UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OR THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
Commission file number 0-12172
Lincoln Logs Ltd.
(Exact name of small business issuer as specified in its charter)
New York 14-1589242
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Riverside Drive, Chestertown, New York 12817
(Address of principal executive offices)
(518) 494 - 5500
(Issuer's telephone number)
Neither name, address nor fiscal year has changed since last report
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes ________ No___X______
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at May 17, 1999
Common Stock, $ .01 par value 5,542,059
- 1 -
<PAGE>
<TABLE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
INDEX
<CAPTION>
Page Number
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets as of April 30, 1998
and January 31, 1998 3 - 4
Consolidated statements of operations
for the three months ended April 30, 1998
and 1997 5
Consolidated statements of changes in
stockholders' equity (deficiency) for the
three months ended April 30, 1998 and the
twelve months ended January 31, 1998 6
Consolidated statements of cash flows
for the three months ended April 30, 1998
and 1997 7
Notes to consolidated financial statements 8 - 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 12 - 15
PART II. OTHER INFORMATION 16
SIGNATURES 17
- 2 -
</TABLE>
<PAGE>
<TABLE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1998 AND JANUARY 31, 1998
ASSETS
------
<CAPTION>
April 30, January 31,
1 9 9 8 1 9 9 8
(Unaudited) (Audited)
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 268,416 $ 124,307
Trade accounts receivable, net of$17,000
allowance for doubtful accounts 269,216 103,910
Inventories (principally raw materials) 862,767 755,210
Prepaid expenses and other current
assets 377,444 339,892
Mortgage receivable 1,838 1,779
---------- ------------
Total current assets $1,779,681 $1,325,098
----------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 784,800 784,800
Buildings and improvements 2,186,953 2,162,883
Machinery and equipment 625,848 625,848
Furniture and fixtures 1,331,288 1,316,883
Transportation equipment 148,595 152,103
------------ ----------
5,077,484 5,042,517
Less: accumulated depreciation (3,320,868) (3,284,868)
------------ -----------
Total property, plant and
equipment - net 1,756,616 1,757,649
--------- ---------
OTHER ASSETS:
Mortgage receivable 72,148 72,148
Assets held for resale 38,189 38,189
Cash surrender value of life insurance,
net of loan of $86,400 at January 31, 1998
and $76,400 at April 30, 1998 15,456 5,456
Deposits and other assets 1,403 988
Intangible assets, net of amortization 15,188 17,620
------- ---------
Total other assets 142,384 134,401
-------- ---------
TOTAL ASSETS $3,678,681 $3,217,148
=========== ==========
<FN>
( continued )
- 3 -
</TABLE>
<PAGE>
<TABLE>
LINCOLN LOGS LYD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
APRIL 30, 1998 AND JANUARY 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
<CAPTION>
April 30, January 31,
1 9 9 8 1 9 9 8
(Unaudited) (Audited)
---------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current installments of long-term debt:
Related parties $ 25,000 $ 25,000
Others 239,001 245,587
Note payable 292,373 430,500
Trade accounts payable 970,351 1,144,959
Customer deposits 2,092,881 1,287,212
Accrued payroll, related taxes and
withholdings 42,051 78,505
Accrued income taxes -- 525
Due to related parties 152,328 152,328
Accrued expenses 424,844 601,234
---------- ----------
Total current liabilities 4,238,829 3,965,850
LONG-TERM DEBT, net of current installments:
Convertible subordinated debentures:
Related parties 229,030 30,710
Others 13,404 930
Other 5,197 4,289
Other long-term liability 92,184 92,184
----------- ----------
Total liabilities 4,578,644 4,093,963
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $ .01 pare value;
authorized 1,000,000 shares; issued
and outstanding - 0 - shares -- --
Common stock, $ .01 par value; authorized
10,000,000 shares; issued
5,796,299 and 3,729,999 shares 57,963 37,300
Additional paid-in capital 5,370,604 4,641,705
Accumulated deficit (5,444,095) (4,671,385)
----------- ----------
(15,528) 7,620
Less: cost of 504,240 shares of common
stock in treasury at April 30, 1998
and January 31, 1998 (884,435) (884,435)
----------- ------------
Total stockholders' deficiency (899,963) (876,815)
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) $3,678,681 $3,217,148
============= ============
<FN>
See accompanying notes to consolidated financial statements.
- 4 -
</TABLE>
<PAGE>
<TABLE>
LINCOLN LOGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<CAPTION)
Three Months Ended
April 30,
-------------------
1 9 9 8 1 9 9 7
--------- --------
<S> <C> <C>
NET SALES $1,446,359 $1,601,498
COST OF SALES 992,280 1,032,743
---------- ----------
GROSS PROFIT 454,079 568,755
---------- ----------
OPERATING EXPENSES:
Commissions 208,008 208,920
Selling, general and administrative 540,347 594,153
---------- ----------
Total operating expenses 748,355 803,073
---------- ----------
(LOSS) FROM OPERATIONS (294,276) (234,318)
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 5,178 13,490
---------- ----------
Interest expense:
Amortization attributable to
beneficial conversion feature
and warrants (note 5) (451,619) --
All other (36,146) ( 54,983)
---------- ----------
Total interest expense (487,765) ( 54,983)
---------- ----------
Other 4,153 2,564
---------- ----------
Total other income (expense) - net (478,434) (38,929)
---------- ----------
(LOSS) BEFORE INCOME TAXES (772,710) (273,247)
INCOME TAXES -- --
---------- ----------
NET (LOSS) $(772,710) $(273,247)
========== ==========
PER SHARE DATA (note 2):
Basic and diluted loss per share $(.22) $(.29)
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 5 -
</TABLE>
<PAGE>
<TABLE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDRS' EQUITY (DEFICIENCY)
FOR THE THREE MONTHS ENDED APRIL 30, 1998 (UNAUDITED) AND
THE TWELVE MONTHS ENDED JANUARY 31, 1998
<CAPTION>
Total
Number Par Additional stockholders'
of value paid-in (Accumulated Treasury equity
shares amount capital deficit) stock (deficiency)
--------- --------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1997 1,449,999 $ 14,500 $3,894,286 $(3,346,640) $( 884,435) $( 322,289)
Common stock issued upon exercise
of stock options 30,000 300 5,419 -- -- 5,719
Debt converted to commom stock 2,250,000 22,500 427,500 -- -- 450,000
Amount assigned to subordinated debenture
beneficial conversion and warrants -- -- 314,500 -- -- 314,500
Net loss - 1998 -- -- -- (1,324,745) -- (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 3,800 38 887 -- -- 925
Debt converted to common stock 1,375,000 13,750 245,825 -- -- 259,575
Common stock issued upon exercise of
stock purchase warrants 687,500 6,875 250,937 -- -- 257,812
Amount assigned to subordinated debenture
beneficial conversion and warrants -- -- 231,250 -- -- 231,250
Net loss - 3 months ended April 30, 1998 -- -- -- ( 772,710) -- ( 772,710)
---------- ----------- ---------- ------------ ---------- --------------
Balance at April 30, 1998 5,796,299 $ 57,963 $5,370,604 $(5,444,095) $( 884,435) $( 899,963)
========== ============ =========== ============ ============= =============
<FN>
See accompanying notes to consolidated financial statements.
- 6 -
</TABLE>
<PAGE>
<TABLE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<CAPTION>
Three Months Ended
April 30,
----------------------------
1 9 9 8 1 9 9 7
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) $ ( 772,710) $ ( 273,247)
Adjustments to reconcile net(loss)to net
cash provided (used) by operating activities:
Depreciation and amortization 38,432 34,430
Amortization of amounts assigned to
beneficial conversion feature
and warrants 451,619 --
Compensation related to exercise of
stock option 925 --
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable (165,306) (131,152)
(Increase) decrease in inventories (107,557) 161,625
(Increase) in prepaid expenses and
other current assets (37,552) (82,635)
(Decrease) in trade accounts payable (174,608) (302,972)
Increase in customer deposits 805,669 59,364
(Decrease) increase in accrued expenses
and other current liabilities (212,844) 68,752
Increase in due to related parties -- 25,293
(Decrease) in accrued and prepaid
income taxes (525) (769)
------------ --------------
Net cash provided (used) by
operating activities (174,457) 103,687
------------ ---------------
INVESTING ACTIVITIES:
(Additions) to property, plant and equipment (34,967) (2,224)
(Increase) in deposits and other assets (474) --
Decrease in due from related parties -- 399
------------ --------------
Net cash (used) by investing activities (35,441) (1,825)
------------ --------------
FINANCING ACTIVITIES:
Proceeds from issuance of Series B Convertible
Subordinated Debentures 240,000 --
Proceeds from issuance of common stock
upon exercise of stock
purchase warrants 257,812 --
Repayments of notes payable (128,127) --
Repayment of loan against cash surrender
value of life insurance policy (10,000) --
Repayments of long-term debt (5,678) (5,400)
---------------- -----------
Net cash provided (used) by financing
activities 354,007 (5,400)
---------------- -----------
Net increase in cash and cash equivalents 144,109 96,462
Cash and cash equivalents at beginning of period 124,307 359,107
-------------- -----------
Cash and cash equivalents at end of period $268,416 $455,569
=============== ==========
<FN>
See accompanying notes to consolidated financial statements.
- 7 -
</TABLE>
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
(1) BASIS OF PRESENTATION
The financial information included herein is unaudited; however,
such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of results for the interim periods.
The results of operations for the three-month periods ended April 30, 1998
and 1997 are not indicative of the results to be expected for the full year,
due to the seasonal nature of the business.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended
January 31, 1998.
(2) EARNINGS (LOSS) 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 used to compute basic loss per
share was 3,482,211 and 945,759 for the three-month periods ended April 30, 1998
and April 30, 1997, respectively.
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 because the effect of including stock
options, warrants and the assumed conversion of the convertible subordinated
debentures would be anti-dilutive.
(3) INCOME TAXES
The Company accrues income tax expense on an interperiod basis as necessary,
and accrues income tax benefits only when it is more likely than not that such
tax benefits will be realized. No income tax benefit nor expense was accrued
in the three months ended April 30, 1998 and 1997.
(4) RECLASSIFICATIONS
Certain amounts in the April 30, 1997 financial statements have been
reclassified to conform with the presentation in the April 30, 1998
financial statements.
-8-
<PAGE>
NOTES TO CONSOLIDATED DINANCIAL STATEMENTS - Continued
(5) INDEBTEDNESS
The Company has authorized and issued $700,000 of Series A Convertible
Subordinated Debentures (the "A Debentures") in July 1993, and authorized
$600,000 and issued $590,000 of Series B Convertible Subordinated Debentures
(the "B Debentures") (collectively the "Debentures"), B Debentures totaling
$340,000 were outstanding at January 31, 1998 and an additional $250,000 were
issued during the three-month period ended April 30, 1998. As discussed below,
$275,000 of B Debentures were converted into the Company's common stock during
the three-month period ended April 30, 1998. The Debentures bear interest,
payable quarterly, at an annual rate of 12%. The A Debentures are due on
June 30, 1998, and the B Debentures are due on May 15, 1999. The A Debentures
may be redeemed by the Company at its option, in whole or in part, at any time
on or after May 1,1996. The 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 a detachable stock purchase warrant, giving the holder
the right, over a five year period, to purchase shares of the Company's common
stock at the quoted market price for the Company's common stock, $.375, on
the committment date. The number of shares of common stock originally subject
to warrants was 1,475,000, fifty (50%) of the number subject to conversion.
The B Debentures are considered to have a beneficial conversion feature
because the rate at which the B Debentures may be converted into common stock
($.20 per share) is lower than the quoted market value for the stock at the
date the B Debentures were issued ($.375 per share). The Debentures are
secured by a security interest granted by the Company in the assets of the
Company and by mortgages on certain parcels of real property owned by the
Company which are located in Chestertown, New York and Auburn, California.
Because of the stock purchase warrants and the beneficial conversion feature
of the B Debentures the Company engaged an independent investment banker to
evaluate the fair value of the components of the B Debentures. Based on the
report issued the Company ssigned a value of two ($.02) cents to each warrant
to purchase one share of common stock with $17,000 being recorded in the fourth
quarter of fiscal 1998 and $12,500 being recorded in the first quarter of fiscal
1999. This amount, totaling $29,500, has been recorded as a debt discount and
as an increase to additional paid-in capital. This amount is being amortized
to interest expense over the life of the B Debentures. For the three-month
period ended April 30, 1998, $3,435 has been amortized to interest expense
related to the debt discount attributable to stock purchase warrants.
The difference between the quoted market value for the Company's common
stock on the B Debentures committment date, $.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 an increase to
additional paid-in capital. For this item, $297,500 was recorded in the
fourth quarter of fiscal 1998 and $218,750 was recorded in the first quarter
of fiscal 1999. This amount, totaling $516,250, is being amortized to
interest expense over the first thirty days subsequent to the issuance of
the B Debentures, the earliest date at which the debt could be converted into
common stock. For the three-month period ended April 30, 1998, $448,184 has
been amortized to interest expense related to the beneficial conversion
feature.
-9-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
On April 20, 1998 a certain shareholder who was an owner of B Debentures
exercised his right to convert his holdings into common stcok of the Company.
The total amount of B Debentures converted into common stock of the Company
was $275,000. Further, this same shareholder exercised his right to purchase
common stock of the Company pursuant to the stock purchase warrants issued as
a component of the B Debentures. The Company issued 1,375,000 shares of common
stock pursuant to the owner's election to convert the B Debentures, and paid
accrued interest to the shareholder to the date of conversion. The Company
issued 687,500 shares of common stock pursuant to the owner's exercise of his
stock purchase warrants.
(6) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the three months ended April 30, 1998, cash was paid in the amounts
of $25,752 for interest and $525 for income taxes. During the three months
ended April 30, 1997, cash was paid in the amounts of $54,983 for interest
and $769 for income taxes.
Non-cash investing and financing activity:
During April 1998 a holder of a Cant Note in the amount of $10,000 exchanged
that Note for a B Debenture in the amount of $10,000.
During April 1998, 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 B Debentures.
During the first quarter of fiscal 1999, the Company recorded an increase
in B Debentures in the amount of $451,619, and a charge to interest expense
in the same amount related to the amortization of the debt discounts
attributable to the beneficial conversion feature and warrants associated
with the B Debentures.
-10-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(7) NEWLY ADOPTED ACCOUNTING STANDARDS
During the three-month period ended April 30, 1998, the Company adopted
Statements of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", and No. 131, "Disclosure about Segments of an Enterprise
and Related Information". Neither statement had an impact on the Company's
financial statements as the Company has no items of other comprehensive income
and operates in only one business segment.
- 11 -
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended April 30, 1998 vs. April 30, 1997
Net sales were $1,446,358 for the three months ended April 30, 1998 as
compared to $1,601,498 in the same period in 1997, a decrease of $155,139, or
slightly less than 10% When compared with the previous year, there was a 3%
decrease in the number of home units shipped, and the average sales
value per home unit shipped deecreased 9% The decrease in sales value per
home unit shipped resulted from the shipment of homes that were both smaller
and less expensive than those shipped in the smae period of the previous year.
The decrease in units shipped was due to adverse spring weather conditions.
Gross profits amounted to $454,079, or 31% of net sales for the three months
ended April 30, 1998 as compared to $568,755, or 36% for the same period in
1997. The decrease in gross profit percentage was the result of both an
increase in labor costs and an increase in cost of materials contained in the
home packages delivered. Higher labor coss were caused by retaining a
greater number of direct labor personnel during the winter months than were
retained during the winter of the previous year. The increase in the cost
of materials was due to purchasing of component materials in smaller
quantitties in the winter months which resulted in higher unit costs per
component.
Total operating expenses of $748,355, or 52% of net sales, decreased
$54,718 from the previous year's amount of $803,073, or 50% of net sales.
The overall decrease in total operating expenses was 7%. Sales
commissions were approximately the same amount as the previous year, $208,008
for the three-months ended April 30, 1998 and $208,920 for the three-months
ended April 30, 1997. Commissions were 14% and 13% of sales in 1998 and 1997,
respectively. Commissions were higher as a percentage of sales in 1998 and 1997
because proprtionately more sales were made by the Company's independent dealers
than the Company's employee salespersons versus the prior year period. A higher
commission rate is paid to the independent dealers than the employee salesperson
Selling, general and administrative expenses were $540,347 for the three months
ended April 30, 1998 compared with $594,153 in the same period in the previous
year, a decrease of $53,806, or 9%. In both periods these expenses were 37% of
net sales. The decrease in these expenses was the result of a general cost
elimination program instituted by the Company in January 1998.
The Company incurred a net loss for the quarter ended April 30,
1998 of $772,710. This loss included an unusual charge to interest expense of
$451,619. This amount is the amortization of debt discount attributable to
two components of the Series B Convertible Subordinated Debentures issued by
the Company in January 1998 and the quarter ended April 30, 1998 (see Note 5
of the cosolidated fincnial statements contained herein), the beneficial
conversion feature, $448,184, and stock purchase warrants, $3,435. Without
regard to these unusual items the net loss for the three months ended
April 30, 1998 would have been $321,091, an increase of $47,844 over the
comparable loss for the same period of the previous year of $273,247.
- 12 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company was in a negative working capital position at both April 30,
1998 and April 30, 1997 of $2,459,148 and $1,682,073, respectively. For the
three months ended April 30, 1998 working capital increased by $181,604 as
compared to a decrease of $246,042 in the same period in 1997. As of the
Company's fiscal year end at January 31, 1998 current liabilities exceeded
current assets by $2,640,752. Cash was primarily provided during
the three-month period ended April 30, 1998 by the issuance of Series B
Convertible Subordinated Debentures and the exercise of stock purchase
warrants.
For the three months ended April 30, 1998 the Company's operations were
a net user $174,457 of cash, while in the comparable period of the previous
year it was a net provider of cash in the amount of $103,687. Overall,
the Company experienced a net increase in its cash position of $141,109
during the three months ended April 30, 1998 as compared with an increase
in its cash position of $96,462 during the three months ended April 30, 1997.
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 be secured by
assets of the Company and be considered senior debt to the Company's Series
A Convertible Subordinated Debentures. This condition could not be satisfied
by the Company because the Series A Convertible Subordinated Debentures are
secured by a mortgage on the assets of the Company. The Company, when
authorizing the issuance of Series B Convertible Subordinated Debentures,
provided for the consideration of commercial bank financing up to $750,000
to be senior to the Series B Convertible Subordinated 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 further discussions with the bank have been held.
As shown in the consolidated financial statements, the Company incurred a
net loss during the quarter ended April 30, 1998 of $772,710. As of April 30,
1998 current liabilities exceeded current assets by $2,459,148 and the Company
had a net capital deficiency of $899,963. The Company has not been successful
in securing a working capital credit facility from commercial lenders or
governmental agency sources. Funds generated by operations, the assistance of
major vendors who have provided extended payment terms to the Company, and the
issuance of the Series B Convertible Subordinated Debentures replacing the
Cant Financing Program, have supported the Company's operations in fiscal 1999.
There is, however, no assurance that the Company will be able to
generate adequate funds from these sources. A reduction in the Company's
sales activity, the inability to extend the Series 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 continue its
operations.
-13-
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Fuinancial Accounting Standards Board Statement ("FASB") 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, 1999, with earlier application 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, the 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 Consolidaed 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 or Obtained
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 of obtained for
internal use. The Company will adopt this statement for the fiscal year
beginning February 1, 1999. Management has evaluated the impact 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-ip 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 Comapny's Consolidated
Financial Statements and concluded that there will be no impact on its
results of operations or its financial position.
OTHER MATTERS
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.
- 14 -
<PAGE>
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 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 their 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. As of April 30, 1998,
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, its security system, facsimile 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.
-15-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 alleged mismanagement,
breach of fidicuary duties and other matters. The Company responded to the
Complaint on behalf of itseld and the current amd 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 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
off $.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, which represents the deductible portion of the insurance
policy applicable to the settlement.
Item 2. Changes in Securities
None
Item 3. Defaults of Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit Index
Exhibit 27, Financial Data Schedule
b. Reports on form 8-K
None
- 165 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has fully caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LINCOLN LOGS LTD.
/ s / John D. Shepherd
John D. Shepherd
Chairman of the Board, President, Chief
Executive Officer and Treasurer
May 28, 1999
/ s / William J. Thyne
William J. Thyne
Chief Financial Officer, Principal Financial
Officer and Secretary
May 28, 1999
- 17 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS DATA EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS
AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 268,416
<SECURITIES> 0
<RECEIVABLES> 286,916
<ALLOWANCES> 17,700
<INVENTORY> 862,767
<CURRENT-ASSETS> 1,779,681
<PP&E> 5,077,484
<DEPRECIATION> 3,320,868
<TOTAL-ASSETS> 3,678,681
<CURRENT-LIABILITIES> 4,238,829
<BONDS> 247,631
0
0
<COMMON> 57,963
<OTHER-SE> (957,926)
<TOTAL-LIABILITY-AND-EQUITY> 3,678,681
<SALES> 1,446,359
<TOTAL-REVENUES> 1,446,359
<CGS> 992,280
<TOTAL-COSTS> 1,740,635
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 487,765
<INCOME-PRETAX> (772,710)
<INCOME-TAX> 0
<INCOME-CONTINUING> (772,710)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (772,710)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
</TABLE>
