UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended October 31, 2004
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 0-12172
Lincoln Logs Ltd.
(Exact name of small business issuer as specified in its charter)
New York 14-1589242
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Riverside Drive, Chestertown, New York 12817
(Address of principal executive offices)
(518) 494 - 5500
(Issuer's telephone number)
Neither name, address nor fiscal year has changed since last report
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at December 13, 2004
Common Stock, $0.01 par value 9,040,059
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
- 1 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
INDEX
Page number
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated balance sheets as of
October 31, 2004 and January 31, 2004 3 - 4
Consolidated statements of operations for the
nine months ended October 31, 2004 and 2003 5
Consolidated statements of operations for the
three months ended October 31, 2004 and 2003 6
Consolidated statements of changes in stockholders'
equity for the nine months ended October 31, 2004
and the twelve months ended January 31, 2004 7
Consolidated statements of cash flows for the
nine months ended October 31, 2004 and 2003 8
Notes to consolidated financial statements 9 - 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13 - 29
ITEM 3. CONTROLS AND PROCEDURES 29
PART II. OTHER INFORMATION 30
SIGNATURES 31
- 2 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2004 AND JANUARY 31, 2004
ASSETS
October 31, January 31,
2 0 0 4 2 0 0 4
(Unaudited)
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 840,233 $ 750,239
Trade accounts receivable, net of
allowance for doubtful accounts of
$20,199 at October 31, 2004 and
January 31, 2004 540,130 337,166
Inventories (raw materials) 2,218,359 2,032,050
Work in process 902,551 477,389
Prepaid expenses and other current assets 608,036 564,883
Income taxes receivable 59,011 96,427
Mortgage and notes receivable 5,623 2,592
---------- ----------
Total current assets 5,173,943 4,260,746
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,012,346 1,020,347
Buildings and improvements 2,905,687 3,047,979
Machinery and equipment 2,054,313 1,926,152
Furniture and fixtures 2,177,219 2,096,515
Transportation equipment 549,858 472,350
---------- ----------
8,699,423 8,563,343
Less: accumulated depreciation (4,261,275) (3,983,816)
---------- ----------
Total property, plant and
equipment - net 4,438,148 4,579,527
---------- ----------
OTHER ASSETS:
Mortgage and notes receivable 72,521 60,053
Deposits and other assets 56,370 70,742
Goodwill 1,353,271 1,319,970
Other intangible assets, net of accumulated
amortization of $204,948 at October 31,
2004 and $97,537 at January 31, 2004 1,447,795 1,546,032
---------- ----------
Total other assets 2,929,957 2,996,797
---------- ----------
TOTAL ASSETS $12,542,048 $11,837,070
========== ==========
See accompanying notes to consolidated financial statements.
( continued )
- 3 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
OCTOBER 31, 2004 AND JANUARY 31, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31, January 31,
2 0 0 4 2 0 0 4
(Unaudited)
----------- -----------
CURRENT LIABILITIES:
Borrowings on line of credit $ 753,000 $ 503,000
Current installments of bank loans 171,520 118,980
Current installments of note payable,
related party 93,458 93,458
Current installments of notes payable 297,881 407,109
Current installments of capital lease
obligations 16,814 22,211
Trade accounts payable 1,227,430 1,578,912
Accrued salaries and wages 249,759 196,243
Accrued expenses 802,441 569,850
Customer deposits 3,325,820 2,575,847
---------- ----------
Total current liabilities 6,938,123 6,065,610
LONG-TERM DEBT, net of current installments:
Note payable, related party 316,563 316,563
Bank loans 2,047,147 1,960,687
Notes payable 948,827 1,037,541
Capital lease obligations 7,248 17,581
---------- ----------
Total long-term debt 3,319,785 3,332,372
---------- ----------
OTHER LONG-TERM OBLIGATION 15,000 15,000
---------- ----------
Total liabilities 10,272,908 9,412,982
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $ .01 par value;
authorized 1,000,000 shares; issued
and outstanding - 0 - shares --- ---
Common stock, $ .01 par value; authorized
12,000,000 shares at October 31, 2004 and
10,000,000 shares at January 31, 2004;
issued 9,544,299 shares at October 31,
2004 and January 31, 2004 95,443 95,443
Additional paid-in capital 6,107,648 6,107,648
Accumulated deficit (3,162,672) (2,945,805)
Accumulated other comprehensive income 113,156 51,237
----------- ----------
3,153,575 3,308,523
Less cost of 504,240 shares of common
stock in treasury (884,435) (884,435)
----------- ----------
Total stockholders' equity 2,269,140 2,424,088
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $12,542,048 $11,837,070
=========== ===========
See accompanying notes to consolidated financial statements.
- 4 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 2004 AND 2003
(UNAUDITED)
NET SALES $16,412,088 $11,723,296
COST OF SALES 10,614,396 6,680,135
---------- ----------
GROSS PROFIT 5,797,692 5,043,161
---------- ----------
OPERATING EXPENSES:
Commissions 1,736,474 1,312,836
Selling, general and administrative 4,287,842 3,352,034
---------- ----------
Total operating expenses 6,024,316 4,664,870
---------- ----------
(LOSS) INCOME FROM OPERATIONS ( 226,624) 378,291
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 6,148 12,826
Interest expense ( 95,207) ( 25,366)
Other 98,816 107,928
---------- ----------
Total other income - net 9,757 95,388
---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES ( 216,867) 473,679
INCOME TAXES --- 163,849
---------- ----------
NET (LOSS) INCOME $( 216,867) $ 309,830
========== ==========
PER SHARE DATA:
Basic (loss) earnings per share $ ( .02) $ .04
========== ==========
Diluted (loss) earnings per share $ ( .02) $ .04
========== ==========
See accompanying notes to consolidated financial statements.
- 5 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2004 AND 2003
(UNAUDITED)
NET SALES $ 6,217,416 $ 5,281,849
COST OF SALES 3,979,045 3,143,840
---------- ----------
GROSS PROFIT 2,238,371 2,138,009
---------- ----------
OPERATING EXPENSES:
Commissions 698,362 568,169
Selling, general and administrative 1,393,448 1,167,039
---------- ----------
Total operating expenses 2,091,810 1,735,208
---------- ----------
INCOME FROM OPERATIONS 146,561 402,801
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 1,679 3,592
Interest expense ( 36,583) ( 6,639)
Other 34,220 6,104
---------- ----------
Total other (expense) income - net ( 684) 3,057
---------- ----------
INCOME BEFORE INCOME TAXES 145,877 405,858
INCOME TAXES 45,000 143,849
---------- ----------
NET INCOME $ 100,877 $ 262,009
========== ==========
PER SHARE DATA:
Basic earnings per share $ .01 $ .03
========== ==========
Diluted earnings per share $ .01 $ .03
========== ==========
See accompanying notes to consolidated financial statements.
- 6 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED OCTOBER 31, 2004 (UNAUDITED) AND
THE TWELVE MONTHS ENDED JANUARY 31, 2004
Other
Accum- Comp-
Number Par Additional ulated Other Total rehen-
of value paid-in Accumulated Comprehen- Treasury stockholders' sive
shares amount capital deficit sive Income stock equity Income
--------- -------- ---------- ----------- ----------- ---------- ------------ ---------
Balance at January 31, 2003 7,759,299 $ 77,593 $5,681,554 $(2,768,414) --- $( 884,435) $ 2,106,298 ---
Debt converted to common
stock 1,162,500 11,625 208,375 --- --- --- 220,000 ---
Common stock issued upon
exercise of stock options 35,000 350 5,663 --- --- --- 6,013 ---
Common stock issued upon
acquisition of business 287,500 2,875 73,456 --- --- --- 76,331 ---
Common stock issued 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)
=========
Foreign currency translation
adjustment --- 61,919 --- 61,919 61,919
Net (loss) - nine months
ended October 31, 2004 --- --- --- ( 216,867) --- --- ( 216,867) (216,867)
---------- -------- ---------- ----------- ----------- ---------- ------------ ---------
Balance at October 31, 2004 9,544,299 $ 95,443 $6,107,648 $(3,162,672) $ 113,156 $( 884,435) $ 2,269,140 $(154,948)
========== ======== ========== =========== =========== ========== ============ =========
See accompanying notes to consolidated financial statements.
- 7 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 31, 2004 AND 2003
(UNAUDITED)
Nine Months Ended
October 31,
----------------------------
2 0 0 4 2 0 0 3
----------- -----------
OPERATING ACTIVITIES:
Net (loss) income $( 216,867) $ 309,830
Adjustments to reconcile net (loss) income
to net cash provided by
operating activities:
Depreciation 401,547 206,443
Amortization 143,719 8,453
(Gain) on sale of assets held for resale --- ( 4,664)
(Gain) on sale of real property ( 36,656) ---
(Gain) on disposition of asset related to
insurance claim ( 10,059) ---
Changes in operating assets and liabilities:
(Increase) in trade accounts receivable ( 201,431) ( 40,358)
(Increase) in inventories ( 582,951) ( 773,780)
(Increase) in prepaid expenses
and other current assets ( 40,515) ( 148,245)
(Increase) decrease in deposits and other
assets 14,372 ( 4,768)
(Decrease) increase in trade accounts
payable ( 356,795) 1,051,179
Increase (decrease) in customer deposits 747,735 ( 241,740)
Increase in accrued expenses, payroll and
related taxes and other current
liabilities 275,603 75,591
Increase in due to related parties --- 34,651
(Increase) in due from related parties --- ( 33,286)
Decrease (increase) in prepaid income
taxes 41,338 ( 64,207)
(Decrease) in accrued income taxes ( 1,000) 117,057
---------- ----------
Net cash provided by operating activities 178,040 492,156
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment ( 230,592) ( 619,596)
Acquisition of businesses ( 17,749) (1,100,840)
Proceeds from the sale of assets held for
resale --- 10,000
Proceeds from the sale of real property 67,916 ---
Proceeds from disposition of insurance
claim 32,931 ---
Issuance of mortgages receivable ( 17,400) ---
Payments received on mortgage receivable 1,901 2,854
---------- ----------
Net cash (used) by investing activities ( 162,993) (1,707,582)
---------- ----------
FINANCING ACTIVITIES:
Capital received upon exercise of stock
options --- 6,013
Proceeds from borrowings of long-term debt 210,161 1,768,036
Proceeds from borrowing on line of credit 900,000 ---
Repayment of line of credit ( 650,000) ---
Loan origination fees ( 9,174) ---
Repayments of capital leases ( 15,730) ( 48,531)
Repayments of bank loans ( 71,161) ( 181,875)
Repayments of notes payable ( 262,296) (1,194,161)
---------- ----------
Net cash provided by financing activities 101,800 349,482
---------- ----------
Effect of foreign currency translation on cash ( 26,853) 57,551
---------- ----------
Net increase (decrease) in cash and cash
equivalents 89,994 ( 808,393)
Cash and cash equivalents at
beginning of period 750,239 1,885,931
---------- ----------
Cash and cash equivalents at
end of period $ 840,233 $1,077,538
========== ==========
See accompanying non-cash disclosure note (Note 5 to consolidated financial
statements).
See accompanying notes to consolidated financial statements.
- 8 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004 AND 2003
(1) BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods.
The results of operations for the nine-month periods ended October 31, 2004
and 2003 are not necessarily indicative of the results to be expected for the
full year due to the seasonal nature of the business. The Company operates in
the housing industry whose activity pattern is more active during the months of
late-spring through late-autumn, and less active during the winter months of the
year.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended January 31,
2004.
(2) 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 9,040,059 and 8,059,867 for the nine-month
periods ended October 31, 2004 and 2003, respectively, and 9,040,059 and
8,651,146 for the three-month periods ended October 31, 2004 and 2003,
respectively.
Diluted earnings (loss) per share is computed based on the weighted average
number of common shares outstanding during the respective periods and adding to
that amount common stock equivalents, that is items that are convertible into
common stock. When the effects are dilutive, the convertible subordinated
debentures are assumed to have been converted into common stock at the beginning
of the period after giving retroactive effect to the elimination of interest
expense, net of income tax effect, applicable to the convertible subordinated
debentures. Stock options are included in the computation of dilutive earnings
per share under the treasury stock method if the effect is dilutive.
The numerator in the calculation of diluted earnings (loss) per share for the
nine-month periods ended October 31, 2004 and 2003 was determined as follows:
- 9 -
2004 2003
Net (loss) income used to calculate basic earnings
per share $(216,867) $ 309,830
Add back interest expense related to convertible
debentures --- 7,408
--------- ---------
Numerator for calculation of diluted (loss) earnings
per share $(216,867) $ 317,238
========= =========
The denominator in the calculation of diluted earnings (loss) per share for
the nine-month periods ended October 31, 2004 and 2003 was determined as
follows:
2004 2003
Weighted average outstanding shares used to calculate
basic earnings (loss) per share 9,040,059 8,059,867
Add shares issuable assuming conversion of debentures --- 442,858
Add shares issuable assuming exercise of outstanding
stock options --- 192,644
--------- ---------
Denominator for calculation of diluted earnings per
share 9,040,059 8,695,369
Basic (loss) earnings per share $(0.02) $0.04
Diluted (loss) earnings per share $(0.02) $0.04
The numerator in the calculation of diluted earnings per share for the
three-month periods ended October 31, 2004 and 2003 was determined as follows:
2004 2003
Net income used to calculate basic earnings per share $ 100,877 $ 262,009
Add back interest expense related to convertible
debentures --- ---
--------- ---------
Numerator for calculation of diluted earnings per share $ 100,877 $ 262,009
========= =========
The denominator in the calculation of diluted earnings per share for the
three-month periods ended October 31, 2004 and 2003 was determined as follows:
2004 2003
Weighted average outstanding shares used to calculate
Basic earnings per share 9,040,059 8,651,146
Add shares issuable assuming conversion of debentures --- ---
Add shares issuable assuming exercise of outstanding
Stock options 203,985 208,904
--------- ---------
Denominator for calculation of diluted earnings per
share 9,244,044 8,860,050
Basic earnings per share $ 0.01 $0.03
Diluted earnings per share $ 0.01 $0.03
(3) INCOME TAXES
The Company accrues income tax expense on an interperiod basis as necessary,
and accrues income tax benefits only when it is more likely than not that such
tax benefits will be realized. For the nine-month period ended October 31,
2004, the Company has not recorded a provision for income taxes or tax benefit.
A provision for income taxes was provided in the amount of $163,849 in the
nine-month period ended October 31, 2003. For the three-month periods ended
- 10 -
October 31, 2004 and 2003, a provision for income taxes was provided in the
amount of $45,000 and $143,849, respectively.
(4) STOCK BASED COMPENSATION
Stock option activity for the nine-month period ended October 31, 2004
and the fiscal year ended January 31, 2004 is summarized as follows:
Weighted Average
Number of shares Option Price Per Share
---------------- ----------------------
Qualified Non-Qualified Qualified Non-Qualified
--------- ------------- --------- -------------
Balance at January 31, 2003 118,500 182,000 $0.16 $0.19
Granted during year 50,000 --- 0.50 ---
Cancelled during year --- --- --- ---
Exercised during year ( 35,000) --- ( 0.18) ---
--------- ------------- --------- -------------
Balance at January 31, 2004 133,500 182,000 $0.29 $0.19
Granted during period --- 50,000 --- 0.55
Cancelled during period --- --- --- ---
Exercised during period --- --- --- ---
--------- ------------- --------- -------------
Balance at October 31, 2004 133,500 232,000 $0.29 $0.27
========= ============= ========= =============
There were no Stock Options granted during the three-month periods ended
October 31, 2004 and October 31, 2003, respectively.
All outstanding stock options are exercisable as of October 31, 2004 with the
exception of 50,000 Non-Qualified Stock Options granted during the first quarter
ended April 30, 2004. Those options become exercisable equally over a five-year
period commencing with 10,000 options becoming exercisable on November 17, 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, except as noted above for the options granted during the first quarter
ended April 30, 2004. The weighted average remaining contractual life of the
outstanding options as of October 31, 2004 is 4.25 years.
During the first quarter ended April 30, 2004, the Company granted 50,000
non-qualified stock options with an exercise price $0.55 per share. At the date
of the grant, the fair market price for the Company's common stock was $0.90 per
share. The Company issued these Non-Qualified Stock Options at a below market
price because of a commitment the Company had made during the negotiations to
purchase Snake River Log Homes, LLC in April 2003 when the fair market price for
the Company's common stock was approximately $0.40 per share. The difference
between the fair market value and the options exercise price will be recognized
by the Company as compensation expense as the stock options vest.
(5) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the nine months ended October 31, 2004, cash was paid in the amounts
of $88,387 for interest and $4,030 for income taxes. During the nine months
- 11 -
ended October 31, 2003, cash was paid in the amounts of $24,322 for interest
and $75,280 for income taxes.
Non-cash investing and financing activities:
During the nine-month period ended October 31, 2004, the Company sold real
property not associated with its core business. In connection with this
transaction, the Company agreed to hold two second mortgages in the amount of
$8,700 each. The mortgages have a term of five years, bear interest at 6%
and are payable in equal monthly installments.
During the nine-month period ended October 31, 2003, the following non-cash
investing and financing transactions occurred:
On May 15, 2003, all holders of Series B Convertible Subordinated Debentures
and Series C Convertible Subordinated Debentures (collectively the "Debentures")
elected to convert their respective holdings into the common stock of the
Company. At May 15, 2003, the total amount of Debentures outstanding equaled
$220,000. The Debentures were converted into 1,162,500 shares of common stock.
Subsequent to the conversion date, the outstanding balance of the Debentures was
zero.
In March 2003, a new truck was purchased for $41,611. The Company took
advantage of special financing offered by the truck manufacturer and financed
the total amount of the purchase with an interest rate of 0%. The borrowing
has a maturity date of March 2006.
(6) COMMITMENTS AND CONTINGENCIES
Litigation. The Company is defending certain 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 the Company is indemnified by the related dealer.
(7) RECLASSIFICATIONS
Certain amounts in the Consolidated Balance Sheets, Consolidated Statement of
Operations and Consolidated Statement of Cash Flows for the nine months ended
October 31, 2003 have been reclassified to conform with the presentation for the
nine months ended October 31, 2004. None of the reclassifications had the
effect of changing the net income as previously reported.
- 12 -
ITEM 2
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 its subsidiaries. It should be read in
conjunction with the consolidated financial statements, notes and tables in
the Company's Annual Report on Form 10-KSB for the year ended January 31, 2004.
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 on Form 10-QSB. These
forward-looking statements speak only as of the date hereof. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
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 subsidiary, Snake River Log Homes LLC, does provide this
service from time to time. We sell a product line of solariums, 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 our
customers with detailed construction drawings that are stamped by a professional
engineer as required. We sell log homes using a variety of types and finished
styles of logs, 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 the following four elements: (1) log
home and panelized home sales, (2) solarium sales, (3) sales of building
materials, and (4) revenues from engineering and design services. For the
nine-month period ended October 31, 2004, approximately 89% of the Company's
total sales were derived from log home and panelized home sales.
We consider the activities relating to 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 for the
purpose of increasing the Company's product diversification through
acquisitions. Although we are experiencing costs associated with some of our
- 13 -
recent acquisitions, we believe we will progress towards increased sales and
cost savings as the newly-acquired entities are further integrated into the
Company.
RESULTS OF OPERATIONS
The following tables illustrate our financial results for the nine-month
and three-month periods ended October 31, 2004 as compared to the nine-
month and three-month periods ended October 31, 2003 (in $1,000's US).
Nine-month periods ended October 31, 2004 and 2003:
Y-T-D Y-T-D
Oct 31, % of Oct 31, % of %
2004 Sales 2003 Sales Change
------- ----- ------- ----- ------
Net Sales $16,412 100% $11,723 100% 40%
Cost of Sales 10,614 65% 6,680 57% 59%
------- ----- ------- ----- ------
Gross Profit 5,798 35% 5,043 43% 15%
Operating expense 6,025 37% 4,665 40% 29%
------- ----- ------- ----- ------
(Loss) Income from Operations ( 227) -2% 378 3% -160%
Other Income, net 10 -- 96 1% -90%
------- ----- ------- ----- ------
(Loss) Income before Income
Taxes ( 217) -2% 474 4% -146%
Income Tax (Expense) --- -- ( 164) -1% 100%
------- ----- ------- ----- ------
Net (Loss) Income $( 217) -2% $ 310 3% -170%
======= ===== ======= ===== ======
Three-month periods ended October 31, 2004 and 2003:
3rd 3rd
Fiscal Fiscal
Quarter % of Quarter % of %
2004 Sales 2003 Sales Change
------- ----- ------- ----- ------
Net Sales $ 6,217 100% $ 5,282 100% 18%
Cost of Sales 3,979 64% 3,144 60% 27%
------- ----- ------- ----- ------
Gross Profit 2,238 36% 2,138 40% 5%
Operating expense 2,091 33% 1,735 32% 21%
------- ----- ------- ----- ------
Income from Operations 147 3% 403 8% -64%
Other (Expense) Income, net ( 1) -- 3 -- -133%
------- ----- ------- ----- ------
Income before Income Taxes 146 3% 406 8% -64%
Income Taxes ( 45) 1% ( 144) -3% -69%
------- ----- ------- ----- ------
Net Income $ 101 2% $ 262 5% -62%
======= ===== ======= ===== ======
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
- 14 -
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 ongoing 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 filed by the Company in its annual report on
Form 10-KSB for the year ended January 31, 2004, the Company believes that the
following addresses its critical accounting policies.
Revenue Recognition: We recognize revenue in accordance with the Securities and
Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements" and the Securities and Exchange Commission's Staff
Accounting Bulletin No. 104, which updated the guidance in Staff Accounting
Bulletin No. 101 (together, both Staff Accounting Bulletins are known as "SAB
101"). 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 further obligation to provide any modification
or customization, upgrades, enhancements, or post-delivery customer support.
Where we provide construction services, revenue is recorded upon the completion
of the construction project. 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. 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 is
disclosed to the customer at the time of the execution of the contact, assuming
all other SAB 101 revenue recognition criteria have been met. We deduct this
amount from the deposit furnished by the customer in connection with the
contract and return the remainder of the deposit to the customer.
Impairment of Long-lived and Intangible Assets: Where indicators of impairment
are present, we evaluate the recoverability of the Company's long-lived assets
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 $30,100 greater than the fair market value of the parcel as
determined by an independent real estate appraisal. We did not record any
impairment losses during the nine-month period ended October 31, 2004.
- 15 -
Income Taxes: We estimate our income taxes in each of the jurisdictions in
which we operate. This process involves an estimation of our actual current tax
exposure together with an assessment of 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 the
valuation allowance in a given 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 of such
accounts. On a regular basis, we evaluate our accounts receivable and
inventories and establish these reserves based on various contributing factors.
In the case of accounts receivable, we establish the reserve based on a
combination of specific customer circumstances as well as the history of write-
offs and collections. In the case of inventories, factors we consider in
establishing a reserve include economic conditions, product mix, sales levels,
customer acceptance of our products and changing product styles. As a result,
we established a reserve for doubtful accounts receivable of $20,199 for the
fiscal year ended January 31, 2004, and a reserve for slow moving and obsolete
inventories of $18,000 for the fiscal year ended January 31, 2004. We have not
added to these reserves during the nine-month period ended October 31, 2004.
Comparison of Nine-month Periods Ended October 31, 2004 and October 31, 2003
Revenues. Net sales were $16,412,088 for the nine-month period ended October
31, 2004 compared with $11,723,296 for the nine-month period ended October 31,
2003. The increase, $4,688,792, was primarily attributable to increased sales
of our log home and panelized home construction kits. Approximately eighty-nine
percent of total revenues are represented by home construction kit sales and
this portion of our revenues improved through a thirty-eight percent increase in
units shipped and a thirty-nine percent increase in sales dollar volume. The
average value of construction kit units shipped remained relatively the same
from one year to the next. The remaining contributors to our revenues are
building material sales, design and engineering services and freight revenues.
Collectively these items increased approximately $1,699,400, or one hundred
forty five percent, over the previous year's revenues for such items, a
significant portion of which was contributed by our newly-acquired companies.
Of the total increase in revenues for the nine-month period ended October 31,
2004 over the nine-month period ended October 31, 2003, approximately fifty-two
percent was contributed by our newly-acquired subsidiaries. Our strategy is to
continue to add to our product offerings and to increase our market share
through the introduction of new home designs, product and style selections. We
also intend to emphasize the sale of building materials through the offering of
log accents and other log products that aesthetically enhance the overall design
of the log home kits we offer. We anticipate that the majority of our revenues
will continue to be produced through the sale of log home and panelized home
construction kits.
- 16 -
At the end of the first nine months of the fiscal year, the Company's
principal building and shipping season is nearing its conclusion. The increase
in revenues during the nine-month period ended October 31, 2004 as compared to
the nine-month period ended October 31, 2003 reflects not only the increase in
its overall business but a realization by the Company of revenues recorded by
the Company's subsidiaries that were acquired during the latter portion of the
fiscal year ended January 31, 2004.
Gross Profit/Cost of Sales. Our gross margin decreased to 35% of sales, or
$5,797,692, in the nine-month period ended October 31, 2004 from 43% of sales,
or $5,043,161, in the nine-month period ended October 31, 2003. The decrease in
gross profit was the result of higher costs of the materials and labor
components of the cost of goods sold. These categories increased in the
following manner over the previous fiscal year: an increase of seven percent in
material costs and an increase of one percent in labor costs. Manufacturing
overhead remained relatively unchanged as a percentage of sales in both nine-
month periods.
The increase in the cost of raw materials that the Company encountered during
the fiscal year ended January 31, 2004 continued during the nine-month period
ended October 31, 2004 with commodity lumber costs continuing to increase
dramatically, although recently the increase in these costs has begun to level
off. The increase in labor costs was attributable to increased employment and
increased wage and benefit costs.
Manufacturing overhead was approximately 11% of sales for both the nine-month
periods ended October 31, 2004 and 2003, respectively. While spending
increased in this category of cost of goods sold, the increase in product
shipments during the recently completed nine-month period has brought
manufacturing overhead in line with the Company's past experience in this area.
Although manufacturing overhead may increase as both a percentage of sales and
in actual spending during the winter months, we believe that the future
relationship of manufacturing overhead costs to sales will be comparable to
levels the Company has achieved in past years.
An additional factor that has contributed to the Company's 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 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 the vast majority of the shipments made
during the nine-month period ended October 31, 2004 were of contracts whose
selling price was set prior to the increase in costs of materials. An
additional contributing factor to the decrease in gross profit is that the
majority of sales made by our newly acquired subsidiaries are made on a
wholesale basis, which as a result of lower than retail selling price
translates to a lower gross profit to the Company.
Operating expenses: Total operating expenses for the nine-month period ended
October 31, 2004 were $6,024,316 as compared with $4,664,870 during the nine-
month period ended October 31, 2003, an increase of $1,359,446, or 29%. As a
percentage of net sales, operating expenses were 37% and 40% for the nine-
month periods ended October 31, 2004 and 2003, respectively.
Sales commissions consist of amounts paid and accrued both to our employee sales
persons and our independent dealers throughout the United States. For the nine-
month period ended October 31, 2004 commissions amounted to $1,736,474 compared
with $1,312,836 in the nine-month period ended October 31, 2003. Sales
commissions were 11% of net sales in both nine-month periods. While total
- 17 -
commissions expense over these periods increased 32% compared to our increase in
total net sales of 40%, it does not necessarily follow that commissions will
change 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 attributable to employee sales
representatives and independent dealers, 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 use independent
dealers and sell most of their home building kits on a wholesale basis to third
parties who in turn sell the product to the end user. Though this practice
results in an elimination of the sales commission that is otherwise paid by the
Company, the practice also generates a lower gross profit due to sales on a
wholesale basis.
Selling, general and administrative expenses of $4,287,842 in the nine-month
ended October 31, 2004 increased $935,808, or 28%, when compared to the selling,
general and administrative expenses in the nine-month period ended October 31,
2003 of $3,352,034. As a percentage of total net sales, selling, general and
administrative expenses were 26% and 29%, for the nine-month period ended
October 31, 2004 and 2003, respectively. The primary items that contributed to
the increase in this category of expenses were an increase in personnel,
increased professional fees, and increased spending on attendance at national
trade show expositions, marketing, advertising and promotion costs.
Additionally, our newly-acquired subsidiaries added to this category of spending
during the recently completed nine-month period in contrast to the previous year
when two of the three entities were acquired in the latter portion of the
comparable nine-month period in 2003. The third entity was acquired during the
fourth quarter of the fiscal year ended January 31, 2004.
Interest expense: In the nine-month period ended October 31, 2004, interest
expense was comprised of interest paid on a new multi-faceted credit facility
established in October 2003, notes payable to sellers of the newly acquired
subsidiaries, and various other credit borrowings of lesser amounts. We expect
the Company's interest expense to be higher than the corresponding amount for
the previous year, which reflects the increased amount of debt outstanding
principally incurred from our acquisition activities.
Income taxes: The Company accrues income tax expense on an intra-period basis
as necessary, and accrues income tax benefits only when it is more likely than
not that such tax benefits will be realized during the fiscal year. For the
nine-month period ended October 31, 2004, the Company has not accrued an income
tax benefit as the Company will not likely be able to utilize the benefit in the
current year. For the nine-month period ended October 31, 2003 the Company made
a provision for income taxes in the amount of $163,800.
Net loss: Even though sales increased forty percent in the nine-month period
ended October 31, 2004 when compared to the previous year's nine-month period
ended October 31, 2003, the Company incurred a net loss of $216,867. The
Company's net income for the nine-month period ended October 31, 2003 equaled
$309,830. The increased overhead cost structure of the Company, including costs
attributable to the acquisitions, combined with the increases in raw material
and direct labor costs, has adversely affected the Company's results. We feel
that the overhead increases are appropriate as we build our organization to
accommodate our growth and believe that we have made necessary expenditures in
this area from which we will derive benefits as volume increases. Our third
- 18 -
quarter results demonstrate that the Company did benefit from the increased
volume that the second portion of the principal building season brings.
However, as we enter the fourth fiscal quarter, a period in which the Company
has historically experienced slower sales activity, we do not anticipate that
the Company will generate sufficient sales volume during this fourth fiscal
quarter to bring its results for the full fiscal year to profitability.
Comparison of Three-month Periods Ended October 31, 2004 and October 31, 2003
Revenues. Net sales were $6,217,416 for the third quarter ended October 31,
2004 compared with $5,281,849 for the third quarter ended October 31, 2003. The
increase of $935,567, or 18%, was primarily attributable to increased sales of
our log home and panelized home construction kits. Approximately ninety-one
percent of total revenues are represented by home construction kit sales and
this portion of our revenues improved through a nine percent increase in units
shipped and a fifteen percent increase in the average value of construction
kit units shipped. The remaining contributors to our revenues are building
material sales, design and engineering services and freight revenues.
Collectively these items increased approximately $533,400, or 61%, over the
previous year's revenues, a significant portion of which was contributed by our
newly-acquired companies. Of the total increase in revenues for the three-month
period ended October 31, 2004 over the three-month period ended October 31,
2003, approximately 60% was contributed by our newly-acquired subsidiaries.
Our strategy is to continue to add to our product offerings and to increase our
market share through the introduction of new home designs, product and style
selections. We also intend to emphasize the sale of building materials through
the offering of log accents and other log products that aesthetically enhance
the overall design of the log home kits we offer. We anticipate that the
majority of our revenues will continue to be produced through the sale of log
home and panelized home construction kits.
Gross Profit/Cost of Sales. Our gross margin decreased to 36% of sales, or
$2,238,371, in the third quarter ended October 31, 2004 from 40% of sales, or
$2,138,009, in the third quarter ended October 31, 2003. The decrease in gross
profit was the result of a combination of higher costs of materials and lower
manufacturing overhead costs. Material costs were approximately 7% higher than
the previous year's costs, and manufacturing overhead costs were approximately
3% lower that the previous year's costs. Direct labor was relatively unchanged
as a percentage of net sales.
The increase in the cost of raw materials that the Company encountered during
the fiscal year ended January 31, 2004 continued into the first six months of
the fiscal year and throughout the third quarter ended October 31, 2004 with
commodity lumber costs continuing to increase dramatically. As the third
quarter ends, lumber costs were beginning to level off and in some instances
were beginning to slightly decline.
A decrease in the cost of design and engineering and lower delivery costs during
the third quarter ended October 31, 2004 led to overall lower manufacturing
overhead costs. Offsetting these decreases was an increase in general factory
costs. The application of a more accurate method of associating and
capitalizing design and engineering efforts with specific undelivered contracts
decreased the amount of these costs charged to shipments made in the third
quarter, and a shift in the number of third quarter deliveries with more
shipments made to destinations closer to the Company's facility in New York
- 19 -
contributed to the decline in overall delivery costs. General factory
overhead costs increased due to an increase in personnel and benefit costs and
an overall increase in operation expenses.
An additional factor that has contributed to the Company's 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 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 most of the shipments made during the
three-month period ended October 31, 2004 were of contracts whose selling price
was set prior to the increase in costs of materials. An additional contributing
factor to the decrease in gross profit is that the majority of sales made by the
Company's newly-acquired subsidiaries are made on a wholesale basis, which as a
result of lower than retail selling price translates to a lower gross profit to
the Company.
Operating expenses: Total operating expenses for the third quarter ended
October 31, 2004 were $2,091,810 as compared with $1,735,208 during the third
quarter ended October 31, 2003, an increase of $356,602, or 21%. As a
percentage of net sales, operating expenses were 33% and 32% for the three-
month periods ended October 31, 2004 and 2003, respectively.
Sales commissions consist of amounts paid and accrued both to our employee sales
persons and our independent dealers throughout the United States. For the
third quarter ended October 31, 2004 commissions amounted to $698,362 compared
with $568,169 in third quarter ended October 31, 2003. Commissions were 11% of
net sales for both three-month periods ended October 31, 2004 and 2003.
Although commissions expense as a percentage of net sales did not change in
the periods presented, it does not necessarily follow that changes in
commissions as a percentage of net sales will change 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 on a wholesale basis to third parties who in turn
sell the product to the end user. This practice results in an elimination of
the sales commission that is otherwise paid by the Company, however, the
practice also generates a lower gross profit due to sales on a wholesale basis.
Selling, general and administrative expenses of $1,393,448 in the third quarter
ended October 31, 2004 increased $226,409, or 19%, when compared to the selling,
general and administrative expenses in the third quarter ended October 31, 2003
of $1,167,039. As a percentage of total net sales, selling, general and
administrative expenses were 22% and 21%, for the third quarters ended October
31, 2004 and 2003, respectively. The primary items that contributed to the
increase were an increase in personnel, increased professional fees, and
increased spending on attendance at national trade show expositions, marketing,
advertising and promotion costs. Additionally, our newly-acquired subsidiaries
added to this category of spending during the current three-month period in
contrast to the previous year when only two of the three entities were acquired
in the latter portion of the comparable quarter. The third entity was acquired
during the fourth quarter of the fiscal year ended January 31, 2004.
Interest expense: In the third quarter ended October 31, 2004, interest
expense was comprised of interest paid on a new multi-faceted credit facility
established in October 2003, notes payable to sellers of the newly-acquired
- 20 -
subsidiaries, and various other credit borrowings of lesser amounts. We expect
the Company's interest expense to be higher than the corresponding amount for
the previous year, which reflects the increased amount of debt outstanding
principally incurred as a result of our acquisition activities.
Income taxes: The Company accrues income tax expense on an intra-period basis
as necessary, and accrues income tax benefits only when it is more likely than
not that such tax benefits will be realized during the fiscal year. For the
three-month periods ended October 31, 2004 and 2003, the Company made a
provision for income taxes in the amounts of $45,000 and $143,849, respectively.
Net income: The Company realized net income of $100,877 for the third quarter
ended October 31, 2004 on an increase of net sales of eighteen percent as
compared with the preceding year's third quarter net income of $262,009. The
increased overhead cost structure of the Company, including costs attributable
to the acquisitions, combined with cost increases in material and direct labor,
have adversely affected the Company's results. We feel that the overhead
increases are appropriate as we build our organization to accommodate our growth
and believe that we have made necessary expenditures in this area from which we
will derive benefits as volume increases. Our third quarter results
demonstrate that the Company will benefit from the increased volume that the
second portion of the principal building season brings. As we enter the fourth
fiscal quarter, a period in which the Company has historically experienced
slower sales activity, we do not anticipate that the Company will generate
sufficient sales volume during this fourth fiscal quarter to bring its results
for the full fiscal year to profitability.
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 True Craft Log
Structures, Ltd. and Hart & Son Industries, Ltd., two companies located in
Maple Ridge, British Columbia, Canada that were affiliated through common
Ownership. 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. With these
acquisitions, we intend 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 these acquisitions have had on our
financial statements (in $1,000's of US dollars):
As of October 31, January 31,
2004 2003 2004
Financial Condition:
Total Assets $ 12,542 $ 10,142 $ 11,837
Total Liabilities $ 10,273 $ 7,313 $ 9,413
Total Equity $ 2,269 $ 2,829 $ 2,424
- 21 -
Debt/equity ratio 2.05 .81 1.85
Assets/debt ratio 2.70 4.45 2.64
Working Capital:
Current Assets $ 5,174 $ 4,280 $ 4,261
Current Liabilities $ 6,938 $ 5,336 $ 6,066
Current Ratio .75 .80 .70
Cash Position:
Cash & cash equivalents $ 840 $ 1,077 $ 750
Cash provided (used) in
operations $ 178 $ 492 $( 250)
Financial Condition
During the second half of the fiscal year ended January 31, 2004, the Company
experienced a significant increase in assets from $6,688,687 at July 31, 2003 to
$11,838,070 at January 31, 2004, and total liabilities increased from $4,410,155
at July 31, 2003 to $9,412,983 at January 31, 2004. Total assets and
liabilities at October 31, 2004 are 12,542,048 and $10,272,908, respectively.
The majority of this increase came as a result of the acquisitions completed
during the latter portion of the fiscal year ended January 31, 2004, with
significant increases in the areas of property, plant and equipment, other
intangible assets, goodwill and debt.
During the fiscal year ended January 31, 2004 we entered into a multi-faceted
credit facility with First Pioneer Farm Credit, ACA ("First Pioneer"). The
total credit available to the Company is $3,675,000 of which the Company has
utilized $2,971,667 as of October 31, 2004. The proceeds from borrowings
against the credit facility have been used principally to finance the Company's
recent acquisitions while recent borrowings on the revolving line of credit
have been used to augment our cash flow for operating purposes. We also used
common stock of the Company as well as seller financing in the form of non-
interest bearing long-term notes to finance portions of the acquisitions
completed by the Company.
The credit facility with First Pioneer has four separate components including
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 years for the
long-term portions. The applicable 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 a one million
dollar tranche 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 the seller financing notes are non-interest
bearing, however, interest has been imputed for financial statements purposes
using rates that approximate those for comparable unsecured promissory notes.
In May 2003, all holders of the Company's Series B and Series C Convertible
Subordinated Debentures, converted their holdings, which totaled in the
aggregate an outstanding amount of $220,000, into the common stock of the
Company at the maturity date of the debentures. The Company issued 1,162,500
shares of common stock as a result of the conversion of those debentures.
- 22 -
Working Capital; Sources and Uses of Cash
At October 31, 2004, we had a working capital deficiency of $1,764,180 as
current liabilities exceeded current assets. At January 31, 2004, we had a
working capital deficiency of $1,804,864. For the nine-month period ended
October 31, 2004, our working capital deficiency decreased by $40,684. Our
balance of cash and cash equivalents increased during nine-month period ended
October 31, 2004 primarily due to cash provided by receipt of customer deposits,
an increase in accrued expenses, the sale of a non-operating asset and
borrowings against our line of credit and the long-term credit facility
provided for capital asset additions. Cash was used primarily for the
repayment of both long-term debt and the revolving line of credit, the payment
of accounts payable, the purchase of inventory and machinery, and an increase
in prepaid expenses and the financing of accounts receivable.
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 remainder of fiscal year 2005. With positive
results achieved during the full building season we were able to fully repay our
revolving line of credit and meet the required "clean-up" period requirement of
the loan covenant. We were also able to reduce our accounts payable balances
significantly and were able to take discounts when offered by suppliers on a
regular basis. If weather conditions in the fourth quarter of the fiscal year
are permitting, we anticipate an active shipping period to complete the fiscal
year and further generate working capital to support the Company's operations.
Our backlog of undelivered contracts at October 31, 2004 was approximately
$26,161,400. This is an increase of $6,528,400, or 33%, over the backlog of
undelivered contracts at October 31, 2003 when the backlog was approximately
$19,633,900. At the Company's fiscal year end date of January 31, 2004, the
backlog was approximately $25,220,000. 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 an average of approximately 44% of the undelivered contracts in
the backlog at the end of a fiscal year are shipped in the subsequent fiscal
year. To the extent this historical standard is used to forecast the Company's
shipments for 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. In the nine-
month period ended October 31, 2004, approximately 36% of the shipments
originated from the backlog at January 31, 2004. In the nine-month period
ended October 31, 2003, 40% of the shipments originated from the backlog at
January 31, 2003.
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 shipments made during fiscal year ended January 31, 2004 approximately
$4,599,000 originated from contracts written during that fiscal year which
represented approximately 20% of contracts written during that fiscal
year. In the nine-month period ended October 31, 2004, approximately 28% of the
shipments originated from contracts written during such nine-month period. In
the previous year's nine-month period ended October 31, 2003, approximately 19%
of the shipments originated from contracts that were written during such nine-
month period then ended. It should be noted that shipments made during the
first nine months of the Company's fiscal year are predominantly of contracts
written in the immediately preceding fiscal year, and historically, the fact
that few or none of the contracts written during the Company's first nine
months of its fiscal year are shipped during the first nine months has not had
- 23 -
a material impact on the Company's total shipments to be made for the full
fiscal year. Fiscal year 2005 potential revenues are contingent on various
factors including general economic conditions, weather, interest rates, the
overall market climate for new housing construction and the ability of our
customers to complete the necessary pre-delivery requirements, such as building
site preparation.
The table below illustrates the changes in our backlog for the nine-month
periods ended October 31, 2004 and 2003, and for the last two fiscal years ended
January 31, 2004 and 2003 (in $1,000's of US dollars):
Nine-months Ended Fiscal Year Ended
October 31, January 31,
2004 2003 2004 2003
Beginning backlog $ 25,220 $ 20,088 $ 20,088 $ 17,667
Add: New contracts 19,232 13,440 23,266 20,926
Amendments 1,074 708 710 482
-------- -------- -------- --------
Sub-total 45,526 34,236 44,064 39,075
Less: Shipments -14,720 -10,661 -13,842 -13,156
Cancellations - 4,645 - 3,942 - 5,002 - 5,831
-------- -------- -------- --------
Ending backlog $ 26,161 $ 19,633 $ 25,220 $ 20,088
======== ======== ======== ========
Each year we experience contract cancellations. The reasons for cancellations
are varied and no one particular reason is dominant over the total collection of
reasons supplied by our customers. It has been the Company's experience, over
the past four years for which such statistics have been kept, that an average
of approximately 23% of undelivered contracts contained in the backlog at the
end of the fiscal year will be canceled 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 canceled during that same fiscal
year. In the event of cancellation of a contract, the Company realizes a
certain amount of revenue for work performed relating to drafting and
engineering services. These charges for work performed are calculated in
accordance with a Disclosure Letter Addendum that each customer signs, which
delineates specific costs for drafting and engineering services. After
deduction of the charges for services performed, the balance of the customer's
deposit is returned to the customer. During the nine-month periods ended
October 31, 2004 and 2003 we realized revenues of $135,277 and $115,751,
respectively, related to the aforementioned services.
Contractual Cash Obligations
We have a number of long-term obligations requiring future payments pursuant
to debt and lease agreements. All of our contractual obligations have
contractual terms whereby the due date of the debt is accelerated upon the
occurrence of certain "events of default." These events of default are standard
terms and conditions in most business debt agreements, such as nonpayment of the
obligation, or allowing a judgment to be levied against the collateralized
property that goes un-remedied for more than 30 days. If and when an event of
default occurs, and the lender declares that there is an event of default and if
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
becomes due and payable immediately.
- 24 -
The bank debt made available by First Pioneer (the "First Pioneer Credit
Facility") is conditioned upon the Company's continued compliance with
affirmative, negative, continuing and financial covenants. Examples of the
affirmative covenants include compliance with laws, maintaining insurance,
maintaining the property, maintaining books and records, and similar items.
Examples of the negative covenants include prohibiting 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 the Company 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, the Company failed to meet the current ratio and the minimum
tangible net worth financial requirements. Failing to meet these financial
covenants constituted an "event of default" under the terms of the First Pioneer
Credit Facility. The Company applied for and received waivers from First
Pioneer with regard to these financial covenants, and, accordingly, the events
of default are deemed 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, and there were no known events of default at
October 31, 2004.
We believe that there were unusual circumstances that contributed to the
events of default that occurred with regard to the financial covenant ratios
with respect to the First Pioneer Credit Facility. The acquisitions that we
made took place much later in the fiscal year than initially planned. When the
financing credit was proposed by First Pioneer in the summer of 2003, our
projections of financial contribution by the companies targeted for acquisition
indicated to us that we would achieve the financial covenants proposed by First
Pioneer. 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. First Pioneer has advised the Company
that our inability to meet the goals set by First Pioneer for our fiscal year
ended January 31, 2004 has not damaged our relationship with them in any way,
nor do we believe that it will hinder our ability to obtain future financing
for contemplated projects. With regard to the current fiscal year, the
Company may not meet certain financial covenants contained in the First Pioneer
Credit Facility at fiscal year end, which is the next scheduled testing date.
The Company is in negotiations with First Pioneer regarding the such covenants
and anticipate that such covenants will be modified prior to the Test Date. We
believe, based on current discussions with First Pioneer, that we will comply
with such covenants as modified. While the Company is optimistic that such
discussions with First Pioneer will be resolved favorably, in the event the
Company does not meet such financial covenants and is unable to come to an
agreement with First Pioneer, the Company will be in default under the First
Pioneer Credit Facility and upon expiration of the applicable grace period(s),
First Pioneer will be able to require the Company to repay the loan in full
immediately. To the extent that First Pioneer elects to require repayment of
the loan as a result of a Company default, the Company would seek a replacement
credit facility on terms comparable to the First Pioneer Credit Facility to
replace the First Pioneer Credit Facility in a timely fashion.
- 25 -
Factors That Could Affect Future Results
Certain statements made in this Quarterly Report on Form 10-QSB and in our
Annual Report on Form 10-KSB for the year ended January 31, 2004 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-QSB and in our Form 10-KSB for the year ended
January 31, 2004. You should consider carefully the risks and uncertainties
described below and in our Annual Report on Form 10-KSB, 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, which 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 profit margins 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, in part, on the ability
of the Company to shift its manufacturing requirements for its customers located
in the western United States to the Company's newly-acquired facility in British
Columbia, Canada.
A significant consideration in the purchase of True Craft Log Structures, Ltd.
and Hart & Son Industries, Ltd., 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. In considering the acquisition,
the Company concluded that there existed the potential cost savings of shipping
home building packages from British Columbia, Canada to customers located in the
western United States instead of shipping 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 received a favorable response to such application on May 12,
2004. During the later portion of the second quarter ended July 31, 2004, the
Company began to assign a portion of its west coast manufacturing requirements
to its subsidiaries in British Columbia, Canada, but this assignment has had
little favorable impact on the financial performance of the Company. The
Company's subsidiaries in British Columbia must prepare for the demands placed
on them with the purchase of raw materials and certain tooling requirements.
It is anticipated that the benefit of shifting west coast production to British
Columbia will ultimately be beneficial to the Company, but its realization may
take longer than originally planned.
- 26 -
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. During
the third quarter ended October 31, 2004, interest rates have begun to increase
as the United States Federal Reserve Board raised the Discount Rate that the
Federal Reserve System charges member banks for overnight borrowing by those
member banks. This in turn has prompted many banks to increase their Base
Interest Rate, as known as the Prime Rate. While these rate increases have
been relatively minor, they may be a harbinger of rate increases to come. Thus
far, these rate increases have not had an adverse effect on our ability to sell
new home construction kits. However, should there be further increases in
mortgage rates in the future, such increases may have a negative effect on the
number of home construction kits that the Company is be able to sell.
We are dependent the performance of certain third-party providers of goods and
services.
We manufacture a home construction kit to be purchased by individuals who
desire to build a new home. The Company does not build the home nor do we
provide certain interior amenities such as plumbing, wiring, cabinetry, etc.,
nor do we prepare the building site or 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 providers of goods and services, such
as building permit reviewing agencies and contractors, to complete their portion
of the work scheduled 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 conditions.
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 in light of the fact that, historically, 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 typically have on our first quarter shipments,
the Company has routinely experienced a loss in past first quarters of the
Company's fiscal year and it has experienced a comparable loss in the first
quarter of fiscal year 2005. Similar to the first quarter our fourth quarter,
which covers the months of November to January, while less affected by weather
than the first quarter, has historically been a period of decreasing shipments
due to the anticipated onset of winter.
We are subject to fluctuations in costs of building materials.
Over the past eighteen months we have experienced a rapid increase in the cost
of commodity lumber prices that have had a negative impact on our gross profit
margin. The cause of this increase is a combination of factors, including the
continued high demand for wood products during the housing boom of the past
several years, recent world events (military conflicts in Iraq and Afghanistan)
and recent natural disasters (hurricanes in the State of Florida) have
exacerbated the situation. The Company tries to offset these materials cost
increases by factoring them into future selling prices. However, the Company's
method of selling with the use of fixed-price contracts, which, by the terms of
the sales contract, hold sales prices constant for a period of nine months from
the time of contract execution, creates a situation that works against us in
times of such cost increases. Until the rise in the cost of lumber abates, we
may continue to experience downward pressure on our profit margins as our
pricing adjustments may lag behind rising costs.
- 27 -
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards 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. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after January 31, 2003. The Company does not
believe this statement will have a material impact on its financial statements.
In December 2002, FASB issued Statement of Financial Accounting Standards 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
Company's 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 Company's 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 American Institute of Certified
Public Accountants' 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
- 28 -
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, or by the guidance of
SAB 104.
In December 2003, FASB issued Financial Interpretation No. 46R ("FIN 46"),
"Consolidation of Variable Interest Entities." The objective of this
interpretation is to provide guidance on how to identify variable interest
entities ("VIE") and determining when the assets, liabilities, non-controlling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in
an entity will need to consolidate that entity if the company's interest in the
VIE is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN 46 also requires additional disclosure by primary beneficiaries and
other significant variable interest holders. Certain provisions of this
interpretation became effective upon issuance. As of October 31, 2004 and
January 31, 2004, we did not have any VIE.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of our management,
including our Principal Executive Officer and Principal Financial Officer, of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")). Based on this evaluation, the principal executive officer
and principal financial officer concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. There was no
change in the Company's internal control over financial reporting during the
Company's most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
- 29 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
a. Exhibit Index
31.1 Certification of Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
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.
- 30 -
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LINCOLN LOGS LTD.
/ s / John D. Shepherd
John D. Shepherd
Chairman of the Board, President and
Chief Executive Officer
December 15, 2004
/ s / Benjamin A. Shepherd
Benjamin A. Shepherd
Vice President and Chief Financial Officer
December 15, 2004
- 31 -
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John D. Shepherd, certify that:
1. I have reviewed this quarterly report of Form 10-QSB of Lincoln Logs
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Lincoln Logs Ltd. as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying 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
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this quarterly report based
on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to affect, the registrant's
internal control over financial reporting;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: December 15, 2004
/ s / John D. Shepherd
Name: John D. Shepherd
Title: Chairman of the Board, 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 quarterly report of Form 10-QSB of Lincoln Logs
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Lincoln Logs Ltd. as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying 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
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this quarterly report based
on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to affect, the registrant's
internal control over financial reporting;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: December 15, 2004
/ s / Benjamin A. Shepherd
Name: Benjamin A. Shepherd
Title: Vice President 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 quarterly report of Lincoln Logs Ltd. (the "Company") on
Form 10-QSB for the period ended October 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: December 15, 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 written statement required by Section 906 has been
provided to Lincoln Logs Ltd. and will be retained by Lincoln Logs Ltd. and
furnished to the Security and Exchange Commission or its staff upon request.]
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Lincoln Logs Ltd. (the "Company") on
Form 10-QSB for the period ended October 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: December 15, 2004 / s / Benjamin A. Shepherd
Name: Benjamin A. Shepherd
Title: Vice President and Chief Financial
Officer
[A signed original of this written statement required by Section 906 has been
provided to Lincoln Logs Ltd. and will be retained by Lincoln Logs Ltd. and
furnished to the Security and Exchange Commission or its staff upon request.]