaid salary and directors' fees,
unreimbursed business travel expenses, accrued severance and other expenses.
As described in note 4 the Company has issued $700,000 of A Debentures in a
private placement on July 30, 1993, of which $500,000 was purchased by certain
then officers and directors of the Company. On January 16, 1998, certain
debenture holders who were officers and directors elected to convert $450,000
of A Debentures into common stock, and on June 30, 1998 current directors and
a former director elected to convert $50,000 of A Debentures into common stock.
Also, the Company authorized the issuance of $600,000 of B Debentures on
January 15, 1998. The Company issued $340,000 of the B Debentures in a
private placement on January 30, 1998 of which $330,000 was exchasnged for
notes outstanding under the Cant Financing Program by certain noteholders who
were officers and directors of the Company at that time, and issued a further
$250,000 of B Debentures between March 1, 1998 and April 30, 1998 of which
$230,000 was purchased by officers, a director and immediate family members of
the director. Of the $560,000 of B Debentures issed to related parties,
$275,000 was converted into common stock on April 20, 1998.
Note 12. Mortgage Receivable
During the fiscal year ended January 31, 1998, the Company reclassified a
mortgage it holds from due from related parties to mortgage receivable. The
mortgage, due from a former officer and employee of the Company, was
reclassified when the individual terminated employment with the Company. The
mortgage, in the amount of $72,990 and $73,927 at January 31, 1999 and 1998,
respectively, bears an interest rate of 6% and is due over a term of 35 years.
The future aggregate mortgage receipts at January 31, 1998 are as follows:
Year ending January 31:
2000 $ 2,302
2001 1,961
2002 2,082
2003 2,210
2004 2,346
Thereafter 62,089
-------
Total $ 72,990
========
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 two years is summarized
as follows:
Average Option
Number of Shares Price Per Share
----------------------- -----------------------
Qualified Non-Qualified Qualified Non-Qualified
--------- ------------- --------- -------------
Balance at January 31, 1997 52,500 207,000 $ .19 $ .19
Granted during year -- -- -- --
Cancelled during year -- -- -- --
Exercise during year ( 5,000) ( 25,000) ($ .19) ($ .19)
------ ------- ----- -----
Balance at January 31, 1998 47,500 182,000 $ .19 $ .19
Graned during year -- -- -- --
Cancelled during year -- -- -- --
Exercies during year (7,500) -- (.19) --
------- ------- ----- -----
Balance at January 31, 1999 40,000 182,000 $(.19) $(.19)
======= ======== ===== =====
The 7,500 options exercised during 1999 resulted in the issuance of
3,800 shares of the Company's common stock because of a cash-less
exercise provision in the stock option agreement, whereby a certain
number of option shares are deemed sold at the then quoted market price
for the Company's common stock and the deemed proceeds are used to pay
for the option shares issued.
All outstanding stock options are exercisable as of January 31, 1999.
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 tern is limited to five
years) and vest upon grant. The weighted average remaining contractual
life of the outstanding options as of January 31, 1998 is 7.4 years.
The pro forma disclosures required under SFAS No. 123 are not presented
as such information is the same as the reported net loss and loss per share.
F-15
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JANUARY 31, 1999 and 1998
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 fiscal 1998, management began to provide a
reserve for warranty claims. Prior to fiscal 1998, no warranty reserve
for potential claims was provided. The amount of the reserve for
warranty claims provided in fiscal 1999 and 1998 was $21,300
and $51,174, respectively.
(b) Litigation. On February 9, 1998, the Company was served with a Summons
and Complaint (the "Complaint) against it and three current members and one
former member of its Board of Directors by a shareholders group, which alleges
mismanagement, breach of fiduciary duties and other matters. The Company
responded to the Complaint on behalf of itself and the current and former
Board members on March 26, 1998, and also filed a counter-suit. On April
20, 1999, the Company reached a compromise agreement with the shareholder
group; neither party admitted wrongdoing or liability. The settlement
requires a cash payment of $150,000 in exchange for the 201,500 shares of
common stock held by the shareholder group and release from all other claims.
Of the settlement amount, $75,000 is being funded by the Company's insurance
company, and $33,248 (calculated as 201,500 shares multiplied by the fair
market value of the Company's common stock at the date on which the settlement
was agreed of $.165) will be funded by an officer, director or other
shareholders of the Company in exchange for the common stock. The remaining
$41,752 has been accrued by the Company in its financial statements for the
year ended January 31, 1998. The Company also accrued $50,000 of legal costs
related to the settlement at January 31, 1998, which represents the deductible
portion of the incurance policy applicable to the settlement.
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.
(c) Sales/Use Tax. In march 1999, the Company has received a Sales/Use Tax
Assessment Summary from the State of Massachusetts Department of Revenue
(the "State) which indicates that the State intends to assess the Company for
sales//use taxes on log home packages sold into the State during the past three
years. The total potential assessment is approximately $149,000, plus interest
and penalties. The Company does not believe that it was responsible for
collecting and remitting sales/use taxes on sales made into Massachusetts
because, among other reasons, it does not have employees in the State nor does
it own or rent tangible property there. Accordingly, the Company intends to
contest the assessment when received. If the Comapny is unsuccessful and is
required to pay the State sales/use taxes related to sales made into the
State in prior years, it intends to attempt to collect sales/uses taxes paid
form the customers involved because the Company's sales contract requires
the customer to pay such taxes if due. However, due to the timing of the
sales and other factors, the Company may be unsuccessful in collecting
all of the sales/use taxes it pays to the State from the customers. During
the fourth quarter of 1999, the Company accrued the estimated costs to
resolve this matter.
Note 15. Supplementary Disclosure of Cash Flow Information
1999 1998
------ ------
Cash paid during the year for:
Interest $ 90,741 $ 228,032
======== =========
Income taxes $ 1,525 $ 2,219
======== =========
Non-cash investing and financing activities:
During fiscal 1999 and 1998, the Company issued promissory notes to certtain
major suppliers of building components in lieu of cash payment of outstanding
trade accounts payable in the total amount of $125,435 and $420,500,
respectively,.
During fiscal 1998, the following other transactions occurred:
The Company recorded an increase in the cash surrender value
of an insurance policy on the life of the Company's Founder and
also recorded an increase in the related liability in the same amount.
The Company recorded an increase in the loan taken against the cash
surrender value of an insurance policy on the life of the Company's
Founder in the amount of $6,728 for interest due on the outstanding
loan takenagainst the same policy in fiscal 1997.
The Company exchanged $340,000 of Series B Convertible Subordinated
Debentures for Cant Notes payable of the same amount, and holders of
$450,000 of Series A Convertible Subordinated Debentures converted
their holdings into the Company's common stock at a conversion price
of $.20 per share.
F-16
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JANUARY 31, 1999 and 1998
Note 15. Supplementary Disclosure of Cash Flow Information (Continued)
During fiscal 1999, the following transactions occurred:
During April 1998, a holder of a Cant Noote in the amount of $10 000
exchanged that note for a Series B Comvertible Suvordinated Debenture in the
same amount.
The Company entered into capital leases for office equipment having a total
cost of $5,672.
The Company recorded an increase in the cash surrender value of an insurance
policy on the life of the Company's Founder and also recorded an increase the
related liability in the same amount.
The Company recorded an increase of $13,750 in Common Stock and an increase
of $245,825 in additional paid in capital with a corresponding reduction of
debt of $259,575 as the result of the exercise of the right of conversion of
certain Series B Convertible Subordinated Debentures.
The Company recorded an increase of $2,500 in Common Stock and an increase
of $47,500 in Additional Paid In Capital with a corresponding reduction of
debt of $50,000 as the result of the exercise of the right of conversion of
certain Series A Convertible Subordinated Debentures.
The Company recorded an increase in Series B Convertible Subordinated
Debentures in the amount of $304,313, and increase in additional paid in
capital of $231,250 and the related charge to interest expense in the
amount of $520,138 related to the accretion of the valuations of warrants
and beneficial conversion features associted with the Series B Convertible
Subordinated Debentures.
Note 16. Quarterly Financial Information (Unaudited)
(in thousands, except per share data)
April 30 July 31 October 31 January 31
-------- ------- ---------- ----------
1999:
Net sales $1,446 3,376 2,995 1,875
Gross profit 454 1,416 1,293 864
Net earnings (loss) $ (773) 271 278 47
===== ===== ===== =====
Basic earnings (loss)
per share $ (.22) .05 .05 .01
====== ====== ====== =====
Diluted earnings (loss)
per share $ (.22) .04 .04 .01
===== ====== ===== =====
1998:
Net sales $1,601 2,814 2,456 940
Gross profit 569 1,039 944 145
Net loss $ (273) ( 85) ( 133) ( 834)
===== ===== ===== =====
Basic and diluted loss
per share $ (.29) ( .09) ( .14) (.62)
===== ===== ===== =====
The sum of the earnings (loss) per share per quarter may not equal the
earnings (loss) per share for the full fiscal year shown on the consolidated
statement of operations due to the differences in the weighted average
number of shares outstanding during the quarters, and the inclusion of
dilutive securities in certain quarters that are excluded for the full year.
F-17
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
JAMUARY 31, 1999 and 1998
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 and Debt.
The carrying amounts of cash and cash equivalents, accounts receivable,
cash surrender value of life insurance, accounts payable, customer
deposits, accrued expenses and debt approximate fair value
because of their short term maturities and because the debt bears interest
that approximate applicable market rates.
(b) Mortgage receivalbe. Based on borrowing rates and terms more commonly
made available by independent mortgage lenders, the fair value of the
mortgage receivable (including current installments) is approximately
$68,300 compared to its carrying amount of $72,990.
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, 1999, current liabilities of the Company
exceeded current assets by approximately $1,808,976. In February 1999, the
Compnay authorized issuance of $300,000 of Series C Convertible Subordinated
Debentures (the "C Debentures")as a source of funds for the repayment of
$200,000 of A Debentures, plus accrued interest from April 1, 1998. In January
1998, the Company authorized the issuance of $600,000 of B Debentures and
discontinued its Cant Financing Program. The Company exchanged $340,000 of the
then outstanding $350,000 of Cant Notes with an equivelant amount of B
Debentures. During the first quarter of fiscal 1999, the Company issued
$250,000 of the remaining $260,000 of B Debentures.
The Company has not been successful in securing working capital from commercial
lenders or governmental agency sources. Funds generated by operations, together
with the assistance of major vendors who have provided extended payment terms to
the Company, and the issuance of the B Debentures, have supported its
operations during fiscal 1999, and are expected to do so in fiscal 2000 as well.
Even though the Company has operated under these same conditions for the past
eight years, there is, however, no assurance that the Company will be able to
continually generate adequate funds from these sources. A reduction in the
Company's sales activity, the inability to extend the B Debentures when they
mature in May 1999 or a reduction in vendor assistance could further reduce
its liquidity and make it extremely difficult for the Company to coninue
operations.
Note 19. Subsequent Events
(a) In February 1999, the Company authorized and issued $300,000 of C
Debentures. The C Debentures bear interest, payable quarterly, at an annual
rate of 12% and are due in February 2002. The C Debentures may be redeemed by
the Company, at its option, in whole or in part, at any time on or after 60
days subsequent to the issue date. The holders of the C Debentures 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
$.16 of principal amount. This conversion rate is equal to the quoted market
price for the Comapany's common stock on the date of issuance. The proceeds of
the C Debentures were used to repay $200,000 of the A Debentures (as discussed
in note 4)plus accrued interest from April 1, 1998 to the date of repayment,
and other debts of the Company. Because $200,000 of A Debentures outstanding at
January 31, 1999 were refinanced with C Debentures due in February 2002, the A
Debentures have been reclassified reclassified to long-term debt at January 31,
1999. The C Debentures are secured by substantially all of the assets of the
Company, and are subordinate to up to $750,000 of commercial bank lending and
the B Debentures.
(b) As discussed in note 4, the original maturity date of the B Debentures was
May 15, 1999. Prior to May 15, 1999, holders of B Debentures with a face amount
of $190,000 agreed to extend the maturity date to May 15, 2001. On May 15,
1999, the remaining $125,000 of B Debentures came due. Due to a dispute with
the holder of the remaining B Debenture, an individual who is a current member
of the Company's Board of Dorectors and its former Chairman of the Board, the
Company decided not to repay that debenture on the due date. As a result, the
Company is in default with respect to such B Debentures, which is also an event
of default under the C Debentures. The holders of the C Debentures have waived
their right to accelerate the maturity date of the C Debentures, and the Company
has begun negotiations with the holder of the B Debenture in order to agree to
a final settlement of all amounts due to, and/or from the Board Member.
F-18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
The Company's directors are elected at each Annual Meeting of Shareholders.
The directors currently serving on the Compnay's Board of Directors are set
forth in the table below:
Year first
Elected a Position with the Company
Name of Director Age Director (other than as a director)
- ---------------- --- -------- ---------------------------
Richard C. Farr 70 1982 Special Administrative Assistant to
the President
Samuel J. Padula 75 1985 Special Administrative Assistant to
the President
Reginald W. Ray, Jr. 68 1982 Special Administrative Assistant to
the President
John D. Shepherd 53 1982 Chairman of the Board; President and Chief
Executive Officer; Treasurer
Business Experience
- -------------------
Richard Farr was, until his resignation from those offices on July 8, 1997,
Chairman of the Board of the Company since January 1990 and President and
Treasurer of the Company since December 1991. Mr. Farr was the Company's Chief
Executive Officer from December 1991 to May 1997, at which time he became a
Member of the Office of Chief Executive, which position he resigned on July 8,
1997. Mr. Farr has also been Chairman and Chief Executive Officer of Farr
Investment Company, a private investment firm in West hartford, Connecticut,
for more than the past five years. From January 1987 to December 1991, Mr.
Farr was a Special Administrative Assistant to the President, a position he has
resumed since his resignation in July 1997.
Samuel J. Padula has been Presidnet and Chief Executive Officer of Padula
Construction Corp., a real estate development and construction firm in
Oceanport, New Jersey, for more than the past five years. Since January 1987,
Mr. Padula has been a Special Administrative Assistant to the President. Mr.
Padula was, until his resignation from that office in December 1997, a member
of the Company's Office of the Chief Executive since May 1997.
<PAGE>
Reginald W. Ray, Jr. has been President of The Hunter Corporation, a
commercial construction firm in Westport, Connecticut, for more than the past
five years. Since January 1987, Mr. Ray has been a Special Administrative
Assistant to the President.
John D. Shepherd has been Chairman of the Board, President and Chief
Executive Officer and Treasurer of the Company since December 1997. Mr.
Shepherd has been President of Sweetbrier Ltd., an equestrian facility, since
June 1992 and a private investor since May 1991. Mr. Shepherd was Co-Chairman
and Treasurer of Aquatherm Products Corporation, a manufacturer and distributor
of health care products for home and institutional use, in Rahway, New Jersey,
from January 1986 to May 1991. From January 1987 until December 1997, Mr.
Shepherd has been a Special Administrative Assistant to the president, and
from May 1997 until December 1997 Mr. Shepherd was a member of the Company's
Office of the Chief Executive.
No director holds any directorship in a company with a class of securities
registered pursuant to Section 12 of the Securities Exchange Act of 1934 or
subject to the requirements of Section 15(d) of such Act. No director holds
any directorship in a company registerd as an investment company under the
Investment Company Act of 1940.
The Board of Directors has established an Audit Committee, a Compensation
Committee and a Strategy Committee. The Audit Committee, whose function is to
oversee the Company's financialreporting systems, consists of Mr. Padula. Mr.
Padula was joined on that committee by two former directors, Mr. Apple and Ms.
Considine(Mr. Apple resigned as a director in December 1997; Ms. Considine
resigned as s director in January 1998). The Compensation Committee, whose
function is to review and make recommendations to the Board on executive
compensation, consists of Messrs. Padula, Ray and Shepherd. The Strategy
Committee, whose function is to make recommendations to the board on the future
business direction of the Company, consists of Messrs. Ray and Shepherd. The
Company does not have a standing nominating committee or any committee
performing a similar function.
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company, each of whom was elected by the Board
of Directors of the Company to serve in the capacities set forth below oposite
their names, and, except as otherwise noted, are currently serving until the
next Annual Meeting of Shareholders, are as follows:
Name Age Office(s)
- ---- --- ---------
John D. Shepherd 1 53 Chairman of the Board; President and Chief Executive
Officer; Treasurer
William J. Thyne 2 49 Chief Financial Officer; Secretary
- -----------------------------------------------------------------------------
1 Mr. Shepherd was elected to these current positions by the Board of Directors
effective December 1997 to serve in these capacities until the next Annual
Meeting of Shareholders. In May 1997, the Board of Directors created The
Office of Chief Executive to replace the position of Chief Executive Officer.
Messrs. Apple, Padula and Shepherd were elected by the Board of Directors to
fill The Office of Chief Executive, to serve until the 1997 Annual Meeting of
The Board of Directors, at which time they would be nominated to serve in that
capacity for the upcoming year. Mr. Apple resigned from the Board of Directors
in December 1997. Mr. Padula resigned from The Office of Chief Executive in
December 1997.
2 Mr. Thyne was elected to these current positions by the Board of Directors
effective January 13, 1998, to serve in those capacities until the next Annual
Meeting of Shareholders.
<PAGE>
John D. Shepherd has been Chairman of the Board, President and Chief
Executive Officer and Treasurer since his election to those offices in
December 1997. Mr. Shepherd has been president of Sweetbrier Ltd., an
equestrian facility, since June 1992 and a private investor since May 1991.
Mr. Shepherd was Co-chairman and Treasurer of Aquatherm Products Corporation,
a manufacturer and distributor of health care products for home and
institutional use in Rahway, New Jersey, from January 1986 to May 1991.
Since January 1987 until his election to his present offices with the Company
Mr. Shepherd has been a Special Administrative Assistant to the President, and
from May 1997 until December 1997 a member of the Company's Office of the Chief
Executive.
William J. Thyne, CPA, has been Chief Financial Officer and Secretary since
January 1998. Prior to joining the Company Mr. Thyne was Chief Financial
Officer of John B. Garret, Inc., a distributor of medical supplies and equipment
and a provider of Medicare Part B services in Guilderland, New York from
August 1996 to January 1998. Prior to that position, Mr. Thyne was Vice
President, Finance and Chief Financial Officer of Reliable Racing Supply, Inc.,
a wholesale and retail distributor of specialized ski equipment and mail order
catalog retailer of ski equipment and apparel in Glens Falls, New York from
July 1995 to August 1996. Prior to that position, Mr. Thyne was Controller and
Chief Financial Officer of Lifeworks International, a wholesale distributor of
health food, dietary supplements and health education materials in Clifton
Park, New York from April 1994 to July 1995. Prior to that position, Mr. Thyne
was Controller of Capital Spouts, Inc., a manufacturer of plastic spouts to be
used with disposable milk and juice cartons, and the related installation
equipment, in Albany, New York from September 1993 to January 1994. Prior to
that position, and for more than five years, Mr. Thyne was the Vice President,
Finance, Chief Financial Officer and Secretary of the Company in
Chestertown, New York.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The table below sets forth all annual and long-term compensation paid by
the Company through the latest practicable date to the Chief Executive Officer
of the Company and to all executive officers of the Company who received total
annual salary and bonus in excess of $100,000 for services rendered in all
capacities to the Company and its subsidiaries during the fiscal years ended
January 31, 1999, January 31, 1998 and January 31, 1997.
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION - ANNUAL COMPENSATION AWARDS
Long-term Compensation
Annual Compensation Awards
------------------ ----------------------
<S> <S> <S> <S> <S> <S> <S> <S> <S>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
All
Other Restricted Other
Name and Annual Stock Options/ LTIP Compen-
Principle Year Salary Bonus Compensation Award(s) SAR's Payout Sation
Position ($) ($) ($) ($) (#) ($) ($)
- ---------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
John D. Shepherd, 1999 78,000.00 0.00 0.00 0.00 0 0.00 3,943.00 (2)
Chief Executive 1998 0.00 0.00 5,000.00(3) 0.00 0 0.00 9,300.00 (4)
Officer (1)(6) 1997 0.00 0.00 0.00 0.00 30,000 (5) 0.00 0.00
Leslie M. Apple, 1999 0.00 0.00 0.00 0.00 0 0.00 0.00
Office of Chief 1998 0.00 0.00 3,750.00(3) 0.00 0 0.00 9,750.00 (7)
Executive (6) 1997 0.00 0.00 0.00 0.00 30,000 (5) 0.00 0.00
Samuel J. Padula, 1999 0.00 0.00 0.00 0.00 0 0.00 0.00
Office of Chief 1998 0.00 0.00 5,000.00(3) 0.00 0 0.00 9,750.00 (7)
Executive (6) 1997 0.00 0.00 0.00 0.00 30,000 (5) 0.00 0.00
Richard C. Farr, 1999 0.00 0.00 0.00 0.00 0 0.00 0.00
Former Chief 1998 0.00 0.00 48,750.00(9) 0.00 0 0.00 31,804.00 (10)
Executive 1997 0.00 0.00 104,894.00(11)0.00 75,000 (5) 0.00 36,000.00 (12)
Officer (6)(8)
</TABLE>
- ------------------------------
(1) Mr. Shepherd was elected Chief Executive Officer in December 1997. From
May 1997 until December 1997, Mr. Shepherd was a member of the Office of
Chief Executive. Prior to May 1997, and since June 1992, Mr. Shepherd
has been a director of the Company.
(2) This amount consists of $2,500 paid for directors' meetings fees, $243
paid for term life insurance and $1,200 paid for interest on an amount
advanced to the Company.
(3) These amounts represent an annual salary of $5,000 paid to the directors
of the Company. Mr. Apple, who resigned from the Company in December
1997, was paid the pro rata amount of $3,750.
(4) This amount consists of $7,500 paid for directors' meetings fees and
$1,800 for interest paid on an amount advanced to the Company.
(5) On June 19, 1996, the Company cancelled all outstanding stock options
and issued new stock options at the then current quoted market price.
For Messrs. Apple, Padula and Shepherd, 20,000 options were cancelled
and replaced with 30,000 options; for Mr. Farr, 40,000 options were
cancelled and replaced with 75,000 options.
<PAGE>
(6) In May 1997, the Company's board of directors established the Office of
Chief Executive. Its members consisted of Leslie M. Apple, Richard C.
Farr, Samuel J. Padula and John D. Shepherd, current directors of the
Company. The Office of Chief Executive terminated in December 1997,
with the election of John D. Shepherd as Chief Executive Officer.
(7) These amounts represent $9,750 paid for directors' meetings fees.
(8) Mr. Farr was the Company's Chief Executive Officer from December 1991
to May 1997, at which time he became a membeer of the Office of Chief
Executive. Mr. Farr resigned from his positions woth the Company,
except that of Director, on July 8, 1997.
(9) This amount consists of an annual salary of $5,000 paid to directors
and $43,750 paid to Mr. Farr for executive services.
(10) This amount consists of $7,500 paid for directors' meetings fees, $9,942
for interest paid on advances made to the Company, and $14,362, which
represents the value attributed to personal use of Company automobiles.
(11) This amount consists of a $5,000 annual salary paid to directors, and
$99,894 for executive services.
(12) In February 1996, the Company accrued an expense for a Post Retirement
Life Insurance Policy on behalf of Mr. Farr.
Employee Savings Plan
The Company maintains a defined ocntribution salary reduction plan (the
"Plan") pursuant to Section 401(k) of the Internal Revenue Code of 1986 (as
amended from time to time, the "Internal Revenue Code") for all employees who
have completed one year of service with the Company. Thirty-eight of the
Company's employees are currently eligible to participate in the Plan, twenty-
nine of whom have elected to participate. Employees participating in the Plan
may elect to defer ompensation up to a maximum permitted by the Internal
Revenue Code. The Company contributes on behalf of each participating employee
a percentage, determined annually by the Company based upon the profits of the
Company, of compensation (as defined by the Plan) to the Plan. Aggregate annual
additions on behalf of any employee may not exceed the lesser of 25% or such
employee's compensation for any given year or $7,000 (as adjusted for increases
in the cost of living as prescribed by regulations by the Secretary of the
Treasury, $10,000 for the 1999 calendar year). Contributions to the Plan made
by the Company are 20% vested after a participating employee completes three
years of service with the Company and continues to vest at the rate of an
additional 20% over each of the following four years of employment.
During the fiscal years ended January 31, 1999, 1998 and 1997, $120,314,
$4,395 and $28,622, respectively, were paid to employees of the Comapany upon
their separation from service to the Company pursuant to the Plan.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table identifies each known person to the company to be the
beneficial owner of more than five percent of the Company's Common Stock and
sets forth the number of shares of the Company's Common Stock beneficially
owned by each such person and the percentage of the shares of the Company's
outstanding Ccommon Stock owned by each such person.
Number of Shares Percent of Out-
of common Stock standing Common
of the Company Stock of the Company
Name and Address Beneficially Owned Beneficially Owned
Of Beneficial Owner as of May 17, 1999 as of May 17, 1999
- ------------------- ---------------------- ----------------------
Richard C. Farr 1,423,302 (1) 14.9%
40 Colony Road
W. Hartford CT 06117
John D. Shepherd 5,001,961 (2) 52.3%
1020 Sport Hill Road
Easton, CT 06612
(1) Includes (i) 75,000 shares subject to options which are exercisable
within 60 days and (iii) 312,500 shares subject to warrants which are
exercisable within 60 days.
(2) Includes (i) 150,000 shares of the Company's Series B Convertible
Subordinated Debentures which are convertible within 60 days,
(ii) 1,562,500 shares subject to the Company's Series C
Convertible Subordinated Debentures which are convertible within 60
days, excludes (iii) 250,000 shares subject to the Company's Series
B Convertible Subordinated Debentures owned by Mrs. Susan Shepherd,
his wife, which are convertible within 60 days, as to which Mr. Shepherd
disclaims beneficial ownership, (iv) 125,000 shares subject to warrants
owned by Mrs. Susan Shepherd which are exercisable within 60 days, as to
which Mr. Shepherd disclaims beneficial ownership, (v) 125,000 shares
subject to the Company's Series B Convertible Subordinated Debentures
owned jointly by Mr. Herman R. Shepherd and Mrs. Carol R. Shepherd, his
father and mother, which are convertible within 60 days, as to which Mr.
Shepherd discliams beneficial ownership, (vi) 62,500 shares subject to
warrants owned jointly by Mr. Herman R. Shepherd and Mrs. Carol R.
Shepherd which are exercisable within 60 days, as to which Mr. Shepherd
disclaims beneficial ownership, (vii) 125,000 shares subject to the
Company's Series B Convertible Subordinated Debentures owned by Mrs.
Carol R. Shepherd, his mother, which are convertible within 60 days, as
to which Mr. Shepherd disclaims beneficial ownership, (viii) 62,500
shares subject to warrants owned by Mrs. Carol R. Shepherd which are
exercisable within 60 days, as to which Mr. Shepherd disclaims beneficial
ownership, (ix) 50,000 shares subject to the Company's Series B
Convertible Subordinated Debentures owned by Mr. Jason Tunick, his son,
which are convertible within 60 days, as to which Mr. Shepherd discliams
beneficial ownership, (x) 25,000 shares subject to warrants owned by Mr.
Jason Tunick which are exercisable within 60 days, as to which Mr.
Shepherd disclaims beneficial ownership, and (xi) 312,500 shares subject
to the Company's Series C Convertible Subordinared Debentures owned by
Mr. Herman R. Shepherd and Mrs. Carol R. Shepherd, his father and mother,
which are convertible within 60 days, as to which Mr. Shepherd disclaims
beneficial ownership.
<PAGE>
Security Ownership of Management
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned by each director of the Company and all directors and
officers of the Company as a group and the percentage of the shares of the
Company's outstanding Common Stock owned by each director of the Company and
all directors and officers of the Company as a group. Except as otherwise
noted, the named individual has sole voting power and sole investment power
over the securities.
Number of Shares Percent of Out-
of Common Stock standing Common
of the Company Stock of the Company
Beneficialy Owned Beneficially Owned
Name as of May 17, 1999 as of May 17, 1999
- --------------- ---------------------- ----------------------
Richard C. Farr 1,423,302 (4) 14.9%
Samuel J. Padula 35,140 (1)(2) .4%
Reginald W. Ray, Jr. 208,802 (1)(3) 2.2%
John D. Shepherd 5,001,961 (5) 52.3%
William J. Thyne 160,050 (6) 1.7%
All officers and
directors as a group
(5 persons) 6,829,255 (7) 71.5%
(1) Includes 30,000 shares subject to options which are exercisable within
60 days.
(2) Includes (i) 2,100 shares owned jointly by Mr. Padula with his wife,
Mrs. Eleanor Padula, with whom Mr. Padula shares voting and investment
power, and excludes (ii) 263,603 shares heldd by Mrs. Padula as to which
Mr. Padula disclaims beneficial ownership, and (iii)75,000 shares subject
to warrants which are exercisable within 60 days.
(3) Excludes 12,702 shares owned by Mr. Ray's wife as to which Mr. Ray
disclaims beneficial ownership.
(4) Includes (i) 75,000 shares subject to options which are exercisable
within 60 days and (iii) 312,500 shares subject to warrants which are
exercisable within 60 days.
<PAGE>
(5) Includes (i) 150,000 shares subject to the Company's Series B Convertible
Subordinated Debentures which are convertible within 60 days,
(iii) 1,562,500 shares subject to the Company's Series C Convertible
Subordinated Debentures which are convertible within 60 days; exludes
(iii) 250,000 shares subject to the Company's Series B Convertible Sub-
ordinated Debentures owned by Mrs. Susan Shepherd, his wife, which are
convertible within 60 days, as to which Mr. Shepherd disclaims beneficial
ownership, (iv) 125,000 shares subject to warrants owned by Mrs. Susan
Shepherd which are exercisable within 60 days, as to which Mr. Shepherd
disclaims beneficial ownership, (v) 125,000 shares subject to the
Company's Series B Convertible Subordinated Debentures owned jointly by
Mr. Herman R. Shepherd and Mrs. Carol R. Shepherd, his father and mother,
which are convertible within 60 days, as to which Mr. Shepherd disclaims
beneficial ownership, (vi) 62,500 shares subject to warrants owned
jointly by Mr. Herman R. Shepherd amd Mrs. Carol R. Shepherd which are
exercisable within 60 days, as to which Mr. Shepherd disclaims beneficial
ownership, (vii) 125,000 shares subject to the Company's Series B
Convertible Subordinated Debentures owned by Mrs. Carol R. Shepherd,
his mother, which are convertible within 60 days, as to which Mr.
Shepherd disclaims beneficial ownership, (viii) 62,500 shares subject
to warrants owned by Mrs. Carol R. Shepherd which are exercisable within
60 days, as to which Mr. Shepherd disclaims beneficial ownership,(ix)
50,000 shares subject to the Company's Series B Convertible Subordinated
Debentures owned by Mr. Jason Tunick, his son, which are convertible
within 60 days, as to which Mr. Shepherd disclaims beneficial ownership,
(x) 25,000 shares subject to warrants owned by Mr. Jason Tunick which
are exercisable within 60 days, as to which Mr. Shepherd disclaims
beneficial ownership, and (xi) 312,500 shares subject to the Company's
Series C Convertible Subordinated Debentures owned by Mr. Herman R.
Shepherd and Mrs. Carol R. Shepherd, his father and mother, which are
convertible within 60 days, as to which Mr. Shepherd disclaims
beneficial ownership.
(6) Includes (i) 10,000 shares subject to options which are exercisable
within 60 days, (ii) 100,000 shares subject to the Company's Series
B Convertible Subordinated Debentures which are convertible within 60
days, and (iii) 50,000 shares subject to warrants which are exercisable
within 60 days, excludes (iv) 50,000 shares subject to the Company's
Series B Convertible Subordinated Debentures owned by Mrs. Glenn E.
Thyne, his wife, which are convertible within 60 days, as to which
Mr. Thyne disclaims beneficial ownership, and (v) 25,000 shares subject
to warrants owned by Mrs. Glenn E. Thyne which are exercisable within
60 days, as to which Mr. Thyne disclaims beneficial ownership.
(7) Includes (i) 145,000 shares subject to options which are exercisable
within 60 days, (ii) 875,000 shares subject to the Company's Series
B Convertible Subordinated Debentures which are convertible within
60 days, (iii) 437,500 shares subject to warrants which are exercisable
within 60 days, and (iv) 1,875,000 shares subject to the Company's
Series C Convertible Subordinated Debentures which are convertible
within 60 days.
There are no agreements known to the Company the operation of which may at a
subsequent date result in a change in control of the Company.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Description of certain transactions and agreements to which the Company and
certain officers and directors of the Company are parties are set forth below.
During the fiscal years ended January 31, 1999 and 1998, the following
transcations with officres, directors and shareholders occurred:
On January 16, 1998, the following officers/directors/shareholders converted
$450,000 of Series A Convertible Subordinated Debentures (the "A Debentures")
into shares of the Company's common stock:
Amount Shares
Converted Issued
--------- -------
John D. Shepherd $200,000 1,000,000
Samuel J. Padula $ 50,000 250,000
Richard C. Farr $200,000 1,000,000
On January 30, 1998, the following officers/directors/shareholders
exchanged notes payable under the Company's Cant Financing Program for Series B
Convertible Subordinated Debentures (the "B Debentures") of the eequivelant
amount:
Amount
Exchanged
---------
John D. Shepherd $175,000
Samuel J. Padula $ 30,000
Richard C. Farr $125,000
During March and April 1998, John D. Shepherd and William J. Thyne
purchased $210,000(3) and $20,000(3), respectively, B Debentures at 100%
of par value. In addition, Mr. Shepherd purchased $30,000 of B Debentures
held by Samuel J. Padula.
On April 20, 1998, John D. Shepherd converted $275,000 of B Debentures
into 1,375,000 shares of the Company's common stock. On that date, Mr.
Shepherd also exercised warrants related to his B Debentures and purchased
687,500 shares of the Company's common stock for $.375 per share, or a total
of $257,812.
On June 30, 1998, Reginald W. Ray, Jr., a director, converted $25,000 of
A Debentures held by him into 125,000 shares of the Company's common stock.
In June 1998, John D. Shepherd purchased $15,000 of A Debentures held by
a former director of the Company. On June 30, 1998, Mr. shepherd converted
the $15,000 of A Debentures into 75,000 shares of the Company's common stock.
- ---------------------------------------
(3) Includes debentures held by family members
of the named officer/firector/shareholder.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
INDEX TO EXHIBITS TO
ANNUAL REPORT ON FORM 10-KSB OF
LINCOLN LOGS LTD.
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
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.
4.2 Form of SERIES B CONVERTIBLE SUBORDINATED DEBENTURES filed as Exhibit
4.2 to the Registrant's Annual Report on Form 10-K for the fiscal year
ended January 31, 1998, filed with the Securities and Exchange Commission
on or about May 24, 1999 and incorporated herein by this referrence.
4.3 Form of WARRANT TO PURCHASE COMMON STOCK filed as Exhibit 4.3 to the
Registrant's Annual Report on form 10-K for the fiscal year ended January
31, 1998, filed with the Securities and Exhcange Commission on or about
May 24, 1999 and incorporated herein by this referrence.
4.4 Form of SERIES C CONVERTIBLE SUBORDINATED DEBENTURE.
Filed herewith
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.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company
during the quarter ended January 31, 1999, or through and including
this filing.
<PAGE>
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: May 28, 1999
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: May 28, 1999
(ii) Principal Financial Officer:
/s/ William J. Thyne
-----------------------
William J. Thyne,
Chief Financial Officer and Secretary
Dated: May 28, 1999
[ Signatures continued on next page ]
<PAGE>
(iii) A Majority of the Board of Directors:
------------------------
Richard C. Farr
/s/ Samuel J. Padula May 5, 1999
------------------------
Samuel J. Padula
/s/ Reginald W. Ray, Jr. May 14, 1999
------------------------
Reginald W. Ray, Jr.
/s/ John D. Shepherd May 28, 1999
------------------------
John D. Shepherd
<PAGE>
INDEX TO EXHIBITS TO
ANNUAL REPORT ON FORM 10-KSB OF
LINCOLN LOGS LTD.
FOR THE FISCAL YEAR ENDED JANUARY 31, 1999
Exhibit
Number Exhibit Description
4.4 Form of SERIES C CONVERTIBLE SUBORDINATED DEBENTURE.
THIS DEBENTURE HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THIS DEBENTURE MAY NOT
BE SOLD OR TRANSFERRED IN THE ABSCENCE OF SUCH REGISTRATION OR
AN OPINION OF COUNSEL SATISFACTROY TO THE ISSUER THAT SUCH
REGISTRATION IS NOT REQUIRED BY SAID ACT.
LINCOLN LOGS. LTD.
SERIES C CONVERTIBLE SUBORDINATED DEBENTURE
No.__________
Lincoln Logs, Ltd., a New York corporation (the "Corporation"), for
value received, hereby promises to pay ___________(the "Holder" and
together with all other holders of the Corporation's Series C Convertible
Subordinated Debentures, the "Holder")on February __, 2002,(the "Due Date")
the sum of _____________Thousand ($__________) Dollars, together with
interest which has accrued thereon from the date hereof at the rate of
12% per annum, which interest shall be paid to the Holder quarterly in
arrears on May 1, August 1, November 1 and February 1 of each year
commencing May 1, 1999. Interest on this Debenture will accrue from the
most recent date as to which interest has been paid or, if no interest
has been paid, from the date hereof. All payments of principal and
interest hereunder shall be made ratably among the Holders in proportion
to the principal amount of these Debentures held by the Holders then
outstanding. Interest will be computed on the basis of a 360-day year
of twelve 30-day months.
This Debenture is one of an issue known as the Corporation's Series
C Convertible Subordinated Debentures (the "Series C Debentures"), in
the total aggregate amount of $300,000, duly authorized, all of like
tenor, except the variations necessary to express the name of the Holder,
the number and the principal amount of each Debenture.
The Corporation reserves the right, upon 60 days' notice delivered by
the Corporation to the holders of the Series C Convertible Subordinated
Debentures at any time and from time to time, to prepay all or any portion
of the principal amount of all Series C Debentures on a pro-rata basis,
together with any unpaid interest which has accrued thereon to the date
of prepayment. Notice of such prepayment will be mailed by first-class
mail, postage prepaid, not less than 60 days prior to the date set for
such prepayment. On and after any prepayment date, interest shall cease
to accrue on the Series C Debentures or portions thereof which shall
have been prepaid.
The Holder shall have the right to convert this Series C Debenture, or
any portion hereof provided such portion is equal to at least $10,000 or
integral multiples thereof in principal amount, into shares of the
Corporation's Common Stock at any time on or after thirty (30) days from
the date of this Series C Debenture and prior to the Due Date, including
any time during the period following the delivery by the Corporation of
its notice to prepay all or any portion of the Debentures as provided in
the immediately preceeding paragraph. If the Holder elects to exercise
this conversion option, in whole or in part, the Holder shall deliver to
the Corporation at its pricnipal office a written notice of such ekection
substantially in the form attached hereto as Annex I for conversions
occuring prior to any Conversion Shares (as defined below) being registered
under the Securities Act of 1933, as amended, with the Securities and
Exchange Commission, or Annex II for conversions occurring after such
registration (each, a "Converiosn Notice"), together with this Series C
Debenture. Upon receipt by the Corporation of teh Conversion Notice
and this Series C Debenture (such date of receipt by the Corporation,
hereinafter the "Date of Conversion") this Series C Debenture shall be
converted into shares of the Corporation's Common Stock at the rate of
one (1) share of the Corporation's Common Stock (the "Conversion Shares")
for each $.16 in principal then owned to the Holder pursuant to this
Series C Debenture; provided, however, that the number of conversion
Shares to be issued to the Holder upon a conversion of this Series C
Debenture shall be adjusted for any reclassification, consolidation,
merger, subdivision, combination, stock dividend or split of the
Corporation's issued and outstanding Common Stock which are duly
authorized and effected between the date of this Series C Debenture and
the Date of Conversion shall be paid to the Holder by the Corporation.
Interest on the principal amount of the Series C Debentures converted
pursuant to the terms of this paragraph shall ceade to accrue upon the
Date of Conversion; provided, however, that in the event less than the
entire principal amount of this Series C Debenture is converted pursuant
to the foregoing, then any accrued interest which is unpaid on only that
portion of the Series C Debenture to be converted on the Date of
Conversion shall be paid to the Holder by the Corporation and interest
only on that portion of the principal to be converted shall cease to
accrue upon the Date of Conversion. Within 10 days following the
Corporation's receipt of the Conversion Notice, the Corporation will
issue a stock certificate representing the Conversion Shares to the
Holder and pay to the Holder any accrued interest owed to such Holder,
and, in the event the Holder elects to convert only a portion of the
Series C Debenture, the Corporation shall deliver to the Holder a new
Series C Debenture for the principal amount thereof not converted.
The indebtedness evidenced by this Series C Debenture shall be
subordinate and subject in right of payment to the prior payment in
full of (1) the Corporations' Series A and Series B Convertible
Subordinated Debentures outstanding at 5 p.m. Eastern Time February 16,
1999 (the "Series A Series B Debentures"); and (2) up to seven hundred
fifty thousand ($750,000.00) of commercial bank indebtedness which the
Corporation mau incur after February 24, 1999 (the "Commercial Bank
Indebtedness"; the Commercial Bank Indebtedness and the Series A
and Series B Debentures, collectively referred to herein as the "Senior
Indebtedness").
Upon the occurrence and continuation of an Event of Default )as
defined in the Security Agreement dated the date hereof between the
Corporation and the Holders), the holders of at least a majority of
the aggregate principal amount of the Series C Debentures then
outstanding may immediately, or if any Senior Indebtedness is outstanding,
following the earlier of (i) ten days after written notice has been given
by the Holders calling the default to the Holders of the Senior
Indebtedness of the attention to accelerate the maturity of the
Series C Debentures; or (ii) such earlier date following such notice
as the Senior Indebtedness shall have been accelerated, declare the
principal amount of the Debentures to be due and payable immediately.
This Series C Debenture is secured by the security interest granted
by the Corporation to the Holders of the Series C Debentures in (i) a
certain Security Agreement dated the date hereof between the Corporation
and the Holders of the Series C Debentures, and (ii) certain mortgages
on parcels of real property owned by the Corporation and is entitled to
the benefits thereof.
IN WITNESS WHEREOF, the undersigned has executed and delivered this
Debenture effective as of the --th day of February, 1999.
LINCOLN LOGS, LTD.
By: ________________
John D. Shepherd
President
[Corporate Seal]
Attest:
_____________________
William J. Thyne
President
EXHIBIT 21
LIST OF SUBSIDIARIES
The registrant has the following subsidiaries:
1. Thermo-Home, Inc., a New York corporation
2. Lincoln Logs International Ltd., a New York corporation
3. Lincoln Holding Corp., a Delaware corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS DATA EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND
THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000717422
<NAME> LINCOLN LOGS LTD.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 223,321
<SECURITIES> 0
<RECEIVABLES> 278,909
<ALLOWANCES> 17,700
<INVENTORY> 593,314
<CURRENT-ASSETS> 1,597,824
<PP&E> 5,124,419
<DEPRECIATION> 3,392,150
<TOTAL-ASSETS> 3,449,820
<CURRENT-LIABILITIES> 3,406,800
<BONDS> 203,577
0
0
<COMMON> 60,463
<OTHER-SE> (314,896)
<TOTAL-LIABILITY-AND-EQUITY> 3,449,820
<SALES> 9,691,513
<TOTAL-REVENUES> 9,691,513
<CGS> 5,664,160
<TOTAL-COSTS> 9,290,955
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 633,453
<INCOME-PRETAX> (176,048)
<INCOME-TAX> 1,132
<INCOME-CONTINUING> (177,180)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (177,180)
<EPS-BASIC> ( .04)
<EPS-DILUTED> ( .04)
</TABLE>
