UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended July 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______ to _______
Commission file number 0-12172
Lincoln Logs Ltd.
(Exact name of small business issuer as specified in its charter)
New York 14-1589242
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Riverside Drive, Chestertown, New York 12817
(Address of principal executive offices)
(518) 494 - 5500
(issuer's telephone number)
Neither name, address nor fiscal year has changed since last report
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Class Outstanding at September 15, 2003
Common Stock, $0.01 par value 8,452,559
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
- 1 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
INDEX
Page number
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets as of
July 31, 2003 and January 31, 2003 3 - 4
Consolidated statements of operations for the
six months ended July 31, 2003 and 2002 5
Consolidated statements of operations for the
three months ended July 31, 2003 and 2002 6
Consolidated statements of changes in stockholders'
equity for the three months ended July 31, 2003
and the twelve months ended January 31, 2003 7
Consolidated statements of cash flows for the
three months ended July 31, 2003 and 2002 8
Notes to consolidated financial statements 9 - 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14 - 19
ITEM 3. CONTROLS AND PROCEDURES 19
PART II. OTHER INFORMATION 20 - 21
SIGNATURES 21
- 2 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2003 AND JANUARY 31, 2003
ASSETS
July 31, January 31,
2 0 0 3 2 0 0 3
(Unaudited) (Audited)
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 689,698 $1,885,931
Trade accounts receivable, net of
allowance for doubtful accounts of
$20,199 481,935 207,692
Inventories (raw materials) 1,676,222 1,277,804
Work in process 262,254 228,076
Prepaid expenses and other current assets 603,564 416,404
Prepaid income taxes 11,592 ---
Mortgage and note receivable 2,592 2,592
Due from related parties 39,526 10,141
---------- ----------
Total current assets 3,767,383 4,028,640
------------ -----------
PROPERTY, PLANT AND EQUIPMENT:
Land 835,241 835,241
Buildings and improvements 2,512,092 2,479,801
Machinery and equipment 885,968 881,674
Furniture and fixtures 1,775,363 1,683,446
Transportation equipment 312,780 262,216
----------- ---------
6,321,444 6,142,378
Less: accumulated depreciation (3,764,695) (3,667,143)
---------- ---------
Total property, plant and
equipment - net 2,556,749 2,475,235
---------- ----------
OTHER ASSETS:
Mortgage receivable 61,232 63,304
Assets held for resale 6,466 11,802
Deposits and other assets 292,958 58,894
Intangible assets, net of accumulated
amortization of $78,434 at July 31, 2003
and $78,174 at January 31, 2003 3,899 4,159
--------- ---------
Total other assets 364,555 138,159
--------- ---------
TOTAL ASSETS $6,688,687 $6,642,034
========== ==========
See accompanying notes to consolidated financial statements.
( continued )
- 3 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
JULY 31, 2003 AND JANUARY 31, 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
July 31, January 31,
2 0 0 3 2 0 0 3
(Unaudited) (Audited)
---------- -----------
CURRENT LIABILITIES:
Current installments of long-term debt:
Related parties $ --- $ 210,000
Other 104,569 121,678
Trade accounts payable 746,293 347,520
Accrued payroll, related taxes and
withholdings 136,828 129,607
Accrued income taxes 20,000 23,100
Accrued expenses 767,882 662,906
Customer deposits 2,323,748 2,817,188
---------- ----------
Total current liabilities 4,099,320 4,311,999
LONG-TERM DEBT, net of current installments:
Mortgage and notes payable 148,125 159,375
Other 62,710 64,362
---------- ----------
Total liabilities 4,310,155 4,535,736
---------- ----------
STOCKHOLDERS' EQUITY:
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; issued 8,946,799 shares
at July 31, 2003 and 7,759,299 at January
31, 2003 89,468 77,593
Additional paid-in capital 5,894,092 5,681,554
Accumulated deficit (2,720,593) (2,768,414)
----------- ----------
3,262,967 2,990,733
Less: cost of 504,240 shares of common
stock in treasury (884,435) (884,435)
----------- ----------
Total stockholders' equity 2,378,532 2,106,298
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $6,688,687 $6,642,034
=========== ===========
See accompanying notes to consolidated financial statements.
- 4 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31, 2003 AND 2002
(UNAUDITED)
NET SALES $ 6,441,447 $ 5,263,743
COST OF SALES 3,536,295 2,902,651
---------- ----------
GROSS PROFIT 2,905,152 2,361,092
---------- ----------
OPERATING EXPENSES:
Commissions 744,667 571,890
Selling, general and administrative 2,184,995 1,776,880
---------- ----------
Total operating expenses 2,929,662 2,348,770
---------- ----------
INCOME (LOSS) FROM OPERATIONS ( 24,510) 12,322
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 9,234 8,538
Interest expense ( 18,727) ( 31,628)
Other 101,824 39,986
---------- ----------
Total other income (expense) - net 92,331 16,896
---------- ----------
INCOME BEFORE INCOME TAXES 67,821 29,218
INCOME TAXES 20,000 ---
---------- ----------
NET INCOME $ 47,821 $ 29,218
========== ==========
PER SHARE DATA:
Basic earnings per share $ .01 $ .00
========== ==========
Diluted earnings per share $ .01 $ .00
========== ==========
See accompanying notes to consolidated financial statements.
- 5 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2003 AND 2002
(UNAUDITED)
NET SALES $ 4,746,261 $ 3,821,677
COST OF SALES 2,519,767 1,988,257
---------- ----------
GROSS PROFIT 2,226,494 1,833,420
---------- ----------
OPERATING EXPENSES:
Commissions 516,228 408,400
Selling, general and administrative 1,036,715 862,085
---------- ----------
Total operating expenses 1,552,943 1,270,485
---------- ----------
INCOME FROM OPERATIONS 673,551 562,935
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 3,355 4,009
Interest expense ( 6,450) ( 14,240)
Other 31,076 14,547
---------- ----------
Total other income (expense) - net 27,981 4,316
---------- ----------
INCOME BEFORE INCOME TAXES 701,532 567,251
INCOME TAXES 241,000 ---
---------- ----------
NET INCOME $ 460,532 $ 567,251
========== ==========
PER SHARE DATA:
Basic earnings per share $ .06 $ .08
========== ==========
Diluted earnings per share $ .05 $ .07
========== ==========
See accompanying notes to consolidated financial statements.
- 6 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 31, 2003 (UNAUDITED) AND
THE TWELVE MONTHS ENDED JANUARY 31, 2003
Number Par Additional Total
of value paid-in (Accumulated Treasury stockholders'
shares amount capital deficit) stock equity
--------- ---------- ---------- ----------- ------------ -------------
Balance at January 31, 2002 7,759,299 $ 77,593 $5,681,554 $(3,968,567) $ ( 884,435) $ 906,145
Net income - 2003 --- --- --- 1,200,153 --- 1,200,153
---------- ---------- ---------- ----------- ------------ ------------
Balance at January 31, 2003 7,759,299 $ 77,593 $5,681,554 $(2,768,414) $ ( 884,435) $ 2,106,298
Debt converted to common stock 1,162,500 11,625 208,375 --- --- 220,000
Common stock issued upon exercise
of stock options 25,000 250 4,163 --- --- 4,413
Net income - 6 months
ended July 31, 2003 --- --- --- 47,821 --- 47,821
---------- ---------- ---------- ----------- ------------ ------------
Balance at July 31, 2003 8,946,799 $ 89,468 $5,894,092 $(2,720,593) $ ( 884,435) $ 2,378,532
========== ========== ========== =========== ============ ============
See accompanying notes to consolidated financial statements.
- 7 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 2003 AND 2002
(UNAUDITED)
Six Months Ended
July 31,
----------------------------
2 0 0 3 2 0 0 2
----------- -----------
OPERATING ACTIVITIES:
Net income $ 47,821 $ 29,218
Adjustments to reconcile net income
to net cash (used) provided by
operating activities:
Depreciation and amortization 97,812 82,944
(Gain) on sale of assets held for resale ( 4,664) ---
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable ( 274,243) ( 403,540)
(Increase) in inventories ( 432,596) ( 415,480)
(Increase) in prepaid expenses
and other current assets ( 187,160) ( 132,012)
(Increase) in prepaid income taxes ( 11,592) ( 100)
Decrease (increase) in deposits
and other assets 924 ( 9,197)
Increase in trade accounts payable 398,773 423,630
(Decrease) increase in customer deposits ( 493,440) 368,828
Increase in accrued expenses
and other current liabilities 112,197 172,863
(Decrease) in due to related parties --- ( 4,951)
(Increase) in due from related parties ( 29,385) ---
(Decrease) in accrued income taxes ( 3,100) ( 3,490)
---------- ----------
Net cash (used) provided by operating
activities ( 778,653) 108,713
---------- ----------
INVESTING ACTIVITIES:
Payments on mortgage receivable 2,072 1,761
Proceeds from sale of assets held for
resale 10,000 ---
Payments of pre-acquisition costs ( 234,988) ---
Additions to property, plant
and equipment ( 137,455) ( 179,231)
---------- ----------
Net cash (used) by investing activities ( 360,371) ( 177,470)
---------- ----------
FINANCING ACTIVITIES:
Capital received on incentive options 4,413 ---
Repayments of long-term debt ( 61,622) ( 46,881)
---------- ----------
Net cash provided (used) by financing
activities ( 57,209) ( 46,881)
---------- ----------
Net (decrease) in cash and cash equivalents (1,196,233) ( 115,638)
Cash and cash equivalents at
beginning of period 1,885,931 502,397
---------- ----------
Cash and cash equivalents at
end of period $ 689,698 $ 386,759
========== ==========
See accompanying notes to consolidated financial statements.
- 8 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003 AND 2002
(1) BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods.
The results of operations for the six-month and three-month periods ended
July 31, 2003 and 2002 are not necessarily indicative of the results to be
expected for the full year due to the seasonal nature of the business. The
Company operates in the housing industry whose activity pattern is more active
during the months of late-spring through late-autumn, and less active during the
winter months of the year.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in
the Company's Annual Report on Form 10-KSB for the fiscal year ended
January 31, 2003.
(2) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings 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 per
share was 7,759,327 and 7,255,059 for the six-month periods ended July 31, 2003
and 2002, respectively, and 8,247,151 and 7,255,059 for the three-month periods
ended July 31, 2003 and 2002, respectively.
Diluted earnings per share is computed based on the weighted average number
of common shares outstanding during the respective periods. When the effects
are dilutive, the convertible subordinated debentures are assumed to have been
converted into common stock at the beginning of the period after giving
retroactive effect to the elimination of interest expense, net of income tax
effect, applicable to the convertible subordinated debentures. Stock options
and warrants are included in the computation of earnings per share under the
treasury stock method if the effect is dilutive.
The numerator in the calculation of diluted earnings per share for the six-
month periods ended July 31, 2003 and 2002 was determined as follows:
2003 2002
Net income used to calculate basic earnings per share $ 47,821 $ 29,218
Add back interest expense related to convertible
debentures 7,408 -0-
-------- --------
Numerator for calculation of diluted earnings per share $ 55,229 $ 29,218
======== ========
- 9 -
The denominator in the calculation of diluted earnings per share for the
six-month periods ended July 31, 2003 and 2002 was determined as follows:
2003 2002
Weighted average outstanding shares used to calculate
basic earnings per share 7,759,327 7,255,059
Add shares issuable assuming conversion of
convertible debentures 667,956 -0-
Add shares issuable assuming exercise of
outstanding stock purchase warrants -0- -0-
Add shares issuable assuming exercise of
outstanding stock options 181,106 60,600
--------- ---------
Denominator for calculation of diluted earnings
per share 8,608,389 7,315,659
========= =========
Basic earnings per share $ 0.01 $ 0.00
===== =====
Diluted earnings per share $ 0.01 $ 0.00
===== =====
There were 812,500 stock purchase warrants outstanding at July 31, 2002 that
were not included in the computation of diluted earnings per share for that
six-month period as their effect was anti-dilutive. All stock purchase warrants
expired on January 31, 2003 without any warrants being exercised. Also, shares
issuable assuming conversion of convertible debentures at July 31, 2002 were not
included in the computation of diluted earnings per share as their effect was
anti-dilutive for the six-month period then ended.
The numerator in the calculation of diluted earnings per share for the three-
month periods ended July 31, 2003 and 2003 was determined as follows:
2003 2002
Net income used to calculate basic earnings per share $ 460,532 $ 567,251
Add back interest expense related to convertible
debentures 1,058 6,350
--------- ---------
Numerator for calculation of diluted earnings per share $ 461,590 $ 573,601
========= =========
The denominator in the calculation of diluted earnings per share for the
three-month periods ended July 31, 2003 and 2002 was determined as follows:
2003 2002
Weighted average outstanding shares used to calculate
basic earnings per share 8,247,151 7,255,059
Add shares issuable assuming conversion of
convertible debentures 189,538 1,162,500
Add shares issuable assuming exercise of
outstanding stock purchase warrants -0- -0-
Add shares issuable assuming exercise of
outstanding stock options 196,331 71,552
--------- ---------
Denominator for calculation of diluted earnings
per share 8,633,020 8,489,111
========= =========
- 10 -
Basic earnings per share $ 0.06 $ 0.08
===== =====
Diluted earnings per share $ 0.05 $ 0.07
===== =====
There were 812,500 stock purchase warrants outstanding at July 31, 2002 that
were not included in the computation of diluted earnings per share for that
three-month period as their effect was anti-dilutive.
(3) INCOME TAXES
The Company accrues income tax expense on an interperiod basis as
necessary, and accrues income tax benefits only when it is more likely than
not that such tax benefits will be realized. For the six-month period and
three-month period ended July 31, 2003, a provision for income taxes was
provided in the amounts of $20,000 and $241,000, respectively. No income tax
expense or benefit was accrued in the six-month or three-month period ended
July 31, 2002.
(4) INDEBTEDNESS
The Company has had two series of subordinated convertible debentures
outstanding during the past four years, Series B Convertible Subordinated
Debentures and Series C Convertible Subordinated Debentures (collectively
the "Debentures"). At January 31, 2003, the total amount of Debentures
outstanding equaled $220,000. The Debentures had a maturity date of May 15,
2003. On May 15, 2003, all holders of the Debentures elected to convert their
respective holdings into common stock of the Company. The Debentures were
converted into 1,162,500 shares of common stock. At July 31, 2003, the
outstanding balance of the Debentures was zero.
In February 2003, the Company purchased a new pickup truck having a total
value of $41,611. The Company took advantage of special financing offered by
the truck manufacturer and financed the total amount of the purchase with an
interest rate of 0%. The borrowing has a maturity date of March 2006,
requires equal monthly payments and is collateralized by the truck purchased.
The Company also has other debt outstanding consisting of a mortgage on
owned real property, automotive equipment loans, and certain assets under
capital leases collateralized by copiers, facsimile machines, computers,
blueprinting equipment and milling equipment.
(5) RECLASSIFICATIONS
Certain amounts in the Consolidated Statement of Operations for the six
months and three months ended July 31, 2002 have been reclassified to conform
with the presentation for the six months and three months ended July 31, 2003.
None of the reclassifications had the effect of changing the net income as
previously reported.
- 11 -
(6) STOCK OPTIONS
During the three-month period ended July 31, 2003, stock options were
exercised by various holders. Stock options activity for the six-month period
ended July 31, 2003 and the fiscal year ended January 31, 2003 is summarized
as follows:
Weighted Average
Number of shares Option Price Per Share
Qualified Non-Qualified Qualified Non-Qualified
Balance at January 31, 2002 130,500 182,000 $ .16 $ .19
Granted during year --- --- --- ---
Cancelled during year ( 12,000) --- .16 ---
Exercised during year --- --- --- ---
-------- -------- ----- -----
Balance at January 31, 2003 118,500 182,000 $ .16 $ .19
Granted during year --- --- --- ---
Cancelled during year --- --- --- ---
Exercised during year ( 25,000) --- ( .18) ---
-------- -------- ----- -----
Balance at July 31, 2003 93,500 182,000 $ .16 $ .19
======== ======== ===== =====
All outstanding stock options are exercisable as of July 31, 2003. Stock
options expire 10 years from the date they are granted (except in the case of
an incentive stock option awarded to a person owning 10% or more of the
Company's stock, in which case the term is limited to five years) and vest upon
grant. The weighted average remaining contractual life of the outstanding
options as of July 31, 2003 is 5.5 years.
(7) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the six months ended July 31, 2003, cash was paid in the amounts of
$18,180 for interest and $34,692 for income taxes. During the six months ended
July 31, 2002, cash was paid in the amounts of $26,074 for interest and $3,590
for income taxes.
Non-cash investing and financing activities:
On May 15, 2003, all holders of Series B Convertible Subordinated Debentures
and Series C Convertible Subordinated Debentures (collectively called the
"Debentures") elected to convert their respective holdings into common stock of
the Company. At May 15, 2003, the total amount of the Debentures outstanding
equaled $220,000. The Debentures were converted into 1,162,500 shares of common
stock. At July 31, 2003, the outstanding balance of the Debentures was zero.
During the six months ended July 31, 2003, a new truck was purchased for
$41,611. The Company took advantage of special financing offered by
the truck manufacturer and financed the total amount of the purchase with an
interest rate of 0%. The borrowing has a maturity date of March 2006.
- 12 -
During the six months ended July 31, 2002 the Company recorded an increase
in transportation equipment of $15,704 and a related increase in long-term
debt in the amount of $11,080, which represented the financed portion of the
purchase.
(8) SUBSEQUENT EVENT
On August 29, 2003, the Company completed its purchase acquisition of two
companies, affiliated through common ownership, in British Columbia, Canada.
Similar to the Company, these companies manufacture log home component kits and
related accessories. The sources of the acquisition price of $1,964,500 were
as follows: Cash of $609,280; Issuance of Debt of $1,182,720; and issuance of
287,500 shares of restricted common stock of the Company.
- 13 -
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Six months ended July 31, 2003 vs. July 31, 2002:
Net sales were $6,441,447 for the six months ended July 31, 2003 as compared
to $5,263,743 in the same period in 2002, an increase of $1,177,704, or 22%.
Comparing the net sales for the six months ended July 31, 2003 with the same
six-month period in the previous year, there was a 13% increase in the number of
units shipped, and the average sales value per unit shipped increased 9%. The
increase in units shipped was due in part to the 14% increase in the number of
customer contracts in the backlog of undelivered contracts at the beginning of
the six-month period ended July 31, 2003, as compared to the beginning of the
same period of the previous year, and in spite of a predominantly rainy spring
and early summer in the Eastern portion of the United States. The Company
believes that the current residential mortgage interest rate environment has
also been a contributing factor to the increase of units shipped during the six
months ended July 31, 2003. The increase in the average sales value per unit
shipped for the six months ended July 31, 2003 is attributable to shipment of
slightly larger homes than those shipped in the comparable period of the
previous year and to price increases that the Company instituted over the prior
two fiscal years.
Gross profit, as a percentage of net sales, was 45% for both six-month
periods ended July 31, 2003 and July 31, 2002. Gross profit amounted to
$2,905,152 and $2,361,092 for the six-month periods ended July 31, 2003 and
July 31, 2002, respectively, which resulted in an overall increase in gross
profit of 23%. The total cost of materials decreased by -.4%, as compared with
the same period for the previous year. While the Company is beginning to
experience increases in certain commodities that are components of its building
kits, material costs have largely stabilized as the Company entered what has
historically been the busiest part of the home building season. Labor costs and
manufacturing overhead costs for the six months ended July 31, 2003 both
increased by .1% each as a percentage of net sales when compared with the same
six-month period for the previous year. Actual costs have increased in both
categories, and such increase is primarily attributable to the increase in sales
volume that the Company experienced during the six-month period ended July 31,
2003.
Total operating expenses for the six-month period ended July 31, 2003 were
$2,929,662, an amount equal to 45% of net sales for such period. The preceding
amount represents an increase of $580,892 from the amount of $2,348,770 for the
same six-month period of the previous year. The total operating expenses for
the six-month period ended July 31, 2002 constituted 45% of net sales for such
period. The overall increase in total operating expenses for the six months
ended July 31, 2003, as compared to the six months ended July 31, 2002 was 25%.
Sales commissions were $744,667 for the six months ended July 31, 2003 and
$571,890 for the six months ended July 31, 2002. Commissions were 12% and 11%
of net sales in the six months ended July 31, 2003 and 2002, respectively.
Selling, general and administrative expenses were $2,184,995 for the six months
ended July 31, 2003 compared with $1,776,880 in the same period of the previous
- 14 -
year, an increase of $408,115, or 23%. Selling, general and administrative
expenses were 34% of net sales at both July 31, 2003 and 2002.
Although net sales increased by 22% in the first six months ended July 31,
2003 total sales commissions increased by 30% during the same period. During
the six-month period ended July 31, 2003, 30% of the shipments were sold by the
Company's employee sales persons as compared with 39% of the shipments made
during the six-month period ended July 31, 2002. Because the Company
compensates its employee sales persons at a lower commission rate than its
independent dealer representatives, total commissions expense will fluctuate
depending upon the total composition of home sales by employee sales persons and
independent dealer representatives. In this instance, the increase in the
number of homes sold by the Company's independent dealers resulted in increased
commissions expense.
Several specific items contributed to the bulk of the increase in selling,
general, and administrative expenses during the six-month period ended July 31,
2003 as measured against the six-month period ended July 31, 2002. The
principal items include increased expenses attributable to an expanded and more
comprehensive annual sales convention, additional expenses relating to an
increase in Company staff particularly in the area of sales support, added
expenses attributable to an increase in achievement awards for management, and
an additional expenses relating to an increase in the number of national trade
show exhibitions and related expenses that the Company representatives attended.
Many other expenses had modest increases as the Company prepares itself to
support the higher sales level anticipated for the remainder of the fiscal year.
Three months ended July 31, 2003 vs. July 31, 2002:
Net sales were $4,746,261 for the three months ended July 31, 2003 as
compared to $3,821,677 in the same period in 2002, an increase of $924,584, or
24%. Comparing the three months ended July 31, 2003 with the same three-month
period of the previous year, there was a 14% increase in the number of units
shipped, and the average sales value per unit shipped increased 10%. The
increase in units shipped was due in part to a backlog of undelivered contracts
at the beginning of the quarter ended July 31, 2003 that was 15% larger than the
comparable backlog of undelivered contracts at the beginning of the second
quarter of the previous fiscal year, and in spite of a predominantly rainy
summer in the Eastern portion of the United States. The Company believes that
the current residential interest rate environment has also had a favorable
effect on the Company's selling activity. The increase in the average sales
value per unit shipped during the quarter is attributable to shipment of
slightly larger homes than those shipped in the comparable quarter of the
previous year and to price increases that the Company instituted over the prior
two fiscal years.
Gross profit for the three months ended July 31, 2003 amounted to $2,226,494,
or 47% of net sales for such period, as compared to gross profit for the three
months ended July 31, 2002 of $1,833,420, or 48% of net sales for such period.
The overall dollar increase in gross profit between the three months ended July
31, 2002 and July 31, 2003 was 21%. Gross profit decreased as a percentage of
- 15 -
sales for the three months ended July 31, 2003 as compared to the three months
ended July 31, 2002. This decrease was due to cost increases (as a percentage
of net sales) in material, direct labor and manufacturing overhead. Material
costs in absolute dollars increased 25% in the quarter ended July 31, 2003 as
compared with the same three month period of the previous year due to increased
shipments. Material costs as a percentage of net sales increased by .2% in the
quarter ended July 31, 2003 as compared with the same three-month period of the
previous year in part as a result of increases in dimensional lumber costs.
Direct labor increased by .2% as a percentage of net sales for the quarter ended
July 31, 2003 as compared with the same three-month period of the prior year due
to wage adjustments, increased benefit costs and increased production time
related to the increased shipments. Manufacturing overhead increased by .6% as
a percentage of net sales in the quarter ended July 31, 2003 when compared to
the previous year's second fiscal quarter. Design and engineering costs made up
a significant portion of the .6% increase in manufacturing overhead in the
quarter ended July 31, 2003 as compared with the same three-month period of the
prior year due to the increased cost of outside engineering required for homes
destined for the western portion of the United States, particularly California.
All other manufacturing costs for the three months ended July 31, 2003 were
comparable to those of the same period of the previous year.
Total operating expenses of $1,552,943 for the three-month period ended July
31, 2003 increased $282,458, or 22%, over the amount for the three-month period
ended July 31, 2002 of $1,270,485. Total operating expenses were 33% of net
sales for both three-month periods presented. Sales commissions were $516,228
for the three months ended July 31, 2003 and $408,402 for the three months ended
July 31, 2002. Commissions were 11% of net sales in both of the second quarters
ended July 31, 2003 and 2002. Selling, general and administrative expenses were
$1,036,715 for the three months ended July 31, 2003 compared with $862,085 in
the same period of the previous year, an increase of $174,630, or 20%. Selling,
general and administrative expenses were 22% and 23% of net sales for the second
quarters ended July 31, 2003 and 2002, respectively. The increase in selling,
general and administrative expenses was primarily due to increased personnel
costs, an increase in expenses relating to achievement awards for management,
and increased spending on the number of national trade shows attended by
Company representatives.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficiency at both July 31, 2003 and July
31, 2002 of $331,937 and $1,404,370, respectively. For the six months ended
July 31, 2003, working capital decreased $48,578, as compared to a decrease of
$346,132 in the same period in 2002. As of the Company's fiscal year end at
January 31, 2003, current liabilities exceeded current assets by $283,359. At
July 31, 2003 the Company's backlog of undelivered contracts was approximately
$18,363,000.
For the six months ended July 31, 2003, the Company's operations used cash
in the amount of $778,653 while the Company's operations for the six months
ended July 31, 2002 provided funds of $108,713. Overall, the Company
experienced a net decrease in its cash position of $1,196,233 and $115,638 for
- 16 -
the six-month periods ended July 31, 2003 and 2002, respectively. In the six-
month period ended July 31, 2003, cash was primarily provided by an increase
in accounts payable. During the same period, cash decreased principally through
the use of funds to increase accounts receivable, to purchase inventory, to pay
for pre-acquisition costs, to acquire new equipment, for repayments of long-
term debt, and from a decrease in customer deposits. In the six-month period
ended July 31, 2002, cash was provided principally from an increase in customer
deposits and increases in accounts payable and accrued expenses. Cash was
primarily used to purchase inventory, to acquire new equipment, for repayment
of long-term debt, and by increases in prepaid assets and trade accounts
receivable.
The Company has had two series of convertible subordinated debentures
outstanding during the past four years, Series B Convertible Subordinated
Debentures (the "Series B Debentures") and Series C Convertible Subordinated
Debentures (the "Series C Debentures") (collectively the "Debentures"). At
January 31, 2003, the total amount of Debentures outstanding equaled $220,000.
The Debentures had a maturity date of May 15, 2003. On May 15, 2003, all
holders of the Debentures elected to convert their respective holdings into
common stock of the Company. The Series B Debentures were converted at a rate
of one share for each $0.20 of principal, or 850,000 shares, and the Series C
Debentures were converted at a rate of one share for each $0.16 of principal,
or 312,500 shares. A total of 1,162,500 were issued pursuant to the conversion
of the Debentures. As of July 31, 2003, all of the Debentures have been
converted into common stock of the Company, and the outstanding balance of the
debentures is zero.
The Company's backlog of undelivered contracts at July 31, 2003 and July 31,
2002 was approximately $18,363,000 and $17,691,000, respectively, and the
backlog of undelivered customer contracts at January 31, 2003 was approximately
$20,100,000. A contract is considered to be part of the Company's backlog when
the contract is signed by the customer, is accompanied by a deposit and is
countersigned by an officer of the Company. It has been the Company's
experience over the past three years that an average of approximately 44% of
its backlog at the conclusion of its fiscal year will result in shipment in the
following fiscal year. 84% of the shipments that occurred in the six months
ended July 31, 2003 were contained in the Company's backlog at its fiscal year
end date of January 31, 2003. In the comparable six-month period of the
previous year, 84% of the shipments were contained in the Company's backlog at
January 31, 2002. The net decrease in the backlog of undelivered contracts
from January 31, 2003 resulted from shipments and cancellations that were in
excess of new contract signings.
Each year the Company experiences contract cancellations. The reasons for
cancellations are varied and no one particular reason is dominant over the
population of reasons given by the Company's customers. The Company's history
over the past three years reveals that an average of approximately 24% of the
customer contracts contained in the backlog at the beginning of the fiscal year
cancelled in the subsequent fiscal year. Contract cancellations in the first
six months ended July 31, 2003 and 2002 were approximately $2,896,000 and
$2,819,200, respectively. For the six-month periods ended July 31, 2003 and
2002, 90% and 97% of the cancellations for the respective periods were
- 17 -
contained in the backlog of undelivered contracts at January 31, 2003 and
January 31, 2002.
The Company realizes a certain amount of revenue for work performed on most
cancelled contracts in connection with the performance of drafting and
engineering services. After deduction of the charges for services performed,
the balance of the customer's deposit is returned to the customer. During the
six months ended July 31, 2003 and 2002, the Company realized revenues of
$80,556 and $60,117, respectively, for performance of drafting and engineering
services.
ACQUISITIONS
The Company completed the purchase of two companies, affiliated through
common ownership, on August 29, 2003. As of the date of filing this quarterly
report on Form 10-QSB, the Company is in the process of preparing the required
filing on Form 8-K. Additionally, the Company is continuing with the process of
completing its due diligence investigation and purchase contract negotiations
related to the intended acquisition of another company. No closing date has yet
been established for this company.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
It should be noted that in this Management's Discussion and Analysis of
Financial Condition and Results of Operations contains "forward-looking
statements." The terms "believe", "anticipate", "intend", "goal", "expect" and
similar expressions may identify forward-looking statements. These forward-
looking statements represent the Company's current expectations or beliefs
concerning future events. The matters covered by these statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those set forth in the forward-looking statements, including
the Company's dependence on weather-related factors, introduction and customer
acceptance of new products, the impact of competition and price erosion, as well
as supply and manufacturing constraints and other risks and uncertainties. The
foregoing list should not be construed as exhaustive, and the Company disclaims
any obligation to subsequently revise any forward-looking statements to reflect
events or circumstances after the date of such statements, or to reflect the
occurrence of anticipated or unanticipated events. In light of the significant
uncertainties inherent in the forward-looking information included herein, the
inclusion of such information should not be regarded as a representation that
the strategy, objectives or other plans of the Company will be achieved. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On July 30, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS No. 146"). This standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
- 18 -
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is
to be applied prospectively to exit or disposal activities initiated after
January 31, 2003, at which time the Company will adopt SFAS No. 146. The
Company does not believe this statement will have a material impact on its
financial statements.
In December 2002, FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transaction and Disclosure" ("SFAS No. 148"). The standard amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods for voluntary transition to SFAS No. 123's fair value method of
accounting for stock-based employee compensation ("the fair value method").
SFAS No. 148 also requires disclosure of the effects of an entity's accounting
policy with respect to stock-based employee compensation on reported net income
(loss) and earnings (loss) per share in annual and interim financial statements.
The transition provisions of SFAS No. 148 are effective in fiscal years
beginning after December 15, 2002. The Company is currently evaluating the
transition provisions of SFAS No. 148 and has adopted the disclosures provisions
of SFAS No. 148.
ITEM 3 CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Chief
Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures were effective as of the end of the period covered by this
report. There has been no change in the Company's internal control over
financial reporting that occurred during the quarter covered by this report that
has materially affected, or is reasonably likely to affect, the Company's
internal control over financial reporting.
- 19 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on July 9, 2003. At
the Annual Meeting of Shareholders, the shareholders elected nine members of the
Board of Directors to serve until the 2004 Annual Meeting of Shareholders. The
following sets forth the number of votes cast for or withheld from each of the
nine directors.
Name For Withheld
John D. Shepherd 6,922,906 1,379
Richard C. Farr 6,922,777 1,508
Samuel J. Padula 6,922,928 1,357
Steven Patlin 6,922,994 1,291
Reginald W. Ray Jr. 6,922,865 1,420
William J. Thyne 6,922,906 1,379
Leslie M. Apple 6,922,928 1,357
Jeffry J. LaPell 6,922,906 1,379
Benjamin A. Shepherd 6,922,826 1,459
The only other item of business at the Company's Annual Meeting of
Shareholders was to ratify the appointment of Urbach Kahn & Werlin LLP to serve
as the Company's independent auditors for the fiscal year ended January 31,
2004. The proposal was passed by the following vote: For - 6,921,636, Against -
1,280, Abstain - 1,369.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit Index
31.1 Certification of Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
- 20 -
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
On May 28, 2003, the Company filed a Current Report on Form
Form 8-K under Item 9 (Regulation FD disclosure of a proposed
acquisition).
On July 1, 2003, the Company filed a Current Report On Form
Form 8-K under Item 5 (Other Items and Regulation FD disclosure).
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LINCOLN LOGS LTD.
/ s / John D. Shepherd
John D. Shepherd
Chairman of the Board, President and
Chief Executive Officer
September 15, 2003
/ s / William J. Thyne
William J. Thyne
Vice President, Treasurer, Secretary,
and Chief Financial Officer
September 15, 2003
- 21 -
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John D. Shepherd, certify that:
1. I have reviewed this quarterly report of Form 10-QSB of Lincoln Logs
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Lincoln Logs Ltd. as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this quarterly
report based on such evaluation; and
c) disclose in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
- 1 -
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 15, 2003
/ s / John D. Shepherd
Name: John D. Shepherd
Title: Chairman of the Board, President
and Chief Executive Officer
- 2 -
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William J. Thyne, certify that:
1. I have reviewed this quarterly report of Form 10-QSB of Lincoln Logs
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Lincoln Logs Ltd. as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this quarterly
report based on such evaluation; and
c) disclose in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
- 1 -
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 15, 2003
/ s / William J. Thyne
Name: William J. Thyne
Title: Vice President, Treasurer,
Secretary, and Chief Financial Officer
- 2 -
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Lincoln Logs, Ltd. ("the Company")
on Form 10-QSB for the period ending July 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, John D.
Shepherd, Chief Executive Officer of the Company, certify that, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that, to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 15, 2003 / s / John D. Shepherd
Name: John D. Shepherd
Title: Chairman of the Board, President
and Chief Executive Officer
[A signed original of this written statement required by Section 906 has been
provided to Lincoln Logs Ltd. and will be retained by Lincoln Logs Ltd. and
furnished to the Security and Exchange Commission or its staff upon request.]
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Lincoln Logs, Ltd. ("the Company")
on Form 10-QSB for the period ending July 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, William
J. Thyne, Chief Financial Officer of the Company, certify that, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that, to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 15, 2003 / s / William J. Thyne
Name: William J. Thyne
Title: Vice President, Treasurer,
Secretary, and Chief Financial Officer
[A signed original of this written statement required by Section 906 has been
provided to Lincoln Logs Ltd. and will be retained by Lincoln Logs Ltd. and
furnished to the Security and Exchange Commission or its staff upon request.]