ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock is traded over-the-counter on the OTC
Bulletin Board(R). The following sets forth the range of the closing
bid prices for the Company's Common Stock for the period February 1,
2003 through January 31, 2005. Such prices represent inter-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, 2003 Common Stock .48 .27
Quarter Ended July 31, 2003 Common Stock .80 .40
Quarter Ended October 31, 2003 Common Stock .85 .45
Quarter Ended January 31, 2004 Common Stock 1.60 .65
Quarter Ended April 30, 2004 Common Stock 1.01 .55
Quarter Ended July 31, 2004 Common Stock .90 .54
Quarter Ended October 31, 2004 Common Stock 1.01 .30
Quarter Ended January 31, 2005 Common Stock 1.01 .42
(b) The approximate number of holders of the Common Stock of the Company
as of April 27, 2005 was 3,100.
6
(c) No cash dividends were declared by the Company during the fiscal years
ended January 31, 2005 and 2004. 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. Further, the Company's Credit Agreement with its primary
lender prohibits the Company's ability to make distributions without
the lender's prior written consent.
(d) The following table presents in tabular form a summary of securities
authorized for issuance under equity compensation plans at January 31,
2005:
Equity Compensation Plan Information
Plan category Number of securities Weighted average Number of sec-
to be issued upon exercise price of urities remain-
exercise of out- outstanding options, ing available for
standing options, warrants and rights future issuance
warrants and rights under equity comp-
ensation plans
(excluding sec-
urities reflected
in column (a))
(a) (b) (c)
Equity comp-
ensation plans 363,500 $ 0.24 548,500
approved by
security
holders
Equity comp-
ensation plans None None None
not approved
by security
holders
Total 363,500 $ 0.24 548,500
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES
On August 29, 2003, the Company completed the acquisition of two companies
affiliated through common ownership for approximately $1,895,400. In
connection with this transaction and as part of the consideration paid for
these entities the Company issued a total of 287,500 unregistered shares of the
Company's common stock to two individual owners of the companies. On the date
of the transaction, the shares conveyed to such individuals were valued at
approximately $76,300. The shares issued to such individuals were issued by
the Company pursuant to an exemption from registration set forth in Section 4(2)
of the Securities Act of 1933, as amended, as the Company believes that no
public offering or sale of securities occurred in connection with the
transaction. All certificates representing the restricted securities contain
appropriate text detailing their restricted status and the Company has issued
"stop transfer" instructions to its transfer agent with respect to such
securities. No commissions were paid in connection with this issuance of
securities.
On November 17, 2003, the Company completed the acquisition of a limited
liability company for approximately $1,209,800. In connection with this
transaction and as part of the consideration paid for these entities the Company
issued a total of 300,000 unregistered shares of the Company's Common Stock to
the two individual owners of the company. On the date of the transaction, the
shares conveyed to such individuals were valued at approximately $141,600. The
shares issued to such individuals were issued by the Company pursuant to an
exemption from registration set forth in Section 4(2) of the Securities Act of
1933, as amended, as the Company believes that no public offering or sale of
securities occurred in connection with the transaction. All certificates
7
representing the restricted securities contain appropriate text detailing their
restricted status and the Company has issued "stop transfer" instructions to
its transfer agent with respect to such securities. No commissions were paid
in connection with this issuance of securities.
On May 15, 2003, holders of the Company's Series B Convertible Subordinated
Debentures (the "B Debentures") with a total face value of $170,000 elected to
convert their respective holdings into unregistered shares of the Company's
Common Stock. The Company issued 850,000 shares to the holders of the B
Debentures pursuant to the conversion. The shares issued to the holders of the
B Debentures were issued by the Company pursuant to an exemption from
registration set forth in Section 3(a)(9) of the Securities Act of 1933, as
amended. All certificates representing the restricted securities contain
appropriate text detailing their restricted status and the Company has issued
"stop transfer" instructions to its transfer agent with respect to such
securities. No commissions were paid in connection with this issuance of
securities.
On May 15, 2003, the holder of the Company's Series C Convertible Subordinated
Debenture (the "C Debenture") with a total face value of $50,000 elected to
convert their respective holdings into unregistered shares of the Company's
Common Stock. The Company issued 312,500 shares to the holder of the C
Debenture pursuant to the conversion. The shares issued to the holder of the
C Debentures were issued by the Company pursuant to an exemption from
registration set forth in Section 3(a)(9) of the Securities Act of 1933, as
amended. All certificates representing the restricted securities contain
appropriate text detailing their restricted status and the Company has issued
"stop transfer" instructions to its transfer agent with respect to such
securities. No commissions were paid in connection with this issuance of
securities.
8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion is intended to further the reader's understanding of the
consolidated financial statements, financial condition, and results of
operations of Lincoln Logs Ltd. and Subsidiaries. It should be read in
conjunction with the consolidated financial statements, notes and tables which
are included elsewhere in this annual report. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties and
assumptions. The actual results may differ materially from those anticipated in
these forward-looking statements as a result of many factors, including but not
limited to those set forth under "Factors That Could Affect Future Results," and
elsewhere in this report.
Overview
The Company manufactures and markets log home construction kits, panelized home
construction kits and post and beam structures. The products we sell are used
to construct a weather-tight shell of a home, that is, we sell the walls,
windows and doors, roof structure and roofing material, and various other
interior materials. While we have not historically provided construction
services to customers (including the sale and installation of foundations,
plumbing, electrical wiring and fixtures, cabinets, and other such amenities)
our newly acquired subsidiary Snake River Log Homes LLC does provide this
service from time to time. We sell a product line of solariums, or sun rooms,
which can be purchased separately or included as an integral part of the house
design. This product line represents a small portion of the Company's revenue
and is a product which complements the Company's design of homes. We also
provide to our customers detailed construction drawings that are stamped by a
professional engineer as required. We sell several styles of log homes, such
as machine milled logs and logs that are turned on a lathe, and we use several
species of wood such as eastern white pine, western cedar, spruce and lodge-
pole pine. All logs are available in various shapes, sizes and lengths and can
be ordered "pre-cut and notched," "pre-cut only," or in specified lengths to be
custom cut and fitted on site. We only operate within the business segment of
manufactured wood products. Our revenue is reported as a single component,
which is comprised of four elements: (1) log and panelized home sales, (2)
solarium sales, (3) sales of building materials, and (4) revenues from
engineering and design services. Approximately 89% of the Company's total
sales are derived from log home and panelized home sales in the fiscal year
ended January 31, 2005.
We consider the activities that surround the manufacture and distribution of log
home and panelized home construction kits to be our core business. Our business
strategy is to promote and grow our core business, and to create diversification
in our product lines in an effort to add strength and breadth to our business
structure. As a result, we are dedicating significant resources to building
infrastructure for the support of our core business and to creating more product
diversification through acquisitions.
RESULTS OF OPERATIONS
9
The following table illustrates our financial results for the fiscal year ended
January 31, 2005 as compared to the fiscal year ended January 31, 2004 (in
$1,000's US).
Fiscal Fiscal
Year % of Year % of %
2005 Sales 2004 Sales Change
------- ----- ------- ----- ------
Net sales $21,550 100% $15,795 100% 36%
Cost of sales 14,301 67% 9,539 60% 50%
------- ----- ------- ----- ------
Gross profit 7,249 33% 6,256 40% 16%
Operating expense 8,040 37% 6,464 41% 24%
------- ----- ------- ----- ------
Loss from operations ( 790) (-4%) ( 208) -1% -280%
Other income, net 6 -- 21 -- -71%
------- ----- ------- ----- ------
Loss before income taxes ( 784) (-4%) ( 187) -1% -319%
Income tax benefit -- -- 10 -- --
------- ----- ------- ----- ------
Net loss $( 784) (-4%) $( 177) -1% -343%
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
inventories, income taxes, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
In addition to the significant accounting policies described in Note 3 of the
Consolidated Financial Statements, the Company believes that the following
discussion addresses its critical accounting policies.
Revenue Recognition: We recognize revenue in accordance with the Securities
and Exchange Commission's Staff Accounting Bulletin No. 104 ("SAB 104"), which
updated the guidance in Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 104 requires that 4 basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
agreement exists; (2) delivery has occurred or services have been rendered; (3)
the fee is fixed and determinable; and (4) collectibility is reasonably assured.
Revenue from products sold is recognized upon delivery to the customer.
Subsequent to the sale of our products, we have no obligation to provide any
modification or customization, upgrades, enhancements, or post-delivery customer
support. Design and engineering services are an integral part of the total home
10
package sold to the customer and as such, revenue for these efforts are not
recognized as a separate line item in our financial statements. However,
customers occasionally cancel their contracts with us. Upon cancellation we
recognize revenue for services performed for design and engineering services in
accordance with a predetermined fee schedule that was shared with the customer
at the time of the contract signing. We deduct this amount from the deposit that
accompanied the contract and return the remainder of the deposit to the
customer.
Impairment of Long-lived and Intangible Assets: We evaluate the
recoverability of the Company's long-lived assets, where indicators of
impairment are present, by reviewing current and projected profitability or
discounted cash flow of such assets. Intangible assets that are subject to
amortization are reviewed for potential impairment whenever events or
circumstances indicate that carrying amounts may not be recoverable.
Intangible assets not subject to amortization are tested for impairment at
least annually. We did not record any impairment losses for the fiscal year
ended January 31, 2005. For the fiscal year ended January 31, 2004, we wrote
down the value of a parcel of real estate that was determined to be valued
higher than its fair market value by $30,100 based on an independent real
estate appraisal.
Income Taxes: We estimate our income taxes in each of the jurisdictions in
which we operate. This process involves an estimation of our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included in our Consolidated
Balance Sheets. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income and to the extent we
believe that recovery is not likely, we must establish a valuation allowance.
To the extent we establish a valuation allowance or increase this allowance in
a period, we must include an expense within the tax provision in our Statement
of Operations. To date, we have recorded a full allowance against our
deferred tax assets.
Reserves for Doubtful Accounts and Obsolete/Excess Inventory: Based on our
judgment, we review our accounts receivable and inventory to establish reserves
that adjust the carrying value to the estimated net realizable value. On a
regular basis, we evaluate our accounts receivable and inventories and
establish these reserves based on a multitude of contributing factors. In the
case of accounts receivable, we establish the reserve based on a combination
of specific customer circumstances as well as the history of write-offs and
collections. In the case of inventories, factors we consider in establishing
a reserve include economic conditions, product mix, sales levels, customer
acceptance of our products and changing product styles. As a result, we
established a reserve for doubtful accounts receivable of $20,199 for the
fiscal year ended January 31, 2004, which was written off with its offsetting
receivable in the fiscal year ended January 31, 2005, and a reserve for slow
moving and obsolete inventories of $18,000 for the fiscal years ended January
31, 2005 and 2004.
RESULTS OF OPERATIONS
Comparison of Fiscal Year Ended January 31, 2005 ("Fiscal 2005") with Fiscal
Year Ended January 31, 2004 ("Fiscal 2004")
11
Revenues: Net sales were $21,549,755 for Fiscal 2005 compared with
$15,795,309 for Fiscal 2004. The increase of $5,804,025 was primarily
attributable to increased sales of our log home and panelized home construction
kits. Approximately 89% of total revenues are represented by home construction
kit sales and this portion improved from Fiscal 2004 to Fiscal 2005 through a
24% increase in units shipped and an increase of 7% in the average value of
these units shipped. The remaining contributors to our revenues are building
material sales, design and engineering services, construction, and freight
revenues. Collectively these items increased 84% over Fiscal 2004 revenues,
with most of the increase attributable to our newly acquired companies. Our
strategy is to continue to add product offerings and to increase our market
share through the introduction of new home designs, product and style
selections. We anticipate that the majority of our revenues will continue to
be produced through the sale of log home and panelized home construction kits.
Over the next year, we expect to continue to grow. We expect our revenues to
increase by a similar rate as that of the current year based on the increase in
our backlog of undelivered contracts at January 31, 2005 and the continued
favorable economic climate for home construction in the United States. We also
believe that the contribution of these subsidiaries during the upcoming year
will add to the Company's anticipated growth.
Gross Profit/Cost of Sales. Our gross margin increased by $993,652, to
$7,249,306 in Fiscal 2005. Although gross profit increased by 16% in Fiscal
2005 as compared with Fiscal 2004, gross profit as a percentage of sales
decreased by 7%, from 40% in Fiscal 2004 to 33% in Fiscal 2005. The decrease
in gross profit percentage was primarily the result of higher material costs,
which increased as a percent of sales by 7% in Fiscal 2005 as compared with
Fiscal 2004. Manufacturing overhead increased by 2%, while design and
engineering costs decreased by 2%. Delivery and direct labor costs remained
relatively constant as a percentage of sales.
Beginning in the Fiscal 2004 building season and continuing throughout Fiscal
2005, commodity lumber costs increased substantially. We use fixed price
contracts, where we do not have the ability to adjust the selling price of the
contracts to rising costs. The selling prices to which we are contractually
bound are valid for a period of nine months from the date of the contract
signing, and typically we do not raise the selling price of the contract if the
shipment takes place within another three months of the expiration of the
initial nine month period, regardless of increases in the costs of materials
used in those contracts. Manufacturing overhead increased due to increased
costs associated with facility and personnel. The design and engineering cost
decrease as a percent of sales was due to the increased contribution to total
sales of the subsidiaries the Company acquired in Fiscal 2004. Their use of
design and engineering is dramatically less than that of the parent company.
In Fiscal 2006, we believe that our gross profit percentage will begin to
increase. We expect cost increases to occur in the area of building materials,
but those increases should be offset by increases to our sales prices. An
additional element to improving our gross profit percentage is the increased
utilization of our newly-acquired subsidiaries in British Columbia, Canada for
the manufacture and distribution of home building kits to customers located in
the western portion of the United States.
Operating expenses: Total operating expenses for the year ended January 31,
2005 were $8,039,610 as compared with $6,463,628 during the fiscal year ended
January 31, 2004, and increase of $1,575,982, or 24%. As a percentage of net
sales, operating expenses were 37% and 41%, respectively, for the fiscal years
ended January 31, 2005 and 2004.
12
Sales commissions consist of amounts paid both to our employee sales persons and
our independent dealers throughout the United States. For Fiscal 2005
commissions amounted to $2,181,751, or 10% of net sales, compared with
$1,796,701 in Fiscal 2004, or 11% of net sales. While total commissions expense
increased 21% compared to our increase in total net sales of 36%, it does not
necessarily follow that commissions will increase at a proportionate rate.
Employee sales representatives are compensated at commission rates that are
lower than the independent dealers utilized by the Company. Depending on the
mix of sales, total commissions can change at a disproportionate rate in
relation to the change in net sales. Also, the Company's newly-acquired
subsidiaries in British Columbia and Idaho do not have independent dealers and
sell most of their home building kits to third parties who in turn sell the
product to the end user. This practice results in an elimination of the
commission, however, the practice also generates a lower gross profit due to
sales on a wholesale basis.
Selling, general and administrative expenses of $5,857,859 in Fiscal 2005 have
increased $1,190,932, or 26%, when compared to the same expenses in Fiscal 2004
of $4,666,927. However, as a percentage of total net sales, selling, general
and administrative expenses decreased by 2%, to 27% in Fiscal 2005. The primary
items that contributed to the increase in expense were an increase in
amortization expense, an increase in personnel and related fringe benefits, and
increased spending on attendance at national trade show expositions and
marketing and promotion costs. Additionally, our newly-acquired subsidiaries
added to this category, contributing costs for a full year compared with less
than half a year in Fiscal 2004 between the time of acquisition of such
subsidiaries and the completion of the fiscal year.
In the coming year, we will continue to attend all national trade shows and to
increase our marketing through various media outlets in order to expand our
presence in the marketplace. We will endeavor to recruit new dealers in areas
where our presence is less than optimal and we will continue to introduce new
products and styles of home building kits. To meet the increased demands placed
on our internal administration as a result of our expansion we will continue to
increase our employment as necessary. As such we expect our selling, general
and administrative costs will increase as we invest in our future.
Interest expense: In Fiscal 2005, interest expense was comprised of interest
paid on our multi-faceted credit facility and various other credit borrowings
of lesser amounts, including on notes payable. In Fiscal 2004, interest expense
was comprised of interest paid on the Company's Convertible Subordinated
Debentures (which debentures matured on May 15, 2003 and all were converted into
common stock of the Company), on our multi-faceted credit facility established
in October 2003 and on various other credit borrowings of lesser amounts. We
expect the Company's interest expense to increase during the coming fiscal year
as we use this credit facility to expand our business and to support our
inventory and operational needs.
Income taxes: For Fiscal 2005, the Company has not accrued any income tax
expense, nor has any benefit been recognized. In Fiscal 2005, the Company will
not owe federal income taxes principally due to losses incurred and to
differences in depreciation rates used for book and tax purposes.
Net loss: Though sales increased for the year, the Company incurred a net
loss of $784,298 for Fiscal 2005. The principal factors that caused the loss
were the unrecoverable cost increases relating to fixed price contracts, The
13
losses incurred at the Company's subsidiary in British Columbia stemming from
a slow sales year and from reorganizational efforts which were ongoing during
Fiscal 2005. We believe, though, that this subsidiary, along with the other
subsidiaries acquired during Fiscal 2004 will enhance our core business and
improve our ability to grow. In addition, the Company continues to spend on
marketing and promotion in order to expand our presence and market share. The
increase in sales in Fiscal 2005, as well as the increase in our backlog of
undelivered contracts of 28% over the amount at the end of the previous fiscal
year, leads us to believe this is a sound strategy. We are expecting increased
sales during the upcoming year, and we anticipate the Company will return to
profitability in the fiscal year ended January 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal year 2004 brought significant changes to the Company's financial
structure as a result of the acquisition of three businesses and the
acquisition of the assets of a fourth business. In August 2003 we acquired two
companies affiliated through common ownership, True Craft Log Structures, Ltd.
and Hart & Son Industries, Ltd. located in Maple Ridge, British Columbia,
Canada; in October 2003 we acquired all of the assets of Adirondack Forest
Industries, Inc., a saw mill located in Galway, New York; and in November 2003
we acquired Snake River Log Homes LLC, located in Rigby, Idaho. The intent of
these acquisitions is to expand our product offerings, to have manufacturing
and distribution capability on the west coast of North America, to increase
the Company's market share both domestically and internationally, to acquire
the capability to manufacture the wood products that we sell, and to employ the
talent of certain individuals who are associated with the acquired companies.
The table below highlights key balances and ratios as the result of this
acquisition plan (in $1,000's of US dollars):
As of January 31,
2005 2004
-------- --------
Financial Condition:
Total Assets $ 11,490 $ 11,838
Total Liabilities $ 9,801 $ 9,414
Total Equity $ 1,689 $ 2,424
Debt/equity ratio 2.56 1.85
Assets/debt ratio 2.65 2.64
Working Capital:
Current Assets $ 4,279 $ 4,262
Current Liabilities $ 6,860 $ 6,067
Current Ratio .62 .70
Cash Position:
Cash & cash equivalents $ 858 $ 750
Cash generated (used) from operations $ 521 $ ( 250)
Financial Condition
During the year ended January 31, 2005, the Company had a decrease in assets
from $11,838,070 in Fiscal 2004 to $11,489,983 in Fiscal 2005. The largest
14
decreases were in the areas of inventory, property, plant and equipment and
intangible assets. We also had an increase in total liabilities from
$9,413,982 in Fiscal 2004 to $9,801,161 in Fiscal 2005, with the largest
increase coming from customer deposits.
During Fiscal 2004 we entered into a multi-faceted credit facility with
First Pioneer Farm Credit, ACA ("First Pioneer"). The total credit available
to the Company is $3,675,000 of which the Company has utilized $2,899,000 as
On January 31, 2005, as compared with $2,588,000 as of January 31, 2004. The
proceeds from borrowings against the credit facility in Fiscal 2004 were used
principally to finance the Company's recent acquisitions. Additional borrowings
in Fiscal 2005 were used principally to purchase fixed assets and for working
capital.
The credit facility with First Pioneer has four separate components which
includes a revolving line of credit intended for the purchase of inventory and
other operating needs. The credit facility has various maturity dates ranging
from yearly renewal for the line of credit to terms of four to ten year for
long-term portions. The interest rate for the majority of the borrowings under
the First Pioneer credit facility is at the prime rate as published in the Wall
Street Journal, but the interest rate for one million dollars of the credit
facility is fixed for a two-year period at a below-prime rate. This portion of
the loan is subsidized by the State of New York and is provided as an incentive
for the creation of employment in the State of New York.
The Company, in Fiscal 2004, used common stock and seller financing in the form
of non-interest bearing long-term notes to finance a portion of the
acquisitions. The seller financing was payable over terms of five to seven
years with the majority of the notes subject to monthly repayments while a
smaller amount is due on an annual basis.
In May 2003, all holders of the Company's Series B and Series C Convertible
Subordinated Debentures, a total of $220,000, converted their holdings into
the common stock of the Company at the maturity date of the debentures. The
Company issued 1,162,500 shares of common stock pursuant to the conversion of
those debentures.
Working Capital; Sources and Uses of Cash
At January 31, 2005, we had a working capital deficiency of $2,580,238 as
current liabilities exceeded current assets. At January 31, 2004, we had a
working capital deficiency of $1,804,864. At January 31, 2005 our working
capital deficiency increased from the previous year by $775,374. Our balance
of cash and cash equivalents increased during Fiscal 2005 primarily due to cash
cash provided by a decrease in inventories and an increase in customer
deposits and accrued expenses, as well as an increase in bank borrowings. Cash
was used to purchase fixed assets, to decrease trade accounts payable and
increase prepaid expenses, and to pay down various notes and bank debt.
We believe that our cash and cash equivalents, together with expected revenues
from operations, will be sufficient to meet the Company's anticipated working
capital requirements for the fiscal year ended January 31, 2006. We anticipate
that as we enter into the building season shipping cycle that we will generate
the needed working capital from the undelivered backlog of contracts at January
31, 2005. Also, we have not drawn all of the available funds provided under the
First Pioneer credit facility, which is available to us to supplement the funds
generated by our operations.
Our backlog of undelivered contracts at January 31, 2005 was approximately
$32,304,000. This is an increase of $7,084,000 or 28% from the prior year's
ending backlog at January 31, 2004. A contract is considered to be part of our
15
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 four years for which such statistics have been kept,
that the products for an average of approximately 43% of the undelivered
contracts in the backlog at the end of the fiscal year are shipped in the
subsequent fiscal year. To the extent this historical standard is used to
forecast the Company's performance in the fiscal year ending January 31, 2006,
approximately $13,890,700 of product is anticipated to be delivered with respect
to the contracts contained in the beginning backlog at January 31, 2005. The
balance of the Company's deliveries during any given fiscal year originate from
contracts that are both written and delivered during the same fiscal year. Of
the amount of shipments for Fiscal 2005 approximately $11,105,000 originated
from the beginning backlog of $25,220,000 at January 31, 2004, and approximately
$8,242,000 originated from contracts written during Fiscal 2005, which
represented approximately 25% of contracts written during the fiscal year.
Fiscal 2006 potential revenues are contingent on various factors including
general economic conditions, weather, interest rates and the overall climate for
new housing construction.
The table below illustrates the changes in our backlog for the past two fiscal
years (in $1,000's of US dollars):
Each year we experience contract cancellation. The reasons for cancellations
are varied and no one particular reason is dominant over the total population
of reasons given by our customers. It has been our experience, over the past
four years for which such statistics have been kept, for an average of
approximately 23% of undelivered contracts contained in the backlog at the end
of the fiscal year will cancel in the subsequent fiscal year. Similarly, the
Company's records over the past four years for which such statistics have been
kept, indicate that an average of 4% of the contracts written during the fiscal
year will also be cancelled during that same fiscal year. In the event of
cancellation of a contract, the Company does realize a certain amount of revenue
for work performed relating to drafting and engineering services. These charges
for work performed are calculated in accordance with a Disclosure Letter
Addendum that each customer signs, which delineates specific costs for 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 fiscal years 2005 and 2004 we realized revenues of $144,810 and $161,237,
respectively, from to the aforementioned services.
Contractual Cash Obligations
We have a number of long-term obligations requiring future payments pursuant to
debt and lease agreements. The table below is a presentation of all such
commitments and agreements.
16
Payments Due by Period
Within 2 -3 4 -5 After
Contractual Obligations Total 1 Year Years Years 5 Years
---------- ---------- ---------- ---------- ----------
Bank Debt:
Line of Credit $ 753,000 $ 753,000 $ -0- $ -0- $ -0-
10 Year Term Loan 1,677,160 173,520 347,040 347,040 809,560
5 Year Term Loan 402,053 92,632 185,264 124,157 -0-
4 Year Term Loan 66,667 25,000 41,667 -0- -0-
Notes Payable:
In connection with
acquisitions:
Related Parties 316,562 87,344 157,919 71,299 -0-
Others 1,073,632 265,857 474,950 283,755 49,070
Vehicles 14,262 11,950 2,312 -0- -0-
Other -0- -0- -0- -0- -0-
Capital Lease Obligations 18,584 15,744 2,840 -0- -0-
Operating Leases 564,976 163,353 306,630 94,993 -0-
Other 7,500 -0- 7,500 -0- -0-
---------- ---------- ---------- ---------- ----------
Total Contractual Cash
Obligations $4,894,396 $1,588,400 $1,526,122 $ 921,244 $ 858,630
========== ========== ========== ========== ==========
All of the contractual obligations shown above have contractual terms whereby
the due date of the debt is accelerated upon the occurrence of certain "events
of default". These events of default are standard terms and conditions in most
business debt agreements, such as nonpayment of the obligation, or allowing a
judgment to be levied against the collateralized property that goes un-remedied
for more than 30 days. If and when an event of default occurs, and the lender
declares that there is an event of default and the default is not corrected
within 30 days of such notice (90 days in the case of certain seller financing
notes), the obligations and any unpaid interest become due and payable
immediately.
The bank debt made available by First Pioneer (the "First Pioneer Credit
Facility") is conditioned upon the Company's continued compliance with
affirmative, negative, continuing and financial covenants. Examples of the
affirmative covenants include compliance with laws; maintaining insurance;
maintaining the property; maintaining books and records, and similar items.
Examples of the negative covenants include not allowing liens or security
interests to be placed against any of our assets; we cannot change fiscal years;
we may not enter into other borrowings without the prior consent of the bank,
and similar restrictions. The continuing covenants require us to provide First
Pioneer with audited financial statements on an annual basis; to provide
quarterly operating statements; to file all necessary tax returns annually and
provide a copy to the bank, and other similar requirements. The financial
covenants require us to meet two financial ratios, debt coverage ratio and
current ratio, and to maintain a minimum net worth, on an annual basis. At
January 31, 2005, we were required to achieve a fixed charge coverage ratio of
not less that 2.0 to 1.0; achieve a current ratio of not less than 1.0 to 1.0;
and to maintain a minimum tangible net worth of $3,606,298. During Fiscal 2005,
the Company failed to meet the financial covenants. Failing to meet these
17
financial covenant constitutes an "event of default" under the terms of the
First Pioneer Credit Facility. The Company applied for and received a waiver
from First Pioneer with regard to these financial covenants for the fiscal year
ended January 31, 2005. There were no other events of default with respect to
the First Pioneer Credit Facility at January 31, 2005.
We believe that the default with regard to the financial covenants of the First
Pioneer Credit Facility occurred due to the aforementioned unrecoverable cost
increases and losses at our subsidiary in British Columbia. We believe that our
inability to meet the goals set by First Pioneer has not damaged our
relationship with them, nor do we believe that it will hinder our ability to
obtain future financing for contemplated projects. The Company has discussed
these issues during its annual review with First Pioneer, and feels that it will
meet the financial covenants that will be in effect for Fiscal 2006.
Factors That Could Affect Future Results
Certain statements made in this Annual Report on Form 10-KSB are forward-looking
statements based on our current expectations, estimates and projections about
our business and our industry. These forward-looking statements involve risks
and uncertainties. Our business, financial condition and results of operations
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, as more fully described below and
elsewhere in this Form 10-KSB. You should carefully consider the risks and
uncertainties described below, which are not the only ones facing our Company.
Additional risks and uncertainties also may impair our business operations.
These forward-looking statements generally relate to our belief that we will
increase the sales of our products to an expanding base of customers; that we
will be able to leverage our West Coast manufacturing capability to provide a
cost effective solution to shipment of products to customers located in the
western United States, and that demand for Swedish-cope style homes will
increase, particularly on the East Coast of the United States, that will lead to
growth of sales revenues of the Company over the next several years.
We face significant price competition. There are no assurances that
competitive pressures will not force us to accept reduced margins to compete in
the future. Large companies within the industry with significantly greater
resources continue to expand in the marketplace and compete for customers with
a strategy that is based on price. While selling price is a distinguishing
factor between companies offering log home construction kits, the Company feels
that other important factors in a purchase decision are product attributes,
service, quality and design.
Our industry is subject to economic fluctuations based on mortgage interest
rates. The home construction industry has enjoyed robust sales over the past
several years as mortgage interest rates have been at or near historical lows.
Should there be an increase in mortgage rates in the future, such an increase
may have an effect on the number of prospective purchasers of newly-constructed
homes, which, in turn may have an effect on the number of home construction
kits that the Company may be able to sell.
We are dependent on the performance of certain third-party individuals and
18
entities. We manufacture a home construction kit to be purchased by individuals
who desire to build new construction. The Company does not build the home nor
do we provide certain interior amenities such as plumbing, wiring, cabinet,
etc., nor do we prepare the building site and install wells or septic systems.
Our ability to ship the home construction kit is dependent to a large extent
upon the timely performance of third party individuals and entities, such as
building permit reviewing agencies and contractors, to complete their portion
of the work schedule prior to our shipment of product. Any adverse incident
with respect to these third party individuals and entities, such as lack of
availability of heavy machinery to excavate a job site, can interfere with our
ability to make shipments to our customers, and consequently, our ability to
generate additional revenue.
The industry is sensitive to seasons and weather. The home construction
industry is seasonal in nature and is sensitive to weather conditions. The
building cycle is more active during the months of May to October and less
active during the months of November to March. This is particularly true for
the Company where a majority of our shipments are made into the northeast region
of the United States where winter conditions may arrive earlier than expected
and stay later than expected into the spring season. In addition, the initial
months of spring can include rain and muddy ground conditions, which are not
conducive for new home construction. Weather conditions are unpredictable and
can have an adverse affect on our ability to ship product and generate revenue.
In light of the effect winter weather conditions have on our first quarter
shipments, the Company has routinely experienced a loss in past first quarters
of the Company's fiscal year and believes it may experience a similar loss in
the first quarter of fiscal year 2006. The Company is working to address the
impact of the winter season on the Company's historical first-quarter
financial performance through acquisitions.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July, 2002, Financial Accounting Standard Board ("FASB") issued Statement No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
No. 146"). The 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 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. SFAX 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-Transition 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.
19
The transition provisions of SFAS No. 148 are effective in fiscal years
beginning after December 15, 2002. During the fiscal year ended January 31,
2003, we adopted the disclosures practices of SFAS No. 148.
In April 2003, FASB issued Statement of Financial Accounting Standards No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("SFAS No. 149"). During the year ended January 31, 2004, we adopted the
provisions of SFAS No. 149, and it had no material effect on the results of
operations or financial position.
In May 2003, FASB issued Statement of Financial Accounting Standards No. 150,
"Accounting For Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 changes the accounting
for certain financial instruments with characteristics of both liabilities and
equity that, under previous pronouncements, issuers could account for as equity.
The new accounting guidance contained in SFAS No. 150 requires that those
instruments be classified as liabilities in the balance sheet. During the year
ended January 31, 2004, we adopted the provisions of SFAS No. 150, and it had
no material effect on the results of operations or financial position.
In December 2003, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 104 ("SAB 104"), which updated the guidance in
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 104 also integrates the set of related SAB 101 Frequently
Asked Questions and recognizes the role of the AICPA's Emerging Issues Task
Force ("EITF"), consensus on Issue No. 00-21 "Accounting for Revenue
Arrangements with Multiple Deliverables." The EITF concluded that revenue
arrangements with multiple elements should be divided into separate units of
accounting if the deliverables in the arrangement have value to the customer on
a standalone basis, if there is objective and reliable evidence of the fair
value of the undelivered elements, and as long as there are no rights of return
or additional performance guarantees by the Company. The provisions of EITF
Issue No. 00-21 are applicable to agreements entered into in fiscal periods
commencing after June 15, 2003. SAB 104 directs companies to identify separate
units of accounting based on EITF Issue 00-21 before applying the guidance of
SAB 104. We believe that neither our operating results nor our financial
condition will be materially affected by the provisions of EITF 00-21, nor by
the guidance of SAB 104.
In December 2003, FASB issued Financial Interpretation No. 46R ("FIN 46"),
"Consolidation of Variable Interest Entities." The objective of this
interpretation is to provide guidance on how to identify variable interest
entities ("VIE") and determining when the assets, liabilities, non-controlling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in
an entity will need to consolidate that entity if the company's interest in the
VIE is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN 46 also requires additional disclosure by primary beneficiaries and
other significant variable interest holders. Certain provisions of this
interpretation became effective upon issuance. As of January 31, 2004, we did
not have any VIE.
20
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 clarifies that abnormal amounts
of idle facility expense, freight, handling costs and spoilage should be
expensed as incurred and not included in overhead. Further, FAS 151 requires
that allocation of fixed and production facilities overhead to conversion costs
should be based on normal capacity of the production facilities. The provisions
in FAS 151 are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not believe that the adoption of
FAS 151 will have a significant effect on its financial statements.
On December 16, 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004), "Share Based Payment"
("SFAS 123(R)"), which is a revision of SFAS 123. SFAS 123(R) supersedes APB
Opinion No. 25 and its interpretations, and amends Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows." SFAS 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair
values. SFAS 123(R) is effective for the Company at the beginning of the first
interim or annual period beginning after December 15, 2005. The Company intends
to adopt SFAS 123(R) beginning with its annual report for the fiscal year ended
January 31, 2006. The Company does not expect that the adoption of SFAS 123(R)
will have a material effect on its financial statements.
21
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements
Page
Reports of Independent Registered Public Accounting Firms 23 & 24
Consolidated balance sheets as of
January 31, 2005 and 2004 25 & 26
Consolidated statements of operations for the years
ended January 31, 2005 and 2004 27
Consolidated statements of changes in stockholders'
equity for the years ended January
31, 2005 and 2004 28
Consolidated statements of cash flows for the years
ended January 31, 2005 and 2004 29
Notes to consolidated financial statements
January 31, 2005 and 2004 30 - 47
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lincoln Logs Ltd. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Lincoln Logs Ltd.
and Subsidiaries as of January 31, 2005, and the related statements of
operations, changes in stockholders' equity and cash flows for the year then
ended. 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. The financial statements of Lincoln Logs Ltd. and
Subsidiaries as of January 31, 2004, were audited by other auditors whose report
dated April 28, 2004, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in
all material respects, the financial position of Lincoln Logs Ltd. and
Subsidiaries as of January 31, 2005, 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 of America.
/s/ UHY LLP
Albany, NY
April 21, 2005
23
Report of Independent Registered Public Accounting Firm
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 as of January 31, 2004, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended. These 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 auditing standards of the Public
Company Accounting Oversight Board (United States). 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, 2004, 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 of America.
/s/ Uhrbach Kahn & Werlin LLP
Albany, New York
April 28, 2004
24
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2005 and 2004
ASSETS
2005 2004
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 857,686 $ 750,239
Trade accounts receivable, net of allowance
for doubtful accounts of $20,199 in 2004 363,601 337,166
Inventories
Raw materials 1,849,741 2,032,050
Work in process 453,898 477,389
Prepaid expenses and other current assets 719,203 564,883
Income taxes receivable 29,686 97,427
Mortgage and note receivable 5,623 2,592
---------- ----------
Total current assets 4,279,438 4,261,746
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Cost 8,710,133 8,563,343
Less accumulated depreciation ( 4,382,790) ( 3,983,816)
---------- ----------
Property, plant and equipment- net 4,327,343 4,579,527
---------- ----------
OTHER ASSETS:
Mortgage receivable 70,938 60,053
Deposits and other assets 68,003 70,742
Goodwill 1,350,020 1,319,970
Intangible assets, net of accumulated
amortization of $282,767 in 2005 and
$97,537 in 2004 1,394,241 1,546,032
---------- ----------
Total other assets 2,883,202 2,996,797
---------- ----------
TOTAL ASSETS $11,489,983 $11,838,070
========== ==========
See accompanying notes to consolidated financial statements.
( continued )
25
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS,(continued)
JANUARY 31, 2005 and 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
2005 2004
CURRENT LIABILITIES:
Borrowings on line of credit $ 753,000 $ 503,000
Current installments of bank loans 254,040 118,980
Current installments of notes payable,
related party 87,344 93,458
Current installments of notes payable 280,120 407,109
Current installments of capital lease
obligations 13,432 22,211
Trade accounts payable 1,408,409 1,578,912
Accrued salaries and wages 179,008 196,243
Accrued expenses 713,100 570,850
Customer deposits 3,171,224 2,575,847
---------- ----------
Total current liabilities 6,859,677 6,066,610
LONG-TERM DEBT, net of current installments:
Note payable, related party 229,218 316,563
Bank loans 1,891,839 1,960,687
Notes Payable 807,775 1,037,541
Capital lease obligations 5,152 17,581
---------- ----------
Total long-term debt 2,933,984 3,332,372
OTHER LONG-TERM OBLIGATION 7,500 15,000
---------- ----------
Total liabilities 9,801,161 9,413,982
---------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
authorized 1,000,000 shares; issued
and outstanding -0- shares --- ---
Common stock, $.01 par value; authorized
12,000,000 shares in 2005, 10,000,000 shares
in 2004; issued 9,040,059 shares in 2005,
9,544,299 shares in 2004 90,401 95,443
Additional paid-in capital 5,228,255 6,107,648
Accumulated deficit (3,730,103) (2,945,805)
Accumulated other comprehensive income 100,269 51,237
---------- ----------
1,688,822 3,308,523
Less cost of 504,240 shares common
stock in treasury in 2004 --- (884,435)
---------- ----------
Total stockholders' equity 1,688,822 2,424,088
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS'EQUITY $11,489,983 $11,838,070
========== ==========
See accompanying notes to consolidated financial statements.
26
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 2005 and 2004
2005 2004
----------- -----------
NET SALES $21,549,755 $15,795,309
COST OF SALES 14,300,449 9,539,655
---------- ----------
GROSS PROFIT 7,249,306 6,255,654
---------- ----------
OPERATING EXPENSES:
Commissions 2,181,751 1,796,701
Selling, general and administrative 5,857,859 4,666,927
---------- ----------
Total operating expenses 8,039,610 6,463,628
---------- ----------
LOSS FROM OPERATIONS ( 790,304) ( 207,974)
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 37,866 31,443
Interest expense ( 154,259) ( 55,284)
Other 122,399 44,510
---------- ----------
Total other income - net 6,006 20,669
---------- ----------
LOSS BEFORE INCOME TAXES ( 784,298) ( 187,305)
INCOME TAXES --- ( 9,914)
---------- ----------
NET LOSS $( 784,298) $( 177,391)
========== ==========
PER SHARE DATA:
Basic loss per share $ ( 0.09) $ ( 0.02)
========== ==========
Diluted loss per share $ ( 0.09) $ ( 0.02)
========== ==========
See accompanying notes to consolidated financial statements.
27
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2005 and 2004
Other
Common Stock Accum- Comp-
Number Par Additional ulated Other Total rehen-
of value paid-in Accumulated Comprehen- Treasury stockholders' sive
shares amount capital deficit sive Income stock equity Income
---------- -------- ---------- ------------ ------------ --------- ------------ ---------
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 35,000 350 5,663 --- --- --- 6,013 ---
Common stock issued upon
acquisition of business 287,500 2,875 73,456 --- --- --- 76,331 ---
Common stock issuable upon
acquisition of business 300,000 3,000 138,600 --- --- --- 141,600 ---
Foreign currency translation
adjustment --- 51,237 --- 51,237 51,237
Net loss - 2004 --- --- --- ( 177,391) --- --- ( 177,391) (177,391)
---------- -------- ---------- ------------ ------------ --------- ------------ ---------
Balance at January 31, 2004 9,544,299 $ 95,443 $6,107,648 $( 2,945,805) $ 51,237 $(884,435) $ 2,424,088 $(126,154)
========== ======== ========== ============ ============ ========= ============ =========
Cancellation of treasury shares ( 504,240) ( 5,042) ( 879,393) --- --- 884,435 --- ---
Foreign currency translation
adjustment --- 49,032 --- 49,032 49,032
Net loss - 2005 --- --- --- ( 784,298) --- --- ( 784,298) (784,298)
---------- -------- ---------- ------------ ------------ --------- ------------ ---------
Balance at January 31, 2005 9,040,059 $ 90,401 $5,228,255 $( 3,730,103) $ 100,269 $ --- $ 1,688,823 $(735,265)
========== ======== ========== ============ ============ ========= ============ =========
See accompanying notes to consolidated financial statements.
28
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2005 and 2004
2005 2004
OPERATING ACTIVITIES:
Net loss $( 784,298) $( 177,391)
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 554,719 316,673
Amortization 185,230 47,863
Gain on sale of assets ( 54,953) ( 4,664)
Changes in operating assets and liabilities:
Increase in trade accounts receivable ( 25,162) ( 129,474)
Decrease (increase) in inventories 220,406 (1,003,559)
Increase in prepaid expenses
and other current assets ( 153,228) ( 148,479)
Decrease (increase) in income taxes receivable 68,223 ( 97,427)
Decrease (increase) in deposits
and other assets 2,739 ( 5,382)
(Decrease) increase in trade accounts payable ( 173,580) 1,231,392
Increase (decrease) in customer deposits 595,204 ( 241,341)
Increase (decrease) in accrued expenses,
payroll, related taxes and withholdings 113,357 ( 26,421)
Decrease in due from related parties --- 10,141
Decrease in accrued income taxes --- ( 22,100)
---------- ----------
Net cash provided (used) by operating activities 548,657 ( 250,169)
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant and equipment ( 334,532) ( 468,398)
Acquisition of businesses --- (1,798,830)
Proceeds from sale of assets 122,748 10,000
Payments received on mortgage receivable 3,484 3,251
--------- ----------
Net cash used by investing activities ( 208,300) (2,253,977)
--------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 210,161 1,222,390
Net proceeds from borrowing on line of credit 250,000 503,000
Proceeds received on exercise of stock options --- 6,013
Loan origination fees ( 9,174) ( 43,544)
Repayments of capital leases ( 25,368) ( 61,616)
Repayments of bank loans ( 143,949) ( 190,208)
Repayments of notes payable ( 520,328) ( 118,818)
---------- ----------
Net cash (used) provided financing activities ( 238,658) 1,317,217
---------- ----------
Effect of foreign currency translation on cash 5,748 51,237
---------- ----------
Net increase (decrease) in cash and cash
equivalents 107,447 (1,135,692)
Cash and cash equivalents at beginning
of period 750,239 1,885,931
---------- ----------
Cash and cash equivalents at end
of period $ 857,686 $ 750,239
========== ==========
See accompanying non-cash disclosure note (Note 17 to the consolidated financial
statements).
See accompanying notes to consolidated financial statements.
29
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2005 and 2004
Note 1. Business Description
Lincoln Logs Ltd. and subsidiaries (the "Company"), headquartered in
Chestertown, N.Y., is a leading supplier of high quality home building packages.
The Company's main products are log home packages and insulated, panelized-wall
home building systems. Its wholly owned subsidiary, Snake River Log Homes LLC
("Snake River") offers as an option to its customers, construction services.
Products are represented, sold and serviced through a 61 member National Dealer
Network and through four Company-owned and operated sales centers in northern
New York, northern California, southeastern Idaho and southwestern British
Columbia, Canada. While the Company sells its products throughout the United
States, western Canada and Japan, its principal markets are in the northeastern
and northwestern regions of the United States.
Lincoln Logs Ltd. 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 operations of Lincoln Logs Ltd. during fiscal year ended
January 31, 1988); Snake River Log Homes, LLC, a sole-member limited liability
company organized under the laws of the State of Idaho whose principal activity
is the marketing and sale of log homes constructed of rustic logs in the
Swedish-cope style; AFI Acquisition Company, LLC, a sole-member limited
liability company organized under the laws of New York in October 2003 whose
principal activity is the manufacture of dimensional wood products for
consumption by Lincoln Logs Ltd.; True-Craft, Inc., a New York corporation that
was formed in November 2004 as a holding company for the Company's Canadian
subsidiary True-Craft Log Structures Co. ("True-Craft"). True-Craft is a Nova
Scotia Unlimited Liability Company formed in November 2004 as a holding company
into which the Company's Canadian subsidiaries, True-Craft Log Structures Ltd.,
Hart & Son Industries Ltd. ("Hart & Son") and Lincoln Logs Canada Ltd., were
amalgamated and whose principal activity is the manufacture, marketing and sales
of log homes principally to the Canadian, European and Pacific Rim markets.
Unless the context otherwise requires, the term "Company" refers to Lincoln Logs
Ltd. and its subsidiaries.
The Company's fiscal year ends on January 31. As used hereafter, 2005 refers
to the fiscal year ended January 31, 2005, and 2004 refers to the fiscal year
ended January 31, 2004.
In 2005, the Company purchased approximately 52% of the materials necessary to
construct its log home and panelized home packages from eight suppliers. Of
these eight suppliers, two accounted for 14% and 10% of purchases for the year
ended January 31, 2005. In 2004, the Company purchased approximately 53% of
the materials necessary to construct its log home and panelized home packages
from six suppliers. Of these six suppliers, which were not necessarily the same
suppliers in 2005, one accounted for 20% of purchases for the year ended January
31, 2004. Alternative sources of raw materials are readily available.
Note 2. Management's Plan
30
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JANUARY 31, 2005 and 2004
The Company's forecasted sales for its fiscal year ending January 31, 2006,
projects a pre-tax operating profit. This forecast is based on historical
backlog trends and a forecast of new bookings. A number of changes have been
made to operations to improve the financial performance of the Company's True-
Craft subsidiary in Canada. The Company has commenced the implementation of its
"Opt-Out" strategy to no longer be an SEC public reporting company, which once
completed will save the Company its annual SEC related compliance expenses.
Note 3. 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) 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 four
banks located in New York, Idaho, California and British Columbia, Canada. At
various times throughout 2005 and 2004 bank balances exceeded FDIC insurance
coverage.
(c) Accounts Receivable and Allowance for Doubtful Accounts. Accounts
receivable are comprised of amounts billed for recognized revenues. The
Company has two types of receivables: secured and unsecured. The secured
receivables result from the use of the Company's short term financing plan,
CASHCO(R), that is secured by an assignment of construction proceeds from the
bank that issues the construction loan to the customer. Unsecured receivables
result principally from the sale of building materials and from the performance
of construction services. Also, amounts due at the time of delivery of a log
home package at or near the Company's year end date, for which the Company
receives payment via certified check and deposits into its bank account
subsequent to the year end date, are classified as accounts receivable at the
year end date.
The Company maintains an allowance for doubtful accounts at an amount it
estimates to be sufficient to provide protection against losses resulting from
collecting less than full payment on its receivables. Management evaluates the
following criteria when forming its judgment as to the adequacy of the allowance
for doubtful accounts: risk of the individual creditor, past experience, the
composition of the debt owed and economic conditions. The Company records an
allowance for uncollectible receivables principally by specific identification
of accounts whose ability to make payments, the Company believes, has been
impaired. The Company writes-off uncollectible receivables when all efforts to
collect have been exhausted. No allowance for doubtful accounts was deemed
necessary in Fiscal 2005.
(d) Mortgage and Notes Receivable. Notes receivable are reported at their
principal balance outstanding which approximates their fair market value. The
mortgage receivable is reported at its principal balance outstanding which
approximates its fair market value. Costs associated with notes receivable, if
any, are charged to income when the note receivable is made. Interest income on
notes and mortgage receivables are recognized when accrued.
31
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JANUARY 31, 2005 and 2004
(e) Inventories. Inventories are valued at the lower of cost (on a first-in,
first-out basis) or market. Inventories are stated net of a reserve for
obsolescence in the amount of $18,000 at January 31, 2005 and January 31, 2004,
respectively.
(f) Revenue Recognition. Revenue from the sale of log home packages is
recognized when (1) we enter into a legally binding arrangement with a customer
for the sale of a home package; (2) we deliver the home package; (3) customer
payment is deemed fixed or determinable and free of contingencies or significant
uncertainties; and (4) collection is probable. For customers who utilize the
construction service offered as an option by the Company's wholly owned
subsidiary, Snake River Log Homes LLC, no revenue is recognized on any portion
of those sales until construction is substantially complete. 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 the
Company's financing plan, known as CASHCO(R) is utilized. The CASHCO plan is a
short term financing plan that is secured by an assignment of construction loan
proceeds from the bank that issues the construction loan to the customer.
Depending on circumstances, the amount financed varies between 50% and 90% with
interest at or above the prime lending rate. The financing plan is utilized for
less than 2% of all shipments and commonly the duration of the loan is not
longer than 90 days.
Upon cancellation of contracts the amounts recognized for the performance of
design and engineering services related to the preparation of blueprints are
included in net sales.
(g) Shipping and Handling Costs. Shipping and handling costs related to the
delivery of the Company's home packages and building materials are included in
cost of sales. Amounts received as reimbursements from customers of shipping
and delivery costs are included in net sales.
(h) Property, Plant & Equipment. 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-nine years. Costs related to the improvement
or betterment of assets that extended their useful life are capitalized and
depreciated over the remaining useful life of the asset; repair and maintenance
costs are expensed as incurred.
(i) 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.
(j) Goodwill. Goodwill represents the excess of the purchase price over the
estimated fair value of the net assets acquired. Goodwill and intangible
assets that have indefinite useful lives are not amortized, but are subject to
impairment testing on at least an annual basis. The Company performs a test
for goodwill impairment at least annually.
(k) Other Intangible Assets. Other intangible assets represent non-competition
agreements, loan origination costs, customer lists and a long-term supply
32
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
agreement that are being amortized over five to ten year periods. Amortization
expense was $185,230 in 2005 and $47,863 in 2004.
(l) Accounting for the Impairment of Long-Lived Assets. 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.
(m) Loss Per Share. Basic loss per share is computed by dividing net loss by
the weighted average number of common shares outstanding during the respective
periods. The weighted average number of common shares used to compute basic
loss per share was 9,040,059 for the year ended January 31, 2005 and 8,293,778
for the year ended January 31, 2004.
Diluted 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 potentially
dilutive common shares had been issued. Stock options 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 years ended January
31, 2005 and January 31, 2004 because the effect of including stock options
would be anti-dilutive.
The numerator in the calculation of diluted loss per share for the years
ended January 31, 2005 and 2004 was determined as follows:
2005 2004
---------- ----------
Net loss used to calculate basic
per share amount $ (784,298) $ (177,391)
---------- ----------
Numerator for calculation of diluted
loss per share $ (784,298) $ (177,391)
========== ==========
The denominator in the calculation of diluted loss per share for the years
ended January 31, 2005 and 2004 was determined as follows:
2005 2004
--------- ---------
Weighted average outstanding shares used
to calculate basic loss per share 9,040,059 8,293,778
Add shares issuable assuming exercise of
outstanding stock options --- ---
--------- ---------
Denominator for calculation of diluted
loss per share 9,040,059 8,293,778
========= =========
Basic loss per share $ (0.09) $ (0.02)
======= =======
Diluted loss per share $ (0.09) $ (0.02)
======= =======
Shares issuable assuming exercise of outstanding stock options at January 31,
2005 and 2004 were not included in the computation of diluted loss per share
for the years then ended as their effect was anti-dilutive.
33
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
(n) Advertising Costs. Advertising costs are expensed when the advertisement
is first run and amounted to $567,369 and $451,910 in 2005 and 2004,
respectively. The Company has prepaid advertising costs of $108,751 and
$121,845 at January 31, 2005 and 2004, respectively. These amounts for 2005 and
2004, respectively, are included in "Prepaid expenses and other current assets"
in the accompanying consolidated balance sheets.
(o) 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.
(p) Stock Based Compensation Plans. The Company accounts for its incentive
stock option plan and non-qualified stock option plan using the intrinsic value
method 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 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 as if the
fair-value-based method defined in SFAS No. 123 had been applied.
On December 16, 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004), "Share Based Payment"
("SFAS 123(R)"), which is a revision of SFAS 123. SFAS 123(R) supersedes APB
Opinion No. 25 and its interpretations, and amends Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows." SFAS 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair
values. SFAS 123(R) is effective for the Company at the beginning of the first
interim or annual period beginning after December 15, 2005. The Company intends
to adopt SFAS 123(R) beginning with its annual report for the fiscal year ended
January 31, 2006. The Company does not expect that the adoption of SFAS 123(R)
will have a material effect on its financial statements.
The following shows the pro-forma effect on net loss and loss per share for 2005
and 2004 as if the value of the stock option grants were charged to earnings
under the provisions of SFAS No. 123:
2005 2004
Net loss as reported $ (784,298) $ (177,391)
Stock compensation expense determined
under the fair value method, net of
$2,925 of income taxes in 2004 --- ( 16,575)
---------- ----------
Pro forma net loss $ (784,298) $ (193,966)
Basic and diluted loss per share as reported $ ( 0.09) $ ( 0.02)
====== ======
Pro forma basic and diluted loss per share $ ( 0.09) $ ( 0.02)
====== ======
34
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
(q) Foreign Currency Translation. The Company translates the assets and
liabilities of its wholly owned Canadian subsidiary, True-Craft, into US
currency at the current exchange rate at the end of the fiscal year. The
revenues and expenses of True-Craft are translated into US currency using the
average exchange rate during the fiscal year. Gains and losses that result from
foreign currency translation are included in Other Comprehensive Income.
Foreign currency transaction gains and losses for the years ended January 31,
2005 and January 31, 2004, which are included in operations, are not material.
Note 4. Property, Plant and Equipment
A summary of property, plant and equipment at January 31, 2005 and 2004 is
as follows:
Estimated
Useful Lives 2005 2004
---------- ----------
Land $1,012,346 $1,020,347
Buildings and improvements 15 - 39 years 2,910,945 3,047,979
Machinery and equipment 5 - 7 years 2,042,566 1,926,152
Furniture and fixtures 5 - 7 years 2,203,910 2,096,515
Transportation equipment 5 years 540,366 472,350
---------- ----------
$8,710,133 $8,563,343
========== ==========
Depreciation expense for the years ended January 31, 2005 and 2004 was
$554,719 and $316,673, respectively.
Note 5. Indebtedness
Long-term debt at January 31, 2005 and 2004 consists of the following:
2005 2004
--------- ---------
Revolving line of credit at prime rate (5.25% at
January 31, 2005), renewable annually,
collateralized by accounts receivable and inventory $ 753,000 $ 503,000
Term loan, due November 2007, interest at prime
rate, payable in equal monthly installments
with interest, collateralized by property, machinery,
equipment and fixtures 66,667 91,667
Term loan, due April 2009, interest at prime
rate, payable in equal quarterly installments,
interest payable monthly, collateralized by property,
machinery, equipment and fixtures 402,053 253,000
Term loan, due October 2013, interest only
payable for the first year, then principal and
35
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
interest payable in equal monthly installments
with the remaining outstanding balance due at
maturity; interest on $966,452 at a fixed rate
of 3.81% for two years, then reverting to prime
rate, interest on $710,707 at prime rate,
collateralized by property, machinery, equipment
and fixtures 1,677,159 1,735,000
Subordinated Note payable to related party in
connection with the Snake River acquisition (see
Note 16), due November 2008, interest at 0%, payable
annually, discounted net present value at
the rate of 7%, unsecured 316,562 410,021
Subordinated Note payable in connection with the
Snake River acquisition (see Note 16), due November
2008, interest at 0%, payable annually, discounted
net present value at the rate of 7%, unsecured 316,562 410,021
Note payable in connection with Snake River
acquisition (see Note 16), due April 2004,
interest at 0%, unsecured --- 95,000
Subordinated Note payable in connection with the True-
Craft/Hart & Son acquisition (see Note 16), due August
2008, interest at 0%, payable monthly, discounted
net present value at the rate of 8%, unsecured 179,102 222,558
Subordinated Note payable in connection with the True-
Craft/Hart & Son acquisition (see Note 16), due August
2010, interest at 0%, payable monthly, discounted
net present value at the rate of 8%, unsecured 577,968 662,767
Notes payable, ranging from 0% to 7.9%, payable in
monthly installments through April 2006, collateralized
by vehicles 14,262 54,304
Obligations under capital leases, net of interest
payable through January 2008 18,584 39,792
---------- ----------
Total long-term debt 4,321,920 4,477,130
Less current installments (1,387,936) (1,144,936)
---------- ----------
Long-term debt, net of current installments $2,933,984 $3,332,372
========== ==========
On October 7, 2003, the Company entered into a multi-faceted credit facility
with First Pioneer Farm Credit, ACA ("First Pioneer")totaling $3,675,000. The
facility consists of a 10-year term loan in the amount of $1,735,000, the first
year interest only, then principal and interest payments made monthly with the
36
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
unpaid balance of the principal due at the end of the tenth year; a 5 year term
loan in the amount of $1,065,000 with principal paid quarterly and interest
paid monthly; a 4 year term loan in the amount of $100,000 with principal and
interest paid monthly; and a $775,000 revolving line of credit that is
renewable annually. The interest rate on all of the aforementioned loans is
the prime lending rate as listed in the Wall Street Journal, which at January
31, 2005 is 5.25% with the exception of the interest rate on $1,000,000 of the
10-year term loan, which is a fixed rate of 3.81% for the first two years,
reverting in October 2005 to prime rate for years three through ten. The
Company has collateralized the term loans with all of the Company's real
property, machinery, equipment and fixtures. The revolving line of credit is
collateralized by the Company's inventory and accounts receivable. The
Company must comply with several debt covenants, affirmative, negative,
continuing and financial, in connection with the First Pioneer credit agreement.
One such covenant prohibits the Company from dividend distributions. At
January 31, 2005, the Company was in violation of three financial covenants,
for which the Company received a waiver from First Pioneer. At January 31,
2004, the Company was in violation of two financial covenants, for which the
Company received a waiver from First Pioneer.
The Company has drawn $2,899,000 and $2,588,000 on this credit facility at
January 31, 2005 and January 31, 2004, respectively.
The principal amount of future maturities of long-term debt by fiscal year
are as follows:
Year ending January 31: Amount
2006 $1,387,936
2007 622,941
2008 589,049
2009 531,589
2010 294,662
Thereafter 895,743
----------
$4,321,920
==========
Assets under capital leases represent computers, a digital copier and
blueprinting equipment. The costs, accumulated depreciation and depreciation
expense are included with owned assets in Note 3. The details are as follows:
Assets with a cost of $130,000 and accumulated depreciation of $58,043 that were
under capital leases in 2004 have ended by January 31, 2005.
The future minimum lease payments for obligations under capital leases, and
included in future maturities of long-term debt shown above, are as follows:
Year ending January 31, Amount
---------
2006 $ 15,486
2007 2,654
2008 2,653
---------
37
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
Total $ 20,793
Less Interest ( 2,209)
---------
Obligations Under
Capital Leases $ 18,584
=========
Note 6. Income Taxes
For 2005, the Company did not provide any current or deferred federal, state,
or foreign income tax provision or benefit because it experienced a net
operating loss for the year. The Company has provided full valuation allowance
on the deferred tax asset because of uncertainty regarding its realizability.
A summary of components of the income tax benefit for the year ended January
31, 2004 is as follows:
Current Deferred Total
Year ended January 31, 2004:
Federal $ 20,559 $ --- $ 20,559
State 4,000 --- 4,000
Foreign (34,473) --- (34,473)
-------- -------- --------
$( 9,914) $ --- $( 9,914)
======== ======== ========
The Company realized a tax benefit of approximately $10,000 in 2004 through the
use of net operating loss carryforwards. At January 31, 2005, the Company has
Federal net operating loss carry-forwards for income tax purposes totaling
approximately $2,672,000; $1,074,000 expire in 2007, $816,000 in 2008, $260,000
in 2009, and $522,000 through 2020. A substantial portion of the Company's net
operating losses are limited on an annual basis pursuant to the Internal Revenue
Code, due to certain changes in ownership and equity transactions. The
Company's Federal net operating loss carry-forwards for income tax purposes are
limited to approximately $565,000 of which approximately $10,000 expires in each
of the next 4 years.
The effective income tax rates for 2005 and 2004, respectively, differ from the
statutory Federal income tax rate for the following reasons:
2005 2004
------ ------
Statutory tax rate 34.0% 15.0%
Non-deductible meals and
entertainment expenses 4.0 (16.0)
State income taxes, net of federal
tax benefit --- ( 2.0)
Change in deferred tax asset
valuation allowance (20.0) ---
Other (10.0) ( 9.0)
Recoverable foreign taxes --- 21.0
Other non-deductible expenses ( 8.0) ( 3.0)
------ ------
0.0% 6.0%
====== ======
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities as of January 31, 2005 and 2004 are presented
below:
2005 2004
Deferred tax assets:
38
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
Vacation accrual $ 25,042 $ 25,042
Inventories, principally due to additional
costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986 15,055 16,544
Allowance for doubtful accounts --- 6,868
Other liabilities 27,200 16,381
Warranty accrual 11,220 13,940
Net operating loss carryforward 192,100 17,563
---------- ----------
Total gross deferred tax assets 270,617 96,428
Less valuation allowance ( 195,910) ( 36,773)
---------- ----------
Net deferred tax asset 74,707 59,685
Deferred tax liability:
Property, plant and equipment - principally
due to differences in depreciation methods ( 53,853) ( 55,352)
Acquired intangibles ( 20,854) ( 4,302)
---------- ----------
Total deferred tax liability ( 74,707) ( 59,685)
---------- ----------
Net deferred taxes $ --- $ ---
========== ==========
The valuation allowance for deferred tax assets as of January 31, 2005 and 2004
was $195,910 and $36,773, respectively. The net change in the total valuation
allowance was a decrease of $159,137 in 2005 and $36,337 in 2004, respectively.
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.
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 2005 and 2004 amounted to $83,056 and
$58,757, respectively.
Note 8. Lease Commitments
The Company is party to several non-cancelable operating leases for various
machinery and equipment, and to property leases for its subsidiaries'
facilities in Idaho and British Columbia, Canada. The facility leases call for
payment of basic monthly lease payments plus additional payments for expenses
incurred by the landlord, such as taxes and insurance. The property lease in
Canada is for a term of five years with an option to renew in August 2008 for
an additional five years. If the Company elects to extend the lease for the
option period, the monthly lease will be changed to approximate the fair market
value for similar facilities in that region, but will not be less than the basic
monthly lease payment at the conclusion of the initial term. The property lease
in Idaho is for a constant amount and will not change as long as the company
remains on the property. Total rent expense incurred by the Company during 2005
39
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
and 2004 was $173,095 and $76,613, respectively. The aggregate future minimum
operating lease payments at January 31, 2005 are as follows:
Year ending January 31:
2006 $ 163,353
2007 157,650
2008 148,979
2009 91,283
2010 3,711
Thereafter ---
---------
Total $ 564,976
=========
Note 9. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at January 31, 2005 and 2004 consist
of the following:
During 2004, through its acquisitions of True Craft Log Structures, Ltd., Hart
and Son Industries, Ltd., and Snake River Log Homes LLC the Company acquired
other intangible assets totaling in the aggregate $1,589,736. Also during 2004,
the Company wrote-off $28,500 representing a fully amortized intangible asset.
Amortization expense for the years ended January 31, 2005 and 2004 was $185,230
and $47,863 respectively.
Note 11. Accrued Expenses
40
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
Accrued expenses at January 31, 2005 and 2004 consist of the following:
On November 17, 2003, the Company completed the acquisition of Snake River. As
a result of the acquisition of Snake River, one of the two principal owners
from whom the acquisition was made has continued his employment as President of
Snake River and as an officer of Lincoln Logs Ltd. A portion of the
consideration given in connection with the acquisition was a 5-year, non-
interest bearing note for $500,000, discounted to a net present value of
$410,021 using an interest rate of 7%, and 150,000 shares of the Company's
common stock valued at market price on the date of the acquisition, $0.80 per
share, discounted to $0.47 per share for stock trading restrictions, or a total
of $70,800. The amounts shown as "Note payable, related party" represents
amounts due under the aforementioned note and total $316,562 and $410,021 at
January 31, 2005 and 2004, respectively.
Note 13. Mortgage Receivable
The mortgage, due from a former officer of the Company who resigned from the
Company in December 1997, originated September 1, 1984, bears an interest rate
of 6% and is due over a term of 35 years. The mortgage also has a clause
whereby the Company, upon 30 days written notice from the mortgagor, must
repurchase the mortgaged premises at any time during the term of the mortgage
for the sum of $90,000 (the original amount of the mortgage) or the appraised
market value of the premises, whichever is greater. The mortgage balance at
January 31, 2005 and 2004 was $60,390 and $62,645, respectively.
There are two notes receivable established in connection with the sale of a
piece of Company owned real estate, the former Theatre Building, in July 2004
and are due from non-affiliated individuals. Both notes are for equal amounts,
face value $8,700 respectively, bear interest at 6.5%, have a term of 5 years
and are payable monthly. The total notes receivable balance at January 31,
2005 was $16,170.
The future aggregate mortgage receipts at January 31, 2005 are as follows:
Year ending January 31:
2006 $ 6,392
2007 6,131
2008 6,526
41
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
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:
Weighted Average
Number of Shares Option Price Per Share
----------------------- -----------------------
Qualified Non-Qualified Qualified Non-Qualified
--------- ------------- --------- -------------
Balance at January 31, 2003 118,500 182,000 $ .16 $ .19
Granted during year 50,000 -- .50 --
Cancelled during year -- -- -- --
Exercised during year ( 35,000) -- ( .17) --
-------- --------- -------- --------
Balance at January 31, 2004 133,500 182,000 $ .29 $ .19
Granted during year -- 50,000 -- .55
Cancelled during year -- ( 2,000) -- ( .19)
Exercised during year -- -- -- --
--------- --------- -------- --------
Balance at January 31, 2005 133,500 230,000 $ .29 $ .27
========= ========= ======== ========
All outstanding incentive stock options are exercisable as of January 31, 2005.
During 2005, the Company granted 50,000 non-qualified stock options with an
exercisable price that was lower than the fair market value of the stock on the
date of the grant. The fair market price on the date of the grant was $0.76 per
share, the exercise price of the grant was $0.55 per share. The non-qualified
stock options granted during 2005 vest ratably over a 5 year period commencing
with 10,000 options that vested on November 17, 2004. A compensation charge of
approximately $2,000 has been recognized in the 2005 statement of operations
related to the non-qualified stock option grant.
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 January 31, 2005 is 3.75 years.
At the annual meeting of shareholders held on July 28, 2004, shareholders
approved a proposal to increase the number of shares available for option awards
to 985,000 shares from 485,000 shares, with 485,000 issuable as Incentive Stock
Options, and 500,000 issuable as Non-Qualified Stock Options. At January 31,
2005, there were available for future grants 548,500 shares.
Pro forma information regarding net loss and loss per share is presented in
Note 3(m) as if the Company had accounted for its stock-based awards to
42
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
employees under the fair value method of SFAS 123. The fair value of the
Company's stock-based awards to employees was estimated as of the date of grant
using a Black-Scholes option pricing model. Limitations of the effectiveness
of the Black-Scholes option valuation model are that it was developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable, and that the model requires the use of
highly subjective assumptions including expected stock price volatility. The
fair value of the Company's stock-based awards to employees during 2004 was
estimated assuming no expected dividends, a risk free interest rate of 2.875%,
an expected life of 5 years and an expected volatility of 1.116.
Note 15. 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
provided for warranty claims at January 31, 2005 and January 31, 2004 was
$33,000 and $41,000, respectively, and was based upon objective historical
data of actual costs incurred over the prior five years. During 2005 and 2004
the Company paid warranty claims of $50,599 and $67,010, respectively.
(b) Property Rent Arrangement. The Company's subsidiary, Snake River Log
Homes LLC, is party to an arrangement whereby the building that houses Snake
River's sales operations is located on the property of the adjoining land owner
to whom Snake River pays $1 per year for the right to site the building on that
site. The arrangement further stipulates that should Snake River move its
building to another site Snake River will be obligated to pay the adjoining
land owner $45,000. Snake River has no plans, either immediate or long-term,
to move from the present site.
(c) Litigation. 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. However, in two of these claims, each of
which seek damages against the Company and other parties of $500,000, coverage
has been denied by the Company's insurance carrier. These claims relate to the
home's construction and are indemnified by the related dealer.
Note 16. Acquisitions
During the year ended January 31, 2004, the Company completed the acquisitions
of Snake River Log Homes LLC ("Snake River"), True Craft Log Homes, Ltd. and
Hart and Son Industries, Ltd. (together hereinafter "True-Craft"), and acquired
substantially all of the assets of Adirondack Forest Industries, Inc. ("AFI").
The transactions were accounted using the purchase method of accounting and,
accordingly, the results of operations subsequent to the acquisition dates are
included in the accompanying consolidated financial statements.
Snake River. Pursuant to a Memberships Interest Purchase Agreement dated
November 17, 2003, the Company acquired 100% of the outstanding membership
interests of Snake River Log Homes LLC located in Rigby, Idaho, for
approximately $1,209,800. Snake River offers Swedish-cope style log home
construction kits, construction services, and drafting and engineering services.
The Company's Board of Directors approved the purchase and determined that the
purchase would provide the Company with increased breadth and depth across the
Company's product, core business and industry coverage. An integral component
43
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
of the acquisition was a product supply arrangement which Snake River maintains
with a vendor. This vendor provides Snake River with substantially all of its
wood components. The Company will also have access to this supplier. Snake
River's results have been included in the Company's Statement of Operations
since November 17, 2003, the date of acquisition. The acquisition of Snake
River's assets and operations has been accounted for using the purchase method
of accounting and, accordingly, the purchase price has been allocated to the
assets purchased and liabilities assumed based upon their fair values at the
date of acquisition.
The purchase price of approximately $1,209,800 consisted of $200,000 in cash,
approximately $820,000 of non-interest bearing, unsecured notes discounted to
their net present value at the rate of 7%, 300,000 shares of restricted common
stock of the Company, to be issued upon receipt of seller representations
letters, valued at the market price for the stock on the date of the
transaction, $0.80 per share, discounted to $0.472 for stock trading
restrictions, or a total of $141,600. The Company also assumed and paid the
existing bank loan of approximately $291,500 and incurred approximately $48,200
of transaction costs and $50,000 of loans the Company made to Snake River prior
to closing. The purchase price of the Snake River assets and operations was
allocated as follows with the excess purchase price over the fair values
recorded as goodwill:
Current assets $ 555,955
Building and equipment 65,956
Other intangible assets 1,092,000
Goodwill 519,173
Liabilities assumed (1,020,250)
---------
Purchase Price $ 1,209,834
The Company utilized a third-party valuation report in its determination of the
fair value of identifiable intangible assets. Purchases of intangibles with
finite lives will be amortized on a straight-line basis over their respective
useful lives. The identifiable intangible assets purchased in the Snake River
acquisition consisted of the following: non-competition covenants of $42,000,
and a product supply agreement of $1,050,000. The Company believes that all of
the goodwill will be deductible for tax purposes.
True-Craft. Pursuant to a Stock Purchase Agreement dated June 27, 2003, the
Company, through its 100% owned subsidiary Lincoln Logs Canada Ltd., acquired
100% of the outstanding stock of True Craft Log Structures, Ltd. and Hart and
Son Industries, Ltd., two companies affiliated through common ownership located
in Maple Ridge, British Columbia, Canada, for approximately $1,895,400. True-
Craft offers pre-cut log home construction kits, windows, doors and building
materials, and drafting and engineering services. The Company's Board of
Directors approved the purchase and determined that the purchase would provide
the Company with increased breadth and depth across the Company's product, core
business and industry coverage. True-Craft's results have been included in the
Company's Statement of Operations since the acquisition date of August 29, 2003.
The acquisition of True-Craft's assets and operations has been accounted for
using the purchase method of accounting and, accordingly, the purchase price
has been allocated to the assets purchased and liabilities assumed based upon
their fair values at the date of acquisition.
The purchase price of approximately $1,895,400 consisted of $615,200 in cash,
approximately $929,000 of non-interest bearing, unsecured notes discounted to
their net present value at the rate of 8%, 287,500 shares of restricted common
stock of the Company valued at the market price for the stock on the date of
the transaction, $0.45 per share, discounted to $0.265 for stock trading
restrictions, or approximately $76,300. The Company also assumed and paid the
44
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
existing bank loan of approximately $155,500 and incurred $274,827 in
transaction costs. The allocation of the purchase price of the True-Craft
assets and operations is preliminary and was allocated as follows with the
excess purchase price over the fair values recorded as goodwill:
The Company utilized a third-party valuation report in its determination of the
fair value of identifiable intangible assets. Purchases of intangibles with
finite lives will be amortized on a straight-line basis over their respective
useful lives. The identifiable intangible assets purchased in the True-Craft
acquisition consisted of the following: non-competition covenants of $33,071,
established long-term customer relations of $88,688 and the Company's trademark
of $323,938. In the course of normal post-closing review, the Company
discovered several items that may result in an adjustment that reduces the
purchase price pursuant to contract terms. The Company believes that all of
the goodwill will be deductible for tax purposes.
AFI. Pursuant to an Asset Sale Agreement dated October 7, 2003, the Company,
through its 100% owned subsidiary AFI Acquisition Company LLC, acquired all of
the assets and assumed the outstanding debt of Adirondack Forest Industries,
Inc. ("AFI") for approximately $1,059,800. AFI is a saw mill that cuts,
manufactures and sells dimensional lumber and its by-products, and
offers kiln-drying services. The Company's Board of Directors approved the
purchase and determined that the purchase would provide the Company with
vertical manufacturing capabilities to augment the purchase of needed raw
material from independent suppliers for the Company's log home kits. AFI's
results have been included in the Company's Statement of Operations since the
acquisition date of October 7, 2003. The acquisition of AFI's assets has been
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets purchased and liabilities
assumed based upon their fair values at the date of acquisition.
The purchase price of approximately $1,059,800 consisted of $865,600 of assumed
bank debt, $62,900 of assumed current liabilities, $22,500 of other long-term
obligations and $108,800 of transaction costs. The purchase price of the AFI's
assets was allocated as follows:
Current assets $ 37,287
Land & buildings 240,000
Machinery & equipment 375,975
Other intangible asset 8,495
Goodwill 398,026
------------
Purchase Price $ 1,059,783
The Company believes that all of the goodwill will be deductible for tax
purposes.
Note 17. Supplementary Disclosure of Cash Flow Information
2005 2004
--------- ---------
Cash paid during the year for:
Interest $ 128,944 $ 49,358
========= =========
Income taxes $ 4,030 $ 75,280
========= =========
45
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
Included in the above amounts are $7,058 in 2004 for cash paid for interest to
related parties in connection with the Company's Series B and Series C
Convertible Subordinated Debentures.
Non-cash investing and financing activities:
During 2005, the following transactions occurred:
In January 2005, the Company recorded an increase in office equipment of $4,160
and a related increase in long-term debt of an equal amount in connection with
the purchase of a digital copier/printer.
In January 2005, the Company cancelled all of the 504,240 shares of common stock
held in its Treasury. This resulted in a reduction in total outstanding shares
to 9,040,059 at January 31, 2005 from 9,544,299 at January 31, 2004. The total
cost of the treasury shares, $844,435, was charged against Common Stock and
Additional Paid-In Capital and reduced those balances to $90,401 and $5,228,255,
respectively, at January 31, 2005.
In July 2004, the Company received notes in the amount of $17,400 for a portion
of the sale of real property.
During Fiscal 2004, the following transactions occurred:
The Company issued 1,162,500 shares of common stock upon the conversion of
$170,000 of Series B Convertible Subordinated Debentures and $50,000 of Series
C Convertible Subordinated Debentures at their maturity on May 15, 2003.
The Company recorded an increase in transportation equipment of $41,611 and a
related increase in long-term debt in the same amount representing the purchase
of a truck.
The Company issued 287,500 shares of common stock upon the acquisition of and as
part of consideration paid for True Craft Log Structures, Ltd. and Hart and Son
Industries, Ltd. on August 29, 2003. The value placed on the shares was equal
to the market price of the shares on the date of the transaction, $0.45 per
share, discounted to $0.265 for per share for stock trading restrictions, or a
total of $76,331. In addition, the Company, through its subsidiary Lincoln Logs
Canada Ltd., issued unsecured, non-interest bearing Notes Payable in connection
with the aforementioned acquisition in the aggregate amount of $959,364
($1,325,458 CDN) converted at the foreign exchange rate on the date of the
transaction, which represents the net present value of the notes discounted at
the rate of 8%.
The Company issued 300,000 shares of common stock as part of the consideration
paid for the acquisition of Snake River Log Homes LLC. The shares are issuable
as of the acquisition transaction date of November 17, 2003 (see Note 16 above).
The value place on the shares was equal to the market price of the shares on the
date of the transaction, $0.80 per share, discounted to $0.47 per share for
stock trading restrictions, or a total of $141,600. In addition, the Company
issued unsecured, non-interest bearing Notes Payable in connection with the
aforementioned acquisition in the aggregate amount of $820,042, which represents
the net present value of the notes discounted at the rate of 7%.
46
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2005 and 2004
In connection with the acquisition of Snake River Log Homes LLC, the Company
assumed a non-interest bearing note with a due date of April 1, 2004 in the
amount of $95,000.
In connection with the acquisition of the assets of Adirondack Forest
Industries, Inc., the company assumed $865,610 of indebtedness to First Pioneer
Farm Credit, ACA. This amount is part of the 10-year term loan contained in the
Company's credit agreement with First Pioneer.
Note 18. 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, Trade Accounts Receivable, Notes Receivable,
Trade Accounts Payable, Customer Deposits, Accrued Expenses and Long-Term Debt.
The carrying amounts of cash and cash equivalents, trade accounts receivable,
notes receivable, trade accounts payable, customer deposits, accrued expenses
and long-term 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 $65,898 compared
to its carrying amount of $60,389.
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 19. Reclassifications
Certain amounts in the Consolidated Balance Sheet and Consolidated Statements
of Operations for the year ended January 31, 2004 have been reclassified to
conform to the presentation for the year ended January 31, 2005.
Note 20. Subsequent Events
Subsequent to year end, the board of directors of the Company approved a 500 to
1 reverse stock split, which is subject to shareholder approval. In conjunction
with the 500 to 1 reverse stock split, the board of directors of the Company
has approved the repurchase of fractional shares, which is expected to total
approximately $115,000.
47
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. 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 fiscal year ended January 31, 2005 that has
materially affected, or is reasonably likely to affect, the Company's internal
control over financial reporting.
ITEM 8B. OTHER INFORMATION
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 Company'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)
---------------- --- -------- ---------------------------
Leslie M. Apple 55 2000
Reginald W. Ray, Jr. 75 1982
Samuel J. Padula 81 1985
Steven Patlin 64 2000
Richard C. Farr 76 1982 Director of Corporate Strategy
John D. Shepherd 59 1982 Chairman of the Board; President and Chief
Executive Officer
William J. Thyne 55 1999 Vice President, Treasurer and Secretary *
Jeffry J. LaPell 45 2001 Vice President and Chief Operating Officer
Benjamin A. Shepherd 51 2003 Vice President of Corporate Development;
Vice President-Finance and Chief
Financial Officer
* William J. Thyne has resigned as an executive officer of the Company. Mr.
Thyne will continue to serve on the board of directors.
48
Business Experience
Leslie M. Apple has been a Partner and practicing attorney in the Albany,
New York law firm of Whiteman, Osterman & Hanna for more than the past five
years. From 1982 through December 1997 Mr. Apple was a Director of the
Company. From January 1987 through December 1997, Mr. Apple had been a
Special Administrative Assistant to the President, and from May 1997 until
December 1997 Mr. Apple was a member of the Company's Office of the Chief
Executive. Mr. Apple resigned from all positions with the Company in
December 1997 and has had no affiliation with the Company until he was
appointed to a vacant seat on the Board of Directors and to the position of
Special Administrative Assistant to the President on November 30, 2000. Mr.
Apple resigned his position as Special Administrative Assistant to the
President on January 31, 2003 and no longer holds any position with the
Company other than as a Director.
Reginald W. Ray, Jr. has been President of The Hunter Corporation, a
holding company in Sherborn, Massachusetts, for more than the past
five years. Since January 1987, Mr. Ray had been a Special Administrative
Assistant to the President. Mr. Ray resigned his position as Special
Administrative Assistant to the President on January 31, 2003 and no longer
holds any position with the Company other than as a Director.
Samuel J. Padula has been President and Chief Executive Officer of Padula
Construction Corp., a real estate development and construction firm in Toms
River, New Jersey, and Samuel J, Padula Real Estate Company in Toms River,
New Jersey for more than the past five years. Since January 1987, Mr. Padula
had 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. Mr. Padula resigned
his position as Special Administrative Assistant to the President on January
31, 2003 and no longer holds any position with the Company other than as a
Director.
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 the Company at which time he resigned that position. Since
February 2000, Mr. Patlin had been a Special Administrative Assistant to the
President. 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 resigned his position as Special Administrative
Assistant to the President on January 31, 2003 and no longer holds any position
with the Company other than as a Director.
Richard C. 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 the Chief Executive, which position he resigned on
49
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 and continues to hold since his resignation as
Chairman in July 1997.
John D. Shepherd has been Chairman of the Board, President and Chief
Executive Officer of the Company since December 1997. Mr. Shepherd was also
Treasurer of the Company from December 1997 until February 2001. Mr. Shepherd
has been President of Sweetbrier Ltd., an equestrian facility, for more than
the past five years. From January 1987 until May 1997, Mr. Shepherd had 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. Mr. Shepherd is the brother of Benjamin A. Shepherd, Vice President-
Finance and Corporate Development and Chief Financial Officer, and a Director
of the Company.
William J. Thyne, CPA, has been Secretary since January 1998, Vice President
since September 1999 and Treasurer since February 2001. Mr. Thyne had also been
Chief Financial Officer of the Company from January 1998 until March 2004. 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.
William J. Thyne resigned as an executive officer of the Company on April 15,
2005. Mr. Thyne will continue to serve on the board of directors.
Jeffry J. LaPell had been Vice President - Sales since re-joining the
Company in December 1999, which position he held until February 4, 2002. In
August 2001, Mr. LaPell was elected to the additional position of Chief
Operating Officer. Prior to re-joining the Company Mr. LaPell was Director of
Sales for Asperline Log Homes, Inc., a wholly owned subsidiary of Imagineering
Services, Inc., in Lock Haven, Pennsylvania from December 1998 to December 1999.
Prior to that position, and for more than five years, Mr. LaPell was employed
by Lincoln Logs Ltd. in various sales positions the most recent of which was
National Sales Manager.
Benjamin A. Shepherd joined the Company in March 2003 as Vice President of
Corporate Development. In March 2004, Mr. Shepherd was appointed to the
additional position of Vice President-Finance and Chief Financial Officer.
Prior to joining the Company, Mr. Shepherd had been President of Armstrong
Pharmaceuticals, Inc., a manufacturer of inhalation pharmaceutical products in
Boston, Massachusetts, since February 1991. Prior to that, Mr. Shepherd held a
number of positions at Armstrong Pharmaceuticals, Inc. including Treasurer,
Chief Financial Officer and Executive Vice President. Mr. Shepherd is the
brother of John D. Shepherd, Chairman of the Board of Directors, President and
Chief Executive Officer of the Company.
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 registered as an investment company under the
Investment Company Act of 1940 other than Mr. Farr who is a Trustee of the
Scottish Widows International Fund.
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 Messrs. Apple,
Ray and Padula. The Board of Directors of the Company has determined that Mr.
50
Apple qualifies as an audit committee financial expert. Mr. Apple is not
independent, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under
the Securities Exchange Act of 1934. The Compensation Committee, whose
function is to review and make recommendations to the Board on executive
compensation, consists of Messrs. Ray, Padula and Farr. The Strategy Committee,
whose function is to make recommendations to the Board on the future business
direction of the Company, consists of Messrs. Farr, Apple and Patlin. The
Company does not have a standing nominating committee or any committee
performing a similar function. During the fiscal year ended January 31, 2005
there were four meetings of the Audit Committee.
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
opposite 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 59 Chairman of the Board; President and Chief Executive
Officer
William J. Thyne 55 Vice President; Treasurer; Secretary *
Jeffry J. LaPell 45 Vice President and Chief Operating Officer
Benjamin Shepherd 51 Vice President - Finance and Corporate Development;
Chief Financial Officer
Charles A. Clark 57 Vice President - Western Region
Richard H. Berry 44 Vice President; President - Snake River Log Homes
* William J. Thyne has resigned as an executive officer of the Company. Mr.
Thyne will continue to serve on the board of directors.
John D. Shepherd has been Chairman of the Board, President and Chief
Executive Officer since his election to those offices in December 1997. Mr.
Shepherd also served as the Company's Treasurer from December 1997 until
February 2001. Mr. Shepherd has been President of Sweetbrier Ltd., an
equestrian facility, for more than the past five years. 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. Mr.
Shepherd is the brother of Benjamin A. Shepherd, Vice President-Finance and
Corporate Development and Chief Financial Officer, and a Director of the
Company.
William J. Thyne, CPA, has been Secretary since January 1998, Vice President
since 1999 and Treasurer in February 2001. Mr. Thyne had been Chief Financial
Officer of the Company from January 1998 until March 2004. 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
51
B services in Guilderland, New York from August 1996 to January 1998.
William J. Thyne resigned as an executive officer of the Company on April 15,
2005. Mr. Thyne will continue to serve on the board of directors.
Jeffry J. LaPell has been Vice President - Sales since re-joining the
Company in December 1999 until February 4, 2002 when Mr. Eric Johnson was hired
as Vice President - Sales. Mr. LaPell was elected to the additional position of
Chief Operating Officer in August 2001. Prior to re-joining the Company Mr.
LaPell was Director of Sales for Asperline Log Homes, Inc., a wholly owned
subsidiary of Imagineering Services, Inc., in Lock Haven, Pennsylvania from
December 1998 to December 1999. Prior to that position, and for more than five
years, Mr. LaPell was employed by Lincoln Logs Ltd. in various sales positions
the most recent of which was National Sales Manager.
Benjamin A. Shepherd joined the Company in March 2003 as Vice President of
Corporate Development. In March 2004, Mr. Shepherd was appointed to the
additional position of Vice President-Finance and Chief Financial Officer.
Prior to joining the Company, Mr. Shepherd had been President of Armstrong
Pharmaceuticals, Inc., a manufacturer of inhalation pharmaceutical products in
Boston, Massachusetts, since February 1991. Prior to that, Mr. Shepherd held a
number of positions at Armstrong Pharmaceuticals, Inc. including Treasurer,
Chief Financial Officer and Executive Vice President. Mr. Shepherd is the
brother of John D. Shepherd, Chairman of the Board of Directors, President and
Chief Executive Officer of the Company.
Charles A. Clark joined the Company the Company in July 1999 as a sales
representative in the Company's Auburn, California office, and was promoted to
the position of Manager of the Auburn, California sales office in October 1999.
In February 2001, Mr. Clark was promoted to the additional position of Western
Regional Manager until his recent promotion to Vice President - Western Region
in April 2003. Prior to joining the Company and for more than the past five
years, Mr. Clark was President of Clark and Associates, an import company of
consumer related products. Prior to that position, Mr. Clark held several
positions as a senior sales manager in a series of companies whose primary
business was the import and distribution of electronics.
Richard H. Berry joined the Company upon the acquisition of Snake River Log
Homes, LLC by the Company on November 17, 2003. Mr. Berry was one of two
principals who owned Snake River Log Homes, LLC and was President of that
company at that time. Mr. Berry was retained as President of Snake River Log
Homes, LLC and given the additional position of Vice President with the Company.
Prior to joining the Company, Mr. Berry was President of Snake River Log Homes,
LLC for three years. Prior to that position, and for more than five years, Mr.
Berry was Vice President of Sales and Marketing as well as a partner in the
firm Cape Athletic, LLC.
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires executive
officers and directors who beneficially own more than ten percent (10%) of the
Company's Common Stock to file initial reports of ownership and reports of
changes of ownership with the Securities and Exchange Commission. Executive
officers, directors and greater than ten percent (10%) beneficial owners are
required by Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.
52
The Company believes that its executive officers, directors and greater than
ten percent (10%) beneficial owners complied with all applicable Section 16(a)
filing requirements during and with respect to the fiscal year ended January 31,
2005.
CODE OF ETHICS
The Company has adopted a code of ethics (the "Code") that applies to all of
the Company's executive officers. The Code is intended to promote honest and
ethical conduct, full and accurate reporting, and compliance with laws as well
as other matters. The Code is posted on the Company's website, www.lincolnlogs.
com and a copy of the Code is included as Exhibit 14.1 to this Annual Report on
Form 10-KSB. Any amendment to or waiver of a provision of the Code will also
be disclosed on the Company's website.
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, 2005, January 31, 2004 and January 31, 2003.
(1) Mr. Shepherd was elected Chief Executive Officer in December 1997. Since
June 1982 Mr. Shepherd has been a director of the Company.
53
(2) This amount consists of $6,000 paid for directors' meetings fees, $5,670
of matching funds contributed to the Company's 401(k) Plan and $348 paid
for term life insurance.
(3) This amount consists of $6,000 paid for directors' meeting fees, $3,480 of
matching funds contributed to the Company's 401(k) Plan, $348 paid for
term life insurance, and $350 paid for interest on amounts advanced to
the Company.
(4) This amount consists of $3,000 paid for directors' meeting fees, $3,443
of matching funds contributed to the Company's 401(k) Plan, and $348 paid
for term life insurance and $1,200 paid for interest on Series B
Convertible Subordinate Debentures.
(5) These amounts represent an annual salary paid to the directors of the
Company. Mr. Benjamin Shepherd was elected to the Board of Directors on
July 9, 2003, and the amount shown next to his name for fiscal year 2004
represents a pro-rated amount for that fiscal year.
(6) Mr. LaPell was elected Vice President and Chief Operating Officer in
August 2001, and appointed to a vacant seat on the Board of Directors in
August 2001. From December 1999 to January 2002 Mr. LaPell was Vice
President - Sales.
(7) This amount consists of $6,000 paid for directors' meeting fees, $4,730
of matching funds contributed to the Company's 401(k) Plan and $387 paid
for term life insurance.
(8) This amount consists of $6,000 paid for directors' meeting fees, $4,437
of matching funds contributed to the Company 401(k) Plan and $320 paid
for term life insurance.
(9) This amount consists of $3,000 paid for directors' meeting fees, $3,080
of matching funds contributed to the Company 401(k) Plan and $313 paid
for term life insurance.
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. Seventy-one of the
Company's employees are currently eligible to participate in the Plan, fifty-
seven 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, $13,000 for the 2004 calendar year). Contributions to the Plan made
by the Company are 20% vested after a participating employee completes two
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. The Company
is current with respect to its funding obligations to the Plan.
During the fiscal years ended January 31, 2005, 2004 and 2003, cumulative
vested account balances of $8,333, $14,953 and $174,532, respectively, were
paid from the Plan to employees of the Company upon their separation from
service in the Company pursuant to the Plan.
Directors' Compensation
During the fiscal years ended January 31, 2005 and 2004, each Director
received an $8,000 annual salary and also received $1,500 for each directors
meeting they attended. Further, members of committees of the Board of
Directors received $500 for each committee meeting attended.
Employment Contracts
54
The Company is party to employment contracts with Jeffry J. LaPell, Vice
President and Chief Operating Officer, Richard Berry, Vice President and
President of Snake River Log Homes LLC, and has been a party to an employment
contract with Eric R. Johnson, Vice President - Sales, until Mr. Johnson
terminated his employment with the Company on September 24, 2004. The contract
with Mr. LaPell is for a term of two years, call for a certain base salary
(adjusted annually for the change in the Consumer Price Index), and includes
incentives for an annual bonus based on the achievement of defined goals related
to sales revenues of Lincoln Logs Ltd. and Lincoln Logs Ltd.'s backlog of
contracts. Mr. LaPell's contract also contains non-competition clauses that
would be effective upon separation from service to the Company, and a severance
provision whereby he would be paid an amount equal to three months' base salary.
Mr. LaPell's contract was renewed on May 31, 2004 for an additional two years.
All terms of the contract remained the same with the exception of Mr. LaPell's
base salary, which was increased to $120,000 per year, and the defined goals
related to his annual bonus were amended to be related to the sales revenues and
backlog of contracts for Lincoln Logs Ltd. and its subsidiaries.
Mr. Berry's contract is for a term of five years and automatically extends
for successive one year periods unless either Mr. Berry or the Company has
given thirty days prior written notice of its intention not to renew the
contract for an additional one year term. The contract calls for a certain
base salary and includes incentives for an annual bonus based on the achievement
of defined goals related to delivery of products from Snake River Log Homes LLC
and sales revenue goals related to Snake River and the Company, and contains a
non-competition clause that would be effective upon conclusion of employment
with the Company. The contract also contains a severance provision that under
certain conditions would continue the payment of Mr. Berry's annual base salary
until the end of the initial five-year employment term, and the payment of an
amount equal to three months base salary if the termination occurs during any of
the one-year extension periods. As of January 31, 2004 the base salary for Mr.
Berry is $85,000. Mr. Berry's employment contract expires on November 17, 2008.
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 Common 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, 2005 as of April 25, 2005
------------------- ---------------------- ----------------------
55
Richard C. Farr 1,110,802 (1) 11.86%
40 Colony Road
W. Hartford CT 06117
John D. Shepherd 5,409,461 (2) 57.77%
1020 Sport Hill Road
Easton, CT 06612
(1) Includes (i) 70,000 shares subject to options which are exercisable
within 60 days.
(2) Includes (i) 250,000 shares owned by Mrs. Susan Shepherd, his wife, as
to which Mr. Shepherd disclaims beneficial ownership, and (ii) 50,000
shares owned by Mr. Jason Tunick, his son, as to which Mr. Shepherd
disclaims beneficial ownership.
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
Beneficially Owned Beneficially Owned
Name as of April 25, 2005 as of April 25, 2005
--------------- ---------------------- ----------------------
Richard C. Farr 1,110,802 (4) 11.86%
Samuel J. Padula 298,743 (1)(2) 3.19%
Reginald W. Ray, Jr. 220,404 (1)(3) 2.35%
John D. Shepherd 5,409,461 (5) 57.77%
William J. Thyne 96,085 (6) 1.03%
Steven Patlin 60,100 (7) 0.64%
Jeffry J. LaPell 25,000 (9) 0.27%
Leslie M. Apple 75,000 (1) 0.80%
Benjamin A. Shepherd 191,000 (8) 2.04%
Charles A. Clark 0 0.00%
Richard Berry 200,000 (10) 2.14%
All officers and
directors as a group
(11 persons) 7,686,595 (11) 82.09%
(1) Includes 25,000 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 (ii) 263,603 shares held by Mrs. Padula as to which Mr. Padula
disclaims beneficial ownership.
56
(3) Includes 12,702 shares owned by Mr. Ray's wife as to which Mr. Ray
disclaims beneficial ownership.
(4) Includes 70,000 shares subject to options which are exercisable
within 60 days.
(5) Includes (i) 250,000 shares owned by Mrs. Susan Shepherd, his wife, as
to which Mr. Shepherd disclaims beneficial ownership, and (ii)50,000
shares owned by Mr. Jason Tunick, his son, as to which Mr. Shepherd
disclaims beneficial ownership.
(6) Includes 61,085 shares owned jointly by Mr. Thyne and his wife with
whom Mr. Thyne shares voting and investment power.
(7) Includes 50,000 shares owned jointly by Mr. Patlin with his wife with
whom Mr. Patlin shares voting and investment power.
(8) Includes (i) 50,000 shares subject to options, which are exercisable
within 60 days, (ii) 20,000 shares owned by Mr. Shepherd's children, as
to which Mr. Shepherd disclaims beneficial ownership, and (iii) 111,000
shares owned jointly by Mr. Shepherd with his wife with whom Mr.
Shepherd shares voting and investment power.
(9) Includes 25,000 shares owned jointly by Mr. LaPell wife with whom Mr.
LaPell shares voting and investment power.
(10) Includes 50,000 shares subject to options, which become exercisable over
a five-year period commencing with 10,000 becoming exercisable on
November 17, 2004.
(11) Includes 245,000 shares subject to options, of which 205,000 become
exercisable within 60 days and 40,000 become exercisable ratably over the
next four years commencing with 10,000 becoming exercisable on November
17, 2005.
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.
ITEM 12. 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.
The Company received legal services from the law firm of Whiteman Osterman
& Hanna LLP, of which Leslie M. Apple, a director of the Company, is a partner,
and accrued fees for such legal services rendered to the Company of $41,300 and
$141,300 during the fiscal years ended January 31, 2005 and January 31, 2004,
respectively.
ITEM 13. EXHIBITS
57
2.1 Stock Purchase Agreement, dated as of June 27, 2003, by and among
Lincoln Logs Ltd., 666764 B.C. Ltd., True-Craft Log Structures Ltd., Hart
& Son Industries Ltd., Robert Gordon Hart, Judith Anne Hart, Matthew
Joseph Mellof and Shelley L. Mellof, filed as Exhibit 2.1 for the
Registrant's Current Report on Form 8-K, dated September 15, 2003, filed
with the Securities and Exchange Commission on September 15, 2003, and
incorporated herein by this reference.
2.2 Membership Interests Purchase Agreement, dated as of November 17, 2003, by
and among Lincoln Logs Ltd., Snake River Log Homes, LLC, Richard Berry and
Darrell Smith, filed as Exhibit 2.1 for the Registrant's Current Report on
Form 8-K, dated November 20, 2003, filed with the Securities and Exchange
Commission on November 20, 2003, and incorporated herein by this
reference.
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.
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.
58
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.
10.7 Employment Agreement with Jeffry LaPell dated as of June 8, 2002, filed as
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 31, 2003, filed with the Securities and Exchange
Commission on April 30, 2003, and incorporated herein by this reference.
10.8 Employment Agreement with Eric Johnson dated as of February 6, 2002, filed
as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 31, 2003, filed with the Securities and Exchange
Commission on April 30, 2003, and incorporated herein by this reference.
10.9 Revolving Credit and Loan Agreement, dated October 7, 2003, by and between
Lincoln Logs Ltd. and First Pioneer Farm Credit, ACA, filed as Exhibit
10.1 for the Registrant's Current Report on Form 8-K, dated October 7,
2003, filed with the Securities and Exchange Commission on October 7,
2003, and incorporated herein by this reference.
14.1 Code of Ethics.
16.1 Letter from Urbach Kahn & Werlin LLP to Securities and Exchange
Commission, dated as of October 12, 2004, filed as Exhibit 16.1 to the
Registrant's Current Report on Form 8-K, dated October 6, 2004, filed
with the Securities and Exchange Commission on October 12, 2004, and
incorporated herein by this reference.
21.1 List of Subsidiaries.
59
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 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 Rule 13a-14(a) and
Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees billed to the Company by Its Independent Auditors
UHY LLP ("UHY") have a continuing relationship with UHY Advisors, Inc.
("Advisors") from which it leases staff who are full time permanent employees
of Advisors and through which its partners provide non-audit services. Non-
audit services for the fiscal year ended January 31, 2005 ("Fiscal 2005"),
referred to below under "Tax Fees" were provided to the Company by Advisors.
As a result of UHY's arrangement with Advisors, UHY has no full time employees
and, therefore, all audit services performed for the Company by UHY for Fiscal
2005 were provided by permanent, full time employees of Advisors leased to UHY.
UHY manages and supervises the audit engagement and the audit staff, and is
exclusively responsible for the report rendered in connection with its audit of
the Company's Fiscal 2005 consolidated financial statements.
For the fiscal year ended January 31, 2005 and 2004, fees for professional
services provided by UHY are categorized as follows:
Audit Fees. Audit fees consist principally of fees for services in connection
with the audit of the Company's annual financial statements and review of the
Company's quarterly financial statements and amounted to $94,300 in 2005 and
$119,901 in 2004.
Audit-related Fees. Audit-related fees consist principally of assurance and
related services that are reasonably related to the performance of the audit or
review of the Company's financial statements but not reported under the caption
"Audit Fees." These fees include review of the Company's Current Reports on
Form 8-K filed by the Company, and participation at audit committee meetings.
These fees amounted to $5,310 in 2005 and $78,176 in 2004.
Tax Fees. Tax fees consist of fees for tax compliance, tax advice, tax planning
and tax return preparation, and amounted to $28,685 in 2005 and $8,618 in 2004.
All Other Fees. All other fees consist of aggregate fees billed for products and
services provided by the independent auditor, other than those disclosed above.
There were no such fees billed by the Company's independent accountants for the
fiscal years ended January 31, 2005 and January 31, 2004.
Pre-Approval of Services by Independent Auditors
60
The Audit Committee pre-approved all audit, audit-related, and tax services
performed by UHY, the Company's external auditors for Fiscal 2005. The Audit
Committee approves all audit fees and terms for all services provided by the
independent auditor and considers whether these services are compatible with the
auditor's independence. There is no de minimis provision under which the pre-
approval process would be waived. The Audit Committee has advised the Company
that it has determined that the non-audit services rendered by the Company's
independent auditors during the Company's most recent fiscal year are compatible
with maintaining the independence of such auditors.
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
Date: April 30, 2005
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: (ii) Principal Financial Officer:
s/John D. Shepherd s/Benjamin A. Shepherd
John D. Shepherd, Benjamin A. Shepherd
Chairman of the Board, Vice President - Finance,
President and Chief Executive Chief Financial Officer
Officer
Date: April 30, 2005 Date: April 30, 2005
(Signitures Continued on Next Page)
61
(iii) A Majority of the Board of Directors:
s/ Richard C. Farr April 29, 2005
------------------------
Richard C. Farr
April , 2005
------------------------
Samuel J. Padula
s/ Reginald W. Ray Jr. April 29, 2005
------------------------
Reginald W. Ray, Jr.
s/ John D. Shepherd April 30, 2005
------------------------
John D. Shepherd
s/ William J. Thyne April 28, 2005
-----------------------
William J. Thyne
s/ Steven Patlin April 30, 2005
------------------------
Steven Patlin
s/ Leslie M. Apple April 29, 2005
------------------------
Leslie M. Apple
s/ Jeffry J. LaPell April 28, 2005
------------------------
Jeffry J. LaPell
s/ Benjamin A. Shepherd April 29, 2005
------------------------
Benjamin A. Shepherd
62
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 annual report of Form 10-KSB of Lincoln Logs Ltd.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The issuer's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and we 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 issuer, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the issuer'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 report based on such evaluation; and
c) disclosed in this report any change in the issuer's internal control over
financial reporting that occurred during the small business issuer's most recent
fiscal quarter (the issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to affect the
issuer's internal control over financial reporting ;
5. The issuer's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
issuer's auditors and the audit committee of the issuer's board of directors
(or persons performing the equivalent function):
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 issuer'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 issuer's internal control over
financial reporting.
Date: April 30, 2005 s/John D. Shepherd
Name: John D. Shepherd
Title: Chairman of the Board of Directors,
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Benjamin A. Shepherd, certify that:
1. I have reviewed this annual report of Form 10-KSB of Lincoln Logs Ltd.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The issuer's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and we 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 issuer, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the issuer'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 report based on such evaluation; and
c) disclosed in this report any change in the issuer's internal control over
financial reporting that occurred during the small business issuer's most recent
fiscal quarter (the issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to affect the
issuer's internal control over financial reporting ;
5. The issuer's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
issuer's auditors and the audit committee of the issuer's board of directors
(or persons performing the equivalent function):
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 issuer'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 issuer's internal control over
financial reporting.
Date: April 30, 2005 s/Benjamin A. Shepherd
Name: Benjamin A. Shepherd
Title: Vice President - Finance & Corporate
Development and Chief Financial Officer
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 annual report of Lincoln Logs Ltd. (the "Company") on
Form 10-KSB for the period ended January 31, 2005 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, 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: April 30, 2005 s/ John D. Shepherd
Name: John D. Shepherd
Title: Chairman of the Board of Directors,
President and Chief Executive Officer
[ A signed original of this statement required by Section 906 has been provided
to Lincoln Logs Ltd. and will be retained by Lincoln Logs Ltd. and furnished to
the Securities 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 annual report of Lincoln Logs Ltd. (the "Company") on
Form 10-KSB for the period ended January 31, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Benjamin A.
Shepherd, Chief Financial Officer of the Company, certify, 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: April 30, 2005 s/ Benjamin A. Shepherd
Name: Benjamin A. Shepherd
Title: Vice President - Finance & Corporate
Development 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 Securities and Exchange Commission or its staff upon request. ]
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