UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
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 ___X_____ No_________
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 June 11, 1999
Common Stock, $ .01 par value 5,542,059
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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, 1999
and January 31, 1999 3 - 4
Consolidated statements of operations
for the three months ended April 30, 1999
and 1998 5
Consolidated statements of changes in
stockholders' equity (deficiency) for the
three months ended April 30, 1999 and the
twelve months ended January 31, 1999 6
Consolidated statements of cash flows
for the three months ended April 30, 1999
and 1998 7
Notes to consolidated financial statements 8 - 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 13 - 15
PART II. OTHER INFORMATION 16 - 17
SIGNATURES 18
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1999 AND JANUARY 31, 1999
ASSETS
------
<CAPTION>
April 30, January 31,
1 9 9 9 1 9 9 9
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivelants $ 213,979 $ 223,521
Trade accounts receivable, net of $17,700
allowance for doubtful accounts 48,181 261,209
Inventories (principally raw materials) 1,022,931 593,314
Prepaid expenses and other current
assets 689,398 516,560
Prepaid income taxes 918 918
Mortgage receivable 2,338 2,302
---------- ----------
Total current assets 1,977,745 1,597,824
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land 784,800 784,800
Buildings and improvements 2,180,409 2,177,600
Machinery and equipment 633,628 625,848
Furniture and fixtures 1,375,137 1,368,254
Transportation equipment 198,386 167,917
---------- ----------
5,172,360 5,124,419
Less: accumulated depreciation (3,428,150) (3,392,150)
---------- ----------
Total property, plant and
equipment - net 1,744,210 1,732,269
---------- ----------
OTHER ASSETS:
Mortgage receivable 70,207 70,688
Assets held for resale 27,561 27,561
Cash surrender value of life insurance,
net of loan of $83,574 at January 31, 1999
and $70,251 at April 30, 1999 24,159 10,606
Deposits and other assets 1,622 1,622
Intangible assets, net of amortization 7,400 9,250
---------- ----------
Total other assets 130,949 119,727
---------- ----------
TOTAL ASSETS $3,852,904 $3,449,820
========== ==========
<FN>
( continued )
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
APRIL 30, 1999 AND JANUARY 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
<CAPTION>
April 30, January 31,
1 9 9 9 1 9 9 9
(Unaudited) (Audited)
---------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current installments of long-term debt:
Related parties $ 125,000 $ 281,350
Others 7,262 34,644
Note payable 78,339 125,435
Trade accounts payable 780,591 830,879
Customer deposits 2,125,776 1,288,125
Accrued payroll, related taxes and
withholdings 46,563 69,874
Accrued income taxes -- 1,050
Due to related parties 152,619 154,122
Accrued expenses 606,020 621,321
---------- ----------
Total current liabilities 3,922,170 3,406,800
LONG-TERM DEBT, net of current installments:
Convertible subordinated debentures:
Related parties 479,186 --
Others 20,000 200,000
Other 19,778 3,577
Other long-term liability 94,410 93,876
----------- ----------
Total liabilities 4,535,544 3,704,253
---------- ----------
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
6,046,299 and 6,046,299 shares 60,463 60,463
Additional paid-in capital 5,418,104 5,418,104
Accumulated deficit (5,277,272) (4,848,565)
----------- ----------
201,795 630,022
Less: cost of 504,240 shares of common
stock in treasury at April 30, 1999
and January 31, 1999 (884,435) (884,435)
----------- ------------
Total stockholders' deficiency (682,640) (884,435)
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIENCY) $3,852,904 $3,449,820
============= ============
<FN>
See accompanying notes to consolidated financial statements.
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LINCOLN LOGS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998
(UNAUDITED)
<CAPTION)
Three Months Ended
April 30,
-------------------
1 9 9 9 1 9 9 8
--------- --------
<S> <C> <C>
NET SALES $1,050,489 $1,446,359
COST OF SALES 702,669 992,280
---------- ----------
GROSS PROFIT 347,820 454,079
---------- ----------
OPERATING EXPENSES:
Commissions 164,495 208,008
Selling, general and administrative 612,249 540,347
---------- ----------
Total operating expenses 776,744 748,355
---------- ----------
LOSS FROM OPERATIONS (428,924) (294,276)
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 7,147 5,178
---------- ----------
Interest expense:
Amortization attributable to
beneficial conversion feature
and warrants (note 5) (3,733 (451,619)
All other (20,566) (36,146)
---------- ----------
Total interest expense (24,299) (487,765)
---------- ----------
Other 17,369 4,153
---------- ----------
Total other income (expense) - net 217 (478,434)
---------- ----------
LOSS BEFORE INCOME TAXES (428,707) (772,710)
INCOME TAXES -- --
---------- ----------
NET LOSS $(428,707) $(772,710)
========== ==========
PER SHARE DATA (note 2):
Basic and diluted loss per share $(.08) $(.22)
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE THREE MONTHS ENDED APRIL 30, 1999 (UNAUDITED) AND
THE TWELVE MONTHS ENDED JANUARY 31, 1999
<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, 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
Common stock issued upon exercise
of stock purchase warrants 687,500 6,875 250,937 -- -- 257,812
Debt converted to commom stock 1,625,000 16,250 293,325 -- -- 309,575
Amount assigned to subordinated debenture
beneficial conversion feature
and warrants -- -- 231,250 -- -- 231,250
Net loss - 1999 -- -- -- (177,180) -- ( 177,180)
---------- ---------- ---------- ---------- ------------- ------------
Balance at January 31, 1999 6,046,299 $ 60,463 $5,418,104 $(4,848,565) $( 884,435) $ (254,433)
Amount assigned to subordinated debenture
warrants -- -- 500 -- -- 500
Net loss - 3 months ended April 30, 1999 -- -- -- ( 428,707) -- (428,707)
---------- ----------- ---------- ------------ ---------- -------------
Balance at April 30, 1999 6,046,299 $ 60,463 $5,418,604 $(5,277,272) $( 884,435) $ (682,640)
========== ============ =========== ============ ============= ================
<FN>
See accompanying notes to consolidated financial statements.
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED APRIL 30, 1999 AND 1998
(UNAUDITED)
<CAPTION>
Three Months Ended
April 30,
----------------------------
1 9 9 9 1 9 9 8
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (428,707) $ (772,710)
Adjustments to reconcile net loss to
net cash (used) by operating
activities:
Depreciation and amortization 37,850 38,432
Amortization of amounts assigned to
beneficial conversion feature
and warrants 3,733 451,619
Compensation related to exercise of
stock option -- 925
Changes in operating assets and liabilities:
Decrease (increase) in trade
accounts receivable 213,028 (165,306)
(Increase) in inventories (429,617) (107,557)
(Increase) in prepaid expenses and
other current assets (172,838) (37,552)
(Decrease) in trade accounts payable (50,288) (174,608)
Increase in customer deposits 837,671 805,669
(Decrease) in accrued expenses
and other current liabilities (38,612) (212,844)
(Decrease) in due to related parties (1,503) --
(Decrease) in accrued income taxes (1,050) (525)
------------ --------------
Net cash (used) by
operating activities (30,353) (174,457)
------------ ---------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (27,901) (34,967)
(Increase) in deposits and other assets -- (474)
Decrease in mortgage receivable 445 --
------------ --------------
Net cash (used) by investing activities (27,456) (35,441)
------------ --------------
FINANCING ACTIVITIES:
Proceeds from issuance of Debentures 310,000 240,000
Net increaase in cash surrender value
of insurance policy 304 --
Proceeds from issuance of common stock
upon exercise of stock
purchase warrants -- 257,812
Repayments of notes payable (47,096) (128,127)
Repayment of loan against cash surrender
value of life insurance policy
and acrued interest (13,323) (10,000)
Repayments of long-term debt (201,618) (5,678)
---------------- -----------
Net cash provided by financing
activities 48,267 354,007
---------------- -----------
Net (decrease) increase in cash and
cash equivelants (9,542) 144,109
Cash and cash equivelants at
beginning of period 223,521 124,307
-------------- -----------
Cash and cash equivelants at
end of period $213,979 $268,416
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
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LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
(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, 1999
and 1998 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, 1999.
(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 5,292,059 and 3,482,211 for the three-month periods ended April 30,
1999 and April 30, 1998, 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 expense or benefit was accrued
in the three months ended April 30, 1999 and 1998.
-8-
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NOTES TO CONSOLIDATED DINANCIAL STATEMENTS - Continued
(4) INDEBTEDNESS
Through Janaury 31, 1999, the Company had authorized and issued $700,000
of Series A Convertible Subordinated Debentures (the "A Debentures"), and
authorized $600,000 and issued $590,000 of Series B Convertible Subordinated
Debentures (the "B Debentures"). An additional $10,000 of B Debentures were
issued during the first quarter ended April 30, 1999. In February 1999, thw
Company authorized and issued $300,000 of Series C Convertible Subordinated
debentures (the "C Debentures")(all of the aformentioned series of convertible
subordinated debentures are collectively known as the "Debentures"). 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 were originally due
on May 15, 1999. A Debentures totaling $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 Part II, Item 1 of
this Form 10-QSB. In February 1999, the $200,000 of A Debentures outstanding
were fully repaid, including interest through he date of repayment, with the
proceeds from the issuance of the C Debentures. 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 C Debentures may be redeemed by the Company at its
option, in whole or in part, at any time on or after April 25, 1999. The
holders of the B Debentures have the right, upon appropriate notice, to convert
the B 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 holders of
the C Debentures have the right, upon appropriate notice, to convert the
C 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. 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 of the Company's common stock, $.375, on the committment date.
The number of shares of common stock subject to warrants was 1,500,000, fifty
(50%) of the number subject to conversion. AS of January 31, 1999 and
April 30, 1999, there were 787,500 and 812,500 warrants outstanding,
respectively. The B Debentures are considered to have a beneficial conversion
feature because the rate at which the B Debentures may be converted into common
stock ($.20 per share) is lower than the quoted market value for the stock at
the date the B Debentures commitment date. 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.
As disclosed in the above paragraph, 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 $200,000 agreed to extend the maturity date to May 15,
2001. On May 15, 1999, the remaining $125,000 of B Debentures became due.
The holder of the remaining $125,000 of B Debentures elected not to convert
the Debenture into the common stock of the Company. Due to a dispute with
the holder of the remaining B Debenture, an individual who is a current member
of the Company's Board of Directors and its former Chairman of the Board, the
Company decided not to repay that debenture on the due date. As a result, the
Company is in default with respect to such B Debenture, which is also an event
of default under the C Debbentures. The holders of the C Debentures have
waived their right to accelerate the maturity date of the C Debentures, and
the Company has begun negotiations with the holder of the B Debenture in order
to agree to a final settlement of all amounts due to, and/or from the Board
Menber.
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Because of the stock purchase warrants and the beneficial conversion feature
of the B Debentures the Company engaged an independent investment banker to
evaluate the fair value of the components of the B Debentures. Based on the
report issued December 22, 1998,the Company ssigned a value of two ($.02) cents
to each warrant to purchase one share of common stock, or $30,000. This amount
has been recorded as a debt discount and as an increase to additional paid-in
capital. This amount is amortized to interest expense over the original life of
the B Debentures, and total amortization related to the warrants was $3,733 and
$3,435 in the three months period ended April 30, 1999 and April 30, 1998,
respectively.
The difference between the quoted market value for the Company's common
stock on the committment date 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 an
increase to additional paid-in capital. This amount, totaling $516,250, was
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. The amounts of debt discount amortized to interest
expense related to the beneficial conversion feature were $0.00 (zero) and
$448,184 in the three month periods ended April 30, 1999 and April 30, 1998,
respectively.
On April 20, 1998 a shareholder, officer and director, who owned B
Debentures exercised his right to convert his holdings into common stcok of
the Company. The face amount of B Debentures converted into common stock of the
Company was $275,000 (carrying amount of $259,575). This individual also
exercised the warrant he held related to the 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.
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(5) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the three months ended April 30, 1999, cash was paid in the amounts
of $27,371 for interest and $1,050 for income taxes. During the three months
ended April 30, 1998, cash was paid in the amounts of $25,752 for interest
and $525 for income taxes.
Non-cash investing and financing activity:
During the first quarters ended April 30, 1999 and April 30, 1998, 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.
During the first quarter ended April 30, 1999, the Company recorded an
increase in transportation equipment of $20,040 and a related increase in
long-term debt in the same amount representing the financed portion of the
purchase of a new truck.
During the first quarter ended April 30, 1999, the Company recorded an
increase in b Debentures in the amount of $3,733, and a charge to interest
expense in the same amount, related to the amortization of debt discount
attributable to warrants associated with the B Debentures.
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 ended April 30, 1998, 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(6) NEWLY ADOPTED ACCOUNTING STANDARDS
During the three-month period ended April 30, 1999, the Company adopted
Accounting Standards Executive Committee's Statemnt of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." 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 reults of operations or its financial
position.
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During the three-month period ended April 30, 1999, the Company adopted
Accounting Standards Executive Committee's Statemnt of Position 98-5,
"Accounting for the Costs of Start-uP Activities." 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 reults
of operations or its financial position.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended April 30, 1999 vs. April 30, 1998
Net sales were $1,050,489 for the three months ended April 30, 1999 as
compared to $1,446,359 in the same period in 1998, a decrease of $395,870, or
27% When compared with the previous year, there was a 31% decrease in the
number of housing units shipped, and the average sales value per housing unit
shipped increased 3% The increase in sales value per housing unit shipped
resulted from the shipment of homes that were both larger and more 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 profit amounted to $347,820, or 33% of net sales for the three months
ended April 30, 1999 as compared to $454,079, or 31% for the same period in
1998. The increase in gross profit percentage was principally the result of
higher prices due to a price increase put into effect in the prior fiscal year
and slightly lower cost of materials contained in the home packages delivered.
Loweer material costs were the result of the Comapny employing better purchasing
techniques.
Total operating expenses of $776,744, or 74% of net sales, increased
$28,389 from the previous year's amount of $748,355, or 52% of net sales.
The overall increase in total operating expenses was 4%. Sales
commissions were $164,495 for the three months ended April 30, 1999 and $208,008
for the three months ended April 30, 1998. Commissions were 16% and 14% of
sales in 1999 and 1998, respectively. Commissions were higher as a percentage
of sales in 1999 compared to 1998 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 $612,249 for the three months ended April 30, 1999
compared with $540,347 in the same period in the previous year, an increase
of $71,902, or 13%. Selling, general and administrative expenses were $58%
and 37% of net sales in 1998 and 1998, respectively. The increase in these
expenses was primarily the result of increased spending on advertising,
trade show expositions and professional fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficiency at both April 30,
1999 and April 30, 1998 of $1,944,425 and $2,459,148, respectively. For the
three months ended April 30, 1999 working capital decreased $135,449 as
compared to an increase of $181,604 in the same period in 1998. As of the
Company's fiscal year end at January 31, 1999 current liabilities exceeded
current assets by $1,808,976. Cash was primarily used during the three-month
period ended April 30, 1999 to purchase inventory, to pay for prepaid expenses,
to reduce accounts payable, acquire eequipment, repay notes payable and to
repay long-term debt. Cash was primarily provided through the collection of
accounts receivable, receipt of customer deposits and the issuance of Series C
Convertible Subordinated Debentures.
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<PAGE>
For the three months ended April 30, 1999 and April 30, 1998, the Company's
operations were a net user of cash in the amounts of $30,353 and $174,457,
respectively. Overall, the Company experienced a net decrease in its cash
position of $9,542 during the three months ended April 30, 1999 as compared to
an increase in its cash position of $144,109 during the three months ended
April 30, 1998.
As shown in the consolidated financial statements, the Company incurred a
net loss during the quarter ended April 30, 1999 of $428,707. As of April 30,
1999, current liabilities exceeded current assets by $1,944,425 and the Company
had a net stockholders' deficiency of $682,640. 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.
In the first quarter of fiscal 2000, the Company issued Series C Convertible
Subordinated Debentures from wich proceeds the remaining outstanding Series A
Convertible Subordinated Debentures were repaid. While the Company's results
from operations improved during the past fiscal year, 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, or a reduction in vendor
assistance could further reduce its liquidity and make it difficult for the
Company to continue its operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial 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.
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<PAGE>
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.
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, 1999,
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 and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
On May 15, 1999, $125,000 of Series B Convertible Subordinated
Debentures (the "B Debentures") became due. The holder of the debenture elected
not to convert the debenture into common stock of the Company nor to extend its
maturity date as other holders of B Debentures had done. due to a dispute with
the holder of the outstanding $125,000 B Debenture the company decided not to
repay the debenture on the due date. As a result, the Company is in default
with respect to such B Debenture, which is also an event of default under the
Series C Convertible Subordinated Debentures (the "C Debentures"). The
holders of the C Debentures have given a written waiver of their right to
accelerate their maturity date of the C Debentures. See also Note 4 to
the Consolidated Financial Statements contained herein.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
- 16 -
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit Index
Exhibit 27, Financial Data Schedule
b. Reports on form 8-K
None
- 17 -
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant has 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
June 14, 1999
/ s / William J. Thyne
William J. Thyne
Chief Financial Officer, Principal Financial
Officer and Secretary
June 14, 1999
- 18 -
<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-31-1999
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 213,979
<SECURITIES> 0
<RECEIVABLES> 65,881
<ALLOWANCES> 17,700
<INVENTORY> 1,022,931
<CURRENT-ASSETS> 1,977,745
<PP&E> 5,172,360
<DEPRECIATION> 3,428,150
<TOTAL-ASSETS> 3,852,904
<CURRENT-LIABILITIES> 3,922,170
<BONDS> 518,964
0
0
<COMMON> 60,463
<OTHER-SE> (743,103)
<TOTAL-LIABILITY-AND-EQUITY> 3,852,904
<SALES> 1,050,469
<TOTAL-REVENUES> 1,050,469
<CGS> 702,669
<TOTAL-COSTS> 1,479,413
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,299
<INCOME-PRETAX> (428,707)
<INCOME-TAX> 0
<INCOME-CONTINUING> (428,707)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (428,707)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
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