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 April 30, 2005
( ) 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)
N/A
(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 June 11, 2005
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 (UNAUDITED)
Consolidated balance sheets as of
April 30, 2005 and January 31, 2005 3 - 4
Consolidated statements of operations for the
three months ended April 30, 2005 and 2004 5
Consolidated statements of changes in stockholders'
equity for the three months ended April 30, 2005
and the twelve months ended January 31, 2005 6
Consolidated statements of cash flows for the
three months ended April 30, 2005 and 2004 7
Notes to consolidated financial statements 8 - 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11 - 23
ITEM 3. CONTROLS AND PROCEDURES 23
PART II. OTHER INFORMATION 24
SIGNATURES 25
- 2 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2005 AND JANUARY 31, 2005
ASSETS
April 30, January 31,
2 0 0 5 2 0 0 5
(Unaudited) (Audited)
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $1,257,825 $ 857,686
Trade accounts receivable 769,685 363,601
Inventories (raw materials) 1,957,121 1,849,741
Work in process 738,572 453,898
Prepaid expenses and other current assets 903,836 719,203
Deferred tax asset 130,000 ---
Income taxes receivable 26,654 29,686
Mortgage and note receivable 5,623 5,623
---------- ----------
Total current assets 5,789,316 4,279,438
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,012,346 1,012,346
Buildings and improvements 2,913,463 2,910,945
Machinery and equipment 2,043,768 2,042,566
Furniture and fixtures 2,211,903 2,203,910
Transportation equipment 539,437 540,366
---------- ----------
8,720,917 8,710,133
Less: accumulated depreciation (4,504,628) (4,382,790)
---------- ----------
Total property, plant and
equipment - net 4,216,289 4,327,343
---------- ----------
OTHER ASSETS:
Mortgage receivable 69,830 70,938
Deposits and other assets 75,418 68,003
Goodwill 1,347,056 1,350,020
Intangible assets, net of accumulated
amortization of $335,490 at April 30, 2005
and $282,767 at January 31, 2005 1,341,518 1,394,241
---------- ----------
Total other assets 2,833,822 2,883,202
---------- ----------
TOTAL ASSETS $12,839,427 $11,489,983
========== ==========
See accompanying notes to consolidated financial statements.
( continued )
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
APRIL 30, 2005 AND JANUARY 31, 2005
LIABILITIES AND STOCKHOLDERS' EQUITY
April 30, January 31,
2 0 0 5 2 0 0 5
(Unaudited) (Audited)
----------- -----------
CURRENT LIABILITIES:
Borrowings on line of credit $ 753,000 $ 753,000
Current installments of bank loans 254,040 254,040
Current installments of notes payable,
related parties 87,344 87,344
Current installments of notes payable 270,126 280,120
Current installments of capital lease
obligations 7,057 13,432
Trade accounts payable 1,312,845 1,408,408
Accrued salaries and wages 177,790 179,008
Accrued expenses 1,134,816 713,100
Customer deposits 4,640,420 3,171,224
---------- ----------
Total current liabilities 8,637,438 6,859,676
LONG-TERM DEBT, net of current installments:
Notes payable, related parties 229,218 229,218
Bank loans 1,819,051 1,891,839
Notes payable 759,459 807,775
Capital lease obligations 2,840 5,152
---------- ----------
Total long-term debt 2,810,568 2,933,984
---------- ----------
OTHER LONG-TERM OBLIGATION 7,500 7,500
---------- ----------
Total liabilities 11,455,506 9,801,160
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $ .01 par value;
authorized 1,000,000 shares; issued
and outstanding - 0 - shares --- ---
Common stock, $ .01 par value; authorized
10,000,000 shares; issued 9,040,059 shares 90,401 90,401
Additional paid-in capital 5,228,255 5,228,255
Accumulated deficit (3,999,678) (3,730,103)
Accumulated other comprehensive income 64,943 100,270
----------- ----------
Total stockholders' equity 1,383,921 1,688,823
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $12,839,427 $11,489,983
=========== ===========
See accompanying notes to consolidated financial statements.
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 2005 AND 2004
(UNAUDITED)
NET SALES $ 4,788,386 $ 2,597,840
COST OF SALES 3,014,272 2,003,262
---------- ----------
GROSS PROFIT 1,774,114 594,578
---------- ----------
OPERATING EXPENSES:
Commissions 515,151 230,974
Selling, general and administrative 1,603,697 1,463,319
---------- ----------
Total operating expenses 2,118,848 1,694,293
---------- ----------
LOSS FROM OPERATIONS ( 344,734) (1,099,715)
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 2,666 3,161
Interest expense ( 44,477) ( 27,674)
Other ( 13,030) 15,830
---------- ----------
Total other income - net ( 54,841) ( 8,683)
---------- ----------
LOSS BEFORE INCOME TAXES ( 399,575) (1,108,398)
INCOME TAX BENEFIT ( 130,000) ( 300,000)
---------- ----------
NET LOSS $( 269,575) $( 808,398)
========== ==========
PER SHARE DATA:
Basic and diluted loss per share $ ( .03) $ ( .09)
========== ==========
See accompanying notes to consolidated financial statements.
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED APRIL 30, 2005 (UNAUDITED) AND
THE TWELVE MONTHS ENDED JANUARY 31, 2005
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, 2004 9,544,299 $ 95,443 $6,107,648 $(2,945,805) $ 51,237 $( 884,435) $ 2,424,088
Cancellation of treasury
shares ( 504,240) ( 5,042) ( 879,393) 884,435 ---
Foreign currency translation
adjustment --- 49,033 --- 49,033 49,033
Net loss - 2005 --- --- --- ( 784,298) --- --- ( 784,298) (784,298)
---------- -------- ---------- ----------- ----------- ---------- ------------ ---------
Balance at January 31, 2005 9,040,059 $ 90,401 $5,228,255 $(3,730,103) $ 100,270 $ --- $ 1,688,823 $(735,265)
=========
Foreign currency translation
adjustment --- ( 35,327) --- ( 35,327) ( 35,327)
Net loss - April 30, 2005 --- --- --- ( 269,575) --- --- ( 269,575) (269,575)
---------- -------- ---------- ----------- ----------- ---------- ------------ ---------
Balance at April 30, 2005 9,040,059 $ 90,401 $5,228,255 $(3,999,678) $ 64,943 $ --- $ 1,383,921 $(304,902)
========== ======== ========== =========== =========== ========== ============ =========
See accompanying notes to consolidated financial statements.
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30, 2005 AND 2004
(UNAUDITED)
Three Months Ended
April 30,
----------------------------
2 0 0 5 2 0 0 4
----------- -----------
OPERATING ACTIVITIES:
Net loss $ ( 269,575) $ ( 808,398)
Adjustments to reconcile net loss
to net cash (used) provided by
operating activities:
Depreciation 128,163 128,421
Amortization 45,966 59,140
Income tax benefit ( 130,000) ( 300,000)
Changes in operating assets and liabilities:
(Increase) in trade accounts
receivable ( 407,299) ( 156,937)
(Increase) in inventories ( 396,757) ( 277,316)
(Increase) in prepaid expenses
and other current assets ( 185,357) ( 144,512)
(Increase) decrease in deposits
and other assets ( 7,415) 9,172
(Decrease) increase in trade accounts
payable ( 92,844) 134,774
Increase in customer deposits 1,469,521 1,021,623
Increase in accrued expenses, payroll
related taxes and withholdings 421,821 128,175
Decrease in income taxes receivable 2,951 21,073
(Decrease) in accrued income taxes --- ( 9)
---------- ----------
Net cash provided (used) by operating
activities 579,175 ( 184,794)
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment ( 31,798) ( 15,731)
Acquisition of businesses --- ( 2,906)
Payments on mortgage receivable 1,108 603
---------- ----------
Net cash (used) by investing activities ( 30,690) ( 18,034)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from borrowing on line of credit --- 150,000
Loan origination fees --- ( 9,174)
Repayments of capital leases ( 12,847) ( 9,863)
Repayments of bank loans ( 72,788) ( 18,900)
Repayments of notes payable ( 47,461) ( 176,042)
---------- ----------
Net cash (used) by financing activities ( 133,096) ( 63,979)
---------- ----------
Effect of foreign currency translation on cash ( 15,250) ( 33,201)
---------- ----------
Net increase (decrease) in cash and cash
equivalents 400,139 ( 300,008)
Cash and cash equivalents at
beginning of period 857,686 750,239
---------- ----------
Cash and cash equivalents at
end of period $1,257,825 $ 450,231
========== ==========
See accompanying non-cash disclosure note (Note 5 to consolidated financial
statements).
See accompanying notes to consolidated financial statements.
- 7 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 AND 2004
(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 three-month periods ended April 30, 2005
and 2004 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,
2005.
(2) LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the respective periods. The
weighted average number of common shares used to compute basic loss per share
was 9,040,059 for both three-month periods ended April 30, 2005 and April 30,
2004, respectively.
Diluted loss per share is computed based on the weighted average number
of common shares outstanding during the respective periods. When the effects
are dilutive, the convertible subordinated debentures are assumed to have been
converted into common stock at the beginning of the period after giving
retroactive effect to the elimination of interest expense, net of income tax
effect, applicable to the convertible subordinated debentures. Stock options
and warrants are included in the computation of earnings per share under the
treasury stock method if the effect is dilutive. Diluted loss per share is
the same as basic loss per share because the effect of including stock options,
warrants and the assumed conversion of the convertible subordinated debentures
would be anti-dilutive.
(3) INCOME TAXES
The Company accrues income tax expense on an interperiod basis as
necessary, and accrues income tax benefits only when it is more likely than
not that such tax benefits will be realized. An income tax benefit of $130,000
and $300,000 was recognized in the three months ended April 30, 2005 and April
30, 2004, respectively.
- 8 -
(4) STOCK BASED COMPENSATION
There were no Stock Options granted during the 3-month period ended April 30,
2005.
During the three-month period ended April 30, 2004 a stock option grant was
made.
Stock option activity for the three-month period ended April 30, 2005 and the
fiscal year ended January 31, 2005 is summarized as follows:
Weighted Average
Number of shares Option Price Per Share
---------------- ----------------------
Qualified Non-Qualified Qualified Non-Qualified
--------- ------------- --------- -------------
Balance at January 31, 2004 133,500 182,000 $0.29 $0.19
Granted during year --- 50,000 --- .55
Cancelled during year --- ( 2,000) --- ( .19)
Exercised during year --- --- --- ---
--------- ------------- --------- -------------
Balance at January 31, 2005 133,500 230,000 $0.29 $0.27
Granted during period --- --- --- ---
Cancelled during period --- --- --- ---
Exercised during period --- --- --- ---
--------- ------------- --------- -------------
Balance at April 30, 2005 133,500 230,000 $0.29 $0.27
========= ============= ========= =============
All outstanding stock options are exercisable as of April 30, 2005 with the
exception of 50,000 Non-Qualified Stock Options granted during the 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 April 30, 2005 is 3.7 years.
During the 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 Company
recognized stock compensation expense of $3,500 related to this stock option
grant at April 30, 2005.
(5) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the three months ended April 30, 2005, cash was paid in the amounts
of $43,189 for interest and $1,500 for income taxes. During the three months
ended April 30, 2004, cash was paid in the amounts of $21,001 for interest and
$4,030 for income taxes.
- 9 -
Non-cash investing and financing activities:
During the first quarters ended April 30, 2005 and April 30, 2004, there
were no non-cash investing and financial transactions.
(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 are indemnified by the related dealer.
- 10 -
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, 2005.
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 several styles of log homes, such as machine milled logs and logs that
are turned on a lathe, and we use several species of wood such as eastern white
pine, western cedar, spruce and lodge-pole pine. All logs are available in
various shapes, sizes and lengths and can be ordered "pre-cut and notched,"
"pre-cut only," or in specified lengths to be custom cut and fitted on site. We
only operate within the business segment of manufactured wood products. Our
revenue is reported as a single component, which is comprised of the following
four elements: (1) log and panelized home sales, (2) solarium sales, (3) sales
of building materials, and (4) revenues from engineering and design services.
For the quarters ended April 30, 2005 and April 30, 2004, approximately 89% and
78%, respectively, of the Company's total sales were derived from log home and
panelized home sales.
We consider the activities that surround the manufacture and distribution of
log home and panelized home construction kits to be our core business. Our
business strategy is to promote and grow our core business, and to create
diversification in our product lines in an effort to add strength and breadth
to our business structure. As a result, we are dedicating significant resources
to building infrastructure for the support of our core business and to creating
more product diversification through acquisitions.
- 11 -
RESULTS OF OPERATIONS
The following table illustrates our financial results for the fiscal quarter
ended April 30, 2005 as compared to the fiscal quarter ended April 30, 2004
(in $1,000's US).
1st 1st
Fiscal Fiscal
Quarter % of Quarter % of %
2005 Sales 2004 Sales Change
------- ----- ------- ----- ------
Net Sales $ 4,788 100% $ 2,598 100% 84%
Cost of Sales 3,014 63% 2,003 77% 50%
------- ----- ------- ----- ------
Gross Profit 1,774 37% 595 23% 198%
Operating expense 2,119 44% 1,694 65% 25%
------- ----- ------- ----- ------
Loss from Operations ( 345) -7% ( 1,099) -42% -69%
Other Expenses, net ( 54) -1% ( 9) -- 500%
------- ----- ------- ----- ------
Loss before Income Taxes ( 399) -8% ( 1,108) -42% -64%
Income Tax Benefit 130 3% 300 11% -57%
------- ----- ------- ----- ------
Net Loss $( 269) -6% $( 808) -31% -67%
======= ===== ======= ===== ======
Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results
of operations are based upon our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of our financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an 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, 2005, 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 ("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
agreement exists; (2) delivery has occurred or services have been rendered; (3)
the fee is fixed and determinable; and (4) collectibility is reasonably assured.
Revenue from products sold is recognized upon delivery to the customer.
- 12 -
Subsequent to the sale of our products, we have no obligation to provide any
modification or customization, upgrades, enhancements, or post-delivery customer
support. Design and engineering services are an integral part of the total home
package sold to the customer and as such, revenue for these efforts are not
recognized as a separate line item in our financial statements. However,
customers occasionally cancel their contracts with us. Upon cancellation we
recognize revenue for services performed for design and engineering services in
accordance with a predetermined fee schedule that is shared with the customer
at the time of the contact signing. We deduct this amount from the deposit that
accompanies the contract and return the remainder of the deposit to the
customer.
Impairment of Long-lived and Intangible Assets: We evaluate the recoverability
of the Company's long-lived assets, where indicators of impairment are present,
by reviewing current and projected profitability or discounted cash flow of
such assets. Intangible assets that are subject to amortization are reviewed
for potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Intangible assets not subject to amortization
are tested for impairment at least annually. We did not record any impairment
losses for either of the three month periods ended April 30, 2005 or April 30,
2004.
Income Taxes: We estimate our income taxes in each of the jurisdictions in
which we operate. This process involves an estimation of our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included in our Consolidated
Balance Sheets. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a particular
period, we must include an expense within the tax provision in our Statement of
Operations.
Reserves for Doubtful Accounts and Obsolete/Excess Inventory: Based on our
judgment, we review our accounts receivable and inventory to establish reserves
that adjust the carrying value to the estimated net realizable value. On a
regular basis, we evaluate our accounts receivable and inventories and
establish these reserves based on a multitude of contributing factors. In the
case of accounts receivable, we establish the reserve based on a combination of
specific customer circumstances as well as the history of write-offs and
collections. In the case of inventories, factors we consider in establishing a
reserve include economic conditions, product mix, sales levels, customer
acceptance of our products and changing product styles. As a result, we
established a reserve for doubtful accounts receivable of $20,199 for the
fiscal year ended January 31, 2004 which was written off with its offsetting
receivable in the fiscal year ended January 31, 2005, and a reserve for slow
moving and obsolete inventories of $18,000 for the three month periods ended
April 30, 2005 and 2004.
Comparison of three-month periods ended April 30, 2005 and April 30, 2004
Revenues: Net sales were $4,788,386 for the three months ended April 30, 2005
as compared to $2,597,840 in the three month period ended April 30, 2004. The
increase of $2,190,546 was primarily attributable to increased sales of our log
home and panelized home construction kits. Approximately 89% of total revenues
- 13 -
are represented by home construction kit sales and this portion of our revenues
increased by 114%. That increase is comprised of a 13% increase in units
shipped and an 89% increase in the average value of the home construction kits
shipped, when compared to the three-month period ended April 30, 2004. Other
contributors to our revenues are building material sales, design and engineering
services and freight revenues. Collectively these items decreased by $70,143,
or 11%, as compared with those revenues for the three-month period ended April
30, 2004. Our strategy is to continue to add to our product offerings and to
increase our market share through the introduction of new home designs, products
and style selections. We also intend to emphasize the sale of building
materials through the offerings 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.
The first quarter of the fiscal year is typically slow in terms of shipments
for the Company as these three months (February, March and April) are considered
"winter months," and weather during these months in certain regions of the
country can pose difficulties for log home construction. While the first
quarter ended April 30, 2005 showed significant improvement over the previous
year's revenues, from a historical standpoint, the Company's peak shipping
season truly does not begin until the month of May.
Gross Profit/Cost of Sales: Our gross margin increased to 37% of sales, or
$1,774,114, in the first quarter ended April 30, 2005 from 23% of sales, or
$594,578, in the first quarter ended April 30, 2004. The increase in gross
profit was the result of lower costs in all components (i.e., material, labor
and overhead) of the cost of goods sold, as a percentage of sales. These
categories decreased, as a percentage of sales, in the following manner over
the previous fiscal year: a decrease of 3% in material costs; a decrease of 5%
in labor costs; and a decrease of 6% in manufacturing overhead.
Costs of the Company's raw materials have declined since the beginning of this
fiscal quarter, which is, in part, attributable to the decrease in commodity
lumber costs during that period.
The decrease in labor costs as a percentage of sales was due to better
absorption of labor resulting from increased sales volume for the three-month
period ended April 30, 2005, as compared with the three-month period ended
April 30, 2004.
Manufacturing overhead decreased as a percentage of sales in all areas as
compared with the quarter ended April 30, 2004. This decline is primarily
attributable to the absorption of costs over a much larger sales base. During
the winter months of February, March and April, overhead costs rise as a
percentage of sales due to the lower number of units shipped during that period.
An additional factor that usually contributes to a declining gross profit in
the first quarter of the Company's fiscal year is our use of fixed price
contracts where we do not have the ability to adjust the selling price of the
contracts to adjust to changes in 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. The costs used to estimate the price of a contract at the
time when it is executed do not necessarily reflect the actual costs incurred
when the shipment of that contract takes place. All of the shipments made
during the first fiscal quarter were of contracts whose selling price was set
prior to that quarter.
Operating expenses: Total operating expenses for the first quarter ended
April 30, 2005 were $2,118,848 as compared with $1,694,293 during the first
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quarter ended April 30, 2004, an increase of $424,555, or 25%. As a percentage
of net sales, operating expenses were 44% and 65% for the three-month periods
ended April 30, 2005 and 2004, 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
first quarter ended April 30, 2005 commissions amounted to $515,151, or 11 of
net sales, compared with $230,974 in first quarter ended April 30, 2004, which
comprised 9% of net sales for that period. While total commissions expense
increased 123% compared to our increase in total net sales of 84%, 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, total commissions can change at a disproportionate rate in relation to
the change in net sales. Also, the Company's subsidiaries in British Columbia
and Idaho do not have independent dealers and sell most of their home building
kits to third parties who in turn sell the product to the end user. This
practice results in an elimination of the sales commission that is otherwise
paid by the Company. This practice also generates a lower gross profit due to
sales on a wholesale basis.
Selling, general and administrative expenses of $1,603,697 in the first
quarter ended April 30, 2005 have increased $140,378, or 10%, when compared to
the selling, general and administrative expenses in the first quarter ended
April 30, 2004. As a percentage of total net sales, selling, general and
administrative expenses were 34% and 56%, for the first quarter ended April 30,
2005 and 2004, respectively. The primary items that contributed to the dollar
increase were an increase in personnel and increased spending on attendance at
national trade show expositions, marketing, advertising and promotion costs.
Interest expense: In the first quarter ended April 30, 2005, interest expense
was comprised of interest paid on the Company's multi-faceted credit facility
established in October 2003, interest imputed on notes payable to the previous
owners of the subsidiaries acquired by the Company in 2003, and interest paid on
various other credit borrowings of lesser amounts. We expect the Company's
interest expense to be higher than the previous year's amount, which reflects
the increased amount of debt outstanding principally incurred as a result of the
Company's acquisition activities.
Income taxes: The Company accrues income tax expense on an inter-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 April 30, 2005 and 2004, the Company accrued income
tax benefits of $130,000 and $300,000, respectively.
Net loss: Even though sales increased in the first quarter ended April 30,
2005 when compared to the previous year's first quarter, the Company incurred a
net loss of $269,575. The Company's net loss for the first quarter ended April
30, 2004 was $808,398. The Company considers the first three months of its
fiscal year, February, March and April, to be part of the "winter season" when
shipments are historically low and expenses remain either constant, or rise in
certain instances. Historically, the Company has never experienced a net profit
in its first quarter of the fiscal year, and the current fiscal quarter was no
exception. However, the Company believes that its shipments will increase
during the remainder of the fiscal year as its backlog of undelivered contracts
at April 30, 2005 is 24% higher than the previous year's amount at the end of
- 15 -
April 30, 2004. The Company believes that the following items are significant
with respect to the Company's outlook on its future performance: (a) the size
of the Company's current backlog of undelivered contracts; (b) the increase in
shipments during the three-month period ended April 30, 2005 (as compared to the
three-month period ended April 30, 2004) and (c) indicators which lead the
Company to believe that the number of shipments during the remainder of the
current fiscal year will be greater that the number of shipments completed by
the Company during the corresponding period of the last fiscal year. The
Company believes that the preceding factors, among others, provide a basis for
the Company's belief that it will return to profitability in the current fiscal
year.
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 highlights key balances and ratios as a result of the
acquisition plan (in $1,000's of US dollars):
As of April 30, January 31,
2005 2004 2005
Financial Condition:
Total Assets $ 12,839 $ 12,226 $ 11,490
Total Liabilities $ 11,456 $ 10,644 $ 9,801
Total Equity $ 1,384 $ 1,582 $ 1,689
Debt/equity ratio 3.02 2.79 2.56
Assets/debt ratio 3.07 2.76 2.66
Working Capital:
Current Assets $ 5,789 $ 4,819 $ 4,279
Current Liabilities $ 8,640 $ 7,386 $ 6,860
Current Ratio .67 .65 .62
Cash Position:
Cash & cash equivalents $ 1,258 $ 450 $ 858
Cash provided (used) in
operations $ 579 $( 185) $ 521
Financial Condition
Total assets at April 30, 2005 are $12,839,427, as compared with $11,489,983
at January 31, 2005, for an increase of $1,349,444. The majority of this
increase was in the areas of cash, accounts receivable, and inventory. We also
- 16 -
had an increase of $1,654,346 in total liabilities, from $9,801,160 at January
31, 2005 to $11,455,506 at April 30, 2005, the majority of which is represented
by an increase in customer deposits and accrued expenses.
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 $2,826,091 as of April 30, 2005. The proceeds from borrowings
against the credit facility were used principally to finance the Company's
recent acquisitions. 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 interest rate for the majority of the borrowings under
the First Pioneer credit facility is at the prime rate as published in the Wall
Street Journal, but the interest rate for one million dollars of the credit
facility is fixed for a two-year period at a below-prime rate. This portion of
the loan is subsidized by the State of New York and is provided as an incentive
for the creation of employment in the State of New York.
The seller financing is payable over terms ranging from 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 similar unsecured promissory
notes.
Working Capital; Sources and Uses of Cash
At April 30, 2005, we had a working capital deficiency of $2,850,546 as
current liabilities exceeded current assets. At January 31, 2005, we had a
working capital deficiency of $2,580,238. For the three month period ended
April 30, 2005, our working capital deficiency increased by $270,308. Our
balance of cash and cash equivalents increased during first quarter ended April
30, 2005 primarily due to increases in customer deposits and accrued
liabilities. Cash was used primarily to purchase inventory and prepaid assets
and to pay down bank loans and notes, and by an increase in 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 2006. Our cash balances
increased in spite of the winter season of our business cycle (which included
the first quarter of each year), which is the period of time during which the
Company historically generates the least amount of shipping activity each fiscal
year. We anticipate that as we enter into the building season shipping cycle,
beginning in May, that we will generate the needed working capital from the
Company's undelivered backlog of contracts at April 30, 2005. Also, we have not
drawn all of the available funds provided under the First Pioneer credit
facility, which is available to us to supplement the funds generated by the
Company's operations.
Our backlog of undelivered contracts at April 30, 2005 was approximately
$33,015,000. This is an increase of $6,456,000, or 24%, over the backlog of
undelivered contracts at April 30, 2004 when the backlog was approximately
$26,559,000. At the Company's fiscal year end date of January 31, 2005, the
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backlog was approximately $32,304,000. 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 43% 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, 2006, approximately
$13,890,700 of product is anticipated to be delivered with respect the
contracts contained in the beginning backlog at January 31, 2005. In the first
quarter ended April 30, 2005, 100% of the shipments originated from the
beginning backlog at January 31, 2005. In the previous year's first quarter
ended April 30, 2004, approximately 87% of the shipments originated from the
beginning backlog at January 31, 2004.
The balance of the Company's product shipments during any given fiscal year
originate from contracts that are both executed and delivered during the same
fiscal year. Of the product shipments made during fiscal year ended January 31,
2005 approximately $8,242,000 originated from contracts executed during that
fiscal year which represented approximately 25% of contracts executed during
that fiscal year. In the fiscal quarter ended April 30, 2005, none of the
shipments originated from contracts executed during such fiscal quarter. In the
previous year's first quarter ended April 30, 2004, approximately 13% of the
shipments originated from contracts that were executed during that fiscal
quarter then ended. It should be noted that shipments made during the first
three months of the Company's fiscal year are predominately of contracts
executed in the immediately preceding fiscal year, and historically, to the
extent that few or none of the contracts executed during the Company's first
quarter are shipped during the first quarter of that fiscal year has not had a
material impact on the Company's total shipments to be made for the
corresponding full fiscal year. The Company's fiscal year 2006 potential
revenue is 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
prerequisites, such as building site preparation.
The table below illustrates the changes in our backlog for the first quarters
ended April 30, 2005 and 2004, and for the last two fiscal years ended January
31, 2005 and 2004 (in $1,000's of US dollars):
Quarter Ended Fiscal Year Ended
April 30, January 31,
2005 2004 2005 2004
Beginning backlog $ 32,304 $ 25,220 $ 25,220 $ 20,088
Add: New contracts 5,419 4,758 31,575 23,266
Amendments 318 625 1,224 710
-------- -------- -------- --------
Sub-total 38,041 30,603 58,019 44,064
Less: Shipments - 4,262 - 2,037 -19,347 -13,842
Cancellations - 764 - 2,007 - 6,368 - 5,002
-------- -------- -------- --------
Ending backlog $ 33,015 $ 26,559 $ 32,304 $ 25,220
======== ======== ======== ========
Each year we experience contract cancellations. The reasons for cancellations
are varied and no one particular reason is dominant over the total population
of reasons given by our customers. It has been 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
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end of the fiscal year will be cancelled in the subsequent fiscal year.
Similarly, the Company's records over the past four years for which such
statistics have been kept, indicate that an average of 4% of the contracts
executed during the fiscal year will also be cancelled 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 quarters ended April 30, 2005 and
2004 we realized revenues of $19,465 and $78,974, respectively, as a result of
the Company's performance of 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 unremedied 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 cured within 30 days of such notice (90 days in the case of
certain seller financing notes), the obligations and any unpaid interest
become due and payable immediately.
The bank debt made available by First Pioneer (the "First Pioneer Credit
Facility") is conditioned upon the Company's continued compliance with
affirmative, negative, continuing and financial covenants. Examples of the
affirmative covenants include compliance with laws, maintaining insurance,
maintaining the property, maintaining books and records, and similar items.
Examples of the negative covenants include 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, 2005, we were required to achieve a fixed charge coverage ratio of
not less than 2.0 to 1.0, achieve a current ratio of not less than 1.0 to 1.0,
and to maintain a minimum tangible net worth of $3,606,298. During Fiscal 2005
and Fiscal 2004, the Company failed to meet the financial covenants. 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 for the
fiscal years ended January 31, 2005 and January 31, 2004, and, accordingly, the
events of default were deemed cured. There were no other events of default with
respect to the First Pioneer Credit Facility at January 31, 2005 or at April 30,
2005.
We believe that the default with regard to the financial covenants of the
First Pioneer Credit Facility occurred due to unrecoverable cost increases
relating to fixed price contracts and losses at our subsidiary in British
Columbia. We believe that our inability to meet the goals set by First Pioneer
has not damaged our relationship with them, nor do we believe that it will
hinder our ability to obtain future financing for contemplated projects. The
- 19 -
Company has discussed these issues during its annual review with First Pioneer,
and believes that it will meet the financial covenants that will be in effect
for the fiscal year ending January 31, 2006.
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, 2005 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, 2005. You should consider carefully the risks and uncertainties
described below and in our Annual Report on Form 10-KSB, which is not an
exclusive list of risks and uncertainties that confront our Company. Additional
risks and uncertainties may also impair our business operations.
These forward-looking statements generally relate to our belief that we will
increase the sales of our products to an expanding base of customers; that we
will be able to leverage our West Coast manufacturing capability to provide a
cost effective solution to shipment of products to customers located in the
western United States, and that demand for Swedish-cope style homes will
increase, particularly on the East Coast of the United States, that will lead to
growth of sales revenues of the Company over the next several years.
We face significant price competition.
There are no assurances that competitive pressures will not force us to accept
reduced margins to compete in the future. Large companies within the industry
with significantly greater resources continue to expand in the market place and
compete for customers with a strategy that is based on price. While sales price
is a distinguishing factor between companies offering log home construction
kits, the Company feels that product attributes, service, quality and design
are other important factors in a purchase decision.
The success of our acquisition in Canada is dependent 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.
One of the considerations for the Company's acquisition of True Craft Log
Structures, Ltd. and Hart & Son Industries, Ltd., the companies subsidiaries
located in Maple Ridge, British Columbia, Canada was the potential cost savings
of shipping home building packages from British Columbia to customers located in
the western United States as opposed to shipping these products from the
Company's facilities in New York. The Company is in the process of shifting
this function to its Canadian facility, however, the speed with which the
Company can execute this task will have an impact on its financial performance
for the remainder of the Company's fiscal year 2006 and beyond.
Our industry is subject to economic fluctuations based on mortgage interest
rates.
The home construction industry has enjoyed robust sales over the past several
years as mortgage interest rates have been at or near historical lows. Should
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there be an increase in mortgage rates in the future, such an increase may have
an effect on the number of prospective purchasers of newly-constructed homes,
which, in turn may have an effect on the number of home construction kits that
the Company is be able to sell.
We are dependent on the performance of certain third-party individuals and
entities.
We manufacture a home construction kit to be purchased by individuals who
desire to build a new home. The Company does not build the home nor do we
provide certain interior amenities such as plumbing, wiring, cabinet, etc., nor
do we prepare the building site 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 individuals and entities, 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.
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 in other regions of the
country and can persist into the spring season. In addition, the weather
conditions in the initial months of spring can result in rain and muddy ground
conditions, which are not conducive for new home construction. Weather
conditions are unpredictable and can have an adverse affect on our ability to
ship product and generate revenue. In light of the effect winter weather
conditions have on our first quarter shipments, the Company has routinely
experienced a loss in past first quarters of the Company's fiscal year and it
has experienced a comparable loss in the first quarter of fiscal year 2006. The
Company is working to address the impact of the winter season on the Company's
historical first-quarter financial performance through acquisitions.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, 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
- 21 -
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 AICPA's Emerging Issues Task
Force ("EITF"), consensus on Issue No. 00-21 "Accounting for Revenue
Arrangements with Multiple Deliverables." The EITF concluded that revenue
arrangements with multiple elements should be divided into separate units of
accounting if the deliverables in the arrangement have value to the customer on
a standalone basis, if there is objective and reliable evidence of the fair
value of the undelivered elements, and as long as there are no rights of return
or additional performance guarantees by the Company. The provisions of EITF
Issue No. 00-21 are applicable to agreements entered into in fiscal periods
commencing after June 15, 2003. SAB 104 directs companies to identify separate
units of accounting based on EITF Issue 00-21 before applying the guidance of
SAB 104. We believe that neither our operating results nor our financial
condition will be materially affected by the provisions of EITF 00-21, nor by
the guidance of SAB 104.
In December 2003, FASB issued Financial Interpretation No. 46R ("FIN 46"),
"Consolidation of Variable Interest Entities." The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity ("VIE") and to determine 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
- 22 -
other significant variable interest holders. Certain provisions of this
interpretation became effective upon issuance. As of April 30, 2004 and January
31, 2004, we did not have any VIE.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4" ("FAS 151"). FAS 151 clarifies that abnormal amounts
of idle facility expense, freight, handling costs and spoilage should be
expensed as incurred and not included in overhead. Further, FAS 151 requires
that allocation of fixed and production facilities overhead to conversion costs
should be based on normal capacity of the production facilities. The provisions
in FAS 151 are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not believe that the adoption of
FAS 151 will have a significant effect on its financial statements.
On December 16, 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based
Payment" ("SFAS 123(R)"), which is a revision of SFAS 123. SFAS 123(R)
supersedes APB Opinion No. 25 and its interpretations, and amends Statement of
Financial Accounting Standards No. 95, "Statement of Cash Flows." SFAS 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. SFAS 123(R) is effective for the Company at the beginning of the first
interim or annual period beginning after December 15, 2005. The Company intends
to adopt SFAS 123(R) beginning with its annual report for the fiscal year ended
January 31, 2006. The Company does not expect that the adoption of SFAS 123(R)
will have a material effect on its financial statements.
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 Chief Executive Officer and Chief 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 (the "Exchange Act")).
Based on this evaluation, the Chief Executive Officer and Chief 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.
- 23 -
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit Index
31.1 Certification of Chief Executive Officer pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
None.
- 24 -
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
June 14, 2005
/ s / Benjamin A. Shepherd
Benjamin A. Shepherd
Vice President and Chief Financial Officer
June 14, 2005
- 25 -
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: June 14, 2005
/ 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: June 14, 2005
/ 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 April 30, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, John D. Shepherd,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: June 14, 2005 s/ John D. Shepherd
Name: John D. Shepherd
Title: Chairman of the Board of Directors,
President and Chief Executive Officer
[A signed original of this 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 April 30, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Benjamin A.
Shepherd, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: June 14, 2005 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.]