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, 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 June 11, 2004
Common Stock, $0.01 par value 9,040,059
Transitional Small Business Disclosure Format (Check one): Yes ( ) No (X)
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LINCOLN LOGS LTD. AND SUBSIDIARIES
INDEX
Page number
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheets as of
April 30, 2004 and January 31, 2004 3 - 4
Consolidated statements of operations for the
three months ended April 30, 2004 and 2003 5
Consolidated statements of changes in stockholders'
equity for the three months ended April 30, 2004
and the twelve months ended January 31, 2004 6
Consolidated statements of cash flows for the
three months ended April 30, 2004 and 2003 7
Notes to consolidated financial statements 8 - 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12 - 24
ITEM 3. CONTROLS AND PROCEDURES 24
PART II. OTHER INFORMATION 25
SIGNATURES 26
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2004 AND JANUARY 31, 2004
ASSETS
April 30, January 31,
2 0 0 4 2 0 0 4
(Unaudited) (Audited)
---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 450,231 $ 750,239
Trade accounts receivable, net of
allowance for doubtful accounts of
$20,199 494,103 337,166
Inventories (raw materials) 2,362,034 2,032,050
Work in process 424,721 477,389
Prepaid expenses and other current assets 709,395 564,883
Income tax asset 300,000 ---
Income taxes receivable 76,354 97,427
Mortgage and note receivable 2,592 2,592
---------- ----------
Total current assets 4,819,430 4,261,746
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land 1,020,347 1,020,347
Buildings and improvements 3,045,822 3,047,979
Machinery and equipment 1,916,358 1,926,152
Furniture and fixtures 2,115,570 2,096,515
Transportation equipment 480,977 472,350
---------- ----------
8,579,074 8,563,343
Less: accumulated depreciation (4,112,237) (3,983,816)
---------- ----------
Total property, plant and
equipment - net 4,466,837 4,579,527
---------- ----------
OTHER ASSETS:
Mortgage receivable 59,450 60,053
Deposits and other assets 61,570 70,742
Goodwill 1,322,876 1,319,970
Intangible assets, net of accumulated
amortization of $156,677 at April 30, 2004
and $97,537 at January 31, 2004 1,496,066 1,546,032
---------- ----------
Total other assets 2,939,962 2,996,797
---------- ----------
TOTAL ASSETS $12,226,229 $11,838,070
========== ==========
See accompanying notes to consolidated financial statements.
( continued )
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LINCOLN LOGS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS ( continued )
APRIL 30, 2004 AND JANUARY 31, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY
April 30, January 31,
2 0 0 4 2 0 0 4
(Unaudited) (Audited)
----------- -----------
CURRENT LIABILITIES:
Borrowings on line of credit $ 653,000 $ 503,000
Current installments of bank loans 118,980 118,980
Current installments of notes payable,
related parties 93,458 93,458
Current installments of notes payable 296,492 407,109
Convertible subordinated debentures:
Related parties --- 210,000
Other --- 10,000
Current installments of capital lease
obligations 17,843 22,211
Trade accounts payable 1,713,686 1,578,912
Accrued salaries and wages 213,701 196,243
Accrued income taxes 991 1,000
Accrued expenses 680,567 569,850
Customer deposits 3,597,470 2,575,847
---------- ----------
Total current liabilities 7,386,188 6,066,610
LONG-TERM DEBT, net of current installments:
Notes payable, related parties 316,563 316,563
Bank loans 1,941,787 1,960,687
Notes payable 972,116 1,037,541
Capital lease obligations 12,086 17,581
---------- ----------
Total long-term debt 3,242,552 3,332,372
---------- ----------
OTHER LONG-TERM OBLIGATION 15,000 15,000
---------- ----------
Total liabilities 10,643,740 9,413,982
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $ .01 par value;
authorized 1,000,000 shares; issued
and outstanding - 0 - shares --- ---
Common stock, $ .01 par value; authorized
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 (3,754,203) (2,945,805)
Accumulated other comprehensive income 18,036 51,237
----------- ----------
2,466,924 3,308,523
Less: cost of 504,240 shares of common
stock in treasury (884,435) (884,435)
----------- ----------
Total stockholders' equity 1,582,489 2,424,088
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $12,226,229 $11,838,070
=========== ===========
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, 2004 AND 2003
(UNAUDITED)
NET SALES $ 2,597,840 $ 1,695,186
COST OF SALES 2,003,262 1,016,528
---------- ----------
GROSS PROFIT 594,578 678,658
---------- ----------
OPERATING EXPENSES:
Commissions 230,974 228,439
Selling, general and administrative 1,463,319 1,148,280
---------- ----------
Total operating expenses 1,694,293 1,376,719
---------- ----------
(LOSS) FROM OPERATIONS (1,099,715) ( 698,061)
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 3,161 5,879
Interest expense ( 27,674) ( 12,277)
Other 15,830 70,748
---------- ----------
Total other income (expense) - net ( 8,683) 64,350
---------- ----------
(LOSS) BEFORE INCOME TAXES (1,108,398) ( 633,711)
INCOME TAX BENEFIT ( 300,000) ( 221,000)
---------- ----------
NET (LOSS) $( 808,398) $( 412,711)
========== ==========
PER SHARE DATA:
Basic and diluted (loss) per share $ ( .09) $ ( .06)
========== ==========
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, 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 --- ( 33,201) --- ( 33,201) ( 33,201)
Net (loss) - April 30, 2004 --- --- --- ( 808,398) --- --- ( 808,398) (808,398)
---------- -------- ---------- ----------- ----------- ---------- ------------ ---------
Balance at April 30, 2004 9,544,299 $ 95,443 $6,107,648 $(3,754,203) $ 18,036 $( 884,435) $ 1,582,489 $(841,599)
========== ======== ========== =========== =========== ========== ============ =========
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, 2004 AND 2003
(UNAUDITED)
Three Months Ended
April 30,
----------------------------
2 0 0 4 2 0 0 3
----------- -----------
OPERATING ACTIVITIES:
Net (loss) $ ( 808,398) $ ( 412,711)
Adjustments to reconcile net (loss)
to net cash (used) provided by
operating activities:
Depreciation 128,421 51,890
Amortization 59,140 130
Income tax asset ( 300,000) ( 221,000)
(Gain) on sale of assets held for resale --- ( 5,689)
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts
receivable ( 156,937) 100,708
(Increase) in inventories ( 277,316) ( 399,143)
(Increase) in prepaid expenses
and other current assets ( 144,512) ( 152,554)
(Increase) decrease in deposits
and other assets 9,172 ( 13,906)
Increase in trade accounts payable 134,774 171,404
Increase in customer deposits 1,021,623 309,315
Increase (decrease) in accrued expenses,
payroll, related taxes and withholdings 128,175 ( 71,852)
Decrease (increase) in income taxes
receivable 21,073 ( 11,592)
(Decrease) in accrued income taxes ( 9) ( 23,100)
---------- ----------
Net cash (used) provided by operating
activities ( 184,794) ( 678,100)
---------- ----------
INVESTING ACTIVITIES:
Additions to property, plant
and equipment ( 15,731) ( 134,451)
Acquisition of businesses ( 2,906) ( 137,112)
Proceeds from sale of assets held for
resale --- 10,000
Payments on mortgage receivable 603 1,879
---------- ----------
Net cash (used) by investing activities ( 18,034) ( 262,684)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt --- 41,611
Proceeds from borrowing on line of credit 150,000 ---
Loan origination fees ( 9,174) ---
Repayments of capital leases ( 9,863) ( 15,602)
Repayments of bank loans ( 18,900) ( 5,625)
Repayments of notes payable ( 176,042) ( 8,067)
---------- ----------
Net cash provided (used) by financing
activities ( 63,979) 12,317
---------- ----------
Effect of foreign currency translation on cash ( 33,201) ---
---------- ----------
Net (decrease) in cash and cash equivalents ( 300,008) ( 928,467)
Cash and cash equivalents at
beginning of period 750,239 1,885,931
---------- ----------
Cash and cash equivalents at
end of period $ 450,231 $ 957,464
========== ==========
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, 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 three-month periods ended April 30, 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) 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 and 7,255,059 for the three-month periods ended April 30, 2004 and
April 30, 2003, 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 $300,000
and $221,000 was recognized in the three months ended April 30, 2004 and April
30, 2003, respectively.
- 8 -
(4) STOCK BASED COMPENSATION
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, 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 April 30, 2004 133,500 232,000 $0.29 $0.27
========= ============= ========= =============
There were no Stock Options granted during the 3-month period ended April 30,
2004.
All outstanding stock options are exercisable as of April 30, 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 April 30, 2004 is 4.7 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. Upon exercise of
the Non-Qualified Stock Options, if the fair market price of the Company's
common stock is greater than the option price on the date of exercise the
grantee will realize ordinary income equal to the difference between the fair
market price and the option price, and the Company will record compensation
expense in the same amount.
The following shows the pro-forma effect on net (loss) and (loss) per share
for the quarter ended April 30, 2004 as if the value of the stock option grant
were charged to earnings under the provision of SFAS No. 123:
- 9 -
Net loss as reported $( 808,398)
Stock compensation expense determined
under the fair value method ( 1,745)
----------
Pro forma net loss $( 810,143)
==========
Basic and diluted loss per share as reported $(0.09)
Pro forma basic and diluted loss per share $(0.09)
Pro forma information regarding net (loss) and (loss) per share shown above
is presented as if the Company had accounted for its stock-based awards to
employees under the fair value method of SFAS 123. The fair value of the
Company's stock-based awards to employees was estimated as of the date of grant
using a Black-Scholes option pricing model. Limitations of the effectiveness
of the Black-Scholes option valuation model are that it was developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable, and that the model requires the use of
highly subjective assumptions including expected stock price volatility. The
fair value of the Company's stock-based awards to employees during the three-
month period ended April 30, 2004 was estimated assuming no expected dividends,
a risk free interest rate of 3.07%, an expected life of 5 years and an expected
volatility of 1.116.
(5) SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
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. During the three months
ended April 30, 2003, cash was paid in the amounts of $12,091 for interest and
$34,692 for income taxes.
Non-cash investing and financing activities:
During the first quarter ended April 30, 2004, there were no non-cash
investing and financial transactions.
During the first quarter ended April 30, 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.
- 10 -
(7) RECLASSIFICATIONS
Certain amounts in the Consolidated Statement of Operations for the three
months ended April 30, 2003 have been reclassified to conform with the
presentation for the three months ended April 30, 2004. None of the reclass-
ifications had the effect of changing the net loss as previously reported.
- 11 -
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 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 quarter ended April 30, 2004,
approximately 75% of the Company's total sales are 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. Even though we are
- 12 -
experiencing costs associated with some of our recent acquisitions, we believe
we will progress towards increased sales and cost savings as these new entities
are integrated into the Company.
RESULTS OF OPERATIONS
The following table illustrates our financial results for the fiscal quarter
ended April 30, 2004 as compared to the fiscal quarter ended April 30, 2003
(in $1,000's US).
1st 1st
Fiscal Fiscal
Quarter % of Quarter % of %
2004 Sales 2003 Sales Change
------- ----- ------- ----- ------
Net Sales $ 2,598 100% $ 1,695 100% 53%
Cost of Sales 2,003 77% 1,016 60% 97%
------- ----- ------- ----- ------
Gross Profit 595 23% 679 40% -88%
Operating expense 1,694 65% 1,377 81% 23%
------- ----- ------- ----- ------
(Loss) from Operations ( 1,099) -42% ( 698) -41% 57%
Other (Expenses) Income, net ( 9) -- 64 4% -114%
------- ----- ------- ----- ------
(Loss) before Income Taxes ( 1,108) -42% ( 634) -37% 75%
Income Tax Benefit 300 11% 221 13% 36%
------- ----- ------- ----- ------
Net (Loss) $( 808) -31% $( 413) -24% 95%
======= ===== ======= ===== ======
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, 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)
- 13 -
the fee is fixed and determinable; and (4) collectibility is reasonably assured.
Revenue from products sold is recognized upon delivery to the customer.
Subsequent to the sale of our products, we have no obligation to provide any
modification or customization, upgrades, enhancements, or post-delivery customer
support. Design and engineering services are an integral part of the total home
package sold to the customer and as such, revenue for these efforts are not
recognized as a separate line item in our financial statements. However,
customers occasionally cancel their contracts with us. Upon cancellation we
recognize revenue for services performed for design and engineering services in
accordance with a predetermined fee schedule that was shared with the customer
at the time of the contact signing. We deduct this amount from the deposit that
accompanied the contract and return the remainder of the deposit to the
customer.
Impairment of Long-lived and Intangible Assets: We evaluate the recoverability
of the Company's long-lived assets, where indicators of impairment are present,
by reviewing current and projected profitability or discounted cash flow of
such assets. Intangible assets that are subject to amortization are reviewed
for potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Intangible assets not subject to amortization
are tested for impairment at least annually. For the fiscal year ended January
31, 2004, we wrote down the value of a parcel of real estate that was determined
to be valued higher than its fair market value by $30,100 based on an
independent real estate appraisal. We did not record any impairment losses for
the fiscal year ended January 31, 2003.
Income Taxes: We estimate our income taxes in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included in our Consolidated
Balance Sheets. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax provision in our Statement of Operations.
To date, we have recorded a full allowance against our deferred tax assets.
Reserves for Doubtful Accounts and Obsolete/Excess Inventory: Based on our
judgment, we review our accounts receivable and inventory to establish reserves
that adjust the carrying value to the estimated net realizable value. On a
regular basis, we evaluate our accounts receivable and inventories and
establish these reserves based on a multitude of contributing factors. In the
case of accounts receivable, we establish the reserve based on a combination of
specific customer circumstances as well as the history of write-offs and
collections. In the case of inventories, factors we consider in establishing a
reserve include economic conditions, product mix, sales levels, customer
acceptance of our products and changing product styles. As a result, we
established a reserve for doubtful accounts receivable of $20,199 for the
fiscal years ended January 31, 2004 and 2003, and a reserve for slow moving and
obsolete inventories of $18,000 for the fiscal years ended January 31, 2004 and
2003.
- 14 -
RESULTS OF OPERATIONS
Comparison of three-month periods ended April 30, 2004 and April 30, 2003
Revenues: Net sales were $2,597,840 for the three months ended April 30, 2004
as compared to $1,695,186 in the same period in 2003. The increase of $902,654
was primarily attributable to increased sales of our log home and panelized home
construction kits. Approximately seventy-five percent of total revenues are
represented by home construction kit sales and this portion of our revenues
improved through a forty-six percent increase in units shipped and a twenty-six
percent increase in sales dollar volume. Offsetting these increases was a
thirteen 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 $489,100, or four hundred thirty-five 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, 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." While the first quarter ended April 30, 2004 showed
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. The
increase in revenues during the fiscal quarter ended April 30, 2004 as compared
to the fiscal quarter ended April 30, 2003 reflects the realization of
contributions of the subsidiaries acquired during the latter portion of the
fiscal year ended January 31, 2004.
Gross Profit/Cost of Sales: Our gross margin decreased to 23% of sales, or
$594,578, in the first quarter ended April 30, 2004 from 40% of sales, or
$678,658, in the first quarter ended April 30, 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 five percent in
material costs; an increase of seven percent in labor costs; and an increase of
five percent in manufacturing overhead.
The increase in raw materials cost that the Company encountered during the
fiscal year ended January 31, 2004 continued during the three-month period
ended April 30, 2004 with commodity lumber costs continuing to increase
dramatically. The increase in labor costs was due 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 was the continued integration of our newly-acquired
subsidiaries during the first fiscal quarter when the volume of shipments for
both the newly-acquired subsidiaries and the Company are historically low.
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 contributes to a declining gross profit is our use of
- 15 -
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 all 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.
Operating expenses: Total operating expenses for the first quarter ended
April 30, 2004 were $1,694,293 as compared with $1,376,719 during the first
quarter ended April 30, 2003, an increase of $317,574, or 23%. As a percentage
of net sales, operating expenses were 65% and 81%, respectively, for the three-
month periods ended April 30, 2004 and 2003.
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, 2004 commissions amounted to $230,974, or 9% of
net sales, compared with $228,439 in first quarter ended April 30, 2003, or 13%
of net sales. While total commissions expense decreased 4% compared to our
increase in total net sales of 53%, 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 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 $1,463,319 in the first
quarter ended April 30, 2004 have increased $315,039, or 27%, when compared to
the selling, general and administrative expenses in the first quarter ended
April 30, 2003 of $1,148,280. As a percentage of total net sales, selling,
general and administrative expenses were 56% and 68%, for the first quarter
ended April 30, 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 quarter in contrast to the
previous year when the entities were not yet a part of the Company.
Interest expense: In the first quarter ended April 30, 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 previous year's amount,
which reflects the increased amount of debt outstanding principally incurred
from our 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, 2004 and 2003, the Company accrued income
tax benefits of $300,000 and $221,000, respectively.
Net loss: Even though sales increased in the first quarter ended April 30,
2004 when compared to the previous year's first quarter, the Company incurred a
- 16 -
net loss of $808,398. The Company's net loss for the first quarter ended April
30, 2003 equaled $412,711. 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 fiscal quarter ending on April 30th, and the current fiscal quarter
was no exception. The addition of subsidiaries acquired during the latter
portion of the fiscal year ended January 31, 2004 resulted in additional
expenses that were incurred by the Company in a fiscal quarter that has
historically been a less productive quarter due to the seasonal nature of the
Company's business. 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, 2004 is 30% higher than the previous year's amount at
the end of April 30, 2003, and with all newly-acquired subsidiaries contributing
for the full fiscal year, we anticipate the Company will return to profitability
in fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
Fiscal year 2004 brought significant changes to the Company's financial
structure as a result of the acquisition of three businesses and the acquisition
of the assets of a fourth business. In August 2003 we acquired 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 April 30, January 31,
2004 2003 2004
Financial Condition:
Total Assets $ 12,226 $ 6,627 $ 11,838
Total Liabilities $ 10,644 $ 4,934 $ 9,414
Total Equity $ 1,582 $ 1,693 $ 2,424
Debt/equity ratio 2.79 .34 1.85
Assets/debt ratio 2.76 11.67 2.64
Working Capital:
Current Assets $ 4,819 $ 3,784 $ 4,262
Current Liabilities $ 7,386 $ 4,483 $ 6,067
Current Ratio .65 .93 .70
Cash Position:
Cash & cash equivalents $ 450 $ 957 $ 750
Cash (used) in operations $( 185) $( 678) $( 250)
- 17 -
Financial Condition
For the year ended January 31, 2004, the Company had a significant increase in
assets from $6,627,407 at April 30, 2003 to $11,838,070 at January 31, 2004.
Total assets at April 30, 2004 are 12,226,229. 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 $4,933,820 at April 30, 2003 to $9,413,982 at
January 31, 2004, the majority of which is represented by an increase in total
debt of approximately $3,909,000 during that nine month period. Total
liabilities at April 30, 2004 are $10,643,740.
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 $2,713,767 as of April 30, 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 interest rate for the majority of the borrowings under
the First Pioneer credit facility is at the prime rate as published in the Wall
Street Journal, but the interest rate for one million dollars of the credit
facility is fixed for a two-year period at a below-prime rate. This portion of
the loan is subsidized by the State of New York and is provided as an incentive
for the creation of employment in the State of New York.
The seller financing is payable over terms of five to seven years with the
majority of the notes subject to monthly repayments while a smaller amount is
due on an annual basis. All the seller financing notes are non-interest
bearing, however, interest has been imputed for financial statements purposes
using rates that approximate those for similar un-secured promissory notes.
In May 2003, all holders of the Company's Series B and Series C Convertible
Subordinated Debentures, a total of $220,000, converted their holdings into the
common stock of the Company at the maturity date of the debentures. The Company
issued 1,162,500 shares of common stock pursuant to the conversion of those
debentures.
Working Capital; Sources and Uses of Cash
At April 30, 2004, we had a working capital deficiency of $2,566,758 as
current liabilities exceeded current assets. At January 31, 2004, we had a
working capital deficiency of $1,804,864. For the three month period ended
April 30, 2004, our working capital deficiency increased by $761,894. Our
balance of cash and cash equivalents decreased during first quarter ended April
30, 2004 primarily due to cash used for the repayment of debt, the purchase of
inventory and machinery, and the financing of accounts receivable. Cash was
provided primarily by an increase in trade accounts payable and accrued
expenses, receipt of customer deposits and borrowing against our line of credit.
- 18 -
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. Our cash balances
decrease and our accounts payable increase during the winter season of our
business cycle (which includes the first fiscal 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, 2004. Also, we have not drawn all of the available funds provided
under the First Pioneer credit facility, which is available to us to supplement
the funds generated by the Company's operations.
Our backlog of undelivered contracts at April 30, 2004 was approximately
$26,559,300. This is an increase of $6,199,800, or 30%, over the backlog of
undelivered contracts at April 30, 2003 when the backlog was approximately
$20,359,500. 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 the
contracts contained in the beginning backlog at January 31, 2004. In the first
quarter ended April 30, 2004, approximately 87% of the shipments originated
from the beginning backlog at January 31, 2004. In the previous year's first
quarter ended April 30, 2003, 100% 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 fiscal quarter ended April 30, 2004, approximately 13% of the
shipments originated from contracts written during such fiscal quarter. In the
previous year's first quarter ended April 30, 2003, there were no shipments of
contracts that were written 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 written in the immediately preceding fiscal
year, and historically, the fact that few or none of the contracts written
during the Company's first quarter are shipped during the first quarter 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 prerequisites, such as
building site preparation.
The table below illustrates the changes in our backlog for the first quarters
ended April 30, 2004 and 2003, and for the last two fiscal years ended January
31, 2004 and 2003 (in $1,000's of US dollars):
Quarter Ended Fiscal Year Ended
April 30, January 31,
2004 2003 2004 2003
Beginning backlog $ 25,220 $ 20,088 $ 20,088 $ 17,667
Add: New contracts 4,758 3,419 23,266 20,926
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Amendments 625 233 710 482
-------- -------- -------- --------
Sub-total 30,603 23,740 44,064 39,075
Less: Shipments - 2,037 - 1,583 -13,842 -13,156
Cancellations - 2,007 - 1,798 - 5,002 - 5,831
-------- -------- -------- --------
Ending backlog $ 26,559 $ 20,359 $ 25,220 $ 20,088
======== ======== ======== ========
Each year we experience contract cancellations. The reasons for cancellations
are varied and no one particular reason is dominant over the total 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
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 April 30, 2004 and
2003 we realized revenues of $78,974 and $33,035, 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
- 20 -
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 April
30, 2004.
We believe that there were unusual circumstances that contributed to our being
in default with regard to the financial covenant ratios of the 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 has in no fashion damaged
our relationship with them, nor do we believe that it will hinder our ability to
obtain future financing for contemplated projects.
Factors That Could Affect Future Results
Certain statements made in this 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, that will lead to
growth of sales revenues of the Company over the next several years.
We face significant price competition.
There are no assurances that competitive pressures will not force us to accept
reduced margins to compete in the future. Large companies within the industry
with significantly greater resources continue to expand in the market place and
compete for customers with a strategy that is based on price. While selling
price is a distinguishing factor between companies offering log home
construction kits, the Company feels that other important factors in a purchase
decision are product attributes, service, quality and design.
- 21 -
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 determining factor for the purchase of True Craft Log
Structures, Ltd. and Hart & Son Industries, Ltd., the companies located in Maple
Ridge, British Columbia, Canada was the ability to ship their soft wood home
packages into the United States under an exemption from the soft wood tariff
that was instituted by the United States government in April 2002. An
additional consideration for the acquisition was 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. Without the Binding Tariff Classification Ruling
decision shipping home construction kits from British Columbia, Canada to
customers located in the western portion of the United States would be more
expensive than shipping the home construction kits from the Company's facilities
located in New York. Now that the Company has received a favorable decision
from the U.S. customs authorities, the speed with which the Company can shift
its west coast manufacturing requirements to its subsidiary in British Columbia,
Canada will have an impact on its financial performance for the remainder of the
Company's fiscal year 2005 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
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 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
- 22 -
than expected into the spring season. In addition, the initial months of spring
can include rain and muddy ground conditions, which are not conducive for new
home construction. Weather conditions are unpredictable and can have an adverse
affect on our ability to ship product and generate revenue. In light of the
effect winter weather conditions have on our first quarter shipments, the
Company has routinely experienced a loss in past first quarters of the Company's
fiscal year and it has experienced a comparable loss in the first quarter of
fiscal year 2005. The Company is working to address the impact of the winter
season on the Company's historical first-quarter financial performance through
acquisitions.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after January 31, 2003. The Company does not
believe this statement will have a material impact on its financial statements.
In December 2002, FASB issued Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure" ("SFAS
No. 148"). The standard amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods for voluntary transition to SFAS
No. 123's fair value method of accounting for stock-based employee compensation
("the fair value method"). SFAS No. 148 also requires disclosure of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income (loss) and earnings (loss) per share in
annual and interim financial statements. The transition provisions of SFAS No.
148 are effective in fiscal years beginning after December 15, 2002. During the
fiscal year ended January 31, 2003, we adopted the disclosures provisions of
SFAS No. 148.
In April 2003, FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS No. 149"). During the year ended January 31, 2004, we
adopted the provisions of SFAS No. 149, and it had no material effect on the
Company's results of operations or financial position.
In May 2003, FASB issued Statement of Financial Accounting Standards No. 150,
"Accounting For Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 changes the accounting
for certain financial instruments with characteristics of both liabilities and
equity that, under previous pronouncements, issuers could account for as equity.
The new accounting guidance contained in SFAS No. 150 requires that those
instruments be classified as liabilities in the balance sheet. During the year
ended January 31, 2004, we adopted the provisions of SFAS No. 150, and it had no
material effect on the Company's results of operations or financial position.
- 23 -
In December 2003, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 104 ("SAB 104"), which updated the guidance in
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 104 also integrates the set of related SAB 101 Frequently
Asked Questions and recognizes the role of the AICPA's Emerging Issues Task
Force ("EITF"), consensus on Issue No. 00-21 "Accounting for Revenue
Arrangements with Multiple Deliverables." The EITF concluded that revenue
arrangements with multiple elements should be divided into separate units of
accounting if the deliverables in the arrangement have value to the customer on
a standalone basis, if there is objective and reliable evidence of the fair
value of the undelivered elements, and as long as there are no rights of return
or additional performance guarantees by the Company. The provisions of EITF
Issue No. 00-21 are applicable to agreements entered into in fiscal periods
commencing after June 15, 2003. SAB 104 directs companies to identify separate
units of accounting based on EITF Issue 00-21 before applying the guidance of
SAB 104. We believe that neither our operating results nor our financial
condition will be materially affected by the provisions of EITF 00-21, nor by
the guidance of SAB 104.
In December 2003, FASB issued Financial Interpretation No. 46R ("FIN 46"),
"Consolidation of Variable Interest Entities." The objective of this
interpretation is to provide guidance on how to identify variable interest
entity ("VIE") and determining when the assets, liabilities, non-controlling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in
an entity will need to consolidate that entity if the company's interest in the
VIE is such that the company will absorb a majority of the VIE's expected losses
and/or receive a majority of the entity's expected residual returns, if 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 April 30, 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
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.
- 24 -
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.
- 25 -
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, 2004
/ s / Benjamin A. Shepherd
Benjamin A. Shepherd
Vice President and Chief Financial Officer
June 14, 2004
- 26 -
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, 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: June 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 April 30, 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: June 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 April 30, 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: June 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.]