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, 2000 Commission File
Number 0-12172
LINCOLN LOGS LTD.
(Name of small business issuer in its charter)
New York 14-1589242
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Riverside Drive, Chestertown, New York 12817
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (518) 494-5500
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
Share Purchase Rights
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended January 31, 2000
were $12,028,193.
The aggregate market value of voting stock held by non-affiliates
of the registrant as of April 25, 2000 was approximately $237,400.
The number of shares of Common Stock of the registrant outstanding
on April 25, 2000 was 7,255,059.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Lincoln Logs Ltd. is primarily engaged in the business of designing,
manufacturing and marketing a broad line of log and panelized homes to be
erected by custom builders and "do-it-yourself" buyers. The Company planes
cants into finished logs at its own manufacturing facilities in Chestertown,
New York and delivers to its customers by truck trailer a weather-tight log
home, or panelized, shell package which includes logs or pre-engineered
structural wall panels, prefabricated roof trusses, oriented strand board,
dimensional lumber, windows, doors, roof shingles, nails, caulking,
between-log sealant, 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 panelized homes were previously manufactured and marketed
(the manufacture and marketing operations of the Company's panelized homes were
integrated into the operation of Lincoln Logs Ltd. during the fiscal year
ended January 31, 1988); Lincoln Logs International Ltd., a New York
corporation which was created to act as a domestic international sales
corporation, but is inactive and Lincoln Holding Corp., a Delaware
corporation, which was formed to hold the registered trademark "Lincoln".
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 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, conventional type home. This product line is referred to
as the Thermo-Home(R) system. Sales of this product line were approximately
7% of total sales in fiscal year 2000.
The Company also has 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 conventional homes. The product line is referred to as Lincoln
Solarium (TM). Sales of this product line were approximately 6% of total
sales in fiscal year 2000.
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
or the pre-engineered structural wall panels. The complete log home
shell package or panelized home 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.
The Company markets its products in the United States through a network of
approximately 60 independent sales representatives in approximately 25 states,
three independent representatives in foreign countries, and two Company owned
and operated sales centers, one in northern New York and the other in northern
California. Both Company owned sales centers are staffed by employee
salespersons. 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 13% 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
(collectively less than 5% in each fiscal year).
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company purchases rough-sawn eastern white pine cants and western cedar
cants, in random lengths from 8 to 16 feet. The pine and cedar cants have
been milled to dimensions of 8-1/2 inches high and 7 inches thick, and 9
inches high and 7 inches thick, respectively, and are used with the Company's
D-shaped finished product. When rough-sawn pine and cedar cants are purchased
to produce the Company's "double-round" finished product, that is cants planed
with a round interior profile as well as a round exterior profile, the milled
dimensions are 8-1/2 inches high and 8 inches thick, and 9 inches high and 8
inches thick, respectively. The rough-sawn eastern white pine cants are
purchased from several mills in the region of the Company's facilities in
Chestertown, New York. Rough-sawn western cedar cants 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 either a round interior or flat
V-joint interior. All finished products have a 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. Alternative sources of raw materials are
readily available to the Company.
COMPETITION
The Company believes that there are approximately 350 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, 2000, the Company employed 55 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.
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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, 2000 or 1999.
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.
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 Thermo-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.
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(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 erecting a new sales
model home.
(7) In addition, the Company owns two parcels of undeveloped
land in Northeastern, New York totaling approximately 50
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 western cedar log home and a 2,500 square foot
western cedar log home planed in the Weatherbloc(R) clapboard style.
As security for 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.
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 alleged 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 any wrongdoing or liability. The settlement required 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 was 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, $.165) was
funded by an officer/director/shareholder and another officer/share-
holder of the Company in exchange for the common stock. The
remaining $41,752 was paid by the Company.
(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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock is traded over-the-counter.
The following sets forth the range of the closing bid prices for
the Company's Common Stock for the period February 1, 1998
through January 31, 2000. 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, 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
Quarter Ended July 31, 1999 Common Stock .45 .45
Quarter Ended October 31, 1999 Common Stock 1/2 5/16
Quarter Ended January 31, 2000 Common Stock 1/2 1/2
(b) The approximate number of holders of the Common Stock
of the Company as of April 25, 2000 was 2,186.
(c) No cash dividends were declared by the Company during
the fiscal years ended January 31, 2000 and 1999. 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 intends 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.
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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, 2000 ("fiscal 2000") were
$12,028,193 compared to $9,691,513 in the fiscal year ended January 31, 1999
("fiscal 1999"). Fiscal 2000 total revenues represent an increase of
$2,336,680, or approximately 24% more than fiscal 1999.
In fiscal 2000, as compared to fiscal 1999, total units shipped increased by
11% while the average sales value per unit shipped increased by 13%. The
increase in units shipped was the result of factors that were positive for the
Company; a.) the availability of contractors improved and b.) favorable
weather conditions throughout the building season, particularly in November
and December 1999 and January 2000, 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 year.
Gross profit was 44% of net sales in fiscal 2000, or $5,256,549. In fiscal
1999, gross profit was 42% of net sales, or $4,027,353. Gross profit
increased from fiscal 1999 due to decreases in certain material costs and a
decrease in sales discounts allowed, and a decrease in manufacturing costs as
a percentage of net sales due to the increase in units produced. Material costs
were affected principally due to improved purchasing techniques put into effect
during fiscal 1999 which continued to have a positive impact during fiscal 2000.
Discounts allowed were lower in fiscal 2000 due to an effort to be less reliant
on sales discounting in the sales process. Manufacturing costs decreased as a
percentage of net sales because the Company did not significantly increase
manafucturing related personnel and expenses to produce the increased number of
units shipped in fiscal 2000.
Total operating expenses of $4,413,134, or 37% of net sales, have increased
$786,341 from the fiscal 1999 amount of $3,626,793, or 37% of net sales.
Sales commissions consist of amounts paid to both the Company's employee sales
persons and its independent dealers throughout the country. Total sales
commissions increased 28% in fiscal 2000 over fiscal 1999. The increase in
commissions, 28%, exceeded the increase in sales revenue, 24%, because certain
independent dealers and employee sales representatives earned bonus commissions
by exceeding certain sales volume targets. Sales commissions, however, remained
the same as a percentage of net sales, 14% in both fiscal years. The increase
in selling, general and administrative expenses from fiscal 1999 of $411,622
was aproximately 18% and was primarily due to an increase in personnel costs
and advertising and promotion costs.
Interest expense in fiscal 2000 and 1999 totalled $73,855 and $633,453,
respectively. In both fiscal years, interest expense includes 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 $4,547 and $506,759 in fiscal years 2000 and 1999,
respectively. The amount attributable to the beneficial conversion feature
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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 $-0- and $13,379 in fiscal years 2000
and 1999, 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 original
term of the Series B Debentures, or 15 months, using the effective yield method.
Cash paid for interest during fiscal 2000 was $84,644 compared to $90,741
in fiscal 1999. This decrease was primarily related to the reduction in
long-term debt due to conversion of both Series B and the Series C Debentures
during fiscal 2000. 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.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2000, the Company had negative working capital, as current
liabilities exceeded current assets by $891,242, compared with negative
working capital of $1,808,976 at January 31, 1999, an improvement of $917,734.
At January 31, 2000, the Company had stockholders' equity of $837,316,
as compared to stockholders' deficiency of $254,433 at January 31, 1999, an
improvement of $1,091,749. As of January 31, 1999, the Company's working
capital deficiency had improved $831,776 from the end of the previous fiscal
year. Cash was provided primarily by the issuance of long-term debt, the
exercise of stock purchase warrants and operations during fiscal 2000 and 1999.
In fiscal 2000, the Company's operations were a net provider of cash in the
amount of $616,684 as compared to the previous year, when operations were a
net provider of cash in the amount of $141,049. Overall, the Company
experienced an increase in its cash position of $132,785 in fiscal 2000,
compared with an increase of $99,214 in fiscal 1999. In fiscal 2000, funds
were generated from the Company's operations, particularly its operating income
of $843,415 and the issuance of Series C Convertible Subordinated Debentures
(the "Series C Debentures"). These funds were used principally to repay
long-term debt and notes payable, reduce trade accounts payable, increase
inventories and for additions to plant and equipment. Funds generated in
fiscal 1998, including decreases in trade accounts receivable and inventories,
were primarily used to repay notes payable, reduce trade accounts payable and
for additions to plant and equipment.
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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, $250,000
during fiscal 1999, and $10,000 during fiscal 2000. 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
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. In
February 1999, the Company authorized and issued $300,000 of Series C
Debentures. In July 1999, a certain shareholder/officer/director converted
$250,000 of the Series C Debentures into common stock of the Company.
The Company has operated without a working capital credit facility for the
past ten years. While the Company has from time to time attempted to secure
such a credit facility from commercial lenders and governmental sources it
has been unsuccessful to do so. The Company has had intermittent conversations
with a commercial lender during the past year, but has made no request for a
credit facility. As the Company's financial condition improves the Company
intends to formally seek a working capital credit arrangement from a commercial
lender in the future. In contemplation of the possible need to secure a credit
facility, the Company, when authorizing the issuance of the Series B Debentures
and Series C Debentures provided for the consideration of commercial bank
financing up to $750,000 to be senior to the Series B Debentures and Series C
Debentures in a mortgage consolidation, modification and extension agreement.
The Company's Series A Debentures have been extinguished in total either by
repayment or conversion into common stock.
In February 1999, the Company authorized and issued $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. Funds generated by
operations and the issuance of the Series C Debentures, together with
assistance from some of the Company's major vendors who have extended payment
terms to the Company, have supported its operations during fiscal 2000, and
are expected to do so in fiscal 2001 as well. Even though the Company has
operated under these same conditions for the past nine 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 difficult for the Company to operate.
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Customer contracts with respect to which there were deposits on hand at the
end of fiscal 2000 represent, if all were to be delivered in fiscal 2001,
potential revenues of approximately $13,749,000 as compared with
potential fiscal 2000 revenues at the end of fiscal 1999 of $11,598,000.
Actual revenues realized in fiscal 2000 from the sale of home building
packages and solariums amounted to $12,028,193. Actual revenues realized in
fiscal 2000 were higher than potential revenues based on deposits on hand
at January 31, 1999, due to customers who both signed contracts and accepted
their delivery during fiscal 2000. Fiscal 2001 potential revenues are
contingent on various factors, including general economic conditions, interest
rates and the climate for new housing construction during calendar 2000, as
well as the Company's ability to continue operations and to expand into new
market areas.
Inventories at January 31, 2000 were $845,174 as compared with $593,314 at
January 31, 1999, an increase of $251,860. This increase in inventory is the
result of the Company's anticipated demands of its delivery schedule in early
fiscal 2001 and its increased cash position which allowed it to purchase
inventory to meet those anticipated demands.
Trade accounts receivable were $150,398 at January 31, 2000, which represents
a decrease of $110,811, or 42%, from the amount of $261,209 as of January 31,
1999. 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board ("FASB")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. In June, 1999, FASB
issued Statement of Financial Accounting Standards ("SFAS") No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133-an amendment of FASB Statement
No. 133" which delayed the effective date of SFAS No. 133 to fiscal years
beginning 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.
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YEAR 2000 ISSUES
The Company's information technology systems successfully completed the
"roll over" to the year 2000. The transition resulted in no adverse or
negative impact on operations. The Company believes that the risk associated
with the Year 2000 problem has been identified and, to the extent present,
eliminated. The Company will continue to evaluate the Year 2000 readiness
of its business systems and significant vendors to ensure a complete
transition throughout the year 2000. the estimated total cost of the
Year 2000 assessment and remediation plan has been less than $10,000.
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ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements
Page
Report of Independent Accountants - Fiscal 2000 13
Independent Auditors' Report - Fiscal 1999 14
Consolidated balance sheets as of
January 31, 2000 and 1999 15
Consolidated statements of operations for the years
ended January 31, 2000 and 1999 17
Consolidated statements of changes in stockholders'
equity (deficiency) for the years ended January
31, 2000 and 1999 18
Consolidated statements of cash flows for the years
ended January 31, 2000 and 1999 19
Notes to consolidated financial statements
January 31, 2000 and 1999 20
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Report of Independent Accountants
To the Board of Directors and
Stockholders of Lincoln Logs Ltd.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in stockholders' equity
(deficiency), and cash flows present fairly, in all material respects, the
financial position of Lincoln Logs Ltd. and Subsidiaries (the "Company") at
January 31, 2000, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted
our audit of these financial statements in accordance with auditing standards
generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in
note 17 to the consolidated financial statements, as of January 31,
2000, current liabilities exceed current assets, and the Company has an
accumulated deficit. 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 17.
The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Albany, New York
March 17, 2000
13
<PAGE>
Independent Auditors' Report
To the Board of Directors and
Stockholders of Lincoln Logs Ltd.
We have audited the accompanying consolidated balance sheet of
Lincoln Logs Ltd. and subsidiaries (the "Company") as of January 31,
1999, and the related consolidated statements of operations,
changes in stockholders' equity (deficiency), and cash flows for the
year 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 audit.
We conducted our audit 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 audit
provides 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 the results of their operations and their cash
flows for the year 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 17 to the consolidated financial statements, at January 31,
1999, current liabilities exceed current assets, and at January 31, 1999,
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 17. 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
14
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 and 1999
ASSETS
2000 1999
CURRENT ASSETS:
Cash and cash equivalents $ 356,306 $ 223,521
Trade accounts receivable, net of allowance
for doubtful accounts of $1,963 in 2000
and $17,700 in 1999 150,398 261,209
Inventories 845,174 593,314
Prepaid expenses and other current assets 428,350 516,560
Prepaid income taxes --- 918
Mortgage receivable 1,922 2,302
--------- ---------
Total current assets 1,782,150 1,597,824
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Cost 5,355,640 5,124,419
Less accumulated depreciation (3,491,173) (3,392,150)
--------- ---------
Property, plant and equipment- net 1,864,467 1,732,269
--------- ---------
OTHER ASSETS:
Mortgage receivable 69,553 70,688
Assets held for resale 27,314 27,561
Cash surrender value of life insurance, net of
loan of $-0- in 2000
and $83,574 in 1999 96,390 10,606
Deposits and other assets 933 1,622
Intangible assets, net of accumulated
amortization of $75,284 in 2000 and $67,884
in 1999 1,850 9,250
-------- --------
Total other assets 196,040 119,727
-------- --------
TOTAL ASSETS $ 3,842,657 $ 3,449,820
========== ==========
See accompanying notes to consolidated financial statements.
( continued )
15
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS,(continued)
JANUARY 31, 2000 and 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
2000 1999
CURRENT LIABILITIES:
Current installments of long-term debt:
Related parties $ --- $ 281,350
Others 5,706 34,644
Notes payable --- 125,435
Trade accounts payable 558,800 830,879
Customer deposits 1,276,963 1,288,125
Accrued salaries and wages 64,508 69,874
Accrued income taxes 7,700 1,050
Due to related parties 221,449 154,122
Accrued expenses 538,266 621,321
--------- ---------
Total current liabilities 2,673,392 3,406,800
LONG-TERM DEBT, net of current installments:
Convertible subordinated debentures:
Related parties 200,000 ---
Others 20,000 200,000
Other 15,559 3,577
Other long-term liability 96,390 93,876
--------- ---------
Total liabilities 3,005,341 3,704,253
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIENCY):
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 2000 and 10,000,000 share in 1999;
issued 7,759,299 shares in 2000 and 6,046,299
shares in 1999 77,593 60,463
Additional paid-in capital 5,681,554 5,418,104
Accumulated deficit (4,037,396)(4,848,565)
----------- ----------
1,721,751 630,002
Less cost of 504,240 shares common
stock in treasury (884,435) (884,435)
---------- ---------
Total stockholders' equity (deficiency) 837,316 (254,433)
---------- ---------
Commitments and contingencies
TOTAL LIABILITIES AND
STOCKHOLDERS'EQUITY (DEFICIENCY) $ 3,842,657 $3,449,820
========= =========
See accompanying notes to consolidated financial statements.
16
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 2000 and 1999
2000 1999
NET SALES $12,028,193 $9,691,513
COST OF SALES 6,771,644 5,664,160
--------- ---------
GROSS PROFIT 5,256,549 4,027,353
--------- ---------
OPERATING EXPENSES:
Commissions 1,718,638 1,343,919
Selling, general and administrative 2,694,496 2,282,874
--------- ---------
Total operating expenses 4,413,134 3,626,793
--------- ---------
INCOME FROM OPERATIONS 843,415 400,560
--------- ----------
OTHER INCOME (EXPENSE):
Interest income 29,392 23,698
--------- ----------
Interest expense:
Amount attributable to beneficial
conversion feature and warrants ( 4,547) (520,138)
All other ( 69,308) (113,315)
---------- ----------
Total interest expense ( 73,855) (633,453)
---------- ----------
Other 20,253 33,147
----------- ----------
Total other income (expense) - net ( 24,210) (576,608)
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 819,205 (176,048)
INCOME TAXES 8,036 1,132
---------- ----------
NET INCOME (LOSS) $ 811,169 $(177,180)
============= ============
PER SHARE DATA:
Basic earnings (loss) per share $ 0.13 $ (0.04)
=========== ==========
Diluted earnings (loss) per share $ 0.11 $ (0.04)
=========== ==========
See accompanying notes to consolidated financial statements.
17
<PAGE>
<TABLE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED JANUARY 31, 2000 and 1999
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, 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 1,625,000 16,250 293,325 --- --- 309,575
Common stock issued upon exercise
of stock purchase warrants 687,500 6,875 250,937 --- --- 257,812
Amount assigned to subordinated
debenture beneficial
conversion 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)
Common stock issued upon exercise
of stock options 500 5 75 --- --- 80
Debt converted to common
stock 1,712,500 17,125 262,875 --- --- 280,000
Amount assigned to subordinated
debenture warrants --- --- 500 --- --- 500
Net income- 2000 --- --- --- 811,169 --- 811,169
----------- ------- ---------- ----------- -------- ---------
Balance at January 31, 2000 7,759,299 $77,593 $5,681,554 $(4,037,396) $(884,435) $837,316
========== ======== ========== ============ ========= =========
See accompanying notes to consolidated financial statements.
18
</TABLE>
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2000 and 1999
2000 1999
OPERATING ACTIVITIES:
Net income (loss) $ 811,169 $ ( 177,180)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 144,549 150,089
Amortization of amount assigned to
beneficial conversion feature and
debt discounts attributable to warrants 4,547 520,138
Compensation related to exercise of
stock option --- 925
Loss(Gain) on sale of assets 6,025 (5,977)
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable 110,811 (157,299)
(Increase) decrease in inventories (251,860) 161,896
Decrease (increase) in prepaid expenses
and other current assets 89,128 (177,586)
(Decrease)in trade
accounts payable (272,079) (188,645)
(Decrease) in customer deposits ( 11,162) 913
(Decrease) increase in accrued expenses
and other current liabilities ( 88,421) 11,456
Increase in due to related
parties 67,327 1,794
Increase in accrued income taxes 6,650 525
-------- --------
Net cash provided by operating activities 616,684 141,049
--------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (265,386) (110,667)
Proceeds from sale of assets 10,300 16,605
Payments received on mortgage receivable 1,515 937
Decrease (increase) in deposits
and other assets 689 (634)
--------- ---------
Net cash used by investing activities (252,882) ( 93,759)
--------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon
exercise of stock options 80 ---
Proceeds from issuance of common stock upon
exercise of stock purchase warrants --- 257,812
Proceeds from issuance of debentures 310,000 240,000
Repayments of notes payable (125,435) (420,500)
Proceeds from loan against cash
surrender value of life insurance --- 6,542
Repayments on loan against cash
surrender value of life insurance ( 83,574) (10,000)
Net increase in cash surrender value of
insurance policy 304 ---
Repayments of long-term debt (332,392) (21,930)
---------- ---------
Net cash (used) provided by
financing activities (231,017) 51,924
---------- ---------
Net increase in cash
and cash equivalents 132,785 99,214
Cash and cash equivalents at beginning
of period 223,521 124,307
--------- ---------
Cash and cash equivalents at end
of period $ 356,306 $ 223,521
========== ==========
See accompanying notes to consolidated financial statements.
19
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2000 and 1999
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 31% of the materials necessary
to construct the log home and panelized home packages from three suppliers.
These three suppliers provided 13%, 10% and 8% of purchases for the year ended
January 31, 2000, respectively. Alternative sources of raw materials
are readily available.
The Company's fiscal year ends on January 31. As used hereafter, 2000
refers to the fiscal year ended January 31, 2000, and 1999 refers to the
fiscal year ended January 31, 1999.
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. Inventories are stated net of a reserve
for obsolescence in the amount of $36,000 at January 31, 2000 and
1999, respectively.
(c) Revenue Recognition. Revenue from the sale of log home
packages is recognized when a substantial portion of the package has been
delivered. 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.
20
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 2. Summary of Significant Accounting Policies (Continued)
(e) Income Taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
(f) 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 represent primarily trademarks
that are being amortized over five year periods. Amortization expense for
the 2000 and 1999 was $7,400 and $8,370, respectively.
(h) Earnings (Loss) Per Share. Basic earnings (loss) per share is computed
by dividing net earnings (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 earnings (loss) per share was
6,414,949 for the year ended January 31, 2000 and 4,998,699 for the year
ended January 31, 1999.
Diluted earnings (loss) per share is computed based on the weighted average
number of common shares outstanding during the respective periods and
includes the number of additional common shares that would have been
outstanding if dilutive potential common shares had been isued. 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 using the treasury stock method if the effect
is dilutive. Diluted (loss) per share is the same as basic (loss) per
share for the year ended January 31, 1999 because the effect of including
stock options, warrants and the assumed conversion of the subordinated
debentures would be anti-dilutive.
The numerator in the calculation of diluted earnings (loss) per share
for the years ended January 31, 2000 and 1999 was determined as follows:
2000 1999
------ ------
Net income (loss) used to calculate basic
earnings per share $811,169 $(177,180)
Add back interest expense related to
convertible debentures 30,947 ---
--------- ---------
Numerator for calculation of diluted earnings
(loss) per share $842,116 $(177,180)
======== ==========
21
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 2. Summary of Significant Accounting Policies (Continued)
The denominator in the calculation of diluted earnings (loss) per share
for the years ended January 31, 2000 and 1999 was determined as follows:
2000 1999
------ ------
Weighted average outstanding shares used
to calculate basic earnings (loss)
per share 6,414,949 4,998,699
Add shares issuable assuming conversion
of convertible debentures 1,162,500 ---
Add shares issuable assuming exercise of
outstanding stock options 192,314 ---
---------- ---------
Denominator for calculation of diluted
earnings (loss) per share 7,769,763 4,998,699
========= ==========
Basic earnings (loss) per share $ 0.13 $ (0.04)
==== ====
Diluted earnings (loss) per share $ 0.11 $ (0.04)
==== ====
There were 812,500 and 787,500 stock purchase warrants outstanding at
January 31, 2000 and January 31, 1999, respectively, that were not
included in the computation of diluted earnings per share for the
full-year periods as their effect was anti-dilutive. Further, share
issuable assuming conversion of convertible debentures and shares
issuable assuming exercise of outstanding stock options at January 31,
1999 were not included in the computation of diluted (loss) per share
for the year then ended as their effect was anti-dilutive.
(i) Advertising Costs. Advertising costs are expensed when the advertisement
is first run and amounted to $383,056 and $170,145 in 2000 and 1999,
respectively. The Company has prepaid advertising costs of $63,969 and
$47,772 at January 31, 2000 and 1999, respectively. These amounts are
included in Prepaid expenses and other current assets in the accompanying
consolidated financial statements.
(j) 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. The Company maintains several bank accounts
in two banks located in New York and California. At January 31, 2000
and 1999, bank balances exceeded FDIC insurance coverage by $591,092
and $205,806, respectively.
(k) 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.
22
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 2. Summary of Significant Accounting Policies (Continued)
(l) 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. As of January 31, 2000 and 1999, the Company
had no impaired long-lived assets.
(m) 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, 2000
and 1999 is as follows:
Estimated
Useful Lives 2000 1999
---- ----
Land $ 784,800 $ 784,800
Buildings and improvements 15 - 31 years 2,357,822 2,177,600
Machinery and equipment 5 - 7 years 637,970 625,848
Furniture and fixtures 5 - 7 years 1,420,446 1,368,254
Transportation equipment 5 years 154,602 167,917
--------- ---------
$5,355,640 $5,124,419
========= =========
Depreciation expense for the years ended January 31, 2000
and 1999 was $137,149 and $141,719, respectively.
Assets held for resale of $27,314 and $27,561 at January 31, 2000
and 1999, respectively, consists primarily of non-operating real
estate, which is carried at the lower of cost or estimated fair
value less costs to sell.
23
<PAGE?
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 4. Indebtedness
Long-term debt at January 31, 2000 and 1999 consists of the
following:
2000 1999
---- ----
Note payable at 7.9% payable in monthly
installments through April 2004, collateralized
by a vehicle $ 17,540 $ ---
Series A Convertible Subordinated Debentures
due June 1998, with annual interest at 12%
payable quarterly --- 200,000
Series B Convertible Subordinated Debentures
due May 15, 1999, extended to May 15, 2001, net of
discount attributable to warrants of $-0- in 2000
and $4,047 in 1999, and discount attributable to
beneficial conversion feature of $0 in 2000 and
$-0- in 1999, with nominal annual interest at 12%
payable quarterly 170,000 310,953
Series C Convertible Subordinated Debentures
due February, 2002 with annual interest at 12%
payable quarterly 50,000 ---
Obligations under capital leases, net of interest
payable through October 2001 3,725 8,618
------------ ----------
Total long-term debt 241,265 519,571
Less current installments ( 5,706) (315,994)
------------ -----------
Long-term debt, net of current installaments $ 235,559 $ 203,577
============ ===========
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 issued $340,000 of Series B Convertible Subordinated
Debentures (the "B" Debentures). An additional $250,000 of B Debentures
were issued during the first quarter of fiscal 1999. An additional $10,000
of B Debentures were issued during the first quarter of fiscal 2000. In
February 1999, the Company authorized and issued $300,000 of Series C
Convertible Subordinated Debentures (the "C Debentures") (all of the
aforementioned series of convertible 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 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.
24
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 4. Indebtedness (Continued)
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 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 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 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, $.375 on the commitment date. The total number of shares of
common stock originally subject to warrants was 1,500,000, fifty (50%) percent
of the number of shares subject to conversion. As of January 31, 2000 and 1999,
there were 812,500 and 787,500 warrants outstanding, respectively. The B
Debentures were considered to have a beneficial conversion feature because the
rate at which the B Debentures may be converted into common stock ($.20 per
share) was lower than the quoted market value for the stock at the B Debentures
commitment date. The Debentures are collateralized 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 discussed 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 $250,000 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 $125,000 of B Debentures elected not to convert
the Debenture into common stock of the Company. Due to a dispute with the
holder of the remaining B Debenture, an individual who is a current member
of the Company's Board of Directors and its former Chairman of the Board. the
Company decided not to repay that Debenture on the due date. As a result,
the Compnay was in default with respect to such B Debenture, which was also
an event of default under the C Debentures. The holders of the C Debentures
waived their right to accelerate the maturity date of the C Debentures.
In December 1999, the Company resolved the dispute with the holder of the B
Debenture and the Company repaid the debenture, including interest through
the date of the repayment.
Because of the stock purchase warrants and the beneficial conversion feature
of the B Debentures, the Company engaged an independent investment banker
to evaluate the total fair value of the components of the B Debentures. Based
on the report issued, the Company has assigned a value of two cents ($.02) to
each warrant to purchase one share of common stock, or a total of $30,000.
This amount was recorded as a debt discount and as an increase to additional
paid-in capital. This amount was amortized to interest expense over the life
of the B Debentures, and total amortization related to the warrants was $4,047
and $13,379 in 2000 and 1999, respectively.
25
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 4. Indebtedness (Continued)
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 was also recorded as a debt discount and as an increase to
additional paid-in capital. The amounts of $218,750 for the 1999 issuance and
$297,500 for the 1998 issuance, were 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 $500
and $506,759 in 2000 and 1999, 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, officer and director, 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 (carrying
amount of $259,575). This individual also exercised 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' elections to convert, and paid accrued interest to the date of
conversion. Finally, on July 29, 1999, a shareholder, officer and director,
who owned B Debentures and C Debentures exercised his right to convert his
holdings into common stock of the Company. The face amount of the B Debentures
converted into common stock of the Company was $30,000 (carrying amount of
$30,000). The face amount of the C Debentures converted into common stock of
the Company was $250,000. The Company issued 1,712,500 shares (150,000 shares
related to the conversion of the B Debentures and 1,562,500 shares related to
the conversion of the C Debentures) and paid accrued interest to the date of
conversion.
The principal amount of future maturities of long-term debt
by fiscal year are as follows:
Year ending January 31: Amount
2001 $ 5,706
2002 175,545
2003 54,231
2004 4,578
2005 1,205
----------
$ 241,265
==========
26
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 4. Indebtedness (Continued)
Assets under capital leases represent copier and facsimile machines. The
costs, accumulated depreciation and depreciation expense are included with
owned assets in Note 3. The details are as follows:
2000 1999
---- ----
Costs $10,995 $10,995
Accumulated Depreciation $(5,399) $(3,208)
Depreciation Expense $ 2,191 $ 1,624
The future minimum lease payments for obligations under capital leases
are as follows:
Year ending January 31, Amount
------
2001 $2,450
2002 1,725
-------
Total $4,175
Less Interest ( 450)
-------
Obligations Under
Capital Leases $3,725
======
Note 5. Notes Payable
During the year ended January 31, 1999, the Company issued a promissory
note to a certain major supplier of building components in lieu of
cash payment of outstanding trade accounts payable. This note was unsecured
and had a fixed interest rate of 9.75%. The outstanding balance of this
note totaled $-0- and $125,435 at January 31, 2000 and 1999, respectively.
The note had a maturity date of June 30, 1999, and interest was payable monthly.
The note was repaid by June 30, 1999.
Note 6. Income Taxes
A summary of components of the provision for income taxes for the
years ended January 31, 2000 and 1999 is as follows:
Current Deferred Total
Year ended January 31, 2000:
Federal $ -- $ -- $ --
State 8,036 -- 8,036
------ ------ ------
$ 8,036 $ -- $ 8,036
====== ====== ======
Year ended January 31, 1999:
Federal $ -- $ -- $ --
State 1,132 -- 1,132
------ ------ ------
$ 1,132 $ -- $ 1,132
====== ====== ======
27
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 6. Income Taxes (Continued)
The Company realized a tax benefit of $261,893 in 2000 through
the use of net operating loss carryforwards. The Company has
Federal net operating loss carry-forwards for income tax purposes
of approximately $3,325,794; $79,968 expire in 2007, $815,639
in 2008, $609,186 in 2009, $372,717 in 2010, $73,806 in 2011,
$309,546 in 2012 and $1,064,932 in 2013.
The effective income tax rates of 1% and 0.6% for 2000
and 1999, respectively, differ from the statutory Federal
income tax rate for the following reasons:
2000 1999
---- ----
Statutory tax rate 34.0% (34.0)%
Nondeductible amortization 1.0 98.2
Non-deductible meals and
entertainment expenses 1.0 1.2
State income taxes, net of federal
tax benefit .9 .4
Change in deferred tax asset
valuation allowance (37.7) (64.7)
Other non-deductible expenses 1.8 ( .5)
----- -----
1.0% 0.6%
===== =====
For the years ended January 31, 2000 and 1999, 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, 2000 and 1999 are presented
below:
2000 1999
---- ----
Deferred tax assets:
Vacation accrual $ --- $ 735
Inventories, principally due to additional
costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986 16,744 16,393
Allowance for doubtful accounts 667 6,018
Other liabilities 32,569 24,641
Net operating loss carryforward 1,130,770 1,430,229
--------- ---------
Total gross deferred tax assets 1,180,750 1,478,016
Less valuation allowance (1,153,155) (1,462,232)
---------- ----------
Net deferred tax asset 27,595 15,784
Deferred tax liability:
Property, plant and equipment - principally
due to differences in depreciation methods (27,595) (15,784)
--------- ---------
Net deferred taxes $ -- --
========= =========
The valuation allowance for deferred tax assets as of February 1,
1999 and 1998 was $1,462,232 and $1,578,780, respectively. The
net change in the total valuation allowance was a decrease of
$309,077 in fiscal 2000 and a decrease of $116,548 in fiscal 1999.
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.
28
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
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 2000 and 1999 amounted to $29,742 and $22,479,
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 2000 and 1999 was $25,514 and $28,951, respectively.
The aggregate future minimum operating lease payments at January 31, 2000
are as follows:
Year ending January 31:
2001 $ 25,680
2002 22,468
2003 12,372
2004 12,372
2005 794
------
Total $ 73,686
=======
Note 9. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at January 31, 2000 and
1999 consist of the following:
2000 1999
-------- --------
Commission advances $ 87,543 $ 119,192
Prepaid design work 106,444 112,644
Prepaid insurance 35,511 37,718
Prepaid advertising and shows 95,602 69,549
Miscellaneous receivables 25,537 55,397
Costs related to deferred sales --- 45,881
Prepaid property taxes 29,380 27,453
Other 48,333 48,726
-------- --------
Total $ 428,350 $ 516,560
======== =========
29
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 10. Accrued Expenses
Accrued expenses at January 31, 2000 and 1999 consist of the
following:
2000 1999
-------- --------
Accrued legal and related costs $ --- $ 87,442
Accrued commissions 53,604 55,966
Accrued backorders 95,955 67,815
Accrued interest 600 24,500
Accrued sales awards 50,800 26,500
Deposits - cancelled contracts 41,470 43,373
Post-retirement benefits --- 72,000
Accrued Warranty 96,074 72,474
Other 199,763 171,251
-------- --------
Total $ 538,266 $ 621,321
========= =========
Note 11. Related Party Transactions
Due to related parties consists of amounts payable to the Company's officers
and directors. Such amounts totaling $221,449 and $154,122 at January 31,
2000 and 1999, respectively, relate to unpaid salary and directors' fees,
unreimbursed business travel expenses 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 exchanged 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
$260,000 of B Debentures between March 1, 1998 and April 30, 1998 of which
$240,000 was purchased by officers, a director and immediate family members of
the director. Of the $570,000 of B Debentures issued to related parties,
$275,000 was converted into common stock on April 20, 1998 and another $30,000
was converted into common stock on July 29, 1999.
As also discuesed in Note 4, the Company issued $300,000 of C Debentures in a
private placement during February, 1999, all of which were purchased by an
officer, director and immediate family members of the director. Of the
$300,000 of C Debentures issued to related parties, $250,000 was
converted into common stock on July 29, 1999.
30
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
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 $71,475 and $72,998 at January 31, 2000 and 1999,
respectively, bears an interest rate of 6% and is due over a term of 35 years.
The future aggregate mortgage receipts at January 31, 2000 are as follows:
Year ending January 31:
2001 $ 1,922
2002 2,072
2003 2,199
2004 2,335
2005 2,479
Thereafter 60,468
-------
Total $ 71,475
========
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, 1998 47,500 182,000 $ .19 $ .19
Granted during year -- -- -- --
Cancelled during year -- -- -- --
Exercised during year ( 7,500) -- ($ .19) --
------ ------- ----- -----
Balance at January 31, 1999 40,000 182,000 $ .19 $ .19
Graned during year 186,000 -- .16 --
Cancelled during year (44,000) -- (.16) --
Exercised during year ( 500) -- (.16) --
------- ------- ----- -----
Balance at January 31, 2000 181,500 182,000 $ .17 $ .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.
31
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 13. Stock Options (Continued)
All outstanding stock options are exercisable as of January 31, 2000.
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, 2000 is 7.5 years.
The pro forma disclosures required under SFAS No. 123 are not presented
for 1999 as such information is the same as the reported net loss and
loss per share.
Had the Company accounted for its Stock Option Plan using the fair value-based
method the Company's net income for fiscal 2000 would have been approximately
$787,000.
The weighted average fair value of each option granted under the Stock Option
Plan during fiscal 2000 was $0.13. The fair value of each option grant was
estimated on the date of the grant using the Black-Sholes Model with the
following weighted average assumptions. The risk-free interest rate was 6.0%.
The expected volatility of the market price of the Company's Common Stock was
181%. The expected average term of the granted options was seven years. There
was no expected dividend yield for the options granted.
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. The amount of the reserve for warranty claims provided
in fiscal 2000 and 1999 was $23,600 and $21,300, 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
required 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) was funded by an officer, director or other
shareholders of the Company in exchange for the common stock. The remaining
$41,752 was paid by the Company and recorded as settlement expense.
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.
32
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 14. Commitments and Contingencies (Continued)
(c) Sales/Use Tax. In March 1999, the Company 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 did 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. The Company has not yet received
any final assessment from the State.
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 from 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 and throughout 2000,
the Company accrued estimated costs to resolve this matter.
Note 15. Supplementary Disclosure of Cash Flow Information
2000 1999
------ ------
Cash paid during the year for:
Interest $ 84,644 $ 90,741
======== =========
Income taxes $ 468 $ 1,525
======== =========
Non-cash investing and financing activities:
During Fiscal 2000, the following 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 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.
The Company recorded an increase in B Debentures in the amount of $4,047,
an increase in additional paid-in capital of $500 and a charge to interest
expense of $4,547 related to the amortization of debt discount attributable
to warrants associated with the B Debentures.
The Company recorded an increase of $17,125 in common stock, an increase of
$262,875 in additional paid-in capital and a corresponding reduction of
debt of $280,000 as the result of the exercise of the right of conversion
of a certain B Debenture and C Debenture holder.
During fiscal 1999, the following other transactions occurred:
During fiscal 1999, the Company issued a promissory note to a certtain
major supplier of building components in lieu of cash payment of outstanding
trade accounts payable in the total amount of $125,435.
33
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 15. Supplementary Disclosure of Cash Flow Information (Continued)
In April 1998, a holder of a Cant Noote in the amount of $10 000
exchanged that note for a Series B Convertible Subordinated 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 in
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 associated with the Series B Convertible
Subordinated Debentures.
Note 16. 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 receivable. 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
$59,000 compared to its carrying amount of $71,475.
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 17. Liquidity
As of January 31, 2000, current liabilities of the Company
exceeded current assets by approximately $891,242. In February 1999, the
Company authorized issuance of $300,000 of Series 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 equivalent amount of B Debentures. During the first quarter of fiscal 2000,
the Company issued $250,000 of the remaining $260,000 of B Debentures. During
the first quarter of fiscal 2000, the Company issued the remaining $10,000 of
B Debentures.
34
<PAGE>
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2000 and 1999
Note 17. Liquidity (Continued)
The Company has not been successful in securing a working capital credit
facility 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 and C
Debentures, have supported its operations during fiscal 2000, and are expected
to do so in fiscal 2001 as well. Even though the Company has operated under
these same conditions for the past nine 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 difficult for the
Company to coninue to operate.
35
<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 71 1982 Special Administrative Assistant to
the President
Samuel J. Padula 76 1985 Special Administrative Assistant to
the President
Steven Patlin 59 2000 Special Administrative Assistant to
the President
Reginald W. Ray, Jr. 70 1982 Special Administrative Assistant to
the President
John D. Shepherd 54 1982 Chairman of the Board; President and Chief
Executive Officer; Treasurer
William J. Thyne 50 1999 Executive Vice President and Chief
Financial Officer; Secretary
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 President 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.
36
<PAGE>
Steven Patlin has been and continues to be an independent dealer of
Lincoln Logs, Ltd. since June 1985. Mr Patlin served as an independent
consultant to the Company on sales and marketing matters from January
1998 through February 1999. From March 1999 through February 2000 Mr.
Patlin served as Vice president of Sales for Lincoln Logs, Ltd. at which
time he resigned that position. Mr. Patlin has been Vice President and
Treasurer of Patlin Enterprises Inc. a distributor of home maintenance
products, for more than the past five years. Mr. Patlin was appointed to
a vacant seat on the Board of Directors on February 4, 2000.
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.
William J. Thyne, CPA, has been Chief Financial Officer and Secretary since
January 1998. Mr. Thyne was also elected to the additional position of
Executive Vice President in September 1999. 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
Lincoln Logs, Ltd. in Chestertown, New York. Mr. Thyne was appointed to a
vacant seat on the Board of Directors on November 30, 1999.
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.
37
<PAGE>
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 financial reporting 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 a 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.
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 54 Chairman of the Board; President and Chief Executive
Officer; Treasurer
William J. Thyne 2 50 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(a former director), Farr, Padula and Shepherd were elected by
the Board of Directors to fill The Office of Chief Executive, to serve until
the next Annual Meeting of Shareholders, at which time they would be nominated
to serve in that capacity for the upcoming year. Mr. Farr resigned from The
Office of Chief Executive in July 1997. 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 the position of Chief Financial Officer and
Secretary by the Board of Directors effective January 13, 1998, to serve in
these capacities until the next Annual Meeting of Shareholders. Mr. Thyne was
elected to the additional position of Executive Vice president by the Board of
Directors effective September 17, 1999, to serve in this additional capacity
until the next Annual Meeting of Shareholders.
38
<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 had 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. Mr. Thyne was also elected to the additional position of
Executive Vice President in September 1999. 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
Lincoln Logs, Ltd. 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 $100,000 for services rendered in all
capacities to the Company and its subsidiaries during the fiscal years ended
January 31, 2000, January 31, 1999 and January 31, 1998.
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION - ANNUAL COMPENSATION AWARDS
Long-term Compensation
Annual Compensation Awards
------------------ ----------------------
<S> <S> <S> <S> <S> <S> <S> <S> <S>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
All
Other Restricted Other
Name and Annual Stock Options/ LTIP Compen-
Principle Year Salary Bonus Compensation Award(s) SAR's Payout Sation
Position ($) ($) ($) ($) (#) ($) ($)
- ---------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
John D. Shepherd, 2000 78,000.00 0.00 5,000.00(3) 0.00 0 0.00 7,501.00 (5)
Chief Executive 1999 78,000.00 0.00 5,000.00(3) 0.00 0 0.00 3,943.00 (2)
Officer (1)(6) 1998 0.00 0.00 5,000.00(3) 0.00 0 0.00 9,300.00 (4)
Leslie M. Apple, 2000 0.00 0.00 0.00 0.00 0 0.00 0.00
Office of Chief 1999 0.00 0.00 0.00 0.00 0 0.00 0.00
Executive (6) 1998 0.00 0.00 3,750.00(3) 0.00 0 0.00 9,750.00 (7)
Samuel J. Padula, 2000 0.00 0.00 5,000.00(3) 0.00 0 0.00 0.00
Office of Chief 1999 0.00 0.00 5,000.00(3) 0.00 0 0.00 0.00
Executive (6) 1998 0.00 0.00 5,000.00(3) 0.00 0 0.00 9,750.00 (7)
Richard C. Farr, 2000 0.00 0.00 5,000.00(3) 0.00 0 0.00 0.00
Former Chief 1999 0.00 0.00 5,000.00(3) 0.00 0 0.00 0.00
Executive 1998 0.00 0.00 48,750.00(9) 0.00 0 0.00 31,804.00 (10)
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 1982, 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) This amount consists of $7,500 paid for directors' meeting fees, $3,480 of
matching funds contributed to the Company's 401(k) Plan and $271 paid for
term life insurance.
39
<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, then 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 member 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.
Employee Savings Plan
The Company maintains a defined contribution 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-nine of the
Company's employees are currently eligible to participate in the Plan, twenty-
eight of whom have elected to participate. Employees participating in the Plan
may elect to defer compensation 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, $10,500 for the 2000 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, 2000, 1999 and 1998, $112,213,
$120,314 and $4,395, respectively, were paid to employees of the Company upon
their separation from service to the Company pursuant to the Plan.
40
<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 person known 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 April 25, 2000 as of April 25, 2000
- ------------------- ---------------------- ----------------------
Richard C. Farr 1,423,302 (1) 14.6%
40 Colony Road
W. Hartford CT 06117
John D. Shepherd 5,001,961 (2) 51.3%
1020 Sport Hill Road
Easton, CT 06612
(1) Includes (i) 75,000 shares subject to options which are exercisable
within 60 days and (ii) 312,500 shares subject to warrants which are
exercisable within 60 days.
(2) Excludes (i) 250,000 shares of 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, (ii) 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, (iii) 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, (iv) 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, (v) 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, (vi) 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,
(vii) 50,000 shares subject to the Company's Series B Convertible
Subordinated Debentures owned by Mr. Jason Tunik, his son, which are
convertible within 60 days, as to which Mr. Shepherd disclaims beneficial
ownership, (viii) 25,000 shares subject to warrants owned by Mr. Jason
Tunik which are exercisable within 60 days, as to which Mr. Shepherd
disclaims beneficial ownership, (ix) 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 discliams
beneficial ownership.
41
<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 April 25, 2000 as of April 25, 2000
- --------------- ---------------------- ----------------------
Richard C. Farr 1,423,302 (4) 14.6%
Samuel J. Padula 35,140 (1)(2) .4%
Reginald W. Ray, Jr. 208,802 (1)(3) 2.1%
John D. Shepherd 5,001,961 (5) 51.3%
William J. Thyne 221,085 (6) 2.3%
David Patton 34,400 (7) .3%
Steven Patlin 85,100 (8) .9%
Jeffry LaPell 30,400 .3%
All officers and
directors as a group
(8 persons) 7,040,190 (9) 72.2%
(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 held by Mrs. Padula as to which
Mr. Padula disclaims beneficial ownership, and (iii)75,000 shares subject
to warrants owned by Mrs. Padula which are exercisable within 60 days as
to which Mr. Padula disclaims beneficial ownership.
(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.
42
<PAGE>
(5) Excludes (i) 250,000 shares of 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, (ii) 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, (iii) 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, (iv) 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, (v) 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 discliams beneficial ownership, (vi) 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,
(vii) 50,000 shares subject to the Company's Series B Convertible
Subordinated Debentures owned by Mr. Jason Tunik, his son, which are
convertible within 60 days, as to which Mr. Shepherd disclaims beneficial
ownership, (viii) 25,000 shares subject to warrants owned by Mr. Jason
Tunik which are exercisable within 60 days, as to which Mr. Shepherd
disclaims beneficial ownership, (ix) 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 discliams
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 4,000 shares subject to options which are exercisable
within 60 days.
(8) Includes (i) 10,000 shares subject to options which are exercisable
within 60 days, (ii) 50,000 shares subject to the Company's Series
B Convertible Subordinated Debentures, owned jointly with his
wife, Leslie Patlin, which are convertible within 60 days, and
(111) 25,000 shares subject to warrants which are exercisable
within 60 days.
(9) Includes (i) 159,000 shares subject to options which are exercisable
within 60 days, (ii) 150,000 shares subject to the Company's Series
B Convertible Subordinated Debentures which are convertible within
60 days, (iii) 387,500 shares subject to warrants which are exercisable
within 60 days.
There are no arrangements known to the Company the operation of which may at a
subsequent date result in a change in control of the Company.
43
<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, 2000 and 1999, the following
transcations with officers, directors and shareholders occurred:
During March and April 1998, John D. Shepherd(3) and William J. Thyne(3)
purchased $210,000(3) and $20,000(3), respectively, Series B Convertible
Subordinated Debentures (the "B Debentures") at 100% par value. In May
1998, 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.
In February 1999, John D. Shepherd purchased $300,000(3) of Series C
Convertible Subordinated Debentures (the "C Debentures") at 100% par value.
In April 1999, William J. Thyne purchased $10,000 of B Debentures at
100% par value.
- --------------------------------------------------
(3) Includes debentures held by family members of the named officer/director/
shareholder.
44
<PAGE>
On July 29, 1999, John D. Shepherd converted $30,000 of B Debentures into
150,000 shares of the Company's common stock and $250,000 of C Debentures
into 1,562,500 shares of the Company's common stock.
On December 27, 1999 the Company repaid Mr. Richard C. Farr $125,000 for
the B Debenture held by him. On January 21, 2000 the Company paid $9,860
to Mr. Farr, which represented all accrued interest related to the B
Debenture repaid to him on December 27, 1999.
On December 31, 1999 the Company sold an automobile with a book value of
$5,660 to Mr. Richard C. Farr for $18,042.
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, 2000
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 files as Exhibit 4.4
to the Registrant's Annual Report on form 10-K for the fiscal year ended
January 31, 1999, filed with the Securities and Exchange Commission on May 28,
1999 and amended on June 7, 1999 and incorporated herein by referrence.
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.
On January 19, 2000 the Company filed a report under Item 4
on Form 8-K (appointing new independent accountants).
There were no other reports on Form 8-K filed by the Company
during the quarter ended January 31, 2000, or through and
including the date of this filing.
45
<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: April 28, 2000
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
(i) Principal Executive Officer:
/s/ John D. Shepherd
--------------------
John D. Shepherd,
Chairman of the Board, President
and Chief Executive Officer
and Treasurer
Dated: April 28, 2000
(ii) Principal Financial Officer:
/s/ William J. Thyne
-----------------------
William J. Thyne,
Executive Vice President,
Chief Financial Officer and Secretary
Dated: April 28, 2000
[ Signatures continued on next page ]
46
<PAGE>
(iii) A Majority of the Board of Directors:
/s/ Richard C. Farr April 20, 2000
------------------------
Richard C. Farr
/s/ Samuel J. Padula April 18, 2000
------------------------
Samuel J. Padula
/s/ Reginald W. Ray, Jr. April 21, 2000
------------------------
Reginald W. Ray, Jr.
/s/ John D. Shepherd April 28, 2000
------------------------
John D. Shepherd
/s/ William J. Thyne April 28, 2000
-----------------------
William J. Thyne
/s/ Steve Patlin April 20, 2000
------------------------
Steven Patlin
47
<PAGE>
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-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 356,306
<SECURITIES> 0
<RECEIVABLES> 152,361
<ALLOWANCES> 1,963
<INVENTORY> 845,174
<CURRENT-ASSETS> 1,782,150
<PP&E> 5,355,640
<DEPRECIATION> 3,493,173
<TOTAL-ASSETS> 3,842,657
<CURRENT-LIABILITIES> 2,673,392
<BONDS> 235,559
0
0
<COMMON> 77,593
<OTHER-SE> 759,723
<TOTAL-LIABILITY-AND-EQUITY> 3,842,657
<SALES> 12,028,193
<TOTAL-REVENUES> 12,028,193
<CGS> 6,771,644
<TOTAL-COSTS> 11,184,778
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,855
<INCOME-PRETAX> 819,205
<INCOME-TAX> 8,036
<INCOME-CONTINUING> 811,169
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 811,169
<EPS-BASIC> .13
<EPS-DILUTED> .11
</TABLE>
