UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended July 31, 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 September 10, 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 (UNAUDITED)
Consolidated balance sheets as of
July 31, 2004 and January 31, 2004 3 - 4
Consolidated statements of operations for the
six months ended July 31, 2004 and 2003 5
Consolidated statements of operations for the
three months ended July 31, 2004 and 2003 6
Consolidated statements of changes in stockholders'
equity for the six months ended July 31, 2004
and the twelve months ended January 31, 2004 7
Consolidated statements of cash flows for the
six months ended July 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 - 28
ITEM 3. CONTROLS AND PROCEDURES 28 - 29
PART II. OTHER INFORMATION 30 - 31
SIGNATURES 31
- 2 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2004 AND JANUARY 31, 2004
ASSETS
July 31, January 31,
2 0 0 4 2 0 0 4
(Unaudited) (Audited)
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $1,177,193 $ 750,239
Trade accounts receivable, net of
allowance for doubtful accounts of
$20,199 630,532 337,166
Inventories (raw materials) 2,086,710 2,032,050
Work in process 593,644 477,389
Prepaid expenses and other current assets 733,304 564,883
Income tax asset 45,000 ---
Income taxes receivable 65,051 96,427
Mortgage and note receivable 5,623 2,592
---------- ----------
Total current assets 5,337,057 4,260,746
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,012,347 1,020,347
Buildings and improvements 2,889,297 3,047,979
Machinery and equipment 1,952,896 1,926,152
Furniture and fixtures 2,102,547 2,096,515
Transportation equipment 493,066 472,350
---------- ----------
8,450,153 8,563,343
Less: accumulated depreciation (4,080,915) (3,983,816)
---------- ----------
Total property, plant and
equipment - net 4,369,238 4,579,527
---------- ----------
OTHER ASSETS:
Mortgage receivable 73,413 60,053
Deposits and other assets 56,716 70,742
Goodwill 1,336,839 1,319,970
Other intangible assets, net of accumulated
amortization of $197,707 at July 31, 2004
and $97,537 at January 31, 2004 1,455,036 1,546,032
---------- ----------
Total other assets 2,922,004 2,996,797
---------- ----------
TOTAL ASSETS $12,628,299 $11,837,070
========== ==========
See accompanying notes to consolidated financial statements.
( continued )
- 3 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
JULY 31, 2004 AND JANUARY 31, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
July 31, January 31,
2 0 0 4 2 0 0 4
(Unaudited) (Audited)
----------- -----------
CURRENT LIABILITIES:
Borrowings on line of credit $ 403,000 $ 503,000
Current installments of bank loans 118,980 118,980
Current installments of note payable,
related party 93,458 93,458
Current installments of notes payable 293,310 407,109
Current installments of capital lease
obligations 22,211 22,211
Trade accounts payable 1,517,408 1,578,912
Accrued salaries and wages 232,251 196,243
Accrued expenses 958,811 569,850
Customer deposits 3,686,972 2,575,847
---------- ----------
Total current liabilities 7,326,401 6,065,610
LONG-TERM DEBT, net of current installments:
Note payable, related party 316,563 316,563
Bank loans 1,922,887 1,960,687
Notes payable 937,412 1,037,541
Capital lease obligations 9,736 17,581
---------- ----------
Total long-term debt 3,186,598 3,332,372
---------- ----------
OTHER LONG-TERM OBLIGATION 15,000 15,000
---------- ----------
Total liabilities 10,527,999 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
10,000,000 shares; issued 9,544,299
shares 95,443 95,443
Additional paid-in capital 6,107,648 6,107,648
Accumulated deficit (3,263,549) (2,945,805)
Accumulated other comprehensive income 45,193 51,237
----------- ----------
2,984,735 3,308,523
Less: cost of 504,240 shares of common
stock in treasury (884,435) (884,435)
----------- ----------
Total stockholders' equity 2,100,300 2,424,088
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $12,628,299 $11,837,070
=========== ===========
See accompanying notes to consolidated financial statements.
- 4 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 31, 2004 AND 2003
(UNAUDITED)
NET SALES $10,194,672 $ 6,441,447
COST OF SALES 6,635,351 3,536,295
---------- ----------
GROSS PROFIT 3,559,321 2,905,152
---------- ----------
OPERATING EXPENSES:
Commissions 1,038,112 744,667
Selling, general and administrative 2,894,394 2,184,995
---------- ----------
Total operating expenses 3,932,506 2,929,662
---------- ----------
(LOSS) FROM OPERATIONS ( 373,185) ( 24,510)
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 4,469 9,234
Interest expense ( 58,624) ( 18,727)
Other 64,596 101,824
---------- ----------
Total other income - net 10,441 92,331
---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES ( 362,744) 67,821
INCOME (TAXES) BENEFIT 45,000 ( 20,000)
---------- ----------
NET (LOSS) INCOME $( 317,744) $ 47,821
========== ==========
PER SHARE DATA:
Basic (loss) earnings per share $ ( .04) $ .01
========== ==========
Diluted (loss) earnings per share $ ( .04) $ .01
========== ==========
See accompanying notes to consolidated financial statements.
- 5 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2004 AND 2003
(UNAUDITED)
NET SALES $ 7,596,832 $ 4,746,261
COST OF SALES 4,632,089 2,519,767
---------- ----------
GROSS PROFIT 2,964,743 2,226,494
---------- ----------
OPERATING EXPENSES:
Commissions 807,138 516,228
Selling, general and administrative 1,431,075 1,036,715
---------- ----------
Total operating expenses 2,238,213 1,552,943
---------- ----------
INCOME FROM OPERATIONS 726,530 673,551
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 1,308 3,355
Interest expense ( 30,950) ( 6,450)
Other 48,766 31,076
---------- ----------
Total other income - net 19,124 27,981
---------- ----------
INCOME BEFORE INCOME TAXES 745,654 701,532
INCOME TAXES ( 255,000) ( 241,000)
---------- ----------
NET INCOME $ 490,654 $ 460,532
========== ==========
PER SHARE DATA:
Basic earnings per share $ .05 $ .06
========== ==========
Diluted earnings per share $ .05 $ .05
========== ==========
See accompanying notes to consolidated financial statements.
- 6 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JULY 31, 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 --- ( 6,044) --- ( 6,044) ( 6,044)
Net (loss) - six months
ended July 31, 2004 --- --- --- ( 317,744) --- --- ( 317,744) (317,744)
---------- -------- ---------- ----------- ----------- ---------- ------------ ---------
Balance at July 31, 2004 9,544,299 $ 95,443 $6,107,648 $(3,263,549) $ 45,193 $( 884,435) $ 2,100,300 $(323,788)
========== ======== ========== =========== =========== ========== ============ =========
See accompanying notes to consolidated financial statements.
- 7 -
LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 31, 2004 AND 2003
(UNAUDITED)
Six Months Ended
July 31,
----------------------------
2 0 0 4 2 0 0 3
----------- -----------
OPERATING ACTIVITIES:
Net (loss) income $( 317,744) $ 47,821
Adjustments to reconcile net (loss) income
to net cash (used) provided by
operating activities:
Depreciation 245,946 97,552
Amortization 100,170 260
Income taxes ( 45,000) ---
(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 ( 293,366) ( 274,243)
(Increase) in inventories ( 170,915) ( 432,596)
(Increase) in prepaid expenses
and other current assets ( 168,421) ( 187,160)
Decrease in deposits and other assets 14,026 924
(Decrease) increase in trade accounts
payable ( 61,504) 398,773
Increase (decrease) in customer deposits 1,111,125 ( 493,440)
Increase in accrued expenses, payroll and
related taxes and other current
liabilities 424,969 112,197
(Increase) in due from related parties --- ( 29,385)
Decrease (increase) in income taxes
receivable 31,376 ( 11,592)
(Decrease) in accrued income taxes --- ( 3,100)
---------- ----------
Net cash provided (used) by operating
activities 823,947 ( 778,653)
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment ( 89,789) ( 137,455)
Acquisition of businesses ( 16,869) ( 234,988)
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 1,009 2,072
---------- ----------
Net cash (used) by investing activities ( 22,202) ( 360,371)
---------- ----------
FINANCING ACTIVITIES:
Capital received upon exercise of stock
options --- 4,413
Proceeds from borrowing on line of credit 150,000 ---
Repayment of line of credit ( 250,000) ---
Loan origination fees ( 9,174) ---
Repayments of capital leases ( 7,845) ( 31,888)
Repayments of bank loans ( 37,800) ( 11,250)
Repayments of notes payable ( 213,928) ( 18,484)
---------- ----------
Net cash (used) by financing activities ( 368,747) ( 57,209)
---------- ----------
Effect of foreign currency translation on cash ( 6,044) ---
---------- ----------
Net increase (decrease) in cash and cash
equivalents 426,954 (1,196,233)
Cash and cash equivalents at
beginning of period 750,239 1,885,931
---------- ----------
Cash and cash equivalents at
end of period $1,177,193 $ 689,698
========== ==========
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
JULY 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 six-month periods ended July 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 7,759,327 for the six-month
periods ended July 31, 2004 and 2003, respectively, and 9,040,059 and 8,247,151
for the three-month periods ended July 31, 2004 and July 31, 2003, respectively.
Diluted earnings 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. Diluted (loss) per
share for the six-month period ended July 31, 2004 is the same as basic (loss)
per share because the effect of including stock options in the calculation
would be anti-dilutive.
The numerator in the calculation of diluted earnings (loss) per share for the
six-month periods ended July 31, 2004 and 2003 was determined as follows:
- 9 -
2004 2003
Net income used to calculate basic earnings per share $(317,744) $ 47,821
Add back interest expense related to convertible
debentures --- 7,408
--------- ---------
Numerator for calculation of diluted earnings per
share $(317,744) $ 55,229
========= =========
The denominator in the calculation of diluted earnings (loss) per share for
the six-month periods ended July 31, 2004 and 2003 was determined as follows:
2004 2003
Weighted average outstanding shares used to calculate
basic earnings per share 9,040,059 7,759,327
Add shares issuable assuming conversion of debentures --- 667,956
Add shares issuable assuming exercise of outstanding
stock options --- 181,106
--------- ---------
Denominator for calculation of diluted earnings per
share 9,040,059 8,608,389
Basic (loss) earnings per share $(0.04) $0.01
Diluted (loss) earnings per share $(0.04) $0.01
The numerator in the calculation of diluted earnings per share for the
three-month periods ended July 31, 2004 and 2003 was determined as follows:
2004 2003
Net income used to calculate basic earnings per share $ 490,654 $ 460,532
Add back interest expense related to convertible
debentures --- 1,058
--------- ---------
Numerator for calculation of diluted earnings per share $ 490,654 $ 461,590
========= =========
The denominator in the calculation of diluted earnings per share for the
three-month periods ended July 31, 2004 and 2003 was determined as follows:
2004 2003
Weighted average outstanding shares used to calculate
Basic earnings per share 9,040,059 8,247,151
Add shares issuable assuming conversion of debentures --- 189,538
Add shares issuable assuming exercise of outstanding
Stock options 198,186 196,331
--------- ---------
Denominator for calculation of diluted earnings per
share 9,238,245 8,633,020
Basic earnings per share $ 0.05 $0.06
Diluted earnings per share $ 0.05 $0.05
(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 $45,000 was recognized
in the six-month period ended July 31, 2004. A provision for income taxes was
provided in the amount of $20,000 in the six-month period ended July 31, 2003.
- 10 -
For the three-month periods ended July 31, 2004 and 2003, a provision for
income taxes was provided in the amount of $255,000 and $241,000, respectively.
(4) STOCK BASED COMPENSATION
During the six-month period ended July 31, 2004 a stock option grant was
made. Stock option activity for the six-month period ended July 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 July 31, 2004 133,500 232,000 $0.29 $0.27
========= ============= ========= =============
There were no Stock Options granted during the six-month period ended July 31,
2003.
All outstanding stock options are exercisable as of July 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 July 31, 2004 is 4.5 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 fair value of
these options at the time of the grant was $0.76. The fair value is recognized
by the Company as compensated cost in the accompanying statement of operations
as the stock options vest. At July 31, 2004, compensation cost related to this
stock option grant amounted to $3,752.
- 11 -
(5) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
During the six months ended July 31, 2004, cash was paid in the amounts of
$59,229 for interest and $4,030 for income taxes. During the six months ended
July 31, 2003, cash was paid in the amounts of $18,180 for interest and
$34,692 for income taxes.
Non-cash investing and financing activities:
During the six-month period ended July 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 six-month period ended July 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.
At July 31, 2003, 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 are indemnified by the related dealer.
(7) RECLASSIFICATIONS
Certain amounts in the Consolidated Statement of Operations for the six
months ended July 31, 2003 have been reclassified to conform with the
presentation for the six months ended July 31, 2004. None of the reclass-
ifications 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 newly-acquired 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
and panelized home sales, (2) solarium sales, (3) sales of building materials,
and (4) revenues from engineering and design services. For the six-month period
ended July 31, 2004, approximately 87% of the Company's total sales are 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 six-month period
and three-month period ended July 31, 2004 as compared to the six-month and
three-month period ended July 31, 2004 (in $1,000's US).
Six-month periods ended July 31, 2004 and 2003:
Y-T-D Y-T-D
July 31, % of July 31, % of %
2004 Sales 2003 Sales Change
------- ----- ------- ----- ------
Net Sales $10,194 100% $ 6,441 100% 58%
Cost of Sales 6,635 65% 3,536 55% 88%
------- ----- ------- ----- ------
Gross Profit 3,559 35% 2,905 45% 22%
Operating expense 3,932 39% 2,929 45% 34%
------- ----- ------- ----- ------
(Loss) from Operations ( 373) -4% ( 24) -- -1454%
Other Income, net 10 -- 92 1% -89%
------- ----- ------- ----- ------
(Loss) before Income Taxes ( 363) -4% 68 1% -634%
Income Tax Benefit 45 1% ( 20) -- 325%
------- ----- ------- ----- ------
Net (Loss) Income $( 318) -3% $ 48 1% -763%
======= ===== ======= ===== ======
Three-month periods ended July 31, 2004 and 2003:
2nd 2nd
Fiscal Fiscal
Quarter % of Quarter % of %
2004 Sales 2003 Sales Change
------- ----- ------- ----- ------
Net Sales $ 7,597 100% $ 4,746 100% 60%
Cost of Sales 4,632 61% 2,520 53% 84%
------- ----- ------- ----- ------
Gross Profit 2,965 39% 2,226 47% 33%
Operating expense 2,238 29% 1,553 33% 44%
------- ----- ------- ----- ------
Income from Operations 727 10% 673 14% 54%
Other Income, net 19 -- 28 1% -32%
------- ----- ------- ----- ------
Income before Income Taxes 746 10% 701 15% 6%
Income Taxes ( 255) 3% ( 241) 5% 6%
------- ----- ------- ----- ------
Net Income $ 491 7% $ 460 10% 7%
======= ===== ======= ===== ======
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
- 14 -
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("SAB 101"), "Revenue
Recognition in Financial Statements." SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
agreement exists; (2) delivery has occurred or services have been rendered; (3)
the fee is fixed and determinable; and (4) collectibility is reasonably assured.
Revenue from products sold is recognized upon delivery to the customer.
Subsequent to the sale of our products, we have no obligation to provide any
modification or customization, upgrades, enhancements, or post-delivery customer
support. Design and engineering services are an integral part of the total home
package sold to the customer and as such, revenue for these efforts are not
recognized as a separate line item in our financial statements. However,
customers occasionally cancel their contracts with us. Upon cancellation we
recognize revenue for services performed for design and engineering services in
accordance with a predetermined fee schedule that is disclosed to the customer
at the time of the execution of the contact. We deduct this amount from the
deposit that accompanied the contract and return the remainder of the deposit
to the customer.
Impairment of Long-lived and Intangible Assets: 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 for the fiscal year ended January 31, 2003, nor have we
recorded any impairment losses during the six-month period ended July 31, 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 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
- 15 -
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 years ended January 31, 2004 and 2003, and a reserve for slow moving and
obsolete inventories of $18,000 for the fiscal years ended January 31, 2004 and
2003. We have not added to these reserves during the six-month period ended
July 31, 2004.
Comparison of Six-month Periods Ended July 31, 2004 and July 31, 2003
Revenues. Net sales were $10,194,672 for the six-month period ended July 31,
2004 compared with $6,441,447 for the six-month period ended July 31, 2003. The
increase, $3,753,225, was primarily attributable to increased sales of our log
home and panelized home construction kits. Approximately eighty-seven percent
of total revenues are represented by home construction kit sales and this
portion of our revenues improved through a sixty-one percent increase in units
shipped and a forty-eight percent increase in sales dollar volume. Offsetting
these increases was an eight percent decrease 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 $786,400, or two hundred
eighteen percent, over the previous year's revenues, a significant portion of
which was contributed by our newly-acquired companies. 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.
At the end of the first six months of the fiscal year, the Company is solidly
in the middle of the principal building and shipping season. The increase in
revenues during the six-month period ended July 31, 2004 as compared to the six-
month period ended July 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.
- 16 -
Gross Profit/Cost of Sales. Our gross margin decreased to 35% of sales, or
$3,559,321, in the six-month period ended July 31, 2004 from 45% of sales, or
$2,905,152, in the six-month period ended July 31, 2003. The decrease in gross
profit was the result of higher costs in all components (i.e., material, labor
and overhead) of the cost of goods sold. These categories increased in the
following manner over the previous fiscal year: an increase of eight percent
in material costs; an increase of one percent in labor costs; and an increase of
one percent in manufacturing overhead.
The increase in the cost of raw materials that the Company encountered
during the fiscal year ended January 31, 2004 continued during the six-month
period ended July 31, 2004 with commodity lumber costs continuing to increase
dramatically. The increase in labor costs was attributable to increased
employment and increased wage and benefit costs.
Manufacturing overhead increased due to increased costs of design and
engineering, and increased costs associated with facilities and personnel. A
contributing factor to the increase was the continued integration of our newly-
acquired subsidiaries during the first half of the fiscal year as overhead costs
remained in excess of projected shipping volume at the acquired companies. As
the number of units continues to increase through the remainder of the fiscal
year the Company believes that its overhead costs should eventually subside to
levels that the Company has maintained in the past in relation to comparable
levels of sales volume. 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 adjust to
rising costs. The selling prices to which we are contractually bound are valid
for a period of nine months from the date of the contract signing, and the vast
majority of the shipments made during the six-month period ended July 31, 2004
were of contracts whose selling price was set prior to the increase in costs of
materials. Further contributing to the decrease in gross profit is the method
of selling by the acquired companies in that the majority of sales made by the
Company's newly acquired subsidiaries are made on a wholesale basis, which
because of a lower than retail selling price contributes a lower gross profit.
Operating expenses: Total operating expenses for the six-month period ended
July 31, 2004 were $3,932,506 as compared with $2,929,662 during the six-month
period ended July 31, 2003, an increase of $1,002,844, or 34%. As a percentage
of net sales, operating expenses were 39% and 45%, respectively, for the six-
month periods ended July 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 six-
month period ended July 31, 2004 commissions amounted to $1,038,112, or 10% of
net sales, compared with $774,667 in six-month period ended July 31, 2003, or
12% of net sales. While total commissions expense increased 39% compared to our
increase in total net sales of 58%, 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.
- 17 -
Selling, general and administrative expenses of $2,894,394 in the six-month
ended July 31, 2004 increased $709,399, or 32%, when compared to the selling,
general and administrative expenses in the six-month period ended July 31, 2003
of $2,184,995. As a percentage of total net sales, selling, general and
administrative expenses were 28% and 34%, for the six-month period ended July
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 six-month period in contrast to
the previous year when the entities were not yet a part of the Company.
Interest expense: In the six-month period ended July 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
six-month period ended July 31, 2004, the Company accrued an income tax benefit
of $45,000 while in the six-month period ended July 31, 2003 the Company made a
provision for income taxes in the amount of $20,000.
Net loss: Even though sales increased in the six-month period ended July 31,
2004 when compared to the previous year's six-month period ended July 31, 2003,
the Company incurred a net loss of $317,744. The Company's net income for the
six-month period ended July 31, 2003 equaled $47,821. The increased overhead
cost structure of the Company, including costs attributable to the acquisitions,
combined with the increases in raw material and manufacturing overhead 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. As our second quarter results show,
results during that period were comparable to those experienced by the Company
in past fiscal years. The Company's second quarter is usually one of its
strongest in terms of sales and profits. Based on our backlog of undelivered
contracts at the end of the second quarter and the continued favorable
conditions for building residential housing, we continue to anticipate a return
to profitability for the full fiscal year.
Comparison of Three-month Periods Ended July 31, 2004 and July 31, 2003
Revenues. Net sales were $7,596,832 for the second quarter ended July 31,
2004 compared with $4,746,261 for the second quarter ended July 31, 2003. The
increase of $2,850,571 was primarily attributable to increased sales of our log
home and panelized home construction kits. Approximately ninety-two percent of
total revenues are represented by home construction kit sales and this portion
of our revenues improved through a sixty-seven percent increase in units shipped
- 18 -
and a fifty-six percent increase in sales dollar volume. Offsetting these
increases was a seven percent decrease 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 $297,300, or 119%, over the previous year's
revenues, a significant portion of which was contributed by our newly-acquired
companies. 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.
The second quarter of the fiscal year clearly shows that the Company has entered
the principal portion of the building and shipping season as demonstrated by the
dramatic increase in revenues over the first quarter's revenues. The increase
in revenues during the second quarter ended July 31, 2004 when compared to the
second quarter ended July 31, 2003 reflects not only the increase in the
Company's overall business but a realization by the Company of revenues recorded
by the subsidiaries acquired during the latter portion of the preceding fiscal
year.
Gross Profit/Cost of Sales. Our gross margin decreased to 39% of sales, or
$2,964,743, in the second quarter ended July 31, 2004 from 47% of sales, or
$2,226,494, in the second quarter ended July 31, 2003. The decrease in gross
profit was the result of higher costs in most components (i.e., material and
overhead) 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 manufacturing overhead.
The increase in the cost of raw materials that the Company encountered during
the fiscal year ended January 31, 2004 continued in the first quarter and
throughout the second quarter ended July 31, 2004 with commodity lumber costs
continuing to increase dramatically. The labor costs increased slightly when
compared to the previous year's second quarter due to increased wage and benefit
costs, but those increases were not significant.
Manufacturing overhead increased due to increased costs of design and
engineering, and increased costs associated with facilities and personnel. An
additional factor that has contributed to a declining gross profit is our use of
fixed price contracts where we do not have the ability to adjust the selling
price of the contracts to adjust to rising costs. The selling prices to which
we are contractually bound are valid for a period of nine months from the date
of the contract signing, and most of the shipments made during the first fiscal
quarter were of contracts whose selling price was set prior to the increase in
costs of materials. Further contributing to the decrease in gross profit is the
method of selling by the acquired companies in that the majority of sales made
by the Company's newly acquired subsidiaries are made on a wholesale basis,
which because of a lower than retail selling price contributes a lower gross
profit.
Operating expenses: Total operating expenses for the second quarter ended
July 31, 2004 were $2,238,213 as compared with $1,552,943 during the second
quarter ended July 31, 2003, an increase of $685,270, or 44%. As a percentage
of net sales, operating expenses were 29% and 33%, respectively, for the three-
month periods ended July 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
- 19 -
second quarter ended July 31, 2004 commissions amounted to $807,138 compared
with $516,228 in second quarter ended July 31, 2003. Commissions were 11% of
net sales for both three-month periods ended July 31, 2004 and 2003. Although
commissions expense as a percentage of net sales did not change between the
periods presented even though there was an increase in total net sales of 60%,
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 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 $1,431,075 in the second quarter
ended July 31, 2004 increased $394,360, or 38%, when compared to the selling,
general and administrative expenses in the second quarter ended July 31, 2003
of $1,036,715. As a percentage of total net sales, selling, general and
administrative expenses were 19% and 22%, for the second quarters ended July 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
incurred expenses attributable to this category of spending during the quarter
in contrast to the previous year when such entities were not yet a part of the
Company.
Interest expense: In the second quarter ended July 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 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 July 31, 2004 and 2003, the Company made a provision
for income taxes in the amounts of $255,000 and $241,000, respectively.
Net income: With increases in net sales over the amount realized in the first
quarter of the current fiscal year and the comparable amount of the second
quarter of the previous fiscal year, we have entered the principal portion of
the building and shipping season. Despite rising material costs, increased
overhead and operating expenses we have earned a profit that is comparable to
those earned by the Company in past second quarters. At July 31, 2004, our
backlog of undelivered contracts remains strong at approximately $26,800,000.
As we move forward to the latter portion of the building season, based on our
aforementioned backlog of undelivered contracts and a positive climate for new
sales, we continue to anticipate a return to profitability for the full fiscal
year.
- 20 -
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 this acquisition plan has had on our
financial statements (in $1,000's of US dollars):
As of July 31, January 31,
2004 2003 2004
Financial Condition:
Total Assets $ 12,628 $ 6,689 $ 11,837
Total Liabilities $ 10,528 $ 4,310 $ 9,413
Total Equity $ 2,100 $ 2,379 $ 2,424
Debt/equity ratio 1.96 .13 1.85
Assets/debt ratio 3.07 21.21 2.64
Working Capital:
Current Assets $ 5,337 $ 3,767 $ 4,261
Current Liabilities $ 7,326 $ 4,099 $ 6,066
Current Ratio .73 .92 .70
Cash Position:
Cash & cash equivalents $ 1,177 $ 690 $ 750
Cash provided (used) in
operations $ 824 $( 779) $( 250)
Financial Condition
For the year ended January 31, 2004, the Company had a significant increase in
assets from $6,688,687 at July 31, 2003 to $11,838,070 at January 31, 2004.
Total assets at July 31, 2004 are 12,628,299. The majority of this increase
came as a result of the acquisitions completed during the fiscal year ended
January 31, 2004, with significant increases in the areas of property, plant and
equipment, other intangible assets and goodwill. We also had a substantial
increase in total liabilities from $4,310,155 at July 31, 2003 to $9,412,982 at
January 31, 2004, the majority of which is represented by an increase in total
debt of approximately $4,162,000 during that six month period. Total
liabilities at July 31, 2004 are $10,527,999.
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
- 21 -
utilized $2,444,867 as of July 31, 2004. The proceeds from borrowings
against the credit facility were used principally to finance the Company's
recent acquisitions. We also used common stock 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 pursuant to the conversion of those debentures.
Working Capital; Sources and Uses of Cash
At July 31, 2004, we had a working capital deficiency of $1,989,344 as
current liabilities exceeded current assets. At January 31, 2004, we had a
working capital deficiency of $1,804,864. For the six-month period ended
July 31, 2004, our working capital deficiency increased by $184,480. Our
balance of cash and cash equivalents increased during six-month period ended
July 31, 2004 primarily due to cash provided by receipt of customer deposits,
an increase in accrued expenses and borrowings against our line of credit. Cash
was used primarily for the repayment of debt, 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. After a winter
season and a first quarter that historically generate the least amount of
shipping activity for the Company, we have entered the principal building season
during the second quarter ended July 31, 2004. As a result, our cash balances
have increased, we have made a repayment of our line of credit and accounts
payable are beginning to decrease. We anticipate that as the principal building
season shipping cycle continues through the remainder of the summer and into the
autumn we will generate the needed working capital from the Company's
undelivered backlog of contracts at July 31, 2004 to make additional repayments
of our line of credit borrowings and further reduce accounts payable. Weather
permitting in the fourth quarter, we anticipate an active shipping period to
complete the fiscal year and further generate working capital to support the
Company's operations.
- 22 -
Our backlog of undelivered contracts at July 31, 2004 was approximately
$26,843,200. This is an increase of $8,480,300, or 46%, over the backlog of
undelivered contracts at July 31, 2003 when the backlog was approximately
$18,362,900. 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 six-
month period ended July 31, 2004, approximately 76% of the shipments originated
from the beginning backlog at January 31, 2004. In the previous year's six-
month period ended July 31, 2003, 84% of the shipments originated from the
beginning 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 six-month period ended July 31, 2004, approximately 24% of the
shipments originated from contracts written during such six-month period. In
the previous year's six-month period ended July 31, 2003, approximately 16% of
the shipments originated from contracts that were written during such six-month
period then ended. It should be noted that shipments made during the first six
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 six months of its
fiscal year are shipped during the first six months has not had 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 six-month
periods ended July 31, 2004 and 2003, and for the last two fiscal years ended
January 31, 2004 and 2003 (in $1,000's of US dollars):
Six-months Ended Fiscal Year Ended
July 31, January 31,
2004 2003 2004 2003
Beginning backlog $ 25,220 $ 20,088 $ 20,088 $ 17,667
Add: New contracts 13,397 6,757 23,266 20,926
Amendments 791 490 710 482
-------- -------- -------- --------
Sub-total 39,408 27,335 44,064 39,075
Less: Shipments - 9,053 - 6,076 -13,842 -13,156
Cancellations - 3,512 - 2,896 - 5,002 - 5,831
-------- -------- -------- --------
Ending backlog $ 26,843 $ 18,363 $ 25,220 $ 20,088
======== ======== ======== ========
- 23 -
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 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 5% of the contracts
written during the fiscal year will also be cancelled during that same fiscal
year. In the event of cancellation of a contract, the Company 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 July 31, 2004 and
2003 we realized revenues of $89,053 and $80,556, 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
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, 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 July
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
- 24 -
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. We believe, with the benefit of a full
business cycle and our newly-acquired companies contributing during the full
business cycle, that we will be able to meet the covenants contained in the
credit agreement for the fiscal year ending January 31, 2005. 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.
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 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., the companies located in Maple Ridge, British
Columbia, Canada was the ability to ship their soft wood home packages into the
- 25 -
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 part 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.
Our industry is subject to economic fluctuations based on mortgage interest
rates.
The home construction industry has enjoyed robust sales over the past several
years as mortgage interest rates have been at or near historical lows. Should
there be an increase in mortgage rates in the future, such an increase may have
a negative effect on the number of prospective purchasers of newly-constructed
homes, which, in turn 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 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 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. The Company is working to address the impact of the
- 26 -
winter season on the Company's historical first-quarter financial performance
through the acquisition of additional companies.
We have experienced a rapid increase in the cost of lumber.
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, some within the
industry and some without. The continued high demand for wood products during
the housing boom of the past several years combined with external world events
(war in Iraq and Afghanistan) and recent natural disasters (hurricanes in the
State of Florida) has exacerbated the situation. As much as the Company tries to
keep up with these materials cost increases by factoring them into future
selling prices, the Company's method of selling with the use of fix price
contracts, which, by the terms of the sales contract, hold sales prices constant
foa 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 will continue to experience downward pressure
on our profit margins as our pricing adjustments will lag behind rising costs.
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.
- 27 -
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, 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 July 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 (the "Exchange Act")).
Based on this evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
- 28 -
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
The Company held its Annual Meeting of Shareholders on July 28, 2004. At the
Annual Meeting of Shareholders, the shareholders were asked to vote on four
proposals. The first of these proposals was to elect nine members of the Board
of Directors to serve until the 2005 Annual Meeting of Shareholders. The
following sets forth the number of votes cast for, or withheld from, each of
the nine directors.
Name For Withheld
John D. Shepherd 7,794,396 1,362
Richard C. Farr 7,793,116 2,642
Samuel J. Padula 7,793,314 2,444
Steven Patlin 7,794,462 1,296
Reginald W. Ray, Jr. 7,793,314 2,444
William J. Thyne 7,794,932 826
Leslie M. Apple 7,795,108 650
Jeffry J. LaPell 7,794,888 870
Benjamin A. Shepherd 7,794,418 1,340
The second proposal for which there was a vote at the Company's Annual
Meeting of Shareholders was to ratify the appointment of Urbach Kahn & Werlin
LLP to serve as the Company's independent auditors for the fiscal year ending
January 31, 2005. The proposal was passed by the following vote: For- 7,792,813,
Against- 1,779, Abstain- 1,166.
The third proposal for which there was a vote at the Company's Annual Meeting
of Shareholders was to ratify an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of the Company to
12,000,000 shares from 10,000,000 shares. The proposal passed by the following
vote: For- 7,784,991, Against- 5,703, Abstain- 5,064.
The fourth and last proposal for which there was a vote at the Company's
Annual Meeting of Shareholders was to ratify an amendment to the Company's
Amended and Restated Stock Option Plan to increase the maximum number of
shares of the Company's Common Stock available for option awards to 985,000
shares from 485,000 shares, with 485,000 issuable as Incentive Stock Options,
and 500,000 issuable as Non-Qualified Stock Options. The proposal passed by
the following vote: For- 7,490,504, Against- 9,081, Abstain- 5,376, Shares
not voted- 290,797.
- 30 -
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.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LINCOLN LOGS LTD.
/ s / John D. Shepherd
John D. Shepherd
Chairman of the Board, President and
Chief Executive Officer
September 14, 2004
/ s / Benjamin A. Shepherd
Benjamin A. Shepherd
Vice President and Chief Financial Officer
September 14, 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: September 14, 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: September 14, 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 July 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: September 14, 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 July 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: September 14, 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.]