UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2004 Commission File
Number 0-12172
LINCOLN LOGS LTD.
(Name of small business issuer in its charter)
New York 14-1589242
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Riverside Drive, Chestertown, New York 12817
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (518) 494-5500
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
NONE NONE
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
Share Purchase Rights
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended January 31, 2004 were
were $15,795,309.
The aggregate market value of common stock held by non-affiliates of the
registrant as of April 27, 2004 was approximately $978,500. The number
of shares of Common Stock of the registrant outstanding on April 27, 2004
was 9,040,059.
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Lincoln Logs Ltd. (herein the "Company") is primarily engaged in the business of
designing, manufacturing and marketing a broad line of log and panelized homes
to be erected by custom builders and "do-it-yourself" buyers. The Company planes
cants (logs milled on four sides) at its own manufacturing facilities in
Chestertown, New York and Maple Ridge, British Columbia and delivers to its
customers by truck trailer a weather-tight log home or panelized shell package
which includes logs or pre-engineered structural wall panels, prefabricated roof
trusses, oriented strand board, dimensional lumber, windows, doors, roof
shingles, nails, caulking, between-log sealant, blueprints and a construction
guide. While the Company historically has not provided construction services
to customers (including the sale and installation of foundations, plumbing,
electrical wiring and fixtures, cabinets, and other amenities), our newly
acquired subsidiary, Snake River Log Homes LLC, does provide this service from
time to time. The Company also provides its customers with services related to
the sale of its housing packages, such as the preparation of customized
blueprints and ongoing customer service through its organization of independent
representatives located throughout the United States.
The Company was incorporated in New York in 1977 and has the following
wholly-owned subsidiaries: Thermo-Home Inc., a New York corporation through
which the Company's panelized homes were previously manufactured and marketed
(the manufacture and marketing operations of the Company's panelized homes were
integrated into the operation of Lincoln Logs Ltd. during the fiscal year ended
January 31, 1988); 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 Acquisitions Company, LLC, a sole-member limited
liability company organized under the laws of New York whose principal activity
is the manufacture of dimensional wood products for consumption by Lincoln Logs
Ltd.; Lincoln Logs Canada Ltd., a holding company incorporated under the laws
of British Columbia, Canada through which the Company acquired two affiliated
companies with common ownership; True Craft Log Structures Ltd., a company
organized under the laws of British Columbia, Canada whose principal activity
is the marketing and sale of log homes; Hart and Son Industries Ltd., a company
organized under the laws of British Columbia, Canada whose principal activity
is the manufacture of log homes for Hart and Son Industries Ltd. and the
Company; and Lincoln Holding Corp., a Delaware corporation, which was formed to
hold the registered trademark "Lincoln". Unless the context otherwise requires,
the term "Company" refers to Lincoln Logs Ltd. and its subsidiaries.
During the fiscal year ended January 31, 2004, the Company made several
acquisitions, as reported by the Company in its reports on Form 8-K. On
August 29, 2003, the Company completed the acquisition of True Craft Log
Structures, Ltd. and Hart and Son Industries, Ltd. On October 7, 2003, the
Company, through its wholly owned subsidiary AFI Acquisition Company LLC,
purchased certain assets of Adirondack Forest Industries, Inc. On November
17, 2003, the Company completed the acquisition of all of the outstanding
limited liability company interests of Snake River Log Homes LLC.
PRODUCTS
The Company's products include over 125 standard models of log homes ranging in
size from 560 to 4,000 square feet, and in price from approximately $24,400 to
$156,800,as well as custom designed homes with prices and sizes ranging up to
approximately $650,000 and 9,000 square feet, respectively. A majority of the
Company's sales are of log homes to be occupied as primary residences by the
buyers.
2
The Company has a product line for the general housing market utilizing a
pre-engineered structural wall system, which when assembled with other standard
building components, facilitates the construction of non-log traditional homes,
as well as log-like structures. These product lines are marketed as the Thermo-
Home(R) system and the Lincoln(R)-Panel system. Sales of this product line were
approximately 19% of total sales in fiscal year 2004.
The Company also has a product line for the solarium/sunspace market utilizing
architectural arches which, when assembled with other standard building
components, will permit the construction of room additions for log and
traditional homes. The product line is referred to as Lincoln Solarium (TM).
Sales of this product line as a stand-alone product were approximately 1% of
total sales in fiscal year 2004, which does not include those solariums that
are built into and are an integral part of the design of the Company's log home
products.
Fifty percent (50%) of the purchase price of the building package is usually
received prior to the manufacture by the Company of any of the solid timber
components or the pre-engineered structural wall panels. The complete log home
shell package or panelized home package is shipped via truck trailers and
delivered to a customer upon payment of the balance of the purchase price.
International sales are completed with the use of letters of credit, or are
conditioned upon receipt of full payment prior to shipment.
The Company markets its products in the United States through a network of
approximately 69 independent sales representatives in approximately 31 states,
and through four Company-owned and operated sales centers, one in northern New
York, one in northern California, one in southeastern Idaho and one in
northwestern Canada. All Company operated sales centers are staffed by Company
employee salespersons. Each of the Company's independent sales representatives
has a written agreement with the Company that specifies the representative's
sales territory and provides for the payment of a commission ranging from 13% to
17.5% of the purchase price for the log home shell package. A majority of the
Company's independent sales representatives have purchased and erected one of
the Company's log homes for use as a sales model. The Company maintains a
cooperative advertising program for independent sales representatives pursuant
to which the Company shares in the cost of advertising undertaken by qualified
sales representatives.
Substantially all of the Company's sales have been to customers in the United
States, with the remainder to customers in Japan (averaging less than 5% in
past fiscal years).
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company manufactures log components from rough-sawn eastern white pine
cants, western red cedar cants and western spruce cants. The cants are milled
to various dimensions to produce the Company's finished product. The pine
cants are purchased from several mills in the region of the Company's facilities
in Chestertown, New York, Maple Ridge, B.C., Canada, and Rigby, Idaho; cedar
cants are purchased from several mills in northern California, Oregon and
western Canada. Finished logs of lodge pole pine for delivery to some of the
Company's customers are purchased from an unaffiliated company on a subcontract
basis. Logs constitute approximately 24% of the dollar value of a typical log
home shell package.
Other components of the Company's log home shell package are purchased from
several suppliers. These components include prefabricated roof trusses,
windows, doors, nails, sheathing, dimensional lumber, shingles, caulking, and
between-log sealant. The Company has not recently experienced any significant
supply shortages, and does not anticipate any such shortages in the near future
based upon currently available information. Alternative sources of raw
materials are readily available to the Company.
3
COMPETITION
The Company believes that there are approximately 350 firms engaged in the
sale of log home materials, of which approximately 125 firms sell log home
packages or kits and are in direct competition with the Company.
The Company's principal competitors are: Tenessee Log Homes, Real Log Homes,
Northeastern Log Homes, Kuhns Bros. and Jim Barna Log Systems. The Company
believes that its competitive position with respect to those firms is favorable,
especially in the areas of quality and range of product, price, appearance, and
energy efficiency.
EMPLOYEES
As of January 31, 2004, the Company employed 109 persons, 104 of whom are full
time employees and 5 individuals that are part-time employees.
The Company has never had a work stoppage and regards its employee relations
as satisfactory. Employees are not covered by collective bargaining agreements.
PATENTS
The Company does not possess any patents covering the system utilized to erect
a Lincoln Logs solid timber home or any of the components thereof. In June 2001,
the Company allowed to expire two patents it had been granted related to its
Thermo-Home (R) panelized wall system. The Company had not used the methods
described in these patents for manufacturing structural wall panels for many
years, and does not consider the patents to be critical to its operations, its
product line or competitive position in the marketplace.
TRADEMARKS
The Company has registered the trademarks LINCOLN LOGS LTD.(R)(and design),
THERMO LOG(R), CASHCO(R), THERMO-HOME(R), STACK 'N BUILD(R), CHECKMATE(R),
LINCOLN-SEAL(R), and WEATHERBLOC(R) (and design) in the United States Patent and
Trademark Office. The Company has registered the words "THE ORIGINAL LINCOLN
LOGS" in several states. Canadian trademarks issued to the Company are "LINCOLN
LOGS LTD." (and design), "EARLY AMERICAN LOG HOMES" (and design), "THERMO-HOME,"
"LINCOLN-SEAL", "STACK 'N BUILD," and "TRUE-CRAFT LOG STRUCTURES." The Company
also owns the federally registered trademark "LINCOLN" in the United States.
Although these trademarks are believed by the Company to have commercial value,
it is the Company's opinion that the invalidation of any of these trademarks
would not have a material adverse effect on the Company.
The Company is party to an agreement pursuant to which the Company agreed not to
use the phrase "Lincoln Log Homes" either as a trademark or in any manner other
than in a purely textual sense (e.g., "Lincoln Log" homes).
RESEARCH AND DEVELOPMENT
No expenditures were made by the Company for research and development during
the fiscal years ended January 31, 2004 or 2003.
GOVERNMENT REGULATIONS
Compliance with federal, state and local regulations that have been enacted or
adopted to regulate the discharge of materials into the environment, or
otherwise relating to the protection of the environment, has not had in the
past, and the Company believes will not have in the future, a material effect
upon the capital expenditures, earnings or competitive position of the Company.
4
State and local regulations have been adopted with respect to the materials
utilized in the construction and various other aspects of residential housing.
The Company believes that its products comply with all material regulations
relating thereto.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns several parcels of real estate located in New York and
California, respectively, as follows:
(a) New York
(1) An approximately 8.5 acre parcel of land on Riverside Drive,
Chestertown, New York, on which are located the Company's executive
offices, consisting of a 6,000 square foot log building, a 2,000
square foot log building, and the Company's production facilities,
consisting of two milling machines located in a 10,200 square foot
metal building, a 10,440 square foot metal-framed, open storage
structure, a 4,800 square foot, log-sided pole shed, and a 14,000
square foot Thermo-Home(R) and log building containing corporate
offices, storage and fabricating facilities for the Company's
Thermo-Home(R) product line. The remainder of the 8.5 acre parcel
is utilized by the Company for outside storage of cants, logs and
building materials used in the Company's log home and panelized
home packages.
(2) An approximately 19 acre parcel of undeveloped land on Route 8,
Chestertown, New York, which is utilized by the Company for storage
of cants and logs.
(3) An approximately one acre parcel of land on Pine Street,
Chestertown, New York, on which is located a 7,680 square foot
building which was previously used as a manufacturing facility
for the Company's Thermo-Home(R) product line and is currently used
for additional storage of building materials for this product line.
(4) An approximately 1.4 acre parcel of land in Lake George, New York on
which is located the Company's new Northern Regional Sales Office in
a 3,050 square foot log home erected by the Company.
(5) Approximately 15 acres of land comprised of three contiguous parcels
of land on Fish House Road, Galway, New York, on which is located the
Company's saw mill operation, consisting of a 13,520 square foot metal
building that houses log sawing production equipment, a 1,752 square
foot wood-frame office building, a 900 square foot building that
contains a drying kiln, and eight additional storage buildings and
drying sheds ranging in size from 667 square feet to 3,528 square
feet. The remainder of the 15 acres is utilized by the Company for
outside storage of logs, cants, timbers and other dimensional lumber
products.
(6) In addition, the Company owns a parcel of approximately 1 acre of
undeveloped land in Northeastern New York acquired by the Company for
potential future use.
(7) An approximately one-half acre parcel of land on Riverside Drive,
Chestertown, New York, on which is located a brick commercial building
consisting of approximately 13,000 square feet which houses a movie
theatre, retail and apartment space, that is leased, in part, to third
party individuals.
5
(b) California
(1) The Company owns an approximately one acre parcel of land in Auburn,
California, on which is located the Company's Western Regional Sales
Office in a 4,000 square foot western cedar Ranch style log home, and
a 2,500 square foot western cedar Cape style log home planed in the
Weatherbloc(R) clapboard style.
(c) Vermont
(1) The Company owns a parcel of land of approximately 1.4 acres in
Southwest Vermont, acquired by the Company for potential future use.
The Company considers these facilities to be in good condition and suitable for
their respective purposes.
As collateral for its Revolving Credit and Loan Agreement dated October 7, 2003
the Company has granted mortgages on the parcels specified in Paragraphs (a)(1)-
(6), (b)(1) and (c)(1) of this Item 2.
ITEM 3. LEGAL PROCEEDINGS
Litigation commenced against the Company could materially impact our liquidity
if there is an adverse outcome. Although we cannot predict the ultimate result,
we are vigorously defending the following claims and have been advised that they
are defensible.
On August 30, 2002, the Company, by and through one of its dealers (the
"Dealer") contracted with certain home package buyers (the "Owners") to sell
them a log home. Thereafter, the Owners engaged the services of another party
to construct it. In accordance with both the dealer and customer contracts, the
Company assumes no responsibility related to the construction of the home and
requires the Dealer to defend and indemnify the Company from any and all claims
brought against it relating to the construction. On July 8, 2003, the Owners
commenced an action in the Supreme Court of New York, Kings County, against
Lincoln Logs Ltd. and the Dealer alleging misleading representations and
warranties to procure the contracts; breach of contract and intentional
infliction of emotional distress and demanded damages in excess of Five Hundred
Thousand ($500,000.00) Dollars. In its answer to the complaint, the Company
denies the essential allegations and demanded a defense and indemnification from
the Dealer and contractor. The Company's insurance carrier, The Hartford, has
denied coverage on the basis that the claims fall outside the scope of the
policy's coverage. The litigation is currently in the early stages of
discovery.
On April 5, 2003, the Company, by and through one of its dealers (the "Dealer")
contracted with certain home package buyers (the "Owners") to sell them a log
home. Thereafter, the Owners engaged the services of another party to construct
it. In accordance with both the dealer and customer contracts, the Company
assumes no responsibility related to the construction and requires the Dealer to
defend and indemnify the Company from any and all claims brought against it
relating to the construction. On December 15, 2003, the Owners commenced an
action in the Supreme Court of New York, Ulster County, against a construction
contractor, the Dealer and Lincoln Logs Ltd. alleging that the defendants failed
to construct the home in good and workmanlike manner and demanded damages in
excess of Five Hundred Thousand ($500,000.00) Dollars. In its answer to the
complaint, the Company denies the essential allegations and demanded a defense
and indemnification from the Dealer and contractor. The Company's insurance
carrier, The Hartford, has denied coverage on the basis that the claims fall
outside the scope of the policy's coverage. The litigation is currently in the
early stages of discovery.
6
The Company is defending certain claims in the ordinary course of and
incidental to the Company's business. In the opinion of the Company's
management, the ultimate settlement of these claims will not exceed amounts
provided for in the consolidated financial statements
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
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,
2002 through January 31, 2004. 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, 2002 Common Stock .21 .21
Quarter Ended July 31, 2002 Common Stock .33 .20
Quarter Ended October 31, 2002 Common Stock .50 .14
Quarter Ended January 31, 2003 Common Stock .40 .14
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
(b) The approximate number of holders of the Common Stock of the Company
as of April 27, 2004 was 2,374.
(c) No cash dividends were declared by the Company during the fiscal years
ended January 31, 2004 and 2003. 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,
2004:
7
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 315,500 $ 0.23 96,500
approved by
security
holders
Equity comp-
ensation plans None None None
not approved
by security
holders
Total 315,500 $ 0.23 96,500
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 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
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 that 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, holders of the Company's Series C Convertible Subordinated
Debentures (the "C Debentures") 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 holders of the C
Debentures pursuant to that conversion. The shares issued to the holders 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.
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 92% of the Company's total
sales are derived from log home and panelized home sales.
9
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. Even though we are experiencing costs
associated with some of our recent acquisitions, we believe we will progress
towards increased sales and cost savings as these new entities are integrated
into the Company.
RESULTS OF OPERATIONS
The following table illustrates our financial results for the fiscal year ended
January 31, 2004 as compared to the fiscal year ended January 31, 2003 (in
$1,000's US).
Fiscal Fiscal
Year % of Year % of %
2004 Sales 2003 Sales Change
------- ----- ------- ----- ------
Net Sales $15,795 100% $13,991 100% 13%
Cost of Sales 9,539 60% 7,386 53% 29%
------- ----- ------- ----- ------
Gross Profit 6,256 40% 6,605 47% -5%
Operating expense 6,464 41% 5,418 39% 19%
------- ----- ------- ----- ------
Income from Operations ( 208) ( 1%) 1,187 9% -118%
Other Income (Expenses), net 21 -- 37 -- -43%
------- ----- ------- ----- ------
Income (Loss) before Income Taxes ( 187) ( 1%) 1,224 9% -115%
Income Tax Benefit (Expense) 10 -- ( 24) -- 138%
------- ----- ------- ----- ------
Net Income (Loss) $( 177) ( 1%) $ 1,200 9% -115%
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 2 of the
Consolidated Financial Statements, the Company believes that the following
discussion addresses its critical accounting policies.
10
Revenue Recognition: We recognize revenue in accordance with the Securities
and Exchange Commission's Staff Accounting Bulletin No. 101, or SAB 101,
"Revenue Recognition in Financial Statements." SAB 101 requires that four
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 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 contact 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. 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.
We did not record any impairment losses for the fiscal year ended January 31,
2003.
Income Taxes: We estimate our income taxes in each of the jurisdictions in
which we operate. This process involves us estimating 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 years ended January 31, 2004 and 2003, and a reserve for slow moving
and obsolete inventories of $18,000 for the fiscal years ended January 31,
2004 and 2003.
11
RESULTS OF OPERATIONS
Comparison of Fiscal 2004 with Fiscal 2003
Revenues: Net sales were $15,795,309 for the fiscal year ended January 31,
2004 compared with $13,991,284 for the fiscal year ended January 31, 2003. The
increase of $1,804,025 was primarily attributable to increased sales of our log
home and panelized home construction kits. Approximately ninety-two percent of
total revenues are represented by home construction kit sales and this portion
improved through a thirteen percent increase in units shipped and an increase
in the average value of these units shipped by two percent. The remaining
contributors to our revenues are building material sales, design and engineering
services and freight revenues. Collectively these items increased thirty-three
percent over the previous year's revenues, nearly all of which was contributed
by 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 at a higher rate than that of the current year based on the increase in
our backlog of undelivered contracts at January 31, 2004 and the continued
favorable economic climate for home construction in the United States. Where
our newly acquired subsidiaries contributed approximately $1,130,000 of our
total increase in revenues in fiscal 2004 while only being a part of our Company
during the latter part of the fiscal year, we expect that their contribution
during the full 2005 fiscal year will add to our anticipated growth.
Gross Profit/Cost of Sales. Our gross margin decreased to 40% of sales, or
$6,255,654, in fiscal 2004 from 47% of sales, or $6,605,513 in fiscal 2003. The
decrease in gross profit was the result of higher costs in all components of the
cost of goods sold, i.e. material, labor and overhead. These categories
increased in the following manner over the previous year: material costs +3%;
labor cost +2%; and manufacturing costs +2%.
During fiscal 2004 we encountered a dramatically different lumber market than
the previous year. Where commodity lumber costs in fiscal year 2003 were
largely unchanged during the building season, these same commodity lumber costs
increased substantially during the fiscal 2004 building season. The increase
in labor costs was due to increased employment and increased benefit costs.
Manufacturing overhead increased due to increased costs of design and
engineering, and increased costs associated with facility and personnel. A
contributing factor was the integration of our newly-acquired subsidiaries at
a point in time when the volume of business of the newly-acquired subsidiaries
was beginning to decline as the Company entered the historically slow shipping
months of the winter. During the winter months, overhead costs rise as a
percentage of sales due to the lower number of units shipped during that period.
An additional factor that contributes to a declining gross profit is our use of
fixed price contracts where we do not have the ability to adjust the selling
price of the contracts to adjust 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.
In fiscal 2005, we expect that our gross profit percentage may continue to
decrease, but not to the extent of the decline of fiscal 2004 from fiscal 2003.
Primarily, we expect cost increases to occur in the area of building materials
and engineering. A significant element to improving our gross profit percentage
is the 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. To the extent we are
unable to obtain a favorable determination from United States customs
authorities with regard to the exemption of our home packages from import duties
assessed on imported soft woods from Canada, the Company may continue to ship
home construction kits to the western United States from our manufacturing
facility located in New York.
12
Operating expenses: Total operating expenses for the year ended January 31,
2004 were $6,463,628 as compared with $5,418,236 during the fiscal year ended
January 31, 2003, and increase of $1,045,392, or 19%. As a percentage of net
sales, operating expenses were 41% and 39%, respectively, for the fiscal years
ended January 31, 2004 and 2003.
Sales commissions consist of amounts paid both to our employee sales persons and
our independent dealers throughout the United States. For the fiscal year 2004
commissions amounted to $1,796,701, or 11% of net sales, compared with
$1,747,763 in fiscal year 2003, or 12% of net sales. While total commissions
expense increased 3% compared to our increase in total net sales of 13%, 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 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 $4,666,927 in fiscal 2004 have
increased $996,454, or 27%, when compared to the same expenses in fiscal 2003
of $3,670,473. As a percentage of total net sales, selling, general and
administrative expenses were 29% and 26%, respectively, for the fiscal years
ended January 31, 2004 and 2003. The primary items that contributed to the
increase were an increase in personnel, increased spending on outside
professionals who assisted us with our acquisitions during the past year, and
increased spending on attendance at national trade show expositions, marketing
and promotion costs. Additionally, our newly acquired subsidiaries added to
this category of spending during the last five months 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 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 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), a new multi-faceted credit facility established in October 2003 and
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 through acquisitions and to support our
inventory and operational needs.
Income taxes: The Company realized a tax benefit of approximately $327,000 in
fiscal 2003 through the use of net operating loss carry-forwards to offset the
majority of its taxable income for that period. As of January 31, 2004, the
Company has utilized essentially all of its net operating carry-forwards from
losses incurred in past years. In Fiscal 2004, the Company will pay not pay
federal income taxes principally due to differences in depreciation rates used
for book and tax purposes. The Company provides for and will pay State income
taxes in several jurisdictions.
13
Net loss: Even though sales increased for the year, the Company incurred a
net loss of $177,391. The principal factor that caused the loss was the
Company's acquisition of subsidiaries late in the business cycle of the year
when expenses remain constant and revenues are declining. The Company also
incurred expenses associated with these acquisitions that are considered non-
recurring expenses. We believe, though, that these acquisitions will enhance
our core business and improve our ability to grow the Company. In addition, the
Company continues to spend on marketing and promotion in order to expand our
presence and market share. While the increase in sales did not match the
increase in expenditures made in this area, our backlog of undelivered contracts
increase 25% over the amount at the end of the previous year. We are expecting
increased sales during the upcoming year, and with all newly-acquired
subsidiaries contributing for the full fiscal year, we anticipate the Company
will return to profitability in Fiscal 2005.
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 companies acquired.
The table below illustrates the effects this acquisition plan has had on our
financial statements (in $1,000's of US dollars):
As of January 31,
2004 2003
-------- --------
Financial Condition:
Total Assets $ 11,838 $ 6,642
Total Liabilities $ 9,414 $ 4,536
Total Equity $ 2,424 $ 2,106
Debt/equity ratio 1.85 .26
Assets/debt ratio 2.64 11.96
Working Capital:
Current Assets $ 4,262 $ 4,029
Current Liabilities $ 6,067 $ 4,312
Current Ratio .70 .93
Cash Position:
Cash & cash equivalents $ 750 $ 1,886
Cash (used) generated from operations $ ( 250) $ 1,699
14
Financial Condition
During the year ended January 31, 2004, the Company had a significant increase
in assets from $6,642,034 in fiscal 2003 to $11,838,070 in fiscal 2004. The
majority of this increase came as a result of the acquisitions completed during
the fiscal year, with significant increases in the areas of property, plant and
equipment, intangible assets and goodwill. We also had a substantial increase
in total liabilities from $4,535,736 in fiscal 2003 to $9,413,982 in fiscal
2004, the majority of which is represented by an increase in total debt by
approximately $3,944,000.
During the fiscal year 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 we have utilized $2,588,000 at January
31, 2004. The proceeds from borrowings against the credit facility were used
principally to finance the Company's recent acquisitions. We also used common
stock to finance a portion of the acquisitions as well as seller financing in
the form of non-interest bearing long-term notes.
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 seller financing is 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. All of the seller financing notes are non-interest
bearing.
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, 2004, we had a working capital deficiency of $1,804,864 as
current liabilities exceeded current assets. At January 31, 2003, we had a
working capital deficiency of $283,359. At January 31, 2004 our working
capital deficiency increased from the previous year by $1,521,505. Our balance
of cash and cash equivalents decreased during fiscal year 2004 primarily due to
cash used for the acquisition of companies, the acquisition of property, plant
and equipment and the purchase of inventory. Cash was provided by primarily by
an increase in trade accounts payable and accrued expenses and long-term
financing from First Pioneer and long-term notes provided as part of seller
financing related to our acquisitions.
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 2005. Our cash balances decreased and
our accounts payable increased during the winter season of our business cycle,
which is the period of our cycle during which we generate the least amount of
shipping activity. Because our acquisitions took place as we entered the
winter business cycle, it was difficult to meet all of our current obligations
and those of our newly acquired subsidiaries from available funds. 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, 2004. 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.
15
Our backlog of undelivered contracts at January 31, 2004 was approximately
$25,220,000. This is an increase of $5,132,000 or 26% from the prior year's
ending backlog at January 31, 2003. A contract is considered to be part of our
backlog when the contact 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 44% 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, 2005,
approximately $11,097,000 of product is anticipated to be delivered with respect
to the contracts contained in the beginning backlog at January 31, 2004. 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 year ended January 31, 2004 approximately
$9,243,000 originated from the beginning backlog of $20,088,000 at January 31,
2003, and approximately $4,599,000 originated from contracts written during
fiscal 2004, which represented approximately 20% of contracts written during the
fiscal year. Fiscal year 2005 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):
Fiscal Year Ended
2004 2003
-------- --------
Beginning backlog $ 20,088 $ 17,667
Add: New contracts 23,266 20,926
Amendments 710 482
-------- --------
Sub-total 44,064 39,075
Less: Shipments ( 13,842) ( 13,156)
Cancellations ( 5,002) ( 5,831)
-------- --------
Ending backlog $ 25,220 $ 20,088
======== ========
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 5% 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 on most cancelled contacts related 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 2004 and 2003 we
realized revenues of $161,237 and $139,254, respectively, related to the
aforementioned services.
16
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.
Payments Due by Period
Within 2 -3 4 -5 After
Contractual Obligations Total 1 Year Years Years 5 Years
---------- ---------- ---------- ---------- ----------
Bank Debt:
Line of Credit $ 503,000 $ 503,000 $ -0- $ -0- $ -0-
10 Year Term Loan 1,735,000 43,380 347,040 347,040 997,540
5 Year Term Loan 253,000 50,600 101,200 101,200 -0-
4 Year Term Loan 91,667 25,000 50,000 16,667 -0-
Notes Payable:
In connection with
acquisitions:
Related Parties 410,021 93,458 168,974 147,589 -0-
Others 1,295,346 273,550 488,810 403,795 129,191
Vehicles 54,305 38,559 15,746 -0- -0-
Other 95,000 95,000 -0- -0- -0-
Capital Lease Obligations 39,792 22,211 17,581 -0- -0-
Operating Leases 99,849 27,670 46,203 22,265 3,711
Other 15,000 -0- 15,000 -0- -0-
---------- ---------- ---------- ---------- ----------
Total Contractual Cash
Obligations $4,591,980 $1,172,428 $1,250,554 $1,038,556 $1,130,442
========== ========== ========== ========== ==========
All of the contractual obligations shown above have contractual terms whereby
the due date of the debt is accelerated upon the occurence 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. An example of the
affirmative covenants is compliance with laws; maintaining insurance;
maintaining the property; maintaining books and records, and similar items. An
example of the negative covenants is 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, 2004, we were
17
required to achieve a debt service ratio of not less than 1.25:1.0; achieve a
current ratio of not less than 0.95:1.0; and to maintain a minimum tangible net
worth of $2,606,298. During fiscal 2004, the Company failed to meet the current
ratio and minimum tangible net worth financial requirements. Failing to meet
these 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, and the
event of default has been cured for the fiscal year ended January 31, 2004.
There were no other events of default with respect to the First Pioneer Credit
Facility at January 31, 2004.
We believe that there were unusual circumstances that contributed to our being
in default with regard to the financial covenant ratios of the First Pioneer
Credit Facility. The acquisitions that we made took place much later in the
fiscal year than were planned. When the financing credit was proposed by First
Pioneer in the summer of 2003, our projections of financial contribution by the
soon to be acquired companies indicated to us that we would achieve the
financial covenants proposed by the bank. However, several issues could not be
resolved quickly and the acquisitions took place in the autumn of 2003, just as
the building season shipping cycle was coming to a close. We believe, with the
benefit of a full business cycle and our newly-acquired companies contributing
during the full business cycle, that we will be able to meet the covenants
contained in the credit agreement the for fiscal year ending January 31, 2005.
Our inability to meet the goals set by First Pioneer has in no fashion damaged
our relationship with them, nor do we believe that it will hinder our ability to
obtain future financing for contemplated projects.
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 consider carefully 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 market place 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.
The success of our acquisition in Canada is dependent on the receipt by the
Company of a favorable determination from United States customs authorities.
A significant determining factor for the purchase of True Craft Log Structures,
Ltd. and Hart & Son Industries, Ltd., the companies located in Maple Ridge,
British Columbia, Canada was the ability to ship their soft wood home packages
into the United States under an exemption from the soft wood tariff that was
instituted by the United States government in April 2002. An additional
18
consideration for the acquisition was the potential cost savings of shipping
home building packages from British Columbia, Canada to customers on the west
coast of the United States instead of shipping those home building kits from
the Company's facilities located in New York. The Company filed an application
for a Binding Tariff Classification Ruling decision from United States customs
authorities on April 6, 2004, and have not yet received a response to such
application. Without the Binding Tariff Classification Ruling decision shipping
home construction kits from British Columbia, Canada to customers located in the
western portion of the United States would be more expensive than shipping the
home construction kits from the Company's facilities located in New York.
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
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 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 2005. 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.
19
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.
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 provisions 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
entity ("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 the
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
ITEM 7. FINANCIAL STATEMENTS
Index to Financial Statements
Page
Report of Independent Accountants 22
Consolidated balance sheets as of
January 31, 2004 and 2003 23 & 24
Consolidated statements of operations for the years
ended January 31, 2004 and 2003 25
Consolidated statements of changes in stockholders'
equity for the years ended January
31, 2004 and 2003 26
Consolidated statements of cash flows for the years
ended January 31, 2004 and 2003 27
Notes to consolidated financial statements
January 31, 2004 and 2003 28 - 45
21
Report of Independent Accountants
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 2003, 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 generally
accepted in the United States of America. 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 2003, 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/ Urbach Kahn & Werlin LLP
Albany, New York
April 28, 2004
22
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2004 and 2003
ASSETS
2004 2003
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 750,239 $ 1,885,931
Trade accounts receivable, net of allowance
for doubtful accounts of $20,199 in 2004
and in 2003 337,166 207,692
Inventories
Raw materials 2,032,050 1,277,804
Work in process 477,389 228,076
Prepaid expenses and other current assets 564,883 416,404
Income taxes receivable 97,427 ---
Mortgage and note receivable 2,592 2,592
Due from related parties --- 10,141
---------- ----------
Total current assets 4,261,746 4,028,640
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Cost 8,563,343 6,142,378
Less accumulated depreciation ( 3,983,816) ( 3,667,143)
---------- ----------
Property, plant and equipment- net 4,579,527 2,475,235
---------- ----------
OTHER ASSETS:
Mortgage receivable 60,053 63,304
Deposits and other assets 70,742 70,696
Goodwill 1,319,970 ---
Intangible assets, net of accumulated
amortization of $97,537 in 2004 and $78,174
in 2003 1,546,032 4,159
---------- ----------
Total other assets 2,996,797 138,159
---------- ----------
TOTAL ASSETS $11,838,070 $ 6,642,034
========== ==========
See accompanying notes to consolidated financial statements.
( continued )
23
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS,(continued)
JANUARY 31, 2004 and 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2003
CURRENT LIABILITIES:
Borrowings on line of credit $ 503,000 $ ---
Current installments of bank loans 118,980 22,500
Current installments of notes payable,
related party 93,458 ---
Current installments of notes payable 407,109 27,416
Convertible subordinated debentures:
Related parties --- 210,000
Other --- 10,000
Current installments of capital lease
obligations 22,211 61,762
Trade accounts payable 1,578,912 347,520
Accrued salaries and wages 196,243 129,607
Accrued income taxes 1,000 23,100
Accrued expenses 569,850 662,906
Customer deposits 2,575,847 2,817,188
---------- ----------
Total current liabilities 6,066,610 4,311,999
LONG-TERM DEBT, net of current installments:
Note payable, related party 316,563 ---
Bank loans 1,960,687 159,375
Notes Payable 1,037,541 24,716
Capital lease obligations 17,581 39,646
---------- ----------
Total long-term debt 3,332,372 223,737
OTHER LONG-TERM OBLIGATION 15,000 ---
---------- ----------
Total liabilities 9,413,982 4,535,736
---------- ----------
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
10,000,000 shares; issued 9,544,299 shares
in 2004, 7,759,299 shares in 2003 95,443 77,593
Additional paid-in capital 6,107,648 5,681,554
Accumulated deficit (2,945,805) (2,768,414)
Accumulated other comprehensive income 51,237 ---
---------- ----------
3,308,523 1,790,580
Less cost of 504,240 shares common
stock in treasury (884,435) (884,435)
---------- ----------
Total stockholders' equity 2,424,088 2,106,298
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS'EQUITY $11,838,070 $ 6,642,034
========== ==========
See accompanying notes to consolidated financial statements.
24
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 31, 2004 and 2003
2004 2003
----------- -----------
NET SALES $15,795,309 $13,991,284
COST OF SALES 9,539,655 7,385,771
---------- ----------
GROSS PROFIT 6,255,654 6,605,513
---------- ----------
OPERATING EXPENSES:
Commissions 1,796,701 1,747,763
Selling, general and administrative 4,666,927 3,670,473
---------- ----------
Total operating expenses 6,463,628 5,418,236
---------- ----------
INCOME (LOSS) FROM OPERATIONS ( 207,974) 1,187,277
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 31,443 24,941
Interest expense ( 55,284) ( 57,966)
Other 44,510 69,901
---------- ----------
Total other income (expense) - net 20,669 36,876
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES ( 187,305) 1,224,153
INCOME TAXES ( 9,914) 24,000
---------- ----------
NET INCOME (LOSS) $( 177,391) $ 1,200,153
========== ==========
PER SHARE DATA:
Basic (loss) earnings per share $ ( 0.02) $ 0.17
========== ==========
Diluted (loss) earnings per share $ ( 0.02) $ 0.14
========== ==========
See accompanying notes to consolidated financial statements.
25
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 31, 2004 and 2003
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, 2002 7,759,299 $ 77,593 $5,681,554 $( 3,968,567) $ --- $(884,435) $ 906,145 $ ---
Net Income - 2003 --- --- --- 1,200,153 --- --- 1,200,153
---------- -------- ---------- ------------ ------------ --------- ------------ ---------
Balance at January 31, 2003 7,759,299 77,593 5,681,554 ( 2,768,414) --- $(884,435) $ 2,106,298 $ ---
Debt converted to common stock 1,162,500 11,625 208,375 --- --- --- 220,000 ---
Common stock issued upon
exercise of stock options 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)
========== ======== ========== ============ ============ ========= ============ =========
See accompanying notes to consolidated financial statements.
26
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2004 and 2003
2004 2003
OPERATING ACTIVITIES:
Net income $( 177,391) $ 1,200,153
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 364,536 180,524
(Gain)on sale of assets ( 4,664) ( 14,980)
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts
receivable ( 129,474) ( 85,038)
(Increase) decrease in inventories (1,003,559) ( 422,565)
(Increase) decrease in prepaid expenses
and other current assets ( 148,479) ( 93,651)
(Increase) decrease in deposits
and other assets ( 5,382) ( 53,475)
(Decrease) in trade accounts payable 1,231,392 ( 66,289)
Increase in customer deposits ( 241,341) 837,865
Increase (decrease) in accrued expenses,
payroll, related taxes and withholdings ( 26,421) 211,777
(Increase) in due from related parties 10,141 ( 15,092)
(Increase) in income taxes receivable ( 97,427) ---
Increase in accrued income taxes ( 22,100) 19,610
---------- ----------
Net cash provided by operating activities ( 250,169) 1,698,839
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant and equipment ( 468,398) ( 229,841)
Acquisition of businesses (1,798,830) ---
Proceeds from sale of assets --- 1,000
Proceeds from the sale of assets held
for resale 10,000 14,500
Payments received on mortgage receivable 3,251 2,306
--------- ----------
Net cash (used) by investing activities (2,253,977) ( 212,035)
--------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,222,390 11,080
Proceeds from borrowing on line of credit 503,000 ---
Proceeds received on exercise of stock options 6,013 ---
Loan origination fees ( 43,544) ---
Repayments of capital leases ( 61,616) ( 60,358)
Repayments of bank loans ( 190,208) ( 22,500)
Repayments of notes payable ( 118,818) ( 31,492)
---------- ----------
Net cash (used) by financing activities 1,317,217 ( 103,270)
---------- ----------
Effect of foreign currency translation on cash 51,237 ---
---------- ----------
Net (decrease) increase in cash and cash
equivalents (1,135,692) 1,383,534
Cash and cash equivalents at beginning
of period 1,885,931 502,397
---------- ----------
Cash and cash equivalents at end
of period $ 750,239 $ 1,885,931
========== ==========
See accompanying non-cash disclosure note (Note 15 to the consolidated financial
statements).
See accompanying notes to consolidated financial statements.
27
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2004 and 2003
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,
offers as an option to its customers, construction services. Products are
represented, sold and serviced through a 69 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.; Lincoln Logs Canada Ltd., a holding company
incorporated under the laws of British Columbia, Canada in July 2003 through
which the Company acquired two affiliated companies with common ownership;
True Craft Log Structures Ltd., a company organized under the laws of British
Columbia, Canada whose principal activity is the marketing and sale of log
homes; Hart and Son Industries Ltd., a company organized under the laws of
British Columbia, Canada whose principal activity is the manufacture of log
homes for Hart and Son Industries Ltd. and the Company and Lincoln Holding
Corp., a Delaware corporation, which was formed to hold the registered
trademark "Lincoln". Unless the context otherwise requires, the term
"Company" refers to Lincoln Logs Ltd. and its subsidiaries.
The Company's fiscal year ends on January 31. As used hereafter, 2004 refers
to the fiscal year ended January 31, 2004, and 2003 refers to the fiscal year
ended January 31, 2003.
In 2004, the Company purchased approximately 53% of the materials necessary to
construct its log home and panelized home packages from six suppliers. These
six suppliers provided 20%, 9%, 7%, 7%, 5% and 5% of purchases for the year
ended January 31, 2004, respectively. In 2003, the Company purchased
approximately 54% of the materials necessary to construct its log home and
panelized home packages from six suppliers. These six suppliers provided 18%,
10%, 8%, 6%, 6% and 5%, respectively, of purchases for the year ended January
31, 2003. Alternative sources of raw materials are readily available.
Note 2. Summary of Significant Accounting Policies
(a) Principles of Consolidation. The consolidated financial statements include
the accounts of Lincoln Logs Ltd. and its wholly-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated in
consolidation.
The Company's subsidiaries, Thermo-Home, Inc., Lincoln Holding Corp. and Lincoln
Logs International Ltd. are currently inactive.
28
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JANUARY 31, 2004 and 2003
(b) 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.
(c) Loans and Mortgage Receivable. Loans 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 loans, if any, are charged to
income when the loan is made. Interest income on loans and the mortgage
receivable is recognized when accrued.
(d) 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, 2004 and January 31, 2003,
respectively.
(e) Revenue Recognition. Revenue from the sale of log home packages is
recognized when substantially all of the package has been delivered. 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 complete (the
"completed contract method"). 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.
Amounts received as reimbursement from customers of shipping and delivery costs
are included in net sales. Also, amounts recognized for the performance of
design and engineering services related to the preparation of blueprints is
included in net sales.
29
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
JANUARY 31, 2004 and 2003
(f) Shipping and Handling Costs. Shipping and handling costs related to the
delivery of the Company's log home packages and building materials are included
in cost of sales. Also, design and engineering costs related to the production
of blueprints is included in cost of sales.
(g) Depreciation. Depreciation of plant and equipment is computed on a
straight-line basis over the estimated useful lives of the assets, which range
from five to thirty-nine years.
(h) 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.
(i) Goodwill. Goodwill represents the excess of the purchase price over the
estimated fair value of the net assets acquired. Effective with the adoption of
Standards of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," ("SFAS No. 142") on January 1, 2002, goodwill and intangible
assets that have indefinite useful lives are not amortized, but are subject to
impairment testing on at least an annual basis. In accordance with SFAS No.
142, the Company performs a test for goodwill impairment at least annually.
(j) Other Intangible Assets. Other intangible assets represent non-competition
agreements, trademarks, loan origination costs, customer lists and a long-term
supply agreement that are being amortized over five to ten year periods.
Amortization expense was $47,863 in 2004 and $520 in 2003.
(k) Earnings (Loss) Per Share. Basic earnings (loss) per share is computed by
dividing net earnings (loss) by the weighted average number of common shares
outstanding during the respective periods. The weighted average number of
common shares used to compute basic earnings (loss) per share was 8,293,778 for
the year ended January 31, 2004 and 7,255,059 for the year ended January 31,
2003.
Diluted earnings (loss) per share is computed based on the weighted average
number of common shares outstanding during the respective periods and includes
the number of additional common shares that would have been outstanding if
potentially dilutive common shares had been issued. Convertible subordinated
debentures are assumed to have been converted into common stock at the
beginning of the period after giving retroactive effect to the elimination of
interest expense, net of income tax effect, applicable to the convertible
subordinated debentures. Stock options are included in the computation using
the treasury stock method if the effect is dilutive. Diluted (loss) per share
is the same as basic (loss) per share for the year ended January 31, 2004
because the effect of including stock options and the assumed conversion of the
subordinated debentures would be anti-dilutive.
The numerator in the calculation of diluted earnings per share for the years
ended January 31, 2004 and 2003 was determined as follows:
2004 2003
---------- ----------
Net income (loss) used to calculate basic
per share amount $ (177,391) $1,200,153
Add back interest expense related to
convertible debentures --- 25,483
---------- ----------
Numerator for calculation of diluted
earnings per share $ (177,391) $1,225,636
========== ==========
30
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
The denominator in the calculation of diluted earnings per share for the
years ended January 31, 2004 and 2003 was determined as follows:
2004 2003
--------- ---------
Weighted average outstanding shares used
to calculate basic earnings per share 8,293,778 7,255,059
Add shares issuable assuming conversion
of convertible debentures --- 1,162,500
Add shares issuable assuming exercise of
outstanding stock options --- 77,591
--------- ---------
Denominator for calculation of diluted
earnings per share 8,293,778 8,495,150
========= =========
Basic earnings (loss) per share $ (0.02) $ 0.17
======= =======
Diluted earnings (loss) per share $ (0.02) $ 0.14
======= =======
Shares issuable assuming conversion of convertible debentures and shares
issuable assuming exercise of outstanding stock options at January 31, 2004
were not included in the computation of diluted (loss) per share for the year
then ended as their effect was anti-dilutive.
(l) Advertising Costs. Advertising costs are expensed when the advertisement
is first run and amounted to $451,910 and $482,181 in 2004 and 2003,
respectively. The Company has prepaid advertising costs of $121,845 and $78,313
at January 31, 2004 and 2003, respectively. These amounts for 2004 and 2003,
respectively, are included in "Prepaid expenses and other current assets" in the
accompanying consolidated balance sheets.
(m) 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 2004 and 2003 bank balances exceeded FDIC insurance
coverage.
(n) 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.
(o) 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.
31
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
(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. The pro-forma
disclosures required under SFAS No. 123 are not presented for 2003 as pro-forma
net earnings is the same as reported net earnings per share because there were
no grants of stock options in 2003.
During fiscal year 2004, the Company granted 50,000 incentive stock options
with an exercise price that was equal to the fair market price of the stock on
the date of the grant of $0.50. The following shows the pro-forma effect on
net (loss) and (loss) per share for 2004 as if the value of the stock option
grant were charged to earnings under the provisions of SFAS No. 123:
Net loss as reported $ ( 177,391)
Stock compensation expense determined
under the fair value method, net of
$2,925 of income taxes ( 16,575)
-----------
Pro forma net loss $ ( 193,966)
Basic and diluted loss per share as reported $ ( 0.02)
Pro forma basic and diluted loss per share $ ( 0.02)
(q) Foreign Currency Translation. The Company translates the assets and
liabilities of its wholly owned Canadian subsidiary, Lincoln Logs Canada Ltd.
("Lincoln Canada"), into US currency at the current exchange rate at the end
of the fiscal year. The revenues and expenses of Lincoln Canada 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 year ended January 31, 2004, which are included in operations,
are not material. The Company did not have any Other Comprehensive Income in
the fiscal year ended January 31, 2003.
Note 3. Property, Plant and Equipment
A summary of property, plant and equipment at January 31, 2004 and 2003 is
as follows:
Estimated
Useful Lives 2004 2003
---------- ----------
Land $1,020,347 $ 835,241
Buildings and improvements 15 - 39 years 3,047,979 2,479,801
Machinery and equipment 5 - 7 years 1,926,152 881,674
Furniture and fixtures 5 - 7 years 2,096,515 1,683,446
Transportation equipment 5 years 472,350 262,216
---------- ----------
$8,563,343 $6,142,378
========== ==========
Depreciation expense for the years ended January 31, 2004 and 2003 was
$316,673 and $180,004, respectively.
32
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
Costs related to the improvement or betterment of assets that extend their
useful life are capitalized and depreciated over the remaining useful life of
the asset; repairs and maintenance costs are expensed as incurred.
Note 4. Indebtedness
Long-term debt at January 31, 2004 and 2003 consists of the following:
2004 2003
--------- ---------
Revolving line of credit at prime rate (4.0% at
January 31, 2004), renewable annually,
collateralized by accounts receivable and inventory $ 503,000 $ - 0 -
Term loan, due October 2007, interest at prime
rate, payable in equal monthly installments
with interest, collateralized by property, machinery,
equipment and fixtures 91,667 - 0 -
Term loan, due October 2008, interest at prime
rate, payable in equal quarterly installments,
interest payable monthly, collateralized by property,
machinery, equipment and fixtures 253,000 - 0 -
Term loan, due October 2013, interest only
payable for the first year, then principal and
interest payable in equal monthly installments
with the remaining outstanding balance due on
October 7, 2013; interest on $1,000,000 at a
fixed rate of 3.81% for two years, then reverting
to prime rate, interest on $735,000 at prime rate,
collaterized by property, machinery, equipment
and fixtures 1,735,000 - 0 -
Subordinated Note payable to related party (see
note 15), due November 2008, interest at 0%, payable
annually, discounted net present value at
the rate of 7%, unsecured 410,021 - 0 -
Subordinated Note payable (see Note 15), due November
2008, interest at 0%, payable annually, discounted
net present value at the rate of 7%, unsecured 410,021 - 0 -
Note payable (see Note 15), due April 2004,
interest at 0%, unsecured 95,000 - 0 -
Subordinated Note payable (see Note 15), due August
2008, interest at 0%, payable monthly, discounted
net present value at the rate of 8%, unsecured 222,558 - 0 -
Subordinated Note payable (see Note 15), due August
2010, interest at 0%, payable monthly, discounted
net present value at the rate of 8%, unsecured 662,767 - 0 -
Series B Convertible Subordinated Debentures
originally due May 15, 1999, extended to May 15,
2003 with annual interest at 12% payable quarterly.
Converted to common stock on May 15, 2003 - 0 - 170,000
33
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
Series C Convertible Subordinated Debentures
originally due February 28, 2002 with annual
interest at 12% through February 28, 2002, extended
to May 15, 2003 with annual interest at 10%
beginning March 1, 2002, interest payable quarterly.
Converted to common stock on May 15, 2003 - 0 - 50,000
Mortgage payable - due January 2011, with annual
interest at Prime plus 2%, payable monthly,
refinanced on October 7, 2003 - 0 - 181,875
Note payable at 7.9% payable in monthly
installments through April 2004, collateralized
by a vehicle 1,205 5,783
Notes payable at 0.0%, payable in monthly
installments through January 2005, collateralized
by three vehicles 48,791 38,367
Note payable at 7.49%, payable in monthly
installments through January 2005, collateralized
by a vehicle 4,309 7,983
Obligations under capital leases, net of interest
payable through July 2005 39,792 101,407
---------- ----------
Total long-term debt 4,477,131 555,415
Less current installments (1,144,758) ( 331,678)
---------- ----------
Long-term debt, net of current installments $3,332,373 $ 223,737
In February 2001, the Company secured a bank loan in the amount of $225,000
and granted a mortgage on its sales model in Lake George, New York. The
debt has a term of ten years with principal repaid in 120 equal monthly
installments, and the interest rate is the prime lending rate as published
in the Wall Street Journal on the first day of each month plus 2%. On October
7, 2003, the Company refinanced this debt as part of the Credit Agreement with
First Pioneer Farm Credit, ACA.
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
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, 2004 is 4% 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 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, 2004, the Company was in violation of two of
those financial covenants, for which the Company received a waiver from First
Pioneer. At January 31, 2004, the Company has drawn a total of $2,591,000
against the credit facility and had made total repayments of $8,333.
34
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
In February 2001 and in May 2001, holders of B Debentures in the amount of
$170,000 with an extended maturity date of May 15, 2001 agreed to extend the
maturity date to May 15, 2003. In February 2002 the holders of C Debentures
in the amount of $50,000 with an original maturity date of February 28, 2002
agreed to extend the maturity date to May 15, 2003 and to reduce the interest
rate to 10% from 12%. On May 15, 2003, all holders of B Debentures and C
Debentures with an aggregate value of $220,000 converted their holdings into
the common stock of the Company. The Company issued an aggregate of 1,162,500
shares of common stock pursuant to the conversion.
The principal amount of future maturities of long-term debt by fiscal year
are as follows:
Year ending January 31: Amount
2005 $1,144,758
2006 623,425
2007 565,926
2008 535,145
2009 481,146
Thereafter 1,126,731
----------
$4,477,131
==========
Assets under capital leases represent computers, blueprinting equipment and
milling equipment. The costs, accumulated depreciation and depreciation expense
are included with owned assets in Note 3. The details are as follows:
2004 2003
--------- ---------
Costs $ 217,524 $ 217,524
Accumulated Depreciation (105,079) (13,819)
Depreciation Expense 35,877 35,877
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
---------
2005 $ 32,148
2006 13,987
---------
Total $ 46,136
Less Interest ( 6,344)
---------
Obligations Under
Capital Leases $ 39,792
=========
Note 5. Income Taxes
A summary of components of the provision (benefit) for income taxes for the
years ended January 31, 2004 and 2003 is as follows:
35
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
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)
======== ======== ========
Year ended January 31, 2003:
Federal $ 20,000 $ --- $ 20,000
State 4,000 --- 4,000
-------- -------- --------
$ 24,000 $ --- $ 24,000
======== ======== ========
The Company realized a tax benefit of approximately $10,000 and $327,000 in
2004 and 2003, respectively, through the use of net operating loss carry-
forwards. The Company has Federal net operating loss carry-forwards for
income tax purposes totaling approximately $2,149,000; $1,074,000 expire in
2007, $816,000 in 2008 and $260,000 in 2009. Substantially all 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 $52,000 of which
approximately $10,000 expires in each of the next 5 years.
The effective income tax rates of 6.0% and 2.1% for 2004 and 2003, respectively,
differ from the statutory Federal income tax rate for the following reasons:
2004 2003
------ ------
Statutory tax rate 15.0% 34.0%
Non-deductible meals and
entertainment expenses (16.0) 1.9
State income taxes, net of federal
tax benefit ( 2.0) 0.2
Change in deferred tax asset
valuation allowance -- (30.1)
Other ( 9.0) ( 4.4)
Recoverable foreign taxes 21.0 --
Other non-deductible expenses ( 3.0) 0.5
------ ------
6.0% 2.1%
====== ======
For the years ended January 31, 2004 and 2003, the Company has no deferred
income tax expense as a result of the changes in temporary differences for
the year. The tax effects of temporary differences that give rise to deferred
tax assets and deferred tax liabilities as of January 31, 2004 and 2003 are
presented below:
36
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
2004 2003
---------- ----------
Deferred tax assets:
Vacation accrual $ 25,042 $ 21,763
Inventories, principally due to additional
costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986 16,544 10,740
Allowance for doubtful accounts 6,868 6,868
Other liabilities 16,381 10,880
Warranty accrual 13,940 ---
Net operating loss carryforward 17,563 32,000
---------- ----------
Total gross deferred tax assets 96,428 82,251
Less valuation allowance ( 36,773) ( 76,681)
---------- ----------
Net deferred tax asset 59,685 5,570
Deferred tax liability:
Property, plant and equipment - principally
due to differences in depreciation methods ( 55,352) ( 5,570)
Acquired intangibles ( 4,302) ---
---------- ----------
Total deferred tax liability ( 59,685) ( 5,570)
---------- ----------
Net deferred taxes $ -0- $ -0-
========== ==========
The valuation allowance for deferred tax assets as of January 31, 2004 and 2003
was $36,773 and $76,681, respectively. The net change in the total valuation
allowance was a decrease of $36,337 in fiscal 2004 and a decrease of $62,752
in fiscal 2003.
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 6. 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 2004 and 2003 amounted to $58,757 and
$46,870, respectively.
Note 7. 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 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
37
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
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
2004 and 2003 was $76,613 and $24,267, respectively. The aggregate future
minimum operating lease payments at January 31, 2004 are as follows:
Year ending January 31:
2005 $ 151,138
2006 149,421
2007 143,718
2008 134,600
2009 83,156
Thereafter 3,711
---------
Total $ 665,744
=========
Note 8. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at January 31, 2004 and 2003 consist
of the following:
2004 2003
-------- --------
Commission advances $ 109,673 $ 112,543
Prepaid insurance 50,063 37,799
Prepaid advertising and shows 185,988 140,200
Miscellaneous receivables 117,408 71,025
Prepaid property taxes 37,977 27,102
Other 63,774 27,735
-------- --------
Total $ 564,883 $ 416,404
======== =========
Note 9. Other Intangible Assets
A summary of other intangible assets at January 31, 2004 and 2003 is as follows:
Estimated
Useful Lives 2004 2003
------------ ------------ ------------
Non-competition covenants 4 - 5 years $ 75,071 $ - 0 -
Loan origination fees 4 - 10 years 68,872 16,833
Distributorship territory cost 5 years - 0 - 28,500
Trademarks indefinite 360,938 37,000
Acquired customer relationships 6.7 years 88,688 - 0 -
Product supply agreement 7 years 1,050,000 - 0 -
------------ ------------ ------------
$ 1,643,569 $ 82,333
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, 2004 and 2003 was $47,863
and $520 respectively.
38
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
Note 10. Accrued Expenses
Accrued expenses at January 31, 2004 and 2003 consist of the following:
2004 2003
--------- ---------
Accrued commissions $ 93,219 $ 16,234
Accrued backorders 212,369 391,869
Accrued sales awards 49,500 50,500
Deposits - cancelled contracts 19,180 32,816
Accrued sales bonuses 65,694 67,094
Accrued Warranty 41,000 32,000
Sales taxes payable 32,150 36,042
Other 56,738 36,351
--------- ---------
Total $ 569,850 $ 662,906
========= =========
Note 11. Related Party Transactions
On November 17, 2003, the Company completed the acquisition of Snake River Log
Homes LLC ("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.
"Due from related parties" as shown on the consolidated balance sheet consists
of amounts receivable from the Company's officers and directors. Such amounts
totaling $0 and $10,141 at January 31, 2004 and 2003, respectively, relate to
travel and expense advances, un-reimbursed business travel expenses and other
expenses.
Note 12. 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, 2004 and 2003 was $62,645 and $65,896, respectively.
The future aggregate mortgage receipts at January 31, 2004 are as follows:
Year ending January 31:
2005 $ 2,592
2006 2,719
2007 2,794
2008 2,967
2009 3,149
Thereafter 48,424
-------
Total $ 62,645
=======
39
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
Note 13. Stock Based Compensation
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, 2002 130,500 182,000 $ .16 $ .19
Granted during year -- -- -- --
Cancelled during year (12,000) -- .16 --
Exercised during year -- -- -- --
-------- --------- ------- -------
Balance at January 31, 2003 118,500 182,000 $ .16 $ .19
Granted during year 50,000 -- .50 --
Cancelled during year -- -- -- --
Exercised during year (35,000) -- ( .17) --
--------- --------- ------- -------
Balance at January 31, 2004 133,500 182,000 $ .29 $ .19
========= ========= ======= =======
All outstanding stock options are exercisable as of January 31, 2004. 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, 2004 is 4.2 years. At January 31, 2004, there were
available for future issuance 96,500 shares.
Pro forma information regarding net (loss) and (loss) per share is presented in
Note 2(p) as if the Company had accounted for its stock-based awards to
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 14. Commitments and Contingencies
(a) Warranty Claims. The Company issues a one hundred year warranty on all
log components sold when a complete log home package is purchased. The amount
provided for warranty claims at January 31, 2004 and January 31, 2003 was
$41,000 and $32,000, respectively, and was based upon objective historical
data of actual costs incurred over the prior five years. During 2004 and 2003
the Company paid warranty claims of $67,010 and $27,285, respectively.
40
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
(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 15. 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
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
41
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
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
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:
Current assets $ 397,216
Equipment 1,232,026
Other intangible assets 445,697
Goodwill 402,771
Liabilities assumed ( 582,299)
----------
Purchase Price $ 1,895,411
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
42
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
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.
Pro Forma Financial Information (unaudited). The unaudited financial
information presented below summarizes the combined results of operations of
the Company and Snake River, True-Craft and AFI, on a pro forma basis, as
though the companies had been combined as of the beginning of each period
presented. The pro forma statements of operations have been adjusted to
reflect increases in expenses that would have been incurred, and decreases in
expenses that would have been eliminated had the acquisitions taken place at
the beginning of the periods presented. All inter-company transactions have
been eliminated. This pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that would have been achieved had the acquisitions taken place at
the beginning of each period presented. The unaudited pro forma condensed
combined statements of operations for the year ended January 31, 2004 combines
the historical results of Lincoln Logs Ltd. for the year ended January 31, 2004,
the historical results for Snake River for the period of November 17, 2003 to
January 31, 2004, the historical results of Snake River for the period February
1, 2003 to October 31, 2003, the historical results of True-Craft for the period
August 29, 2003 to January 31, 2004 and the historical results of True-Craft for
the period April 1, 2003 to August 29, 2003.
UNAUDITED
Years Ended January 31,
2004 2003
------------ ------------
Revenues $ 18,251,483 $ 17,671,143
Net (loss) income ( 472,699) 935,124
(Loss) earnings per share:
Basic $ ( 0.05) $ 0.12
Diluted $ ( 0.05) $ 0.11
43
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
Note 16. Supplementary Disclosure of Cash Flow Information
2004 2003
--------- ---------
Cash paid during the year for:
Interest $ 49,358 $ 54,061
========= =========
Income taxes $ 75,280 $ 4,403
========= =========
Included in the above amounts are $7,058 and $18,233 in 2004 and 2003,
respectively, 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 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 will issue 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 15 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%.
In connection with the acquisition of Snake River Log Homes LLC, the Company
assumed a non-interest bearing 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.
44
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JANUARY 31, 2004 and 2003
During Fiscal 2003, the following transactions occurred:
The Company recorded an increase in transportation equipment of $15,704 and a
related increase in long-term debt in the amount of $11,080, which represents
the financed portion of the purchase.
Note 17. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.
(a) Cash and Cash Equivalents, Accounts Receivable, Accounts Payable, Customer
Deposits, Accrued Expenses and Debt. The carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable, customer deposits, accrued
expenses and debt approximate fair value because of their short term maturities
and because the debt bears interest that approximate applicable market rates.
(b) Mortgage receivable. Based on borrowing rates and terms more commonly made
available by independent mortgage lenders, the fair value of the mortgage
receivable (including current installments) is approximately $70,600 compared
to its carrying amount of $62,645.
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 18. Reclassifications
Certain amounts in the Consolidated Balance Sheet and Consolidated Statements
of Operations for the year ended January 31, 2003 have been reclassified to
conform to the presentation for the year ended January 31, 2004.
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, 2004 that
has materially affected, or is reasonably likely to affect, the Company's
internal control over financial reporting.
45
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 54 2000
Reginald W. Ray, Jr. 74 1982
Samuel J. Padula 80 1985
Steven Patlin 63 2000
Richard C. Farr 75 1982 Director of Corporate Strategy
John D. Shepherd 58 1982 Chairman of the Board; President and Chief
Executive Officer
William J. Thyne 54 1999 Vice President, Treasurer and Secretary
Jeffry J. LaPell 44 2001 Vice President and Chief Operating Officer
Benjamin A. Shepherd 50 2003 Vice President of Corporate Development;
Vice President-Finance and Chief
Financial Officer
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.
46
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 served as Chairman of the Board of the Company since January
1990 and President and Treasurer of the Company since December 1991 until his
resignation from those offices on July 8, 1997. 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
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 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.
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.
47
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.
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, 2004
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 58 Chairman of the Board; President and Chief Executive
Officer
William J. Thyne 54 Vice President; Treasurer; Secretary
Jeffry J. LaPell 44 Vice President and Chief Operating Officer
Eric R. Johnson 38 Vice President - Sales
Benjamin Shepherd 50 Vice President - Finance and Corporate Development;
Chief Financial Officer
Charles A. Clark 56 Vice President - Western Region
Richard H. Berry 43 Vice President - Marketing; President - Snake River
Log Homes
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.
48
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
B services in Guilderland, New York from August 1996 to January 1998.
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.
Eric R. Johnson joined the Company on February 4, 2002 as Vice President-
Sales. Prior to joining the Company Mr. Johnson was Show and Seminar Manager
for Home Buyer Publications, Inc., publishers of Log Home Living and Timber
Frame Homes magazines, in Chantilly, Virginia from June 1998 to January 2002.
Prior to that position, Mr. Johnson was Regional Manager for Nationwide Homes,
Inc., a manufacturer of modular homes in Martinsville, Virginia from May 1997
to May 1998. Prior to that Mr. Johnson was the Regional Training Manager for
Lindal Cedar Homes, Inc. based in Fairfax, Virginia from September 1993 to
April 1997. From July 1989 to August 1993 Mr. Johnson held the position of
General Manager of Alpine Cedar Homes, an independent distributor for Lindal
Cedar Homes, Inc. in South Glens Falls, New York.
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 - Marketing
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.
49
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.
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,
2003.
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 $100,000 for services rendered in all
capacities to the Company and its subsidiaries during the fiscal years ended
January 31, 2004, January 31, 2003 and January 31, 2002.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION - ANNUAL COMPENSATION AWARDS
Long-term Compensation
Annual Compensation Awards
------------------- ----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
All
Other Restricted Other
Name and Annual Stock Options/ LTIP Compen-
Principle Year Salary Bonus Compensation Award(s) SAR's Payout Sation
Position ($) ($) ($) ($) (#) ($) ($)
--------------------------------------------------------------------------------------------------------
John D. Shepherd, 2004 100,000.00 75,000.00 8,000.00(5) 0.00 0 0.00 7,991.00 (3)
Chief Executive 2003 100,000.00 0.00 8,000.00(5) 0.00 0 0.00 7,991.00 (4)
Officer (1) 2002 91,327.00 0.00 6,000.00(5) 0.00 0 0.00 22,155.00 (2)
Jeffry J. LaPell, 2004 91,710.00 32,533.00 8,000.00(5) 0.00 0 0.00 10,757.00 (8)
Chief Operating 2003 89,539.00 40,628.00 8,000.00(5) 0.00 0 0.00 6,393.00 (9)
Officer (6) 2002 84,841.00 22,805.00 1,667.00(5) 0.00 0 0.00 3,541.00 (7)
William J. Thyne, 2004 91,710.00 30,000.00 8,000.00(5) 0.00 0 0.00 11,138.00 (12)
Chief Financial 2003 89,539.00 0.00 8,000.00(5) 0.00 0 0.00 8,725.00 (13)
Officer (10) 2002 84,841.00 0.00 6,000.00(5) 0.00 0 0.00 9,812.00 (11)
Eric R. Johnson, 2004 73,728.00 29,096.00 0.00 0.00 0 0.00 3,250.00 (15)
Vice President- 2003 72,000.00 26,369.00 0.00 0.00 0 0.00 250.00 (16)
Sales (14) 2002 0.00 0.00 0.00 0.00 0 0.00 0.00
50
(1) Mr. Shepherd was elected Chief Executive Officer in December 1997. Since
June 1982 Mr. Shepherd has been a director of the Company.
(2) This amount consists of $4,250 paid for directors' meetings fees, $2,867
of matching funds contributed to the Company's 401(k) Plan, $352 paid for
term life insurance, $13,836 for interest paid on amounts advanced to the
Company and $850 paid for interest on Series B Convertible Subordinated
Debentures.
(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. During fiscal year 2002 the annual salary was increased to
$8,000. The amounts shown for fiscal year 2002 represent pro-rata amounts
paid. Mr. LaPell was appointed to a vacant seat on the Board of Directors
in August 2001. Mr. Thyne was appointed to a vacant seat on the Board of
Directors in November 2000.
(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 $3,225 of matching funds contributed to the
Company's 401(k) Plan and $316 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.
(10) Mr. Thyne was elected Chief Financial Officer and Secretary in January
1998, Vice President in September 1999 and Treasurer in February 2001.
Mr. Thyne ceased being Chief Financial Officer in March 2004.
(11) This amount consists of $4,250 paid for directors' meetings fees, $2,837
of matching funds contributed to the Company's 401(k) Plan, $325 paid for
term life insurance, and $2,400 paid for interest on Series B Convertible
Subordinated Debentures.
(12) This amount consists of $6,000 paid for directors' meetings fees, $4,118
of matching funds contributed to the Company's 401(k) Plan, $320 paid for
term life insurance, and $700 paid for interest on Series B Convertible
Subordinated Debentures.
(13) This amount consists of $3,000 paid for directors' meeting fees, $3,012
of matching funds contributed to the Company's 401(k) Plan, $313 paid
for term life insurance, and $2,400 paid for interest on Series B
Convertible Subordinated Debentures.
(14) Mr. Johnson joined the Company as Vice President - Sales in February 2002.
(15) This amount consists of $2,993 of matching funds contributed to the
Company's 401(k) Plan, and $257 paid for term life insurance.
(16) This amount represents $250 paid for term life insurance.
51
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. Fifty-five of the
Company's employees are currently eligible to participate in the Plan, forty-
six 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, $11,500 for the 2003 calendar year). Contributions to the Plan made
by the Company are 20% vested after a participating employee completes three
years of service with the Company and continues to vest at the rate of an
additional 20% over each of the following four years of employment. The Company
is current with respect to its funding obligations to the Plan.
During the fiscal years ended January 31, 2004, 2003 and 2002, cumulative
vested account balances of $14,953, $174,532 and $22,494, 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, 2004 and 2003, 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
The Company is party to employment contracts with Jeffry J. LaPell, Vice
President and Chief Operating Officer, Eric R. Johnson, Vice President-Sales,
and Richard Berry, Vice President - Marketing and President of Snake River Log
Homes LLC. The contracts with Messrs. LaPell and Johnson are each for a term
of two years, call for a certain base salary (adjusted annually for the change
in the Consumer Price Index), and include incentives for an annual bonus based
on the achievement of defined goals related to sales revenues and the Company's
backlog of contracts. The contracts with Messrs. LaPell and Johnson also
contain non-competition clauses that would be effective upon conclusion of
employment with the Company, and severance provisions whereby each individual
would be paid an amount equal to three months' base salary. As of January 31,
2004, the base salaries for Mssrs. LaPell and Johnson are $91,710 and $73,728,
respectively. The contracts of Mr. LaPell expires on May 31, 2004, and the
contract with Mr. Johnson expire on January 31, 2005.
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.
52
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 23, 2004 as of April 23, 2004
------------------- ---------------------- ----------------------
Richard C. Farr 1,110,802 (1) 11.87%
40 Colony Road
W. Hartford CT 06117
John D. Shepherd 5,409,461 (2) 57.82%
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 23, 2004 as of April 23, 2004
--------------- ---------------------- ----------------------
Richard C. Farr 1,110,802 (4) 11.87%
Samuel J. Padula 298,743 (1)(2) 3.19%
Reginald W. Ray, Jr. 221,504 (1)(3) 2.37%
John D. Shepherd 5,409,461 (5) 57.82%
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%
Eric R. Johnson 0 0.00%
Richard Berry 200,000 (10) 2.14%
All officers and
directors as a group
(12 persons) 7,487,695 (11) 80.03%
53
(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.
(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 195,000 become
exercisable within 60 days and 50,000 become exercisable on November
17, 2004.
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
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 of $141,300 for such legal services rendered to the Company
during the fiscal year ended January 31, 2004.
54
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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.
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.
55
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.
21.1 List of Subsidiaries.
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.
Reference is also made to the Exhibit Index.
(b) Reports on Form 8-K.
On November 13, 2003, the Company filed an Amended Current Report under
Item 7 on Form 8-K/A (Financial Statements, Pro Forma Information and
Exhibits) whereby the Company filed financial information related to its
acquisition of True Craft Log Structures, Ltd. and Hart & Son Industries,
Ltd.
On November 17, 2003, the Company filed a Current Report under Item 5 on
Form 8-K (Other Events and Regulation FD) disclosing the Company's
acquisition of Snake River Log Homes LLC.
On November 20, 2003, the Company filed a Current Report under Item 2 on
Form 8-K (Acquisition or Disposition of Assets) whereby the Company
reported its acquisition of Snake River Log Homes LLC.
On January 30, 2004, the Company filed an Amended Current Report under
Item 7 on Form 8-K/A (Financial Statements, Pro Forma Information and
Exhibits) whereby the Company filed financial information related to its
acquisition of Snake River Log Homes LLC.
There were no other reports on Form 8-K filed by the Company during the quarter
ended January 31, 2004, or through and including the date of this filing.
56
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees billed to the Company by Its Independent Auditors
Urbach Kahn & Werlin LLP ("UKW") have a continuing relationship with Urbach Kahn
& Werlin 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,
2004 ("Fiscal 2004"), referred to below under "All Other Fees" were provided to
the Company by Advisors. As a result of UKW's arrangement with Advisors, UKW
has no full time employees and, therefore, all audit services performed for the
Company by UKW for Fiscal 2004 was provided by permanent, full time employees
of Advisors leased to UKW. UKW 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 2004 consolidated financial
statements.
For the fiscal year ended January 31, 2004 and 2003, fees for professional
services provided by Urbach Kahn & Werlin LLP 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 $119,901 in 2004 and
$44,533 in 2003.
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 $78,176 in 2004 and $22,612 in 2003.
Tax Fees. Tax fees consist of fees for tax compliance, tax advice, tax planning
and tax return preparation, and amounted to $8,618 in 2004 and $-0- in 2003.
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 year ended January 31, 2004 and January 31, 2003.
Pre-Approval of Services by Independent Auditors
The Audit Committee pre-approved all audit, audit-related, and tax services
performed by Urbach Kahn & Werlin LLP, the Company's external auditors for
fiscal year 2004. 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.
57
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, 2004
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, 2004 Date: April 30, 2004
58
(iii) A Majority of the Board of Directors:
s/ Richard C. Farr April 30, 2004
------------------------
Richard C. Farr
s/ Samuel J. Padula April 27, 2004
------------------------
Samuel J. Padula
April , 2004
------------------------
Reginald W. Ray, Jr.
s/ John D. Shepherd April 30, 2004
------------------------
John D. Shepherd
s/ William J. Thyne April 28, 2004
-----------------------
William J. Thyne
April , 2004
------------------------
Steven Patlin
s/ Leslie M. Apple April 30, 2004
------------------------
Leslie M. Apple
s/ Jeffry J. LaPell April 26, 2004
------------------------
Jeffry J. LaPell
s/ Benjamin A. Shepherd April 30, 2004
------------------------
Benjamin A. Shepherd
59
EXHIBIT 14.1
LINCOLN LOGS LTD.
Code of Ethics for Executive Officers
The honesty, integrity and sound judgment of its executive officers is
fundamental to the reputation and success of Lincoln Logs Ltd. (the "Company").
While all employees and directors are required to adhere to the highest level
of personal and business ethics, the professional and ethical conduct of the
executive officers is essential to our proper functioning and success.
Executive officers of the Company hold an important and elevated role in
corporate governance. These individuals are key members of the Company's
management team, who are uniquely capable and empowered to ensure that the
interests of our shareholders (including customers, employees and suppliers)
are appropriately balanced, protected and preserved. Executive officers of
the Company fulfill this responsibility by prescribing and enforcing the
policies and procedures employed in the Company's operations.
Executive officers of the Company must:
Act with honesty and integrity, avoiding conflicts of interest in personal
and professional relationships;
Disclose any material transaction or relationship that could reasonably give
rise to a conflict;
Perform responsibilities with a view to causing periodic reports filed with
the Securities and Exchange Commission, and other public communications, to
contain information, which is accurate, full, fair, relevant and
understandable;
Provide colleagues with information that is accurate, complete, objective,
relevant and understandable;
Comply with applicable laws, rules and regulations of federal, state and
local governments and other appropriate private and public regulatory
agencies;
Act in good faith, with due care, competence and diligence, without
misrepresenting material facts or allowing independent judgment to be
subordinated;
Respect the confidentiality of information acquired in the course of
employment where appropriate;
Proactively promote ethical and honest behavior within the workplace;
Assure responsible use of and control of all assets, resources and
information in possession of the Company; and
Promptly report violations of this code to the Board of Directors.
All executive officers of the Company are expected to adhere to the highest
level of personal and business ethics at all times. The Board of Directors
shall have the authority to discipline any executive officer of the Company
that has committed a violation of this Code of Ethics as deemed appropriate.
The Board of Directors shall review the action at the subject executive
officer's request. Appropriate disciplinary actions include:
Termination;
Required attendance at a ethics program;
Disclosure/notation in employment record; and
Rescission of subject transaction
The Board of Directors shall have the sole and absolute discretionary authority
to approve any deviation or waiver from the Code of Ethics.
EXHIBIT 21.1
LINCOLN LOGS LTD.
LIST OF SUBSIDIARIES
As Of January 31, 2004
Thermo-Home Inc.
Snake River Log Homes, LLC
AFI Acquisition Company, LLC
Lincoln Logs Canada Ltd.
True Craft Log Structures Ltd.
Hart and Son Industries Ltd.
Lincoln Holding Corp.
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, 2004 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, 2004 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, 2004 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, 2004 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, 2004 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, 2004 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. ]